PTC 10-K 2019-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the Fiscal Year Ended: September 30, 2019

OR

For the transition period from_ to_

Commission File Number: 0-18059

PTC Inc.

(Exact name of registrant as specified in its charter)

121 Seaport Boulevard**,** Boston**,** MA 02210

(Address of principal executive offices, including zip code)

(781) 370-5000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant

to Section 12(g) of the Act: None

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ¨

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No ☑

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑

The aggregate market value of our voting stock held by non-affiliates was approximately $10,784,576,792 on April 1, 2019 based on the last reported sale price of our common stock on the Nasdaq Global Select Market on March 29, 2019. There were 118,097,684 shares of our common stock outstanding on that day and 115,492,735 shares of our common stock outstanding on November 15, 2019.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement in connection with the 2020 Annual Meeting of Stockholders (2020 Proxy Statement) are incorporated by reference into Part III.

PTC Inc.

ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR 2019

Table of Contents

Forward-Looking Statements

Statements in this Annual Report about our anticipated financial results and growth, as well as about the development of our products and markets, are forward-looking statements that are based on our current plans and assumptions. Important information about factors that may cause our actual results to differ materially from these statements is discussed in Item 1A. “Risk Factors” and generally throughout this Annual Report.

Unless otherwise indicated, all references to a year reflect our fiscal year that ends on September 30.

PART I

PTC is a global software and services company that, together with a partner ecosystem, drives digital transformation for industrial companies. We serve a broad range of these companies, including discrete manufacturers (industrial machinery & components, aerospace & defense, automotive, and electronics & high technology), process/continuous manufacturers (life sciences, energy & resources, and consumer packaged goods), and operators. Our technology enables customers to improve operational efficiency, accelerate product and service innovation, and increase workforce productivity.

We go to market with four technology platforms, consisting of and supported by products that enable 3D modeling (CAD), lifecycle management (PLM), data orchestration (IIoT), and experience creation (AR). Together, these technologies power the digital thread across industrial enterprises.

We continue to expand our solution offerings to address the most pressing business problems our customers confront. These solutions are being designed to aggregate products and technology from our portfolio as well as from other companies, including our key partners.

Our business is based on a subscription business model, which provides flexibility to customers and increases predictability and consistency of billings to PTC. Our customer success program partners with customers to enable successful deployment and utilization of our solutions.

We generate revenue through the sale of software subscriptions, which include license access and support (technical support and software updates), support for existing perpetual licenses, professional services (consulting, implementation, and training), and cloud services.

Recent Events

On November 1, 2019, we acquired Onshape, creators of the first Software as a Service (SaaS) product development platform that unites robust CAD with powerful data management and collaboration tools, for approximately $470 million, net of cash acquired. The acquisition is expected to accelerate our ability to attract new customers with a SaaS-based product offering and position the company to capitalize on an industry transition to SaaS. In connection with the acquisition, we borrowed $455 million under our existing credit facility.

On November 13, 2019, we also increased the revolving loan commitment under the credit facility to $1 billion and made other amendments to the credit facility.

Our Principal Products and Services

3D (CAD)

Our 3D platform enables users to create conceptual and detailed designs, analyze designs, perform engineering calculations and leverage the information created downstream using 2D, 3D, parametric and direct modeling. Our principal 3D product is described below.

Our Creo® interoperable suite of product design software provides a scalable set of packages for design engineers to meet a variety of specialized needs. Creo provides capabilities for design flexibility, advanced assembly design, piping and cabling design, advanced surfacing, comprehensive virtual prototyping and other essential design functions. Our Creo solutions include augmented and virtual reality through a native cloud dependent integration with our Vuforia® augmented reality (AR) solution. With every seat of Creo, our customers can create and publish AR experiences and share their design instantly to collaborate with anyone across the entire enterprise around the world on any device. Creo also now includes the Discovery Live real-time simulation technology from ANSYS. This solution offers customers a unified modeling and simulation environment and provides design engineers with an interactive design experience that will enable them to create higher quality products, while reducing product and development costs.

Lifecycle Management (PLM)

Our PLM platform enables efficient and consistent product data management from inception through design, as well as communication and collaboration across the entire enterprise, including product development, manufacturing and the supply chain. Our principal Lifecycle Management product is described below.

Our Windchill® suite of PLM software provides product lifecycle management capabilities - from design to service. Windchill offers a single repository for all product information, thus providing a “single source of truth” for all product-related content such as CAD models, documents, technical illustrations, embedded software, calculations, and requirement specifications for all phases of the product lifecycle to help companies streamline enterprise-wide communication and make informed decisions. As the “single source of truth,” Windchill provides the digital thread that connects the full product lifecycle. Our Windchill product now also includes augmented reality (AR) capabilities, enabling customers to build a digital product definition and publish the representation of the resulting product in AR. Using AR in the product development process connects the digital model to the physical product to determine real-time behavior, conduct product design reviews in real-world environments, and share the product definition with disparate stakeholders.

Data Orchestration (IIoT)

Our data orchestration platform delivers tools, technologies, and solutions that empower companies to rapidly develop and deploy powerful industrial IoT applications, enabling them to transform their operations, products, and services - and unlock new business models. Our principal data orchestration product is described below.

Our ThingWorx® product enables customers to reduce the time, cost, and risk required to build and deploy IoT applications; connect devices, systems, and applications; manage connected products; and analyze industrial IoT data. ThingWorx includes cloud-based tools that allow customers to easily and more securely connect products and devices to the cloud, and intelligently process and store product and sensor data. ThingWorx Solution Central is a centralized portal in the cloud that allows users of ThingWorx to efficiently discover, deploy, and manage ThingWorx applications across the enterprise from a single location, which allows for cost-effective, efficient, and version controlled management of applications. ThingWorx contains integral communications connectivity to industrial automation environments through our ThingWorx Kepware® product, which enables users to connect, manage,

monitor, and control disparate devices and software applications. ThingWorx also offers sophisticated artificial intelligence and machine learning technology that enables customers to simplify and automate complex analytical processes that enhance industrial IoT solutions through real-time insights, predictions and recommendations from information collected from smart, connected products. ThingWorx also includes AR capabilities that superimpose IoT digital information on a human’s view of the physical world, enabling valuable insights.

Experience Creation (AR)

Our Experience Creation platform offers a way to capture, create, and deliver content for industrial augmented reality experiences. Our principal experience creation products are described below.

Our Vuforia Studio™ product is a powerful, easy-to-use, cloud-based tool that enables industrial enterprises to rapidly author and publish augmented reality experiences. These augmented reality experiences overlay important digital information from IoT, CAD, and other sources onto the view of the physical things on which users work. Our Vuforia Expert Capture™ product chronicles the real-time movements of a person wearing an AR headset by monitoring the individual both audio-visually and spatially in three dimensions. Vuforia Expert Capture supports a variety of industrial use cases, such as creating step-by-step operating or repair instructions, procedural guidance, and hands-on training. The Vuforia suite also includes the Vuforia Engine™ technology for application development and Vuforia Chalk™ collaboration and remote assistance solution.

Strategic Partners

Building an ecosystem of partners is becoming increasingly important as we expand the capabilities of our core solutions, and IoT offerings and as we expand our addressable markets by leveraging our partner sales and services distribution channels. With this in mind, in 2018, we entered into the three strategic alliances described below.

We partnered with Rockwell Automation to align our respective smart factory technologies to address the market for smart, connected operations, with particular focus on the plant and factory setting. As part of this strategic alliance, we have aligned our ThingWorx® IoT, Kepware® industrial connectivity, and Vuforia® augmented reality (AR) platforms with Rockwell Automation’s FactoryTalk® MES, FactoryTalk Analytics, and Industrial Automation platforms, and we both offer these solutions in the market. This suite is now launched and marketed as FactoryTalk Innovation Suite Powered by PTC. Rockwell Automation has exclusive rights to resell certain of our solutions to certain customers and geographic regions. In connection with this strategic alliance, Rockwell Automation made a $1 billion equity investment in PTC.

We partnered with Microsoft to make the ThingWorx® Industrial Innovation Platform available on the Microsoft Azure cloud platform as our preferred cloud platform. By partnering with Microsoft, we are able to leverage the two companies’ complementary technologies and together pursue opportunities in industrial sectors. This integration enables us to deliver a combined and connected solution for industrial IoT and digital product lifecycle management that enable companies to bring new products to market faster, enhance customer service, and introduce new revenue streams, while reducing operating costs.

We partnered with ANSYS to enable us to embed Ansys' Discovery Live real-time simulation within Creo, enabling us to offer a fully-integrated CAD and real-time simulation solution.

Our Markets and How We Address Them

We compete in the Industrial IoT (IIoT) and augmented reality markets and the CAD and PLM markets. The markets we serve present different growth opportunities for us. We see greater opportunity for market growth for our IIoT and AR solutions for the enterprise, followed by more moderate market growth for our CAD and PLM solutions.

We derive most of our sales from products and services sold directly by our sales force to end-user customers. Approximately 20% to 30% of our sales of products and services are through third-party resellers and other strategic partners. Our sales force focuses on large accounts, while our reseller channel provides a cost-effective means of covering the small- and medium-size business market. Our strategic services partners provide service offerings to help customers implement our product offerings. As we grow our IIoT business, we expect our go-to-market strategy will rely more on partners, including the types of strategic partners described above, and marketing directly to end users and developers.

Additional financial information about our segments and international and domestic operations may be found in Note 18. Segment and Geographic Information of Notes to Consolidated Financial Statements in this Annual Report, which information is incorporated herein by reference.

Competition

We compete with a number of companies that offer solutions that address one or more specific functional areas covered by our solutions. In our IIoT business, we compete with large established companies like Amazon, IBM, Oracle, SAP, Siemens AG, and GE. There are also a number of small companies that compete in the market for IoT products. We believe our ThingWorx IoT platform and solutions are complementary to the offerings of many of our competitors, and we have partnered with many of the named competitors. For enterprise CAD and PLM solutions and for discrete desktop CAD products, we compete with companies including AutoDesk, Dassault Systèmes SA and Siemens AG. For PLM solutions, we also compete with Oracle and SAP, but we believe our products are more specifically targeted toward the business process challenges of manufacturing companies and offer broader and deeper functionality for those processes than ERP-based solutions.

Proprietary Rights

Our software products and related technical know-how, along with our trademarks, including our company names, product names and logos, are proprietary. We protect our intellectual property rights in these items by relying on copyrights, trademarks, patents and common law safeguards, including trade secret protection. The nature and extent of such legal protection depends in part on the type of intellectual property right and the relevant jurisdiction. In the U.S., we are generally able to maintain our trademark registrations for as long as the trademarks are in use and to maintain our patents for up to 20 years from the earliest effective filing date. We also use license management and other anti-piracy technology measures, as well as contractual restrictions, to curtail the unauthorized use and distribution of our products.

Our proprietary rights are subject to risks and uncertainties described under Item 1A. “Risk Factors” below. You should read that discussion, which is incorporated into this section by reference.

Deferred Revenue and Backlog (Unbilled Deferred Revenue)

Information about Deferred Revenue and Backlog (Unbilled Deferred Revenue) is discussed in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Executive Overview” below. You should read that discussion, which is incorporated into this section by reference.

Employees

As of September 30, 2019, we had 6,055 employees, including 1,889 in product development; 1,674 in customer support, training, consulting, cloud services and product distribution; 1,777 in sales and marketing; and 715 in general and administration. Of these employees, 2,203 were located in the United States and 3,852 were located outside the United States.

Website Access to Reports and Code of Business Conduct and Ethics

We make available free of charge on our website at www.ptc.com the following reports as soon as reasonably practicable after electronically filing them with, or furnishing them to, the SEC: our Annual Reports on Form 10-K; our Quarterly Reports on Form 10-Q; our Current Reports on Form 8-K; and amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934. Our Proxy Statements for our Annual Meetings and Section 16 trading reports on SEC Forms 3, 4 and 5 also are available on our website. The reference to our website is not intended to incorporate information on our website into this Annual Report by reference.

Our Code of Ethics for Senior Executive Officers is embedded in our Code of Business Conduct and Ethics, which is also available on our website. Additional information about this code and amendments and waivers thereto can be found below in Part III, Item 10 of this Annual Report.

Executive Officers

Information about our executive officers is incorporated by reference from our 2020 Proxy Statement.

Corporate Information

PTC was incorporated in Massachusetts in 1985 and is headquartered in Boston, Massachusetts.

The following are important factors we have identified that could affect our future results and your investment in our securities. You should consider them carefully when evaluating an investment in PTC securities or any forward-looking statements made by us, including those contained in this Annual Report, because these factors could cause actual results to differ materially from historical results or the performance projected in forward- looking statements. The risks described below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition and/or operating results. Holders of the 6.00% Senior Notes due 2024 (the “2024 6% Notes”) that we issued in May 2016 should also consider the risk factors related to those notes described in the prospectus supplement we filed with the Securities and Exchange Commission on May 5, 2016, which are incorporated herein by reference.

**I.**Risks Related to Our Business Operations and Industry

We face significant competition, which may reduce our profitability and limit or reduce our market share.

The markets for our products and solutions are rapidly changing and characterized by intense competition, disruptive technology developments, evolving distribution models and increasingly lower barriers to entry. If we are unable to provide products and solutions that address customers’ needs as well as our competitors’ products and solutions do, or to align our pricing, licensing and delivery models with customer preferences, we could lose customers and/or fail to attract new customers, which could cause us to lose revenue and market share. Competitive pressures could also cause us to reduce our prices, which could reduce our revenue and margins.

Our current and potential competitors range from large and well-established companies to emerging start-ups. Some of our competitors and potential competitors have greater name recognition in the markets we serve and greater financial, technical, sales and marketing, and other resources, which could limit our ability to gain customer recognition and confidence in our products and solutions and successfully sell our products and solutions, which could adversely affect our ability to grow our business.

A breach of security in our products or computer systems, or those of our third-party service providers, could compromise the integrity of our products, cause loss of data, harm our reputation, create additional liability and adversely impact our financial results.

We have implemented and continue to implement measures intended to maintain the security and integrity of our products, source code and computer systems. The potential consequences of a security breach or system disruption (particularly through cyber-attack or cyber-intrusion, including by computer hackers, foreign governments and cyber terrorists) have increased in scope as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Despite efforts to create security barriers to such threats, it is impossible for us to eliminate this risk, and, in fact, we deal with security issues on a regular basis and have experienced security incidents from time to time. Accordingly, there is a risk that we might encounter a material event or issue and that such an event or issue may occur.

In addition, we offer cloud services to our customers and some of our products are hosted by third-party service providers, which expose us to additional risks as those repositories of our customers’ proprietary data may be targeted by hackers.

A significant breach of the security and/ or integrity of our products or systems, or those of our third-party service providers, could prevent our products from functioning properly, could enable access to sensitive, proprietary or confidential information, including that of our customers, or could disrupt our business operations or those of our customers. This could require us to incur significant costs of investigation, remediation, and further protection, harm our reputation, cause customers to stop buying our products, and cause us to face lawsuits and potential liability, which could have a material adverse effect on our financial condition and results of operations.

We may be unable to hire or retain personnel with the necessary skills to operate and grow our business, which could adversely affect our ability to compete.

Our success depends upon our ability to attract and retain highly skilled managerial, sales and marketing, technical, financial and administrative personnel to operate and grow our business. Competition for such personnel in our industry is intense, particularly in the Boston, Massachusetts area where our global headquarters is located.

The technical personnel required to develop our products and solutions are in high demand, particularly technical personnel with augmented and virtual reality and analytics expertise as there are comparatively fewer persons with those skills. If we are unable to attract and retain technical personnel with the requisite skills, our product and solution development efforts could be delayed, which could adversely affect our ability to compete and thereby adversely affect our revenues and profitability.

The managerial, sales and marketing, financial and administrative personnel necessary to guide our operations, market and sell our solutions and support our business operations are also in high demand due to the intense competition in our industry.

If we are unable to attract and retain the personnel we need to develop compelling products and solutions, and guide, operate and support our business, we may be unable to successfully compete in the marketplace, which would adversely affect our revenues and profitability.

We depend on sales within the discrete manufacturing sector and our business could be adversely affected if manufacturing activity does not grow, or if it contracts, or if manufacturers are adversely affected by other economic factors.

A large amount of our sales are to customers in the discrete manufacturing sector. The global Manufacturing Purchasing Managers' Index (PMI) has declined significantly over the past year and remained below the 50% level in September 2019, with a particularly large recent decline in Europe. Although the decline in Manufacturing PMI did not have a significant adverse affect on our business in 2019, if the manufacturing sector does not improve or continues to decline, our customers in this sector may, as they have in the past, reduce or defer purchases of our products and services, which could adversely affect our financial results.

In addition, manufacturers worldwide are facing increasing uncertainty about the global economic climate due to, among other factors, the geopolitical environment and ongoing trade tensions and tariffs. In addition, within the technology industry the U.S. Administration’s focus on technology transactions with non-U.S. entities and potential expanded prohibitions has created additional uncertainty. In light of these concerns and challenges, including the potential enactment or expansion of laws that restrict our ability to sell our solutions to customers, customers may delay, reduce or forego purchases of our solutions, which would adversely affect our business and financial results.

If we fail to successfully manage our transition to a subscription-based licensing company, our business and financial results could be adversely affected.

We completed our transition from offering perpetual licenses for our products to offering only subscription-based licenses worldwide in January 2019 (excluding Kepware). While we expect our subscription base, recurring revenue and cash flow to increase over time as a result of this licensing model transition, our ability to achieve these financial objectives is subject to risks and uncertainties. Becoming a subscription-based licensing company requires a considerable investment of technical, financial, legal and sales resources, and a scalable organization. Whether our transition will be successful and will accomplish our business and financial objectives is subject to uncertainties, including but not limited to: customer demand, attach and renewal rates, channel acceptance, our ability to further develop and scale infrastructure, our ability to include functionality and usability in such offerings that address customer requirements, and our costs. If we are unable to successfully establish these new offerings and navigate our business transition due to the foregoing risks and uncertainties, our business and financial results could be adversely impacted.

Because our sales and operations are globally dispersed, we face additional compliance risks and any compliance risk could adversely affect our business and financial results.

We sell and deliver software and services, and maintain support operations, in a large number of countries whose laws and practices differ from one another and are subject to unexpected changes. Managing these geographically dispersed operations requires significant attention and resources to

ensure compliance with laws of those countries and those of the U.S. governing our activities in non-U.S. countries.

Those laws include, but are not limited to, anti-corruption laws and regulations (including the U.S. Foreign Corrupt Practices Act (FCPA) and the U.K. Bribery Act 2010), data privacy laws and regulations (including the European Union's General Data Privacy Regulation), and trade and economic sanctions laws and regulations (including laws administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control, the U.S. State Department, the U.S. Department of Commerce, the United Nations Security Council and other relevant sanctions authorities). Our compliance risks are heightened due to the go-to-market approach for our businesses that relies heavily on a partner ecosystem, the fact that we operate in, and are expanding into, countries with a higher incidence of corruption and fraudulent business practices than others, the fact that we deal with governments and state-owned business enterprises, the fact that cyber attacks and intrusions that could expose sensitive information have increased, and the fact that global enforcement of laws has significantly increased.

Accordingly, while we strive to maintain a comprehensive compliance program, we cannot guarantee that an employee, agent or business partner will not act in violation of our policies or U.S. or other applicable laws, that a cyber attack or intrusion would not be successful, or that we may inadvertently violate such laws. Investigations of alleged violations of those laws and cyber intrusions can be expensive and disruptive. Violations of such laws can lead to civil and/or criminal prosecutions, substantial fines and other sanctions, including the revocation of our rights to continue certain operations, and also cause business and reputation loss, which could adversely affect our financial results and/or stock price.

Our international businesses present economic and operating risks, which could adversely affect our business and financial results.

We expect that our international operations will continue to expand and to account for a significant portion of our total revenue. Because we transact business in various foreign currencies, the volatility of foreign exchange rates has had and may in the future have a material adverse effect on our revenue, expenses and operating results.

Other risks inherent in our international operations include, but are not limited to, the following:

We may have exposure to additional tax liabilities and our effective tax rate may increase or fluctuate, which could increase our income tax expense and reduce our net income.

As a multinational organization, we are subject to income taxes as well as non-income based taxes in the U.S. and in various foreign jurisdictions. Significant judgment is required in determining our worldwide income tax provision and other tax liabilities. In the ordinary course of a global business, there are many intercompany transactions and calculations where the ultimate tax determination is uncertain. Our tax returns are subject to review by various taxing authorities. Although we believe that our tax estimates are reasonable, the final determination of tax audits or tax disputes could be different from what is reflected in our historical income tax provisions and accruals. For example, we have an open tax dispute in South Korea with respect to which we paid $12 million in 2017 to accommodate the potential tax liability through 2015, which we are disputing. If we do not prevail in that challenge, we could be subject to additional liabilities for periods after 2015, which we estimate could be $13 million.

Our effective tax rate can be adversely affected by several factors, many of which are outside of our control, including:

**II.**Risks Related to Acquisitions and Strategic Relationships

Businesses we acquire may not generate the revenue and earnings we anticipate and may otherwise adversely affect our business.

We have acquired, and intend to continue to acquire, new businesses and technologies. If we fail to successfully integrate and manage the businesses and technologies we acquire, or if an acquisition does not further our business strategy as we expect, our operating results will be adversely affected.

Moreover, business combinations involve risks and uncertainties that can adversely affect our operations and operating results, including:

Our inability to maintain or develop our strategic and technology relationships could adversely affect our business.

We have many strategic and technology relationships with other companies with which we work to offer complementary solutions and services, that market and sell our solutions, and that provide technologies that we embed in our solutions. We may not realize the expected benefits from these relationships and such relationships may be terminated by the other party. If these companies fail to perform or if a company terminates or substantially alters the terms of the relationship, we could suffer delays in product development, reduced sales or other operational difficulties and our business, results of operations and financial condition could be materially adversely affected.

**III.**Risks Related to Our Intellectual Property

We may be unable to adequately protect our proprietary rights, which could adversely affect our business and our ability to compete effectively.

Our software products are proprietary. We protect our intellectual property rights in these items by relying on copyrights, trademarks, patents and common law safeguards, including trade secret protection, as well as restrictions on disclosures and transferability contained in our agreements with other parties. Despite these measures, the laws of all relevant jurisdictions may not afford adequate protection to our products and other intellectual property. In addition, we frequently encounter attempts by individuals and companies to pirate our software. If our measures to protect our intellectual property rights fail, others may be able to use those rights, which could reduce our competitiveness and revenues.

In addition, any legal action to protect our intellectual property rights that we may bring or be engaged in could be costly, may distract management from day-to-day operations and may lead to additional claims against us, and we may not succeed, all of which would materially adversely affect our operating results.

Intellectual property infringement claims could be asserted against us, which could be expensive to defend and could result in limitations on our use of the claimed intellectual property.

The software industry is characterized by frequent litigation regarding copyright, patent and other intellectual property rights. If a lawsuit of this type is filed, it could result in significant expense to us and divert the efforts of our technical and management personnel. We cannot be sure that we would prevail against any such asserted claims. If we did not prevail, we could be prevented from using the claimed intellectual property or be required to enter into royalty or licensing agreements, which might not be available on terms acceptable to us. In addition to possible claims with respect to our proprietary products, some of our products contain technology developed by and licensed from third parties and we may likewise be susceptible to infringement claims with respect to these third-party technologies.

**IV.**Risks Related to Our Indebtedness

Our substantial indebtedness could adversely affect our business, financial condition and results of operations, as well as our ability to meet our payment obligations under our debt.

We have a significant amount of indebtedness. As of November 15, 2019, our total debt outstanding was approximately $1.1 billion, approximately $628 million of which was under our $1 billion secured credit facility (which matures in September 2023) and $500 million of which was associated with the 6% Senior Notes issued May 2016, which mature in May 2024 and are unsecured. Of the $628 million outstanding under our secured credit facility, $455 million was borrowed on November 1, 2019 to finance our acquisition of Onshape. In November 2019, we also amended the credit facility to increase the revolving loan commitment from $700 million to $1 billion (see Liquidity and Capital Resources-Outstanding Notes in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report). All amounts outstanding under the credit facility and the notes will be due and payable in full on their respective maturity dates. As of November 15, 2019, we had unused commitments under our credit facility of approximately $357 million. PTC Inc. and one of our foreign subsidiaries are eligible borrowers under the credit facility and certain other foreign subsidiaries may become borrowers under our credit facility in the future, subject to certain conditions.

Notwithstanding the limits contained in the credit agreement governing our credit facility and the indenture governing our 2024 6% Notes, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our level of debt could intensify. Specifically, our level of debt could:

Any of the above-listed factors could have an adverse effect on our business, financial condition and results of operations and our ability to meet our payment obligations under our debt agreements.

We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors some

of which are beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. Our debt agreements restrict our ability to dispose of assets and use the proceeds from those dispositions and may also restrict our ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due.

Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results of operations and our ability to satisfy our debt obligations.

If we cannot make scheduled payments on our debt, we will be in default and the lenders under our credit facility could terminate their commitments to loan money, the lenders could foreclose against the assets securing their borrowings, the holders of our 2024 6% Notes could declare all outstanding principal, premium, if any, and interest to be due and payable, and we could be forced into bankruptcy or liquidation. All of these events could result in a loss of your investment.

We are required to comply with certain financial and operating covenants under our debt agreements. Any failure to comply with those covenants could cause amounts borrowed to become immediately due and payable and/or prevent us from borrowing under the credit facility.

We are required to comply with specified financial and operating covenants under our debt agreements and to make payments under our debt, which limit our ability to operate our business as we otherwise might operate it. Our failure to comply with any of these covenants or to meet any debt payment obligations could result in an event of default which, if not cured or waived, would result in any amounts outstanding, including any accrued interest and/or unpaid fees, becoming immediately due and payable. We might not have sufficient working capital or liquidity to satisfy any repayment obligations in the event of an acceleration of those obligations. In addition, if we are not in compliance with the financial and operating covenants under the credit facility when we wish to borrow funds, we will be unable to borrow funds.

In addition, the financial and operating covenants under the credit facility may limit our ability to borrow funds, including for strategic acquisitions and share repurchases.

Our credit facility has variable interest tied to LIBOR and we could become subject to higher interest rates if the replacement rate we agree on with our banks is higher.

Borrowings under our revolving credit facility use the London Interbank Offering Rate (LIBOR) as a benchmark for establishing the interest rate. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. Although we believe the recent discussions about alternative rates will not materially increase the interest rates on our credit facility, the final agreed rate may increase the cost of our variable rate indebtedness.

**V.**Risks Related to Our Common Stock and Debt Securities

Our operating results fluctuate from quarter to quarter, making future operating results difficult to predict; failure to meet market expectations could cause the price of our securities to decline.

Our quarterly operating results historically have fluctuated and are likely to continue to fluctuate depending on many factors, including:

Accordingly, our quarterly results are difficult to predict prior to the end of the quarter and we may be unable to confirm or adjust expectations with respect to our operating results for a quarter until that quarter has closed. Any failure to meet our quarterly revenue or earnings targets could adversely impact the market price of our securities.

Our long-range financial targets are predicated on expanding our portfolio of recurring revenue contracts (ARR growth), operating margin improvements and cash flow growth that we may fail to achieve, which could reduce our expected earnings and cause us to fail to meet the expectations of analysts or investors and cause the price of our securities to decline.

We are projecting long-term ARR, operating margin and cash flow growth. Our projections are based on the expected growth potential in the IoT and AR markets, as well as more modest growth in our core CAD and PLM markets. We may not achieve the expected ARR growth if the markets we serve do not grow at expected rates, if customers do not purchase, renew, or expand subscriptions as we expect, if we are not able to deliver solutions desired by customers and potential customers, and/or if acquired businesses do not generate the revenue growth that we expect.

Over time, we expect our operating margin to improve, which improvements are predicated on operating leverage and on improved operating efficiencies, particularly within our sales organization, and on service margin improvements. If we are unable to reduce our sales and marketing expenses as a percentage of revenue through productivity initiatives, or to reduce the amount of services we provide and/or to improve our services margins, we may not achieve our operating margin targets.

If we fail to achieve our long-range financial targets, or if analysts and investors expect that we will not achieve our long-range financial targets, the price of our securities could decline.

Our stock price has been volatile, which may make it harder to resell shares at a favorable time and price.

Market prices for securities of software companies are generally volatile and are subject to significant fluctuations that may be unrelated or disproportionate to the operating performance of these companies. The trading prices and valuations of these stocks, and of ours, may not be predictable. Negative changes in the public’s perception of the prospects of software companies, or of PTC or the markets we serve, could depress our stock price regardless of our operating results.

Also, a large percentage of our common stock is held by institutional investors and by Rockwell Automation. Purchases and sales of our common stock by these investors could have a significant impact on the market price of the stock. For more information about those investors, please see our proxy statement with respect to our most recent annual meeting of stockholders and Schedules 13D and 13G filed with the SEC with respect to our common stock.

Our 2024 6% Notes are not listed on any national securities exchange or included in any automated quotation system, which could make it harder to resell the notes at a favorable time and price.

Our 2024 6% Notes are not listed on any national securities exchange or included in any automated quotation system. As a result, an active market for the notes may not exist or be maintained, which would adversely affect the market price and liquidity of the notes. In that case, holders may not be able to sell their notes when they want to or at a favorable price.

The market for non-investment grade debt historically has been subject to severe disruptions that have caused substantial volatility in the prices of securities similar to the notes. The market, if any, for

the notes may experience similar disruptions and any such disruptions may adversely affect the liquidity in that market or the prices at which the notes may be sold.

None.

We currently have 80 primary office locations used in operations in the United States and internationally, predominately as sales and/or support offices and for research and development work. Of our total of approximately 1,812,000 square feet of leased facilities used in operations, approximately 420,000 square feet are located in the U.S., including 250,000 square feet at our headquarters facility located in Boston, Massachusetts, and approximately 289,000 square feet are located in India, where a significant amount of our research and development is conducted. In addition, approximately 520,000 feet are associated with facilities that have been restructured, primarily our previous headquarters facility in Needham, Massachusetts. We believe that our facilities are adequate for our present and foreseeable needs.

None.

Not applicable.

PART II

Our common stock is traded on the Nasdaq Global Select Market under the symbol "PTC."

On September 30, 2019, the close of our fiscal year, and on November 13, 2019, our common stock was held by 1,107 and 1,104 shareholders of record, respectively.

The table below shows the shares of our common stock we repurchased in the fourth quarter of 2019.

(1) Periods are our fiscal months within the fiscal quarter.

(2) Our Board of Directors has authorized us to repurchase up to $1,500 million of our common stock for the period October 1, 2017 through September 30, 2020, which program we announced on September 19, 2017 and announced expansion of in July 2018.

Our five-year summary of selected financial data and quarterly financial data for the past two years is located on pages A-1 and A-2 at the end of this Form 10-K and incorporated herein by reference.

Forward-Looking Statements

Statements in this Annual Report about anticipated financial results and growth, as well as about the development of our products and markets, are forward-looking statements that are based on our current plans and assumptions. Important information about the bases for these plans and assumptions and factors that may cause our actual results to differ materially from these statements is contained below and in Item 1A. “Risk Factors” of this Annual Report.

Unless otherwise indicated, all references to a year reflect our fiscal year that ends on September 30.

Operating and Non-GAAP Financial Measures

Our discussion of results includes discussion of our operating measures (including "ARR," “license and subscription bookings” and other subscription-related measures) and non-GAAP financial measures. Our operating measures and non-GAAP financial measures, including the reasons we use those measures, are described below in Results of Operations - Operating Measures and Results of Operations - Non-GAAP Financial Measures, respectively. You should read those sections to understand our operating and non-GAAP financial measures.

Revenue Sources and Recognition

We sell software subscription and perpetual licenses, support for perpetual licenses, cloud services and professional services.

Subscription revenue is comprised of time-based licenses whereby customers use our software and receive related support for a specified term. Results for reporting periods beginning on or after October 1, 2018 are presented under the Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASC 606), while prior period amounts are not adjusted and continue to be reported 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 (ASC 605). Through 2018, revenue for our subscription contracts was recognized ratably over the term of the contract under ASC 605; this differs from how revenue for such contracts is recognized under ASC 606. Our contracts with customers may include multiple goods and services. Under ASC 606, revenue is recognized for each performance obligation that can be separately identified under the contract. Accordingly, our on-premise subscription contracts are unbundled into multiple performance obligations (i.e., license, cloud and support). Determining whether the software licenses and the cloud services are distinct from each other, and therefore performance obligations to be accounted for separately, or not distinct from each other, and therefore part of a single performance obligation, may require significant judgment. To date, for the majority of our products, we have concluded that the on-premise software licenses and cloud services provided in our subscription offerings are distinct from each other such that revenue from each performance obligation within the offering should be recognized separately. We will continue to review this conclusion as the cloud services that we deliver in combination with our on-premise subscriptions continue to evolve, which could result in changes to how we recognize revenue for such products. The license portion of our on-premise subscription contracts (approximately 50% to 55%) is recognized upfront and the cloud and support portions (approximately 45% to 50%) are recognized ratably over the term. Software as a Service (SaaS) and cloud services for which revenue is generally recognized ratably over the term of the contract are included in subscription revenue and have been immaterial to date.

Perpetual licenses are a perpetual right to use the software, for which revenue is generally recognized up front upon shipment to the customer. Support revenue is comprised of contracts to maintain new and/or previously purchased licenses, for which revenue is recognized ratably over the

term of the contract. Professional services engagements typically result from sales of new licenses, and for which revenue is recognized as the services are performed.

Our revenue recognition practices and the effects of our adoption of ASC 606, including adjustments to accumulated deficit related to billed and unbilled deferred revenue, are described in "revenue Recognition" and "Recently Adopted Accounting Pronouncements" in Note 2. Summary of Significant Accounting Policies and in Note 3. Revenue from Contracts with Customers in the Notes to Consolidated Financial Statements in this Annual Report.

Our adoption of ASC 606 has increased the volatility of our revenue results as a significant portion of subscription revenue is recognized at the time of delivery, rather than being recognized ratably over the contract period.

Executive Overview

ARR increased 10% to $1,116 million ($1,134 million and 12% at the guidance rate) as of the end of 2019 reflecting solid growth for this metric across all our businesses, particularly in our IoT and AR businesses.

Operating cash flow was $285 million, up 15% in 2019 compared to 2018. We made $22 million more in restructuring payments in 2019 compared to 2018 related to our workforce realignment and headquarters relocation.

Our 2019 results reflect continued demand for our PLM and CAD products as well as growing demand for our IoT and Augmented Reality (AR) products. License and subscription bookings in the fourth quarter of 2019 were $150 million, higher than anticipated, driven by strong bookings in IoT and AR, including a mega deal (bookings greater than $5 million) with our strategic alliance partner, Rockwell Automation. License and subscription bookings were $472 million, up 1% (4% constant currency) in 2019 compared to 2018, primarily driven by strong IoT and AR bookings growth, offset by declines in PLM and CAD bookings.

Under ASC 605, total revenue, software revenue and subscription revenue grew in 2019 compared to 2018, despite an 800 basis point increase in subscription mix in 2019. Under ASC 605, recurring software revenue was $1,079 million, an increase of 10% (13% constant currency) in 2019 compared to 2018. Under ASC 605, recurring revenue as a percentage of software revenue was 94% in 2019 compared to 90% in 2018. Under ASC 605, perpetual license and support revenue decreased year over year because we discontinued offering perpetual licenses for most of our solutions effective January 1, 2019. Operating margin under ASC 605 increased 200 basis points in 2019 resulting from the compounding effect of subscription licenses and lower operating expenses due to effective cost discipline. EPS declined under ASC 605 in 2019 primarily due to a higher tax provision.

Summary Revenue and Earnings Results

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We face exposure to financial market risks, including adverse movements in foreign currency exchange rates and changes in interest rates. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial results.

Foreign currency exchange risk

Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Our most significant foreign currency exposures relate to Western European countries, Japan, Israel, China and Canada. We enter into foreign currency forward contracts to manage our exposure to fluctuations in foreign exchange rates that arise from receivables and payables denominated in foreign currencies. We do not enter into or hold foreign currency derivative financial instruments for trading or speculative purposes nor do we enter into derivative financial instruments to hedge future cash flow or forecast transactions.

Our non-U.S. revenues generally are transacted through our non-U.S. subsidiaries and typically are denominated in their local currency. In addition, expenses that are incurred by our non-U.S. subsidiaries typically are denominated in their local currency. In 2019, approximately 60% of our revenue and 40% of our expenses were transacted in currencies other than the U.S. dollar. Historically two-thirds of our revenue and half of our expenses were transacted in currencies other than U.S. Dollars. Currency translation affects our reported results because we report our results of operations in U.S. Dollars. Historically, our most significant currency risk has been changes in the Euro and Japanese Yen relative to the U.S. Dollar. Based on current revenue and expense levels (excluding restructuring charges and stock-based compensation), a $0.10 change in the USD to European exchange rates and a 10 Yen change in the Yen to USD exchange rate would impact operating income by approximately $17 million and $7 million, respectively.

Our exposure to foreign currency exchange rate fluctuations arises in part from intercompany transactions, with most intercompany transactions occurring between a U.S. dollar functional currency entity and a foreign currency denominated entity. Intercompany transactions typically are denominated in the local currency of the non-U.S. dollar functional currency subsidiary in order to centralize foreign currency risk. Also, both PTC (the parent company) and our non-U.S. subsidiaries may transact business with our customers and vendors in a currency other than their functional currency (transaction risk). In addition, we are exposed to foreign exchange rate fluctuations as the financial results and balances of our non-U.S. subsidiaries are translated into U.S. dollars (translation risk). If sales to customers outside of the United States increase, our exposure to fluctuations in foreign currency exchange rates will increase.

Our foreign currency risk management strategy is principally designed to mitigate the future potential financial impact of changes in the U.S. dollar value of balances denominated in foreign currency, resulting from changes in foreign currency exchange rates. Our foreign currency hedging program uses forward contracts to manage the foreign currency exposures that exist as part of our ongoing business operations. The contracts primarily are denominated in Canadian Dollars and European currencies, and have maturities of less than three months.

Generally, we do not designate foreign currency forward contracts as hedges for accounting purposes, and changes in the fair value of these instruments are recognized immediately in earnings. Because we enter into forward contracts only as an economic hedge, any gain or loss on the underlying foreign-denominated balance would be offset by the loss or gain on the forward contract. Gains and

losses on forward contracts and foreign denominated receivables and payables are included in foreign currency net losses.

As of September 30, 2019 and 2018, we had outstanding forward contracts for derivatives not designated as hedging instruments with notional amounts equivalent to the following:

As of September 30, 2019 and 2018, we had outstanding forward contracts designated as cash flow hedges with notional amounts equivalent to the following:

Debt

In addition to the $500 million due under our 2024 6% Notes, as of September 30, 2019, we had $173 million outstanding under our credit facility. As of November 15, 2019, we have $628 million outstanding under our credit facility due to the Onshape acquisition. Loans under the credit facility bear interest at variable rates which reset every 30 to 180 days depending on the rate and period selected by us. These loans are subject to interest rate risk as interest rates will be adjusted at each rollover date to the extent such amounts are not repaid. As of September 30, 2019, the annual rate on the credit facility loans was 3.44%. If there was a hypothetical 100 basis point change in interest rates, the annual net impact to earnings and cash flows would be $1.7 million. This hypothetical change in cash flows and earnings has been calculated based on the borrowings outstanding at September 30, 2019 and a 100 basis point per annum change in interest rate applied over a one-year period.

Cash and cash equivalents

As of September 30, 2019, cash equivalents were invested in highly liquid investments with maturities of three months or less when purchased. We invest our cash with highly rated financial institutions in North America, Europe and Asia-Pacific and in diversified domestic and international money market mutual funds. At September 30, 2019, we had cash and cash equivalents of $40.0 million in the United States, $83.0 million in Europe, $122.0 million in Asia Pacific Rim (including India), and $25.0 million in other non-U.S. countries. Given the short maturities and investment grade quality of the portfolio holdings at September 30, 2019, a hypothetical 10% change in interest rates would not materially affect the fair value of our cash and cash equivalents.

Our invested cash is subject to interest rate fluctuations and, for non-U.S. operations, foreign currency risk. In a declining interest rate environment, we would experience a decrease in interest income. The

opposite holds true in a rising interest rate environment. Over the past several years, the U.S. Federal Reserve Board, European Central Bank and Bank of England have changed certain benchmark interest rates, which have led to declines and increases in market interest rates. These changes in market interest rates have resulted in fluctuations in interest income earned on our cash and cash equivalents. Interest income will continue to fluctuate based on changes in market interest rates and levels of cash available for investment. Our consolidated cash balances were impacted favorably by $2.6 million and $7.8 million in 2019 and 2018, respectively and unfavorably by $1.1 million in 2017, due to changes in foreign currencies relative to the U.S. dollar, particularly the Euro and the Japanese Yen.

The consolidated financial statements and notes to the consolidated financial statements are attached as APPENDIX A.

None.

Evaluation of Disclosure Controls and Procedures

Our management maintains disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), as appropriate, to allow for timely decisions regarding required disclosure.

As required by SEC Rule 15d-15(b), we carried out an evaluation, under the supervision and with the participation of management, including our principal executive and principal financial officers, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report. Based on this evaluation, we concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2019.

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of September 30, 2019 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on this assessment and those criteria, our management concluded that, as of September 30, 2019, our internal control over financial reporting was effective.

The effectiveness of our internal control over financial reporting as of September 30, 2019 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which appears under Item 8.

Change in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

None.

PART III

The information required by this item with respect to our directors and executive officers may be found in the sections captioned “Proposal 1: Election of Directors,” “Corporate Governance,” "Our Executive Officers," and “Transactions With Related Persons” appearing in our 2020 Proxy Statement. Such information is incorporated into this Item 10 by reference.

Code of Ethics for Senior Executive Officers

We have adopted a Code of Ethics for Senior Executive Officers that applies to our Chief Executive Officer, President, Chief Financial Officer, and Controller, as well as others. The Code is embedded in our Code of Business Conduct and Ethics applicable to all employees. A copy of the Code of Business Conduct and Ethics is publicly available on our website at www.ptc.com. If we make any substantive amendments to, or grant any waiver from, including any implicit waiver, the Code of Ethics for Senior Executive Officers to or for our Chief Executive Officer, President, Chief Financial Officer or Controller, we will disclose the nature of such amendment or waiver in a current report on Form 8-K.

Information with respect to director and executive compensation may be found under the headings “Director Compensation,” “Compensation Discussion and Analysis,” “Executive Compensation,” and “Compensation Committee Report” appearing in our 2020 Proxy Statement. Such information is incorporated herein by reference.

Information required by this item may be found under the headings “Information about PTC Common Stock Ownership” in our 2020 Proxy Statement. Such information is incorporated herein by reference.

Information with respect to this item may be found under the headings “Independence of Our Directors,” “Review of Transactions with Related Persons” and “Transactions with Related Persons” in our 2020 Proxy Statement. Such information is incorporated herein by reference.

Information with respect to this item may be found under the headings “Engagement of Independent Auditor and Approval of Professional Services and Fees” and “PricewaterhouseCoopers LLP Professional Services and Fees” in our 2020 Proxy Statement. Such information is incorporated herein by reference.

PART IV

(a) Documents Filed as Part of Form 10-K

(b) Exhibits

We hereby file the exhibits listed in the attached Exhibit Index.

(c) Financial Statement Schedules

None.

None

EXHIBIT INDEX

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