filings.toolsItem 16. Form 10-K Summary
212K characters. Original on sec.gov · Markdown
Item 16. Form 10-K Summary
None
EXHIBIT INDEX
| * | Identifies a management contract or compensatory plan or arrangement in which an executive officer or director of PTC participates. |
| ** | Indicates that the exhibit is being furnished with this report and is not filed as a part of it. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 29th day of November, 2017.
| PTC Inc. | ||
| By: | /s/ JAMES HEPPELMANN | |
| James Heppelmann President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated below, on the 29th day of November, 2017.
| Signature | Title | |
| (i) Principal Executive Officer: | ||
| /s/ JAMES HEPPELMANN | President and Chief Executive Officer | |
| James Heppelmann | ||
| (ii) Principal Financial and Accounting Officer: | ||
| /s/ ANDREW MILLER | Executive Vice President and Chief Financial Officer | |
| Andrew Miller | ||
| (iii) Board of Directors: | ||
| /s/ ROBERT SCHECHTER | Chairman of the Board of Directors | |
| Robert Schechter | ||
| /s/ JANICE CHAFFIN | Director | |
| Janice Chaffin | ||
| /s/ PHILLIP FERNANDEZ | Director | |
| Phillip Fernandez | ||
| /s/ DONALD GRIERSON | Director | |
| Donald Grierson | ||
| /s/ JAMES HEPPELMANN | Director | |
| James Heppelmann | ||
| /s/ KLAUS HOEHN | Director | |
| Klaus Hoehn | ||
| /s/ PAUL LACY | Director | |
| Paul Lacy | ||
| /s/ Corinna Lathan | Director | |
| Corinna Lathan |
APPENDIX A
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of PTC Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of comprehensive income (loss), of stockholders’ equity, and of cash flows present fairly, in all material respects, the financial position of PTC Inc. and its subsidiaries as of September 30, 2017 and September 30, 2016, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in “Management's Annual Report on Internal Control over Financial Reporting” appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note B to the consolidated financial statements, the Company changed the manner in which it accounts for debt issuance costs in 2017.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
November 29, 2017
F-1
PTC Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
| September 30, | |||||||
| 2017 | 2016 | ||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 280,003 | $ | 277,935 | |||
| Short-term marketable securities | 18,408 | 18,695 | |||||
| Accounts receivable, net of allowance for doubtful accounts of $1,062 and $1,012 at September 30, 2017 and 2016, respectively | 152,299 | 161,357 | |||||
| Prepaid expenses | 49,913 | 52,819 | |||||
| Other current assets | 165,933 | 131,783 | |||||
| Total current assets | 666,556 | 642,589 | |||||
| Property and equipment, net | 63,600 | 67,113 | |||||
| Goodwill | 1,182,772 | 1,169,813 | |||||
| Acquired intangible assets, net | 257,908 | 310,305 | |||||
| Long-term marketable securities | 31,907 | 30,921 | |||||
| Deferred tax assets | 123,166 | 89,692 | |||||
| Other assets | 34,475 | 35,296 | |||||
| Total assets | $ | 2,360,384 | $ | 2,345,729 | |||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
| Current liabilities: | |||||||
| Accounts payable | $ | 35,160 | $ | 18,022 | |||
| Accrued expenses and other current liabilities | 80,761 | 84,141 | |||||
| Accrued compensation and benefits | 110,957 | 145,633 | |||||
| Accrued income taxes | 5,735 | 6,303 | |||||
| Deferred revenue | 446,296 | 400,420 | |||||
| Total current liabilities | 678,909 | 654,519 | |||||
| Long-term debt, net of current portion | 712,406 | 751,601 | |||||
| Deferred tax liabilities | 17,880 | 13,754 | |||||
| Deferred revenue | 12,611 | 13,237 | |||||
| Other liabilities | 53,142 | 69,952 | |||||
| Total liabilities | 1,474,948 | 1,503,063 | |||||
| Commitments and contingencies (Note I) | |||||||
| Stockholders’ equity: | |||||||
| Preferred stock, $0.01 par value; 5,000 shares authorized; none issued | — | — | |||||
| Common stock, $0.01 par value; 500,000 shares authorized; 115,333 and 114,968 shares issued and outstanding at September 30, 2017 and 2016, respectively | 1,153 | 1,150 | |||||
| Additional paid-in capital | 1,609,030 | 1,598,548 | |||||
| Accumulated deficit | (650,840 | ) | (657,079 | ) | |||
| Accumulated other comprehensive loss | (73,907 | ) | (99,953 | ) | |||
| Total stockholders’ equity | 885,436 | 842,666 | |||||
| Total liabilities and stockholders’ equity | $ | 2,360,384 | $ | 2,345,729 |
The accompanying notes are an integral part of these consolidated financial statements.
F-2
PTC Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| Year ended September 30, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Revenue: | |||||||||||
| Subscription | $ | 279,246 | $ | 118,322 | $ | 65,239 | |||||
| Support | 574,680 | 651,807 | 681,524 | ||||||||
| Total recurring revenue | 853,926 | 770,129 | 746,763 | ||||||||
| Perpetual license | 133,390 | 173,467 | 282,760 | ||||||||
| Total subscription, support and license revenue | 987,316 | 943,596 | 1,029,523 | ||||||||
| Professional services | 176,723 | 196,937 | 225,719 | ||||||||
| Total revenue | 1,164,039 | 1,140,533 | 1,255,242 | ||||||||
| Cost of revenue: | |||||||||||
| Cost of license and subscription revenue | 86,047 | 69,710 | 53,163 | ||||||||
| Cost of support revenue | 92,202 | 85,729 | 82,829 | ||||||||
| Total cost of software revenue | 178,249 | 155,439 | 135,992 | ||||||||
| Cost of professional services revenue | 150,770 | 170,226 | 198,742 | ||||||||
| Total cost of revenue | 329,019 | 325,665 | 334,734 | ||||||||
| Gross margin | 835,020 | 814,868 | 920,508 | ||||||||
| Operating expenses | |||||||||||
| Sales and marketing | 372,946 | 367,465 | 346,794 | ||||||||
| Research and development | 236,059 | 229,331 | 227,513 | ||||||||
| General and administrative | 145,067 | 145,615 | 158,715 | ||||||||
| U.S. pension settlement loss | — | — | 66,332 | ||||||||
| Amortization of acquired intangible assets | 32,108 | 33,198 | 36,129 | ||||||||
| Restructuring charges | 7,942 | 76,273 | 43,409 | ||||||||
| Total operating expenses | 794,122 | 851,882 | 878,892 | ||||||||
| Operating income (loss) | 40,898 | (37,014 | ) | 41,616 | |||||||
| Foreign currency losses, net | (5,686 | ) | (1,889 | ) | (2,706 | ) | |||||
| Interest income | 3,249 | 3,437 | 3,697 | ||||||||
| Interest expense | (42,400 | ) | (29,882 | ) | (14,742 | ) | |||||
| Other income (expense), net | 2,533 | (1,844 | ) | (1,340 | ) | ||||||
| Income (loss) before income taxes | (1,406 | ) | (67,192 | ) | 26,525 | ||||||
| Benefit from income taxes | (7,645 | ) | (12,727 | ) | (21,032 | ) | |||||
| Net income (loss) | $ | 6,239 | $ | (54,465 | ) | $ | 47,557 | ||||
| Earnings (loss) per share—Basic | $ | 0.05 | $ | (0.48 | ) | $ | 0.41 | ||||
| Earnings (loss) per share—Diluted | $ | 0.05 | $ | (0.48 | ) | $ | 0.41 | ||||
| Weighted average shares outstanding—Basic | 115,523 | 114,612 | 114,775 | ||||||||
| Weighted average shares outstanding—Diluted | 117,356 | 114,612 | 116,012 |
The accompanying notes are an integral part of these consolidated financial statements.
F-3
PTC Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
| Year ended September 30, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Net income (loss) | $ | 6,239 | $ | (54,465 | ) | $ | 47,557 | ||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Unrealized hedge gain (loss) arising during the period, net of tax of $0.1 million in 2017 and $0 million in 2016 and 2015, respectively | (758 | ) | (3,375 | ) | — | ||||||
| Net hedge (gain) loss reclassified into earnings, net of tax of ($0.1 million) in 2017 and $0 million in 2016 and 2015, respectively | 459 | 2,131 | — | ||||||||
| Unrealized loss on hedging instruments | (299 | ) | (1,244 | ) | — | ||||||
| Foreign currency translation adjustment, net of tax of $0 for all periods | 16,593 | 408 | (47,177 | ) | |||||||
| Unrealized loss on marketable securities, net of tax of $0 for all periods | (22 | ) | (122 | ) | — | ||||||
| Amortization of net actuarial pension loss included in net income, net of tax of ($1.0 million), ($0.7 million), and ($18.5 million) in 2017, 2016 and 2015, respectively | 2,392 | 1,609 | 52,249 | ||||||||
| Pension net gain (loss) arising during the period net of tax of ($3.6 million), $3.5 million and $1.6 million in 2017, 2016, and 2015, respectively | 8,636 | (8,646 | ) | (4,797 | ) | ||||||
| Change in unamortized pension loss during the period related to changes in foreign currency | (1,254 | ) | (216 | ) | 2,350 | ||||||
| Other comprehensive income (loss) | 26,046 | (8,211 | ) | 2,625 | |||||||
| Comprehensive income (loss) | $ | 32,285 | $ | (62,676 | ) | $ | 50,182 |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
PTC Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Year ended September 30, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | 6,239 | $ | (54,465 | ) | $ | 47,557 | ||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Stock-based compensation | 76,708 | 65,996 | 50,182 | ||||||||
| Depreciation and amortization | 86,742 | 86,554 | 84,433 | ||||||||
| Benefit from deferred income taxes | (28,289 | ) | (44,182 | ) | (49,361 | ) | |||||
| Excess tax benefits realized from stock-based awards | (644 | ) | (93 | ) | (24 | ) | |||||
| Pension settlement loss | — | — | 66,332 | ||||||||
| Other non-cash costs, net | 2,272 | 966 | 157 | ||||||||
| Changes in operating assets and liabilities, excluding the effects of acquisitions: | |||||||||||
| Accounts receivable | 12,832 | 52,617 | 29,723 | ||||||||
| Accounts payable and accrued expenses | 20,315 | (14,185 | ) | 31,134 | |||||||
| Accrued compensation and benefits | (34,846 | ) | 60,944 | (56,950 | ) | ||||||
| Deferred revenue | 5,808 | 16,232 | 8,852 | ||||||||
| Accrued income taxes, net of income tax receivable | (798 | ) | 6,749 | (3,536 | ) | ||||||
| Other current assets and prepaid expenses | 721 | 4,591 | (10,716 | ) | |||||||
| Other noncurrent assets and liabilities | (12,470 | ) | 1,444 | (17,880 | ) | ||||||
| Net cash provided by operating activities | 134,590 | 183,168 | 179,903 | ||||||||
| Cash flows from investing activities: | |||||||||||
| Additions to property and equipment | (25,444 | ) | (26,189 | ) | (30,628 | ) | |||||
| Purchases of short- and long-term marketable securities | (19,726 | ) | (44,605 | ) | — | ||||||
| Proceeds from maturities of short- and long-term marketable securities | 18,785 | — | — | ||||||||
| Acquisitions of businesses, net of cash acquired | (4,960 | ) | (165,802 | ) | (98,411 | ) | |||||
| Purchases of investments | — | (560 | ) | (11,000 | ) | ||||||
| Proceeds from sales of investments | 15,218 | — | — | ||||||||
| Net cash used by investing activities | (16,127 | ) | (237,156 | ) | (140,039 | ) | |||||
| Cash flows from financing activities: | |||||||||||
| Borrowings under credit facility and senior notes | 150,000 | 670,000 | 185,000 | ||||||||
| Repayments of borrowings under credit facility | (190,000 | ) | (580,000 | ) | (128,750 | ) | |||||
| Repurchases of common stock | (50,991 | ) | — | (64,940 | ) | ||||||
| Proceeds from issuance of common stock | 10,778 | 21 | 41 | ||||||||
| Excess tax benefits realized from stock-based awards | 644 | 93 | 24 | ||||||||
| Payments of withholding taxes in connection with vesting of stock-based awards | (26,654 | ) | (20,939 | ) | (29,207 | ) | |||||
| Credit facility origination costs | (184 | ) | (6,855 | ) | — | ||||||
| Contingent consideration | (11,054 | ) | (10,621 | ) | (4,323 | ) | |||||
| Net cash provided (used) by financing activities | (117,461 | ) | 51,699 | (42,155 | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 1,066 | 6,807 | (17,946 | ) | |||||||
| Net increase (decrease) in cash and cash equivalents | 2,068 | 4,518 | (20,237 | ) | |||||||
| Cash and cash equivalents, beginning of year | 277,935 | 273,417 | 293,654 | ||||||||
| Cash and cash equivalents, end of year | $ | 280,003 | $ | 277,935 | $ | 273,417 | |||||
| Supplemental disclosure of non-cash financing activities: | |||||||||||
| Fair value of contingent consideration recorded for acquisitions | $ | — | $ | 16,900 | $ | 3,800 |
The accompanying notes are an integral part of these consolidated financial statements.
F-5
PTC Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | ||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||
| Balance as of October 1, 2014 | 115,025 | $ | 1,150 | $ | 1,597,277 | $ | (650,171 | ) | $ | (94,367 | ) | $ | 853,889 | |||||||||
| Common stock issued for employee stock-based awards | 2,212 | 22 | 19 | — | — | 41 | ||||||||||||||||
| Shares surrendered by employees to pay taxes related to stock-based awards | (764 | ) | (8 | ) | (29,199 | ) | — | — | (29,207 | ) | ||||||||||||
| Compensation expense from stock-based awards | — | — | 50,182 | — | — | 50,182 | ||||||||||||||||
| Excess tax benefits from stock-based awards | — | — | 24 | — | — | 24 | ||||||||||||||||
| Net income | — | — | — | 47,557 | — | 47,557 | ||||||||||||||||
| Repurchases of common stock | (2,728 | ) | (27 | ) | (64,913 | ) | — | — | (64,940 | ) | ||||||||||||
| Foreign currency translation adjustment | — | — | — | — | (47,177 | ) | (47,177 | ) | ||||||||||||||
| Change in pension benefits, net of tax | — | — | — | — | 49,802 | 49,802 | ||||||||||||||||
| Balance as of September 30, 2015 | 113,745 | $ | 1,137 | $ | 1,553,390 | $ | (602,614 | ) | $ | (91,742 | ) | $ | 860,171 | |||||||||
| Common stock issued for employee stock-based awards | 1,820 | 18 | 3 | — | — | 21 | ||||||||||||||||
| Shares surrendered by employees to pay taxes related to stock-based awards | (597 | ) | (5 | ) | (20,934 | ) | — | — | (20,939 | ) | ||||||||||||
| Compensation expense from stock-based awards | — | — | 65,996 | — | — | 65,996 | ||||||||||||||||
| Excess tax benefits from stock-based awards | — | — | 93 | — | — | 93 | ||||||||||||||||
| Net loss | — | — | — | (54,465 | ) | — | (54,465 | ) | ||||||||||||||
| Unrealized loss on hedging instruments, net of tax | — | — | — | — | (1,244 | ) | (1,244 | ) | ||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | 408 | 408 | ||||||||||||||||
| Unrealized loss on available-for-sale securities, net of tax | — | — | — | — | (122 | ) | (122 | ) | ||||||||||||||
| Change in pension benefits, net of tax | — | — | — | — | (7,253 | ) | (7,253 | ) | ||||||||||||||
| Balance as of September 30, 2016 | 114,968 | $ | 1,150 | $ | 1,598,548 | $ | (657,079 | ) | $ | (99,953 | ) | $ | 842,666 | |||||||||
| Common stock issued for employee stock-based awards | 1,586 | 15 | (15 | ) | — | — | — | |||||||||||||||
| Shares surrendered by employees to pay taxes related to stock-based awards | (544 | ) | (5 | ) | (26,649 | ) | — | — | (26,654 | ) | ||||||||||||
| Common stock issued for employee stock purchase plan | 269 | 3 | 10,775 | — | — | 10,778 | ||||||||||||||||
| Compensation expense from stock-based awards | — | — | 76,708 | — | — | 76,708 | ||||||||||||||||
| Excess tax benefits from stock-based awards | — | — | 644 | — | — | 644 | ||||||||||||||||
| Net income | — | — | — | 6,239 | — | 6,239 | ||||||||||||||||
| Repurchases of common stock | (946 | ) | (10 | ) | (50,981 | ) | — | — | (50,991 | ) | ||||||||||||
| Unrealized loss on hedging instruments, net of tax | — | — | — | — | (299 | ) | (299 | ) | ||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | 16,593 | 16,593 | ||||||||||||||||
| Unrealized loss on available-for-sale securities, net of tax | — | — | — | — | (22 | ) | (22 | ) | ||||||||||||||
| Change in pension benefits, net of tax | — | — | — | — | 9,774 | 9,774 | ||||||||||||||||
| Balance as of September 30, 2017 | 115,333 | $ | 1,153 | $ | 1,609,030 | $ | (650,840 | ) | $ | (73,907 | ) | $ | 885,436 |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
PTC Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Description of Business and Basis of Presentation
Business
PTC Inc. was incorporated in 1985 and is headquartered in Needham, Massachusetts. PTC is a global software and services company that delivers a technology platform and solutions to help companies design, manufacture, operate, and service things for a smart, connected world.
Basis of Presentation
Our fiscal year-end is September 30. The consolidated financial statements include PTC Inc. (the parent company) and its wholly owned subsidiaries, including those operating outside the U.S. All intercompany balances and transactions have been eliminated in the consolidated financial statements. In 2015, we recorded an out of period correction of approximately $6.4 million of additional revenue that was deferred and should have been recognized previously. Management believes this correction was not material to the then current period financial statements or any previously issued financial statements.
We prepare our financial statements under generally accepted accounting principles in the U.S. that require management to make estimates and assumptions that affect the amounts reported and the related disclosures. Actual results could differ from these estimates.
Reclassifications
Effective with the beginning of the third quarter of 2017, we are reporting cost of license and subscription revenue separately from cost of support revenue and are presenting cost of revenue in three categories: 1) cost of license and subscription revenue, 2) cost of support revenue, and 3) cost of professional services revenue. Cost of license and subscription includes the cost of perpetual and subscription licenses; cost of support includes the cost of supporting both perpetual and subscription licenses. Costs of revenue for previous periods in the accompanying Consolidated Statements of Operations are presented on a basis consistent with the current period presentation.
B. Summary of Significant Accounting Policies
Foreign Currency Translation
For our non-U.S. operations where the functional currency is the local currency, we translate assets and liabilities at exchange rates in effect at the balance sheet date and record translation adjustments in stockholders’ equity. For our non-U.S. operations where the U.S. dollar is the functional currency, we remeasure monetary assets and liabilities using exchange rates in effect at the balance sheet date and nonmonetary assets and liabilities at historical rates and record resulting exchange gains or losses in foreign currency net losses in the Consolidated Statements of Operations. We translate income statement amounts at average rates for the period. Transaction gains and losses are recorded in foreign currency net losses in the Consolidated Statements of Operations.
Revenue Recognition
Our sources of revenue include: (1) subscription, (2) support, (3) perpetual license and (4) professional services. We record revenues for software related deliverables in accordance with the guidance provided by ASC 985-605, Software-Revenue Recognition and revenues for non-software deliverables in accordance with ASC 605-25, Revenue Recognition, Multiple-Element Arrangements when the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred (generally, FOB shipping point or electronic distribution), (3) the fee is fixed or determinable, and (4) collection is probable. We exercise judgment and use estimates in connection with determining the amounts of software license and services revenues to be recognized in each accounting period. Our primary judgments involve the following:
| • | determining whether collection is probable; |
| • | assessing whether the fee is fixed or determinable; |
| • | determining whether service arrangements, including modifications and customization of the underlying software, are not essential to the functionality of the licensed software and thus would |
F-7
result in the revenue for license and service elements of an agreement being recorded separately; and
| • | determining the fair value of services and support elements included in multiple-element arrangements, which is the basis for allocating and deferring revenue for such services and support. |
Our software is distributed primarily through our direct sales force. In addition, we have an indirect distribution channel through alliances with resellers. Revenue arrangements with resellers are generally recognized on a sell-through basis; that is, when we deliver the product to the end-user customer. We record consideration given to a reseller as a reduction of revenue to the extent we have recorded revenue from the reseller. We do not offer contractual rights of return, stock balancing, or price protection to our resellers, and actual product returns from them have been insignificant to date. As a result, we do not maintain reserves for reseller product returns.
At the time of each sale transaction, we must make an assessment of the collectability of the amount due from the customer. Revenue is only recognized at that time if management deems that collection is probable. In making this assessment, we consider customer credit-worthiness and historical payment experience. At that same time, we assess whether fees are fixed or determinable and free of contingencies or significant uncertainties. In assessing whether the fee is fixed or determinable, we consider the payment terms of the transaction, including transactions with payment terms that extend beyond our customary payment terms, and our collection experience in similar transactions without making concessions, among other factors. We have periodically provided financing to credit-worthy customers with payment terms up to 24 months. If the fee is determined not to be fixed or determinable, revenue is recognized only as payments become due from the customer, provided that all other revenue recognition criteria are met. Our software license arrangements generally do not include customer acceptance provisions. However, if an arrangement includes an acceptance provision, we record revenue only upon the earlier of (1) receipt of written acceptance from the customer or (2) expiration of the acceptance period.
Generally, our contracts are accounted for individually. However, when contracts are closely interrelated and dependent on each other, it may be necessary to account for two or more contracts as one to reflect the substance of the group of contracts.
Subscription
Subscription revenue includes revenue from two primary sources: (1) subscription-based licenses, and (2) cloud services.
Subscription-based licenses include the right for a customer to use our licenses and receive related support for a specified term and revenue is recognized ratably over the term of the arrangement since we do not have VSOE of fair value for our coterminous support. When sold in arrangements with other elements, VSOE of fair value is established for the subscription-based licenses through the use of a substantive renewal clause within the customer contract for a combined annual fee that includes the term-based license and related support.
Cloud services revenue (which in 2017, 2016 and 2015 represented less than 5% of our total revenue) includes fees for hosting and application management of customers’ perpetual or subscription-based licenses (hosting services) and fees for Software as a Service (SaaS) arrangements. Generally, customers have the right to terminate a hosting services contract and take possession of the licenses without a significant penalty. When hosting services are sold as part of a multi-element transaction, revenue is allocated to hosting services based on VSOE, and recognized ratably over the contractual term beginning on the commencement dates of each contract, which is the date the services are made available to the customer. VSOE is established for hosting services either through a substantive stated renewal option or stated contractual overage rates, as these rates represent the value the customer is willing to pay on a standalone basis. We also offer cloud services under SaaS arrangements whereby customers access our software in the cloud. Under SaaS arrangements, customers are not entitled to terminate the cloud services and cannot take possession of the software. Cloud services include set-up fees, which are recognized ratably over the contract term or the expected customer life, whichever is longer.
F-8
Support
Support contracts generally include rights to unspecified upgrades (when and if available), telephone and internet-based support, updates and bug fixes. Support revenue is recognized ratably over the term of the support contract on a straight-line basis.
Perpetual License
Under perpetual license arrangements, we generally recognize license revenue up front upon shipment to the customer. We use the residual method to recognize revenue from perpetual license software arrangements that include one or more elements to be delivered at a future date when evidence of the fair value of all undelivered elements exists, and the elements of the arrangement qualify for separate accounting as described below. Under the residual method, the fair value of the undelivered elements (i.e., support and services) based on our vendor-specific objective evidence (“VSOE”) of fair value is deferred and the remaining portion of the total arrangement fee is allocated to the delivered elements (i.e., perpetual software license). If evidence of the fair value of one or more of the undelivered elements does not exist, all revenues are deferred and recognized when delivery of all of those elements has occurred or when fair values can be established. We determine VSOE of the fair value of services and support revenue based upon our recent pricing for those elements when sold separately. For certain transactions, VSOE is determined based on a substantive renewal clause within a customer contract. Our current pricing practices are influenced primarily by product type, purchase volume, sales channel and customer location. We review services and support sold separately on a periodic basis and update, when appropriate, our VSOE of fair value for such elements to ensure that it reflects our recent pricing experience.
Professional Services
Our software arrangements often include implementation, consulting and training services that are sold under consulting engagement contracts or as part of the software license arrangement. When we determine that such services are not essential to the functionality of the licensed software, we record revenue separately for the license and service elements of these arrangements, provided that appropriate evidence of fair value exists for the undelivered services (i.e. VSOE of fair value). We consider various factors in assessing whether a service is not essential to the functionality of the software, including if the services may be provided by independent third parties experienced in providing such services (i.e. consulting and implementation) in coordination with dedicated customer personnel, and whether the services result in significant modification or customization of the software’s functionality. When professional services qualify for separate accounting, professional services revenues under time and materials billing arrangements are recognized as the services are performed. Professional services revenues under fixed-priced contracts are generally recognized as the services are performed using a proportionate performance model with hours or costs as the input method of attribution.
When we provide professional services that are considered essential to the functionality of the software, the arrangement does not qualify for separate accounting of the license and service elements, and the license revenue is recognized together with the consulting services using the percentage-of-completion method of contract accounting. Under such arrangements, consideration is recognized as the services are performed as measured by an observable input. In these circumstances, we separate license revenue from service revenue for income statement presentation by allocating VSOE of fair value of the consulting services as service revenue, and the residual portion as license revenue. Under the percentage-of-completion method, we estimate the stage of completion of contracts with fixed or “not to exceed” fees based on hours or costs incurred to date as compared with estimated total project hours or costs at completion. Adjustments to estimates to complete are made in the periods in which facts resulting in a change become known. When total cost estimates exceed revenues, we accrue for the estimated losses when identified. The use of the proportionate performance and percentage-of-completion methods of accounting require significant judgment relative to estimating total contract costs or hours (hours being a proxy for costs), including assumptions relative to the length of time to complete the project, the nature and complexity of the work to be performed and anticipated changes in salaries and other costs.
Reimbursements of out-of-pocket expenditures incurred in connection with providing consulting services are included in professional services revenue, with the offsetting expense recorded in cost of professional services revenue.
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Training services include on-site and classroom training. Training revenues are recognized as the related training services are provided.
Deferred Revenue
Billed deferred revenue primarily relates to software subscription and support agreements billed to customers for which the services have not yet been provided. The liability associated with performing these services is included in deferred revenue and, if not yet paid, the related customer receivable is included in other current assets. Billed but uncollected support and subscription-related amounts included in other current assets at September 30, 2017 and 2016 were $160.9 million and $126.3 million, respectively. Deferred revenue consisted of the following:
| September 30, | |||||||
| 2017 | 2016 | ||||||
| (in thousands) | |||||||
| Deferred subscription revenue | $ | 193,376 | $ | 102,847 | |||
| Deferred support revenue | 256,999 | 297,684 | |||||
| Deferred perpetual license revenue | 1,773 | 4,151 | |||||
| Deferred professional services revenue | 6,759 | 8,975 | |||||
| Total deferred revenue | $ | 458,907 | $ | 413,657 |
Cash Equivalents
Our cash equivalents are invested in money market accounts and time deposits of financial institutions. We have established guidelines relative to credit ratings, diversification and maturities that are intended to maintain safety and liquidity. Cash equivalents include highly liquid investments with maturity periods of three months or less when purchased.
Marketable Securities
The amortized cost and fair value of marketable securities as of September 30, 2017 and 2016 were as follows:
| September 30, 2017 | |||||||||||||||
| Amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||
| (in thousands) | |||||||||||||||
| Certificates of deposit | $ | 240 | $ | — | $ | — | $ | 240 | |||||||
| Corporate notes/bonds | 47,811 | 2 | (140 | ) | 47,673 | ||||||||||
| U.S. government agency securities | 2,407 | — | (5 | ) | 2,402 | ||||||||||
| $ | 50,458 | $ | 2 | $ | (145 | ) | $ | 50,315 |
| September 30, 2016 | |||||||||||||||
| Amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||
| (in thousands) | |||||||||||||||
| Certificates of deposit | $ | 681 | $ | — | $ | — | $ | 681 | |||||||
| Commercial paper | 11,945 | — | (20 | ) | 11,925 | ||||||||||
| Corporate notes/bonds | 34,701 | — | (100 | ) | 34,601 | ||||||||||
| U.S. government agency securities | 2,411 | — | (2 | ) | 2,409 | ||||||||||
| $ | 49,738 | $ | — | $ | (122 | ) | $ | 49,616 |
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
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securities, the more susceptible they are to changes in market interest rates and bond yields. All unrealized losses are due to changes in market interest rates, bond yields and/or credit ratings.
We review our investments to identify and evaluate investments that have an indication of possible impairment. We concluded that, at September 30, 2017, the unrealized losses were temporary. The following table summarizes the fair value and gross unrealized losses aggregated by category and the length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2017. As of September 30, 2016, all securities were held for less than twelve months.
| September 30, 2017 | |||||||||||||||||||||||
| Less than twelve months | Greater than twelve months | Total | |||||||||||||||||||||
| Fair Value | Gross unrealized loss | Fair Value | Gross unrealized loss | Fair Value | Gross unrealized loss | ||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Certificates of deposit | $ | 240 | $ | — | $ | — | $ | — | $ | 240 | $ | — | |||||||||||
| Corporate notes/bonds | 15,254 | (43 | ) | 28,885 | (97 | ) | 44,139 | (140 | ) | ||||||||||||||
| US government agency securities | — | — | 2,402 | (5 | ) | 2,402 | (5 | ) | |||||||||||||||
| $ | 15,494 | $ | (43 | ) | $ | 31,287 | $ | (102 | ) | $ | 46,781 | $ | (145 | ) |
The following table presents our available-for-sale marketable securities by contractual maturity date, as of September 30, 2017 and 2016.
| September 30, 2017 | September 30, 2016 | ||||||||||||||
| Amortized cost | Fair value | Amortized cost | Fair value | ||||||||||||
| (in thousands) | (in thousands) | ||||||||||||||
| Due in one year or less | $ | 18,274 | $ | 18,244 | $ | 18,585 | $ | 18,549 | |||||||
| Due after one year through three years | 32,184 | 32,071 | 31,153 | 31,067 | |||||||||||
| $ | 50,458 | $ | 50,315 | $ | 49,738 | $ | 49,616 |
Cost Method Investments
We generally account for non-marketable equity investments under the cost method. We monitor non-marketable equity investments for events that could indicate that the investments are impaired, such as deterioration in the investee's financial condition and business forecasts, and lower valuations in recent or proposed financings. For an other-than-temporary impairment in the investment, we record a charge to other expense for the difference between the estimated fair value and the carrying value. The carrying value of our non-marketable equity investments are recorded in noncurrent assets and totaled $0.7 million and $11.6 million as of September 30, 2017 and 2016, respectively. In 2017, we sold a cost method investment in a private company for $13.7 million for a gain of approximately $3.7 million.
Concentration of Credit Risk and Fair Value of Financial Instruments
The amounts reflected in the Consolidated Balance Sheets for cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to their short maturities. Financial instruments that potentially subject us to concentration of credit risk consist primarily of investments, trade accounts receivable and foreign currency derivative instruments. Our cash, cash equivalents, and foreign currency derivatives are placed with financial institutions with high credit standings. Our credit risk for derivatives is also mitigated due to the short-term nature of the contracts. Our customer base consists of large numbers of geographically diverse customers dispersed across many industries. No individual customer comprised more than 10% of our trade accounts receivable as of September 30, 2017 or 2016 or comprised more than 10% of our revenue for the years ended September 30, 2017, 2016 or 2015.
Fair Value Measurements
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. Generally accepted accounting principles prescribe a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use
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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 are usually large financial institutions. Our foreign currency contracts’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy.
The fair value of our contingent consideration arrangements is determined based on our evaluation as to the probability and amount of any earn-out that will be achieved based on expected future performances by the acquired entities. These arrangements are classified within Level 3 of the fair value hierarchy.
Our significant financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 and 2016 were as follows:
| September 30, 2017 | |||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| (in thousands) | |||||||||||||||
| Financial assets: | |||||||||||||||
| Cash equivalents (1) | $ | 49,845 | $ | — | $ | — | $ | 49,845 | |||||||
| Marketable securities | |||||||||||||||
| Certificates of deposit | — | 240 | — | 240 | |||||||||||
| Corporate notes/bonds | 47,673 | — | — | 47,673 | |||||||||||
| U.S. government agency securities | — | 2,402 | — | 2,402 | |||||||||||
| Forward contracts | — | 1,163 | — | 1,163 | |||||||||||
| $ | 97,518 | $ | 3,805 | $ | — | $ | 101,323 | ||||||||
| Financial liabilities: | |||||||||||||||
| Contingent consideration related to acquisitions | $ | — | $ | — | $ | 8,400 | $ | 8,400 | |||||||
| Forward contracts | — | 4,347 | — | 4,347 | |||||||||||
| $ | — | $ | 4,347 | $ | 8,400 | $ | 12,747 |
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| September 30, 2016 | |||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| (in thousands) | |||||||||||||||
| Financial assets: | |||||||||||||||
| Cash equivalents (1) | $ | 60,139 | $ | — | $ | — | $ | 60,139 | |||||||
| Marketable securities | |||||||||||||||
| Certificates of deposit | — | 681 | — | 681 | |||||||||||
| Commercial paper | — | 11,925 | — | 11,925 | |||||||||||
| Corporate notes/bonds | 34,601 | — | — | 34,601 | |||||||||||
| U.S. government agency securities | — | 2,409 | — | 2,409 | |||||||||||
| Forward contracts | — | 260 | — | 260 | |||||||||||
| $ | 94,740 | $ | 15,275 | $ | — | $ | 110,015 | ||||||||
| Financial liabilities: | |||||||||||||||
| Contingent consideration related acquisitions | $ | — | $ | — | $ | 19,570 | $ | 19,570 | |||||||
| Forward contracts | — | 3,170 | — | 3,170 | |||||||||||
| $ | — | $ | 3,170 | $ | 19,570 | $ | 22,740 |
(1) Money market funds and time deposits.
Since 2013, we have had three acquisitions resulting in contingent consideration: ThingWorx, ColdLight and Kepware. Changes in the fair value of Level 3 contingent consideration liability associated with these acquisitions were as follows:
| Contingent Consideration | |||||||||||||||
| (in thousands) | |||||||||||||||
| ThingWorx | ColdLight | Kepware | Total | ||||||||||||
| Balance at October 1, 2015 | $ | 9,000 | $ | 4,000 | $ | — | $ | 13,000 | |||||||
| Contingent consideration at acquisition | — | — | 16,900 | 16,900 | |||||||||||
| Change in fair value of contingent consideration | — | 1,000 | 170 | 1,170 | |||||||||||
| Payment of contingent consideration | (9,000 | ) | (2,500 | ) | — | (11,500 | ) | ||||||||
| Balance at October 1, 2016 | — | 2,500 | 17,070 | 19,570 | |||||||||||
| Change in fair value of contingent consideration | — | — | 930 | 930 | |||||||||||
| Payment of contingent consideration | — | (2,500 | ) | (9,600 | ) | (12,100 | ) | ||||||||
| Balance at September 30, 2017 | $ | — | $ | — | $ | 8,400 | $ | 8,400 |
As of September 30, 2017, all contingent consideration liabilities are included in accrued expenses and other current liabilities. Contingent consideration is valued using a discounted cash flow method and a probability weighted estimate of achievement of the targets. Of the payments made in 2017, 2016 and 2015, $11.0 million, $10.6 million and $4.3 million, respectively, was included in financing activities in the Consolidated Statement of Cash Flows based on the fair value of the liabilities recorded at the acquisition dates with the balance recorded in operating activities.
In connection with our acquisition of Kepware, the former shareholders were eligible to receive additional consideration of up to $18.0 million, which was contingent on the achievement of certain Financial Performance, Product Integration and Business Integration targets (as defined in the Stock Purchase Agreement) within 24 months from April 1, 2016. If such targets were achieved within the defined 12 month, 18 month and 24 month earn-out periods. The estimated undiscounted range of outcomes for the contingent consideration was $16.9 million to $18.0 million at the acquisition date. As of September 30, 2017, our estimate of the liability was $8.4 million, net of $9.6 million in payments made in 2017.
In connection with our 2015 acquisition of ColdLight, the former shareholders were eligible to receive contingent consideration of up to $5.0 million. In connection with accounting for the business combination, we recorded a liability of $3.8 million, representing the fair value of the contingent consideration.
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In connection with our 2014 acquisition of ThingWorx, the former shareholders were eligible to receive contingent consideration of up to $18.0 million if certain profitability and bookings targets were achieved within two years of the acquisition. As of October 1, 2015, the contingent consideration had been fully earned and $9.0 million of the total contingent consideration was paid in July 2015, with the remainder paid in July 2016.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. In determining the adequacy of the allowance for doubtful accounts, management specifically analyzes individual accounts receivable, historical bad debts, customer concentrations, customer credit-worthiness, current economic conditions, and accounts receivable aging trends. Our allowance for doubtful accounts on trade accounts receivable was $1.1 million as of September 30, 2017, $1.0 million as of September 30, 2016, $1.0 million as of September 30, 2015 and $1.6 million as of September 30, 2014. Uncollectible trade accounts receivable written-off, net of recoveries, were $1.5 million, $0.3 million and $0.8 million in 2017, 2016 and 2015, respectively. Bad debt expense was $1.5 million, $0.3 million and $0.2 million in 2017, 2016 and 2015, respectively, and is included in general and administrative expenses in the accompanying Consolidated Statements of Operations.
Derivatives
Generally accepted accounting principles require all derivatives, whether designated in a hedging relationship or not, to be recorded on the balance sheet at fair value. Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Our most significant foreign currency exposures relate to Western European countries, Japan, China and Canada. Our foreign currency risk management strategy is principally designed to mitigate the future potential financial impact of changes in the U.S. dollar value of anticipated transactions and balances denominated in foreign currency, resulting from changes in foreign currency exchange rates. We enter into derivative transactions, specifically foreign currency forward contracts, to manage the exposures to foreign currency exchange risk to reduce earnings volatility. We do not enter into derivatives transactions for trading or speculative purposes. For a description of our non-designated hedge and cash flow hedge activities see Note N Derivative Financial Instruments.
Non-Designated Hedges
We hedge our net foreign currency monetary assets and liabilities primarily resulting from foreign currency denominated receivables and payables with foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These contracts have maturities of up to approximately three months. Generally, we do not designate these foreign currency forward contracts as hedges for accounting purposes and changes in the fair value of these instruments are recognized immediately in earnings. Gains or losses on the underlying foreign-denominated balance are offset by the loss or gain on the forward contract and are included in foreign currency losses, net.
Cash Flow Hedges
Our foreign exchange risk management program objective is to identify foreign exchange exposures and implement appropriate hedging strategies to minimize earnings fluctuations resulting from foreign exchange rate movements. We designate certain foreign exchange forward contracts as cash flow hedges of Euro, Yen and SEK denominated intercompany forecast revenue transactions (supported by third party sales). All foreign exchange forward contracts are carried at fair value on the Consolidated Balance Sheets and the maximum duration of foreign exchange forward contracts is 15 months.
Cash flow hedge relationships are designated at inception, and effectiveness is assessed prospectively and retrospectively using regression analysis on a monthly basis. As the forward contracts are highly effective in offsetting changes to future cash flows on the hedged transactions, we record the effective portion of changes in these cash flow hedges in accumulated other comprehensive income and subsequently reclassify into earnings in the same period during which the hedged transactions are recognized in earnings. Changes in the fair value of foreign exchange forward contracts due to changes in time value are included in the assessment of effectiveness. Our derivatives are not subject to any credit contingent features. We manage credit risk with counter-parties by trading among several counter-parties and we review our counter-parties’ credit at least quarterly.
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Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives. Computer hardware and software are typically amortized over three to five years, and furniture and fixtures over three to eight years. Leasehold improvements are amortized over the shorter of their useful lives or the remaining terms of the related leases. Property and equipment under capital leases are amortized over the lesser of the lease terms or their estimated useful lives. Maintenance and repairs are charged to expense when incurred; additions and improvements are capitalized. When an item is sold or retired, the cost and related accumulated depreciation is relieved, and the resulting gain or loss, if any, is recognized in income.
Software Development Costs
We incur costs to develop computer software to be licensed or otherwise marketed to customers. Research and development costs are expensed as incurred, except for costs of internally developed or externally purchased software that qualify for capitalization. Development costs for software to be sold externally incurred subsequent to the establishment of technological feasibility, but prior to the general release of the product, are capitalized and, upon general release, are amortized using the greater of either the straight-line method over the expected life of the related products or based upon the pattern in which economic benefits related to such assets are realized. The straight-line method is used if it approximates the same amount of expense as that calculated using the ratio that current period gross product revenues bear to total anticipated gross product revenues. No development costs for software to be sold externally were capitalized in 2017, 2016 or 2015. In connection with acquisitions of businesses described in Note E, we capitalized software of $6.0 million and $71.5 million in 2017 and 2016, respectively. These assets are included in acquired intangible assets in the accompanying Consolidated Balance Sheets.
Goodwill, Acquired Intangible Assets and Long-lived Assets
Goodwill is the amount by which the purchase price in a business acquisition exceeds the fair values of net identifiable assets on the date of purchase.
Goodwill is evaluated for impairment annually, as of the end of the third quarter, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Factors we consider important, on an overall company basis and reportable-segment basis, when applicable, that could trigger an impairment review include significant under-performance relative to historical or projected future operating results, significant changes in our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period and a reduction of our market capitalization relative to net book value.
Our annual goodwill impairment test is based on either a qualitative (Step 0) or quantitative (Step 1) assessment, and is designed to conclude whether we believe it is more likely than not that the fair values of our reporting units exceed their carrying values. A Step 0 assessment includes a review of qualitative factors including company specific (financial performance and long-range plans), industry, and macroeconomic factors, and a consideration of the fair value of each reporting unit at the last valuation date. A Step 1 assessment is a quantitative analysis that compares the fair value of the reporting unit to its carrying value. If the reporting unit’s carrying value exceeds its fair value, we record an impairment loss equal to the difference between the carrying value of goodwill and its implied fair value. We estimate the fair values of our reporting units using discounted cash flow valuation models. Those models require estimates of future revenues, profits, capital expenditures, working capital, terminal values based on revenue multiples, and discount rates for each reporting unit. We estimate these amounts by evaluating historical trends, current budgets, operating plans and industry data.
We completed our annual goodwill impairment review as of July 1, 2017 based on a Step 0 assessment and concluded that no impairment charge was required as of that date.
Long-lived assets primarily include property and equipment and acquired intangible assets with finite lives (including purchased software, customer lists and trademarks). Purchased software is amortized over periods up to 11 years, customer lists are amortized over periods up to 12 years and trademarks are amortized over periods up to 12 years. We review long-lived assets for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of those assets are no longer appropriate. An impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset or asset group. If
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impairment is indicated, the asset is written down to its estimated fair value based on a discounted cash flow analysis.
Advertising Expenses
Advertising costs are expensed as incurred. Total advertising expenses incurred were $2.5 million, $2.1 million and $1.1 million in 2017, 2016 and 2015, respectively.
Income Taxes
Our income tax expense includes U.S. and international income taxes. Certain items of income and expense are not reported in tax returns and financial statements in the same year. The tax effects of these differences are reported as deferred tax assets and liabilities. Deferred tax assets are recognized for the estimated future tax effects of deductible temporary differences and tax operating loss and credit carryforwards. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that it is more likely than not that all or a portion of deferred tax assets will not be realized, we establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we include an expense within the tax provision in the Consolidated Statements of Operations.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss), which includes foreign currency translation adjustments, changes in unrecognized actuarial gains and losses (net of tax) related to pension benefits, unrealized gains and losses on hedging instruments and unrealized gains and losses on marketable securities. For the purposes of comprehensive income disclosures, we do not record tax provisions or benefits for the net changes in the foreign currency translation adjustment, as we intend to reinvest permanently undistributed earnings of our foreign subsidiaries. Accumulated other comprehensive loss is reported as a component of stockholders’ equity and, as of September 30, 2017 and 2016, was comprised of cumulative translation adjustment losses of $54.6 million and $71.2 million, respectively, unrecognized actuarial losses related to pension benefits of $24.7 million ($17.6 million net of tax) and $38.7 million ($27.4 million net of tax), respectively, unrecognized loss on hedging instruments of $1.8 million ($1.5 million net of tax) and $1.4 million, respectively, and unrecognized losses on marketable securities of $0.1 million and $0.1 million, respectively.
Earnings per Share (EPS)
Basic EPS is calculated by dividing net income by the weighted average number of shares outstanding during the period. Unvested restricted shares, although legally issued and outstanding, are not considered outstanding for purposes of calculating basic earnings per share. Diluted EPS is calculated by dividing net income by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding stock options, restricted shares and restricted stock units using the treasury stock method. The calculation of the dilutive effect of outstanding equity awards under the treasury stock method includes consideration of proceeds from the assumed exercise of stock options, unrecognized compensation expense and any tax benefits as additional proceeds. Due to the net loss generated in the year ended September 30, 2016, approximately 1.7 million restricted stock units have been excluded from the computation of diluted EPS as the effect would have been anti-dilutive.
The following table presents the calculation for both basic and diluted EPS:
| Year ended September 30, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands, except per share data) | |||||||||||
| Net income (loss) | $ | 6,239 | $ | (54,465 | ) | $ | 47,557 | ||||
| Weighted average shares outstanding | 115,523 | 114,612 | 114,775 | ||||||||
| Dilutive effect of employee stock options, restricted shares and restricted stock units | 1,833 | — | 1,237 | ||||||||
| Diluted weighted average shares outstanding | 117,356 | 114,612 | 116,012 | ||||||||
| Basic earnings (loss) per share | $ | 0.05 | $ | (0.48 | ) | $ | 0.41 | ||||
| Diluted earnings (loss) per share | $ | 0.05 | $ | (0.48 | ) | $ | 0.41 |
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Stock-Based Compensation
We measure the compensation cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award. See Note K for a description of the types of stock-based awards granted, the compensation expense related to such awards and detail of equity-based awards outstanding. See Note G for detail of the tax benefit related to stock-based compensation recognized in the Consolidated Statements of Operations.
Recently Adopted Accounting Pronouncements
Cash Flows
In August 2016, the FASB issued ASU 2016-15 to clarify whether the following items should be categorized as operating, investing or financing in the statement of cash flows: (i) debt prepayments and extinguishment costs, (ii) settlement of zero-coupon debt, (iii) settlement of contingent consideration, (iv) insurance proceeds, (v) settlement of corporate-owned life insurance (COLI) and bank-owned life insurance (BOLI) policies, (vi) distributions from equity method investees, (vii) beneficial interests in securitization transactions, and (viii) receipts and payments with aspects of more than one class of cash flows. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017 (our fiscal 2019) and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We adopted this new guidance in our fourth quarter ended September 30, 2017 with no impact on the financial statements.
Debt Issuance Costs
In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30), to simplify the required presentation of debt issuance costs. The amended guidance requires that debt issuance costs be presented in the balance sheet as a direct reduction from the carrying amount of the related debt liability rather than as an asset. It is effective for financial statements issued for fiscal years beginning after December 15, 2015 (our fiscal 2017) with early adoption permitted. We adopted this new guidance in our first quarter ended December 31, 2016 and applied this guidance retrospectively. As a result, debt issuance costs of $6.5 million previously included in other long-term assets on the Consolidated Balance Sheet as of September 30, 2016 have been reclassified. See Note H. Debt for our debt balances at September 30, 2017 and 2016 net of the debt issuance costs.
Going Concern
In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern," which requires management to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern and, if so, provide certain footnote disclosures. This ASU is effective for annual periods ending after December 15, 2016, including interim reporting periods thereafter. We adopted this new guidance in our fourth quarter ended September 30, 2017 with no impact on the financial statements.
Pending Accounting Pronouncements
Derivative Financial Instruments
In August 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-12, "Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedging Activities", which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The guidance is effective for annual reporting periods beginning after December 15, 2018 (our fiscal 2020) including interim reporting periods within those annual reporting periods and early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
Income Taxes
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). The purpose of ASU 2016-16 is to simplify the income tax accounting of an intra-entity transfer of an asset other than inventory and to record its effect when the transfer occurs. The guidance is effective for annual reporting periods beginning after December 15, 2017 (our fiscal 2019) including interim reporting periods within those annual reporting periods and early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements. We expect to record a net deferred tax asset of approximately $77 million upon
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adoption, primarily relating to deductible amortization of intangible assets in Ireland. Post adoption, our effective tax rate will no longer include the benefit of this amortization which is reflected in our effective tax rate reconciliation under the current guidance.
Stock Compensation
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments, including accounting for income taxes, earnings per share, and forfeitures. The ASU is effective for public companies in annual periods beginning after December 15, 2016 (our fiscal 2018) and interim periods within those years. Early adoption is permitted in any interim period, with all adjustments applied as of the beginning of the fiscal year of adoption. We will adopt the guidance in the first quarter of 2018. We do not expect adoption of the guidance to have a material impact on our consolidated financial statements. Previously unrecognized excess tax benefits will increase deferred tax assets, which will be substantially offset by an increase in the valuation allowance. We have elected to account for forfeitures as they occur, rather than estimate expected forfeitures, which will result in a cumulative effect adjustment of approximately $1 million to reduce retained earnings as of October 1, 2017.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will replace the existing guidance in ASC 840, Leases. The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and to disclose important information about leasing arrangements. ASU 2016-02 is effective for annual periods beginning after December 15, 2018 (our fiscal 2020) and interim periods within those annual periods. Early adoption is permitted and modified retrospective application is required. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09). ASU 2014-09 supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The FASB has also issued additional standards to provide clarification and implementation guidance on ASU 2014-09.
The core principle of ASU 2014-09 is to recognize revenue when promised goods or services are transferred to a customer in an amount that reflects the consideration that is expected to be received for those goods or services. Under the new guidance, an entity is required to evaluate revenue recognition through a five-step process: (1) identifying a contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations in the contract; and (5) recognizing revenue when (or as) the entity satisfies a performance obligation. The standard also requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In applying the principles of ASU 2014-09, it is possible more judgment and estimates may be required within the revenue recognition process than is required under existing U.S. GAAP, including identifying performance obligations, estimating the amount of variable consideration to include in the transaction price, and estimating the value of each performance obligation to allocate the total transaction price to each separate performance obligation.
ASU 2014-09 is effective for us in our first quarter of fiscal 2019. Companies may adopt ASU 2014-09 using either the retrospective method, under which each prior reporting period is presented under ASU 2014-09, with the option to elect certain permitted practical expedients, or the modified retrospective method, under which a company adopts ASU 2014-09 from the beginning of the year of initial application with no restatement of comparative periods, with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application, with certain additional required disclosures. We currently expect to adopt ASU 2014-09 using the modified retrospective method.
While we are continuing to assess the impact of the new standard, we currently believe the most significant impact relates to accounting for our subscription arrangements that include term-based on-premise software licenses bundled with support. Under current GAAP, the revenue attributable to these subscription licenses is recognized ratably over the term of the arrangement because VSOE does not exist for the undelivered support element as it is not sold separately. Under the new standard, the requirement to have VSOE for undelivered elements to enable the separation of revenue for the delivered software
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licenses is eliminated. Accordingly, under the new standard we will be required to recognize as revenue a portion of the subscription fee upon delivery of the software license. We currently expect revenue related to our perpetual license revenue and related support contracts, professional services and cloud offerings to remain substantially unchanged. Due to the complexity of certain of our contracts, the actual revenue recognition treatment required under the new standard may be dependent on contract-specific terms and, therefore, may vary in some instances.
Upon implementation of the new standard in fiscal 2019, we expect to make revisions to contract terms with our customers that will result in shortening the initial, non-cancellable term of our multi-year subscriptions to one year. This change will result in annual contractual periods for the majority of our software subscriptions, the license portion of which will be recognized at the beginning of each annual contract period upon delivery of the licenses and the support portion of which will be recognized ratably over the one year contractual period. As a result, we anticipate one year of subscription revenue will be recognized for each contract each year; however, more of the revenue will be recognized in the quarter that the contract period begins and less will be recognized in the subsequent three quarters of the contract than under the current accounting rules.
Under the modified retrospective method, we will evaluate each contract that is ongoing on the adoption date as if that contract had been accounted for under ASU 2014-09 from contract inception. Some license revenue related to subscription arrangements that would have been recognized in future periods under current GAAP will be recast under ASU 2014-09 as if the revenue had been recognized in prior periods. Under this transition method, we will not adjust historical reported revenue amounts. Instead, the revenue that would have been recognized under this method prior to the adoption date will be an adjustment to retained earnings and will not be recognized as revenue in future periods as previously planned. Because we expect that license revenue associated with subscription contracts will be recognized up front instead of over time under ASU 2014-09, we expect to have some portion of our deferred revenue to be adjusted to retained earnings upon adoption, which could be material. During the first year of adoption, we will disclose the amount of this retained earnings adjustment and intend to provide supplemental disclosure of how this revenue would have been recognized under the current rules.
Another significant provision under ASU 2014-09 includes the capitalization and amortization of costs associated with obtaining a contract, such as sales commissions. Currently, we expense sales commissions in the period incurred. Under ASU 2014-09, direct and incremental costs to acquire a contract are capitalized and amortized using a systematic basis over the pattern of transfer of the goods and services to which the asset relates. While we are continuing to assess the impact of this provision of ASU 2014-09, we likely will be required to capitalize incremental costs such as commissions and amortize those costs over the period the capitalized assets are expected to contribute to future cash flows.
Furthermore, we have made and will continue to make investments in systems and processes to enable timely and accurate reporting under the new standard. We currently expect that necessary operational and internal control structural changes will be implemented prior to the adoption date.
C. Restructuring Charges
Restructuring charges for 2017 were $7.9 million, $8.1 million related to the plan announced in October 2015 described below, offset by a $0.2 million credit related to prior year restructuring actions.
On October 23, 2015, we initiated a plan to restructure our workforce and consolidate select facilities in order to reduce our cost structure to enable us to invest in our identified growth opportunities. The actions resulted in total restructuring charges of $85.3 million, primarily associated with termination benefits associated with approximately 800 employees. In 2017, we recorded restructuring charges of $2.6 million attributable to termination benefits and $5.6 million related to the closure of excess facilities. In 2016, we recorded restructuring charges of $75.8 million attributable to termination benefits and $1.3 million related to the closure of excess facilities. As of September 30, 2017, this restructuring plan was substantially complete.
On April 4, 2015, we committed to a plan to restructure our workforce and consolidate select facilities to realign our global workforce to increase investment in our IoT business and to reduce our cost structure through organizational efficiencies in the face of significant foreign currency depreciation relative to the U.S. Dollar and a more cautious outlook on global macroeconomic conditions. The actions resulted in total restructuring charges of $42.1 million, primarily associated with termination benefits
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associated with 411 employees. In 2015, we recorded restructuring charges of $41.8 million attributable termination benefits and $1.4 million related to the closure of excess facilities and in 2016 and 2017, we recorded restructuring credits of $0.8 million and $0.2 million, respectively, attributable to termination benefits.
The following table summarizes restructuring charges reserve activity for the three years ended September 30, 2017:
| Employee Severance and Related Benefits | Facility Closures and Other Costs | Consolidated Total | |||||||||
| (in thousands) | |||||||||||
| Balance, October 1, 2014 | $ | 25,835 | $ | 535 | $ | 26,370 | |||||
| Charges to operations | 41,997 | 1,412 | 43,409 | ||||||||
| Cash disbursements | (52,882 | ) | (706 | ) | (53,588 | ) | |||||
| Foreign currency impact | (864 | ) | (73 | ) | (937 | ) | |||||
| Balance, September 30, 2015 | 14,086 | 1,168 | 15,254 | ||||||||
| Charges to operations | 74,929 | 1,344 | 76,273 | ||||||||
| Cash disbursements | (53,966 | ) | (1,053 | ) | (55,019 | ) | |||||
| Foreign currency impact | 128 | (28 | ) | 100 | |||||||
| Balance, September 30, 2016 | 35,177 | 1,431 | 36,608 | ||||||||
| Charges to operations | 2,373 | 5,569 | 7,942 | ||||||||
| Cash disbursements | (35,069 | ) | (2,005 | ) | (37,074 | ) | |||||
| Other non-cash charges | — | (704 | ) | (704 | ) | ||||||
| Foreign currency impact | (745 | ) | 217 | (528 | ) | ||||||
| Balance, September 30, 2017 | $ | 1,736 | $ | 4,508 | $ | 6,244 |
Of the accrual for facility closures and related costs, as of September 30, 2017 $2.3 million is included in accrued expenses and other current liabilities and $2.2 million is included in other liabilities in the Consolidated Balance Sheets. The accrual for facility closures is net of assumed sublease income of $4.2 million. The accrual for employee severance and related benefits is included in accrued compensation and benefits in the Consolidated Balance Sheets.
D. Property and Equipment
Property and equipment consisted of the following:
| September 30, | |||||||
| 2017 | 2016 | ||||||
| (in thousands) | |||||||
| Computer hardware and software | $ | 286,380 | $ | 267,928 | |||
| Furniture and fixtures | 21,145 | 20,742 | |||||
| Leasehold improvements | 47,658 | 43,769 | |||||
| Gross property and equipment | 355,183 | 332,439 | |||||
| Accumulated depreciation and amortization | (291,583 | ) | (265,326 | ) | |||
| Net property and equipment | $ | 63,600 | $ | 67,113 |
Depreciation expense was $28.0 million, $28.8 million and $28.9 million in 2017, 2016 and 2015, respectively.
E. Acquisitions
In 2016, we completed the acquisition of Kepware (on January 12, 2016) and Vuforia (on November 3, 2015), in 2015, we completed the acquisition of ColdLight (on May 7, 2015). The results of
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operations of these acquired businesses have been included in our consolidated financial statements beginning on their respective acquisition dates. Our results of operations prior to these acquisitions, if presented on a pro forma basis, would not differ materially from our reported results.
These acquisitions have been accounted for as business combinations. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the respective acquisition date. The fair values of intangible assets for Kepware and ColdLight were based on valuations using an income approach, with estimates and assumptions provided by management of the acquired companies and PTC. The fair values of intangible assets for Vuforia were based on valuations using a cost approach which requires the use of significant estimates and assumptions, including estimating costs to reproduce an asset. The process for estimating the fair values of identifiable intangible assets as well as the Kepware and ColdLight contingent consideration liabilities requires the use of significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill.
Acquisition-related costs were $1.6 million, $3.5 million and $8.9 million in 2017, 2016 and 2015, respectively. Acquisition-related costs include direct costs of completing an acquisition (e.g., investment banker fees and professional fees, including legal and valuation services) and expenses related to acquisition integration activities (e.g., professional fees, severance, and retention bonuses). In addition, subsequent adjustments to our initial estimated amounts of contingent consideration, primarily net present value changes, are included within acquisition-related charges. These costs are classified in general and administrative expenses in the accompanying Consolidated Statements of Operations.
2016 Acquisitions
Kepware
On January 12, 2016, we acquired all of the ownership interest in Kepware, Inc. for $99.4 million in cash (net of cash acquired of $0.6 million) and, $16.9 million representing the fair value of contingent consideration payable upon achievement of targets described below. We borrowed $100.0 million under our existing credit facility in January of 2016 to fund the acquisition.
The acquisition of Kepware's KEPServerEX® communication platform enhanced our portfolio of Internet of Things (IoT) technology, and accelerated our entry into the factory setting and industrial IoT. At the time of the acquisition, Kepware had historical annualized revenues which were immaterial to our financial results. Kepware added approximately $16 million to our 2016 revenue and approximately $15 million in costs and expenses.
The purchase price allocation resulted in $77.1 million of goodwill, which will be deductible for income tax purposes. Intangible assets of $34.5 million includes purchased software of $28.7 million, customer relationships of $5.2 million and trademarks of $0.6 million, which are being amortized over useful lives of 10 years, 10 years and 6 years, respectively, based upon the pattern in which economic benefits related to such assets are expected to be realized.
The resulting amount of goodwill reflects our expectations of the following benefits: 1) Kepware’s protocol translators and connectivity platform strengthen the ThingWorx technology platform and accelerate our entry into the factory setting and Industrial IoT (IIoT); 2) cross-selling opportunities for our integrated technology platforms in the critical infrastructure markets to drive revenue growth; and 3) Kepware’s 20 years of manufacturing experience strengthens our manufacturing talent and domain expertise and provides support for our manufacturing strategy initiatives.
Vuforia
On November 3, 2015, pursuant to an Asset Purchase Agreement, we acquired the Vuforia business from Qualcomm Connected Experiences, Inc., a subsidiary of Qualcomm Incorporated, for $64.8 million in cash (net of cash acquired of $4.5 million). We borrowed $50.0 million under our credit facility to finance this acquisition.
The acquisition of Vuforia's augmented reality (AR) technology platform enhances our technology portfolio and accelerates our strategy as a leading provider of technologies and solutions that blend the digital and physical worlds. At the time of the acquisition, Vuforia had approximately 80 employees and historical annualized revenues which were immaterial to our financial results. The purchase price allocation resulted in $23.3 million of goodwill, which will be deductible for income tax purposes, $41.2 million of technology and $0.3 million of net tangible assets. The acquired technology is being amortized
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over a useful life of 6 years. The resulting amount of goodwill reflects the value of the synergies created by integrating Vuforia’s augmented technology platform into PTC’s IoT solutions.
The total purchase price for our 2016 acquisitions was allocated to assets and liabilities acquired as follows:
| Purchase price allocation: | Kepware | Vuforia | |||||
| (in thousands) | |||||||
| Goodwill | $ | 77,081 | $ | 23,316 | |||
| Identifiable intangible assets | 34,500 | 41,200 | |||||
| Cash | 590 | 4,466 | |||||
| Other assets and liabilities, net | 4,729 | 261 | |||||
| Total allocation of purchase price consideration | 116,900 | 69,243 | |||||
| Less: cash acquired | (590 | ) | (4,466 | ) | |||
| Total purchase price allocation, net of cash acquired | 116,310 | 64,777 | |||||
| Less: contingent consideration | (16,900 | ) | — | ||||
| Net cash used for acquisitions of businesses | $ | 99,410 | $ | 64,777 |
2015 Acquisition
ColdLight
On May 7, 2015, we acquired all of the ownership interest of ColdLight Solutions, LLC, a company that offered solutions for data machine learning and predictive analytics, for approximately $98.6 million in cash (net of cash acquired of $1.3 million).
The purchase price allocation resulted in $85.3 million of goodwill, which is deductible for income tax purposes. Intangible assets of $17.6 million includes purchased software of $13.6 million, customer relationships of $3.5 million and trademarks of $0.5 million, which are being amortized over useful lives of 10 years, 9 years and 7 years, respectively, based upon the pattern in which economic benefits related to such assets are expected to be realized.
F. Goodwill and Acquired Intangible Assets
Effective with the beginning of the third quarter of 2016, we have three operating and reportable segments: (1) Solutions Group, (2) IoT Group and (3) 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. Prior to the change in 2016, we had two operating and reportable segments: (1) Software Products, which included license and related support revenue (including updates and technical support) for all our products except training-related products; and (2) Services, which included consulting, implementation, training, cloud services, computer-based training products, including support on these products and other services revenue.
As of September 30, 2017, goodwill and acquired intangible assets in the aggregate attributable to our Solutions Group, IoT Group and Professional Services segment was $1,175.6 million, $234.4 million and $30.6 million, respectively. As of September 30, 2016, goodwill and acquired intangible assets in the aggregate attributable to our Solutions Group, IoT Group and Professional Services segment was $1,196.6 million, $252.8 million and $30.7 million, respectively.
Goodwill is tested for impairment annually, or on an interim basis if an event occurs or circumstances change that would, more likely than not, reduce the fair value of the reporting segment below its carrying value. We completed our annual goodwill impairment review as of July 1, 2017 and concluded that no impairment charge was required as of that date. We completed our annual goodwill impairment review as of July 1, 2017 based on a qualitative assessment. Our qualitative assessment included company specific (financial performance and long-range plans), industry, and macroeconomic factors, and consideration of the fair value of each reporting unit, which was approximately double its carrying value or higher at July 2, 2016, the last valuation date. Based on our qualitative assessment, we believe it is more likely than not that the fair values of our reporting units exceed their carrying values and no further impairment testing is required. Through September 30, 2017, there have not been any events or changes
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in circumstances that indicate that the carrying values of goodwill or acquired intangible assets may not be recoverable.
Goodwill and acquired intangible assets consisted of the following:
| September 30, 2017 | September 30, 2016 | ||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Book Value | Gross Carrying Amount | Accumulated Amortization | Net Book Value | ||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Goodwill (not amortized) | $ | 1,182,772 | $ | 1,169,813 | |||||||||||||||||||
| Intangible assets with finite lives (amortized) (1): | |||||||||||||||||||||||
| Purchased software | $ | 362,955 | $ | 228,377 | $ | 134,578 | $ | 354,595 | $ | 199,192 | $ | 155,403 | |||||||||||
| Capitalized software | 22,877 | 22,877 | — | 22,877 | 22,877 | — | |||||||||||||||||
| Customer lists and relationships | 359,932 | 241,554 | 118,378 | 355,698 | 206,515 | 149,183 | |||||||||||||||||
| Trademarks and trade names | 19,138 | 14,186 | 4,952 | 19,007 | 13,323 | 5,684 | |||||||||||||||||
| Other | 4,030 | 4,030 | — | 3,955 | 3,920 | 35 | |||||||||||||||||
| $ | 768,932 | $ | 511,024 | $ | 257,908 | $ | 756,132 | $ | 445,827 | $ | 310,305 | ||||||||||||
| Total goodwill and acquired intangible assets | $ | 1,440,680 | $ | 1,480,118 |
(1) The weighted average useful lives of purchased software, customer lists and relationships, and trademarks and trade names with a remaining net book value are 9 years, 10 years, and 10 years, respectively.
The changes in the carrying amounts of goodwill from October 1, 2016 to September 30, 2017 are due to the impact of acquisitions and to foreign currency translation adjustments related to those asset balances that are recorded in non-U.S. currencies.
Changes in goodwill presented by reportable segment were as follows:
| Software Products Segment | Services Segment | Total | |||||||||||||
| (in thousands) | |||||||||||||||
| Balance, September 30, 2015 | $ | 1,016,413 | $ | 52,628 | $ | 1,069,041 | |||||||||
| Acquisition of Vuforia | 23,316 | — | 23,316 | ||||||||||||
| Acquisition of Kepware | 77,081 | — | 77,081 | ||||||||||||
| Foreign currency translation adjustments | 228 | (6 | ) | 222 | |||||||||||
| Balance, July 2, 2016 prior to reallocation | $ | 1,117,038 | $ | 52,622 | $ | 1,169,660 | |||||||||
| Solutions Group | IoT Group | Professional Services | Total | ||||||||||||
| (in thousands) | |||||||||||||||
| Balance, July 2, 2016 after reallocation | $ | 1,050,013 | $ | 90,053 | $ | 29,594 | $ | 1,169,660 | |||||||
| Foreign currency translation adjustments | 137 | 12 | 4 | 153 | |||||||||||
| Balance, September 30, 2016 | $ | 1,050,150 | $ | 90,065 | $ | 29,598 | $ | 1,169,813 | |||||||
| Acquisition | 2,847 | — | — | 2,847 | |||||||||||
| Foreign currency translation adjustments | 9,077 | 778 | 257 | 10,112 | |||||||||||
| Balance, September 30, 2017 | $ | 1,062,074 | $ | 90,843 | $ | 29,855 | $ | 1,182,772 |
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The aggregate amortization expense for intangible assets with finite lives recorded for the years ended September 30, 2017, 2016 and 2015 was reflected in our Consolidated Statements of Operations as follows:
| Year ended September 30, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Amortization of acquired intangible assets | $ | 32,108 | $ | 33,198 | $ | 36,129 | |||||
| Cost of software revenue | 26,621 | 24,604 | 19,402 | ||||||||
| Total amortization expense | $ | 58,729 | $ | 57,802 | $ | 55,531 |
The estimated aggregate future amortization expense for intangible assets with finite lives remaining as of September 30, 2017 is $58.1 million for 2018, $50.8 million for 2019, $48.0 million for 2020, $42.5 million for 2021, $29.2 million for 2022 and $29.2 million thereafter.
G. Income Taxes
Our income (loss) before income taxes consisted of the following:
| Year ended September 30, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Domestic | $ | (140,150 | ) | $ | (156,166 | ) | $ | (110,867 | ) | ||
| Foreign | 138,744 | 88,974 | 137,392 | ||||||||
| Total income (loss) before income taxes | $ | (1,406 | ) | $ | (67,192 | ) | $ | 26,525 |
Our (benefit) provision for income taxes consisted of the following:
| Year ended September 30, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Current: | |||||||||||
| Federal | $ | 2,423 | $ | 2,417 | $ | 3,907 | |||||
| State | 340 | 571 | 599 | ||||||||
| Foreign | 17,881 | 28,467 | 23,823 | ||||||||
| 20,644 | 31,455 | 28,329 | |||||||||
| Deferred: | |||||||||||
| Federal | 4,911 | 965 | (20,809 | ) | |||||||
| State | 877 | 515 | (566 | ) | |||||||
| Foreign | (34,077 | ) | (45,662 | ) | (27,986 | ) | |||||
| (28,289 | ) | (44,182 | ) | (49,361 | ) | ||||||
| Total provision (benefit) for income taxes | $ | (7,645 | ) | $ | (12,727 | ) | $ | (21,032 | ) |
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Taxes computed at the statutory federal income tax rates are reconciled to the provision (benefit) for income taxes as follows (in thousands):
| Year ended September 30, | ||||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||||||||
| Statutory federal income tax rate | $ | (492 | ) | (35 | )% | $ | (23,517 | ) | (35 | )% | $ | 9,284 | 35 | % | ||||||
| Change in valuation allowance | 17,334 | 1,233 | % | 37,996 | 57 | % | 16,718 | 63 | % | |||||||||||
| State income taxes, net of federal tax benefit | 627 | 45 | % | (82 | ) | — | % | 1,788 | 7 | % | ||||||||||
| Federal research and development credits | (2,182 | ) | (155 | )% | (5,981 | ) | (9 | )% | (2,097 | ) | (8 | )% | ||||||||
| Resolution of uncertain tax positions | (3,840 | ) | (273 | )% | — | — | % | (2,991 | ) | (11 | )% | |||||||||
| Foreign rate differences | (27,932 | ) | (1,987 | )% | (27,513 | ) | (41 | )% | (56,375 | ) | (213 | )% | ||||||||
| Foreign tax on U.S. provision | 2,737 | 195 | % | 1,987 | 3 | % | 3,764 | 14 | % | |||||||||||
| U.S. permanent items | 6,030 | 429 | % | 2,886 | 4 | % | 9,062 | 34 | % | |||||||||||
| Other, net | 73 | 4 | % | 1,497 | 2 | % | (185 | ) | — | % | ||||||||||
| Benefit for income taxes | $ | (7,645 | ) | (544 | )% | $ | (12,727 | ) | (19 | )% | $ | (21,032 | ) | (79 | )% |
In 2017 and 2016, our effective tax rate was materially impacted by our corporate structure in which our foreign taxes are at an effective tax rate lower than the U.S. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland. In 2017, 2016 and 2015, the foreign rate differential predominantly relates to these Irish earnings. Additionally, we have a full valuation allowance against deferred tax assets in the U.S., primarily related to net operating loss and tax credit carry forwards. As a result, we have not recorded a benefit related to ongoing U.S. losses. Our foreign rate differential in 2017, 2016 and 2015 includes the continuing rate benefit from a business realignment completed on September 30, 2014 in which intellectual property was transferred between two wholly-owned foreign subsidiaries. The realignment allows us to more efficiently manage the distribution of our products to European customers. In 2017 and 2016, this realignment resulted in a tax benefit of approximately $28 million in each year and a benefit of $24 million in 2015. In 2017 and 2016, the change in valuation allowance primarily relates to U.S. losses not benefitted, partially offset by the release of valuation allowances in foreign subsidiaries of $9.0 million and $3.1 million, respectively. Also, in 2017, we recorded a tax benefit of $3.5 million related to the release of a tax reserve upon completion of a favorable agreement with tax authorities in a foreign jurisdiction. In 2017 and 2016, we recorded foreign withholding taxes, an obligation of the U.S. parent, of $2.0 million, respectively. Additionally, in 2017 and 2016, our provision reflects a tax benefit related to U.S. research and development tax credits which were offset by corresponding provisions to increase our U.S. valuation allowance of $2.2 million and $6.0 million, respectively.
In 2015, U.S. permanent items include the tax effect of a $14.5 million expense related to a pending legal settlement. Other factors impacting the effective tax rate in 2015 include: the release of a valuation allowance totaling $18.7 million relating to the U.S. pension plan termination, foreign withholding taxes of $3.8 million, a tax benefit of $3.1 million relating to the reassessment of our reserve requirements and a benefit of $1.4 million in conjunction with the reorganization of our Atego U.S. subsidiaries. Additionally, our provision reflects a $2.1 million tax benefit related to a retroactive extension of the U.S. research and development tax credit enacted in the first quarter of 2015. This benefit was offset by a corresponding provision to increase our U.S. valuation allowance.
At September 30, 2017 and 2016, income taxes payable and income tax accruals recorded on the accompanying Consolidated Balance Sheets were $16.2 million ($5.7 million in accrued income taxes, $2.3 million in other current liabilities and $8.2 million in other liabilities) and $18.7 million ($6.3 million in accrued income taxes, $5.5 million in other current liabilities and $6.9 million in other liabilities), respectively. At September 30, 2017 and 2016, prepaid taxes recorded in prepaid expenses on the accompanying Consolidated Balance Sheets were $7.1 million and $9.9 million, respectively. We made net income tax payments of $35.4 million, $25.5 million and $30.1 million in 2017, 2016 and 2015, respectively.
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The significant temporary differences that created deferred tax assets and liabilities are shown below:
| September 30, | |||||||
| 2017 | 2016 | ||||||
| (in thousands) | |||||||
| Deferred tax assets: | |||||||
| Net operating loss carryforwards | $ | 143,793 | $ | 100,033 | |||
| Foreign tax credits | 21,099 | 18,041 | |||||
| Capitalized research and development expense | 13,044 | 22,504 | |||||
| Pension benefits | 12,107 | 14,348 | |||||
| Deferred revenue | 59,022 | 65,145 | |||||
| Stock-based compensation | 25,360 | 19,846 | |||||
| Other reserves not currently deductible | 16,905 | 25,993 | |||||
| Amortization of intangible assets | 78,351 | 54,069 | |||||
| Other tax credits | 42,652 | 41,381 | |||||
| Depreciation | 3,095 | 3,002 | |||||
| Capital loss carryforward | 33,535 | 8,019 | |||||
| Deferred interest | 11,666 | 7,622 | |||||
| Other | 15,849 | 14,778 | |||||
| Gross deferred tax assets | 476,478 | 394,781 | |||||
| Valuation allowance | (279,683 | ) | (235,503 | ) | |||
| Total deferred tax assets | 196,795 | 159,278 | |||||
| Deferred tax liabilities: | |||||||
| Acquired intangible assets not deductible | (70,570 | ) | (78,663 | ) | |||
| Pension prepayments | (2,093 | ) | (542 | ) | |||
| Deferred revenue | (6,214 | ) | (2,039 | ) | |||
| U.S taxes on unremitted foreign earnings | (11,440 | ) | (67 | ) | |||
| Other | (1,192 | ) | (2,025 | ) | |||
| Total deferred tax liabilities | (91,509 | ) | (83,336 | ) | |||
| Net deferred tax assets | $ | 105,286 | $ | 75,942 |
We have concluded, based on the weight of available evidence, that a full valuation allowance continues to be required against our U.S. net deferred tax assets as they are not more likely than not to be realized in the future. We will continue to reassess our valuation allowance requirements each financial reporting period.
For U.S. tax return purposes, net operating loss (NOL) carryforwards and tax credits are generally available to be carried forward to future years, subject to certain limitations. At September 30, 2017, we had U.S. federal NOL carryforwards of $383.0 million that expire in 2018 to 2037. These include NOL carryforwards from acquisitions of $82.2 million. The utilization of these NOL carryforwards is limited as a result of the change in ownership rules under Internal Revenue Code Section 382. NOL's totaling $61.4 million relate to windfall tax benefits that have not been recognized. The deferred tax asset associated with this benefit will be recorded to retained earnings in the first quarter of 2018, as a result of the adoption of ASU 2016-09. This benefit will be offset in full by an increase to the valuation allowance. See Note B. Summary of Significant Accounting Policies.
As of September 30, 2017, we had Federal R&D credit carryforwards of $27.4 million, which expire beginning in 2021 and ending in 2037, and Massachusetts R&D credit carryforwards of $23.5 million, which expire beginning in 2018 and ending in 2032. We also had foreign tax credits of $20.8 million, which expire beginning in 2023 and ending in 2027. A full valuation allowance is recorded against these carryforwards. Federal R&D credits totaling $13.4 million relate to windfall tax benefits that have not been recorded as a deferred tax asset as of September 30, 2017. The deferred tax asset associated with this benefit will be recorded to retained earnings in the first quarter of 2018, as a result of the adoption of ASU 2016-09. This
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benefit will be offset in full by an increase to the valuation allowance. See Note B. Summary of Significant Accounting Policies.
We also have NOL carryforwards in non-U.S. jurisdictions totaling $90.2 million, the majority of which do not expire. We also have non-U.S. tax credit carryforwards of $5.4 million that expire beginning in 2029 and ending in 2035. Additionally, we have interest and amortization carryforwards of $93.3 million and $535.6 million, respectively in a foreign jurisdiction. There are limitations imposed on the utilization of such NOLs that could restrict the recognition of any tax benefits.
As of September 30, 2017, we have a valuation allowance of $239.3 million against net deferred tax assets in the U.S. and a valuation allowance of $40.4 million against net deferred tax assets in certain foreign jurisdictions. The valuation allowance recorded against net deferred tax assets of certain foreign jurisdictions is established primarily for our net operating loss carryforwards, the majority of which do not expire. However, there are limitations imposed on the utilization of such net operating losses that could restrict the recognition of any tax benefits.
The changes to the valuation allowance were primarily due to the following:
| Year ended September 30, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in millions) | |||||||||||
| Valuation allowance beginning of year | $ | 235.5 | $ | 198.2 | $ | 177.5 | |||||
| Net release of valuation allowance (1) | (9.1 | ) | (3.1 | ) | (18.7 | ) | |||||
| Net increase/decrease in deferred tax assets with a full valuation allowance | 53.3 | 39.8 | 39.4 | ||||||||
| Establish valuation allowance in foreign jurisdictions | — | 0.6 | — | ||||||||
| Valuation allowance end of year | $ | 279.7 | $ | 235.5 | $ | 198.2 |
| (1) | In 2017 and 2016, this is attributable to the release in foreign jurisdictions. In 2015, this is attributable to a reduction in deferred tax assets associated with our U.S. pension plan. |
Our policy is to record estimated interest and penalties related to the underpayment of income taxes as a component of our income tax provision. In 2017, we reduced interest expense by $0.9 million and in 2016 and 2015, we recorded interest expense of $0.5 million and $0.1 million, respectively. In 2017, 2016 and 2015, we had no tax penalty expense in our income tax provision. As of September 30, 2017 and 2016, we had accrued $1.1 million and $2.0 million, respectively, of net estimated interest expense related to income tax accruals. We had no accrued tax penalties as of September 30, 2017, 2016 or 2015.
| Year ended September 30, | |||||||||||
| Unrecognized tax benefits | 2017 | 2016 | 2015 | ||||||||
| (in millions) | |||||||||||
| Unrecognized tax benefit beginning of year | $ | 15.5 | $ | 14.1 | $ | 15.0 | |||||
| Tax positions related to current year: | |||||||||||
| Additions | 0.9 | 1.0 | 1.3 | ||||||||
| Tax positions related to prior years: | |||||||||||
| Additions | 1.0 | 0.4 | 0.8 | ||||||||
| Reductions | (1.6 | ) | — | (3 | ) | ||||||
| Settlements | (1.0 | ) | — | — | |||||||
| Statute expirations | — | — | — | ||||||||
| Unrecognized tax benefit end of year | $ | 14.8 | $ | 15.5 | $ | 14.1 |
If all of our unrecognized tax benefits as of September 30, 2017 were to become recognizable in the future, we would record a benefit to the income tax provision of $14.8 million (which would be partially offset by an increase in the U.S. valuation allowance of $5.1 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
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next 12 months the amount of unrecognized tax benefits related to the resolution of multi-jurisdictional tax positions could be reduced by up to $6 million as audits close and statutes of limitations expire.
In the fourth quarter of 2016, we received an assessment of approximately $12 million from the tax authorities in Korea related to a tax audit. The assessment relates to various tax matters but primarily to foreign withholding taxes. We have appealed and will vigorously defend our positions. We believe that it is more likely than not that our positions will be sustained upon appeal. 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.
In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the IRS in the U.S. We regularly assess the likelihood of additional assessments by tax authorities and provide for these matters as appropriate. We are currently under audit by tax authorities in several jurisdictions. Audits by tax authorities typically involve examination of the deductibility of certain permanent items, transfer pricing, limitations on net operating losses and tax credits. Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in material changes in our estimates. As of September 30, 2017, we remained subject to examination in the following major tax jurisdictions for the tax years indicated:
| Major Tax Jurisdiction | Open Years | |
| United States | 2014 through 2017 | |
| Germany | 2011 through 2017 | |
| France | 2014 through 2017 | |
| Japan | 2012 through 2017 | |
| Ireland | 2013 through 2017 |
Additionally, net operating loss and tax credit carryforwards from certain earlier periods in these jurisdictions may be subject to examination to the extent they are utilized in later periods.
We incurred expenses related to stock-based compensation in 2017, 2016 and 2015 of $76.7 million, $66.0 million and $50.2 million, respectively. Accounting for the tax effects of stock-based awards requires that we establish a deferred tax asset as the compensation is recognized for financial reporting prior to recognizing the tax deductions. The tax benefit recognized in the Consolidated Statements of Operations related to stock-based compensation totaled $1.3 million, $0.7 million and $0.7 million in 2017, 2016 and 2015, respectively. Upon the settlement of the stock-based awards (i.e., exercise or vesting), the actual tax deduction is compared with the cumulative financial reporting compensation cost and any excess tax deduction is considered a windfall tax benefit and is tracked in a “windfall tax benefit pool” to offset any future tax deduction shortfalls and will be recorded as increases to APIC in the period when the tax deduction reduces income taxes payable. In 2017, 2016 and 2015, we recorded windfall tax benefits of $0.6 million, $0.1 million and $0.0 million to APIC, respectively. We follow the with-and-without approach for the direct effects of windfall tax deductions to determine the timing of the recognition of benefits for windfall tax deductions. We follow the direct method for indirect effects. As of September 30, 2017, the tax effect of windfall tax deductions which had not yet reduced taxes payable was $38.3 million. In the first quarter of 2018, the company will adopt ASU 2016-09. See Note B. Note B. Summary of Significant Accounting Policies.
We have not provided for U.S. income taxes or foreign withholding taxes on foreign unrepatriated earnings as it is our current intention to permanently reinvest these earnings outside the U.S. unless repatriation can be done with no significant tax cost, with the exception of a foreign holding company formed in 2014 and our Taiwan subsidiary. In 2017, we established a deferred tax liability of $11 million to provide for taxes on these unremitted earnings. This liability was offset by a corresponding release in valuation allowance. In 2016, we incurred U.S. tax expense of $12 million on the repatriation of the 2016 earnings of this foreign holding company. This expense was offset by a change in the valuation allowance. If we decide to repatriate any additional non-U.S. earnings in the future, we may be required to establish a deferred tax liability on such earnings. The cumulative basis difference associated with the undistributed earnings of our subsidiaries totaled approximately $882 million and $789 million as of September 30, 2017 and 2016, respectively. The amount of unrecognized deferred tax liability on the undistributed earnings cannot be practicably determined at this time.
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H. Debt
As of September 30, 2017 and 2016, we had the following long-term borrowing obligations:
| September 30, | |||||||
| 2017 | 2016 | ||||||
| (in thousands) | |||||||
| 6.000% Senior notes due 2024 | $ | 500,000 | $ | 500,000 | |||
| Credit facility-revolver | 218,125 | 258,125 | |||||
| Total debt | 718,125 | 758,125 | |||||
| Unamortized debt issuance costs for the Senior notes (1) | (5,719 | ) | (6,524 | ) | |||
| Total debt, net of issuance costs (2) | $ | 712,406 | $ | 751,601 | |||
| (1) Unamortized debt issuance costs related to the credit facility were $2.0 million and $4.2 million as of September 30, 2017 and September 30, 2016, respectively, and were included in other assets. | |||||||
| (2) As of September 30, 2017 and 2016 all debt was included in long-term debt. |
Senior Unsecured Notes
In May 2016, we issued $500 million in aggregate principal amount of 6.0% senior, unsecured long-term debt at par value, due in 2024. We used the net proceeds from the sale of the notes to repay a portion of our outstanding revolving loan under our current credit facility. Interest is payable semi-annually on November 15 and May 15. The debt indenture includes covenants that limit our ability to, among other things, incur additional debt, grant liens on our properties or capital stock, enter into sale and leaseback transactions or asset sales, and make capital distributions. We were in compliance with all of the covenants as of September 30, 2017.
On and after May 15, 2019, we may redeem the senior notes at any time in whole or from time to time in part at specified redemption prices. In certain circumstances constituting a change of control, we will be required to make an offer to repurchase the senior notes at a purchase price equal to 101% of the aggregate principal amount of the notes, plus accrued and unpaid interest. Our ability to repurchase the senior notes in such event may be limited by law, by the indenture associated with the senior notes, by our then-available financial resources or by the terms of other agreements to which we may be party at such time. If we fail to repurchase the senior notes as required by the indenture, it would constitute an event of default under the indenture governing the senior notes which, in turn, may also constitute an event of default under other obligations.
As of September 30, 2017, the total estimated fair value of the Notes was approximately $538.7 million, which is based on quoted prices for the notes on that date.
Credit Agreement
In November 2015, we entered into a multi-currency credit facility with a syndicate of sixteen banks for which JPMorgan Chase Bank, N.A. acts as Administrative Agent. We use the credit facility for general corporate purposes, including acquisitions of businesses, share repurchases and working capital requirements. As of September 30, 2017, the fair value of our credit facility approximates its book value.
The credit facility initially consisted of a $1 billion revolving loan commitment, which was reduced to $900 million in June 2016 and further reduced to $600 million March 2017 pursuant to an amendment to the Credit Agreement. The March 2017 amendment also increased the maximum permissible leverage ratio, defined as consolidated total indebtedness to the consolidated trailing four quarters EBITDA, from 4.00 to 1.00 to 4.50 to 1.00. The loan commitment may be increased by an additional $500 million (in the form of revolving loans or term loans, or a combination thereof) if the existing or additional lenders are willing to make such increased commitments. The revolving loan commitment does not require amortization of principal and may be repaid in whole or in part prior to the scheduled maturity date at our option without penalty or premium. The credit facility matures on September 15, 2019, when all remaining amounts outstanding will be due and payable in full.
PTC and certain eligible foreign subsidiaries are eligible borrowers under the credit facility. Any borrowings by PTC Inc. under the credit facility would be guaranteed by PTC Inc.’s material domestic subsidiaries that become parties to the subsidiary guaranty, if any. As of the filing of this Form 10-K, there are no subsidiary guarantors of the obligations under the credit facility. Any borrowings by eligible foreign
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subsidiary borrowers would be guaranteed by PTC Inc. and any subsidiary guarantors. As of the filing of this Form 10-K, no amounts under the credit facility have been borrowed by an eligible foreign subsidiary borrower. In addition, PTC and certain of its material domestic subsidiaries' owned property (including equity interests) is subject to first priority perfected liens in favor of the lenders of this credit facility. 100% of the voting equity interests of certain of PTC’s domestic subsidiaries and 65% of its material first-tier foreign subsidiaries are pledged as collateral for the obligations under the credit facility.
Loans under the credit facility bear interest at variable rates which reset every 30 to 180 days depending on the rate and period selected by PTC as described below. As of September 30, 2017, the annual rate for borrowing outstanding was 3.125%. Interest rates on borrowings outstanding under the credit facility range from 1.25% to 1.75% above an adjusted LIBO rate for Euro currency borrowings or would range from 0.25% to 0.75% above the defined base rate (the greater of the Prime Rate, the FRBYN rate plus 0.5%, or an adjusted LIBO rate plus 1%) for base rate borrowings, in each case based upon PTC’s total leverage ratio. Additionally, PTC may borrow certain foreign currencies at rates set in the same range above the respective London interbank offered interest rates for those currencies, based on PTC’s total leverage ratio. A quarterly commitment fee on the undrawn portion of the credit facility is required, ranging from 0.175% to 0.30% per annum, based upon PTC’s total leverage ratio.
The credit facility limits PTC’s and its subsidiaries’ ability to, among other things: incur liens or guarantee obligations; pay dividends (other than to PTC) and make other distributions; make investments and enter into joint ventures; dispose of assets; and engage in transactions with affiliates, except on an arms-length basis. Under the credit facility, PTC and its material domestic subsidiaries may not invest cash or property in, or loan to, PTC’s foreign subsidiaries in aggregate amounts exceeding $75 million for any purpose and an additional $200 million for acquisitions of businesses. In addition, under the credit facility, PTC and its subsidiaries must maintain the following financial ratios:
| • | a total leverage ratio, defined as consolidated funded indebtedness to consolidated trailing four quarters EBITDA, not to exceed 4.50 to 1.00 as of the last day of any fiscal quarter; |
| • | a senior secured leverage ratio, defined as senior consolidated total indebtedness (which excludes unsecured indebtedness) to the consolidated trailing four quarters EBITDA, not to exceed 3.00 to 1.00 as of the last day of any fiscal quarter; and |
| • | a fixed charge coverage ratio, defined as the ratio of consolidated trailing four quarters EBITDA less consolidated capital expenditures to consolidated fixed charges, of not less than 3.50 to 1.00 as of the last day of any fiscal quarter. |
As of September 30, 2017, our total leverage ratio was 2.82 to 1.00, our senior secured leverage ratio was 0.86 to 1.00 and our fixed charge coverage ratio was 5.96 to 1.00 and we were in compliance with all financial and operating covenants of the credit facility.
Any failure to comply with the financial or operating covenants of the credit facility would prevent PTC from being able to borrow additional funds, and would constitute a default, permitting the lenders to, among other things, accelerate the amounts outstanding, including all accrued interest and unpaid fees, under the credit facility and to terminate the credit facility. A change in control of PTC, as defined in the agreement, also constitutes an event of default, permitting the lenders to accelerate the indebtedness and terminate the credit facility.
We incurred $6.9 million in financing costs in connection with the Senior Notes in 2016. These origination costs were recorded as deferred debt issuance costs when incurred and were being expensed over the remaining term of the obligations. In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30), the amended guidance requires that debt issuance costs be presented in the balance sheet as a direct reduction from the carrying amount of the related debt liability rather than as an asset. We adopted this new guidance in our first quarter ended December 31, 2016 and applied this guidance retrospectively. As a result, the debt issuance costs of $6.5 million previously included in other long-term assets on the Consolidated Balance Sheet as of September 30, 2016 have been reclassified.
In 2017, 2016 and 2015, we paid $38.9 million, $13.3 million and $10.1 million, respectively, of interest on our debt. The average interest rate on borrowings outstanding during 2017, 2016 and 2015 was approximately 4.9%, 3.0% and 1.7%, respectively.
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I. Commitments and Contingencies
Leasing Arrangements
We lease office facilities under operating leases expiring at various dates through 2037. Certain leases require us to pay for taxes, insurance, maintenance and other operating expenses in addition to rent. Lease expense was $35.8 million, $37.2 million and $36.9 million in 2017, 2016 and 2015, respectively. At September 30, 2017, our future minimum lease payments under noncancelable operating leases are as follows:
| Year ending September 30, | (in thousands) | ||
| 2018 | $ | 39,261 | |
| 2019 | 30,988 | ||
| 2020 | 25,941 | ||
| 2021 | 28,134 | ||
| 2022 | 24,018 | ||
| Thereafter | 212,234 | ||
| Total minimum lease payments | $ | 360,576 |
Amounts above include future minimum lease payments for our corporate headquarters facility located in Needham, Massachusetts. The lease for our headquarters facility was renewed in the first quarter of 2011 for an additional 10 years (through November 2022) with a ten-year renewal option through November 2032. Under the terms of the lease, we are paying approximately $7.4 million in annual base rent plus operating expenses. Utilities related to this lease are excluded from the above table due to variability year to year. These costs were approximately $1.5 million in 2017. The amended lease provides for $12.8 million in landlord funding for leasehold improvements which we completed in 2014. We capitalized these leasehold improvements and will amortize them to expense over the shorter of the lease term or their expected useful life. The $12.8 million of funding by the landlord is not included in the table above and reduces rent expense over the lease term.
On September 7, 2017, we entered into a lease agreement with SCD L2 Seaport Square LLC for approximately 250,000 square feet located at 121 Seaport Boulevard, Boston, Massachusetts. Upon completion of construction of the new facility, we expect to move our headquarters from Needham to Boston. The term of the lease is expected to run from January 1, 2019 through June 30, 2037, subject to adjustment based on the initial occupancy date. Base rent for the first year of the lease is $11.0 million and will increase by $1 per square foot leased per year thereafter ($0.3 million per year). Base rent, which first becomes payable on July 1, 2020, subject to adjustment based on the lease commencement date, is included in the operating lease obligations above. In addition to the base rent, PTC shall pay its pro rata portions of building operating costs and real estate taxes (together, “Additional Rent”). Additional rent, equal to approximately 63% of total building operating costs and real estate taxes, is estimated to be approximately $7.1 million for the first year we begin paying rent and is not included in the operating lease payments above. The lease provides for up to approximately $25 million in landlord funding for leasehold improvements ($100 per square foot). We capitalize leasehold improvements as the assets are placed in service and amortize them to expense over the shorter of the lease term or their expected useful life. The $25 million of funding by the landlord is not included in the table above and reduces rent expense over the lease term.
As of September 30, 2017 and 2016, we had letters of credit and bank guarantees outstanding of $4.3 million (of which $1.2 million was collateralized) and $4.2 million (of which $1.2 million was collateralized), respectively, primarily related to our corporate headquarters lease.
Legal and Regulatory Matters
Korean Tax Audit
In July 2016, we received an assessment from the tax authorities in Korea related to an ongoing tax audit of approximately $12 million. See Note G. Income Taxes for additional information.
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Legal Proceedings
On March 7, 2016, a putative call action lawsuit captioned Matthew Crandall v. PTC Inc. et al., No. 1:16-cv-10471, was filed against us and certain of our current and former officers and directors in the U.S. District Court for the District of Massachusetts, ostensibly on behalf of purchasers of our stock during the period November 24, 2011 through July 29, 2015. The lawsuit, which sought unspecified damages, interest, attorneys' fees and costs, alleges (among other things) that, during that period, PTC's public disclosures concerning investigations by the U.S. Securities and Exchange Commission and the U.S. Department of Justice into U.S. Foreign Corrupt Practices Act matters in China (the "China Investigation") were false and/or misleading. The parties settled the lawsuit for an amount that is not material to our results of operations. The associated liability was accrued in our fiscal 2016 results and was paid into escrow in the third quarter of 2017. The settlement received final court approval on July 14, 2017 and all claims against PTC and the other defendants have been dismissed with prejudice.
We are subject to various legal proceedings and claims that arise in the ordinary course of business. We do not believe that resolving the legal proceedings and claims that we are currently subject to will have a material adverse impact on our financial condition, results of operations or cash flows. However, the results of legal proceedings cannot be predicted with certainty. Should any of these legal proceedings and claims be resolved against us, the operating results for a particular reporting period could be adversely affected.
Accruals
With respect to legal proceedings and claims, we record an accrual for a contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. For legal proceedings and claims for which the likelihood that a liability has been incurred is more than remote but less than probable, we estimate the range of possible outcomes. As of September 30, 2017 and 2016, we had a legal proceedings and claims accrual of $0.3 million and $3.6 million, respectively.
Accounts Receivable
Accounts receivable as of September 30, 2017 includes an amount invoiced under a multi-year contract for which the period of performance, and related revenue recognized, has spanned a number of years (with no revenue recognized since the first quarter of 2017). The invoiced amount is being disputed by the customer. If we are unable to recover amounts owed through a mutual business resolution, we intend to vigorously pursue collection of the full invoiced amount. If we are unsuccessful in collecting the full invoiced amount, there could be a write-down of accounts receivable and professional services revenue, which could range from $0 to $17.3 million.
Guarantees and Indemnification Obligations
We enter into standard indemnification agreements in the ordinary course of our business. Pursuant to such agreements with our business partners or customers, we indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to our products, as well as claims relating to property damage or personal injury resulting from the performance of services by us or our subcontractors. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. Historically, our costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and we accordingly believe the estimated fair value of liabilities under these agreements is immaterial.
We warrant that our software products will perform in all material respects in accordance with our standard published specifications in effect at the time of delivery of the licensed products for a specified period of time. Additionally, we generally warrant that our consulting services will be performed consistent with generally accepted industry standards. In most cases, liability for these warranties is capped. If necessary, we would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history; however, we have not incurred significant cost under our product or services warranties. As a result, we believe the estimated fair value of these liabilities is immaterial.
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J. Stockholders’ Equity
Preferred Stock
We may issue up to 5.0 million shares of our preferred stock in one or more series. 0.5 million of these shares are designated as Series A Junior Participating Preferred Stock. Our Board of Directors is authorized to fix the rights and terms for any series of preferred stock without additional shareholder approval.
Common Stock
Our Articles of Organization authorize us to issue up to 500 million shares of our common stock. Our Board of Directors has periodically authorized the repurchase of shares of our common stock. On August 4, 2014, our Board of Directors authorized us to repurchase up to $600 million of our common stock through September 30, 2017. On September 14, 2017, our Board of Directors authorized us to repurchase up to $500 million of our common stock after October 1, 2017 through September 30, 2020. We intend to use cash from operations and borrowings under our credit facility to make such repurchases. In 2017, we repurchased 0.9 million shares at cost of $51.0 million. In 2016, we did not repurchase any shares. We repurchased 2.7 million shares at a cost of $64.9 million in 2015. All shares of our common stock repurchased are automatically restored to the status of authorized and unissued.
K. Equity Incentive Plan
Our 2000 Equity Incentive Plan (2000 Plan) provides for grants of nonqualified and incentive stock options, common stock, restricted stock, restricted stock units and stock appreciation rights to employees, directors, officers and consultants. We award restricted stock units as the principal equity incentive awards, including certain performance-based awards that are earned based on achieving performance criteria established by the Compensation Committee of our Board of Directors on or prior to the grant date. Each restricted stock unit represents the contingent right to receive one share of our common stock.
The fair value of restricted stock units granted in 2017, 2016 and 2015 was based on the fair market value of our stock on the date of grant. The weighted average fair value per share of restricted stock units granted in 2017, 2016 and 2015 was $51.27, $37.25 and $38.19, respectively. In 2017, the weighted average fair value per share of restricted stock was increased by $2.27 by the additional shares earned for the 2016 TSR grant upon measurement on the vest date in 2017. Pre-vesting forfeiture rates for purposes of determining stock-based compensation for 2017 and 2016 were estimated by us to be 0% for directors and executive officers, 6% to 8% for vice president-level employees and 11% for all other employees. Pre-vesting forfeiture rates for purposes of determining stock-based compensation for 2015 were estimated by us to be 0% for directors and executive officers, 2% to 4% for vice president-level employees and 7% for all other employees.
The following table shows total stock-based compensation expense recorded from our stock-based awards as reflected in our Consolidated Statements of Operations:
| Year ended September 30, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Cost of license subscription revenue | $ | 1,379 | $ | 805 | $ | 521 | |||||
| Cost of support revenue | 5,116 | 4,593 | 3,775 | ||||||||
| Cost of professional services revenue | 6,116 | 5,393 | 5,871 | ||||||||
| Sales and marketing | 15,373 | 14,659 | 14,189 | ||||||||
| Research and development | 13,968 | 10,174 | 11,623 | ||||||||
| General and administrative | 34,756 | 30,372 | 14,203 | ||||||||
| Total stock-based compensation expense | $ | 76,708 | $ | 65,996 | $ | 50,182 |
Stock-based compensation expense in 2017 and 2016 includes $3.2 million and $0.4 million, respectively, related to our employee stock purchase plan (ESPP). The stock-based compensation expense in 2016 included $10 million of expense related to modifications of certain performance-based RSUs previously granted under our long-term incentive programs. The Compensation Committee of our Board of Directors amended these equity awards due to the impact of changes in our business model and strategy and foreign currency on our financial results.
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As of September 30, 2017, total unrecognized compensation cost related to unvested restricted stock units expected to vest was approximately $84.5 million and the weighted average remaining recognition period for unvested awards was 17 months.
As of September 30, 2017, 3.7 million shares of common stock were available for grant under the 2000 Plan and 3.5 million shares of common stock were reserved for issuance upon the exercise of stock options and vesting of restricted stock units granted and outstanding.
Our ESPP, initiated in the fourth quarter of 2016, allows eligible employees to contribute up to 10% of their base salary, up to a maximum of $25,000 per year and subject to any other plan limitations, toward the purchase of our common stock at a discounted price. The purchase price of the shares on each purchase date is equal to 85% of the lower of the fair market value of our common stock on the first and last trading days of each offering period. The ESPP is qualified under Section 423 of the Internal Revenue Code. We estimate the fair value of each purchase right under the ESPP on the date of grant using the Black-Scholes option valuation model and use the straight-line attribution approach to record the expense over the six-month offering period.
| Shares | Weighted Average Grant Date Fair Value | Aggregate Intrinsic Value as of September 30, 2017 | ||||||||
| Restricted stock unit activity for the year ended September 30, 2017 | (in thousands except grant date fair value data) | |||||||||
| Balance of nonvested outstanding restricted stock units October 1, 2016 | 3,776 | $ | 37.30 | |||||||
| Granted | 1,946 | $ | 51.27 | |||||||
| Vested | (1,586 | ) | $ | 36.05 | ||||||
| Forfeited or not earned | (649 | ) | $ | 37.83 | ||||||
| Balance of nonvested outstanding restricted stock units September 30, 2017 | 3,487 | $ | 45.57 | $ | 196,230 |
| Restricted Stock Units | |||||||||
| Restricted stock unit grants | TSR Units (1) | Performance-based RSUs (2) | Service-based RSUs (3) | ||||||
| (Number of Units in thousands) | |||||||||
| Year ended September 30, 2017 | 358 | 325 | 1,263 |
| (1) | The TSR units were granted to our executive officers pursuant to the terms described below. |
(2) The performance-based RSUs were issued to employees, our executive officers, our directors and a consultant. Executive officers may earn up to one or, for our CEO, two times the number of time-based RSUs (up to a maximum of 325 thousand shares) if certain performance conditions are met. Of the service-based RSUs, approximately 108 thousand shares will vest in one installment on or about the anniversary of the date of grant. Approximately 217 thousand shares will vest in two substantially equal annual installments on or about the anniversary of the date of grant. All other service-based RSUs will vest in three substantially equal annual installments on or about the anniversary of the date of grant. The performance-based RSUs will vest in three substantially equal installments on the later of November 15, 2017, November 15, 2018 and November 15, 2019, or the date the Compensation Committee determines the extent to which the applicable performance criteria have been achieved.
(3) The service-based RSUs were granted to employees, our executive officers and our directors. All service-based RSUs will vest in three substantially equal annual installments on or about the anniversary of the date of grant.
In the first quarter of 2017, we granted the target performance-based TSR units ("target RSUs") shown in the table above to our executive officers. These RSUs are eligible to vest based upon our total shareholder return relative to a peer group (the “TSR units”), measured annually over a three-year period. The number of TSR units to 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, 2017, 2018
F-34
and 2019, respectively. The shares earned for each period will vest on November 15 following each measurement period, up to a maximum of two times the number of target RSUs (up to a maximum of 499 thousand shares). No vesting will occur in a period unless an annual threshold requirement is achieved. The employee must remain employed by PTC through the applicable vest date for any RSUs to vest. If the return to PTC shareholders is negative but still meets or exceeds the peer group indexed return, a maximum of 100% of the target RSUs will vest for the measurement period. TSR units 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 units was $68.02 per target RSU on the grant date. The fair value of the TSR units 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:
| Average volatility of peer group | 29.3 | % |
| Risk free interest rate | 0.99 | % |
| Dividend yield | — | % |
Until July 2005, we generally granted stock options. For those options, the option exercise price was typically the fair market value at the date of grant, and they generally vested over four years and expired ten years from the date of grant. There were no options outstanding and exercisable at September 30, 2017 and 2016.
| Year ended September 30, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Value of stock option and stock-based award activity | (in thousands) | ||||||||||
| Total intrinsic value of stock options exercised | $ | — | $ | 88 | $ | 182 | |||||
| Total fair value of restricted stock unit awards vested | $ | 78,573 | $ | 63,655 | $ | 84,189 |
In 2017, shares issued upon vesting of restricted stock units were net of 0.5 million shares retained by us to cover employee tax withholdings of $26.7 million. In 2016, shares issued upon vesting of restricted stock units were net of 0.6 million shares retained by us to cover employee tax withholdings of $20.9 million. In 2015, shares issued upon vesting of restricted stock and restricted stock units were net of 0.8 million shares retained by us to cover employee tax withholdings of $29.2 million.
L. Employee Benefit Plan
We offer a savings plan to eligible U.S. employees. The plan is intended to qualify under Section 401(k) of the Internal Revenue Code. Participating employees may defer a portion of their pre-tax compensation, as defined, but not more than statutory limits. We contribute 50% of the amount contributed by the employee, up to a maximum of 3% of the employee’s earnings. Our matching contributions vest at a rate of 25% per year of service, with full vesting after 4 years of service. We made matching contributions of $5.6 million, $5.4 million, and $5.3 million in 2017, 2016 and 2015, respectively.
M. Pension Plans
We maintain several international defined benefit pension plans primarily covering certain employees of Computervision, which we acquired in 1998, CoCreate, which we acquired in 2008, and covering employees in Japan. Benefits are based upon length of service and average compensation with vesting after one to five years of service. The pension cost was actuarially computed using assumptions applicable to each subsidiary plan and economic environment. We adjust our pension liability related to our plans due to changes in actuarial assumptions and performance of plan investments, as shown below. Effective in 1998, benefits under one of the international plans were frozen indefinitely.
F-35
We maintained a U.S. defined benefit pension plan (the Plan) that covered certain persons who were employees of Computervision Corporation (acquired by us in 1998). Benefits under the Plan were frozen in 1990. In the second quarter of 2014, we began the process of terminating the Plan, which included settling Plan liabilities by offering lump sum distributions to plan participants and purchasing annuity contracts to cover vested benefits. We completed the termination in the fourth quarter of 2015. In connection with the termination, we contributed $25.5 million to the Plan and recorded a settlement loss of $66.3 million.
The following table presents the actuarial assumptions used in accounting for the pension plans:
| U.S. Plan | International Plans | ||||||||||||||||
| 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | ||||||||||||
| Weighted average assumptions used to determine benefit obligations at September 30 measurement date: | |||||||||||||||||
| Discount rate | — | % | — | % | — | % | 1.8 | % | 1.3 | % | 2.2 | % | |||||
| Rate of increase in future compensation | — | % | — | % | — | % | 2.8 | % | 2.8 | % | 3.0 | % | |||||
| Weighted average assumptions used to determine net periodic pension cost for fiscal years ended September 30: | |||||||||||||||||
| Discount rate | — | % | — | % | 3.80 | % | 1.3 | % | 2.2 | % | 2.4 | % | |||||
| Rate of increase in future compensation | — | % | — | % | — | % | 2.8 | % | 3.0 | % | 3.0 | % | |||||
| Rate of return on plan assets | — | % | — | % | 1.35 | % | 5.4 | % | 5.7 | % | 5.8 | % |
In selecting the expected long-term rate of return on assets, we considered the current investment portfolio and the investment return goals in the plans’ investment policy statements. We, with input from the plans’ professional investment managers and actuaries, also considered the average rate of earnings expected on the funds invested or to be invested to provide plan benefits. This process included determining expected returns for the various asset classes that comprise the plans’ target asset allocation. This basis for selecting the long-term asset return assumptions is consistent with the prior year. Using generally accepted diversification techniques, the plans’ assets, in aggregate and at the individual portfolio level, are invested so that the total portfolio risk exposure and risk-adjusted returns best meet the plans’ long-term liabilities to employees. Plan asset allocations are reviewed periodically and rebalanced to achieve target allocation among the asset categories when necessary.
As of September 30, 2017, for the international plans, the weighted long-term rate of return assumption is 5.42%. These rates of return, together with the assumptions used to determine the benefit obligations as of September 30, 2017 in the table above, will be used to determine our 2018 net periodic pension cost, which we expect to be approximately $0.8 million.
The actuarially computed components of net periodic pension cost recognized in our Consolidated Statements of Operations for each year are shown below:
| U.S. Plan | International Plans | ||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | ||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Interest cost of projected benefit obligation | $ | — | $ | — | $ | 4,591 | $ | 815 | $ | 1,374 | $ | 1,828 | |||||||||||
| Service cost | — | — | — | 1,696 | 1,599 | 1,466 | |||||||||||||||||
| Expected return on plan assets | — | — | (1,364 | ) | (3,327 | ) | (3,305 | ) | (3,364 | ) | |||||||||||||
| Amortization of prior service cost | — | — | — | (5 | ) | (5 | ) | (4 | ) | ||||||||||||||
| Recognized actuarial loss | — | — | 2,577 | 3,385 | 2,292 | 1,815 | |||||||||||||||||
| Settlement loss | — | — | 66,332 | — | — | — | |||||||||||||||||
| Net periodic pension cost | $ | — | $ | — | $ | 72,136 | $ | 2,564 | $ | 1,955 | $ | 1,741 |
F-36
The following tables display the change in benefit obligation and the change in the plan assets and funded status of the plans as well as the amounts recognized in our Consolidated Balance Sheets:
| International Plans | |||||||
| Year ended September 30, | |||||||
| 2017 | 2016 | ||||||
| (in thousands) | |||||||
| Change in benefit obligation: | |||||||
| Projected benefit obligation—beginning of year | $ | 92,695 | $ | 78,188 | |||
| Service cost | 1,696 | 1,599 | |||||
| Interest cost | 815 | 1,374 | |||||
| Actuarial loss (gain) | (8,496 | ) | 10,556 | ||||
| Foreign exchange impact | 2,379 | 2,431 | |||||
| Participant contributions | 183 | 147 | |||||
| Benefits paid | (2,104 | ) | (1,600 | ) | |||
| Settlements | — | — | |||||
| Projected benefit obligation—end of year | $ | 87,168 | $ | 92,695 | |||
| Change in plan assets and funded status: | |||||||
| Plan assets at fair value—beginning of year | $ | 61,935 | $ | 57,961 | |||
| Actual return on plan assets | 6,261 | 1,742 | |||||
| Employer contributions | 2,036 | 1,978 | |||||
| Participant contributions | 183 | 147 | |||||
| Foreign exchange impact | 2,183 | 1,707 | |||||
| Settlements | — | — | |||||
| Benefits paid | (2,104 | ) | (1,600 | ) | |||
| Plan assets at fair value—end of year | 70,494 | 61,935 | |||||
| Projected benefit obligation—end of year | 87,168 | 92,695 | |||||
| Underfunded status | $ | (16,674 | ) | $ | (30,760 | ) | |
| Accumulated benefit obligation—end of year | $ | 84,298 | $ | 88,768 | |||
| Amounts recognized in the balance sheet: | |||||||
| Non-current liability | $ | (16,674 | ) | $ | (30,760 | ) | |
| Current liability | $ | — | $ | — | |||
| Amounts in accumulated other comprehensive loss: | |||||||
| Unrecognized actuarial loss | $ | 24,738 | $ | 38,667 |
F-37
We expect to recognize approximately $2.1 million of the unrecognized actuarial loss as of September 30, 2017 as a component of net periodic pension cost in 2018.
The following table shows change in accumulated other comprehensive loss:
| International Plans | |||||||
| Year ended September 30, | |||||||
| 2017 | 2016 | ||||||
| (in thousands) | |||||||
| Accumulated other comprehensive loss- beginning of year | $ | 38,667 | $ | 28,339 | |||
| Recognized during year - net actuarial (losses) | (3,380 | ) | (2,288 | ) | |||
| Occurring during year - settlement loss | — | — | |||||
| Occurring during year - net actuarial losses (gains) | (11,430 | ) | 12,119 | ||||
| Foreign exchange impact | 881 | 497 | |||||
| Accumulated other comprehensive loss- end of year | $ | 24,738 | $ | 38,667 |
The following table shows the percentage of total plan assets for each major category of plan assets:
| International Plans | |||||
| September 30, | |||||
| 2017 | 2016 | ||||
| Asset category: | |||||
| Equity securities | 23 | % | 49 | % | |
| Fixed income securities | 57 | % | 30 | % | |
| Commodities | 6 | % | 4 | % | |
| Insurance company | 12 | % | 16 | % | |
| Cash | 2 | % | 1 | % | |
| 100 | % | 100 | % |
We periodically review the pension plans’ investments in the various asset classes. The current asset allocation target is 60% equity securities and 40% fixed income securities for the CoCreate plan in Germany, and 100% fixed income securities for the other international plans. The fixed income securities for the other international plans primarily include investments held with insurance companies with fixed returns. The plans’ investment managers are provided specific guidelines under which they are to invest the assets assigned to them. In general, investment managers are expected to remain fully invested in their asset class with further limitations on risk as related to investments in a single security, portfolio turnover and credit quality.
The German CoCreate plan's investment policy prohibits the use of derivatives associated with leverage and speculation or investments in securities issued by PTC, except through index-related strategies and/or commingled funds. An investment committee oversees management of the pension plans’ assets. Plan assets consist primarily of investments in mutual funds invested in equity and fixed income securities.
In 2017, 2016 and 2015 our actual return on plan assets was $6.3 million, $1.7 million and $1.9 million, respectively.
Based on actuarial valuations and additional voluntary contributions, we contributed $2.0 million, $2.0 million, and $46.7 million in 2017, 2016 and 2015, respectively, to the plans.
F-38
As of September 30, 2017, benefit payments expected to be paid over the next ten years are outlined in the following table:
| Future Benefit Payments | |||
| (in thousands) | |||
| Year ending September 30, | |||
| 2018 | $ | 2,472 | |
| 2019 | 2,627 | ||
| 2020 | 3,054 | ||
| 2021 | 3,315 | ||
| 2022 | 3,954 | ||
| 2023 to 2027 | 22,648 |
Fair Value of Plan Assets
The International Plan assets are comprised primarily of investments in a trust and an insurance company. The underlying investments in the trust are primarily publicly traded European DJ EuroStoxx50 equities and European governmental fixed income securities. They are classified as Level 1 because the underlying units of the trust are traded in open public markets. The fair value of the underlying investments in equity securities and fixed income are based upon publicly-traded exchange prices.
| September 30, 2017 | |||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| (in thousands) | |||||||||||||||
| International plan assets: | |||||||||||||||
| Fixed income securities: | |||||||||||||||
| Government | $ | 29,445 | $ | — | $ | — | $ | 29,445 | |||||||
| European corporate investment grade | 10,675 | — | — | 10,675 | |||||||||||
| European large capitalization stocks | 16,164 | — | — | 16,164 | |||||||||||
| Commodities | 3,966 | — | — | 3,966 | |||||||||||
| Insurance company funds (1) | — | 8,714 | — | 8,714 | |||||||||||
| Cash | 1,530 | — | — | 1,530 | |||||||||||
| $ | 61,780 | $ | 8,714 | $ | — | $ | 70,494 |
| September 30, 2016 | |||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| (in thousands) | |||||||||||||||
| International plan assets: | |||||||||||||||
| Fixed income securities: | |||||||||||||||
| Government | $ | 8,518 | $ | — | $ | — | $ | 8,518 | |||||||
| European corporate investment grade | 10,218 | — | — | 10,218 | |||||||||||
| European large capitalization stocks | 30,615 | — | — | 30,615 | |||||||||||
| Commodities | 2,709 | — | 2,709 | ||||||||||||
| Insurance company funds (1) | — | 9,578 | — | 9,578 | |||||||||||
| Cash | 297 | — | — | 297 | |||||||||||
| $ | 52,357 | $ | 9,578 | $ | — | $ | 61,935 |
F-39
(1) These investments are comprised primarily of funds invested with an insurance company in Japan with a guaranteed rate of return. The insurance company invests these assets primarily in government and corporate bonds.
N. Derivative Financial Instruments
As of September 30, 2017 and 2016, we had outstanding forward contracts for derivatives not designated as hedging instruments with notional amounts equivalent to the following:
| September 30, | |||||||
| Currency Hedged | 2017 | 2016 | |||||
| (in thousands) | |||||||
| Canadian/U.S. Dollar | $ | 12,809 | $ | 14,685 | |||
| Euro/U.S. Dollar | 244,000 | 174,120 | |||||
| Israeli Sheqel/U.S. Dollar | 8,820 | 7,271 | |||||
| Japanese Yen/Euro | 17,694 | 32,782 | |||||
| Japanese Yen/U.S. Dollar | 3,198 | 6,716 | |||||
| Swiss Franc / Euro | 7,157 | — | |||||
| Swedish Krona / U.S. Dollar | 4,627 | 3,852 | |||||
| Chinese Yuan offshore / Euro | 10,423 | — | |||||
| Singapore Dollar / U.S. Dollar | 1,186 | 1,448 | |||||
| All other | 8,605 | 8,660 | |||||
| Total | $ | 318,519 | $ | 249,534 |
The following table shows the effect of our non-designated hedges in the Consolidated Statements of Operations for the twelve months ended September 30, 2017 and 2016:
| Derivatives Not Designated as Hedging Instruments | Location of Gain or (Loss) Recognized in Income | Net realized and unrealized gain or (loss) (excluding the underlying foreign currency exposure being hedged) | ||||||||||||
| Twelve months ended | ||||||||||||||
| September 30, 2017 | September 30, 2016 | September 30, 2015 | ||||||||||||
| (in thousands) | ||||||||||||||
| Forward Contracts | Interest income and other expense, net | $ | 870 | $ | (883 | ) | $ | 615 |
As of September 30, 2017 and 2016, we had outstanding forward contracts designated as cash flow hedges with notional amounts equivalent to the following:
| Currency Hedged | September 30, 2017 | September 30, 2016 | |||||
| (in thousands) | |||||||
| Euro / U.S. Dollar | $ | 64,831 | $ | 26,181 | |||
| Japanese Yen / U.S. Dollar | 22,675 | 8,800 | |||||
| SEK / U.S. Dollar | 14,091 | 4,078 | |||||
| Total | $ | 101,597 | $ | 39,059 |
F-40
We had no derivative instruments designated as cash flow hedges in the Consolidated Statements of Operations for the twelve months ended September 30, 2015. The following table shows the effect of our derivative instruments designated as cash flow hedges in the Consolidated Statements of Operations for the twelve months ended September 30, 2017 and 2016 (in thousands):
| Derivatives Designated as Hedging Instruments | Gain or (Loss) Recognized in OCI-Effective Portion | Location of Gain or (Loss) Reclassified from OCI into Income-Effective Portion | Gain or (Loss) Reclassified from OCI into Income-Effective Portion | Location of Gain or (Loss) Recognized-Ineffective Portion | Gain or (Loss) Recognized-Ineffective Portion | ||||||||||||||||||||
| Twelve Months Ended | Twelve Months Ended | Twelve Months Ended | |||||||||||||||||||||||
| September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 | ||||||||||||||||||||
| Forward Contracts | $ | (866 | ) | $ | (3,859 | ) | Software Revenue | $ | (524 | ) | $ | (2,436 | ) | Other Income (Expense) | $ | (49 | ) | $ | (24 | ) |
As of September 30, 2017, we estimated that approximately all values reported in accumulated other comprehensive income will be reclassified to income within the next twelve months.
In the event the underlying forecast transaction does not occur, or it becomes probable that it will not occur, the related hedge gains and losses on the cash flow hedge would be immediately reclassified to “Other Income (Expense)” on the Consolidated Statements of Operations. For the twelve months ended September 30, 2017, there were no such gains or losses.
The following table shows our derivative instruments measured at gross fair value as reflected in the Consolidated Balance Sheets:
| Fair Value of Derivatives Designated As Hedging Instruments | Fair Value of Derivatives Not Designated As Hedging Instruments | ||||||||||||||
| September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 | ||||||||||||
| (in thousands) | (in thousands) | ||||||||||||||
| Derivative assets (a): | |||||||||||||||
| Forward Contracts | $ | 540 | $ | 44 | $ | 623 | $ | 216 | |||||||
| Derivative liabilities (b): | |||||||||||||||
| Forward Contracts | $ | 2,352 | $ | 1,477 | $ | 1,995 | $ | 1,693 | |||||||
| (a) As of September 30, 2017, $1,128 thousand current derivative assets are recorded in other current assets, and $35 thousand long-term derivative assets are recorded in other assets in the Consolidated Balance Sheets. As of September 30, 2016, all derivative assets were recorded in other current assets in the Consolidated Balance Sheet. | |||||||||||||||
| (b) As of September 30, 2017, $4,329 thousand current derivative liabilities are recorded in accrued expenses and other current liabilities, and $18 thousand long term derivative liabilities are recorded in other liabilities in the Consolidated Balance Sheets. As of September 30, 2016, all derivative liabilities were recorded in accrued expenses and other current liabilities in the Consolidated Balance Sheets. |
Offsetting Derivative Assets and Liabilities
We have entered into master netting arrangements which allow net settlements under certain conditions. Although netting is permitted, it is currently our policy and practice to record all derivative assets and liabilities on a gross basis in the Consolidated Balance Sheets.
F-41
The following table sets forth the offsetting of derivative assets as of September 30, 2017:
| Gross Amounts Offset in the Consolidated Balance Sheets | Gross Amounts Not Offset in the Consolidated Balance Sheets | ||||||||||||||||||||||
| September 30, 2017 | 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 | |||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Forward Contracts | $ | 1,163 | $ | — | $ | 1,163 | $ | (1,163 | ) | $ | — | $ | — |
The following table sets forth the offsetting of derivative liabilities as of September 30, 2017:
| Gross Amounts Offset in the Consolidated Balance Sheets | Gross Amounts Not Offset in the Consolidated Balance Sheets | ||||||||||||||||||||||
| September 30, 2017 | 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 | |||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Forward Contracts | $ | 4,347 | $ | — | $ | 4,347 | $ | (1,163 | ) | $ | — | $ | 3,184 |
Net gains and losses on foreign currency exposures, including realized and unrealized gains and losses on forward contracts, included in foreign currency net losses, were net losses of $5.7 million, $1.9 million and $2.7 million for 2017, 2016 and 2015, respectively. Net realized and unrealized gains and losses on forward contracts included in foreign currency net losses were a net loss of 1.8 million in 2017, a net loss of 0.5 million in 2016, and a net gain of 0.6 million in 2015.
O. Segment 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 three operating and reportable segments: (1) the Solutions Group, which includes license, subscription, support and cloud services revenue for our core CAD, SLM and PLM products; (2) the IoT Group, which includes license, subscription, support and cloud services revenue for our IoT, analytics and augmented reality solutions, and (3) Professional Services, which includes consulting, implementation and training revenue. Our reported segment profit includes revenue from third party sales of our products and services, less direct controllable segment costs. Direct costs of the segments include certain costs of revenue, research and development and certain marketing costs. Costs excluded from segment margin include cost of revenue, selling expenses, corporate marketing and general and administrative costs that are incurred in support of all of our segments and are not specifically allocated to our segments for management reporting. Additionally, the 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.
F-42
| Year ended September 30, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Solutions Group | |||||||||||
| Revenue | $ | 893,606 | $ | 871,225 | $ | 980,274 | |||||
| Direct costs | 184,160 | 186,174 | 224,042 | ||||||||
| Profit | 709,446 | 685,051 | 756,232 | ||||||||
| IoT Group | |||||||||||
| Revenue | 93,710 | 72,371 | 49,249 | ||||||||
| Direct costs | 96,535 | 83,747 | 28,998 | ||||||||
| Profit (loss) | (2,825 | ) | (11,376 | ) | 20,251 | ||||||
| Professional Services | |||||||||||
| Revenue | 176,723 | 196,937 | 225,719 | ||||||||
| Direct costs | 145,091 | 165,325 | 193,397 | ||||||||
| Profit | 31,632 | 31,612 | 32,322 | ||||||||
| Total segment revenue | 1,164,039 | 1,140,533 | 1,255,242 | ||||||||
| Total segment costs | 425,786 | 435,246 | 446,437 | ||||||||
| Total segment profit | 738,253 | 705,287 | 808,805 | ||||||||
| Other unallocated operating expenses (1) | 689,413 | 666,028 | 723,780 | ||||||||
| Restructuring charges | 7,942 | 76,273 | 43,409 | ||||||||
| Total operating income (loss) | 40,898 | (37,014 | ) | 41,616 | |||||||
| Interest and other expense, net | 42,304 | 30,178 | 15,091 | ||||||||
| Income (loss) before income taxes | $ | (1,406 | ) | $ | (67,192 | ) | $ | 26,525 |
| (1) | The Solutions Group segment includes depreciation of $5.4 million, $5.4 million and $5.6 million in 2017, 2016 and 2015, respectively. The IoT Group segment includes depreciation of $1.5 million, $1.6 million and $1.0 million in 2017, 2016 and 2015, respectively. The Professional Services segment includes depreciation of $1.8 million, $2.0 million and $2.2 million in 2017, 2016 and 2015, respectively. Unallocated departments include depreciation of $19.3 million, $19.7 million and $20.1 million in 2017, 2016 and 2015, respectively. |
We report revenue by the following four product areas:
| • | CAD: Creo® and Mathcad®. |
| • | PLM: PLM solutions (primarily Windchill®), Integrity™ and Atego®. |
| • | SLM: Arbortext® and Servigistics®. |
| • | IoT: ThingWorx®, Vuforia® and Kepware®. |
| Year ended September 30, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| CAD | $ | 474,608 | $ | 462,307 | $ | 511,582 | |||||
| PLM | 454,299 | 456,285 | 524,741 | ||||||||
| SLM | 131,773 | 141,644 | 166,060 | ||||||||
| IoT | 103,359 | 80,297 | 52,859 | ||||||||
| Total revenue | $ | 1,164,039 | $ | 1,140,533 | $ | 1,255,242 |
F-43
Revenue and long-lived tangible assets for the geographic regions in which we operate is presented below.
| Year ended September 30, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Revenue: | |||||||||||
| Americas (1) | $ | 500,879 | $ | 487,594 | $ | 530,311 | |||||
| Europe (2) | 435,183 | 424,268 | 467,805 | ||||||||
| Asia-Pacific | 227,977 | 228,671 | 257,126 | ||||||||
| Total revenue | $ | 1,164,039 | $ | 1,140,533 | $ | 1,255,242 |
| September 30, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Long-lived tangible assets: | |||||||||||
| Americas (3) | $ | 47,055 | $ | 48,281 | $ | 47,509 | |||||
| Europe | 6,284 | 6,915 | 7,424 | ||||||||
| Asia-Pacific | 10,261 | 11,917 | 10,229 | ||||||||
| Total long-lived tangible assets | $ | 63,600 | $ | 67,113 | $ | 65,162 |
| (1) | Includes revenue in the United States totaling $475.5 million, $463.1 million and $500.6 million for 2017, 2016 and 2015, respectively. |
| (2) | Includes revenue in Germany totaling $164.7 million, $167.2 million and $177.1 million for 2017, 2016 and 2015, respectively. |
| (3) | Substantially all of the Americas long-lived tangible assets are located in the United States. |
Our international revenue is presented based on the location of our customer. We license products to customers worldwide. Our sales and marketing operations outside the United States are conducted principally through our international sales subsidiaries throughout Europe and the Asia-Pacific regions. Intercompany sales and transfers between geographic areas are accounted for at prices that are designed to be representative of unaffiliated party transactions.
P. Subsequent Events
Restricted Stock Unit Grants
In November 2017, we granted restricted stock units (RSUs) valued at approximately $65.5 million to employees, including $28.1 million target value of performance-based RSUs granted to our executives and $37.4 million of time-based RSUs granted to employees and executives.
The performance-based RSUs are eligible to vest based upon annual performance measures, measured over a three-year period that commenced on October 1, 2017. To the extent earned, these units will vest in three substantially equal installments on the later of November 15, 2018, 2019 and 2020, or the date the Compensation Committee determines the extent to which the applicable performance criteria have been achieved for each performance period. RSUs not earned for a period may be earned in the third period. The performance-based RSUs allow for upside based on 2018, 2019 and 2020 performance measures, and provide the opportunity to earn up to one time the number of performance-based RSUs (up to a maximum of 189,000 shares) if certain performance conditions are met.
The time-based RSUs will vest in three substantially equal annual installments on November 15, 2018, 2019 and 2020. The time-based RSUs allow for upside based on a 2018 performance measure. Executives have the opportunity to earn up to one or, for our CEO, two times the number of time-based RSUs (up to a maximum of 250,000 shares) if certain performance conditions are met.
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Borrowings
In November 2017, we borrowed $50 million under our credit facility to fund working capital requirements, including 2017 year end incentive-based compensation accruals.
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SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this Annual Report.
The Consolidated Statements of Operations data for the years ended September 30, 2017, 2016, and 2015 and the Consolidated Balance Sheets data as of September 30, 2017 and 2016 are derived from our audited consolidated financial statements appearing elsewhere in this Annual Report. The Consolidated Statements of Operations data for the years ended September 30, 2014 and 2013 and the Consolidated Balance Sheet data as of September 30, 2015, 2014 and 2013 are derived from our audited consolidated financial statements that are not included in this Annual Report. The historical results are not necessarily indicative of results in any future period.
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA (1)
(in thousands, except per share data)
| 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
| Revenue | $ | 1,164,039 | $ | 1,140,533 | $ | 1,255,242 | $ | 1,356,967 | $ | 1,293,541 | |||||||||
| Gross margin | 835,020 | 814,868 | 920,508 | 983,284 | 920,502 | ||||||||||||||
| Operating income (loss) (2) | 40,898 | (37,014 | ) | 41,616 | 196,576 | 127,324 | |||||||||||||
| Net income (loss) (2) (3) | 6,239 | (54,465 | ) | 47,557 | 160,194 | 143,769 | |||||||||||||
| Earnings (loss) per share—Basic (2) (3) | 0.05 | (0.48 | ) | 0.41 | 1.36 | 1.20 | |||||||||||||
| Earnings (loss) per share—Diluted (2) (3) | 0.05 | (0.48 | ) | 0.41 | 1.34 | 1.19 | |||||||||||||
| Total assets | 2,360,384 | 2,345,729 | 2,209,913 | 2,199,954 | 1,828,906 | ||||||||||||||
| Working capital | (12,353 | ) | (11,930 | ) | 87,419 | 105,500 | 151,603 | ||||||||||||
| Long-term liabilities | 796,039 | 848,544 | 732,482 | 719,398 | 373,813 | ||||||||||||||
| Stockholders’ equity | 885,436 | 842,666 | 860,171 | 853,889 | 926,480 |
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in thousands, except per share data)
| September 30, 2017 | July 1, 2017 | April 1, 2017 | December 31 2016 | ||||||||||||
| Revenue | $ | 306,379 | $ | 291,293 | $ | 280,040 | $ | 286,327 | |||||||
| Gross margin | 223,574 | 209,025 | 198,210 | 204,212 | |||||||||||
| Operating income (loss) (2) | 17,569 | 11,256 | 7,513 | 4,561 | |||||||||||
| Net income (loss) (2) (3) | 17,435 | (951 | ) | (1,104 | ) | (9,141 | ) | ||||||||
| Earnings (loss) per share (2) (3): | |||||||||||||||
| Basic | $ | 0.15 | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.08 | ) | ||||
| Diluted | $ | 0.15 | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.08 | ) | ||||
| Common Stock prices: (4) | |||||||||||||||
| High | $ | 59.29 | $ | 60.22 | $ | 56.73 | $ | 49.93 | |||||||
| Low | $ | 52.20 | $ | 51.00 | $ | 45.93 | $ | 43.10 |
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| September 30, 2016 | July 2, 2016 | April 2, 2016 | January 2, 2016 | ||||||||||||
| Revenue | $ | 288,237 | $ | 288,652 | $ | 272,627 | $ | 291,017 | |||||||
| Gross margin | 205,381 | 206,182 | 192,436 | 210,870 | |||||||||||
| Operating income (loss) (2) | (33,075 | ) | 7,596 | 1,758 | (13,292 | ) | |||||||||
| Net income (loss) (2) (3) | (28,473 | ) | 3,073 | (5,173 | ) | (23,892 | ) | ||||||||
| Earnings (loss) per share (2) (3): | |||||||||||||||
| Basic | $ | (0.25 | ) | $ | 0.03 | $ | (0.05 | ) | $ | (0.21 | ) | ||||
| Diluted | $ | (0.25 | ) | $ | 0.03 | $ | (0.05 | ) | $ | (0.21 | ) | ||||
| Common Stock prices: (4) | |||||||||||||||
| High | $ | 44.75 | $ | 39.44 | $ | 34.20 | $ | 37.09 | |||||||
| Low | $ | 36.57 | $ | 31.58 | $ | 27.06 | $ | 30.53 |
| (1) | The consolidated financial position and results of operations data reflect our acquisitions of Kepware on January 12, 2016 for $99.4 million in cash, Vuforia on November 3, 2015 for $64.8 million in cash, ColdLight on May 7, 2015 for $98.6 million in cash, Axeda on August 11, 2014 for $165.9 million in cash, ThingWorx on December 30, 2013 for $111.5 million in cash and Servigistics on October 2, 2012 for $220.8 million in cash, as well as certain other less significant businesses during these periods. Results of operations for the acquired businesses have been included in the Consolidated Statements of Operations since their acquisition dates. |
| (2) | Operating income (loss) and net income (loss) in 2016 includes pre-tax restructuring charges of $76.3 million ($31.7 million in the fourth quarter, $2.8 million in the third quarter, $4.6 million in the second quarter and $37.2 million in the first quarter). Operating income and net income in 2015 includes a pre-tax U.S pension settlement loss of $66.3 million recorded in the fourth quarter, a $28.2 million charge related to a legal accrual and pre-tax restructuring charges of $43.4 million ($0.8 million in the fourth quarter, $4.4 million in the third quarter, $38.5 million in the second quarter and ($0.3) million in the first quarter). Operating income and net income in 2014 includes pre-tax restructuring charges of $28.4 million ($26.8 million in the fourth quarter, $0.5 million in the third quarter and $1.1 million in the first quarter). Operating income and net income in 2013 includes pre-tax restructuring charges of $52.2 million ($17.9 million in the fourth quarter, $3.1 million in the third quarter, $15.8 million in the second quarter and $15.4 million in the first quarter). |
| (3) | In 2015, net income includes an $18.7 million tax benefit related to settlement of our U.S pension plan recorded in the fourth quarter. Net income in 2014 and 2013 includes tax benefits totaling $18.1 million ($9.1 million in the fourth quarter and $8.9 million in the second quarter) and $44.6 million ($12.0 million in the fourth quarter and $32.6 million in the first quarter), respectively, related to the reversal of a portion of the valuation allowance in the U.S. related to the impact on deferred taxes in accounting for acquisitions and accounting for the U.S. pension plan. |
| (4) | The common stock prices are based on the Nasdaq Global Select Market daily high and low sale prices. Our common stock is traded on the Nasdaq Global Select Market under the symbol "PTC". |
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