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PTC INC. - Quarter Report: 2023 June (Form 10-Q)

10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 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 118,833,211 shares of our common stock outstanding on August 2, 2023.

 



 

PTC Inc.

INDEX TO FORM 10-Q

For the Quarter Ended June 30, 2023

 

Page

Number

Part I—FINANCIAL INFORMATION

 

Item 1.

Unaudited Condensed Consolidated Financial Statements:

1

Consolidated Balance Sheets as of June 30, 2023 and September 30, 2022

1

Consolidated Statements of Operations for the three and nine months ended June 30, 2023 and June 30, 2022

2

Consolidated Statements of Comprehensive Income for the three and nine months ended June 30, 2023 and June 30, 2022

3

Consolidated Statements of Cash Flows for the nine months ended June 30, 2023 and June 30, 2022

4

Consolidated Statements of Stockholders' Equity for the three and nine months ended June 30, 2023 and June 30, 2022

5

Notes to Condensed Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

32

Item 4.

Controls and Procedures

32

 

Part II—OTHER INFORMATION

 

Item 1A.

Risk Factors

32

Item 5.

 

Other Information

 

32

Item 6.

Exhibits

33

Signature

34

 

 

 

 


Table of Contents

 

PART I—FINANCIAL INFORMATION

ITEM 1.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PTC Inc.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)

 

 

 

 

June 30,
2023

 

 

September 30,
2022

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

281,513

 

 

$

272,182

 

Accounts receivable, net of allowance for doubtful accounts of $429 and $362 at June 30, 2023 and September 30, 2022, respectively

 

 

625,471

 

 

 

636,556

 

Prepaid expenses

 

 

118,872

 

 

 

88,854

 

Other current assets

 

 

77,421

 

 

 

71,065

 

Total current assets

 

 

1,103,277

 

 

 

1,068,657

 

Property and equipment, net

 

 

89,180

 

 

 

98,101

 

Goodwill

 

 

3,377,319

 

 

 

2,353,654

 

Acquired intangible assets, net

 

 

959,120

 

 

 

382,718

 

Deferred tax assets

 

 

146,307

 

 

 

256,091

 

Operating right-of-use lease assets

 

 

144,860

 

 

 

137,780

 

Other assets

 

 

387,586

 

 

 

390,267

 

Total assets

 

$

6,207,649

 

 

$

4,687,268

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

18,492

 

 

$

40,153

 

Accrued expenses and other current liabilities

 

 

148,784

 

 

 

117,158

 

Accrued compensation and benefits

 

 

150,774

 

 

 

104,022

 

Accrued income taxes

 

 

19,198

 

 

 

5,142

 

Deferred acquisition payments

 

 

620,040

 

 

 

 

Deferred revenue

 

 

631,325

 

 

 

503,781

 

Short-term lease obligations

 

 

23,042

 

 

 

22,002

 

Total current liabilities

 

 

1,611,655

 

 

 

792,258

 

Long-term debt

 

 

1,738,241

 

 

 

1,350,628

 

Deferred tax liabilities

 

 

35,077

 

 

 

28,396

 

Deferred revenue

 

 

19,102

 

 

 

16,552

 

Long-term lease obligations

 

 

171,777

 

 

 

167,573

 

Other liabilities

 

 

33,133

 

 

 

35,827

 

Total liabilities

 

 

3,608,985

 

 

 

2,391,234

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock, $0.01 par value; 5,000 shares authorized; none issued

 

 

 

 

 

 

Common stock, $0.01 par value; 500,000 shares authorized; 118,731 and 117,472 shares issued and outstanding at June 30, 2023 and September 30, 2022, respectively

 

 

1,186

 

 

 

1,175

 

Additional paid-in capital

 

 

1,767,442

 

 

 

1,720,580

 

Retained earnings

 

 

927,674

 

 

 

727,737

 

Accumulated other comprehensive loss

 

 

(97,638

)

 

 

(153,458

)

Total stockholders’ equity

 

 

2,598,664

 

 

 

2,296,034

 

Total liabilities and stockholders’ equity

 

$

6,207,649

 

 

$

4,687,268

 

 

 

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

1


Table of Contents

 

PTC Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

June 30,
2023

 

 

June 30,
2022

 

 

June 30,
2023

 

 

June 30,
2022

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

License

 

$

192,940

 

 

$

175,163

 

 

$

562,631

 

 

$

562,646

 

Support and cloud services

 

 

313,721

 

 

 

248,237

 

 

 

875,448

 

 

 

736,597

 

Total software revenue

 

 

506,661

 

 

 

423,400

 

 

 

1,438,079

 

 

 

1,299,243

 

Professional services

 

 

35,681

 

 

 

39,074

 

 

 

112,354

 

 

 

126,179

 

Total revenue

 

 

542,342

 

 

 

462,474

 

 

 

1,550,433

 

 

 

1,425,422

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of license revenue

 

 

11,501

 

 

 

13,676

 

 

 

41,293

 

 

 

35,406

 

Cost of support and cloud services revenue

 

 

68,264

 

 

 

46,598

 

 

 

177,626

 

 

 

137,251

 

Total cost of software revenue

 

 

79,765

 

 

 

60,274

 

 

 

218,919

 

 

 

172,657

 

Cost of professional services revenue

 

 

36,089

 

 

 

41,721

 

 

 

106,231

 

 

 

117,793

 

Total cost of revenue

 

 

115,854

 

 

 

101,995

 

 

 

325,150

 

 

 

290,450

 

Gross margin

 

 

426,488

 

 

 

360,479

 

 

 

1,225,283

 

 

 

1,134,972

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

145,083

 

 

 

124,325

 

 

 

392,673

 

 

 

366,209

 

Research and development

 

 

103,819

 

 

 

88,170

 

 

 

292,345

 

 

 

250,639

 

General and administrative

 

 

57,055

 

 

 

54,618

 

 

 

173,949

 

 

 

154,027

 

Amortization of acquired intangible assets

 

 

10,670

 

 

 

8,931

 

 

 

29,352

 

 

 

25,865

 

Restructuring and other charges (credits), net

 

 

(39

)

 

 

4,458

 

 

 

(376

)

 

 

36,887

 

Total operating expenses

 

 

316,588

 

 

 

280,502

 

 

 

887,943

 

 

 

833,627

 

Operating income

 

 

109,900

 

 

 

79,977

 

 

 

337,340

 

 

 

301,345

 

Interest and debt premium expense

 

 

(35,836

)

 

 

(13,758

)

 

 

(93,719

)

 

 

(38,983

)

Other income (expense), net

 

 

2,462

 

 

 

34,559

 

 

 

398

 

 

 

(2,642

)

Income before income taxes

 

 

76,526

 

 

 

100,778

 

 

 

244,019

 

 

 

259,720

 

Provision for income taxes

 

 

15,128

 

 

 

30,302

 

 

 

44,082

 

 

 

53,476

 

Net income

 

$

61,398

 

 

$

70,476

 

 

$

199,937

 

 

$

206,244

 

Earnings per share—Basic

 

$

0.52

 

 

$

0.60

 

 

$

1.69

 

 

$

1.76

 

Earnings per share—Diluted

 

$

0.51

 

 

$

0.60

 

 

$

1.68

 

 

$

1.75

 

Weighted-average shares outstanding—Basic

 

 

118,483

 

 

 

117,073

 

 

 

118,186

 

 

 

117,114

 

Weighted-average shares outstanding—Diluted

 

 

119,392

 

 

 

117,968

 

 

 

119,072

 

 

 

118,097

 

 

 

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

2


Table of Contents

 

PTC Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

June 30,
2023

 

 

June 30,
2022

 

 

June 30,
2023

 

 

June 30,
2022

 

Net income

 

$

61,398

 

 

$

70,476

 

 

$

199,937

 

 

$

206,244

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Hedge gain (loss) arising during the period, net of tax of $0.2 million and $(1.9) million in the third quarter of 2023 and 2022, respectively, and $4.7 million and $(4.0) million in the first nine months of 2023 and 2022, respectively

 

 

(521

)

 

 

5,880

 

 

 

(14,005

)

 

 

12,072

 

Foreign currency translation adjustment, net of tax of $0 for each period

 

 

1,405

 

 

 

(35,795

)

 

 

70,181

 

 

 

(52,819

)

Amortization of net actuarial pension loss included in net income, net of tax of $0.0 million and $0.0 million in the third quarter of 2023 and 2022, respectively, and $0.0 million and $(0.2) million in the first nine months of 2023 and 2022, respectively

 

 

43

 

 

 

(78

)

 

 

125

 

 

 

447

 

Change in unamortized pension loss during the period related to changes in foreign currency

 

 

(67

)

 

 

1,354

 

 

 

(481

)

 

 

2,277

 

Other comprehensive income (loss)

 

 

860

 

 

 

(28,639

)

 

 

55,820

 

 

 

(38,023

)

Comprehensive income

 

$

62,258

 

 

$

41,837

 

 

$

255,757

 

 

$

168,221

 

 

 

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

3


Table of Contents

 

PTC Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Nine months ended

 

 

 

June 30,
2023

 

 

June 30,
2022

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

199,937

 

 

$

206,244

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

76,943

 

 

 

65,456

 

Amortization of right-of-use lease assets

 

 

24,705

 

 

 

26,149

 

Stock-based compensation

 

 

147,568

 

 

 

133,283

 

Loss on investment

 

 

 

 

 

31,854

 

Gain on divestiture of business

 

 

 

 

 

(29,808

)

Other non-cash items, net

 

 

(3,114

)

 

 

(645

)

Changes in operating assets and liabilities, excluding the effects of acquisitions:

 

 

 

 

 

 

Accounts receivable

 

 

99,521

 

 

 

25,228

 

Accounts payable and accrued expenses

 

 

5,407

 

 

 

(7,434

)

Accrued compensation and benefits

 

 

5,961

 

 

 

(9,334

)

Deferred revenue

 

 

18,696

 

 

 

18,038

 

Accrued income taxes

 

 

(9,910

)

 

 

6,124

 

Other current assets and prepaid expenses

 

 

8,670

 

 

 

(26,933

)

Operating lease liabilities

 

 

(1,360

)

 

 

(10,544

)

Other noncurrent assets and liabilities

 

 

(11,932

)

 

 

(30,851

)

Net cash provided by operating activities

 

 

561,092

 

 

 

396,827

 

Cash flows from investing activities:

 

 

 

 

 

 

Additions to property and equipment

 

 

(18,035

)

 

 

(9,979

)

Acquisitions of businesses, net of cash acquired

 

 

(828,271

)

 

 

(274,974

)

Proceeds from sale of investments

 

 

349

 

 

 

46,906

 

Purchases of investments

 

 

(5,823

)

 

 

 

Purchase of intangible assets

 

 

 

 

 

(5,453

)

Settlement of net investment hedges

 

 

(14,204

)

 

 

18,043

 

Divestitures of businesses and assets, net

 

 

(154

)

 

 

32,518

 

Net cash used in investing activities

 

 

(866,138

)

 

 

(192,939

)

Cash flows from financing activities:

 

 

 

 

 

 

Borrowings under credit facility

 

 

1,130,000

 

 

 

264,000

 

Repayments of borrowings under credit facility

 

 

(744,000

)

 

 

(280,000

)

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

 

 

(75,489

)

 

 

(62,856

)

Payments of principal for financing leases

 

 

(217

)

 

 

(239

)

Credit facility origination costs

 

 

(13,355

)

 

 

 

Net cash provided by (used in) financing activities

 

 

307,531

 

 

 

(193,238

)

Effect of exchange rate changes on cash, cash equivalents, and restricted cash

 

 

6,835

 

 

 

(14,654

)

Net change in cash, cash equivalents, and restricted cash

 

 

9,320

 

 

 

(4,004

)

Cash, cash equivalents, and restricted cash, beginning of period

 

 

272,888

 

 

 

327,046

 

Cash, cash equivalents, and restricted cash, end of period

 

$

282,208

 

 

$

323,042

 

Supplemental disclosure of non-cash financing and investing activities:

 

 

 

 

 

 

Withholding taxes in connection with stock-based awards, accrued

 

 

5,705

 

 

 

5,803

 

Operating right-of-use assets obtained in exchange for operating lease liabilities

 

 

23,142

 

 

 

11,825

 

 

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

4


Table of Contents

 

PTC Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

 

 

 

Three months ended June 30, 2023

 

 

 

Common Stock

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional
Paid-In
Capital

 

 

Retained Earnings

 

 

Other
Comprehensive
Loss

 

 

Total
Stockholders’
Equity

 

Balance as of March 31, 2023

 

 

118,334

 

 

$

1,182

 

 

$

1,749,574

 

 

$

866,276

 

 

$

(98,498

)

 

$

2,518,534

 

Common stock issued for employee stock-based awards

 

 

582

 

 

 

6

 

 

 

(6

)

 

 

 

 

 

 

 

 

 

Shares surrendered by employees to pay taxes related to stock-based awards

 

 

(185

)

 

 

(2

)

 

 

(25,170

)

 

 

 

 

 

 

 

 

(25,172

)

Compensation expense from stock-based awards

 

 

 

 

 

 

 

 

43,044

 

 

 

 

 

 

 

 

 

43,044

 

Net income

 

 

 

 

 

 

 

 

 

 

 

61,398

 

 

 

 

 

 

61,398

 

Loss on net investment hedges, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(521

)

 

 

(521

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,405

 

 

 

1,405

 

Change in pension benefits, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(24

)

 

 

(24

)

Balance as of June 30, 2023

 

 

118,731

 

 

$

1,186

 

 

$

1,767,442

 

 

$

927,674

 

 

$

(97,638

)

 

$

2,598,664

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended June 30, 2023

 

 

 

Common Stock

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional
Paid-In
Capital

 

 

Retained Earnings

 

 

Other
Comprehensive
Loss

 

 

Total
Stockholders’
Equity

 

Balance as of September 30, 2022

 

 

117,472

 

 

$

1,175

 

 

$

1,720,580

 

 

$

727,737

 

 

$

(153,458

)

 

$

2,296,034

 

Common stock issued for employee stock-based awards

 

 

1,766

 

 

 

18

 

 

 

(18

)

 

 

 

 

 

 

 

 

 

Shares surrendered by employees to pay taxes related to stock-based awards

 

 

(609

)

 

 

(7

)

 

 

(81,187

)

 

 

 

 

 

 

 

 

(81,194

)

Common stock issued for employee stock purchase plan

 

 

102

 

 

 

 

 

 

10,592

 

 

 

 

 

 

 

 

 

10,592

 

Compensation expense from stock-based awards

 

 

 

 

 

 

 

 

117,475

 

 

 

 

 

 

 

 

 

117,475

 

Net income

 

 

 

 

 

 

 

 

 

 

 

199,937

 

 

 

 

 

 

199,937

 

Loss on net investment hedges, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,005

)

 

 

(14,005

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

70,181

 

 

 

70,181

 

Change in pension benefits, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(356

)

 

 

(356

)

Balance as of June 30, 2023

 

 

118,731

 

 

$

1,186

 

 

$

1,767,442

 

 

$

927,674

 

 

$

(97,638

)

 

$

2,598,664

 

 

5


Table of Contents

 

 

 

 

Three months ended June 30, 2022

 

 

 

Common Stock

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional
Paid-In
Capital

 

 

Retained Earnings

 

 

Other
Comprehensive
Loss

 

 

Total
Stockholders’
Equity

 

Balance as of March 31, 2022

 

 

116,976

 

 

$

1,170

 

 

$

1,637,631

 

 

$

550,424

 

 

$

(105,248

)

 

$

2,083,977

 

Common stock issued for employee stock-based awards

 

 

558

 

 

 

6

 

 

 

(6

)

 

 

 

 

 

 

 

 

 

Shares surrendered by employees to pay taxes related to stock-based awards

 

 

(172

)

 

 

(2

)

 

 

(18,062

)

 

 

 

 

 

 

 

 

(18,064

)

Compensation expense from stock-based awards

 

 

 

 

 

 

 

 

49,420

 

 

 

 

 

 

 

 

 

49,420

 

Net income

 

 

 

 

 

 

 

 

 

 

 

70,476

 

 

 

 

 

 

70,476

 

Gain on net investment hedges, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,880

 

 

 

5,880

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(35,795

)

 

 

(35,795

)

Change in pension benefits, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,276

 

 

 

1,276

 

Balance as of June 30, 2022

 

 

117,362

 

 

$

1,174

 

 

$

1,668,983

 

 

$

620,900

 

 

$

(133,887

)

 

$

2,157,170

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended June 30, 2022

 

 

 

Common Stock

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional
Paid-In
Capital

 

 

Retained Earnings

 

 

Other
Comprehensive
Loss

 

 

Total
Stockholders’
Equity

 

Balance as of September 30, 2021

 

 

117,163

 

 

$

1,172

 

 

$

1,718,504

 

 

$

414,656

 

 

$

(95,864

)

 

$

2,038,468

 

Common stock issued for employee stock-based awards

 

 

1,729

 

 

 

18

 

 

 

(18

)

 

 

 

 

 

 

 

 

 

Shares surrendered by employees to pay taxes related to stock-based awards

 

 

(594

)

 

 

(6

)

 

 

(68,653

)

 

 

 

 

 

 

 

 

(68,659

)

Common stock issued for employee stock purchase plan

 

 

110

 

 

 

1

 

 

 

10,856

 

 

 

 

 

 

 

 

 

10,857

 

Compensation expense from stock-based awards

 

 

 

 

 

 

 

 

133,283

 

 

 

 

 

 

 

 

 

133,283

 

Repurchases of common stock

 

 

(1,046

)

 

 

(11

)

 

 

(124,989

)

 

 

 

 

 

 

 

 

(125,000

)

Net income

 

 

 

 

 

 

 

 

 

 

 

206,244

 

 

 

 

 

 

206,244

 

Gain on net investment hedges, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,072

 

 

 

12,072

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(52,819

)

 

 

(52,819

)

Change in pension benefits, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,724

 

 

 

2,724

 

Balance as of June 30, 2022

 

 

117,362

 

 

$

1,174

 

 

$

1,668,983

 

 

$

620,900

 

 

$

(133,887

)

 

$

2,157,170

 

 

 

 

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

6


Table of Contents

 

PTC Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation

General

The accompanying unaudited condensed consolidated financial statements include the accounts of PTC Inc. and its wholly owned subsidiaries and have been prepared by management in accordance with accounting principles generally accepted in the United States of America (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.

2. Revenue from Contracts with Customers

Receivables, Contract Assets and Contract Liabilities

(in thousands)

 

June 30,
2023

 

 

September 30,
2022

 

Short-term and long-term receivables

 

$

844,941

 

 

$

870,962

 

Contract assets

 

$

17,826

 

 

$

21,096

 

Deferred revenue

 

$

650,427

 

 

$

520,333

 

During the nine months ended June 30, 2023, we recognized $457.0 million of revenue that was included in Deferred revenue as of September 30, 2022. In addition, Deferred revenue increased by $97.8 million as a result of the acquisition of ServiceMax. The remainder of the change was driven by additional deferrals, primarily from new billings.

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 June 30, 2023 and September 30, 2022, our total revenue liability was $25.2 million and $34.2 million, respectively, primarily associated with the annual right to exchange on-premises subscription software.

Remaining Performance Obligations

Our contracts with customers include transaction price amounts allocated to performance obligations that will be satisfied and recognized as revenue at a later date. As of June 30, 2023, the transaction price amounts include performance obligations of $650.4 million recorded in Deferred revenue and $1,246.5 million that are not yet recorded in the Consolidated Balance Sheets. We expect to recognize approximately 58% of the total $1,896.9 million over the next 12 months, with the remaining amount thereafter.

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Table of Contents

 

Disaggregation of Revenue

 

(in thousands)

 

Three months ended

 

 

Nine months ended

 

 

 

June 30, 2023

 

 

June 30, 2022

 

 

June 30, 2023

 

 

June 30, 2022

 

Recurring revenue(1)

 

$

498,410

 

 

$

415,197

 

 

$

1,407,662

 

 

$

1,273,032

 

Perpetual license

 

 

8,251

 

 

 

8,203

 

 

 

30,417

 

 

 

26,211

 

Professional services

 

 

35,681

 

 

 

39,074

 

 

 

112,354

 

 

 

126,179

 

Total revenue

 

$

542,342

 

 

$

462,474

 

 

$

1,550,433

 

 

$

1,425,422

 

(1)
Recurring revenue is comprised of on-premises subscription, perpetual support, SaaS, and cloud services revenue.

Our international revenue is presented based on the location of our customer. Revenue for the geographic regions in which we operate is presented below.

(in thousands)

 

Three months ended

 

 

Nine months ended

 

 

 

June 30,
2023

 

 

June 30,
2022

 

 

June 30,
2023

 

 

June 30,
2022

 

Americas

 

$

278,329

 

 

$

193,043

 

 

$

761,617

 

 

$

608,924

 

Europe

 

 

173,559

 

 

 

176,419

 

 

 

549,835

 

 

 

561,690

 

Asia Pacific

 

 

90,454

 

 

 

93,012

 

 

 

238,981

 

 

 

254,808

 

Total revenue

 

$

542,342

 

 

$

462,474

 

 

$

1,550,433

 

 

$

1,425,422

 

 

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)

Restructuring accrual balances as of June 30, 2023 and September 30, 2022 and activity for the nine months ended June 30, 2023 were immaterial. The following table summarizes restructuring accrual activity for the nine months ended June 30, 2022:

(in thousands)

 

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

 

 

33,471

 

 

 

(721

)

 

 

32,750

 

Cash disbursements

 

 

(31,965

)

 

 

(2,159

)

 

 

(34,124

)

Foreign exchange impact

 

 

(550

)

 

 

 

 

 

(550

)

Accrual, June 30, 2022

 

$

2,937

 

 

$

625

 

 

$

3,562

 

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 $0.7 million and $1.9 million in the third quarter and first nine months of 2022, respectively.

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4. Stock-based Compensation

The value of stock issued for RSUs vested is as follows:

(in thousands)

 

Three months ended

 

 

Nine months ended

 

 

 

June 30, 2023

 

 

June 30, 2022

 

 

June 30, 2023

 

 

June 30, 2022

 

Stock issued for vested RSUs

 

$

79,129

 

 

$

58,544

 

 

$

235,430

 

 

$

198,712

 

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

(in thousands)

 

Three months ended

 

 

Nine months ended

 

 

 

June 30,
2023

 

 

June 30,
2022

 

 

June 30,
2023

 

 

June 30,
2022

 

Cost of license revenue

 

$

53

 

 

$

338

 

 

$

141

 

 

$

413

 

Cost of support and cloud services revenue

 

 

3,479

 

 

 

2,544

 

 

 

9,464

 

 

 

8,183

 

Cost of professional services revenue

 

 

2,315

 

 

 

5,547

 

 

 

6,063

 

 

 

10,069

 

Sales and marketing

 

 

14,513

 

 

 

14,029

 

 

 

39,554

 

 

 

38,556

 

Research and development

 

 

14,801

 

 

 

11,002

 

 

 

41,839

 

 

 

30,682

 

General and administrative

 

 

18,657

 

 

 

15,960

 

 

 

50,507

 

 

 

45,380

 

Total stock-based compensation expense

 

$

53,818

 

 

$

49,420

 

 

$

147,568

 

 

$

133,283

 

As of June 30, 2023, we had liability-classified awards related to stock-based compensation of $30.1 million.

5. Earnings per Share (EPS) and Common Stock

EPS

The following table presents the calculation for both basic and diluted EPS:

(in thousands, except per share data)

 

Three months ended

 

 

Nine months ended

 

 

 

June 30,
2023

 

 

June 30,
2022

 

 

June 30,
2023

 

 

June 30,
2022

 

Net income

 

$

61,398

 

 

$

70,476

 

 

$

199,937

 

 

$

206,244

 

Weighted-average shares outstanding—Basic

 

 

118,483

 

 

 

117,073

 

 

 

118,186

 

 

 

117,114

 

Dilutive effect of restricted stock units

 

 

909

 

 

 

895

 

 

 

886

 

 

 

983

 

Weighted-average shares outstanding—Diluted

 

 

119,392

 

 

 

117,968

 

 

 

119,072

 

 

 

118,097

 

Earnings per share—Basic

 

$

0.52

 

 

$

0.60

 

 

$

1.69

 

 

$

1.76

 

Earnings per share—Diluted

 

$

0.51

 

 

$

0.60

 

 

$

1.68

 

 

$

1.75

 

Anti-dilutive shares were immaterial for the three and nine months ended June 30, 2023 and June 30, 2022.

6. Acquisitions

Acquisition and transaction-related costs in the third quarter and first nine months of 2023 totaled $0.8 million and $18.5 million, respectively, compared to $6.4 million and $11.3 million in the third quarter and first nine months of 2022, respectively. These costs are classified in General and administrative expense in the accompanying Consolidated Statements of Operations.

Our results of operations include or exclude, as applicable, the results of acquired or sold businesses beginning on their respective acquisition or sale date.

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Table of Contents

 

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.

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 and nine months ended June 30, 2023, ServiceMax revenue was $46.6 million and $91.7 million, respectively, 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 sets forth 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.

(in thousands)

 

 

Goodwill(1)

$

979,349

 

Customer relationships

 

509,200

 

Purchased software

 

106,900

 

Accounts receivable

 

58,722

 

Trademarks

 

9,000

 

Other net assets

 

5,540

 

Net tax liability(1)

 

(122,654

)

Deferred revenue

 

(97,829

)

Total

$

1,448,228

 

(1)
Includes a measurement period adjustment of $4.2 million to Goodwill and $(4.2) million to Net tax liability in the third quarter of 2023 related to deferred tax liabilities.

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 will not be deductible for income tax purposes. The amount of goodwill resulting from purchase price allocation reflects expected future growth as ServiceMax expands our closed-loop product lifecycle management (PLM) strategy.

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Table of Contents

 

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 nine months ended June 30, 2023 and 2022 presented below combines the historical results of PTC for those periods and the historical results of ServiceMax for the three and nine months ended July 31, 2022, respectively, and the effects of the pro forma adjustments listed above.

(in thousands)

 

Pro forma three months ended

 

 

Pro forma nine months ended

 

 

 

June 30, 2023

 

 

June 30, 2022

 

 

June 30, 2023

 

 

June 30, 2022

 

Revenue

 

$

542,342

 

 

$

506,367

 

 

$

1,594,118

 

 

$

1,550,767

 

Net income

 

$

61,398

 

 

$

59,905

 

 

$

193,834

 

 

$

136,495

 

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.

7. Goodwill and Intangible Assets

Our reporting units are the same as our operating segments. In the third quarter of 2023, we reevaluated our operating segments to better align with how our chief operating decision maker ("CODM") evaluates performance and allocates resources, which resulted in a change from two operating segments—Software Products and Professional Services—to a single operating segment. As part of this reevaluation, we determined that our reporting unit is the same as our operating segment.

Before combining the reporting units, we performed a step zero qualitative assessment of the Software Products reporting unit and a step one quantitative assessment of the Professional Services reporting unit. As of June 30, 2023 and prior to the reporting unit change, goodwill attributable to the Software Products segment was $3,367.5 million and to the Professional Services segment was $9.8 million.

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 the reporting unit relative to its carrying value at the last valuation date (June 27, 2020). Based on our qualitative assessment, we believe it is more likely than not that the fair value of our Software Products reporting unit exceeds its carrying value and no further impairment testing is required.

Our quantitative assessment for Professional Services 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. This model requires estimates of future revenues, profits, capital expenditures, working capital, and a terminal value based on a residual cash flow valuation model. We estimated this amount by evaluating historical trends, current budgets and operating plans. Based on a comparison of the estimated fair value to the carrying value of the Professional Services reporting unit as of June 30, 2023, no impairment was required.

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Table of Contents

 

After combining the reporting units, we performed a step zero qualitative assessment on the combined goodwill balance and determined that it is more likely than not that the fair value of the combined reporting unit exceeds its carrying value and no further impairment testing is required.

Goodwill and acquired intangible assets consisted of the following:

(in thousands)

 

June 30, 2023

 

 

September 30, 2022

 

 

 

Gross
Carrying
Amount

 

 

Accumulated
Amortization

 

 

Net Book
Value

 

 

Gross
Carrying
Amount

 

 

Accumulated
Amortization

 

 

Net Book
Value

 

Goodwill (not amortized)

 

 

 

 

 

 

 

$

3,377,319

 

 

 

 

 

 

 

 

$

2,353,654

 

Intangible assets with finite lives (amortized):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchased software

 

$

617,241

 

 

$

386,917

 

 

$

230,324

 

 

$

502,859

 

 

$

355,857

 

 

$

147,002

 

Capitalized software

 

 

22,877

 

 

 

22,877

 

 

 

 

 

 

22,877

 

 

 

22,877

 

 

 

 

Customer lists and relationships

 

 

1,116,980

 

 

406,177

 

 

 

710,803

 

 

 

594,970

 

 

 

369,390

 

 

 

225,580

 

Trademarks and trade names

 

 

37,005

 

 

 

19,012

 

 

 

17,993

 

 

 

27,546

 

 

 

17,410

 

 

 

10,136

 

Other

 

 

3,912

 

 

 

3,912

 

 

 

 

 

 

3,766

 

 

 

3,766

 

 

 

 

Total intangible assets with finite lives

 

$

1,798,015

 

 

$

838,895

 

 

$

959,120

 

 

$

1,152,018

 

 

$

769,300

 

 

$

382,718

 

Total goodwill and acquired intangible assets

 

 

 

 

 

 

 

$

4,336,439

 

 

 

 

 

 

 

 

$

2,736,372

 

Goodwill

Changes in goodwill were as follows:

(in thousands)

 

 

Balance, October 1, 2022

$

2,353,654

 

Acquisitions

 

979,349

 

Foreign currency translation adjustment

 

44,316

 

Balance, June 30, 2023

$

3,377,319

 

Amortization of Intangible Assets

The aggregate amortization expense for intangible assets with finite lives is classified in our Consolidated Statements of Operations as follows:

(in thousands)

 

Three months ended

 

 

Nine months ended

 

 

 

June 30,
2023

 

 

June 30,
2022

 

 

June 30,
2023

 

 

June 30,
2022

 

Amortization of acquired intangible assets

 

$

10,670

 

 

$

8,931

 

 

$

29,352

 

 

$

25,865

 

Cost of revenue

 

 

9,841

 

 

 

6,596

 

 

 

25,817

 

 

 

19,010

 

Total amortization expense

 

$

20,511

 

 

$

15,527

 

 

$

55,169

 

 

$

44,875

 

 

8. Fair Value Measurements

The valuation hierarchy for disclosure of assets and liabilities reported at fair value prioritizes the inputs for such valuations into three broad levels:

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2: quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; or
Level 3: unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.

A financial asset's or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

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Table of Contents

 

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 June 30, 2023 and September 30, 2022 were as follows:

(in thousands)

 

June 30, 2023

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents(1)

 

$

70,583

 

 

$

 

 

$

 

 

$

70,583

 

Convertible note

 

 

 

 

 

 

 

 

2,000

 

 

 

2,000

 

Forward contracts

 

 

 

 

 

1,747

 

 

 

 

 

 

1,747

 

Options

 

 

 

 

 

594

 

 

 

 

 

 

594

 

 

$

70,583

 

 

$

2,341

 

 

$

2,000

 

 

$

74,924

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Forward contracts

 

 

 

 

 

1,537

 

 

 

 

 

 

1,537

 

 

$

 

 

$

1,537

 

 

$

 

 

$

1,537

 

 

(in thousands)

 

September 30, 2022

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents(1)

 

$

102,313

 

 

$

 

 

$

 

 

$

102,313

 

Convertible note

 

 

 

 

 

 

 

 

2,000

 

 

 

2,000

 

Forward contracts

 

 

 

 

 

9,058

 

 

 

 

 

 

9,058

 

 

$

102,313

 

 

$

9,058

 

 

$

2,000

 

 

$

113,371

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Forward contracts

 

 

 

 

 

2,908

 

 

 

 

 

 

2,908

 

 

$

 

 

$

2,908

 

 

$

 

 

$

2,908

 

(1)
Money market funds and time deposits.

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 nine months ended June 30, 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 $6.1 million as of June 30, 2023 and $1.0 million as of September 30, 2022.

Equity Securities

During the nine months ended June 30, 2022, we recognized a loss of $34.8 million 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 June 30, 2023 or September 30, 2022.

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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:

(in thousands)

 

Fair Value of Derivatives Designated As Hedging Instruments

 

 

Fair Value of Derivatives Not Designated As Hedging Instruments

 

 

 

June 30,
2023

 

 

September 30,
2022

 

 

June 30,
2023

 

 

September 30,
2022

 

Derivative assets(1):

 

 

 

 

 

 

 

 

 

 

 

 

Forward Contracts

 

$

773

 

 

$

1,960

 

 

$

974

 

 

$

7,098

 

Options

 

$

 

 

$

 

 

$

594

 

 

$

 

Derivative liabilities(2):

 

 

 

 

 

 

 

 

 

 

 

 

Forward Contracts

 

$

 

 

$

 

 

$

1,537

 

 

$

2,908

 

(1)
As of June 30, 2023 and September 30, 2022, current derivative assets of $2.3 million and $9.1 million, respectively, are recorded in Other current assets in the Consolidated Balance Sheets.
(2)
As of June 30, 2023 and September 30, 2022, current derivative liabilities of $1.5 million and $2.9 million, respectively, are recorded in Accrued expenses and other current liabilities in the Consolidated Balance Sheets.

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.

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As of June 30, 2023 and September 30, 2022, we had outstanding forward contracts and options with notional amounts equivalent to the following:

Currency Hedged (in thousands)

 

June 30,
2023

 

 

September 30,
2022

 

Canadian Dollar / U.S. Dollar

 

$

9,470

 

 

$

2,731

 

Euro / U.S. Dollar(1)

 

 

613,619

 

 

 

316,869

 

British Pound / U.S. Dollar

 

 

509

 

 

 

7,368

 

Israeli Shekel / U.S. Dollar

 

 

10,854

 

 

 

12,052

 

Japanese Yen / U.S. Dollar(2)

 

 

12,353

 

 

 

25,566

 

Swiss Franc / U.S. Dollar

 

 

6,002

 

 

 

25,559

 

Swedish Krona / U.S. Dollar

 

 

6,188

 

 

 

35,713

 

Singapore Dollar / U.S. Dollar

 

 

 

 

 

3,637

 

Chinese Renminbi / U.S. Dollar

 

 

6,054

 

 

 

23,965

 

New Taiwan Dollar / U.S. Dollar

 

 

5,428

 

 

 

13,906

 

Korean Won/ U.S. Dollar

 

 

 

 

 

4,919

 

Danish Krone/ U.S. Dollar

 

 

1,487

 

 

 

3,192

 

Australian Dollar/ U.S. Dollar

 

 

2,273

 

 

 

3,269

 

Hong Kong Dollar/U.S. Dollar

 

 

2,263

 

 

 

785

 

All other

 

 

2,464

 

 

 

3,647

 

Total

 

$

678,964

 

 

$

483,178

 

(1)
As of June 30, 2023, $573.8 million of the Euro to U.S. Dollar outstanding notional amount relates to forward contracts and $39.8 million relates to options. As of September 30, 2022, all the Euro to U.S. Dollar outstanding notional amount relates to forward contracts.
(2)
As of June 30, 2023, $1.5 million of the Japanese Yen to U.S. Dollar outstanding notional amount relates to forward contracts and $10.9 million relates to options. As of September 30, 2022, all the Japanese Yen to U.S. Dollar outstanding notional amount relates to forward contracts.

The following table shows the effect of our non-designated hedges in the Consolidated Statements of Operations for the three and nine months ended June 30, 2023 and June 30, 2022:

 (in thousands)

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

Location of Gain (Loss)

 

June 30,
2023

 

 

June 30,
2022

 

 

June 30,
2023

 

 

June 30,
2022

 

Net realized and unrealized gain (loss), excluding the underlying foreign currency exposure being hedged

 

Other income (expense), net

 

$

(1,006

)

 

$

3,399

 

 

$

(13,437

)

 

$

3,761

 

In the three months ended June 30, 2023 and June 30, 2022, foreign currency gains, net were $0.5 million and $0.9 million, respectively. In the nine months ended June 30, 2023 and June 30, 2022, foreign currency losses, net were $3.4 million and $3.1 million, respectively.

Net Investment Hedges

We translate balance sheet accounts of subsidiaries with foreign functional currencies into the U.S. Dollar using the exchange rate at each balance sheet date. Resulting translation adjustments are reported as a component of Accumulated other comprehensive loss on the Consolidated Balance Sheets. We designate certain foreign exchange forward contracts as net investment hedges against exposure on translation of balance sheet accounts of Euro 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.

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Net investment hedge relationships are designated at inception, and effectiveness is assessed retrospectively on a quarterly basis using the net equity position of Euro 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 June 30, 2023 and September 30, 2022, we had outstanding forward contracts designated as net investment hedges with notional amounts equivalent to the following:

Currency Hedged (in thousands)

 

June 30,
2023

 

 

September 30,
2022

 

Euro / U.S. Dollar

 

$

236,246

 

 

$

110,466

 

Japanese Yen / U.S. Dollar

 

 

10,575

 

 

 

 

Total

 

$

246,821

 

 

$

110,466

 

 

The following table shows the effect of our derivative instruments designated as net investment hedges in the Consolidated Statements of Operations for the three and nine months ended June 30, 2023 and June 30, 2022:

(in thousands)

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

Location of Gain (Loss)

 

June 30,
2023

 

 

June 30,
2022

 

 

June 30,
2023

 

 

June 30,
2022

 

Gain (loss) recognized in OCI

 

OCI

 

$

(695

)

 

$

7,818

 

 

$

(18,663

)

 

$

16,050

 

Gain (loss) reclassified from OCI to earnings

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

Gain recognized, excluded portion

 

Other income (expense), net

 

 

1,124

 

 

 

515

 

 

 

3,272

 

 

 

1,124

 

As of June 30, 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 June 30, 2023:

(in thousands)

 

Gross Amounts Offset in the Consolidated Balance Sheets

 

 

 

 

 

Gross Amounts Not Offset in the Consolidated Balance Sheets

 

 

 

 

As of June 30, 2023

 

Gross
Amount of
Recognized
Assets

 

 

Gross
Amounts
Offset in the
Consolidated
Balance
Sheets

 

 

Net Amounts of
Assets
Presented in
the
Consolidated
Balance Sheets

 

 

Financial
Instruments

 

 

Cash
Collateral
Received

 

 

Net
Amount

 

Forward Contracts

 

$

1,747

 

 

$

 

 

$

1,747

 

 

$

(1,537

)

 

$

 

 

$

210

 

 

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The following table sets forth the offsetting of derivative liabilities as of June 30, 2023:

(in thousands)

 

Gross Amounts Offset in the Consolidated Balance Sheets

 

 

 

 

 

Gross Amounts Not Offset in the Consolidated Balance Sheets

 

 

 

 

As of June 30, 2023

 

Gross
Amount of
Recognized
Liabilities

 

 

Gross
Amounts
Offset in the
Consolidated
Balance
Sheets

 

 

Net Amounts of
Liabilities
Presented in
the
Consolidated
Balance Sheets

 

 

Financial
Instruments

 

 

Cash
Collateral
Pledged

 

 

Net
Amount

 

Forward Contracts

 

$

1,537

 

 

$

 

 

$

1,537

 

 

$

(1,537

)

 

$

 

 

$

 

 

10. Segment Information

In the third quarter of 2023, we reevaluated our operating segments to better align with how our CODM, who is our Chief Executive Officer, evaluates performance and allocates resources. The key factors evaluated included our organization structure, financial results reviewed by the CODM, and compensation structure, among others. As a result, we consolidated our operating segment structure from two segments to one. This change reflects our strategy to focus our professional services business on high-value services and to leverage partners to provide services, while delivering products that require fewer consulting and training services. Based on this change, we determined we have a single reportable segment.

11. Income Taxes

(in thousands)

 

Three months ended

 

 

Nine months ended

 

 

 

June 30,
2023

 

 

June 30,
2022

 

 

June 30,
2023

 

 

June 30,
2022

 

Income before income taxes

 

$

76,526

 

 

$

100,778

 

 

$

244,019

 

 

$

259,720

 

Provision for income taxes

 

$

15,128

 

 

$

30,302

 

 

$

44,082

 

 

$

53,476

 

Effective income tax rate

 

 

20

%

 

 

30

%

 

 

18

%

 

 

21

%

The effective tax rate for the three and nine months ended June 30, 2023 was lower than the effective tax rate for the corresponding prior-year periods primarily due to $8.1 million of tax expense in the quarter ended June 30, 2022 arising from the basis difference on goodwill related to the sale of a portion of our PLM business.

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, transfer pricing, limitations on net operating losses and tax credits.

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12. Debt

As of June 30, 2023 and September 30, 2022, we had the following long-term debt obligations:

(in thousands)

 

June 30,
2023

 

 

September 30,
2022

 

4.000% Senior notes due 2028

 

$

500,000

 

 

$

500,000

 

3.625% Senior notes due 2025

 

 

500,000

 

 

 

500,000

 

Credit facility revolving line(1)(2)

 

 

245,000

 

 

 

359,000

 

Credit facility term loan(1)(2)

 

 

500,000

 

 

 

 

Total debt

 

 

1,745,000

 

 

 

1,359,000

 

Unamortized debt issuance costs for the senior notes(3)

 

 

(6,759

)

 

 

(8,372

)

Total debt, net of issuance costs

 

$

1,738,241

 

 

$

1,350,628

 

(1)
Unamortized debt issuance costs related to the credit facility were $2.3 million included in Other current assets and $8.1 million included in Other assets on the Consolidated Balance Sheet as of June 30, 2023 and $2.7 million included in Other assets on the Consolidated Balance Sheet as of September 30, 2022.
(2)
Both the revolving line and the term loan will mature and all amounts then outstanding will become due and payable on January 3, 2028, unless the 2025 notes have not been refinanced to mature on or after April 3, 2028, in which case the amounts will become due on November 16, 2024. The term loan will begin amortizing in March 2024, with payments of $9.4 million in 2024, $21.9 million in 2025, and $25.0 million in each year thereafter.
(3)
Unamortized debt issuance costs for the senior notes are included in Long-term debt on the Consolidated Balance Sheets.

Senior Unsecured Notes

In February 2020, we issued $500 million in aggregate principal amount of 4.0% senior, unsecured long-term debt at par value, due in 2028 (the 2028 notes) and $500 million in aggregate principal amount of 3.625% senior, unsecured long-term debt at par value, due in 2025 (the 2025 notes).

As of June 30, 2023, the total estimated fair value of the 2028 and 2025 notes was approximately $463.8 million and $482.7 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 June 30, 2023.

Credit Agreement

In January 2023, we entered into an amended and restated credit agreement 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. 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. As of June 30, 2023, unused commitments under our credit facility were approximately $1,005 million.

As of June 30, 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). 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 base rate (for USD borrowings, either the adjusted Daily Simple RFR or adjusted Term SOFR) and period selected by us. The spread over the base rate depends on our total leverage ratio. As

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of June 30, 2023, the annual rate for borrowings outstanding was 6.93%. 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. The credit facility also requires that we maintain certain financial ratios.

As of June 30, 2023, we were in compliance with all financial and operating covenants of the credit facility.

In the first nine 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.

Interest

In the third quarter and first nine months of 2023, we incurred interest expense on our debt of $35.8 million and $93.7 million, respectively, and $13.8 million and $39.0 million in the third quarter and first nine months of 2022, respectively. Interest expense in the three and nine months ended June 30, 2023 includes $10.0 million and $20.0 million, respectively, 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 third quarter and first nine months of 2023, we paid $22.6 million and $51.9 million of interest on our debt, respectively, and $2.1 million and $25.9 million in the third quarter and first nine months of 2022, respectively. The average interest rate on borrowings outstanding was approximately 5.2% and 4.8% during the third quarter and first nine months of 2023, respectively, and 3.4% and 3.3% during the third quarter and first nine months of 2022, respectively.

13. Commitments and Contingencies

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. These agreements typically limit our liability with respect to indemnification claims other than intellectual property infringement 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.

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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 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 due to, among other factors, 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 ARR and/or cash flow 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 via share repurchases, 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. Other risks and uncertainties that could cause actual results to differ materially from those projected are described below throughout or referenced in Part II, Item 1A. Risk Factors of this report.

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Table of Contents

 

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 grew 25% to $1.93 billion as of the end of Q3’23 compared to Q3’22. Organic ARR grew 14% year over year to $1.76 billion. ARR growth was driven by the contribution from the ServiceMax business acquired in Q2'23 and solid growth in both the CAD and PLM product groups.

We generated $169 million of cash from operations in Q3’23 compared to $117 million in Q3’22, an increase of 45% that was driven by continued strong execution, based on a foundation of solid collections and cost discipline. Interest payments were $21 million higher in Q3'23 compared to Q3'22, while restructuring payments and acquisition- and transaction-related cash outflows decreased $17 million in Q3'23 compared to Q3'22. Free cash flow of $164 million in Q3'23 increased 46% from $112 million in Q3'22.

Revenue growth of 17% (21% constant currency) in Q3'23 compared to Q3'22 was primarily due to the contribution from ServiceMax. We incurred higher interest expense in the period related to the ServiceMax acquisition, which adversely affected our net income and earnings per share results.

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Results of Operations

The following table shows the operating and financial measures that we consider the most significant indicators of our business performance.

(Dollar amounts in millions, except per share data)

 

Three months ended

 

 

Percent Change

 

 

 

June 30, 2023

 

 

June 30, 2022

 

 

Actual

 

 

Constant
Currency
(1)

 

ARR

 

$

1,928.7

 

 

$

1,544.4

 

 

 

25

%

 

 

25

%

 

 

 

 

 

 

 

 

 

 

 

 

Total recurring revenue(2)

 

$

498.4

 

 

$

415.2

 

 

 

20

%

 

 

23

%

Perpetual license

 

 

8.3

 

 

 

8.2

 

 

 

1

%

 

 

3

%

Professional services

 

 

35.7

 

 

 

39.1

 

 

 

(9

)%

 

 

(7

)%

Total revenue

 

 

542.3

 

 

 

462.5

 

 

 

17

%

 

 

21

%

Total cost of revenue

 

 

115.9

 

 

 

102.0

 

 

 

14

%

 

 

15

%

Gross margin

 

 

426.5

 

 

 

360.5

 

 

 

18

%

 

 

22

%

Operating expenses

 

 

316.6

 

 

 

280.5

 

 

 

13

%

 

 

14

%

Operating income

 

$

109.9

 

 

$

80.0

 

 

 

37

%

 

 

57

%

Non-GAAP operating income(1)

 

$

185.0

 

 

$

155.7

 

 

 

19

%

 

 

26

%

Operating margin

 

 

20.3

%

 

 

17.3

%

 

 

 

 

 

 

Non-GAAP operating margin(1)

 

 

34.1

%

 

 

33.7

%

 

 

 

 

 

 

Diluted earnings per share

 

$

0.51

 

 

$

0.60

 

 

 

 

 

 

 

Non-GAAP diluted earnings per share(1)

 

$

0.99

 

 

$

0.97

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow from operations(3)

 

$

169.2

 

 

$

116.8

 

 

 

 

 

 

 

Capital expenditures

 

 

(5.1

)

 

 

(4.5

)

 

 

 

 

 

 

Free cash flow

 

$

164.1

 

 

$

112.3

 

 

 

 

 

 

 

 

(Dollar amounts in millions, except per share data)

 

Nine months ended

 

 

Percent Change

 

 

 

June 30, 2023

 

 

June 30, 2022

 

 

Actual

 

 

Constant
Currency
(1)

 

ARR

 

$

1,928.7

 

 

$

1,544.4

 

 

 

25

%

 

 

25

%

 

 

 

 

 

 

 

 

 

 

 

 

Total recurring revenue(2)

 

$

1,407.7

 

 

$

1,273.0

 

 

 

11

%

 

 

16

%

Perpetual license

 

 

30.4

 

 

 

26.2

 

 

 

16

%

 

 

21

%

Professional services

 

 

112.4

 

 

 

126.2

 

 

 

(11

)%

 

 

(7

)%

Total revenue

 

 

1,550.4

 

 

 

1,425.4

 

 

 

9

%

 

 

14

%

Total cost of revenue

 

 

325.2

 

 

 

290.5

 

 

 

12

%

 

 

15

%

Gross margin

 

 

1,225.3

 

 

 

1,135.0

 

 

 

8

%

 

 

14

%

Operating expenses

 

 

887.9

 

 

 

833.6

 

 

 

7

%

 

 

9

%

Operating income

 

$

337.3

 

 

$

301.3

 

 

 

12

%

 

 

28

%

Non-GAAP operating income(1)

 

$

558.2

 

 

$

527.7

 

 

 

6

%

 

 

14

%

Operating margin

 

 

21.8

%

 

 

21.1

%

 

 

 

 

 

 

Non-GAAP operating margin(1)

 

 

36.0

%

 

 

37.0

%

 

 

 

 

 

 

Diluted earnings per share

 

$

1.68

 

 

$

1.75

 

 

 

 

 

 

 

Non-GAAP diluted earnings per share(1)

 

$

3.14

 

 

$

3.31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow from operations(3)

 

$

561.1

 

 

$

396.8

 

 

 

 

 

 

 

Capital expenditures

 

 

(18.0

)

 

 

(10.0

)

 

 

 

 

 

 

Free cash flow

 

$

543.1

 

 

$

386.8

 

 

 

 

 

 

 

 

(1)
See Non-GAAP Financial Measures below for a reconciliation of our GAAP results to our non-GAAP financial measures and Impact of Foreign Currency Exchange on Results of Operations below for a description of how we calculate our results on a constant currency basis.
(2)
Recurring revenue is comprised of on-premises subscription, perpetual support, SaaS, and cloud revenue.
(3)
Cash flow from operations in Q3'23 includes $2.8 million of acquisition and transaction-related payments. Cash flow from operations for the first nine months of FY'23 includes $1.4 million of restructuring payments and $9.3 million of acquisition and transaction-related payments. Cash flow from operations for the third quarter and first nine months of FY'22 includes $10.2 million and $38.5 million of restructuring payments, respectively, and $9.7 million and $10.1 million of acquisition and transaction-related payments, respectively.

 

22


Table of Contents

 

Impact of Foreign Currency Exchange on Results of Operations

Approximately 45% 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.

If reported results for the nine months ended June 30, 2023 were converted into U.S. dollars based on September 30, 2022 exchange rates, ARR would have been lower by $61 million, revenue would have been lower by $41 million, and expenses would have been lower by $17 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 $49 million, revenue would have been lower by $102 million, and expenses would have been lower by $44 million.

Revenue

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)

 

Three months ended

 

 

Percent Change

 

 

Nine months ended

 

 

Percent Change

 

 

 

June 30,
2023

 

 

June 30,
2022

 

 

Actual

 

 

Constant
Currency

 

 

June 30,
2023

 

 

June 30,
2022

 

 

Actual

 

 

Constant Currency

 

License

 

$

192.9

 

 

$

175.2

 

 

 

10

%

 

 

15

%

 

$

562.6

 

 

$

562.6

 

 

 

(0

)%

 

 

6

%

Support and cloud services

 

 

313.7

 

 

 

248.2

 

 

 

26

%

 

 

28

%

 

 

875.4

 

 

 

736.6

 

 

 

19

%

 

 

24

%

Software revenue

 

 

506.7

 

 

 

423.4

 

 

 

20

%

 

 

23

%

 

 

1,438.1

 

 

 

1,299.2

 

 

 

11

%

 

 

16

%

Professional services

 

 

35.7

 

 

 

39.1

 

 

 

(9

)%

 

 

(7

)%

 

 

112.4

 

 

 

126.2

 

 

 

(11

)%

 

 

(7

)%

Total revenue

 

$

542.3

 

 

$

462.5

 

 

 

17

%

 

 

21

%

 

$

1,550.4

 

 

$

1,425.4

 

 

 

9

%

 

 

14

%

Software revenue in Q3'23 and the first nine months of FY'23 benefited from contributions from ServiceMax, as well as 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.

Within software revenue, license revenue is impacted by the quantity and size of expiring and renewing multi-year on-premises subscription contracts along with the duration of those contracts that start in the period. In Q3’23, the weighted-average duration of contracts starting in the quarter was substantially similar to Q3'22 with duration increases in the Americas offset by duration decreases in Europe. However, durations were lower in the first nine months of FY'23 compared to FY'22. The FY'23 decrease was primarily due to a few high-value renewal contracts in FY'22 that had longer than typical durations. 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 represented a headwind to license revenue growth in the first nine months of FY'23.

23


Table of Contents

 

Professional services revenue decreased in Q3'23 and the first nine 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

(Dollar amounts in millions)

 

Three months ended

 

 

Percent Change

 

 

Nine months ended

 

 

Percent Change

 

 

 

June 30,
2023

 

 

June 30,
2022

 

 

Actual

 

 

Constant
Currency

 

 

June 30,
2023

 

 

June 30,
2022

 

 

Actual

 

 

Constant
Currency

 

PLM

 

$

314.4

 

 

$

233.2

 

 

 

35

%

 

 

38

%

 

$

864.4

 

 

$

709.4

 

 

 

22

%

 

 

27

%

CAD

 

 

192.3

 

 

 

190.2

 

 

 

1

%

 

 

4

%

 

 

573.7

 

 

 

589.8

 

 

 

(3

)%

 

 

3

%

Software revenue

 

$

506.7

 

 

$

423.4

 

 

 

20

%

 

 

23

%

 

$

1,438.1

 

 

$

1,299.2

 

 

 

11

%

 

 

16

%

PLM software revenue growth in Q3'23 and the first nine 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 Windchill and IIoT in the Americas, offset by a decrease in Windchill revenue in Europe due to shorter durations of on-premises subscription contracts.

PLM ARR grew 36% (actual and constant currency) from Q3’22 to Q3'23, driven by ServiceMax, Windchill and IIoT.

CAD software revenue in Q3'23 and the first nine months of FY'23 was negatively impacted by a decline in the value of foreign currencies compared to the U.S. Dollar. The constant currency revenue growth was driven by Creo revenue in the Americas, offset by a decrease in Creo revenue in Europe due to shorter durations of on-premises subscription contracts.

CAD ARR grew 11% (actual and constant currency) from Q3’22 to Q3’23, driven by Creo.

24


Table of Contents

 

Gross Margin

(Dollar amounts in millions)

 

Three months ended

 

 

 

 

 

Nine months ended

 

 

 

 

 

 

June 30, 2023

 

 

June 30, 2022

 

 

Percent Change

 

 

June 30, 2023

 

 

June 30, 2022

 

 

Percent Change

 

License gross margin

 

$

181.4

 

 

$

161.5

 

 

 

12

%

 

$

521.3

 

 

$

527.2

 

 

 

(1

)%

License gross margin percentage

 

 

94

%

 

 

92

%

 

 

 

 

 

93

%

 

 

94

%

 

 

 

Support and cloud services gross margin

 

$

245.5

 

 

$

201.6

 

 

 

22

%

 

$

697.8

 

 

$

599.3

 

 

 

16

%

Support and cloud services gross margin percentage

 

 

78

%

 

 

81

%

 

 

 

 

 

80

%

 

 

81

%

 

 

 

Professional services gross margin

 

$

(0.4

)

 

$

(2.6

)

 

 

(85

)%

 

$

6.1

 

 

$

8.4

 

 

 

(27

)%

Professional services gross margin percentage

 

 

(1

)%

 

 

(7

)%

 

 

 

 

 

5

%

 

 

7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gross margin

 

$

426.5

 

 

$

360.5

 

 

 

18

%

 

$

1,225.3

 

 

$

1,135.0

 

 

 

8

%

Total gross margin percentage

 

 

79

%

 

 

78

%

 

 

 

 

 

79

%

 

 

80

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP gross margin(1)

 

$

442.2

 

 

$

375.5

 

 

 

18

%

 

$

1,266.8

 

 

$

1,172.6

 

 

 

8

%

Non-GAAP gross margin percentage(1)

 

 

82

%

 

 

81

%

 

 

 

 

 

82

%

 

 

82

%

 

 

 

(1)
Non-GAAP financial measures are reconciled to GAAP results under Non-GAAP Financial Measures below.

License gross margin increased in Q3’23 compared to Q3’22 due mainly to higher license revenue. License gross margin decreased in the first nine months of FY’23 compared to the corresponding FY’22 period due to increases in cost of license driven by higher royalty expense while license revenue remained flat.

Support and cloud services gross margin increased in the third quarter and first nine months of FY’23 compared to the corresponding FY’22 periods due to increases in support and cloud services revenue, partially offset by increases in cost of support and cloud services, which were driven by higher royalty expenses, compensation costs, higher intangible amortization expense due to the ServiceMax acquisition, and cloud hosting costs.

Professional services gross margin decreased in the third quarter and first nine months of FY’23 compared to the corresponding FY’22 periods due to decreases in professional services revenue, offset by a decrease in professional services costs in the first nine 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.

25


Table of Contents

 

Operating Expenses

(Dollar amounts in millions)

 

Three months ended

 

 

 

 

 

Nine months ended

 

 

 

 

 

 

June 30, 2023

 

 

June 30, 2022

 

 

Percent Change

 

 

June 30, 2023

 

 

June 30, 2022

 

 

Percent Change

 

Sales and marketing

 

$

145.1

 

 

$

124.3

 

 

 

17

%

 

$

392.7

 

 

$

366.2

 

 

 

7

%

% of total revenue

 

 

27

%

 

 

27

%

 

 

 

 

 

25

%

 

 

26

%

 

 

 

Research and development

 

$

103.8

 

 

$

88.2

 

 

 

18

%

 

$

292.3

 

 

$

250.6

 

 

 

17

%

% of total revenue

 

 

19

%

 

 

19

%

 

 

 

 

 

19

%

 

 

18

%

 

 

 

General and administrative

 

$

57.1

 

 

$

54.6

 

 

 

4

%

 

$

173.9

 

 

$

154.0

 

 

 

13

%

% of total revenue

 

 

11

%

 

 

12

%

 

 

 

 

 

11

%

 

 

11

%

 

 

 

Amortization of acquired intangible assets

 

$

10.7

 

 

$

8.9

 

 

 

19

%

 

$

29.4

 

 

$

25.9

 

 

 

13

%

% of total revenue

 

 

2

%

 

 

2

%

 

 

 

 

 

2

%

 

 

2

%

 

 

 

Restructuring and other charges (credits), net

 

$

(0.0

)

 

$

4.5

 

 

 

(101

)%

 

$

(0.4

)

 

$

36.9

 

 

 

(101

)%

% of total revenue

 

 

(0

)%

 

 

1

%

 

 

 

 

 

(0

)%

 

 

3

%

 

 

 

Total operating expenses

 

$

316.6

 

 

$

280.5

 

 

 

13

%

 

$

887.9

 

 

$

833.6

 

 

 

7

%

Headcount increased 11% between Q3’22 and Q3’23, primarily driven by our acquisition of ServiceMax.

Operating expenses in Q3'23 increased compared to Q3'22, primarily due to the following:

a $30 million increase in compensation expense (including stock-based compensation and benefit costs) primarily due to our acquisition of ServiceMax; and
an $8 million increase in marketing expense primarily due to our Q3'23 LiveWorx event.

Operating expenses in the first nine months of FY’23 increased compared to the first nine months of FY’22, due to the following:

a $57 million increase in compensation expense (including stock-based compensation and benefit costs) primarily due to our acquisition of ServiceMax; and
an $11 million increase in marketing expense primarily due to our Q3'23 LiveWorx event;

partially offset by:

a $37 million decrease in restructuring and other charges.

Interest Expense

(Dollar amounts in millions)

 

Three months ended

 

 

 

 

 

Nine months ended

 

 

 

 

 

 

June 30, 2023

 

 

June 30, 2022

 

 

Percent Change

 

 

June 30, 2023

 

 

June 30, 2022

 

 

Percent Change

 

Interest and debt premium expense

 

$

(35.8

)

 

$

(13.8

)

 

 

160

%

 

$

(93.7

)

 

$

(39.0

)

 

 

140

%

Interest expense includes interest on our credit facility and senior notes and imputed interest on the ServiceMax deferred acquisition payment. The increase in interest expense was driven by higher total debt and higher interest rates in Q3’23 compared to Q3’22, as well as the imputed interest on the ServiceMax deferred acquisition payment.

26


Table of Contents

 

Other Income (Expense)

(Dollar amounts in millions)

 

Three months ended

 

 

 

 

 

Nine months ended

 

 

 

 

 

 

June 30, 2023

 

 

June 30, 2022

 

 

Percent Change

 

 

June 30, 2023

 

 

June 30, 2022

 

 

Percent Change

 

Interest income

 

$

1.4

 

 

$

0.6

 

 

 

128

%

 

$

3.9

 

 

$

1.6

 

 

 

142

%

Other income (expense), net

 

 

1.1

 

 

 

34.0

 

 

 

(97

)%

 

 

(3.5

)

 

 

(4.2

)

 

 

(18

)%

Other income (expense), net

 

$

2.5

 

 

$

34.6

 

 

 

(93

)%

 

$

0.4

 

 

$

(2.6

)

 

 

(115

)%

The decrease in Other income (expense), net, in Q3’23 was driven by a recognized gain on the sale of a portion of our PLM services business of $29.8 million in Q3’22 and a $3.0 million gain on the sale of an investment in Q3'22. In addition, net charges for the first nine months of FY'22 include a recognized loss on our equity investment in a publicly-traded company of $34.8 million.

Income Taxes

(Dollar amounts in millions)

 

Three months ended

 

 

 

 

 

Nine months ended

 

 

 

 

 

 

June 30, 2023

 

 

June 30, 2022

 

 

Percent Change

 

 

June 30, 2023

 

 

June 30, 2022

 

 

Percent Change

 

Income before income taxes

 

$

76.5

 

 

$

100.8

 

 

 

(24

)%

 

$

244.0

 

 

$

259.7

 

 

 

(6

)%

Provision for income taxes

 

$

15.1

 

 

$

30.3

 

 

 

(50

)%

 

$

44.1

 

 

$

53.5

 

 

 

(18

)%

Effective income tax rate

 

 

20

%

 

 

30

%

 

 

 

 

 

18

%

 

 

21

%

 

 

 

The effective tax rate for Q3'23 and the first nine months of FY'23 was lower than the effective tax rate for the corresponding FY’22 periods primarily due to $8.1 million of tax expense in Q3'22 arising from the basis difference on goodwill related to the sale of a portion of our PLM business in that period.

 

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.

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)

 

June 30, 2023

 

 

September 30, 2022

 

Cash and cash equivalents

 

$

281.5

 

 

$

272.2

 

Restricted cash

 

 

0.7

 

 

 

0.7

 

Total

 

$

282.2

 

 

$

272.9

 

 

 

 

 

 

 

 

(in millions)

 

Nine months ended

 

 

 

June 30, 2023

 

 

June 30, 2022

 

Net cash provided by operating activities

 

$

561.1

 

 

$

396.8

 

Net cash used in investing activities

 

$

(866.1

)

 

$

(192.9

)

Net cash provided by (used in) financing activities

 

$

307.5

 

 

$

(193.2

)

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.

27


Table of Contents

 

A significant portion of our cash is generated and held outside the U.S. As of June 30, 2023, we had cash and cash equivalents of $13.6 million in the U.S., $123.9 million in Europe, $119.3 million in Asia Pacific (including India) and $24.7 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 $164.3 million in the first nine months of FY’23 compared to the first nine months of FY’22. The increase 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 and higher interest payments. Cash from operations for the first nine months of FY'23 includes $1.4 million of restructuring payments and $9.3 million of acquisition and transaction-related payments compared to $38.5 million of restructuring payments and $10.1 million of acquisition and transaction-related payments in the prior-year period. Cash from operations for the first nine months of FY'23 includes $51.9 million of interest payments, compared to $25.9 million in the prior-year period.

Cash Used In Investing Activities

Cash used in investing activities in the first nine months of FY’23 was driven by the acquisition of ServiceMax for $828.2 million in Q2'23. Cash used in investing activities in the first nine months of FY’22 reflects the acquisition of the Codebeamer business for $275 million, offset by $47 million of proceeds from the sale of an investment and $33 million of proceeds from the sale of a portion of our PLM services business.

Cash Provided by (Used In) Financing Activities

Cash provided by financing activities in the first nine months of FY’23 was primarily related to net new borrowings of $771.0 million (a $500.0 million term loan and a $271.0 million incremental revolving line) to fund the ServiceMax acquisition and repayments of $385.0 million on the new revolving facility. Cash used in financing activities in the first nine months of FY’22 included $125.0 million of repurchases of our common stock.

Outstanding Debt

(in millions)

 

June 30, 2023

 

4.000% Senior notes due 2028

 

$

500.0

 

3.625% Senior notes due 2025

 

 

500.0

 

Credit facility revolving line

 

 

245.0

 

Credit facility term loan

 

 

500.0

 

Total debt

 

$

1,745.0

 

Unamortized debt issuance costs for the senior notes

 

 

(6.8

)

Total debt, net of issuance costs

 

$

1,738.2

 

 

 

 

Undrawn under credit facility revolving line

 

$

1,005.0

 

Undrawn under credit facility revolving line available to borrow

 

$

341.2

 

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 June 30, 2023, we were in compliance with all financial and operating covenants of the credit facility and the note indentures.

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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 $2 million in Q4'23) through at least the next twelve months and to meet our known 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.

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

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 consider a contract to be active when the product or service contractual term commences (the “start date”) until the right to use the product or service ends (the “expiration date”). Even if the contract with the customer is executed before the start date, the contract will not count toward ARR until the customer right to receive the benefit of the products or services has commenced.
For contracts that include annual values that increase over time, which we refer to as ramp contracts, we include in ARR only the annualized value of components of the contract that are considered active as of the date of the ARR calculation. We do not include any future committed increases in the contract value as of the date of the ARR calculation.
As ARR includes only contracts that are active at the end of the reporting period, ARR does not reflect assumptions or estimates regarding future customer renewals or non-renewals.
Active contracts are annualized by dividing the total active contract value by the contract duration in days (expiration date minus start date), then multiplying that by 365 days (or 366 days for leap years).

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 that commence in a reporting period and decreases by the annualized value of contracts that expire in the reporting period.

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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:

free cash flow—cash flow from operations
non-GAAP gross margin—GAAP gross margin
non-GAAP operating income—GAAP operating income
non-GAAP operating margin—GAAP operating margin
non-GAAP net income—GAAP net income
non-GAAP diluted earnings per share—GAAP diluted earnings per share

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; significant non-ordinary course 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.

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)

 

Three months ended

 

 

Nine months ended

 

 

 

June 30, 2023

 

 

June 30, 2022

 

 

June 30, 2023

 

 

June 30, 2022

 

GAAP gross margin

 

$

426.5

 

 

$

360.5

 

 

$

1,225.3

 

 

$

1,135.0

 

Stock-based compensation

 

 

5.8

 

 

 

8.4

 

 

 

15.7

 

 

 

18.7

 

Amortization of acquired intangible assets included in cost of revenue

 

 

9.8

 

 

 

6.6

 

 

 

25.8

 

 

 

19.0

 

Non-GAAP gross margin

 

$

442.2

 

 

$

375.5

 

 

$

1,266.8

 

 

$

1,172.6

 

GAAP operating income

 

$

109.9

 

 

$

80.0

 

 

$

337.3

 

 

$

301.3

 

Stock-based compensation

 

 

53.8

 

 

 

49.4

 

 

 

147.6

 

 

 

133.3

 

Amortization of acquired intangible assets

 

 

20.5

 

 

 

15.5

 

 

 

55.2

 

 

 

44.9

 

Acquisition and transaction-related charges

 

 

0.8

 

 

 

6.4

 

 

 

18.5

 

 

 

11.3

 

Restructuring and other charges (credits), net

 

 

(0.0

)

 

 

4.5

 

 

 

(0.4

)

 

 

36.9

 

Non-GAAP operating income

 

$

185.0

 

 

$

155.7

 

 

$

558.2

 

 

$

527.7

 

GAAP net income

 

$

61.4

 

 

$

70.5

 

 

$

199.9

 

 

$

206.2

 

Stock-based compensation

 

 

53.8

 

 

 

49.4

 

 

 

147.6

 

 

 

133.3

 

Amortization of acquired intangible assets

 

 

20.5

 

 

 

15.5

 

 

 

55.2

 

 

 

44.9

 

Acquisition and transaction-related charges

 

 

0.8

 

 

 

6.4

 

 

 

18.5

 

 

 

11.3

 

Restructuring and other charges (credits), net

 

 

(0.0

)

 

 

4.5

 

 

 

(0.4

)

 

 

36.9

 

Non-operating charges (credits), net(1)

 

 

 

 

 

(32.8

)

 

 

5.1

 

 

 

2.0

 

Income tax adjustments(2)

 

 

(18.8

)

 

 

1.1

 

 

 

(52.5

)

 

 

(43.6

)

Non-GAAP net income

 

$

117.7

 

 

$

114.5

 

 

$

373.4

 

 

$

391.0

 

GAAP diluted earnings per share

 

$

0.51

 

 

$

0.60

 

 

$

1.68

 

 

$

1.75

 

Stock-based compensation

 

 

0.45

 

 

 

0.42

 

 

 

1.24

 

 

 

1.13

 

Amortization of acquired intangible assets

 

 

0.17

 

 

 

0.13

 

 

 

0.46

 

 

 

0.38

 

Acquisition and transaction-related charges

 

 

0.01

 

 

 

0.05

 

 

 

0.16

 

 

 

0.10

 

Restructuring and other charges (credits), net

 

 

(0.00

)

 

 

0.04

 

 

 

(0.00

)

 

 

0.31

 

Non-operating charges (credits), net(1)

 

 

 

 

 

(0.28

)

 

 

0.04

 

 

 

0.02

 

Income tax adjustments(2)

 

 

(0.16

)

 

 

0.01

 

 

 

(0.44

)

 

 

(0.37

)

Non-GAAP diluted earnings per share

 

$

0.99

 

 

$

0.97

 

 

$

3.14

 

 

$

3.31

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash provided by operating activities

 

$

169.2

 

 

$

116.8

 

 

$

561.1

 

 

$

396.8

 

Capital expenditures

 

 

(5.1

)

 

 

(4.5

)

 

 

(18.0

)

 

 

(10.0

)

Free cash flow

 

$

164.1

 

 

$

112.3

 

 

$

543.1

 

 

$

386.8

 

(1)
In the nine months ended June 30, 2023, we recognized $4.2 million of financing charges for a debt commitment agreement associated with our acquisition of ServiceMax. Credits for Q3'22 include a $29.8 million gain on the sale of a portion of our PLM services business, and a $3.0 million gain on sale of an investment. Net charges for the nine months ended June 30, 2022 include a $34.8 million expense recognized due to the reduction in value of an equity investment in a publicly-traded company, offset by a $29.8 million gain on the sale of a portion of our PLM services business, and a $3.0 million gain on sale of an investment.
(2)
Income tax adjustments reflect the tax effects of non-GAAP adjustments which are calculated by applying the applicable tax rate by jurisdiction to the non-GAAP adjustments listed above. In Q3'22, adjustments include tax expense of $15.5 million related to the sale of our PLM service business, of which $8.1 million pertains to the basis difference on goodwill.

Operating margin impact of non-GAAP adjustments:

 

 

Three months ended

 

 

Nine months ended

 

 

 

June 30, 2023

 

 

June 30, 2022

 

 

June 30, 2023

 

 

June 30, 2022

 

GAAP operating margin

 

 

20.3

%

 

 

17.3

%

 

 

21.8

%

 

 

21.1

%

Stock-based compensation

 

 

9.9

%

 

 

10.7

%

 

 

9.5

%

 

 

9.4

%

Amortization of acquired intangible assets

 

 

3.8

%

 

 

3.4

%

 

 

3.6

%

 

 

3.1

%

Acquisition and transaction-related charges

 

 

0.1

%

 

 

1.4

%

 

 

1.2

%

 

 

0.8

%

Restructuring and other charges (credits), net

 

 

0.0

%

 

 

1.0

%

 

 

0.0

%

 

 

2.6

%

Non-GAAP operating margin

 

 

34.1

%

 

 

33.7

%

 

 

36.0

%

 

 

37.0

%

 

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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 June 30, 2023.

Management excluded ServiceMax from its assessment of internal control over financial reporting as of June 30, 2023 because it was acquired in a business combination in the current fiscal year. ServiceMax's total assets and total revenues represent approximately 2% (excluding the impact of goodwill and intangibles from the acquisition) and 9%, respectively, of our total assets and total revenues, as of and for the nine months ended June 30, 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 June 30, 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 5. OTHER INFORMATION

Director and Executive Officer Adoption, Modification or Termination of 10b5-1 Plans in Q3’23

None.

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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).

 

 

 

4.3

 

Form of 4.000% senior unsecured notes due 2028 (filed as Exhibit 4.3 to our Current Report on Form 8-K filed on February 13, 2020 (File No. 0-18059) and incorporated herein by reference).

 

 

 

31.1

 

Certification of the Chief Executive Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a).

 

 

 

31.2

 

Certification of the Chief Financial Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a).

 

 

32*

 

Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350.

 

 

101

 

The following materials from PTC Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 ("Q3 Form 10-Q") formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of June 30, 2023 and September 30, 2022; (ii) Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2023 and June 30, 2022; (iii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended June 30, 2023 and June 30, 2022; (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2023 and June 30, 2022; (v) Consolidated Statements of Stockholders’ Equity for the three and nine months ended June 30, 2023 and June 30, 2022; and (vi) Notes to Condensed Consolidated Financial Statements.

 

 

 

104

 

The cover page of the Q3 Form 10-Q formatted in Inline XBRL (included in Exhibit 101).

 

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

 

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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.

 

 

PTC Inc.

 

 

 

 

 

 

By:

 

/S/ KRISTIAN TALVITIE

 

 

 

Kristian Talvitie

Executive Vice President and Chief Financial

Officer (Principal Financial Officer)

Date: August 4, 2023

34