Edgar Filing: PTC INC.

Document

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 December 29, 2018

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)

121 Seaport Boulevard, Boston, MA 02210

(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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act:



Large accelerated filer	þ	Accelerated filer	¨	Non-accelerated filer	¨	Smaller reporting company	¨
				(Do not check if a smaller reporting company)
						Emerging growth company	¨

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

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

There were 118,627,720 shares of our common stock outstanding on February 5, 2019.

PTC Inc.

INDEX TO FORM 10-Q

For the Quarter Ended December 29, 2018



		Page Number
Part I—FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Consolidated Financial Statements:
	Consolidated Balance Sheets as of December 29, 2018 and September 30, 2018	1
	Consolidated Statements of Operations for the three months ended December 29, 2018 and December 30, 2017	2
	Consolidated Statements of Comprehensive Income (Loss) for the three months ended December 29, 2018 and December 30, 2017	3
	Consolidated Statements of Cash Flows for the three months ended December 29, 2018 and December 30, 2017	4
	Consolidated Statements of Stockholders' Equity for the three months ended December 29, 2018 and December 30, 2017	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	54
Item 4.	Controls and Procedures	54


Part II—OTHER INFORMATION
Item 1A.	Risk Factors	55
Item 6.	Exhibits	55
Signature		56

PART I—FINANCIAL INFORMATION


ITEM 1.	UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PTC Inc.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)



	December 29, 2018			September 30, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	276,990		$	259,946
Short-term marketable securities	25,598			25,836
Accounts receivable, net of allowance for doubtful accounts of $564 and $607 at December 29, 2018 and September 30, 2018, respectively	385,670			129,297
Prepaid expenses	63,045			48,997
Other current assets	48,682			169,708
Total current assets	799,985			633,784
Property and equipment, net	107,359			80,613
Goodwill	1,230,901			1,182,457
Acquired intangible assets, net	205,084			200,202
Long-term marketable securities	30,054			30,115
Deferred tax assets	201,149			165,566
Other assets	178,437			36,285
Total assets	$	2,752,969		$	2,329,022
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	57,249		$	53,473
Accrued expenses and other current liabilities	83,721			74,388
Accrued compensation and benefits	74,483			101,784
Accrued income taxes	405			18,044
Deferred revenue	325,111			487,590
Total current liabilities	540,969			735,279
Long-term debt	778,484			643,268
Deferred tax liabilities	36,261			5,589
Deferred revenue	10,197			11,852
Other liabilities	65,889			58,445
Total liabilities	1,431,800			1,454,433
Commitments and contingencies (Note 14)
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued	—			—
Common stock, $0.01 par value; 500,000 shares authorized; 118,657 and 117,981 shares issued and outstanding at December 29, 2018 and September 30, 2018, respectively	1,187			1,180
Additional paid-in capital	1,553,875			1,558,403
Accumulated deficit	(138,785		)	(599,409		)
Accumulated other comprehensive loss	(95,108		)	(85,585		)
Total stockholders’ equity	1,321,169			874,589
Total liabilities and stockholders’ equity	$	2,752,969		$	2,329,022

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
	December 29, 2018			December 30, 2017
Revenue:
License	$	105,322		$	119,518
Support and cloud services	187,921			145,672
Total software revenue	293,243			265,190
Professional services	41,446			41,454
Total revenue	334,689			306,644
Cost of revenue:
Cost of license revenue	12,563			12,114
Cost of support and cloud services revenue	31,197			34,502
Total cost of software revenue	43,760			46,616
Cost of professional services revenue	33,592			36,419
Total cost of revenue	77,352			83,035
Gross margin	257,337			223,609
Operating expenses:
Sales and marketing	104,218			99,375
Research and development	60,782			63,972
General and administrative	37,864			35,020
Amortization of acquired intangible assets	5,936			7,821
Restructuring and other charges, net	18,493			105
Total operating expenses	227,293			206,293
Operating income	30,044			17,316
Interest expense	(10,276		)	(10,047		)
Other income (expense), net	655			(798		)
Income before income taxes	20,423			6,471
Benefit for income taxes	(562		)	(7,406		)
Net income	$	20,985		$	13,877
Earnings per share—Basic	$	0.18		$	0.12
Earnings per share—Diluted	$	0.18		$	0.12
Weighted average shares outstanding—Basic	118,323			115,731
Weighted average shares outstanding—Diluted	119,638			117,656

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

PTC Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)



	Three months ended
	December 29, 2018			December 30, 2017
Net income	$	20,985		$	13,877
Other comprehensive income (loss), net of tax:
Realized and unrealized hedge gain (loss) arising during the period, net of tax of $0 million and $0.1 million in the first quarter of 2019 and 2018, respectively	(2,129		)	(913		)
Net hedge (gain) loss reclassified into earnings, net of tax of $0.1 million in the first quarter of 2019 and $0.1 million in the first quarter of 2018	(549		)	573
Unrealized loss on hedging instruments	(2,678		)	(340		)
Foreign currency translation adjustment, net of tax of $0 for each period	(7,569		)	5,229
Unrealized gain (loss) on marketable securities, net of tax of $0 for each period	13			(179		)
Amortization of net actuarial pension loss included in net income, net of tax of $0.2 million and $0.2 million in the first quarter of 2019 and 2018, respectively	430			371
Change in unamortized pension loss during the period related to changes in foreign currency	281			(263		)
Other comprehensive income (loss)	(9,523		)	4,818
Comprehensive income	$	11,462		$	18,695

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

PTC Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Three months ended
	December 29, 2018			December 30, 2017
Cash flows from operating activities:
Net income	$	20,985		$	13,877
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	20,053			21,046
Stock-based compensation	29,407			18,331
Other non-cash items, net	(5		)	361
Changes in operating assets and liabilities, excluding the effects of acquisitions:
Accounts receivable	24,025			21,603
Accounts payable and accrued expenses	(9,628		)	(12,885		)
Accrued compensation and benefits	(27,504		)	(40,172		)
Deferred revenue	(21,820		)	22,055
Accrued income taxes	(21,668		)	(14,272		)
Other current assets and prepaid expenses	849			(8,575		)
Other noncurrent assets and liabilities	6,520			4,146
Net cash provided by operating activities	21,214			25,515
Cash flows from investing activities:
Additions to property and equipment	(30,332		)	(6,377		)
Purchase of intangible asset	—			(2,500		)
Purchases of short- and long-term marketable securities	(6,736		)	(4,248		)
Proceeds from maturities of short- and long-term marketable securities	7,007			3,740
Acquisitions of businesses, net of cash acquired	(69,556		)	—
Settlement of net investment hedges	(1,595		)	—
Net cash used in investing activities	(101,212		)	(9,385		)
Cash flows from financing activities:
Borrowings under credit facility	155,000			50,000
Repayments of borrowings under credit facility	(20,000		)	(20,000		)
Proceeds (costs) from issuance of common stock	(4,640		)	—
Contingent consideration	(1,575		)	(3,176		)
Payments of withholding taxes in connection with stock-based awards	(33,788		)	(33,488		)
Net cash provided by (used in) financing activities	94,997			(6,664		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	2,041			2,598
Net increase in cash, cash equivalents, and restricted cash	17,040			12,064
Cash, cash equivalents, and restricted cash, beginning of period	261,093			281,209
Cash, cash equivalents, and restricted cash, end of period	$	278,133		$	293,273

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

PTC Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)



	Common Stock					Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Shares		Amount			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
Balance as of September 30, 2018	117,981		$	1,180		$	1,558,403		$	(599,409	)	$	(85,585	)	$	874,589
ASU 2016-16 adoption	—		—			—			72,261			—			72,261
ASC 606 adoption	—		—			—			367,378			—			367,378
Common stock issued for employee stock-based awards	1,056		11			(11		)	—			—			—
Shares surrendered by employees to pay taxes related to stock-based awards	(380	)	(4		)	(33,784		)	—			—			(33,788		)
Common stock issued	—		—			(140		)							(140		)
Compensation expense from stock-based awards	—		—			29,407			—			—			29,407
Net income	—		—			—			20,985			—			20,985
Unrealized loss on cash flow hedges, net of tax	—		—			—			—			(385		)	(385		)
Unrealized loss on net investment hedges, net of tax	—		—			—			—			(2,293		)	(2,293		)
Foreign currency translation adjustment	—		—			—			—			(7,569		)	(7,569		)
Unrealized loss on available-for-sale securities, net of tax	—		—			—			—			13			13
Change in pension benefits, net of tax	—		—			—			—			711			711
Balance as of December 29, 2018	118,657		$	1,187		$	1,553,875		$	(138,785	)	$	(95,108	)	$	1,321,169



	Common Stock					Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Shares		Amount			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
Balance as of September 30, 2017	115,333		$	1,153		$	1,609,030		$	(650,840	)	$	(73,907	)	$	885,436
ASU 2016-09 adoption	—		—			681			(556		)	—			125
Common stock issued for employee stock-based awards	1,317		13			(13		)	—			—			—
Shares surrendered by employees to pay taxes related to stock-based awards	(524	)	(5		)	(33,483		)	—			—			(33,488		)
Compensation expense from stock-based awards	—		—			18,331			—			—			18,331
Net income	—		—			—			13,877			—			13,877
Unrealized loss on cash flow hedges, net of tax	—		—			—			—			(340		)	(340		)
Foreign currency translation adjustment	—		—			—			—			5,229			5,229
Unrealized loss on available-for-sale securities, net of tax	—		—			—			—			(179		)	(179		)
Change in pension benefits, net of tax	—		—			—			—			108			108
Balance as of December 30, 2017	116,126		$	1,161		$	1,594,546		$	(637,519	)	$	(69,089	)	$	889,099

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. 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 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, 2018. 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. The September 30, 2018 Consolidated Balance Sheet included herein is derived from our audited consolidated financial statements.

Unless otherwise indicated, all references to a year mean our fiscal year, which ends on September 30. Our fiscal quarters end on a Saturday following a thirteen-week calendar, and may result in different quarter end dates year to year. The first quarter of 2019 ended on December 29, 2018 and the first quarter of 2018 ended on December 30, 2017. The results of operations for the three months ended December 29, 2018 are not necessarily indicative of the results expected for the remainder of the fiscal year.

Changes in Presentation and Reclassifications

On October 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASC 606). Results for reporting periods beginning on or after October 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the guidance provided by ASC 985-605, Software-Revenue Recognition and revenues for non-software deliverables in accordance with ASC 605-25, Revenue Recognition, Multiple-Element Arrangements (ASC 605). In connection with the adoption, we changed our presentation of the statement of operations to reflect revenue and associated costs as license, support and cloud services, and professional services. For the prior year period, all components of subscription licenses (including support) are included in license revenue. Prior to our adoption of 606, revenues from subscription licenses and support thereon were not separated and were previously included in subscription revenue in our consolidated statement of operations since we did not have VSOE of fair value for support on subscription sales. In addition, revenue and costs associated with our cloud services, which are immaterial and were previously reported in subscription revenue, are classified as support and cloud services for all periods presented.

Effective at the beginning of fiscal 2019, in accordance with the adoption of ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, all non-service net periodic pension costs are now presented in Other income (expense), net on the Consolidated Statement of Operations. The prior period non-service net periodic pension cost amounts have been reclassified for comparability.

Effective at the beginning of fiscal 2019, in accordance with the adoption of ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, restricted cash is now included with cash and cash equivalents in the net cash increase (decrease), beginning of period total amount and end of period total amount on the Consolidated Statements of Cash Flows. The prior period restricted cash amounts have been reclassified for comparability. As of December 29, 2018 and September 30, 2018, $1.1 million of restricted cash was included in other current assets.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Revenue Recognition

On October 1, 2018, we adopted ASC 606, which supersedes substantially all existing revenue recognition guidance under U.S. GAAP. We adopted ASC 606 using the modified retrospective method, under which the cumulative effect of initially applying ASC 606 was recorded as a reduction to accumulated deficit with no restatement of comparative periods.

The core principle of ASC 606 is to recognize revenue when promised goods or services are transferred to a customer in an amount that reflects the consideration that is expected to be received for those goods or services. Under the new guidance, an entity is required to evaluate revenue recognition through a five-step process: (1) identifying a contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations in the contract; and (5) recognizing revenue when (or as) the entity satisfies a performance obligation. The standard also requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In applying the principles of ASC 606, more judgment and estimates are required within the revenue recognition process than is required under previous U.S. GAAP, including identifying performance obligations, estimating the amount of variable consideration to include in the transaction price, and estimating the value of each performance obligation to allocate the total transaction price to each separate performance obligation.

The most significant impact of ASC 606 relates to accounting for our subscription arrangements that include term-based on-premise software licenses bundled with support. Under previous GAAP (through September 30, 2018), revenue attributable to these subscription licenses was recognized ratably over the term of the arrangement because VSOE does not exist for the undelivered support element as it is not sold separately. Under the new standard, the requirement to have VSOE for undelivered elements to enable the separation of revenue for the delivered software licenses is eliminated. Accordingly, under the new standard we recognize as revenue a portion of the subscription fee upon delivery of the software license. Revenue recognition related to our perpetual licenses and related support contracts, professional services and cloud offerings is substantially unchanged, with support and cloud revenue being recorded ratably over the contract term. Due to the complexity of certain of our contracts, the actual revenue recognition treatment required under the new standard may be dependent on contract-specific terms and, therefore, may vary in some instances.

Upon implementation of the new standard in fiscal 2019, we made prospective revisions to contract terms with our customers that will result in shortening the initial, non-cancellable term of our multi-year subscriptions to one year for contract periods that begin on or after October 1, 2018. This change will result in annual contractual periods for most of our software subscriptions, the license portion of which will be recognized at the beginning of each annual contract period upon delivery of the licenses and the support portion of which will be recognized ratably over the one-year contractual period. As a result, we anticipate one year of subscription revenue will be recognized for each contract each year; however, more of the revenue will be recognized in the quarter that the contract period begins and less will be recognized in the subsequent three quarters of the contract than under ASC 605.

Under the modified retrospective method, we evaluated each contract that was ongoing on October 1, 2018 as if that contract had been accounted for under ASC 606 from contract inception. Some license revenue related to subscription arrangements that would have been recognized in future periods under current GAAP was recast under ASC 606 as if the revenue had been recognized in prior periods. Under this transition method, we did not adjust historical reported revenue amounts. Instead, the revenue that would have been recognized under this method prior to the adoption date was recorded as an adjustment to accumulated deficit and will not be recognized as revenue in future periods as previously expected. Because license revenue associated with subscription contracts is recognized up front instead of over time under ASC 606, a material portion of our deferred revenue was adjusted to accumulated deficit upon adoption.

Another significant provision under ASC 606 includes the capitalization and amortization of costs associated with obtaining a contract, such as sales commissions. Prior to October 1, 2018, we expensed commissions in the period incurred. Under ASC 606, direct and incremental costs to acquire a contract are capitalized and amortized using a systematic basis over the pattern of transfer of the goods and services to which the asset relates.

Refer to Note 2. Revenue from Contracts with Customers for further detail about the impact of the adoption of ASC 606 and further disclosures.

Income Taxes

In October 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The purpose of ASU 2016-16 is to simplify the income tax accounting of an intra-entity transfer of an asset other than inventory and to record its effect when the transfer occurs. We adopted this amendment beginning in the first quarter of 2019 using the modified retrospective method with a cumulative effect adjustment to accumulated deficit of $72.3 million, with a corresponding increase of $75.3 million to deferred tax assets, $6.0 million decrease to income tax assets and a $3.0 million decrease to income tax liabilities. The adjustment primarily relates to deductible amortization of intangible assets in Ireland. Post adoption, our effective tax rate no longer includes the benefit of this amortization.

Pension Accounting

In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which provides guidance on the capitalization, presentation and disclosure of net benefit costs related to postretirement benefit plans. We adopted the new guidance in the first quarter of 2019 on a full retrospective basis, which resulted in the retrospective reclassification of $0.2 million of non-service net periodic pension cost for the three months ended December 30, 2017 from line items within cost of revenue and operating expenses into Other income (expense), net on the Consolidated Statement of Operations.

Equity Investments

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities and requires equity securities to be measured at fair value, unless the measurement alternative method has been elected for equity investments without readily determinable fair values. Adoption of this guidance in the first quarter of fiscal 2019 did not have a material impact on our consolidated financial statements.

Restricted Cash

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The new guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Statement of Cash Flows. Adoption of this guidance in the first quarter of fiscal 2019 did not have a material impact on our consolidated financial statements.

Pending Accounting Pronouncements

Derivative Financial Instruments

In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedging Activities", which amends and simplifies existing guidance to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The guidance is effective for annual reporting periods beginning after December 15, 2018 (our fiscal 2020) including interim reporting periods within those annual reporting periods and early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will replace the existing guidance in ASC 840, Leases. The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and to disclose important information about leasing arrangements. ASU 2016-02 is effective for annual periods beginning after December 15, 2018 (our fiscal 2020) and interim periods within those annual periods. Early adoption is permitted and modified retrospective application is required. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

2. Revenue from Contracts with Customers

Upon adoption of ASC 606, we recorded a decrease in accumulated deficit of $431.9 million ($367.4 million, net of tax) due to the cumulative effect of the ASC 606 adoption, with the impact primarily derived from revenue related to on-premise subscription software licenses.

Nature of Products and Services

Our sources of revenue include: (1) subscription, (2) perpetual license, (3) perpetual support and (4) professional services. Revenue is derived from the licensing of computer software products and from related support contracts. We enter into contracts that include combinations of products, support and professional services, which are accounted for as separate performance obligations with differing revenue recognition patterns.



Performance Obligation	When Performance Obligation is Typically Satisfied
Term-based subscriptions
On-premise software licenses	Point in Time: Upon the later of when the software is made available or the subscription term commences
Support and cloud-based offerings	Over Time: Ratably over the contractual term; commencing upon the later of when the software is made available or the subscription term commences
Perpetual software licenses	Point in Time: when the software is made available
Support for perpetual software licenses	Over Time: Ratably over the contractual term
Professional services	Over time: As services are provided

Judgments and Estimates

Our contracts with customers for subscriptions typically include commitments to transfer term-based on-premise software licenses bundled with support and/or cloud services. On-premise software is determined to be a distinct performance obligation from support which is sold for the same term of the subscription. For subscription arrangements which include cloud services, we assessed whether the cloud component was highly interrelated with on-premise term software licenses. Other than a limited population of subscriptions, the cloud component is not currently deemed to be interrelated with the on-premise term software and, as a result, cloud services will be accounted for as a distinct performance obligation from the software and support components of the subscription.

Judgment is required to allocate the transaction price to each performance obligation. We use the estimated standalone selling price method to allocate the transaction price for items that are not sold separately. The estimated standalone selling price is determined using all information reasonably available to us, including market conditions and other observable inputs. The corresponding revenues are recognized as the related performance obligations are satisfied. We determined that 50% to 55% of the estimated standalone selling price for subscriptions that contain distinct license and support performance obligations are attributable to software licenses and 45% to 50%, depending upon the product offering, is attributable to support for those licenses.

Our standard multi-year, non-cancellable on-premise subscription contracts provide customers with an annual right to exchange software within the original subscription with other software. Although the exchange right is limited to software products within a similar product grouping, the exchange right is not limited to products with substantially similar features and functionality as those originally delivered. We determined that this right to exchange previously delivered software for different software represents variable consideration to be accounted for as a liability. We have identified a standard portfolio of contracts with common characteristics and applied the expected value method of determining variable consideration associated with this right. Additionally, where there are isolated situations that are outside of the standard portfolio of contracts due to contract size, longer contract duration, or other unique contractual terms, we used the most likely amount method to determine the amount of variable consideration. In both circumstances, the amount of variable consideration included in the transaction price is constrained by an amount where it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. As of December 29, 2018, the total refund liability was $23.6 million, primarily associated with the annual right to exchange on-premise subscription software.

Contract Assets and Contract Liabilities



	December 29, 2018		October 1, 2018, as adjusted
	(in thousands)
Contract asset	$	14,513	$	26,265
Deferred revenue	$	335,119	$	357,490

As of December 29, 2018, our contract assets are expected to be transferred to receivables within the next 12 months and therefore are included in other current assets. Approximately $12.2 million of the October 1, 2018 contract asset balance was transferred to receivables during the current period as a result of the right to payment becoming unconditional. The majority of both the contract asset balance and the amounts transferred to receivables relates to two large professional services contracts with invoicing terms based on performance milestones. Additions to contract assets of approximately $0.4 million related to revenue recognized in the period, net of period billings. There were no impairments of contract assets during the three months ended December 29, 2018.

During the three months ended December 29, 2018, $153.7 million of revenue that was included in the deferred revenue opening balance was recognized. There were additional deferrals of $131.3 million, which were primarily related to new billings.

Costs to Obtain or Fulfill a Contract

The new revenue recognition standard requires the capitalization of certain incremental costs of obtaining a contract, which impacts the period in which we record our commission expense. Prior to our adoption of the new revenue standard, we recognized commissions expense as incurred. Under the new revenue recognition standard, we are required to recognize these expenses over the period of benefit associated with these costs. This results in a deferral of certain commission expenses each period. Upon adoption, we reduced our accumulated deficit by $70.0 million and recognized an offsetting asset for deferred commission related to contracts that were not completed prior to October 1, 2018.

We recognize an asset for the incremental costs of obtaining a contract with a customer if the benefit of those costs is expected to be longer than one year. These deferred costs are amortized proportionately related to revenue over five years, which is generally longer than the term of the initial contract because of anticipated renewals as commissions for renewals are not commensurate with commissions related to our initial contracts. As of December 29, 2018, deferred costs of $19.9 million were included in other current assets and $52.5 million were included in other assets (non-current).

As the revenue recognition pattern has changed under ASC 606, the costs to fulfill contracts has also changed to match this pattern of expense recognition. As of October 1, 2018, this resulted in a $2.8 million increase in our accumulated deficit with recognition of an offsetting current liability.

Remaining Performance Obligations

Our contracts with customers include amounts allocated to performance obligations that will be satisfied at a later date. As of December 29, 2018, amounts allocated to these remaining performance obligations are $938 million, of which we expect to recognize 90% over the next 24 months with the remaining amount thereafter.

Disaggregation of Revenue



	Three months ended

	As Reported ASC 606		ASC 605		As Reported ASC 605
	December 29, 2018		December 29, 2018		December 30, 2017
Revenue	December 29, 2018		December 29, 2018		December 30, 2017
	(in thousands)
Subscription license	$	63,517
Subscription support & cloud services	77,424
Total Subscription	140,941		$	148,413	$	100,008
Perpetual support	110,497		109,225		131,197
Total recurring revenue	251,438		257,638		231,205
Perpetual license	41,805		41,750		33,985
Total software revenue	293,243		299,388		265,190
Professional services	41,446		39,369		41,454
Total revenue	$	334,689	$	338,757	$	306,644

For further disaggregation of revenue by geographic region and product area see Note 11. Segment and Geographical Information.

Practical Expedients

We elected certain practical expedients with the adoption of the new revenue standard. We do not account for significant financing components if the period between revenue recognition and when the customer pays for the products or services will be one year or less. Additionally, we recognize revenue equal to the amount we have a right to invoice, when the amount corresponds directly with the value to the customer of our performance date.

Transition Disclosures

In accordance with the modified retrospective method transition requirements, we will present the financial statement line items impacted and adjusted to compare to presentation under ASC 605 for each of the interim and annual periods during the first year of adoption of ASC 606.

The following tables present our Balance Sheets and Statements of Operations as reported under ASC 606 for the current period with comparative periods reported under ASC 605:



	As Reported ASC 606			ASC 605			As Reported ASC 605
	December 29, 2018			December 29, 2018			September 30, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	276,990		$	276,990		$	259,946
Short-term marketable securities	25,598			25,598			25,836
Accounts receivable⁽¹⁾	385,670			138,989			129,297
Prepaid expenses	63,045			63,045			48,997
Other current assets ⁽²⁾	48,682			143,104			169,708
Total current assets	799,985			647,726			633,784
Property and equipment, net	107,359			107,359			80,613
Goodwill	1,230,901			1,230,901			1,182,457
Acquired intangible assets, net	205,084			205,084			200,202
Long-term marketable securities	30,054			30,054			30,115
Deferred tax assets⁽³⁾	201,149			234,558			165,566
Other assets ⁽⁴⁾	178,437			34,328			36,285
Total assets	$	2,752,969		$	2,490,010		$	2,329,022
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	57,249		$	57,249		$	53,473
Accrued expenses and other current liabilities⁽⁵⁾	83,721			56,897			74,388
Accrued compensation and benefits	74,483			74,483			101,784
Accrued income taxes⁽³⁾	405			4,958			18,044
Deferred revenue⁽⁶⁾	325,111			484,613			487,590
Total current liabilities	540,969			678,200			735,279
Long-term debt	778,484			778,484			643,268
Deferred tax liabilities⁽³⁾	36,261			5,731			5,589
Deferred revenue⁽⁶⁾	10,197			8,324			11,852
Other liabilities	65,889			65,889			58,445
Total liabilities	1,431,800			1,536,628			1,454,433

Stockholders’ equity:
Preferred stock	—			—			—
Common stock	1,187			1,187			1,180
Additional paid-in capital	1,553,875			1,553,875			1,558,403
Accumulated deficit	(138,785		)	(507,900		)	(599,409		)
Accumulated other comprehensive loss	(95,108		)	(93,780		)	(85,585		)
Total stockholders’ equity	1,321,169			953,382			874,589
Total liabilities and stockholders’ equity	$	2,752,969		$	2,490,010		$	2,329,022

The changes in balance sheet accounts due to the adoption of 606 are due primarily to the following:


(1)	Up front license recognition under our subscription contracts and billed but uncollected support and subscription receivables that had corresponding deferred revenue, which were included in other current assets prior to our adoption of 606.

(2) Contract assets and capitalized commission costs.


(3)	The tax effect of the accumulated deficit impact related to the acceleration of revenue and deferral of costs (primarily commissions).

(4) The long-term portion of unbilled receivables due to the acceleration of license revenue on multi-year subscription contracts and the long-term portion of capitalized commission costs.

(5) Refund liability, primarily associated with the annual right to exchange on-premise subscription software described above in Judgments and Estimates.

(6) The decrease in deferred revenue recorded to accumulated deficit upon adoption of ASC 606 primarily related to on-premise subscription software licenses.



	Three months ended
	As Reported ASC 606			ASC 605			As Reported ASC 605
	December 29, 2018			December 29, 2018			December 30, 2017
Revenue:
License⁽¹⁾	$	105,322		$	173,905		$	119,518
Support and cloud services⁽¹⁾	187,921			125,483			145,672
Total software revenue	293,243			299,388			265,190
Professional services	41,446			39,369			41,454
Total revenue	334,689			338,757			306,644
Cost of revenue:
Cost of license revenue	12,563			12,347			12,114
Cost of support and cloud services revenue	31,197			30,630			34,502
Total cost of software revenue	43,760			42,977			46,616
Cost of professional services revenue	33,592			32,219			36,419
Total cost of revenue⁽²⁾	77,352			75,196			83,035
Gross margin	257,337			263,561			223,609
Operating expenses:
Sales and marketing⁽³⁾	104,218			107,304			99,375
Research and development	60,782			60,782			63,972
General and administrative	37,864			37,864			35,020
Amortization of acquired intangible assets	5,936			5,936			7,821
Restructuring and other charges, net	18,493			18,493			105
Total operating expenses	227,293			230,379			206,293
Operating income	30,044			33,182			17,316
Interest expense	(10,276		)	(10,276		)	(10,047		)
Other income (expense), net	655			548			(798		)
Income before income taxes	20,423			23,454			6,471
Provision (benefit) for income taxes⁽⁴⁾	(562		)	4,206			(7,406		)
Net income	$	20,985		$	19,248		$	13,877

(1)

The reduction in license revenue and increase in support revenue is a result of the support component of subscription licenses which is included in license revenue under ASC 605. Additionally, license revenue decreased by approximately $65 million as a result of the revenue recorded to accumulated deficit, which would have been recognized during the quarter, partially offset by approximately $59 million of upfront license revenue recognition on new and renewal bookings.

(2) Cost of revenue under ASC 606 is higher under ASC 606 due to the treatment of deferred professional services costs under the new accounting guidance, partially offset by the timing of revenue recognition under ASC 606 resulting in lower associated royalty costs.

(3) Sales and marketing costs are lower under ASC 606 due to the amortization of commissions costs capitalized upon adoption of ASC 606, offset by the deferral of ongoing commission expenses under the new accounting guidance.

(4) The benefit for income taxes under ASC 606 includes indirect effects of the adoption.

3. Restructuring and Other Charges

Restructuring and other charges, net includes restructuring charges (credits) and headquarters relocation charges.

Restructuring Charges (Credits)

In October 2018, we initiated a restructuring plan to realign our workforce to shift investment to support Industrial Internet of Things and Augmented Reality strategic high growth opportunities. As this is a realignment of resources rather than a cost-savings initiative, we do not expect this realignment to result in significant cost savings. The restructuring plan was completed in the first quarter of 2019 and resulted in restructuring charges of $16.3 million for termination benefits associated with approximately 240

employees, substantially all of which we expect will be paid in fiscal 2019. We also recorded $0.3 million of charges related to prior restructuring actions.

The following table summarizes restructuring accrual activity for the three months ended December 29, 2018:



	Employee severance and related benefits			Facility closures and related costs			Total
	(in thousands)
October 1, 2018	$	—		$	2,415		$	2,415
Charges to operations, net	16,343			243			16,586
Cash disbursements	(8,019		)	(264		)	(8,283		)
Foreign exchange impact	32			(59		)	(27		)
Accrual, December 29, 2018	$	8,356		$	2,335		$	10,691

The following table summarizes restructuring accrual activity for the three months ended December 30, 2017:



	Employee severance and related benefits			Facility closures and related costs			Total
	(in thousands)
October 1, 2017	$	1,736		$	4,508		$	6,244
Charges (credit) to operations, net	(212		)	317			105
Cash disbursements	(198		)	(537		)	(735		)
Foreign exchange impact	17			(18		)	(1		)
Accrual, December 30, 2017	$	1,343		$	4,270		$	5,613

Of the accrual for facility closures and related costs, as of December 29, 2018, $1.3 million is included in accrued expenses and other current liabilities and $1.0 million is included in other liabilities in the Consolidated Balance Sheets. The accrual for facility closures is net of assumed sublease income of $1.9 million. The accrual for employee severance and related benefits is included in accrued compensation and benefits in the Consolidated Balance Sheets.

Of the accrual for facility closures and related costs, as of December 30, 2017 $2.2 million is included in accrued expenses and other current liabilities and $2.1 million is included in other liabilities in the Consolidated Balance Sheets.

Other - Headquarters Relocation Charges

Headquarters relocation charges represent accelerated depreciation expense associated with exiting our Needham headquarters facility and relocating to our new worldwide headquarters in the Boston Seaport District, which occurred in January 2019. Because our prior headquarters lease will not expire until November 2022, we are seeking to sublease that space, but have not yet done so. As a result, we will bear overlapping rent obligations for those premises and, in the second quarter of 2019, we expect to incur a restructuring charge of approximately $24 million, based on the net present value of remaining lease commitments net of estimated sublease income. From a cash perspective, the free rent and estimated sublease income on the Seaport headquarters total approximately $30 million, as compared to the estimated cash outflows of $29 million on the prior headquarters (rent obligations and operating expenses net of estimated sublease income). Restructuring charges could increase and estimated cash outflows could increase if we are unable to sublease our prior headquarters as we expect. Additionally, we will incur other costs associated with the move which will be recorded as incurred. In the first quarter of 2019 we recorded $1.9 million of accelerated depreciation expense related to shortening the estimated useful lives of leasehold improvements related to the Needham location.

4. Stock-based Compensation

Our equity incentive plan provides for grants of nonqualified and incentive stock options, common stock, restricted stock, restricted stock units (RSUs) and stock appreciation rights to employees, directors, officers and consultants. We award RSUs as the principal equity incentive awards, including 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.

We measure the cost of employee services received in exchange for RSU awards based on the fair value of RSU awards 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. We account for forfeitures as they occur, rather than estimate expected forfeitures.

Our employee stock purchase plan (ESPP), initiated in the fourth quarter of 2016, allows eligible employees to contribute up to 10% of their base salary, up to a maximum of $25,000 per year and subject to other plan limitations, toward the purchase of our common stock at a discounted price. The purchase price of the shares on each purchase date is equal to 85% of the lower of the fair market value of our common stock on the first and last trading days of each offering period. The ESPP is qualified under Section 423 of the Internal Revenue Code. We estimate the fair value of each purchase right under the ESPP on the date of grant using the Black-Scholes option valuation model and use the straight-line attribution approach to record the expense over the six-month offering period.



Restricted stock unit activity for the three months ended December 29, 2018	Shares		Weighted Average Grant Date Fair Value (Per Share)
	(in thousands)
Balance of outstanding restricted stock units October 1, 2018	3,284		$	65.93
Granted (1)	979		$	81.34
Vested	(1,056	)	$	53.40
Forfeited or not earned	(266	)	$	63.60
Balance of outstanding restricted stock units December 29, 2018	2,941		$	75.85

_________________

(1) Restricted stock granted includes 141,000 shares from prior period TSR awards that were earned upon achievement of the performance criteria and vested in November 2018.



	Restricted Stock Units
Grant Period	Performance-based RSUs (1)	Service-based RSUs (2)
	(Number of Units in thousands)
First three months of 2019	344	494

_________________

(1)

Substantially all the performance-based RSUs were granted to our executive officers. Approximately 145,000 shares are eligible to vest based upon annual performance measures over a three-year period. RSUs not earned for a period may be earned in the third period. To the extent earned, those performance-based RSUs will vest in three substantially equal installments on November 15, 2019, November 15, 2020 and November 15, 2021, or the date the Compensation Committee determines the extent to which the applicable performance criteria have been achieved for each performance period. An additional 199,000 performance-based RSU's are eligible to vest based upon a 2019 performance measure, which RSUs will be forfeited to the extend the performance measure is not achieved. These RSUs will vest, to the extent earned, in three substantially equal installments on November 15, 2019, 2020 and 2021.


(2)	The service-based RSUs were granted to employees, including our executive officers. Substantially all service-based RSUs will vest in three substantially equal annual installments on or about the anniversary of the date of grant.

Compensation expense recorded for our stock-based awards was classified in our Consolidated Statements of Operations as follows:



	Three months ended
	December 29, 2018		December 30, 2017
	(in thousands)
Cost of license revenue	$	322	$	(90	)
Cost of support and cloud services revenue	975		1,311
Cost of professional services revenue	1,814		1,706
Sales and marketing	9,722		4,879
Research and development	4,900		2,960
General and administrative	11,674		7,565
Total stock-based compensation expense	$	29,407	$	18,331

Stock-based compensation expense in the first quarter of 2019 and 2018 includes $1.3 million and $1.1 million, respectively, related to the ESPP.

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. Diluted EPS is calculated by dividing net income by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding RSUs using the treasury stock method. The calculation of the dilutive effect of outstanding equity awards under the treasury stock method includes consideration of unrecognized compensation expense as additional proceeds.



	Three months ended
Calculation of Basic and Diluted EPS	December 29, 2018		December 30, 2017
	(in thousands, except per share data)
Net income	$	20,985	$	13,877
Weighted average shares outstanding—Basic	118,323		115,731
Dilutive effect of restricted stock units	1,315		1,925
Weighted average shares outstanding—Diluted	119,638		117,656
Earnings per share—Basic	$	0.18	$	0.12
Earnings per share—Diluted	$	0.18	$	0.12

There were no antidilutive shares for the three months ended December 29, 2018 and 0.3 million of antidilutive shares for the three months ended December 30, 2017.

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 $1,500 million of our common stock in the period October 1, 2017 through September 30, 2020. We did not repurchase any shares in the first quarter of either 2019 or 2018, but resumed repurchases in the second quarter of 2019 as described in Note 15. Subsequent Events. All shares of our common stock repurchased are automatically restored to the status of authorized and unissued.

6. Acquisitions

Acquisition-related costs in the first quarter of 2019 totaled $0.4 million, compared to less than $0.1 million in the first quarter of 2018. Acquisition-related costs include direct costs of potential and completed acquisitions (e.g., investment banker fees and professional fees, including legal and valuation services) and expenses related to acquisition integration activities (e.g., professional fees and severance). In addition, subsequent adjustments to our initial estimated amount of contingent consideration associated with specific acquisitions are included within acquisition-related charges. These costs are

classified in general and administrative expenses in the accompanying Consolidated Statements of Operations.

Frustum

On November 19, 2018, we acquired Frustum Inc. for $69.6 million (net of cash acquired of $0.7 million). We financed the acquisition with borrowings under our credit facility. Frustum is engaged in next-generation computer-aided design, including generative design, an approach that leverages artificial intelligence to generate design options. At the time of the acquisition, Frustum had approximately 12 employees and historical annualized revenues were not material. We do not expect the acquisition to add material revenue in fiscal 2019.

The acquisition of Frustum has been accounted for as a business combination. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition date. The fair values of intangible assets were based on valuations using a discounted cash flow model which requires the use of significant estimates and assumptions, including estimating future revenues and costs. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill.

The purchase price allocation resulted in $53.8 million of goodwill, $17.9 million of purchased software and $2.1 million of other net liabilities. The acquired technology is being amortized over a useful life of 15 years based on the expected benefit pattern of the assets. The acquired goodwill was allocated to our software products segment and will not be deductible for income tax purposes. The resulting amount of goodwill reflects the expected value that will be created by integrating Frustum generative design technology into our CAD solutions.

7. Goodwill and Intangible Assets

We have two operating and reportable segments: (1) Software Products and (2) Professional Services. We assess goodwill for impairment at the reporting unit level. Our reporting units are determined based on the components of our operating segments that constitute a business for which discrete financial information is available and for which operating results are regularly reviewed by segment management. Our reporting units are the same as our operating segments.

As of December 29, 2018, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was $1,405.9 million and our Professional Services segment was $30.1 million. As of September 30, 2018, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was $1,352.4 million and our Professional Services segment was $30.2 million. 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 30, 2018 based on a qualitative assessment. Our qualitative assessment included company specific (financial performance and long-range plans), industry, and macroeconomic factors, and consideration of the fair value of each reporting unit relative to its carrying value at 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:



	December 29, 2018						September 30, 2018
	Gross Carrying Amount		Accumulated Amortization		Net Book Value		Gross Carrying Amount		Accumulated Amortization		Net Book Value
	(in thousands)
Goodwill (not amortized)					$	1,230,901					$	1,182,457
Intangible assets with finite lives (amortized) (1):
Purchased software	$	379,653	$	259,850	$	119,803	$	362,679	$	254,059	$	108,620
Capitalized software	22,877		22,877		—		22,877		22,877		—
Customer lists and relationships	355,412		274,239		81,173		357,586		270,272		87,314
Trademarks and trade names	18,987		14,879		4,108		19,054		14,786		4,268
Other	3,981		3,981		—		4,003		4,003		—
	$	780,910	$	575,826	$	205,084	$	766,199	$	565,997	$	200,202
Total goodwill and acquired intangible assets					$	1,435,985					$	1,382,659

(1) The weighted-average useful lives of purchased software, customer lists and relationships, and trademarks and trade names with a remaining net book value are 10 years, 10 years, and 11 years, respectively.

Goodwill

Changes in goodwill presented by reportable segments were as follows:



	Software Products			Professional Services			Total
	(in thousands)
Balance, October 1, 2018	$	1,152,720		$	29,737		$	1,182,457
Frustum acquisition	53,777			—			53,777
Foreign currency translation adjustment	(5,199		)	(134		)	(5,333		)
Balance, December 29, 2018	$	1,201,298		$	29,603		$	1,230,901

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
	December 29, 2018		December 30, 2017
	(in thousands)
Amortization of acquired intangible assets	$	5,936	$	7,821
Cost of license revenue	6,717		6,675
Total amortization expense	$	12,653	$	14,496

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. GAAP prescribes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs that may be used to measure fair value:


•	Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

•

Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or


•	Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Money market funds, time deposits and corporate notes/bonds are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets.

Certificates of deposit, commercial paper and certain U.S. government agency securities are classified within Level 2 of the fair value hierarchy. These instruments are valued based on quoted prices in markets that are not active or based on other observable inputs consisting of market yields, reported trades and broker/dealer quotes.

The principal market in which we execute our foreign currency contracts is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants usually are large financial institutions. Our foreign currency contracts’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy.

The fair value of our contingent consideration arrangements is determined based on our evaluation of the probability and amount of any earn-out that will be achieved based on expected future performances by the acquired entities. These arrangements are classified within Level 3 of the fair value hierarchy.

Our significant financial assets and liabilities measured at fair value on a recurring basis as of December 29, 2018 and September 30, 2018 were as follows:



	December 29, 2018
	Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets:
Cash equivalents	$	89,023	$	—	$	—	$	89,023
Marketable securities
Certificates of deposit	—		220		—		220
Commercial paper	—		1,956		—		1,956
Corporate notes/bonds	52,480		—		—		52,480
U.S. government agency securities	—		995		—		995
Forward contracts	—		1,216		—		1,216
	$	141,503	$	4,387	$	—	$	145,890
Financial liabilities:
Contingent consideration related to acquisitions	$	—	$	—	$	—	$	—
Forward contracts	—		584		—		584
	$	—	$	584	$	—	$	584



	September 30, 2018
	Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets:
Cash equivalents	$	93,058	$	—	$	—	$	93,058
Marketable securities
Certificates of deposit	—		219		—		219
Corporate notes/bonds	54,737		—		—		54,737
U.S. government agency securities	—		995		—		995
Forward contracts	—		2,889		—		2,889
	$	147,795	$	4,103	$	—	$	151,898
Financial liabilities:
Contingent consideration related to acquisitions	$	—	$	—	$	1,575	$	1,575
Forward contracts	—		3,419		—		3,419
	$	—	$	3,419	$	1,575	$	4,994

Changes in the fair value of Level 3 contingent consideration liability associated with our acquisitions were as follows:



	Contingent Consideration
	(in thousands)
	Other
Balance, October 1, 2018	$	1,575
Payment of contingent consideration	(1,575		)
Balance, December 29, 2018	$	—



	Contingent Consideration
	(in thousands)
	Kepware
Balance, October 1, 2017	$	8,400
Payment of contingent consideration	(3,757		)
Balance, December 30, 2017	$	4,643

In the Consolidated Balance Sheet as of December 29, 2018, there is no accrued contingent consideration. In the Consolidated Balance Sheet as of December 30, 2017, there was $4.6 million of the contingent consideration liability included in accrued expenses and other current liabilities.

Of the $1.6 million payments in the first three months of 2019, $1.6 million represents the fair value of the liabilities recorded at the acquisition date and is included in financing activities in the Consolidated Statements of Cash Flows. Of the $3.8 million payments in the first three months of 2018, $3.2 million represents the fair value of the liabilities recorded at the acquisition date and is included in financing activities in the Consolidated Statements of Cash Flows.

9. Marketable Securities

The amortized cost and fair value of marketable securities as of December 29, 2018 and September 30, 2018 were as follows:



	December 29, 2018
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
	(in thousands)
Certificates of deposit	$	221	$	—	$	(1	)	$	220
Commercial paper	1,961		—		(5		)	1,956
Corporate notes/bonds	52,868		6		(394		)	52,480
U.S. government agency securities	1,000		—		(5		)	995
	$	56,050	$	6	$	(405	)	$	55,651



	September 30, 2018
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
	(in thousands)
Certificates of deposit	$	220	$	—	$	(1	)	$	219
Corporate notes/bonds	55,140		—		(403		)	54,737
U.S. government agency securities	1,004		—		(9		)	995
	$	56,364	$	—	$	(413	)	$	55,951

Our investment portfolio consists of certificates of deposit, commercial paper, corporate notes/bonds and government securities that have a maximum maturity of two years. The longer the duration of these securities, the more susceptible they are to changes in market interest rates and bond yields. All unrealized losses are due to changes in market interest rates, bond yields and/or credit ratings.

We review our investments to identify and evaluate investments that have an indication of possible impairment. We concluded that, at December 29, 2018, the unrealized losses were temporary. The following tables summarize the fair value and gross unrealized losses aggregated by category and the length of time that individual securities have been in a continuous unrealized loss position as of

December 29, 2018 and September 30, 2018.



	December 29, 2018
	Less than twelve months					Greater than twelve months					Total
	Fair Value		Gross unrealized loss			Fair Value		Gross unrealized loss			Fair Value		Gross unrealized loss
	(in thousands)
Certificates of deposit	$	—	$	—		$	220	$	(1	)	$	220	$	(1	)
Commercial paper	1,956		(5		)	—		—			1,956		(5		)
Corporate notes/bonds	22,303		(119		)	27,695		(275		)	49,998		(394		)
U.S. government agency securities	—		—			995		(5		)	995		(5		)
	$	24,259	$	(124	)	$	28,910	$	(281	)	$	53,169	$	(405	)



	September 30, 2018
	Less than twelve months					Greater than twelve months					Total
	Fair Value		Gross unrealized loss			Fair Value		Gross unrealized loss			Fair Value		Gross unrealized loss
	(in thousands)
Certificates of deposit	$	219	$	(1	)	$	—	$	—		$	219	$	(1	)
Corporate notes/bonds	24,067		(70		)	30,670		(333		)	54,737		(403		)
U.S. government agency securities	—		—			995		(9		)	995		(9		)
	$	24,286	$	(71	)	$	31,665	$	(342	)	$	55,951	$	(413	)

The following table presents our available-for-sale marketable securities by contractual maturity date as of December 29, 2018 and September 30, 2018.



	December 29, 2018				September 30, 2018
	Amortized cost		Fair value		Amortized cost		Fair value
	(in thousands)				(in thousands)
Due in one year or less	$	25,544	$	25,430	$	25,792	$	25,670
Due after one year through three years	30,506		30,221		30,572		30,281
	$	56,050	$	55,651	$	56,364	$	55,951

10. Derivative Financial Instruments

Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Our most significant foreign currency exposures relate to Western European countries, Japan, China, Israel, India and Canada. Our foreign currency risk management strategy is principally designed to mitigate the future potential financial impact of changes in the U.S. Dollar value of anticipated transactions and balances denominated in foreign currency, resulting from changes in foreign currency exchange rates. We enter into derivative transactions, specifically foreign currency forward contracts, to manage the exposures to foreign currency exchange risk to reduce earnings volatility. We do not enter into derivatives transactions for trading or speculative purposes.

Non-Designated Hedges

We hedge our net foreign currency monetary assets and liabilities primarily resulting from foreign currency denominated receivables and payables with foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These contracts have maturities of up to approximately three months. Generally, we do not designate these foreign currency forward contracts as hedges for accounting purposes and changes in the fair value of these instruments are recognized immediately in earnings. Because we enter into forward contracts only as an economic hedge, any gain or loss on the underlying foreign-denominated

balance would be offset by the loss or gain on the forward contract. Gains and losses on forward contracts and foreign denominated receivables and payables are included in interest income and other expense, net.

As of December 29, 2018 and September 30, 2018, we had outstanding forward contracts with notional amounts equivalent to the following:



Currency Hedged	December 29, 2018		September 30, 2018
	(in thousands)
Canadian / U.S. Dollar	7,195		7,334
Euro / U.S. Dollar	249,703		297,730
British Pound / U.S. Dollar	7,616		7,074
Israeli Sheqel / U.S. Dollar	7,424		9,778
Japanese Yen / U.S. Dollar	27,810		37,456
Swiss Franc / U.S. Dollar	12,875		11,944
Danish Kroner/ U.S. Dollar	3,067		1,902
Swedish Kronor / U.S. Dollar	13,562		18,207
Chinese Renminbi / U.S. Dollar	8,981		9,010
All other	9,282		5,521
Total	$	347,515	$	405,956

The following table shows the effect of our non-designated hedges in the Consolidated Statements of Operations for the three months ended December 29, 2018 and December 30, 2017:



Derivatives Not Designated as Hedging Instruments	Location of Gain or (Loss) Recognized in Income	Net realized and unrealized gain or (loss) (excluding the underlying foreign currency exposure being hedged)
		Three months ended
		December 29, 2018			December 30, 2017
		(in thousands)
Forward Contracts	Interest income and other expense, net	$	(987	)	$	587

In the three months ended December 29, 2018 and December 30, 2017, foreign currency losses, net were $0.2 million and $1.5 million, respectively.

Cash Flow Hedges

Our foreign exchange risk management program objective is to identify foreign exchange exposures and implement appropriate hedging strategies to minimize earnings fluctuations resulting from foreign exchange rate movements. We designate certain foreign exchange forward contracts as cash flow hedges of Euro, Yen and SEK denominated intercompany forecasted revenue transactions (supported by third party sales). All foreign exchange forward contracts are carried at fair value on the Consolidated Balance Sheets and the maximum duration of foreign exchange forward contracts is 15 months.

Cash flow hedge relationships are designated at inception, and effectiveness is assessed prospectively and retrospectively using regression analysis monthly. As the forward contracts are highly effective in offsetting changes to future cash flows on the hedged transactions, we record the effective portion of changes in these cash flow hedges in accumulated other comprehensive income and subsequently reclassify it into earnings in the period during which the hedged transactions are recognized in earnings. Changes in the fair value of foreign exchange forward contracts due to changes in time value are included in the assessment of effectiveness. Our derivatives are not subject to any credit contingent features. We manage credit risk with counterparties by trading among several counterparties and we review our counterparties’ credit at least quarterly.

As of December 29, 2018 and September 30, 2018, we had outstanding forward contracts designated as cash flow hedges with notional amounts equivalent to the following:



Currency Hedged	December 29, 2018		September 30, 2018
	(in thousands)
Euro / U.S. Dollar	$	—	$	8,495
Japanese Yen / U.S. Dollar	—		2,193
Swedish Kronor / U.S. Dollar	—		1,708
Total	$	—	$	12,396

The following table shows the effect of our derivative instruments designated as cash flow hedges in the Consolidated Statements of Operations for the three months ended December 29, 2018 and December 30, 2017 (in thousands):



Derivatives Designated as Hedging Instruments	Gain or (Loss) Recognized in OCI-Effective Portion					Location of Gain or (Loss) Reclassified from OCI into Income-Effective Portion	Gain or (Loss) Reclassified from OCI into Income-Effective Portion					Location of Gain or (Loss) Recognized-Ineffective Portion	Gain or (Loss) Recognized-Ineffective Portion
	Three months ended						Three months ended						Three months ended
	December 29, 2018		December 30, 2017				December 29, 2018		December 30, 2017				December 29, 2018		December 30, 2017
Forward Contracts	$	187	$	(1,044	)	Total software revenue	$	627	$	(655	)	Interest income and other expense, net	$	—	$	(19	)

As of December 29, 2018, we estimated that all amounts reported in accumulated other comprehensive income will be reclassified to income within the next twelve months.

If an underlying forecast transaction does not occur, or it becomes probable that it will not occur, the related hedge gains and losses on the cash flow hedge would be immediately reclassified to interest income and other expense, net on the Consolidated Statements of Operations. For the three months ended December 29, 2018 and December 30, 2017, there were no such gains or losses.

Net Investment Hedges

We translate balance sheet accounts of subsidiaries with foreign functional currencies into the U.S. Dollar using the exchange rate at each balance sheet date. Resulting translation adjustments are reported as a component of accumulated other comprehensive income on the Consolidated Balance Sheet. We designate certain foreign exchange forward contracts as net investment hedges against exposure on translation of balance sheet accounts of Euro functional subsidiaries. Net investment hedges partially offset the impact of foreign currency translation adjustment recorded in accumulated other comprehensive income on the Consolidated Balance Sheet. All foreign exchange forward contracts are carried at fair value on the Consolidated Balance Sheet and the maximum duration of foreign exchange forward contracts is approximately three months.

Net investment hedge relationships are designated at inception, and effectiveness is assessed retrospectively on a quarterly basis using net equity position of Euro functional subsidiaries. As the forward contracts are highly effective in offsetting exchange rate exposure, we record changes in these net investment hedges in accumulated other comprehensive income and subsequently reclassify them to foreign currency translation adjustment in accumulated other comprehensive income at the time of forward contract maturity. Changes in the fair value of foreign exchange forward contracts due to changes in time value are excluded from the assessment of effectiveness. Our derivatives are not subject to any credit contingent features. We manage credit risk with counterparties by trading among several counterparties and we review our counterparties’ credit at least quarterly.

As of December 29, 2018 and September 30, 2018, we had outstanding forward contracts designated as net investment hedges with notional amounts equivalent to the following:



Currency Hedged	December 29, 2018		September 30, 2018
	(in thousands)
Euro / U.S. Dollar	$	140,492	$	—
Total	$	140,492	$	—

The following table shows the effect of our derivative instruments designated as net investment hedges in the Consolidated Statements of Operations for the three months ended December 29, 2018 and December 30, 2017 (in thousands):



Derivatives Designated as Hedging Instruments	Gain or (Loss) Recognized in OCI-Effective Portion					Location of Gain or (Loss) Reclassified from OCI into Income-Effective Portion	Gain or (Loss) Reclassified from OCI into Income-Effective Portion				Location of Gain or (Loss) Excluded from Effectiveness Testing	Gain or (Loss) Recognized-Ineffective Portion
	Three months ended						Three months ended					Three months ended
	December 29, 2018			December 30, 2017			December 29, 2018		December 30, 2017			December 29, 2018		December 30, 2017
Forward Contracts	$	(698	)	$	—	Accumulated other comprehensive income (loss)	$	773	$	—	Interest income and other expense, net	$	486	$	—

As of December 29, 2018, we estimate that all amounts reported in accumulated other comprehensive income will be reclassified to income within the next three months.

The following table shows our derivative instruments measured at gross fair value as reflected in the Consolidated Balance Sheets: