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 March 31, 2023
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 118,353,472 shares of our common stock outstanding on May 2, 2023.
INDEX TO FORM 10-Q
For the Quarter Ended March 31, 2023
Page
Number
Part I—FINANCIAL INFORMATION
Item 1.
Unaudited Condensed Consolidated Financial Statements:
1
Consolidated Balance Sheets as of March 31, 2023 and September 30, 2022
Consolidated Statements of Operations for the three and six months ended March 31, 2023 and March 31, 2022
2
Consolidated Statements of Comprehensive Income for the three and six months ended March 31, 2023 and March 31, 2022
3
Consolidated Statements of Cash Flows for the six months ended March 31, 2023 and March 31, 2022
4
Consolidated Statements of Stockholders' Equity for the three and six months ended March 31, 2023 and March 31, 2022
5
Notes to Condensed Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
28
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
42
Item 4.
Controls and Procedures
Part II—OTHER INFORMATION
Item 1A.
Risk Factors
Item 6.
Exhibits
43
Signature
44
Table of Contents
PART I—FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
March 31,2023
September 30,2022
ASSETS
Current assets:
Cash and cash equivalents
$
320,477
272,182
Accounts receivable, net of allowance for doubtful accounts of $355 and $362 at March 31, 2023 and September 30, 2022, respectively
643,017
636,556
Prepaid expenses
119,298
88,854
Other current assets
83,618
71,065
Total current assets
1,166,410
1,068,657
Property and equipment, net
92,003
98,101
Goodwill
3,369,041
2,353,654
Acquired intangible assets, net
979,221
382,718
Deferred tax assets
151,154
256,091
Operating right-of-use lease assets
150,327
137,780
Other assets
391,464
390,267
Total assets
6,299,620
4,687,268
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
37,693
40,153
Accrued expenses and other current liabilities
138,184
117,158
Accrued compensation and benefits
110,027
104,022
Accrued income taxes
13,319
5,142
Deferred acquisition payments
620,040
—
Deferred revenue
649,262
503,781
Short-term lease obligations
24,521
22,002
Total current liabilities
1,593,046
792,258
Long-term debt
1,917,703
1,350,628
Deferred tax liabilities
38,221
28,396
22,142
16,552
Long-term lease obligations
177,106
167,573
Other liabilities
32,868
35,827
Total liabilities
3,781,086
2,391,234
Commitments and contingencies (Note 14)
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued
Common stock, $0.01 par value; 500,000 shares authorized; 118,334 and 117,472 shares issued and outstanding at March 31, 2023 and September 30, 2022, respectively
1,182
1,175
Additional paid-in capital
1,749,574
1,720,580
Retained earnings
866,276
727,737
Accumulated other comprehensive loss
(98,498
)
(153,458
Total stockholders’ equity
2,518,534
2,296,034
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
Six months ended
March 31, 2023
March 31, 2022
Revenue:
License
196,993
218,375
369,691
387,483
Support and cloud services
304,071
243,875
561,727
488,360
Total software revenue
501,064
462,250
931,418
875,843
Professional services
41,117
42,977
76,673
87,105
Total revenue
542,181
505,227
1,008,091
962,948
Cost of revenue:
Cost of license revenue
17,039
11,936
29,792
21,730
Cost of support and cloud services revenue
59,137
44,768
109,362
90,653
Total cost of software revenue
76,176
56,704
139,154
112,383
Cost of professional services revenue
37,330
36,633
70,142
76,072
Total cost of revenue
113,506
93,337
209,296
188,455
Gross margin
428,675
411,890
798,795
774,493
Operating expenses:
Sales and marketing
129,207
116,408
247,590
241,884
Research and development
100,349
81,935
188,526
162,469
General and administrative
65,923
47,469
116,894
99,409
Amortization of acquired intangible assets
10,656
8,450
18,682
16,934
Restructuring and other charges (credits), net
(1,562
(337
32,429
Total operating expenses
306,136
252,700
571,355
553,125
Operating income
122,539
159,190
227,440
221,368
Interest and debt premium expense
(41,525
(12,239
(57,883
(25,225
Other income (expense), net
55
(43,385
(2,064
(37,201
Income before income taxes
81,069
103,566
167,493
158,942
Provision for income taxes
17,565
13,887
28,954
23,174
Net income
63,504
89,679
138,539
135,768
Earnings per share—Basic
0.54
0.77
1.17
1.16
Earnings per share—Diluted
0.53
0.76
1.15
Weighted-average shares outstanding—Basic
118,260
117,008
118,037
117,135
Weighted-average shares outstanding—Diluted
119,041
117,811
118,912
118,162
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 $0.7 million and $(1.2) million in the second quarter of 2023 and 2022, respectively, and $4.5 million and $(2.0) million in the first six months of 2023 and 2022, respectively
(1,999
3,697
(13,484
6,192
Foreign currency translation adjustment, net of tax of $0 for each period
8,747
(11,356
68,776
(17,024
Amortization of net actuarial pension loss included in net income, net of tax of $0 million and $(0.1) million in the second quarter of 2023 and 2022, respectively, and $0 million and $(0.2) million in the first six months of 2023 and 2022, respectively
41
260
82
525
Change in unamortized pension gain (loss) during the period related to changes in foreign currency
(65
538
(414
923
Other comprehensive income (loss)
6,724
(6,861
54,960
(9,384
Comprehensive income
70,228
82,818
193,499
126,384
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
49,037
43,468
Amortization of right-of-use lease assets
16,564
17,536
Stock-based compensation
93,750
83,863
Loss on investment
34,847
Other non-cash items, net
(2,089
(110
Loss on disposal of fixed assets
Changes in operating assets and liabilities, excluding the effects of acquisitions:
Accounts receivable
86,478
12,310
Accounts payable and accrued expenses
11,110
(23,388
(18,468
(16,544
36,092
47,012
(12,169
(6,279
Other current assets and prepaid expenses
(786
(20,569
Operating lease liabilities
4,985
(3,360
Other noncurrent assets and liabilities
(11,174
(24,493
Net cash provided by operating activities
391,869
280,061
Cash flows from investing activities:
Additions to property and equipment
(12,950
(5,510
Acquisitions of businesses, net of cash acquired
(828,271
Proceeds from sale of investments
42,693
Purchases of investments
(5,823
Purchase of intangible assets
(4,454
Settlement of net investment hedges
(12,544
11,308
Divestitures of businesses and assets, net
(154
Net cash provided by (used in) investing activities
(859,742
44,037
Cash flows from financing activities:
Borrowings under credit facility
1,130,000
Repayments of borrowings under credit facility
(564,000
(175,000
Repurchases of common stock
(125,000
Proceeds from issuance of common stock
10,592
10,857
Payments of withholding taxes in connection with stock-based awards
(56,022
(50,595
Payments of principal for financing leases
(217
(239
Credit facility origination costs
(13,355
Net cash provided by (used in) financing activities
506,998
(339,977
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
9,181
(3,739
Net change in cash, cash equivalents, and restricted cash
48,306
(19,618
Cash, cash equivalents, and restricted cash, beginning of period
272,888
327,046
Cash, cash equivalents, and restricted cash, end of period
321,194
307,428
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three months ended March 31, 2023
Common Stock
Accumulated
Shares
Amount
AdditionalPaid-InCapital
Retained Earnings
OtherComprehensiveLoss
TotalStockholders’Equity
Balance as of December 31, 2022
118,161
1,701,817
802,772
(105,222
2,400,549
Common stock issued for employee stock-based awards
94
(1
Shares surrendered by employees to pay taxes related to stock-based awards
(23
(3,146
(3,147
Common stock issued for employee stock purchase plan
102
Compensation expense from stock-based awards
40,312
Unrealized loss on net investment hedges, net of tax
Foreign currency translation adjustment
Change in pension benefits, net of tax
(24
Balance as of March 31, 2023
118,334
Six months ended March 31, 2023
Balance as of September 30, 2022
117,472
1,184
12
(12
(424
(5
(56,017
74,431
(332
Three months ended March 31, 2022
Balance as of December 31, 2021
116,870
1,169
1,590,285
460,745
(98,387
1,953,812
51
(1,430
110
10,856
37,921
(43
Unrealized gain on net investment hedges, net of tax
798
Balance as of March 31, 2022
116,976
1,170
1,637,631
550,424
(105,248
2,083,977
Six months ended March 31, 2022
Balance as of September 30, 2021
117,163
1,172
1,718,504
414,656
(95,864
2,038,468
1,171
(422
(4
(50,591
Repurchase of common stock
(1,046
(11
(124,989
1,448
6
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, 2022. 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 as of the dates and for the periods indicated. The September 30, 2022 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.
Pending Accounting Pronouncements
There have been no accounting pronouncements or changes in accounting pronouncements that are significant or potentially significant to our consolidated financial statements.
2. Revenue from Contracts with Customers
Contract Assets and Contract Liabilities
Contract asset
23,771
21,096
671,404
520,333
As of March 31, 2023, $22.5 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 $7.9 million of the September 30, 2022 contract asset balance was transferred to receivables during the six months ended March 31, 2023 as a result of the right to payment becoming unconditional. Additions to contract assets of approximately $10.6 million primarily 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 six months ended March 31, 2023.
During the six months ended March 31, 2023, we recognized $362.3 million of revenue that was included in Deferred revenue as of September 30, 2022 and there were additional deferrals of $415.6 million, primarily related to new billings. In addition, Deferred revenue increased by $97.8 million as a result of the acquisition of ServiceMax. For subscription contracts we generally invoice customers annually. The balance of total short- and long-term receivables as of March 31, 2023 was $862.8 million, compared to total short- and long-term receivables as of September 30, 2022 of $871.0 million.
Our multi-year, non-cancellable on-premises subscription contracts provide customers with an annual right to exchange software within the subscription with other software. As of March 31, 2023 and September 30, 2022, our total revenue liability was $27.1 million and $34.2 million, respectively, primarily associated with the annual right to exchange on-premises subscription software.
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 $0.4 million as of March 31, 2023 and $0.4 million as of September 30, 2022. Uncollectible trade accounts receivable written off, net of recoveries and net bad debt expense were immaterial for the three and six months ended March 31, 2023 and 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 March 31, 2023 and September 30, 2022, deferred costs of $42.3 million and $40.7 million, respectively, are included in Other current assets and $77.3 million and $77.0 million, respectively, are included in Other assets (non-current). Amortization expense related to costs to obtain a contract with a customer was $12.5 million and $24.5 million in the three and six months ended March 31, 2023, respectively, and $12.7 million and $24.3 million in the three and six months ended March 31, 2022, respectively. There were no impairments of the contract cost asset in the three and six months ended March 31, 2023 and March 31, 2022.
Remaining Performance Obligations
Our contracts with customers include transaction price amounts allocated to performance obligations that will be satisfied and recognized as revenue at a later date. As of March 31, 2023, the transaction price amounts include performance obligations of $671.4 million recorded in deferred revenue and $1,337.0 million that are not yet recorded in the Consolidated Balance Sheets. We expect to recognize approximately 58% of the total $2,008.4 million over the next 12 months, with the remaining amount thereafter.
Disaggregation of Revenue
Recurring revenue(1)
492,143
452,710
909,253
857,835
Perpetual license
8,921
9,540
22,165
18,008
For further disaggregation of revenue by geographic region see Note 10. Segment and Geographic Information.
8
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.
Restructuring Charges (Credits)
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-premises customers to move to the cloud. The restructuring plan resulted in charges of $33.1 million in 2022, primarily associated with the termination benefits of approximately 330 employees.
Restructuring accrual balances as of March 31, 2023 and September 30, 2022 and activity for the six months ended March 31, 2023 were immaterial. The following table summarizes restructuring accrual activity for the six months ended March 31, 2022:
Employee Severance and Related Benefits
Facility Closures and Related Costs
Total
Accrual, October 1, 2021
1,981
3,505
5,486
Charges (credits) to operations, net
33,428
(377
33,051
Cash disbursements
(25,744
(1,336
(27,080
Foreign exchange impact
(354
Accrual, March 31, 2022
9,311
1,792
11,103
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. In addition to the payments referenced above, payments related to lease costs for exited facilities were $0.6 million and $1.3 million in the second quarter and first six months of 2022, respectively.
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 six months ended March 31, 2023:
(in thousands, except grant date fair value data)
Number ofRSUs
Weighted-AverageGrant Date Fair ValuePer RSU
Balance of outstanding RSUs, October 1, 2022
2,754
105.07
Granted(1)
1,202
127.59
Vested
(1,184
104.78
Forfeited or not earned
(94
112.24
Balance of outstanding RSUs, March 31, 2023
2,678
115.07
9
The following table presents the number of RSU awards granted by award type:
Six months endedMarch 31, 2023
Performance-based RSUs(1)
69
Service-based RSUs(2)
965
Relative Total Shareholder Return RSUs(3)
The weighted-average fair value of the rTSR RSUs on the grant date was $179.60 per RSU. 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
41.54
%
Risk free interest rate
4.12
Dividend yield
Total value on vest date of RSUs vested are as follows:
Value of stock option and stock-based award activity
Total value of RSU awards at vest
12,507
5,838
156,301
140,168
Compensation expense recorded for our stock-based awards is classified in our Consolidated Statements of Operations as follows:
March 31,2022
37
88
75
3,195
2,161
5,985
5,639
2,500
2,066
3,748
4,522
12,845
11,446
25,041
24,527
15,580
9,504
27,038
19,680
18,075
12,707
31,850
29,420
Total stock-based compensation expense
52,246
Stock-based compensation expense includes $1.6 million and $3.5 million in the second quarter and first six months of 2023, respectively, and $1.3 million and $3.2 million in the second quarter and first six months of 2022, respectively, related to our employee stock purchase plan.
As of March 31, 2023, we had liability-classified awards related to stock-based compensation of $19.3 million.
10
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
781
803
875
1,027
Anti-dilutive shares were immaterial for the three and six months ended March 31, 2023 and 2022.
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 second quarter and first six months of 2023, we did not repurchase any shares. In the second quarter and first six months of 2022, we repurchased 43 thousand shares for $5.3 million and 1,046 thousand shares for $125.0 million, respectively. All shares repurchased are automatically restored to the status of authorized and unissued.
6. Acquisitions and Disposition of Business
Acquisition and transaction-related costs in the second quarter and first six months of 2023 totaled $11.9 million and $17.7 million, respectively, compared to $3.9 million and $5.0 million in the second quarter and first six months of 2022, 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 third-party costs related to structuring transactions.
Our results of operations include or exclude, as applicable, the results of acquired or sold businesses beginning on their respective acquisition or sale date.
ServiceMax
On January 3, 2023, we acquired ServiceMax, Inc. pursuant to a Share Purchase Agreement dated November 17, 2022 by and among PTC, ServiceMax, Inc., and ServiceMax JV, LP. ServiceMax develops and licenses cloud-native, product-centric field service management (FSM) software, which is included within our PLM product group. The purchase price of $1,448.2 million, net of cash acquired, is payable in two installments. Upon closing of the transaction, PTC paid the first installment of $828.2 million, as adjusted for working capital, indebtedness, cash, and transaction expenses as set forth in the Share Purchase Agreement. The remaining installment of $650.0 million, of which $620.0 million represents the fair value as of the acquisition date and $30.0 million is imputed interest, is payable on October 2, 2023. The fair value of the deferred acquisition payment was calculated based on our borrowing rate at the time of the acquisition.
11
PTC borrowed $630 million under the revolving line of our new credit facility and $500 million under the term loan of the new credit facility to repay amounts under the prior credit facility and to pay the closing purchase price and transaction expenses related to the acquisition. ServiceMax had approximately 500 employees on the close date. In the three months ended March 31, 2023, ServiceMax revenue was $45.2 million and ServiceMax earnings were immaterial.
The acquisition of ServiceMax 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, future costs, and an applicable discount rate. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The purchase price allocation is considered preliminary, and additional adjustments may be recorded during the measurement period as we receive additional information relevant to the value of deferred tax assets and liabilities.
The following table outlines the preliminary purchase price allocation for ServiceMax. We have also recorded a liability of $620.0 million related to the fair value of the $650.0 million deferred purchase price payment.
975,132
Customer relationships
509,200
Purchased software
106,900
58,722
Trademarks
9,000
Other net assets
5,540
Net tax liability
(118,437
(97,829
1,448,228
The acquired customer relationships, purchased software, and trademarks are being amortized over useful lives of 19 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 expected future growth as ServiceMax expands our closed-loop product lifecycle management (PLM) strategy.
Unaudited Pro Forma Financial Information
The unaudited pro forma financial information in the table below summarizes the combined results of operations for PTC and ServiceMax. The unaudited pro forma financial information for all periods presented includes adjustments to reflect certain business combination effects, including: amortization of acquired intangible assets, including the elimination of related ServiceMax expenses; acquisition-related costs incurred by both parties; reversal of certain costs incurred by ServiceMax which would not have been incurred had the acquisition occurred at the beginning of fiscal 2022; interest expense under the new combined capital structure; stock-based compensation charges; and the related tax effects as though ServiceMax was acquired as of the beginning of fiscal 2022. The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2022.
The unaudited pro forma financial information for the three and six months ended March 31, 2023 and 2022 combines the historical results of PTC for those periods and the historical results of ServiceMax for the three and six months ended April 30, 2022, respectively, and the effects of the pro forma adjustments listed above. The unaudited pro forma financial information was as follows:
Pro forma three months ended
Pro forma six months ended
Revenue
546,685
1,051,776
1,044,400
74,805
71,839
132,436
76,591
The impact from acquisitions other than ServiceMax for the reported periods if presented on a pro forma basis would not differ materially from our reported results.
Intland Software
On April 29, 2022, we acquired Intland Software, GmbH, and Eger Invest GmbH (together, “Intland Software”) pursuant to a Share Sale and Purchase Agreement. Intland Software developed and marketed the Codebeamer™ Application Lifecycle Management (ALM) family of software products, which is included within our PLM product group. The purchase price was $278.1 million, net of cash acquired, which was financed with cash on hand and $264 million borrowed under our credit facility. Intland Software had approximately 150 employees on the close date.
The acquisition of Intland Software 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 following table outlines the purchase price allocation for Intland Software:
240,971
38,800
19,100
6,506
1,300
(20,811
(6,925
Other net liabilities
(818
278,123
13
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.
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 in Q3'22, which consisted of $60.4 million of consideration received, less net assets of the business of $30.6 million. Net assets included $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 through June 1, 2024, 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.
As of March 31, 2023, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was $4,337.1 million and attributable to our Professional Services segment was $11.2 million. As of September 30, 2022, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was $2,725.2 million and attributable to our Professional Services segment was $11.2 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.
14
We completed our annual goodwill impairment review as of June 30, 2022. This review consisted of a qualitative assessment of our Software Products segment and a quantitative assessment of our Professional Services segment. 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). 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 Professional Services reporting unit using a discounted cash flow valuation model. Based on our qualitative assessment for the Software Products segment and quantitative assessment for the Professional Services segment as of June 30, 2022, no impairment was required. Through March 31, 2023, there were no events or changes in circumstances that indicated that the carrying values of goodwill or acquired intangible assets may not be recoverable.
Goodwill and acquired intangible assets consisted of the following:
September 30, 2022
GrossCarryingAmount
AccumulatedAmortization
Net BookValue
Goodwill (not amortized)
Intangible assets with finite lives (amortized):
616,665
376,637
240,028
502,859
355,857
147,002
Capitalized software
22,877
Customer lists and relationships
1,116,040
395,336
720,704
594,970
369,390
225,580
Trademarks and trade names
36,968
18,479
18,489
27,546
17,410
10,136
Other
3,903
3,766
Total intangible assets with finite lives
1,796,453
817,232
1,152,018
769,300
Total goodwill and acquired intangible assets
4,348,262
2,736,372
Changes in goodwill presented by reportable segments were as follows:
SoftwareProducts
ProfessionalServices
Balance, October 1, 2022
2,344,019
9,635
ServiceMax acquisition
975,131
40,091
165
40,256
Balance, March 31, 2023
3,359,241
9,800
Amortization of Intangible Assets
The aggregate amortization expense for intangible assets with finite lives is classified in our Consolidated Statements of Operations as follows:
9,834
5,921
15,976
12,414
Total amortization expense
20,490
14,371
34,658
29,348
15
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:
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.
Our significant financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2023 and September 30, 2022 were as follows:
Level 1
Level 2
Level 3
Financial assets:
Cash equivalents(1)
97,293
Convertible note
2,000
Forward contracts
1,038
Options
780
1,818
101,111
Financial liabilities:
3,190
102,313
9,058
113,371
2,908
16
Level 3 Investments
Convertible Note
In the fourth quarter of 2021, we invested $2.0 million in a non-marketable convertible note. This debt security is classified as available-for-sale and is included in Other assets on the Consolidated Balance Sheet. There were no changes in the fair value of this level 3 investment in the three and six months ended March 31, 2023.
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 $6.0 million as of March 31, 2023 and $1.0 million as of September 30, 2022.
Equity Securities
During the second quarter and first six months of 2022, we recognized a loss of $44.6 million and $34.8 million, respectively, in Other income (expense), net related to fluctuations in the value of equity securities we held in Matterport, Inc. All shares owned in Matterport were sold in the second quarter of 2022 for an aggregate price of $42.7 million. We did not hold any equity securities as of March 31, 2023 or September 30, 2022.
9. 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
1,960
994
7,098
Derivative liabilities(2):
1,361
1,829
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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.
We hedge our forecasted U.S. Dollar cash flows with foreign exchange options to reduce the risk that they will be adversely affected by changes in Euro or Japanese Yen exchange rates. These contracts have maturities of up to approximately nine months. We do not designate these foreign currency options as hedges for accounting purposes and changes in the fair value of these instruments are recognized immediately in earnings. Because we enter into options as an economic hedge, currency impacts on the Euro or Japanese Yen-denominated operations as compared to the forecasted plan rate may be partially offset by the gain on the put option. Gain on put options are included in Other income (expense), net.
As of March 31, 2023 and September 30, 2022, we had outstanding forward contracts and options with notional amounts equivalent to the following:
Currency Hedged (in thousands)
Canadian / U.S. Dollar
4,651
2,731
Euro / U.S. Dollar(1)
540,165
316,869
British Pound / U.S. Dollar
6,749
7,368
Israeli Shekel / U.S. Dollar
11,270
12,052
Japanese Yen / U.S. Dollar(2)
42,545
25,566
Swiss Franc / U.S. Dollar
12,895
25,559
Swedish Krona / U.S. Dollar
15,461
35,713
Singapore Dollar / U.S. Dollar
3,637
Chinese Renminbi / U.S. Dollar
6,233
23,965
New Taiwan Dollar / U.S. Dollar
2,087
13,906
Korean Won/ U.S. Dollar
4,919
Danish Krone/ U.S. Dollar
5,523
3,192
Australian Dollar/ U.S. Dollar
3,391
3,269
Hong Kong Dollar/U.S. Dollar
3,415
785
All other
3,576
3,647
657,961
483,178
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The following table shows the effect of our non-designated hedges in the Consolidated Statements of Operations for the three and six months ended March 31, 2023 and March 31, 2022:
Location of (Gain) Loss
Net realized and unrealized (gain) loss, excluding the underlying foreign currency exposure being hedged
(1,422
3,797
(12,431
362
In the three months ended March 31, 2023 and March 31, 2022, foreign currency losses, net were $0.8 million and foreign currency gains, net were $0.4 million, respectively. In the six months ended March 31, 2023 and March 31, 2022 foreign currency losses, net were $3.9 million and $4.0 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 and Japanese Yen functional subsidiaries. Net investment hedges partially offset the impact of foreign currency translation adjustment recorded in Accumulated other comprehensive loss on the Consolidated Balance Sheets. All foreign exchange forward contracts are carried at fair value on the Consolidated Balance Sheets and the maximum duration of net investment hedge foreign exchange forward contracts is approximately three months.
Net investment hedge relationships are designated at inception, and effectiveness is assessed retrospectively on a quarterly basis using the net equity position of Euro and Japanese Yen functional subsidiaries. As the forward contracts are highly effective in offsetting exchange rate exposure, we record changes in these net investment hedges in Accumulated other comprehensive loss and subsequently 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 March 31, 2023 and September 30, 2022, we had outstanding forward contracts designated as net investment hedges with notional amounts equivalent to the following:
Euro / U.S. Dollar
232,807
110,446
Japanese Yen / U.S. Dollar
11,487
244,294
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 six months ended March 31, 2023 and March 31, 2022:
Location of Gain (Loss)
Gain (loss) recognized in OCI
OCI
(915
81
(5,425
(3,075
Gain (loss) reclassified from OCI
(1,996
(1,415
5,034
(7,150
Gain recognized, excluded portion
1,179
342
2,148
609
19
As of March 31, 2023, we estimate that all amounts reported in Accumulated other comprehensive loss will be applied against exposed balance sheet accounts upon translation within the next three months.
Offsetting Derivative Assets and Liabilities
We have entered into master netting arrangements for our forward contracts that allow net settlements under certain conditions. Although netting is permitted, it is currently our policy and practice to record all derivative assets and liabilities on a gross basis in the Consolidated Balance Sheets.
The following table sets forth the offsetting of derivative assets as of March 31, 2023:
Gross Amounts Offset in the Consolidated Balance Sheets
Gross Amounts Not Offset in the Consolidated Balance Sheets
As of March 31, 2023
GrossAmount ofRecognizedAssets
Net Amounts of Assets Presented in the Consolidated Balance Sheets
FinancialInstruments
CashCollateralReceived
NetAmount
(1,038
The following table sets forth the offsetting of derivative liabilities as of March 31, 2023:
GrossAmount ofRecognizedLiabilities
GrossAmountsOffset in theConsolidatedBalanceSheets
Net Amounts of LiabilitiesPresented intheConsolidatedBalance Sheets
CashCollateralPledged
2,152
20
10. 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 operating 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
Operating costs(1)
147,865
121,016
278,593
237,044
Profit
353,199
341,234
652,825
638,799
Professional Services
Operating costs(2)
34,830
34,567
66,394
71,550
6,287
8,410
10,279
15,555
Total segment revenue
Total segment costs
182,695
155,583
344,987
308,594
Total segment profit
359,486
349,644
663,104
654,354
Unallocated operating expenses:
Sales and marketing expenses
116,362
104,962
222,549
217,357
General and administrative expenses
35,965
30,859
67,355
65,036
Intangibles amortization
Other unallocated operating expenses(3)
11,883
17,689
4,953
Total operating income
21
Our international revenue is presented based on the location of our customer. Revenue for the geographic regions in which we operate is presented below.
March 31,2022(1)
Americas
256,376
202,999
483,288
415,880
Europe
209,066
222,963
376,276
385,271
Asia Pacific
76,739
79,265
148,527
161,797
11. Income Taxes
Effective income tax rate
22
In the second quarter and first six months of 2023 and 2022, 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 2023 and 2022, the foreign rate differential predominantly relates to these earnings.
In 2023 and 2022, 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.
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 March 31, 2023, we maintain our conclusion that it is more likely than not that our deferred tax assets related to U.S. federal and state income will be realizable.
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.
As of March 31, 2023 and September 30, 2022, we had unrecognized tax benefits of $27.2 million and $23.9 million, respectively. If all our unrecognized tax benefits as of March 31, 2023 were to become recognizable in the future, we would record a benefit to the income tax provision of $27.2 million, which would be partially offset by an increase in the U.S. valuation allowance of $5.4 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 $5 million.
We made net income tax payments of $41.2 million and $28.4 million in the six months ended March 31, 2023 and 2022, respectively.
12. Debt
As of March 31, 2023 and September 30, 2022, we had the following long-term debt obligations:
4.000% Senior notes due 2028
500,000
3.625% Senior notes due 2025
Credit facility revolving line(1)
425,000
359,000
Credit facility term loan(1)
Total debt
1,925,000
1,359,000
Unamortized debt issuance costs for the senior notes(2)
(7,297
(8,372
Total debt, net of issuance costs
Senior Unsecured Notes
In February 2020, we issued $500 million in aggregate principal amount of 4.0% senior, unsecured long-term debt at par value, due in 2028 (the 2028 notes) and $500 million in aggregate principal amount of 3.625% senior, unsecured long-term debt at par value, due in 2025 (the 2025 notes).
As of March 31, 2023, the total estimated fair value of the 2028 and 2025 notes was approximately $477.6 million and $482.5 million, respectively, based on quoted prices for the notes on that date.
We were in compliance with all the covenants for all our senior notes as of March 31, 2023. Any failure to comply with such covenants could constitute a default that could cause all amounts outstanding to become due and payable immediately.
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 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.
23
Credit Agreement
On January 3, 2023, we entered into a Fourth 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. Pursuant to the agreement, all prior revolving commitments under the prior credit agreement were replaced with the revolving commitments under the new credit facility.
We use the new credit facility for general corporate purposes, including acquisitions of other businesses, and working capital requirements.
The new credit facility consists of (i) a $1.25 billion revolving credit facility, (ii) a $500 million term loan credit facility, and (iii) an incremental facility pursuant to which we may incur additional term loan tranches or increase the revolving credit facility by an amount of up to (a) the greater of $766 million and 10% of consolidated EBITDA, plus (b) an additional amount subject to a ratio of first lien secured indebtedness to consolidated EBITDA of not greater than 1.75 to 1.00 on a pro forma basis. As of March 31, 2023, unused commitments under our credit facility were approximately $825 million.
Both the revolving credit facility and the term loan will mature and all amounts then outstanding will become due and payable on the earlier of (i) January 3, 2028, and (ii) if our 3.625% senior unsecured notes due 2025 have not been refinanced to mature on or after April 3, 2028, November 16, 2024. The term loan will begin amortizing in March 2024 and is required to be paid in equal quarterly installments of 0.625% of the aggregate principal amount of the term loan on each of the first four quarterly payment dates, and 1.25% of the aggregate principal amount of the term loan on each quarterly payment date thereafter. The revolving loan commitment does not require amortization of principal and may be repaid in whole or in part prior to the maturity date at our option without penalty or premium. As of March 31, 2023, 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, ServiceMax, Inc. was the only subsidiary guarantor. Any borrowings by eligible foreign subsidiary borrowers would be guaranteed by PTC Inc. and any subsidiary guarantors and secured, subject to exceptions, by a first priority perfected security interest in substantially all existing and after-acquired personal property owned by PTC and its material domestic subsidiaries (except for certain indirect material domestic subsidiaries), including without limitation, intellectual property and a pledge of (i) 100% of the voting equity interests of PTC’s domestic subsidiaries and (ii) 65% of the voting equity interests of PTC Inc.’s material first-tier foreign subsidiaries. As of the filing of this Form 10-Q, no funds were borrowed by an eligible foreign subsidiary borrower.
Loans under the credit facility bear interest at variable rates that reset every 30 to 180 days depending on the rate and period selected by us. As of March 31, 2023, the annual rate for borrowings outstanding was 6.44%. Interest rates for the credit facility may range from 1.25% to 2.0% plus an additional 0.1% above either (i) adjusted Daily Simple RFR (or other agreed upon successor rate) or (ii) adjusted Term SOFR Rate (or other agreed upon successor rate) or may range from 0.25% to 1.0% above the defined base rate for base rate borrowings, in each case based upon our total leverage ratio. Additionally, we may borrow certain foreign currencies at rates set in the same range above a defined adjusted rate for such currency (or other agreed upon successor rate), based on our total leverage ratio. A quarterly revolving commitment fee on the undrawn portion of the revolving credit facility is required, ranging from 0.175% to 0.325% per annum, based upon our total leverage ratio.
The credit facility limits our ability to, among other things: incur additional indebtedness; incur liens or guarantee obligations; pay dividends and make other distributions; make investments and enter into joint ventures; dispose of assets; and engage in transactions with affiliates, except on an arms-length basis. Under the credit facility, PTC Inc. and its material domestic subsidiaries may not invest cash or property in, or loan amounts to, PTC’s foreign subsidiaries in aggregate amounts exceeding $100 million for purposes other than acquisitions of businesses.
24
The credit facility requires that we maintain the following financial ratios:
As of March 31, 2023, our total leverage ratio was 3.41 to 1.00, our senior secured leverage ratio was 2.09 to 1.00 and our interest coverage ratio was 6.40 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 first six months of 2023, we incurred $13.4 million in financing costs in connection with the January 2023 credit facility and related arrangements, of which $4.2 million (related to a since-extinguished bridge loan) was expensed in the period and $9.2 million is recorded as deferred debt issuance costs and included in Other assets and Other current assets on the Consolidated Balance Sheet. Deferred debt issuance costs are expensed over the term of the obligations.
In the second quarter and first six months of 2023, we incurred interest expense on our debt of $41.5 million and $57.9 million, respectively, and $12.2 million and $25.2 million in the second quarter and first six months of 2022. Interest expense in the second quarter and first six months of 2023 includes $10.0 million of interest associated with the $620.0 million fair value of a $650.0 million deferred acquisition payment related to the ServiceMax acquisition. In the second quarter and first six months of 2023, we paid $20.4 million and $25.2 million of interest on our debt, respectively, and $21.5 million and $23.8 million in the second quarter and first six months of 2022, respectively. The average interest rate on borrowings outstanding was approximately 5.2% and 4.7% during the second quarter and first six months of 2023, respectively, and 3.2% and 3.2% during the second quarter and first six months of 2022, respectively.
13. 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. In March 2023, we extended the sublease through January 31, 2024, and we will receive $1.7 million in sublease income over the term of the extension.
25
The components of lease cost reflected in the Consolidated Statement of Operations for the three and six months ended March 31, 2023 and March 31, 2022 were as follows:
Operating lease cost
8,510
8,676
Short-term lease cost
1,724
582
2,487
1,123
Variable lease cost
2,759
2,596
5,389
5,086
Sublease income
(1,201
(1,113
(2,386
(2,230
Total lease cost
11,792
10,741
22,054
21,515
Supplemental cash flow and right-of-use assets information for the three and six months ended March 31, 2023 was as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
9,621
9,248
17,883
25,113
Financing cash flows from financing leases
217
239
Right-of-use assets obtained in exchange for new lease obligations:
Operating leases(1)
9,796
6,179
23,596
11,095
Financing leases
62
(1) In the three months ended March 31, 2023, operating right-of-use assets increased by ServiceMax assets of $4.0 million.
Supplemental balance sheet information related to the leases as of March 31, 2023 was as follows:
Weighted-average remaining lease term - operating leases
11.1 years
Weighted-average remaining lease term - financing leases
1.5 years
Weighted-average discount rate - operating leases
5.3
Weighted-average discount rate - financing leases
3.5
Maturities of lease liabilities as of March 31, 2023 are as follows:
Remainder of 2023
18,329
2024
31,366
2025
27,225
2026
22,688
2027
19,639
Thereafter
152,051
Total future lease payments
271,298
Less: imputed interest
(69,671
Total lease liability
201,627
As of March 31, 2023 we had operating leases that had not yet commenced. The leases will commence in fiscal 2023 with lease terms of 7 years and we will make future lease payments of approximately $2.8 million.
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14. Commitments and Contingencies
As of March 31, 2023 and March 31, 2022, we had letters of credit and bank guarantees outstanding of $13.1 million (of which $0.5 million was collateralized) and $15.2 million (of which $0.5 million was collateralized), respectively, primarily related to our corporate headquarters lease.
Legal and Regulatory Matters
Legal Proceedings
With respect to legal proceedings and claims, we record an accrual for a contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
We are subject to legal proceedings and claims against us in the ordinary course of business. As of March 31, 2023, we estimate that the range of possible outcomes for such matters is immaterial and we do not believe that resolving them will have a material adverse impact on our financial condition, results of operations or cash flows. However, the results of legal proceedings cannot be predicted with certainty. Should any of these legal proceedings and claims be resolved against us, the operating results for a reporting period could be adversely affected.
Guarantees and Indemnification Obligations
We enter into standard indemnification agreements with our customers and business partners in the ordinary course of our business. Under such agreements, we typically indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to our products. Indemnification may also cover other types of claims, including claims relating to certain data breaches. 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. 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.
15. Subsequent Events
Subsequent to March 31, 2023, we have made aggregate payments of $65 million toward the revolving credit facility, bringing our total debt down to $1.86 billion.
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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 company that provides a portfolio of innovative digital solutions that work together to transform how physical products are engineered, manufactured, and serviced.
Our software portfolio includes award-winning offerings that enable companies to author product data (our CAD portfolio solutions) and manage product data management and orchestrate processes (our PLM portfolio solutions). Our software can be delivered on premises, in the cloud, or in a hybrid model.
Our customers include some of the world's most innovative companies in the aerospace and defense, automotive, electronics and high tech, industrial machinery and equipment, life sciences, retail and consumer products industries.
We generate revenue through the sale of software subscriptions, which include license access and support (technical support and software updates); support for perpetual licenses; cloud services (hosting for our software and software-as-a-service (SaaS)); perpetual licenses; and professional services (consulting, implementation, and training).
Forward-Looking Statements
Statements in this document that are not historic facts, including statements about our future financial and growth expectations 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 deteriorate sooner or to a greater extent than we expect due to, among other factors, the effects of the COVID-19 pandemic, including supply chain disruptions, increasing interest rates and inflation, volatile foreign exchange rates and the relative strength of the U.S. dollar, tightening of credit standards and availability, the effects of the Russia/Ukraine conflict, including the effect on energy supplies to Europe, and growing tensions with China, any of 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 ServiceMax and SaaS businesses, may not expand and/or generate the revenue, cash flow, or ARR we expect if customers are slower to adopt those technologies than we expect or if they adopt competing technologies; our strategic initiatives and investments, including our accelerated investments in our transition to SaaS and the acquisition of ServiceMax, may not deliver the results when or as we expect; we may be unable to integrate the ServiceMax technology when or as we expect; we may be unable to generate sufficient operating cash flow to return 50% of free cash flow to shareholders, and other uses of cash or our credit facility limits could preclude such repurchases; 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
ARR of $1.88 billion at the end of Q2’23 represents 23% growth (26% on a constant currency basis) compared to Q2’22, including contribution from ServiceMax, which we acquired in January 2023. Organic constant currency ARR growth year over year was 13%, which excludes ARR associated with our acquired ServiceMax and Codebeamer businesses. ARR growth in Q2'23 compared to the year-ago period was driven by acquisitions, new bookings and churn improvement. While bookings were solid in Q2'23, we saw more ramp deals than expected, which puts some pressure on ARR and revenue in the near term.
We generated $211 million of cash from operations in Q2’23 compared to $142 million in Q2’22, with the increase driven by strong execution, based on a foundation of solid collections and cost discipline. Q2’23 cash from operations included $1 million of restructuring-related cash outflows, compared to $18 million in Q2'22. Free cash flow of $207 million in Q2'23 increased from $140 million in Q2'22, which is net of capital expenditures of $4 million in Q2'23 and $2 million in Q2'22.
Revenue growth of 7% (13% constant currency) in Q2'23 compared to Q2'22 was due to contribution from ServiceMax. Operating margin decreased in Q2'23 compared to Q2'22 mainly due to higher costs associated with the ServiceMax acquisition, including increases in stock-based compensation expense, intangibles amortization, and acquisition and transaction-related charges.
In Q2'23, we closed our previously announced transaction to acquire ServiceMax. and made the first installment payment of $835 million, funded by a new credit facility that we entered into in connection with the closing of the acquisition. In conjunction with financing the acquisition, we incurred a substantial increase in interest expense in the period, which adversely affected our net income and earnings per share results.
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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
1,882.0
1,532.5
Total recurring revenue(2)
492.1
452.7
8.9
9.5
(6
)%
41.1
43.0
0
542.2
505.2
113.5
93.3
428.7
411.9
Operating expenses
306.1
252.7
122.5
159.2
(17
Non-GAAP operating income(1)
207.2
213.8
(3
Operating margin
22.6
31.5
Non-GAAP operating margin(1)
38.2
42.3
Diluted earnings per share
Non-GAAP diluted earnings per share(1)
1.39
Cash flow from operations(3)
210.9
142.3
Capital expenditures
(3.8
(2.1
Free cash flow
140.2
909.3
857.8
22.2
18.0
76.7
87.1
1,008.1
962.9
209.3
188.5
798.8
774.5
571.4
553.1
227.4
221.4
373.2
372.0
23.0
37.0
38.6
2.15
2.34
391.9
280.1
(13.0
(5.5
378.9
274.6
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Impact of Foreign Currency Exchange on Results of Operations
Approximately 50% 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. Our constant currency disclosures are calculated by multiplying the results in local currency for the quarterly periods for FY’23 and FY’22 by the exchange rates in effect on September 30, 2022. Changes in foreign currency exchange rates were a headwind to reported results in Q2'23 compared to Q2'22, but were a tailwind for Q2'23 compared to the exchange rates in effect on September 30, 2022.
If reported results for the six months ended March 31, 2023 were converted into U.S. dollars based on September 30, 2022 exchange rates, ARR would have been lower by $68 million, revenue would have been lower by $24 million, and expenses would have been lower by $10 million. If reported results for the same period in FY'22 were converted into U.S. dollars based on September 30, 2022 exchange rates, ARR would have been lower by $93 million, revenue would have been lower by $75 million, and expenses would have been lower by $33 million.
Under ASC 606, the volume, mix, and duration of contract types (support, SaaS, on-premises subscription) starting or renewing in any given period can 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-premises subscription contracts up front when we deliver the licenses to the customer, typically on the start date, and we recognize revenue on the support portion of on-premises subscription contracts and stand-alone support contracts ratably over the term. We continue to convert existing support contracts to on-premises subscriptions, resulting in a shift to up-front recognition of on-premises 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 expect that over time a higher portion of our revenue will be recognized ratably as we expand our SaaS offerings, release additional cloud functionality into our products, and customers migrate from on-premises subscriptions to SaaS. 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
197.0
218.4
(10
369.7
387.5
304.1
243.9
561.7
488.4
Software revenue
501.1
462.3
931.4
875.8
Software revenue in Q2'23 and the first six months of FY'23 includes contributions of $39 million from ServiceMax, which was acquired early in Q2'23, and from Codebeamer, which was acquired in Q3'22. The decline in the value of foreign currencies compared to the U.S. Dollar was a headwind to year-over-year revenue growth. In addition to contributions from the acquired businesses, constant currency revenue growth for Q2'23 was driven by revenue from our IIoT, Arena, and Windchill offerings, offset by a decrease in Creo revenue. Constant currency revenue growth for the first six months of FY'23 was driven by revenue from our IIoT, Windchill, Arena and Creo offerings.
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Within software revenue, license revenue is impacted by the duration of on-premises subscription contracts that start in the period. In Q2’23, the weighted-average duration of contracts starting in the quarter decreased significantly compared to Q2’22. The decrease was primarily due to a small number of high-value Creo and Windchill renewing contracts in Q2’22 that had durations of 4+ years, which exceeded our typical contract terms of 1-3 years. Because longer duration contracts typically have a higher total contract value, which drives the amount of license revenue recognized on on-premises contracts, this year-over-year duration decrease resulted in a decrease in license revenue in Q2'23.
Professional services revenue decreased in Q2'23 and first six months of FY’23 as we continue to execute on our strategy of leveraging partners to deliver services rather than contracting to deliver services ourselves, including the Q3'22 sale of a portion of our PLM services business to ITC Infotech. The decline in the value of foreign currencies compared to the U.S. Dollar also contributed to the year-over-year revenue decline. These decreases were partially offset by ServiceMax professional services revenue.
Our expectation is that professional services revenue will continue to trend down over time as we execute on our partner strategy and deliver products that require less consulting and training services.
Software Revenue by Product Group
PLM
304.7
249.1
550.0
476.3
CAD
196.4
213.2
(8
381.4
399.5
PLM software revenue growth in Q2'23 and first six months of FY’23 benefited from contributions from ServiceMax (acquired early in Q2'23) and Codebeamer (acquired in Q3’22). The decline in the value of foreign currencies compared to the U.S. Dollar was a headwind to year-over-year revenue growth. Excluding contributions from ServiceMax and Codebeamer, constant currency revenue growth was driven by IIoT, Windchill and Arena.
PLM ARR grew 36% (39% constant currency) from Q2’22 to Q2'23, driven by ServiceMax and Windchill.
CAD software revenue declined in Q2'23 and the first six months of FY'23, driven by a decline in the value of foreign currencies compared to the U.S. Dollar. The constant currency revenue decline for Q2'23 was driven by Creo, due in part to a decline in the average duration of on-premises subscription contract renewals starting in Q2’23 compared to Q2’22, resulting in less up-front revenue recognized. Revenue growth the first six months of FY'23 was driven by Creo.
CAD ARR grew 7% (10% constant currency) from Q2’22 to Q2’23, driven by Creo.
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Software Revenue by Geographic Region
A significant portion of our software revenue is generated outside the U.S. In the first six months of FY'23 and FY'22, approximately 45% of software revenue was generated in the Americas, 40% in Europe, and 15% in Asia Pacific.
239.8
187.1
454.8
383.9
191.1
201.6
340.1
342.4
70.2
73.6
136.5
149.5
(9
Americas software revenue growth in the second quarter and first six months of FY’23 was driven by contribution from ServiceMax, with additional revenue growth from Windchill, IIoT, Creo and Arena.
Americas ARR was up 29% actual and constant currency in Q2'23, driven by ServiceMax, Windchill and Creo.
Europe software revenue in Q2’23 and the first six months of FY’23 was adversely affected by a decline in the value of foreign currencies compared to the U.S. Dollar. On a constant currency basis, Europe software revenue grew in Q2'23 and the first six months of FY'23, driven by contributions from ServiceMax and Codebeamer. The average duration of on-premises subscription contract renewals starting in the period decreased for both Windchill and Creo, resulting in lower Q2'23 revenue from both products and lower Creo revenue for the first six months of FY'23.
Europe ARR was up 21% (25% constant currency) in Q2'23, driven by ServiceMax, Windchill, Codebeamer and Creo.
Asia Pacific software revenue in Q2’23 and the first six months of FY’23 was adversely affected by a decline in the value of foreign currencies compared to the U.S. Dollar. Revenue growth on a constant currency basis in Q2'23 was driven by ServiceMax and IIoT. Growth in the first six months of FY'23 was driven by Creo and ServiceMax, offset by a decline in Windchill, which was primarily due to a reduction in the average duration of on-premises subscription contract renewals starting in the period.
Asia Pacific ARR was up 10% (19% constant currency) in Q2'23, driven by ServiceMax, Creo and Windchill.
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Gross Margin
License gross margin
180.0
206.4
(13
339.9
365.8
(7
License gross margin percentage
91
95
92
Support and cloud services gross margin
244.9
199.1
452.4
397.7
Support and cloud services gross margin percentage
Professional services gross margin
3.8
6.3
(40
6.5
11.0
(41
Professional services gross margin percentage
Total gross margin
Total gross margin percentage
79
80
Non-GAAP gross margin(1)
444.3
422.1
824.6
797.1
Non-GAAP gross margin percentage(1)
84
83
License gross margin decreased in the second quarter and first six months of FY’23 compared to the corresponding FY’22 periods due to decreases in license revenue of $21.4 million and $17.8 million, respectively, along with increases in cost of license of $5.1 million and $8.1 million, respectively, which were driven by higher intangible amortization expense due to the ServiceMax acquisition and higher royalty expense.
Support and cloud services gross margin increased in the second quarter and first six months of FY’23 compared to the corresponding FY’22 periods due to increases in support and cloud services revenue of $60.2 million and $73.4 million, respectively, partially offset by increases in cost of support and cloud services of $14.4 million and $18.7 million, respectively, which were driven by higher royalty expenses, cloud hosting costs, and compensation costs.
Professional services gross margin decreased in the second quarter and first six months of FY’23 compared to the corresponding FY’22 periods due to decreases in professional services revenue of $1.9 million and $10.4 million, respectively, offset by a decrease of $6.0 million in professional services costs in the first six months of FY’23. The decreases in professional services revenue are mainly due to the sale of a portion of our services business in FY'22 and our continued execution on our strategy of leveraging partners to deliver services rather than contracting to deliver services ourselves.
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Operating Expenses
129.2
116.4
247.6
241.9
% of total revenue
100.3
81.9
162.5
65.9
47.5
39
116.9
99.4
10.7
8.5
18.7
16.9
0.0
(1.6
(100
(0.3
32.4
(101
(0
Headcount increased 11% between Q2’23 and Q2’22, primarily driven by our acquisitions of ServiceMax and Intland (Codebeamer).
Operating expenses in Q2'23 increased compared to Q2'22, primarily due to the following:
Operating expenses in the first six months of FY’23 increased compared to the first six months of FY’22, due to the following:
partially offset by:
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Interest Expense
(41.5
(12.2
(57.9
(25.2
129
Interest expense includes interest on our credit facility and senior notes and imputed interest on the ServiceMax deferred acquisition payment. We had $1.9 billion of total debt as of March 31, 2023, compared to $1.3 billion as of March 31, 2022. In Q2'23, we had net new borrowings of $771 million (consisting of a $500 million term loan and a $271 million incremental draw on our revolving credit facility) and made payments of $205 million on the new revolving facility. The average interest rate on borrowings outstanding was approximately 5.2% and 4.7% during the second quarter and first six months of FY’23, respectively, and 3.2% and 3.2% during the second quarter and first six months of FY’22, respectively.
Other Income (Expense)
Interest income
1.5
0.5
200
2.5
1.0
150
(1.4
(43.9
(97
(4.6
(38.2
(88
0.1
(43.4
(37.2
Interest income represents earnings on the investment of our available cash and cash equivalents.
The decrease in other income (expense), net in the FY’23 periods over the FY’22 periods was driven by a recognized loss on our equity investment in a publicly-traded company of $44.6 million and $34.8 million in the three and six months ended March 31, 2022, respectively.
Income Taxes
81.1
103.6
(22
167.5
158.9
17.6
13.9
29.0
23.2
In the second quarter and first six months of FY’23 and FY’22, 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 2023 and 2022, the foreign rate differential predominantly relates to these earnings.
In FY’23 and FY’22, 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.
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 2022 Annual Report on Form 10-K.
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Recent Accounting Pronouncements
As discussed in Note 1. Basis of Presentation to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q, there have been no accounting pronouncements or changes in accounting pronouncements that are expected to have a material effect on our financial statements or results.
Liquidity and Capital Resources
(in millions)
320.5
272.2
Restricted cash
0.7
321.2
272.9
(859.7
44.0
507.0
(340.0
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.
A significant portion of our cash is generated and held outside the U.S. As of March 31, 2023, we had cash and cash equivalents of $51.9 million in the U.S., $113.8 million in Europe, $126.0 million in Asia Pacific (including India) and $28.8 million in other non-U.S. countries. We have substantial cash requirements in the U.S., but believe that the combination of our existing U.S. cash and cash equivalents, our ability to repatriate cash to the U.S., future U.S. operating cash flows, and cash available under our credit facility will be sufficient to meet our ongoing U.S. operating expenses and known capital requirements.
Cash Provided by Operating Activities
Cash provided by operating activities increased $111.8 million in the first six months of FY’23, compared to the first six months of FY’22. The increase in was driven by an increase in collections, including contributions from ServiceMax, and lower restructuring payments, partially offset by increases in salary-related payments and vendor disbursements driven by the ServiceMax acquisition. Cash from operations for the first six months of FY'23 includes $1.4 million of restructuring payments and $6.5 million of acquisition and transaction-related payments compared to $28.4 million of restructuring payments and $0.4 million of acquisition and transaction-related payments in the prior-year period.
Cash Provided by (Used In) Investing Activities
(828.3
42.7
Divestiture of business, net
(0.2
(5.8
(4.5
(12.5
11.3
Cash used in investing activities in the first six months of FY’23 was driven by the acquisition of ServiceMax for $828.2 million in Q2'23. Cash provided by investing activities in the first six months of FY’22 was driven by the sale of our investment in a publicly-traded company of $42.7 million.
Cash Provided by (Used In) Financing Activities
Borrowings (repayments) on debt, net
566.0
(175.0
(125.0
10.6
10.9
(56.0
(50.6
(13.4
Cash provided by financing activities in the first six months of FY’23 was primarily due to net new borrowings of $771 million in Q2'23 (a $500 million term loan and a $271 million incremental revolving line) to fund the ServiceMax acquisition and our Q2'23 repayments of $205 million on the new revolving facility. Cash used in financing activities in the first six months of FY’22 primarily reflects our use of cash generated to pay down debt and repurchase stock.
Outstanding Debt
500.0
Credit facility revolving line
425.0
Credit facility term loan
1,925.0
Unamortized debt issuance costs for the senior notes
(7.3
1,917.7
Undrawn under credit facility revolving line
825.0
Undrawn under credit facility revolving line available to borrow
161.2
In addition to the debt shown in the above table, we have recorded a $620.0 million Deferred acquisition payment liability related to the fair value of the $650.0 million installment due in October 2023 for the ServiceMax acquisition. Of the $650 million to be paid, $620 million will be a financing outflow and $30 million of imputed interest will be an operating cash outflow.
As of March 31, 2023, we were in compliance with all financial and operating covenants of the credit facility and the note indentures.
Our credit facility and our senior notes are described in Note 12. 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, 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 (expected capital expenditures of approximately $7 million in the second half of FY’23) through at least the next twelve months and to meet our known long-term capital requirements.
During the remainder of FY'23 and in FY'24, we expect to use a substantial portion of our cash generated from operating activities to repay debt outstanding under our credit facility revolving line and to make the deferred ServiceMax acquisition payment. We expect that we will not repurchase shares in the remainder of FY'23 or in FY'24 as we seek to reduce our debt.
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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 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 (Annual Run Rate) represents the annualized value of our portfolio of active subscription software, cloud, SaaS, and support contracts as of the end of the reporting period. We calculate ARR as follows:
We believe ARR is a valuable operating measure to assess the health of a subscription business because it is aligned with the amount that we invoice the customer on an annual basis. We generally invoice customers annually for the current year of the contract. A customer with a one-year contract will typically be invoiced for the total value of the contract at the beginning of the contractual term, while a customer with a multi-year contract will be invoiced for each annual period at the beginning of each year of the contract.
ARR increases by the annualized value of active contracts which commence in a reporting period and decreases by the annualized value of contracts which expire in the reporting period.
As ARR is not annualized recurring revenue, it is not calculated based on recognized or unearned revenue and is not affected by variability in the timing of revenue under ASC 606, particularly for on-premises license subscriptions where a substantial portion of the total value of the contract is recognized at a point in time upon the later of when the software is made available, or the subscription term commences.
ARR should be viewed independently of recognized and unearned revenue and is not intended to be combined with, or to replace, either of those items. Investors should consider our ARR operating measure only in conjunction with our GAAP financial results.
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, 2022.
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 and transaction-related charges included in general and administrative expenses; restructuring and other charges (credits), 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, 2022.
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
5.7
4.3
9.8
10.2
Amortization of acquired intangible assets included in cost of revenue
5.9
16.0
12.4
Non-GAAP gross margin
GAAP operating income
52.2
37.9
93.8
83.9
20.5
14.4
34.7
29.3
Acquisition and transaction-related charges
11.9
3.9
17.7
5.0
Non-GAAP operating income
GAAP net income
63.5
89.7
138.5
135.8
Non-operating charges, net(1)
4.6
44.6
5.1
34.8
Income tax adjustments(2)
(14.9
(25.4
(33.7
(44.7
Non-GAAP net income
137.8
163.5
255.8
276.5
GAAP diluted earnings per share
0.44
0.32
0.79
0.71
0.17
0.12
0.29
0.25
0.10
0.03
0.15
0.04
0.00
(0.01
0.27
0.38
(0.13
(0.22
(0.28
(0.38
Non-GAAP diluted earnings per share
Cash provided by operating activities
Operating margin impact of non-GAAP adjustments:
GAAP operating margin
9.6
7.5
9.3
8.7
2.8
3.4
3.0
2.2
0.8
1.8
Non-GAAP operating margin
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 2022 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 March 31, 2023.
Management excluded ServiceMax from its assessment of internal control over financial reporting as of March 31, 2023 because it was acquired in a business combination in the period. ServiceMax's total assets and total revenues represent approximately 2% (excluding the impact of goodwill and intangibles from the acquisition) and 8%, respectively, of our total assets and total revenues, as of and for the three months ended March 31, 2023.
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 March 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
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 2022 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
3.1
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
Amended and Restated By-Laws of PTC Inc., as amended through June 24, 2021 (filed as Exhibit 3.2 to our Annual Report on Form 10-K for the fiscal year ended September 30, 2022 (File No. 0-18059) and incorporated herein by reference)
4.1
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).
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).
10.1
Fourth Amended and Restated Credit Agreement dated January 3, 2023 by and among PTC, PTC (IFSC) Limited, JPMorgan Chase Bank, N.A., as administrative agent, and the Lenders named therein (filed as Exhibit 4.4 to our Current Report on Form 8-K filed on January 3, 2023 (File No. 0-18059) and incorporated herein by reference).
2000 Equity Incentive Plan (filed as Exhibit 10.1 to our Current Report on Form 8-K filed on February 21, 2023 (File No. 0-18059) and incorporated herein by reference).
10.3
2016 Employee Stock Purchase Plan (filed as Exhibit 10.2 to our Current Report on Form 8-K filed on February 21, 2023 (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 March 31, 2023 ("Q2 Form 10-Q") formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of March 31, 2023 and September 30, 2022; (ii) Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2023 and March 31, 2022; (iii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended March 31, 2023 and March 31, 2022; (iv) Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2023 and March 31, 2022; (v) Consolidated Statements of Stockholders’ Equity for the three and six months ended March 31, 2023 and March 31, 2022; and (vi) Notes to Condensed Consolidated Financial Statements.
104
The cover page of the Q2 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: May 3, 2023