filings.toolsItem 16. Form 10-K Summary
208K 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 15th day of November, 2018.
| 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 15th day of November, 2018.
| 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 | ||
| /s/ BLAKE MORET | Director | |
| Blake Moret |
APPENDIX A
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of PTC Inc.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of PTC Inc. and its subsidiaries (the "Company") as of September 30, 2018 and September 30, 2017, and the related consolidated statements of operations, of comprehensive income (loss), of stockholders’ equity, and of cash flows for each of the three years in the period ended September 30, 2018, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of September 30, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2018 and September 30, 2017, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal
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control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
November 15, 2018
We have served as the Company’s auditor since 1992.
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PTC Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
| September 30, | |||||||
| 2018 | 2017 | ||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 259,946 | $ | 280,003 | |||
| Short-term marketable securities | 25,836 | 18,408 | |||||
| Accounts receivable, net of allowance for doubtful accounts of $607 and $1,062 at September 30, 2018 and 2017, respectively | 129,297 | 152,299 | |||||
| Prepaid expenses | 48,997 | 49,913 | |||||
| Other current assets | 169,708 | 165,933 | |||||
| Total current assets | 633,784 | 666,556 | |||||
| Property and equipment, net | 80,613 | 63,600 | |||||
| Goodwill | 1,182,457 | 1,182,772 | |||||
| Acquired intangible assets, net | 200,202 | 257,908 | |||||
| Long-term marketable securities | 30,115 | 31,907 | |||||
| Deferred tax assets | 165,566 | 123,166 | |||||
| Other assets | 36,285 | 34,475 | |||||
| Total assets | $ | 2,329,022 | $ | 2,360,384 | |||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
| Current liabilities: | |||||||
| Accounts payable | $ | 53,473 | $ | 35,160 | |||
| Accrued expenses and other current liabilities | 74,388 | 80,761 | |||||
| Accrued compensation and benefits | 101,784 | 110,957 | |||||
| Accrued income taxes | 18,044 | 5,735 | |||||
| Deferred revenue | 487,590 | 446,296 | |||||
| Total current liabilities | 735,279 | 678,909 | |||||
| Long-term debt, net of current portion | 643,268 | 712,406 | |||||
| Deferred tax liabilities | 5,589 | 17,880 | |||||
| Deferred revenue | 11,852 | 12,611 | |||||
| Other liabilities | 58,445 | 53,142 | |||||
| Total liabilities | 1,454,433 | 1,474,948 | |||||
| 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; 117,981 and 115,333 shares issued and outstanding at September 30, 2018 and 2017, respectively | 1,180 | 1,153 | |||||
| Additional paid-in capital | 1,558,403 | 1,609,030 | |||||
| Accumulated deficit | (599,409 | ) | (650,840 | ) | |||
| Accumulated other comprehensive loss | (85,585 | ) | (73,907 | ) | |||
| Total stockholders’ equity | 874,589 | 885,436 | |||||
| Total liabilities and stockholders’ equity | $ | 2,329,022 | $ | 2,360,384 |
The accompanying notes are an integral part of these consolidated financial statements.
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PTC Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| Year ended September 30, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| Revenue: | |||||||||||
| Subscription | $ | 482,027 | $ | 279,246 | $ | 118,322 | |||||
| Support | 496,826 | 574,680 | 651,807 | ||||||||
| Total recurring revenue | 978,853 | 853,926 | 770,129 | ||||||||
| Perpetual license | 109,634 | 133,390 | 173,467 | ||||||||
| Total subscription, support and license revenue | 1,088,487 | 987,316 | 943,596 | ||||||||
| Professional services | 153,337 | 176,723 | 196,937 | ||||||||
| Total revenue | 1,241,824 | 1,164,039 | 1,140,533 | ||||||||
| Cost of revenue: | |||||||||||
| Cost of license and subscription revenue | 94,108 | 86,047 | 69,710 | ||||||||
| Cost of support revenue | 88,575 | 92,202 | 85,729 | ||||||||
| Total cost of software revenue | 182,683 | 178,249 | 155,439 | ||||||||
| Cost of professional services revenue | 143,511 | 150,770 | 170,226 | ||||||||
| Total cost of revenue | 326,194 | 329,019 | 325,665 | ||||||||
| Gross margin | 915,630 | 835,020 | 814,868 | ||||||||
| Operating expenses | |||||||||||
| Sales and marketing | 414,524 | 372,946 | 367,465 | ||||||||
| Research and development | 249,774 | 236,059 | 229,331 | ||||||||
| General and administrative | 142,981 | 145,067 | 145,615 | ||||||||
| Amortization of acquired intangible assets | 31,350 | 32,108 | 33,198 | ||||||||
| Restructuring and other charges, net | 3,764 | 7,942 | 76,273 | ||||||||
| Total operating expenses | 842,393 | 794,122 | 851,882 | ||||||||
| Operating income (loss) | 73,237 | 40,898 | (37,014 | ) | |||||||
| Foreign currency losses, net | (6,982 | ) | (5,686 | ) | (1,889 | ) | |||||
| Interest income | 3,819 | 3,249 | 3,437 | ||||||||
| Interest expense | (41,673 | ) | (42,400 | ) | (29,882 | ) | |||||
| Other income (expense), net | 255 | 2,533 | (1,844 | ) | |||||||
| Income (loss) before income taxes | 28,656 | (1,406 | ) | (67,192 | ) | ||||||
| Benefit from income taxes | (23,331 | ) | (7,645 | ) | (12,727 | ) | |||||
| Net income (loss) | $ | 51,987 | $ | 6,239 | $ | (54,465 | ) | ||||
| Earnings (loss) per share—Basic | $ | 0.45 | $ | 0.05 | $ | (0.48 | ) | ||||
| Earnings (loss) per share—Diluted | $ | 0.44 | $ | 0.05 | $ | (0.48 | ) | ||||
| Weighted average shares outstanding—Basic | 116,390 | 115,523 | 114,612 | ||||||||
| Weighted average shares outstanding—Diluted | 118,158 | 117,356 | 114,612 |
The accompanying notes are an integral part of these consolidated financial statements.
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PTC Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
| Year ended September 30, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| Net income (loss) | $ | 51,987 | $ | 6,239 | $ | (54,465 | ) | ||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Unrealized hedge gain (loss) arising during the period, net of tax of $0.2 million in 2018, $0.1 million in 2017 and $0 million in 2016, respectively | 1,445 | (758 | ) | (3,375 | ) | ||||||
| Net hedge (gain) loss reclassified into earnings, net of tax of ($0.1 million) in 2018, ($0.1 million) in 2017 and $0 million in 2016, respectively | 483 | 459 | 2,131 | ||||||||
| Unrealized loss on hedging instruments | 1,928 | (299 | ) | (1,244 | ) | ||||||
| Foreign currency translation adjustment, net of tax of $0 for all periods | (11,767 | ) | 16,593 | 408 | |||||||
| Unrealized loss on marketable securities, net of tax of $0 for all periods | (269 | ) | (22 | ) | (122 | ) | |||||
| Amortization of net actuarial pension loss included in net income, net of tax of ($0.7 million), ($1.0 million), and ($0.7 million) in 2018, 2017 and 2016, respectively | 1,629 | 2,392 | 1,609 | ||||||||
| Pension net gain (loss) arising during the period net of tax of $1.5 million, ($3.6 million), and $3.5 million in 2018, 2017, and 2016, respectively | (3,787 | ) | 8,636 | (8,646 | ) | ||||||
| Change in unamortized pension loss during the period related to changes in foreign currency | 588 | (1,254 | ) | (216 | ) | ||||||
| Other comprehensive income (loss) | (11,678 | ) | 26,046 | (8,211 | ) | ||||||
| Comprehensive income (loss) | $ | 40,309 | $ | 32,285 | $ | (62,676 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
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PTC Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Year ended September 30, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | 51,987 | $ | 6,239 | $ | (54,465 | ) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Stock-based compensation | 82,939 | 76,708 | 65,996 | ||||||||
| Depreciation and amortization | 87,408 | 86,742 | 86,554 | ||||||||
| Benefit from deferred income taxes | (56,556 | ) | (28,289 | ) | (44,182 | ) | |||||
| Other non-cash costs, net | 534 | 2,272 | 966 | ||||||||
| Changes in operating assets and liabilities, excluding the effects of acquisitions: | |||||||||||
| Accounts receivable | 20,396 | 12,832 | 52,617 | ||||||||
| Accounts payable and accrued expenses | 5,251 | 20,315 | (14,185 | ) | |||||||
| Accrued compensation and benefits | (6,988 | ) | (34,846 | ) | 60,944 | ||||||
| Deferred revenue | 56,141 | 5,808 | 16,232 | ||||||||
| Accrued income taxes, net of income tax receivable | 10,323 | (798 | ) | 6,749 | |||||||
| Other current assets and prepaid expenses | (10,583 | ) | 721 | 4,591 | |||||||
| Other noncurrent assets and liabilities | 6,959 | (12,470 | ) | 1,444 | |||||||
| Net cash provided by operating activities | 247,811 | 135,234 | 183,261 | ||||||||
| Cash flows from investing activities: | |||||||||||
| Additions to property and equipment | (36,041 | ) | (25,444 | ) | (26,189 | ) | |||||
| Purchases of short- and long-term marketable securities | (24,311 | ) | (19,726 | ) | (44,605 | ) | |||||
| Proceeds from maturities of short- and long-term marketable securities | 18,140 | 18,785 | — | ||||||||
| Acquisitions of businesses, net of cash acquired | (3,000 | ) | (4,960 | ) | (165,802 | ) | |||||
| Purchases of investments | (1,000 | ) | — | (560 | ) | ||||||
| Proceeds from sales of investments | — | 15,218 | — | ||||||||
| Purchase of intangible asset | (3,000 | ) | — | — | |||||||
| Net cash used by investing activities | (49,212 | ) | (16,127 | ) | (237,156 | ) | |||||
| Cash flows from financing activities: | |||||||||||
| Borrowings under credit facility and senior notes | 250,000 | 150,000 | 670,000 | ||||||||
| Repayments of borrowings under credit facility | (320,000 | ) | (190,000 | ) | (580,000 | ) | |||||
| Repurchases of common stock | (1,100,000 | ) | (50,991 | ) | — | ||||||
| Proceeds from issuance of common stock | 1,015,654 | 10,778 | 21 | ||||||||
| Payments of withholding taxes in connection with vesting of stock-based awards | (45,374 | ) | (26,654 | ) | (20,939 | ) | |||||
| Credit facility origination costs | (2,851 | ) | (184 | ) | (6,855 | ) | |||||
| Contingent consideration | (8,275 | ) | (11,054 | ) | (10,621 | ) | |||||
| Net cash provided (used) by financing activities | (210,846 | ) | (118,105 | ) | 51,606 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (7,810 | ) | 1,066 | 6,807 | |||||||
| Net increase (decrease) in cash and cash equivalents | (20,057 | ) | 2,068 | 4,518 | |||||||
| Cash and cash equivalents, beginning of year | 280,003 | 277,935 | 273,417 | ||||||||
| Cash and cash equivalents, end of year | $ | 259,946 | $ | 280,003 | $ | 277,935 | |||||
| Supplemental disclosure of non-cash financing activities: | |||||||||||
| Fair value of contingent consideration recorded for acquisitions | $ | 2,100 | $ | — | $ | 16,900 |
The accompanying notes are an integral part of these consolidated financial statements.
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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, 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 | |||||||||
| Common stock issued for employee stock-based awards | 1,830 | 18 | (18 | ) | — | — | — | |||||||||||||||
| Shares surrendered by employees to pay taxes related to stock-based awards | (664 | ) | (6 | ) | (45,368 | ) | — | — | (45,374 | ) | ||||||||||||
| Common stock issued | 10,582 | 106 | 995,394 | — | — | 995,500 | ||||||||||||||||
| Common stock issued for employee stock purchase plan | 292 | 2 | 15,652 | — | — | 15,654 | ||||||||||||||||
| Compensation expense from stock-based awards | — | — | 82,939 | — | — | 82,939 | ||||||||||||||||
| ASU 2016-09 adoption | — | — | 681 | (556 | ) | — | 125 | |||||||||||||||
| Net income | — | — | — | 51,987 | — | 51,987 | ||||||||||||||||
| Repurchases of common stock | (9,392 | ) | (93 | ) | (1,099,907 | ) | — | — | (1,100,000 | ) | ||||||||||||
| Unrealized loss on hedging instruments, net of tax | — | — | — | — | 1,928 | 1,928 | ||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | (11,767 | ) | (11,767 | ) | ||||||||||||||
| Unrealized loss on available-for-sale securities, net of tax | — | — | — | — | (269 | ) | (269 | ) | ||||||||||||||
| Change in pension benefits, net of tax | — | — | — | — | (1,570 | ) | (1,570 | ) | ||||||||||||||
| Balance as of September 30, 2018 | 117,981 | $ | 1,180 | $ | 1,558,403 | $ | (599,409 | ) | $ | (85,585 | ) | $ | 874,589 |
The accompanying notes are an integral part of these consolidated financial statements.
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PTC Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Description of Business and Basis of Presentation
Business
PTC Inc. was incorporated in 1985 and is headquartered in Needham, Massachusetts. PTC is a global software and services company that delivers a technology platform and solutions to help companies design, manufacture, operate, and service things for a smart, connected world.
Basis of Presentation
Our fiscal year-end is September 30. The consolidated financial statements include PTC Inc. (the parent company) and its wholly owned subsidiaries, including those operating outside the U.S. All intercompany balances and transactions have been eliminated in the consolidated financial statements.
We prepare our financial statements under generally accepted accounting principles in the U.S. that require management to make estimates and assumptions that affect the amounts reported and the related disclosures. Actual results could differ from these estimates.
Reclassifications
Effective at the beginning of fiscal 2018, in accordance with the adoption of ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, excess tax benefits are now classified as an operating activity on the statement of cash flows rather than as a financing activity. The prior period excess tax benefits have been reclassified for comparability.
Effective with the beginning of the third quarter of 2017, we are reporting cost of license and subscription revenue separately from cost of support revenue and are presenting cost of revenue in three categories: 1) cost of license and subscription revenue, 2) cost of support revenue, and 3) cost of professional services revenue. Cost of license and subscription includes the cost of perpetual and subscription licenses; cost of support includes the cost of supporting both perpetual and subscription licenses. Costs of revenue for previous periods in the accompanying Consolidated Statements of Operations are presented on a basis consistent with the current period presentation.
Segments
In fiscal 2017, we had three operating and reportable segments: (1) the Solutions Group, which included license, subscription, support and cloud services revenue for our core CAD, SLM and PLM products; (2) the IoT Group, which included license, subscription, support and cloud services revenue for our IoT, analytics and augmented reality solutions; and (3) Professional Services, which included consulting, implementation and training revenue.
With a change in our organizational structure to streamline our operations, we merged our Solution Group segment with our IoT Group segment and revised the information that our chief executive officer, who is also our chief operating decision maker ("CODM"), regularly reviews for purposes of allocating resources and assessing performance. As a result, effective with the beginning of the first quarter of fiscal 2018, we changed our operating and reportable segments from three to two: (1) Software Products, which includes license, subscription and related support revenue (including updates and technical support) for all our products; and (2) Professional Services, which includes consulting, implementation and training services.
Revenue and operating income in Note Q. Segment Information have been reclassified to conform to the current period presentation.
B. Summary of Significant Accounting Policies
Foreign Currency Translation
For our non-U.S. operations where the functional currency is the local currency, we translate assets and liabilities at exchange rates in effect at the balance sheet date and record translation adjustments in stockholders’ equity. For our non-U.S. operations where the U.S. dollar is the functional currency, we remeasure monetary assets and liabilities using exchange rates in effect at the balance sheet date and nonmonetary assets and liabilities at historical rates and record resulting exchange gains or losses in
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foreign currency net losses in the Consolidated Statements of Operations. We translate income statement amounts at average rates for the period. Transaction gains and losses are recorded in foreign currency net losses in the Consolidated Statements of Operations.
Revenue Recognition
Our sources of revenue include: (1) subscription, (2) support, (3) perpetual license and (4) professional services. Through 2018, we recorded revenues for software related deliverables in accordance with the guidance provided by ASC 985-605, Software-Revenue Recognition and revenues for non-software deliverables in accordance with ASC 605-25, Revenue Recognition, Multiple-Element Arrangements. Under those standards, revenue is recorded when the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred (generally, FOB shipping point or electronic distribution), (3) the fee is fixed or determinable, and (4) collection is probable. We exercise judgment and use estimates in connection with determining the amounts of software license and services revenues to be recognized in each accounting period. Our primary judgments involve the following:
| • | determining whether collection is probable; |
| • | assessing whether the fee is fixed or determinable; |
| • | determining whether service arrangements, including modifications and customization of the underlying software, are not essential to the functionality of the licensed software and thus would result in the revenue for license and service elements of an agreement being recorded separately; and |
| • | determining the fair value of services and support elements included in multiple-element arrangements, which is the basis for allocating and deferring revenue for such services and support. |
Our software is distributed primarily through our direct sales force. In addition, we have an indirect distribution channel through alliances with resellers. Revenue arrangements with resellers are generally recognized on a sell-through basis; that is, when we deliver the product to the end-user customer. We record consideration given to a reseller as a reduction of revenue to the extent we have recorded revenue from the reseller. We do not offer contractual rights of return, stock balancing, or price protection to our resellers, and actual product returns from them have been insignificant to date. As a result, we do not maintain reserves for reseller product returns.
At the time of each sale transaction, we must make an assessment of the collectability of the amount due from the customer. Revenue is only recognized at that time if management deems that collection is probable. In making this assessment, we consider customer credit-worthiness and historical payment experience. At that same time, we assess whether fees are fixed or determinable and free of contingencies or significant uncertainties. In assessing whether the fee is fixed or determinable, we consider the payment terms of the transaction, including transactions with payment terms that extend beyond our customary payment terms, and our collection experience in similar transactions without making concessions, among other factors. We have periodically provided financing to credit-worthy customers with payment terms up to 24 months. If the fee is determined not to be fixed or determinable, revenue is recognized only as payments become due from the customer, provided that all other revenue recognition criteria are met. Our software license arrangements generally do not include customer acceptance provisions. However, if an arrangement includes an acceptance provision, we record revenue only upon the earlier of (1) receipt of written acceptance from the customer or (2) expiration of the acceptance period.
Generally, our contracts are accounted for individually. However, when contracts are closely interrelated and dependent on each other, it may be necessary to account for two or more contracts as one to reflect the substance of the group of contracts.
Subscription
Subscription revenue includes revenue from two primary sources: (1) subscription-based licenses, and (2) cloud services.
Subscription-based licenses include the right for a customer to use our licenses on-premise and receive related support for a specified term and revenue is recognized ratably over the term of the arrangement since we do not have vendor-specific objective evidence (“VSOE”) of fair value for our coterminous support. When sold in arrangements with other elements, VSOE of fair value is established for
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the subscription-based licenses through the use of a substantive renewal clause within the customer contract for a combined annual fee that includes the term-based license and related support.
Cloud services revenue (which in 2018, 2017 and 2016 represented less than 5% of our total revenue) includes fees for hosting and application management of customers’ perpetual or subscription-based licenses (hosting services) and fees for Software as a Service (SaaS) arrangements. When hosting services are sold as part of a multi-element transaction, revenue is allocated to hosting services based on VSOE, and recognized ratably over the contractual term beginning on the commencement dates of each contract, which is the date the services are made available to the customer. VSOE is established for hosting services either through a substantive stated renewal option or stated contractual overage rates, as these rates represent the value the customer is willing to pay on a standalone basis. We also offer cloud services under SaaS arrangements whereby customers access our software in the cloud. Under SaaS arrangements, customers cannot take possession of the software. Cloud services include set-up fees, which are recognized ratably over the contract term or the expected customer life, whichever is longer.
Support
Support contracts generally include rights to unspecified upgrades (when and if available), telephone and internet-based support, updates and bug fixes. Support revenue is recognized ratably over the term of the support contract on a straight-line basis.
Perpetual License
Under perpetual license arrangements, we generally recognize license revenue up front upon shipment to the customer. We use the residual method to recognize revenue from perpetual license software arrangements that include one or more elements to be delivered at a future date when evidence of the fair value of all undelivered elements exists, and the elements of the arrangement qualify for separate accounting as described below. Under the residual method, the fair value of the undelivered elements (i.e., support and services) based on our VSOE of fair value is deferred and the remaining portion of the total arrangement fee is allocated to the delivered elements (i.e., perpetual software license). If evidence of the fair value of one or more of the undelivered elements does not exist, all revenues are deferred and recognized when delivery of all of those elements has occurred or when fair values can be established. We determine VSOE of the fair value of services and support revenue based upon our recent pricing for those elements when sold separately. For certain transactions, VSOE is determined based on a substantive renewal clause within a customer contract. Our current pricing practices are influenced primarily by product type, purchase volume, sales channel and customer location. We review services and support sold separately on a periodic basis and update, when appropriate, our VSOE of fair value for such elements to ensure that it reflects our recent pricing experience.
Professional Services
Our software arrangements often include implementation, consulting and training services that are sold under consulting engagement contracts or as part of the software license arrangement. When we determine that such services are not essential to the functionality of the licensed software, we record revenue separately for the license and service elements of these arrangements, provided that appropriate evidence of fair value exists for the undelivered services (i.e. VSOE of fair value). We consider various factors in assessing whether a service is not essential to the functionality of the software, including if the services may be provided by independent third parties experienced in providing such services (i.e. consulting and implementation) in coordination with dedicated customer personnel, and whether the services result in significant modification or customization of the software’s functionality. When professional services qualify for separate accounting, professional services revenues under time and materials billing arrangements are recognized as the services are performed. Professional services revenues under fixed-priced contracts are generally recognized as the services are performed using a proportionate performance model with hours or costs as the input method of attribution.
When we provide professional services that are considered essential to the functionality of the software, the arrangement does not qualify for separate accounting of the license and service elements, and the license revenue is recognized together with the consulting services using the percentage-of-completion method of contract accounting. Under such arrangements, consideration is recognized as the services are performed as measured by an observable input. In these circumstances, we separate license revenue from service revenue for income statement presentation by allocating VSOE of fair value
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of the consulting services as service revenue, and the residual portion as license revenue. Under the percentage-of-completion method, we estimate the stage of completion of contracts with fixed or “not to exceed” fees based on hours or costs incurred to date as compared with estimated total project hours or costs at completion. Adjustments to estimates to complete are made in the periods in which facts resulting in a change become known. When total cost estimates exceed revenues, we accrue for the estimated losses when identified. The use of the proportionate performance and percentage-of-completion methods of accounting require significant judgment relative to estimating total contract costs or hours (hours being a proxy for costs), including assumptions relative to the length of time to complete the project, the nature and complexity of the work to be performed and anticipated changes in salaries and other costs.
Reimbursements of out-of-pocket expenditures incurred in connection with providing consulting services are included in professional services revenue, with the offsetting expense recorded in cost of professional services revenue.
Training services include on-site and classroom training. Training revenues are recognized as the related training services are provided.
Deferred Revenue
Billed deferred revenue primarily relates to software subscription and support agreements billed to customers for which the services have not yet been provided. The liability associated with performing these services is included in deferred revenue and, if not yet paid, the related customer receivable is included in other current assets. Billed but uncollected support and subscription-related amounts included in other current assets at September 30, 2018 and 2017 were $153.6 million and $160.9 million, respectively. Deferred revenue consisted of the following:
| September 30, | |||||||
| 2018 | 2017 | ||||||
| (in thousands) | |||||||
| Deferred subscription revenue | $ | 288,012 | $ | 193,376 | |||
| Deferred support revenue | 196,684 | 256,999 | |||||
| Deferred perpetual license revenue | 1,475 | 1,773 | |||||
| Deferred professional services revenue | 13,272 | 6,759 | |||||
| Total deferred revenue | $ | 499,443 | $ | 458,907 |
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
Our investment portfolio consists of certificates of deposit, commercial paper, corporate notes/bonds and government securities that have a maximum maturity of three years. The longer the duration of these securities, the more susceptible they are to changes in market interest rates and bond yields. All unrealized losses are due to changes in market interest rates, bond yields and/or credit ratings.
We review our investments to identify and evaluate investments that have an indication of possible impairment. We concluded that, at September 30, 2018, the unrealized losses were temporary.
Cost Method Investments
We generally account for non-marketable equity investments under the cost method. We monitor non-marketable equity investments for events that could indicate that the investments are impaired, such as deterioration in the investee's financial condition and business forecasts, and lower valuations in recent or proposed financings. For an other-than-temporary impairment in the investment, we record a charge to other expense for the difference between the estimated fair value and the carrying value. The
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carrying value of our non-marketable equity investments are recorded in noncurrent assets and totaled $1.7 million and $0.7 million as of September 30, 2018 and 2017, respectively. In 2017, we sold a cost method investment in a private company for $13.7 million for a gain of approximately $3.7 million.
Concentration of Credit Risk and Fair Value of Financial Instruments
The amounts reflected in the Consolidated Balance Sheets for cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to their short maturities. Financial instruments that potentially subject us to concentration of credit risk consist primarily of investments, trade accounts receivable and foreign currency derivative instruments. Our cash, cash equivalents, and foreign currency derivatives are placed with financial institutions with high credit standings. Our credit risk for derivatives is also mitigated due to the short-term nature of the contracts. Our customer base consists of large numbers of geographically diverse customers dispersed across many industries. No individual customer comprised more than 10% of our trade accounts receivable as of September 30, 2018 or 2017 or comprised more than 10% of our revenue for the years ended September 30, 2018, 2017 or 2016.
Fair Value Measurements
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. Generally accepted accounting principles prescribe a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs that may be used to measure fair value:
| • | Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; |
| • | Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or |
| • | Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. In determining the adequacy of the allowance for doubtful accounts, management specifically analyzes individual accounts receivable, historical bad debts, customer concentrations, customer credit-worthiness, current economic conditions, and accounts receivable aging trends. Our allowance for doubtful accounts on trade accounts receivable was $0.6 million as of September 30, 2018, $1.1 million as of September 30, 2017, $1.0 million as of September 30, 2016 and $1.0 million as of September 30, 2015. Uncollectible trade accounts receivable written-off, net of recoveries, were $1.0 million, $1.5 million and $0.3 million in 2018, 2017 and 2016, respectively. Bad debt expense was $0.5 million, $1.5 million and $0.3 million in 2018, 2017 and 2016, respectively, and is included in general and administrative expenses in the accompanying Consolidated Statements of Operations.
Allowance for Sales Credits
We record an allowance for sales credits that is established based on the evaluation of historical credits and is recorded as a reduction in accounts receivable and revenue. As of September 30, 2018, the allowance for sale credits was $2.0 million.
Derivatives
Generally accepted accounting principles require all derivatives, whether designated in a hedging relationship or not, to be recorded on the balance sheet at fair value. Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Our most significant foreign currency exposures relate to Western European countries, Japan, China and Canada. Our foreign
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currency risk management strategy is principally designed to mitigate the future potential financial impact of changes in the U.S. dollar value of anticipated transactions and balances denominated in foreign currency, resulting from changes in foreign currency exchange rates. We enter into derivative transactions, specifically foreign currency forward contracts, to manage the exposures to foreign currency exchange risk to reduce earnings volatility. We do not enter into derivatives transactions for trading or speculative purposes. For a description of our non-designated hedge and cash flow hedge activities see Note P. Derivative Financial Instruments.
Non-Designated Hedges
We hedge our net foreign currency monetary assets and liabilities primarily resulting from foreign currency denominated receivables and payables with foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These contracts have maturities of up to approximately three months. Generally, we do not designate these foreign currency forward contracts as hedges for accounting purposes and changes in the fair value of these instruments are recognized immediately in earnings. Gains or losses on the underlying foreign-denominated balance are offset by the loss or gain on the forward contract and are included in foreign currency losses, net.
Cash Flow Hedges
Our foreign exchange risk management program objective is to identify foreign exchange exposures and implement appropriate hedging strategies to minimize earnings fluctuations resulting from foreign exchange rate movements. We designate certain foreign exchange forward contracts as cash flow hedges of Euro, Yen and SEK denominated intercompany forecast revenue transactions (supported by third party sales). All foreign exchange forward contracts are carried at fair value on the Consolidated Balance Sheets and the maximum duration of foreign exchange forward contracts is 14 months.
Cash flow hedge relationships are designated at inception, and effectiveness is assessed prospectively and retrospectively using regression analysis on a monthly basis. As the forward contracts are highly effective in offsetting changes to future cash flows on the hedged transactions, we record the effective portion of changes in these cash flow hedges in accumulated other comprehensive income and subsequently reclassify into earnings in the same period during which the hedged transactions are recognized in earnings. Changes in the fair value of foreign exchange forward contracts due to changes in time value are included in the assessment of effectiveness. Our derivatives are not subject to any credit contingent features. We manage credit risk with counter-parties by trading among several counter-parties and we review our counter-parties’ credit at least quarterly.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives. Computer hardware and software are typically amortized over three to five years, and furniture and fixtures over three to eight years. Leasehold improvements are amortized over the shorter of their useful lives or the remaining terms of the related leases. Property and equipment under capital leases are amortized over the lesser of the lease terms or their estimated useful lives. Maintenance and repairs are charged to expense when incurred; additions and improvements are capitalized. When an item is sold or retired, the cost and related accumulated depreciation is relieved, and the resulting gain or loss, if any, is recognized in income.
Software Development Costs
We incur costs to develop computer software to be licensed or otherwise marketed to customers. Research and development costs are expensed as incurred, except for costs of internally developed or externally purchased software that qualify for capitalization. Development costs for software to be sold externally incurred subsequent to the establishment of technological feasibility, but prior to the general release of the product, are capitalized and, upon general release, are amortized using the greater of either the straight-line method over the expected life of the related products or based upon the pattern in which economic benefits related to such assets are realized. The straight-line method is used if it approximates the same amount of expense as that calculated using the ratio that current period gross product revenues bear to total anticipated gross product revenues. No development costs for software to be sold externally were capitalized in 2018, 2017 or 2016. In 2018 and 2017, we acquired capitalized software of $0.8 million and $6.0 million, respectively. These assets are included in acquired intangible assets in the accompanying Consolidated Balance Sheets.
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Goodwill, Acquired Intangible Assets and Long-lived Assets
Goodwill is the amount by which the purchase price in a business acquisition exceeds the fair values of net identifiable assets on the date of purchase.
Goodwill is evaluated for impairment annually, as of the end of the third quarter, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Factors we consider important, on an overall company basis and reportable-segment basis, when applicable, that could trigger an impairment review include significant under-performance relative to historical or projected future operating results, significant changes in our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period and a reduction of our market capitalization relative to net book value.
Our annual goodwill impairment test is based on either a qualitative (Step 0) or quantitative (Step 1) assessment, and is designed to determine whether we believe it is more likely than not that the fair values of our reporting units exceed their carrying values. A Step 0 assessment includes a review of qualitative factors including company specific (financial performance and long-range plans), industry, and macroeconomic factors, and a consideration of the fair value of each reporting unit at the last valuation date. A Step 1 assessment is a quantitative analysis that compares the fair value of the reporting unit to its carrying value. If the reporting unit’s carrying value exceeds its fair value, we record an impairment loss equal to the difference between the carrying value of goodwill and its implied fair value. We estimate the fair values of our reporting units using discounted cash flow valuation models. Those models require estimates of future revenues, profits, capital expenditures, working capital, terminal values based on revenue multiples, and discount rates for each reporting unit. We estimate these amounts by evaluating historical trends, current budgets, operating plans and industry data.
We completed our annual goodwill impairment review as of July 1, 2018 based on a Step 0 assessment and concluded that no impairment charge was required as of that date.
Long-lived assets primarily include property and equipment and acquired intangible assets with finite lives (including purchased software, customer lists and trademarks). Purchased software is amortized over periods up to 11 years, customer lists are amortized over periods up to 12 years and trademarks are amortized over periods up to 12 years. We review long-lived assets for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of those assets are no longer appropriate. An impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset or asset group. If impairment is indicated, the asset is written down to its estimated fair value based on a discounted cash flow analysis.
Advertising Expenses
Advertising costs are expensed as incurred. Total advertising expenses incurred were $2.9 million, $2.5 million and $2.1 million in 2018, 2017 and 2016, respectively and are included in sales and marketing expenses in the accompanying Consolidated Statements of Operations.
Income Taxes
Our income tax expense includes U.S. and international income taxes. Certain items of income and expense are not reported in tax returns and financial statements in the same year. The tax effects of these differences are reported as deferred tax assets and liabilities. Deferred tax assets are recognized for the estimated future tax effects of deductible temporary differences and tax operating loss and credit carryforwards. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that it is more likely than not that all or a portion of deferred tax assets will not be realized, we establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we include an expense within the tax provision in the Consolidated Statements of Operations.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss), which includes foreign currency translation adjustments, changes in unrecognized actuarial gains and losses (net of tax) related to pension benefits, unrealized gains and losses on hedging instruments and unrealized gains and losses on marketable securities. For the purposes of comprehensive income disclosures, we do not record tax provisions or benefits for the net changes in the foreign currency
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translation adjustment, as we intend to reinvest permanently undistributed earnings of our foreign subsidiaries. Accumulated other comprehensive loss is reported as a component of stockholders’ equity and, as of September 30, 2018 and 2017, was comprised of cumulative translation adjustment losses of $66.4 million and $54.6 million, respectively, unrecognized actuarial losses related to pension benefits of $27.0 million ($19.2 million net of tax) and $24.7 million ($17.6 million net of tax), respectively, unrecognized gain on hedging instruments of $0.4 million ($0.4 million net of tax) and unrecognized loss of $1.8 million ($1.5 million net of tax), respectively, and unrecognized losses on marketable securities of $0.4 million and $0.1 million, respectively.
Earnings per Share (EPS)
Basic EPS is calculated by dividing net income by the weighted average number of shares outstanding during the period. Unvested restricted shares, although legally issued and outstanding, are not considered outstanding for purposes of calculating basic earnings per share. Diluted EPS is calculated by dividing net income by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding stock options, restricted shares and restricted stock units using the treasury stock method. The calculation of the dilutive effect of outstanding equity awards under the treasury stock method includes consideration of proceeds from the assumed exercise of stock options, unrecognized compensation expense and any tax benefits as additional proceeds. Due to the net loss generated in the year ended September 30, 2016, approximately 1.7 million restricted stock units have been excluded from the computation of diluted EPS in that year as the effect would have been anti-dilutive.
The following table presents the calculation for both basic and diluted EPS:
| Year ended September 30, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| (in thousands, except per share data) | |||||||||||
| Net income (loss) | $ | 51,987 | $ | 6,239 | $ | (54,465 | ) | ||||
| Weighted average shares outstanding | 116,390 | 115,523 | 114,612 | ||||||||
| Dilutive effect of employee stock options, restricted shares and restricted stock units | 1,768 | 1,833 | — | ||||||||
| Diluted weighted average shares outstanding | 118,158 | 117,356 | 114,612 | ||||||||
| Basic earnings (loss) per share | $ | 0.45 | $ | 0.05 | $ | (0.48 | ) | ||||
| Diluted earnings (loss) per share | $ | 0.44 | $ | 0.05 | $ | (0.48 | ) |
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. Equity Incentive Plan for a description of the types of stock-based awards granted, the compensation expense related to such awards and detail of equity-based awards outstanding. See Note G. Income Taxes for detail of the tax benefit related to stock-based compensation recognized in the Consolidated Statements of Operations.
Recently Adopted Accounting Pronouncements
Stock Compensation
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. We adopted ASU No. 2016-09 in the first quarter of 2018.
Effective with the adoption, stock-based compensation excess tax benefits or deficiencies are reflected in the Consolidated Statements of Operations as a component of the provision for income taxes when the awards vest or are settled. Previously they were recognized in equity. Upon adoption, under the modified retrospective transition method, we recognized the previously unrecognized excess tax benefits of $37.0 million as increases in deferred tax assets for tax loss carryovers and tax credits, $36.9 million of which were offset by an increase in our U.S. valuation allowance.
Additionally, excess tax benefits from stock-based awards will no longer be separately classified on our Consolidated Statements of Cash Flows as a financing activity apart from other income tax, and will be presented as an operating activity. As a result of the adoption of ASU 2016-09, the Consolidated
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Statement of Cash Flows was adjusted as follows: a $0.6 million and $0.1 million increase to net cash provided by operating activities for the periods ended September 30, 2017 and September 30, 2016, respectively, and a $0.6 million and $0.1 million decrease to net cash used in financing activities for the periods ended September 30, 2017 and September 30, 2016, respectively.
Finally, we have elected to account for forfeitures as they occur, rather than estimate expected forfeitures, which resulted in a cumulative effect adjustment of $0.7 million to reduce retained earnings as of October 1, 2017.
Pending Accounting Pronouncements
Derivative Financial Instruments
In August 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-12, "Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedging Activities", which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The guidance is effective for annual reporting periods beginning after December 15, 2018 (our fiscal 2020) including interim reporting periods within those annual reporting periods, and early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
Income Taxes
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). The purpose of ASU 2016-16 is to simplify the income tax accounting of an intra-entity transfer of an asset other than inventory and to record its effect when the transfer occurs. The guidance is effective for annual reporting periods beginning after December 15, 2017 (our fiscal 2019) including interim reporting periods within those annual reporting periods and early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements. We expect to record a net deferred tax asset of approximately $72 million upon adoption, primarily relating to deductible amortization of intangible assets in Ireland. Post adoption, our effective tax rate will no longer include the benefit of this amortization, which is reflected in our effective tax rate reconciliation under the current guidance.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will replace the existing guidance in ASC 840, Leases. The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and to disclose important information about leasing arrangements. ASU 2016-02 is effective for annual periods beginning after December 15, 2018 (our fiscal 2020) and interim periods within those annual periods. Early adoption is permitted and modified retrospective application is required. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASC 606). ASC 606 supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The FASB has also issued additional standards to provide clarification and implementation guidance on ASC 606.
The core principle of ASC 606 is to recognize revenue when promised goods or services are transferred to a customer in an amount that reflects the consideration that is expected to be received for those goods or services. Under the new guidance, an entity is required to evaluate revenue recognition through a five-step process: (1) identifying a contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations in the contract; and (5) recognizing revenue when (or as) the entity satisfies a performance obligation. The standard also requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In applying the principles of ASC 606, it is possible more judgment and estimates may be required within the revenue recognition process than is required under existing U.S. GAAP, including identifying performance obligations, estimating the amount of variable consideration to include in the transaction price, and estimating the value of each performance obligation to allocate the total transaction price to each separate performance obligation.
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ASC 606 is effective for us in the first quarter of our fiscal 2019. Companies may adopt ASC 606 using either the retrospective method, under which each prior reporting period is presented under ASC 606, with the option to elect certain permitted practical expedients, or the modified retrospective method, under which a company adopts ASC 606 from the beginning of the year of initial application with no restatement of comparative periods, with the cumulative effect of initially applying ASC 606 recognized at the date of initial application, and with certain additional required disclosures. We are adopting ASC 606 using the modified retrospective method.
While we are continuing to assess the impact of the new standard, we currently believe the most significant impact relates to accounting for our subscription arrangements that include term-based on-premise software licenses bundled with support and/or cloud services. Under current GAAP, the revenue attributable to these subscription licenses bundled with support is recognized ratably over the term of the arrangement because VSOE does not exist for the undelivered support element as it is not sold separately. Under the new standard, the requirement to have VSOE for undelivered elements to enable the separation of revenue for the delivered software licenses is eliminated. Accordingly, under the new standard we will be required to recognize as revenue a portion of the subscription fee upon delivery of the software license. For subscriptions arrangements that also include cloud services, the company assessed whether the cloud component was highly interrelated with the on-premise term software license. Other than a limited population of subscriptions, the cloud component is currently not deemed to be interrelated with the on-premise term software and as a result, cloud services will be accounted for as a separate distinct performance obligation. We do have a limited number of subscriptions that incorporate substantial cloud services where cloud services are not distinct from the on-premise term license in the context of the contracts as they are considered highly interrelated and represent a single performance obligation, for which the revenue will continue to be recognized over time. We currently expect revenue related to our perpetual license revenue and related support contracts, professional services and cloud offerings to remain substantially unchanged. Due to the complexity of certain of our contracts, the actual revenue recognition treatment required under the new standard may be dependent on contract-specific terms and, therefore, may vary in some instances.
Upon implementation of the new standard in fiscal 2019, we expect to make revisions to contract terms with our customers for new orders that will result in shortening the initial, non-cancellable term of our multi-year subscriptions to one year. This change will result in annual contractual periods for the majority of our software subscriptions, the license portion of which will be recognized at the beginning of each annual contract period upon delivery of the licenses and the support portion of which will be recognized ratably over the one year contractual period. As a result, we anticipate one year of subscription revenue will be recognized for each contract each year; however, more of the revenue will be recognized in the quarter that the contract period begins and less will be recognized in the subsequent three quarters of the contract than under the current accounting rules.
Under the modified retrospective method, we will evaluate each contract that is ongoing on the adoption date as if that contract had been accounted for under ASC 606 from contract inception. Some license revenue related to subscription arrangements that would have been recognized in future periods under current GAAP will be recast under ASC 606 as if the revenue had been recognized in prior periods. Under this transition method, we will not adjust historical reported revenue amounts. Instead, the revenue that would have been recognized under this method prior to the adoption date will be an adjustment to retained earnings and will not be recognized as revenue in future periods as previously planned. Because we expect that license revenue associated with subscription contracts will be recognized up front instead of over time under ASC 606, we expect approximately $350 million to $380 million will be adjusted to retained earnings upon adoption related to billed and unbilled deferred revenue. During the first year of adoption, we will disclose the amount of this retained earnings adjustment and intend to provide supplemental disclosure of how this revenue would have been recognized under the current rules.
Another significant provision under ASC 606 includes the capitalization and amortization of costs associated with obtaining and fulfilling a contract. Currently, substantially all of these costs are expensed in the period incurred. Under ASC 606, direct and incremental costs to acquire a contract are capitalized and amortized using a systematic basis over the pattern of transfer of the goods and services to which the asset relates. Under ASC 606, we estimate approximately $70 million of commission costs will be capitalized and amortized over the period the capitalized assets are expected to contribute to future cash flows.
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Furthermore, we have made and will continue to make investments in systems and processes to enable timely and accurate reporting under the new standard. We are implementing operational and internal control structural changes.
C. Restructuring and Other Charges
Restructuring Charges (Credits)
In fiscal 2016, we initiated a plan to restructure our workforce and consolidate select facilities to reduce our cost structure and to realign our investments with what we believe to be our higher growth opportunities. The actions resulted in total restructuring charges of $84.5 million, primarily associated with termination benefits associated with approximately 800 employees. This restructuring plan was substantially completed in 2017.
In fiscal 2015, we committed to a plan to restructure our workforce and consolidate select facilities to realign our global workforce to increase investment in our IoT business and to reduce our cost structure through organizational efficiencies in the face of significant foreign currency depreciation relative to the U.S. Dollar and a more cautious outlook on global macroeconomic conditions. The actions resulted in total restructuring charges of $42.1 million, primarily associated with termination benefits associated with 411 employees. This restructuring plan was substantially completed in 2016.
In 2018, we recorded restructuring credits of $1.0 million ($0.2 million related to the 2016 restructuring and $0.8 million related to the 2015 restructuring). We made cash payments related to restructuring charges of $2.8 million ($2.6 million related to the 2016 restructuring and $0.2 million related to the 2015 restructuring). At September 30, 2018, accrued restructuring totaled $2.4 million related to the 2016 restructuring.
In 2017, we recorded restructuring charges of $7.9 million ($8.2 million of which related to the 2016 restructuring offset by $0.3 million related to the 2015 restructuring). We made cash payments related to restructuring charges of $37.1 million ($36.4 million of which related to the 2016 restructuring and $0.7 million related to the 2015 restructuring).
In 2016, we recorded restructuring charges of $76.3 million ($77.1 million of which related to the 2016 restructuring offset by $0.8 million credit related to the 2015 restructuring). We made cash payments related to restructuring charges of $55.0 million ($42.1 million of which related to the 2016 restructuring, $12.1 million related to the 2015 restructuring and $0.8 million related to prior restructuring plans).
The following table summarizes restructuring charges reserve activity for the three years ended September 30, 2018:
| Employee Severance and Related Benefits | Facility Closures and Other Costs | Consolidated Total | |||||||||
| (in thousands) | |||||||||||
| Balance, October 1, 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 | ||||||||
| Charges (credits) to operations | (509 | ) | (494 | ) | (1,003 | ) | |||||
| Cash disbursements | (1,247 | ) | (1,509 | ) | (2,756 | ) | |||||
| Foreign currency impact | 20 | (90 | ) | (70 | ) | ||||||
| Balance, September 30, 2018 | $ | — | $ | 2,415 | $ | 2,415 |
F-18
Of the accrual for facility closures and related costs, as of September 30, 2018, $1.5 million is included in accrued expenses and other current liabilities and $0.9 million is included in other liabilities in the Consolidated Balance Sheets. The accrual for facility closures is net of assumed sublease income of $2.8 million. The accrual for employee severance and related benefits is included in accrued compensation and benefits in the Consolidated Balance Sheets.
Other - Headquarters relocation charges
Headquarters relocation charges represent accelerated depreciation expense recorded in anticipation of exiting our current headquarters facility. In 2019, we will be moving into a new worldwide headquarters in the Boston Seaport District, and we will be vacating our current headquarters space. Because our current headquarters lease will not expire until November 2022, we are seeking to sublease that space, but have not yet done so. If we are unable to sublease our current headquarters space for an amount at least equal to our rent obligations under the current headquarters lease (approximately $12 million per year), we will bear overlapping rent obligations for those premises and will be required to record additional headquarters relocation charges related to any rent shortfall. A charge for such shortfall will be recorded in the earlier of the period that we cease using the space (which will likely occur in the second quarter of our fiscal 2019) or the period we sign sublease contracts. Additionally, we will incur other costs associated with the move which will be recorded as incurred. In 2018, we recorded $4.8 million of accelerated depreciation expense related to shortening the estimated useful lives of leasehold improvements in our current facility.
D. Property and Equipment
Property and equipment consisted of the following:
| September 30, | |||||||
| 2018 | 2017 | ||||||
| (in thousands) | |||||||
| Computer hardware and software | $ | 324,765 | $ | 286,380 | |||
| Furniture and fixtures | 20,737 | 21,145 | |||||
| Leasehold improvements | 47,272 | 47,658 | |||||
| Gross property and equipment | 392,774 | 355,183 | |||||
| Accumulated depreciation and amortization | (312,161 | ) | (291,583 | ) | |||
| Net property and equipment | $ | 80,613 | $ | 63,600 |
Depreciation expense was $29.4 million, $28.0 million and $28.8 million in 2018, 2017 and 2016, respectively.
E. Acquisitions
In 2016, we completed the acquisitions of Kepware (on January 12, 2016) and Vuforia (on November 3, 2015). The results of operations of these acquired businesses have been included in our consolidated financial statements beginning on their respective acquisition dates. Our results of operations prior to these acquisitions, if presented on a pro forma basis, would not differ materially from our reported results.
These acquisitions have been accounted for as business combinations. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the respective acquisition date. The fair values of intangible assets for Kepware were based on valuations using an income approach, with estimates and assumptions provided by management of the acquired companies and PTC. The fair values of intangible assets for Vuforia were based on valuations using a cost approach which requires the use of significant estimates and assumptions, including estimating costs to reproduce an asset. The process for estimating the fair values of identifiable intangible assets as well as the Kepware contingent consideration liabilities requires the use of significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill.
F-19
Acquisition-related costs were $0.5 million, $1.6 million and $3.5 million in 2018, 2017 and 2016, respectively. Acquisition-related costs include direct costs of completing an acquisition (e.g., investment banker fees and professional fees, including legal and valuation services) and expenses related to acquisition integration activities (e.g., professional fees, severance, and retention bonuses). In addition, subsequent adjustments to our initial estimated amounts of contingent consideration, primarily net present value changes, are included within acquisition-related charges. These costs are classified in general and administrative expenses in the accompanying Consolidated Statements of Operations.
2016 Acquisitions
Kepware
On January 12, 2016, we acquired all of the ownership interest in Kepware, Inc. for $99.4 million in cash (net of cash acquired of $0.6 million) and, $16.9 million representing the fair value of contingent consideration payable upon achievement of targets described below. We borrowed $100.0 million under our existing credit facility in January of 2016 to fund the acquisition.
The acquisition of Kepware's KEPServerEX® communication platform enhanced our portfolio of Internet of Things (IoT) technology, and accelerated our entry into the factory setting and industrial IoT. At the time of the acquisition, Kepware had historical annualized revenues which were immaterial to our financial results. Kepware added approximately $16 million to our 2016 revenue and approximately $15 million in costs and expenses.
The purchase price allocation resulted in $77.1 million of goodwill, which will be deductible for income tax purposes. Intangible assets of $34.5 million includes purchased software of $28.7 million, customer relationships of $5.2 million and trademarks of $0.6 million, which are being amortized over useful lives of 10 years, 10 years and 6 years, respectively, based upon the pattern in which economic benefits related to such assets are expected to be realized.
The resulting amount of goodwill reflects our expectations of the following benefits: 1) Kepware’s protocol translators and connectivity platform strengthen the ThingWorx technology platform and accelerate our entry into the factory setting and Industrial IoT (IIoT); 2) cross-selling opportunities for our integrated technology platforms in the critical infrastructure markets to drive revenue growth; and 3) Kepware’s 20 years of manufacturing experience strengthens our manufacturing talent and domain expertise and provides support for our manufacturing strategy initiatives.
Vuforia
On November 3, 2015, pursuant to an Asset Purchase Agreement, we acquired the Vuforia business from Qualcomm Connected Experiences, Inc., a subsidiary of Qualcomm Incorporated, for $64.8 million in cash (net of cash acquired of $4.5 million). We borrowed $50.0 million under our credit facility to finance this acquisition.
The acquisition of Vuforia's augmented reality (AR) technology platform enhances our technology portfolio and accelerates our strategy as a leading provider of technologies and solutions that blend the digital and physical worlds. At the time of the acquisition, Vuforia had approximately 80 employees and historical annualized revenues which were immaterial to our financial results. The purchase price allocation resulted in $23.3 million of goodwill, which will be deductible for income tax purposes, $41.2 million of technology and $0.3 million of net tangible assets. The acquired technology is being amortized over a useful life of 6 years. The resulting amount of goodwill reflects the value of the synergies created by integrating Vuforia’s augmented technology platform into PTC’s IoT solutions.
F-20
The total purchase price for our 2016 acquisitions was allocated to assets and liabilities acquired as follows:
| Purchase price allocation: | 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 |
F. Goodwill and Acquired Intangible Assets
In 2017, we had three operating and reportable segments: (1) Solutions Group, (2) IoT Group and (3) Professional Services. Effective with the beginning of the first quarter of 2018, we changed our operating and reportable segments from three to two: (1) Software Products and (2) Professional Services. We assess goodwill for impairment at the reporting unit level. Our reporting units are determined based on the components of our operating segments that constitute a business for which discrete financial information is available and for which operating results are regularly reviewed by segment management. Our reporting units are the same as our operating segments.
As of September 30, 2018, goodwill and acquired intangible assets in the aggregate attributable to our Software Products and Professional Services segment was $1,352.4 million and $30.2 million, respectively. As of September 30, 2017, goodwill and acquired intangible assets in the aggregate attributable to our Software Products and Professional Services segment was $1,410.0 million and $30.6 million, respectively.
Goodwill is tested for impairment annually, or on an interim basis if an event occurs or circumstances change that would, more likely than not, reduce the fair value of the reporting segment below its carrying value. We completed our annual goodwill impairment review as of June 30, 2018 and concluded that no impairment charge was required as of that date. We completed our annual goodwill impairment review as of June 30, 2018 based on a qualitative assessment. Our qualitative assessment included company specific (financial performance and long-range plans), industry, and macroeconomic factors, and consideration of the fair value of each reporting unit, which was approximately double its carrying value or higher at July 2, 2016, the last valuation date. Based on our qualitative assessment, we believe it is more likely than not that the fair values of our reporting units exceed their carrying values and no further impairment testing is required. Through September 30, 2018, there have not been any events or changes in circumstances that indicate that the carrying values of goodwill or acquired intangible assets may not be recoverable.
F-21
Goodwill and acquired intangible assets consisted of the following:
| September 30, 2018 | September 30, 2017 | ||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Book Value | Gross Carrying Amount | Accumulated Amortization | Net Book Value | ||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Goodwill (not amortized) | $ | 1,182,457 | $ | 1,182,772 | |||||||||||||||||||
| Intangible assets with finite lives (amortized) (1): | |||||||||||||||||||||||
| Purchased software | $ | 362,679 | $ | 254,059 | $ | 108,620 | $ | 362,955 | $ | 228,377 | $ | 134,578 | |||||||||||
| Capitalized software | 22,877 | 22,877 | — | 22,877 | 22,877 | — | |||||||||||||||||
| Customer lists and relationships | 357,586 | 270,272 | 87,314 | 359,932 | 241,554 | 118,378 | |||||||||||||||||
| Trademarks and trade names | 19,054 | 14,786 | 4,268 | 19,138 | 14,186 | 4,952 | |||||||||||||||||
| Other | 4,003 | 4,003 | — | 4,030 | 4,030 | — | |||||||||||||||||
| $ | 766,199 | $ | 565,997 | $ | 200,202 | $ | 768,932 | $ | 511,024 | $ | 257,908 | ||||||||||||
| Total goodwill and acquired intangible assets | $ | 1,382,659 | $ | 1,440,680 |
(1) The weighted average useful lives of purchased software, customer lists and relationships, and trademarks and trade names with a remaining net book value are 9 years, 10 years, and 11 years, respectively.
The changes in the carrying amounts of goodwill from October 1, 2017 to September 30, 2018 are due to the impact of acquisitions and to foreign currency translation adjustments related to those asset balances that are recorded in non-U.S. currencies.
Changes in goodwill presented by reportable segment were as follows:
| Software Products | Professional Services | Total | |||||||||
| (in thousands) | |||||||||||
| Balance, September 30, 2016 | $ | 1,140,215 | $ | 29,598 | $ | 1,169,813 | |||||
| Acquisition | 2,847 | — | 2,847 | ||||||||
| Foreign currency translation adjustments | 9,855 | 257 | 10,112 | ||||||||
| Balance, September 30, 2017 | $ | 1,152,917 | $ | 29,855 | $ | 1,182,772 | |||||
| Acquisition | 4,350 | — | 4,350 | ||||||||
| Foreign currency translation adjustments | (4,547 | ) | (118 | ) | (4,665 | ) | |||||
| Balance, September 30, 2018 | $ | 1,152,720 | $ | 29,737 | $ | 1,182,457 |
The aggregate amortization expense for intangible assets with finite lives recorded for the years ended September 30, 2018, 2017 and 2016 was reflected in our Consolidated Statements of Operations as follows:
| Year ended September 30, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| (in thousands) | |||||||||||
| Amortization of acquired intangible assets | $ | 31,350 | $ | 32,108 | $ | 33,198 | |||||
| Cost of software revenue | 26,706 | 26,621 | 24,604 | ||||||||
| Total amortization expense | $ | 58,056 | $ | 58,729 | $ | 57,802 |
The estimated aggregate future amortization expense for intangible assets with finite lives remaining as of September 30, 2018 is $50.6 million for 2019, $47.8 million for 2020, $42.3 million for 2021, $29.1 million for 2022, $17.1 million for 2023 and $13.2 million thereafter.
F-22
G. Income Taxes
Our income (loss) before income taxes consisted of the following:
| Year ended September 30, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| (in thousands) | |||||||||||
| Domestic | $ | (114,591 | ) | $ | (140,150 | ) | $ | (156,166 | ) | ||
| Foreign | 143,247 | 138,744 | 88,974 | ||||||||
| Total income (loss) before income taxes | $ | 28,656 | $ | (1,406 | ) | $ | (67,192 | ) |
Our (benefit) provision for income taxes consisted of the following:
| Year ended September 30, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| (in thousands) | |||||||||||
| Current: | |||||||||||
| Federal | $ | 3,009 | $ | 2,423 | $ | 2,417 | |||||
| State | 2,003 | 340 | 571 | ||||||||
| Foreign | 28,213 | 17,881 | 28,467 | ||||||||
| 33,225 | 20,644 | 31,455 | |||||||||
| Deferred: | |||||||||||
| Federal | (12,594 | ) | 4,911 | 965 | |||||||
| State | (445 | ) | 877 | 515 | |||||||
| Foreign | (43,517 | ) | (34,077 | ) | (45,662 | ) | |||||
| (56,556 | ) | (28,289 | ) | (44,182 | ) | ||||||
| Total provision (benefit) for income taxes | $ | (23,331 | ) | $ | (7,645 | ) | $ | (12,727 | ) |
On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act, (the "Tax Act"), which significantly changed existing U.S. tax laws by a reduction of the corporate tax rate, the implementation of a new system of taxation for non-U.S. earnings, the imposition of a one-time tax on the deemed repatriation of undistributed earnings of non-U.S. subsidiaries, and the expansion of the limitations on the deductibility of executive compensation and interest expense. As we have a September 30 fiscal year-end, a blended U.S. statutory federal rate of approximately 24.5% applies for our fiscal year ending September 30, 2018 and 21% for subsequent fiscal years. The Tax Act also provides that net operating losses generated in years ending after December 31, 2017 (our fiscal 2018) will be carried forward indefinitely and can no longer be carried back, and that net operating losses generated in years beginning after December 31, 2017 can only reduce taxable income by up to 80% when utilized in a future period.
We have provided no federal income taxes payable as a result of the deemed repatriation of undistributed earnings as the tax will be offset by a combination of current year losses and existing attributes which had a full valuation allowance recorded against the related deferred tax assets. We recorded a state income taxes payable on the deemed repatriation of $2.1 million. We also recorded a deferred tax benefit of $14.1 million for the impact of the Tax Act on our net U.S. deferred income tax balances. This was primarily attributable to the reduction of the federal tax rate on the net deferred tax liability in the U.S., and the ability to realize net operating losses from the reversal of existing deferred tax assets which can now be carried forward indefinitely and can therefore be netted against deferred tax liabilities for indefinite lived intangible assets.
The changes included in the Tax Act are broad and complex. The Securities Exchange Commission has issued rules that allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. We have finalized our accounting for the effects of the legislation with the exception of any additional guidance that may impact our provisional amounts recorded for the transition tax. We are not able to make reasonable estimates at this time of the effects of certain provisions of the Tax Act that will apply to us beginning in our fiscal year ending September 30, 2019, including the Global Intangible Low Tax Income tax (the "GILTI" tax) and any associated impact on our U.S. valuation allowance. We currently anticipate finalizing and recording any resulting adjustments in the quarter ending December 29, 2018.
F-23
Taxes computed at the statutory federal income tax rates are reconciled to the provision (benefit) for income taxes as follows (in thousands):
| Year ended September 30, | ||||||||||||||||||||
| 2018 | 2017 | 2016 | ||||||||||||||||||
| Statutory federal income tax rate | $ | 7,021 | 25 | % | $ | (492 | ) | (35 | )% | $ | (23,517 | ) | (35 | )% | ||||||
| Change in valuation allowance | (181,047 | ) | (632 | )% | 17,334 | 1,233 | % | 37,996 | 57 | % | ||||||||||
| Transition impact of U.S. Tax Act | 126,122 | 440 | % | — | — | — | — | |||||||||||||
| Federal rate change | 69,648 | 243 | % | — | — | % | — | — | % | |||||||||||
| State income taxes, net of federal tax benefit | 2,401 | 8 | % | 627 | 45 | % | (82 | ) | — | % | ||||||||||
| Federal research and development credits | (3,058 | ) | (11 | )% | (2,182 | ) | (155 | )% | (5,981 | ) | (9 | )% | ||||||||
| Resolution of uncertain tax positions | (4,646 | ) | (16 | )% | (3,840 | ) | (273 | )% | — | — | % | |||||||||
| Foreign rate differences | (38,743 | ) | (135 | )% | (27,932 | ) | (1,987 | )% | (27,513 | ) | (41 | )% | ||||||||
| Foreign tax on U.S. provision | 2,736 | 10 | % | 2,737 | 195 | % | 1,987 | 3 | % | |||||||||||
| Excess tax benefits from restricted stock | (11,641 | ) | (41 | )% | — | — | — | — | ||||||||||||
| Audits and settlements | 2,352 | 8 | % | — | — | — | — | |||||||||||||
| U.S. permanent items | 5,408 | 19 | % | 6,030 | 429 | % | 2,886 | 4 | % | |||||||||||
| Other, net | 116 | 1 | % | 73 | 4 | % | 1,497 | 2 | % | |||||||||||
| Benefit for income taxes | $ | (23,331 | ) | (81 | )% | $ | (7,645 | ) | (544 | )% | $ | (12,727 | ) | (19 | )% |
In 2018 our effective tax rate was lower than the statutory federal income tax rate due to U.S. tax reform, as described above. In 2018, 2017 and 2016, our effective tax rate was materially impacted by our corporate structure in which our foreign taxes are at an effective tax rate lower than the U.S. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland. In 2018, 2017 and 2016, the foreign rate differential predominantly relates to these Irish earnings. Additionally, we have a full valuation allowance against deferred tax assets in the U.S., primarily related to net operating loss, tax credit carryforwards, capitalized research and development expense and deferred revenue. As a result, we have not recorded a benefit related to ongoing U.S. losses. Our foreign rate differential in 2018 ,2017 and 2016 includes the continuing rate benefit from a business realignment completed on September 30, 2014 in which intellectual property was transferred between two wholly-owned foreign subsidiaries. The realignment allows us to more efficiently manage the distribution of our products to European customers. In 2018, this realignment resulted in a tax benefit of approximately $24 million and in 2017 and 2016, a benefit of approximately $28 million in each year. In 2017 and 2016, the change in valuation allowance primarily relates to U.S. losses not benefited, partially offset by the release of valuation allowances in foreign subsidiaries of $9.0 million and $3.1 million, respectively. We recorded foreign withholding taxes, an obligation of the U.S. parent of $2.7 million in 2018 and $2.0 million in 2017 and 2016, respectively.
At September 30, 2018 and 2017, income taxes payable and income tax accruals recorded on the accompanying Consolidated Balance Sheets were $24.2 million ($18.0 million in accrued income taxes, $1.8 million in other current liabilities and $4.4 million in other liabilities) and $16.2 million ($5.7 million in accrued income taxes, $2.3 million in other current liabilities and $8.2 million in other liabilities), respectively. At September 30, 2018 and 2017, prepaid taxes recorded in prepaid expenses on the accompanying Consolidated Balance Sheets were $4.8 million and $7.1 million, respectively. We made net income tax payments of $22.6 million, $35.4 million and $25.5 million in 2018, 2017 and 2016, respectively.
F-24
The significant temporary differences that created deferred tax assets and liabilities are shown below:
| September 30, | |||||||
| 2018 | 2017 | ||||||
| (in thousands) | |||||||
| Deferred tax assets: | |||||||
| Net operating loss carryforwards | $ | 31,329 | $ | 143,793 | |||
| Foreign tax credits | 2,201 | 21,099 | |||||
| Capitalized research and development expense | 20,999 | 13,044 | |||||
| Pension benefits | 12,296 | 12,107 | |||||
| Prepaid expenses | 30,614 | 9,250 | |||||
| Deferred revenue | 33,886 | 59,022 | |||||
| Stock-based compensation | 11,622 | 25,360 | |||||
| Other reserves not currently deductible | 13,588 | 16,905 | |||||
| Amortization of intangible assets | 96,841 | 78,351 | |||||
| Other tax credits | 55,760 | 42,652 | |||||
| Depreciation | 4,364 | 3,095 | |||||
| Capital loss carryforward | 33,024 | 33,535 | |||||
| Deferred interest | 13,057 | 11,666 | |||||
| Other | 1,152 | 6,599 | |||||
| Gross deferred tax assets | 360,733 | 476,478 | |||||
| Valuation allowance | (141,950 | ) | (279,683 | ) | |||
| Total deferred tax assets | 218,783 | 196,795 | |||||
| Deferred tax liabilities: | |||||||
| Acquired intangible assets not deductible | (41,139 | ) | (70,570 | ) | |||
| Pension prepayments | (2,362 | ) | (2,093 | ) | |||
| Deferred revenue | (6,978 | ) | (6,214 | ) | |||
| U.S taxes on unremitted foreign earnings | — | (11,440 | ) | ||||
| Deferred income | (6,641 | ) | — | ||||
| Other | (1,686 | ) | (1,192 | ) | |||
| Total deferred tax liabilities | (58,806 | ) | (91,509 | ) | |||
| Net deferred tax assets | $ | 159,977 | $ | 105,286 |
We have concluded, based on the weight of available evidence, that a full valuation allowance continues to be required against our U.S. net deferred tax assets as they are not more likely than not to be realized in the future. We will continue to reassess our valuation allowance requirements each financial reporting period.
For U.S. tax return purposes, net operating loss (NOL) carryforwards and tax credits are generally available to be carried forward to future years, subject to certain limitations. At September 30, 2018, we had U.S. federal NOL carryforwards from acquisitions of $4.1 million that expire in 2023 to 2029. The utilization of these NOL carryforwards is limited as a result of the change in ownership rules under Internal Revenue Code Section 382.
As of September 30, 2018, we had Federal R&D credit carryforwards of $30.0 million, which expire beginning in 2021 and ending in 2038, and Massachusetts R&D credit carryforwards of $22.4 million, which expire beginning in 2019 and ending in 2033. We also had foreign tax credits of $2.2 million, which expire beginning in 2026 and ending in 2027. A full valuation allowance is recorded against these carryforwards.
We also have NOL carryforwards in non-U.S. jurisdictions totaling $84.2 million, the majority of which do not expire. We also have non-U.S. tax credit carryforwards of $5.0 million that expire beginning in 2029 and ending in 2035. Additionally, we have interest and amortization carryforwards of $104.5 million and $709.3 million, respectively, in a foreign jurisdiction. There are limitations imposed on the utilization of such attributes that could restrict the recognition of any tax benefits.
As of September 30, 2018, we have a valuation allowance of $108.6 million against net deferred tax assets in the U.S. and a valuation allowance of $33.3 million against net deferred tax assets in certain
F-25
foreign jurisdictions. The valuation allowance recorded against net deferred tax assets of certain foreign jurisdictions is established primarily for our net operating loss carryforwards, the majority of which do not expire. However, there are limitations imposed on the utilization of such net operating losses that could restrict the recognition of any tax benefits.
The changes to the valuation allowance were primarily due to the following:
| Year ended September 30, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| (in millions) | |||||||||||
| Valuation allowance beginning of year | $ | 279.7 | $ | 235.5 | $ | 198.2 | |||||
| Net release of valuation allowance (1) | (2.8 | ) | (9.1 | ) | (3.1 | ) | |||||
| Net increase (decrease) in deferred tax assets with a full valuation allowance (2) | (134.9 | ) | 53.3 | 39.8 | |||||||
| Establish valuation allowance in foreign jurisdictions | — | — | 0.6 | ||||||||
| Valuation allowance end of year | $ | 142.0 | $ | 279.7 | $ | 235.5 |
| (1) | In 2018, 2017 and 2016, this is attributable to the release in foreign jurisdictions. |
| (2) | This is primarily attributable to U.S. tax reform: the utilization of tax attributes used to offset the transition tax, the revaluation of the U.S. net deferred tax assets and liabilities, the ability to realize net operating losses from the reversal of existing deferred tax assets which can now be carried forward indefinitely and can therefore be netted against deferred tax liabilities for indefinite lived intangible. |
Our policy is to record estimated interest and penalties related to the underpayment of income taxes as a component of our income tax provision. In 2018 and 2017, we reduced interest expense by $0.6 million and $0.9 million, respectively, and in 2016, we recorded interest expense of $0.5 million. In 2018, 2017 and 2016, we had no tax penalty expense in our income tax provision. As of September 30, 2018 and 2017, we had accrued $0.5 million and $1.1 million, respectively, of net estimated interest expense related to income tax accruals. We had no accrued tax penalties as of September 30, 2018, 2017 or 2016.
| Year ended September 30, | |||||||||||
| Unrecognized tax benefits | 2018 | 2017 | 2016 | ||||||||
| (in millions) | |||||||||||
| Unrecognized tax benefit beginning of year | $ | 14.8 | $ | 15.5 | $ | 14.1 | |||||
| Tax positions related to current year: | |||||||||||
| Additions | 1.5 | 0.9 | 1.0 | ||||||||
| Tax positions related to prior years: | |||||||||||
| Additions | — | 1.0 | 0.4 | ||||||||
| Reductions | (4.7 | ) | (1.6 | ) | — | ||||||
| Settlements | — | (1 | ) | — | |||||||
| Statute expirations | (1.8 | ) | — | — | |||||||
| Unrecognized tax benefit end of year | $ | 9.8 | $ | 14.8 | $ | 15.5 |
If all of our unrecognized tax benefits as of September 30, 2018 were to become recognizable in the future, we would record a benefit to the income tax provision of $9.8 million (which would be partially offset by an increase in the U.S. valuation allowance of $3.7 million). Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in favorable or unfavorable changes in our estimates. We believe it is reasonably possible that within the next 12 months the amount of unrecognized tax benefits related to the resolution of multi-jurisdictional tax positions could be reduced by up to $2 million as audits close and statutes of limitations expire.
In the fourth quarter of 2016, we received an assessment of approximately $12 million from the tax authorities in Korea. The assessment relates to various tax issues, primarily foreign withholding taxes. We have appealed and intend to vigorously defend our positions. We believe that upon completion of a multi-level appeal process it is more likely than not that our positions will be sustained. Accordingly, we
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have not recorded a tax reserve for this matter. We paid this assessment in the first quarter of 2017 and have recorded the amount in other assets, pending resolution of the appeal process.
In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the IRS in the U.S. We regularly assess the likelihood of additional assessments by tax authorities and provide for these matters as appropriate. We are currently under audit by tax authorities in several jurisdictions. Audits by tax authorities typically involve examination of the deductibility of certain permanent items, transfer pricing, limitations on net operating losses and tax credits. Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in material changes in our estimates. As of September 30, 2018, we remained subject to examination in the following major tax jurisdictions for the tax years indicated:
| Major Tax Jurisdiction | Open Years | |
| United States | 2015 through 2018 | |
| Germany | 2011 through 2018 | |
| France | 2015 through 2018 | |
| Japan | 2013 through 2018 | |
| Ireland | 2014 through 2018 |
Additionally, net operating loss and tax credit carryforwards from certain earlier periods in these jurisdictions may be subject to examination to the extent they are utilized in later periods.
We incurred expenses related to stock-based compensation in 2018, 2017 and 2016 of $82.9 million, $76.7 million and $66.0 million, respectively. Accounting for the tax effects of stock-based awards requires that we establish a deferred tax asset as the compensation is recognized for financial reporting prior to recognizing the tax deductions. The tax benefit recognized in the Consolidated Statements of Operations related to stock-based compensation totaled $28.3 million, $1.3 million and $0.7 million in 2018, 2017 and 2016, respectively. Upon the settlement of the stock-based awards (i.e., exercise or vesting), the actual tax deduction is compared with the cumulative financial reporting compensation cost and any excess tax deduction is considered a windfall tax benefit and is recorded to the tax provision. In 2018, windfall tax benefits of $13.2 million were recorded to the tax provision. Prior to the adoption of ASU 2016-09, windfall tax benefits were recorded to APIC when they resulted in a reduction in taxes payable. In 2017 and 2016, we recorded windfall tax benefits of $0.6 million and $0.1 million to APIC, respectively.
In the first quarter of 2018, as a result of the adoption of ASU 2016-09, we recognized previously unrecognized tax benefits of $37.0 million as increases in deferred tax assets for tax loss carryovers and tax credits, primarily in the U.S. A corresponding increase to the valuation allowance of $36.9 million was recorded to the extent that it was not more likely than not that these benefits would be realized.
Prior to the passage of the U.S. Tax Act, the Company asserted that substantially all of the undistributed earnings of its foreign subsidiaries were considered indefinitely invested and accordingly, no deferred taxes were provided. Pursuant to the provisions of the U.S. Tax Act, these earnings were subjected to U.S. federal taxation via a one-time transition tax, and there is therefore no longer a material cumulative basis difference associated with the undistributed earnings. We maintain our assertion of our intention to permanently reinvest these earnings outside the U.S. unless repatriation can be done substantially tax-free, with the exception of a foreign holding company formed in 2018 and our Taiwan subsidiary. If we decide to repatriate any additional non-U.S. earnings in the future, we may be required to establish a deferred tax liability on such earnings. The amount of unrecognized deferred tax liability on the undistributed earnings would not be material.
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H. Debt
As of September 30, 2018 and 2017, we had the following long-term borrowing obligations:
| September 30, | |||||||
| 2018 | 2017 | ||||||
| (in thousands) | |||||||
| 6.000% Senior notes due 2024 | $ | 500,000 | $ | 500,000 | |||
| Credit facility-revolver | 148,125 | 218,125 | |||||
| Total debt | 648,125 | 718,125 | |||||
| Unamortized debt issuance costs for the Senior notes (1) | (4,857 | ) | (5,719 | ) | |||
| Total debt, net of issuance costs (2) | $ | 643,268 | $ | 712,406 | |||
| (1) Unamortized debt issuance costs related to the credit facility were $3.8 million and $2.0 million as of September 30, 2018 and September 30, 2017, respectively, and were included in other assets. | |||||||
| (2) As of September 30, 2018 and 2017, all debt was included in long-term debt. |
Senior Unsecured Notes
In May 2016, we issued $500 million in aggregate principal amount of 6.0% senior, unsecured long-term debt at par value, due in 2024. We used the net proceeds from the sale of the notes to repay a portion of our outstanding revolving loan under our current credit facility. Interest is payable semi-annually on November 15 and May 15. The debt indenture includes covenants that limit our ability to, among other things, incur additional debt, grant liens on our properties or capital stock, enter into sale and leaseback transactions or asset sales, and make capital distributions. We were in compliance with all of the covenants as of September 30, 2018.
On and after May 15, 2019, we may redeem the senior notes at any time in whole or from time to time in part at specified redemption prices. In certain circumstances constituting a change of control, we will be required to make an offer to repurchase the senior notes at a purchase price equal to 101% of the aggregate principal amount of the notes, plus accrued and unpaid interest. Our ability to repurchase the senior notes in such event may be limited by law, by the indenture associated with the senior notes, by our then-available financial resources or by the terms of other agreements to which we may be party at such time. If we fail to repurchase the senior notes as required by the indenture, it would constitute an event of default under the indenture which, in turn, may also constitute an event of default under other obligations.
As of September 30, 2018, the total estimated fair value of the Notes was approximately $521.2 million, which is based on quoted prices for the notes on that date.
Credit Agreement
We maintain a multi-currency credit facility with a syndicate of sixteen banks for which JPMorgan Chase Bank, N.A. acts as Administrative Agent. We use the credit facility for general corporate purposes, including acquisitions of businesses, share repurchases and working capital requirements. As of September 30, 2018, the fair value of our credit facility approximates its book value.
In September 2018, we amended and restated the credit facility to increase the revolving loan commitment from $600 million to $700 million and amend other provisions, including replacing the fixed charge coverage ratio with an interest coverage ratio. The revolving loan commitment does not require amortization of principal and may be repaid in whole or in part prior to the scheduled maturity date at our option without penalty or premium. The credit facility matures on September 13, 2023, when all remaining amounts outstanding will be due and payable in full.
PTC and certain eligible foreign subsidiaries are eligible borrowers under the credit facility. Any borrowings by PTC Inc. under the credit facility would be guaranteed by PTC Inc.’s material domestic subsidiaries that become parties to the subsidiary guaranty, if any. As of the filing of this Form 10-K, there are no subsidiary guarantors of the obligations under the credit facility. Any borrowings by eligible foreign subsidiary borrowers would be guaranteed by PTC Inc. and any subsidiary guarantors. As of the filing of this Form 10-K, $110.0 million were borrowed by an eligible foreign subsidiary borrower. In addition, owned property (including equity interests) of PTC and certain of its material domestic subsidiaries' owned property is subject to first priority perfected liens in favor of the lenders under this credit facility. 100% of
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the voting equity interests of certain of PTC’s domestic subsidiaries and 65% of its material first-tier foreign subsidiaries are pledged as collateral for the obligations under the credit facility.
Loans under the credit facility bear interest at variable rates which reset every 30 to 180 days depending on the rate and period selected by PTC as described below. As of September 30, 2018, the annual rate for borrowing outstanding was 3.8%. Interest rates on borrowings outstanding under the credit facility range from 1.25% to 1.75% above an adjusted LIBO rate for Euro currency borrowings or would range from 0.25% to 0.75% above the defined base rate (the greater of the Prime Rate, the NYFRB rate plus 0.5%, or an adjusted LIBO rate plus 1%) for base rate borrowings, in each case based upon PTC’s total leverage ratio. Additionally, PTC may borrow certain foreign currencies at rates set in the same range above the respective London interbank offered interest rates for those currencies, based on PTC’s total leverage ratio. A quarterly commitment fee on the undrawn portion of the credit facility is required, ranging from 0.175% to 0.30% per annum, based upon PTC’s total leverage ratio.
The credit facility limits PTC’s and its subsidiaries’ ability to, among other things: incur liens or guarantee obligations; pay dividends (other than to PTC) and make other distributions; make investments and enter into joint ventures; dispose of assets; and engage in transactions with affiliates, except on an arms-length basis. Under the credit facility, PTC and its material domestic subsidiaries may not invest cash or property in, or loan to, PTC’s foreign subsidiaries in aggregate amounts exceeding $100 million for any purpose and an additional $200 million for acquisitions of businesses. In addition, under the credit facility, PTC and its subsidiaries must maintain the following financial ratios:
| • | a total leverage ratio, defined as consolidated funded indebtedness to consolidated trailing four quarters EBITDA, not to exceed 4.50 to 1.00 as of the last day of any fiscal quarter; |
| • | a senior secured leverage ratio, defined as senior consolidated total indebtedness (which excludes unsecured indebtedness) to the consolidated trailing four quarters EBITDA, not to exceed 3.00 to 1.00 as of the last day of any fiscal quarter; and |
| • | an interest coverage ratio, defined as the ratio of consolidated trailing four quarters EBITDA to consolidated trailing our quarters of cash basis interest expense, of not less than 3.00 to 1.00 as of the last day of any fiscal quarter. |
As of September 30, 2018, our total leverage ratio was 2.36 to 1.00, our senior secured leverage ratio was 0.58 to 1.00 and our interest coverage ratio was 6.18 to 1.00 and we were in compliance with all financial and operating covenants of the credit facility.
Any failure to comply with the financial or operating covenants of the credit facility would prevent PTC from being able to borrow additional funds, and would constitute a default, permitting the lenders to, among other things, accelerate the amounts outstanding, including all accrued interest and unpaid fees, under the credit facility and to terminate the credit facility. A change in control of PTC, as defined in the agreement, also constitutes an event of default, permitting the lenders to accelerate the indebtedness and terminate the credit facility.
We incurred $2.9 million in financing costs in connection with the September 2018 credit facility amendment and restatement. These origination costs are recorded as deferred debt issuance costs and are included in other assets. We incurred $6.9 million in financing costs in connection with the Senior Notes in 2016. These origination costs are recorded as a direct reduction from the carrying amount of the related debt liability. Financing costs are expensed over the remaining term of the obligations.
In 2018, 2017 and 2016, we paid $39.8 million, $38.9 million and $13.3 million, respectively, of interest on our debt. The average interest rate on borrowings outstanding during 2018, 2017 and 2016 was approximately 5.2%, 4.9% and 3.0%, respectively.
I. Commitments and Contingencies
Leasing Arrangements
We lease office facilities under operating leases expiring at various dates through 2037. Certain leases require us to pay for taxes, insurance, maintenance and other operating expenses in addition to rent. Lease expense was $36.9 million, $35.8 million and $37.2 million in 2018, 2017 and 2016, respectively. At September 30, 2018, our future minimum lease payments under noncancellable operating leases are as follows:
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| Year ending September 30, | (in thousands) | ||
| 2019 | $ | 38,690 | |
| 2020 | 33,753 | ||
| 2021 | 33,109 | ||
| 2022 | 28,248 | ||
| 2023 | 18,336 | ||
| Thereafter | 200,543 | ||
| Total minimum lease payments | $ | 352,679 |
Amounts above include future minimum lease payments for our corporate headquarters facility located in Needham, Massachusetts. The lease for our headquarters facility was renewed in the first quarter of 2011 for an additional 10 years (through November 2022) with a ten-year renewal option through November 2032. Under the terms of the lease, we are paying approximately $7.4 million in annual base rent plus operating expenses. Utilities related to this lease are excluded from the above table due to variability year to year. These costs were approximately $1.6 million in 2018. The amended lease provides for $12.8 million in landlord funding for leasehold improvements which we completed in 2014. We capitalized these leasehold improvements and will amortize them to expense over the shorter of the lease term or their expected useful life. The $12.8 million of funding by the landlord is not included in the table above and reduces rent expense over the lease term.
On September 7, 2017, we entered into a lease agreement with SCD L2 Seaport Square LLC for approximately 250,000 square feet located at 121 Seaport Boulevard, Boston, Massachusetts. Upon completion of construction of the new facility, we expect to move our headquarters from Needham to Boston. The term of the lease is expected to run from January 1, 2019 through June 30, 2037, subject to adjustment based on the initial occupancy date. Base rent for the first year of the lease is $11.0 million and will increase by $1 per square foot leased per year thereafter ($0.3 million per year). Base rent, which first becomes payable on July 1, 2020, subject to adjustment based on the lease commencement date, is included in the operating lease obligations above. In addition to the base rent, PTC shall pay its pro rata portions of building operating costs and real estate taxes (together, “Additional Rent”). Additional rent, equal to approximately 63% of total building operating costs and real estate taxes, is estimated to be approximately $7.1 million for the first year we begin paying rent and is not included in the operating lease payments above. The lease provides for up to approximately $25 million in landlord funding for leasehold improvements ($100 per square foot). We capitalize leasehold improvements as the assets are placed in service and amortize them to expense over the shorter of the lease term or their expected useful life. The $25 million of funding by the landlord is not included in the table above and reduces rent expense over the lease term.
As of September 30, 2018 and 2017, we had letters of credit and bank guarantees outstanding of $15.5 million (of which $1.1 million was collateralized) and $4.3 million (of which $1.2 million was collateralized), respectively, primarily related to our corporate headquarters lease.
Legal and Regulatory Matters
Korean Tax Audit
In July 2016, we received an assessment from the tax authorities in Korea related to an ongoing tax audit of approximately $12 million. See Note G. Income Taxes for additional information.
Legal Proceedings
We are subject to various legal proceedings and claims that arise in the ordinary course of business. We do not believe that resolving the legal proceedings and claims that we are currently subject to will have a material adverse impact on our financial condition, results of operations or cash flows. However, the results of legal proceedings cannot be predicted with certainty. Should any of these legal proceedings and claims be resolved against us, the operating results for a particular reporting period could be adversely affected.
Accruals
With respect to legal proceedings and claims, we record an accrual for a contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. For
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legal proceedings and claims for which the likelihood that a liability has been incurred is more than remote but less than probable, we estimate the range of possible outcomes. As of September 30, 2018, we estimate approximately $0.7 million to $5.0 million in legal proceedings and claims, of which we had accrued $0.9 million. As of September 30, 2017, we had a legal proceedings and claims accrual of $0.3 million.
Accounts Receivable
Accounts receivable as of September 30, 2017 included an amount invoiced under a multi-year contract for which the period of performance, and related revenue recognized, spanned a number of years (with no revenue recognized since the first quarter of 2017). The invoiced amount was disputed by the customer. A settlement reached in September 2018 included partial payment of the receivable and new software purchases. The net revenue write-down recorded in the fourth quarter was $9.3 million, comprised of $14.5 million professional services revenue write-down, partially offset by new license revenue of $5.2 million.
Guarantees and Indemnification Obligations
We enter into standard indemnification agreements in the ordinary course of our business. Pursuant to such agreements with our business partners or customers, we indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to our products, as well as claims relating to property damage or personal injury resulting from the performance of services by us or our subcontractors. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. Historically, our costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and we accordingly believe the estimated fair value of liabilities under these agreements is immaterial.
We warrant that our software products will perform in all material respects in accordance with our standard published specifications in effect at the time of delivery of the licensed products for a specified period of time. Additionally, we generally warrant that our consulting services will be performed consistent with generally accepted industry standards. In most cases, liability for these warranties is capped. If necessary, we would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history; however, we have not incurred significant cost under our product or services warranties. As a result, we believe the estimated fair value of these liabilities is immaterial.
J. Stockholders’ Equity
Preferred Stock
We may issue up to 5.0 million shares of our preferred stock in one or more series. 0.5 million of these shares are designated as Series A Junior Participating Preferred Stock. Our Board of Directors is authorized to fix the rights and terms for any series of preferred stock without additional shareholder approval.
Common Stock
Our Articles of Organization authorize us to issue up to 500 million shares of our common stock. As part of a strategic alliance, in the fourth quarter of 2018, Rockwell Automation made a $1 billion equity investment in PTC, by acquiring 10,582,010 shares at a price of $94.50 per share.
Our Board of Directors has authorized us to repurchase up to $1,500 million of our common stock for the October 1, 2017 through September 30, 2020 period.
We intend to use cash from operations and borrowings under our credit facility to make such repurchases. All shares of our common stock repurchased are automatically restored to the status of authorized and unissued.
In 2018, we repurchased 9.4 million shares. The repurchases were made under two accelerated repurchase (ASR) agreements. We completed the $100 million ASR repurchase in the third quarter of 2018. We entered into a $1,000 million ASR in July 2018. Shares valued at $800 million in the aggregate were delivered to us upon entry into the ASR. The remaining $200 million represents the amount held back by the bank counterparty pending final settlement of the ASR, which is expected to occur in the second or third quarter of 2019. Upon settlement of the ASR, the total shares repurchased by us will equal
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$1,000 million divided by the average daily volume weighted-average price of our common stock during the term of the ASR program less a fixed per share discount. We used the $1 billion in proceeds from the Rockwell Automation investment in PTC and $100 million of cash from operations to make the repurchases.
In 2017, we repurchased 0.9 million shares at cost of $51.0 million. In 2016, we did not repurchase any shares due to our transition to a subscription business model and the near-term impact on free cash flow and EBITDA.
K. Equity Incentive Plan
Our 2000 Equity Incentive Plan (2000 Plan) provides for grants of nonqualified and incentive stock options, common stock, restricted stock, restricted stock units and stock appreciation rights to employees, directors, officers and consultants. We award restricted stock units as the principal equity incentive awards, including certain performance-based awards that are earned based on achieving performance criteria established by the Compensation Committee of our Board of Directors on or prior to the grant date. Each restricted stock unit represents the contingent right to receive one share of our common stock.
The fair value of restricted stock units granted in 2018, 2017 and 2016 was based on the fair market value of our stock on the date of grant. The weighted average fair value per share of restricted stock units granted in 2018, 2017 and 2016 was $76.17, $51.27 and $37.25, respectively. In 2018 and 2017, the weighted average fair value per share of restricted stock was increased by $4.35 and $2.27, respectively, by the additional shares earned for the 2016 TSR grant upon measurement on the vest date in 2017.
Beginning in the first quarter of 2018, we account for forfeitures as they occur, rather than estimate expected forfeitures.
The following table shows total stock-based compensation expense recorded from our stock-based awards as reflected in our Consolidated Statements of Operations:
| Year ended September 30, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| (in thousands) | |||||||||||
| Cost of license subscription revenue | $ | 1,801 | $ | 1,379 | $ | 805 | |||||
| Cost of support revenue | 2,645 | 5,116 | 4,593 | ||||||||
| Cost of professional services revenue | 7,079 | 6,116 | 5,393 | ||||||||
| Sales and marketing | 24,893 | 15,373 | 14,659 | ||||||||
| Research and development | 13,488 | 13,968 | 10,174 | ||||||||
| General and administrative | 33,033 | 34,756 | 30,372 | ||||||||
| Total stock-based compensation expense | $ | 82,939 | $ | 76,708 | $ | 65,996 |
Stock-based compensation expense in 2018, 2017 and 2016 includes $4.3 million, $3.2 million, and $0.4 million respectively, related to our employee stock purchase plan (ESPP). The stock-based compensation expense in 2016 included $10 million of expense related to modifications of certain performance-based RSUs previously granted under our long-term incentive programs. The Compensation Committee of our Board of Directors amended these equity awards due to the impact of changes in our business model and strategy and foreign currency on our financial results.
As of September 30, 2018, total unrecognized compensation cost related to unvested restricted stock units expected to vest was approximately $144.5 million and the weighted average remaining recognition period for unvested awards was 28 months.
As of September 30, 2018, 2.3 million shares of common stock were available for grant under the 2000 Plan and 3.3 million shares of common stock were reserved for issuance upon the exercise of stock options and vesting of restricted stock units granted and outstanding.
Our ESPP, initiated in the fourth quarter of 2016, allows eligible employees to contribute up to 10% of their base salary, up to a maximum of $25,000 per year and subject to any other plan limitations, toward the purchase of our common stock at a discounted price. The purchase price of the shares on each purchase date is equal to 85% of the lower of the fair market value of our common stock on the first and
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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, 2018 | ||||||||
| Restricted stock unit activity for the year ended September 30, 2018 | (in thousands except grant date fair value data) | |||||||||
| Balance of nonvested outstanding restricted stock units October 1, 2017 | 3,487 | $ | 45.57 | |||||||
| Granted (1) | 2,190 | $ | 76.17 | |||||||
| Vested | (1,829 | ) | $ | 43.91 | ||||||
| Forfeited or not earned | (564 | ) | $ | 51.32 | ||||||
| Balance of nonvested outstanding restricted stock units September 30, 2018 | 3,284 | $ | 65.93 | $ | 348,638 |
(1) Restricted stock granted includes approximately 184,000 shares from prior period TSR awards that were earned upon achievement of the performance criteria and vested in November 2018.
| Restricted Stock Units | ||||||
| Restricted stock unit grants | Performance-based RSUs (1) | Service-based RSUs (2) | ||||
| (Number of Units in thousands) | ||||||
| Year ended September 30, 2018 | 961 | 1,045 |
(1) Substantially all the performance-based RSUs were granted to our executive officers. Approximately 189,000 shares are eligible to vest based upon annual performance measures, measured over a three-year period. RSUs not earned for a period may be earned in the third period. An additional 250,000 shares are eligible to vest based upon a 2018 performance measure. To the extent earned, those performance-based RSUs will vest in three substantially equal installments on November 15, 2018, November 15, 2019 and November 15, 2020, or the date the Compensation Committee determines the extent to which the applicable performance criteria have been achieved for each performance period. An additional 500,000 shares are eligible to vest based upon annual performance measures, measured over a three-year period in fiscal years 2021, 2022 and 2023. RSUs not earned for a period may be earned in the third period.
(2) The service-based RSUs were granted to employees, our executive officers and our directors. All service-based RSUs will vest in three substantially equal annual installments on or about the anniversary of the date of grant.
Until July 2005, we generally granted stock options. For those options, the option exercise price was typically the fair market value at the date of grant, and they generally vested over four years and expired ten years from the date of grant. There were no options outstanding and exercisable at September 30, 2018, 2017 and 2016.
| Year ended September 30, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| Value of stock option and stock-based award activity | (in thousands) | ||||||||||
| Total intrinsic value of stock options exercised | $ | — | $ | — | $ | 88 | |||||
| Total fair value of restricted stock unit awards vested | $ | 127,525 | $ | 78,573 | $ | 63,655 |
In 2018, shares issued upon vesting of restricted stock units were net of 0.7 million shares retained by us to cover employee tax withholdings of $45.4 million. In 2017, shares issued upon vesting of restricted stock units were net of 0.5 million shares retained by us to cover employee tax withholdings of $26.7 million. In 2016, shares issued upon vesting of restricted stock and restricted stock units were net of 0.6 million shares retained by us to cover employee tax withholdings of $20.9 million.
L. Employee Benefit Plan
We offer a savings plan to eligible U.S. employees. The plan is intended to qualify under Section 401(k) of the Internal Revenue Code. Participating employees may defer a portion of their pre-tax
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compensation, as defined, but not more than statutory limits. We contribute 50% of the amount contributed by the employee, up to a maximum of 3% of the employee’s earnings. Our matching contributions vest at a rate of 25% per year of service, with full vesting after 4 years of service. We made matching contributions of $5.8 million, $5.6 million, and $5.4 million in 2018, 2017 and 2016, respectively.
M. Pension Plans
We maintain several international defined benefit pension plans primarily covering certain employees of Computervision, which we acquired in 1998, and CoCreate, which we acquired in 2008, and covering employees in Japan. Benefits are based upon length of service and average compensation with vesting after one to five years of service. The pension cost was actuarially computed using assumptions applicable to each subsidiary plan and economic environment. We adjust our pension liability related to our plans due to changes in actuarial assumptions and performance of plan investments, as shown below. Effective in 1998, benefits under one of the international plans were frozen indefinitely.
The following table presents the actuarial assumptions used in accounting for the pension plans:
| 2018 | 2017 | 2016 | ||||||
| Weighted average assumptions used to determine benefit obligations at September 30 measurement date: | ||||||||
| Discount rate | 1.9 | % | 1.8 | % | 1.3 | % | ||
| Rate of increase in future compensation | 3.0 | % | 2.8 | % | 2.8 | % | ||
| Weighted average assumptions used to determine net periodic pension cost for fiscal years ended September 30: | ||||||||
| Discount rate | 1.8 | % | 1.3 | % | 2.2 | % | ||
| Rate of increase in future compensation | 2.8 | % | 2.8 | % | 3.0 | % | ||
| Rate of return on plan assets | 5.4 | % | 5.4 | % | 5.7 | % |
In selecting the expected long-term rate of return on assets, we considered the current investment portfolio and the investment return goals in the plans’ investment policy statements. We, with input from the plans’ professional investment managers and actuaries, also considered the average rate of earnings expected on the funds invested or to be invested to provide plan benefits. This process included determining expected returns for the various asset classes that comprise the plans’ target asset allocation. This basis for selecting the long-term asset return assumptions is consistent with the prior year. Using generally accepted diversification techniques, the plans’ assets, in aggregate and at the individual portfolio level, are invested so that the total portfolio risk exposure and risk-adjusted returns best meet the plans’ long-term liabilities to employees. Plan asset allocations are reviewed periodically and rebalanced to achieve target allocation among the asset categories when necessary.
As of September 30, 2018, the weighted long-term rate of return assumption is 5.4%. These rates of return, together with the assumptions used to determine the benefit obligations as of September 30, 2018 in the table above, will be used to determine our 2019 net periodic pension cost, which we expect to be approximately $1.2 million.
The actuarially computed components of net periodic pension cost recognized in our Consolidated Statements of Operations for each year are shown below:
| Year ended September 30, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| (in thousands) | |||||||||||
| Interest cost of projected benefit obligation | $ | 1,260 | $ | 815 | $ | 1,374 | |||||
| Service cost | 1,535 | 1,696 | 1,599 | ||||||||
| Expected return on plan assets | (4,180 | ) | (3,327 | ) | (3,305 | ) | |||||
| Amortization of prior service cost | (5 | ) | (5 | ) | (5 | ) | |||||
| Recognized actuarial loss | 2,293 | 3,385 | 2,292 | ||||||||
| Settlement loss | 9 | — | — | ||||||||
| Net periodic pension cost | $ | 912 | $ | 2,564 | $ | 1,955 |
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The following tables display the change in benefit obligation and the change in the plan assets and funded status of the plans as well as the amounts recognized in our Consolidated Balance Sheets:
| Year ended September 30, | |||||||
| 2018 | 2017 | ||||||
| (in thousands) | |||||||
| Change in benefit obligation: | |||||||
| Projected benefit obligation—beginning of year | $ | 87,168 | $ | 92,695 | |||
| Service cost | 1,535 | 1,696 | |||||
| Interest cost | 1,260 | 815 | |||||
| Actuarial loss (gain) | 2,157 | (8,496 | ) | ||||
| Foreign exchange impact | (1,669 | ) | 2,379 | ||||
| Participant contributions | 212 | 183 | |||||
| Benefits paid | (1,637 | ) | (2,104 | ) | |||
| Settlements | (1,162 | ) | — | ||||
| Projected benefit obligation—end of year | $ | 87,864 | $ | 87,168 | |||
| Change in plan assets and funded status: | |||||||
| Plan assets at fair value—beginning of year | $ | 70,494 | $ | 61,935 | |||
| Actual return on plan assets | 1,025 | 6,261 | |||||
| Employer contributions | 2,459 | 2,036 | |||||
| Participant contributions | 212 | 183 | |||||
| Foreign exchange impact | (1,250 | ) | 2,183 | ||||
| Settlements | (1,162 | ) | — | ||||
| Benefits paid | (1,637 | ) | (2,104 | ) | |||
| Plan assets at fair value—end of year | 70,141 | 70,494 | |||||
| Projected benefit obligation—end of year | 87,864 | 87,168 | |||||
| Underfunded status | $ | (17,723 | ) | $ | (16,674 | ) | |
| Accumulated benefit obligation—end of year | $ | 85,103 | $ | 84,298 | |||
| Amounts recognized in the balance sheet: | |||||||
| Non-current liability | $ | (17,502 | ) | $ | (16,674 | ) | |
| Current liability | $ | (221 | ) | $ | — | ||
| Amounts in accumulated other comprehensive loss: | |||||||
| Unrecognized actuarial loss | $ | 27,027 | $ | 24,738 |
We expect to recognize approximately $2.4 million of the unrecognized actuarial loss as of September 30, 2018 as a component of net periodic pension cost in 2019.
The following table shows change in accumulated other comprehensive loss:
| Year ended September 30, | |||||||
| 2018 | 2017 | ||||||
| (in thousands) | |||||||
| Accumulated other comprehensive loss- beginning of year | $ | 24,738 | $ | 38,667 | |||
| Recognized during year - net actuarial (losses) | (2,288 | ) | (3,380 | ) | |||
| Occurring during year - settlement loss | (9 | ) | — | ||||
| Occurring during year - net actuarial losses (gains) | 5,312 | (11,430 | ) | ||||
| Foreign exchange impact | (726 | ) | 881 | ||||
| Accumulated other comprehensive loss- end of year | $ | 27,027 | $ | 24,738 |
F-35
The following table shows the percentage of total plan assets for each major category of plan assets:
| September 30, | |||||
| 2018 | 2017 | ||||
| Asset category: | |||||
| Equity securities | 35 | % | 23 | % | |
| Fixed income securities | 46 | % | 57 | % | |
| Commodities | 1 | % | 6 | % | |
| Insurance company funds | 12 | % | 12 | % | |
| Cash | 6 | % | 2 | % | |
| 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 2018, 2017 and 2016 our actual return on plan assets was $1.0 million, $6.3 million and $1.7 million, respectively.
Based on actuarial valuations and additional voluntary contributions, we contributed $2.5 million, $2.0 million, and $2.0 million in 2018, 2017 and 2016, respectively, to the plans.
As of September 30, 2018, benefit payments expected to be paid over the next ten years are outlined in the following table:
| Future Benefit Payments | |||
| (in thousands) | |||
| Year ending September 30, | |||
| 2019 | $ | 2,721 | |
| 2020 | 2,989 | ||
| 2021 | 3,265 | ||
| 2022 | 3,871 | ||
| 2023 | 3,873 | ||
| 2024 to 2028 | 23,493 |
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.
F-36
| September 30, 2018 | |||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| (in thousands) | |||||||||||||||
| Plan assets: | |||||||||||||||
| Fixed income securities: | |||||||||||||||
| Government | $ | 29,754 | $ | — | $ | — | $ | 29,754 | |||||||
| European corporate investment grade | 2,499 | — | — | 2,499 | |||||||||||
| European large capitalization stocks | 24,502 | — | — | 24,502 | |||||||||||
| Commodities | 724 | — | — | 724 | |||||||||||
| Insurance company funds (1) | — | 8,413 | — | 8,413 | |||||||||||
| Cash | 4,249 | — | — | 4,249 | |||||||||||
| $ | 61,728 | $ | 8,413 | $ | — | $ | 70,141 |
| September 30, 2017 | |||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| (in thousands) | |||||||||||||||
| 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 |
(1) These investments are comprised primarily of funds invested with an insurance company in Japan with a guaranteed rate of return. The insurance company invests these assets primarily in government and corporate bonds.
N. Fair Value Measurements
Money market funds, time deposits and corporate notes/bonds are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets.
Certificates of deposit, commercial paper and certain U.S. government agency securities are classified within Level 2 of the fair value hierarchy. These instruments are valued based on quoted prices in markets that are not active or based on other observable inputs consisting of market yields, reported trades and broker/dealer quotes.
The principal market in which we execute our foreign currency contracts is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants are usually large financial institutions. Our foreign currency contracts’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy.
The fair value of our contingent consideration arrangements is determined based on our evaluation as to the probability and amount of any earn-out that will be achieved based on expected future performances by the acquired entities. These arrangements are classified within Level 3 of the fair value hierarchy.
F-37
Our significant financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2018 and 2017 were as follows:
| September 30, 2018 | |||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| (in thousands) | |||||||||||||||
| Financial assets: | |||||||||||||||
| Cash equivalents (1) | $ | 93,058 | $ | — | $ | — | $ | 93,058 | |||||||
| Marketable securities: | |||||||||||||||
| Certificates of deposit | — | 219 | — | 219 | |||||||||||
| Corporate notes/bonds | 54,737 | — | — | 54,737 | |||||||||||
| U.S. government agency securities | — | 995 | — | 995 | |||||||||||
| Forward contracts | — | 2,889 | — | 2,889 | |||||||||||
| $ | 147,795 | $ | 4,103 | $ | — | $ | 151,898 | ||||||||
| Financial liabilities: | |||||||||||||||
| Contingent consideration related to acquisitions | $ | — | $ | — | $ | 1,575 | $ | 1,575 | |||||||
| Forward contracts | — | 3,419 | — | 3,419 | |||||||||||
| $ | — | $ | 3,419 | $ | 1,575 | $ | 4,994 |
| 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 acquisitions | $ | — | $ | — | $ | 8,400 | $ | 8,400 | |||||||
| Forward contracts | — | 4,347 | — | 4,347 | |||||||||||
| $ | — | $ | 4,347 | $ | 8,400 | $ | 12,747 |
(1) Money market funds and time deposits.
Since 2015, we have had two major acquisitions resulting in contingent consideration: ColdLight and Kepware. Changes in the fair value of Level 3 contingent consideration liability associated with these acquisitions were as follows:
| Contingent Consideration | |||||||||||||||
| (in thousands) | |||||||||||||||
| ColdLight | Kepware | Other | Total | ||||||||||||
| 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 October 1, 2017 | $ | — | $ | 8,400 | $ | — | $ | 8,400 | |||||||
| Contingent consideration at acquisition | — | — | 2,100 | 2,100 | |||||||||||
| Payment of contingent consideration | — | (8,400 | ) | (525 | ) | (8,925 | ) | ||||||||
| Balance at September 30, 2018 | $ | — | $ | — | $ | 1,575 | $ | 1,575 |
F-38
As of September 30, 2018, all contingent consideration liabilities are included in accrued expenses and other current liabilities. Contingent consideration is valued using a discounted cash flow method and a probability weighted estimate of achievement of the targets. Payments made against the original fair value ($8.3 million, $11.0 million and $10.6 million, in 2018, 2017 and 2016, respectively) were included in financing activities in the Consolidated Statement of Cash Flows. Payments related to changes in fair value after the respective acquisition dates are recorded in operating activities.
In connection with our acquisition of Kepware, the former shareholders were eligible to receive additional consideration of up to $18.0 million, which was contingent on the achievement of certain Financial Performance, Product Integration and Business Integration targets (as defined in the Stock Purchase Agreement) within 24 months from April 1, 2016. The estimated undiscounted range of outcomes for the contingent consideration was $16.9 million to $18.0 million at the acquisition date. As of September 30, 2018, we had made $18.0 million in payments and had no liability remaining.
O. Marketable Securities
The amortized cost and fair value of marketable securities as of September 30, 2018 and 2017 were as follows:
| September 30, 2018 | |||||||||||||||
| Amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||
| (in thousands) | |||||||||||||||
| Certificates of deposit | $ | 220 | $ | — | $ | (1 | ) | $ | 219 | ||||||
| Corporate notes/bonds | 55,140 | — | (403 | ) | 54,737 | ||||||||||
| U.S. government agency securities | 1,004 | — | (9 | ) | 995 | ||||||||||
| $ | 56,364 | $ | — | $ | (413 | ) | $ | 55,951 |
| 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 |
The following tables summarize the fair value and gross unrealized losses aggregated by category and the length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2018 and 2017.
| September 30, 2018 | |||||||||||||||||||||||
| Less than twelve months | Greater than twelve months | Total | |||||||||||||||||||||
| Fair Value | Gross unrealized loss | Fair Value | Gross unrealized loss | Fair Value | Gross unrealized loss | ||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Certificates of deposit | $ | 219 | $ | (1 | ) | $ | — | $ | — | $ | 219 | $ | (1 | ) | |||||||||
| Corporate notes/bonds | 24,067 | (70 | ) | 30,670 | (333 | ) | 54,737 | (403 | ) | ||||||||||||||
| US government agency securities | — | — | 995 | (9 | ) | 995 | (9 | ) | |||||||||||||||
| $ | 24,286 | $ | (71 | ) | $ | 31,665 | $ | (342 | ) | $ | 55,951 | $ | (413 | ) |
F-39
| 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, 2018 and 2017.
| September 30, 2018 | September 30, 2017 | ||||||||||||||
| Amortized cost | Fair value | Amortized cost | Fair value | ||||||||||||
| (in thousands) | (in thousands) | ||||||||||||||
| Due in one year or less | $ | 25,792 | $ | 25,670 | $ | 18,274 | $ | 18,244 | |||||||
| Due after one year through three years | 30,572 | 30,281 | 32,184 | 32,071 | |||||||||||
| $ | 56,364 | $ | 55,951 | $ | 50,458 | $ | 50,315 |
P. Derivative Financial Instruments
As of September 30, 2018 and 2017, we had outstanding forward contracts for derivatives not designated as hedging instruments with notional amounts equivalent to the following:
| September 30, | |||||||
| Currency Hedged | 2018 | 2017 | |||||
| (in thousands) | |||||||
| Canadian / U.S. Dollar | $ | 7,334 | $ | 12,809 | |||
| Euro / U.S. Dollar | 297,730 | 244,000 | |||||
| British Pound / U.S. Dollar | 7,074 | 907 | |||||
| Israeli Sheqel / U.S. Dollar | 9,778 | 8,820 | |||||
| Japanese Yen / Euro | — | 17,694 | |||||
| Japanese Yen / U.S. Dollar | 37,456 | 3,198 | |||||
| Swiss Franc / U.S. Dollar | 11,944 | 605 | |||||
| Swiss Franc / Euro | — | 7,157 | |||||
| Swedish Krona / U.S. Dollar | 18,207 | 4,627 | |||||
| Chinese Yuan offshore / Euro | — | 10,423 | |||||
| Singapore Dollar / U.S. Dollar | 1,314 | 1,186 | |||||
| Chinese Renminbi / U.S. Dollar | 9,010 | — | |||||
| All other | 6,109 | 7,093 | |||||
| Total | $ | 405,956 | $ | 318,519 |
F-40
The following table shows the effect of our non-designated hedges in the Consolidated Statements of Operations for the year ended September 30, 2018 and 2017:
| Derivatives Not Designated as Hedging Instruments | Location of Gain or (Loss) Recognized in Income | Net realized and unrealized gain or (loss) (excluding the underlying foreign currency exposure being hedged) | ||||||||||||
| Year ended September 30, | ||||||||||||||
| 2018 | 2017 | 2016 | ||||||||||||
| (in thousands) | ||||||||||||||
| Forward Contracts | Other income (expense), net | $ | (9,720 | ) | $ | 870 | $ | (883 | ) |
As of September 30, 2018 and 2017, we had outstanding forward contracts designated as cash flow hedges with notional amounts equivalent to the following:
| September 30, | |||||||
| Currency Hedged | 2018 | 2017 | |||||
| (in thousands) | |||||||
| Euro / U.S. Dollar | $ | 8,495 | $ | 64,831 | |||
| Japanese Yen / U.S. Dollar | 2,193 | 22,675 | |||||
| SEK / U.S. Dollar | 1,708 | 14,091 | |||||
| Total | $ | 12,396 | $ | 101,597 |
The following table shows the effect of our derivative instruments designated as cash flow hedges in the Consolidated Statements of Operations for the twelve months ended September 30, 2018 and 2017 (in thousands):
| Derivatives Designated as Hedging Instruments | Gain or (Loss) Recognized in OCI-Effective Portion | Location of Gain or (Loss) Reclassified from OCI into Income-Effective Portion | Gain or (Loss) Reclassified from OCI into Income-Effective Portion | Location of Gain or (Loss) Recognized-Ineffective Portion | Gain or (Loss) Recognized-Ineffective Portion | ||||||||||||||||||||
| Year ended September 30, | |||||||||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||
| Forward Contracts | $ | 1,652 | $ | (866 | ) | Software Revenue | $ | (552 | ) | $ | (524 | ) | Other Income (Expense) | $ | 21 | $ | (49 | ) |
As of September 30, 2018, we estimated that approximately all values reported in accumulated other comprehensive income will be reclassified to income within the next twelve months.
In the event the underlying forecast transaction does not occur, or it becomes probable that it will not occur, the related hedge gains and losses on the cash flow hedge would be immediately reclassified to “Other income (expense), net” on the Consolidated Statements of Operations. For the year ended September 30, 2018, there were no such gains or losses.
F-41
The following table shows our derivative instruments measured at gross fair value as reflected in the Consolidated Balance Sheets:
| September 30, | |||||||||||||||
| Fair Value of Derivatives Designated As Hedging Instruments | Fair Value of Derivatives Not Designated As Hedging Instruments | ||||||||||||||
| 2018 | 2017 | 2018 | 2017 | ||||||||||||
| (in thousands) | (in thousands) | ||||||||||||||
| Derivative assets (a): | |||||||||||||||
| Forward Contracts | $ | 440 | $ | 540 | $ | 2,449 | $ | 623 | |||||||
| Derivative liabilities (b): | |||||||||||||||
| Forward Contracts | $ | — | $ | 2,352 | $ | 3,419 | $ | 1,995 | |||||||
| (a) As of September 30, 2018, $2,889 thousand current derivative assets are recorded in other current assets, in the Consolidated Balance Sheets. As of September 30, 2017, $1,128 thousand current derivative assets are recorded in other current assets, and $35 thousand long-term derivative assets are recorded in other assets in the Consolidated Balance Sheets. | |||||||||||||||
| (b) As of September 30, 2018, $3,419 thousand current derivative liabilities are recorded in accrued expenses and other current liabilities in the Consolidated Balance Sheets. As of September 30, 2017, $4,329 thousand current derivative liabilities are recorded in accrued expenses and other current liabilities, and $18 thousand long-term derivative liabilities are recorded in other liabilities in the Consolidated Balance Sheets. |
Offsetting Derivative Assets and Liabilities
We have entered into master netting arrangements which allow net settlements under certain conditions. Although netting is permitted, it is currently our policy and practice to record all derivative assets and liabilities on a gross basis in the Consolidated Balance Sheets.
The following table sets forth the offsetting of derivative assets as of September 30, 2018:
| Gross Amounts Offset in the Consolidated Balance Sheets | Gross Amounts Not Offset in the Consolidated Balance Sheets | ||||||||||||||||||||||
| September 30, 2018 | 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 | $ | 2,889 | $ | — | $ | 2,889 | $ | (2,889 | ) | $ | — | $ | — |
The following table sets forth the offsetting of derivative liabilities as of September 30, 2018:
| Gross Amounts Offset in the Consolidated Balance Sheets | Gross Amounts Not Offset in the Consolidated Balance Sheets | ||||||||||||||||||||||
| September 30, 2018 | 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 | $ | 3,419 | $ | — | $ | 3,419 | $ | (2,889 | ) | $ | — | $ | 530 |
Net gains and losses on foreign currency exposures, including realized and unrealized gains and losses on forward contracts, included in foreign currency net losses, were net losses of $7.0 million, $5.7 million and $1.9 million for 2018, 2017 and 2016, respectively. Net realized and unrealized gains and losses on forward contracts included in foreign currency net losses were a net loss of $7.5 million in 2018, a net gain of $1.8 million in 2017, and a net gain of $0.5 million in 2016.
F-42
Q. Segment Information
Effective with the beginning of fiscal 2018, we changed our segments, see Note A. Description of Business and Basis of Presentation for additional information. We operate within a single industry segment -- computer software and related services. Operating segments as defined under GAAP are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our President and Chief Executive Officer. We have two operating and reportable segments: (1) Software Products, which includes license, subscription and related support revenue (including updates and technical support) for all our products; and (2) Professional Services, which includes consulting, implementation and training services. We do not allocate sales & marketing or general and administrative expense to our operating segments as these activities are managed on a consolidated basis. Additionally, segment profit does not include stock-based compensation, amortization of intangible assets, restructuring charges and certain other identified costs that we do not allocate to the segments for purposes of evaluating their operational performance.
The revenue and profit attributable to our operating segments are summarized below. We do not produce asset information by reportable segment; therefore, it is not reported.
| Year ended September 30, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| (in thousands) | |||||||||||
| Software Products | |||||||||||
| Revenue | $ | 1,088,487 | $ | 987,316 | $ | 943,596 | |||||
| Operating Costs (1) | 387,817 | 367,224 | 344,594 | ||||||||
| Profit | 700,670 | 620,092 | 599,002 | ||||||||
| Professional Services | |||||||||||
| Revenue | 153,337 | 176,723 | 196,937 | ||||||||
| Operating Costs (2) | 136,816 | 145,091 | 165,325 | ||||||||
| Profit | 16,521 | 31,632 | 31,612 | ||||||||
| Total segment revenue | 1,241,824 | 1,164,039 | 1,140,533 | ||||||||
| Total segment costs | 524,633 | 512,315 | 509,919 | ||||||||
| Total segment profit | 717,191 | 651,724 | 630,614 | ||||||||
| Unallocated operating expenses: | |||||||||||
| Sales and marketing expenses | 389,631 | 357,573 | 352,806 | ||||||||
| General and administrative expenses | 108,095 | 108,439 | 108,548 | ||||||||
| Restructuring and headquarters relocation charges, net | 3,764 | 7,942 | 76,273 | ||||||||
| Intangibles amortization | 58,056 | 58,729 | 57,802 | ||||||||
| Stock-based compensation | 82,939 | 76,708 | 65,996 | ||||||||
| Other unallocated operating expenses (3) | 1,469 | 1,435 | 6,203 | ||||||||
| Total operating income | 73,237 | 40,898 | (37,014 | ) | |||||||
| Interest expense | (41,673 | ) | (42,400 | ) | (29,882 | ) | |||||
| Interest income and other expense, net | (2,908 | ) | 96 | (296 | ) | ||||||
| Income (loss) before income taxes | $ | 28,656 | $ | (1,406 | ) | $ | (67,192 | ) |
(1) Operating costs for the Software Products segment includes all cost of software revenue and research and development costs, excluding stock-based compensation and intangible amortization. Operating costs for the Software Products segment includes depreciation of $5.1 million, $5.0 million and $4.7 million in 2018, 2017 and 2016, respectively.
F-43
(2) Operating costs for the Professional Services segment includes all cost of professional services revenue, excluding stock-based compensation, intangible amortization, and fair value adjustments for deferred services costs. The Professional Services segment includes depreciation of $1.6 million, $1.8 million and $2.0 million in 2018, 2017 and 2016, respectively.
(3) Other unallocated operating expenses include acquisition-related and other transactional costs, certain legal accrual expenses, pension plan termination-related costs and fair value adjustments for deferred services costs. Unallocated departments include depreciation of $22.7 million, $21.2 million and $22.1 million in 2018, 2017 and 2016, respectively.
We report revenue by the following four product areas:
| • | CAD: Creo® and Mathcad®. |
| • | PLM: PLM solutions (primarily Windchill®), Integrity™ and Atego®. |
| • | IoT: ThingWorx®, Vuforia® and Kepware®. |
| • | Other, including service parts management. |
| Year ended September 30, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| (in thousands) | |||||||||||
| CAD | $ | 499,772 | $ | 474,608 | $ | 462,307 | |||||
| PLM | 483,327 | 454,299 | 456,285 | ||||||||
| IoT | 139,278 | 103,359 | 80,297 | ||||||||
| Other | 119,447 | 131,773 | 141,644 | ||||||||
| Total revenue | $ | 1,241,824 | $ | 1,164,039 | $ | 1,140,533 |
Revenue and long-lived tangible assets for the geographic regions in which we operate is presented below.
| Year ended September 30, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| (in thousands) | |||||||||||
| Revenue: | |||||||||||
| Americas (1) | $ | 511,237 | $ | 500,879 | $ | 487,594 | |||||
| Europe (2) | 485,851 | 435,183 | 424,268 | ||||||||
| Asia-Pacific | 244,736 | 227,977 | 228,671 | ||||||||
| Total revenue | $ | 1,241,824 | $ | 1,164,039 | $ | 1,140,533 |
| September 30, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| (in thousands) | |||||||||||
| Long-lived tangible assets: | |||||||||||
| Americas (3) | $ | 67,704 | $ | 47,055 | $ | 48,281 | |||||
| Europe | 5,303 | 6,284 | 6,915 | ||||||||
| Asia-Pacific | 7,606 | 10,261 | 11,917 | ||||||||
| Total long-lived tangible assets | $ | 80,613 | $ | 63,600 | $ | 67,113 |
| (1) | Includes revenue in the United States totaling $487.3 million, $475.5 million and $463.1 million for 2018, 2017 and 2016, respectively. |
| (2) | Includes revenue in Germany totaling $193.3 million, $164.7 million and $167.2 million for 2018, 2017 and 2016, respectively. |
| (3) | Substantially all of the Americas long-lived tangible assets are located in the United States. |
F-44
Our international revenue is presented based on the location of our customer. We license products to customers worldwide. Our sales and marketing operations outside the United States are conducted principally through our international sales subsidiaries throughout Europe and the Asia-Pacific regions. Intercompany sales and transfers between geographic areas are accounted for at prices that are designed to be representative of unaffiliated party transactions.
R. Subsequent Events
Restructuring
In October 2018, we announced a restructuring charge of approximately $18 million, which consists principally of termination benefits, substantially all of which we expect will be paid in fiscal 2019. With the growth opportunity in front of us in the Industrial Internet of Things and Augmented Reality, other strategic initiatives we’ve undertaken, and our continued commitment to operating margin improvement, we are realigning our workforce to shift investment to support these strategic, high growth opportunities. As this is a realignment of resources rather than a cost-savings initiative, we don’t expect this realignment will result in significant cost savings.
Restricted Stock Unit Grants
In October and November 2018, we granted restricted stock units (RSUs) valued at approximately $73.5 million to employees, including $31.9 million target value of performance-based RSUs, of which $31.7 million was granted to our executives, and $41.6 million of time-based RSUs granted to employees and executives.
Substantially all of the executive performance-based RSUs are eligible to vest based upon annual performance measures. To the extent earned, these units will vest in three substantially equal installments on the later of November 15, 2019, 2020 and 2021, or the date the Compensation Committee determines the extent to which the applicable performance criteria have been achieved for each performance period. RSUs not earned for a period may be earned in the third period. The performance-based RSUs allow for upside based on 2019, 2020 and 2021 performance measures, and provide the opportunity to earn up to one times the number of performance-based RSUs (up to a maximum of 146,000 shares) if certain performance conditions are met.
The time-based RSUs will vest in three substantially equal annual installments on November 15, 2019, 2020 and 2021. The time-based RSUs granted to our executives allow for upside based on a 2019 performance measure. Executives have the opportunity to earn up to one times or, for our CEO, two times the number of time-based RSUs granted (up to a maximum of 197,000 shares) if the upside performance measure is achieved. Any upside RSUs earned will vest in three substantially equal installments at the same times as the base RSUs.
Borrowings
In November 2018, we borrowed $80 million under our credit facility to fund working capital requirements, including 2018 year end incentive-based compensation accruals.
F-45
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this Annual Report.
The Consolidated Statements of Operations data for the years ended September 30, 2018, 2017, and 2016 and the Consolidated Balance Sheets data as of September 30, 2018 and 2017 are derived from our audited consolidated financial statements appearing elsewhere in this Annual Report. The Consolidated Statements of Operations data for the years ended September 30, 2015 and 2014 and the Consolidated Balance Sheet data as of September 30, 2016, 2015 and 2014 are derived from our audited consolidated financial statements that are not included in this Annual Report. The historical results are not necessarily indicative of results in any future period.
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA (1)
(in thousands, except per share data)
| 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
| Revenue | $ | 1,241,824 | $ | 1,164,039 | $ | 1,140,533 | $ | 1,255,242 | $ | 1,356,967 | |||||||||
| Gross margin | 915,630 | 835,020 | 814,868 | 920,508 | 983,284 | ||||||||||||||
| Operating income (loss) (2) | 73,237 | 40,898 | (37,014 | ) | 41,616 | 196,576 | |||||||||||||
| Net income (loss) (2) (3) | 51,987 | 6,239 | (54,465 | ) | 47,557 | 160,194 | |||||||||||||
| Earnings (loss) per share—Basic (2) (3) | 0.45 | 0.05 | (0.48 | ) | 0.41 | 1.36 | |||||||||||||
| Earnings (loss) per share—Diluted (2) (3) | 0.44 | 0.05 | (0.48 | ) | 0.41 | 1.34 | |||||||||||||
| Total assets | 2,329,022 | 2,360,384 | 2,345,729 | 2,209,913 | 2,199,954 | ||||||||||||||
| Working capital | (101,495 | ) | (12,353 | ) | (11,930 | ) | 87,419 | 105,500 | |||||||||||
| Long-term liabilities | 719,154 | 796,039 | 848,544 | 732,482 | 719,398 | ||||||||||||||
| Stockholders’ equity | 874,589 | 885,436 | 842,666 | 860,171 | 853,889 |
| (1) | The consolidated financial position and results of operations data reflect our acquisitions of Kepware on January 12, 2016 for $99.4 million in cash, Vuforia on November 3, 2015 for $64.8 million in cash, ColdLight on May 7, 2015 for $98.6 million in cash, Axeda on August 11, 2014 for $165.9 million in cash, ThingWorx on December 30, 2013 for $111.5 million in cash as well as certain other less significant businesses during these periods. Results of operations for the acquired businesses have been included in the Consolidated Statements of Operations since their acquisition dates. |
| (2) | Operating income (loss) and net income (loss) in 2016 includes pre-tax restructuring charges of $76.3 million. Operating income and net income in 2015 includes a pre-tax U.S pension settlement loss of $66.3 million, a $28.2 million charge related to a legal accrual and pre-tax restructuring charges of $43.4 million. Operating income and net income in 2014 includes pre-tax restructuring charges of $28.4 million. |
| (3) | In 2015, net income includes an $18.7 million tax benefit related to settlement of our U.S pension plan. Net income in 2014 includes tax benefits totaling $18.1 million related to the reversal of a portion of the valuation allowance in the U.S. related to the impact on deferred taxes in accounting for acquisitions and accounting for the U.S. pension plan. |
A-1
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in thousands, except per share data)
| September 30, 2018 | June 30, 2018 | March 31, 2018 | December 30, 2017 | ||||||||||||
| Revenue | $ | 312,521 | $ | 314,777 | $ | 307,833 | $ | 306,644 | |||||||
| Gross margin | 234,472 | 233,221 | 224,252 | 223,686 | |||||||||||
| Operating income | 11,697 | 21,703 | 22,366 | 17,472 | |||||||||||
| Net income | 13,191 | 16,997 | 7,922 | 13,877 | |||||||||||
| Earnings per share: | |||||||||||||||
| Basic | $ | 0.11 | $ | 0.15 | $ | 0.07 | $ | 0.12 | |||||||
| Diluted | $ | 0.11 | $ | 0.14 | $ | 0.07 | $ | 0.12 |
| 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 | 17,569 | 11,256 | 7,513 | 4,561 | |||||||||||
| Net income (loss) | 17,435 | (951 | ) | (1,104 | ) | (9,141 | ) | ||||||||
| Earnings (loss) per share: | |||||||||||||||
| Basic | $ | 0.15 | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.08 | ) | ||||
| Diluted | $ | 0.15 | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.08 | ) |
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