PTC 10-Q 2022-06-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2022

OR

For the transition period from_ to_

Commission File Number: 0-18059

PTC Inc.

(Exact name of registrant as specified in its charter)

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

(Address of principal executive offices, including zip code)

(781) 370-5000

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

There were 117,466,379 shares of our common stock outstanding on August 4, 2022.

PTC Inc.

INDEX TO FORM 10-Q

For the Quarter Ended June 30, 2022

PART I—FINANCI****AL INFORMATION

UNAUDITED CONDENSED CONS****OLIDATED FINANCIAL STATEMENTS

PTC Inc.

CONSOLIDATED B****ALANCE SHEETS

(in thousands, except per share data)

(unaudited)

The accompanying notes are an integral part of the condensed consolidated financial statements.

PTC Inc.

CONSOLIDATED STATEM****ENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

The accompanying notes are an integral part of the condensed consolidated financial statements.

PTC Inc.

CONSOLIDATED STATEMENTS OF C****OMPREHENSIVE INCOME

(in thousands)

(unaudited)

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Business Overview

PTC is a global software and services company that enables industrial companies to improve growth and profitability with a portfolio of innovative digital solutions that work together to transform how physical products are engineered, manufactured, and serviced. Our award-winning technology portfolio spans the computer-aided design (CAD), product lifecycle management (PLM), Industrial Internet of Things (IIoT), and Augmented Reality (AR) markets.

Our customer base includes some of the world’s most innovative manufacturers in the aerospace and defense, automotive, electronics and high tech, industrial machinery and equipment, life sciences, oil and gas, retail, and consumer products industries. Our solutions enable industrial companies to create a closed loop of information shared across their organization’s entire value chain. This “digital thread” can drive excellence in engineering, efficiency in manufacturing operations and service delivery, and innovation across product offerings and business models. With our solutions, digital transforms physical.

We generate revenue through the sale of on-premise software subscriptions, which include license access and support (technical support and software updates); support for existing perpetual licenses; professional services (consulting, implementation, and training); and cloud services (hosting for our software and Software as a Service (SaaS)).

Forward-Looking Statements

Statements in this document that are not historic facts, including statements about our future financial and growth expectations and targets, and potential stock repurchases, are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. These risks include: the macroeconomic and/or global manufacturing climates may not improve when or as we expect, or may deteriorate, due to, among other factors, the COVID-19 pandemic, the effects of the Russia/Ukraine conflict, and inflation, which could cause customers to delay or reduce purchases of new software, reduce the number of subscriptions they carry, or delay payments to us, which would adversely affect ARR and/or our financial results, including cash flow; our businesses, including our SaaS businesses, may not expand and/or generate the revenue or ARR we expect if customers are slower to adopt our technologies than we expect or if they adopt competing technologies; the Codebeamer™ and ITC Infotech transactions may not have expected effects on our business or results of operations; our strategic initiatives and investments, including our restructuring and our accelerated investments in our transition to SaaS, may not deliver the results when or as we expect; we may be unable to generate sufficient operating cash flow to repay amounts under our credit facility or to return 50% of free cash flow to shareholders, and other uses of cash or our credit facility limits or other matters could preclude such repayment and/or repurchases; we may be unable to attract and retain employees in the current competitive hiring environment, which could adversely impact our operations and our financial results; and foreign exchange rates may differ materially from those we expect. In addition, our assumptions concerning our future GAAP and non-GAAP effective income tax rates are based on estimates and other factors that could change, including the geographic mix of our revenue, expenses, and profits, as well as other risks and uncertainties described below throughout or referenced in Part II, Item 1A. Risk Factors of this report.

Operating and Non-GAAP Financial Measures

Our discussion of results includes discussion of our ARR (Annual Run Rate) operating measure, non-GAAP financial measures, and disclosure of our results on a constant currency basis. ARR and our non-GAAP financial measures, including the reasons we use those measures, are described below in Results of Operations - Operating Measure and Results of Operations - Non-GAAP Financial Measures, respectively. The methodology used to calculate constant currency disclosures is described in Results of Operations - Impact of Foreign Currency Exchange on Results of Operations. You should read those sections to understand our operating measure, non-GAAP financial measures, and constant currency disclosures.

Executive Overview

Q3’22 ARR was $1.54 billion, $1.63 billion on a constant currency basis, representing growth of 9% and 16%, respectively, compared to Q3’21, driven by strength in new bookings across all segments and geographic regions. ARR at the end of Q3’22 includes a contribution of $15 million ($16 million constant currency) from the Codebeamer business acquired in the quarter and a $4 million reduction associated with discontinuing our business operations in Russia in Q2’22. Q3’22 revenue of $462 million was up 6% (12% constant currency) over Q3’21, driven by higher revenue from our recurring revenue business lines, particularly in Digital Thread. Q3’22 operating margin was 17% compared to 17% in Q3’21, and Q3’22 non-GAAP operating margin was 34% compared to 31% in Q3’21. Q3’22 EPS increased to $0.60 compared to $0.43 in Q3’21, and non-GAAP EPS increased to $0.97 compared to $0.83 in Q3’21. Both GAAP and non-GAAP EPS benefited from year-over-year revenue increases and expense discipline; GAAP EPS also benefited from a recognized gain on the sale of a portion of our PLM services business to ITC Infotech.

We generated $117 million of cash from operations compared to $88 million in Q3’21, with the increase driven by higher ARR and strong operational execution. Operating cash flow includes payments related to restructuring, which were $8.2 million higher year over year, and acquisition and transaction-related payments, which were $5.9 million higher year over year. These were offset by a decrease of $16.9 million in non-ordinary course tax payments. In Q3’22, we received $32.5 million related to the ITC Infotech divestiture transaction (included in cash from investing activities), and used $275 million ($264 million of which we borrowed under our credit facility) to purchase the Codebeamer business.

Results of Operations

The following table shows the financial measures that we consider the most significant indicators of our business performance. In addition to providing operating income, operating margin, diluted earnings per share and cash from operations as calculated under GAAP, we provide non-GAAP operating income, non-GAAP operating margin, non-GAAP diluted earnings per share, and free cash flow for the reported periods. We also provide a view of our actual results on a constant currency basis. These non-GAAP financial measures exclude the items described in Non-GAAP Financial Measures below. Investors should use these non-GAAP financial measures only in conjunction with our GAAP results.

(1)

For the June 30, 2021 period, to facilitate comparability, we removed $7 million of ARR associated with a Vuforia AR product that we ceased selling as of September 30, 2021.

(2)

Recurring revenue is comprised of on-premise subscription, perpetual support, and SaaS, and cloud revenue.

(3)

See Non-GAAP Financial Measures below for a reconciliation of our GAAP results to our non-GAAP financial measures and Impact of Foreign Currency Exchange on Results of Operations below for a description of how we calculate our results on a constant currency basis.

(4)

Cash flow from operations for the third quarter and first nine months of FY’22 includes $10.2 million and $38.5 million of restructuring payments, respectively, and $9.7 million and $10.1 million of acquisition and transaction-related payments. Cash flow from operations for the third quarter and first nine months of FY’21 includes $2.0 million and $13.7 million of restructuring payments, respectively, and $3.8 million and $14.8 million of acquisition and transaction-related payments, respectively.

Impact of Foreign Currency Exchange on Results of Operations

Approximately 60% of our revenue and 35% of our expenses are transacted in currencies other than the U.S. Dollar. Because we report our results of operations in U.S. Dollars, currency translation, particularly changes in the Euro, Yen, Shekel, and Rupee relative to the U.S. Dollar, affects our reported results. Changes in foreign currency exchange rates have been a headwind to reported results in the first nine months of FY’22. We anticipate foreign currency exchange rates will continue to be a headwind for the remainder of FY’22.

The results of operations in the table above and revenue by line of business, product group, and geographic region in the tables that follow present both actual percentage changes year over year and percentage changes on a constant currency basis. Our constant currency disclosures are calculated by multiplying the results in local currency for the quarterly and year-to-date periods for FY’22 and FY’21 by the exchange rates in effect on September 30, 2021. If reported results for the nine months ended June 30, 2022 were converted into U.S. dollars based on this methodology, ARR would have been higher by $81 million, year-to-date revenue would have been higher by $25 million and year-to-date expenses would have been higher by $9 million. If reported results for the nine months ended June 30, 2021 were converted into U.S. dollars based on this methodology, ARR would have been lower by $13 million, year-to-date revenue would have been lower by $20 million and year-to-date expenses would have been lower by $6 million.

Revenue

Under ASC 606, the volume, mix, and duration of contract types (support, SaaS, on-premise subscription) starting or renewing in any given period may have a material impact on revenue in the period, and as a result can impact the comparability of reported revenue period-over-period. We recognize revenue for the license portion of on-premise subscription contracts up front when we deliver the licenses to the customer, typically on the start date, and we recognize revenue on the support element of on-premise subscription contracts and stand-alone support contracts ratably over the term. We continue to convert existing support contracts to on-premise subscriptions, resulting in a shift to up-front recognition of on-premise subscription license revenue in the period converted compared to ratable recognition for a perpetual support contract. Revenue from our cloud services (primarily SaaS) contracts is recognized ratably. We are expanding our SaaS offerings and are releasing additional cloud functionality into our products and customers are migrating from on-premise subscriptions to SaaS products. As a result, we expect that over time a higher portion of our revenue will be recognized ratably. Given the different mix, duration and volume of new and renewing contracts in any period, year-over-year or sequential revenue comparisons can vary significantly.

Revenue by Line of Business

Software revenue in the third quarter and first nine months of FY’22 increased compared to the year-ago periods, primarily due to growth in Digital Thread – Core subscription revenue driven by PLM growth in Europe and growth in Velocity due primarily to contribution from Arena, offset by a decline in perpetual support revenue due to conversions of support contracts to subscriptions.

Professional services revenue in the third quarter and first nine months of FY’22 relative to the respective year-ago periods reflects an increase in revenue associated with large PLM consulting engagements, particularly with automotive, aerospace and defense and consumer electronics customers, and the fact that professional services revenue in the first half of FY’21 was negatively impacted by services delivery challenges associated with the COVID-19 pandemic. Q3’22 professional services revenue also reflects the effect of foreign currency headwinds, as approximately 65% of our professional services revenue comes from Europe and Asia Pacific.

We expect that professional services revenue will be higher in FY'22 than FY’21 or FY’20 as we expect demand for services will increase to a level that is more consistent with pre-pandemic levels. Our longer-term expectation is that professional services revenue will trend down over time as we migrate more services engagements to our partners, including through our transaction with ITC Infotech described above, and as we deliver products that require less consulting and training services.

Software Revenue by Product Group

Digital Thread

Core software revenue growth in the third quarter and first nine months of FY’22 compared to the year-ago periods was driven by on-premise subscription license revenue growth of 11% (17% constant currency) and 5% (9% constant currency), respectively. For the third quarter and first nine months of FY’22, on-premise subscription support revenues increased 14% (21% constant currency) and 17% (21% constant currency), respectively, and cloud services revenues grew by 24% (28% constant currency) and 30% (33% constant currency), respectively. Growth in on-premise subscription and cloud services revenues were offset by a decrease in perpetual support revenue as customers continue to convert from perpetual support contracts to subscriptions.

Core ARR increased 6% (14% constant currency) for Q3’22 compared to Q3’21, reflecting growth in both CAD and PLM.

Growth software revenue growth in the third quarter and first nine months of FY’22 compared to the year-ago periods was driven by support and cloud services revenue growth of 15% (19% constant currency) and 16% (19% constant currency), respectively. In Q3'22, on-premise subscription license revenue increased by 4% (9% constant currency), driven by IIoT. For the first nine months of FY'22, on-premise subscription license revenue decreased by 3% (1% constant currency), driven by the discontinuance of certain Vuforia products with up-front revenue recognition at the beginning of FY’22.

Growth ARR increased 13% (19% constant currency) for Q3’22 compared to Q3’21, driven primarily by growth in IIoT.

FSG software revenue in the third quarter and first nine months of FY’22 was driven by cloud services revenue growth of 20% (23% constant currency) and 22% (24% constant currency), respectively. On-premise subscription license revenue decreased by 19% (15% constant currency) and 3% (flat constant currency) for the third quarter and first nine months of FY'22, respectively. The decrease in on-premise subscription license revenue in the third quarter was driven by a reduction in the mix of on-premise subscriptions compared to SaaS, as well as a reduction in the average duration of on-premise subscription contracts which renewed in the period. Software revenue for the third quarter and first nine months includes revenue from the Codebeamer business, which we acquired in April 2022.

FSG ARR increased by 11% (17% constant currency) for Q3’22 compared to Q3’21 driven primarily by the acquisition of the Codebeamer business, which added $15 million ($16 million constant currency) to Q3’22 ending ARR.

Velocity

Velocity software revenue in the third quarter reflects growth from Arena of 68% (actual and constant currency) and from Onshape of 44% (actual and constant currency). Growth for the first nine months of FY'22 was primarily driven by the acquisition of Arena in January 2021, as well as 47% growth from Onshape (actual and constant currency). The increase in revenue from Arena includes the effect of purchase accounting adjustments to reduce acquired deferred revenue. Revenue was reduced by these purchase accounting adjustments in the third quarter and first nine months of FY'21 of $3.1 million and $6.9 million, respectively. Revenue was reduced by $1.3 million during the first nine months of FY'22 without any impact to Q3'22.

Velocity ARR grew in Q3’22 compared to Q3’21 by 29% (actual and constant currency), reflecting growth in both Arena and Onshape.

Software Revenue by Geographic Region

A significant portion of our software revenue is generated outside the U.S. In FY'22 and FY’21, approximately 40% of software revenue was generated in the Americas, 40% in Europe, and 20% in Asia Pacific.

Americas software revenue growth in the third quarter and first nine months of FY’22 compared to the year-ago periods was driven primarily by the Velocity product group, where Arena (which was acquired in January 2021) increased by 75% (actual and constant currency) and 182% (actual and constant currency), respectively. The increase in revenue from Arena includes the effect of purchase accounting adjustments to reduce acquired deferred revenue, as discussed above. Digital Thread revenue in the Americas increased 4% (actual and constant currency) and 2% (actual and constant currency) during the three and nine months ended FY’22, respectively.

Q3’22 Americas ARR was up 14% (actual and constant currency) over Q3’21, led by double-digit percentage growth in Digital Thread – Core and mid-20s percentage growth in Velocity.

Europe software revenue growth in the third quarter and first nine months was driven by growth in Digital Thread – Core of 14% (24% constant currency) and 7% (13% constant currency), respectively, primarily due to increases in PLM revenue, as well as increases in IIoT revenue of 28% (39% constant currency) and 18% (25% constant currency), respectively.

Q3’22 ARR in Europe was up 5% (17% constant currency) over Q3’21, led by growth in Digital Thread-Core and IIoT.

Asia Pacific software revenue in the third quarter decreased due to a reduction in Digital Thread - Core revenue of 2% (6% increase in constant currency). The software revenue increase in the first nine months was driven by an increase in Digital Thread - Core revenue of 9% (15% constant currency).

Q3’22 ARR in Asia Pacific was up 4% (16% constant currency) over Q3’21, led by Digital Thread – Core.

Gross Margin

(1)

Non-GAAP financial measures are reconciled to GAAP results under Non-GAAP Financial Measures below.

License gross margin increased in the third quarter of FY’22 compared to the corresponding FY’21 period due to an increase in license revenue of $11.6 million, along with a decrease in cost of license of $1.8 million, which was driven by lower amortization expense. License gross margin increased in the first nine months of FY'22 compared to the corresponding FY'21 period due to an increase in license revenue of $23.9 million, along with a decrease in cost of license revenue of $7.5 million, which was driven by lower intangible amortization expense, royalty expense and compensation costs.

Support and cloud services gross margin increased in the third quarter and first nine months of FY’22 compared to the corresponding FY’21 periods due to increases in support and cloud services revenue of $17.4 million and $65.7 million, respectively, partially offset by increases in cost of support and cloud services of $4.2 million and $16.5 million, respectively, which were driven by higher compensation and hosting costs**.**

Professional services gross margin decreased in the third quarter and first nine months of FY’22 compared to the corresponding FY’21 periods due to increases in professional services costs of $4.5 million and $10.1 million in the third quarter and the first nine months of FY'22, respectively, including $5.1 million of stock-based compensation expense recognized in Q3'22 related to the sale of a portion of our PLM services business.

Operating Expenses

Headcount decreased 4% between Q3’22 and Q3’21.

Operating expenses in Q3’22 compared to operating expenses in Q3’21 increased primarily due to the following:

a $6 million increase in acquisition and transaction-related costs;

a $5 million increase in other professional fees included in restructuring related to our SaaS transformation;

a $3 million increase in travel expenses;

a $3 million increase in stock-based compensation; and

a $1 million increase in intangible amortization expense;

partially offset by:

an $8 million decrease in compensation expense (including benefit costs) due to lower headcount caused by attrition and the restructuring actions.

Operating expenses in the first nine months of FY’22 compared to operating expenses in the first nine months of FY’21 increased primarily due to the following:

a $36 million increase in restructuring charges primarily due to the restructuring plan initiated in Q1’22;

a $6 million increase in travel expense,

a $4 million increase in software subscriptions;

a $4 million increase in intangible amortization expense; and

a $4 million increase in internal hosting costs;

partially offset by:

a $5 million decrease in stock-based compensation;

a $5 million decrease in compensation expense (including benefit costs) due to lower headcount caused by attrition and the restructuring actions; and

a $4 million decrease in acquisition and transaction-related costs.

Interest Expense

Interest expense includes interest on our credit facility and senior notes. We had $1.4 billion of total debt at June 30, 2022, compared to $1.5 billion at June 30, 2021. We repaid $105 million of our revolving credit facility in Q3'22, offset by $264 million borrowed at the end of April to fund the acquisition of the Codebeamer business. The average interest rate on borrowings outstanding was approximately 3.4% and 3.3% during the third quarter and first nine months of FY’22, respectively, and 3.1% and 3.4% during the third quarter and first nine months of FY’21, respectively. We expect the average interest rates will increase during the rest of the year, driven by our variable-rate revolving credit facility.

Other Income (Expense)

The increase in Other income (expense), net, in FY’22 over the FY’21 periods is driven by a recognized gain on the sale of a portion of our PLM services business of $29.8 million and a $3.0 million gain on the sale of an investment in the third quarter of FY'22. Net charges for the nine months ended June 30, 2022 include a recognized FY'22 loss on our equity investment in a publicly-traded company of $34.8 million. We sold our investment for $42.7 million in Q2’22 for an overall realized gain of $34.0 million.

Income Taxes

In the third quarter and first nine months of FY’22 and FY’21, our effective tax rate differed from the statutory federal income tax rate of 21% due to our corporate structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland and the Cayman Islands. In 2022 and 2021, the foreign rate differential predominantly relates to these earnings.

In FY’22 and FY’21, in addition to the foreign rate differential, the effective tax rate was impacted by the net effects of the Global Intangible Low-Taxed Income (GILTI) and Foreign Derived Intangible Income (FDII) regimes and the excess tax benefit related to stock-based compensation.

Additionally, in the third quarter and first nine months of FY’22 our results include tax expense related to the sale of a portion of our PLM services business of $15.5 million, including $8.1 million of expense related to the basis difference on goodwill. Our results for the third quarter and nine months ended June 30, 2021, include the effects of the full valuation allowance, which was maintained against our U.S. net deferred tax assets at that time. Additionally, in the first nine months of FY’21, our results include the reduction of our previously established U.S. valuation allowance by $42.3 million as a result of the Arena acquisition, and a charge of $37.3 million related to the effects of an unrecognized tax benefit in the Republic of Korea (South Korea), primarily related to foreign withholding taxes.

Critical Accounting Policies and Estimates

The financial information included in Item 1 reflects no material changes in our critical accounting policies and estimates as set forth under the heading Critical Accounting Policies and Estimates in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2021 Annual Report on Form 10-K.

Recent Accounting Pronouncements

In accordance with recently issued accounting pronouncements, we will be required to comply with certain changes in accounting rules and regulations. Refer to Note 1. Basis of Presentation to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q, which is incorporated herein by reference, for all recently issued accounting pronouncements.

Liquidity and Capital Resources

Cash, Cash Equivalents and Restricted Cash

We invest our cash with highly rated financial institutions. Cash and cash equivalents include highly liquid investments with original maturities of three months or less. At June 30, 2022, cash and cash equivalents totaled $322 million, compared to $327 million at September 30, 2021.

A significant portion of our cash is generated and held outside the U.S. As of June 30, 2022, we had cash and cash equivalents of $23 million in the U.S., $100 million in Europe, $167 million in Asia Pacific (including India) and $32 million in other non-U.S. countries. We have substantial cash requirements in the U.S., but we believe that the combination of our existing U.S. cash and cash equivalents, our ability to repatriate cash to the U.S., future U.S. operating cash flows, and cash available under our credit facility will be sufficient to meet our ongoing U.S. operating expenses and known capital requirements.

Cash Provided by Operating Activities

Cash provided by operating activities was $397 million in the first nine months of FY’22, compared to $323 million in the first nine months of FY’21. Cash from operations for the first nine months of FY'22 includes $38.5 million of restructuring payments and $10.1 million of acquisition and transaction-related payments compared to $13.7 million of restructuring payments and $14.8 million of acquisition and transaction-related payments in the prior-year period. The increase in cash from operations in the first nine months of FY'22 compared to the same period in FY’21 was driven by an increase in collections, including contributions from Arena & Codebeamer, partially offset by increases in restructuring payments and disbursements.

Cash Used In Investing Activities

Cash used in investing activities in the first nine months of FY’22 reflects proceeds from sale of investments of $47 million, proceeds from the sale of a portion of our PLM services business of $33 million and proceeds from net investment hedges of $18 million, offset by $275 million used to acquire the Codebeamer business, fixed asset additions of $10 million and purchases of intangible assets of $5 million. Cash used in investing activities in the first nine months of FY’21 reflects approximately $715 million used for the Arena acquisition and $59 million in net proceeds from the sale and maturity of marketable securities.

Cash (Used In) Provided by Financing Activities

Cash used in financing activities in the first nine months of FY’22 reflects repurchases of common stock of $125 million, payment of withholding taxes related to stock-based awards of $63 million, compared to $42 million in the year ago period, and net repayments of $16 million under our credit facility. Cash provided by financing activities in the first nine months of FY’21 reflects net borrowings of $472 million under our credit facility.

Outstanding Debt

As of June 30, 2022, we were in compliance with all financial and operating covenants of the credit facility and the note indentures. Any failure to comply with such covenants under the credit facility would prevent us from being able to borrow additional funds under the credit facility, and, as with any failure to comply with such covenants under the note indentures, could constitute a default that could cause all amounts outstanding to become due and payable immediately.

Our credit facility and our senior notes described in Note 13. Debt to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Future Expectations

We believe that existing cash and cash equivalents as of June 30, 2022, together with cash generated from operations and amounts available under the credit facility, will be sufficient to meet our working capital and capital expenditure requirements (which we expect to be approximately $20 million in FY’22) through at least the next twelve months and to meet our known long-term capital requirements. We expect foreign exchange rate headwinds to continue to have an impact on our results for the full year, particularly in ARR where our Q3'22 results based on rates as of June 30, 2022 were $81 million lower than they would have been using rates as of the beginning of the year.

Related to restructuring, we do not expect to incur any significant additional charges and expect to make $2 million to $7 million in payments for the remainder of FY’22. The FY’22 restructuring action is expected to help align our customer facing and product-related functions with the SaaS industry best practices and accelerate the opportunity for our on-premise customers to move to the cloud.

Our expected uses and sources of cash could change, our cash position could be reduced, and we could incur additional debt obligations if we decide to retire debt, engage in additional strategic transactions, or repurchase shares, any of which could be commenced, suspended, or completed at any time. Any such repurchases or retirement of debt will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, and other factors. The amounts involved in any debt retirement or issuance, share repurchases, or strategic transactions may be material.

Operating Measure

ARR

We provide an ARR (Annual Run Rate) operating measure to help investors understand and assess the performance of our business as a SaaS and on-premise subscription company. ARR represents the annualized value of our portfolio of active subscription software, cloud, SaaS and support contracts as of the end of the reporting period. ARR includes orders placed under our Strategic Alliance Agreement with Rockwell Automation, including orders placed to satisfy contractual minimum commitments.

We believe ARR is a valuable operating metric to measure the health of a subscription business because it captures expected subscription and support cash generation from customers.

Non-GAAP Financial Measures

Our non-GAAP financial measures and the reasons we use them and the reasons we exclude the items identified below are described in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended September 30, 2021.

The non-GAAP financial measures presented in the discussion of our results of operations and the respective most directly comparable GAAP measures are:

free cash flow—cash flow from operations

non-GAAP gross margin—GAAP gross margin

non-GAAP operating income—GAAP operating income

non-GAAP operating margin—GAAP operating margin

non-GAAP net income—GAAP net income

non-GAAP diluted earnings or loss per share—GAAP diluted earnings or loss per share

We provide information on free cash flow to enable investors to assess our ability to generate cash without incurring additional external financings and to evaluate our performance against our announced long-term goals and intent to return approximately 50% of our free cash flow to shareholders via stock repurchases. Free cash flow is cash flow from operations net of capital expenditures, which are expenditures for property and equipment and consist primarily of facility improvements, office equipment, computer equipment, and software.

The non-GAAP financial measures other than free cash flow exclude, as applicable, stock-based compensation expense; amortization of acquired intangible assets; acquisition-related and other transactional charges included in general and administrative expenses; restructuring and other charges, net; non-operating charges (credits), including those associated with the sale of a portion of our PLM services business and gains or losses on equity investments; and income tax adjustments as defined in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021. In Q1’21, we incurred tax expense related to a reserve for a South Korean tax exposure established in the quarter which is excluded from our non-GAAP financial measures as it was related to prior periods and not included in management’s view of Q1’21 results for comparative purposes.

We use these non-GAAP financial measures, and we believe that they assist our investors, to make period-to-period comparisons of our operational performance because they provide a view of our operating results without items that are not, in our view, indicative of our core operating results. We believe that these non-GAAP financial measures help illustrate underlying trends in our business, and we use the measures to establish budgets and operational goals (communicated internally and externally) for managing our business and evaluating our performance. We believe that providing non-GAAP financial measures also affords investors a view of our operating results that may be more easily compared to the results of other companies in our industry that use similar financial measures to supplement their GAAP results.

The items excluded from the non-GAAP financial measures often have a material impact on our financial results, certain of those items are recurring, and other such items often recur. Accordingly, the non-GAAP financial measures included in this Quarterly Report on Form 10-Q should be considered in addition to, and not as a substitute for or superior to, the comparable measures prepared in accordance with GAAP. The following tables reconcile each of these non-GAAP financial measures to its most closely comparable GAAP measure on our financial statements.

(1)

Credits for the three months ended June 30, 2022 include a $29.8 million gain on the sale of a portion of our PLM services business, and a $3.0 million gain on sale of an investment. Net charges for the nine months ended June 30, 2022 include a $34.8 million expense recognized due to the reduction in value of an equity investment in a publicly-traded company, offset by the $29.8 million gain on the sale of a portion of our PLM services business, and the $3.0 million gain on sale of an investment.

(2)

Income tax adjustments reflect the tax effects of non-GAAP adjustments which are calculated by applying the applicable tax rate by jurisdiction to the non-GAAP adjustments listed above. In Q3, adjustments include tax expense of $15.5 million related to the sale of our PLM services business, of which $8.1 million pertains to the basis difference on goodwill. In FY'21 we had recorded a full valuation allowance against our U.S. net deferred tax assets. As we were profitable on a non-GAAP basis, the FU'21 tax provision was calculated assuming there was no valuation allowance. Additionally, our non-GAAP results for the nine months ended June 30, 2021 excluded tax expenses of $34.8 million related to a non-U.S. prior period tax exposure, primarily related to foreign withholding taxes.

Operating margin impact of non-GAAP adjustments:

There have been no significant changes in our market risk exposure as described in Item 7A. Quantitative and Qualitative Disclosures about Market Risk of our 2021 Annual Report on Form 10-K.

Evaluation of Effectiveness of Disclosure Controls and Procedures

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

We evaluated, under the supervision and with the participation of management, including our principal executive and principal financial officers, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2022.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a or 15(d) of the Exchange Act that occurred during the period ended June 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHE****R INFORMATION

ITEM 1. LEGAL PRO****CEEDINGS

Information on legal proceedings can be found in Note 15. Commitments and Contingencies – Legal Proceedings – 401(k) Plan of Notes to Consolidated Financial Statements in this Form 10-Q, which information is incorporated herein by reference.

In addition to other information set forth in this report, you should carefully consider the risk factors described in Part I. Item 1A. Risk Factors in our 2021 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.

• Indicates that the exhibit is being furnished, not filed, with this report.

SIGNA****TURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: August 5, 2022