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 30, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_ to_
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, $.01 par value per share
PTC
NASDAQ Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer
Accelerated filer
Non-accelerated filer
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 ☑
There were 117,466,379 shares of our common stock outstanding on August 4, 2022.
INDEX TO FORM 10-Q
For the Quarter Ended June 30, 2022
Page
Number
Part I—FINANCIAL INFORMATION
Item 1.
Unaudited Condensed Consolidated Financial Statements:
1
Consolidated Balance Sheets as of June 30, 2022 and September 30, 2021
Consolidated Statements of Operations for the three and nine months ended June 30, 2022 and June 30, 2021
2
Consolidated Statements of Comprehensive Income for the three and nine months ended June 30, 2022 and June 30, 2021
3
Consolidated Statements of Cash Flows for the nine months ended June 30, 2022 and June 30, 2021
4
Consolidated Statements of Stockholders' Equity for the three and nine months ended June 30, 2022 and June 30, 2021
5
Notes to Condensed Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
29
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
43
Item 4.
Controls and Procedures
Part II—OTHER INFORMATION
Legal Proceedings
44
Item 1A.
Risk Factors
Item 6.
Exhibits
45
Signature
46
Table of Contents
PART I—FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
June 30,2022
September 30,2021
ASSETS
Current assets:
Cash and cash equivalents
$
322,326
326,532
Accounts receivable, net of allowance for doubtful accounts of $715 and $304 at June 30, 2022 and September 30, 2021, respectively
473,298
541,072
Prepaid expenses
91,734
69,991
Other current assets
61,074
135,415
Total current assets
948,432
1,073,010
Property and equipment, net
90,815
100,237
Goodwill
2,382,680
2,191,887
Acquired intangible assets, net
398,634
378,967
Deferred tax assets
282,556
297,789
Operating right-of-use lease assets
143,388
152,337
Other assets
359,033
313,333
Total assets
4,605,538
4,507,560
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
16,462
33,381
Accrued expenses and other current liabilities
124,342
113,067
Accrued compensation and benefits
109,732
117,784
Accrued income taxes
15,703
5,055
Deferred revenue
481,360
482,131
Short-term lease obligations
22,072
27,864
Total current liabilities
769,671
779,282
Long-term debt
1,425,084
1,439,471
Deferred tax liabilities
24,362
4,165
14,113
15,546
Long-term lease obligations
172,764
180,935
Other liabilities
42,374
49,693
Total liabilities
2,448,368
2,469,092
Commitments and contingencies (Note 15)
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued
—
Common stock, $0.01 par value; 500,000 shares authorized; 117,362 and 117,163 shares issued and outstanding at June 30, 2022 and September 30, 2021, respectively
1,174
1,172
Additional paid-in capital
1,668,983
1,718,504
Retained earnings
620,900
414,656
Accumulated other comprehensive loss
(133,887
)
(95,864
Total stockholders’ equity
2,157,170
2,038,468
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of the condensed consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended
Nine months ended
June 30, 2022
June 30, 2021
Revenue:
License
175,163
163,583
562,646
538,769
Support and cloud services
248,237
230,851
736,597
670,853
Total software revenue
423,400
394,434
1,299,243
1,209,622
Professional services
39,074
41,234
126,179
116,882
Total revenue
462,474
435,668
1,425,422
1,326,504
Cost of revenue:
Cost of license revenue
13,676
15,502
35,406
42,918
Cost of support and cloud services revenue
46,598
42,392
137,251
120,706
Total cost of software revenue
60,274
57,894
172,657
163,624
Cost of professional services revenue
41,721
37,183
117,793
107,731
Total cost of revenue
101,995
95,077
290,450
271,355
Gross margin
360,479
340,591
1,134,972
1,055,149
Operating expenses:
Sales and marketing
124,325
134,412
366,209
388,315
Research and development
88,170
78,134
250,639
221,514
General and administrative
54,618
47,084
154,027
157,417
Amortization of acquired intangible assets
8,931
7,511
25,865
21,708
Restructuring and other charges (credits), net
4,458
(132
36,887
584
Total operating expenses
280,502
267,009
833,627
789,538
Operating income
79,977
73,582
301,345
265,611
Interest and debt premium expense
(13,758
(13,178
(38,983
(37,622
Other income (expense), net
34,559
(1,935
(2,642
(5,756
Income before income taxes
100,778
58,469
259,720
222,233
Provision for income taxes
30,302
7,266
53,476
38,253
Net income
70,476
51,203
206,244
183,980
Earnings per share—Basic
0.60
0.44
1.76
1.58
Earnings per share—Diluted
0.43
1.75
1.56
Weighted-average shares outstanding—Basic
117,073
116,934
117,114
116,702
Weighted-average shares outstanding—Diluted
117,968
118,611
118,097
118,181
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Other comprehensive income (loss), net of tax:
Hedge gain (loss) arising during the period, net of tax of $1.9 million and $0 million in the third quarter of 2022 and 2021, respectively, and $4.0 million and $0 million in the first nine months of 2022 and 2021, respectively
5,880
(1,797
12,072
(1,559
Foreign currency translation adjustment, net of tax of $0 for each period
(35,795
6,457
(52,819
10,581
Unrealized loss on marketable securities, net of tax of $0 for each period
(307
Amortization of net actuarial pension loss included in net income, net of tax of $0 million and $0.3 million in the third quarter of 2022 and 2021, respectively, and $0.2 million and $0.9 million in the first nine months of 2022 and 2021, respectively
(78
738
447
2,214
Change in unamortized pension gain (loss) during the period related to changes in foreign currency
1,354
(291
2,277
(385
Other comprehensive income (loss)
(28,639
5,107
(38,023
10,544
Comprehensive income
41,837
56,310
168,221
194,524
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
65,456
62,670
Amortization of right-of-use lease assets
26,149
28,031
Stock-based compensation
133,283
133,896
Loss on investment
31,854
Gain on divestiture of business
(29,808
Other non-cash items, net
(645
(1,108
Changes in operating assets and liabilities, excluding the effects of acquisitions:
Accounts receivable
25,228
(4,110
Accounts payable and accrued expenses
(7,434
15,834
(9,334
121
18,038
30,733
6,124
(13,524
Other current assets and prepaid expenses
(26,933
426
Operating lease liabilities
(10,544
(13,106
Other noncurrent assets and liabilities
(30,851
(100,355
Net cash provided by operating activities
396,827
323,488
Cash flows from investing activities:
Additions to property and equipment
(9,979
(11,662
Purchases of short- and long-term marketable securities
(7,562
Proceeds from sales of short- and long-term marketable securities
56,170
Proceeds from maturities of short- and long-term marketable securities
9,861
Acquisitions of businesses, net of cash acquired
(274,974
(717,779
Proceeds from sale of investments
46,906
Purchases of investments
(2,000
Purchase of intangible assets
(5,453
(550
Settlement of net investment hedges
18,043
(1,291
Divestiture of business, net
32,518
Net cash used in investing activities
(192,939
(674,813
Cash flows from financing activities:
Borrowings under credit facility
264,000
600,000
Repayments of borrowings under credit facility
(280,000
(128,000
Repurchases of common stock
(125,000
Proceeds from issuance of common stock
10,857
10,484
Payments of withholding taxes in connection with stock-based awards
(62,856
(42,215
Payments of principal for financing leases
(239
(279
Net cash (used in) provided by financing activities
(193,238
439,990
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(14,654
1,646
Net change in cash, cash equivalents, and restricted cash
(4,004
90,311
Cash, cash equivalents, and restricted cash, beginning of period
327,046
275,960
Cash, cash equivalents, and restricted cash, end of period
323,042
366,271
Supplemental disclosure of non-cash financing activities:
Withholding taxes in connection with stock-based awards, accrued
5,803
9,979
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three months ended June 30, 2022
Common Stock
Accumulated
Shares
Amount
AdditionalPaid-InCapital
Retained Earnings
OtherComprehensiveLoss
TotalStockholders’Equity
Balance as of March 31, 2022
116,976
1,170
1,637,631
550,424
(105,248
2,083,977
Common stock issued for employee stock-based awards
558
6
(6
Shares surrendered by employees to pay taxes related to stock-based awards
(172
(2
(18,062
(18,064
Compensation expense from stock-based awards
49,420
Unrealized gain on net investment hedges, net of tax
Foreign currency translation adjustment
Change in pension benefits, net of tax
1,276
Balance as of June 30, 2022
117,362
Nine months ended June 30, 2022
Balance as of September 30, 2021
117,163
1,729
18
(18
(594
(68,653
(68,659
Common stock issued for employee stock purchase plan
110
10,856
(1,046
(11
(124,989
2,724
Three months ended June 30, 2021
Balance as of March 31, 2021
116,855
1,169
1,676,791
70,510
(97,937
1,650,533
608
(183
(24,951
(24,953
43,068
Unrealized loss on net investment hedges, net of tax
Balance as of June 30, 2021
117,280
1,173
1,694,902
121,713
(92,830
1,724,958
Nine months ended June 30, 2021
Retained Earnings (AccumulatedDeficit)
Balance as of September 30, 2020
116,125
1,161
1,602,728
(62,267
(103,374
1,438,248
1,470
15
(15
(459
(4
(52,190
(52,194
144
10,483
Unrealized loss on marketable securities, net of tax
1,829
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 (U.S. GAAP) 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, 2021. 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, 2021 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.
Risks and Uncertainties - COVID-19 Pandemic
The COVID-19 pandemic that began in early 2020 continues to significantly affect global economic activity and create macroeconomic uncertainty.
We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of the COVID-19 pandemic as of June 30, 2022 and through the date of this report. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, stock-based compensation, the carrying value of our goodwill and other long-lived assets, financial assets, valuation allowances for tax assets and revenue recognition. While our assessment did not result in a material impact to our consolidated financial statements as of and for the quarter ended June 30, 2022, our future assessment could result in material impacts to our consolidated financial statements in future reporting periods.
Recently Adopted Accounting Pronouncements
Income Taxes
In December 2019, the FASB issued Accounting Standards Update ASU 2019-12, Income Taxes (Topic 740) on Simplifying the Accounting for Income Taxes. The decisions reflected in ASU 2019-12 update specific areas of ASC 740, Income Taxes, to reduce complexity while maintaining or improving the usefulness of the information provided to users of financial statements. The new standard became effective for us in the first quarter of 2022 ending December 31, 2021 and did not have a material impact on our consolidated financial statements.
Business Combinations
In October 2021, the FASB issued Accounting Standards Update ASU 2021-08, Business Combinations (Topic 805) on Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU is intended to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to 1) recognition of an acquired contract asset and liability, and 2) payment terms and their effect on subsequent revenue recognized by the acquirer. We have adopted ASU 2021-08 early as of the third quarter of 2022 and applied it to our acquisition of Intland Software, which was completed in the quarter. The adoption of ASU 2021-08 did not have a material impact on our consolidated financial statements. Refer to Note 6. Acquisitions and Disposition of Business for additional discussion regarding the accounting for the acquisition of Intland Software.
Pending Accounting Pronouncements
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides optional guidance for contract modifications and certain hedging relationships associated with the transition from reference rates that are expected to be discontinued. ASU 2020-04 is effective for all entities upon issuance through December 31, 2022. We are still evaluating the impact, but do not expect the standard to have a material impact on our consolidated financial statements.
2. Revenue from Contracts with Customers
Contract Assets and Contract Liabilities
Contract asset
17,869
12,934
495,473
497,677
As of June 30, 2022, $13.4 million of our contract assets are expected to be transferred to receivables within the next 12 months and therefore are included in other current assets. The remainder is included in other long-term assets and expected to be transferred within the next 24 months. Approximately $6.9 million of the September 30, 2021 contract asset balance was transferred to receivables during the nine months ended June 30, 2022 as a result of the right to payment becoming unconditional. Additions to contract assets of approximately $11.9 million related to revenue recognized in the period, net of billings. The majority of the contract asset balance relates to two large professional services contracts with invoicing terms based on performance milestones. There were no impairments of contract assets during the nine months ended June 30, 2022.
During the nine months ended June 30, 2022, we recognized $443.5 million of revenue that was included in deferred revenue as of September 30, 2021 and there were additional deferrals of $434.4 million, primarily related to new billings. In addition, deferred revenue increased by $6.9 million as a result of the acquisition of Intland. For subscription contracts, we generally invoice customers annually. The balance of total short- and long-term receivables as of June 30, 2022 was $696.9 million, compared to total short- and long-term receivables as of September 30, 2021 of $744.6 million.
Our multi-year, non-cancellable on-premise subscription contracts provide customers with an annual right to exchange software within the subscription with other software. As of June 30, 2022 and September 30, 2021, the total refund liability was $36.4 million and $40.3 million, respectively, primarily associated with the annual right to exchange on-premise subscription software.
8
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. In determining the adequacy of the allowance for doubtful accounts, management specifically analyzes individual accounts receivable, historical bad debt, customer concentrations, customer credit-worthiness, current economic conditions, and accounts receivable aging trends. Our allowance for doubtful accounts on trade accounts receivable was $0.7 million as of June 30, 2022 and $0.3 million as of September 30, 2021. Uncollectible trade accounts receivable written-off and bad debt expense were immaterial in the three and nine months ended June 30, 2022.
Costs to Obtain or Fulfill a Contract
We recognize an asset for the incremental costs of obtaining a contract with a customer if the benefit of those costs is expected to be longer than one year. These deferred costs are primarily related to commissions. As of June 30, 2022 and September 30, 2021, deferred costs of $39.7 million and $40.2 million, respectively, are included in other current assets and $75.9 million and $81.1 million, respectively, are included in other assets (non-current). Amortization expense related to costs to obtain a contract with a customer was $11.9 million and $36.2 million in the three and nine months ended June 30, 2022, respectively, and $11.7 million and $33.1 million in the three and nine months ended June 30, 2021, respectively. There were no impairments of the contract cost asset in the three and nine months ended June 30, 2022 and June 30, 2021.
Remaining Performance Obligations
Our contracts with customers include transaction price amounts allocated to performance obligations that will be satisfied and recognized as revenue at a later date. As of June 30, 2022, the transaction price amounts include performance obligations of $495.5 million recorded in deferred revenue and $916.9 million that are not yet recorded in the Consolidated Balance Sheets. We expect to recognize approximately 83% of the total $1,412.4 million over the next 24 months, with the remaining amount thereafter.
Disaggregation of Revenue
Recurring revenue(1)
415,197
387,175
1,273,032
1,186,978
Perpetual license
8,203
7,259
26,211
22,644
For further disaggregation of revenue by geographic region and product group see Note 11. Segment and Geographic Information.
3. Restructuring and Other Charges
Restructuring and other charges, net includes restructuring charges (credits) and impairment and accretion expense charges related to the lease assets of exited facilities. Refer to Note 14. Leases for additional information about exited facilities.
In the three months ended June 30, 2022, restructuring and other charges, net totaled $4.5 million, of which $5.1 million is attributable to other charges for professional fees included in restructuring related to our SaaS transformation, offset by a $0.6 million credit, primarily attributable to sublease income and the reversal of lease liabilities related to exited lease facilities. We made cash payments related to restructuring and other charges of $9.5 million ($6.2 million related to employee charges, $2.5 million in payments for other professional fees included in restructuring related to our SaaS transformation, and $0.8 million in net payments for variable costs related to restructured facilities).
9
In the nine months ended June 30, 2022, restructuring and other charges, net totaled $36.9 million of which $32.8 million is attributable to restructuring charges, $5.1 million is attributable to other charges for professional fees included in restructuring related to our SaaS transformation, offset by a $1.0 million credit attributable to sublease income and the reversal of lease liabilities related to exited lease facilities. We made cash payments related to restructuring charges of $36.6 million ($32.0 million related to employee charges, $2.5 million in payments for other professional fees included in restructuring related to our SaaS transformation, and $2.1 million in net payments for variable costs related to restructured facilities).
In the three and nine months ended June 30, 2021, restructuring and other charges, net totaled $(0.1) million and $0.6 million, respectively, which is attributable to restructuring charges and impairment and accretion expense related to exited facilities.
Restructuring Charges
In the first quarter of 2022, we committed to a plan to restructure our workforce and consolidate select facilities to align our customer facing and product-related functions with the SaaS industry best practices and accelerate the opportunity for our on-premise customers to move to the cloud. The restructuring plan resulted in charges of $0.1 million and $33.6 million in the third quarter and first nine months of 2022, primarily associated with the termination benefits of approximately 330 employees. We are anticipating total restructuring charges for this plan to be approximately $37 million.
In the first quarter of 2020, we initiated a restructuring program as part of a realignment associated with expected synergies and operational efficiencies related to the Onshape acquisition. The restructuring plan resulted in charges of $30.8 million through fiscal year 2020 for termination benefits associated with approximately 250 employees. During the nine months ended June 30, 2022 and June 30, 2021, we incurred credits of $0.1 million and charges of $0.2 million, respectively, in connection with this restructuring plan.
The following table summarizes restructuring accrual activity for the nine months ended June 30, 2022:
Employee Severance and Related Benefits
Facility Closures and Related Costs
Total
Accrual, October 1, 2021
1,981
3,505
5,486
Charges to operations, net
33,471
(721
32,750
Cash disbursements
(31,965
(2,159
(34,124
Foreign exchange impact
Accrual, June 30, 2022
2,937
625
3,562
The following table summarizes restructuring accrual activity for the nine months ended June 30, 2021:
Accrual, October 1, 2020
3,992
5,995
9,987
162
183
345
(3,925
(2,303
(6,228
33
17
50
Accrual, June 30, 2021
262
3,892
4,154
The accrual for employee severance and related benefits is included in accrued compensation and benefits in the Consolidated Balance Sheets.
The accrual for facility closures and related costs is included in accrued expenses and other current liabilities in the Consolidated Balance Sheets.
10
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 our principal equity incentive awards.
The following table shows RSU activity for the nine months ended June 30, 2022:
(in thousands, except grant date fair value data)
Number ofRSUs
Weighted-AverageGrant Date Fair ValuePer RSU
Balance of outstanding restricted stock units, October 1, 2021
3,217
92.46
Granted(1)
1,609
114.18
Vested
(1,728
92.83
Forfeited or not earned
(318
98.55
Balance of outstanding restricted stock units, June 30, 2022
2,780
104.93
The following table presents the number of RSU awards granted by award type:
Nine months endedJune 30, 2022
Performance-based RSUs(1)
89
Service-based RSUs(2)
1,320
Relative Total Shareholder Return RSUs(3)
76
The weighted-average fair value of the rTSR RSUs was 136.43 per target RSU on the grant date. The fair value of the rTSR RSUs was determined using a Monte Carlo simulation model.
The significant assumptions used in the Monte Carlo simulation model were as follows:
Average volatility of peer group
34.67
%
Risk free interest rate
0.81
Dividend yield
11
Compensation expense recorded for our stock-based awards is classified in our Consolidated Statements of Operations as follows:
June 30,2021
338
26
413
66
2,544
2,611
8,183
7,222
5,547
2,457
10,069
6,746
14,029
14,229
38,556
42,533
11,002
8,514
30,682
24,878
15,960
15,231
45,380
52,451
Total stock-based compensation expense
Stock-based compensation expense includes $1.6 million and $4.8 million in the third quarter and first nine months of 2022, respectively, and $1.8 million and $5.6 million in the third quarter and first nine months of 2021, respectively, related to our employee stock purchase plan.
5. Earnings per Share (EPS) and Common Stock
EPS
The following table presents the calculation for both basic and diluted EPS:
Dilutive effect of restricted stock units
895
1,677
983
1,479
Anti-dilutive shares for the three and nine months ended June 30, 2022 and 2021 were immaterial.
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 billion of our common stock in the period October 1, 2020 through September 30, 2023. In the third quarter ended June 30, 2022, we did not repurchase any shares. In the nine months ended June 30, 2022, we repurchased 1,046 thousand shares for $125 million. We did not repurchase any shares in the third quarter and first nine months of 2021. All shares of our common stock repurchased are automatically restored to the status of authorized and unissued.
12
6. Acquisitions and Disposition of Business
Acquisition and transaction-related costs in the third quarter and first nine months of 2022 totaled $6.4 million and $11.3 million, respectively, compared to $0.6 million and $14.8 million in the third quarter and first nine months of 2021, respectively. These costs are classified in general and administrative expenses in the accompanying Consolidated Statements of Operations.
Acquisition and transaction-related costs include direct costs of potential and completed acquisitions and dispositions (e.g., investment banker fees and professional fees, including diligence, legal and valuation services), expenses related to acquisition integration activities (e.g., professional fees and severance), and other transactional charges include third-party costs related to structuring unusual transactions. In addition, subsequent adjustments to our initial estimated amount of contingent consideration associated with specific acquisitions are included within acquisition-related charges.
Our results of operations include the results of acquired or sold businesses beginning on their respective acquisition or sale date. Our results of operations for the reported periods if presented on a pro forma basis would not differ materially from our reported results.
Intland Software
On April 29, 2022, we acquired Intland Software, GmbH, and Eger Invest GmbH (together, “Intland Software”) pursuant to a Share Sale and Purchase Agreement. Intland Software develops and markets the Codebeamer™ Application Lifecycle Management (ALM) family of software products. The preliminary purchase price of the acquisition is $277.2 million, of which approximately $274.8 million has been paid, net of cash acquired, which was financed with cash on hand and $264 million borrowed under our existing credit facility. Intland had approximately 150 employees on the close date.
The acquisition of Intland 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 is considered preliminary, and additional adjustments may be recorded during the measurement period as the company receives additional information relevant to the acquisition related to the finalization of working capital adjustments to the purchase price and deferred tax assets and liabilities.
The preliminary purchase price allocation resulted in $240.0 million of goodwill, $38.8 million of customer relationships, $19.1 million of purchased software, $1.3 million of trademarks, $20.8 million of deferred tax liabilities, $6.9 million of deferred revenue, $6.5 million of accounts receivable, and $0.8 million of other net liabilities. The acquired customer relationships, purchased software, and trademarks are being amortized over useful lives of 11 years, 10 years, and 10 years, respectively, based on the expected economic benefit pattern of the assets. The acquired goodwill was allocated to our software products segment and will not be deductible for income tax purposes. The resulting amount of goodwill reflects the expected value that will be created by expanding our ALM offerings, which are complementary to our PLM offerings.
13
Arena
On January 15, 2021, we acquired Arena Holdings, Inc. (“Arena”) pursuant to the Agreement and Plan of Merger dated as of December 12, 2020 by and among PTC, Arena, Astronauts Merger Sub, Inc., and the Representative named therein. We paid approximately $715 million, net of cash acquired of $11.1 million, for Arena, which amount was financed with cash on hand and $600 million borrowed under our existing credit facility. Arena had approximately 170 employees on the close date. The acquisition of Arena added revenue of approximately $29.8 million in FY'21, which is net of approximately $9.1 million in fair value adjustments related to purchase accounting for the acquisition.
The acquisition of Arena has been accounted for as a business combination. Assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The fair values of intangible assets were based on valuations using a discounted cash flow model which requires the use of significant estimates and assumptions, including estimating future revenues and costs. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill.
The purchase price allocation resulted in $562.8 million of goodwill, $155.0 million of customer relationships, $38.3 million of purchased software, $4.2 million of trademarks, $41.3 million of deferred tax liabilities, $15.5 million of deferred revenue, $11.4 million of accounts receivable, and $0.4 million of other net liabilities. The acquired customer relationships, purchased software, and trademarks are being amortized over useful lives of 13 years, 9 years, and 12 years, respectively, based on the expected economic benefit pattern of the assets. The acquired goodwill was allocated to our software products segment and will not be deductible for income tax purposes. The resulting amount of goodwill reflects the expected value that will be created by participation in expected future growth of the PLM SaaS market and expansion into the mid-market for PLM, where SaaS solutions are becoming the standard.
PLM Services Business Disposition
On June 1, 2022, we sold a portion of our PLM services business to ITC Infotech India Limited ("ITC Infotech") pursuant to the Strategic Partner Agreement dated as of April 20, 2022 by and among PTC and ITC Infotech India Limited. Consideration received from ITC Infotech for the sale was approximately $60.4 million, consisting of $32.5 million cash paid on closing and $28.0 million of services to be provided by ITC Infotech to PTC for no additional charge.
We recognized a gain on the sale of $29.8 million, which is included within Other income (expense), net. The recognized gain consists of $60.4 million of consideration received, less net assets of the business of $30.6 million. Net assets include $33.0 million of goodwill allocated to the business, less $2.4 million of liabilities associated with approximately 160 employees who transferred to ITC Infotech. Goodwill was allocated to the sold business based on a relative fair value allocation of total goodwill of the Professional Services segment.
Additional future contingent consideration of up to $20 million may be received by PTC based on certain performance milestones. We have elected to defer the recognition of gains associated with contingent consideration until they become realizable.
7. Goodwill and 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.
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As of June 30, 2022, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was $2,769.8 million and attributable to our Professional Services segment was $11.5 million. As of September 30, 2021, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was $2,525.7 million and attributable to our Professional Services segment was $45.2 million. 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 evaluate 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. If a reporting unit's carrying value exceeds its fair value, we record an impairment loss equal to the difference between the carrying value of goodwill and its estimated fair value. Factors we consider important, on an overall company basis and segment basis, when applicable, that could trigger an impairment review include significant under-performance relative to historical or projected future operating results, significant changes in our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period and a reduction of our market capitalization relative to net book value.
We completed our annual goodwill impairment review as of June 30, 2022, which consisted of a qualitative assessment of our Software Products segment and a quantitative assessment of our Professional Services segment in conjunction with the sale of a portion of that business to ITC Infotech. Our qualitative assessment for Software Products included company-specific (e.g., financial performance and long-range plans), industry, and macroeconomic factors, as well as consideration of the fair value of each reporting unit relative to its carrying value at the last valuation date (June 27, 2020). Based on our qualitative assessment, we believe it is more likely than not that the fair value of our Software Products reporting unit exceeds its carrying value and no further impairment testing is required. Our quantitative assessment for the Professional Services segment compared the fair value of the reporting unit to its carrying value. We estimated the fair value of the reporting unit using a discounted cash flow valuation model. This model requires estimates of future revenues, profits, capital expenditures, working capital, and a terminal value based on a residual cash flow valuation model. We estimated this amount by evaluating historical trends, current budgets and operating plans, including consideration of the completed transaction with ITC Infotech. Based on a comparison of the estimated fair value to the carrying value of the Professional Services reporting unit as of June 30, 2022, no impairment was required.
Goodwill and acquired intangible assets consisted of the following:
September 30, 2021
GrossCarryingAmount
AccumulatedAmortization
Net BookValue
Goodwill (not amortized)
Intangible assets with finite lives (amortized):
Purchased software
503,579
352,587
150,992
483,771
338,542
145,229
Capitalized software
22,877
Customer lists and relationships
604,261
367,082
237,179
574,516
350,648
223,868
Trademarks and trade names
27,865
17,402
10,463
26,906
17,036
9,870
Other
3,856
4,000
Total intangible assets with finite lives
1,162,438
763,804
1,112,070
733,103
Total goodwill and acquired intangible assets
2,781,314
2,570,854
Changes in goodwill presented by reportable segments were as follows:
SoftwareProducts
ProfessionalServices
Balance, October 1, 2021
2,148,968
42,919
Acquisition
240,709
Divestiture of business
(32,992
(16,755
(169
(16,924
Balance, June 30, 2022
2,372,922
9,758
Amortization of Intangible Assets
The aggregate amortization expense for intangible assets with finite lives is classified in our Consolidated Statements of Operations as follows:
6,596
8,260
19,010
21,644
Total amortization expense
15,527
15,771
44,875
43,352
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. There are three levels of inputs that may be used to measure fair value:
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.
Time deposits and corporate notes/bonds are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets.
The principal market in which we execute our foreign currency derivatives is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants usually are large financial institutions. Our foreign currency derivatives’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy.
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Our significant financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2022 and September 30, 2021 were as follows:
Level 1
Level 2
Level 3
Financial assets:
Cash equivalents(1)
124,879
Convertible note
2,000
Forward contracts
2,392
129,271
Financial liabilities:
1,572
114,375
Equity securities
77,540
5,363
79,540
199,278
3,318
Level 3 Investments
Convertible Note
In the fourth quarter of 2021, we invested $2.0 million into a non-marketable convertible note. This debt security is classified as available-for-sale and is included in other assets on the Consolidated Balance Sheet. There were no changes in the fair value of this level 3 investment in the three and nine months ended June 30, 2022.
Non-Marketable Equity Investments
The carrying value of our non-marketable equity investments is recorded in other assets on the Consolidated Balance Sheets and totaled $1.0 million for the period ended June 30, 2022 and $2.2 million for the period ended September 30, 2021. During the three months ended June 30, 2022, PTC sold a non-marketable equity investment for $4.2 million, which had been held at a cost of $1.2 million. The $3.0 million gain recognized on the sale is included in Other income (expense), net for the three and nine months ended June 30, 2022.
Equity Securities
As of June 30, 2022, PTC held no remaining shares in Matterport, Inc., a publicly traded company, as we sold all previously held shares during the three months ended March 31, 2022. The shares sold included those held as of September 30, 2021, as well as additional shares which PTC earned during the second quarter of FY22 based on contingent earn-outs achieved in January. Shares related to the original investment were restricted from sale until January 2022 (six months after Matterport became a public company). At expiration of this lock-out, we sold all shares held from the original investment for $39.1 million at an average price of $9.1 per share. In February 2022, we sold an additional $3.6 million shares at an average share price of $7.6 per share. Due to the decline in the price per share during the first six months of fiscal 2022, we recognized a loss of $34.8 million in Other income (expense), net on the Consolidated Statements of Operations. No additional gains or losses have been recognized in the three months ended June 30, 2022 and the aggregate realized gain from the original investment of $8.7 million was $34.0 million.
The following table provides a summary of changes in the fair value of our Level 3 investment in the Matterport, Inc. shares from October 1, 2021 to June 30, 2022:
Fair Values
Realized loss
(38,468
Sale of investment
(39,072
9. Marketable Securities
We did not hold any marketable securities as of September 30, 2021 or June 30, 2022. In December 2020, we sold our remaining marketable securities to partially fund the Arena acquisition, resulting in proceeds of $56.2 million. Neither gross realized gains nor gross realized losses related to the sale were material.
10. Derivative Financial Instruments
We enter into derivative transactions, specifically foreign currency forward contracts and options, to manage our exposure to foreign currency exchange risk in order to reduce earnings volatility. We do not enter into derivative transactions for trading or speculative purposes.
The following table shows our derivative instruments measured at gross fair value as reflected in the Consolidated Balance Sheets:
Fair Value of Derivatives Designated As Hedging Instruments
Fair Value of Derivatives Not Designated As Hedging Instruments
Derivative assets(1):
Forward Contracts
771
1,641
1,621
3,722
Derivative liabilities(2):
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 Other income (expense), net.
As of June 30, 2022 and September 30, 2021, we had outstanding forward contracts with notional amounts equivalent to the following:
Currency Hedged (in thousands)
Canadian / U.S. Dollar
4,837
4,894
Euro / U.S. Dollar
362,686
387,466
British Pound / U.S. Dollar
6,095
23,141
Israeli Shekel / U.S. Dollar
11,415
10,475
Japanese Yen / U.S. Dollar
46,450
Swiss Franc / U.S. Dollar
9,272
18,039
Swedish Krona / U.S. Dollar
13,182
34,196
Singapore Dollar / U.S. Dollar
3,397
3,498
Chinese Renminbi / U.S. Dollar
7,975
23,297
New Taiwan Dollar / U.S. Dollar
15,758
3,369
Danish krone/ U.S. Dollar
2,900
2,380
Australian Dollar/ U.S. Dollar
3,068
2,086
All other
3,524
4,630
444,109
563,921
The following table shows the effect of our non-designated hedges in the Consolidated Statements of Operations for the three and nine months ended June 30, 2022 and June 30, 2021:
Location of Gain (Loss)
Net realized and unrealized (gain) loss, excluding the underlying foreign currency exposure being hedged
3,399
(2,508
3,761
(7,128
In the three months ended June 30, 2022 and June 30, 2021, foreign currency gains, net were $0.9 million and foreign currency losses, net were $2.0 million, respectively. In the nine months ended June 30, 2022 and June 30, 2021 foreign currency losses, net were $3.1 million and $6.1 million, respectively.
Net Investment Hedges
We translate balance sheet accounts of subsidiaries with foreign functional currencies into the U.S. Dollar using the exchange rate at each balance sheet date. Resulting translation adjustments are reported as a component of accumulated other comprehensive loss on the Consolidated Balance Sheets. We designate certain foreign exchange forward contracts as net investment hedges against exposure on translation of balance sheet accounts of Euro-functional subsidiaries. Net investment hedges partially offset the impact of foreign currency translation adjustment recorded in accumulated other comprehensive loss on the Consolidated Balance Sheets. All foreign exchange forward contracts are carried at fair value on the Consolidated Balance Sheets and the maximum duration of net investment hedge foreign exchange forward contracts is approximately three months.
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Net investment hedge relationships are designated at inception, and effectiveness is assessed retrospectively on a quarterly basis using the net equity position of Euro-functional subsidiaries. As the forward contracts are highly effective in offsetting exchange rate exposure, we record changes in these net investment hedges in accumulated other comprehensive loss and subsequently reclassify them to foreign currency translation adjustment in accumulated other comprehensive loss at the time of forward contract maturity. Changes in the fair value of foreign exchange forward contracts due to changes in time value are excluded from the assessment of effectiveness. Our derivatives are not subject to any credit contingent features. We manage credit risk with counterparties by trading among several counterparties and we review our counterparties’ credit at least quarterly.
As of June 30, 2022 and September 30, 2021, we had outstanding forward contracts designated as net investment hedges with notional amounts equivalent to the following:
114,651
128,103
The following table shows the effect of our derivative instruments designated as net investment hedges in the Consolidated Statements of Operations for the three and nine months ended June 30, 2022 and June 30, 2021:
Gain (loss) recognized in OCI
OCI
1,082
(2,309
(1,993
(268
Gain (loss) reclassified from OCI
(4,281
4,143
(11,431
4,044
Gain recognized, excluded portion
515
267
1,124
1,000
As of June 30, 2022, we estimate that all amounts reported in accumulated other comprehensive loss will be applied against exposed balance sheet accounts upon translation within the next three months.
Offsetting Derivative Assets and Liabilities
We have entered into master netting arrangements for our forward contracts that allow net settlements under certain conditions. Although netting is permitted, it is currently our policy and practice to record all derivative assets and liabilities on a gross basis in the Consolidated Balance Sheets.
The following table sets forth the offsetting of derivative assets as of June 30, 2022:
Gross Amounts Offset in the Consolidated Balance Sheets
Gross Amounts Not Offset in the Consolidated Balance Sheets
As of June 30, 2022
GrossAmount ofRecognizedAssets
Net Amounts of Assets Presented in the Consolidated Balance Sheets
FinancialInstruments
CashCollateralReceived
NetAmount
(1,572
820
The following table sets forth the offsetting of derivative liabilities as of June 30, 2022:
GrossAmount ofRecognizedLiabilities
GrossAmountsOffset in theConsolidatedBalanceSheets
Net Amounts of LiabilitiesPresented intheConsolidatedBalance Sheets
CashCollateralPledged
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11. Segment and Geographic Information
We operate within a single industry segment – computer software and related services. Operating segments as defined under GAAP are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our Chief Executive Officer. We have two operating and reportable segments: (1) Software Products, which includes license, subscription and related support revenue (including updates and technical support) for all our products; and (2) Professional Services, which includes consulting, implementation and training services. We do not allocate sales and marketing or general and administrative expense to our operating segments as these activities are managed on a consolidated basis. Additionally, segment profit does not include stock-based compensation, amortization of intangible assets, restructuring charges and certain other identified costs that we do not allocate to the segments for purposes of evaluating their operational performance.
The revenue and profit attributable to our operating segments are summarized below. We do not produce asset information by reportable segment; therefore, it is not reported.
Software Products
Revenue
Operating costs(1)
127,964
116,617
365,008
331,328
Profit
295,436
277,817
934,235
878,294
Professional Services
Operating costs(2)
36,174
34,726
107,724
100,985
6,508
18,455
15,897
Total segment revenue
Total segment costs
164,138
151,343
472,732
432,313
Total segment profit
298,336
284,325
952,690
894,191
Unallocated operating expenses:
Sales and marketing expenses
110,296
120,183
327,653
345,782
General and administrative expenses
32,303
31,235
97,339
90,122
Restructuring and other charges, net
Intangibles amortization
Other unallocated operating expenses(3)
6,355
618
11,308
14,844
Total operating income
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Our international revenue is presented based on the location of our customer. Revenue for the geographic regions in which we operate is presented below.
June 30,2022(1)
Americas
193,043
180,154
608,924
562,763
Europe
176,419
159,558
561,690
524,354
Asia Pacific
93,012
95,956
254,808
239,387
(1) Subsequent to filing our second quarter 2022 Form 10-Q, we identified an immaterial typographical error in the above disclosure. Revenue by region was transposed for Europe and Asia Pacific for the three and six-months ended March 31, 2022. Amounts presented above for the nine months ended June 30, 2022 reflect the corrected amounts.
12. Income Taxes
Effective income tax rate
30
In the third quarter and first nine months of 2022 and 2021, our effective tax rate differed from the statutory federal income tax rate of 21% due to our corporate structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland and the Cayman Islands. In 2022 and 2021, the foreign rate differential predominantly relates to these earnings.
In 2022 and 2021, in addition to the foreign rate differential, the effective tax rate was impacted by the net effects of the Global Intangible Low-Taxed Income (GILTI) and Foreign Derived Intangible Income (FDII) regimes and the excess tax benefit related to stock-based compensation.
Additionally, in the third quarter and first nine months of FY’22 our results include tax expense related to the sale of a portion of our PLM services business of $15.5 million, including $8.1 million of expense which relates to the basis difference on goodwill. In the third quarter and first nine months of 2021, our results also include the effects of the full valuation allowance, which was maintained against our U.S. net deferred tax assets at that time. Additionally, in the first nine months of 2021, our results include the reduction of our previously established U.S. valuation allowance by $42.3 million as a result of the Arena acquisition and a charge of $37.3 million related to the effects of an unrecognized tax benefit in the Republic of Korea (South Korea), primarily related to foreign withholding taxes.
We reassess our valuation allowance requirements each financial reporting period. We assess available positive and negative evidence to estimate whether sufficient future taxable income will be generated to use our existing deferred tax assets. In the assessment for the period ended September 30, 2021, we concluded it was more likely than not that our deferred tax assets related to United States federal and state income would be realizable, and therefore, the United States federal and the majority of the state valuation allowances were released in the fourth quarter of 2021. In the third quarter of 2022, we continue to maintain this conclusion.
In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the Internal Revenue Service in the U.S. We regularly assess the likelihood of additional assessments by tax authorities and provide for these matters as appropriate. We are currently under audit by tax authorities in several jurisdictions. Audits by tax authorities typically involve examination of the deductibility of certain permanent items, limitations on net operating losses and tax credits.
22
As of June 30, 2022 and September 30, 2021, we had unrecognized tax benefits of $24.1 million and $21.2 million, respectively. If all our unrecognized tax benefits as of June 30, 2022 were to become recognizable in the future, we would record a benefit to the income tax provision of $24.1 million, which would be partially offset by an increase in the U.S. valuation allowance of $4.9 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 $3 million.
13. Debt
At June 30, 2022 and September 30, 2021, we had the following long-term debt obligations:
4.000% Senior notes due 2028
500,000
3.625% Senior notes due 2025
Credit facility revolver(1)
434,000
450,000
Total debt
1,434,000
1,450,000
Unamortized debt issuance costs for the senior notes(2)
(8,916
(10,529
Total debt, net of issuance costs
(1) Unamortized debt issuance costs related to the credit facility were $3.0 million and $3.8 million as of June 30, 2022 and September 30, 2021, respectively, and are included in other assets on the Consolidated Balance Sheets.
(2) Unamortized debt issuance costs are included in long-term debt on the Consolidated Balance Sheets.
Senior Unsecured Notes
In February 2020, we issued $500 million in aggregate principal amount of 4.0% senior, unsecured long-term debt at par value, due in 2028 (the 2028 notes) and $500 million in aggregate principal amount of 3.625% senior, unsecured long-term debt at par value, due in 2025 (the 2025 notes).
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As of June 30, 2022, the total estimated fair value of the 2028 and 2025 notes was approximately $462.4 million and $476.2 million, respectively, based on quoted prices for the notes on that date.
We were in compliance with all the covenants for our senior notes as of June 30, 2022.
Terms of the 2028 and 2025 Notes
Interest on the 2028 and 2025 notes is payable semi-annually on February 15 and August 15. The debt indenture for the 2028 and 2025 notes includes covenants that limit our ability to, among other things, incur additional debt, grant liens on our properties or capital stock, enter into sale and leaseback transactions or asset sales, and make capital distributions.
We may, on one or more occasions, redeem the 2028 and 2025 notes in whole or in part at specified redemption prices. In certain circumstances constituting a change of control, we will be required to make an offer to repurchase the notes at a purchase price equal to 101% of the aggregate principal amount of the notes, plus accrued and unpaid interest. Our ability to repurchase the notes upon such event may be limited by law, by the indenture associated with the notes, by our then-available financial resources or by the terms of other agreements to which we may be party at such time. If we fail to repurchase the notes as required by the indenture, it would constitute an event of default under the indenture which, in turn, may also constitute an event of default under other obligations.
Credit Agreement
In February 2020, we entered into a Third Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as Administrative Agent, for a new secured multi-currency bank credit facility with a syndicate of banks. We expect to use the credit facility for general corporate purposes, including acquisitions of businesses, share repurchases and working capital requirements.
The credit facility consists of a $1 billion revolving credit facility, which may be increased by up to an additional $500 million in the aggregate if the existing or additional lenders are willing to make such increased commitments. The maturity date of the credit facility is February 13, 2025, when all remaining amounts outstanding will be due and payable. The revolving loan commitment does not require amortization of principal and may be repaid in whole or in part prior to the scheduled maturity date at our option without penalty or premium. As of June 30, 2022, the fair value of our credit facility approximates its book value.
PTC and certain eligible foreign subsidiaries are eligible borrowers under the credit facility. Any borrowings by PTC Inc. under the credit facility would be guaranteed by PTC Inc.’s material domestic subsidiaries that become parties to the subsidiary guaranty, if any. As of the filing of this Form 10-Q, there are no subsidiary guarantors of the obligations under the credit facility. Any borrowings by eligible foreign subsidiary borrowers would be guaranteed by PTC Inc. and any subsidiary guarantors. As of the filing of this Form 10-Q, no funds were borrowed by an eligible foreign subsidiary borrower. In addition, owned property (including equity interests) of PTC and certain of its material domestic subsidiaries' owned property is subject to first priority perfected liens in favor of the lenders under this credit facility. 100% of the voting equity interests of certain of PTC’s domestic subsidiaries and 65% of its material first-tier foreign subsidiaries are pledged as collateral for the obligations under the credit facility.
Loans under the credit facility bear interest at variable rates which reset every 30 to 180 days depending on the rate and period selected by PTC as described below. As of June 30, 2022, the annual rate for borrowings outstanding was 2.67%. Interest rates on borrowings outstanding under the credit facility range from 1.25% to 1.75% above an adjusted LIBO rate (or an agreed successor rate) for Euro currency borrowings or range from 0.25% to 0.75% above the defined base rate (the greater of the Prime Rate, the NYFRB rate plus 0.5%, or an adjusted LIBO rate plus 1%) for base rate borrowings, in each case based upon PTC’s total leverage ratio. A quarterly commitment fee on the undrawn portion of the credit facility is required, ranging from 0.175% to 0.30% per annum based upon PTC’s total leverage ratio.
24
The credit facility limits PTC’s and its subsidiaries’ ability to, among other things: incur additional indebtedness, incur liens or guarantee obligations; pay dividends (other than to PTC) and make other distributions; make investments and enter into joint ventures; dispose of assets; and engage in transactions with affiliates, except on an arms-length basis. Under the credit facility, PTC and its material domestic subsidiaries may not invest cash or property in, or loan to, PTC’s foreign subsidiaries in aggregate amounts exceeding $100 million for any purpose and an additional $200 million for acquisitions of businesses. In addition, under the credit facility, PTC and its subsidiaries must maintain the following financial ratios:
• Total leverage ratio, defined as consolidated funded indebtedness to consolidated trailing four quarters EBITDA, not to exceed 4.50 to 1.00 as of the last day of any fiscal quarter;
• Senior secured leverage ratio, defined as senior consolidated total indebtedness (which excludes unsecured indebtedness) to the consolidated trailing four quarters EBITDA, not to exceed 3.00 to 1.00 as of the last day of any fiscal quarter; and
• Interest coverage ratio, defined as the ratio of consolidated trailing four quarters EBITDA to consolidated trailing four quarters of cash basis interest expense, of not less than 3.00 to 1.00 as of the last day of any fiscal quarter.
As of June 30, 2022, our total leverage ratio was 1.97 to 1.00, our senior secured leverage ratio was 0.61 to 1.00 and our interest coverage ratio was 13.74 to 1.00 and we were in compliance with all financial and operating covenants of the credit facility.
Any failure to comply with the financial or operating covenants of the credit facility would prevent PTC from being able to borrow additional funds, and would constitute a default, permitting the lenders to, among other things, accelerate the amounts outstanding, including all accrued interest and unpaid fees, under the credit facility and to terminate the credit facility. A change in control of PTC, as defined in the agreement, also constitutes an event of default, permitting the lenders to accelerate the indebtedness and terminate the credit facility.
In the third quarter and first nine months of 2022, we paid $2.1 million and $25.9 million of interest on our debt, respectively, and $3.2 million and $23.7 million in the third quarter and first nine months of 2021, respectively. The average interest rate on borrowings outstanding was approximately 3.4% and 3.3% during the third quarter and first nine months of 2022, respectively, and 3.1% and 3.4% during the third quarter and first nine months of 2021, respectively.
14. Leases
Our operating leases expire at various dates through 2037 and are primarily for office space, automobiles, servers, and office equipment.
Our headquarters are located at 121 Seaport Boulevard, Boston, Massachusetts. In February 2019, we subleased a portion of our headquarters through June 30, 2022, and received approximately $9.1 million in sublease income over the term of the sublease. In March 2022, we extended the sublease through June 30, 2023, and we will receive $2.9 million in sublease income over the term of the extension.
The components of lease cost reflected in the Consolidated Statement of Operations for the three and nine months ended June 30, 2022 and June 30, 2021 were as follows:
Operating lease cost
8,613
9,075
Short-term lease cost
812
627
1,935
1,785
Variable lease cost
2,608
2,443
7,694
7,306
Sublease income
(1,176
(1,114
(3,406
(3,329
Total lease cost
11,031
32,372
33,793
25
Supplemental cash flow and right-of-use assets information for the three and nine months ended June 30, 2022 was as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
10,087
12,319
35,200
40,396
Financing cash flows from financing leases
239
279
Right-of-use assets obtained in exchange for new lease obligations:
Operating leases
730
126
11,825
773
Financing leases
Supplemental balance sheet information related to the leases as of June 30, 2022 was as follows:
Weighted-average remaining lease term - operating leases
11.9 years
Weighted-average remaining lease term - financing leases
2.1 years
Weighted-average discount rate - operating leases
5.4
Weighted-average discount rate - financing leases
3.0
Maturities of lease liabilities as of June 30, 2022 are as follows:
Remainder of 2022
9,139
2023
30,971
2024
26,710
2025
23,816
2026
19,853
Thereafter
160,184
Total future lease payments
270,673
Less: imputed interest
(75,837
Total lease liability
194,836
As of June 30, 2022 we had an operating lease that had not yet commenced. The lease will commence in FY'23 with a lease term of 10 years and we will make future lease payments of approximately $11.6 million.
Exited (Restructured) Facilities
As of June 30, 2022, we had net liabilities of $0.7 million related to excess facilities (compared to $3.6 million at September 30, 2021), representing $0.2 million of right-of-use assets and $0.9 million of lease obligations, all of which is classified as short term. Variable costs related to these exited facilities are included in our restructuring accrual. All expenses and income associated with exited facilities are included in restructuring and other charges, net (refer to Note 3. Restructuring and Other Charges).
In determining the amount of right-of-use assets for restructured facilities, we are required to estimate such factors as future vacancy rates, the time required to sublet properties and sublease rates. Updates to these estimates may result in revisions to the value of right-of-use assets recorded. The amounts recorded are based on the net present value of estimated sublease income. As of June 30, 2022, the right-of-use assets for exited facilities reflects discounted committed sublease income of approximately $0.2 million.
In the three and nine months ended June 30, 2022, we made payments of $0.7 million and $1.9 million, respectively, related to lease costs for exited facilities. In the three and nine months ended June 30, 2021, we made payments of $1.2 million and $7.5 million, respectively.
15. Commitments and Contingencies
As June 30, 2022 and June 30, 2021, we had letters of credit and bank guarantees outstanding of $15.2 million (of which $0.5 million was collateralized) and $16.3 million (of which $0.5 million was collateralized), respectively, primarily related to our corporate headquarters lease.
Legal and Regulatory Matters
With respect to legal proceedings and claims, we record an accrual for a contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
401(k) Plan
On September 17, 2020, three individual plaintiffs filed a putative class action lawsuit against PTC, the Investment Committee for the PTC Inc. 401(k) Plan (“Plan”), and the Board of Directors (collectively, the “PTC Defendants”) in the U.S. District Court for the District of Massachusetts alleging claims regarding the Plan. Plaintiffs allege that the defendants breached their fiduciary duties under the Employee Retirement Income Security Act of 1974 ("ERISA") in the oversight of the Plan, principally by allegedly selecting and retaining certain investment options despite fees and costs that were higher than other available investment options, causing participants in the Plan to pay excessive recordkeeping fees and suffer lower returns on their investments, and by allegedly failing to monitor other fiduciaries. The plaintiffs sought unspecified damages on behalf of a class of Plan participants from September 17, 2014 through the date of any judgment. On September 22, 2021, the plaintiffs and the PTC Defendants reached an agreement in principle to settle the lawsuit for a gross settlement amount of $1.725 million. The settlement received preliminary approval from the Court on May 12, 2022, and a Fairness Hearing is scheduled for September 14, 2022. The ultimate outcome by judgment or settlement is not expected to be material to our financial position, results of operations or cash flows.
Other Legal Proceedings
In addition to the matter listed above, we are subject to legal proceedings and claims against us in the ordinary course of business. As of June 30, 2022, we estimate that the range of possible outcomes for such matters is immaterial and we do not believe that resolving them will have a material adverse impact on our financial condition, results of operations or cash flows. However, the results of legal proceedings cannot be predicted with certainty. Should any of these legal proceedings and claims be resolved against us, the operating results for a reporting period could be adversely affected.
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Guarantees and Indemnification Obligations
We enter into standard indemnification agreements with our customers and business partners in the ordinary course of our business. Under such agreements, we typically indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to our products. Indemnification may also cover other types of claims, including claims relating to certain data breaches. Except for intellectual property infringement indemnification, these agreements typically limit our liability with respect to other indemnification claims. Historically, our costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and, accordingly, we believe the estimated fair value of liabilities under these agreements is immaterial.
We warrant that our software products will perform in all material respects in accordance with our standard published specifications during the term of the license/subscription. Additionally, we generally warrant that our consulting services will be performed consistent with generally accepted industry standards and, in the case of fixed price services, the agreed-upon specifications. In most cases, liability for these warranties is capped. If necessary, we would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history; however, we have not incurred significant cost under our product or services warranties. As a result, we believe the estimated fair value of these liabilities is immaterial.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business Overview
PTC is a global software and services company that enables industrial companies to improve growth and profitability with a portfolio of innovative digital solutions that work together to transform how physical products are engineered, manufactured, and serviced. Our award-winning technology portfolio spans the computer-aided design (CAD), product lifecycle management (PLM), Industrial Internet of Things (IIoT), and Augmented Reality (AR) markets.
Our customer base includes some of the world’s most innovative manufacturers in the aerospace and defense, automotive, electronics and high tech, industrial machinery and equipment, life sciences, oil and gas, retail, and consumer products industries. Our solutions enable industrial companies to create a closed loop of information shared across their organization’s entire value chain. This “digital thread” can drive excellence in engineering, efficiency in manufacturing operations and service delivery, and innovation across product offerings and business models. With our solutions, digital transforms physical.
We generate revenue through the sale of on-premise software subscriptions, which include license access and support (technical support and software updates); support for existing perpetual licenses; professional services (consulting, implementation, and training); and cloud services (hosting for our software and Software as a Service (SaaS)).
Forward-Looking Statements
Statements in this document that are not historic facts, including statements about our future financial and growth expectations and targets, and potential stock repurchases, are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. These risks include: the macroeconomic and/or global manufacturing climates may not improve when or as we expect, or may deteriorate, due to, among other factors, the COVID-19 pandemic, the effects of the Russia/Ukraine conflict, and inflation, which could cause customers to delay or reduce purchases of new software, reduce the number of subscriptions they carry, or delay payments to us, which would adversely affect ARR and/or our financial results, including cash flow; our businesses, including our SaaS businesses, may not expand and/or generate the revenue or ARR we expect if customers are slower to adopt our technologies than we expect or if they adopt competing technologies; the Codebeamer™ and ITC Infotech transactions may not have expected effects on our business or results of operations; our strategic initiatives and investments, including our restructuring and our accelerated investments in our transition to SaaS, may not deliver the results when or as we expect; we may be unable to generate sufficient operating cash flow to repay amounts under our credit facility or to return 50% of free cash flow to shareholders, and other uses of cash or our credit facility limits or other matters could preclude such repayment and/or repurchases; we may be unable to attract and retain employees in the current competitive hiring environment, which could adversely impact our operations and our financial results; and foreign exchange rates may differ materially from those we expect. In addition, our assumptions concerning our future GAAP and non-GAAP effective income tax rates are based on estimates and other factors that could change, including the geographic mix of our revenue, expenses, and profits, as well as other risks and uncertainties described below throughout or referenced in Part II, Item 1A. Risk Factors of this report.
Operating and Non-GAAP Financial Measures
Our discussion of results includes discussion of our ARR (Annual Run Rate) operating measure, non-GAAP financial measures, and disclosure of our results on a constant currency basis. ARR and our non-GAAP financial measures, including the reasons we use those measures, are described below in Results of Operations - Operating Measure and Results of Operations - Non-GAAP Financial Measures, respectively. The methodology used to calculate constant currency disclosures is described in Results of Operations - Impact of Foreign Currency Exchange on Results of Operations. You should read those sections to understand our operating measure, non-GAAP financial measures, and constant currency disclosures.
Executive Overview
Q3’22 ARR was $1.54 billion, $1.63 billion on a constant currency basis, representing growth of 9% and 16%, respectively, compared to Q3’21, driven by strength in new bookings across all segments and geographic regions. ARR at the end of Q3’22 includes a contribution of $15 million ($16 million constant currency) from the Codebeamer business acquired in the quarter and a $4 million reduction associated with discontinuing our business operations in Russia in Q2’22. Q3’22 revenue of $462 million was up 6% (12% constant currency) over Q3’21, driven by higher revenue from our recurring revenue business lines, particularly in Digital Thread. Q3’22 operating margin was 17% compared to 17% in Q3’21, and Q3’22 non-GAAP operating margin was 34% compared to 31% in Q3’21. Q3’22 EPS increased to $0.60 compared to $0.43 in Q3’21, and non-GAAP EPS increased to $0.97 compared to $0.83 in Q3’21. Both GAAP and non-GAAP EPS benefited from year-over-year revenue increases and expense discipline; GAAP EPS also benefited from a recognized gain on the sale of a portion of our PLM services business to ITC Infotech.
We generated $117 million of cash from operations compared to $88 million in Q3’21, with the increase driven by higher ARR and strong operational execution. Operating cash flow includes payments related to restructuring, which were $8.2 million higher year over year, and acquisition and transaction-related payments, which were $5.9 million higher year over year. These were offset by a decrease of $16.9 million in non-ordinary course tax payments. In Q3’22, we received $32.5 million related to the ITC Infotech divestiture transaction (included in cash from investing activities), and used $275 million ($264 million of which we borrowed under our credit facility) to purchase the Codebeamer business.
Results of Operations
The following table shows the financial measures that we consider the most significant indicators of our business performance. In addition to providing operating income, operating margin, diluted earnings per share and cash from operations as calculated under GAAP, we provide non-GAAP operating income, non-GAAP operating margin, non-GAAP diluted earnings per share, and free cash flow for the reported periods. We also provide a view of our actual results on a constant currency basis. These non-GAAP financial measures exclude the items described in Non-GAAP Financial Measures below. Investors should use these non-GAAP financial measures only in conjunction with our GAAP results.
(Dollar amounts in millions, except per share data)
Percent Change
Actual
ConstantCurrency(1)
ARR(1)
1,544.4
1,418.4
Total recurring revenue(2)
415.2
387.2
8.2
7.3
39.1
41.2
(5
)%
462.5
435.7
102.0
95.1
360.5
340.6
Operating expenses
280.5
267.0
Total costs and expenses
382.5
362.1
80.0
73.6
Non-GAAP operating income(3)
155.7
132.9
Operating margin
17.3
16.9
Non-GAAP operating margin(3)
33.7
30.5
Diluted earnings per share
Non-GAAP diluted earnings per share(3)
0.97
0.83
Cash flow from operations(4)
116.8
88.0
Capital expenditures
(4.5
(3.4
Free cash flow(3)
112.3
84.6
1,273.0
1,187.0
26.2
22.6
126.2
116.9
1,425.4
1,326.5
290.5
271.4
1,135.0
1,055.1
833.6
789.5
1,124.1
1,060.9
301.3
265.6
527.7
458.3
21.1
20.0
37.0
34.5
3.31
2.87
396.8
323.5
(10.0
(11.7
386.8
311.8
31
Impact of Foreign Currency Exchange on Results of Operations
Approximately 60% of our revenue and 35% of our expenses are transacted in currencies other than the U.S. Dollar. Because we report our results of operations in U.S. Dollars, currency translation, particularly changes in the Euro, Yen, Shekel, and Rupee relative to the U.S. Dollar, affects our reported results. Changes in foreign currency exchange rates have been a headwind to reported results in the first nine months of FY’22. We anticipate foreign currency exchange rates will continue to be a headwind for the remainder of FY’22.
The results of operations in the table above and revenue by line of business, product group, and geographic region in the tables that follow present both actual percentage changes year over year and percentage changes on a constant currency basis. Our constant currency disclosures are calculated by multiplying the results in local currency for the quarterly and year-to-date periods for FY’22 and FY’21 by the exchange rates in effect on September 30, 2021. If reported results for the nine months ended June 30, 2022 were converted into U.S. dollars based on this methodology, ARR would have been higher by $81 million, year-to-date revenue would have been higher by $25 million and year-to-date expenses would have been higher by $9 million. If reported results for the nine months ended June 30, 2021 were converted into U.S. dollars based on this methodology, ARR would have been lower by $13 million, year-to-date revenue would have been lower by $20 million and year-to-date expenses would have been lower by $6 million.
Under ASC 606, the volume, mix, and duration of contract types (support, SaaS, on-premise subscription) starting or renewing in any given period may have a material impact on revenue in the period, and as a result can impact the comparability of reported revenue period-over-period. We recognize revenue for the license portion of on-premise subscription contracts up front when we deliver the licenses to the customer, typically on the start date, and we recognize revenue on the support element of on-premise subscription contracts and stand-alone support contracts ratably over the term. We continue to convert existing support contracts to on-premise subscriptions, resulting in a shift to up-front recognition of on-premise subscription license revenue in the period converted compared to ratable recognition for a perpetual support contract. Revenue from our cloud services (primarily SaaS) contracts is recognized ratably. We are expanding our SaaS offerings and are releasing additional cloud functionality into our products and customers are migrating from on-premise subscriptions to SaaS products. As a result, we expect that over time a higher portion of our revenue will be recognized ratably. Given the different mix, duration and volume of new and renewing contracts in any period, year-over-year or sequential revenue comparisons can vary significantly.
Revenue by Line of Business
(Dollar amounts in millions)
ConstantCurrency
Constant Currency
175.2
163.6
562.6
538.8
248.2
230.9
736.6
670.9
Software revenue
423.4
394.4
1,299.2
1,209.6
32
Software revenue in the third quarter and first nine months of FY’22 increased compared to the year-ago periods, primarily due to growth in Digital Thread – Core subscription revenue driven by PLM growth in Europe and growth in Velocity due primarily to contribution from Arena, offset by a decline in perpetual support revenue due to conversions of support contracts to subscriptions.
Professional services revenue in the third quarter and first nine months of FY’22 relative to the respective year-ago periods reflects an increase in revenue associated with large PLM consulting engagements, particularly with automotive, aerospace and defense and consumer electronics customers, and the fact that professional services revenue in the first half of FY’21 was negatively impacted by services delivery challenges associated with the COVID-19 pandemic. Q3’22 professional services revenue also reflects the effect of foreign currency headwinds, as approximately 65% of our professional services revenue comes from Europe and Asia Pacific.
We expect that professional services revenue will be higher in FY'22 than FY’21 or FY’20 as we expect demand for services will increase to a level that is more consistent with pre-pandemic levels. Our longer-term expectation is that professional services revenue will trend down over time as we migrate more services engagements to our partners, including through our transaction with ITC Infotech described above, and as we deliver products that require less consulting and training services.
Software Revenue by Product Group
Digital Thread - Core
286.8
271.2
896.5
859.4
Digital Thread - Growth
60.5
54.1
185.0
170.2
Digital Thread - FSG
54.4
55.7
158.1
154.4
Digital Thread (Total)
401.7
381.0
1,239.6
1,184.0
Velocity
21.7
13.4
62
63
59.6
25.6
133
Digital Thread
Core software revenue growth in the third quarter and first nine months of FY’22 compared to the year-ago periods was driven by on-premise subscription license revenue growth of 11% (17% constant currency) and 5% (9% constant currency), respectively. For the third quarter and first nine months of FY’22, on-premise subscription support revenues increased 14% (21% constant currency) and 17% (21% constant currency), respectively, and cloud services revenues grew by 24% (28% constant currency) and 30% (33% constant currency), respectively. Growth in on-premise subscription and cloud services revenues were offset by a decrease in perpetual support revenue as customers continue to convert from perpetual support contracts to subscriptions.
Core ARR increased 6% (14% constant currency) for Q3’22 compared to Q3’21, reflecting growth in both CAD and PLM.
Growth software revenue growth in the third quarter and first nine months of FY’22 compared to the year-ago periods was driven by support and cloud services revenue growth of 15% (19% constant currency) and 16% (19% constant currency), respectively. In Q3'22, on-premise subscription license revenue increased by 4% (9% constant currency), driven by IIoT. For the first nine months of FY'22, on-premise subscription license revenue decreased by 3% (1% constant currency), driven by the discontinuance of certain Vuforia products with up-front revenue recognition at the beginning of FY’22.
Growth ARR increased 13% (19% constant currency) for Q3’22 compared to Q3’21, driven primarily by growth in IIoT.
FSG software revenue in the third quarter and first nine months of FY’22 was driven by cloud services revenue growth of 20% (23% constant currency) and 22% (24% constant currency), respectively. On-premise subscription license revenue decreased by 19% (15% constant currency) and 3% (flat constant currency) for the third quarter and first nine months of FY'22, respectively. The decrease in on-premise subscription license revenue in the third quarter was driven by a reduction in the mix of on-premise subscriptions compared to SaaS, as well as a reduction in the average duration of on-premise subscription contracts which renewed in the period. Software revenue for the third quarter and first nine months includes revenue from the Codebeamer business, which we acquired in April 2022.
FSG ARR increased by 11% (17% constant currency) for Q3’22 compared to Q3’21 driven primarily by the acquisition of the Codebeamer business, which added $15 million ($16 million constant currency) to Q3’22 ending ARR.
Velocity software revenue in the third quarter reflects growth from Arena of 68% (actual and constant currency) and from Onshape of 44% (actual and constant currency). Growth for the first nine months of FY'22 was primarily driven by the acquisition of Arena in January 2021, as well as 47% growth from Onshape (actual and constant currency). The increase in revenue from Arena includes the effect of purchase accounting adjustments to reduce acquired deferred revenue. Revenue was reduced by these purchase accounting adjustments in the third quarter and first nine months of FY'21 of $3.1 million and $6.9 million, respectively. Revenue was reduced by $1.3 million during the first nine months of FY'22 without any impact to Q3'22.
Velocity ARR grew in Q3’22 compared to Q3’21 by 29% (actual and constant currency), reflecting growth in both Arena and Onshape.
Software Revenue by Geographic Region
A significant portion of our software revenue is generated outside the U.S. In FY'22 and FY’21, approximately 40% of software revenue was generated in the Americas, 40% in Europe, and 20% in Asia Pacific.
178.9
164.9
562.8
522.2
156.9
139.9
499.2
467.4
87.6
89.6
237.2
220.0
Americas software revenue growth in the third quarter and first nine months of FY’22 compared to the year-ago periods was driven primarily by the Velocity product group, where Arena (which was acquired in January 2021) increased by 75% (actual and constant currency) and 182% (actual and constant currency), respectively. The increase in revenue from Arena includes the effect of purchase accounting adjustments to reduce acquired deferred revenue, as discussed above. Digital Thread revenue in the Americas increased 4% (actual and constant currency) and 2% (actual and constant currency) during the three and nine months ended FY’22, respectively.
Q3’22 Americas ARR was up 14% (actual and constant currency) over Q3’21, led by double-digit percentage growth in Digital Thread – Core and mid-20s percentage growth in Velocity.
34
Europe software revenue growth in the third quarter and first nine months was driven by growth in Digital Thread – Core of 14% (24% constant currency) and 7% (13% constant currency), respectively, primarily due to increases in PLM revenue, as well as increases in IIoT revenue of 28% (39% constant currency) and 18% (25% constant currency), respectively.
Q3’22 ARR in Europe was up 5% (17% constant currency) over Q3’21, led by growth in Digital Thread-Core and IIoT.
Asia Pacific software revenue in the third quarter decreased due to a reduction in Digital Thread - Core revenue of 2% (6% increase in constant currency). The software revenue increase in the first nine months was driven by an increase in Digital Thread - Core revenue of 9% (15% constant currency).
Q3’22 ARR in Asia Pacific was up 4% (16% constant currency) over Q3’21, led by Digital Thread – Core.
Gross Margin
License gross margin
161.5
148.0
527.2
495.8
License gross margin percentage
92
91
94
Support and cloud services gross margin
201.6
188.5
599.3
550.1
Support and cloud services gross margin percentage
81
82
Professional services gross margin
(2.6
4.1
(165
8.4
9.2
(8
Professional services gross margin percentage
(7
Total gross margin
Total gross margin percentage
78
80
Non-GAAP gross margin(1)
375.5
353.9
1,172.6
1,090.8
Non-GAAP gross margin percentage(1)
License gross margin increased in the third quarter of FY’22 compared to the corresponding FY’21 period due to an increase in license revenue of $11.6 million, along with a decrease in cost of license of $1.8 million, which was driven by lower amortization expense. License gross margin increased in the first nine months of FY'22 compared to the corresponding FY'21 period due to an increase in license revenue of $23.9 million, along with a decrease in cost of license revenue of $7.5 million, which was driven by lower intangible amortization expense, royalty expense and compensation costs.
Support and cloud services gross margin increased in the third quarter and first nine months of FY’22 compared to the corresponding FY’21 periods due to increases in support and cloud services revenue of $17.4 million and $65.7 million, respectively, partially offset by increases in cost of support and cloud services of $4.2 million and $16.5 million, respectively, which were driven by higher compensation and hosting costs.
Professional services gross margin decreased in the third quarter and first nine months of FY’22 compared to the corresponding FY’21 periods due to increases in professional services costs of $4.5 million and $10.1 million in the third quarter and the first nine months of FY'22, respectively, including $5.1 million of stock-based compensation expense recognized in Q3'22 related to the sale of a portion of our PLM services business.
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Operating Expenses
124.3
134.4
366.2
388.3
% of total revenue
88.2
78.1
250.6
221.5
54.6
47.1
154.0
157.4
8.9
7.5
25.9
4.5
(0.1
(3477
36.9
0.6
6216
(0
0
Headcount decreased 4% between Q3’22 and Q3’21.
Operating expenses in Q3’22 compared to operating expenses in Q3’21 increased primarily due to the following:
partially offset by:
Operating expenses in the first nine months of FY’22 compared to operating expenses in the first nine months of FY’21 increased primarily due to the following:
36
Interest Expense
(13.8
(13.2
(39.0
(37.6
Interest expense includes interest on our credit facility and senior notes. We had $1.4 billion of total debt at June 30, 2022, compared to $1.5 billion at June 30, 2021. We repaid $105 million of our revolving credit facility in Q3'22, offset by $264 million borrowed at the end of April to fund the acquisition of the Codebeamer business. The average interest rate on borrowings outstanding was approximately 3.4% and 3.3% during the third quarter and first nine months of FY’22, respectively, and 3.1% and 3.4% during the third quarter and first nine months of FY’21, respectively. We expect the average interest rates will increase during the rest of the year, driven by our variable-rate revolving credit facility.
Other Income (Expense)
Interest income
0.4
1.6
1.3
34.0
(2.3
(1578
(4.2
(7.1
(41
34.6
(1.9
(1921
(5.8
(55
The increase in Other income (expense), net, in FY’22 over the FY’21 periods is driven by a recognized gain on the sale of a portion of our PLM services business of $29.8 million and a $3.0 million gain on the sale of an investment in the third quarter of FY'22. Net charges for the nine months ended June 30, 2022 include a recognized FY'22 loss on our equity investment in a publicly-traded company of $34.8 million. We sold our investment for $42.7 million in Q2’22 for an overall realized gain of $34.0 million.
100.8
58.5
72
259.7
222.2
30.3
317
53.5
38.3
40
In the third quarter and first nine months of FY’22 and FY’21, our effective tax rate differed from the statutory federal income tax rate of 21% due to our corporate structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland and the Cayman Islands. In 2022 and 2021, the foreign rate differential predominantly relates to these earnings.
In FY’22 and FY’21, in addition to the foreign rate differential, the effective tax rate was impacted by the net effects of the Global Intangible Low-Taxed Income (GILTI) and Foreign Derived Intangible Income (FDII) regimes and the excess tax benefit related to stock-based compensation.
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Additionally, in the third quarter and first nine months of FY’22 our results include tax expense related to the sale of a portion of our PLM services business of $15.5 million, including $8.1 million of expense related to the basis difference on goodwill. Our results for the third quarter and nine months ended June 30, 2021, include the effects of the full valuation allowance, which was maintained against our U.S. net deferred tax assets at that time. Additionally, in the first nine months of FY’21, our results include the reduction of our previously established U.S. valuation allowance by $42.3 million as a result of the Arena acquisition, and a charge of $37.3 million related to the effects of an unrecognized tax benefit in the Republic of Korea (South Korea), primarily related to foreign withholding taxes.
Critical Accounting Policies and Estimates
The financial information included in Item 1 reflects no material changes in our critical accounting policies and estimates as set forth under the heading Critical Accounting Policies and Estimates in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2021 Annual Report on Form 10-K.
Recent Accounting Pronouncements
In accordance with recently issued accounting pronouncements, we will be required to comply with certain changes in accounting rules and regulations. Refer to Note 1. Basis of Presentation to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q, which is incorporated herein by reference, for all recently issued accounting pronouncements.
Liquidity and Capital Resources
(in millions)
322.3
326.5
Restricted cash
0.7
0.5
323.0
327.0
(192.9
(674.8
(193.2
440.0
Cash, Cash Equivalents and Restricted Cash
We invest our cash with highly rated financial institutions. Cash and cash equivalents include highly liquid investments with original maturities of three months or less. At June 30, 2022, cash and cash equivalents totaled $322 million, compared to $327 million at September 30, 2021.
A significant portion of our cash is generated and held outside the U.S. As of June 30, 2022, we had cash and cash equivalents of $23 million in the U.S., $100 million in Europe, $167 million in Asia Pacific (including India) and $32 million in other non-U.S. countries. We have substantial cash requirements in the U.S., but we believe that the combination of our existing U.S. cash and cash equivalents, our ability to repatriate cash to the U.S., future U.S. operating cash flows, and cash available under our credit facility will be sufficient to meet our ongoing U.S. operating expenses and known capital requirements.
38
Cash Provided by Operating Activities
Cash provided by operating activities was $397 million in the first nine months of FY’22, compared to $323 million in the first nine months of FY’21. Cash from operations for the first nine months of FY'22 includes $38.5 million of restructuring payments and $10.1 million of acquisition and transaction-related payments compared to $13.7 million of restructuring payments and $14.8 million of acquisition and transaction-related payments in the prior-year period. The increase in cash from operations in the first nine months of FY'22 compared to the same period in FY’21 was driven by an increase in collections, including contributions from Arena & Codebeamer, partially offset by increases in restructuring payments and disbursements.
Cash Used In Investing Activities
Proceeds from short- and long-term marketable securities, net
(275.0
(717.8
46.9
32.5
12.6
(3.8
Cash used in investing activities in the first nine months of FY’22 reflects proceeds from sale of investments of $47 million, proceeds from the sale of a portion of our PLM services business of $33 million and proceeds from net investment hedges of $18 million, offset by $275 million used to acquire the Codebeamer business, fixed asset additions of $10 million and purchases of intangible assets of $5 million. Cash used in investing activities in the first nine months of FY’21 reflects approximately $715 million used for the Arena acquisition and $59 million in net proceeds from the sale and maturity of marketable securities.
Cash (Used In) Provided by Financing Activities
Borrowings (repayments) on debt, net
(16.0
472.0
(125.0
10.9
10.5
(62.9
(42.2
Payment of principal for financing leases
(0.2
(0.3
Cash used in financing activities in the first nine months of FY’22 reflects repurchases of common stock of $125 million, payment of withholding taxes related to stock-based awards of $63 million, compared to $42 million in the year ago period, and net repayments of $16 million under our credit facility. Cash provided by financing activities in the first nine months of FY’21 reflects net borrowings of $472 million under our credit facility.
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Outstanding Debt
500.0
Credit facility revolver
434.0
1,434.0
Unamortized debt issuance costs for the senior notes
(8.9
1,425.1
Undrawn under credit facility revolver
566.0
Undrawn under credit facility revolver available to borrow
550.8
As of June 30, 2022, we were in compliance with all financial and operating covenants of the credit facility and the note indentures. Any failure to comply with such covenants under the credit facility would prevent us from being able to borrow additional funds under the credit facility, and, as with any failure to comply with such covenants under the note indentures, could constitute a default that could cause all amounts outstanding to become due and payable immediately.
Our credit facility and our senior notes described in Note 13. Debt to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
Future Expectations
We believe that existing cash and cash equivalents as of June 30, 2022, together with cash generated from operations and amounts available under the credit facility, will be sufficient to meet our working capital and capital expenditure requirements (which we expect to be approximately $20 million in FY’22) through at least the next twelve months and to meet our known long-term capital requirements. We expect foreign exchange rate headwinds to continue to have an impact on our results for the full year, particularly in ARR where our Q3'22 results based on rates as of June 30, 2022 were $81 million lower than they would have been using rates as of the beginning of the year.
Related to restructuring, we do not expect to incur any significant additional charges and expect to make $2 million to $7 million in payments for the remainder of FY’22. The FY’22 restructuring action is expected to help align our customer facing and product-related functions with the SaaS industry best practices and accelerate the opportunity for our on-premise customers to move to the cloud.
Our expected uses and sources of cash could change, our cash position could be reduced, and we could incur additional debt obligations if we decide to retire debt, engage in additional strategic transactions, or repurchase shares, any of which could be commenced, suspended, or completed at any time. Any such repurchases or retirement of debt will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, and other factors. The amounts involved in any debt retirement or issuance, share repurchases, or strategic transactions may be material.
Operating Measure
ARR
We provide an ARR (Annual Run Rate) operating measure to help investors understand and assess the performance of our business as a SaaS and on-premise subscription company. ARR represents the annualized value of our portfolio of active subscription software, cloud, SaaS and support contracts as of the end of the reporting period. ARR includes orders placed under our Strategic Alliance Agreement with Rockwell Automation, including orders placed to satisfy contractual minimum commitments.
We believe ARR is a valuable operating metric to measure the health of a subscription business because it captures expected subscription and support cash generation from customers.
Non-GAAP Financial Measures
Our non-GAAP financial measures and the reasons we use them and the reasons we exclude the items identified below are described in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended September 30, 2021.
The non-GAAP financial measures presented in the discussion of our results of operations and the respective most directly comparable GAAP measures are:
We provide information on free cash flow to enable investors to assess our ability to generate cash without incurring additional external financings and to evaluate our performance against our announced long-term goals and intent to return approximately 50% of our free cash flow to shareholders via stock repurchases. Free cash flow is cash flow from operations net of capital expenditures, which are expenditures for property and equipment and consist primarily of facility improvements, office equipment, computer equipment, and software.
The non-GAAP financial measures other than free cash flow exclude, as applicable, stock-based compensation expense; amortization of acquired intangible assets; acquisition-related and other transactional charges included in general and administrative expenses; restructuring and other charges, net; non-operating charges (credits), including those associated with the sale of a portion of our PLM services business and gains or losses on equity investments; and income tax adjustments as defined in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021. In Q1’21, we incurred tax expense related to a reserve for a South Korean tax exposure established in the quarter which is excluded from our non-GAAP financial measures as it was related to prior periods and not included in management’s view of Q1’21 results for comparative purposes.
We use these non-GAAP financial measures, and we believe that they assist our investors, to make period-to-period comparisons of our operational performance because they provide a view of our operating results without items that are not, in our view, indicative of our core operating results. We believe that these non-GAAP financial measures help illustrate underlying trends in our business, and we use the measures to establish budgets and operational goals (communicated internally and externally) for managing our business and evaluating our performance. We believe that providing non-GAAP financial measures also affords investors a view of our operating results that may be more easily compared to the results of other companies in our industry that use similar financial measures to supplement their GAAP results.
The items excluded from the non-GAAP financial measures often have a material impact on our financial results, certain of those items are recurring, and other such items often recur. Accordingly, the non-GAAP financial measures included in this Quarterly Report on Form 10-Q should be considered in addition to, and not as a substitute for or superior to, the comparable measures prepared in accordance with GAAP. The following tables reconcile each of these non-GAAP financial measures to its most closely comparable GAAP measure on our financial statements.
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(in millions, except per share amounts)
GAAP gross margin
5.1
18.7
14.0
Amortization of acquired intangible assets included in cost of revenue
6.6
8.3
19.0
21.6
Non-GAAP gross margin
GAAP operating income
49.4
43.1
133.3
133.9
15.5
15.8
44.9
43.4
Acquisition-related and other transactional charges
6.4
11.3
14.8
Non-GAAP operating income
GAAP net income
70.5
51.2
206.2
184.0
Non-operating charges (credits), net(1)
(32.8
2.0
Income tax adjustments(2)
1.1
(12.5
(43.6
(37.1
Non-GAAP net income
114.5
98.0
391.0
339.6
GAAP diluted earnings per share
0.42
0.36
1.13
0.13
0.38
0.37
0.05
0.01
0.10
0.04
0.31
(0.28
0.02
(0.11
(0.37
(0.31
Non-GAAP diluted earnings per share
Operating margin impact of non-GAAP adjustments:
GAAP operating margin
10.7
9.9
9.4
10.1
3.4
3.6
3.1
3.3
1.4
0.1
0.8
1.0
0.0
2.6
Non-GAAP operating margin
42
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in our market risk exposure as described in Item 7A. Quantitative and Qualitative Disclosures about Market Risk of our 2021 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Effectiveness of Disclosure Controls and Procedures
Our management maintains disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), as appropriate, to allow for timely decisions regarding required disclosure.
We evaluated, under the supervision and with the participation of management, including our principal executive and principal financial officers, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2022.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a or 15(d) of the Exchange Act that occurred during the period ended June 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information on legal proceedings can be found in Note 15. Commitments and Contingencies – Legal Proceedings – 401(k) Plan of Notes to Consolidated Financial Statements in this Form 10-Q, which information is incorporated herein by reference.
ITEM 1A. RISK FACTORS
In addition to other information set forth in this report, you should carefully consider the risk factors described in Part I. Item 1A. Risk Factors in our 2021 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.
ITEM 6. EXHIBITS
Share Sale and Purchase Agreement dated as of April 19, 2022, by and among PTC (SSI), Intland Software GmbH, Eger Invest GmbH, Janos Rezso Koppány, Zsolt Koppány, Szabolcs Koppány and Eger Software Holding UG (haftungsbeschränkt) & Co. KG. (filed as Exhibit 1.1 to our Current Report on Form 8-K filed on April 20, 2022 (File No. 0-18059) and incorporated herein by reference).
Restated Articles of Organization of PTC Inc. adopted August 4, 2015 (filed as Exhibit 3.1 to our Annual Report on Form 10-K for the fiscal year ended September 30, 2015 (File No. 0-18059) and incorporated herein by reference).
3.2
By-Laws, as amended and restated, of PTC Inc. (filed as Exhibit 3.2 to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 2014 (File No. 0-18059) and incorporated herein by reference).
Amendment to PTC By-Laws dated June 24, 2021 (filed as Exhibit 3.1 to our Current Report on Form 8-K filed on June 25, 2021 (File No. 0-18059) and incorporated herein by reference).
Indenture, dated as of February 13, 2020, between PTC Inc. and Wells Fargo Bank, National Association, as trustee (filed as Exhibit 4.1 to our Current Report on Form 8-K filed on February 13, 2020 (File No. 0-18059) and incorporated herein by reference).
4.2
Form of 3.625% senior unsecured notes due 2025 (filed as Exhibit 4.2 to our Current Report on Form 8-K filed on February 13, 2020 (File No. 0-18059) and incorporated herein by reference).
4.3
Form of 4.000% senior unsecured notes due 2028 (filed as Exhibit 4.3 to our Current Report on Form 8-K filed on February 13, 2020 (File No. 0-18059) and incorporated herein by reference).
31.1
Certification of the Chief Executive Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a).
31.2
Certification of the Chief Financial Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a).
32*
Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350.
101
The following materials from PTC Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 ("Q3 Form 10-Q") formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of June 30, 2022 and September 30, 2021; (ii) Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2022 and June 30, 2021; (iii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended June 30, 2022 and June 30, 2021; (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2022 and June 30, 2021; (v) Consolidated Statements of Stockholders’ Equity for the three and nine months ended June 30, 2022 and June 30, 2021; and (vi) Notes to Condensed Consolidated Financial Statements.
104
The cover page of the Q3 Form 10-Q formatted in Inline XBRL (included in Exhibit 101).
* Indicates that the exhibit is being furnished, not filed, with this report.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
By:
/S/ KRISTIAN TALVITIE
Kristian Talvitie
Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
Date: August 5, 2022