PTC 06/29/2013-Q3
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________
FORM 10-Q
____________________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2013
Commission File Number: 0-18059
____________________________________________________
PTC Inc.
(Exact name of registrant as specified in its charter)
____________________________________________________
|
| | |
Massachusetts | | 04-2866152 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
140 Kendrick Street, Needham, MA 02494
(Address of principal executive offices, including zip code)
(781) 370-5000
(Registrant’s telephone number, including area code)
____________________________________________________
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 þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
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| | | | | | | | | | |
Large accelerated filer | þ | | Accelerated filer | ¨ | | Non-accelerated filer | ¨ | | Smaller reporting company | ¨ |
| | | | | | (Do not check if a smaller reporting company) | | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
There were 119,070,239 shares of our common stock outstanding on August 2, 2013.
PTC Inc.
INDEX TO FORM 10-Q
For the Quarter Ended June 29, 2013
|
| | |
| | Page Number |
Part I—FINANCIAL INFORMATION | |
Item 1. | | |
| | |
| | |
| | |
| | |
| | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
| |
Part II—OTHER INFORMATION | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 6. | | |
| |
PART I—FINANCIAL INFORMATION
| |
ITEM 1. | UNAUDITED CONDENSED FINANCIAL STATEMENTS |
PTC Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
|
| | | | | | | |
| June 29, 2013 | | September 30, 2012 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 257,031 |
| | $ | 489,543 |
|
Accounts receivable, net of allowance for doubtful accounts of $3,449 and $3,418 at June 29, 2013 and September 30, 2012, respectively | 200,883 |
| | 217,370 |
|
Prepaid expenses | 46,302 |
| | 28,341 |
|
Other current assets | 99,154 |
| | 121,019 |
|
Deferred tax assets | 36,578 |
| | 22,879 |
|
Total current assets | 639,948 |
| | 879,152 |
|
Property and equipment, net | 61,482 |
| | 63,466 |
|
Goodwill | 746,584 |
| | 610,347 |
|
Acquired intangible assets, net | 266,997 |
| | 185,885 |
|
Deferred tax assets | 5,208 |
| | 20,660 |
|
Other assets | 36,558 |
| | 32,124 |
|
Total assets | $ | 1,756,777 |
| | $ | 1,791,634 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable, accrued expenses and other current liabilities | $ | 71,574 |
| | $ | 65,517 |
|
Accrued compensation and benefits | 87,346 |
| | 92,212 |
|
Accrued income taxes | 4,700 |
| | 804 |
|
Deferred tax liabilities | 657 |
| | 402 |
|
Current portion of long term debt | 9,375 |
| | 7,500 |
|
Deferred revenue | 320,376 |
| | 315,309 |
|
Total current liabilities | 494,028 |
| | 481,744 |
|
Long term debt, net of current portion | 258,750 |
| | 362,500 |
|
Deferred tax liabilities | 42,644 |
| | 31,854 |
|
Deferred revenue | 8,214 |
| | 12,220 |
|
Other liabilities | 102,436 |
| | 106,057 |
|
Total liabilities | 906,072 |
| | 994,375 |
|
Commitments and contingencies (Note 13) |
| |
|
Stockholders’ equity: | | | |
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued | — |
| | — |
|
Common stock, $0.01 par value; 500,000 shares authorized; 119,018 and 119,553 shares issued and outstanding at June 29, 2013 and September 30, 2012, respectively | 1,190 |
| | 1,196 |
|
Additional paid-in capital | 1,791,181 |
| | 1,822,698 |
|
Accumulated deficit | (866,830 | ) | | (954,134 | ) |
Accumulated other comprehensive loss | (74,836 | ) | | (72,501 | ) |
Total stockholders’ equity | 850,705 |
| | 797,259 |
|
Total liabilities and stockholders’ equity | $ | 1,756,777 |
| | $ | 1,791,634 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
PTC Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 |
Revenue: | | | | | | | |
License | $ | 79,902 |
| | $ | 83,829 |
| | $ | 238,777 |
| | $ | 247,696 |
|
Service | 72,540 |
| | 74,771 |
| | 222,384 |
| | 226,204 |
|
Support | 162,554 |
| | 152,383 |
| | 487,535 |
| | 456,484 |
|
Total revenue | 314,996 |
| | 310,983 |
| | 948,696 |
| | 930,384 |
|
Cost of revenue: | | | | | | | |
Cost of license revenue | 8,431 |
| | 7,634 |
| | 24,734 |
| | 23,117 |
|
Cost of service revenue | 62,941 |
| | 65,689 |
| | 196,083 |
| | 203,505 |
|
Cost of support revenue | 19,796 |
| | 19,531 |
| | 60,693 |
| | 57,667 |
|
Total cost of revenue | 91,168 |
| | 92,854 |
| | 281,510 |
| | 284,289 |
|
Gross margin | 223,828 |
| | 218,129 |
| | 667,186 |
| | 646,095 |
|
Operating expenses: | | | | | | | |
Sales and marketing | 88,298 |
| | 94,706 |
| | 269,906 |
| | 283,446 |
|
Research and development | 53,834 |
| | 53,260 |
| | 166,791 |
| | 162,829 |
|
General and administrative | 28,812 |
| | 29,851 |
| | 98,027 |
| | 88,957 |
|
Amortization of acquired intangible assets | 6,532 |
| | 5,103 |
| | 19,795 |
| | 15,444 |
|
Restructuring charges | 3,137 |
| | 4,126 |
| | 34,349 |
| | 24,928 |
|
Total operating expenses | 180,613 |
| | 187,046 |
| | 588,868 |
| | 575,604 |
|
Operating income | 43,215 |
| | 31,083 |
| | 78,318 |
| | 70,491 |
|
Interest and other income (expense), net | 3,181 |
| | (304 | ) | | (491 | ) | | (5,914 | ) |
Income before income taxes | 46,396 |
| | 30,779 |
| | 77,827 |
| | 64,577 |
|
Provision (benefit) for income taxes | 11,941 |
| | 7,884 |
| | (9,476 | ) | | 15,990 |
|
Net income | $ | 34,455 |
| | $ | 22,895 |
| | $ | 87,303 |
| | $ | 48,587 |
|
Earnings per share—Basic | $ | 0.29 |
| | $ | 0.19 |
| | $ | 0.73 |
| | $ | 0.41 |
|
Earnings per share—Diluted | $ | 0.29 |
| | $ | 0.19 |
| | $ | 0.72 |
| | $ | 0.40 |
|
Weighted average shares outstanding—Basic | 119,440 |
| | 119,042 |
| | 119,628 |
| | 118,584 |
|
Weighted average shares outstanding—Diluted | 120,828 |
| | 120,728 |
| | 121,234 |
| | 120,898 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
PTC Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 |
Net income | $ | 34,455 |
| | $ | 22,895 |
| | $ | 87,303 |
| | $ | 48,587 |
|
Other comprehensive income (loss), net of tax: | | | | | | | |
Foreign currency translation adjustment, net of tax of $0 for all periods | (998 | ) | | (11,089 | ) | | (4,073 | ) | | (8,310 | ) |
Minimum pension liability adjustment, net of tax of $0.1 million and ($0.9) million for the third quarter and first nine months of 2013, respectively, and ($0.1) million and ($0.4) million the third quarter and first nine months of 2012 | (178 | ) | | 231 |
| | 1,738 |
| | 1,093 |
|
Other comprehensive loss | (1,176 | ) | | (10,858 | ) | | (2,335 | ) | | (7,217 | ) |
Comprehensive income | $ | 33,279 |
| | $ | 12,037 |
| | $ | 84,968 |
| | $ | 41,370 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
PTC Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
| | | | | | | |
| Nine months ended |
| June 29, 2013 | | June 30, 2012 |
Cash flows from operating activities: | | | |
Net income | $ | 87,303 |
| | $ | 48,587 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 57,432 |
| | 50,152 |
|
Stock-based compensation | 34,880 |
| | 39,405 |
|
Excess tax benefits from stock-based awards | (171 | ) | | (453 | ) |
Other non-cash items, net | 207 |
| | 307 |
|
Changes in operating assets and liabilities, excluding the effects of acquisitions: | | | |
Accounts receivable | 35,874 |
| | 41,782 |
|
Accounts payable and accrued expenses | 3,373 |
| | (7,881 | ) |
Accrued compensation and benefits | (11,897 | ) | | 1,589 |
|
Deferred revenue | 42,951 |
| | 52,228 |
|
Accrued and deferred income taxes | (40,349 | ) | | (28,111 | ) |
Other current assets and prepaid expenses | (21,077 | ) | | 6,558 |
|
Other noncurrent assets and liabilities | (7,504 | ) | | (7,119 | ) |
Net cash provided by operating activities | 181,022 |
| | 197,044 |
|
Cash flows from investing activities: | | | |
Additions to property and equipment | (19,128 | ) | | (22,506 | ) |
Acquisitions of businesses, net of cash acquired | (220,817 | ) | | (1,170 | ) |
Net cash used by investing activities | (239,945 | ) | | (23,676 | ) |
Cash flows from financing activities: | | | |
Borrowings under credit facility | — |
| | 40,000 |
|
Repayments of borrowings under credit facility | (101,875 | ) | | (100,000 | ) |
Repurchases of common stock | (54,912 | ) | | (34,953 | ) |
Proceeds from issuance of common stock | 3,412 |
| | 15,315 |
|
Excess tax benefits from stock-based awards | 171 |
| | 453 |
|
Payments of withholding taxes in connection with vesting of stock-based awards | (14,974 | ) | | (20,893 | ) |
Net cash used by financing activities | (168,178 | ) | | (100,078 | ) |
Effect of exchange rate changes on cash and cash equivalents | (5,411 | ) | | (3,121 | ) |
Net (decrease) increase in cash and cash equivalents | (232,512 | ) | | 70,169 |
|
Cash and cash equivalents, beginning of period | 489,543 |
| | 167,878 |
|
Cash and cash equivalents, end of period | $ | 257,031 |
| | $ | 238,047 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
PTC Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
General
The accompanying unaudited condensed consolidated financial statements include the accounts of PTC Inc. (formerly named Parametric Technology Corporation) and its wholly owned subsidiaries and have been prepared by management in accordance with accounting principles generally accepted in the United States of America and in accordance with the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. While we believe that the disclosures presented are adequate in order to make the information not misleading, these unaudited quarterly financial statements should be read in conjunction with our annual consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair statement of our financial position, results of operations and cash flows at the dates and for the periods indicated. Unless otherwise indicated, all references to a year mean our fiscal year, which ends on September 30. The September 30, 2012 consolidated balance sheet included herein is derived from our audited consolidated financial statements.
The results of operations for the nine months ended June 29, 2013 are not necessarily indicative of the results expected for the remainder of the fiscal year.
Recent Accounting Pronouncements
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists
In July 2013, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (ASU) 2013-11,
Income Taxes (Topic 740)—Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2011-13 generally requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, shall be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. This Update is effective for us in our first quarter of fiscal 2015. We are currently evaluating the impact of ASU 2013-11 on our consolidated financial statements.
Disclosures about Offsetting Assets and Liabilities
In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210)—Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. ASU 2013-01 clarifies the scope of disclosures about offsetting assets and liabilities originally outlined in ASU 2011-11 issued in December 2011. ASU 2013-01 limits the scope of the disclosures to recognized derivative instruments accounted for in accordance with ASC 815, Derivatives and Hedging. For assets and liabilities within the scope of the standard, entities are required to disclose certain quantitative information in a tabular format, separately for assets and liabilities. The information required includes: a) the gross amounts of those recognized assets and those recognized liabilities; b) the amounts offset to determine the net amounts presented in the statement of financial position; c) the net amounts presented in the statement of financial position; d) the amounts subject to an enforceable master netting arrangement or similar agreement not otherwise included in (b); and e) the net amount after deducting the amounts in (d) from the amounts in (c). The disclosures are effective for us in our first quarter of fiscal 2014. We are currently evaluating the impact of ASU 2013-01 on our consolidated financial statements.
Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220)—Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02). ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety from accumulated other comprehensive income to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. ASU 2013-02 is effective for us in our first quarter of fiscal 2014 with earlier adoption permitted. We are currently evaluating the impact of ASU 2013-02 on our consolidated financial statements.
2. Deferred Revenue and Financing Receivables
Deferred Revenue
Deferred revenue primarily relates to software support agreements billed to customers for which the services have not yet been provided. The liability associated with performing these services is included in deferred revenue and, if not yet paid, the related customer receivable is included in other current assets. Billed but uncollected support-related amounts included in other current assets at June 29, 2013 and September 30, 2012 were $71.1 million and $110.7 million, respectively.
Financing Receivables
We periodically provide extended payment terms for software purchases to credit-worthy customers with payment terms up to 24 months. The determination of whether to offer such payment terms is based on the size, nature and credit-worthiness of the customer, and the history of collecting amounts due, without concession, from the customer and customers generally. This determination is based on an internal credit assessment. In making this assessment, we use the Standard & Poor's (S&P) credit rating as our primary credit quality indicator, if available. If a customer, whether commercial or the U.S. Federal government, has a S&P bond rating of BBB- or above, we designate the customer as Tier 1. If a customer does not have a S&P bond rating, or has a S&P bond rating below BBB-, we base our assessment on an internal credit assessment which considers selected balance sheet, operating and liquidity measures, historical payment experience, and current business conditions within the industry or region. We designate these customers as Tier 2 or Tier 3, with Tier 3 being lower credit quality than Tier 2.
As of June 29, 2013 and September 30, 2012 amounts due from customers for contracts with original payment terms greater than twelve months (financing receivables) totaled $65.8 million and $42.5 million, respectively. Accounts receivable in the accompanying consolidated balance sheets included current receivables from such contracts totaling $47.2 million and $29.5 million at June 29, 2013 and September 30, 2012, respectively, and other assets in the accompanying consolidated balance sheets included long-term receivables from such contracts totaling $18.6 million and $13.0 million at June 29, 2013 and September 30, 2012, respectively. As of June 29, 2013, $2.5 million of these receivables were past due, (of which $0.7 million were greater than 90 days past due). None of these receivables were past due as of September 30, 2012. Our credit risk assessment for financing receivables was as follows:
|
| | | | | | | |
| June 29, 2013 | | September 30, 2012 |
| (in thousands) |
S&P bond rating BBB-1 and above-Tier 1 | $ | 60,726 |
| | $ | 34,017 |
|
Internal Credit Assessment-Tier 2 | 5,089 |
| | 8,446 |
|
Internal Credit Assessment-Tier 3 | — |
| | — |
|
Total financing receivables | $ | 65,815 |
| | $ | 42,463 |
|
We evaluate the need for an allowance for doubtful accounts for estimated losses resulting from the inability of these customers to make required payments. As of June 29, 2013 and September 30, 2012, we concluded that all financing receivables were collectible and no reserve for credit losses was recorded. We did not provide a reserve for credit losses or write off any uncollectible financing receivables in the nine months ended June 29, 2013 and fiscal year 2012. We write off uncollectible trade and financing receivables when we have exhausted all collection avenues.
We periodically transfer future payments under certain of these contracts to third-party financial institutions on a non-recourse basis. We record such transfers as sales of the related accounts receivable when we surrender control of such receivables. There were $8.5 million financing receivables sold in the first nine months of 2013. We sold $1.8 million of financing receivables to third-party financial institutions in the nine months ended June 30, 2012.
3. Restructuring Charges
In the first quarter of 2013, as part of our strategy to reduce costs and to realign our business, we implemented a restructuring of our business and recorded restructuring charges of $15.5 million. The restructuring charges included $15.5 million for severance and related costs associated with 168 employees notified of termination during the first quarter and $27 thousand of charges related to excess facilities. In addition, the first quarter of 2013 restructuring charges include a benefit of $0.1 million related to adjusting facility accruals recorded in prior periods.
In the second quarter of 2013, we adopted a plan to further restructure our workforce and related facilities to enhance long-term profitability and recorded a restructuring charge of $15.8 million. The restructuring charges included $14.4 million for severance and related costs associated with 120 employees notified of termination in the second quarter and $1.4 million related to facility consolidations.
In the third quarter of 2013, we implemented a further restructuring of our workforce and recorded a restructuring charge of $3.1 million primarily for severance and related costs associated with 63 employees notified of termination, approximately half of whom will continue to work for PTC through the fourth quarter. Severance costs for these employees are being
recorded over their remaining service period and will result in restructuring charges of approximately $1 million in the fourth quarter.
In the second and third quarters of 2012, we implemented restructurings of our business and recorded restructuring charges of $20.8 million and $4.1 million, respectively. The restructuring charges primarily included severance and related costs associated with 168 and 41 employees notified of termination during the second and third quarters of 2012, respectively.
The employee terminations in prior quarters described above triggered curtailments of a non-U.S. pension plan and interim remeasurements of the pension plan's assets and liabilities. The remeasurements resulted in decreases in the plan's net unrecognized losses which were recorded in accumulated other comprehensive income of $2.1 million, $0.6 million and $1.2 million in the second quarter of 2013, the first quarter of 2013 and the second quarter of 2012, respectively, net of tax.
The following table summarizes restructuring accrual activity for the nine months ended June 29, 2013:
|
| | | | | | | | | | | | | | | | | | | | |
| | 2013 Restructuring Charges | |
| | |
| | Employee Severance and Related Benefits | | Facility Closures and Related Costs | | Total | | Prior (1) | | Total |
| | (in thousands) |
October 1, 2012 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4,461 |
| | $ | 4,461 |
|
Charges to operations | | 33,166 |
| | 1,397 |
| | 34,563 |
| | (214 | ) | | 34,349 |
|
Cash disbursements | | (26,057 | ) | | (1,111 | ) | | (27,168 | ) | | (4,208 | ) | | (31,376 | ) |
Foreign exchange impact | | (246 | ) | | (11 | ) | | (257 | ) | | 13 |
| | (244 | ) |
Accrual, June 29, 2013 | | $ | 6,863 |
| | $ | 275 |
| | $ | 7,138 |
| | $ | 52 |
| | $ | 7,190 |
|
(1) The prior balances and activity are primarily for employee severance and related benefits related to the 2012 restructuring charges.
The accrual for facility closures and related costs is included in accrued expenses and other liabilities in the consolidated balance sheet, and the accrual for employee severance and related benefits is included in accrued compensation and benefits in the consolidated balance sheet.
4. Stock-based Compensation
We measure the cost of employee services received in exchange for restricted stock and restricted stock unit (RSU) awards based on the fair value of our common stock on the date of grant. That cost is recognized over the period during which an employee is required to provide service in exchange for the award.
Our equity incentive plan provides for grants of nonqualified and incentive stock options, common stock, restricted stock, RSUs and stock appreciation rights to employees, directors, officers and consultants. We award RSUs as the principal equity incentive awards, including certain performance-based awards that are earned based on achievement of performance criteria established by the Compensation Committee of our Board of Directors. Each RSU represents the contingent right to receive one share of our common stock.
Our equity incentive plans are described more fully in Note K to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012.
|
| | | | | | |
Restricted stock unit activity for the nine months ended June 29, 2013 | Shares | | Weighted Average Grant Date Fair Value (Per Share) |
| (in thousands) | | |
Balance of outstanding restricted stock units October 1, 2012 | 5,134 |
| | $ | 19.99 |
|
Granted | 2,612 |
| | $ | 22.79 |
|
Vested | (2,185 | ) | | $ | 19.26 |
|
Forfeited or not earned | (350 | ) | | $ | 21.12 |
|
Balance of outstanding restricted stock units June 29, 2013 | 5,211 |
| | $ | 21.63 |
|
|
| | | |
| Restricted Stock Units |
Grant Period | Performance-based (1) | | Time-based (2) |
| |
| (Number of Units in thousands) |
First nine months of 2013 | 422 | | 2,190 |
_________________
| |
(1) | Of these performance-based RSUs, 90,859 will be eligible to vest to the extent earned in three substantially equal installments on the later of November 15, 2013 and the date the Compensation Committee determines the extent to which the performance criteria have been achieved, November 15, 2014 and November 15, 2015 and 317,197 will be eligible to vest in three substantially equal installments on (i) the later of November 15, 2013 and the date the Compensation Committee determines the extent to which performance criteria have been achieved, (ii) the later of November 15, 2014 and the date the Compensation Committee determines the extent to which the applicable performance criteria have been achieved, and (iii) the later of November 15, 2015 and the date the Compensation Committee determines the extent to which the applicable performance criteria have been achieved; RSUs not earned for a period may be earned in subsequent periods. The remaining 14,046 will vest on the later of November 15, 2013 and the date the Compensation Committee determines the extent to which the performance criteria have been achieved. |
| |
(2) | The time-based RSUs were issued to employees, including some of our executive officers, and the Board of Directors. Of these time-based RSUs, 1,363,705 will vest in three substantially equal annual installments in November 2013, 2014 and 2015; 7,681 will vest in three substantially equal installments in March 2014, 2015, and 2016; 752,950 will vest in three substantially equal installments in May 2014, 2015, and 2016; and 9,185 will vest in three substantially equal installments in June 2014, 2015, and 2016. The remaining 56,144 will vest the earlier of the date of the 2014 Annual Meeting of Stockholders or March 15, 2014. |
Compensation expense recorded for our stock-based awards was classified in our consolidated statements of operations as follows:
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 |
| (in thousands) | | (in thousands) |
Cost of license revenue | $ | 4 |
| | $ | 4 |
| | $ | 17 |
| | $ | 16 |
|
Cost of service revenue | 1,372 |
| | 1,314 |
| | 4,404 |
| | 4,235 |
|
Cost of support revenue | 722 |
| | 736 |
| | 2,383 |
| | 2,499 |
|
Sales and marketing | 2,693 |
| | 3,334 |
| | 7,986 |
| | 10,368 |
|
Research and development | 2,139 |
| | 1,886 |
| | 6,475 |
| | 6,675 |
|
General and administrative | 4,247 |
| | 6,057 |
| | 13,615 |
| | 15,612 |
|
Total stock-based compensation expense | $ | 11,177 |
| | $ | 13,331 |
| | $ | 34,880 |
| | $ | 39,405 |
|
5. Earnings per Share (EPS) and Common Stock
EPS
Basic EPS is calculated by dividing net income by the weighted average number of shares outstanding during the period. Unvested restricted stock, although legally issued and outstanding, is not considered outstanding for purposes of calculating basic EPS. 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 RSUs 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.
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
Calculation of Basic and Diluted EPS | June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 |
| (in thousands, except per share data) |
Net income | $ | 34,455 |
| | $ | 22,895 |
| | $ | 87,303 |
| | $ | 48,587 |
|
Weighted average shares outstanding—Basic | 119,440 |
| | 119,042 |
| | 119,628 |
| | 118,584 |
|
Dilutive effect of employee stock options, restricted shares and restricted stock units | 1,388 |
| | 1,686 |
| | 1,606 |
| | 2,314 |
|
Weighted average shares outstanding—Diluted | 120,828 |
| | 120,728 |
| | 121,234 |
| | 120,898 |
|
Earnings per share—Basic | $ | 0.29 |
| | $ | 0.19 |
| | $ | 0.73 |
| | $ | 0.41 |
|
Earnings per share—Diluted | $ | 0.29 |
| | $ | 0.19 |
| | $ | 0.72 |
| | $ | 0.40 |
|
Stock options to purchase 0.1 million shares were outstanding during the first nine months of 2012 but were not included in the calculation of diluted EPS because the exercise prices per share were greater than the average market price of our common stock for those periods. These shares were excluded from the computation of diluted EPS as the effect would have been anti-dilutive.
Common Stock Repurchases
Our Articles of Organization authorize us to issue up to 500 million shares of our common stock. Our Board of Directors has authorized us to repurchase up to $100 million worth of shares with cash from operations in the period October 1, 2012 through September 30, 2013. In the third quarter and first nine months of 2013, we repurchased 0.8 million shares and 2.3 million shares at a cost of $20.0 million and $54.9 million, respectively. In the third quarter and first nine months of 2012, we repurchased 1.0 million shares and 1.6 million shares at a cost of $20.0 million and $35.0 million, respectively. All shares of our common stock repurchased are automatically restored to the status of authorized and unissued.
6. Acquisition
Acquisition-related costs were $0.9 million and $7.6 million for the third quarter and nine months ended June 29, 2013, respectively, and $0.0 million and $2.5 million for the third quarter and first nine months ended June 30, 2012, respectively. Acquisition-related costs include direct costs of completing an acquisition (e.g., investment banker fees, professional fees, including legal and valuation services) and expenses related to acquisition integration activities (e.g., professional fees, severance, and retention bonuses). These costs have been classified in general and administrative expenses in the accompanying consolidated statements of operations.
Servigistics
On October 2, 2012, we acquired Servigistics, Inc. (“Servigistics”), a developer of a suite of service lifecycle management (SLM) software solutions, for $220.8 million in cash (net of a final purchase price adjustment of $1.6 million received from the sellers in the the third quarter of 2013 and net of cash acquired of $1.4 million). We acquired Servigistics to expand our products that support service organizations within manufacturing companies, including managing service and spare parts information and the delivery of service for warranty and product support processes. Servigistics had annualized revenues of approximately $80 million and approximately 400 employees. The acquisition was completed pursuant to the terms of a Stock Purchase Agreement dated as of August 7, 2012 by and among PTC, the stockholders of Servigistics (the Sellers) and Servigistics, LLC, as the Sellers' representative, to acquire all of the outstanding shares of capital stock of Servigistics from the Sellers. We borrowed $230 million under our existing credit facility to fund the acquisition (Note 12).
The results of operations of Servigistics have been included in our consolidated financial statements beginning on the acquisition date. Servigistics added $22.5 million and $68.0 million to our revenue in the third quarter and first nine months ended June 29, 2013, respectively.
The acquisition of Servigistics has been accounted for as a business combination. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the October 2, 2012 acquisition date. The fair values of intangible assets were based on valuations using an income approach, with estimates and assumptions provided by management of Servigistics and PTC. The process for estimating the fair values of identifiable intangible assets and certain tangible assets requires the use of significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill.
Based upon a valuation, the total purchase price allocation was as follows:
|
| | | |
| (in thousands) |
Goodwill | $ | 139,833 |
|
Identifiable intangible assets | 118,300 |
|
Cash | 1,355 |
|
Accounts receivable | 20,536 |
|
Property and equipment | 3,588 |
|
Deferred maintenance revenue | (11,714 | ) |
Deferred tax assets and liabilities, net | (35,566 | ) |
Accrued employee related liabilities | (9,010 | ) |
Net assumed liabilities | (5,149 | ) |
Total purchase price allocation | 222,173 |
|
Less: Servigistics cash acquired | (1,355 | ) |
Total purchase price allocation, net of cash acquired | $ | 220,818 |
|
The purchase price allocation resulted in $139.8 million of goodwill, the majority of which will not be deductible for income tax purposes. Of the acquired goodwill, $127.0 million was allocated to our software products segment and $12.8 million was allocated to our services segment. Intangible assets of $118.3 million includes purchased software of $49.9 million, customer relationships of $66.0 million and trademarks of $2.4 million, which are being amortized over weighted average useful lives of 9 years, 10 years and 7 years, respectively, based upon the pattern in which economic benefits related to such assets are expected to be realized. In accounting for the business combination we recorded net deferred tax liabilities of $35.6 million, primarily related to the tax effect of the acquired intangible assets other than goodwill and the fair value adjustment for deferred revenue that are not deductible for income tax purposes. The resulting amount of goodwill reflects our expectations of the following synergistic benefits: (1) the potential to sell Servigistics products into our customer base and to sell PTC products into Servigistics' customer base; (2) our intention to leverage our larger sales force and our intellectual property to attract new contracts and revenue; and (3) our intention to leverage our established presence in global markets.
The unaudited financial information in the table below summarizes the combined results of operations of PTC and Servigistics, on a pro forma basis, as though the companies had been combined as of the beginning of PTC's fiscal year 2012. The pro forma information for all periods presented includes the effects of business combination accounting resulting from the acquisition as though the acquisition had been consummated as of the beginning of fiscal year 2012, including amortization charges from acquired intangible assets, the fair value adjustment of acquired deferred support revenue being recorded in fiscal year 2012 versus fiscal year 2013, interest expense on borrowings in connection with the acquisition, the exclusion of acquisition-related costs and the related tax effects. PTC's first quarter of 2013 results also exclude the $32.6 million tax benefit recorded to decrease our valuation allowance in jurisdictions where we have recorded a valuation allowance as a result of Servigistics' net deferred tax liability position recorded in accounting for the business combination (Note 11). The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the results of operations that actually would have been achieved if the acquisition had taken place at the beginning of 2012.
Unaudited Pro Forma Financial Information
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 |
| (in millions, except per share amounts) |
Revenue | $ | 315.5 |
| | $ | 331.7 |
| | $ | 951.4 |
| | $ | 982.8 |
|
Net income | $ | 34.3 |
| | $ | 21.7 |
| | $ | 60.3 |
| | $ | 44.6 |
|
Earnings per share—Basic | $ | 0.29 |
| | $ | 0.18 |
| | $ | 0.50 |
| | $ | 0.38 |
|
Earnings per share—Diluted | $ | 0.28 |
| | $ | 0.18 |
| | $ | 0.50 |
| | $ | 0.37 |
|
7. Goodwill and Intangible Assets
We have two operating segments: (1) Software Products and (2) Services. We assess goodwill for impairment at the reporting unit level. Our reporting units are determined based on the components of our operating segments that constitute a business for which discrete financial information is available and for which operating results are regularly reviewed by segment management. Our reporting units are consistent with our operating segments. As of June 29, 2013 and September 30, 2012, goodwill and acquired intangible assets in the aggregate attributable to our software products reportable segment were $970.7
million and $768.1 million, respectively, and attributable to our services reportable segment were $42.9 million and $28.1 million, respectively. We test goodwill for impairment in the third quarter of our fiscal year, or on an interim basis if an event occurs or circumstances change that would, more likely than not, reduce the fair value of a reporting segment below its carrying value. Acquired intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.
We completed our annual goodwill impairment review as of June 29, 2013 based on a qualitative assessment. Our qualitative assessment included company specific (financial performance and long-range plans), industry, and macroeconomic factors, as well as a sensitivity analysis of key model assumptions and consideration of the fair value of each reporting unit, which was approximately double its carrying value or higher, at the last valuation date. Based on our qualitative assessment, we believe it is more likely than not that the fair values of our reporting units exceed their carrying values and no further impairment testing is required.
Goodwill and acquired intangible assets consisted of the following:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 29, 2013 | | September 30, 2012 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
| (in thousands) |
Goodwill (not amortized) | | | | | $ | 746,584 |
| | | | | | $ | 610,347 |
|
Intangible assets with finite lives (amortized) (1): | | | | | | | | | | | |
Purchased software | $ | 226,821 |
| | $ | 141,062 |
| | 85,759 |
| | $ | 177,166 |
| | $ | 127,250 |
| | $ | 49,916 |
|
Capitalized software | 22,877 |
| | 22,877 |
| | — |
| | 22,877 |
| | 22,877 |
| | — |
|
Customer lists and relationships | 289,780 |
| | 112,122 |
| | 177,658 |
| | 227,097 |
| | 93,215 |
| | 133,882 |
|
Trademarks and trade names | 13,257 |
| | 9,687 |
| | 3,570 |
| | 11,013 |
| | 8,967 |
| | 2,046 |
|
Other | 3,456 |
| | 3,446 |
| | 10 |
| | 3,437 |
| | 3,396 |
| | 41 |
|
| $ | 556,191 |
| | $ | 289,194 |
| | $ | 266,997 |
| | $ | 441,590 |
| | $ | 255,705 |
| | $ | 185,885 |
|
Total goodwill and acquired intangible assets | | | | | $ | 1,013,581 |
| | | | | | $ | 796,232 |
|
(1) The weighted average useful lives of purchased software, customer lists and relationships, trademarks and trade names and other intangible assets with a remaining net book value are 8 years, 10 years, 7 years, and 3 years, respectively.
Goodwill
The changes in the carrying amounts of goodwill for the nine months ended June 29, 2013 are due to our acquisition of Servigistics described in Note 6 and to foreign currency translation adjustments related to those asset balances that are recorded in non-U.S. currencies.
Changes in goodwill for the nine months ended June 29, 2013, presented by reportable segment, are as follows:
|
| | | | | | | | | | | |
| Software Products Segment | | Services Segment | | Total |
| (in thousands) |
Balance, September 30, 2012 | $ | 585,469 |
| | $ | 24,878 |
| | $ | 610,347 |
|
Acquisition | 127,033 |
| | 12,800 |
| | 139,833 |
|
Foreign currency translation adjustments | (3,617 | ) | | 21 |
| | (3,596 | ) |
Balance, June 29, 2013 | $ | 708,885 |
| | $ | 37,699 |
| | $ | 746,584 |
|
Amortization of Intangible Assets
The aggregate amortization expense for intangible assets with finite lives was classified in our consolidated statements of operations as follows:
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 |
| (in thousands) |
Amortization of acquired intangible assets | $ | 6,532 |
| | $ | 5,103 |
| | $ | 19,795 |
| | $ | 15,444 |
|
Cost of license revenue | 4,598 |
| | 3,933 |
| | 13,865 |
| | 11,967 |
|
Total amortization expense | $ | 11,130 |
| | $ | 9,036 |
| | $ | 33,660 |
| | $ | 27,411 |
|
The estimated aggregate future amortization expense for intangible assets with finite lives remaining as of June 29, 2013 is $11.1 million for the remainder of 2013, $45.8 million for 2014, $44.0 million for 2015, $37.6 million for 2016, $33.8 million for 2017, $30.1 million for 2018 and $64.6 million thereafter.
8. Fair Value Measurements
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. Generally accepted accounting principles prescribe a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs that may be used to measure fair value:
| |
• | Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; |
| |
• | Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or |
| |
• | Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Our significant financial assets and liabilities measured at fair value on a recurring basis as of June 29, 2013 and September 30, 2012 were as follows:
|
| | | | | | | |
| June 29, 2013 | | September 30, 2012 |
| (in thousands) |
Financial assets: | | | |
Cash equivalents—Level 1 (1) | $ | 62,375 |
| | $ | 231,488 |
|
Forward contracts—Level 2 | 2,593 |
| | 236 |
|
| $ | 64,968 |
| | $ | 231,724 |
|
Financial liabilities: | | | |
Forward contracts—Level 2 | $ | 390 |
| | $ | — |
|
_________________
| |
(1) | Money market funds and time deposits. |
9. Derivative Financial Instruments
Our foreign currency risk management strategy is principally designed to mitigate the future potential financial impact of changes in the value of transactions and balances denominated in foreign currency resulting from changes in foreign currency exchange rates. We enter into derivative transactions, specifically foreign currency forward contracts with maturities of up to three months, to manage our exposure to fluctuations in foreign exchange rates that arise primarily from our foreign currency-denominated receivables and payables.
Generally, we do not designate foreign currency forward contracts as hedges for accounting purposes, and changes in the fair value of these instruments are recognized immediately in earnings. Because we enter into forward contracts only as an economic hedge, any gain or loss on the underlying foreign-denominated balance would be offset by the loss or gain on the
forward contract. Gains and losses on forward contracts and foreign denominated receivables and payables are included in other income (expense), net.
As of June 29, 2013 and September 30, 2012, we had outstanding forward contracts with notional amounts equivalent to the following:
|
| | | | | | | |
Currency Hedged | June 29, 2013 | | September 30, 2012 |
| (in thousands) |
Canadian Dollar / U.S. Dollar | $ | 44,228 |
| | $ | 54,133 |
|
Euro / U.S. Dollar | 46,356 |
| | 53,716 |
|
Chinese Renminbi / U.S. Dollar | 3,434 |
| | 3,666 |
|
Japanese Yen / U.S. Dollar | 8,834 |
| | 13,415 |
|
Japanese Yen / Euro | 3,034 |
| | — |
|
Israeli New Sheqel / U.S. Dollar | 2,233 |
| | — |
|
All other | 8,883 |
| | 8,973 |
|
Total | $ | 117,002 |
| | $ | 133,903 |
|
The accompanying consolidated balance sheets include a net liability of $0.4 million in accrued expenses and a net asset of $2.6 million in other current assets as of June 29, 2013, and a net asset of $0.2 million as of September 30, 2012 related to the fair value of our forward contracts.
Net gains and losses on foreign currency exposures are recorded in other income (expense), net and include realized and unrealized gains and losses on forward contracts. Net gains and losses on foreign currency exposures for the three and nine month periods ended June 29, 2013 and June 30, 2012 were as follows: |
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 |
| (in thousands) |
Net losses on foreign currency exposures | $ | 749 |
| | $ | 572 |
| | $ | 1,737 |
| | $ | 5,142 |
|
Net realized and unrealized (gain) loss on forward contracts (excluding the underlying foreign currency exposure being hedged) | $ | (1,443 | ) | | $ | (1,570 | ) | | $ | (5,039 | ) | | $ | 816 |
|
10. Segment Information
We operate within a single industry segment—computer software and related services. Operating segments as defined under GAAP are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our President and Chief Executive Officer. We have two operating and reportable segments: (1) Software Products, which includes license and related support revenue (including updates and technical support) for all our products except training-related products; and (2) Services, which includes consulting, implementation, training, computer-based training products, including support on these products, and other services revenue. We do not allocate sales and marketing or administrative expenses to our operating segments as these activities are managed on a consolidated basis.
The revenue and operating income attributable to our operating segments are summarized as follows:
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 |
| (in thousands) |
Revenue: | | | | | | | |
Total Software Products segment revenue | $ | 236,306 |
| | $ | 229,706 |
| | $ | 712,174 |
| | $ | 688,322 |
|
Total Services segment revenue | 78,690 |
| | 81,277 |
| | 236,522 |
| | 242,062 |
|
Total revenue | $ | 314,996 |
| | $ | 310,983 |
| | $ | 948,696 |
| | $ | 930,384 |
|
Operating income: (1) | | | | | | | |
Software Products segment | $ | 148,904 |
| | $ | 145,829 |
| | $ | 434,031 |
| | $ | 431,897 |
|
Services segment | 13,227 |
| | 12,491 |
| | 27,321 |
| | 27,774 |
|
Sales and marketing expenses | (89,443 | ) | | (97,386 | ) | | (282,734 | ) | | (298,606 | ) |
General and administrative expenses | (29,473 | ) | | (29,851 | ) | | (100,300 | ) | | (90,574 | ) |
Total operating income | 43,215 |
| | 31,083 |
| | 78,318 |
| | 70,491 |
|
Other income (expense), net | 3,181 |
| | (304 | ) | | (491 | ) | | (5,914 | ) |
Income before income taxes | $ | 46,396 |
| | $ | 30,779 |
| | $ | 77,827 |
| | $ | 64,577 |
|
| |
(1) | We recorded restructuring charges of $3.1 million and $34.3 million in the third quarter and first nine months of 2013, respectively. Software Products included $1.0 million and $12.6 million, respectively; Services included $0.3 million and $6.6 million, respectively; sales and marketing expenses included $1.1 million and $12.8 million, respectively; and general and administrative expenses included $0.7 million and $2.3 million, respectively, of these restructuring charges. We recorded restructuring charges of $4.1 million and $24.9 million in the third quarter and first nine months of 2012, respectively. Software Products included $0.7 million and $4.1 million, respectively; Services included $0.8 million and $4.0 million, respectively; sales and marketing expenses included $2.7 million and $15.2 million, respectively; and general and administrative expenses included $0 million and $1.6 million, respectively, of these restructuring charges. |
We report revenue by the following three solution areas:
| |
• | CAD - PTC Creo®, including PTC Creo ParametricTM and PTC Creo Elements/Direct®, and PTC Mathcad®. |
| |
• | Extended PLM - our PLM solutions (primarily PTC Windchill® and PTC Creo ViewTM ), our ALM solutions (primarily PTC Integrity™) and our SCM Solutions (primarily PTC Windchill FlexPLM®). |
| |
• | SLM - PTC Arbortext® and PTC Servigistics® products. |
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 |
| (in thousands) |
Revenue: | | | | | | | |
CAD | $ | 135,249 |
| | $ | 142,774 |
| | $ | 403,540 |
| | $ | 427,956 |
|
Extended PLM | 140,517 |
| | 146,286 |
| | 422,758 |
| | 442,379 |
|
SLM | 39,230 |
| | 21,923 |
| | 122,398 |
| | 60,049 |
|
Total revenue | $ | 314,996 |
| | $ | 310,983 |
| | $ | 948,696 |
| | $ | 930,384 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 |
| (in thousands) |
Revenue: | | | | | | | |
Americas (1) | $ | 129,501 |
| | $ | 112,661 |
| | $ | 380,310 |
| | $ | 339,680 |
|
Europe (2) | 115,425 |
| | 120,214 |
| | 353,920 |
| | 369,169 |
|
Pacific Rim | 36,268 |
| | 43,593 |
| | 114,179 |
| | 118,170 |
|
Japan | 33,802 |
| | 34,515 |
| | 100,287 |
| | 103,365 |
|
Total revenue | $ | 314,996 |
| | $ | 310,983 |
| | $ | 948,696 |
| | $ | 930,384 |
|
_________________
| |
(1) | Includes revenue in the United States totaling $121.9 million and $106.1 million for the third quarters ended June 29, 2013 and June 30, 2012, respectively, and $350.5 million and $319.1 million for the nine months ended June 29, 2013 and June 30, 2012, respectively. |
| |
(2) | Includes revenue in Germany totaling $41.8 million and $48.0 million for the third quarters ended June 29, 2013 and June 30, 2012, respectively, and $123.5 million and $145.3 million for the nine months ended June 29, 2013 and June 30, 2012, respectively. |
11. Income Taxes
In the third quarter and first nine months of 2013, our effective tax rate was 26% on pre-tax income of $46.4 million and a benefit of 12% on pre-tax income of $77.8 million, respectively, compared to 26% on pre-tax income of $30.8 million and 25% on pre-tax income of $64.6 million in the third quarter and first nine months of 2012, respectively. In the third quarter and first nine months of 2013, as well as the first nine months of 2012, our effective tax rate was lower than the 35% statutory federal income tax rate due to our corporate structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate. For the first nine months of 2013, the lower effective rate was primarily due to the reversal of a portion of the valuation allowance against our U.S. deferred tax assets described below. Our tax provision for the third quarter and tax benefit for the first nine months of 2013 do not include a tax benefit on our forecast 2013 U.S. loss as it is offset by the valuation allowance. A discrete benefit of $1.6 million was recorded in the third quarter of 2013 as a result of the conclusion of tax audits in several jurisdictions. In the first nine months of 2013, we recorded a $2.0 million tax benefit related to research and development (R&D) tax credits in the U.S triggered by a retroactive extension of the R&D credit enacted in the second quarter and a $3.2 million tax benefit related to final resolution of a long standing tax litigation and completion of a tax audit. The third quarter and first nine months of 2012 provision included a discrete non-cash tax charge of $4.2 million due to the restructuring of our Canadian operations that resulted in a change in the tax status of the foreign legal entity. Additionally, the provision for the first nine months of 2012 reflected the expiration on December 31, 2011 of the R&D tax credit in the U.S. and a discrete non-cash charge of $1.5 million related to the impact of a Japanese legislative change enacted in the first quarter of 2012 on our Japan entity's deferred tax assets.
In the fourth quarter of 2012, we recorded a $124.5 million non-cash charge to the income tax provision to establish a valuation allowance against all of our U.S. deferred tax assets, which were net of approximately $28.0 million of U.S. deferred tax liabilities. In the first quarter of 2013, our acquisition of Servigistics, Inc. was accounted for as a business combination. Assets acquired, including the fair values of acquired tangible assets, intangible assets (including finite-lived acquired intangible assets totaling $118.3 million) and assumed liabilities were recorded, and we recorded net deferred tax liabilities of $35.6 million primarily related to the tax effect of the acquired intangible assets that are not deductible for income tax purposes. These net deferred tax liabilities reduced our net deferred tax asset balance and resulted in a tax benefit of $32.6 million to decrease our valuation allowance in jurisdictions where we have recorded a valuation allowance (primarily the U.S.). As this decrease in the valuation allowance is not part of the accounting for the business combination (the fair value of the assets acquired and liabilities assumed), it was recorded as an income tax benefit.
As of June 29, 2013 and September 30, 2012, we had unrecognized tax benefits of $16.4 million and $19.1 million, respectively. If all of our unrecognized tax benefits as of June 29, 2013 were to become recognizable in the future, we would record a benefit to the income tax provision of $15.6 million which would be partially offset by an increase in the U.S. valuation allowance of $7.1 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 $7 million as audits close and statutes of limitations expire.
12. Debt
Credit Agreement
In August 2012, we entered into a multi-currency credit facility (the credit facility) with a syndicate of ten banks for which JPMorgan Chase Bank, N.A. acts as Administrative Agent. The credit facility replaced a revolving credit facility with the same banks entered into in August 2010. We expect to use the credit facility for general corporate purposes, including acquisitions of businesses and working capital requirements. As of June 29, 2013, the fair value of our credit facility approximates our book value. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy described in Note 8.
The credit facility consists of a $150 million term loan and a $300 million revolving loan commitment, and may be increased by an additional $150 million (in the form of revolving loans or term loans, or a combination thereof) if the existing or additional lenders are willing to make such increased commitments. The revolving loan commitment does not require amortization of principal. The term loan requires principal payments at the end of each calendar quarter. The revolving loan and term loan may be repaid in whole or in part prior to the scheduled maturity dates at PTC's option without penalty or premium. The credit facility matures on August 16, 2017, when all remaining amounts outstanding will be due and payable in full. We are required to make principal payments under the term loan of $1.9 million, $15.0 million, $15.0 million, $22.5 million and $90.0 million in the remainder of 2013, 2014, 2015, 2016 and 2017, respectively.
PTC is the sole borrower under the credit facility. The obligations under the credit facility are guaranteed by PTC’s material domestic subsidiaries, and 65% of the voting equity interests of PTC’s material first-tier foreign subsidiaries are pledged as collateral for the obligations.
As of June 29, 2013 we had $268.1 million outstanding under the credit facility (including $230 million borrowed in connection with our October 2012 acquisition of Servigistics described in Note 6), comprised of a $144 million term loan and a $124 million revolving loan. During the nine months ended June 29, 2013, we repaid $5.6 million of the term loan and we repaid $96.3 million of the revolving loan.
Loans under the credit facility bear interest at variable rates which reset every 30 to 180 days depending on the rate and period selected by PTC. As of June 29, 2013, the annual rate on both the term loan and the revolving loan was 1.6875%, which will reset on August 15, 2013 and September 13, 2013. Interest rates on borrowings outstanding under the credit facility range from 1.25% to 1.625% above an adjusted London interbank offered interest rate (LIBOR) for Eurodollar-based borrowings or would range from 0.25% to 0.625% above the defined base rate (the greater of the Prime Rate, the Federal Funds Effective Rate plus 0.005%, or an adjusted LIBO rate plus 1%) for base rate borrowings, in each case based upon PTC’s leverage ratio. Additionally, PTC may borrow certain foreign currencies at rates set in the same range above the respective LIBOR for those currencies, based on PTC’s leverage ratio. A quarterly commitment fee on the undrawn portion of the credit facility is required, ranging from 0.20% to 0.30% per annum, based upon PTC’s leverage ratio.
The credit facility limits PTC’s and its subsidiaries’ ability to, among other things: incur additional indebtedness; incur liens or guarantee obligations; pay dividends (other than to PTC) and make other distributions; make investments and enter into joint ventures; dispose of assets; and engage in transactions with affiliates, except on an arms-length basis. Under the credit facility, PTC and its material domestic subsidiaries may not invest cash or property in, or loan to, PTC’s foreign subsidiaries in aggregate amounts exceeding $50 million for any purpose and an additional $75 million for acquisitions of businesses. In addition, under the credit facility, PTC and its subsidiaries must maintain the following financial ratios:
| |
• | a leverage ratio, defined as consolidated funded indebtedness to consolidated trailing four quarters EBITDA, of no greater than 2.50 to 1.00 at any time; and |
| |
• | a fixed charge coverage ratio, defined as the ratio of consolidated trailing four quarters EBITDA less consolidated capital expenditures to consolidated fixed charges, of no less than 3.50 to 1.00 at any time. |
As of June 29, 2013, our leverage ratio was 0.99 to 1.00 and our fixed charge coverage ratio was 19.62 to 1.00. We were in compliance with all financial and operating covenants of the credit facility as of June 29, 2013.
Any failure to comply with the financial or operating covenants of the credit facility would prevent PTC from being able to borrow additional funds, and would constitute a default, permitting the lenders to, among other things, accelerate the amounts outstanding, including all accrued interest and unpaid fees, under the credit facility and to terminate the credit facility. A change in control of PTC, as defined in the agreement, also constitutes an event of default, permitting the lenders to accelerate the indebtedness and terminate the credit facility.
13. Commitments and Contingencies
Legal and Regulatory Matters
China Investigation
We have been cooperating to provide information to the U.S. Securities and Exchange Commission and the Department of Justice concerning payments and expenses by certain of our business partners in China and/or by employees of our Chinese subsidiary that raise questions concerning compliance with laws, including the U.S. Foreign Corrupt Practices Act. We recently began discussions with the SEC and Department of Justice regarding possible resolution of this matter. Resolution of this matter could include fines and penalties; however we are unable to determine when this matter may be resolved or to estimate an amount that could be associated with any resolution and, accordingly, we have not recorded a liability for this matter. If we are required to record a liability for this matter, this could materially impact our results for the period in which the liability is recorded.
We terminated certain employees and business partners in China in connection with this matter, which may have an adverse impact on our level of sales in China until replacements for those employees and business partners are in place and productive. Revenue from China has historically represented 6% to 7% of our total revenue. Further, any settlement or other resolution of this matter could have collateral effects on our business in China, the United States and elsewhere.
Other Legal Proceedings
We are subject to various legal proceedings and claims that arise in the ordinary course of business. We do not believe that resolving the legal proceedings and claims that we are currently subject to will have a material adverse impact on our financial condition, results of operations or cash flows. However, the results of legal proceedings cannot be predicted with certainty. Should any of these legal proceedings and claims be resolved against us, the operating results for a particular reporting period could be adversely affected.
Accruals
With respect to legal proceedings and claims, we record an accrual for a contingency when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. For legal proceedings and claims for which the likelihood that a liability has been incurred is more than remote but less than probable, we estimate the range of possible outcomes. As of June 29, 2013, we had a legal proceedings and claims accrual of $0.5 million.
Guarantees and Indemnification Obligations
We enter into standard indemnification agreements in the ordinary course of our business. Pursuant to such agreements with our business partners or customers, we indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to our products, as well as claims relating to property damage or personal injury resulting from the performance of services by us or our subcontractors. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. Historically, our costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and we accordingly believe the estimated fair value of liabilities under these agreements is immaterial.
We warrant that our software products will perform in all material respects in accordance with our standard published specifications in effect at the time of delivery of the licensed products for a specified period of time. Additionally, we generally warrant that our consulting services will be performed consistent with generally accepted industry standards. In most cases, liability for these warranties is capped. If necessary, we would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history; however, we have not incurred significant cost under our product or services warranties. As a result, we believe the estimated fair value of these liabilities is immaterial.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward-Looking Statements
Statements in this Quarterly Report on Form 10-Q about our future financial and growth expectations, the development of our products and markets and adoption of our solutions and future purchases by customers are forward-looking statements that are subject to the inherent uncertainties in predicting future results and conditions. Risks and uncertainties that could cause actual results to differ materially from projected results include the following: the macroeconomic climate may not improve or may deteriorate; our customers may not purchase our solutions when or in the amounts we expect; we may not achieve the license, service or support growth rates or revenue we expect, which could result in a different mix of revenue between license, service and support and could adversely affect our profitability; foreign currency exchange rates may vary from our expectations and thereby affect our reported revenue and expense; we may be unable to achieve planned services margins and operating margin improvements; our restructurings and cost containment measures may not generate the operating margin improvements we expect and could adversely affect our revenue; we may be unable to achieve our profitability targets with lower license revenue or without additional restructuring or cost containment measures; we may be unable to attain or maintain a technology leadership position and any such leadership position may not generate the revenue we expect; our ability to successfully differentiate our products and services from those of our competitors and otherwise compete could be adversely affected by the relatively larger size and greater resources of several of the companies with which we compete; remedial actions related to our investigation in China could have a material impact on our operations in China, fines or penalties may be imposed by government agencies in connection with resolving that matter, and any such resolution may have collateral effects on our business in China, the U.S. or elsewhere; we may have insufficient cash resources to make planned repayments under our credit facility or to repurchase shares of our common stock as or when planned, as well as other risks and uncertainties described below throughout or referenced in Part II, Item 1A. Risk Factors of this report.
Business Overview
PTC develops software solutions and delivers related services that help companies design products, manage product information and improve their product development and services processes. Our software solutions help customers increase innovation, improve product quality, decrease time to market, reduce product development costs, and optimize their supply chains and the delivery of after-market services.
We generate revenue through the sale of:
| |
• | support (previously referred to as maintenance), which includes technical support and software updates, and |
| |
• | consulting and training services, which include implementation services for our software. |
We offer solutions in the following markets:
| |
• | the CAD market (computer-aided design, manufacturing and engineering (CAD, CAM and CAE) solutions), |
| |
• | the product lifecycle management (PLM) market (product data management, collaboration and related solutions), |
| |
• | the application lifecycle management (ALM) market (coordination and management of all aspects of global software development), |
| |
• | the supply chain management (SCM) market (management and optimization of the supply chain), and |
| |
• | the service lifecycle management (SLM) market (delivery and capture of product intelligence at the point of service). |
We acquired Servigistics, Inc. in October 2012 to expand our offerings in the SLM market. Servigistics developed and sold an innovative suite of SLM solutions that complements our existing SLM solutions to provide our customers with a broad technology solution to transform their service strategies and operations.
The markets we serve present different growth opportunities for us. We believe the markets for PLM, ALM, SCM and SLM solutions present the greatest opportunities for revenue growth and that revenue from these markets will constitute an increasingly greater proportion of our revenue over time. We believe that the market for our CAD solutions among small- and medium-size businesses also provides an opportunity for growth. Conversely, the market for our CAD solutions among large businesses is highly penetrated and presents a lower growth opportunity for us.
Executive Overview
In our third quarter, we continued to deliver on our margin expansion strategy with reported earnings at the high end of our expected range, while revenue was at the low end of our expected range. Earnings per share was up 50% from $0.19 in the year-ago period to $0.29 in the third quarter and non-GAAP earnings per share was up 22% from $0.37 in the year ago period to $0.45 in the third quarter. Our revenue has been unfavorably impacted by the slowdown in the global manufacturing industry, particularly in Europe and China, and unfavorable currency movements, particularly the Japanese Yen.
For the third quarter of 2013, our total revenue was $315 million ($316 million on a non-GAAP basis), up 1% year over year and up 4% on a constant currency basis (at third quarter of 2012 foreign currency exchange rates). On an organic basis, excluding revenue from our Servigistics business, total revenue was down 6% year over year (down 4% on a constant currency basis). Servigistics revenue was $22 million in the quarter ($23 million on a non-GAAP basis). Total license revenue for the quarter was $80 million, a decrease of 5% year over year (down 1% on a constant currency basis). On an organic basis, total license revenue was down 10% year over year (down 7% on a constant currency basis). From a geographic perspective, total license revenue results reflect solid growth in the Americas and Japan (which was positively impacted by a large transaction, partially offset by unfavorable currency movements) offset by declines in Europe and the Pacific Rim. Our service revenue was down year over year and sequentially, on both a reported and organic basis, due to lower license sales in recent periods driving less overall demand for services and, in part, due to expansion of our service partner program. Results for the quarter reflect macroeconomic conditions and the continued effects of softness in the global manufacturing industry, which have impacted customer purchasing decisions, causing customers to reduce the size of their purchases and/or to delay purchase decisions. This particularly impacted third quarter license revenue in Europe and the Pacific Rim.
Our operating margin in the third quarter of 2013 increased to 14% from 10% in the year-ago period (to 22% from 19% on a non-GAAP basis) due primarily to cost containment measures, including our restructuring actions in 2012 and 2013 to date, and higher service margins.
We ended the third quarter of 2013 with $257 million of cash, up from $241 million at the end of the second quarter of 2013, reflecting, in part, $85 million of cash generated from operations, $40 million used to repay a portion of the balance outstanding under our credit facility and $20 million used for stock repurchases. As of June 29, 2013, we had $176 million available under the revolving loan portion of our credit facility.
Non-GAAP measures are reconciled to GAAP results under Results of Operations - Income and Margins; Earnings per Share below.
Future Expectations, Strategies and Risks
The slowdown in the global manufacturing industry, uncertainty about the near-term economic environment and unfavorable foreign currency exchange rates remain headwinds for revenue growth in fiscal 2013. As a result, we have reduced our revenue outlook for 2013 but are maintaining our earnings targets as we expect to continue to focus on cost containment, including cost savings from restructuring actions as well as continued improvements in our service margins. For 2013, our goal is to achieve year-over-year revenue growth of 2% to 3%, including revenue from Servigistics of approximately $90 million. This revenue goal includes support revenue growth of approximately 7%, a decrease in license revenue of 1% to 4%, and a decrease in service revenue of approximately 1%. Our 2013 earnings goals are to achieve non-GAAP operating margin expansion of 200 basis points, from 19.6% in 2012 to approximately 21.5% in 2013 (expansion of GAAP operating margins from 10.2% in 2012 to approximately 11% in 2013) and non-GAAP earnings per share of $1.72 to $1.77 (GAAP earnings per share of $1.04 - $1.09). These goals reflect higher support revenue, lower service revenue and lower license revenue than our fiscal 2013 plan announced in connection with our second quarter 2013 earnings release, which included a revenue growth goal of 4% to 5%. If economic conditions do not improve or deteriorate further, or if foreign currency exchange rates relative to the U.S. dollar differ significantly from our current assumed rates, our results could differ materially from our targets. Our targets assume rates of $1.30 USD to one Euro and 100 Yen to one USD.
Also, our results have been impacted, and we expect will continue to be impacted, by our ability to close large transactions. The amount of revenue, particularly license revenue, attributable to large transactions, and the number of such transactions, may vary significantly from quarter to quarter based on customer purchasing decisions and macroeconomic conditions. Our growth rates have become increasingly dependent on adoption of our solutions by large direct customers. Such transactions tend to be larger in size and may have long lead times as they often follow a lengthy product selection and evaluation process. This may cause volatility in our results.
Impact of an Investigation in China
We have been cooperating to provide information to the U.S. Securities and Exchange Commission and the Department of Justice concerning payments and expenses by certain of our business partners in China and/or by employees of our Chinese subsidiary that raise questions concerning compliance with laws, including the U.S. Foreign Corrupt Practices Act. We recently began discussions with the SEC and Department of Justice regarding possible resolution of this matter. Resolution of this matter could include fines and penalties; however we are unable to determine when this matter may be resolved or to estimate an amount that could be associated with any resolution and, accordingly, we have not recorded a liability for this matter. If we are required to record a liability for this matter, this could materially impact our results for the period in which the liability is recorded.
We terminated certain employees and business partners in China in connection with this matter, which may have an adverse impact on our level of sales in China until replacements for those employees and business partners are in place and productive. Revenue from China has historically represented 6% to 7% of our total revenue. Further, any settlement or other resolution of this matter could have collateral effects on our business in China, the United States and elsewhere.
Revenue, Operating Margin, Earnings per Share and Cash Flow from Operations
The following table shows the financial measures that we consider the most significant indicators of the performance of our business. In addition to providing operating income, operating margin, and diluted earnings per share as calculated under generally accepted accounting principles (“GAAP”), we also show non-GAAP operating income, operating margin, and diluted earnings per share for the reported periods. We discuss the non-GAAP measures in detail, including items excluded from the measures, and provide a reconciliation to the comparable GAAP measures under Results of Operations - Income and Margins;
Earnings per Share below. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Three months ended |
| Percent Change 2012 to 2013 | | Nine months ended | | Percent Change 2012 to 2013 |
| June 29, 2013 | | June 30, 2012 |
| Actual | | Constant Currency | | June 29, 2013 | | June 30, 2012 | | Actual | | Constant Currency |
| (dollar amounts in millions, except per share data) |
License revenue | $ | 79.9 |
| | $ | 83.8 |
|
| (5 | )% | | (1 | )% | | $ | 238.8 |
| | $ | 247.7 |
| | (4 | )% | | (1 | )% |
Service revenue | 72.5 |
| | 74.8 |
|
| (3 | )% | | (2 | )% | | 222.4 |
| | 226.2 |
| | (2 | )% | | — | % |
Support revenue | 162.6 |
| | 152.4 |
|
| 7 | % | | 9 | % | | 487.5 |
| | 456.5 |
| | 7 | % | | 9 | % |
Total revenue | 315.0 |
| | 311.0 |
|
| 1 | % | | 4 | % | | 948.7 |
| | 930.4 |
| | 2 | % | | 4 | % |
Cost of license | 8.4 |
| | 7.6 |
| | 10 | % | | | | 24.7 |
| | 23.1 |
| | 7 | % | | |
Cost of service | 62.9 |
| | 65.7 |
| | (4 | )% | | | | 196.1 |
| | 203.5 |
| | (4 | )% | | |
Cost of support | 19.8 |
| | 19.5 |
| | 1 | % | | | | 60.7 |
| | 57.7 |
| | 5 | % | | |
Total cost of revenue | 91.2 |
| | 92.9 |
| | (2 | )% | | | | 281.5 |
| | 284.3 |
| | (1 | )% | | |
Gross margin | 223.8 |
| | 218.1 |
| | 3 | % | | | | 667.2 |
| | 646.1 |
| | 3 | % | | |
Operating expenses | 180.6 |
| | 187.0 |
| | (3 | )% | | | | 588.9 |
| | 575.6 |
| | 2 | % | | |
Total costs and expenses (1) | 271.8 |
| | 279.9 |
|
| (3 | )% | | (2 | )% | | 870.4 |
| | 859.9 |
| | 1 | % | | 2 | % |
Operating income (1) | $ | 43.2 |
| | $ | 31.1 |
|
| 39 | % | | 53 | % | | $ | 78.3 |
| | $ | 70.5 |
| | 11 | % | | 22 | % |
Non-GAAP operating income (1) | $ | 70.1 |
| | $ | 57.8 |
|
| 21 | % | | 29 | % | | $ | 191.6 |
| | $ | 167.2 |
| | 15 | % | | 20 | % |
Operating margin (1) | 13.7 | % | | 10.0 | % |
|
| |
| | 8.3 | % | | 7.6 | % | | | | |
Non-GAAP operating margin (1) | 22.2 | % | | 18.6 | % |
|
| |
| | 20.1 | % | | 17.9 | % | | | | |
Diluted earnings per share (2) | $ | 0.29 |
| | $ | 0.19 |
|
|
| |
| | $ | 0.72 |
| | $ | 0.40 |
| | | | |
Non-GAAP diluted earnings per share (2) | $ | 0.45 |
| | $ | 0.37 |
|
|
| |
| | $ | 1.22 |
| | $ | 1.01 |
| | | | |
Cash flow from operations | $ | 84.6 |
| | $ | 64.0 |
|
|
| |
| | $ | 181.0 |
| | $ | 197.0 |
| | | | |
|
| |
|
|
| |
| | | | | | | | |
(1) Costs and expenses in the third quarter and first nine months of 2013 included restructuring charges of $3.1 million and $34.3 million, respectively, compared to $4.1 million and $24.9 million in the third quarter and first nine months of 2012, respectively. Additionally, the third quarter and first nine months of 2013 included $0.9 million and $7.6 million, respectively, of acquisition-related costs, compared to $0.0 million and $2.5 million in the third quarter and first nine months of 2012, respectively. These restructuring and acquisition-related costs have been excluded from non-GAAP operating income. |
(2) Other income (expense) net includes a legal settlement gain of $5.1 million recorded in the third quarter of 2013 and foreign currency transaction losses of $0.8 million related to legal entity mergers completed during the first quarter of 2012, which were both excluded from non-GAAP diluted earnings per share. Income taxes for non-GAAP diluted earnings per share reflect the tax effects of non-GAAP adjustments for the three and nine months ended June 29, 2013 and June 30, 2012, which are calculated by applying the applicable tax rate by jurisdiction to the non-GAAP adjustments described in Income and Margins; Earnings per Share, as well as identified tax items. In the fourth quarter of 2012, a valuation allowance was established against our U.S. net deferred tax assets. As the U.S. is profitable on a non-GAAP basis, the 2013 non-GAAP tax provision is being calculated assuming there is no U.S. valuation allowance and, as a result, an income tax benefit of $7.6 million and $17.9 million is included for the three and nine months ended June 29, 2013, respectively. The nine months ended June 29, 2013 non-GAAP tax provision excludes tax benefits of $3.2 million relating to final resolution of a long standing tax litigation and completion of an international jurisdiction tax audit recorded in the second quarter and a one-time non-cash tax benefit of $32.6 million related to the release of a portion of the valuation allowance as a result of deferred tax liabilities established in accounting for the acquisition of Servigistics recorded in the first quarter. The three and nine months ended June 30, 2012 non-GAAP tax provision exclude a one-time non-cash charge, net, of $3.3 million primarily related to acquired legal entity integration activities recorded in the third quarter. In addition, the nine months ended June 30, 2012 excludes a one-time non-cash tax charge of $1.4 million related to the impact from a reduction in the statutory tax rate in Japan on deferred tax assets from a litigation settlement recorded in the first quarter.
|
Results of Operations
Acquisitions
We acquired Servigistics on October 2, 2012. The results of operations of Servigistics have been included in our consolidated financial statements beginning on the acquisition date. Servigistics added $22.5 million and $68.0 million to our revenue in the third quarter and first nine months of 2013, respectively ($23.0 million and $70.8 million, respectively, on a non-GAAP basis).
Impact of Foreign Currency Exchange on Results of Operations
Approximately two-thirds of our revenue and half 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 and Yen, relative to the U.S. Dollar, affects our reported results. If actual reported results for the third quarter and first nine months of 2013 had been converted into U.S. Dollars based on the foreign currency exchange rates in effect for the third quarter and first nine months of 2012, revenue would have been higher by $7.7 million and $17.2 million, respectively, costs and expenses would have been higher by $3.4 million and $9.2 million, respectively, and operating income would have been higher by $4.3 million and $8.0 million, respectively. Our constant currency disclosures are calculated by multiplying the actual results for the third quarter and first nine months months of 2013 by the exchange rates in effect for the comparable periods in 2012.
Revenue
The following tables provide license, service and support revenue for each of our solution areas: CAD, Extended PLM,
and SLM.
CAD revenue includes: PTC Creo®, including PTC Creo ParametricTM and PTC Creo Elements/Direct®, and PTC Mathcad®.
Extended PLM revenue includes our PLM solutions (primarily PTC Windchill® and PTC Creo ViewTM ), our ALM solutions (primarily PTC Integrity™) and our SCM Solutions (primarily PTC Windchill FlexPLM®).
SLM revenue includes PTC Arbortext® and PTC Servigistics® products.
Results include combined revenue from direct sales and our channel.
Revenue by Solution |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| | | | | Percent Change | | | | | | Percent Change |
| June 29, 2013 | | June 30, 2012 | | Actual | | Constant Currency | | June 29, 2013 | | June 30, 2012 | | Actual | | Constant Currency |
| (Dollar amounts in millions) |
CAD | | | | | | | | | | | | | | | |
License | $ | 35.7 |
| | $ | 40.2 |
| | (11 | )% | | (8 | )% | | $ | 102.7 |
| | $ | 116.8 |
| | (12 | )% | | (10 | )% |
Service | 6.5 |
| | 7.6 |
| | (15 | )% | | (11 | )% | | 18.2 |
| | 23.2 |
| | (22 | )% | | (19 | )% |
Support | 93.1 |
| | 95.0 |
| | (2 | )% | | 1 | % | | 282.6 |
| | 288.0 |
| | (2 | )% | | — | % |
Total revenue | $ | 135.2 |
| | $ | 142.8 |
| | (5 | )% | | (2 | )% | | $ | 403.5 |
| | $ | 428.0 |
| | (6 | )% | | (3 | )% |
CAD revenue in the third quarter and first nine months of 2013 was down compared with the year-ago periods, consisting primarily of lower license revenue in Europe, down 36% ($6.2 million) and 34% ($17.4 million), respectively, reflecting lower revenue from large license transactions, and the Pacific Rim, down 15% ($1.9 million) and 4% ($1.4 million), respectively. These decreases were partially offset by license growth in Japan, up 61% ($2.2 million) and 46% ($4.7 million), respectively, and the Americas, up 22% ($1.5 million) and flat, respectively. In both the third quarter and first nine months of 2013, total revenue in Japan declined 9% ($1.8 million and $5.6 million, respectively), compared with the year-ago periods reflecting the unfavorable impact of foreign currency rate changes. On a constant currency basis, revenue in Japan in the third quarter and first nine months of 2013 increased 11% and 4%, respectively, primarily due to comparatively higher large deal activity in the second and third quarters of 2013.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| | | | | Percent Change | | | | | | Percent Change |
| June 29, 2013 | | June 30, 2012 | | Actual | | Constant Currency | | June 29, 2013 | | June 30, 2012 | | Actual | | Constant Currency |
| (Dollar amounts in millions) |
Extended PLM | | | | | | | | | | | | | | | |
License | $ | 36.3 |
| | $ | 36.8 |
| | (1 | )% | | 3 | % | | $ | 105.5 |
| | $ | 116.6 |
| | (10 | )% | | (7 | )% |
Service | 50.2 |
| | 59.0 |
| | (15 | )% | | (14 | )% | | 156.2 |
| | 178.1 |
| | (12 | )% | | (11 | )% |
Support | 54.0 |
| | 50.5 |
| | 7 | % | | 9 | % | | 161.1 |
| | 147.7 |
| | 9 | % | | 10 | % |
Total revenue | $ | 140.5 |
| | $ | 146.3 |
| | (4 | )% | | (2 | )% | | $ | 422.8 |
| | $ | 442.4 |
| | (4 | )% | | (3 | )% |
Extended PLM revenue was down in the third quarter and first nine months of 2013 compared with the year-ago periods, reflecting continued weakness in Europe and declines in the Pacific Rim, offset by improved results in the Americas and Japan. License revenue in both the third quarter and first nine months of 2013 declined 24% ($2.8 million and $9.5 million, respectively) in Europe, and 47% ($4.4 million) and 15% ($3.3 million), respectively, in the Pacific Rim. License revenue in the third quarter and first nine months of 2013 in the Americas increased 54% ($5.3 million) and 4% ($1.8 million), respectively, and in Japan license revenue increased 25% ($1.4 million) in the third quarter and declined 1% ($0.2 million) year to date. Results reflect continued softness in Extended PLM license and service revenue in Europe reflecting lower revenue from large license transactions in the first nine months of 2013 relative to the year-ago period, which we attribute to macroeconomic conditions. We remain confident in our competitive positioning in Extended PLM and in our long- term growth prospects.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| | | | | Percent Change | | | | | | Percent Change |
| June 29, 2013 | | June 30, 2012 | | Actual | | Constant Currency | | June 29, 2013 | | June 30, 2012 | | Actual | | Constant Currency |
| (Dollar amounts in millions) |
SLM | | | | | | | | | | | | | | | |
License | $ | 7.9 |
| | $ | 6.8 |
| | 16 | % | | 17 | % | | $ | 30.6 |
| | $ | 14.3 |
| | 114 | % | | 117 | % |
Service | 15.9 |
| | 8.2 |
| | 93 | % | | 95 | % | | 48.0 |
| | 24.9 |
| | 93 | % | | 94 | % |
Support | 15.5 |
| | 6.9 |
| | 124 | % | | 127 | % | | 43.8 |
| | 20.8 |
| | 110 | % | | 112 | % |
Total revenue | $ | 39.2 |
| | $ | 21.9 |
| | 79 | % | | 81 | % | | $ | 122.4 |
| | $ | 60.0 |
| | 104 | % | | 106 | % |
SLM license revenue in the third quarter and first nine months of 2013 reflects a decline in organic license revenue of 51% ($3.5 million) and 18% ($2.6 million), respectively, and license revenue from Servigistics, which in the third quarter and first nine months of 2013 was $4.5 million and $18.9 million, respectively. Year over year, license revenue in the Americas grew in the third quarter, following a weak second quarter, while license revenue in Europe and the Pacific Rim declined in the third quarter, which we attribute to macroeconomic conditions in those regions. For the first nine months of 2013, license revenue increased in all geographic regions. In the third quarter and first nine months of 2013, Servigistics also contributed $9.8 million and $26.9 million, respectively, in service revenue and $8.2 million and $22.2 million, respectively, in support revenue.
Revenue by Line of Business
|
| | | | | | | | | | | |
| Three months ended | | Nine months ended |
Revenue as a Percentage of Total Revenue | June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 |
License | 25 | % | | 27 | % | | 25 | % | | 27 | % |
Service | 23 | % | | 24 | % | | 23 | % | | 24 | % |
Support | 52 | % | | 49 | % | | 52 | % | | 49 | % |
| 100 | % | | 100 | % | | 100 | % | | 100 | % |
License Revenue
The decrease in license revenue in the third quarter of 2013 reflects year-over-year declines in Europe and the Pacific Rim of 31% and 30%, respectively, offset by increases of 44% in the Americas and and 41% in Japan (up 76% on a constant currency basis). The decline in license revenue in the first nine months of 2013 reflects year-over-year declines of 24% in Europe, primarily due to lower license revenue from large deals, and 7% (8% on a constant currency basis) in the Pacific Rim. We attribute the results in Europe and the Pacific Rim, particularly China, to unfavorable macroeconomic conditions in those regions. The year-to-date decreases in Europe and the Pacific Rim were partially offset by growth in Japan of 33% (58% on a constant currency basis) and an increase in the Americas of 13%.
Organic license revenue in the third quarter of 2013 was down 10% year over year (down 7% on a constant currency basis) and in the first nine months of 2013 was down 11% (down 9% on a constant currency basis). Servigistics license revenue was $4.5 million and $18.9 million in the third quarter and first nine months of 2013, respectively.
The amount of license revenue attributable to large transactions, and the number of such transactions, may vary significantly from quarter to quarter and by geographic region. We had one transaction with license revenue in excess of $5 million in both the third quarter of 2013 (in Japan) and the third quarter of 2012 (in Europe) and three of such transactions in both the first nine months of 2013 (two in Japan and one in the Americas) and the first nine months of 2012 (two in Europe and one in the Americas).
Foreign currency exchange rate movements impacted license revenue unfavorably by $3.1 million and $5.9 million in the third quarter and first nine months of 2013, respectively, compared to the third quarter and first nine months of 2012.
Service Revenue
Consulting and training services engagements typically result from sales of new licenses, particularly of our Extended PLM and SLM solutions. Year over year, service revenue for the third quarter and first nine months of 2013 was down overall and on an organic basis. Organic service revenue was down 16% (15% on a constant currency basis) and 14% (down 13% on a constant currency basis) for the third quarter and first nine months of 2013, respectively. Servigistics service revenue was $9.8 million and $26.9 million in the third quarter and first nine months of 2013, respectively. Year over year, our organic consulting service revenue, which primarily supports PTC Windchill implementations, was down 18% and 15% in the third quarter and first nine months of 2013, respectively. Year over year, our organic training business, which typically represents about 15% of our total service revenue, was down 3% in the third quarter of 2013 and flat in the first nine months of 2013. We attribute the declines in total service revenue and consulting service revenue to lower license revenue in recent quarters and to success we are having in expanding our service partner program. Our service partner program, under which service engagements are referred to third party service providers, is part of our overall margin expansion strategy. As our service partners increase their delivery capabilities and perform additional service engagements, we expect service revenue to decline as a percentage of total revenue, which we expect will contribute to overall operating margin improvements as service revenue has lower margins than license and support revenue.
Foreign currency exchange rate movements impacted consulting and training service revenue unfavorably by $1.0 million and $2.7 million in the third quarter and first nine months of 2013, respectively, compared to the third quarter and first nine months of 2012.
Support Revenue
Support revenue is comprised of contracts to maintain new and/or previously purchased software. We saw steady growth in support revenue in 2012 and in 2013. CAD and Extended PLM support seats increased 3% and 22%, respectively, as of the end of the third quarter of 2013 compared to the end of the third quarter of 2012. Organic support revenue increased 1% and 2% in the third quarter and first nine months of 2013, respectively (both periods were up 4% on a constant currency basis) compared to the third quarter and first nine months of 2012. Servigistics support revenue was $8.2 million and $22.2 million in the third quarter and first nine months of 2013, respectively.
Foreign currency exchange rate movements impacted support revenue unfavorably by $3.6 million and $8.5 million in the third quarter and first nine months of 2013, respectively, compared to the third quarter and first nine months of 2012.
Revenue from Individual Customers
We enter into customer contracts that may result in revenue being recognized over multiple reporting periods. Accordingly, revenue recognized in a current period may be attributable to contracts entered into during the current period or in prior periods. The table below shows license and/or service revenue of $1 million or more recognized from individual customers in a single quarter during the fiscal year from contracts entered into during that quarter and/or a prior quarter. The
amount of revenue, particularly license revenue, attributable to such customers, and the number of such customers, may vary significantly from quarter to quarter based on customer purchasing decisions, the completion of large service engagements commenced in previous quarters and macroeconomic conditions.
For the third quarters of 2013 and 2012 there were 33 (14 in the Americas, 12 in Europe and 7 in Asia) and 34 (11 in the Americas, 11 in Europe and 12 in Asia) of these customers, respectively, with average revenue per customer of $2.1 million and $2.2 million, respectively.
Revenue from large customers in the third quarter of 2013 decreased 9% compared to the third quarter of 2012 and decreased 6% in the first nine months of 2013 compared to the first nine months of 2012. License revenue as a proportion of revenue from such customers was 47% and 44% in the third quarters of 2013 and 2012, respectively, and was 45% and 42% in the first nine months of 2013 and 2012, respectively.
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 |
| (Dollar amounts in millions) |
License and/or service revenue greater than $1 million from individual customers in a quarter | $ | 68.3 |
| | $ | 74.7 |
| | $ | 188.0 |
| | $ | 199.9 |
|
% of total license and service revenue | 45 | % | | 47 | % | | 41 | % | | 42 | % |
Revenue by Geographic Region
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Percent Change | | Nine months ended | | Percent Change |
| June 29, 2013 | | June 30, 2012 | | Actual | | Constant Currency | | June 29, 2013 | | June 30, 2012 | | Actual | | Constant Currency |
| (Dollar amounts in millions) |
Americas | $ | 129.5 |
| | $ | 112.7 |
| | 15 | % | | 15 | % | | $ | 380.3 |
| | $ | 339.7 |
| | 12 | % | | 12 | % |
Europe | $ | 115.4 |
| | $ | 120.2 |
| | (4 | )% | | (4 | )% | | $ | 353.9 |
| | $ | 369.2 |
| | (4 | )% | | (3 | )% |
Pacific Rim | $ | 36.3 |
| | $ | 43.6 |
| | (17 | )% | | (17 | )% | | $ | 114.2 |
| | $ | 118.2 |
| | (3 | )% | | (4 | )% |
Japan | $ | 33.8 |
| | $ | 34.5 |
| | (2 | )% | | 20 | % | | $ | 100.3 |
| | $ | 103.4 |
| | (3 | )% | | 11 | % |
|
| | | | | | | | | | | |
| Three months ended | | Nine months ended |
| June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 |
Revenue by region as a % of total revenue: | | | | | | | |
Americas | 41 | % | | 36 | % | | 40 | % | | 37 | % |
Europe | 37 | % | | 39 | % | | 37 | % | | 40 | % |
Pacific Rim | 12 | % | | 14 | % | | 12 | % | | 13 | % |
Japan | 11 | % | | 11 | % | | 11 | % | | 11 | % |
Americas
The increase in revenue in the Americas in the third quarter of 2013 compared to the third quarter of 2012 consisted of an increase of 44% ($8.9 million) in license revenue, an increase of 14% ($8.5 million) in support revenue, and a decrease of 2% ($0.6 million) in service revenue. Revenue in the first nine months of 2013 compared to the first nine months of 2012 consisted of an increase of 13% ($9.6 million) in license revenue, an increase of 13% ($23.7 million) in support revenue and an increase of 8% ($7.3 million) in service revenue. In the third quarter of 2013 and first nine months of 2013, organic license revenue was up 22% and down 1%, respectively, and total organic revenue was down 1% and 2%, respectively. In the third quarter and first nine months of 2013, total revenue from Servigistics in the Americas was $17.8 million and $48.4 million, respectively. While the macroeconomic environment remains soft in the Americas, we are optimistic about the long-term outlook for this region.
Europe
Revenue in Europe in the third quarter of 2013 compared to the third quarter of 2012 consisted of a decrease in license revenue of 31% ($9.6 million), partially offset by an increase in support revenue of 5% ($3.4 million) and an increase in service
revenue of 5% ($1.4 million). Revenue in the first nine months of 2013 compared to the the first nine months of 2012 consisted of a decrease in license revenue of 24% ($22.7 million) and a decrease in service revenue of 1% ($1.1 million), partially offset by an increase in support revenue of 5% ($8.5 million). In the third quarter and first nine months of 2013, total revenue in Europe from Servigistics was $2.7 million and $11.0 million, respectively. In the third quarter and first nine months of 2013, organic license revenue was down 31% and 29%, respectively, and total organic revenue was down 6% and 7%, respectively. We were expecting a decline in Europe on a year-over-year basis given strong comparative results in the first quarter of 2012; however, results were further impacted by the macroeconomic environment in Europe. Although the macroeconomic environment in Europe remains uncertain and revenue has been declining in this region, our revenue targets for the fourth quarter and fiscal 2013 reflect expected growth in the region in the fourth quarter of fiscal 2013.
Changes in foreign currency exchange rates, particularly the Euro, unfavorably impacted revenue in Europe by $0.2 million and $3.3 million in the third quarter and first nine months of 2013, respectively, as compared to the third quarter and first nine months of 2012.
Pacific Rim
The decrease in revenue in the Pacific Rim in the third quarter of 2013 compared to the third quarter of 2012 consisted primarily of a decrease of 30% ($7.1 million) in license revenue and a decrease of 19% ($1.7 million) in service revenue, partially offset by an increase of 13% ($1.4 million) in support revenue. The decrease in revenue in the Pacific Rim in the first nine months of 2013 compared to the first nine months of 2012 consisted of a decrease of 7% ($4.0 million) in license revenue and a decrease of 13% ($3.6 million) in service revenue, partially offset by an increase of 11% ($3.6 million) in support revenue. In the third quarter and first nine months of 2013, total revenue from Servigistics in the Pacific Rim was $0.2 million and $1.2 million, respectively.
Revenue from China has historically represented 6% to 7% of our total revenue. In the third quarter and first nine months of 2013, as compared to the third quarter and first nine months of 2012, revenue in China decreased 16% and 6%, respectively, and represented 5% of consolidated revenue in both periods.
Changes in foreign currency exchange rates impacted revenue in the Pacific Rim favorably by $0.3 million and $0.8 million in the third quarter and first nine months of 2013 as compared to the third quarter and first nine months of 2012.
Japan
Revenue in Japan in the third quarter and first nine months of 2013 was driven by revenue from large transactions offset by unfavorable currency movements. The decrease in revenue in Japan in the third quarter of 2013 compared to the third quarter of 2012 included an increase of 41% ($3.9 million), 76% on a constant currency basis, in license revenue, partially offset by a decrease of 24% ($1.3 million), 4% on a constant currency basis, in service revenue and a decrease of 16% ($3.2 million), an increase of 1% on a constant currency basis, in support revenue. The decrease in revenue in Japan in the first nine months of 2013 compared to the first nine months of 2012 included an increase of 33% ($8.1 million), 58% on a constant currency basis, in license revenue, offset by a decrease of 35% ($6.4 million), 25% on a constant currency basis, in service revenue, and a decrease of 8% ($4.8 million), an increase of 3% on a constant currency basis, in support revenue. In the third quarter and first nine months of 2013, total revenue in Japan from Servigistics was $1.8 million and $7.5 million, respectively. In the third quarter and first nine months of 2013, organic license revenue was up 39% and 20%, (up 74% and 43% on a constant currency basis) respectively, and total organic revenue was down 7% and 10% (up 14% and 3% on a constant currency basis), respectively.
Changes in the Yen to U.S. Dollar exchange rate unfavorably impacted revenue in Japan by $7.8 million and $14.6 million in the third quarter and first nine months of 2013, respectively, compared to the third quarter and first nine months of 2012.
Gross Margin
|
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| June 29, 2013 | | June 30, 2012 | | Percent Change | | June 29, 2013 | | June 30, 2012 | | Percent Change |
| (Dollar amounts in millions) |
Gross margin | $ | 223.8 |
| | $ | 218.1 |
| | 3 | % | | $ | 667.2 |
| | $ | 646.1 |
| | 3 | % |
Non-GAAP gross margin | 231.1 |
| | 224.3 |
| | 3 | % | | 690.6 |
| | 667.3 |
| | 3 | % |
Gross margin as a % of revenue: | | | | |