filings.toolsItem 16. Form 10-K Summary
174K characters. Original on sec.gov · Markdown
Item 16. Form 10-K Summary
None.
EXHIBIT INDEX
- Identifies a management contract or compensatory plan or arrangement in which an executive officer or director of PTC participates.
** Indicates that the exhibit is being furnished with this report and is not filed as a part of it.
*** Certain information has been excluded from this exhibit because it is not material and would likely cause competitive harm to the registrant if publicly disclosed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 17th day of November, 2023.
| PTC Inc. | ||
| By: | /s/ JAMES HEPPELMANN | |
| James Heppelmann Chairman of the Board 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 17th day of November, 2023.
| Signature | Title | |
| (i) Principal Executive Officer: | ||
| /s/ JAMES HEPPELMANN | 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/ JAMES HEPPELMANN | Chairman of the Board | |
| James Heppelmann | ||
| /s/ JANICE CHAFFIN | Lead Independent Director | |
| Janice Chaffin | ||
| /s/ NEIL BARUA | Director | |
| Neil Barua | ||
| /s/ MARK BENJAMIN | Director | |
| Mark Benjamin | ||
| /s/ MICHAL KATZ | Director | |
| Michal Katz | ||
| /s/ PAUL LACY | Director | |
| Paul Lacy | ||
| /s/ CORINNA LATHAN | Director | |
| Corinna Lathan | ||
| /s/ JANESH MOORJANI | Director | |
| Janesh Moorjani | ||
| /s/ ROBERT SCHECHTER | Director | |
| Robert Schechter |
APPENDIX A
Report of Independent Re****gistered 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, 2023 and 2022, and the related consolidated statements of operations, of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended September 30, 2023, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2023 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, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Annual Report on Internal Control over Financial Reporting, management has excluded ServiceMax, Inc. from its assessment of internal control over financial reporting as of
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September 30, 2023 because it was acquired by the Company in a purchase business combination during fiscal 2023. We have also excluded ServiceMax, Inc. from our audit of internal control over financial reporting. ServiceMax, 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 1% and 7%, respectively, of the related consolidated financial statement amounts as of and for the year ended September 30, 2023.
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 Recognition - 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 licenses, (3) support for perpetual licenses and (4) professional services. Revenue is derived from the licensing of computer software products, cloud-based offerings, and related support and professional services contracts. During the year ended September 30, 2023, the Company recognized revenue from contracts with customers of $2,097 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. As disclosed by management, significant judgment is used in determining the performance obligations related to these bundled products and services. 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 - identification of distinct performance obligations, is a critical audit matter are the (i) significant judgment by management when identifying the distinct performance obligations, and (ii) 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
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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 controls over 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 ServiceMax, Inc. – Valuation of the Customer Relationships and Purchased Software Intangible Assets
As described in Note 6 to the consolidated financial statements, the Company completed its acquisition of ServiceMax, Inc. on January 3, 2023, for purchase consideration of $1,448.2 million, net of cash acquired. The Company has accounted for the acquisition of ServiceMax, Inc. 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 $512.7 million of customer relationships and $106.9 million of purchased software being recorded. Management estimated the fair value of the customer relationships and purchased software intangible assets using discounted cash flow models which included significant estimates and assumptions related to future revenues, costs and an applicable discount rate.
The principal considerations for our determination that performing procedures relating to the valuation of the customer relationships and purchased software intangible assets in the acquisition of ServiceMax, Inc. is a critical audit matter are (i) the significant judgment by management when developing the fair value estimate of the customer relationships and purchased software acquired, (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to future revenues, costs and the discount rate for the customer relationships and future revenues and the discount rate for the purchased software intangible assets; and (iii) 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 the acquisition accounting, including controls over management’s valuation of the customer relationships and purchased software acquired. These procedures also included, among others (i) reading the purchase agreement; (ii) testing management’s process for developing the fair value estimate of the customer relationships and purchased software acquired; (iii) evaluating the appropriateness of the discounted cash flow models used by management to develop the fair value estimates; (iv) testing the completeness and accuracy of the underlying data used in the discounted cash flow models used by management to develop the fair value estimates; and (v) evaluating the reasonableness of the significant assumptions used by management related to future revenues, costs and the discount rate for the customer relationships and future revenues and the discount rate for the purchased software intangible assets. Evaluating management’s assumptions related to future revenues, costs and the discount rate for the customer relationships intangible asset and the future revenues and the discount rate for the purchased software intangible asset involved considering (i) the consistency with external economic and industry data, (ii) the past performance of the acquired business, and (iii) 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 models and the reasonableness of the discount rate assumptions.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
November 17, 2023
We have served as the Company’s auditor since 1992.
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PTC Inc.
CONSOLIDATED B****ALANCE SHEETS
(in thousands, except per share data)
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 288,103 | $ | 272,182 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $429 and $362 at September 30, 2023 and September 30, 2022, respectively | 811,398 | 636,556 | ||||||
| Prepaid expenses | 96,016 | 88,854 | ||||||
| Other current assets | 81,849 | 71,065 | ||||||
| Total current assets | 1,277,366 | 1,068,657 | ||||||
| Property and equipment, net | 88,391 | 98,101 | ||||||
| Goodwill | 3,358,511 | 2,353,654 | ||||||
| Acquired intangible assets, net | 941,249 | 382,718 | ||||||
| Deferred tax assets | 123,319 | 256,091 | ||||||
| Operating right-of-use lease assets | 143,028 | 137,780 | ||||||
| Other assets | 356,978 | 390,267 | ||||||
| Total assets | $ | 6,288,842 | $ | 4,687,268 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 43,480 | $ | 40,153 | ||||
| Accrued expenses and other current liabilities | 132,841 | 117,158 | ||||||
| Accrued compensation and benefits | 160,431 | 104,022 | ||||||
| Accrued income taxes | 14,919 | 5,142 | ||||||
| Current portion of long-term debt | 9,375 | — | ||||||
| Deferred acquisition payments | 620,040 | — | ||||||
| Deferred revenue | 665,362 | 503,781 | ||||||
| Short-term lease obligations | 24,737 | 22,002 | ||||||
| Total current liabilities | 1,671,185 | 792,258 | ||||||
| Long-term debt | 1,686,410 | 1,350,628 | ||||||
| Deferred tax liabilities | 29,508 | 28,396 | ||||||
| Long-term deferred revenue | 16,188 | 16,552 | ||||||
| Long-term lease obligations | 168,455 | 167,573 | ||||||
| Other liabilities | 39,806 | 35,827 | ||||||
| Total liabilities | 3,611,552 | 2,391,234 | ||||||
| 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; 118,846 and 117,472 shares issued and outstanding at September 30, 2023 and September 30, 2022, respectively | 1,188 | 1,175 | ||||||
| Additional paid-in capital | 1,820,905 | 1,720,580 | ||||||
| Retained earnings | 973,277 | 727,737 | ||||||
| Accumulated other comprehensive loss | (118,080 | ) | (153,458 | ) | ||||
| Total stockholders’ equity | 2,677,290 | 2,296,034 | ||||||
| Total liabilities and stockholders’ equity | $ | 6,288,842 | $ | 4,687,268 |
The accompanying notes are an integral part of these consolidated financial statements.
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PTC Inc.
CONSOLIDATED STATEM****ENTS OF OPERATIONS
(in thousands, except per share data)
| Year ended September 30, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Revenue: | ||||||||||||
| License | $ | 747,022 | $ | 782,680 | $ | 738,053 | ||||||
| Support and cloud services | 1,199,536 | 987,573 | 911,288 | |||||||||
| Total software revenue | 1,946,558 | 1,770,253 | 1,649,341 | |||||||||
| Professional services | 150,495 | 163,094 | 157,818 | |||||||||
| Total revenue | 2,097,053 | 1,933,347 | 1,807,159 | |||||||||
| Cost of revenue: | ||||||||||||
| Cost of license revenue | 53,200 | 49,240 | 61,750 | |||||||||
| Cost of support and cloud services revenue | 245,027 | 184,789 | 164,108 | |||||||||
| Total cost of software revenue | 298,227 | 234,029 | 225,858 | |||||||||
| Cost of professional services revenue | 142,779 | 151,951 | 145,244 | |||||||||
| Total cost of revenue | 441,006 | 385,980 | 371,102 | |||||||||
| Gross margin | 1,656,047 | 1,547,367 | 1,436,057 | |||||||||
| Operating expenses: | ||||||||||||
| Sales and marketing | 530,125 | 485,247 | 517,779 | |||||||||
| Research and development | 394,370 | 338,822 | 299,917 | |||||||||
| General and administrative | 233,516 | 204,732 | 206,006 | |||||||||
| Amortization of acquired intangible assets | 40,022 | 34,970 | 29,396 | |||||||||
| Restructuring and other charges (credits), net | (460 | ) | 36,234 | 2,211 | ||||||||
| Total operating expenses | 1,197,573 | 1,100,005 | 1,055,309 | |||||||||
| Operating income | 458,474 | 447,362 | 380,748 | |||||||||
| Interest and debt premium expense | (129,417 | ) | (54,268 | ) | (50,478 | ) | ||||||
| Other income, net | 3,509 | 4,004 | 61,485 | |||||||||
| Income before income taxes | 332,566 | 397,098 | 391,755 | |||||||||
| Provision (benefit) for income taxes | 87,026 | 84,017 | (85,168 | ) | ||||||||
| Net income | $ | 245,540 | $ | 313,081 | $ | 476,923 | ||||||
| Earnings per share—Basic | $ | 2.07 | $ | 2.67 | $ | 4.08 | ||||||
| Earnings per share—Diluted | $ | 2.06 | $ | 2.65 | $ | 4.03 | ||||||
| Weighted-average shares outstanding—Basic | 118,341 | 117,194 | 116,836 | |||||||||
| Weighted-average shares outstanding—Diluted | 119,334 | 118,233 | 118,367 |
The accompanying notes are an integral part of these consolidated financial statements.
F-5
PTC Inc.
CONSOLIDATED STATEMENTS OF C****OMPREHENSIVE INCOME
(in thousands)
| Year ended September 30, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Net income | $ | 245,540 | $ | 313,081 | $ | 476,923 | ||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||
| Hedge gain (loss) arising during the period, net of tax of $2.5 million, $(5.8) million, and $(0.4) million in 2023, 2022, and 2021, respectively | (7,516 | ) | 17,556 | 1,248 | ||||||||
| Foreign currency translation adjustment, net of tax of $0 for each period | 45,692 | (92,768 | ) | 1,613 | ||||||||
| Unrealized loss on marketable securities, net of tax of $0 for each period | — | — | (307 | ) | ||||||||
| Amortization of net actuarial pension loss included in net income, net of tax of $(0.1) million, $(0.4) million, and $(1.2) million in 2023, 2022, and 2021, respectively | 161 | 1,010 | 2,930 | |||||||||
| Pension net gain (loss) and plan amendments arising during the period, net of tax of $1.3 million, $(6.1) million, and $(0.7) million in 2023, 2022, and 2021, respectively | (2,642 | ) | 15,027 | 1,891 | ||||||||
| Change in unamortized pension loss during the period related to changes in foreign currency, net of tax of $0.1 million, $(0.6) million, and $0.0 million in 2023, 2022, and 2021, respectively | (317 | ) | 1,581 | 135 | ||||||||
| Other comprehensive income (loss) | 35,378 | (57,594 | ) | 7,510 | ||||||||
| Comprehensive income | $ | 280,918 | $ | 255,487 | $ | 484,433 |
The accompanying notes are an integral part of these consolidated financial statements.
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PTC Inc.
CONSOLIDATED STATEM****ENTS OF CASH FLOWS
(in thousands)
| Year ended September 30, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 245,540 | $ | 313,081 | $ | 476,923 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 104,760 | 87,694 | 85,239 | |||||||||
| Amortization of right-of-use lease assets | 32,402 | 34,346 | 37,295 | |||||||||
| Stock-based compensation | 206,459 | 174,863 | 177,289 | |||||||||
| Loss (gain) on investment | — | 31,854 | (68,829 | ) | ||||||||
| Gain on divestiture of business | — | (29,808 | ) | — | ||||||||
| Other non-cash items, net | (4,065 | ) | (4,560 | ) | (1,381 | ) | ||||||
| Provision (benefit) from deferred income taxes | 16,676 | 42,963 | (158,105 | ) | ||||||||
| Changes in operating assets and liabilities, excluding the effects of acquisitions: | ||||||||||||
| Accounts receivable | (98,607 | ) | (165,006 | ) | (119,418 | ) | ||||||
| Accounts payable and accrued expenses | 15,918 | 6,957 | 25,096 | |||||||||
| Accrued compensation and benefits | 7,845 | (6,645 | ) | 16,775 | ||||||||
| Deferred revenue | 56,572 | 57,586 | 58,702 | |||||||||
| Accrued income taxes | 4,639 | (15,329 | ) | 13,979 | ||||||||
| Other current assets and prepaid expenses | 6,974 | (40,643 | ) | (14,206 | ) | |||||||
| Operating lease liabilities | (1,929 | ) | (13,610 | ) | (7,129 | ) | ||||||
| Other noncurrent assets and liabilities | 17,677 | (38,417 | ) | (153,421 | ) | |||||||
| Net cash provided by operating activities | 610,861 | 435,326 | 368,809 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Additions to property and equipment | (23,814 | ) | (19,496 | ) | (24,713 | ) | ||||||
| Purchases of short- and long-term marketable securities | — | — | (7,562 | ) | ||||||||
| Proceeds from sales of short- and long-term marketable securities | — | — | 56,170 | |||||||||
| Proceeds from maturities of short- and long-term marketable securities | — | — | 9,861 | |||||||||
| Acquisitions of businesses, net of cash acquired | (828,271 | ) | (282,943 | ) | (718,030 | ) | ||||||
| Proceeds from sale of investments | 349 | 46,906 | — | |||||||||
| Purchases of investments | (5,823 | ) | — | (4,000 | ) | |||||||
| Purchase of intangible assets | (800 | ) | (6,451 | ) | (550 | ) | ||||||
| Settlement of net investment hedges | (7,602 | ) | 24,857 | 965 | ||||||||
| Divestitures of businesses and assets, net | (154 | ) | 32,518 | — | ||||||||
| Other investing activities | — | 3,408 | — | |||||||||
| Net cash used in investing activities | (866,115 | ) | (201,201 | ) | (687,859 | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Borrowings under credit facility | 1,540,000 | 264,000 | 600,000 | |||||||||
| Repayments of borrowings under credit facility | (1,197,000 | ) | (355,000 | ) | (168,000 | ) | ||||||
| Repurchases of common stock | — | (125,000 | ) | (30,000 | ) | |||||||
| Proceeds from issuance of common stock | 21,652 | 21,207 | 21,575 | |||||||||
| Payments of withholding taxes in connection with stock-based awards | (82,448 | ) | (68,991 | ) | (52,957 | ) | ||||||
| Payments of principal for financing leases | (536 | ) | (297 | ) | (354 | ) | ||||||
| Credit facility origination costs | (13,355 | ) | — | — | ||||||||
| Net cash provided by (used in) financing activities | 268,313 | (264,081 | ) | 370,264 | ||||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 2,851 | (24,203 | ) | (127 | ) | |||||||
| Net change in cash, cash equivalents, and restricted cash | 15,910 | (54,159 | ) | 51,087 | ||||||||
| Cash, cash equivalents, and restricted cash, beginning of period | 272,888 | 327,047 | 275,960 | |||||||||
| Cash, cash equivalents, and restricted cash, end of period | $ | 288,798 | $ | 272,888 | $ | 327,047 |
The accompanying notes are an integral part of these consolidated financial statements.
F-7
PTC Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
| Common Stock | Additional | Retained Earnings | Accumulated Other | Total | ||||||||||||||||||||
| Shares | Amount | Paid-In Capital | (Accumulated Deficit) | Comprehensive Loss | Stockholders’ Equity | |||||||||||||||||||
| 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 | ) | ||||||||||||||
| 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 | ||||||||||||
| Common stock issued for employee stock-based awards | 1,737 | 18 | (18 | ) | — | — | — | |||||||||||||||||
| Shares surrendered by employees to pay taxes related to stock-based awards | (597 | ) | (6 | ) | (68,985 | ) | — | — | (68,991 | ) | ||||||||||||||
| Common stock issued for employee stock purchase plan | 215 | 2 | 21,205 | — | — | 21,207 | ||||||||||||||||||
| Compensation expense from stock-based awards | — | — | 174,863 | — | — | 174,863 | ||||||||||||||||||
| Net income | — | — | — | 313,081 | — | 313,081 | ||||||||||||||||||
| Repurchases of common stock | (1,046 | ) | (11 | ) | (124,989 | ) | — | — | (125,000 | ) | ||||||||||||||
| Gain on net investment hedges, net of tax | — | — | — | — | 17,556 | 17,556 | ||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | (92,768 | ) | (92,768 | ) | ||||||||||||||||
| Change in pension benefits, net of tax | — | — | — | — | 17,618 | 17,618 | ||||||||||||||||||
| Balance as of September 30, 2022 | 117,472 | $ | 1,175 | $ | 1,720,580 | $ | 727,737 | $ | (153,458 | ) | $ | 2,296,034 | ||||||||||||
| Common stock issued for employee stock-based awards | 1,798 | 18 | (18 | ) | — | — | — | |||||||||||||||||
| Shares surrendered by employees to pay taxes related to stock-based awards | (620 | ) | (7 | ) | (82,761 | ) | — | — | (82,768 | ) | ||||||||||||||
| Common stock issued for employee stock purchase plan | 196 | 2 | 21,650 | — | — | 21,652 | ||||||||||||||||||
| Compensation expense from stock-based awards | — | — | 161,454 | — | — | 161,454 | ||||||||||||||||||
| Net income | — | — | — | 245,540 | — | 245,540 | ||||||||||||||||||
| Loss on net investment hedges, net of tax | — | — | — | — | (7,516 | ) | (7,516 | ) | ||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | 45,692 | 45,692 | ||||||||||||||||||
| Change in pension benefits, net of tax | — | — | — | — | (2,798 | ) | (2,798 | ) | ||||||||||||||||
| Balance as of September 30, 2023 | 118,846 | $ | 1,188 | $ | 1,820,905 | $ | 973,277 | $ | (118,080 | ) | $ | 2,677,290 |
The accompanying notes are an integral part of these consolidated financial statements.
F-8
PTC Inc**.**
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Basis of Presentation
Business
PTC Inc. was incorporated in 1985 and is headquartered in Boston, Massachusetts. PTC is a global software company that provides a portfolio of innovative digital solutions that work together to transform how physical products are engineered, manufactured, and serviced.
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 United States. 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 United States that require management to make estimates and assumptions that affect the amounts reported and the related disclosures. Actual results could differ from these estimates.
2. Summary of Significant Accounting Policies
Foreign Currency Translation
For our non-U.S. operations where the functional currency is the local currency, we translate assets and liabilities at exchange rates in effect at the balance sheet date and record translation adjustments in stockholders’ equity. For our non-U.S. operations where the U.S. Dollar is the functional currency, we remeasure monetary assets and liabilities using exchange rates in effect at the balance sheet date and non-monetary assets and liabilities at historical rates and record resulting exchange gains or losses in Other income, net 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
Nature of Products and Services
Our sources of revenue include: (1) subscriptions, (2) perpetual licenses, (3) support for perpetual licenses and (4) professional services. Subscriptions include term-based on-premises licenses and related support, Software-as-a-Service (SaaS), and hosting services. Revenue is derived from the licensing of computer software products, cloud-based offerings, and related support and professional services contracts. In accordance with ASC 606, Revenue from Contracts with Customers, revenue is recognized when a customer obtains control of promised products or services. The amount of revenue recognized reflects the consideration that we expect to be entitled to receive in exchange for these products or services. To achieve the core principle of this standard, we apply the following five steps:
(1)
identify the contract with the customer,
(2)
identify the performance obligations in the contract,
(3)
determine the transaction price,
(4)
allocate the transaction price to performance obligations in the contract, and
(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, cloud-based offerings, and professional services, each of 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 (including SaaS) | 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-premises software licenses bundled with support and/or cloud services. Significant judgment is used in determining the performance obligations related to these bundled products and services. On-premises 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-premises licenses, we assess whether the cloud component is highly interrelated with the on-premises term-based software licenses. Other than a limited population of subscriptions, the cloud component is not currently deemed to be interrelated with the on-premises 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-premises software and support only, we determined that approximately 55% of the estimated standalone selling price for subscriptions is attributable to software licenses and approximately 45% is attributable to support for those licenses. Some of our subscription offerings include a combination of on-premises and cloud-based technology. In such cases, the cloud-based technology is generally considered distinct and receives an allocation of approximately 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 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, for on-premises licenses, this right to exchange previously delivered software for different software represents variable consideration to be accounted for as a liability. We have identified a standard portfolio of contracts with common characteristics and applied the expected value method of determining variable consideration associated with this right. Additionally, in 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, 2023 and 2022, the total liability was $23.7 million and $34.2 million, respectively, primarily associated with the annual right to exchange on-premises subscription software.
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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, 2023, we did not hold any marketable securities. 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
In July 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, which were restricted from sale until January 2022. For the year ended September 30, 2021, we recorded an unrealized gain of $68.8 million on the appreciation of the value of the shares in Other income, net in the Consolidated Statement of Operations. In 2022, we sold all shares held for a total of $42.7 million. The shares sold included those held as of September 30, 2021, as well as additional shares that we earned based on contingent earn-outs. In the year ended September 30, 2022, we recognized a net loss of $34.8 million in Other income, net in the Consolidated Statements of Operations. The aggregate realized gain from the original investment of $8.7 million was $34.0 million. As of and subsequent to September 30, 2022, PTC held no shares in Matterport.
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, 2023 or 2022 or more than 10% of our revenue for the years ended September 30, 2023, 2022 or 2021.
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Fair Value Measurements
Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.
The valuation hierarchy for disclosure of assets and liabilities reported at fair value prioritizes the inputs for such valuations into three broad levels:
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2: quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; or
Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The hierarchy requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. In determining the adequacy of the allowance for doubtful accounts, we analyze specific individual accounts receivable, historical bad debts, customer concentrations, customer credit-worthiness, current economic conditions, and accounts receivable aging trends.
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 Eurozone countries, Japan, Sweden, Switzerland, China and India. 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 derivatives transactions, specifically foreign currency forward contracts and options, to manage our exposure to foreign currency exchange risk in order 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 16. 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 four 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 and losses on forward contracts and foreign denominated receivables and payables are included in Other income, net.
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We hedge our forecasted U.S. Dollar cash flows with foreign exchange options to reduce the risk that they will be adversely affected by changes in Euro or Japanese Yen exchange rates. We did not hold any foreign currency option contracts as of September 30, 2023. We do not designate these foreign currency options as hedges for accounting purposes and changes in the fair value of these instruments are recognized immediately in earnings. Because we enter into options as an economic hedge, currency impacts on the Euro or Japanese Yen-denominated operations as compared to the forecasted plan rate may be partially offset by gains on the options. Gains and losses on foreign exchange options are included in Other income, net.
Net Investment Hedges
We translate balance sheet accounts of subsidiaries with foreign functional currencies into the U.S. Dollar 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 Sheets. We designate certain foreign exchange forward contracts as net investment hedges against exposure on translation of balance sheet accounts of Euro and Japanese Yen functional subsidiaries. Net investment hedges partially offset the impact of foreign currency translation adjustment recorded in Accumulated other comprehensive loss on the Consolidated Balance Sheets. All foreign exchange forward contracts are carried at fair value on the Consolidated Balance Sheets and the maximum duration of net investment hedge 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 and Japanese Yen 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 upon contract maturity reclassify them to Foreign currency translation adjustment in Accumulated other comprehensive loss. 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.
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in Operating right-of-use lease assets, Short-term lease obligations, and Long-term lease obligations on our Consolidated Balance Sheets. Our operating leases are primarily for office space, automobiles, 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.
F-13
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. 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 software and 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 internal development costs for software to be sold externally were capitalized in 2023, 2022 or 2021. We purchased software of $1.0 million, $6.0 million, and $0.6 million in 2023, 2022, and 2021, respectively. Additionally, we acquired capitalized software through business combinations (for further detail, see Note 6. Acquisitions and Disposition of Businesses). These assets are included in Acquired intangible assets, net 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.
Segments
In the third quarter of 2023, we reevaluated our operating segments to better align with how our chief operating decision maker ("CODM"), who is our Chief Executive Officer, evaluates performance and allocates resources, which resulted in a change from two operating segments—Software Products and Professional Services—to a single operating segment. The key factors evaluated included our organization structure, financial results reviewed by the CODM, and compensation structure, among others. This change reflects our strategy to focus our professional services business on high-value services and to
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leverage partners to provide services, while delivering products that require fewer consulting and training services. Based on this change, we determined we have a single reportable segment.
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; 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.
In the third quarter of 2023, we reevaluated our operating segments to better align with how our CODM evaluates performance and allocates resources, which resulted in a change from two operating segments—Software Products and Professional Services—to a single operating segment. As part of this reevaluation, we determined that our reporting unit is the same as our operating segment.
Before combining the reporting units, we performed a step zero qualitative assessment of the Software Products reporting unit and a step one quantitative assessment of the Professional Services reporting unit. As of June 30, 2023 (prior to the reporting unit change), goodwill attributable to the Software Products segment was $3,367.5 million and to the Professional Services segment was $9.8 million. Based on our qualitative assessment, we concluded it was more likely than not that the fair value of our Software Products reporting unit exceeded its carrying value and no further impairment testing was required. Based on a comparison of the estimated fair value to the carrying value of the Professional Services reporting unit as of June 30, 2023, no impairment was required.
After combining the reporting units, we performed a step zero qualitative assessment on the combined goodwill balance and determined that it is more likely than not that the fair value of the combined reporting unit exceeds its carrying value and no further impairment testing is required. Through September 30, 2023, there were no events or changes in circumstances that indicated that the carrying values of goodwill or acquired intangible assets may not be recoverable.
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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 20 years and trademarks are amortized over periods up to 15 years. We review long-lived assets for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of those assets are no longer appropriate. An impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset or asset group. If impairment is indicated, the asset is written down to its estimated fair value based on a discounted cash flow analysis.
Advertising Expenses
Advertising costs are expensed as incurred. Total advertising expenses incurred were $11.7 million, $8.6 million and $7.1 million in 2023, 2022 and 2021, 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 Provision (benefit) for income taxes in the Consolidated Statements of Operations.
Comprehensive Income
Comprehensive income consists of Net income 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 comprised the following as of September 30, 2023: cumulative translation adjustment losses of $114.5 million, unrecognized actuarial losses related to pension benefits of $9.6 million ($6.7 million net of tax), and accumulated net gains from net investment hedges of $6.9 million ($3.1 million net of tax). As of September 30, 2022, Accumulated other comprehensive loss comprised the following: cumulative translation adjustment losses of $160.2 million, unrecognized actuarial losses related to pension benefits of $5.4 million ($3.9 million net of tax), and accumulated net gains from net investment hedges of $16.9 million ($10.6 million net of tax).
Earnings 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, 2023, 2022, and 2021.
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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, | |||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Net income | $ | 245,540 | $ | 313,081 | $ | 476,923 | ||||||
| Weighted average shares outstanding | 118,341 | 117,194 | 116,836 | |||||||||
| Dilutive effect of employee stock options, restricted shares and restricted stock units | 993 | 1,039 | 1,531 | |||||||||
| Diluted weighted average shares outstanding | 119,334 | 118,233 | 118,367 | |||||||||
| Earnings per share—Basic | $ | 2.07 | $ | 2.67 | $ | 4.08 | ||||||
| Earnings per share—Diluted | $ | 2.06 | $ | 2.65 | $ | 4.03 |
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 Plans 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.
3. Revenue from Contracts with Customers
Receivables, Contract Assets, and Contract Liabilities
| (in thousands) | September 30, | |||||||
| 2023 | 2022 | |||||||
| Short-term and long-term receivables | $ | 997,490 | $ | 870,962 | ||||
| Contract asset | $ | 16,465 | $ | 21,096 | ||||
| Deferred revenue | $ | 681,550 | $ | 520,333 |
As of September 30, 2023, $16.1 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 assets and expected to be transferred within the next 24 months. As of September 30, 2022, $16.9 million of our contract asset balance was included in Other current assets with the remainder included in Other assets.
Approximately $14.7 million of the September 30, 2022 contract asset balance was transferred to receivables during the year ended September 30, 2023 as a result of the right to payment becoming unconditional. Additions to contract asset of approximately $10.0 million primarily related to revenue recognized in the period, net of billings. There were no impairments of contract assets in the year ended September 30, 2023.
During the year ended September 30, 2023, we recognized $509.1 million of revenue that was included in deferred revenue as of September 30, 2022. There were additional deferrals of $572.5 million, primarily related to new billings. In addition, the acquisition of ServiceMax added $97.8 million of deferred revenue. For subscription contracts, we generally invoice customers annually.
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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, 2023 and September 30, 2022, deferred costs of $41.8 million and $40.7 million, respectively, were included in Other current assets and $78.7 million and $77.0 million, respectively, were included in Other assets. Amortization expense related to costs to obtain a contract with a customer was $53.4 million and $50.9 million in the years ended September 30, 2023 and 2022, respectively. There were no substantial impairments of the contract cost asset in the years ended September 30, 2023 and 2022.
Remaining Performance Obligations
Our contracts with customers include transaction price amounts allocated to performance obligations that will be satisfied and recognized as revenue at a later date. As of September 30, 2023, the transaction price amounts include additional performance obligations of $681.6 million recorded in deferred revenue and $1,369.4 million that are not yet recorded in the Consolidated Balance Sheets. We expect to recognize approximately 59% of the total $2,051.0 million over the next 12 months, with the remaining amount thereafter.
Disaggregation of Revenue
| (in thousands) | Year ended September 30, | |||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Recurring revenue(1) | $ | 1,907,918 | $ | 1,736,188 | $ | 1,616,328 | ||||||
| Perpetual license | 38,640 | 34,065 | 33,013 | |||||||||
| Professional services | 150,495 | 163,094 | 157,818 | |||||||||
| Total revenue | $ | 2,097,053 | $ | 1,933,347 | $ | 1,807,159 |
(1)
Recurring revenue is comprised of on-premises subscription, perpetual support, SaaS, and cloud services revenue.
We report revenue by the following two product groups:
| (in thousands) | Year ended September 30, | |||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Product lifecycle management (PLM) | 1,330,316 | 1,137,016 | 1,012,120 | |||||||||
| Computer-aided design (CAD) | 766,737 | 796,331 | 795,039 | |||||||||
| Total revenue | $ | 2,097,053 | $ | 1,933,347 | $ | 1,807,159 |
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. 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, | |||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Americas(1) | $ | 1,023,273 | $ | 895,095 | $ | 766,021 | ||||||
| Europe(2) | 753,796 | 714,216 | 722,977 | |||||||||
| Asia Pacific | 319,984 | 324,036 | 318,161 | |||||||||
| Total revenue | $ | 2,097,053 | $ | 1,933,347 | $ | 1,807,159 |
(1)
Includes revenue in the United States totaling $993.8 million, $864.7 million, and $741.3 million for 2023, 2022 and 2021, respectively.
(2)
Includes revenue in Germany totaling $292.0 million, $318.5 million, and $290.7 million for 2023, 2022 and 2021, respectively.
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4. Restructuring and Other Charges (Credits), Net
Restructuring and other charges (credits), net includes restructuring charges (credits) and impairment and accretion expense charges related to the lease assets of exited facilities.
In 2023, Restructuring and other charges (credits), net and related payments were immaterial.
In 2022, Restructuring and other charges (credits), net totaled $36.2 million, of which $32.4 million is attributable to restructuring charges primarily related to employee termination benefits, $5.1 million is attributable to other charges for professional fees included in restructuring related to our SaaS transformation, offset by a $1.3 million credit attributable to sublease income and the reversal of lease liabilities related to exited lease facilities. These charges substantially relate 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-premises customers to move to the cloud. We made cash payments related to restructuring charges of $40.8 million ($34.0 million related to employee charges, $2.5 million in payments for other professional fees, and $4.3 million in net payments for variable costs related to restructured facilities).
In 2021, Restructuring and other charges (credits), net totaled $2.2 million, of which $2.1 million was attributable to restructuring charges and $0.1 million was 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).
The following table summarizes restructuring accrual activity for the three years ended September 30, 2023:
| (in thousands) | Employee severance and related benefits | Facility closures and other costs | Consolidated total | |||||||||
| 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 | |||||||||
| Charges (credits) to operations, net | 32,971 | (561 | ) | 32,410 | ||||||||
| Cash disbursements | (34,023 | ) | (2,355 | ) | (36,378 | ) | ||||||
| Foreign exchange impact | (583 | ) | — | (583 | ) | |||||||
| Balance, September 30, 2022 | 346 | 589 | 935 | |||||||||
| Credits to operations, net | (143 | ) | (281 | ) | (424 | ) | ||||||
| Cash disbursements | (121 | ) | (304 | ) | (425 | ) | ||||||
| Foreign exchange impact | 21 | — | 21 | |||||||||
| Balance, September 30, 2023 | $ | 103 | $ | 4 | $ | 107 |
As of September 30, 2023 and 2022, the accrual for employee severance and related benefits was included in Accrued compensation and benefits in the Consolidated Balance Sheets.
As of September 30, 2023 and 2022, the accrual for facility closures and related costs was included in Accrued expenses and other current liabilities in the Consolidated Balance Sheets.
5. Property and Equipment
Property and equipment consisted of the following:
| (in thousands) | September 30, | |||||||
| 2023 | 2022 | |||||||
| Computer hardware and software | $ | 304,045 | $ | 364,762 | ||||
| Furniture and fixtures | 20,042 | 29,744 | ||||||
| Leasehold improvements | 77,703 | 95,383 | ||||||
| Gross property and equipment | 401,790 | 489,889 | ||||||
| Accumulated depreciation and amortization | (313,399 | ) | (391,788 | ) | ||||
| Net property and equipment | $ | 88,391 | $ | 98,101 |
F-19
Depreciation expense was $29.0 million, $27.1 million and $26.1 million in 2023, 2022 and 2021, respectively.
Property and equipment additions which were accrued and unpaid as of September 30, 2023, 2022, and 2021 were $1.8 million, $6.8 million, and $0.6 million, respectively.
Our material long-lived assets primarily reside in the United States in 2023, 2022 and 2021.
6. Acqui****sitions and Disposition of Businesses
Acquisition and transaction-related costs were $18.7 million, $13.2 million and $15.0 million in 2023, 2022 and 2021, respectively. Acquisition and transaction-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). Other transactional charges include third-party costs related to structuring unusual transactions, such as the divestiture of a portion of our business. These costs are classified in General and administrative expenses in the accompanying Consolidated Statements of Operations.
Our results of operations include or exclude, as applicable, the results of acquired or sold businesses beginning on their respective acquisition or sale date.
The acquisitions described below have been accounted for as business combinations. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the respective acquisition date. The fair values of intangible assets were based on valuations using discounted cash flow models which require the use of significant estimates and assumptions, including estimating future revenues, future costs, and an applicable discount rate. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill.
ServiceMax
On January 3, 2023, we acquired ServiceMax, Inc. pursuant to a Share Purchase Agreement dated November 17, 2022 by and among PTC, ServiceMax, Inc., and ServiceMax JV, LP. ServiceMax develops and licenses cloud-native, product-centric field service management (FSM) software, which is included within our PLM product group. The purchase price of $1,448.2 million, net of cash acquired, was payable in two installments. Upon closing of the transaction, PTC paid the first installment of $828.2 million, as adjusted for working capital, indebtedness, cash, and transaction expenses as set forth in the Share Purchase Agreement. The remaining installment of $650.0 million, of which $620.0 million represents the fair value as of the acquisition date and $30.0 million is imputed interest, was paid in October 2023. The fair value of the deferred acquisition payment was calculated based on our borrowing rate at the time of the acquisition.
PTC borrowed $630 million under the revolving line of our new credit facility and $500 million under the term loan of the new credit facility to repay amounts under the prior credit facility and to pay the closing purchase price and transaction expenses related to the acquisition. ServiceMax had approximately 500 employees on the close date. In the year ended September 30, 2023, ServiceMax revenue was $137.6 million and ServiceMax earnings were immaterial.
F-20
The following table sets forth the purchase price allocation for ServiceMax. The purchase price allocation includes the finalization of measurement period adjustments related to intangibles and deferred tax liabilities that resulted in a $3.5 million increase in customer relationships, a $3.2 million increase in net tax liability, and a $0.3 million decrease in goodwill compared to the balances reported as of March 31, 2023. We have also recorded a liability of $620.0 million related to the fair value of the $650.0 million deferred purchase price payment.
| (in thousands) | |||
| Goodwill | $ | 974,850 | |
| Customer relationships | 512,700 | ||
| Purchased software | 106,900 | ||
| Accounts receivable | 58,722 | ||
| Trademarks | 9,000 | ||
| Other net assets | 5,540 | ||
| Net tax liability | (121,656 | ) | |
| Deferred revenue | (97,829 | ) | |
| Total | $ | 1,448,227 |
The acquired customer relationships, purchased software, and trademarks are being amortized over useful lives of 20 years, 10 years, and 10 years, respectively, based on the expected economic benefit pattern of the assets. The acquired goodwill will not be deductible for income tax purposes. The amount of goodwill resulting from the purchase price allocation reflects expected future growth as ServiceMax expands our closed-loop product lifecycle management (PLM) strategy.
Unaudited Pro Forma Financial Information
The unaudited pro forma financial information in the table below summarizes the combined results of operations for PTC and ServiceMax. The unaudited pro forma financial information for all periods presented includes adjustments to reflect certain business combination effects, including: amortization of acquired intangible assets and the elimination of related ServiceMax expenses; acquisition-related costs incurred by both parties; reversal of certain costs incurred by ServiceMax which would not have been incurred had the acquisition occurred at the beginning of fiscal 2022; interest expense under the new combined capital structure; stock-based compensation charges; and the related tax effects as though ServiceMax was acquired as of the beginning of fiscal 2022. The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2022.
The unaudited pro forma financial information for the years ended September 30, 2023 and 2022 presented below combines the historical results of PTC for those periods, the historical results of ServiceMax for the year ended October 31, 2022 and the three months ended January 31, 2023, and the effects of the pro forma adjustments listed above.
| (in thousands) | Pro forma year ended September 30, | |||||||
| 2023 | 2022 | |||||||
| Revenue | $ | 2,140,738 | $ | 2,101,796 | ||||
| Net income | $ | 239,437 | $ | 230,655 |
The impact from acquisitions other than ServiceMax for the reported periods if presented on a pro forma basis would not differ materially from our reported results.
Intland Software
On April 29, 2022, we acquired Intland Software, GmbH, and Eger Invest GmbH (together, “Intland Software”) pursuant to a Share Sale and Purchase Agreement. Intland Software developed and marketed the Codebeamer Application Lifecycle Management (ALM) family of software products. The purchase price of the acquisition was $278.1 million, net of cash acquired, which was financed with cash
F-21
on hand and $264 million borrowed under our existing credit facility. Intland Software had approximately 150 employees on the close date.
The following table sets forth the purchase price allocation for Intland Software. The purchase price allocation includes the finalization of measurement period adjustments, which resulted in a $0.9 million increase in goodwill from $240.0 million as of June 30, 2022, driven by completion of working capital adjustments.
| (in thousands) | |||
| Goodwill | $ | 240,971 | |
| Customer relationships | 38,800 | ||
| Purchased software | 19,100 | ||
| Accounts receivable | 6,506 | ||
| Trademarks | 1,300 | ||
| Net tax liability | (20,811 | ) | |
| Deferred revenue | (6,925 | ) | |
| Other net liabilities | (818 | ) | |
| Total | $ | 278,123 |
The acquired customer relationships, purchased software, and trademarks are being amortized over useful lives of 11 years, 10 years, and 10 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 expanding our ALM offerings, which are complementary to our PLM offerings.
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. We 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 FY'21, which was net of approximately $9.1 million in fair value adjustments related to purchase accounting for the acquisition.
The following table sets forth the purchase price allocation for Arena.
| (in thousands) | |||
| Goodwill | $ | 562,838 | |
| Customer relationships | 155,000 | ||
| Purchased software | 38,300 | ||
| Accounts receivable | 11,392 | ||
| Trademarks | 4,200 | ||
| Net tax liability | (41,256 | ) | |
| Deferred revenue | (15,500 | ) | |
| Other net liabilities | (369 | ) | |
| Total | $ | 714,605 |
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-22
PLM Services Business Disposition
On June 1, 2022, we sold a portion of our PLM services business to ITC Infotech India Limited pursuant to a Strategic Partner Agreement dated as of April 20, 2022 by and between PTC and ITC Infotech. Consideration received from ITC Infotech for the sale was approximately $60.4 million, consisting of $32.5 million cash paid on closing and $28.0 million of services to be provided by ITC Infotech to PTC for no additional charge.
We recognized a gain on the sale of $29.8 million, which is included within Other income, net. The recognized gain consists of $60.4 million of consideration received, less net assets of the business of $30.6 million. Net assets include $33.0 million of goodwill allocated to the business, less $2.4 million of liabilities associated with approximately 160 employees who transferred to ITC Infotech. Goodwill was allocated to the sold business based on a relative fair value allocation of total goodwill of the Professional Services segment.
Additional future contingent consideration of up to $20 million may be received by PTC based on certain performance milestones. We have elected to defer the recognition of gains associated with contingent consideration until they become realizable.
7. Goodwill and Acquired Intangible Assets
Goodwill and acquired intangible assets consisted of the following:
| (in thousands) | September 30, 2023 | September 30, 2022 | ||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Book Value | Gross Carrying Amount | Accumulated Amortization | Net Book Value | |||||||||||||||||||
| Goodwill (not amortized) | $ | 3,358,511 | $ | 2,353,654 | ||||||||||||||||||||
| Intangible assets with finite lives (amortized)(1): | ||||||||||||||||||||||||
| Purchased software | $ | 615,915 | $ | 395,109 | $ | 220,806 | $ | 502,859 | $ | 355,857 | $ | 147,002 | ||||||||||||
| Capitalized software | 22,877 | 22,877 | — | 22,877 | 22,877 | — | ||||||||||||||||||
| Customer lists and relationships | 1,116,117 | 413,125 | 702,992 | 594,970 | 369,390 | 225,580 | ||||||||||||||||||
| Trademarks and trade names | 36,851 | 19,400 | 17,451 | 27,546 | 17,410 | 10,136 | ||||||||||||||||||
| Other | 3,867 | 3,867 | — | 3,766 | 3,766 | — | ||||||||||||||||||
| $ | 1,795,627 | $ | 854,378 | $ | 941,249 | $ | 1,152,018 | $ | 769,300 | $ | 382,718 | |||||||||||||
| Total goodwill and acquired intangible assets | $ | 4,299,760 | $ | 2,736,372 |
(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 11 years, 17 years, and 11 years, respectively. The weighted-average useful life for all intangible assets in total is 15 years.
The changes in the carrying amounts of goodwill from September 30, 2022 to September 30, 2023 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 were as follows:
| (in thousands) | ||||
| Balance, September 30, 2021 | $ | 2,191,887 | ||
| Intland Software acquisition | 240,971 | |||
| Other acquisitions | 691 | |||
| Divestiture of business | (32,992 | ) | ||
| Foreign currency translation adjustments | (46,903 | ) | ||
| Balance, September 30, 2022 | $ | 2,353,654 | ||
| ServiceMax acquisition | 974,850 | |||
| Other acquisitions | — | |||
| Foreign currency translation adjustments | 30,007 | |||
| Balance, September 30, 2023 | $ | 3,358,511 |
F-23
The aggregate amortization expense for intangible assets with finite lives recorded for the years ended September 30, 2023, 2022 and 2021 was reflected in our Consolidated Statements of Operations as follows:
| (in thousands) | Year ended September 30, | |||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Amortization of acquired intangible assets | $ | 40,022 | $ | 34,970 | $ | 29,396 | ||||||
| Cost of revenue | 35,694 | 25,578 | 29,769 | |||||||||
| Total amortization expense | $ | 75,716 | $ | 60,548 | $ | 59,165 |
The estimated aggregate future amortization expense for intangible assets with finite lives remaining as of September 30, 2023 is $79.8 million for 2024, $76.6 million for 2025, $76.5 million for 2026, $75.9 million for 2027, $72.8 million for 2028 and $559.6 million thereafter.
8. Income Taxes
Our Income (loss) before income taxes consisted of the following:
| (in thousands) | Year ended September 30, | |||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Domestic | $ | (49,193 | ) | $ | 97,460 | $ | 41,199 | |||||
| Foreign | 381,759 | 299,638 | 350,556 | |||||||||
| Total income before income taxes | $ | 332,566 | $ | 397,098 | $ | 391,755 |
Our Provision (benefit) for income taxes consisted of the following:
| (in thousands) | Year ended September 30, | |||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Current: | ||||||||||||
| Federal | $ | 7,311 | $ | 767 | $ | 4,774 | ||||||
| State | 10,020 | 6,675 | 1,609 | |||||||||
| Foreign | 53,019 | 33,612 | 66,554 | |||||||||
| 70,350 | 41,054 | 72,937 | ||||||||||
| Deferred: | ||||||||||||
| Federal | (11,821 | ) | 25,730 | (152,311 | ) | |||||||
| State | (10,028 | ) | (3,177 | ) | (27,228 | ) | ||||||
| Foreign | 38,525 | 20,410 | 21,434 | |||||||||
| 16,676 | 42,963 | (158,105 | ) | |||||||||
| Provision (benefit) for income taxes | $ | 87,026 | $ | 84,017 | $ | (85,168 | ) |
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, | |||||||||||||||||||||||
| 2023 | 2022 | 2021 | ||||||||||||||||||||||
| Statutory federal income tax rate | $ | 69,839 | 21 | % | $ | 83,391 | 21 | % | $ | 82,268 | 21 | % | ||||||||||||
| Change in valuation allowance | — | — | — | — | (134,695 | ) | (34 | )% | ||||||||||||||||
| State income taxes, net of federal tax benefit | 577 | 0 | % | 6,518 | 2 | % | (28,768 | ) | (8 | )% | ||||||||||||||
| Federal research and development credits | (7,751 | ) | (2 | )% | (7,477 | ) | (2 | )% | (5,764 | ) | (2 | )% | ||||||||||||
| Uncertain tax positions | 23,302 | 7 | % | 2,418 | 1 | % | 3,398 | 1 | % | |||||||||||||||
| Foreign tax credit | (11,415 | ) | (3 | )% | (9,078 | ) | (2 | )% | (35,368 | ) | (9 | )% | ||||||||||||
| Foreign rate differences | (20,829 | ) | (6 | )% | (8,982 | ) | (2 | )% | (34,584 | ) | (9 | )% | ||||||||||||
| Foreign tax on U.S. provision | 11,415 | 3 | % | 9,078 | 2 | % | 5,931 | 2 | % | |||||||||||||||
| Excess tax benefits from restricted stock | (6,963 | ) | (2 | )% | (8,278 | ) | (2 | )% | (6,141 | ) | (2 | )% | ||||||||||||
| Audits and settlements | — | — | — | — | 33,370 | 9 | % | |||||||||||||||||
| U.S. permanent items | 5,341 | 2 | % | 3,453 | — | 7,449 | 2 | % | ||||||||||||||||
| Non-deductible compensation | 8,344 | 3 | % | 11,851 | 3 | % | 10,940 | 3 | % | |||||||||||||||
| Base Erosion Anti-Abuse Tax (BEAT) | — | — | — | — | 2,936 | 1 | % | |||||||||||||||||
| GILTI, net of foreign tax credits | 17,861 | 5 | % | 2,705 | 1 | % | 18,217 | 4 | % | |||||||||||||||
| Foreign-Derived Intangible Income (FDII) | (8,987 | ) | (3 | )% | (6,848 | ) | (2 | )% | (4,428 | ) | (1 | )% | ||||||||||||
| Non-deductible imputed interest | 6,292 | 2 | % | — | — | — | — | |||||||||||||||||
| Sale of a portion of the PLM services business | — | — | 6,844 | 2 | % | — | — | |||||||||||||||||
| Other, net | — | (1 | )% | (1,578 | ) | (1 | )% | 71 | — | |||||||||||||||
| Provision (benefit) for income taxes | $ | 87,026 | 26 | % | $ | 84,017 | 21 | % | $ | (85,168 | ) | (22 | )% |
F-24
In 2023, 2022, and 2021, our effective tax rate is impacted by 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 2023, 2022, and 2021, the foreign rate differential predominantly relates to these earnings. In addition to the foreign rate differential, our tax rate differed from the U.S. statutory federal income tax due to 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.
Additionally in 2023, our results include tax expense of $21.8 million relating to an uncertain tax position regarding transfer pricing in a foreign jurisdiction where we are currently under audit. Our rate was also impacted by non-deductible imputed interest related to the deferred payment on the acquisition of ServiceMax, Inc.
In 2022, our results include tax expense relating to the book over tax basis difference in goodwill disposed of as part of the sale of a portion of the PLM services business.
In 2021, our tax rate includes a benefit due to the release of the valuation allowance on the majority of our U.S. net deferred tax assets and the tax impact related to the effects of a tax matter in the Republic of Korea (South Korea).
At September 30, 2023 and 2022, income taxes payable and income tax accruals recorded on the accompanying Consolidated Balance Sheets were $30.4 million ($14.9 million in Accrued income taxes, $4.8 million in Accrued expenses and other current liabilities and $10.7 million in Other liabilities) and $17.3 million ($5.1 million in Accrued income taxes, $5.6 million in Accrued expenses and other current liabilities and $6.6 million in Other liabilities), respectively. At September 30, 2023 and 2022, prepaid taxes recorded in Prepaid expenses on the accompanying Consolidated Balance Sheets were $22.7 million and $25.8 million, respectively. We made net income tax payments of $65.9 million, $55.0 million and $56.0 million in 2023, 2022 and 2021, respectively.
F-25
The significant temporary differences that created deferred tax assets and liabilities are shown below:
| (in thousands) | September 30, | |||||||
| 2023 | 2022 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | 22,272 | $ | 40,419 | ||||
| Foreign tax credits | 3,750 | 14,527 | ||||||
| Capitalized research and development | 83,748 | 23,274 | ||||||
| Pension benefits | 5,327 | 7,639 | ||||||
| Prepaid expenses | 15,040 | 15,886 | ||||||
| Deferred revenue | 5,902 | 2,146 | ||||||
| Stock-based compensation | 19,684 | 19,486 | ||||||
| Other reserves not currently deductible | 19,604 | 14,689 | ||||||
| Amortization of intangible assets | 90,888 | 130,825 | ||||||
| Research and development and other tax credits | 64,618 | 78,862 | ||||||
| Lease liabilities | 50,102 | 46,672 | ||||||
| Fixed assets | 83,796 | 78,249 | ||||||
| Capital loss carryforward | 3,700 | 3,955 | ||||||
| Other | 2,279 | 1,256 | ||||||
| Gross deferred tax assets | 470,710 | 477,885 | ||||||
| Valuation allowance | $ | (21,695 | ) | $ | (22,283 | ) | ||
| Total deferred tax assets | 449,015 | 455,602 | ||||||
| Deferred tax liabilities: | ||||||||
| Acquired intangible assets not deductible | $ | (263,178 | ) | $ | (118,360 | ) | ||
| Lease assets | (37,332 | ) | (36,940 | ) | ||||
| Pension prepayments | (1,808 | ) | (2,622 | ) | ||||
| Deferred revenue | (17,400 | ) | (35,193 | ) | ||||
| Depreciation | (5,779 | ) | (6,937 | ) | ||||
| Deferred income | (8,656 | ) | (5,991 | ) | ||||
| Prepaid commissions | (13,757 | ) | (13,356 | ) | ||||
| Other | (7,294 | ) | (8,508 | ) | ||||
| Total deferred tax liabilities | (355,204 | ) | (227,907 | ) | ||||
| Net deferred tax assets | $ | 93,811 | $ | 227,695 |
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 our existing deferred tax assets.
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, 2023, we had U.S. federal tax effected NOL carryforwards from acquisitions of $6.4 million, of which $1.2 million expire in 2025 to 2034. The remaining carryforwards of $5.2 million do not expire. The use 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, 2023, we had federal R&D credit carryforwards of $46.7 million, which expire beginning in 2025 and ending in 2043, and Massachusetts R&D credit carryforwards of $27.3 million, which expire beginning in 2024 and ending in 2038. We also had foreign tax credits of $3.7 million, which expire beginning in 2030 and ending in 2033.
We also have tax effected NOL carryforwards in non-U.S. jurisdictions totaling $6.8 million, the majority of which do not expire, and non-U.S. tax credit carryforwards of $2.3 million that expire beginning in 2030 and ending in 2041. Additionally, we have tax effected amortization carryforwards of $85.3 million in a foreign jurisdiction. There are limitations imposed on the use of such attributes that could restrict the recognition of any tax benefits.
As of September 30, 2023, we have a valuation allowance of $17.4 million against net deferred tax assets in the United States and a valuation allowance of $4.3 million against net deferred tax assets in certain foreign jurisdictions. The $17.4 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
F-26
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, | |||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Valuation allowance, beginning of year | $ | 22,283 | $ | 52,085 | $ | 205,423 | ||||||
| Net release of valuation allowance(1) | — | — | (134,235 | ) | ||||||||
| Net decrease in deferred tax assets with a full valuation allowance(2) | (588 | ) | (29,802 | ) | (19,103 | ) | ||||||
| Valuation allowance, end of year | $ | 21,695 | $ | 22,283 | $ | 52,085 |
(1)
In 2021, this is attributable to the release in the United States.
(2)
In 2022, this change included the loss of foreign attributes upon liquidation of a foreign subsidiary. In 2021, this change includes the loss of state attributes upon merger of two wholly-owned subsidiaries.
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 2023, 2022 and 2021 we recorded interest expense of $0.5 million, $0.2 million and $2.2 million, respectively. In 2023 and 2022 we had no penalty expenses in our income tax provision. In 2021 we had $2.0 million tax penalty expense in our income tax provision. As of September 30, 2023 and 2022, we had accrued $1.4 million and $0.9 million of net estimated interest expense, respectively. We had no accrued tax penalties as of September 30, 2023, 2022 or 2021.
| Year ended September 30, | ||||||||||||
| Unrecognized tax benefits (in thousands) | 2023 | 2022 | 2021 | |||||||||
| Unrecognized tax benefit, beginning of year | $ | 23,923 | $ | 21,166 | $ | 16,107 | ||||||
| Tax positions related to current year: | ||||||||||||
| Additions | 7,075 | 3,144 | 4,844 | |||||||||
| Tax positions related to prior years: | ||||||||||||
| Additions | 20,855 | 785 | 30,130 | |||||||||
| Reductions | — | (1,172 | ) | (478 | ) | |||||||
| Settlements | — | — | (29,437 | ) | ||||||||
| Statute expirations | (1,111 | ) | — | — | ||||||||
| Unrecognized tax benefit, end of year | $ | 50,742 | $ | 23,923 | $ | 21,166 |
If all of our unrecognized tax benefits as of September 30, 2023 were to become recognizable in the future, we would record a benefit to the income tax provision of $50.7 million (which would be partially offset by an increase in the U.S. valuation allowance of $5.7 million). Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in favorable or unfavorable changes in our estimates. We believe it is reasonably possible that within the next 12 months the amount of unrecognized tax benefits related to the resolution of multi-jurisdictional tax positions could be reduced by up to $26 million as audits close and statutes of limitations expire.
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, and additional payments of approximately $20 million to South Korea in settlement of the amounts previously accrued.
F-27
In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the IRS in the United States. 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, including Germany, Ireland, and Italy. 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, 2023, we remained subject to examination in the following major tax jurisdictions for the tax years indicated:
| Major Tax Jurisdiction | Open Years | |
| United States | 2020 through 2023 | |
| Germany | 2015 through 2023 | |
| France | 2020 through 2023 | |
| Japan | 2018 through 2023 | |
| Ireland | 2019 through 2023 |
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 used in later periods.
We incurred expenses related to stock-based compensation in 2023, 2022 and 2021 of $206.5 million, $174.9 million and $177.3 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 $33.4 million, $27.1 million and $39.9 million in 2023, 2022 and 2021, respectively. Upon vesting of the stock-based awards, 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 2023, 2022 and 2021, net windfall tax benefits of $7.8 million, $5.2 million and $9.9 million were recorded to the tax provision.
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 United States unless repatriation can be done substantially tax-free, with the exception of a foreign holding company formed in 2018 and our Taiwan subsidiary. If we decide to repatriate any additional non-U.S. earnings in the future, we may be required to establish a deferred tax liability on such earnings. The amount of unrecognized deferred tax liability on the undistributed earnings would not be material.
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9. Debt
As of September 30, 2023 and 2022, we had the following short- and long-term debt obligations:
| (in thousands) | September 30, | |||||||
| 2023 | 2022 | |||||||
| 4.000% Senior Notes due 2028 | $ | 500,000 | $ | 500,000 | ||||
| 3.625% Senior Notes due 2025 | 500,000 | 500,000 | ||||||
| Credit facility revolver line(1)(2) | 202,000 | 359,000 | ||||||
| Credit facility term loan(1)(2) | 500,000 | — | ||||||
| Total debt | 1,702,000 | 1,359,000 | ||||||
| Unamortized debt issuance costs for the Senior Notes(3) | (6,215 | ) | (8,372 | ) | ||||
| Total debt, net of issuance costs(4) | $ | 1,695,785 | $ | 1,350,628 |
(1)
Unamortized debt issuance costs related to the credit facility were $2.3 million included in Other current assets and $7.5 million included in Other assets on the Consolidated Balance Sheet as of September 30, 2023 and $2.7 million included in Other assets on the Consolidated Balance Sheet as of September 30, 2022.
(2)
Both the revolving line and the term loan will mature and all amounts then outstanding will become due and payable on January 3, 2028, unless the 2025 notes have not been either refinanced to mature on or after April 3, 2028 or repaid, in which case the amounts will become due on November 16, 2024. The term loan will begin amortizing in March 2024, with payments of $9.4 million in 2024, $21.9 million in 2025, $25.0 million in 2026 and 2027, and $418.7 million in 2028.
(3)
Unamortized debt issuance costs for the Senior Notes were included in Long-term debt on the Consolidated Balance Sheets.
(4)
As of September 30, 2023, $9.4 million of debt associated with the credit facility term loan was classified as short term with the remaining balance classified as long term. As of September 30, 2022, all debt was classified as long term.
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, 2023, the total estimated fair value of the 2028 and 2025 notes was approximately $450.2 million and $480.6 million, respectively, based on quoted prices for the notes on that date.
We were in compliance with all the covenants for all our Senior Notes as of September 30, 2023.
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 2028 and 2025 notes in whole or in part at specified redemption prices. In certain circumstances constituting a change of control, we will be required to make an offer to repurchase the 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 January 2023, we entered into an amended and restated credit agreement for a new secured multi-currency bank credit facility with a syndicate of banks. Pursuant to the agreement, all revolving commitments under the prior credit agreement were replaced with the revolving commitments under the new credit facility. The new credit facility consists of (i) a $1.25 billion revolving credit facility, (ii) a $500 million term loan credit facility, and (iii) an incremental facility pursuant to which we may incur additional term loan tranches or increase the revolving credit facility. As of September 30, 2023, unused
F-29
commitments under our credit facility were approximately $1,048.0 million and amounts available for borrowing were $384.6 million.
As of September 30, 2023, the fair value of our credit facility approximates its book value.
PTC Inc. 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, ServiceMax, Inc. was the only subsidiary guarantor. Any borrowings by eligible foreign subsidiary borrowers would be guaranteed by PTC Inc. and any subsidiary guarantors and secured, subject to exceptions, by a first priority perfected security interest in substantially all existing and after-acquired personal property owned by PTC Inc. and its material domestic subsidiaries (except for certain indirect material domestic subsidiaries). As of September 30, 2023, all funds borrowed under the revolving credit facility were borrowed by an eligible foreign subsidiary borrower. Subsequent to September 30, 2023, we borrowed an additional $739.8 million under the revolving credit facility, including $650.0 million to finance the deferred payment related to the ServiceMax acquisition and $89.8 million borrowed by the subsidiary borrower for our acquisition of pure-systems. Refer to Note 18. Subsequent Events for more detail.
Loans under the credit facility bear interest at variable rates that reset every 30 to 180 days depending on the base rate (for USD borrowings, either the adjusted Daily Simple RFR or adjusted Term SOFR) and period selected by us. The spread over the base rate depends on our total leverage ratio. As of September 30, 2023, the annual rate for borrowings outstanding was 7.18%. A quarterly revolving commitment fee on the undrawn portion of the revolving credit facility is required, ranging from 0.175% to 0.325% per annum, based upon our total leverage ratio.
The credit facility limits our ability to, among other things: incur additional indebtedness; incur liens or guarantee obligations; pay dividends 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 Inc. and its material domestic subsidiaries may not invest cash or property in, or loan amounts to, PTC Inc.’s foreign subsidiaries in aggregate amounts exceeding $100 million for purposes other than acquisitions of businesses. The credit facility also requires that we maintain certain financial ratios. As of September 30, 2023, we were in compliance with all financial and operating covenants of the credit facility.
In 2023, we incurred $13.4 million in financing costs in connection with the January 2023 credit facility and related arrangements, of which $4.2 million (related to a since-extinguished bridge loan) was expensed in the period and $9.2 million was recorded as deferred debt issuance costs and included in Other assets and Other current assets on the Consolidated Balance Sheet. Deferred debt issuance costs are expensed over the term of the obligations.
Interest
In 2023, 2022 and 2021, we incurred interest expense of $129.4 million, $54.3 million, and $50.5 million, respectively, and paid $89.8 million, $48.5 million and $45.2 million, respectively, of interest on our debt. Interest expense in the year ended 2023 includes $30.0 million of interest imputed on the $650.0 million deferred acquisition payment related to the ServiceMax acquisition. The average interest rate on borrowings outstanding during 2023, 2022 and 2021 was approximately 4.9%, 3.4% and 3.3%, respectively.
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10. Commitments and Contingencies
As of September 30, 2023 and 2022, we had letters of credit and bank guarantees outstanding of $13.1 million (of which $0.5 million was collateralized) and $15.0 million (of which $0.5 million was collateralized), respectively, primarily related to our corporate headquarters lease.
Legal and Regulatory Matters
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.
We are subject to legal proceedings and claims against us in the ordinary course of business. As of September 30, 2023, 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. These agreements typically limit our liability with respect to indemnification claims other than intellectual property infringement 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.
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. 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.
11. Stockholders’ Equity
Preferred Stock
We may issue up to 5.0 million shares of our preferred stock in one or more series. Of these shares, 0.5 million 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 had authorized us to repurchase up to $1 billion of our common stock in the period October 1, 2020 through September 30, 2023. We used cash from operations and borrowings under our credit facility to make such repurchases. All shares of our common stock repurchased were automatically restored to the status of authorized and unissued.
We did not repurchase any shares in 2023. In 2022 and 2021, we repurchased 1.05 million shares for $125 million and 0.23 million shares for $30 million, respectively.
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12. Equity Incentive Plan****s
We have two equity incentive plans, our 2000 Equity Incentive Plan and our 2016 Employee Stock Purchase Plan (ESPP).
Our 2000 Equity Incentive 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 RSU represents the contingent right to receive one share of our common stock.
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.
The following table shows total stock-based compensation expense recorded in our Consolidated Statements of Operations:
| (in thousands) | Year ended September 30, | |||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Cost of license revenue | $ | 145 | $ | 272 | $ | 100 | ||||||
| Cost of support and cloud services revenue | 12,801 | 11,022 | 9,900 | |||||||||
| Cost of professional services revenue | 7,928 | 11,481 | 9,263 | |||||||||
| Sales and marketing | 56,394 | 49,467 | 53,712 | |||||||||
| Research and development | 58,931 | 41,944 | 34,272 | |||||||||
| General and administrative | 70,260 | 60,677 | 70,042 | |||||||||
| Total stock-based compensation expense | $ | 206,459 | $ | 174,863 | $ | 177,289 |
Stock-based compensation expense in 2023, 2022 and 2021 includes $6.8 million, $6.4 million, and $7.3 million respectively, related to our ESPP.
2000 Equity Incentive Plan Accounting and Stock-Based Compensation Expense
The fair value of RSUs granted in 2023, 2022 and 2021 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 (rTSR) performance RSUs. The weighted average fair value per share of RSUs granted in 2023, 2022 and 2021 was $130.64, $114.31 and $111.48, respectively.
We account for forfeitures as they occur, rather than estimate expected forfeitures.
As of September 30, 2023, total unrecognized compensation cost related to unvested RSUs expected to vest was approximately $204.4 million and the weighted average remaining recognition period for unvested RSUs was 17 months. As of September 30, 2023, the weighted average remaining vesting term for outstanding awards is 1.0 years.
As of September 30, 2023, 7.3 million shares of common stock were available for grant under the equity incentive plan and 2.6 million shares of common stock were reserved for issuance upon vesting of RSUs granted and outstanding.
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The following table sets forth the restricted stock unit activity for the year ended September 30, 2023.
| (in thousands, except grant date fair value data) | Shares | Weighted Average Grant Date Fair Value | Aggregate Intrinsic Value | |||||||||
| Balance of outstanding RSUs at October 1, 2022 | 2,754 | $ | 105.07 | |||||||||
| Granted(1) | 1,767 | $ | 130.64 | |||||||||
| Vested | (1,800 | ) | $ | 104.00 | ||||||||
| Forfeited or not earned | (140 | ) | $ | 114.67 | ||||||||
| Balance of outstanding RSUs at September 30, 2023 | 2,581 | $ | 122.82 | $ | 365,619 |
(1)
RSUs granted includes 38 shares from prior period rTSR awards that were earned upon achievement of the performance criteria and vested in November 2022 and 61 shares from prior period performance-based awards that were earned upon achievement of the performance criteria and vested in November 2022.
The following table presents the number of RSU awards granted by award type:
| (in thousands) | Year ended September 30, 2023 | |||
| Performance-based RSUs(1) | 69 | |||
| Service-based RSUs(2) | 1,530 | |||
| Relative Total Shareholder Return RSUs(3) | 69 |
(1)
The performance-based RSUs are primarily made up of RSUs 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, 2023, November 15, 2024, and November 15, 2025, 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.
(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.
(3)
The rTSR 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 PTC peer companies established as of the grant date, as determined at the end of the measurement period ending on September 30, 2025. The RSUs earned will vest on November 15, 2025. Up to a maximum of two times the number of rTSR RSUs eligible to be earned for the period may vest. If the stock price as of the beginning of the period is below the stock price at the end of the period, a maximum of 100% of the rTSR RSUs may vest.
The weighted-average fair value of the rTSR RSUs was $179.60 per target RSU on the grant date. The fair value of the rTSR 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 rTSR 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:
| 2023 | 2022 | 2021 | ||||||||||
| Average volatility of peer group | 41.54 | % | 34.67 | % | 41.52 | % | ||||||
| Risk-free interest rate | 4.12 | % | 0.81 | % | 0.21 | % | ||||||
| Dividend yield | — | % | — | % | — | % | ||||||
| Expected term (in years) | 2.87 | 2.87 | 2.87 |
Total value on vest date of RSUs vested are as follows:
| (in thousands) | Year ended September 30, | |||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Total value of restricted stock unit awards at vest | $ | 240,066 | $ | 199,738 | $ | 171,316 |
In 2023, shares issued upon vesting of restricted stock units were net of 0.6 million shares retained by us to cover employee tax withholdings of $82.8 million. In 2022, shares issued upon vesting of restricted stock units were net of 0.6 million shares retained by us to cover employee tax withholdings of $69.0 million. In 2021, 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 $53.1 million.
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As of September 30, 2023, we had liability-classified awards related to stock-based compensation based on a fixed monetary amount of $44.9 million.
13. Employee Benefit Plan
We offer a savings plan to eligible U.S. employees. The plan is qualified 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 $8.6 million, $7.8 million and $7.8 million in 2023, 2022 and 2021, respectively.
14. Pension Plans
We maintain several international defined benefit pension plans primarily covering certain employees of Computervision, which we acquired in 1998, and CoCreate, which we acquired in 2008, and covering employees in Japan. Benefits are based upon length of service and average compensation with vesting after one to five years of service. The pension cost was actuarially computed using assumptions applicable to each subsidiary plan and economic environment. We adjust our pension liability related to our plans due to changes in actuarial assumptions and performance of plan investments, as shown below. Effective in 1998, benefits under one of the international plans were frozen indefinitely.
The following table presents the actuarial assumptions used in accounting for the pension plans:
| 2023 | 2022 | 2021 | ||||||||||
| Weighted average assumptions used to determine benefit obligations at September 30 measurement date: | ||||||||||||
| Discount rate | 4.2 | % | 3.7 | % | 1.0 | % | ||||||
| Rate of increase in future compensation | 3.0 | % | 3.6 | % | 2.8 | % | ||||||
| Weighted average assumptions used to determine net periodic pension cost for fiscal years ended September 30: | ||||||||||||
| Discount rate | 3.7 | % | 1.0 | % | 1.1 | % | ||||||
| Rate of increase in future compensation | 3.6 | % | 2.8 | % | 2.8 | % | ||||||
| Rate of return on plan assets | 4.8 | % | 5.0 | % | 5.0 | % |
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, 2023 in the table above, will be used to determine our 2024 net periodic pension cost, which we expect to be approximately $0.1 million.
As of September 30, 2023, the weighted average interest credit rate used in our two cash balance pension plans is 4.2%.
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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, | |||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Interest cost of projected benefit obligation | $ | 2,126 | $ | 550 | $ | 692 | ||||||
| Service cost | 690 | 1,016 | 1,127 | |||||||||
| Expected return on plan assets | (3,541 | ) | (3,712 | ) | (3,643 | ) | ||||||
| Amortization of prior service cost | — | (4 | ) | (5 | ) | |||||||
| Recognized actuarial loss | 241 | 1,425 | 4,139 | |||||||||
| Settlement gain | — | (82 | ) | — | ||||||||
| Net periodic pension (benefit) cost | $ | (484 | ) | $ | (807 | ) | $ | 2,310 |
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, | |||||||
| 2023 | 2022 | |||||||
| Change in benefit obligation: | ||||||||
| Projected benefit obligation, beginning of year | $ | 58,129 | $ | 96,512 | ||||
| Service cost | 690 | 1,016 | ||||||
| Interest cost | 2,126 | 550 | ||||||
| Actuarial gain | (1,589 | ) | (22,616 | ) | ||||
| Foreign exchange impact | 3,714 | (12,949 | ) | |||||
| Participant contributions | 96 | 96 | ||||||
| Benefits paid | (2,968 | ) | (2,343 | ) | ||||
| Plan amendments | 235 | — | ||||||
| Divestiture of business | — | (1,184 | ) | |||||
| Settlements | — | (953 | ) | |||||
| Projected benefit obligation, end of year | $ | 60,433 | $ | 58,129 | ||||
| Change in plan assets and funded status: | ||||||||
| Plan assets at fair value, beginning of year | $ | 67,581 | $ | 78,385 | ||||
| Actual return (loss) on plan assets | (1,919 | ) | 2,348 | |||||
| Employer contributions | 1,343 | 3,007 | ||||||
| Participant contributions | 96 | 96 | ||||||
| Foreign exchange impact | 4,593 | (12,959 | ) | |||||
| Settlements | — | (953 | ) | |||||
| Benefits paid | (2,968 | ) | (2,343 | ) | ||||
| Plan amendments | 149 | — | ||||||
| Plan assets at fair value, end of year | 68,875 | 67,581 | ||||||
| Projected benefit obligation, end of year | 60,433 | 58,129 | ||||||
| Underfunded status | $ | (10,693 | ) | $ | (9,782 | ) | ||
| Overfunded status | $ | 19,135 | $ | 19,234 | ||||
| Accumulated benefit obligation, end of year | $ | 59,602 | $ | 57,310 | ||||
| Amounts recognized in the balance sheet: | ||||||||
| Non-current asset | $ | 19,135 | $ | 19,234 | ||||
| Non-current liability | $ | (10,419 | ) | $ | (9,434 | ) | ||
| Current liability | $ | (274 | ) | $ | (348 | ) | ||
| Amounts in accumulated other comprehensive loss: | ||||||||
| Unrecognized actuarial loss | $ | 9,573 | $ | 5,408 |
As of September 30, 2023 and 2022, two of our pension plans had projected benefit obligations and accumulated benefit obligations in excess of plan assets. Three international plans were overfunded.
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The following table shows the change in Accumulated other comprehensive loss:
| (in thousands) | Year ended September 30, | |||||||
| 2023 | 2022 | |||||||
| Accumulated other comprehensive loss, beginning of year | $ | 5,408 | $ | 30,213 | ||||
| Recognized during year - net actuarial losses | (241 | ) | (1,421 | ) | ||||
| Occurring during year - settlement gain | — | 82 | ||||||
| Occurring during year - net actuarial losses (gains) | 3,871 | (21,253 | ) | |||||
| Plan amendments | 91 | — | ||||||
| Foreign exchange impact | 444 | (2,213 | ) | |||||
| Accumulated other comprehensive loss, end of year | $ | 9,573 | $ | 5,408 |
In 2023, our actuarial losses were impacted by volatility in capital markets and the impact of rising interest rates. In 2022, our actuarial gains were impacted by the change in discount rate from 1.0% in 2021 to 3.7% in 2022.
The following table shows the percentage of total plan assets for each major category of plan assets:
| September 30, | ||||||||
| Asset category | 2023 | 2022 | ||||||
| Equity securities | 31 | % | 33 | % | ||||
| Fixed income securities | 42 | % | 33 | % | ||||
| Commodities | 7 | % | 1 | % | ||||
| Insurance company funds | 10 | % | 10 | % | ||||
| Options | 0 | % | 2 | % | ||||
| Cash | 10 | % | 21 | % | ||||
| 100 | % | 100 | % |
We periodically review the pension plans’ investments in the various asset classes. For the CoCreate plans 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 2023, 2022 and 2021, our actual return (loss) on plan assets was $(1.9) million, $2.3 million and $7.4 million, respectively.
Based on actuarial valuations and additional voluntary contributions, we contributed $1.3 million, $3.0 million and $3.0 million in 2023, 2022 and 2021, respectively, to the plans. In 2024, we expect to contribute $0.6 million to the plans and to directly pay $3.2 million in benefits.
As of September 30, 2023, benefit payments expected to be paid over the next ten years are as follows:
| (in thousands) | Future Benefit Payments | |||
| 2024 | $ | 4,158 | ||
| 2025 | 3,782 | |||
| 2026 | 3,898 | |||
| 2027 | 4,485 | |||
| 2028 | 4,694 | |||
| 2029 to 2033 | 23,443 |
F-36
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, 2023 | |||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Fixed income securities: | ||||||||||||||||
| Government | $ | 27,322 | $ | — | $ | — | $ | 27,322 | ||||||||
| Corporate investment grade | 1,632 | — | — | 1,632 | ||||||||||||
| Large capitalization stocks | 20,864 | — | — | 20,864 | ||||||||||||
| Commodities | 4,977 | — | — | 4,977 | ||||||||||||
| Insurance company funds(1) | — | 7,102 | — | 7,102 | ||||||||||||
| Cash | 6,978 | — | — | 6,978 | ||||||||||||
| Total plan assets | $ | 61,773 | $ | 7,102 | $ | — | $ | 68,875 |
| (in thousands) | September 30, 2022 | |||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Fixed income securities: | ||||||||||||||||
| Government | $ | 20,430 | $ | — | $ | — | $ | 20,430 | ||||||||
| Corporate investment grade | 2,038 | — | — | 2,038 | ||||||||||||
| Large capitalization stocks | 22,379 | — | — | 22,379 | ||||||||||||
| Commodities | 599 | — | — | 599 | ||||||||||||
| Insurance company funds(1) | — | 6,823 | — | 6,823 | ||||||||||||
| Options | 1,430 | — | — | 1,430 | ||||||||||||
| Cash | 13,882 | — | — | 13,882 | ||||||||||||
| Total plan assets | $ | 60,758 | $ | 6,823 | $ | — | $ | 67,581 |
(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.
F-37
15. Fair Value Measurements
Money market funds, time deposits and corporate notes/bonds are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets.
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 derivatives’ 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 significant financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and 2022 were as follows:
| (in thousands) | September 30, 2023 | |||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Financial assets: | ||||||||||||||||
| Cash equivalents(1) | $ | 72,754 | $ | — | $ | — | $ | 72,754 | ||||||||
| Convertible note | — | — | 2,000 | 2,000 | ||||||||||||
| Forward contracts | — | 7,340 | — | 7,340 | ||||||||||||
| $ | 72,754 | $ | 7,340 | $ | 2,000 | $ | 82,094 | |||||||||
| Financial liabilities: | ||||||||||||||||
| Forward contracts | — | 3,158 | — | 3,158 | ||||||||||||
| $ | — | $ | 3,158 | $ | — | $ | 3,158 |
| (in thousands) | September 30, 2022 | |||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Financial assets: | ||||||||||||||||
| Cash equivalents(1) | $ | 102,313 | $ | — | $ | — | $ | 102,313 | ||||||||
| Convertible note | — | — | 2,000 | 2,000 | ||||||||||||
| Forward contracts | — | 9,058 | — | 9,058 | ||||||||||||
| $ | 102,313 | $ | 9,058 | $ | 2,000 | $ | 113,371 | |||||||||
| Financial liabilities: | ||||||||||||||||
| Forward contracts | — | 2,908 | — | 2,908 | ||||||||||||
| $ | — | $ | 2,908 | $ | — | $ | 2,908 |
(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 Sheets. There were no changes in the fair value of this level 3 investment in the twelve months ended September 30, 2023.
F-38
16. Derivative Financial Instruments
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, | ||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Derivative assets:(1) | ||||||||||||||||
| Forward contracts | $ | 3,770 | $ | 1,960 | $ | 3,570 | $ | 7,098 | ||||||||
| Derivative liabilities:(2) | ||||||||||||||||
| Forward contracts | $ | — | $ | — | $ | 3,158 | $ | 2,908 |
(1)
As of September 30, 2023 and 2022, current derivative assets of $7.3 million and $9.1 million, respectively, are recorded in Other current assets on the Consolidated Balance Sheets.
(2)
As of September 30, 2023 and 2022, current derivative liabilities of $3.2 million and $2.9 million, respectively, are recorded in Accrued expenses and other current liabilities on the Consolidated Balance Sheets.
Non-Designated Hedges
As of September 30, 2023 and 2022, we had outstanding forward contracts not designated as hedging instruments with notional amounts equivalent to the following:
| September 30, | ||||||||
| Currency Hedged (in thousands) | 2023 | 2022 | ||||||
| Canadian Dollar / U.S. Dollar | $ | 5,135 | $ | 2,731 | ||||
| Euro / U.S. Dollar | 383,227 | 316,869 | ||||||
| British Pound / U.S. Dollar | 6,058 | 7,368 | ||||||
| Israeli Shekel / U.S. Dollar | 11,852 | 12,052 | ||||||
| Japanese Yen / U.S. Dollar | 4,770 | 25,566 | ||||||
| Swiss Franc / U.S. Dollar | 32,766 | 25,559 | ||||||
| Swedish Krona / U.S. Dollar | 35,085 | 35,713 | ||||||
| Singapore Dollar / U.S. Dollar | — | 3,637 | ||||||
| Chinese Renminbi / U.S. Dollar | 16,660 | 23,965 | ||||||
| New Taiwan Dollar / U.S. Dollar | 11,855 | 13,906 | ||||||
| Korean Won / U.S. Dollar | 6,157 | 4,919 | ||||||
| Danish Krone / U.S. Dollar | 6,731 | 3,192 | ||||||
| Australian Dollar / U.S. Dollar | 452 | 3,269 | ||||||
| All other | 2,888 | 4,432 | ||||||
| Total | $ | 523,636 | $ | 483,178 |
The following table shows the effect of our non-designated hedges, including forward contracts and options, on the Consolidated Statements of Operations for the years ended September 30, 2023, 2022 and 2021:
| (in thousands) | Year ended September 30, | |||||||||||||
| Location of Gain (Loss) | 2023 | 2022 | 2021 | |||||||||||
| Net realized and unrealized gain (loss), excluding the underlying foreign currency exposure being hedged | Other income, net | $ | (11,757 | ) | $ | 14,603 | $ | (6,055 | ) |
In 2023, 2022 and 2021, foreign currency losses, net were $2.1 million, $0.9 million and $8.0 million, respectively.
Net Investment Hedges
As of September 30, 2023 and 2022, we had outstanding forward contracts designated as net investment hedges with notional amounts equivalent to the following:
| September 30, | ||||||||
| Currency Hedged (in thousands) | 2023 | 2022 | ||||||
| Euro / U.S. Dollar | $ | 337,923 | $ | 110,466 | ||||
| Japanese Yen / U.S. Dollar | 10,285 | — | ||||||
| Total | $ | 348,208 | $ | 110,466 |
F-39
The following table shows the effect of our derivative instruments designated as net investment hedges on the Consolidated Statements of Operations for the years ended September 30, 2023, 2022, and 2021:
| (in thousands) | Year ended September 30, | |||||||||||||
| Location of Gain (Loss) | 2023 | 2022 | 2021 | |||||||||||
| Gain (loss) recognized in OCI | OCI | $ | (10,033 | ) | $ | 23,379 | $ | 1,660 | ||||||
| Gain (loss) reclassified from OCI to earnings | n/a | $ | - | $ | - | $ | - | |||||||
| Gain recognized, excluded portion | Other income, net | $ | 4,241 | $ | 1,797 | $ | 1,249 |
As of September 30, 2023, 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.
Offsetting Derivative Assets and Liabilities
We have entered into master netting arrangements for our forward contracts that 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, 2023:
| (in thousands) | Gross Amounts Offset in the Consolidated Balance Sheets | Gross Amounts Not Offset in the Consolidated Balance Sheets | ||||||||||||||||||||||
| As of September 30, 2023 | 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 | $ | 7,340 | $ | — | $ | 7,340 | $ | (3,158 | ) | $ | — | $ | 4,182 |
The following table sets forth the offsetting of derivative liabilities as of September 30, 2023:
| (in thousands) | Gross Amounts Offset in the Consolidated Balance Sheets | Gross Amounts Not Offset in the Consolidated Balance Sheets | ||||||||||||||||||||||
| As of September 30, 2023 | 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 | $ | 3,158 | $ | — | $ | 3,158 | $ | (3,158 | ) | $ | — | $ | — |
F-40
17. Leases
Our headquarters are located at 121 Seaport Boulevard, Boston, Massachusetts. The lease is for approximately 250,000 square feet and runs through June 30, 2037. We have subleased a portion of the leased space through January 31, 2024. Base rent for the first year of the lease was $11.0 million and increases 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 $8.1 million.
The components of lease cost reflected in the Consolidated Statements of Operations for the years ended September 30, 2023, 2022, and 2021 were as follows:
| (in thousands) | Year ended September 30, | |||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Operating lease cost | $ | 32,402 | $ | 34,346 | $ | 37,295 | ||||||
| Short-term lease cost | 5,411 | 2,653 | 2,452 | |||||||||
| Variable lease cost | 10,945 | 10,095 | 9,808 | |||||||||
| Sublease income | (4,749 | ) | (4,600 | ) | (4,438 | ) | ||||||
| Total lease cost | $ | 44,009 | $ | 42,494 | $ | 45,117 |
Supplemental cash flow information for the years ended September 30, 2023, 2022, and 2021 was as follows:
| 2023 | 2022 | 2021 | ||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||
| Operating cash flows from operating leases | $ | 36,038 | $ | 38,709 | $ | 50,299 | ||||||
| Financing cash flows from financing leases | $ | 536 | $ | 297 | $ | 354 | ||||||
| Right-of-use assets obtained in exchange for new lease obligations: | ||||||||||||
| Operating leases(1) | $ | 28,257 | $ | 15,431 | $ | 9,576 | ||||||
| Financing leases(2) | $ | 40 | $ | — | $ | 1,146 |
(1)
In the year ended September 30, 2023, operating lease additions included $4.0 million related to the ServiceMax acquisition.
(2)
In the year ended September 30, 2023, all financing lease additions related to the ServiceMax acquisition.
Supplemental balance sheet information related to the leases as of September 30, 2023 and 2022 was as follows:
| 2023 | 2022 | |||||||
| Weighted-average remaining lease term - operating leases | 10.9 years | 11.8 years | ||||||
| Weighted-average remaining lease term - financing leases | 1 year | 2 years | ||||||
| Weighted-average discount rate - operating leases | 5.2 | % | 5.4 | % | ||||
| Weighted-average discount rate - financing leases | 3.7 | % | 3.0 | % |
Maturities of lease liabilities as of September 30, 2023 are as follows:
| (in thousands) | Operating Leases | |||
| 2024 | $ | 34,247 | ||
| 2025 | 28,490 | |||
| 2026 | 23,523 | |||
| 2027 | 19,738 | |||
| 2028 | 17,874 | |||
| Thereafter | 134,033 | |||
| Total future lease payments | 257,905 | |||
| Less: imputed interest | (64,713 | ) | ||
| Total lease liability | $ | 193,192 |
As of September 30, 2023, we had operating leases that had not yet commenced. The leases will commence in 2024 with a lease term of 7.75 years and we will make future lease payments of approximately $2.4 million.
F-41
18. Subsequent Events
In October 2023, we made a payment of $650 million to settle the ServiceMax deferred acquisition payment liability, of which $620 million is purchase consideration and $30 million is imputed interest. To finance this payment, we borrowed the full amount under the revolving line of our existing credit facility.
In October 2023, we acquired pure-systems GmbH, a leading provider of product and software variant management solutions, for approximately $98 million. We borrowed EUR 85 million, the USD equivalent of which was approximately $90 million, under the revolving line of our existing credit facility to fund the acquisition.
Subsequent to September 30, 2023, we have made aggregate payments of $45 million on the revolving credit facility.
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