filings.toolsItem 16. Form 10-K Summary
199K characters. Original on sec.gov · Markdown
Item 16. Form 10-K Summary
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None.
EXHIBIT INDEX
| * | Identifies a management contract or compensatory plan or arrangement in which an executive officer or director of PTC participates. |
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| ** | Indicates that the exhibit is being furnished with this report and is not filed as a part of it. |
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| *** | 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. |
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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 19th day of November, 2021.
| 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 19th day of November, 2021.
| 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/ MARK BENJAMIN | Director | |
| Mark Benjamin | ||
| /s/ JANICE CHAFFIN | Director | |
| Janice Chaffin | ||
| /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, 2021 and 2020, 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, 2021, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2021 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, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in fiscal 2020 and the manner in which it accounts for revenues from contracts with customers in fiscal 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
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such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Annual Report on Internal Control over Financial Reporting, management has excluded Arena Holdings, Inc. from its assessment of internal control over financial reporting as of September 30, 2021 because it was acquired by the Company in a purchase business combination during fiscal 2021. We have also excluded Arena Holdings, Inc. from our audit of internal control over financial reporting. Arena Holdings, Inc. is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent approximately 1% and 2%, respectively, of the related consolidated financial statement amounts as of and for the year ended September 30, 2021.
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 matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue from Contracts with Customers - Identification of Distinct Performance Obligations
As described in Note 2 to the consolidated financial statements, the Company’s sources of revenue include: (1) subscriptions, (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, 2021, the Company recognized revenue from contracts with customers of $1,807.2 million. The Company’s contracts with customers for subscriptions typically include commitments to transfer term-based, on-premises software licenses bundled with support and/or cloud services. On-premises software is determined to be a distinct performance obligation from support. 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, is a critical audit matter are the significant judgment by management in the identification of distinct performance obligations, specifically the determination that the on-premises software is determined to
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be a distinct performance obligation from support, which 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.
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 the identification of distinct performance obligations. These procedures also included, among others (i) evaluating the Company’s revenue recognition accounting policy and (ii) testing management’s identification of distinct performance obligations in its contracts with customers by examining revenue contracts on a sample basis and evaluating whether these performance obligations are satisfied at a point in time or satisfied over time.
Acquisition of Arena Holdings, Inc. – Valuation of the Customer Relationships Intangible Asset
As described in Note 6 to the consolidated financial statements, the Company completed its acquisition of Arena Holdings, Inc. on January 15, 2021, for purchase consideration of approximately $715.0 million, net of cash acquired of $11.1 million. The acquisition of Arena Holdings, Inc. 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 purchase price allocation resulted in $155.0 million of customer relationships being recorded. Management estimated the fair value of the customer relationships intangible asset using a discounted cash flow model which included significant judgment and assumptions related to future revenues and costs.
The principal considerations for our determination that performing procedures relating to the valuation of the customer relationships intangible asset in the acquisition of Arena Holdings, Inc. is a critical audit matter are the significant judgment by management when estimating the fair value of the customer relationships intangible asset, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to the discounted cash flow model utilized to value the customer relationships intangible asset and management’s assumptions related to future revenues and costs. In addition, the audit effort involved the use of professionals with specialized skill and knowledge.
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 management’s determination of the fair value of the customer relationships intangible asset. These procedures also included, among others (i) reading the purchase agreement; (ii) testing management’s process for estimating the fair value of the customer relationships intangible asset; (iii) evaluating the appropriateness of the discounted cash flow model used by management; (iv) testing the completeness and accuracy of the underlying data used in the valuation; and (v) evaluating the reasonableness of the significant assumptions related to future revenues and costs. Evaluating management’s assumptions related to future revenues and costs involved evaluating whether the assumptions used by management were reasonable considering (i) the consistency with external economic and industry data and (ii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the discounted cash flow model.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
November 19, 2021
We have served as the Company’s auditor since 1992.
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PTC Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
| September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 326,532 | $ | 275,458 | ||||
| Short-term marketable securities | — | 28,129 | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $304 and $543 at September 30, 2021 and September 30, 2020, respectively | 541,072 | 415,221 | ||||||
| Prepaid expenses | 69,991 | 69,408 | ||||||
| Other current assets | 135,415 | 45,231 | ||||||
| Total current assets | 1,073,010 | 833,447 | ||||||
| Property and equipment, net | 100,237 | 101,499 | ||||||
| Goodwill | 2,191,887 | 1,625,786 | ||||||
| Acquired intangible assets, net | 378,967 | 237,570 | ||||||
| Long-term marketable securities | — | 30,970 | ||||||
| Deferred tax assets | 297,789 | 190,963 | ||||||
| Operating right-of-use lease assets | 152,337 | 149,933 | ||||||
| Other assets | 313,333 | 212,570 | ||||||
| Total assets | $ | 4,507,560 | $ | 3,382,738 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 33,381 | $ | 24,910 | ||||
| Accrued expenses and other current liabilities | 113,067 | 96,313 | ||||||
| Accrued compensation and benefits | 117,784 | 101,087 | ||||||
| Accrued income taxes | 5,055 | 7,011 | ||||||
| Deferred revenue | 482,131 | 416,804 | ||||||
| Short-term lease obligations | 27,864 | 34,635 | ||||||
| Total current liabilities | 779,282 | 680,760 | ||||||
| Long-term debt | 1,439,471 | 1,005,314 | ||||||
| Deferred tax liabilities | 4,165 | 12,431 | ||||||
| Deferred revenue | 15,546 | 9,661 | ||||||
| Long-term lease obligations | 180,935 | 180,388 | ||||||
| Other liabilities | 49,693 | 55,936 | ||||||
| Total liabilities | 2,469,092 | 1,944,490 | ||||||
| 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; 117,163 and 116,125 shares issued and outstanding at September 30, 2021 and September 30, 2020, respectively | 1,172 | 1,161 | ||||||
| Additional paid-in capital | 1,718,504 | 1,602,728 | ||||||
| Retained earnings (Accumulated deficit) | 414,656 | (62,267 | ) | |||||
| Accumulated other comprehensive loss | (95,864 | ) | (103,374 | ) | ||||
| Total stockholders’ equity | 2,038,468 | 1,438,248 | ||||||
| Total liabilities and stockholders’ equity | $ | 4,507,560 | $ | 3,382,738 |
The accompanying notes are an integral part of these consolidated financial statements.
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PTC Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| Year ended September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | |||||||||
| Revenue: | |||||||||||
| License | $ | 738,053 | $ | 509,792 | $ | 324,400 | |||||
| Support and cloud services | 911,288 | 804,825 | 763,700 | ||||||||
| Total software revenue | 1,649,341 | 1,314,617 | 1,088,100 | ||||||||
| Professional services | 157,818 | 143,798 | 167,531 | ||||||||
| Total revenue | 1,807,159 | 1,458,415 | 1,255,631 | ||||||||
| Cost of revenue: | |||||||||||
| Cost of license revenue | 61,750 | 53,195 | 51,936 | ||||||||
| Cost of support and cloud services revenue | 164,108 | 145,386 | 133,478 | ||||||||
| Total cost of software revenue | 225,858 | 198,581 | 185,414 | ||||||||
| Cost of professional services revenue | 145,244 | 135,690 | 139,964 | ||||||||
| Total cost of revenue | 371,102 | 334,271 | 325,378 | ||||||||
| Gross margin | 1,436,057 | 1,124,144 | 930,253 | ||||||||
| Operating expenses: | |||||||||||
| Sales and marketing | 517,779 | 435,451 | 417,449 | ||||||||
| Research and development | 299,917 | 256,575 | 246,888 | ||||||||
| General and administrative | 206,006 | 159,826 | 127,919 | ||||||||
| Amortization of acquired intangible assets | 29,396 | 28,713 | 23,841 | ||||||||
| Restructuring and other charges, net | 2,211 | 32,716 | 51,114 | ||||||||
| Total operating expenses | 1,055,309 | 913,281 | 867,211 | ||||||||
| Operating income | 380,748 | 210,863 | 63,042 | ||||||||
| Interest and debt premium expense | (50,478 | ) | (76,428 | ) | (43,047 | ) | |||||
| Other income, net | 61,485 | 271 | 305 | ||||||||
| Income before income taxes | 391,755 | 134,706 | 20,300 | ||||||||
| Provision (benefit) for income taxes | (85,168 | ) | 4,011 | 47,760 | |||||||
| Net income (loss) | $ | 476,923 | $ | 130,695 | $ | (27,460 | ) | ||||
| Earnings (loss) per share—Basic | $ | 4.08 | $ | 1.13 | $ | (0.23 | ) | ||||
| Earnings (loss) per share—Diluted | $ | 4.03 | $ | 1.12 | $ | (0.23 | ) | ||||
| Weighted-average shares outstanding—Basic | 116,836 | 115,663 | 117,724 | ||||||||
| Weighted-average shares outstanding—Diluted | 118,367 | 116,267 | 117,724 |
The accompanying notes are an integral part of these consolidated financial statements.
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PTC Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
| Year ended September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | |||||||||
| Net income (loss) | $ | 476,923 | $ | 130,695 | $ | (27,460 | ) | ||||
| Other comprehensive income, net of tax: | |||||||||||
| Hedge gain (loss) arising during the period, net of tax of $0.4 million, $1.7 million, and $1.7 million in 2021, 2020, and 2019, respectively | 1,248 | (13,242 | ) | 5,251 | |||||||
| Net hedge (loss) reclassified into earnings, net of tax of $0 million, $0 million, and $0.1 million in 2021, 2020, and 2019, respectively | — | — | (549 | ) | |||||||
| Realized and unrealized gain (loss) on hedging instruments | 1,248 | (13,242 | ) | 4,702 | |||||||
| Foreign currency translation adjustment, net of tax of $0 for each period | 1,613 | 22,076 | (24,755 | ) | |||||||
| Unrealized gain (loss) on marketable securities, net of tax of $0 for each period | (307 | ) | 188 | 530 | |||||||
| Amortization of net actuarial pension gain included in net income, net of tax of $1.2 million, $0.9 million, and $0.7 million in 2021, 2020, and 2019, respectively | 2,930 | 2,983 | 1,691 | ||||||||
| Pension net gain (loss) arising during the period net of tax of $0.7 million, $0.7 million, and $3.6 million in 2021, 2020, and 2019, respectively | 1,891 | (2,791 | ) | (8,743 | ) | ||||||
| Change in unamortized pension gain (loss) during the period related to changes in foreign currency | 135 | (1,878 | ) | 1,450 | |||||||
| Other comprehensive income (loss) | 7,510 | 7,336 | (25,125 | ) | |||||||
| Comprehensive income (loss) | $ | 484,433 | $ | 138,031 | $ | (52,585 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
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PTC Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Year ended September 30, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income (loss) | $ | 476,923 | $ | 130,695 | $ | (27,460 | ) | |||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 85,239 | 80,817 | 77,824 | |||||||||
| Amortization of right-of-use lease assets | 37,295 | 38,687 | — | |||||||||
| Stock-based compensation | 177,289 | 115,149 | 86,400 | |||||||||
| Gain on investment | (68,829 | ) | — | — | ||||||||
| Other non-cash items, net | (1,381 | ) | (3,167 | ) | (4,148 | ) | ||||||
| Provision (benefit) from deferred income taxes | (158,105 | ) | (24,641 | ) | 1,708 | |||||||
| Changes in operating assets and liabilities, excluding the effects of acquisitions: | ||||||||||||
| Accounts receivable | (119,418 | ) | (32,365 | ) | 29,446 | |||||||
| Accounts payable and accrued expenses | 25,096 | (5,135 | ) | 16,200 | ||||||||
| Accrued compensation and benefits | 16,775 | 10,282 | (12,098 | ) | ||||||||
| Deferred revenue | 58,702 | 17,046 | 45,875 | |||||||||
| Income taxes | 13,979 | (26,616 | ) | 232 | ||||||||
| Other current assets and prepaid expenses | (14,206 | ) | 36,189 | (2,829 | ) | |||||||
| Operating lease liabilities | (7,129 | ) | (11,110 | ) | — | |||||||
| Other noncurrent assets and liabilities | (153,421 | ) | (92,023 | ) | 73,995 | |||||||
| Net cash provided by operating activities | 368,809 | 233,808 | 285,145 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Additions to property and equipment | (24,713 | ) | (20,196 | ) | (64,411 | ) | ||||||
| Purchases of short- and long-term marketable securities | (7,562 | ) | (33,869 | ) | (33,027 | ) | ||||||
| Proceeds from sales of short- and long-term marketable securities | 56,170 | 1,521 | 1,507 | |||||||||
| Proceeds from maturities of short- and long-term marketable securities | 9,861 | 30,521 | 30,469 | |||||||||
| Acquisitions of businesses, net of cash acquired | (718,030 | ) | (483,478 | ) | (86,737 | ) | ||||||
| Purchases of investments | (4,000 | ) | — | (7,500 | ) | |||||||
| Purchase of intangible assets | (550 | ) | (11,050 | ) | — | |||||||
| Settlement of net investment hedges | 965 | (9,421 | ) | 9,675 | ||||||||
| Net cash used in investing activities | (687,859 | ) | (525,972 | ) | (150,024 | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from issuance of Senior Notes | — | 1,000,000 | — | |||||||||
| Borrowings under credit facility | 600,000 | 455,000 | 205,000 | |||||||||
| Repayments of Senior Notes | — | (500,000 | ) | — | ||||||||
| Repayments of borrowings under credit facility | (168,000 | ) | (610,125 | ) | (180,000 | ) | ||||||
| Repurchases of common stock | (30,000 | ) | — | (114,994 | ) | |||||||
| Proceeds from issuance of common stock | 21,575 | 18,382 | 12,975 | |||||||||
| Debt issuance costs | — | (17,107 | ) | — | ||||||||
| Contingent consideration | — | — | (1,575 | ) | ||||||||
| Debt early redemption premium | — | (15,000 | ) | — | ||||||||
| Payments of withholding taxes in connection with stock-based awards | (52,957 | ) | (33,740 | ) | (44,366 | ) | ||||||
| Payments of principal for financing leases | (354 | ) | — | — | ||||||||
| Net cash provided by (used in) financing activities | 370,264 | 297,410 | (122,960 | ) | ||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (127 | ) | 25 | (2,565 | ) | |||||||
| Net change in cash, cash equivalents, and restricted cash | 51,087 | 5,271 | 9,596 | |||||||||
| Cash, cash equivalents, and restricted cash, beginning of period | 275,960 | 270,689 | 261,093 | |||||||||
| Cash, cash equivalents, and restricted cash, end of period | $ | 327,047 | $ | 275,960 | $ | 270,689 | ||||||
| Supplemental disclosure of non-cash financing activities: | ||||||||||||
| Withholding taxes in connection with stock-based awards, accrued | 120 | — | — |
The accompanying notes are an integral part of these consolidated financial statements.
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PTC Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
| Common Stock | Additional | Retained Earnings | Accumulated Other | Total | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Shares | Amount | Paid-In Capital | (Accumulated Deficit) | Comprehensive Loss | Stockholders’ Equity | |||||||||||||||||||
| 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 available-for-sale 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 | |||||||||||
| ASU 2016-02 (ASC 842) adoption | — | — | — | (1,572 | ) | — | (1,572 | ) | ||||||||||||||||
| Common stock issued for employee stock-based awards | 1,392 | 14 | (14 | ) | — | — | — | |||||||||||||||||
| Shares surrendered by employees to pay taxes related to stock-based awards | (455 | ) | (4 | ) | (33,736 | ) | — | — | (33,740 | ) | ||||||||||||||
| Common stock issued for employee stock purchase plan | 289 | 2 | 18,380 | — | — | 18,382 | ||||||||||||||||||
| Compensation expense from stock-based awards | — | — | 115,149 | — | — | 115,149 | ||||||||||||||||||
| Net income | — | — | — | 130,695 | — | 130,695 | ||||||||||||||||||
| Unrealized loss on net investment hedges, net of tax | — | — | — | — | (13,242 | ) | (13,242 | ) | ||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | 22,076 | 22,076 | ||||||||||||||||||
| Unrealized gain on available-for-sale securities, net of tax | — | — | — | — | 188 | 188 | ||||||||||||||||||
| Change in pension benefits, net of tax | — | — | — | — | (1,686 | ) | (1,686 | ) | ||||||||||||||||
| Balance as of September 30, 2020 | 116,125 | $ | 1,161 | $ | 1,602,728 | $ | (62,267 | ) | $ | (103,374 | ) | $ | 1,438,248 | |||||||||||
| Common stock issued for employee stock-based awards | 1,490 | 15 | (15 | ) | — | — | — | |||||||||||||||||
| Shares surrendered by employees to pay taxes related to stock-based awards | (466 | ) | (4 | ) | (53,073 | ) | — | — | (53,077 | ) | ||||||||||||||
| Common stock issued for employee stock purchase plan | 240 | 2 | 21,573 | — | — | 21,575 | ||||||||||||||||||
| Compensation expense from stock-based awards | — | — | 177,289 | — | — | 177,289 | ||||||||||||||||||
| Net income | — | — | — | 476,923 | — | 476,923 | ||||||||||||||||||
| Repurchases of common stock | (226 | ) | (2 | ) | (29,998 | ) | — | — | (30,000 | ) | ||||||||||||||
| Unrealized gain on net investment hedges, net of tax | — | — | — | — | 1,248 | 1,248 | ||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | 1,613 | 1,613 | ||||||||||||||||||
| Unrealized loss on available-for-sale securities, net of tax | — | — | — | — | (307 | ) | (307 | ) | ||||||||||||||||
| Change in pension benefits, net of tax | — | — | — | — | 4,956 | 4,956 | ||||||||||||||||||
| Balance as of September 30, 2021 | 117,163 | $ | 1,172 | $ | 1,718,504 | $ | 414,656 | $ | (95,864 | ) | $ | 2,038,468 |
The accompanying notes are an integral part of these consolidated financial statements.
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PTC Inc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 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.
Risks and Uncertainties - COVID-19 Pandemic
In December 2019, the COVID-19 coronavirus surfaced. The virus has spread worldwide, including in the United States, and has been declared a pandemic by the World Health Organization. The COVID-19 pandemic significantly impacted global economic activity and continues to cause macroeconomic uncertainty.
We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of COVID-19 as of September 30, 2021, and through the date of this report. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, stock-based compensation, the carrying value of our goodwill and other long-lived assets, financial assets, valuation allowances for tax assets and revenue recognition. While our assessment did not result in a material impact to our consolidated financial statements as of and for the year ended September 30, 2021, our future assessment could result in material impacts to our consolidated financial statements in future reporting periods.
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.
- 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 statement amounts at average rates for the period. Transaction gains and losses are recorded in other income, net in the Consolidated Statements of Operations.
Revenue Recognition
We adopted ASC 606, Revenue from Contracts with Customers, effective October 1, 2018, using the modified retrospective method.
Nature of Products and Services
Our sources of revenue include: (1) subscriptions, (2) perpetual licenses, (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. In accordance with ASC 606,
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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, |
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| (2) | identify the performance obligations in the contract, |
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| (3) | determine the transaction price, |
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| (4) | allocate the transaction price to performance obligations in the contract, and |
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| (5) | recognize revenue when or as we satisfy a performance obligation. |
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We enter into contracts that include combinations of licenses, 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-premises 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 |
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 and on-premise licenses, we assess whether the cloud component is highly interrelated with the 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. Where subscriptions include on-premise software and support only, we determined that 55% of the estimated standalone selling price for subscriptions is attributable to software licenses and 45% is attributable to support for those licenses. Some of our subscription offerings include a combination of on-premise and cloud-based technology. In such cases, the cloud-based technology is considered distinct and receives an allocation of 5% to 50% of the estimated standalone selling price of the subscription. The amounts allocated to cloud are based on assessment of the relative value of the cloud functionality in the subscription, with the remaining amounts allocated between software and support.
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
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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, 2021 and 2020, the total refund liability was $40.3 million and $34.5 million, respectively, primarily associated with the annual right to exchange on-premise subscription software.
Practical Expedients
We have elected certain practical expedients associated with our revenue recognition policy. 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 to 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
As of September 30, 2020, our investment portfolio consisted of certificates of deposit, commercial paper, corporate notes/bonds and government securities that had a maximum maturity of three years. In December 2020, we sold all our marketable securities to partially fund the Arena acquisition, resulting in proceeds of $56.2 million. Neither gross realized gains nor gross realized losses related to the sale were material.
Equity Securities
On July 22, 2021, a company in which we were a preferred equity investor, Matterport, Inc., completed a business combination with a public company. The carrying value of our investment, which was classified as a non-marketable equity investment, was approximately $8.7 million prior to the business combination. Our preferred shares were converted into common shares of Matterport. The Matterport shares are considered equity securities and are included in other current assets. Any change to fair value will be recorded to the Consolidated Statements of Operations.
After the date of the business combination, for a period of six months, subject to certain exceptions, we are restricted from selling the Matterport shares pursuant to Rule 144 under the Securities Act (Rule 144) and Matterport’s bylaws.
The fair value of the Matterport shares as of September 30, 2021 was $77.5 million and was determined using the closing price of Matterport’s common stock on the Nasdaq stock market as of September 30, 2021, less a temporary discount for lack of marketability. We recorded an unrealized gain on the appreciation of the value of the shares in other income, net on the Consolidated Statement of Operations. The discount for lack of marketability, which will reverse once the applicable restrictions are lifted, is calculated using a put-option model which includes observable and unobservable inputs. The methods used to determine fair value of the Matterport shares may produce a value that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
We also have non-marketable equity investments that we account for at cost, less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for identical or
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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, net on the Consolidated Statements of Operations. In the years ended September 30, 2021and 2019, we did not record any impairment charges to our investments. In the year ended September 30, 2020, we recorded $0.5 million of impairment charges related to one of our investments. The carrying value of our non-marketable equity investments is recorded in other assets on the Consolidated Balance Sheets and totaled $2.2 million and $8.9 million as of September 30, 2021 and 2020, respectively.
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 many geographically diverse customers dispersed across many industries. No individual customer comprised more than 10% of our trade accounts receivable as of September 30, 2021 or 2020 or more than 10% of our revenue for the years ended September 30, 2021, 2020 or 2019.
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; |
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| • | 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 |
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| • | 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. |
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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. Effective October 1, 2020, we adopted ASC 326, Financial Instruments—Credit Losses, which replaces the incurred loss impairment model with an expected loss model that requires the use of forward-looking information to calculate credit loss estimates. 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 $0.3 million as of September 30, 2021, $0.5 million as of September 30, 2020, and $0.7 million as of September 30, 2019. Uncollectible trade accounts
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receivable written-off, net of recoveries, were $0.1 million, $0.2 million and $0.2 million in 2021, 2020 and 2019, respectively. Bad debt recoveries were $0.2 million in 2021, and bad debt expense was $0.0 million and $0.3 million in 2020 and 2019, 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 currencies 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 net investment hedge activity 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. Because we enter into forward contracts only as an economic hedge, any gain or loss on the underlying foreign-denominated balance would be offset by the loss or gain on the forward contract. Gains or losses on the underlying foreign-denominated balance are offset by the loss or gain on the forward contract and are included in other income, net.
Net Investment Hedges
We translate balance sheet accounts of subsidiaries with foreign functional currencies into 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 counterparties by trading among several counterparties, and we review our counterparties’ credit at least quarterly.
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Leases
We adopted ASC 842 effective October 1, 2019 (the effective date). ASC 842 requires a modified retrospective transition method that could either be applied at the earliest comparative period in the financial statements or in the period of adoption. We elected to use the period of adoption (October 1, 2019) transition method and therefore did not recast prior periods.
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets and operating lease obligations on our Consolidated Balance Sheets. Our operating leases are primarily for office space, cars, servers, and office equipment. We made an election not to separate lease components from non-lease components for office space, servers and office equipment. We combine fixed payments for non-lease components with lease payments and account for them together as a single lease component which increases the amount of our lease assets and liabilities. Finance leases are included in property and equipment, accrued expenses and other current liabilities, and other liabilities on our Consolidated Balance Sheets.
Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the leases. Right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term as that of the lease payments at the commencement date. The right-of-use assets include any lease payments made and exclude lease incentives received. Operating lease expense is recognized on a straight-line basis over the lease term.
Our lease terms include periods under options to extend or terminate the lease when it is reasonably certain that we will exercise that option. We generally use the base non-cancellable lease term when determining the lease assets and liabilities.
Certain lease agreements contain variable payments, which are expensed as incurred and not included in the lease assets and liabilities. These variable payments include insurance, taxes, consumer price index payments, and payments for maintenance and utilities.
Our operating leases expire at various dates through 2037.
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 twelve 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 term 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. Our research and development expenses consist principally of salaries and benefits, costs of computer equipment, and facility expenses. Research and development costs are expensed as incurred, except for costs of internally developed or externally purchased software that qualify for capitalization. Development costs for software to be sold externally incurred subsequent to the establishment of technological feasibility, but prior to the general release of the product, are capitalized and, upon general release, are amortized using the greater of either the straight-line method over the expected life of the related products or based upon the pattern in which economic benefits related to such assets are realized. The straight-line method is used if it approximates the same amount of expense as that calculated using the ratio that current period gross product revenues bear to total anticipated gross product revenues. No development costs for software to be sold externally were capitalized in 2021, 2020 or 2019. We purchased software of $0.6 million and $11.1 million in 2021 and 2020, respectively.
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Additionally, we acquired capitalized software through business combinations (for further detail, see Note 6. Acquisitions). These assets are included in acquired intangible assets in the accompanying Consolidated Balance Sheets.
Business Combinations
We allocate the purchase price of acquisitions to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair value. Goodwill is measured as the excess of the purchase price over the value of net identifiable assets acquired. While best estimates and assumptions are used to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. Any adjustments to estimated fair value are recorded to goodwill, provided that we are within the measurement period (up to one year from the acquisition date) and that we continue to collect information to determine estimated fair value. Subsequent to the measurement period or our final determination of estimated fair value, whichever comes first, adjustments are recorded in the Consolidated Statements of Operations.
Goodwill, Acquired Intangible Assets and Long-lived Assets
Goodwill is the amount by which the purchase price in a business acquisition exceeds the fair value 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 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 quantitative or qualitative assessment. A quantitative assessment 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 estimated 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 and operating plans, including consideration of the impact of the COVID-19 pandemic on our future results; and industry data. A qualitative assessment 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. Qualitative 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.
We completed our annual goodwill impairment review as of June 30, 2021, based on a qualitative assessment. Our qualitative assessment included company-specific (e.g., financial performance and long-range plans), industry, and macroeconomic factors, as well as consideration of the fair value of each reporting unit relative to its carrying value at the last valuation date which was June 27, 2020. 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, 2021, there were no events or changes in circumstances that indicated that the carrying values of goodwill or acquired intangible assets may not be recoverable.
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 16 years, customer lists are amortized over periods up to 13 years and trademarks are amortized over periods up to 12 years. We review long-lived assets for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of those assets are no longer appropriate. An impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset or asset group. If
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impairment is indicated, the asset is written down to its estimated fair value based on a discounted cash flow analysis.
Advertising Expenses
Advertising costs are expensed as incurred. Total advertising expenses incurred were $7.1 million, $3.8 million and $3.6 million in 2021, 2020 and 2019, respectively and are included in sales and marketing expenses in the accompanying Consolidated Statements of Operations.
Income Taxes
Our income tax expense includes U.S. and international income taxes. Certain items of income and expense are not reported in tax returns and financial statements in the same year. The tax effects of these differences are reported as deferred tax assets and liabilities. Deferred tax assets are recognized for the estimated future tax effects of deductible temporary differences and tax operating loss and credit carryforwards. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that it is more likely than not that all or a portion of deferred tax assets will not be realized, we establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we include an expense within the tax provision in the Consolidated Statements of Operations.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss), which includes foreign currency translation adjustments, changes in unrecognized actuarial gains and losses (net of tax) related to pension benefits, unrealized gains and losses on hedging instruments and unrealized gains and losses on marketable securities. 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, 2021, was comprised of the following: cumulative translation adjustment losses of $67.5 million, unrecognized actuarial losses related to pension benefits of $30.2 million ($21.5 million net of tax), and accumulated net losses from net investment hedges of $6.5 million ($6.5 million net of tax). As of September 30, 2020, accumulated other comprehensive loss was comprised of the following: cumulative translation adjustment losses of $69.1 million, unrecognized actuarial losses related to pension benefits of $37.2 million ($26.4 million net of tax), unrecognized gains on available-for-sale securities of $0.3 million($0.3 million net of tax), and accumulated net gains from net investment hedges of $8.2 million ($8.2 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. 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. Anti-dilutive shares excluded from the calculations of diluted EPS were immaterial in the years ended September 30, 2021 and 2020. Due to the net loss generated in the year ended September 30, 2019, approximately 1.0 million restricted stock units were excluded from the computation of diluted EPS in that year as the effect would have been anti-dilutive.
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The following table presents the calculation for both basic and diluted EPS:
| (in thousands, except per share data) | Year ended September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||
| Net income (loss) | $ | 476,923 | $ | 130,695 | $ | (27,460 | ) | |||||
| Weighted average shares outstanding | 116,836 | 115,663 | 117,724 | |||||||||
| Dilutive effect of employee stock options, restricted shares and restricted stock units | 1,531 | 604 | — | |||||||||
| Diluted weighted average shares outstanding | 118,367 | 116,267 | 117,724 | |||||||||
| Basic earnings (loss) per share | $ | 4.08 | $ | 1.13 | $ | (0.23 | ) | |||||
| Diluted earnings (loss) per share | $ | 4.03 | $ | 1.12 | $ | (0.23 | ) |
Stock-Based Compensation
We measure the compensation cost of employee services received in exchange for an award of equity 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 equity awards granted, the compensation expense related to such awards and detail of such 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
Intangibles—Goodwill and Other—Internal-Use Software
In August 2018, the FASB issued Accounting Standards Update (ASU) 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which aligns the requirements for capitalizing implementation costs in cloud computing arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We adopted the new standard prospectively effective October 1, 2020. As a result of the adoption, we are required to capitalize certain costs related to the implementation of cloud computing arrangements. Capitalized costs related to cloud computing arrangements, which are included in other assets on the Consolidated Balance Sheets, were $2.8 million as of September 30, 2021.
Financial Instruments—Credit Losses
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASC 326), which, along with subsequent amendments, replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information when recording credit loss estimates. We adopted the new standard effective October 1, 2020, with no impact on our consolidated financial statements.
Pending Accounting Pronouncements
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides optional guidance for contract modifications and certain hedging relationships associated with the transition from reference rates that are expected to be discontinued. ASU 2020-04 is effective for all entities upon issuance through December 31, 2022. We are still evaluating the impact, but do not expect the standard to have a material impact on our consolidated financial statements.
Income Taxes
In December 2019, the FASB issued Accounting Standards Update ASU 2019-12, Income Taxes (Topic 740) on Simplifying the Accounting for Income Taxes. The decisions reflected in ASU 2019-12 update specific areas of ASC 740, Income Taxes, to reduce complexity while maintaining or improving the usefulness of the information provided to users of financial statements. The new standard will be effective
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for us in the first quarter of 2022 ending December 31, 2021. We do not expect this accounting standard to have a material impact on our consolidated financial statements.
Business Combinations
In October 2021, the FASB issued Accounting Standards Update ASU 2021-08, Business Combinations (Topic 805) on Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU is intended to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to 1) recognition of an acquired contract liability, and 2) payment terms and their effect on subsequent revenue recognized by the acquirer. ASU 2021-08 will be effective for us in the first quarter of 2024, though early adoption of the standard is permitted. We are currently evaluating the impact the standard will have on our consolidated financial statements, but at this time we do not expect it to be material for prior acquisitions; the impact in future periods will depend on the contract assets and contract liabilities acquired in future business combinations.
- Revenue from Contracts with Customers
Contract Assets and Contract Liabilities
| (in thousands) | September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||
| Contract asset | $ | 12,934 | $ | 11,984 | ||||
| Deferred revenue | $ | 497,677 | $ | 426,465 |
As of September 30, 2021, $8.2 million of our contract assets are expected to be transferred to receivables within the next 12 months and therefore are included in other current assets. The remainder is included in other long-term assets and expected to be transferred within the next 24 months. As of September 30, 2020, $6.9 million of our contract asset balance was included in other current assets and $5.0 million was included in other long-term assets.
Approximately $6.6 million of the September 30, 2020 contract asset balance was transferred to receivables during the year ended September 30, 2021 as a result of the right to payment becoming unconditional. The majority of the contract asset balance relates to two large professional services contracts with invoicing terms based on performance milestones. The net increase in contract assets of $0.9 million includes an increase of approximately $7.5 million related to revenue recognized in the period, net of billings.
During the year ended September 30, 2021, we recognized $402.5 million of revenue that was included in deferred revenue as of September 30, 2020 and there were additional deferrals of $458.2 million, primarily related to new billings. In addition, deferred revenue increased by $15.5 million (net of a $10.4 million fair value adjustment) as a result of the acquisition of Arena. For subscription contracts, we generally invoice customers annually. The balance of total short- and long-term receivables as of September 30, 2021 was $744.6 million, compared to $511.3 million as of September 30, 2020.
Costs to Obtain or Fulfill a Contract
We recognize an asset for the incremental costs of obtaining a contract with a customer if the benefit of those costs is expected to be longer than one year. These deferred costs (primarily commissions) are amortized proportionately related to revenue over 5 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, 2021 and September 30, 2020, deferred costs of $40.2 million and $33.9 million, respectively, were included in other current assets and $81.1 million and $72.9 million, respectively, were included in other assets (non-current). Amortization expense related to costs to obtain a contract with a customer was $46.7 million and $36.2 million in the years ended September 30, 2021 and 2020, respectively. There were no impairments of the contract cost asset in the years ended September 30, 2021 and 2020.
F-18
Remaining Performance Obligations
Our contracts with customers include amounts allocated to performance obligations that will be satisfied at a later date. As of September 30, 2021, the amounts include additional performance obligations of $497.7 million recorded in deferred revenue and $987.3 million that are not yet recorded in the consolidated balance sheets. We expect to recognize approximately 82% of the total $1,485.0 million over the next 24 months, with the remaining amount thereafter.
Disaggregation of Revenue
| (in thousands) | Year ended September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||
| Total recurring revenue | $ | 1,616,328 | $ | 1,281,949 | $ | 1,017,398 | ||||||
| Perpetual license | 33,013 | 32,668 | 70,702 | |||||||||
| Professional services | 157,818 | 143,798 | 167,531 | |||||||||
| Total revenue | $ | 1,807,159 | $ | 1,458,415 | $ | 1,255,631 |
For further disaggregation of revenue by geographic region and product group see Note 18. Segment and Geographic Information.
- Restructuring and Other Charges
Restructuring and other charges, net includes restructuring charges (credits), headquarters relocation charges, and impairment and accretion expense charges related to the lease assets of exited facilities. Refer to Note 19. Leases for additional information about exited facilities.
In 2021, restructuring and other charges, net totaled $2.2 million, of which $2.1 million is attributable to restructuring charges and $0.1 million is attributable to impairment and accretion expense related to exited lease facilities. We made cash payments related to restructuring charges of $6.7 million ($3.9 million related to the 2020 restructuring and $2.8 million in rent payments for the restructured facilities).
In 2020, restructuring and other charges, net totaled $32.7 million, of which $26.4 million is attributable to restructuring charges, $5.6 million is attributable to impairment and accretion expense related to exited lease facilities, and $0.7 million is attributable to accelerated depreciation related to the planned exit of a facility. We made cash payments related to restructuring charges of $31.5 million ($27.3 million related to the 2020 restructuring, $3.9 million related to the 2019 restructuring, and $0.3 million related to a prior restructuring).
In 2019, restructuring and other charges, net totaled $51.1 million, of which $48.6 million was attributable to restructuring charges ($0.2 million of which related to prior facility restructuring actions) and $2.5 million was 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 a prior restructuring).
Restructuring Charges
In anticipation of a potential restructuring action, we incurred $1.7 million of professional fees in the fourth quarter of 2021. Refer to Note 20. Subsequent Events for additional information about this restructuring charge.
During the first quarter of 2020, we initiated a restructuring program as part of a realignment associated with expected synergies and operational efficiencies related to the Onshape acquisition. In the year ended September 30, 2020, we incurred $30.8 million in connection with this restructuring plan for termination benefits associated with approximately 250 employees. In the year ended September 30, 2021, we recorded $0.2 million of charges related to this restructuring plan.
During the first quarter of 2019, we initiated a restructuring plan to realign our workforce to shift investment to support Industrial Internet of Things and Augmented Reality strategic opportunities. The restructuring plan was completed in the first quarter of 2019 and resulted in restructuring charges of $16.3 million for termination benefits associated with approximately 240 employees, substantially all of which
F-19
has been paid. In the year ended September 30, 2020, we recorded $0.1 million of credits related to this restructuring plan.
During the second quarter of 2019, we relocated our worldwide headquarters to the Boston Seaport District. We incurred a restructuring charge for the former headquarters lease, which expires in November 2022. As a result, we bear overlapping rent obligations for those premises and, in 2019, we recorded restructuring charges of approximately $32.7 million, based on the net present value of remaining lease commitments net of estimated sublease income. Other costs associated with the move were recorded as incurred. In 2020, we recorded a $4.3 million net credit for accrued variable operating restructuring charges, primarily associated with the exit of a portion of our former headquarters lease under a partial buy-out agreement with the landlord. In 2021, we recorded restructuring charges of $0.3 million, primarily associated with maintenance and operating expenses.
The following table summarizes restructuring accrual activity for the three years ended September 30, 2021:
| (in thousands) | Employee severance and related benefits | Facility closures and other costs | Consolidated total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance, September 30, 2018 | $ | — | $ | 2,415 | $ | 2,415 | ||||||
| Charges to operations, net | 15,704 | 32,908 | 48,612 | |||||||||
| Cash disbursements | (15,402 | ) | (9,319 | ) | (24,721 | ) | ||||||
| Other non-cash charges | — | 4,812 | 4,812 | |||||||||
| Foreign exchange impact | (4 | ) | (28 | ) | (32 | ) | ||||||
| Balance, September 30, 2019 | 298 | 30,788 | 31,086 | |||||||||
| ASC 842 adoption | — | (16,462 | ) | (16,462 | ) | |||||||
| Charges (credits) to operations, net | 30,690 | (4,263 | ) | 26,427 | ||||||||
| Cash disbursements | (27,256 | ) | (4,246 | ) | (31,502 | ) | ||||||
| Other non-cash | — | 164 | 164 | |||||||||
| Foreign exchange impact | 260 | 14 | 274 | |||||||||
| Balance, September 30, 2020 | 3,992 | 5,995 | 9,987 | |||||||||
| Charges to operations, net | 1,887 | 249 | 2,136 | |||||||||
| Cash disbursements | (3,925 | ) | (2,756 | ) | (6,681 | ) | ||||||
| Foreign exchange impact | 27 | 17 | 44 | |||||||||
| Balance, September 30, 2021 | $ | 1,981 | $ | 3,505 | $ | 5,486 |
The accrual for employee severance and related benefits is included in accrued compensation and benefits in the Consolidated Balance Sheets.
Upon adoption of ASC 842, $16.5 million of accrued expenses and other current liabilities, representing the present value of lease commitments net of estimated sublease income, were reclassified to lease assets and obligations: $7.6 million to lease assets, $9.2 million to short-term lease obligations and $14.9 million to long-term lease obligations.
As of September 30, 2021, the remaining restructuring facility accrual of $3.5 million relates to variable non-lease costs not subject to ASC 842, of which $2.6 million is included in accrued expenses and other current liabilities and $0.9 million is included in other liabilities in the Consolidated Balance Sheets.
Of the accrual for facility closures and related costs, as of September 30, 2020, $2.8 million is included in accrued expenses and other current liabilities and $3.2 million is included in other liabilities in the Consolidated Balance Sheets.
Other - Headquarters Relocation Charges
Headquarters relocation charges represent other expenses associated with exiting our prior Needham headquarters facility and relocating to our worldwide headquarters in the Boston Seaport District. In 2019, we recorded $1.9 million of accelerated depreciation expense related to shortening the estimated useful lives of leasehold improvements related to the Needham location. Headquarters relocation charges for 2019 also included $0.6 million of rental expense for the Needham facility that overlapped with rental expense for the new Seaport headquarters.
F-20
- Property and Equipment
Property and equipment consisted of the following:
| (in thousands) | September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||
| Computer hardware and software | $ | 352,704 | $ | 330,392 | ||||
| Furniture and fixtures | 30,568 | 30,251 | ||||||
| Leasehold improvements | 94,959 | 99,883 | ||||||
| Gross property and equipment | 478,231 | 460,526 | ||||||
| Accumulated depreciation and amortization | (377,994 | ) | (359,027 | ) | ||||
| Net property and equipment | $ | 100,237 | $ | 101,499 |
Depreciation expense was $26.1 million, $24.7 million and $26.7 million in 2021, 2020 and 2019, respectively.
- Acquisitions
Acquisition-related costs were $15.0 million, $8.6 million and $3.1 million in 2021, 2020 and 2019, respectively. Acquisition-related costs include direct costs of potential and completed acquisitions (e.g., investment banker fees and professional fees, including legal and valuation services) and expenses related to acquisition integration activities (e.g., professional fees and severance). In addition, subsequent adjustments to our initial estimated amount of contingent consideration associated with specific acquisitions are included within acquisition-related charges. These costs are classified in general and administrative expenses in the accompanying Consolidated Statements of Operations.
Our results of operations include the results of acquired businesses beginning on their respective acquisition date. For all acquisitions made in 2021, our results of operations, if presented on a pro forma basis, would not differ materially from our reported results.
Arena
On January 15, 2021, we acquired Arena Holdings, Inc. (“Arena”) pursuant to an Agreement and Plan of Merger dated as of December 12, 2020 by and among PTC, Arena, Astronauts Merger Sub, Inc., and the Representative named therein, the material terms of which are described in the Form 8-K filed by PTC on December 14, 2020 and which is filed as Exhibit 1.1 to that Form 8-K. PTC paid approximately $715 million, net of cash acquired of $11.1 million, for Arena, which amount was financed with cash on hand and $600 million borrowed under our existing credit facility. Arena had approximately 170 employees on the close date. The acquisition of Arena added revenue of approximately $29.8 million in 2021, which is net of approximately $9.1 million in fair value adjustments related to purchase accounting for the acquisition.
The acquisition of Arena 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 $562.8 million of goodwill, $155.0 million of customer relationships, $38.3 million of purchased software, $4.2 million of trademarks, $41.3 million of deferred tax liabilities, $15.5 million of deferred revenue, $11.4 million of accounts receivable, and $0.4 million of other net liabilities. The acquired customer relationships, purchased software, and trademarks are being amortized over useful lives of 13 years, 9 years, and 12 years, respectively, based on the expected economic 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 participation in expected future growth of the PLM SaaS market and expansion into the mid-market for PLM, where SaaS solutions are becoming the standard.
F-21
Onshape
On November 1, 2019, we acquired Onshape Inc. pursuant to an Agreement and Plan of Merger dated as of October 23, 2019 by and among PTC, Onshape Inc., OPAL Acquisition Corporation and the Stockholder Representative named therein, the material terms of which are described in the Form 8-K filed by PTC on October 23, 2019 and which is filed as Exhibit 1.1 to that Form 8-K. PTC paid approximately $469 million, net of cash acquired of $7.5 million, for Onshape, which amount we borrowed under our existing credit facility. The acquisition of Onshape did not add material revenue in 2020.
The acquisition of Onshape has been accounted for as a business combination. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition date. The fair values of intangible assets were based on valuations using a discounted cash flow model which requires the use of significant judgment and assumptions, including estimating future revenues and costs. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill.
The purchase price allocation resulted in $364.9 million of goodwill, $56.8 million of customer relationships, $47.3 million of purchased software, $3.6 million of trademarks and $4.1 million of other net liabilities. The acquired customer relationships, purchased software, and trademarks are being amortized over useful lives of 10 years, 16 years, and 15 years, respectively, based on the expected benefit pattern of the assets. The acquired goodwill was allocated to our software products segment and will not be deductible for income tax purposes. The resulting amount of goodwill reflects the expected value that will be created by the expected acceleration of CAD and PLM growth, especially in the low end of the market, and participation in expected future growth of the CAD and PLM SaaS market. In addition, over the longer term, we anticipate building products based on the Onshape SaaS technology platform.
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 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 fourth quarter of 2020, we completed an acquisition for $15.0 million (net of cash acquired of $0.1 million). At the time of acquisition, the company had approximately 20 employees and historical annualized revenues were not material. This acquisition did not add material revenue in 2020.
The acquisition was accounted for as a business combination. 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
F-22
price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill.
The purchase price allocation resulted in $12.3 million of goodwill, $3.4 million of purchased software, $0.7 of customer relationships and $1.4 million of other net liabilities. The purchased software and customer relationships are being amortized over useful lives of 7 years and 10 years, respectively, based on the expected benefit pattern of the assets. The acquired goodwill was allocated to our software segment and will not be deductible for income tax purposes.
- Goodwill and Acquired Intangible Assets
We have two operating and reportable segments: (1) Software Products and (2) Professional Services. We assess goodwill for impairment at the reporting unit level. Our reporting units are determined based on the components of our operating segments that constitute a business for which discrete financial information is available and for which operating results are regularly reviewed by segment management. Our reporting units are the same as our operating segments.
As of September 30, 2021, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was $2,525.7 million and attributable to our Professional Services segment was $45.2 million. As of September 30, 2020, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was $1,818.1 million and attributable to our Professional Services segment was $45.3 million.
Goodwill and acquired intangible assets consisted of the following:
| (in thousands) | September 30, 2021 | September 30, 2020 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross Carrying Amount | Accumulated Amortization | Net Book Value | Gross Carrying Amount | Accumulated Amortization | Net Book Value | |||||||||||||||||||
| Goodwill (not amortized) | $ | 2,191,887 | $ | 1,625,786 | ||||||||||||||||||||
| Intangible assets with finite lives (amortized)(1): | ||||||||||||||||||||||||
| Purchased software | $ | 483,771 | $ | 338,542 | $ | 145,229 | $ | 443,275 | $ | 309,124 | $ | 134,151 | ||||||||||||
| Capitalized software | 22,877 | 22,877 | — | 22,877 | 22,877 | — | ||||||||||||||||||
| Customer lists and relationships | 574,516 | 350,648 | 223,868 | 418,953 | 322,092 | 96,861 | ||||||||||||||||||
| Trademarks and trade names | 26,906 | 17,036 | 9,870 | 22,687 | 16,129 | 6,558 | ||||||||||||||||||
| Other | 4,000 | 4,000 | — | 4,017 | 4,017 | — | ||||||||||||||||||
| $ | 1,112,070 | $ | 733,103 | $ | 378,967 | $ | 911,809 | $ | 674,239 | $ | 237,570 | |||||||||||||
| Total goodwill and acquired intangible assets | $ | 2,570,854 | $ | 1,863,356 |
| (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 10 years, 11 years, and 12 years, respectively. |
|---|
The changes in the carrying amounts of goodwill from September 30, 2020 to September 30, 2021 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, 2019 | $ | 1,196,064 | $ | 42,115 | $ | 1,238,179 | ||||||
| Onshape Acquisition | 364,910 | — | 364,910 | |||||||||
| Other acquisitions | 12,262 | — | 12,262 | |||||||||
| Foreign currency translation adjustments | 10,080 | 355 | 10,435 | |||||||||
| Balance, September 30, 2020 | $ | 1,583,316 | $ | 42,470 | $ | 1,625,786 | ||||||
| Arena acquisition | 563,620 | — | 563,620 | |||||||||
| Other acquisitions | 181 | 400 | 581 | |||||||||
| Foreign currency translation adjustments | 1,851 | 49 | 1,900 | |||||||||
| Balance, September 30, 2021 | $ | 2,148,968 | $ | 42,919 | $ | 2,191,887 |
F-23
The aggregate amortization expense for intangible assets with finite lives recorded for the years ended September 30, 2021, 2020 and 2019 was reflected in our Consolidated Statements of Operations as follows:
| (in thousands) | Year ended September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||
| Amortization of acquired intangible assets | $ | 29,396 | $ | 28,713 | $ | 23,841 | ||||||
| Cost of software revenue | 29,769 | 27,391 | 27,307 | |||||||||
| Total amortization expense | $ | 59,165 | $ | 56,104 | $ | 51,148 |
The estimated aggregate future amortization expense for intangible assets with finite lives remaining as of September 30, 2021 is $57.9 million for 2022, $49.5 million for 2023, $40.8 million for 2024, $34.6 million for 2025, $31.0 million for 2026 and $165.2 million thereafter.
- Income Taxes
Our income (loss) before income taxes consisted of the following:
| (in thousands) | Year ended September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||
| Domestic | $ | 41,199 | $ | (73,865 | ) | $ | (112,077 | ) | ||||
| Foreign | 350,556 | 208,571 | 132,377 | |||||||||
| Total income before income taxes | $ | 391,755 | $ | 134,706 | $ | 20,300 |
Our provision (benefit) for income taxes consisted of the following:
| (in thousands) | Year ended September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||
| Current: | ||||||||||||
| Federal | $ | 4,774 | $ | 2,187 | $ | 13,130 | ||||||
| State | 1,609 | 1,266 | (945 | ) | ||||||||
| Foreign | 66,554 | 25,199 | 33,867 | |||||||||
| 72,937 | 28,652 | 46,052 | ||||||||||
| Deferred: | ||||||||||||
| Federal | (152,311 | ) | (26,811 | ) | 22,911 | |||||||
| State | (27,228 | ) | (4,063 | ) | 1,759 | |||||||
| Foreign | 21,434 | 6,233 | (22,962 | ) | ||||||||
| (158,105 | ) | (24,641 | ) | 1,708 | ||||||||
| Total provision (benefit) for income taxes | $ | (85,168 | ) | $ | 4,011 | $ | 47,760 |
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, | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||||||||||||||
| Statutory federal income tax rate | $ | 82,268 | 21 | % | $ | 28,288 | 21 | % | $ | 4,263 | 21 | % | ||||||||||||
| Change in valuation allowance | (134,695 | ) | (34 | )% | (16,489 | ) | (12 | )% | 66,417 | 327 | % | |||||||||||||
| State income taxes, net of federal tax benefit | (28,768 | ) | (8 | )% | (2,998 | ) | (2 | )% | 607 | 3 | % | |||||||||||||
| Federal research and development credits | (5,764 | ) | (2 | )% | (5,483 | ) | (4 | )% | (3,731 | ) | (18 | )% | ||||||||||||
| Uncertain tax positions | 3,398 | 1 | % | 3,072 | 2 | % | 2,611 | 13 | % | |||||||||||||||
| Foreign tax credit | (35,368 | ) | (9 | )% | — | — | — | — | ||||||||||||||||
| Foreign rate differences | (34,584 | ) | (9 | )% | $ | (22,074 | ) | (16 | )% | $ | (26,952 | ) | (133 | )% | ||||||||||
| Foreign tax on U.S. provision | 5,931 | 2 | % | 4,523 | 3 | % | 6,547 | 32 | % | |||||||||||||||
| Excess tax benefits from restricted stock | (6,141 | ) | (2 | )% | (1,743 | ) | (1 | )% | (5,940 | ) | (29 | )% | ||||||||||||
| Audits and settlements | 33,370 | 9 | % | — | — | 51 | — | |||||||||||||||||
| U.S. permanent items | 18,389 | 5 | % | 6,590 | 5 | % | 2,483 | 12 | % | |||||||||||||||
| BEAT | 2,936 | 1 | % | (1,759 | ) | (1 | )% | 1,759 | 9 | % | ||||||||||||||
| GILTI, net of foreign tax credits | 18,217 | 4 | % | 14,899 | 11 | % | 6,170 | 31 | % | |||||||||||||||
| Foreign-Derived Intangible Income (FDII) | (4,428 | ) | (1 | )% | (2,461 | ) | (2 | )% | (6,409 | ) | (32 | )% | ||||||||||||
| Other, net | 71 | — | (354 | ) | (1 | )% | (116 | ) | (1 | )% | ||||||||||||||
| Provision (benefit) for income taxes | $ | (85,168 | ) | (22 | )% | $ | 4,011 | 3 | % | $ | 47,760 | 235 | % |
F-24
In 2021, 2020, and 2019, our tax rate differed from the U.S. statutory federal income tax rate due to our corporate structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland and the Cayman Islands. In 2021, 2020, and 2019, the foreign rate differential predominantly relates to these earnings.
In 2021, in addition to the foreign rate differential, our tax rate differed from the U.S. statutory federal income tax rate due to the release of the valuation allowance on the majority of our U.S. net deferred tax assets, the net effects of the Global Intangible Low-Taxed Income (GILTI) and Foreign Derived Intangible Income (FDII) regimes (together referred to as U.S. Tax reform), and the excess tax benefit related to stock-based compensation.
In 2020, in addition to the foreign rate differential, our tax rate differed from the statutory federal income tax rate due to U.S. tax reform, the excess tax benefit related to stock-based compensation and the indirect effects of the adoption of ASC 606. Additionally, we recorded benefits for the reduction of the U.S. valuation allowance as a result of the Onshape acquisition. A further reduction to the valuation allowance was also recorded to reflect the impact from the scheduling of the reversal of existing temporary differences resulting in deferred tax liabilities that cannot be offset against deferred tax assets.
In 2019, our effective tax rate was higher than the statutory federal income tax rate 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 and foreign withholding taxes, an obligation of the U.S. parent. This is offset by foreign rate differences, the excess tax benefit related to stock-based compensation and the indirect effects of the adoption of ASC 606.
At September 30, 2021 and 2020, income taxes payable and income tax accruals recorded on the accompanying Consolidated Balance Sheets were $15.7 million ($5.0 million in accrued income taxes, $0.8 million in other current liabilities and $9.9 million in other liabilities) and $15.4 million ($7.0 million in accrued income taxes, $1.0 million in other current liabilities and $7.4 million in other liabilities), respectively. At September 30, 2021and 2020, prepaid taxes recorded in prepaid expenses on the accompanying Consolidated Balance Sheets were $15.4 million and $17.3 million, respectively. We made net income tax payments of $56.0 million, $52.6 million and $38.9 million in 2021, 2020 and 2019, respectively.
F-25
The significant temporary differences that created deferred tax assets and liabilities are shown below:
| (in thousands) | September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | 65,383 | $ | 61,495 | ||||
| Foreign tax credits | 36,287 | 8,074 | ||||||
| Capitalized research and development | 27,546 | 30,109 | ||||||
| Pension benefits | 14,097 | 14,370 | ||||||
| Prepaid expenses | 12,540 | 13,579 | ||||||
| Deferred revenue | 2,274 | 6,021 | ||||||
| Stock-based compensation | 15,822 | 13,630 | ||||||
| Other reserves not currently deductible | 16,796 | 15,130 | ||||||
| Amortization of intangible assets | 147,385 | 162,426 | ||||||
| Research and development and other tax credits | 74,846 | 70,695 | ||||||
| Lease liabilities | 51,471 | 52,224 | ||||||
| Fixed assets | 53,025 | 47,457 | ||||||
| Capital loss carryforward | 35,156 | 35,851 | ||||||
| Other | 2,269 | 1,849 | ||||||
| Gross deferred tax assets | 554,897 | 532,910 | ||||||
| Valuation allowance | (52,085 | ) | (205,423 | ) | ||||
| Total deferred tax assets | 502,812 | 327,487 | ||||||
| Deferred tax liabilities: | ||||||||
| Acquired intangible assets not deductible | (108,746 | ) | (65,894 | ) | ||||
| Lease assets | (37,273 | ) | (35,885 | ) | ||||
| Pension prepayments | (2,834 | ) | (1,155 | ) | ||||
| Deferred revenue | (2,662 | ) | (594 | ) | ||||
| Depreciation | (7,121 | ) | (7,481 | ) | ||||
| Unbilled accounts receivable | (6,391 | ) | (12,699 | ) | ||||
| Deferred income | (21,744 | ) | (5,821 | ) | ||||
| Prepaid commissions | (16,990 | ) | (17,124 | ) | ||||
| Other | (5,427 | ) | (2,302 | ) | ||||
| Total deferred tax liabilities | (209,188 | ) | (148,955 | ) | ||||
| Net deferred tax assets | $ | 293,624 | $ | 178,532 |
We reassess our valuation allowance requirements each financial reporting period. We assess available positive and negative evidence to estimate whether sufficient future taxable income will be generated to use its existing deferred tax assets. In the assessment for the period ended September 30, 2021, we have concluded it is more likely than not that our deferred tax assets related to United States federal and state income will be realizable, and therefore, the United States federal and the majority of the state valuation allowances were released, which resulted in non-cash federal and state tax benefits of $109.4 million and $24.8 million, respectively, to earnings in this period. That determination was based, in part, on the Company’s cumulative profits before tax and permanent differences from the past three years, which became profitable during 2021, and projections of profits before tax and permanent differences in future years.
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, 2021, we had U.S. federal NOL carryforwards from acquisitions of $190.3 million, of which $32.5 million expire in 2023 to 2036. The remaining carryforwards of $157.8 million do not expire. The utilization of these NOL carryforwards is limited as a result of the change in ownership rules under Internal Revenue Code Section 382.
As of September 30, 2021, we had Federal R&D credit carryforwards of $54.1 million, which expire beginning in 2027 and ending in 2041, and Massachusetts R&D credit carryforwards of $24.2 million, which expire beginning in 2022 and ending in 2036. We also had foreign tax credits of $36.3 million, which expire beginning in 2025 and ending in 2031.
We also have NOL carryforwards in non-U.S. jurisdictions totaling $49.8 million, the majority of which do not expire, and non-U.S. tax credit carryforwards of $4.7 million that expire beginning in 2030 and ending in 2040. Additionally, we have amortization carryforwards of $1,084.6 million in a foreign
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jurisdiction. There are limitations imposed on the utilization of such attributes that could restrict the recognition of any tax benefits.
As of September 30, 2021, we have a valuation allowance of $17.7 million against net deferred tax assets in the U.S. and a valuation allowance of $34.4 million against net deferred tax assets in certain foreign jurisdictions. The $17.7 million U.S. valuation allowance relates to Massachusetts tax credit carryforwards which we do not expect to realize a benefit from prior to expiration. The valuation allowance recorded against net deferred tax assets of certain foreign jurisdictions is established primarily for our capital loss carryforwards, the majority of which do not expire. However, there are limitations imposed on the utilization of such capital losses that could restrict the recognition of any tax benefits.
The changes to the valuation allowance were primarily due to the following:
| (in thousands) | Year ended September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||
| Valuation allowance, beginning of year | $ | 205,423 | $ | 177,663 | $ | 141,950 | ||||||
| Net release of valuation allowance(1) | (134,235 | ) | — | (1,772 | ) | |||||||
| Net increase (decrease) in deferred tax assets with a full valuation allowance(2) | (19,103 | ) | 27,760 | 37,485 | ||||||||
| Valuation allowance, end of year | $ | 52,085 | $ | 205,423 | $ | 177,663 |
| (1) | In 2021, this is attributable to the release in the U.S and in 2019, this is attributable to the release in foreign jurisdictions. |
|---|
| (2) | In 2021, this change includes the loss of state attributes a upon merger of two wholly-owned subsidiaries. In 2020, this change is largely attributed to the Onshape acquisition, the adoption of ASC 842 and the impact to the change in scheduling of the reversal of existing temporary differences. 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 ASC 606. |
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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 2021, 2020 and 2019 we recorded interest expense of $2.2 million, $0.3 million and $0.1 million, respectively. In 2021, we had penalty expenses of $2.0 million. In 2020 and 2019 we had no tax penalty expense in our income tax provision. As of September 30, 2021 and 2020, we had accrued $0.7 million and $0.6 million of net estimated interest expense related to income tax accruals, respectively. We had no accrued tax penalties as of September 30, 2021, 2020 or 2019.
| Year ended September 30, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Unrecognized tax benefits (in thousands) | 2021 | 2020 | 2019 | |||||||||
| Unrecognized tax benefit, beginning of year | $ | 16,107 | $ | 11,484 | $ | 9,812 | ||||||
| Tax positions related to current year: | ||||||||||||
| Additions | 4,844 | 2,173 | 1,466 | |||||||||
| Tax positions related to prior years: | ||||||||||||
| Additions | 30,130 | 2,452 | 1,375 | |||||||||
| Reductions | (478 | ) | (2 | ) | (9 | ) | ||||||
| Settlements | (29,437 | ) | — | (1,160 | ) | |||||||
| Unrecognized tax benefit, end of year | $ | 21,166 | $ | 16,107 | $ | 11,484 |
If all of our unrecognized tax benefits as of September 30, 2021 were to become recognizable in the future, we would record a benefit to the income tax provision of $21.2 million (which would be partially offset by an increase in the U.S. valuation allowance of $4.5 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 $1 million as audits close and statutes of limitations expire.
F-27
Our results for the year ended September 30, 2021 include a charge of $37.3 million related to the effects of a tax matter in the Republic of Korea (South Korea) of $34.4 million, and the resulting impact on U.S. income taxes of $2.9 million. The charge relates to an assessment with respect to various tax issues, primarily foreign withholding taxes, that was under appeal in South Korea. We received an assessment of approximately $12 million from the tax authorities in South Korea in the fourth quarter of 2016 for the years 2011 to 2015 and paid the assessment in the first quarter of 2017. We appealed that assessment to an intermediate appellate court. In December 2020, our appeal to that court - the Seoul High Court - was rejected. We appealed this decision to the Supreme Court of the Republic of Korea. In May 2021, the Supreme Court denied our request for a review of the case. Therefore, the decision of the Seoul High Court was deemed final. We made additional payments of approximately $20 million to the tax authorities in South Korea in FY’21 for the years 2016 to 2021 in settlement of the amounts previously accrued.
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, 2021, we remained subject to examination in the following major tax jurisdictions for the tax years indicated:
| Major Tax Jurisdiction | Open Years | |
|---|---|---|
| United States | 2017 through 2021 | |
| Germany | 2015 through 2021 | |
| France | 2018 through 2021 | |
| Japan | 2016 through 2021 | |
| Ireland | 2017 through 2021 |
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 2021, 2020 and 2019 of $177.3 million, $115.1 million and $86.4 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 $39.9 million, $13.4 million and $16.6 million in 2021, 2020 and 2019, respectively. Upon the settlement of the stock-based awards (i.e., 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 2021, 2020 and 2019, windfall tax benefits of $9.9 million, $1.3 million and $6.7 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.
Prior to the passage of the U.S. Tax Cuts and Jobs Act in December of 2017 (the Tax Act), we asserted that substantially all of the undistributed earnings of our foreign subsidiaries were considered indefinitely reinvested 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.
F-28
- Debt
As of September 30, 2021 and 2020, we had the following long-term borrowing obligations:
| (in thousands) | September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||
| 4.000% Senior notes due 2028 | $ | 500,000 | $ | 500,000 | ||||
| 3.625% Senior notes due 2025 | 500,000 | 500,000 | ||||||
| Credit facility revolver(1) | 450,000 | 18,000 | ||||||
| Total debt | 1,450,000 | 1,018,000 | ||||||
| Unamortized debt issuance costs for the senior notes(2) | (10,529 | ) | (12,686 | ) | ||||
| Total debt, net of issuance costs(3) | $ | 1,439,471 | $ | 1,005,314 |
| (1) | Unamortized debt issuance costs related to the credit facility were $3.8 million and $4.9 million as of September 30, 2021 and 2020, respectively, and were included in other assets on the Consolidated Balance Sheets. |
|---|
| (2) | Of the $14.1 million in financing costs incurred in connection with the issuance of the 2028 and 2025 notes, unamortized debt issuance costs were $10.5 million and $12.7 million as of September 30, 2021 and 2020, respectively, and were included in long-term debt on the Consolidated Balance Sheet. |
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| (3) | As of September 30, 2021, and 2020, all debt was classified as long term. |
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Senior Unsecured Notes
In February 2020, we issued $500 million in aggregate principal amount of 4.0% senior, unsecured long-term debt at par value, due in 2028 (the 2028 notes) and $500 million in aggregate principal amount of 3.625% senior, unsecured long-term debt at par value, due in 2025 (the 2025 notes).
As of September 30, 2021, the total estimated fair value of the 2028 and 2025 senior notes was approximately $513.7 million and $508.6 million respectively, based on quoted prices for the notes on that date.
We were in compliance with all the covenants for all of our senior notes as of September 30, 2021.
Terms of the 2028 and 2025 Notes
Interest on the 2028 and 2025 notes is payable semi-annually on February 15 and August 15. The debt indenture for the 2028 and 2025 notes includes covenants that limit our ability to, among other things, incur additional debt, grant liens on our properties or capital stock, enter into sale and leaseback transactions or asset sales, and make capital distributions.
We may, on one or more occasions, redeem the 2025 and 2028 notes in whole or in part at specified redemption prices. In certain circumstances constituting a change of control, we would be required to make an offer to repurchase the notes at a purchase price equal to 101% of the aggregate principal amount of the notes, plus accrued and unpaid interest. Our ability to repurchase the notes upon such event may be limited by law, by the indenture associated with the notes, by our then-available financial resources or by the terms of other agreements to which we may be party at such time. If we fail to repurchase the notes as required by the indenture, it would constitute an event of default under the indenture which, in turn, may also constitute an event of default under other obligations.
Credit Agreement
In February 2020, we entered into a Third Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as Administrative Agent, for a new secured multi-currency bank credit facility with a syndicate of banks. We expect to use the credit facility for general corporate purposes, including acquisitions of businesses, share repurchases and working capital requirements.
The credit facility consists of a $1 billion revolving credit facility, which may be increased by up to an additional $500 million in the aggregate if the existing or additional lenders are willing to make such increased commitments. As of September 30, 2021, unused commitments under our credit facility were approximately $550.0 million. The maturity date of the credit facility is February 13, 2025, when all remaining amounts outstanding will be due and payable. The revolving loan commitment does not require amortization of principal and may be repaid in whole or in part prior to the scheduled maturity
F-29
date at our option without penalty or premium. As of September 30, 2021, the fair value of our credit facility approximates its book value.
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, 2021, the annual rate for borrowing outstanding was 1.69%. Interest rates on borrowings outstanding under the credit facility range from 1.25% to 1.75% above an adjusted London Interbank Offering Rate (LIBOR) for Euro currency borrowings or range from 0.25% to 0.75% above the defined base rate (the greater of the Prime Rate, the NYFRB rate plus 0.5%, or an adjusted LIBOR 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 LIBOR for those currencies, based on PTC’s total leverage ratio. A quarterly commitment fee on the undrawn portion of the credit facility is required, ranging from 0.175% to 0.30% per annum, based upon PTC’s total leverage ratio.
The credit facility limits PTC’s and its subsidiaries’ ability to, among other things: incur additional indebtedness; incur liens or guarantee obligations; pay dividends (other than to PTC) and make other distributions; make investments and enter into joint ventures; dispose of assets; and engage in transactions with affiliates, except on an arms-length basis. Under the credit facility, PTC and its material domestic subsidiaries may not invest cash or property in, or loan to, PTC’s foreign subsidiaries in aggregate amounts exceeding $100 million for any purpose and an additional $200 million for acquisitions of businesses. In addition, under the credit facility, PTC and its subsidiaries must maintain the following financial ratios:
| • | 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; |
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| • | 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 |
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| • | 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. |
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As of September 30, 2021, our total leverage ratio was 2.23 to 1.00, our senior secured leverage ratio was 0.71 to 1.00, our interest coverage ratio was 13.64 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 $2.0 million in financing costs in connection with the February 2020 credit facility and $1.0 million in connection with a November 2019 amendment to our prior credit facility. These origination
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costs are recorded as deferred debt issuance costs and are included in other assets. Financing costs are expensed over the remaining term of the obligations.
In 2021, 2020 and 2019, we incurred interest expense of $50.5 million, $76.4 million, and $43.0 million, respectively, and paid $45.2 million, $60.6 million and $40.8 million, respectively, of interest on our debt. Additionally, in the third quarter of 2020, we paid $15.0 million in penalties for the early redemption of the 2024 notes. The average interest rate on borrowings outstanding during 2021, 2020 and 2019 was approximately 3.3%, 4.3% and 5.4%, respectively.
- Commitments and Contingencies
As of September 30, 2021and 2020, we had letters of credit and bank guarantees outstanding of $16.3 million (of which $0.5 million was collateralized) and $16.4 million (of which $0.5 million was collateralized), respectively, primarily related to our corporate headquarters lease.
Legal and Regulatory Matters
Legal Proceedings
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.
401(k) Plan
On September 17, 2020, three individual plaintiffs filed a putative class action lawsuit against PTC, the Investment Committee for the PTC Inc. 401(k) Plan (“Plan”), and the Board of Directors (collectively, the “PTC Defendants”) in the U.S. District Court for the District of Massachusetts alleging claims regarding the Plan. Plaintiffs allege that the defendants breached their fiduciary duties under the Employee Retirement Income Security Act of 1974 ("ERISA") in the oversight of the Plan, principally by allegedly selecting and retaining certain investment options despite their higher fees and costs than other available investment options, causing participants in the Plan to pay excessive recordkeeping fees and suffer lower returns on their investments, and by allegedly failing to monitor other fiduciaries. The plaintiffs seek unspecified damages on behalf of a class of Plan participants from September 17, 2014 through the date of any judgment. The plaintiffs and the PTC Defendants reached an agreement in principle to settle the lawsuit on September 22, 2021. It is expected that the Plaintiffs will file a motion for preliminary approval of the settlement on or before December 1, 2021. The ultimate outcome by judgment or settlement is not expected to be material to our financial position, results of operations or cash flows.
Other Legal Proceedings
In addition to the matters listed above, we are subject to legal proceedings and claims against us in the ordinary course of business. As of September 30, 2021, we estimate that the range of possible outcomes for such matters is immaterial and we do not believe that resolving them will have a material adverse impact on our financial condition, results of operations or cash flows. However, the results of legal proceedings cannot be predicted with certainty. Should any of these legal proceedings and claims be resolved against us, the operating results for a reporting period could be adversely affected.
Guarantees and Indemnification Obligations
We enter into standard indemnification agreements with our customers and business partners in the ordinary course of our business. Under such agreements, we typically indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to our products. Indemnification may also cover other types of claims, including claims relating to certain data breaches. Except for intellectual property infringement indemnification, the liability for which is uncapped, these agreements typically limit our liability with respect to other indemnification claims. Historically, our costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and, accordingly, we believe the estimated fair value of liabilities under these agreements is immaterial.
F-31
We warrant that our software products will perform in all material respects in accordance with our standard published specifications during the term of the license/subscription. Additionally, we generally warrant that our consulting services will be performed consistent with generally accepted industry standards and, in the case of fixed price services, the agreed-upon specifications. 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.
- 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 billion of our common stock in the period October 1, 2020 through September 30, 2023. 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 2021, we repurchased 0.2 million shares for $30 million. We did not repurchase any shares in 2020. In 2019, we repurchased 1.4 million shares for $115 million. In addition, in 2019, we repurchased 3.0 million shares, under an accelerated share repurchase ("ASR") agreement. On July 20, 2018, we entered into an 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, 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 in May 2019 and, accordingly, was recorded as a reduction to additional paid-in capital in 2018.
- Equity Incentive Plans
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 (RSUs) as the principal equity incentive awards, including certain performance-based awards that are earned based on achieving performance criteria established by the Compensation Committee of our Board of Directors on or prior to the grant date. Each restricted stock unit represents the contingent right to receive one share of our common stock.
In the fourth quarter of 2020, we modified certain performance-based awards for executives by adjusting the performance criteria for the current and future periods, as well as removing certain provisions for catch up of unearned awards. There was not a material impact in 2020 due to the timing of the modifications, but there was an increase in stock-based compensation in 2021.
The fair value of RSUs granted in 2021, 2020 and 2019 was based on the fair market value of our stock on the date of grant for service- and certain performance- based RSUs and based on a Monte Carlo simulation model for relative total shareholder return (TSR) performance RSUs. The weighted average fair value per share of restricted stock units granted in 2021, 2020 and 2019 was $111.48, $77.57 and $82.77, respectively.
We account for forfeitures as they occur, rather than estimate expected forfeitures.
F-32
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, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||
| Cost of license revenue | $ | 100 | $ | 47 | $ | 509 | ||||||
| Cost of support and cloud services revenue | 9,900 | 6,910 | 5,004 | |||||||||
| Cost of professional services revenue | 9,263 | 7,012 | 6,426 | |||||||||
| Sales and marketing | 53,712 | 37,351 | 32,026 | |||||||||
| Research and development | 34,272 | 27,005 | 22,019 | |||||||||
| General and administrative | 70,042 | 36,824 | 20,416 | |||||||||
| Total stock-based compensation expense | $ | 177,289 | $ | 115,149 | $ | 86,400 |
Stock-based compensation expense in 2021, 2020 and 2019 includes $7.3 million, $5.8 million, and $6.2 million respectively, related to our employee stock purchase plan (ESPP).
As of September 30, 2021, total unrecognized compensation cost related to unvested restricted stock units expected to vest was approximately $190.3 million and the weighted average remaining recognition period for unvested awards was 17 months.
As of September 30, 2021, 4.1 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 vesting of restricted stock units granted and outstanding.
Our ESPP allows eligible employees to contribute up to 10% of their base salary, up to a maximum of $25,000 per year and subject to 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, 2021 (in thousands, except grant date fair value data) | Shares | Weighted Average Grant Date Fair Value | Aggregate Intrinsic Value | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance of outstanding restricted stock units, October 1, 2020 | 3,509 | $ | 79.13 | |||||||||
| Granted(1) | 1,480 | $ | 111.48 | |||||||||
| Vested | (1,488 | ) | $ | 80.64 | ||||||||
| Forfeited or not earned | (284 | ) | $ | 90.99 | ||||||||
| Balance of outstanding restricted stock units, September 30, 2021 | 3,217 | $ | 92.46 | $ | 385,311 |
| (1) | RSUs granted includes 33,000 shares from prior period Total Shareholder Return (TSR) awards that were earned upon achievement of the performance criteria and vested in November 2020. |
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The following table presents the number of RSU awards granted by award type:
| (in thousands) | Twelve months ended September 30, 2021 | |||
|---|---|---|---|---|
| Performance-based RSUs(1) | 90 | |||
| Service-based RSUs(2) | 1,267 | |||
| Total Shareholder Return RSUs(3) | 90 |
| (1) | The performance-based RSUs were granted to our executives and are eligible to vest based upon annual performance measures over a three-year period. To the extent earned, those performance-based RSUs will vest in three substantially equal installments on November 15, 2021, 2022 and 2023, or the date the Compensation Committee determines the extent to which the applicable performance criteria have been achieved for each performance period. Up to a maximum of two times the number of RSUs can be earned (a maximum aggregate of 179,000 RSUs). |
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| (2) | The service-based RSUs were granted to employees, including our executive officers. Substantially all service-based RSUs will vest in three substantially equal annual installments on or about the anniversary of the date of grant. |
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| (3) | The Total Shareholder Return RSUs (TSR RSUs) were granted to our executives and are eligible to vest based on the performance of PTC stock relative to the stock performance of an index of companies established as of the grant date, as determined at the end of three measurement periods ending on September 30, 2021, 2022 and 2023, respectively. The RSUs earned for each period will vest on November 15, 2021, 2022, and 2023. Up to a maximum of two times the number of TSR RSUs eligible to be earned for the period (up to a maximum aggregate of 179,000 RSUs) may vest. If the return to PTC shareholders is |
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| negative for a period but still meets or exceeds the group indexed return, a maximum of 100% of the eligible TSR RSUs may vest for the measurement period. |
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As of September 30, 2021, weighted average remaining vesting term for outstanding awards is 1.0 year.
The weighted-average fair value of the TSR RSUs was $124.04 per target RSU on the grant date. The fair value of the TSR RSUs was determined using a Monte Carlo simulation model, a generally accepted statistical technique used to simulate a range of possible future stock prices for PTC and the peer group. The method uses a risk-neutral framework to model future stock price movements based upon the risk-free rate of return, the historical volatility of each entity, and the pairwise correlations of each entity being modeled. The fair value for each simulation is the product of the payout percentage determined by PTC’s TSR rank against the peer group, the projected price of PTC stock, and a discount factor based on the risk-free rate.
The significant assumptions used in the Monte Carlo simulation model were as follows:
| Average volatility of peer group | 41.5 | % | ||
|---|---|---|---|---|
| Risk-free interest rate | 0.21 | % | ||
| Dividend yield | — | % |
Total fair value of RSUs vested are as follows:
| (in thousands) | Year ended September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Value of stock option and stock-based award activity | 2021 | 2020 | 2019 | |||||||||
| Total fair value of restricted stock unit awards vested | $ | 171,316 | $ | 103,265 | $ | 131,659 |
In 2021, shares issued upon vesting of restricted stock units were net of 0.5 million shares retained by us to cover employee tax withholdings of $53.1 million. In 2020, shares issued upon vesting of restricted stock units were net of 0.5 million shares retained by us to cover employee tax withholdings of $33.7 million. In 2019, 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 $44.4 million.
- 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 immediately. We made matching contributions of $7.8 million, $6.7 million, and $6.0 million in 2021, 2020 and 2019, respectively.
F-34
- 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:
| 2021 | 2020 | 2019 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Weighted average assumptions used to determine benefit obligations at September 30 measurement date: | ||||||||||||
| Discount rate | 1.0 | % | 1.1 | % | 0.9 | % | ||||||
| Rate of increase in future compensation | 2.8 | % | 2.8 | % | 2.8 | % | ||||||
| Weighted average assumptions used to determine net periodic pension cost for fiscal years ended September 30: | ||||||||||||
| Discount rate | 1.1 | % | 0.9 | % | 1.9 | % | ||||||
| Rate of increase in future compensation | 2.8 | % | 2.8 | % | 3.0 | % | ||||||
| Rate of return on plan assets | 5.0 | % | 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 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. The discount rate is based on yield curves for highly rated corporate fixed income securities matched against cash flows for each future year.
The weighted long-term rate of return assumption, together with the assumptions used to determine the benefit obligations as of September 30, 2021 in the table above, will be used to determine our 2022 net periodic pension income, which we expect to be approximately $0.7 million.
As of September 30, 2021, the weighted average interest crediting rate used in our only cash balance pension plan is 6%.
All non-service net periodic pension costs are presented in other income, net on the Consolidated Statement of Operations. 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, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||
| Interest cost of projected benefit obligation | $ | 692 | $ | 527 | $ | 1,199 | ||||||
| Service cost | 1,127 | 1,426 | 1,372 | |||||||||
| Expected return on plan assets | (3,643 | ) | (3,878 | ) | (3,728 | ) | ||||||
| Amortization of prior service cost | (5 | ) | (5 | ) | (5 | ) | ||||||
| Recognized actuarial loss | 4,139 | 3,854 | 2,390 | |||||||||
| Settlement loss | — | — | (30 | ) | ||||||||
| Net periodic pension cost | $ | 2,310 | $ | 1,924 | $ | 1,198 |
F-35
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:
| (in thousands) | Year ended September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||
| Change in benefit obligation: | ||||||||
| Projected benefit obligation, beginning of year | $ | 97,832 | $ | 94,983 | ||||
| Service cost | 1,127 | 1,426 | ||||||
| Interest cost | 692 | 527 | ||||||
| Actuarial loss (gain) | 1,100 | (2,835 | ) | |||||
| Foreign exchange impact | (1,562 | ) | 6,452 | |||||
| Participant contributions | 109 | 86 | ||||||
| Benefits paid | (2,786 | ) | (2,234 | ) | ||||
| Curtailments | — | (573 | ) | |||||
| Projected benefit obligation, end of year | $ | 96,512 | $ | 97,832 | ||||
| Change in plan assets and funded status: | ||||||||
| Plan assets at fair value, beginning of year | $ | 72,063 | $ | 69,879 | ||||
| Actual return on plan assets | 7,383 | (2,990 | ) | |||||
| Employer contributions | 3,049 | 2,622 | ||||||
| Participant contributions | 109 | 86 | ||||||
| Foreign exchange impact | (1,433 | ) | 4,700 | |||||
| Benefits paid | (2,786 | ) | (2,234 | ) | ||||
| Plan assets at fair value—end of year | 78,385 | 72,063 | ||||||
| Projected benefit obligation, end of year | 96,512 | 97,832 | ||||||
| Underfunded status | $ | (18,127 | ) | $ | (25,769 | ) | ||
| Accumulated benefit obligation, end of year | $ | 95,090 | $ | 96,270 | ||||
| Amounts recognized in the balance sheet: | ||||||||
| Non-current asset | $ | 855 | $ | — | ||||
| Non-current liability | $ | (18,615 | ) | $ | (25,437 | ) | ||
| Current liability | $ | (367 | ) | $ | (332 | ) | ||
| Amounts in accumulated other comprehensive loss: | ||||||||
| Unrecognized actuarial loss | $ | 30,213 | $ | 37,175 |
As of September 30, 2021 and 2020 all of our pension plans had project benefit obligations and accumulated benefit obligations in excess of plan assets.
The following table shows the change in accumulated other comprehensive loss:
| (in thousands) | Year ended September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||
| Accumulated other comprehensive loss, beginning of year | $ | 37,175 | $ | 34,920 | ||||
| Recognized during year - net actuarial losses | (4,135 | ) | (3,850 | ) | ||||
| Occurring during year - net actuarial losses | (2,640 | ) | 3,460 | |||||
| Foreign exchange impact | (187 | ) | 2,645 | |||||
| Accumulated other comprehensive loss, end of year | $ | 30,213 | $ | 37,175 |
In 2021, our net actuarial gains were driven by the asset performance. In 2020 our net actuarial losses occurring during the year were primarily driven by poor asset performance due to COVID-19 pandemic, offset by favorable impact on liabilities due primarily to a higher assumed discount rate.
The following table shows the percentage of total plan assets for each major category of plan assets:
| September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|
| Asset category | 2021 | 2020 | ||||||
| Equity securities | 35 | % | 33 | % | ||||
| Fixed income securities | 34 | % | 34 | % | ||||
| Commodities | 11 | % | 11 | % | ||||
| Insurance company funds | 12 | % | 13 | % | ||||
| Options | 1 | % | 1 | % | ||||
| Cash | 7 | % | 8 | % | ||||
| 100 | % | 100 | % |
F-36
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 equity and fixed income securities.
In 2021, 2020 and 2019 our actual return on plan assets was $7.4 million, $(3.0) million and $3.5 million, respectively.
Based on actuarial valuations and additional voluntary contributions, we contributed $3.0 million, $2.6 million, and $2.6 million in 2021, 2020 and 2019, respectively, to the plans. We expect to pay $3.8 million in contributions in 2022, of which $0.8 million will be paid directly to the plans.
As of September 30, 2021, benefit payments expected to be paid over the next ten years are as follows:
| (in thousands) | Future Benefit Payments | |||
|---|---|---|---|---|
| 2022 | $ | 4,297 | ||
| 2023 | 4,216 | |||
| 2024 | 4,860 | |||
| 2025 | 4,558 | |||
| 2026 | 4,638 | |||
| 2027 to 2031 | 24,407 |
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 equities and 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, 2021 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Fixed income securities: | ||||||||||||||||
| Government | $ | 24,013 | $ | — | $ | — | $ | 24,013 | ||||||||
| Corporate investment grade | 2,924 | — | — | 2,924 | ||||||||||||
| Large capitalization stocks | 27,078 | — | — | 27,078 | ||||||||||||
| Commodities | 8,558 | — | — | 8,558 | ||||||||||||
| Insurance company funds(1) | — | 9,105 | — | 9,105 | ||||||||||||
| Options | 1,122 | — | — | 1,122 | ||||||||||||
| Cash | 5,585 | — | — | 5,585 | ||||||||||||
| Total plan assets | $ | 69,280 | $ | 9,105 | $ | — | $ | 78,385 |
F-37
| (in thousands) | September 30, 2020 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Fixed income securities: | ||||||||||||||||
| Government | $ | 20,663 | $ | — | $ | — | $ | 20,663 | ||||||||
| Corporate investment grade | 3,599 | — | — | 3,599 | ||||||||||||
| Large capitalization stocks | 23,878 | — | — | 23,878 | ||||||||||||
| Commodities | 7,750 | — | — | 7,750 | ||||||||||||
| Insurance company funds(1) | — | 9,131 | — | 9,131 | ||||||||||||
| Options | 1,126 | — | — | 1,126 | ||||||||||||
| Cash | 5,916 | — | — | 5,916 | ||||||||||||
| Total plan assets | $ | 62,932 | $ | 9,131 | $ | — | $ | 72,063 |
| (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. |
|---|
- 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 forward contracts is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants usually are large financial institutions. Our foreign currency forward 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.
Our investment in a non-marketable convertible note and shares of Matterport are classified within Level 3 of the fair value hierarchy as they are valued using inputs with little to no market activity. Refer to Note 2. Summary of Significant Accounting Policies for additional information about Matterport investment.
Our significant financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2021and 2020 were as follows:
| (in thousands) | September 30, 2021 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Financial assets: | ||||||||||||||||
| Cash equivalents(1) | $ | 114,375 | $ | — | $ | — | $ | 114,375 | ||||||||
| Convertible note | — | — | 2,000 | 2,000 | ||||||||||||
| Equity securities | — | — | 77,540 | 77,540 | ||||||||||||
| Forward contracts | — | 5,363 | — | 5,363 | ||||||||||||
| $ | 114,375 | $ | 5,363 | $ | 79,540 | $ | 199,278 | |||||||||
| Financial liabilities: | ||||||||||||||||
| Forward contracts | — | 3,318 | — | 3,318 | ||||||||||||
| $ | — | $ | 3,318 | $ | — | $ | 3,318 |
F-38
| (in thousands) | September 30, 2020 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Financial assets: | ||||||||||||||||
| Cash equivalents(1) | $ | 105,299 | $ | — | $ | — | 105,299 | |||||||||
| Marketable securities: | ||||||||||||||||
| Corporate notes/bonds | 59,099 | — | — | 59,099 | ||||||||||||
| Forward contracts | — | 903 | — | 903 | ||||||||||||
| $ | 164,398 | $ | 903 | $ | — | $ | 165,301 | |||||||||
| Financial liabilities: | ||||||||||||||||
| Forward contracts | — | 1,073 | — | 1,073 | ||||||||||||
| $ | — | $ | 1,073 | $ | — | $ | 1,073 |
| (1) | Money market funds and time deposits. |
|---|
Level 3 Investments
Convertible Note
In the fourth quarter of 2021, we invested $2.0 million in a non-marketable convertible note. This debt security is classified as available-for-sale and is included in other assets on the Consolidated Balance Sheet.
In the first quarter of 2021, we invested $1.0 million into a non-marketable convertible note, which converted to preferred stock in the fourth quarter of 2021. At the time of conversion an unrealized gain of $0.2 million was recognized. This preferred stock investment is classified as non-marketable equity investment and is included in other assets on the Consolidated Balance Sheet.
Equity Securities
As of September 30, 2021, we owned 4,316,301 common shares of Matterport, Inc., which are classified as Level 3 in the fair value hierarchy and are recognized at fair value of $77.5 million in other current assets on the Consolidated Balance Sheets. For the three months ended September 30, 2021, we recognized a gain of $68.8 million related to the shares in other income, net on the Consolidated Statements of Operations, which includes a gain of $72.9 million of gain on investment and a $4.1 million valuation adjustment due to lack of marketability.
The following table presents changes in fair value of our Level 3 investment in the Matterport, Inc. shares:
| (in thousands) | September 30, 2021 | |||
|---|---|---|---|---|
| Fair Values | ||||
| Balance, July 22, 2021 | $ | 8,711 | ||
| Unrealized gains | 72,910 | |||
| Discount due to lack of marketability | (4,081 | ) | ||
| Balance, September 30, 2021 | $ | 77,540 |
- Marketable Securities
We did not hold any marketable securities as of September 30, 2021. In December 2020, we sold all our marketable securities to partially fund the Arena acquisition, resulting in proceeds of $56.2 million. Neither gross realized gains nor gross realized losses related to the sale were material. The amortized cost and fair value of marketable securities as of September 30, 2020 were as follows:
| (in thousands) | September 30, 2020 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | |||||||||||||
| Corporate notes/bonds | $ | 58,793 | $ | 323 | $ | (17 | ) | $ | 59,099 |
F-39
The following tables summarize the fair value and gross unrealized losses aggregated by category and the length of time that individual securities had been in a continuous unrealized loss position as of September 30, 2020.
| (in thousands) | September 30, 2020 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Less than twelve months | Greater than twelve months | Total | ||||||||||||||||||||||
| Fair value | Gross unrealized loss | Fair value | Gross unrealized loss | Fair value | Gross unrealized loss | |||||||||||||||||||
| Corporate notes/bonds | $ | 9,841 | $ | (17 | ) | $ | — | $ | — | $ | 9,841 | $ | (17 | ) |
The following table presents our available-for-sale marketable securities by contractual maturity date as of September 30, 2020.
| (in thousands) | September 30, 2020 | |||||||
|---|---|---|---|---|---|---|---|---|
| Amortized cost | Fair value | |||||||
| Due in one year or less | $ | 27,727 | $ | 27,899 | ||||
| Due after one year through three years | 31,066 | 31,200 | ||||||
| $ | 58,793 | $ | 59,099 |
- Derivative Financial Instruments
Non-Designated Hedges
As of September 30, 2021 and 2020, we had outstanding forward contracts for derivatives not designated as hedging instruments with notional amounts equivalent to the following:
| September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|
| Currency Hedged (in thousands) | 2021 | 2020 | ||||||
| Canadian / U.S. Dollar | $ | 4,894 | $ | 6,847 | ||||
| Euro / U.S. Dollar | 387,466 | 390,673 | ||||||
| British Pound / U.S. Dollar | 23,141 | 6,328 | ||||||
| Israeli Shekel / U.S. Dollar | 10,475 | 9,503 | ||||||
| Japanese Yen / U.S. Dollar | 46,450 | 50,379 | ||||||
| Swiss Franc / U.S. Dollar | 18,039 | 12,874 | ||||||
| Swedish Krona / U.S. Dollar | 34,196 | 18,871 | ||||||
| Singapore Dollar / U.S. Dollar | 3,498 | 3,281 | ||||||
| Chinese Renminbi / U.S. Dollar | 23,297 | 5,415 | ||||||
| New Taiwan Dollar / U.S. Dollar | 3,369 | 1,483 | ||||||
| Russian Ruble/ U.S. Dollar | 2,614 | 309 | ||||||
| All other | 6,482 | 6,499 | ||||||
| Total | $ | 563,921 | $ | 512,462 |
The following table shows the effect of our non-designated hedges, all of which were forward contracts, on the Consolidated Statements of Operations for the years ended September 30, 2021, 2020 and 2019:
| (in thousands) | Year ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Location of gain (loss) | 2021 | 2020 | 2019 | |||||||||||
| Net realized and unrealized gain (loss), excluding the underlying foreign currency exposure being hedged | Other income, net | $ | (3,758 | ) | $ | 3,518 | $ | (11,314 | ) |
Cash Flow Hedges
We stopped entering into cash flow hedges in the first quarter of 2019. We had no outstanding forward contracts designated as cash flow hedges as of either September 30, 2021, 2020 or 2019. For the year ended September 30, 2019, we had a gain of $0.2 million related to effective portion of the hedge recognized in other comprehensive income on the Consolidated Balance Sheet, and $0.6 million reclassified from other comprehensive income on the Consolidated Balance Sheet into software revenue on the Consolidated Statements of Operations.
F-40
Net Investment Hedges
As of September 30, 2021 and 2020, we had outstanding forward contracts designated as net investment hedges with notional amounts equivalent to the following:
| September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|
| Currency Hedged (in thousands) | 2021 | 2020 | ||||||
| Euro / U.S. Dollar | $ | 128,103 | $ | 164,885 |
The following table shows the effect of our derivative instruments designated as net investment hedges, all of which were forward contracts, on the Consolidated Statements of Operations for the years ended September 30, 2021, 2020, and 2019:
| (in thousands) | Year ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Location of gain (loss) | 2021 | 2020 | 2019 | |||||||||||
| Gain (loss) recognized in OCI—effective portion | OCI | $ | 695 | $ | (5,483 | ) | $ | (2,925 | ) | |||||
| Gain (loss) reclassified from OCI—effective portion | OCI | $ | 2,723 | $ | 109 | $ | (7,630 | ) | ||||||
| Gain recognized—portion excluded from effectiveness testing | Other income, net | $ | 1,249 | $ | 3,506 | $ | 4,598 |
As of September 30, 2021, we estimate that all amounts reported in accumulated other comprehensive loss will be applied against exposed balance sheet accounts upon translation within the next three months.
The following table shows our derivative instruments measured at gross fair value as reflected in the Consolidated Balance Sheets:
| (in thousands) | Fair Value of Derivatives Designated As Hedging Instruments | Fair Value of Derivatives Not Designated As Hedging Instruments | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30, | ||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Derivative assets:(1) | ||||||||||||||||
| Forward contracts | $ | 1,641 | $ | 3 | $ | 3,722 | $ | 900 | ||||||||
| Derivative liabilities:(2) | ||||||||||||||||
| Forward contracts | $ | — | $ | 306 | $ | 3,318 | $ | 767 |
| (1) | As of September 30, 2021 and 2020, current derivative assets of $5.4 million and $0.9 million, respectively, are recorded in other current assets on the Consolidated Balance Sheets. |
|---|
| (2) | As of September 30, 2021 and 2020, current derivative liabilities of $3.3 million and $1.1 million, respectively, are recorded in accrued expenses and other current liabilities on 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, 2021:
| (in thousands) | Gross Amounts Offset in the Consolidated Balance Sheets | Gross Amounts Not Offset in the Consolidated Balance Sheets | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| As of September 30, 2021 | 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 | $ | 5,363 | $ | — | $ | 5,363 | $ | (3,318 | ) | $ | — | $ | 2,045 |
F-41
The following table sets forth the offsetting of derivative liabilities as of September 30, 2021:
| (in thousands) | Gross Amounts Offset in the Consolidated Balance Sheets | Gross Amounts Not Offset in the Consolidated Balance Sheets | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| As of September 30, 2021 | 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 | $ | 3,318 | $ | — | $ | 3,318 | $ | (3,318 | ) | $ | — | $ | — |
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 $8.0 million, $1.7 million and $3.2 million in 2021, 2020 and 2019, respectively. Net realized and unrealized gains and losses on forward contracts included in foreign currency net losses were a net loss of $4.9 million and $8.4 million in 2021 and 2019, and net gain of $7.0 million in 2020.
- Segment and Geographic Information
We operate within a single industry segment—computer software and related services. Operating segments as defined under GAAP are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our President and Chief Executive Officer. We have two operating and reportable segments: (1) Software Products, which includes license, subscription and related support revenue (including updates and technical support) for all our products; and (2) Professional Services, which includes consulting, implementation and training services. We do not allocate sales and marketing or general and administrative expense to our operating segments as these activities are managed on a consolidated basis. Additionally, segment profit does not include stock-based compensation, amortization of intangible assets, restructuring charges and certain other identified costs that we do not allocate to the segments for purposes of evaluating their operational performance.
F-42
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.
| (in thousands) | Year ended September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||
| Software Products | ||||||||||||
| Revenue | $ | 1,649,341 | $ | 1,314,617 | $ | 1,088,100 | ||||||
| Operating costs(1) | 451,734 | 393,803 | 377,464 | |||||||||
| Profit | 1,197,607 | 920,814 | 710,636 | |||||||||
| Professional Services | ||||||||||||
| Revenue | 157,818 | 143,798 | 167,531 | |||||||||
| Operating costs(2) | 135,981 | 128,678 | 133,846 | |||||||||
| Profit | 21,837 | 15,120 | 33,685 | |||||||||
| Total segment revenue | 1,807,159 | 1,458,415 | 1,255,631 | |||||||||
| Total segment costs | 587,715 | 522,481 | 511,310 | |||||||||
| Total segment profit | 1,219,444 | 935,934 | 744,321 | |||||||||
| Unallocated operating expenses:(3) | ||||||||||||
| Sales and marketing expenses | 464,067 | 398,100 | 385,423 | |||||||||
| General and administrative expenses | 120,954 | 114,386 | 104,393 | |||||||||
| Intangibles amortization | 59,165 | 56,104 | 51,147 | |||||||||
| Restructuring and other charges, net | 2,211 | 32,716 | 51,114 | |||||||||
| Stock-based compensation | 177,289 | 115,149 | 86,400 | |||||||||
| Other unallocated operating expenses(4) | 15,010 | 8,616 | 2,802 | |||||||||
| Total operating income | 380,748 | 210,863 | 63,042 | |||||||||
| Interest expense | (50,478 | ) | (76,428 | ) | (43,047 | ) | ||||||
| Other income, net | 61,485 | 271 | 305 | |||||||||
| Income before income taxes | $ | 391,755 | $ | 134,706 | $ | 20,300 |
| (1) | Operating costs for the Software Products segment include all costs of software revenue and research and development costs, excluding stock-based compensation and intangible amortization. Operating costs for the Software Products segment include depreciation of $4.0 million, $4.2 million and $4.6 million in 2021, 2020 and 2019, respectively. |
|---|
| (2) | Operating costs for the Professional Services segment include all costs 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 $1.1 million, $1.1 million and $1.4 million in 2021, 2020 and 2019, respectively. |
|---|
| (3) | Unallocated departments include depreciation of $21.0 million, $19.4 million and $20.6 million in 2021, 2020 and 2019, respectively. |
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| (4) | Other unallocated operating expenses include acquisition-related and other transactional costs and fair value adjustments for deferred services costs. |
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We report revenue by the following three product groups:
| (in thousands) | Year ended September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||
| Core | $ | 1,257,827 | $ | 1,025,668 | $ | 868,970 | ||||||
| Growth | 316,074 | 222,646 | 167,544 | |||||||||
| Focused Solutions Group (FSG) | 233,258 | 210,101 | 219,117 | |||||||||
| Total revenue | $ | 1,807,159 | $ | 1,458,415 | $ | 1,255,631 |
F-43
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 region. Intercompany sales and transfers between geographic areas are accounted for at prices that are designed to be representative of unaffiliated party transactions. Our material long-lived assets primarily reside in the United States in 2021, 2020, and 2019. 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, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||
| Revenue: | ||||||||||||
| Americas(1) | $ | 766,021 | $ | 649,383 | $ | 537,548 | ||||||
| Europe(2) | 722,977 | 543,779 | 464,666 | |||||||||
| Asia Pacific | 318,161 | 265,253 | 253,417 | |||||||||
| Total revenue | $ | 1,807,159 | $ | 1,458,415 | $ | 1,255,631 |
| (1) | Includes revenue in the United States totaling $741.3 million, $621.8 million, and $514.4 million for 2021, 2020 and 2019, respectively. |
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| (2) | Includes revenue in Germany totaling $290.7 million, $198.7 million, and $185.4 million for 2021, 2020 and 2019, respectively. |
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- Leases
Our headquarters are located at 121 Seaport Boulevard, Boston, Massachusetts (the Boston lease). The Boston lease is for approximately 250,000 square feet and runs from January 1, 2019 through June 30, 2037. Base rent for the first year of the lease is $11.0 million and will increase by $1 per square foot per year thereafter ($0.3 million per year). Base rent first became payable on July 1, 2020. In addition to the base rent, we are required to pay our pro rata portions of building operating costs and real estate taxes (together, “Additional Rent”). Annual Additional Rent is estimated to be approximately $7.1 million. The lease provides for $25 million in landlord funding for leasehold improvements ($100 per square foot). The leasehold improvement funding provision was fully utilized by us and was reflected as a derecognition adjustment to the right-of-use asset.
The components of lease cost reflected in the Consolidated Statement of Operations for the year ended September 30, 2021 were as follows:
| (in thousands) | Year ended September 30, 2021 | |||
|---|---|---|---|---|
| Operating lease cost | $ | 37,295 | ||
| Short-term lease cost | 2,452 | |||
| Variable lease cost | 9,808 | |||
| Sublease income | (4,438 | ) | ||
| Total lease cost | $ | 45,117 |
Supplemental cash flow and right-of use assets information for the year ended September 30, 2021 was as follows:
| (in thousands) | Year ended September 30, 2021 | |||
|---|---|---|---|---|
| Cash paid for amounts included in the measurement of lease liabilities | ||||
| Operating cash flows from operating leases | $ | 50,299 | ||
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 9,576 | ||
| Right-of-use assets obtained in exchange for new financing lease liabilities | $ | 1,146 |
Supplemental balance sheet information related to the leases as of September 30, 2021 was as follows:
| As of September 30, 2021 | ||||
|---|---|---|---|---|
| Weighted-average remaining lease term - operating leases | 11.9 years | |||
| Weighted-average remaining lease term - financing leases | 4 years | |||
| Weighted-average discount rate - operating leases | 5.5 | % | ||
| Weighted-average discount rate - financing leases | 3.0 | % |
F-44
Maturities of lease liabilities as of September 30, 2021 are as follows:
| (in thousands) | Operating Leases | |||
|---|---|---|---|---|
| 2022 | $ | 44,132 | ||
| 2023 | 28,988 | |||
| 2024 | 24,956 | |||
| 2025 | 21,760 | |||
| 2026 | 17,872 | |||
| Thereafter | 157,358 | |||
| Total future lease payments | 295,066 | |||
| Less: imputed interest | (86,267 | ) | ||
| Total | $ | 208,799 |
Exited (Restructured) Facilities
As of September 30, 2021, we have net liabilities of $3.6 million related to excess facilities (compared to $11.3 million at September 30, 2020), representing $1.2 million of right-of-use assets and $4.8 million of lease obligations, of which $4.2 million is classified as short term and $0.6 million is classified as long term.
In determining the amount of right-of-use assets for restructured facilities, we are required to estimate such factors as future vacancy rates, the time required to sublet properties, and sublease rates. Updates to these estimates may result in revisions to the value of right-of-use assets recorded. The amounts recorded are based on the net present value of estimated sublease income. As of September 30, 2021, the right-of-use assets for exited facilities reflect discounted committed sublease income of approximately $1.2 million. There was no uncommitted sublease income as of September 30, 2021. As a result of changes in our sublease income assumptions and an incremental obligation to exit a portion of our former headquarters facility early, in the year ended September 30, 2021, we recorded a facility impairment charge of $0.1 million.
In the year ended September 30, 2021, we made payments of $7.8 million related to lease costs for exited facilities.
- Subsequent Events
Equity Grants
In November 2021, we granted shares valued at approximately $20.5 million to our employees, including our executive officers ($3.1 million), in payment of amounts earned under our annual Corporate Incentive Plan. We also granted service-based restricted stock units (RSUs) valued at approximately $47.0 million to employees, including our executive officers ($11.1 million), and performance-based RSUs valued at approximately $18.2 million to employees, including our executive officers ($11.1 million). The service-based RSUs will generally vest in three substantially equal annual installments on November 15, 2022, 2023 and 2024. Half of the performance-based RSUs are eligible to vest based upon annual cash flow performance measures, measured over a three-year period and will vest in three substantially equal annual installments on November 15, 2022, 2023 and 2024. The other half are relative Total Shareholder Return RSUs which are eligible to vest based on the performance of PTC stock relative to the stock performance of an index of software and services companies for the period ending September 30, 2024 and will vest to the extent earned on November 15, 2024.
Restructuring
On November 3, 2021, we committed to a plan to restructure our workforce and consolidate select facilities to align our customer facing and product-related functions with SaaS industry best practices and accelerate the opportunity for our on-premise customers to move to the cloud. The expected savings from the restructuring will be re-invested in the business. The restructuring is expected to result in a charge and cash payments of approximately $45 million to $50 million in 2022. We anticipate additional cash restructuring payments of approximately $5 million related to past restructurings.
F-45
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