filings.toolsItem 16. Form 10-K Summary
229K 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. |
| *** | Certain information has been excluded from this exhibit because it is not material and would likely cause competitive harm to the registrant if publicly disclosed. |
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, 2019.
| 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, 2019.
| Signature | Title | |
| (i) Principal Executive Officer: | ||
| /s/ JAMES HEPPELMANN | President and Chief Executive Officer | |
| James Heppelmann | ||
| (ii) Principal Financial and Accounting Officer: | ||
| /s/ Kristian Talvitie | Executive Vice President and Chief Financial Officer | |
| Kristian Talvitie | ||
| (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 Stockholders 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, 2019 and 2018, 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, 2019, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2019 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, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for revenues from contracts with customers in 2019.
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.
F-1
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 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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue from Contracts with Customers - Identification of Distinct Performance Obligations and Estimate of Standalone Selling Price
As described in Note 2 to the consolidated financial statements, the Company’s sources of revenue include: (1) subscription, (2) perpetual license, (3) support for perpetual licenses and (4) professional services. Revenue is derived from the licensing of computer software products and from related support and/or professional services contracts. During the year ended September 30, 2019, the Company recognized revenue from contracts with customers of $1,255.6 million. The Company’s adoption of the accounting standard related to revenue recognition resulted in a decrease in accumulated deficit of $363.2 million, net of tax. The Company’s contracts with customers for subscriptions typically include commitments to transfer term-based, on-premise software licenses bundled with support. On-premise software is determined to be a distinct performance obligation from support. Judgment is required by management to allocate the transaction price to each performance obligation. Management uses the estimated standalone selling price method to allocate the transaction price for items that are not sold separately. The estimated standalone selling price is determined using all information reasonably available to management, including market conditions and other observable inputs. The corresponding revenues are recognized as the related performance obligations are satisfied.
The principal considerations for our determination that performing procedures relating to revenue recognition, specifically related to management’s identification of distinct performance obligations and their estimate of standalone selling price, is a critical audit matter are there was significant judgment by management in both the identification of distinct performance obligations, specifically the determination that the on-premise software is determined to be a distinct performance obligation from support, and in estimating the standalone selling price using market pricing conditions and other observable inputs, such as historical pricing practices, for each distinct performance obligation. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to management’s identification of distinct performance obligations within contracts with customers and the judgments made by management used to estimate the standalone selling price used to allocate the transaction price to the distinct performance obligations. Due to this complexity, there
F-2
was a significant level of auditor judgment and effort in evaluating the Company’s adoption of the accounting standard related to revenue recognition including the completeness and accuracy of management’s cumulative adoption adjustments to accumulated deficit and deferred revenue.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over management’s adoption of the accounting standard related to revenue recognition, identification of distinct performance obligations and estimate of standalone selling prices used to allocate transaction price to distinct performance obligations in its contracts with customers. These procedures also included, among others, (i) evaluating the Company’s revenue recognition accounting policy resulting from its adoption of the accounting standard related to revenue recognition and testing the completeness and accuracy of management’s cumulative adoption adjustments; (ii) testing management’s identification of distinct performance obligations in its contracts with customers; (iii) testing management’s process for estimating standalone selling price which included testing the completeness and accuracy of input data used and evaluating the reasonableness of significant assumptions used by management, principally market and pricing conditions and other observable inputs such as historical pricing practices; and (iv) evaluation of the accuracy of management’s allocation of transaction price to the performance obligations contained within a sample of contracts with customers.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
November 15, 2019
We have served as the Company’s auditor since 1992.
F-3
PTC Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
| September 30, | |||||||
| 2019 | 2018 | ||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 269,579 | $ | 259,946 | |||
| Short-term marketable securities | 27,891 | 25,836 | |||||
| Accounts receivable, net of allowance for doubtful accounts of $744 and $607 at September 30, 2019 and 2018, respectively | 372,743 | 129,297 | |||||
| Prepaid expenses | 52,701 | 48,997 | |||||
| Other current assets | 59,707 | 169,708 | |||||
| Total current assets | 782,621 | 633,784 | |||||
| Property and equipment, net | 105,531 | 80,613 | |||||
| Goodwill | 1,238,179 | 1,182,457 | |||||
| Acquired intangible assets, net | 169,949 | 200,202 | |||||
| Long-term marketable securities | 29,544 | 30,115 | |||||
| Deferred tax assets | 198,634 | 165,566 | |||||
| Other assets | 140,130 | 36,285 | |||||
| Total assets | $ | 2,664,588 | $ | 2,329,022 | |||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
| Current liabilities: | |||||||
| Accounts payable | $ | 42,442 | $ | 53,473 | |||
| Accrued expenses and other current liabilities | 104,028 | 74,388 | |||||
| Accrued compensation and benefits | 88,769 | 101,784 | |||||
| Accrued income taxes | 17,407 | 18,044 | |||||
| Deferred revenue | 385,509 | 487,590 | |||||
| Total current liabilities | 638,155 | 735,279 | |||||
| Long-term debt / Revolving credit facility | 669,134 | 643,268 | |||||
| Deferred tax liabilities | 41,683 | 5,589 | |||||
| Deferred revenue | 11,123 | 11,852 | |||||
| Other liabilities | 102,495 | 58,445 | |||||
| Total liabilities | 1,462,590 | 1,454,433 | |||||
| Commitments and contingencies (Note 10) | |||||||
| Stockholders’ equity: | |||||||
| Preferred stock, $0.01 par value; 5,000 shares authorized; none issued | — | — | |||||
| Common stock, $0.01 par value; 500,000 shares authorized; 114,899 and 117,981 shares issued and outstanding at September 30, 2019 and 2018, respectively | 1,149 | 1,180 | |||||
| Additional paid-in capital | 1,502,949 | 1,558,403 | |||||
| Accumulated deficit | (191,390 | ) | (599,409 | ) | |||
| Accumulated other comprehensive loss | (110,710 | ) | (85,585 | ) | |||
| Total stockholders’ equity | 1,201,998 | 874,589 | |||||
| Total liabilities and stockholders’ equity | $ | 2,664,588 | $ | 2,329,022 |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
PTC Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| Year ended September 30, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Revenue: | |||||||||||
| License | $ | 324,400 | $ | 529,265 | $ | 356,326 | |||||
| Support and cloud services | 763,700 | 559,222 | 630,990 | ||||||||
| Total software revenue | 1,088,100 | 1,088,487 | 987,316 | ||||||||
| Professional services | 167,531 | 153,337 | 176,723 | ||||||||
| Total revenue | 1,255,631 | 1,241,824 | 1,164,039 | ||||||||
| Cost of revenue: | |||||||||||
| Cost of license revenue | 51,936 | 47,737 | 66,841 | ||||||||
| Cost of support and cloud services revenue | 133,478 | 135,106 | 110,931 | ||||||||
| Total cost of software revenue | 185,414 | 182,843 | 177,772 | ||||||||
| Cost of professional service revenue | 139,964 | 143,659 | 150,730 | ||||||||
| Total cost of revenue | 325,378 | 326,502 | 328,502 | ||||||||
| Gross margin | 930,253 | 915,322 | 835,537 | ||||||||
| Operating expenses: | |||||||||||
| Sales and marketing | 417,449 | 414,764 | 372,702 | ||||||||
| Research and development | 246,888 | 249,786 | 236,028 | ||||||||
| General and administrative | 127,919 | 143,045 | 144,991 | ||||||||
| Amortization of acquired intangible assets | 23,841 | 31,350 | 32,108 | ||||||||
| Restructuring and other charges, net | 51,114 | 3,764 | 7,942 | ||||||||
| Total operating expenses | 867,211 | 842,709 | 793,771 | ||||||||
| Operating income | 63,042 | 72,613 | 41,766 | ||||||||
| Interest expense | (43,047 | ) | (41,673 | ) | (42,400 | ) | |||||
| Other income (expense), net | 305 | (2,284 | ) | (772 | ) | ||||||
| Income before income taxes | 20,300 | 28,656 | (1,406 | ) | |||||||
| Provision (benefit) for income taxes | 47,760 | (23,331 | ) | (7,645 | ) | ||||||
| Net income (loss) | $ | (27,460 | ) | $ | 51,987 | $ | 6,239 | ||||
| Earnings (loss) per share—Basic | $ | (0.23 | ) | $ | 0.45 | $ | 0.05 | ||||
| Earnings (loss) per share—Diluted | $ | (0.23 | ) | $ | 0.44 | $ | 0.05 | ||||
| Weighted average shares outstanding—Basic | 117,724 | 116,390 | 115,523 | ||||||||
| Weighted average shares outstanding—Diluted | 117,724 | 118,158 | 117,356 |
The accompanying notes are an integral part of these consolidated financial statements.
F-5
PTC Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
| Year ended September 30, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Net income (loss) | $ | (27,460 | ) | $ | 51,987 | $ | 6,239 | ||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Hedge gain (loss) arising during the period, net of tax of $1.7 million, $0.2 million and $0.1 million in 2019, 2018 and 2017, respectively. | 5,251 | 1,445 | (758 | ) | |||||||
| Net hedge gain (loss) reclassified into earnings, net of tax of $0.1 million in 2019, 2018 and 2017, respectively. | (549 | ) | 483 | 459 | |||||||
| Realized and unrealized gain (loss) on hedging instruments | 4,702 | 1,928 | (299 | ) | |||||||
| Foreign currency translation adjustment, net of tax of $0 for all periods | (24,755 | ) | (11,767 | ) | 16,593 | ||||||
| Unrealized gain (loss) on marketable securities, net of tax of $0 for all periods | 530 | (269 | ) | (22 | ) | ||||||
| Amortization of net actuarial pension loss included in net income, net of tax of $0.7 million in in 2019, 2018, respectively, and $1.0 million and 2017 | 1,691 | 1,629 | 2,392 | ||||||||
| Pension net gain (loss) arising during the period net of tax of $3.6 million, $1.5 million, and $3.6 million in 2019, 2018, and 2017, respectively | (8,743 | ) | (3,787 | ) | 8,636 | ||||||
| Change in unamortized pension loss during the period related to changes in foreign currency | 1,450 | 588 | (1,254 | ) | |||||||
| Other comprehensive income (loss) | (25,125 | ) | (11,678 | ) | 26,046 | ||||||
| Comprehensive income (loss) | $ | (52,585 | ) | $ | 40,309 | $ | 32,285 |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
PTC Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Year ended September 30, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | (27,460 | ) | $ | 51,987 | $ | 6,239 | ||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Stock-based compensation | 86,400 | 82,939 | 76,708 | ||||||||
| Depreciation and amortization | 77,824 | 87,408 | 86,742 | ||||||||
| Provision (benefit) from deferred income taxes | 1,708 | (56,556 | ) | (28,289 | ) | ||||||
| Other non-cash costs, net | (4,148 | ) | 534 | 2,272 | |||||||
| Changes in operating assets and liabilities, excluding the effects of acquisitions: | |||||||||||
| Accounts receivable | 29,446 | 20,396 | 12,832 | ||||||||
| Accounts payable and accrued expenses | 16,200 | 5,251 | 20,315 | ||||||||
| Accrued compensation and benefits | (12,098 | ) | (6,988 | ) | (34,846 | ) | |||||
| Deferred revenue | 45,875 | 56,141 | 5,808 | ||||||||
| Accrued income taxes, net of income tax receivable | 232 | 10,323 | (798 | ) | |||||||
| Other current assets and prepaid expenses | (2,829 | ) | (10,642 | ) | 690 | ||||||
| Other noncurrent assets and liabilities | 73,995 | 6,959 | (12,470 | ) | |||||||
| Net cash provided by operating activities | 285,145 | 247,752 | 135,203 | ||||||||
| Cash flows from investing activities: | |||||||||||
| Additions to property and equipment | (64,411 | ) | (36,041 | ) | (25,444 | ) | |||||
| Purchases of short- and long-term marketable securities | (33,027 | ) | (24,311 | ) | (19,726 | ) | |||||
| Proceeds from maturities of short- and long-term marketable securities | 31,976 | 18,140 | 18,785 | ||||||||
| Acquisitions of businesses, net of cash acquired | (86,737 | ) | (3,000 | ) | (4,960 | ) | |||||
| Purchases of investments | (7,500 | ) | (1,000 | ) | — | ||||||
| Settlement of net investment hedges | 9,675 | — | — | ||||||||
| Proceeds from sales of investments | — | — | 15,218 | ||||||||
| Purchase of intangible asset | — | (3,000 | ) | — | |||||||
| Net cash used by investing activities | (150,024 | ) | (49,212 | ) | (16,127 | ) | |||||
| Cash flows from financing activities: | |||||||||||
| Borrowings under credit facility | 205,000 | 250,000 | 150,000 | ||||||||
| Repayments of borrowings under credit facility | (180,000 | ) | (320,000 | ) | (190,000 | ) | |||||
| Repurchases of common stock | (114,994 | ) | (1,100,000 | ) | (50,991 | ) | |||||
| Proceeds from issuance of common stock | 12,975 | 1,015,654 | 10,778 | ||||||||
| Payments of withholding taxes in connection with vesting of stock-based awards | (44,366 | ) | (45,374 | ) | (26,654 | ) | |||||
| Credit facility origination costs | — | (2,851 | ) | (184 | ) | ||||||
| Contingent consideration | (1,575 | ) | (8,275 | ) | (11,054 | ) | |||||
| Net cash used by financing activities | (122,960 | ) | (210,846 | ) | (118,105 | ) | |||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (2,565 | ) | (7,810 | ) | 1,066 | ||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 9,596 | (20,116 | ) | 2,037 | |||||||
| Cash, cash equivalents and restricted cash, beginning of year | 261,093 | 281,209 | 279,172 | ||||||||
| Cash, cash equivalents and restricted cash, end of year | $ | 270,689 | $ | 261,093 | $ | 281,209 | |||||
| Supplemental disclosure of non-cash financing activities: | |||||||||||
| Fair value of contingent consideration recorded for acquisition | $ | — | $ | 2,100 | $ | — |
The accompanying notes are an integral part of these consolidated financial statements.
F-7
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 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 | ) | |||||||||||||
| Compensation expense from stock-based awards | — | — | 76,708 | — | — | 76,708 | |||||||||||||||||
| Common stock issued for employee stock purchase plan | 269 | 3 | 10,775 | — | — | 10,778 | |||||||||||||||||
| 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 cash flow hedges, net of tax | — | — | — | — | (299 | ) | (299 | ) | |||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | 16,593 | 16,593 | |||||||||||||||||
| Unrealized loss on marketable 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 | ||||||||||
| ASU 2016-09 Adoption | — | — | 681 | (556 | ) | — | 125 | ||||||||||||||||
| 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 | |||||||||||||||||
| Net income | — | — | — | 51,987 | — | 51,987 | |||||||||||||||||
| Repurchases of common stock | (9,392 | ) | (93 | ) | (1,099,907 | ) | — | — | (1,100,000 | ) | |||||||||||||
| Unrealized gain on cash flow hedges, net of tax | — | — | — | — | 1,928 | 1,928 | |||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | (11,767 | ) | (11,767 | ) | |||||||||||||||
| Unrealized loss on marketable 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 | ||||||||||
| ASU 2016-16 Adoption | — | — | — | 72,261 | — | 72,261 | |||||||||||||||||
| ASC 606 Adoption | — | — | — | 363,218 | — | 363,218 | |||||||||||||||||
| Common stock issued for employee stock-based awards | 1,495 | 15 | (15 | ) | — | — | — | ||||||||||||||||
| Shares surrendered by employees to pay taxes related to stock-based awards | (504 | ) | (5 | ) | (44,361 | ) | — | — | (44,366 | ) | |||||||||||||
| Common stock issued | — | — | (140 | ) | — | — | (140 | ) | |||||||||||||||
| Common stock issued for employee stock purchase plan | 275 | 3 | 17,612 | — | — | 17,615 | |||||||||||||||||
| Compensation expense from stock-based awards | — | — | 86,400 | — | — | 86,400 | |||||||||||||||||
| Net loss | — | — | — | (27,460 | ) | — | (27,460 | ) | |||||||||||||||
| Repurchases of common stock | (4,348 | ) | (44 | ) | (114,950 | ) | — | — | (114,994 | ) | |||||||||||||
| Unrealized loss on cash flow hedges, net of tax | — | — | — | — | (385 | ) | (385 | ) | |||||||||||||||
| Unrealized gain on net investment hedges, net of tax | — | — | — | — | 5,087 | 5,087 | |||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | (24,755 | ) | (24,755 | ) | |||||||||||||||
| Unrealized gain on marketable securities, net of tax | — | — | — | — | 530 | 530 | |||||||||||||||||
| Change in pension benefits, net of tax | — | — | — | — | (5,602 | ) | (5,602 | ) | |||||||||||||||
| Balance as of September 30, 2019 | 114,899 | $ | 1,149 | $ | 1,502,949 | $ | (191,390 | ) | $ | (110,710 | ) | $ | 1,201,998 |
The accompanying notes are an integral part of these consolidated financial statements.
F-8
PTC Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Basis of Presentation
Business
PTC Inc. was incorporated in 1985 and is headquartered in Boston, 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.
Changes in Presentation and Reclassifications
On October 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASC 606). Results for reporting periods beginning on or after October 1, 2018 are presented under 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). In connection with the adoption of ASC 606, we changed our presentation of the statement of operations to reflect revenue and associated costs as license, support and cloud services, and professional services. For the prior year period, all components of subscription licenses (including support) are included in license revenue. Prior to our adoption of ASC 606, revenues from subscription licenses and support thereon were not separated and were previously included in subscription revenue in our consolidated statement of operations since we did not have VSOE of fair value for support on subscription sales. In addition, revenue and costs associated with our cloud services, which are immaterial and were previously reported in subscription revenue, are classified as support and cloud services for all periods presented.
Effective at the beginning of fiscal 2019, in accordance with the adoption of ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, all non-service net periodic pension costs are now presented in Other income (expense), net on the Consolidated Statement of Operations. The prior period non-service net periodic pension cost amounts have been reclassified for comparability.
Effective at the beginning of fiscal 2019, in accordance with the adoption of ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, restricted cash is now included with cash and cash equivalents on the Consolidated Statements of Cash Flows. The prior period restricted cash amounts have been reclassified for comparability. As of September 30, 2019 and September 30, 2018, $1.1 million of restricted cash was included in other current assets.
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.
2. 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 non-monetary assets and liabilities at historical rates and record resulting exchange gains or losses in foreign currency net losses in the Consolidated Statements of Operations. We translate income
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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
Nature of Products and Services
Our sources of revenue include: (1) subscription, (2) perpetual license, (3) support for perpetual licenses and (4) professional services. Revenue is derived from the licensing of computer software products and from related support and/or professional services contracts. Effective October 1, 2018, we record revenues in accordance with the guidance provided by ASC 606, Revenue from Contracts with Customers. In accordance with ASC 606, revenue is recognized when a customer obtains control of promised products or services. The amount of revenue recognized reflects the consideration that we expect to be entitled to receive in exchange for these products or services. To achieve the core principle of this standard, we apply the following five steps:
(1) Identify the contract with the customer,
(2) identify the performance obligations in the contract,
(3) determine the transaction price,
(4) allocation the transaction price to performance obligations in the contract,
(5) recognize revenue when or as we satisfy a performance obligation.
We enter into contracts that include combinations of products, support and professional services, which are accounted for as separate performance obligations with differing revenue recognition patterns referenced below.
| Performance Obligation | When Performance Obligation is Typically Satisfied |
| Term-based subscriptions | |
| On-premise software licenses | Point in Time: Upon the later of when the software is made available or the subscription term commences |
| Support and cloud-based offerings | Over Time: Ratably over the contractual term; commencing upon the later of when the software is made available or the subscription term commences |
| Perpetual software licenses | Point in Time: when the software is made available |
| Support for perpetual software licenses | Over Time: Ratably over the contractual term |
| Professional services | Over time: As services are provided |
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.
Judgments and Estimates
Our contracts with customers for subscriptions typically include commitments to transfer term-based, on-premise software licenses bundled with support and/or cloud services. On-premise software is determined to be a distinct performance obligation from support which is sold for the same term of the subscription. For subscription arrangements which include cloud services, we assess whether the cloud component is highly interrelated with on-premise term-based software licenses. Other than a limited population of subscriptions, the cloud component is not currently deemed to be interrelated with the on-premise term software and, as a result, cloud services are accounted for as a distinct performance obligation from the software and support components of the subscription.
Judgment is required to allocate the transaction price to each performance obligation. We use the estimated standalone selling price method to allocate the transaction price for items that are not sold separately. The estimated standalone selling price is determined using all information reasonably available to us, including market conditions and other observable inputs. The corresponding revenues are recognized as the related performance obligations are satisfied. We determined that 50% to 55% of the estimated standalone selling price for subscriptions that contain distinct license and support
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performance obligations are attributable to software licenses and 45% to 50%, depending upon the product offering, is attributable to support for those licenses.
Our multi-year, non-cancellable on-premise subscription contracts provide customers with an annual right to exchange software within the original subscription with other software. Although the exchange right is limited to software products within a similar product grouping, the exchange right is not limited to products with substantially similar features and functionality as those originally delivered. We determined that this right to exchange previously delivered software for different software represents variable consideration to be accounted for as a liability. We have identified a standard portfolio of contracts with common characteristics and applied the expected value method of determining variable consideration associated with this right. Additionally, where there are isolated situations that are outside of the standard portfolio of contracts due to contract size, longer contract duration, or other unique contractual terms, we use the most likely amount method to determine the amount of variable consideration. In both circumstances, the variable consideration included in the transaction price is constrained to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. As of September 30, 2019, the total refund liability was $22.9 million, primarily associated with the annual right to exchange on-premise subscription software.
Practical Expedients
We elected certain practical expedients with the adoption of the new revenue standard. We do not account for significant financing components if the period between revenue recognition and when the customer pays for the products or services is one year or less. Additionally, we recognize revenue equal to the amount we have a right to invoice, when the amount corresponds directly with the value to the customer of our performance date.
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, 2019, the unrealized losses were temporary.
Non-Marketable Equity Investments
We account for non-marketable equity investments at cost, less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. We monitor non-marketable equity investments for events that could indicate that the investments are impaired, such as deterioration in the investee's financial condition and business forecasts, and lower valuations in recent or proposed financings. Changes in fair value of non-marketable equity investments are recorded in Other income (expense), net on the Consolidated Statements of Operations. The carrying value of our non-marketable equity investments is recorded in Other assets on the Consolidated Balance Sheets and totaled $9.4 million and $1.7 million as of September 30, 2019 and 2018, 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
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customer comprised more than 10% of our trade accounts receivable as of September 30, 2019 or 2018 or comprised more than 10% of our revenue for the years ended September 30, 2019, 2018 or 2017.
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 $0.7 million as of September 30, 2019, $0.6 million as of September 30, 2018, $1.1 million as of September 30, 2017 and $1.0 million as of September 30, 2016. Uncollectible trade accounts receivable written-off, net of recoveries, were $0.2 million, $1.0 million and $1.5 million in 2019, 2018 and 2017, respectively. Bad debt expense was $0.3 million, $0.5 million and $1.5 million in 2019, 2018 and 2017, respectively, and is included in general and administrative expenses in the accompanying Consolidated Statements of Operations.
Derivatives
Generally accepted accounting principles require all derivatives, whether designated in a hedging relationship or not, to be recorded on the balance sheet at fair value. Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Our most significant foreign currency exposures relate to Western European countries, Japan, China and Canada. Our foreign currency risk management strategy is principally designed to mitigate the future potential financial impact of changes in the U.S. dollar value of anticipated transactions and balances denominated in foreign currency, resulting from changes in foreign currency exchange rates. We enter into derivative transactions, specifically foreign currency forward contracts, to manage the exposures to foreign currency exchange risk to reduce earnings volatility. We do not enter into derivatives transactions for trading or speculative purposes. For a description of our non-designated hedge and cash flow hedge activities see Note 17. 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.
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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.
In 2017, 2018 and the first quarter of 2019 we designated certain foreign exchange forward contracts as cash flow hedges of Euro, Yen and SEK denominated intercompany forecast revenue transactions (supported by third party sales). No cash flow hedges were entered after the first quarter of 2019. All foreign exchange forward contracts were carried at fair value on the Consolidated Balance Sheets and had maximum duration of up to 15 months.
Cash flow hedge relationships were designated at inception, and effectiveness was assessed prospectively and retrospectively using monthly regression analysis. As the forward contracts were 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 reclassified into earnings in the same period during which the hedged transactions were recognized in earnings. Changes in the fair value of foreign exchange forward contracts due to changes in time value were included in the assessment of effectiveness. Our derivatives were not subject to any credit contingent features. We managed credit risk with counter-parties by trading among several counter-parties and we reviewed our counter-parties’ credit at least quarterly.
Net Investment Hedges
We translate balance sheet accounts of subsidiaries with foreign functional currencies into the U.S. Dollars using the exchange rate at each balance sheet date. Resulting translation adjustments are reported as a component of accumulated other comprehensive loss on the Consolidated Balance Sheet. We designate certain foreign exchange forward contracts as net investment hedges against exposure on translation of balance sheet accounts of Euro functional subsidiaries. Net investment hedges partially offset the impact of foreign currency translation adjustment recorded in accumulated other comprehensive loss on the Consolidated Balance Sheet. All foreign exchange forward contracts are carried at fair value on the Consolidated Balance Sheet and the maximum duration of foreign exchange forward contracts is approximately three months.
Net investment hedge relationships are designated at inception, and effectiveness is assessed retrospectively on a quarterly basis using the net equity position of Euro functional subsidiaries. As the forward contracts are highly effective in offsetting exchange rate exposure, we record changes in these net investment hedges in accumulated other comprehensive loss and subsequently reclassify them to foreign currency translation adjustment in accumulated other comprehensive loss at the time of forward contract maturity. Changes in the fair value of foreign exchange forward contracts due to changes in time value are excluded from the assessment of effectiveness. Our derivatives are not subject to any credit contingent features. We manage credit risk with 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
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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 2019, 2018 or 2017. In 2018, we acquired capitalized software of $0.8 million. These assets are included in acquired intangible assets in the accompanying Consolidated Balance Sheets.
Goodwill, Acquired Intangible Assets and Long-lived Assets
Goodwill is the amount by which the purchase price in a business acquisition exceeds the fair values of net identifiable assets on the date of purchase.
Goodwill is evaluated for impairment annually, as of the end of the third quarter, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Factors we consider important, on an overall company basis and reportable-segment basis, when applicable, that could trigger an impairment review include significant under-performance relative to historical or projected future operating results, significant changes in our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period and a reduction of our market capitalization relative to net book value.
Our annual goodwill impairment test is based on either a qualitative (Step 0) or quantitative (Step 1) assessment and is designed to 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 June 29,2019 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 $3.6 million, $2.9 million and $2.5 million in 2019, 2018 and 2017, 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)
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Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss), which includes foreign currency translation adjustments, changes in unrecognized actuarial gains and losses (net of tax) related to pension benefits, unrealized gains and losses on hedging instruments and unrealized gains and losses on marketable securities. For the purposes of comprehensive income disclosures, we do not record tax provisions or benefits for the net changes in the foreign currency translation adjustment, as we intend to reinvest permanently undistributed earnings of our foreign subsidiaries. Accumulated other comprehensive loss is reported as a component of stockholders’ equity and, as of September 30, 2019 and 2018, was comprised of cumulative translation adjustment losses of $91.2 million and $66.4 million, respectively, unrecognized actuarial losses related to pension benefits of $34.9 million ($24.8 million net of tax) and $27.0 million ($19.2 million net of tax), respectively, unrecognized gain on marketable securities of $0.1 million and unrecognized loss of $0.4 million, respectively. Cash flow hedges were discontinued in 2019 and in 2018 unrecognized gain on cash flow hedging instruments was $0.4 million ($0.4 million net of tax). In 2019 we started a net investment hedge program and had accumulated net gain of $6.8 million ($5.1 million net of tax).
Earnings (loss) 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, 2019, approximately 1.0 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:
| (in thousands, except per share data) | Year ended September 30, | ||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Net income (loss) | $ | (27,460 | ) | $ | 51,987 | $ | 6,239 | ||||
| Weighted average shares outstanding | 117,724 | 116,390 | 115,523 | ||||||||
| Dilutive effect of employee stock options, restricted shares and restricted stock units | — | 1,768 | 1,833 | ||||||||
| Diluted weighted average shares outstanding | 117,724 | 118,158 | 117,356 | ||||||||
| Basic earnings (loss) per share | $ | (0.23 | ) | $ | 0.45 | $ | 0.05 | ||||
| Diluted earnings (loss) per share | $ | (0.23 | ) | $ | 0.44 | $ | 0.05 |
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 12. 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 8. Income Taxes for detail of the tax benefit related to stock-based compensation recognized in the Consolidated Statements of Operations.
Recently Adopted Accounting Pronouncements
Revenue Recognition
On October 1, 2018, we adopted ASC 606, which supersedes substantially all existing revenue recognition guidance under U.S. GAAP. We adopted ASC 606 using the modified retrospective method, under which the cumulative effect of initially applying ASC 606 was recorded as a reduction to accumulated deficit with no restatement of comparative periods.
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
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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, more judgment and estimates are required within the revenue recognition process than is required under previous 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.
The most significant impact of ASC 606 relates to accounting for our subscription arrangements that include term-based on-premise software licenses bundled with support. Under previous GAAP (ASC 605, through September 30, 2018), revenue attributable to these subscription licenses was 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 recognize as revenue a portion of the subscription fee upon delivery of the software license. Revenue recognition related to our perpetual licenses and related support contracts, professional services and cloud offerings is substantially unchanged, with support and cloud revenue being recorded ratably over the contract term. 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.
Certain of our multi-year subscription contracts with start dates on or after October 1, 2018 contain a limited annual cancellation right. For such cancellable subscription contracts, we consider each annual period a discrete contract. We recognize the license portion at the beginning of each one-year contract period and the support portion ratably over each one-year contractual period. Early in the fourth quarter of 2019, we discontinued offering the cancellation right for substantially all new contracts.
Under the modified retrospective method, we evaluated each contract that was ongoing on October 1, 2018 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 was recast under ASC 606 as if the revenue had been recognized in prior periods. Under this transition method, we did not adjust historical reported revenue amounts. Instead, the revenue that would have been recognized under this method prior to the adoption date was recorded as an adjustment to accumulated deficit and will not be recognized as revenue in future periods as previously expected. Because license revenue associated with subscription contracts is recognized up front instead of over time under ASC 606, a material portion of our deferred revenue was adjusted to accumulated deficit upon adoption.
Another significant provision under ASC 606 includes the capitalization and amortization of costs associated with obtaining a contract, such as sales commissions. Prior to October 1, 2018, we expensed commissions 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.
Refer to Note 3. Revenue from Contracts with Customers for further detail about the impact of the adoption of ASC 606 and further disclosures.
Income Taxes
In October 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. 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. We adopted this standard beginning in the first quarter of 2019 using the modified retrospective method with a cumulative effect adjustment to accumulated deficit of $72.3 million, with a corresponding increase of $75.3 million to deferred tax assets, a $6.0 million decrease to income tax assets and a $3.0 million decrease to income tax liabilities. The adjustment primarily relates to deductible amortization of intangible assets in Ireland. Post adoption, our effective tax rate no longer includes the benefit of this amortization.
Pension Accounting
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In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which provides guidance on the capitalization, presentation and disclosure of net benefit costs related to post-retirement benefit plans. We adopted the new guidance in the first quarter of 2019 on a full retrospective basis, which resulted in the retrospective reclassification of $0.6 million and $0.9 million of non-service net periodic pension cost for the years ended September 30, 2018 and 2017, respectively, from line items within cost of revenue and operating expenses into Other income (expense), net on the Consolidated Statement of Operations.
Equity Investments
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities and requires equity securities to be measured at fair value, unless the measurement alternative method has been elected for equity investments without readily determinable fair values. Adoption of this guidance in the first quarter of fiscal 2019 did not have a material impact on our consolidated financial statements.
Restricted Cash
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The new guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Statement of Cash Flows. Adoption of this guidance in the first quarter of fiscal 2019 did not have a material impact on our consolidated financial statements.
Pending Accounting Pronouncements
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. We will adopt ASU 2016-02 effective October 1, 2019 (the effective date).
Financial information for the comparative periods will not be recast. We intend to elect the available practical expedients, including carrying forward the classification of our existing leases and our assessment of their remaining lease terms. Our operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon our adoption of the standard.
ASU 2016-02 will materially increase our total assets and total liabilities that we report relative to such amounts prior to adoption. We expect to recognize operating lease liabilities between $233 million to $238 million and right-of-use assets between $162 million to $167 million. The expected operating lease liabilities are calculated based on the present value of the remaining minimum lease payments for existing operating leases as of September 30, 2019. The expected right-of-use assets reflect adjustments for derecognition of deferred leasing incentives.
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.
3. Revenue from Contracts with Customers
Upon adoption of ASC 606, we recorded a decrease in accumulated deficit of $432.2 million ($363.2 million, net of tax) due to the cumulative effect of the ASC 606 adoption, with the impact primarily
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derived from revenue related to on-premise subscription software licenses, net of tax due to the cumulative effect of the ASC 606 adoption, with an impact from revenue adjustments of $366.8 million primarily derived from acceleration of revenue related to on-premise subscription software licenses. The revenue related adjustment was reflected on the adjusted opening balance sheet as an increase to unbilled receivables of $218.5 million, decrease to deferred revenue of $143.2 million and an increase to other assets of $5.1 million.
Contract Assets and Contract Liabilities
| (in thousands) | As Reported | As Adjusted | |||||
| September 30, 2019 | October 1, 2018 | ||||||
| Contract asset | $ | 21,038 | $ | 25,037 | |||
| Deferred revenue | $ | 396,632 | $ | 356,263 |
As of September 30, 2019, our contract assets are expected to be transferred to receivables within the next 12 months and therefore are included in other current assets. Approximately $17.8 million of the October 1, 2018 contract asset balance was transferred to receivables during the year ended September 30, 2019 as a result of the right to payment becoming unconditional. The majority of both the contract asset balance and the amounts transferred to receivables relates to two large professional services contracts with invoicing terms based on performance milestones. Additions to contract assets of approximately $13.8 million related to revenue recognized in the period, net of billings. There were no impairments of contract assets during the year ended September 30, 2019.
During the year ended September 30, 2019, $333.7 million of revenue that was included in the deferred revenue opening balance was recognized, respectively. There were additional deferrals of $374.1 million, which were primarily related to new billings. Adjusted opening balance of total short- and long-term receivables as of October 1, 2018 under ASC 606 was $503.7 million, compared to total short- and long-term receivables as of September 30, 2019 under ASC 606 of $412.5 million.
Costs to Obtain or Fulfill a Contract
The new revenue recognition standard requires the capitalization of certain incremental costs of obtaining a contract, which impacts the period in which we record our commission expense. Prior to our adoption of the new revenue standard, we recognized commissions expense as incurred. Under the new revenue recognition standard, we are required to recognize these expenses over the period of benefit associated with these costs. This results in a deferral of certain commission expenses each period. Upon adoption, we reduced our accumulated deficit by $70.0 million and recognized an offsetting asset for deferred commission related to contracts that were not completed prior to October 1, 2018.
We recognize an asset for the incremental costs of obtaining a contract with a customer if the benefit of those costs is expected to be longer than one year. These deferred costs are amortized proportionately related to revenue over five years, which is generally longer than the term of the initial contract because of anticipated renewals as commissions for renewals are not commensurate with commissions related to our initial contracts. As of September 30, 2019, deferred costs of $27.7 million were included in other current assets and $64.8 million were included in other assets (non-current).
As the revenue recognition pattern has changed under ASC 606, the recognition of costs to fulfill contracts has also changed to match this pattern of recognition. As of October 1, 2018, this resulted in a $2.8 million increase in our accumulated deficit with recognition of an offsetting current liability.
Remaining Performance Obligations
Our contracts with customers include amounts allocated to performance obligations that will be satisfied at a later date. The amounts include additional performance obligations that are not yet recorded in the consolidated balance sheets. As of September 30, 2019, amounts allocated to these additional contractual obligations are $1,021 million, of which we expect to recognize approximately 90% over the next 24 months, with the remaining amount thereafter.
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Disaggregation of Revenue
| Year Ended September 30, | ||||||||||||||||
| As Reported ASC 606 | ASC 605 | As Reported ASC 605 | As Reported ASC 605 | |||||||||||||
| Revenue (in thousands) | 2019 | 2019 | 2018 | 2017 | ||||||||||||
| Subscription license | $ | 253,698 | ||||||||||||||
| Subscription support & cloud services | 348,452 | |||||||||||||||
| Total subscription | 602,150 | $ | 667,597 | $ | 482,027 | $ | 279,246 | |||||||||
| Perpetual support | 415,248 | 411,030 | 496,826 | 574,680 | ||||||||||||
| Total recurring revenue | 1,017,398 | 1,078,627 | 978,853 | 853,926 | ||||||||||||
| Perpetual license | 70,702 | 72,191 | 109,634 | 133,390 | ||||||||||||
| Total software revenue | 1,088,100 | 1,150,818 | 1,088,487 | 987,316 | ||||||||||||
| Professional services | 167,531 | 160,676 | 153,337 | 176,723 | ||||||||||||
| Total revenue | $ | 1,255,631 | $ | 1,311,494 | $ | 1,241,824 | $ | 1,164,039 |
For further disaggregation of revenue by geographic region and product group see Note 18. Segment and Geographic Information.
Transition Disclosures
In accordance with the modified retrospective method transition requirements, we will present the financial statement line items impacted and adjusted to compare to presentation under ASC 605 for each of the interim and annual periods during the first year of adoption of ASC 606.
Subsequent to the adoption of ASC 606 and the issuance of our unaudited Condensed Consolidated Financial Statements for the three-months ended December 29, 2018, six-months ended March 30, 2019 and nine-months ended June 29, 2019, PTC’s management identified errors in the application of ASC 606 for the calculation of the decrease in accumulated deficit upon adoption, as well as adoption balances for contract assets and deferred revenue as of October 1, 2018. The impact to our accumulated deficit was $0.3 million ($4.2 million, net of tax). The identified errors appeared only in the Notes to Condensed Consolidated Financial Statements and not in any of the individual Consolidated Financial Statements. Based on an analysis of the relevant quantitative and qualitative factors, we determined the impact was not material to any prior interim period. Therefore, management concluded that amendments of previously filed reports are not required.
We corrected the errors as of the adoption date by revising the following amounts presented in the Notes to Condensed Consolidated Financial Statements: 1) contract assets as of October 1, 2018 has been changed from $26.2 million to $25.0 million; 2) deferred revenue as of October 1, 2018 has been changed from $357.5 million to $356.3 million; 3) the decrease in accumulated deficit has been changed from $431.9 million ($367.4 million, net of tax) to $432.2 million ($363.2 million, net of tax).
F-19
The following tables present our Balance Sheets and Statements of Operations as reported under ASC 606 for the current period with comparative periods reported under ASC 605:
| (in thousands) | September 30, | ||||||||||
| As Reported ASC 606 | ASC 605 | As Reported ASC 605 | |||||||||
| 2019 | 2019 | 2018 | |||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 269,579 | $ | 269,579 | $ | 259,946 | |||||
| Short-term marketable securities | 27,891 | 27,891 | 25,836 | ||||||||
| Accounts receivable (1) | 372,743 | 107,921 | 129,297 | ||||||||
| Prepaid expenses | 52,701 | 54,384 | 48,997 | ||||||||
| Other current assets (2) | 59,707 | 199,513 | 169,708 | ||||||||
| Total current assets | 782,621 | 659,288 | 633,784 | ||||||||
| Property and equipment, net | 105,531 | 105,531 | 80,613 | ||||||||
| Goodwill | 1,238,179 | 1,238,179 | 1,182,457 | ||||||||
| Acquired intangible assets, net | 169,949 | 169,949 | 200,202 | ||||||||
| Long-term marketable securities | 29,544 | 29,544 | 30,115 | ||||||||
| Deferred tax assets (3) | 198,634 | 233,026 | 165,566 | ||||||||
| Other assets (4) | 140,130 | 36,391 | 36,285 | ||||||||
| Total assets | $ | 2,664,588 | $ | 2,471,908 | $ | 2,329,022 | |||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 42,442 | $ | 42,442 | $ | 53,473 | |||||
| Accrued expenses and other current liabilities (5) | 104,028 | 78,007 | 74,388 | ||||||||
| Accrued compensation and benefits | 88,769 | 88,769 | 101,784 | ||||||||
| Accrued income taxes (3) | 17,407 | 21,336 | 18,044 | ||||||||
| Deferred revenue (6) | 385,509 | 569,171 | 487,590 | ||||||||
| Total current liabilities | 638,155 | 799,725 | 735,279 | ||||||||
| Long-term debt | 669,134 | 669,134 | 643,268 | ||||||||
| Deferred tax liabilities (3) | 41,683 | 14,644 | 5,589 | ||||||||
| Deferred revenue (6) | 11,123 | 9,577 | 11,852 | ||||||||
| Other liabilities | 102,495 | 102,495 | 58,445 | ||||||||
| Total liabilities | 1,462,590 | 1,595,575 | 1,454,433 | ||||||||
| Stockholders’ equity: | |||||||||||
| Preferred stock | — | — | — | ||||||||
| Common stock | 1,149 | 1,149 | 1,180 | ||||||||
| Additional paid-in capital | 1,502,949 | 1,502,949 | 1,558,403 | ||||||||
| Accumulated deficit | (191,390 | ) | (524,169 | ) | (599,409 | ) | |||||
| Accumulated other comprehensive loss | (110,710 | ) | (103,596 | ) | (85,585 | ) | |||||
| Total stockholders’ equity | 1,201,998 | 876,333 | 874,589 | ||||||||
| Total liabilities and stockholders’ equity | $ | 2,664,588 | $ | 2,471,908 | $ | 2,329,022 |
The changes in balance sheet accounts due to the adoption of ASC 606 are due primarily to the following:
| (1) | Up front license recognition under our subscription contracts and billed but uncollected support and subscription receivables that had corresponding deferred revenue, which were included in other current assets prior to our adoption of ASC 606. |
| (2) | Support and subscription receivables previously included in other current assets described in note (1) above, offset by contract assets and capitalized commission costs. Under ASC 605, unearned billed deferred revenue, which is not yet paid is included in other current assets. Billed, but uncollected support and subscription amounts included in other current assets as of September 30, 2019 and 2018 were $185.7 million and $153.6 million, respectively. |
| (3) | The tax effect of the accumulated deficit impact related to the acceleration of revenue and deferral of costs (primarily commissions). |
| (4) | The long-term portion of unbilled receivables due to the acceleration of license revenue on multi-year subscription contracts and the long-term portion of capitalized commission costs. |
(5) Refund liability, primarily associated with the annual right to exchange on-premise subscription software described above in Judgments and Estimates.
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(6) The decrease in deferred revenue recorded to accumulated deficit upon adoption of ASC 606 primarily related to on-premise subscription software licenses.
| (in thousands) | September 30, | ||||||||||||||
| As Reported ASC 606 | ASC 605 | As Reported ASC 605 | As Reported ASC 605 | ||||||||||||
| 2019 | 2019 | 2018 | 2017 | ||||||||||||
| Revenue: | |||||||||||||||
| License (1) | $ | 324,400 | $ | 666,770 | $ | 529,265 | $ | 356,326 | |||||||
| Support and cloud services (1) | 763,700 | 484,048 | 559,222 | 630,990 | |||||||||||
| Total software revenue | 1,088,100 | 1,150,818 | 1,088,487 | 987,316 | |||||||||||
| Professional services | 167,531 | 160,676 | 153,337 | 176,723 | |||||||||||
| Total revenue | 1,255,631 | 1,311,494 | 1,241,824 | 1,164,039 | |||||||||||
| Cost of revenue: | |||||||||||||||
| Cost of license revenue | 51,936 | 50,231 | 47,737 | 66,841 | |||||||||||
| Cost of support and cloud services revenue | 133,478 | 132,987 | 135,106 | 110,931 | |||||||||||
| Total cost of software revenue | 185,414 | 183,218 | 182,843 | 177,772 | |||||||||||
| Cost of professional service revenue | 139,964 | 134,936 | 143,659 | 150,730 | |||||||||||
| Total cost of revenue: (2) | 325,378 | 318,154 | 326,502 | 328,502 | |||||||||||
| Gross margin | 930,253 | 993,340 | 915,322 | 835,537 | |||||||||||
| Operating expenses: | |||||||||||||||
| Sales and marketing (3) | 417,449 | 441,958 | 414,764 | 372,702 | |||||||||||
| Research and development | 246,888 | 246,888 | 249,786 | 236,028 | |||||||||||
| General and administrative | 127,919 | 127,919 | 143,045 | 144,991 | |||||||||||
| Amortization of acquired intangible assets | 23,841 | 23,841 | 31,350 | 32,108 | |||||||||||
| Restructuring and other charges, net | 51,114 | 51,114 | 3,764 | 7,942 | |||||||||||
| Total operating expenses | 867,211 | 891,720 | 842,709 | 793,771 | |||||||||||
| Operating income | 63,042 | 101,620 | 72,613 | 41,766 | |||||||||||
| Interest expense | (43,047 | ) | (43,047 | ) | (41,673 | ) | (42,400 | ) | |||||||
| Other income (expense), net | 305 | 131 | (2,284 | ) | (772 | ) | |||||||||
| Income before income taxes | 20,300 | 58,704 | 28,656 | (1,406 | ) | ||||||||||
| Provision (benefit) for income taxes (4) | 47,760 | 55,725 | (23,331 | ) | (7,645 | ) | |||||||||
| Net income (loss) | $ | (27,460 | ) | $ | 2,979 | $ | 51,987 | $ | 6,239 |
| (1) | The reduction in license revenue and increase in support revenue is a result of the support component of subscription licenses which is included in license revenue under ASC 605. For the year ended September 30, 2019, license revenue decreased by approximately $215.0 million as a result of the revenue recorded to accumulated deficit. This was partially offset by approximately $153.5 million as a result of revenue recognized in future fiscal periods. |
(2) Cost of revenue under ASC 606 is higher than under ASC 605 due to the treatment of deferred professional services costs under the new accounting guidance, partially offset by the timing of revenue recognition under ASC 606 resulting in lower associated royalty costs.
(3) Sales and marketing costs are lower under ASC 606 due to the amortization of commissions costs capitalized upon adoption of ASC 606, offset by the deferral of ongoing commission expenses under the new accounting guidance.
(4) The benefit for income taxes under ASC 606 includes indirect effects of the adoption.
4. Restructuring and Other Charges
Restructuring Charges (Credits)
Restructuring and other charges, net includes restructuring charges (credits) and headquarters relocation charges.
In 2019, we recorded restructuring and other charges of $51.1 million, of which $48.6 million is attributable to workforce realignment and facility closures (including $0.2 million related to prior facility restructuring actions) and $2.5 million is attributable to headquarters relocation charges. We made cash payments related to restructuring charges of $24.7 million ($23.6 million related to the 2019 restructuring and $1.1 million related to the 2016 restructuring).
In January 2019, we relocated our worldwide headquarters to the Boston Seaport District. Our prior headquarters lease will not expire until November 2022, and we are seeking to sublease that space. As a result, we will bear overlapping rent obligations for those premises and, in 2019, we recorded restructuring
F-21
charges of approximately $32.7 million, based on the net present value of remaining lease commitments net of estimated sublease income. Restructuring charges and estimated cash outflows could increase if we are unable to sublease our prior headquarters as we expect. Other costs associated with the move were recorded as incurred.
In October 2018, we initiated a restructuring plan to realign our workforce to shift investment to support Industrial Internet of Things and Augmented Reality strategic high growth opportunities. As this was a realignment of resources rather than a cost-savings initiative, it did not result in significant cost savings. The restructuring plan was completed in the first quarter of 2019 and resulted in restructuring charges of $15.7 million for termination benefits associated with approximately 240 employees, substantially all of which has been paid.
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).
The following table summarizes restructuring charges reserve activity for the three years ended September 30, 2019:
| (in thousands) | Employee Severance and Related Benefits | Facility Closures and Other Costs | Consolidated Total | ||||||||
| 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 | ||||||||
| Charges (credits) to operations | 15,704 | 32,908 | 48,612 | ||||||||
| Cash disbursements | (15,402 | ) | (9,319 | ) | (24,721 | ) | |||||
| Other non-cash charges | — | 4,812 | 4,812 | ||||||||
| Foreign currency impact | (4 | ) | (28 | ) | (32 | ) | |||||
| Balance, September 30, 2019 | $ | 298 | $ | 30,788 | $ | 31,086 |
Of the accrual for facility closures and related costs, as of September 30, 2019, $11.9 million is included in accrued expenses and other current liabilities and $18.9 million is included in other liabilities in the Consolidated Balance Sheets. The accrual for employee severance and related benefits is included in accrued compensation and benefits in the Consolidated Balance Sheets.
Of the accrual for facility closures and related costs, as of 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.
In determining the amount of the facilities accrual, we are required to estimate such factors as future vacancy rates, the time required to sublet properties and sublease rates. These estimates are reviewed quarterly based on known real estate market conditions and the credit-worthiness of subtenants and may result in revisions to established facility reserves. The accrual is based on the net present value of remaining lease commitments net of estimated sublease income. We had $30.8 million accrued as of September 30, 2019 related to excess facilities (compared to $2.4 million at September 30, 2018),
F-22
representing discounted lease commitments with agreements expiring at various dates through 2023 of approximately $38.4 million, net of committed sublease income of $3.9 million and uncommitted, estimated sublease income of $3.7 million.
Other - Headquarters Relocation Charges
Headquarters relocation charges represent other expenses associated with exiting our prior Needham headquarters facility and relocating to our new worldwide headquarters in the Boston Seaport District. In 2019 and 2018 we recorded $1.9 million and $4.8 million, respectively, of accelerated depreciation expense related to shortening the estimated useful lives of leasehold improvements related to the Needham location. Headquarters relocation charges for 2019 also include $0.6 million of rental expense for the Needham facility that overlapped with rental expense for the new Seaport headquarters.
5. Property and Equipment
Property and equipment consisted of the following:
| (in thousands) | September 30, | ||||||
| 2019 | 2018 | ||||||
| Computer hardware and software | $ | 313,967 | $ | 324,765 | |||
| Furniture and fixtures | 28,445 | 20,737 | |||||
| Leasehold improvements | 97,657 | 47,272 | |||||
| Gross property and equipment | 440,069 | 392,774 | |||||
| Accumulated depreciation and amortization | (334,538 | ) | (312,161 | ) | |||
| Net property and equipment | 105,531 | 80,613 |
Depreciation expense was $26.7 million, $29.4 million and $28.0 million in 2019, 2018 and 2017, respectively.
6. Acquisitions
Acquisition-related costs were $3.1 million, $0.5 million and $1.6 million in 2019, 2018 and 2017, 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. For all acquisitions made in 2019, our results of operations, if presented on a pro forma basis, would not differ materially from our reported results.
Frustum
On November 19, 2018, we acquired Frustum Inc. for $69.5 million (net of cash acquired of $0.7 million). We financed the acquisition with borrowings under our credit facility. Frustum is engaged in next-generation computer-aided design, including generative design, an approach that leverages artificial intelligence to generate design options. At the time of the acquisition, Frustum had approximately 12 employees and historical annualized revenues were not material. The acquisition of Frustum did not add material revenue in 2019.
The acquisition of Frustum has been accounted for as a business combination. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition date. The fair values of intangible assets were based on valuations using a discounted cash flow model which requires the use of significant estimates and assumptions, including estimating future revenues and costs. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill.
The purchase price allocation resulted in $53.7 million of goodwill, $17.9 million of purchased software and $2.1 million of other net liabilities. The acquired technology is being amortized over a useful life of 15 years based on the expected benefit pattern of the assets. The acquired goodwill was allocated to our software products segment and will not be deductible for income tax purposes. The
resulting amount of goodwill reflects the expected value that will be created by integrating Frustum generative design technology into our CAD solutions.
Other Acquisitions
In the third quarter of 2019, we completed two acquisitions for $17.3 million (net of cash acquired of $0.3 million). At the time of acquisitions, the combined companies had approximately 95 employees and historical annualized revenues were not material. These acquisitions did not add material revenue in 2019.
The acquisitions were accounted for as business combinations. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition dates. The fair values of intangible assets were based on valuations using a discounted cash flow model which requires the use of significant estimates and assumptions, including estimating future revenues and costs. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill.
The purchase price allocation resulted in $12.6 million of goodwill, $3.4 million of customer relationships and $1.3 million of other net assets. The acquired goodwill was allocated to our services segment and will not be deductible for income tax purposes.
7. 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, 2019, goodwill and acquired intangible assets in the aggregate attributable to our Software Products and Professional Services segment was $1,362.4 million and $45.7 million, respectively. 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.
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, 2019 and concluded that no impairment charge was required as of that date. We completed our annual goodwill impairment review as of June 29, 2019 based on a qualitative assessment. Our qualitative assessment included company specific (financial performance and long-range plans), industry, and macroeconomic factors, and consideration of the fair value of each reporting unit relative to its carrying value at 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, 2019, there have not been any triggering events or changes in circumstances that indicate that the carrying values of goodwill or acquired intangible assets may not be recoverable.
F-23
Goodwill and acquired intangible assets consisted of the following:
| (in thousands) | September 30, 2019 | September 30, 2018 | |||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Book Value | Gross Carrying Amount | Accumulated Amortization | Net Book Value | ||||||||||||||||||
| Goodwill (not amortized) | $ | 1,238,179 | $ | 1,182,457 | |||||||||||||||||||
| Intangible assets with finite lives (amortized) (1): | |||||||||||||||||||||||
| Purchased software | $ | 377,359 | $ | 278,144 | $ | 99,215 | $ | 362,679 | $ | 254,059 | $ | 108,620 | |||||||||||
| Capitalized software | 22,877 | 22,877 | — | 22,877 | 22,877 | — | |||||||||||||||||
| Customer lists and relationships | 355,931 | 288,828 | 67,103 | 357,586 | 270,272 | 87,314 | |||||||||||||||||
| Trademarks and trade names | 18,891 | 15,260 | 3,631 | 19,054 | 14,786 | 4,268 | |||||||||||||||||
| Other | 3,910 | 3,910 | — | 4,003 | 4,003 | — | |||||||||||||||||
| $ | 778,968 | $ | 609,019 | $ | 169,949 | $ | 766,199 | $ | 565,997 | $ | 200,202 | ||||||||||||
| Total goodwill and acquired intangible assets | $ | 1,408,128 | $ | 1,382,659 |
(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, 2018 to September 30, 2019 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:
| (in thousands) | Software Products | Professional Services | Total | ||||||||
| 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 | |||||
| Frustum acquisition | 53,673 | — | 53,673 | ||||||||
| Other acquisitions | — | 12,645 | 12,645 | ||||||||
| Foreign currency translation adjustments | (10,329 | ) | (267 | ) | (10,596 | ) | |||||
| Balance, September 30, 2019 | $ | 1,196,064 | $ | 42,115 | $ | 1,238,179 |
The aggregate amortization expense for intangible assets with finite lives recorded for the years ended September 30, 2019, 2018 and 2017 was reflected in our Consolidated Statements of Operations as follows:
| (in thousands) | Year ended September 30, | ||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Amortization of acquired intangible assets | $ | 23,841 | $ | 31,350 | $ | 32,108 | |||||
| Cost of software revenue | 27,307 | 26,706 | 26,621 | ||||||||
| Total amortization expense | $ | 51,148 | $ | 58,056 | $ | 58,729 |
The estimated aggregate future amortization expense for intangible assets with finite lives remaining as of September 30, 2019 is $49.0 million for 2020, $43.8 million for 2021, $30.8 million for 2022, $19.0 million for 2023, $8.4 million for 2024 and $18.9 million thereafter.
8. Income Taxes
Our income (loss) before income taxes consisted of the following:
F-24
| (in thousands) | Year ended September 30, | ||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Domestic | $ | (112,077 | ) | $ | (114,591 | ) | $ | (140,150 | ) | ||
| Foreign | 132,377 | 143,247 | 138,744 | ||||||||
| Total income (loss) before income taxes | $ | 20,300 | $ | 28,656 | $ | (1,406 | ) |
Our (benefit) provision for income taxes consisted of the following:
| (in thousands) | Year ended September 30, | ||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Current: | |||||||||||
| Federal | $ | 13,130 | $ | 3,009 | $ | 2,423 | |||||
| State | (945 | ) | 2,003 | 340 | |||||||
| Foreign | 33,867 | 28,213 | 17,881 | ||||||||
| 46,052 | 33,225 | 20,644 | |||||||||
| Deferred: | |||||||||||
| Federal | 22,911 | (12,594 | ) | 4,911 | |||||||
| State | 1,759 | (445 | ) | 877 | |||||||
| Foreign | (22,962 | ) | (43,517 | ) | (34,077 | ) | |||||
| 1,708 | (56,556 | ) | (28,289 | ) | |||||||
| Total provision (benefit) for income taxes | $ | 47,760 | $ | (23,331 | ) | $ | (7,645 | ) |
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, | |||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||
| Statutory federal income tax rate | $ | 4,263 | 21 | % | $ | 7,021 | 25 | % | $ | (492 | ) | (35 | )% | |||||||
| Change in valuation allowance | 66,417 | 327 | % | (181,047 | ) | (632 | )% | 17,334 | 1,233 | % | ||||||||||
| Transition impact of U.S. Tax Act | — | — | % | 126,122 | 440 | % | — | — | % | |||||||||||
| Federal rate change | — | — | % | 69,648 | 243 | % | — | — | % | |||||||||||
| State income taxes, net of federal tax benefit | 607 | 3 | % | 2,401 | 8 | % | 627 | 45 | % | |||||||||||
| Federal research and development credits | (3,731 | ) | (18 | )% | (3,058 | ) | (11 | )% | (2,182 | ) | (155 | )% | ||||||||
| Uncertain tax positions | 2,611 | 13 | % | (4,646 | ) | (16 | )% | (3,840 | ) | (273 | )% | |||||||||
| Foreign rate differences | (26,952 | ) | (133 | )% | (38,743 | ) | (135 | )% | (27,932 | ) | (1,987 | )% | ||||||||
| Foreign tax on U.S. provision | 6,547 | 32 | % | 2,736 | 10 | % | 2,737 | 195 | % | |||||||||||
| Excess tax benefits from restricted stock | (5,940 | ) | (29 | )% | (11,641 | ) | (41 | )% | — | — | % | |||||||||
| Audits and settlements | 51 | — | % | 2,352 | 8 | % | — | — | % | |||||||||||
| U.S. permanent items | 2,483 | 12 | % | 5,408 | 19 | % | 6,030 | 429 | % | |||||||||||
| BEAT | 1,759 | 9 | % | — | — | % | — | — | % | |||||||||||
| GILTI, net of foreign tax credits | 6,170 | 31 | % | — | — | % | — | — | % | |||||||||||
| Foreign-Derived Intangible Income (FDII) | (6,409 | ) | (32 | )% | — | — | % | — | — | % | ||||||||||
| Other, net | (116 | ) | (1 | )% | 116 | 1 | % | 73 | 4 | % | ||||||||||
| Benefit for income taxes | $ | 47,760 | 235 | % | $ | (23,331 | ) | (81 | )% | $ | (7,645 | ) | (544 | )% |
In 2019, our tax rate is higher than the statutory federal income tax rate of 21% due in large part, to the scheduling of the reversal of existing temporary differences resulting in deferred tax liabilities that cannot be offset against deferred tax assets requiring an increase to the U.S. valuation allowance, U.S. tax reform (as described below) and foreign withholding taxes, an obligation of the U.S. parent. This is offset by our corporate structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate, the excess tax benefit related to stock-based compensation and the indirect effects of the adoption of ASC 606. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland. In 2019 the foreign rate differential predominantly relates to these Irish earnings.
In 2018, our effective tax rate was lower than the statutory federal income tax rate due to U.S. tax
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reform, as described below. In 2018, and 2017, 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 and 2017, 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 losses, tax credit carryforwards, capitalized research and development and deferred revenue. As a result, we have not recorded a benefit related to ongoing U.S. losses. Our foreign rate differential in 2018, and 2017 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, a benefit of approximately $28 million. In 2017, 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. We recorded foreign withholding taxes, an obligation of the U.S. parent of $2.7 million in 2018 and $2.0 million in 2017.
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 ended 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. The Tax Act includes a provision to tax global intangible low-tax income (GILTI) of foreign subsidiaries, a deduction for Foreign-Derived Intangible Income (FDII), and the base erosion anti-abuse tax (BEAT) measure that taxes certain payments between a U.S. corporation and its foreign subsidiaries. The GILTI, FDII and BEAT provisions were effective for us beginning October 1, 2018. Our accounting policy is to treat tax on GILTI as a current period cost included in tax expense in the year incurred.
In 2018, we provided no federal income taxes payable as a result of the deemed repatriation of undistributed earnings as the tax was offset by a combination of current year losses and existing attributes which had a full valuation allowance recorded against the related deferred tax assets. In 2018, we recorded a state income taxes payable on the deemed repatriation of $1.7 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 U.S. Securities and Exchange Commission issued rules that allow for a period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. We finalized recording the impacts of the Tax Act in the quarter ended December 29, 2018 and did not record any significant adjustments.
At September 30, 2019 and 2018, income taxes payable and income tax accruals recorded on the accompanying Consolidated Balance Sheets were $23.4 million ($17.4 million in accrued income taxes, $0.4 million in other current liabilities and $5.6 million in other liabilities) and $24.2 million ($18.0 million in accrued income taxes, $1.8 million in other current liabilities and $4.4 million in other liabilities), respectively. At September 30, 2019 and 2018, prepaid taxes recorded in prepaid expenses on the accompanying Consolidated Balance Sheets were $5.3 million and $4.8 million, respectively. We made net income tax payments of $38.9 million, $22.6 million and $35.4 million in 2019, 2018 and 2017, respectively.
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The significant temporary differences that created deferred tax assets and liabilities are shown below:
| (in thousands) | September 30, | ||||||
| 2019 | 2018 | ||||||
| Deferred tax assets: | |||||||
| Net operating loss carryforwards | $ | 26,462 | $ | 31,329 | |||
| Foreign tax credits | — | 2,201 | |||||
| Capitalized research and development | 34,560 | 20,999 | |||||
| Pension benefits | 14,838 | 12,296 | |||||
| Prepaid expenses | 41,739 | 30,614 | |||||
| Deferred revenue | 9,899 | 33,886 | |||||
| Stock-based compensation | 12,306 | 11,622 | |||||
| Other reserves not currently deductible | 20,986 | 13,588 | |||||
| Amortization of intangible assets | 168,376 | 96,841 | |||||
| Research and development and other tax credits | 49,995 | 55,760 | |||||
| Fixed assets | 45,450 | 4,364 | |||||
| Capital loss carryforward | 31,248 | 33,024 | |||||
| Deferred interest | 10,864 | 13,057 | |||||
| Other | 1,623 | 1,152 | |||||
| Gross deferred tax assets | 468,346 | 360,733 | |||||
| Valuation allowance | (177,663 | ) | (141,950 | ) | |||
| Total deferred tax assets | 290,683 | 218,783 | |||||
| Deferred tax liabilities: | |||||||
| Acquired intangible assets not deductible | (42,554 | ) | (41,139 | ) | |||
| Pension prepayments | (2,532 | ) | (2,362 | ) | |||
| Deferred revenue | (19,312 | ) | (6,978 | ) | |||
| Unbilled accounts receivable | (31,005 | ) | — | ||||
| Deferred income | (19,040 | ) | (6,641 | ) | |||
| Prepaid commissions | (17,423 | ) | — | ||||
| Other | (1,866 | ) | (1,686 | ) | |||
| Total deferred tax liabilities | (133,732 | ) | (58,806 | ) | |||
| Net deferred tax assets | $ | 156,951 | $ | 159,977 |
In October 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. 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. We adopted this standard beginning in the first quarter of 2019 using the modified retrospective method with a cumulate effect adjustment to accumulated deficit of $72.3 million, with a corresponding increase of $75.3 million to deferred tax assets, a $6.0 million decrease to income tax assets and a $3.0 million decrease to income tax liabilities. The adjustment primarily relates to deductible amortization of intangible assets in Ireland. Post adoption, our effective tax rate no longer includes the benefit of this amortization.
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. However, we believe that there is a reasonable possibility that within the next 12 months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that we are able to actually achieve.
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, 2019, we had U.S. federal NOL carryforwards from acquisitions of $8.8 million that expire in 2023 to 2029. The
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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, 2019, we had Federal R&D credit carryforwards of $26.2 million, which expire beginning in 2028 and ending in 2039, and Massachusetts R&D credit carryforwards of $22.1 million, which expire beginning in 2020 and ending in 2034. A full valuation allowance is recorded against the carryforwards.
We also have NOL carryforwards in non-U.S. jurisdictions totaling $64.4 million, the majority of which do not expire, and non-U.S. tax credit carryforwards of $3.2 million that expire beginning in 2029 and ending in 2035. Additionally, we have interest and amortization carryforwards of $86.9 million and $825.9 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, 2019, we have a valuation allowance of $146.1 million against net deferred tax assets in the U.S. and a valuation allowance of $31.6 million against net deferred tax assets in certain foreign jurisdictions. The valuation allowance recorded against net deferred tax assets of certain foreign jurisdictions is established primarily for our net operating loss carryforwards, the majority of which do not expire. However, there are limitations imposed on the utilization of such net operating losses that could restrict the recognition of any tax benefits.
The changes to the valuation allowance were primarily due to the following:
| (in millions) | Year ended September 30, | ||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Valuation allowance beginning of year | $ | 142.0 | $ | 279.7 | $ | 235.5 | |||||
| Net release of valuation allowance (1) | (1.8 | ) | (2.8 | ) | (9.1 | ) | |||||
| Net increase (decrease) in deferred tax assets with a full valuation allowance (2) | 37.5 | (134.9 | ) | 53.3 | |||||||
| Valuation allowance end of year | $ | 177.7 | $ | 142.0 | $ | 279.7 |
| (1) | In 2019, 2018 and 2017, this is attributable to the release in foreign jurisdictions. |
| (2) | In 2019, this is due in large part to a change in method of accounting for federal income tax purposes resulting in deferred tax liabilities that cannot be offset against available tax attributes in the scheduling of the reversal of existing temporary differences, and by the adoption of ASC606. In 2018, 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 2019 we recorded interest expense of $0.1 million and, in 2018 and 2017, we reduced interest expense by $0.6 million and $0.9 million, respectively. In 2019, 2018 and 2017, we had no tax penalty expense in our income tax provision. As of both September 30, 2019 and 2018, we had accrued $0.5 million of net estimated interest expense related to income tax accruals. We had no accrued tax penalties as of September 30, 2019, 2018 or 2017.
| Year ended September 30, | ||||||||||||
| Unrecognized tax benefits (in millions) | 2019 | 2018 | 2017 | |||||||||
| Unrecognized tax benefit beginning of year | $ | 9.8 | $ | 14.8 | $ | 15.5 | ||||||
| Tax positions related to current year: | ||||||||||||
| Additions | 1.5 | 1.5 | 0.9 | |||||||||
| Tax positions related to prior years: | ||||||||||||
| Additions | 1.4 | — | 1.0 | |||||||||
| Reductions | — | (4.7 | ) | (1.6 | ) | |||||||
| Settlements | (1.2 | ) | — | (1.0 | ) | |||||||
| Statute expirations | — | (1.8 | ) | — | ||||||||
| Unrecognized tax benefit end of year | $ | 11.5 | $ | 9.8 | $ | 14.8 |
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If all of our unrecognized tax benefits as of September 30, 2019 were to become recognizable in the future, we would record a benefit to the income tax provision of $11.5 million (which would be partially offset by an increase in the U.S. valuation allowance of $5.4 million). Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in favorable or unfavorable changes in our estimates. We believe it is reasonably possible that within the next 12 months the amount of unrecognized tax benefits related to the resolution of multi-jurisdictional tax positions could be reduced by up to $0.5 million as audits close and statutes of limitations expire.
In the fourth quarter of 2016, we received an assessment of approximately $12 million from the tax authorities in Korea. The assessment relates to various tax issues, primarily foreign withholding taxes. We have appealed and intend to vigorously defend our positions. We believe that upon completion of a multi-level appeal process it is more likely than not that our positions will be sustained. Accordingly, we have not recorded a tax reserve for this matter. We paid this assessment in the first quarter of 2017 and have recorded the amount in other assets, pending resolution of the appeal process. If the South Korean tax authorities were to prevail the potential additional exposure through 2019 would be approximately $13 million.
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, 2019, 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 2019 | |
| Germany | 2011 through 2019 | |
| France | 2016 through 2019 | |
| Japan | 2014 through 2019 | |
| Ireland | 2015 through 2019 |
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 2019, 2018 and 2017 of $86.4 million, $82.9 million and $76.7 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 $16.6 million, $28.3 million and $1.3 million in 2019, 2018 and 2017, 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 2019 and 2018, windfall tax benefits of $6.7 million and $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 we recorded windfall tax benefits of $0.6 million to APIC.
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.
In July 2015, the U.S. Tax Court issued an opinion in Altera Corp. v. Commissioner related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. The opinion invalidated part of a treasury regulation requiring stock-based compensation to be included in any qualified intercompany cost-sharing arrangement. The Company previously recorded a tax benefit based on the opinion in the case, which was offset by a corresponding increase in the valuation allowance against U.S. deferred tax assets. On June 7, 2019, the U.S. Court of Appeals for the Ninth Circuit reversed the U.S. Tax Court’s decision. On July 22, 2019, Altera Corp. filed a petition for an en banc rehearing before the U.S. Court of Appeals for the Ninth Circuit, which was denied on November
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12, 2019. Altera Corp. has 90 days from this date to petition the U.S. Supreme Court for review of the decision. Due to the fact that the Altera decision is not yet final, as well as uncertainty surrounding the status of the current regulations and questions related to jurisdiction given the Company does not reside in the Ninth Circuit, we have determined no adjustment is required to the consolidated financial statements as a result of this ruling. The Company will continue to monitor ongoing developments and potential impacts to its consolidated financial statements.
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.
9. Debt
As of September 30, 2019 and 2018, we had the following long-term borrowing obligations:
| (in thousands) | September 30, | ||||||
| 2019 | 2018 | ||||||
| 6.000% Senior notes due 2024 | $ | 500,000 | $ | 500,000 | |||
| Revolving credit facility | 173,125 | 148,125 | |||||
| Total debt | 673,125 | 648,125 | |||||
| Unamortized debt issuance costs for the Senior notes (1) | (3,991 | ) | (4,857 | ) | |||
| Total debt, net of issuance costs (2) | $ | 669,134 | $ | 643,268 |
(1) Unamortized debt issuance costs related to the credit facility were $3.1 million and $3.8 million as of September 30, 2019 and September 30, 2018, respectively, and were included in other assets.
(2) As of September 30, 2019 and 2018, 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, 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, 2019, the total estimated fair value of the Notes was approximately $526.3 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, 2019, the fair value of our credit facility approximates its book value.
In November 2019, we amended and restated the credit facility to increase the revolving loan commitment from $700 million to $1 billion and amend other provisions. The revolving loan commitment
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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, no funds 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 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, 2019, the annual rate for borrowing outstanding was 3.44%. 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, 2019, our total leverage ratio was 1.73 to 1.00, our senior secured leverage ratio was 0.47 to 1.00 and our interest coverage ratio was 9.76 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.
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In 2019, 2018 and 2017, we paid $40.8 million, $39.8 million and $38.9 million, respectively, of interest on our debt. The average interest rate on borrowings outstanding during 2019, 2018 and 2017 was approximately 5.4%, 5.2% and 4.9%, respectively.
10. 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 $39.3 million, $36.9 million and $35.8 million in 2019, 2018 and 2017, respectively. At September 30, 2019, our future minimum lease payments under noncancellable operating leases are as follows (in thousands):
| Year ending September 30, | |||
| 2020 | $ | 31,868 | |
| 2021 | 33,094 | ||
| 2022 | 25,624 | ||
| 2023 | 19,279 | ||
| 2024 | 16,909 | ||
| Thereafter | 186,037 | ||
| Total minimum lease payments | $ | 312,811 |
Amounts above include future minimum lease payments for our corporate headquarters facility located in Boston, Massachusetts. 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 moved our headquarters from Needham to Boston. The term of the lease runs from January 1, 2019 through June 30, 2037. Base rent for the first year of the lease is $11.0 million and will increase by $1 per square foot leased per year thereafter ($0.3 million per year). Base rent, which first becomes payable on July 1, 2020 is included in the operating lease obligations above. In addition to the base rent, PTC is required to 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 capitalized these leasehold improvements as the assets were placed in service and amortized 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, 2019 and 2018, we had letters of credit and bank guarantees outstanding of $15.1 million (of which $1.1 million was collateralized) and $15.5 million (of which $1.1 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. We estimate potential additional exposure of $13 million through 2019. See Note 8. 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
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With respect to legal proceedings and claims, we record an accrual for a contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. For legal proceedings and claims for which the likelihood that a liability has been incurred is more than remote but less than probable, we estimate the range of possible outcomes. As of September 30, 2019, we estimate approximately $0.5 million to $1.6 million in legal proceedings and claims, of which we had accrued $0.5 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.
11. Stockholders’ Equity
Preferred Stock
We may issue up to 5.0 million shares of our preferred stock in one or more series. 0.5 million of these shares are designated as Series A Junior Participating Preferred Stock. Our Board of Directors is authorized to fix the rights and terms for any series of preferred stock without additional shareholder approval.
Common Stock
Our Articles of Organization authorize us to issue up to 500 million shares of our common stock. Our Board of Directors has authorized us to repurchase up to $1,500 million of our common stock for the October 1, 2017 through September 30, 2020 period. We 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 2019, we repurchased 1.4 million shares for $115 million. In addition, in 2019 and 2018, we repurchased 3.0 million and 8.2 million shares, respectively, under an accelerated share repurchase ("ASR") agreement. On July 20, 2018, we entered into an accelerated share repurchase (“ASR”) agreement with a major financial institution (“Bank”). The ASR allowed us to buy a large number of shares immediately at a purchase price determined by an average market price over a period of time. Under the ASR, we agreed to purchase $1 billion of our common stock, in total, with an initial delivery to us in July 2018 of 8.2 million shares (“Initial Shares”), which represented the number of shares at the current market price equal to 80% of the total fixed purchase price of $1 billion. The remainder of the total purchase price of $200 million reflected the value of the stock held by the Bank pending final settlement and, accordingly, was recorded as a reduction to additional paid-in capital in 2018. In addition, we initiated and completed an ASR repurchase of 1.2 million shares for $100 million in the third quarter of 2018. In 2017, we repurchased 0.9 million shares at cost of $51.0 million.
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.
12. 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
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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 2019, 2018 and 2017 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 2019, 2018 and 2017 was $82.77, $76.17 and $51.27, respectively. In 2019, 2018 and 2017, the weighted average fair value per share of restricted stock was increased by $4.62, $4.35 and $2.27, respectively, by the additional shares earned for the 2016 and 2017 total shareholder return (TSR) grants upon measurement on the vest date in 2018.
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:
| (in thousands) | Year ended September 30, | ||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Cost of license revenue | $ | 509 | $ | 144 | $ | (148 | ) | ||||
| Cost of support and cloud services revenue | 5,004 | 4,302 | 6,643 | ||||||||
| Cost of professional services revenue | 6,426 | 7,079 | 6,116 | ||||||||
| Sales and marketing | 32,026 | 24,893 | 15,373 | ||||||||
| Research and development | 22,019 | 13,488 | 13,968 | ||||||||
| General and administrative | 20,416 | 33,033 | 34,756 | ||||||||
| Total stock-based compensation expense | $ | 86,400 | $ | 82,939 | $ | 76,708 |
Stock-based compensation expense in 2019, 2018 and 2017 includes $6.2 million, $4.3 million, and $3.2 million respectively, related to our employee stock purchase plan (ESPP).
As of September 30, 2019, total unrecognized compensation cost related to unvested restricted stock units expected to vest was approximately $159.2 million and the weighted average remaining recognition period for unvested awards was 22 months.
As of September 30, 2019, 6.9 million shares of common stock were available for grant under the 2000 Plan and 3.2 million shares of common stock were reserved for issuance upon the exercise of stock options and vesting of restricted stock units granted and outstanding.
Our ESPP, initiated in the fourth quarter of 2016, allows eligible employees to contribute up to 10% of their base salary, up to a maximum of $25,000 per year and subject to any other plan limitations, toward the purchase of our common stock at a discounted price. The purchase price of the shares on each purchase date is equal to 85% of the lower of the fair market value of our common stock on the first and last trading days of each offering period. The ESPP is qualified under Section 423 of the Internal Revenue Code. We estimate the fair value of each purchase right under the ESPP on the date of grant using the Black-Scholes option valuation model and use the straight-line attribution approach to record the expense over the six-month offering period.
| Restricted stock unit activity for the year ended September 30, 2019 (in thousands except grant date fair value data) | Shares | Weighted Average Grant Date Fair Value | Aggregate Intrinsic Value as of September 30, 2019 | ||||||||
| Balance of outstanding restricted stock units October 1, 2018 | 3,284 | $ | 65.93 | ||||||||
| Granted (1) | 1,836 | $ | 82.77 | ||||||||
| Vested | (1,494 | ) | $ | 55.11 | |||||||
| Forfeited or not earned | (394 | ) | $ | 66.20 | |||||||
| Balance of outstanding restricted stock units September 30, 2019 | 3,232 | $ | 80.52 | $ | 220,358 |
(1) Restricted stock granted includes approximately 141,000 shares from prior period TSR awards that were earned upon achievement of the performance criteria and vested in November 2019.
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| (Number of Units in thousands) | Restricted Stock Units | |||||
| Restricted stock unit grants | Performance-based RSUs (1) | Service-based RSUs (2) | ||||
| Year ended September 30, 2019 | 376 | 1,319 |
(1) Substantially all the performance-based RSUs were granted to our executive officers. Approximately 160,000 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. To the extent earned, those performance-based RSUs will vest in three substantially equal installments on 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. An additional 213,000 performance-based RSUs are eligible to be earned based upon a 2019 performance measure, which RSUs will be forfeited to the extent the performance measure is not achieved. These RSUs would have vest, to the extent earned, in three substantially equal installments on November 15, 2019, 2020 and 2021. These RSUs were not earned and were forfeited.
(2) The service-based RSUs were granted to employees, our executive officers and our directors. Substantially all service-based RSUs will vest in three substantially equal annual installments on or about the anniversary of the date of grant.
| (in thousands) | Year ended September 30, | |||||||||||
| Value of stock option and stock-based award activity | 2019 | 2018 | 2017 | |||||||||
| Total fair value of restricted stock unit awards vested | $ | 131,659 | $ | 127,525 | $ | 78,573 |
In 2019, shares issued upon vesting of restricted stock units were net of 0.5 million shares retained by us to cover employee tax withholdings of $44.4 million. 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 and restricted stock units were net of 0.5 million shares retained by us to cover employee tax withholdings of $26.7 million.
13. Employee Benefit Plan
We offer a savings plan to eligible U.S. employees. The plan is intended to qualify under Section 401(k) of the Internal Revenue Code. Participating employees may defer a portion of their pre-tax compensation, as defined, but not more than statutory limits. We contribute 50% of the amount contributed by the employee, up to a maximum of 3% of the employee’s earnings. Our matching contributions vest at a rate of 25% per year of service, with full vesting after 4 years of service. We made matching contributions of $6.0 million, $5.8 million, and $5.6 million in 2019, 2018 and 2017, respectively.
14. 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:
| 2019 | 2018 | 2017 | ||||||
| Weighted average assumptions used to determine benefit obligations at September 30 measurement date: | ||||||||
| Discount rate | 0.9 | % | 1.9 | % | 1.8 | % | ||
| Rate of increase in future compensation | 2.8 | % | 3.0 | % | 2.8 | % | ||
| Weighted average assumptions used to determine net periodic pension cost for fiscal years ended September 30: | ||||||||
| Discount rate | 1.9 | % | 1.8 | % | 1.3 | % | ||
| Rate of increase in future compensation | 3.0 | % | 2.8 | % | 2.8 | % | ||
| Rate of return on plan assets | 5.4 | % | 5.4 | % | 5.4 | % |
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
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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, 2019, 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, 2019 in the table above, will be used to determine our 2020 net periodic pension cost, which we expect to be approximately $1.9 million.
The actuarially computed components of net periodic pension cost recognized in our Consolidated Statements of Operations for each year are shown below:
| (in thousands) | Year ended September 30, | ||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Interest cost of projected benefit obligation | $ | 1,199 | $ | 1,260 | $ | 815 | |||||
| Service cost | 1,372 | 1,535 | 1,696 | ||||||||
| Expected return on plan assets | (3,728 | ) | (4,180 | ) | (3,327 | ) | |||||
| Amortization of prior service cost | (5 | ) | (5 | ) | (5 | ) | |||||
| Recognized actuarial loss | 2,390 | 2,293 | 3,385 | ||||||||
| Settlement loss | (30 | ) | 9 | — | |||||||
| Net periodic pension cost | $ | 1,198 | $ | 912 | $ | 2,564 |
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:
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| (in thousands) | Year ended September 30, | ||||||
| 2019 | 2018 | ||||||
| Change in benefit obligation: | |||||||
| Projected benefit obligation—beginning of year | $ | 87,864 | $ | 87,168 | |||
| Service cost | 1,372 | 1,535 | |||||
| Interest cost | 1,199 | 1,260 | |||||
| Actuarial loss | 12,059 | 2,157 | |||||
| Foreign exchange impact | (4,674 | ) | (1,669 | ) | |||
| Participant contributions | 154 | 212 | |||||
| Benefits paid | (1,836 | ) | (1,637 | ) | |||
| Settlements | (1,155 | ) | (1,162 | ) | |||
| Projected benefit obligation—end of year | $ | 94,983 | $ | 87,864 | |||
| Change in plan assets and funded status: | |||||||
| Plan assets at fair value—beginning of year | $ | 70,141 | $ | 70,494 | |||
| Actual return on plan assets | 3,512 | 1,025 | |||||
| Employer contributions | 2,576 | 2,459 | |||||
| Participant contributions | 154 | 212 | |||||
| Foreign exchange impact | (3,513 | ) | (1,250 | ) | |||
| Settlements | (1,155 | ) | (1,162 | ) | |||
| Benefits paid | (1,836 | ) | (1,637 | ) | |||
| Plan assets at fair value—end of year | 69,879 | 70,141 | |||||
| Projected benefit obligation—end of year | 94,983 | 87,864 | |||||
| Underfunded status | $ | (25,104 | ) | $ | (17,723 | ) | |
| Accumulated benefit obligation—end of year | $ | 92,280 | $ | 85,103 | |||
| Amounts recognized in the balance sheet: | |||||||
| Non-current liability | $ | (24,868 | ) | $ | (17,502 | ) | |
| Current liability | $ | (236 | ) | $ | (221 | ) | |
| Amounts in accumulated other comprehensive loss: | |||||||
| Unrecognized actuarial loss | $ | 34,920 | $ | 27,027 |
We expect to recognize approximately $3.8 million of the unrecognized actuarial loss as of September 30, 2019 as a component of net periodic pension cost in 2020.
The following table shows change in accumulated other comprehensive loss:
| (in thousands) | Year ended September 30, | ||||||
| 2019 | 2018 | ||||||
| Accumulated other comprehensive loss- beginning of year | $ | 27,027 | $ | 24,738 | |||
| Recognized during year - net actuarial (losses) | (2,385 | ) | (2,288 | ) | |||
| Occurring during year - settlement loss | 30 | (9 | ) | ||||
| Occurring during year - net actuarial losses (gains) | 12,274 | 5,312 | |||||
| Foreign exchange impact | (2,026 | ) | (726 | ) | |||
| Accumulated other comprehensive loss- end of year | $ | 34,920 | $ | 27,027 |
The following table shows the percentage of total plan assets for each major category of plan assets:
| September 30, | ||||||
| Asset category: | 2019 | 2018 | ||||
| Equity securities | 32 | % | 35 | % | ||
| Fixed-income securities | 46 | % | 46 | % | ||
| Commodities | 2 | % | 1 | % | ||
| Insurance company funds | 12 | % | 12 | % | ||
| Cash | 8 | % | 6 | % | ||
| 100 | % | 100 | % |
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We periodically review the pension plans’ investments in the various asset classes. For the CoCreate plan in Germany assets are actively allocated between equity and fixed income securities to achieve target return. For the other international plans assets are allocated 100% to fixed income securities. 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 2019, 2018 and 2017 our actual return on plan assets was $3.5 million, $1.0 million and $6.3 million, respectively.
Based on actuarial valuations and additional voluntary contributions, we contributed $2.6 million, $2.5 million, and $2.0 million in 2019, 2018 and 2017, respectively, to the plans.
As of September 30, 2019, benefit payments expected to be paid over the next ten years are outlined in the following table:
| (in thousands) | Future Benefit Payments | |||
| Year ending September 30, | ||||
| 2020 | $ | 2,918 | ||
| 2021 | 3,008 | |||
| 2022 | 3,648 | |||
| 2023 | 3,519 | |||
| 2024 | 4,401 | |||
| 2025 to 2029 | 22,173 |
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.
| (in thousands) | September 30, 2019 | |||||||||||||||
| Plan assets: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Fixed income securities: | ||||||||||||||||
| Government | $ | 26,996 | $ | — | $ | — | $ | 26,996 | ||||||||
| European corporate investment grade | 4,816 | — | — | 4,816 | ||||||||||||
| European large capitalization stocks | 22,648 | — | — | 22,648 | ||||||||||||
| Commodities | 1,086 | — | — | 1,086 | ||||||||||||
| Insurance company funds (1) | — | 8,494 | — | 8,494 | ||||||||||||
| Cash | 5,839 | — | — | 5,839 | ||||||||||||
| $ | 61,385 | $ | 8,494 | $ | — | $ | 69,879 |
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| (in thousands) | September 30, 2018 | |||||||||||||||
| Plan assets: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| 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 |
(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.
15. 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.
Our significant financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2019 and 2018 were as follows:
| (in thousands) | September 30, 2019 | ||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Financial assets: | |||||||||||||||
| Cash equivalents (1) | $ | 108,020 | $ | — | $ | — | $ | 108,020 | |||||||
| Marketable securities: | |||||||||||||||
| Commercial paper | — | 999 | — | 999 | |||||||||||
| Corporate notes/bonds | 56,436 | — | — | 56,436 | |||||||||||
| Forward contracts | — | 3,064 | — | 3,064 | |||||||||||
| $ | 164,456 | $ | 4,063 | $ | — | $ | 168,519 | ||||||||
| Financial liabilities: | |||||||||||||||
| Forward contracts | — | 2,771 | — | 2,771 | |||||||||||
| $ | — | $ | 2,771 | $ | — | $ | 2,771 |
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| (in thousands) | September 30, 2018 | ||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| 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 acquisitions | $ | — | $ | — | $ | 1,575 | $ | 1,575 | |||||||
| Forward contracts | — | 3,419 | — | 3,419 | |||||||||||
| $ | — | $ | 3,419 | $ | 1,575 | $ | 4,994 |
(1) Money market funds and time deposits.
Changes in the fair value of Level 3 contingent consideration liability associated with our acquisitions was as follows:
| (in thousands) | Contingent Consideration | |||||||||||
| Kepware | Other | Total | ||||||||||
| Balance at September 30, 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 | ||||||
| Payment of contingent consideration | — | (1,575 | ) | (1,575 | ) | |||||||
| Balance at September 30, 2019 | $ | — | $ | — | $ | — |
Payments made against the original fair value of the liabilities recorded at the acquisition date ($1.6 million, $8.3 million and $11.0 million, in 2019, 2018 and 2018, respectively) are 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.
16. Marketable Securities
The amortized cost and fair value of marketable securities as of September 30, 2019 and 2018 were as follows:
| (in thousands) | September 30, 2019 | ||||||||||||||
| Amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||
| Commercial paper | 999 | — | — | 999 | |||||||||||
| Corporate notes/bonds | 56,318 | 146 | (28 | ) | 56,436 | ||||||||||
| $ | 57,317 | $ | 146 | $ | (28 | ) | $ | 57,435 |
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| (in thousands) | September 30, 2018 | ||||||||||||||
| Amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||
| 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 |
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, 2019 and 2018.
| (in thousands) | September 30, 2019 | ||||||||||||||||||||||
| Less than twelve months | Greater than twelve months | Total | |||||||||||||||||||||
| Fair Value | Gross unrealized loss | Fair Value | Gross unrealized loss | Fair Value | Gross unrealized loss | ||||||||||||||||||
| Corporate notes/bonds | $ | 12,419 | $ | (14 | ) | $ | 16,369 | $ | (14 | ) | $ | 28,788 | $ | (28 | ) |
| (in thousands) | 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 | ||||||||||||||||||
| 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 | ) |
The following table presents our available-for-sale marketable securities by contractual maturity date, as of September 30, 2019 and 2018.
| (in thousands) | September 30, 2019 | September 30, 2018 | |||||||||||||
| Amortized cost | Fair value | Amortized cost | Fair value | ||||||||||||
| Due in one year or less | $ | 27,725 | $ | 27,735 | $ | 25,792 | $ | 25,670 | |||||||
| Due after one year through three years | 29,592 | 29,700 | 30,572 | 30,281 | |||||||||||
| $ | 57,317 | $ | 57,435 | $ | 56,364 | $ | 55,951 |
17. Derivative Financial Instruments
Non-Designated Hedges
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:
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| (in thousands) | September 30, | |||||||
| Currency Hedged | 2019 | 2018 | ||||||
| Canadian / U.S. Dollar | $ | 9,408 | $ | 7,334 | ||||
| Euro / U.S. Dollar | 308,282 | 297,730 | ||||||
| British Pound / U.S. Dollar | 3,756 | 7,074 | ||||||
| Israeli Sheqel / U.S. Dollar | 10,272 | 9,778 | ||||||
| Japanese Yen / U.S. Dollar | 37,462 | 37,456 | ||||||
| Swiss Franc / U.S. Dollar | 12,001 | 11,944 | ||||||
| Swedish Krona / U.S. Dollar | 20,636 | 18,207 | ||||||
| Chinese Yuan offshore / U.S. Dollar | 43,387 | 116 | ||||||
| Singapore Dollar / U.S. Dollar | 34,585 | 1,314 | ||||||
| Chinese Renminbi / U.S. Dollar | 9,079 | 9,010 | ||||||
| All other | 9,487 | 5,993 | ||||||
| Total | $ | 498,355 | $ | 405,956 |
The following table shows the effect of our non-designated hedges in the Consolidated Statements of Operations for the years ended September 30, 2019, 2018 and 2017 (in thousands):
| 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, | ||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||
| Forward Contracts | Other income (expense), net | $ | (6,716 | ) | $ | (9,720 | ) | $ | 870 |
Cash Flow Hedges
We stopped entering into cash flow hedges in the first quarter of 2019. As of September 30, 2018, we had outstanding forward contracts designated as cash flow hedges with notional amounts equivalent to the following:
| (in thousands) | September 30, | |||||||
| Currency Hedged | 2019 | 2018 | ||||||
| Euro / U.S. Dollar | $ | — | $ | 8,495 | ||||
| Japanese Yen / U.S. Dollar | — | 2,193 | ||||||
| SEK / U.S. Dollar | — | 1,708 | ||||||
| Total | $ | — | $ | 12,396 |
The following table shows the effect of our derivative instruments designated as cash flow hedges in the Consolidated Statements of Operations for the years ended September 30, 2019 and 2018 (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, | ||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||||
| Forward Contracts | $ | 187 | $ | 1,652 | $ | (866 | ) | Software Revenue | $ | 627 | $ | (552 | ) | $ | (524 | ) | Other Income (Expense) | $ | — | $ | 21 | $ | (49 | ) |
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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 years ended September 30, 2019, 2018 and 2017 there were no such gains or losses.
Net Investment Hedges
As of September 30, 2019 and 2018, we had outstanding forward contracts designated as net investment hedges with notional amounts equivalent to the following:
| Currency Hedged (in thousands) | 2019 | 2018 | ||||||
| Euro / U.S. Dollar | $ | 183,396 | $ | — | ||||
| Total | $ | 183,396 | $ | — |
The following table shows the effect of our derivative instruments designated as net investment hedges in the Consolidated Statements of Operations for the years ended September 30, 2019 and 2018 (in thousands):
| Derivatives Designated as Hedging Instruments | Gain or (Loss) Recognized in OCI-Effective Portion | Location of Gain or (Loss) Reclassified from OCI -Effective Portion | Gain or (Loss) Reclassified from OCI-Effective Portion | Location of Gain or (Loss) Excluded from Effectiveness Testing | Gain or (Loss) Recognized-Excluded Portion | |||||||||||||||||||||||||||||||||||
| Year ended September 30, | ||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||||
| Forward Contracts | $ | (2,925 | ) | $ | — | $ | — | Accumulated other comprehensive loss | $ | (7,630 | ) | $ | — | $ | — | Other income (expense), net | $ | 4,598 | $ | — | $ | — |
As of September 30, 2019, we estimate that all amounts reported in accumulated other comprehensive loss will be applied against exposed balance sheet accounts upon translation within the next three months.
The following table shows our derivative instruments measured at gross fair value as reflected in the Consolidated Balance Sheets:
| (in thousands) | September 30, | ||||||||||||||
| Fair Value of Derivatives Designated As Hedging Instruments | Fair Value of Derivatives Not Designated As Hedging Instruments | ||||||||||||||
| 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Derivative assets (a): | |||||||||||||||
| Forward Contracts | $ | 1,674 | $ | 440 | $ | 1,390 | $ | 2,449 | |||||||
| Derivative liabilities (b): | |||||||||||||||
| Forward Contracts | $ | — | $ | — | $ | 2,771 | $ | 3,419 |
(a) As of September 30, 2019, $3.1 million current derivative assets are recorded in other current assets, in the Consolidated Balance Sheets. As of September 30, 2018, $2.9 million current derivative assets are recorded in other current assets, in the Consolidated Balance Sheets.
(b) As of September 30, 2019, $2.8 million current derivative liabilities are recorded in accrued expenses and other current liabilities in the Consolidated Balance Sheets. As of September 30, 2018, $3.4 million current derivative liabilities are recorded in accrued expenses and other current liabilities in the Consolidated Balance Sheets.
Offsetting Derivative Assets and Liabilities
We have entered into master netting arrangements which allow net settlements under certain conditions. Although netting is permitted, it is currently our policy and practice to record all derivative assets and liabilities on a gross basis in the Consolidated Balance Sheets.
The following table sets forth the offsetting of derivative assets as of September 30, 2019:
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| (in thousands) | Gross Amounts Offset in the Consolidated Balance Sheets | Gross Amounts Not Offset in the Consolidated Balance Sheets | ||||||||||||||||||||||
| September 30, 2019 | Gross Amount of Recognized Assets | Gross Amounts Offset in the Consolidated Balance Sheets | Net Amounts of Assets Presented in the Consolidated Balance Sheets | Financial Instruments | Cash Collateral Received | Net Amount | ||||||||||||||||||
| Forward Contracts | $ | 3,064 | $ | — | $ | 3,064 | $ | (2,771 | ) | $ | — | $ | 293 |
The following table sets forth the offsetting of derivative liabilities as of September 30, 2019:
| (in thousands) | Gross Amounts Offset in the Consolidated Balance Sheets | Gross Amounts Not Offset in the Consolidated Balance Sheets | ||||||||||||||||||||||
| September 30, 2019 | Gross Amount of Recognized Liabilities | Gross Amounts Offset in the Consolidated Balance Sheets | Net Amounts of Liabilities Presented in the Consolidated Balance Sheets | Financial Instruments | Cash Collateral Pledged | Net Amount | ||||||||||||||||||
| Forward Contracts | $ | 2,771 | $ | — | $ | 2,771 | $ | (2,771 | ) | $ | — | $ | — |
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 $3.2 million, $7.0 million and $5.7 million for 2019, 2018 and 2017, respectively. Net realized and unrealized gains and losses on forward contracts included in foreign currency net losses were a net loss of $8.4 million in 2019 and $7.5 million in 2018, and a net gain of $1.8 million in 2017.
18. Segment and Geographic Information
We operate within a single industry segment -- computer software and related services. Operating segments as defined under GAAP are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our President and Chief Executive Officer. We have two operating and reportable segments: (1) Software Products, which includes license, subscription and related support revenue (including updates and technical support) for all our products; and (2) Professional Services, which includes consulting, implementation and training services. We do not allocate sales & marketing or general and administrative expense to our operating segments as these activities are managed on a consolidated basis. Additionally, segment profit does not include stock-based compensation, amortization of intangible assets, restructuring charges and certain other identified costs that we do not allocate to the segments for purposes of evaluating their operational performance.
The revenue and profit attributable to our operating segments are summarized below. We do not produce asset information by reportable segment; therefore, it is not reported.
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| (in thousands) | Year ended September 30, | ||||||||||||||
| As reported ASC 606 | ASC 605 | As reported ASC 605 | As reported ASC 605 | ||||||||||||
| 2019 | 2019 | 2018 | 2017 | ||||||||||||
| Software Products | |||||||||||||||
| Revenue | $ | 1,088,100 | $ | 1,150,818 | $ | 1,088,487 | $ | 987,316 | |||||||
| Operating Costs (1) | 377,464 | 375,268 | 387,989 | 366,716 | |||||||||||
| Profit | 710,636 | 775,550 | 700,498 | 620,600 | |||||||||||
| Professional Services | |||||||||||||||
| Revenue | 167,531 | 160,676 | 153,337 | 176,723 | |||||||||||
| Operating costs (2) | 133,846 | 128,818 | 136,964 | 145,051 | |||||||||||
| Profit (loss) | 33,685 | 31,858 | 16,373 | 31,672 | |||||||||||
| Total segment revenue | 1,255,631 | 1,311,494 | 1,241,824 | 1,164,039 | |||||||||||
| Total segment costs | 511,310 | 504,086 | 524,953 | 511,767 | |||||||||||
| Total segment profit (loss) | 744,321 | 807,408 | 716,871 | 652,272 | |||||||||||
| Unallocated operating expenses: | |||||||||||||||
| Sales and marketing expenses | 385,423 | 409,932 | 389,871 | 357,329 | |||||||||||
| General and administrative expenses | 104,393 | 104,393 | 108,159 | 108,363 | |||||||||||
| Intangibles amortization | 51,147 | 51,147 | 58,056 | 58,729 | |||||||||||
| Restructuring and other charges, net | 51,114 | 51,114 | 3,764 | 7,942 | |||||||||||
| Stock-based compensation | 86,400 | 86,400 | 82,939 | 76,708 | |||||||||||
| Other unallocated operating expenses (3) | 2,802 | 2,802 | 1,469 | 1,435 | |||||||||||
| Total operating income | 63,042 | 101,620 | 72,613 | 41,766 | |||||||||||
| Interest expense | (43,047 | ) | (43,047 | ) | (41,673 | ) | (42,400 | ) | |||||||
| Other (expense) income, net | 305 | 131 | (2,284 | ) | (772 | ) | |||||||||
| Income (loss) before income taxes | $ | 20,300 | $ | 58,704 | $ | 28,656 | $ | (1,406 | ) |
(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 $4.6 million, $5.1 million and $5.0 million in 2019, 2018 and 2017, respectively.
(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 $1.4 million, $1.6 million and $1.8 million in 2019, 2018 and 2017, 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 $20.6 million, $22.7 million and $21.2 million in 2019, 2018 and 2017, respectively.
We report revenue by the following two product groups:
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| (in thousands) | Year ended September 30, | ||||||||||||||
| As reported ASC 606 | ASC 605 | As reported ASC 605 | As reported ASC 605 | ||||||||||||
| 2019 | 2019 | 2018 | 2017 | ||||||||||||
| Solutions | $ | 1,099,811 | $ | 1,135,891 | $ | 1,102,546 | $ | 1,060,692 | |||||||
| IoT | 155,820 | 175,603 | 139,278 | 103,348 | |||||||||||
| Total revenue | $ | 1,255,631 | $ | 1,311,494 | $ | 1,241,824 | $ | 1,164,039 |
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. Our international revenue is presented based on the location of our customer. Revenue for the geographic regions in which we operate is presented below.
| (in thousands) | Year ended September 30, | ||||||||||||||
| As reported ASC 606 | ASC 605 | As reported ASC 605 | As reported ASC 605 | ||||||||||||
| 2019 | 2019 | 2018 | 2017 | ||||||||||||
| Revenue: | |||||||||||||||
| Americas (1) | $ | 537,548 | $ | 565,362 | $ | 511,237 | $ | 500,879 | |||||||
| Europe (2) | 464,666 | 494,864 | 485,851 | 435,183 | |||||||||||
| Asia Pacific | $ | 253,417 | $ | 251,268 | $ | 244,736 | $ | 227,977 | |||||||
| Total revenue | $ | 1,255,631 | $ | 1,311,494 | $ | 1,241,824 | $ | 1,164,039 |
| (1) | Includes revenue in the United States totaling $514.4 million (ASC 606) and $541.7 million (ASC 605), $487.3 million and $475.5 million for 2019, 2018 and 2017, respectively. |
| (2) | Includes revenue in Germany totaling $185.4 million (ASC 606) and $197.2 million (ASC 605), $193.3 million and $164.7 million for 2019, 2018 and 2017, respectively. |
| (3) | Substantially all of the Americas long-lived tangible assets are located in the United States. |
19. Subsequent Events
Acquisition
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.
Borrowings and Credit Facility
We borrowed $455 million under our existing credit facility to acquire Onshape, bringing our total outstanding indebtedness to approximately $1.1 billion. Subsequently, we amended the credit facility to increase the revolving loan commitment from $700 million to $1 billion and make other administrative amendments.
Equity Grants
In November 2019, we granted shares valued at approximately $16.8 million to our employees, including our executives ($3.3 million), in payment of amounts earned under our annual Corporate Incentive Plan.
In November 2019, we granted time-based restricted stock units (RSUs) valued at approximately $49.2 million to employees. The time-based RSUs will generally vest in three substantially equal annual installments on November 15, 2020, 2021 and 2022.
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SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this Annual Report.
The Consolidated Statements of Operations data for the years ended September 30, 2019, 2018, and 2017 and the Consolidated Balance Sheets data as of September 30, 2019 and 2018 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, 2016 and 2015 and the Consolidated Balance Sheets data as of September 30, 2017, 2016 and 2015 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) | 2019 | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||||
| As reported ASC 606 | ASC 605 | As reported ASC 605 | As reported ASC 605 | As reported ASC 605 | As reported ASC 605 | ||||||||||||||||||
| Revenue | $ | 1,255,631 | $ | 1,311,494 | $ | 1,241,824 | $ | 1,164,039 | $ | 1,140,533 | $ | 1,255,242 | |||||||||||
| Gross margin | 930,253 | 993,340 | 915,322 | 835,537 | 814,868 | 920,508 | |||||||||||||||||
| Operating income (loss) (2) | 63,042 | 101,620 | 72,613 | 41,766 | (37,014 | ) | 41,616 | ||||||||||||||||
| Net income (loss) (2) (3) | (27,460 | ) | 2,979 | 51,987 | 6,239 | (54,465 | ) | 47,557 | |||||||||||||||
| Earnings (loss) per share—Basic (2) (3) | (0.23 | ) | 0.03 | 0.45 | 0.05 | (0.48 | ) | 0.41 | |||||||||||||||
| Earnings (loss) per share—Diluted (2) (3) | (0.23 | ) | 0.03 | 0.44 | 0.05 | (0.48 | ) | 0.41 | |||||||||||||||
| Total assets | 2,664,588 | 2,471,908 | 2,329,022 | 2,360,384 | 2,345,729 | 2,209,913 | |||||||||||||||||
| Working capital (deficit) | 144,466 | (140,437 | ) | (101,495 | ) | (12,353 | ) | (11,930 | ) | 87,419 | |||||||||||||
| Long-term liabilities | 824,435 | 795,850 | 719,154 | 796,039 | 848,544 | 732,482 | |||||||||||||||||
| Stockholders’ equity | 1,201,998 | 876,333 | 874,589 | 885,436 | 842,666 | 860,171 |
| (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 and net income 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. |
| (3) | In 2015, net income includes an $18.7 million tax benefit related to settlement of our U.S pension plan. |
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QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
| (in thousands except per share data) | September 30, 2019 | June 29, 2019 | March 30, 2019 | December 29, 2018 | |||||||||||||||||||||||||||
| As reported ASC 606 | ASC 605 | As reported ASC 606 | ASC 605 | As reported ASC 606 | ASC 605 | As reported ASC 606 | ASC 605 | ||||||||||||||||||||||||
| Revenue | $ | 335,004 | $ | 334,828 | $ | 295,486 | $ | 322,410 | $ | 290,451 | $ | 315,499 | $ | 334,689 | $ | 338,757 | |||||||||||||||
| Gross margin | 249,587 | 251,070 | 212,781 | 241,177 | 210,547 | 237,532 | 257,337 | 263,561 | |||||||||||||||||||||||
| Operating income | 46,551 | 37,640 | 9,305 | 32,370 | (22,858 | ) | (1,572 | ) | 30,044 | 33,182 | |||||||||||||||||||||
| Net income | 9,826 | (15,944 | ) | (14,758 | ) | 11,705 | (45,513 | ) | (12,030 | ) | 20,985 | 19,248 | |||||||||||||||||||
| Earnings per share: | |||||||||||||||||||||||||||||||
| Basic | $ | 0.09 | $ | (0.14 | ) | $ | (0.13 | ) | $ | 0.10 | $ | (0.37 | ) | $ | (0.10 | ) | $ | 0.18 | $ | 0.16 | |||||||||||
| Diluted | $ | 0.08 | $ | (0.14 | ) | $ | (0.13 | ) | $ | 0.10 | $ | (0.37 | ) | $ | (0.10 | ) | $ | 0.18 | $ | 0.16 |
| (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 | 234,395 | 233,144 | 224,175 | 223,609 | |||||||||||
| Operating income | 11,541 | 21,547 | 22,210 | 17,316 | |||||||||||
| Net income (loss) | 13,191 | 16,997 | 7,922 | 13,877 | |||||||||||
| Earnings (loss) per share: | |||||||||||||||
| Basic | $ | 0.11 | $ | 0.15 | $ | 0.07 | $ | 0.12 | |||||||
| Diluted | $ | 0.11 | $ | 0.14 | $ | 0.07 | $ | 0.12 |
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Previous: Item 15. Exhibits and Financial Statement Schedules