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|
ITEM 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Forward-Looking Statements
Statements in this Annual Report about anticipated financial results and growth, as well as about the development of our products and markets, are forward-looking statements that are based on our current plans and assumptions. Important information about the bases for these plans and assumptions and factors that may cause our actual results to differ materially from these statements is contained below and in Item 1A. “Risk Factors” of this Annual Report.
Information about Our Financial Reporting
We use certain operating measures, including our Subscription Measures, and non-GAAP financial measures when discussing our business and results. We discuss these measures, how we use them and how they are calculated in “Subscription Measures” and “Non-GAAP Financial Measures” below.
Unless otherwise indicated, all references to a year reflect our fiscal year that ends on September 30.
Executive Overview
We executed well across our key strategic and operational objectives in 2017. Bookings grew year over year, reflecting broad-based strength across our IoT, CAD and PLM businesses and strength in Europe, the Americas and our global channel. Our subscription transition initiative also progressed well throughout 2017, with subscription bookings constituting 69% of all software license bookings for the year and subscription revenue up 136% over 2016. Finally, we improved our operating margins over 2016, despite a higher than expected subscription mix for the year.
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Year Ended
|
|
|
|
Constant Currency Change
|
|
|
|
September 30, 2017
|
|
September 30, 2016
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|
Revenue
|
|
|
|
Change
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Subscription
|
|
$
|
279.2
|
|
|
$
|
118.3
|
|
|
136
|
%
|
|
135
|
%
|
|
Support
|
|
574.7
|
|
|
651.8
|
|
|
(12
|
)%
|
|
(12
|
)%
|
|
Total recurring revenue
|
|
853.9
|
|
|
770.1
|
|
|
11
|
%
|
|
11
|
%
|
|
Perpetual license
|
|
133.4
|
|
|
173.5
|
|
|
(23
|
)%
|
|
(23
|
)%
|
|
Total subscription, support and license revenue
|
|
987.3
|
|
|
943.6
|
|
|
5
|
%
|
|
5
|
%
|
|
Professional services
|
|
176.7
|
|
|
196.9
|
|
|
(10
|
)%
|
|
(11
|
)%
|
|
Total revenue
|
|
$
|
1,164.0
|
|
|
$
|
1,140.5
|
|
|
2
|
%
|
|
2
|
%
|
|
The increase in total revenue and subscription revenue reflects our exit from the trough in revenue and EPS growth that occurs when transitioning from a perpetual to subscription business model. As our mix of subscription sales relative to perpetual license sales has increased, perpetual license revenue and support revenue have declined. Additionally, professional services revenue has declined in accordance with our strategy to migrate more services engagements to our partners and to deliver products that require less consulting and training services.
License and subscription bookings grew 4% in 2017 over 2016, to $419 million, and grew 21% over 2015. Excluding a $20 million SLM mega deal from the fourth quarter of 2016, license and subscription bookings grew 10% in 2017 over 2016.
The increase in subscription revenue relative to perpetual license revenue has resulted in an increase in our recurring software revenue, with approximately 73% of our total revenue in 2017 from recurring software revenue streams, compared to 68% in 2016 and 59% in 2015. Annualized Recurring Revenue
was approximat
ely $905 m
illion as of the fourth quarter of 2017, an increase of 12% compared to the fourth quarter of 2016.
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Year Ended
|
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|
September 30, 2017
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September 30, 2016
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Earnings Measures
|
|
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|
Change
|
|
|
|
|
|
|
|
Operating Margin
|
|
3.5
|
%
|
|
(3.2
|
)%
|
|
208
|
%
|
|
Earnings (Loss) Per Share
|
|
$
|
0.05
|
|
|
$
|
(0.48
|
)
|
|
111
|
%
|
|
|
|
|
|
|
|
|
|
Non-GAAP Operating Margin
(1)
|
|
16.1
|
%
|
|
15.1
|
%
|
|
7
|
%
|
|
Non-GAAP EPS
(1)
|
|
$
|
1.17
|
|
|
$
|
1.19
|
|
|
(2
|
)%
|
|
(1) Non-GAAP measures are reconciled to GAAP results under
Results of Operations - Non-GAAP Measures
below.
|
GAAP and non-GAAP operating income in 2017 reflect an increase in gross margin associated with higher revenue and a lower mix of professional services revenue, which has lower margins than our software revenue, partially offset by higher costs associated with our cloud services revenue. Additionally, operating margin improved due to lower restructuring charges in 2017, which were $68.3 million lower in 2017 compared to 2016.
Our GAAP and non-GAAP earnings reflect an additional $12.5 million in interest expense due to our 2016 issuance of $500 million of 6.0% senior, unsecured long-term notes and a higher GAAP and non-GAAP tax rate in 2017 compared to 2016.
We ended 2017 with cash, cash equivalents and marketable securities of $330 million, up from $328 million at the end of 2016. We generated
$135 million
of cash from operations in 2017, which included $37 million of restructuring payments and a $3 million legal settlement payment. We used cash from operations to repurchase $51 million of common stock and to repay
$40 million
of borrowings under our credit facility in 2017. At September 30, 2017, the balance outstanding under our credit facility was $218 million and total debt outstanding was $718 million.
Future Expectations, Strategies and Risks
Our transition to a subscription model has been a headwind for revenue and earnings in 2017, the effect of which is moderating as the subscription business matures and we exit the subscription trough. A
higher mix of subscription bookings is expected to benefit us over the long term, but results in lower revenue and lower earnings in the near term.
Our results have been impacted, and we expect will continue to be impacted, by our ability to close large transactions. The amount of bookings and revenue, particularly license and subscriptions, attributable to large transactions, and the number of such transactions, may vary significantly from quarter to quarter based on customer purchasing decisions and macroeconomic conditions. Such transactions may have long lead times as they often follow a lengthy product selection and evaluation process and, for existing customers, are influenced by contract expiration cycles. This may cause volatility in our results.
As we move into 2018, our three overriding goals continue to be:
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|
|
|
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Sustainable Growth
|
Our goals for overall growth are predicated on continuing to grow in the IoT market and continuing to drive improvements in operational performance in our core CAD, PLM and SLM Solutions business.
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|
Expand Subscription
|
Through 2014, the majority of our software licenses were sold as perpetual licenses, under which customers own the software license and revenue is recognized at the time of sale. We began offering subscription licensing for our core Solutions Group products in 2015 and expanded our subscription program in 2016. Under a subscription, customers pay a periodic fee to license our software and access technical support over a specified period of time. As part of our expanded subscription program, we also launched a program for our existing customers to convert their support contracts to subscription contracts. A number of customers converted their support contracts to subscriptions in 2016 and 2017, and we expect there will be continued opportunities to convert existing support contracts to subscription contracts in 2018 and beyond.
Given the subscription adoption rates we have seen in the Americas and Western Europe, effective January 1, 2018, new software licenses for our core solutions and ThingWorx solutions will be available only by subscription in the Americas and Western Europe. We plan to continue to offer both perpetual and subscription licenses to customers outside the Americas and Western Europe until such time as we believe a change may be appropriate. This could affect customer purchasing decisions, particularly in the affected regions, as customers may accelerate purchases of perpetual licenses before January 1, 2018 or, conversely, may delay purchases.
|
|
Cost Controls and Margin Expansion
|
We continue to proactively manage our cost structure and invest in what we believe are high return opportunities in our business. Our goal is to drive continued margin expansion over the long term. We expect to deliver continued operating margin expansion in 2018, and we expect further margin expansion in 2019 and beyond, when we expect we will realize the compounding benefit of our maturing subscription model.
|
Results of Operations
Revenue, Operating Margin, Earnings per Share and Cash Flow
The following table shows the financial measures that we consider the most significant indicators of the performance of our business. In addition to providing operating income, operating margin, and diluted earnings per share as calculated under generally accepted accounting principles (“GAAP”), it shows non-GAAP operating income, non-GAAP operating margin, and non-GAAP diluted earnings per share for the reported periods. These non-GAAP financial measures exclude fair value adjustments related to acquired deferred revenue, acquired deferred costs, stock-based compensation expense, amortization of acquired intangible assets expense, acquisition-related and pension plan termination costs, restructuring charges, certain identified gains or charges included in non-operating other income (expense) and the related tax effects of the preceding items, as well as the tax items identified. These non-GAAP financial measures provide investors another view of our operating results that is aligned with management budgets and with performance criteria in our incentive compensation plans. Management uses, and investors should use, non-GAAP financial measures in conjunction with our GAAP results.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Percent change 2016 to 2017
|
|
2015
|
|
Percent change 2015 to 2016
|
Actual
|
|
Constant
Currency
|
|
Actual
|
|
Constant
Currency
|
|
(Dollar amounts in millions, except per share data)
|
Subscription
|
$
|
279.2
|
|
|
$
|
118.3
|
|
|
136
|
%
|
|
135
|
%
|
|
$
|
65.2
|
|
|
81
|
%
|
|
83
|
%
|
Support
|
574.7
|
|
|
651.8
|
|
|
(12
|
)%
|
|
(12
|
)%
|
|
681.5
|
|
|
(4
|
)%
|
|
(2
|
)%
|
Total recurring revenue
|
853.9
|
|
|
770.1
|
|
|
11
|
%
|
|
11
|
%
|
|
746.8
|
|
|
3
|
%
|
|
5
|
%
|
Perpetual license
|
133.4
|
|
|
173.5
|
|
|
(23
|
)%
|
|
(23
|
)%
|
|
282.8
|
|
|
(39
|
)%
|
|
(37
|
)%
|
Total subscription, support and license revenue
|
987.3
|
|
|
943.6
|
|
|
5
|
%
|
|
5
|
%
|
|
1,029.5
|
|
|
(8
|
)%
|
|
(6
|
)%
|
Professional services
|
176.7
|
|
|
196.9
|
|
|
(10
|
)%
|
|
(11
|
)%
|
|
225.7
|
|
|
(13
|
)%
|
|
(10
|
)%
|
Total revenue
|
1,164.0
|
|
|
1,140.5
|
|
|
2
|
%
|
|
2
|
%
|
|
1,255.2
|
|
|
(9
|
)%
|
|
(7
|
)%
|
Total cost of revenue
|
329.0
|
|
|
325.7
|
|
|
1
|
%
|
|
|
|
334.7
|
|
|
(3
|
)%
|
|
|
Gross margin
|
835.0
|
|
|
814.9
|
|
|
2
|
%
|
|
|
|
920.5
|
|
|
(11
|
)%
|
|
|
Operating expenses
|
794.1
|
|
|
851.9
|
|
|
(7
|
)%
|
|
|
|
878.9
|
|
|
(3
|
)%
|
|
|
Total costs and expenses (1)
|
1,123.1
|
|
|
1,177.5
|
|
|
(5
|
)%
|
|
(4
|
)%
|
|
1,213.6
|
|
|
(3
|
)%
|
|
(1
|
)%
|
Operating income (loss) (1)
|
$
|
40.9
|
|
|
$
|
(37.0
|
)
|
|
211
|
%
|
|
214
|
%
|
|
$
|
41.6
|
|
|
(189
|
)%
|
|
(182
|
)%
|
Non-GAAP operating income (1)
|
$
|
188.4
|
|
|
$
|
172.7
|
|
|
9
|
%
|
|
7
|
%
|
|
$
|
340.3
|
|
|
(49
|
)%
|
|
(41
|
)%
|
Operating margin (1)
|
3.5
|
%
|
|
(3.2
|
)%
|
|
|
|
|
|
3.3
|
%
|
|
|
|
|
Non-GAAP operating margin (1)
|
16.1
|
%
|
|
15.1
|
%
|
|
|
|
|
|
24.2
|
%
|
|
|
|
|
Diluted earnings (loss) per share (2)
|
$
|
0.05
|
|
|
$
|
(0.48
|
)
|
|
|
|
|
|
$
|
0.41
|
|
|
|
|
|
Non-GAAP diluted earnings per share (2)
|
$
|
1.17
|
|
|
$
|
1.19
|
|
|
|
|
|
|
$
|
2.23
|
|
|
|
|
|
Cash flow from operations
|
$
|
134.6
|
|
|
$
|
183.2
|
|
|
|
|
|
|
$
|
179.9
|
|
|
|
|
|
|
|
(1)
|
Costs and expenses in 2017 included $7.9 million of restructuring charges. Costs and expenses in 2016 included $76.3 million of restructuring charges, a $3.2 million legal accrual, and $3.5 million of acquisition-related costs. Costs and expenses in 2015 included $73.2 million of pension plan termination-related costs, $43.4 million of restructuring charges, a $28.2 million legal accrual, and $8.9 million of acquisition-related costs. These restructuring, acquisition-related, pension plan termination and legal accrual costs have been excluded from non-GAAP operating income, non-GAAP operating margin and non-GAAP diluted EPS.
|
|
|
(2)
|
Income taxes for non-GAAP diluted earnings per share reflect the tax effects of non-GAAP adjustments which are calculated by applying the applicable tax rate by jurisdiction to the non-GAAP adjustments described in
Non-GAAP Financial Measures
, and also exclude certain non-operating income and tax items. The GAAP diluted earnings per share in 2015 reflect a tax benefit of
|
$18.7 million
related to the reversal of a portion of the U.S. valuation allowance related to reducing deferred tax assets in connection with settling the U.S. pension plan.
Subscription Measures
Given the difference in revenue recognition between the sale of a perpetual software license (revenue is recognized at the time of sale) and a subscription (revenue is recognized ratably over the subscription term), we use bookings for internal planning, forecasting and reporting of new license and subscription sales and cloud services transactions.
Bookings
In order to normalize between perpetual and subscription licenses, we define
subscription bookings
as the subscription annualized contract value (subscription ACV) of new subscription bookings multiplied by a conversion factor of 2. We arrived at the conversion factor of 2 by considering a number of variables, including pricing, support, length of term, and renewal rates. In 2017, 2016 and 2015, the average subscription contract term was approximately two years.
We define
subscription ACV
as the total value of a new subscription booking divided by the term of the contract (in days), multiplied by 365. If the term of the subscription contract is less than a year, the ACV is equal to the total contract value.
S
ubscription ACV increased 25% over 2016 to $143 million due to continued adoption of our subscription offerings around the globe.
We define
license and subscription bookings
as subscriptions bookings (as defined above) plus perpetual license bookings during the period.
License and subscription bookings for 2017 were $419 million, up 4% over 2016. Excluding a $20 million booking from a mega-deal in 2016, bookings increased 10% over 2016. CAD and PLM bookings grew 14% and 6%, respectively, for the full year and our IoT bookings grew above the market growth rate of 30%-40% organically and in total.
Because subscription bookings is a metric we use to approximate the value of subscription sales if sold as perpetual licenses, it does not represent the actual revenue that will be recognized with respect to subscription sales or that would be recognized if the sales had been perpetual licenses.
We believe that over time the revenue from these contracts will exceed the initial booking value as we expect customers will renew their subscriptions for more than two years and will expand their subscriptions as well.
Annualized Recurring Revenue (ARR)
Annualized Recurring Revenue (ARR) for a given period is calculated by dividing the non-GAAP subscription and support software revenue for the period by the number of days in the period and multiplying by 365. ARR should be viewed independently of revenue and deferred revenue as it is an operating measure and is not intended to be combined with or to replace either of those items. ARR is not a forecast and does not include perpetual license or professional services revenues.
ARR was approximat
ely $905 m
illion as of the fourth quarter of 2017, which increased 12% compared to the fourth quarter of 2016.
Impact of Foreign Currency Exchange on Results of Operations
Approximately two thirds of our revenue and half of our expenses are transacted in currencies other than the U.S. dollar. Currency translation affects our reported results, which are in U.S. Dollars. Changes in currency exchange rates, particularly for the Yen and the Euro, compared to the prior year decreased revenue and decreased expenses in 2017 and 2016. If actual reported results were converted into U.S. dollars based on the corresponding prior year’s foreign currency exchange rates, 2017 and 2016 revenue would have been higher by $1.0 million and $24.4 million, respectively, and expenses would have been higher by $3.0 million and $24.1 million, respectively. The net impact on year-over-year results would have been a decrease in operating income of $2.0 million in 2017 and an increase in operating income of $0.3 million in 2016. The results of operations, revenue by line of business and revenue by geographic region in the tables that follow present both actual percentage changes year over year and percentage changes on a constant currency basis.
Acquisitions
There were no significant acquisitions in 2017. In 2017, we had a full year of revenue for Kepware, which we acquired on January 12, 2016. Kepware contributed $16.1 million to 2016 revenue. In 2016, we also acquired Vuforia (on November 3, 2015) and in 2015, we acquired ColdLight (on May 7, 2015). Prior to their acquisitions, Vuforia and ColdLight revenues were not material.
Reclassifications
Effective with the beginning of the third quarter of 2017, we report cost of license and subscription revenue separately from cost of support revenue and are presenting cost of revenue in
three
categories: 1) cost of license and subscription revenue, 2) cost of support revenue, and 3) cost of professional services revenue. The discussion that follows reflects our revised reporting structure.
Deferred Revenue and Backlog (Unbilled Deferred Revenue)
Deferred revenue primarily relates to software agreements invoiced to customers for which the revenue has not yet been recognized. Unbilled deferred revenue (backlog) consists of contractually committed orders for license, subscription and support with a customer for which the customer has not yet been invoiced and the associated revenue has not been recognized. We do not record unbilled deferred revenue on our Consolidated Balance Sheet until we invoice the customer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
September 30, 2016
|
|
September 30, 2015
|
|
(Dollar amounts in millions)
|
Unbilled deferred revenue
|
$
|
633
|
|
|
$
|
369
|
|
|
$
|
211
|
|
Deferred revenue
|
459
|
|
|
414
|
|
|
387
|
|
Total
|
$
|
1,092
|
|
|
$
|
783
|
|
|
$
|
598
|
|
Of the unbilled deferred revenue balance at September 30, 2017, we expect to invoice customers approximately $355 million within the next twelve months. Unbilled deferred revenue grew 72% year-over-year due to the high volume of new subscription bookings in the fourth quarter of 2017 with a billing and subscription start date of October 1, 2017 or later (which are booked in the quarter when the order is received if the start date is less than 100 days from the end of the quarter) and a large number of subscription renewals, with billing renewal dates of October 1, 2017 or later (in accordance with the 100 day booking rule), as well as the second or third year billing of multi-year subscription contracts. Many of our subscription bookings are for multiple years and are typically billed annually at the start of each
annual subscription period. The average contract duration was approximately 2 years for new subscription contracts in 2017 and 2016.
We expect that the amount of deferred revenue and unbilled deferred revenue will fluctuate from quarter to quarter due to the specific timing, duration and size of customer subscription and support agreements, varying billing cycles of such agreements, the specific timing of customer renewals, foreign currency fluctuations, the timing of when deferred revenue is recognized as revenue and the timing of our fiscal quarter ends.
Revenue
Revenue is reported below by line of business (subscription, support, perpetual license and professional services), by product area (Solutions and IoT Groups) and by geographic region (Americas, Europe, Asia Pacific). Results include combined revenue from direct sales and our channel.
Revenue by Line of Business
Revenue by Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
|
|
Percent Change
|
|
|
|
Percent Change
|
|
|
|
2017
|
|
Actual
|
|
Constant
Currency
|
|
2016
|
|
Actual
|
|
Constant
Currency
|
|
2015
|
|
(Dollar amounts in millions)
|
Solutions Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software revenue
|
893.7
|
|
|
3
|
%
|
|
3
|
%
|
|
871.2
|
|
|
(11
|
)%
|
|
(9
|
)%
|
|
980.3
|
|
Professional services
|
167.1
|
|
|
(12
|
)%
|
|
(12
|
)%
|
|
189.0
|
|
|
(15
|
)%
|
|
(12
|
)%
|
|
222.1
|
|
Total revenue
|
$
|
1,060.7
|
|
|
—
|
%
|
|
—
|
%
|
|
$
|
1,060.2
|
|
|
(12
|
)%
|
|
(10
|
)%
|
|
$
|
1,202.4
|
|
IoT Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software revenue
|
93.7
|
|
|
29
|
%
|
|
29
|
%
|
|
72.4
|
|
|
47
|
%
|
|
47
|
%
|
|
49.2
|
|
Professional services
|
9.6
|
|
|
22
|
%
|
|
21
|
%
|
|
7.9
|
|
|
120
|
%
|
|
121
|
%
|
|
3.6
|
|
Total revenue
|
$
|
103.3
|
|
|
28
|
%
|
|
28
|
%
|
|
$
|
80.3
|
|
|
52
|
%
|
|
52
|
%
|
|
$
|
52.9
|
|
Software Revenue Performance
Software revenue consists of subscription, support, and perpetual license revenue. Subscription revenue is comprised of time-based licenses whereby customers use our software and receive related
support for a specified term, and for which revenue is recognized ratably over the term of the contract. Support revenue is composed of contracts to maintain new and/or previously purchased perpetual licenses, for which revenue is recognized ratably over the term of the contract. Perpetual licenses include a perpetual right to use the software, for which revenue is generally recognized up front upon delivery to the customer.
Solutions Group
Software revenue returned to growth in 2017 after a trough in 2016, as the subscription model transition accelerated, customers purchased fewer perpetual licenses and associated support, and some existing support contracts converted to subscriptions. The strength in our Solutions business was driven by our CAD and core PLM businesses. CAD delivered 14% bookings growth for the full year, well above estimated market growth rates. Our CAD business has now delivered two consecutive years of double-digit constant currency bookings growth. Creo growth has benefited from our go-to-market improvement initiatives, evidenced by seven consecutive quarters of double-digit bookings growth in our reseller channel. In core PLM, full-year bookings grew 6%, which is in line with estimated market growth rates. PLM continues to benefit from sales of ThingWorx Navigate, for which we closed transactions across a variety of vertical markets, and which we believe presents an opportunity to drive continued PLM growth. We also closed several major strategic PLM deals in the Americas and Europe. Growth in CAD and PLM was offset by a significant decline in SLM bookings. Our SLM business is characterized by low volume, high dollar transactions and we have experienced volatility period to period in this business.
The decline in software revenue in 2016 compared to 2015 was driven primarily by a higher mix of subscription bookings as well as foreign currency rate changes and macroeconomic conditions.
IoT Group
The IoT Group delivered revenue growth in 2017 and 2016. In 2017, software revenue growth was driven by continued adoption of our IoT solutions, with IoT bookings growing above estimated market rates of 30% to 40% for the fiscal year, partially offset by higher subscription mix. IoT bookings continue to come from a wide variety of vertical markets and use cases, led by the industrial factory operations. In 2017, customer expansions comprised approximately 70% of ThingWorx bookings.
Additionally, Kepware, which we acquired on January 12, 2016, contributed to IoT revenue growth from 2015 to 2016 (with $16.1 million of revenue in 2016) and to a lesser extent in 2017 which included a full year of Kepware revenue.
Professional Services Revenue
Consulting and training services engagements typically result from sales of new perpetual licenses and subscriptions, particularly of our PLM and SLM solutions. The decline in professional services revenue in 2017 and 2016 was due in part to strong growth in bookings by our service partners, which is in line with
our strategy for professional services revenue to trend flat-to-down over time as we e
xpand our service partner program under which service engagements are referred to third party service providers. Additionally, over time, we anticipate offering solutions that require less service. As a result, we do not expect that professional services revenue will increase proportionately with software revenue. Foreign currency exchange rates impacted services revenue positively by $0.5 million in 2017 and negatively by $5.9 million in 2016.
Revenue by Geographic Region
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2017
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|
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Percent Change
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|
2016
|
|
|
|
Percent Change
|
|
2015
|
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% of Total Revenue
|
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Actual
|
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Constant
Currency
|
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% of Total Revenue
|
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Actual
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Constant
Currency
|
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% of Total Revenue
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(Dollar amounts in millions)
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Revenue by region:
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Americas
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$
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500.9
|
|
|
43
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%
|
|
3
|
%
|
|
2
|
%
|
|
$
|
487.6
|
|
|
43
|
%
|
|
(8
|
)%
|
|
(8
|
)%
|
|
$
|
530.3
|
|
42
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%
|
Europe
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$
|
435.1
|
|
|
37
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%
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3
|
%
|
|
4
|
%
|
|
$
|
424.3
|
|
|
37
|
%
|
|
(9
|
)%
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|
(5
|
)%
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$
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467.8
|
|
37
|
%
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Asia Pacific
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$
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228.0
|
|
|
20
|
%
|
|
—
|
%
|
|
(2
|
)%
|
|
$
|
228.7
|
|
|
20
|
%
|
|
(11
|
)%
|
|
(11
|
)%
|
|
$
|
257.1
|
|
21
|
%
|
A significant percentage of our annual revenue comes from large customers in the broader manufacturing space. As a result, software revenue growth in our core CAD and PLM products historically has correlated to growth in broader measures of the global manufacturing economy, including GDP, industrial production and manufacturing PMI.
The increase in revenue in 2017 compared to 2016 was driven by our exit from the subscription trough coupled with strong new bookings performance despite a 1300 basis point increase in our subscription mix to 69% in 2017. Europe and Americas were strong, with full-year bookings growth of 29% (28% on a constant currency basis) in Europe and flat in the Americas, up 15% excluding the $20 million mega deal from the fourth quarter of 2016. Asia Pacific bookings were down 16% in 2017 compared to 2016 (16% decline on a constant currency basis), primarily due to Japan, which was down 42%. We believe that the decline in Japan is due primarily to sales execution issues, which we are addressing.
The decrease in revenue in 2016 compared to 2015 was driven primarily by a higher mix of subscription bookings as well as the impact of currency movements on reported revenue, particularly the Euro and the Yen.
Americas
The increase in revenue in the Americas in 2017 compared to 2016 was due to strong bookings, offset by a higher subscription mix. The increase in revenue in the Americas in 2017 compared to 2016 consisted of an increase in subscription revenue of 126% offset by decreases of 33%, 15% and 8% in perpetual license revenue, support revenue and, professional services revenue, respectively.
The decrease in revenue in the Americas in 2016 compared to 2015 consisted of decreases of 39%, 24% and 3% in perpetual license revenue, professional services revenue and support revenue (primarily PLM), respectively, partially offset by an increase in subscription revenue of 58%.
Europe
The increase in revenue in Europe in 2017 compared to 2016 was due to the strong bookings, partially offset by a higher subscription mix. The increase in revenue in Europe in 2017 compared to 2016 consisted of an increase of 139% in subscription revenue, offset by decreases of 17% in perpetual license revenue, 11% in professional services revenue, and 10% in support revenue. Currency did not have a material impact on revenue in 2017 relative to 2016.
The decrease in revenue in Europe in 2016 compared to 2015 consisted of decreases in perpetual license revenue of 46% (43% on a constant currency basis) and in support revenue of 6% (1% on a constant currency basis), partially offset by an increase in subscription revenue of 84% (91% on a constant currency basis).
Year-over-year changes in foreign currency exchange rates, particularly the Euro, unfavorably impacted European revenue by $3.9 million and $21.3 million in 2017 and 2016, respectively.
Asia Pacific
Asia Pacific revenue in 2017 compared to 2016 was flat, primarily due to a higher subscription mix and in part due to sales execution challenges in Japan. Asia Pacific bookings declined 16% on a constant currency basis in 2017 compared to 2016. Although below historical bookings, we saw some progress in Japan in the fourth quarter of 2017, with bookings growth of 80% sequentially to approximately $8 million.
In 2017 compared to 2016, subscription revenue increased by 178% offset by decreases in perpetual license revenue of 20%, in professional services revenue of 13% and in support revenue of 6%. Currency did not have a material effect on revenue in 2017 relative to 2016.
The decrease in revenue in Asia Pacific in 2016 compared to 2015 consisted of decreases in perpetual license revenue of 31% (29% on a constant currency basis), in professional services revenue of 10% (10% on a constant currency basis) and in support revenue of 4% (4% on a constant currency basis) partially offset by an increase in subscription revenue of 414% (374% on a constant currency basis).
Year-over-year changes in foreign currency exchange rates favorably impacted revenue by $1.6 million in 2017, and unfavorably by $0.2 million in 2016.
Gross Margin
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2017
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Percent
Change
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|
2016
|
|
Percent
Change
|
|
2015
|
|
(Dollar amounts in millions)
|
Gross margin
|
$
|
835.0
|
|
|
2
|
%
|
|
$
|
814.9
|
|
|
(11
|
)%
|
|
$
|
920.5
|
|
Non-GAAP gross margin
|
876.5
|
|
|
3
|
%
|
|
853.2
|
|
|
(11
|
)%
|
|
953.4
|
|
Gross margin as a % of revenue:
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|
License and subscription gross margin
|
79
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%
|
|
|
|
76
|
%
|
|
|
|
85
|
%
|
Support gross margin
|
84
|
%
|
|
|
|
87
|
%
|
|
|
|
88
|
%
|
Professional Services
|
15
|
%
|
|
|
|
14
|
%
|
|
|
|
12
|
%
|
Gross margin as a % of total revenue
|
72
|
%
|
|
|
|
71
|
%
|
|
|
|
73
|
%
|
Non-GAAP gross margin as a % of total non-GAAP revenue
|
75
|
%
|
|
|
|
75
|
%
|
|
|
|
76
|
%
|
The increase in total gross margin in 2017 compared to 2016 is in line with total revenue growth. Total revenue in 2017 grew 2% over 2016. Margins for license and subscription are beginning to expand as the subscription model matures and revenue that has been deferred begins to contribute to current periods. Support gross margins are down for 2017 compared to 2016 primarily due to the 12% decrease in support revenue associated with an increase in our subscription mix and the conversion of existing customers from support contracts to subscription. Support revenue comprised
49%
of our total revenue in 2017 compared to
57%
in 2016 and
54%
in 2015.
Gross margin as a percentage of total revenue in 2016 compared to 2015 reflects lower software margins due to lower perpetual license revenue as a result of the acceleration of our subscription transition.
Costs and Expenses
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2017
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Percent
Change
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|
2016
|
|
Percent
Change
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|
2015
|
|
|
|
|
|
|
|
|
|
|
Cost of license and subscription revenue
|
$
|
86.0
|
|
|
23
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%
|
|
$
|
69.7
|
|
|
31
|
%
|
|
$
|
53.2
|
|
Cost of support revenue
|
92.2
|
|
|
8
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%
|
|
85.7
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|
|
4
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%
|
|
82.8
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|
Cost of professional services revenue
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150.8
|
|
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(11
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)%
|
|
170.2
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|
|
(14
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)%
|
|
198.7
|
|
Sales and marketing
|
372.9
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|
|
1
|
%
|
|
367.5
|
|
|
6
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%
|
|
346.8
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|
Research and development
|
236.1
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|
|
3
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%
|
|
229.3
|
|
|
1
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%
|
|
227.5
|
|
General and administrative
|
145.1
|
|
|
—
|
%
|
|
145.6
|
|
|
(8
|
)%
|
|
158.7
|
|
U.S. pension settlement loss
|
—
|
|
|
|
|
|
—
|
|
|
|
|
|
66.3
|
|
Amortization of acquired intangible assets
|
32.1
|
|
|
(3
|
)%
|
|
33.2
|
|
|
(8
|
)%
|
|
36.1
|
|
Restructuring charges
|
7.9
|
|
|
(90
|
)%
|
|
76.3
|
|
|
76
|
%
|
|
43.4
|
|
Total costs and expenses
|
$
|
1,123.1
|
|
|
(5
|
)%
|
(1)
|
$
|
1,177.5
|
|
|
(3
|
)%
|
(1)
|
$
|
1,213.6
|
|
Total headcount at end of period
|
6,041
|
|
|
4
|
%
|
|
5,800
|
|
|
(3
|
)%
|
|
5,982
|
|
|
|
(1)
|
On a constant currency basis from the prior period, total costs and expenses decreased
4%
from
2016
to
2017
and decreased
1%
from
2015
to
2016
.
|
2017 compared to 2016
Costs and expenses in 2017 compared to 2016 decreased primarily as a result of the following:
|
|
•
|
substantial completion of restructuring activities in 2016, for which restructuring charges totaled $76.3 million in 2016 compared to $7.9 million in 2017; and
|
|
|
•
|
a decrease in professional services costs primarily due to a decrease in headcount as we migrated more service engagements to our partners and we delivered products that required less consulting and training services.
|
The decreases above were partially offset by increases due to:
|
|
•
|
an increase of $18.1 million in total cost of license, subscription and support compensation costs primarily driven by increased headcount;
|
|
|
•
|
an increase of $8.7 million in cloud services hosting costs due to an increase in SaaS revenue and related expenses and an increase in applications hosted in the cloud that support our IT infrastructure.
|
|
|
•
|
an increase of $5.0 million in total research and development compensation costs primarily driven by increased headcount; and
|
|
|
•
|
annual merit salary increases.
|
2016 compared to 2015
Costs and expenses in 2016 compared to 2015 decreased primarily as a result of the following:
|
|
•
|
cost savings from restructuring actions in 2016 and 2015;
|
|
|
•
|
acquisition and pension termination-related costs, which were $75.4 million lower in 2016 compared to 2015 due to costs associated with terminating our U.S. pension plan which totaled $73.2 million (including a $66.3 million settlement loss) in 2015;
|
|
|
•
|
a $28.2 million accrual recorded in 2015 related to an investigation in China; and
|
|
|
•
|
foreign currency rates which favorably impacted costs and expenses of 2016 by $24.1 million.
|
The decreases above were partially offset by increases due to:
|
|
•
|
cash-based incentive compensation expense, which was higher by $30.3 million in 2016 compared to 2015 (as a result of over performance on subscription mix in 2016 and because 2015 incentive targets were not achieved in full);
|
|
|
•
|
costs from acquired businesses (ColdLight, Vuforia, and Kepware added approximately 255 employees at the date of the acquisitions);
|
|
|
•
|
an increase in stock-based compensation expense of $15.8 million in 2016, compared to 2015, due in part to a modification of performance-based awards previously granted under our long-term incentive programs;
|
|
|
•
|
investments in our IoT business; and
|
|
|
•
|
annual merit salary increases.
|
Cost of License and Subscription Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
Percent
Change
|
|
2016
|
|
Percent
Change
|
|
2015
|
|
(Dollar amounts in millions)
|
Cost of license and subscription revenue
|
$
|
86.0
|
|
|
23
|
%
|
|
$
|
69.7
|
|
|
31
|
%
|
|
$
|
53.2
|
|
% of total revenue
|
7
|
%
|
|
|
|
6
|
%
|
|
|
|
4
|
%
|
% of total license and subscription revenue
|
21
|
%
|
|
|
|
24
|
%
|
|
|
|
15
|
%
|
Our cost of license and subscription includes cost of license, which consists of fixed and variable costs associated with reproducing and distributing software and documentation, as well as royalties paid to third parties for technology embedded in or licensed with our software products, and amortization of intangible assets associated with acquired products, and cost of subscription, which includes our cost of cloud services and software as a service revenue, including hosting fees. Costs associated with providing post-contract support such as providing software updates and technical support for both our subscription offerings and our perpetual licenses are included in cost of support revenue. Cost of license and subscription revenue as a percent of license and subscription revenue can vary depending on the subscription mix percentage, the product mix sold, the effect of fixed and variable royalties, headcount and the level of amortization of acquired software intangible assets.
Costs in 2017 compared to 2016 increased primarily as a result of a $15.0 million increase in total compensation, benefit and travel expense due to increased headcount, primarily associated with supporting our Cloud products, and a $3.4 million increase in cloud services hosting costs.
Costs in 2016 compared to 2015 increased primarily as a result of a $5.2 million increase in total compensation, benefit and travel expense due to increased headcount, a $4.9 million increase in cloud services hosting costs and $1.9 million increase in amortization of acquired purchase software.
Cost of Support Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
Percent
Change
|
|
2016
|
|
Percent
Change
|
|
2015
|
|
(Dollar amounts in millions)
|
Cost of support
|
$
|
92.2
|
|
|
8
|
%
|
|
$
|
85.7
|
|
|
4
|
%
|
|
$
|
82.8
|
|
% of total revenue
|
8
|
%
|
|
|
|
8
|
%
|
|
|
|
7
|
%
|
% of total support revenue
|
16
|
%
|
|
|
|
13
|
%
|
|
|
|
12
|
%
|
Cost of support revenue consists of costs such as salaries, benefits, and computer equipment and facilities associated with customer support and the release of support updates (including related royalty costs) associated with providing support for both our perpetual licenses and subscription licenses.
Costs and expense in 2017 compared to 2016 increased primarily due to an increase of $3.1 million (5%) in total compensation, benefit and travel costs.
Costs and expense in 2016 compared to 2015 increased primarily due to an increase of $3.0 million (5%) in total compensation, benefit and travel costs.
Cost of Professional Services Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
Percent
Change
|
|
2016
|
|
Percent
Change
|
|
2015
|
|
(Dollar amounts in millions)
|
Cost of professional services revenue
|
$
|
150.8
|
|
|
(11
|
)%
|
|
$
|
170.2
|
|
|
(14
|
)%
|
|
$
|
198.7
|
|
% of total revenue
|
13
|
%
|
|
|
|
15
|
%
|
|
|
|
16
|
%
|
% of total professional services revenue
|
85
|
%
|
|
|
|
86
|
%
|
|
|
|
88
|
%
|
Our cost of professional services revenue includes costs such as salaries, benefits, information technology costs and facilities expenses for our training and consulting personnel, and third-party subcontractor fees.
In 2017 compared to 2016, total compensation, benefit costs and travel expenses decreased by $18.8 million. The cost of third-party consulting services was $4.7 million lower in 2017 compared to 2016.
In 2016 compared to 2015, total compensation, benefit costs and travel expenses decreased by $24.8 million. The cost of third-party consulting services was $2.6 million lower in 2016 compared to 2015.
As a result of decreases in professional services revenue in 2017, 2016 and 2015, we have reduced headcount, resulting in lower compensation-related costs. The decreases in 2017 and 2016 compared to the prior years in the cost of third-party consulting services is a result of our strategy to have our strategic services partners perform services for customers directly, which has decreased revenue and improved services margins.
Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
Percent
Change
|
|
2016
|
|
Percent
Change
|
|
2015
|
|
(Dollar amounts in millions)
|
Sales and marketing expenses
|
$
|
372.9
|
|
|
1
|
%
|
|
$
|
367.5
|
|
|
6
|
%
|
|
$
|
346.8
|
|
% of total revenue
|
32
|
%
|
|
|
|
32
|
%
|
|
|
|
28
|
%
|
Our sales and marketing expenses primarily include salaries and benefits, sales commissions, advertising and marketing programs, travel, information technology costs and facility expenses.
In 2017 compared to 2016, event costs increased $3.1 million due to our LiveWorx event held in May 2017. Our compensation, benefits and travel costs were $3.5 million lower in 2017 compared to 2016
primarily due to lower commissions, which were higher in 2016 as a result of significantly higher than planned subscription bookings.
Our compensation, benefit costs and travel expenses were higher by an aggregate of 5% ($14.4 million) in 2016 compared to 2015, which reflects lower salaries, offset by higher incentive-based compensation, including commissions (due primarily to higher than anticipated subscription bookings), and increased headcount.
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
Percent
Change
|
|
2016
|
|
Percent
Change
|
|
2015
|
|
(Dollar amounts in millions)
|
Research and development expenses
|
$
|
236.1
|
|
|
3
|
%
|
|
$
|
229.3
|
|
|
1
|
%
|
|
$
|
227.5
|
|
% of total revenue
|
20
|
%
|
|
|
|
20
|
%
|
|
|
|
18
|
%
|
Our research and development expenses consist principally of salaries and benefits, information technology costs and facility expenses. Major research and development activities include developing new releases and updates of our software that enhance functionality and add features.
In 2017 compared to 2016, total compensation, benefit and travel expenses were higher by 3% ($5.0 million) due to an increase in headcount and a $1.6 million increase in cloud services hosting costs as some product testing has moved to a cloud environment. The percentage increase in headcount is greater than the percentage increase in total compensation costs due to a shift in headcount to lower cost geographies.
Total compensation, benefit costs and travel expenses were higher by 2% ($4.3 million) in 2016 compared to 2015. The decrease in research and development headcount from 2015 to 2016 reflects restructuring actions offset by approximately 132 employees added from businesses acquired since the second quarter of 2015.
General and Administrative (G&A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
Percent
Change
|
|
2016
|
|
Percent
Change
|
|
2015
|
|
(Dollar amounts in millions)
|
General and administrative
|
$
|
145.1
|
|
|
—
|
%
|
|
$
|
145.6
|
|
|
(8
|
)%
|
|
$
|
158.7
|
|
% of total revenue
|
12
|
%
|
|
|
|
13
|
%
|
|
|
|
13
|
%
|
Our G&A expenses include the costs of our corporate, finance, information technology, human resources, legal and administrative functions, as well as acquisition-related charges, bad debt expense and outside professional services, including accounting and legal fees. Acquisition-related costs include direct costs of acquisitions and expenses related to acquisition integration activities, including transaction fees, due diligence costs, retention bonuses and severance, and professional fees, including legal and accounting costs, related to the acquisition. In addition, subsequent adjustments to our initial estimated amount of contingent consideration associated with specific acquisitions are included in acquisition-related charges.
In 2017 compared to 2016, total compensation, benefit and travel cost increased by $7.0 million primarily because of merit increases and increased severance costs, as well as higher stock-based compensation due to a higher attainment of performance-based awards, an award modification, and the launch of the employee stock purchase plan (ESPP) in the fourth quarter of 2016. Offsetting the increases, acquisition-related charges decreased $4.9 million because there were no significant acquisitions in the year, and tax and audit fees decreased $1.8 million during the year.
The decrease in overall general and administrative costs in 2016 compared to 2015 was due primarily to a $28.2 million accrual recorded in 2015 related to the settlement of an investigation in China, partially offset by an increase in performance-based bonus and stock-based compensation of $23.7 million (due in part to a modification of performance-based awards previously granted under our long-term incentive programs).
U.S. pension settlement loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
Percent
Change
|
|
2016
|
|
Percent
Change
|
|
2015
|
|
(Dollar amounts in millions)
|
U.S. pension termination loss
|
$
|
—
|
|
|
|
|
$
|
—
|
|
|
|
|
$
|
66.3
|
|
% of total revenue
|
—
|
%
|
|
|
|
—
|
%
|
|
|
|
5
|
%
|
U.S. pension settlement loss reflects the loss recognized in the fourth quarter of 2015 related to the termination of our U.S. pension plan, due to the amortization of actuarial losses previously recorded in equity.
Amortization of Acquired Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
Percent
Change
|
|
2016
|
|
Percent
Change
|
|
2015
|
|
(Dollar amounts in millions)
|
Amortization of acquired intangible assets
|
$
|
32.1
|
|
|
(3
|
)%
|
|
$
|
33.2
|
|
|
(8
|
)%
|
|
$
|
36.1
|
|
% of total revenue
|
3
|
%
|
|
|
|
3
|
%
|
|
|
|
3
|
%
|
Amortization of acquired intangible assets reflects the amortization of acquired non-product related intangible assets, primarily customer and trademark-related intangible assets, recorded in connection with completed acquisitions. Amortization of intangible assets typically follows the economic benefit pattern of the acquired intangible assets.
The decrease in amortization of acquired intangible assets from 2015 to 2016 is due to certain intangibles becoming fully amortized, partially offset by an increase in amortization related to recent acquisitions.
Restructuring Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
(Dollar amounts in millions)
|
Restructuring charges
|
$
|
7.9
|
|
|
$
|
76.3
|
|
|
$
|
43.4
|
|
% of total revenue
|
1
|
%
|
|
7
|
%
|
|
3
|
%
|
Restructuring charges for 2017 were $7.9 million, including $5.6 million of facility related charges and $2.4 million of employee termination-related costs. As of September 30, 2017, we were materially complete with the restructuring actions and had incurred total restructuring charges of approximately $84.2 million. The cost savings associated with our 2017 and 2016 restructuring actions were largely offset by planned cost increases and investments in our business.
Restructuring charges for 2016 were $76.3 million, $77.1 million related to the plan announced in October 2015 described below, offset by a $0.8 million credit related to prior year restructuring actions.
The charge of $77.1 million in 2016 included $1.3 million of facility related charges and $75.8 million of employee related termination costs, primarily related to termination benefits associated with approximately 800 employees.
Our 2015 restructuring was undertaken to enable us to increase investment in our IoT business and to reduce our cost structure through organizational efficiencies in the face of significant foreign currency depreciation relative to the U.S. Dollar and a more cautious outlook on global macroeconomic conditions. The restructuring actions resulted in charges of $43.4 million during 2015, including $1.4 million of facility related charges and $42.0 million of employee-related termination costs, primarily related to termination benefits associated with 411 employees. This reorganization resulted in net annualized expense reductions of approximately $30 million.
In 2017, 2016 and 2015, we made cash payments related to restructuring charges of $37.1 million, $55.0 million and $53.6 million, respectively. At September 30, 2017, accrued expenses for unpaid
restructuring charges totaled $6.2 million, of which we expect to pay $4.1 million within the next twelve months.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
(Dollar amounts in millions)
|
Interest expense
|
$
|
(42.4
|
)
|
|
(29.9
|
)
|
|
(14.7
|
)
|
The increase in interest expense in 2017 compared to 2016 was due to a full year of interest being incurred on the $500 million 6% senior notes (the 2024 6% Notes) which were issued in the third quarter of 2016, and higher average interest rates on our revolving credit facility in 2017 compared to 2016.
The increase in interest expense in 2016 compared to 2015 was due to higher amounts outstanding under our credit facility and the issuance of the 2024 6% Notes. We had $758 million total debt at September 30, 2016, compared to $668 million at September 30, 2015. We used the net proceeds from the issuance of the 2024 6% Notes to repay a portion of our outstanding revolving loan under our credit facility. Because the interest rate on the notes is higher than the variable rate we paid under our credit facility, our annual interest expense has increased.
The average interest rate on our total borrowings was
4.9%
in 2017,
3.0%
in 2016 and
1.7%
in 2015.
Interest Income and Other Expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
(Dollar amounts in millions)
|
Foreign currency losses, net
|
$
|
(5.7
|
)
|
|
$
|
(1.9
|
)
|
|
$
|
(2.7
|
)
|
Interest income
|
3.2
|
|
|
3.4
|
|
|
3.7
|
|
Other income (expense), net
|
2.5
|
|
|
(1.8
|
)
|
|
(1.3
|
)
|
|
$
|
0.1
|
|
|
$
|
(0.3
|
)
|
|
$
|
(0.3
|
)
|
Foreign currency net losses include costs of hedging contracts, certain realized and unrealized foreign currency transaction gains or losses, and foreign exchange gains or losses resulting from the required period-end currency re-measurement of the assets and liabilities of our subsidiaries that use the U.S. dollar as their functional currency. Because a large portion of our revenue and expenses is transacted in foreign currencies, we engage in hedging transactions involving the use of foreign currency forward contracts to reduce our exposure to fluctuations in foreign exchange rates. Changes in the balance year over year are due to required period-end currency re-measurement of the assets and liabilities of our subsidiaries that use the U.S. Dollar as their functional currency. Hedging costs increased $1.3 million in 2017 compared to 2016.
Interest income represents earnings on the investment of our available cash balances and interest on financing provided to customers as described in Note B Summary of Significant Accounting Policies of "Notes to Consolidated Financial Statements" in this Annual Report.
Other income (expense), net is primarily made up other non-operating gains and losses. In January 2017, we sold a cost method investment for a gain of $3.7 million.
Income Taxes
Tax Provision and Effective Income Tax Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
(Dollar amounts in millions)
|
Pre-tax income (loss)
|
$
|
(1.4
|
)
|
|
$
|
(67.2
|
)
|
|
$
|
26.5
|
|
Tax benefit
|
(7.6
|
)
|
|
(12.7
|
)
|
|
(21.0
|
)
|
Effective income tax rate
|
544
|
%
|
|
19
|
%
|
|
(79
|
)%
|
In 2017 and 2016 our effective tax rate was materially impacted by our corporate structure in which our foreign taxes are at an effective tax rate lower than the U.S. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland. In 2017, 2016 and 2015, the foreign rate differential predominantly relates to these Irish earnings. Additionally, we have a full valuation allowance against deferred tax assets in the U.S., primarily related to net operating loss and tax credit carry forwards. As a result, we have not recorded a benefit related to ongoing U.S. losses. Our foreign rate differential in 2017, 2016 and 2015 includes the continuing rate benefit from a business realignment completed on September 30, 2014 in which intellectual property was transferred between two wholly-owned foreign subsidiaries. The realignment allows us to more efficiently manage the distribution of our products to European customers. In 2017 and 2016, this realignment resulted in a tax benefit of approximately $28 million each year and a benefit of $24 million in 2015. In 2017 and 2016, we released valuation allowances in certain foreign subsidiaries and recorded benefits of $9.0 and $3.1 million, respectively. Also, in 2017, we recorded a tax benefit of $3.5 million related to the release of a tax reserve upon completion of a favorable agreement with tax authorities in a foreign jurisdiction.
Additionally, in 2015, U.S. permanent items include the tax effect of a $14.5 million expense related to the settlement of an investigation in China. Other factors that impacted the 2015 effective tax rate included: the release of a valuation allowance totaling
$18.7 million
relating to the U.S. pension plan termination, foreign withholding taxes of
$3.8 million
, a tax benefit of
$3.1 million
relating to the reassessment of our reserve requirements and a benefit of
$1.4 million
in conjunction with the reorganization of our Atego U.S. subsidiaries.
Valuation Allowance
We have concluded, based on the weight of available evidence, that a full valuation allowance continues to be required against our U.S. net deferred tax assets as they are not more likely than not to be realized in the future. We will continue to reassess our valuation allowance requirements each financial reporting period.
Tax Audits and Examinations
In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the Internal Revenue Service (IRS) 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. Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in material changes in our estimates.
Our Future Effective Income Tax Rate
Our future effective income tax rate may be materially impacted by the amount of income taxes associated with our foreign earnings, which are taxed at rates different from the U.S. federal statutory income tax rate, as well as the timing and extent of the realization of deferred tax assets and changes in the tax law. Further, our tax rate may fluctuate within a fiscal year, including from quarter to quarter, due to items arising from discrete events, including settlements of tax audits and assessments, the resolution or identification of tax position uncertainties, and acquisitions of other companies.
Non-GAAP Financial Measures
The non-GAAP financial measures presented in the discussion of our results of operations and the respective most directly comparable GAAP measures are:
|
|
•
|
non-GAAP revenue—GAAP revenue
|
|
|
•
|
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 exclude fair value adjustments related to acquired deferred revenue and deferred costs, stock-based compensation expense, amortization of acquired intangible assets expense, acquisition-related charges, pension plan termination-related costs, a legal settlement
accrual, restructuring charges, non-operating credit facility refinancing costs, identified discrete charges included in non-operating other expense, net and the related tax effects of the preceding items, and any other identified tax items.
These items are normally included in the comparable measures calculated and presented in accordance with GAAP. Our management excludes these items when evaluating our ongoing performance and/or predicting our earnings trends, and therefore excludes them when presenting non-GAAP financial measures. Management uses non-GAAP financial measures in conjunction with our GAAP results, as should investors.
Fair value of acquired deferred revenue
is a purchase accounting adjustment recorded to reduce acquired deferred revenue to the fair value of the remaining obligation, so our GAAP revenue after an acquisition does not reflect the full amount of revenue that would have been reported if the acquired deferred revenue was not written down to fair value. We believe excluding these adjustments to revenue from these contracts (and associated costs in
fair value adjustment to deferred services cost
) is useful to investors as an additional means to assess revenue trends of our business.
Stock-based compensation
is a non-cash expense relating to stock-based awards issued to executive officers, employees and outside directors, consisting of restricted stock, stock options and restricted stock units. We exclude this expense as it is a non-cash expense and we assess our internal operations excluding this expense and believe it facilitates comparisons to the performance of other companies in our industry.
Amortization of acquired intangible assets
is a non-cash expense that is impacted by the timing and magnitude of our acquisitions. We believe the assessment of our operations excluding these costs is relevant to our assessment of internal operations and comparisons to the performance of other companies in our industry.
Acquisition-related charges included in general and administrative costs
are
direct costs of potential and completed acquisitions and expenses related to acquisition integration activities, including transaction fees, due diligence costs, severance and professional fees. In addition, subsequent adjustments to our initial estimated amount of contingent consideration associated with specific acquisitions are also included within acquisition-related charges. The occurrence and amount of these costs will vary depending on the timing and size of acquisitions.
U.S. pension plan termination-related costs
include charges related to our plan that we began terminating in the second quarter of 2014. Costs associated with termination of the plan are not considered part of our regular operations.
Legal accrual
includes amounts accrued to settle our SEC and DOJ FCPA investigation in China, which was ultimately settled and paid in the second quarter of 2016 for $28.2 million, and other amounts in respect of related regulatory and other matters. We view these matters as non-ordinary course events and exclude the amounts when reviewing our operating performance.
Restructuring charges
include severance costs and excess facility restructuring charges resulting from reductions of personnel driven by modifications to our business strategy. These costs may vary in size based on our restructuring plan.
Non-operating credit facility refinancing costs
are non-operating charges we record as a result of the refinancing of our credit facility. We assess our internal operations excluding these costs and believe it facilitates comparisons to the performance of other companies in our industry.
Income tax adjustments
include the tax impact of the items above and assumes that we are profitable on a non-GAAP basis in the U.S. and one foreign jurisdiction, and eliminates the effect of the valuation allowance recorded against our net deferred tax assets in those jurisdictions. Additionally, we exclude other material tax items that we view as non-ordinary course.
We use these non-GAAP financial measures, and we believe that they assist our investors, to make period-to-period comparisons of our operational performance because they provide a view of our operating results without items that are not, in our view, indicative of our core operating results. We believe that these non-GAAP financial measures help illustrate underlying trends in our business, and we use the measures to establish budgets and operational goals (communicated internally and externally) for managing our business and evaluating our performance. We believe that providing non-GAAP financial measures affords investors a view of our operating results that may be more easily compared to the results of peer companies.
The items excluded from the non-GAAP financial measures often have a material impact on our financial results and such items often recur. Accordingly, the non-GAAP financial measures included in this Annual Report 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
2017
|
|
2016
|
|
2015
|
|
(in millions, except per share amounts)
|
GAAP revenue
|
$
|
1,164.0
|
|
|
$
|
1,140.5
|
|
|
$
|
1,255.2
|
|
Fair value of acquired deferred revenue
|
2.7
|
|
|
3.5
|
|
|
3.9
|
|
Non-GAAP revenue
|
$
|
1,166.8
|
|
|
$
|
1,144.0
|
|
|
$
|
1,259.1
|
|
|
|
|
|
|
|
GAAP gross margin
|
$
|
835.0
|
|
|
$
|
814.9
|
|
|
$
|
920.5
|
|
Fair value of acquired deferred revenue
|
2.7
|
|
|
3.5
|
|
|
3.9
|
|
Fair value to acquired deferred costs
|
(0.4
|
)
|
|
(0.5
|
)
|
|
(0.5
|
)
|
Stock-based compensation
|
12.6
|
|
|
10.8
|
|
|
10.2
|
|
Amortization of acquired intangible assets included in cost of revenue
|
26.6
|
|
|
24.6
|
|
|
19.4
|
|
Non-GAAP gross margin
|
$
|
876.5
|
|
|
$
|
853.2
|
|
|
$
|
953.4
|
|
|
|
|
|
|
|
GAAP operating income (loss)
|
$
|
40.9
|
|
|
$
|
(37.0
|
)
|
|
$
|
41.6
|
|
Fair value of acquired deferred revenue
|
2.7
|
|
|
3.5
|
|
|
3.9
|
|
Fair value to acquired deferred costs
|
(0.4
|
)
|
|
(0.5
|
)
|
|
(0.5
|
)
|
Stock-based compensation
|
76.7
|
|
|
66.0
|
|
|
50.2
|
|
Amortization of acquired intangible assets included in cost of revenue
|
26.6
|
|
|
24.6
|
|
|
19.4
|
|
Amortization of acquired intangible assets
|
32.1
|
|
|
33.2
|
|
|
36.1
|
|
Acquisition-related charges included in general and administrative expenses
|
1.6
|
|
|
3.5
|
|
|
8.9
|
|
U.S. pension plan termination-related costs (1)
|
0.3
|
|
|
—
|
|
|
73.2
|
|
Legal accrual
|
—
|
|
|
3.2
|
|
|
28.2
|
|
Restructuring charges (credits), net
|
7.9
|
|
|
76.3
|
|
|
43.4
|
|
Non-GAAP operating income
|
$
|
188.4
|
|
|
$
|
172.7
|
|
|
$
|
304.3
|
|
|
|
|
|
|
|
GAAP net income (loss)
|
$
|
6.2
|
|
|
$
|
(54.5
|
)
|
|
$
|
47.6
|
|
Fair value of acquired deferred revenue
|
2.7
|
|
|
3.5
|
|
|
3.9
|
|
Fair value to acquired deferred costs
|
(0.4
|
)
|
|
(0.5
|
)
|
|
(0.5
|
)
|
Stock-based compensation
|
76.7
|
|
|
66.0
|
|
|
50.2
|
|
Amortization of acquired intangible assets included in cost of revenue
|
26.6
|
|
|
24.6
|
|
|
19.4
|
|
Amortization of acquired intangible assets
|
32.1
|
|
|
33.2
|
|
|
36.1
|
|
Acquisition-related charges included in general and administrative expenses
|
1.6
|
|
|
3.5
|
|
|
8.9
|
|
U.S. pension plan termination-related costs (1)
|
0.3
|
|
|
—
|
|
|
73.2
|
|
Legal accrual
|
—
|
|
|
3.2
|
|
|
28.2
|
|
Restructuring charges (credits), net
|
7.9
|
|
|
76.3
|
|
|
43.4
|
|
Non-operating credit facility refinancing costs
|
1.2
|
|
|
2.4
|
|
|
—
|
|
Income tax adjustments (2)
|
(17.4
|
)
|
|
(19.8
|
)
|
|
(51.1
|
)
|
Non-GAAP net income
|
$
|
137.6
|
|
|
$
|
137.8
|
|
|
$
|
259.2
|
|
|
|
|
|
|
|
GAAP diluted earnings (loss) per share
|
$
|
0.05
|
|
|
$
|
(0.48
|
)
|
|
$
|
0.41
|
|
Fair value of acquired deferred revenue
|
0.02
|
|
|
0.03
|
|
|
0.03
|
|
Fair value to acquired deferred costs
|
—
|
|
|
—
|
|
|
—
|
|
Stock-based compensation
|
0.65
|
|
|
0.57
|
|
|
0.43
|
|
Total amortization of acquired intangible assets
|
0.50
|
|
|
0.50
|
|
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related charges included in general and administrative expenses
|
0.01
|
|
|
0.03
|
|
|
0.08
|
|
U.S. pension plan termination-related costs
|
—
|
|
|
—
|
|
|
0.63
|
|
Legal accrual
|
—
|
|
|
0.03
|
|
|
0.24
|
|
Restructuring charges (credits), net
|
0.07
|
|
|
0.66
|
|
|
0.37
|
|
Non-operating credit facility refinancing costs
|
0.01
|
|
|
0.02
|
|
|
—
|
|
Income tax adjustments (2)
|
(0.15
|
)
|
|
(0.17
|
)
|
|
(0.44
|
)
|
Non-GAAP diluted earnings per share (3)
|
$
|
1.17
|
|
|
$
|
1.19
|
|
|
$
|
2.23
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
Operating margin impact of non-GAAP adjustments:
|
2017
|
|
2016
|
|
2015
|
GAAP operating margin
|
3.5
|
%
|
|
(3.2
|
)%
|
|
3.3
|
%
|
Fair value of acquired deferred revenue
|
0.2
|
%
|
|
0.3
|
%
|
|
0.3
|
%
|
Fair value to acquired deferred costs
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Stock-based compensation
|
6.6
|
%
|
|
5.8
|
%
|
|
4.0
|
%
|
Total amortization of acquired intangible assets
|
5.0
|
%
|
|
5.1
|
%
|
|
4.4
|
%
|
Acquisition-related charges included in general and administrative expenses
|
0.1
|
%
|
|
0.3
|
%
|
|
0.7
|
%
|
U.S. pension plan termination-related costs
|
—
|
%
|
|
—
|
%
|
|
5.8
|
%
|
Legal accrual
|
—
|
%
|
|
0.3
|
%
|
|
2.2
|
%
|
Restructuring charges (credits), net
|
0.7
|
%
|
|
6.7
|
%
|
|
3.5
|
%
|
Non-GAAP operating margin
|
16.1
|
%
|
|
15.1
|
%
|
|
24.2
|
%
|
|
|
(1)
|
Represents charges related to terminating a U.S. pension plan, including a settlement loss of $66.3 million in 2015.
|
|
|
(2)
|
We have recorded a full valuation allowance against our U.S. net deferred tax assets and a valuation allowance against net deferred tax assets in certain foreign jurisdictions. As we are profitable on a non-GAAP basis, the 2017 and 2016 non-GAAP tax provisions are being calculated assuming there is no valuation allowance. 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. Additionally, we recorded a tax benefit in 2016 for the write-off of a deferred tax liability that resulted from the change in tax status of a foreign subsidiary. This tax benefit has been excluded from non-GAAP tax expense.
|
|
|
(3)
|
Diluted earnings per share impact of non-GAAP adjustments is calculated by dividing the dollar amount of the non-GAAP adjustment by the diluted weighted average shares outstanding for the respective year.
|
Critical Accounting Policies and Estimates
We have prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our reported revenues, results of operations, and net income, as well as on the value of certain assets and liabilities on our balance sheet. These estimates, assumptions and judgments are made based on our historical experience and on other assumptions that we believe to be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time.
The accounting policies, methods and estimates used to prepare our financial statements are described generally in Note B
Summary of Significant Accounting Policies
of “Notes to Consolidated Financial Statements" in this Annual Report. The most important accounting judgments and estimates that we made in preparing the financial statements involved:
|
|
•
|
accounting for income taxes;
|
|
|
•
|
valuation of assets and liabilities acquired in business combinations;
|
|
|
•
|
accounting for pensions; and
|
A critical accounting policy is one that is both material to the presentation of our financial statements and requires us to make subjective or complex judgments that could have a material effect on our financial condition and results of operations. Critical accounting policies require us to make assumptions about matters that are uncertain at the time of the estimate, and different estimates that we could have used, or changes in the estimates that are reasonably likely to occur, may have a material impact on our financial condition or results of operations. Because the use of estimates is inherent in the financial reporting process, actual results could differ from those estimates.
Accounting policies, guidelines and interpretations related to our critical accounting policies and estimates are generally subject to numerous sources of authoritative guidance and are often reexamined by accounting standards rule makers and regulators. These rule makers and/or regulators may promulgate interpretations, guidance or regulations that may result in changes to our accounting policies, which could have a material impact on our financial position and results of operations.
Revenue Recognition
Our sources of revenue include: (1) subscription, (2) support, (3) perpetual license and (4) professional services. We record revenues for software related deliverables in accordance with the guidance provided by ASC 985-605,
Software-Revenue Recognition
and revenues for non-software deliverables in accordance with
ASC 605-25
, Revenue Recognition, Multiple-Element Arrangements
when the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred (generally, FOB shipping point or electronic distribution), (3) the fee is fixed or determinable, and (4) collection is probable. We exercise judgment and use estimates in connection with determining the amounts of software license and services revenues to be recognized in each accounting period. Our primary judgments involve the following:
|
|
•
|
determining whether collection is probable;
|
|
|
•
|
assessing whether the fee is fixed or determinable;
|
|
|
•
|
determining whether service arrangements, including modifications and customization of the underlying software, are not essential to the functionality of the licensed software and thus would result in the revenue for license and service elements of an agreement being recorded separately; and
|
|
|
•
|
determining the fair value of services and support elements included in multiple-element arrangements, which is the basis for allocating and deferring revenue for such services and support.
|
Our software is distributed primarily through our direct sales force. In addition, we have an indirect distribution channel through alliances with resellers. Revenue arrangements with resellers are generally recognized on a sell-through basis; that is, when we deliver the product to the end-user customer. We record consideration given to a reseller as a reduction of revenue to the extent we have recorded revenue from the reseller. We do not offer contractual rights of return, stock balancing, or price protection to our resellers, and actual product returns from them have been insignificant to date. As a result, we do not maintain reserves for reseller product returns.
At the time of each sale transaction, we must make an assessment of the collectability of the amount due from the customer. Revenue is only recognized at that time if management deems that collection is probable. In making this assessment, we consider customer credit-worthiness and historical payment experience. At that same time, we assess whether fees are fixed or determinable and free of contingencies or significant uncertainties. In assessing whether the fee is fixed or determinable, we consider the payment terms of the transaction, including transactions with payment terms that extend beyond our customary payment terms, and our collection experience in similar transactions without making concessions, among other factors. We have periodically provided financing to credit-worthy customers with payment terms up to
24
months. If the fee is determined not to be fixed or determinable, revenue is recognized only as payments become due from the customer, provided that all other revenue recognition criteria are met. Our software license arrangements generally do not include customer acceptance provisions. However, if an arrangement includes an acceptance provision, we record
revenue only upon the earlier of (1) receipt of written acceptance from the customer or (2) expiration of the acceptance period.
Generally, our contracts are accounted for individually. However, when contracts are closely interrelated and dependent on each other, it may be necessary to account for two or more contracts as one to reflect the substance of the group of contracts.
Subscription
Subscription revenue includes revenue from two primary sources: (1) subscription-based licenses, and (2) cloud services.
Subscription-based licenses include the right for a customer to use our licenses and receive related support for a specified term and revenue is recognized ratably over the term of the arrangement since we do not have VSOE of fair value for our coterminous support. When sold in arrangements with other elements, VSOE of fair value is established for the subscription-based licenses through the use of a substantive renewal clause within the customer contract for a combined annual fee that includes the term-based license and related support.
Cloud services revenue (which in 2017, 2016 and 2015 represented less than
5%
of our total revenue) includes fees for hosting and application management of customers’ perpetual or subscription-based licenses (hosting services) and fees for Software as a Service (SaaS) arrangements. Generally, customers have the right to terminate a hosting services contract and take possession of the licenses without a significant penalty. When hosting services are sold as part of a multi-element transaction, revenue is allocated to hosting services based on VSOE, and recognized ratably over the contractual term beginning on the commencement dates of each contract, which is the date the services are made available to the customer. VSOE is established for hosting services either through a substantive stated renewal option or stated contractual overage rates, as these rates represent the value the customer is willing to pay on a standalone basis. We also offer cloud services under SaaS arrangements whereby customers access our software in the cloud. Under SaaS arrangements, customers are not entitled to terminate the cloud services and cannot take possession of the software. Cloud services include set-up fees, which are recognized ratably over the contract term or the expected customer life, whichever is longer.
Support
Support contracts generally include rights to unspecified upgrades (when and if available), telephone and internet-based support, updates and bug fixes. Support revenue is recognized ratably over the term of the support contract on a straight-line basis.
Perpetual License
Under perpetual license arrangements, we generally recognize license revenue up front upon shipment to the customer. We use the residual method to recognize revenue from perpetual license software arrangements that include one or more elements to be delivered at a future date when evidence of the fair value of all undelivered elements exists, and the elements of the arrangement qualify for separate accounting as described below. Under the residual method, the fair value of the undelivered elements (i.e., support and services) based on our vendor-specific objective evidence (“VSOE”) of fair value is deferred and the remaining portion of the total arrangement fee is allocated to the delivered elements (i.e., perpetual software license). If evidence of the fair value of one or more of the undelivered elements does not exist, all revenues are deferred and recognized when delivery of all of those elements has occurred or when fair values can be established. We determine VSOE of the fair value of services and support revenue based upon our recent pricing for those elements when sold separately. For certain transactions, VSOE is determined based on a substantive renewal clause within a customer contract. Our current pricing practices are influenced primarily by product type, purchase volume, sales channel and customer location. We review services and support sold separately on a periodic basis and update, when appropriate, our VSOE of fair value for such elements to ensure that it reflects our recent pricing experience.
Professional Services
Our software arrangements often include implementation, consulting and training services that are sold under consulting engagement contracts or as part of the software license arrangement. When we determine that such services are not essential to the functionality of the licensed software, we record revenue separately for the license and service elements of these arrangements, provided that
appropriate evidence of fair value exists for the undelivered services (i.e. VSOE of fair value). We consider various factors in assessing whether a service is not essential to the functionality of the software, including if the services may be provided by independent third parties experienced in providing such services (i.e. consulting and implementation) in coordination with dedicated customer personnel, and whether the services result in significant modification or customization of the software’s functionality. When professional services qualify for separate accounting, professional services revenues under time and materials billing arrangements are recognized as the services are performed. Professional services revenues under fixed-priced contracts are generally recognized as the services are performed using a proportionate performance model with hours or costs as the input method of attribution.
When we provide professional services that are considered essential to the functionality of the software, the arrangement does not qualify for separate accounting of the license and service elements, and the license revenue is recognized together with the consulting services using the percentage-of-completion method of contract accounting. Under such arrangements, consideration is recognized as the services are performed as measured by an observable input. In these circumstances, we separate license revenue from service revenue for income statement presentation by allocating VSOE of fair value of the consulting services as service revenue, and the residual portion as license revenue. Under the percentage-of-completion method, we estimate the stage of completion of contracts with fixed or “not to exceed” fees based on hours or costs incurred to date as compared with estimated total project hours or costs at completion. Adjustments to estimates to complete are made in the periods in which facts resulting in a change become known. When total cost estimates exceed revenues, we accrue for the estimated losses when identified. The use of the proportionate performance and percentage-of-completion methods of accounting require significant judgment relative to estimating total contract costs or hours (hours being a proxy for costs), including assumptions relative to the length of time to complete the project, the nature and complexity of the work to be performed and anticipated changes in salaries and other costs.
Reimbursements of out-of-pocket expenditures incurred in connection with providing consulting services are included in professional services revenue, with the offsetting expense recorded in cost of professional services revenue.
Training services include on-site and classroom training. Training revenues are recognized as the related training services are provided.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to calculate our income tax expense based on taxable income by jurisdiction. There are many transactions and calculations about which the ultimate tax outcome is uncertain; as a result, our calculations involve estimates by management. Some of these uncertainties arise as a consequence of revenue-sharing, cost-reimbursement and transfer pricing arrangements among related entities and the differing tax treatment of revenue and cost items across various jurisdictions. If we were compelled to revise or to account differently for our arrangements, that revision could affect our tax liability.
The income tax accounting process also involves estimating our actual current tax liability, together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that it is more likely than not that all or a portion of our deferred tax assets will not be realized, we must establish a valuation allowance as a charge to income tax expense.
As of September 30, 2017, we have a valuation allowance of
$239.3 million
against net deferred tax assets in the U.S. and a valuation allowance of
$40.4 million
against net deferred tax assets in certain foreign jurisdictions. We have concluded, based on the weight of available evidence, that a full valuation allowance continues to be required against our U.S. net deferred tax assets as they are not more likely than not to be realized in the future. We will continue to reassess our valuation allowance requirements each financial reporting period.
The valuation allowance recorded against net deferred tax assets of certain foreign jurisdictions is established primarily for our net operating loss carryforwards, the majority of which do not expire. There
are limitations imposed on the utilization of such net operating losses that could further restrict the recognition of any tax benefits.
We have not provided for U.S. income taxes or foreign withholding taxes on foreign unrepatriated earnings as it is our current intention to permanently reinvest these earnings outside the U.S. unless repatriation can be done with no significant tax cost, with the exception of a foreign holding company formed in 2014 and our Taiwan subsidiary. In 2017, we established a deferred tax liability of $11 million to provide for taxes on the unremitted earnings of this foreign holding company and in 2016, we incurred U.S. tax expense of
$12 million
on the repatriation of the 2016 earnings of this foreign holding company. In 2017 and 2016, the tax provision associated with these earnings was offset by a corresponding change in the valuation allowance. If we decide to repatriate any additional non-U.S. earnings in the future, we may be required to establish a deferred tax liability on such earnings. The cumulative basis difference associated with the undistributed earnings of our subsidiaries totaled approximately
$882 million
and
$789 million
as of
September 30, 2017
and
2016
, respectively. The amount of unrecognized deferred tax liability on the undistributed earnings cannot be practicably determined at this time.
In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the Internal Revenue Service (IRS) 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. Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in material changes in our estimates.
Valuation of Assets and Liabilities Acquired in Business Combinations
In accordance with business combination accounting, we allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. Determining these fair values requires management to make significant estimates and assumptions, especially with respect to intangible assets.
Our identifiable intangible assets acquired consist of developed technology, core technology, tradenames, customer lists and contracts, and software support agreements and related relationships. Developed technology consists of products that have reached technological feasibility. Core technology represents a combination of processes, inventions and trade secrets related to the design and development of acquired products. Customer lists and contracts and software support agreements and related relationships represent the underlying relationships and agreements with customers of the acquired company’s installed base. We have generally valued intangible assets using a discounted cash flow model. Critical estimates in valuing certain of the intangible assets include but are not limited to:
|
|
•
|
future expected cash flows from software license sales, customer support agreements, customer contracts and related customer relationships and acquired developed technologies and trademarks and trade names;
|
|
|
•
|
expected costs to develop the in-process research and development into commercially viable products and estimating cash flows from the projects when completed;
|
|
|
•
|
the acquired company’s brand awareness and market position, as well as assumptions about the period of time the acquired brand will continue to be used by the combined company; and
|
|
|
•
|
discount rates used to determine the present value of estimated future cash flows.
|
In addition, we estimate the useful lives of our intangible assets based upon the expected period over which we anticipate generating economic benefits from the related intangible asset.
Net tangible assets consist of the fair values of tangible assets less the fair values of assumed liabilities and obligations. Except for deferred revenues, net tangible assets were generally valued by us at the respective carrying amounts recorded by the acquired company, if we believed that their carrying values approximated their fair values at the acquisition date. The values assigned to deferred revenue reflect an amount equivalent to the estimated cost plus an appropriate profit margin to perform the services related to the acquired company’s software support contracts.
In addition, uncertain tax positions and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date and we reevaluate these items quarterly with any adjustments to our preliminary estimates being recorded to goodwill provided that we are within the measurement period (up to one year from the acquisition date) and we continue to collect information in order to determine their estimated values. Subsequent to the measurement period or our final determination of the estimated value of uncertain tax positions or tax related valuation allowances, whichever comes first, changes to these uncertain tax positions and tax related valuation allowances will affect our provision for income taxes in our Consolidated Statements of Operations.
Our estimates of fair value are based upon assumptions believed to be reasonable at that time, but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur, which may affect the accuracy or validity of such assumptions, estimates or actual results.
When events or changes in circumstances indicate that the carrying value of a finite-lived intangible asset may not be recoverable, we perform an assessment of the asset for potential impairment. This assessment is based on projected undiscounted future cash flows over the asset’s remaining life. If the carrying value of the asset exceeds its undiscounted cash flows, we record an impairment loss equal to the excess of the carrying value over the fair value of the asset, determined using projected discounted future cash flows of the asset.
Valuation of Goodwill
Our goodwill totaled
$1,182.8 million
and
$1,169.8 million
as of
September 30, 2017
and
2016
, respectively. We assess goodwill for impairment at the reporting unit level. Our reporting units are determined based on the components of our operating segments that constitute a business for which discrete financial information is available and for which operating results are regularly reviewed by segment management. We have three operating and reportable segments: (1) the Solutions Group, (2) the IoT Group and (3) Professional Services.
As of
September 30, 2017
, goodwill and acquired intangible assets in the aggregate attributable to our Solutions Group, IoT Group and Professional Services segment was
$1,175.6 million
,
$234.4 million
and
$30.6 million
, respectively. As of
September 30, 2016
, goodwill and acquired intangible assets in the aggregate attributable to our Solutions Group, IoT Group and Professional Services segment was
$1,196.6 million
,
$252.8 million
and
$30.7 million
, respectively. We test goodwill for impairment in the third quarter of our fiscal year, or on an interim basis if an event occurs or circumstances change that would, more likely than not, reduce the fair value of a reporting segment below its carrying value. Factors we consider important (on an overall company basis and reportable segment basis, as applicable) that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in our use of the acquired assets or a significant change in the strategy for our business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period, or a reduction of our market capitalization relative to net book value.
We completed our annual goodwill impairment review as of July 1, 2017 based on a qualitative assessment. Our qualitative assessment included company specific (financial performance and long-range plans), industry, and macroeconomic factors, and consideration of the fair value of each reporting unit, which was approximately double its carrying value or higher at July 2, 2016, the last valuation date. Based on our qualitative assessment, we believe it is more likely than not that the fair values of our reporting units exceed their carrying values and no further impairment testing is required.
Accounting for Pensions
We sponsor several international pension plans. We make assumptions that are used in calculating the expense and liability of these plans. These key assumptions include the expected long-term rate of return on plan assets and the discount rate used to determine the present value of benefit obligations. In selecting the expected long-term rate of return on assets, we consider the average future rate of earnings expected on the funds invested to provide for the benefits under the pension plan. This includes considering the plans' asset allocations and the expected returns likely to be earned over the life of the plans. The discount rate reflects the estimated rate at which an amount that is invested in a portfolio of high-quality debt instruments would provide the future cash flows necessary to pay benefits when they come due. The actuarial assumptions used by us may differ materially from actual results due to
changing market and economic conditions or longer or shorter life spans of the participants. Our actual results could differ materially from those we estimated, which could require us to record a greater amount of pension expense in future years and/or require higher than expected cash contributions.
Accounting and reporting for these plans requires the use of country-specific assumptions for discount rates and expected rates of return on assets. We apply a consistent methodology in determining the key assumptions that, in addition to future experience assumptions such as mortality rates, are used by our actuaries to determine our liability and expense for each of these plans. The discount rate for Germany was selected with reference to a spot-rate yield curve based on the yields of AA-rated Euro-denominated corporate bonds. In addition, our actuarial consultants determine the expense and liabilities of the plan using other assumptions for future experience, such as mortality rates. In determining our pension cost for
2017
,
2016
, and
2015
, we used weighted average discount rates of
1.3%
,
2.2%
and
2.4%
, respectively, and weighted average expected returns on plan assets of
5.4%
,
5.7%
and
5.8%
, respectively. In
2017
,
2016
and
2015
, our actual return (loss) on plan assets was
$6.3 million
, $1.7 million and $(0.4) million, respectively. If actual returns are below our expected rates of return, it will impact the amount and timing of future contributions and expense for these plans.
As of
September 30, 2017
and
2016
, our plans in total were underfunded, representing the difference between our projected benefit obligation and fair value of plan assets, by
$16.7 million
and
$30.8 million
, respectively. The projected benefit obligation as of
September 30, 2017
was determined using a weighted average discount rate of
1.8%
. The most sensitive assumptions used in calculating the expense and liability of our pension plans are the discount rate and the expected return on plan assets. Total GAAP net periodic pension cost was
$2.6 million
in
2017
and we expect it to be approximately
$0.8 million
in
2018
. A 50 basis point change to our discount rate and expected return on plan assets assumptions would have changed our pension expense for the year ended September 30, 2017 by less than $1 million. A 50 basis point decrease in our discount rate assumptions would increase our projected benefit obligation as of September 30, 2017 by approximately $7 million.
Legal Contingencies
We are periodically subject to various legal claims and involved in various legal proceedings. We routinely review the status of each significant matter and assess our potential financial exposure. If the potential loss from any matter is considered probable and the amount can be reasonably estimated, we record a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether the amount of an exposure is reasonably estimable. Because of inherent uncertainties related to these legal matters, we base our loss accruals on the best information available at the time. Further, estimates of this nature are highly subjective, and the final outcome of these matters could vary significantly from the amounts that have been included in the accompanying Consolidated Financial Statements. As additional information becomes available, we reassess our potential liability and may revise our estimates. Such revisions could have a material impact on future quarterly or annual results of operations.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
2017
|
|
2016
|
|
2015
|
|
(in thousands)
|
Cash and cash equivalents
|
$
|
280,003
|
|
|
$
|
277,935
|
|
|
$
|
273,417
|
|
Marketable securities
|
50,315
|
|
|
49,616
|
|
|
—
|
|
Total
|
$
|
330,318
|
|
|
$
|
327,551
|
|
|
$
|
273,417
|
|
|
|
|
|
|
|
Activity for the year included the following:
|
|
|
|
|
|
Cash provided by operating activities
|
$
|
134,590
|
|
|
$
|
183,168
|
|
|
$
|
179,903
|
|
Cash used by investing activities
|
(16,127
|
)
|
|
(237,156
|
)
|
|
(140,039
|
)
|
Cash provided (used) by financing activities
|
(117,461
|
)
|
|
51,699
|
|
|
(42,155
|
)
|
Cash and cash equivalents
We invest our cash with highly rated financial institutions and in diversified domestic and international money market mutual funds. Cash and cash equivalents include highly liquid investments with original maturities of three months or less. In addition, we hold investments in marketable securities totaling approximately
$50.3 million
with an average maturity of 18 months. At
September 30, 2017
, cash and cash equivalents totaled
$280.0 million
, compared to
$277.9 million
at
September 30, 2016
, reflecting
$134.6 million
in operating cash flow,
$15.2 million
of proceeds from sales of investments,
$10.8 million
of proceeds from issuance of common stock under our employee stock purchase plan, offset by
$51.0 million
used for repurchases of common stock,
$40.0 million
of net repayments under our credit facility,
$26.7 million
used to pay withholding taxes on stock-based awards that vested in the period,
$25.4 million
used for capital expenditures,
$11.1 million
used for payment of contingent consideration and
$5.0 million
used for acquisitions.
Cash provided by operating activities
Cash provided by operating activities was
$134.6 million
in
2017
compared to
$183.2 million
in
2016
and
$179.9 million
in
2015
. The decrease in 2017 is primarily due to an increase in bonus and commission payments of approximately $33 million, lower cash collections from accounts receivable of $27 million
(due to higher 2016 collections of receivables with extended payment terms and a higher subscription mix in 2017),
higher interest payments of approximately $26 million,
and a $12 million payment related to a Korean tax audit, partially offset by a
$35 million increase in cash flows from accounts payable and accrued expenses due to renegotiations with vendors, and more effective utilization of available payment terms,
$18 million of lower restructuring payments and $28 million paid in 2016 to resolve the regulatory investigation with respect to our China business.
Cash provided by operations in 2016 reflects lower contributions to pension plans ($44.7 million lower in 2016 compared to 2015).
Restructuring payments totaled
$37.1 million
in 2017, compared to
$55.0 million
in 2016 and
$53.6 million
in 2015. Cash paid for income taxes was
$35.4 million
,
$25.5 million
, and
$30.1 million
in 2017, 2016, and 2015, respectively.
Cash used by investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
2017
|
|
2016
|
|
2015
|
|
(in thousands)
|
Acquisitions of businesses, net of cash acquired
|
$
|
(4,960
|
)
|
|
$
|
(165,802
|
)
|
|
$
|
(98,411
|
)
|
Additions to property and equipment
|
(25,444
|
)
|
|
(26,189
|
)
|
|
(30,628
|
)
|
Purchases of short- and long-term marketable securities
|
(19,726
|
)
|
|
(44,605
|
)
|
|
—
|
|
Proceeds from maturities of short- and long-term marketable securities
|
18,785
|
|
|
—
|
|
|
—
|
|
Proceeds from sales of investments
|
15,218
|
|
|
—
|
|
|
—
|
|
Purchases of investments
|
—
|
|
|
(560
|
)
|
|
(11,000
|
)
|
|
$
|
(16,127
|
)
|
|
$
|
(237,156
|
)
|
|
$
|
(140,039
|
)
|
We spent approximately $5 million on acquisitions in 2017. In the second quarter of 2016, we acquired Kepware for
$99.4 million
, net of cash acquired, and in the first quarter of 2016, we acquired Vuforia for
$64.8 million
, net of cash acquired. In the third quarter of 2015, we acquired ColdLight for
$98.6 million
, net of cash acquired.
In 2017, we disposed of minority investments in preferred stock for proceeds of approximately $15 million, which we purchased in 2015 for $11 million.
In 2016, we invested in investment grade securities with maturities up to three years.
Our expenditures for property and equipment consist primarily of computer equipment, software, office equipment and facility improvements.
Cash provided (used) by financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
2017
|
|
2016
|
|
2015
|
|
(in thousands)
|
Borrowings under debt agreements
|
$
|
150,000
|
|
|
$
|
670,000
|
|
|
$
|
185,000
|
|
Repayments of borrowings under credit facility
|
(190,000
|
)
|
|
(580,000
|
)
|
|
(128,750
|
)
|
Repurchases of common stock
|
(50,991
|
)
|
|
—
|
|
|
(64,940
|
)
|
Proceeds from issuance of common stock
|
10,778
|
|
|
21
|
|
|
41
|
|
Payments of withholding taxes in connection with vesting of stock-based awards
|
(26,654
|
)
|
|
(20,939
|
)
|
|
(29,207
|
)
|
Excess tax benefits from stock-based awards
|
644
|
|
|
93
|
|
|
24
|
|
Credit facility origination costs
|
(184
|
)
|
|
(6,855
|
)
|
|
—
|
|
Contingent consideration
|
$
|
(11,054
|
)
|
|
$
|
(10,621
|
)
|
|
$
|
(4,323
|
)
|
|
$
|
(117,461
|
)
|
|
$
|
51,699
|
|
|
$
|
(42,155
|
)
|
In 2017, we resumed our stock repurchase program and used
$51.0 million
to repurchase our common stock, repaid
$40.0 million
under our credit facility, and received
$10.8 million
of proceeds from our employee stock purchase plan. In 2016, credit facility origination costs included costs associated with issuing our 2024 6% Notes. In 2015, we borrowed
$100 million
as a result of the purchase of ColdLight and used
$64.9 million
to repurchase shares.
Credit Agreement
In November 2015, we entered into a multi-currency credit facility with a syndicate of banks. As a result of an amendment to the credit facility in March 2017, the revolving loan commitment was reduced to $600 million from $900 million. The revolving loan commitment may be increased by an additional $500 million if the existing or additional lenders are willing to make such increased commitments. Due to the decrease in the loan commitment amount under the credit facility, associated annual commitment fees will decline by approximately $0.9 million. Outstanding revolving loan amounts may be repaid in whole or in part, without penalty or premium, prior to the September 15, 2019 maturity date, when all remaining amounts outstanding will be due and payable in full.
We use the credit facility for general corporate purposes, including acquisitions of businesses, share repurchases and working capital requirements. As of September 30, 2017, we had
$218.1 million
in revolving loans outstanding under the credit facility, the fair value of which approximated its book value. As of September 30, 2017, we have approximately $382 million undrawn, of which $369 million would be available to borrow, the availability of which is reduced by letters of credit and certain other long term liabilities.
Any borrowings by PTC Inc. or certain of our foreign subsidiaries under the credit facility would be guaranteed, respectively, by our material domestic subsidiaries that become parties to the subsidiary guaranty, if any, and/or by PTC Inc. Borrowings are also secured by first priority liens on property of PTC and certain of our material domestic subsidiaries, including 100% of the voting equity interests of certain of our domestic subsidiaries and 65% of our material first-tier foreign subsidiaries. Loans under the credit facility bear interest at variable rates that reset every 30 to 180 days depending on the rate and period selected by us and based upon our total leverage ratio. During 2017, the weighted average annual interest rate for all borrowings outstanding was
4.94%
and, as of September 30, 2017, the rate on the credit facility was
3.125%
. We also pay a quarterly commitment fee on the undrawn portion of the credit facility ranging from 0.175% to 0.30% per year based on our total leverage ratio.
The credit facility imposes customary covenants that limit our ability to incur liens or guarantee obligations, pay dividends and make other distributions, make investments and engage in certain other transactions. In addition, we and our material domestic subsidiaries may not invest in, or loan to, our foreign subsidiaries in aggregate amounts exceeding $75 million for any purpose and an additional $200 million for acquisitions of businesses. We also must maintain the following financial ratios:
|
|
|
|
|
|
Ratio as of September 30, 2017
|
Total Leverage Ratio
Ratio of consolidated total indebtedness to the consolidated trailing four quarters EBITDA, not to exceed 4.50 to 1.00 as of the last day of any fiscal quarter.
|
2.82
|
to
|
1.00
|
Fixed Charge Coverage Ratio
Ratio of consolidated trailing four quarters EBITDA less consolidated capital expenditures to consolidated fixed charges as of the last day of any fiscal quarter, to be not less than 3.50 to 1.00.
|
5.96
|
to
|
1.00
|
Senior Secured Leverage Ratio
Ratio of senior consolidated total indebtedness (which excludes unsecured indebtedness) to consolidated trailing four quarters EBITDA as of the last day of any fiscal quarter, not to exceed 3.00 to 1.00.
|
0.86
|
to
|
1.00
|
Any failure to comply with such covenants would prevent us from being able to borrow additional funds, and would constitute a default, permitting the lenders to, among other things, accelerate the amounts outstanding and terminate the credit facility. As of September 30, 2017, we were in compliance with all financial and operating covenants of the credit facility.
Outstanding Notes
On May 12, 2016, we issued $500 million of 6.00% Senior Notes due 2024 (the “2024 6% Notes”) in a registered offering and used the net proceeds to prepay indebtedness under our senior credit facility. As of September 30, 2017, unamortized deferred financing fees associated with the offering and presented as a direct reduction from the carrying amount of the 2024 6% Notes were
$5.7 million
.
The 2024 6% Notes are unsecured, mature on May 15, 2024, and bear interest at a rate of 6.00% per annum, payable semi-annually (November and May). At any time before May 15, 2019, (i) we may redeem up to 40% of the aggregate principal amount of the 2024 6% Notes with the net cash proceeds of certain public equity offerings at a price equal to 106.00% of the aggregate principal amount redeemed plus accrued and unpaid interest, provided that at least 60% of the 2024 6% Notes that were originally issued remain outstanding immediately thereafter, and (ii) we may redeem some or all of the 2024 6% Notes at a price equal to 100% of the aggregate principal amount plus accrued and unpaid interest and a make-whole premium. On or after May 15, 2019, we may redeem some or all of the 2024 6% Notes at redemption prices specified in the 2024 6% Notes plus accrued and unpaid interest. In addition, if we undergo a change of control, we will be required to make an offer to purchase all the 2024 6% Notes at a price equal to 101% of the principal amount of the 2024 6% Notes plus accrued and unpaid interest.
The notes were issued under an indenture that contains customary covenants. Subject to certain exceptions, our ability to incur certain additional debt is limited unless, after giving pro forma effect to such incurrence and the application of the proceeds thereof, the ratio of our EBITDA to our Consolidated Fixed Charges (as both terms are defined in the indenture) is not greater than 2.00 to 1.00. The indenture also restricts our ability to incur liens, pay dividends or make certain other distributions, sell assets or engage in sale/leaseback transactions. Any failure to comply with these and other covenants included in the indenture could constitute an event of default that could result in the acceleration of the payment of the aggregate principal amount of 2024 6% Notes then outstanding and accrued interest. As of September 30, 2017, we were in compliance with all such covenants.
Share Repurchase Authorization
Our Articles of Organization authorize us to issue up to
500 million
shares of our common stock. Our Board of Directors has periodically authorized the repurchase of shares of our common stock. In August 2014, our Board of Directors authorized us to repurchase up to
$600 million
of our common stock through
September 30, 2017. On September 14, 2017, our Board of Directors authorized us to repurchase up to
$500 million
of our common stock from October 1, 2017 through September 30, 2020.
We intend to use cash from operations and borrowings under our credit facility to make such repurchases. In 2017, we repurchased
(0.9) million
shares at cost of
$51.0 million
. In 2016, we did not repurchase any shares due to the accelerated pace of our transition to a subscription business model and the near-term impact on free cash flow and EBITDA. We repurchased
(2.7) million
shares at a cost of
$64.9 million
in 2015. All shares of our common stock repurchased are automatically restored to the status of authorized and unissued.
Expectations for Fiscal 2018
Our transition to a subscription licensing model has had, and will continue to have, an adverse impact on revenue, operating margin and EPS relative to periods in which we primarily sold perpetual licenses until the expected transition of our customer base to subscription is completed. This also affects consolidated EBITDA as calculated under our credit facility and, as a result of the Total Leverage Ratio under the facility, limits the amount we can borrow under the facility. Notwithstanding the effect of the subscription transition and those limitations, 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 (which we expect to be $40 million in 2018) through at least the next twelve months and to meet our known long-term capital requirements.
Our expected uses of cash could change, our cash position could be reduced and we could incur additional debt obligations if we purchase our outstanding shares or retire debt or engage in strategic transactions, any of which could be commenced, suspended or completed at any time. Any such purchases or retirement of debt will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. We also evaluate possible strategic transactions on an ongoing basis and at any given time may be engaged in discussions or negotiations with respect to possible strategic transactions. The amounts involved in any share or debt repurchases or strategic transactions may be material.
We ended 2017 with a cash balance of $280 million and marketable securities of $50 million. A significant portion of our cash is generated and held outside of the United States. At September 30, 2017, we had cash and cash equivalents of
$26.8 million
in the United States,
$128.1 million
in Europe,
$68.1 million
in the Pacific Rim (including India),
$30.2 million
in Japan and
$26.8 million
in other non-U.S. countries. All of the marketable securities are held in Europe. We have substantial cash requirements in the United States, but we believe that the combination of our existing U.S. cash and cash equivalents, marketable securities, and 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.
Contractual Obligations
At
September 30, 2017
, our contractual obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
Contractual Obligations
|
Total
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than
5 years
|
|
(in millions)
|
Debt (1)
|
$
|
945.2
|
|
|
$
|
38.1
|
|
|
$
|
287.1
|
|
|
$
|
60.0
|
|
|
$
|
560.0
|
|
Operating leases (2)
|
360.6
|
|
|
39.3
|
|
|
56.9
|
|
|
52.2
|
|
|
212.2
|
|
Purchase obligations (3)
|
48.1
|
|
|
28.4
|
|
|
18.9
|
|
|
0.8
|
|
|
—
|
|
Pension liabilities (4)
|
16.7
|
|
|
2.3
|
|
|
5.2
|
|
|
5.9
|
|
|
3.3
|
|
Unrecognized tax benefits (5)
|
14.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
1,385.4
|
|
|
$
|
108.1
|
|
|
$
|
368.1
|
|
|
$
|
118.9
|
|
|
$
|
775.5
|
|
|
|
(1)
|
Includes required principal repayments and interest and commitment fees on our 2024 6% Notes and our revolving credit facility based on the balance outstanding as of September 30, 2017 and the interest rates in effect as of September 30, 2017, 6.0% for our 2024 6% Notes and
3.125%
for our revolving credit facility. The credit facility matures on September 15, 2019, when all remaining
|
amounts outstanding will be due and payable in full. Principal and interest on any additional borrowing that may be required to refinance the credit facility upon its maturity are not included in the contractual obligations above.
|
|
(2)
|
The future minimum lease payments above include minimum future lease payments for excess facilities under non-cancelable operating leases. These leases qualify for operating lease accounting treatment and, as such, are not included on our balance sheet. See Note I
Commitments and Contingencies
of “Notes to Consolidated Financial Statements” in this Annual Report for additional information regarding our operating leases. On September 7, 2017, we entered into a lease for approximately 250,000 square feet located at 121 Seaport Boulevard, Boston, Massachusetts. The term of the lease is expected to run from January 1, 2019 through June 30, 2037, subject to adjustment based on the initial occupancy date. Base rent for the first year of the lease is $11.0 million and will increase by $1 per square foot leased per year thereafter ($0.3 million per year). Base rent which first becomes payable on July 1, 2020, subject to adjustment based on the lease commencement date, is included in the operating lease obligations above. In addition to the base rent, PTC must pay its pro rata portions of building operating costs and real estate taxes (together, “Additional Rent”). Additional rent, equal to approximately 63% of total building operating costs and real estate taxes, is estimated to be approximately $7.1 million for the first year we begin paying rent and is not included in the operating lease payments above.
|
|
|
(3)
|
Purchase obligations represent minimum commitments due to third parties, including royalty contracts, research and development contracts, telecommunication contracts, information technology maintenance contracts in support of internal-use software and hardware and other marketing and consulting contracts. Contracts for which our commitment is variable, based on volumes, with no fixed minimum quantities, and contracts that can be canceled without payment penalties have been excluded. The purchase obligations included above are in addition to amounts included in current liabilities and prepaid expenses recorded on our September 30, 2017 consolidated balance sheet.
|
|
|
(4)
|
These obligations relate to our international pension plans and are not subject to fixed payment terms. Payments have been estimated based on the plans’ current funded status, planned employer contributions and actuarial assumptions. In addition, we may, at our discretion, make additional voluntary contributions to the plans. See Note M
Pension Plans
of “Notes to Consolidated Financial Statements” in this Annual Report for further discussion.
|
|
|
(5)
|
As of
September 30, 2017
, we had recorded total unrecognized tax benefits of
$14.8 million
. This liability is not subject to fixed payment terms and the amount and timing of payments, if any, which we will make related to this liability, are not known. See Note G
Income Taxes
of “Notes to Consolidated Financial Statements” in this Annual Report for additional information.
|
As of
September 30, 2017
, we had letters of credit and bank guarantees outstanding of approximately
$4.3 million
(of which
$1.2 million
was collateralized), primarily related to our corporate headquarters lease in Needham, Massachusetts.
Off-Balance Sheet Arrangements
We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating parts of our business that are not consolidated (to the extent of our ownership interest therein) into our financial statements. We have not entered into any transactions with unconsolidated entities whereby we have subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us.
Recent Accounting Pronouncements
In accordance with recently issued accounting pronouncements, we will be required to comply with certain changes in accounting rules and regulations. Refer to Note B. Summary of Significant Accounting Policies to the Condensed Consolidated Financial Statements in this Form 10-K for all recently issued accounting pronouncements. We are currently evaluating the impact of the new guidance on our consolidated financial statements. Outlined below are the recent accounting pronouncements that we believe will have the most significant impact on us.
Income Taxes
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). The purpose of ASU 2016-16 is to simplify the income tax accounting of an intra-entity transfer of an asset other than inventory and to record its effect when the transfer occurs. The guidance is effective for annual reporting periods beginning after December 15, 2017 (our fiscal 2019) including interim reporting periods within those annual reporting periods and early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements. We expect to record a net deferred tax asset of approximately $77 million upon adoption, primarily relating to deductible amortization of intangibles in Ireland. Post adoption, our effective tax rate will no longer include the benefit of this amortization which is reflected in our effective tax rate reconciliation under the current guidance.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will replace the existing guidance in ASC 840, Leases. The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and to disclose important information about leasing arrangements. ASU 2016-02 is effective for annual periods beginning after December 15, 2018 (our fiscal 2020) and interim periods within those annual periods. Early adoption is permitted and modified retrospective application is required. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09). ASU 2014-09 supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The FASB has also issued additional standards to provide clarification and implementation guidance on ASU 2014-09.
The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to a customer in an amount that reflects the consideration that is expected to be received for those goods or services. Under the new guidance, an entity is required to evaluate revenue recognition through a five-step process: (1) identifying a contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations in the contract; and (5) recognizing revenue when (or as) the entity satisfies a performance obligation. The standard also requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In applying the principles in ASU 2014-09, it is possible more judgment and estimates may be required within the revenue recognition process than is required under existing U.S. GAAP, including identifying performance obligations, estimating the amount of variable consideration to include in the transaction price, and estimating the value of each performance obligation to allocate the total transaction price to each separate performance obligation.
ASU 2014-09 is effective for us in our first quarter of fiscal 2019. Companies may adopt ASU 2014-09 using either the retrospective method, under which each prior reporting period is presented under ASU 2014-09, with the option to elect certain permitted practical expedients, or the modified retrospective method, under which a company adopts ASU 2014-09 from the beginning of the year of initial application with no restatement of comparative periods, with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application, with certain additional required disclosures. We currently expect to adopt ASU 2014-09 using the modified retrospective method.
While we are continuing to assess the impact of the new standard, we currently believe the most significant impact relates to accounting for our subscription arrangements that include term-based on premise software licenses bundled with support. Under current GAAP, the revenue attributable to these subscription licenses is recognized ratably over the term of the arrangement because VSOE does not exist for the undelivered support element as it is not sold separately. Under the new standard, the requirement to have VSOE for undelivered elements to enable the separation of revenue for the delivered software licenses is eliminated. Accordingly, under the new standard we will be required to recognize as revenue a portion of the subscription fee upon delivery of the software license. We currently expect revenue related to our perpetual license revenue and related support contracts, professional services and cloud offerings to remain substantially unchanged. Due to the complexity of certain of our contracts, the actual revenue
recognition treatment required under the new standard may be dependent on contract-specific terms and, therefore, may vary in some instances.
Upon implementation of the new standard in fiscal 2019, we expect to make revisions to contract terms with our customers that will result in shortening the initial, non-cancellable term of our multi-year subscriptions to one year. This change will result in annual contractual periods for the majority of our software subscriptions, the license portion of which will be recognized at the beginning of each annual contract period upon delivery of the licenses and the support portion of which will be recognized ratably over the one year contractual period. As a result, we anticipate one year of subscription revenue will be recognized for each contract each year; however, more of the revenue will be recognized in the quarter that the contract period begins and less will be recognized in the subsequent three quarters of the contract than under the current accounting rules.
Under the modified retrospective method, we will evaluate each contract that is ongoing on the adoption date as if that contract had been accounted for under ASU 2014-09 from contract inception. Some license revenue related to subscription arrangements that would have been recognized in future periods under current GAAP will be recast under ASU 2014-09 as if the revenue had been recognized in prior periods. Under this transition method, we will not adjust historical reported revenue amounts. Instead, the revenue that would have been recognized under this method prior to the adoption date will be an adjustment to retained earnings and will not be recognized as revenue in future periods as previously planned. Because we expect that license revenue associated with subscription contracts will be recognized up front instead of over time under ASU 2014-09, we expect to have some portion of our deferred revenue to be adjusted to retained earnings upon adoption, which could be material. During the first year of adoption, we will disclose the amount of this retained earnings adjustment and intend to provide supplemental disclosure of how this revenue would have been recognized under the current rules.
Another significant provision under ASU 2014-09 includes the capitalization and amortization of costs associated with obtaining a contract, such as sales commissions. Currently, we expense sales commissions in the period incurred. Under ASU 2014-09, direct and incremental costs to acquire a contract are capitalized and amortized using a systematic basis over the pattern of transfer of the goods and services to which the asset relates. While we are continuing to assess the impact of this provision of ASU 2014-09, we likely will be required to capitalize incremental costs such as commissions and amortize those costs over the period the capitalized assets are expected to contribute to future cash flows.
Furthermore, we have made and will continue to make investments in systems and processes to enable timely and accurate reporting under the new standard. We currently expect that necessary operational and internal control structural changes will be implemented prior to the adoption date.
ITEM 7A.
Quantitative and Qualitative Disclosures about Market Risk
We face exposure to financial market risks, including adverse movements in foreign currency exchange rates and changes in interest rates. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial results.
Foreign currency exchange risk
Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Our most significant foreign currency exposures relate to Western European countries, Japan, China and Canada. We enter into foreign currency forward contracts to manage our exposure to fluctuations in foreign exchange rates that arise from receivables and payables denominated in foreign currencies. We do not enter into or hold foreign currency derivative financial instruments for trading or speculative purposes nor do we enter into derivative financial instruments to hedge future cash flow or forecast transactions.
Our non-U.S. revenues generally are transacted through our non-U.S. subsidiaries and typically are denominated in their local currency. In addition, expenses that are incurred by our non-U.S. subsidiaries typically are denominated in their local currency. In 2017, 2016, and 2015, approximately two-thirds of our revenue and half of our expenses were transacted in currencies other than the U.S. dollar. Currency translation affects our reported results because we report our results of operations in U.S. Dollars. Historically, our most significant currency risk has been changes in the Euro and Japanese Yen relative to the U.S. Dollar. Based on current revenue and expense levels (excluding restructuring charges and stock-based compensation), a $0.10 change in the USD to European exchange rates and a 10 Yen change in
the Yen to USD exchange rate would impact operating income by approximately $14 million and $5 million, respectively.
Our exposure to foreign currency exchange rate fluctuations arises in part from intercompany transactions, with most intercompany transactions occurring between a U.S. dollar functional currency entity and a foreign currency denominated entity. Intercompany transactions typically are denominated in the local currency of the non-U.S. dollar functional currency subsidiary in order to centralize foreign currency risk. Also, both PTC (the parent company) and our non-U.S. subsidiaries may transact business with our customers and vendors in a currency other than their functional currency (transaction risk). In addition, we are exposed to foreign exchange rate fluctuations as the financial results and balances of our non-U.S. subsidiaries are translated into U.S. dollars (translation risk). If sales to customers outside of the United States increase, our exposure to fluctuations in foreign currency exchange rates will increase.
Our foreign currency risk management strategy is principally designed to mitigate the future potential financial impact of changes in the U.S. dollar value of balances denominated in foreign currency, resulting from changes in foreign currency exchange rates. Our foreign currency hedging program uses forward contracts to manage the foreign currency exposures that exist as part of our ongoing business operations. The contracts primarily are denominated in Canadian Dollars and European currencies, and have maturities of less than three months.
Generally, we do not designate foreign currency forward contracts as hedges for accounting purposes, and changes in the fair value of these instruments are recognized immediately in earnings. Because we enter into forward contracts only as an economic hedge, any gain or loss on the underlying foreign-denominated balance would be offset by the loss or gain on the forward contract. Gains and losses on forward contracts and foreign denominated receivables and payables are included in foreign currency net losses.
As of
September 30, 2017
and
2016
, we had outstanding forward contracts for derivatives not designated as hedging instruments with notional amounts equivalent to the following:
|
|
|
|
|
|
|
|
|
|
September 30,
|
Currency Hedged
|
2017
|
|
2016
|
|
(in thousands)
|
Canadian/U.S. Dollar
|
$
|
12,809
|
|
|
$
|
14,685
|
|
Euro/U.S. Dollar
|
244,000
|
|
|
174,120
|
|
Israeli Sheqel/U.S. Dollar
|
8,820
|
|
|
7,271
|
|
Japanese Yen/Euro
|
17,694
|
|
|
32,782
|
|
Japanese Yen/U.S. Dollar
|
3,198
|
|
|
6,716
|
|
Swiss Franc / Euro
|
7,157
|
|
|
—
|
|
Swedish Krona / U.S. Dollar
|
4,627
|
|
|
3,852
|
|
Chinese Yuan offshore / Euro
|
10,423
|
|
|
—
|
|
Singapore Dollar / U.S. Dollar
|
1,186
|
|
|
1,448
|
|
All other
|
8,605
|
|
|
8,660
|
|
Total
|
$
|
318,519
|
|
|
$
|
249,534
|
|
As of
September 30, 2017
and
2016
, we had outstanding forward contracts designated as cash flow hedges with notional amounts equivalent to the following:
|
|
|
|
|
|
|
|
|
Currency Hedged
|
September 30,
2017
|
|
September 30,
2016
|
|
(in thousands)
|
Euro / U.S. Dollar
|
$
|
64,831
|
|
|
$
|
26,181
|
|
Japanese Yen / U.S. Dollar
|
22,675
|
|
|
8,800
|
|
SEK / U.S. Dollar
|
14,091
|
|
|
4,078
|
|
Total
|
$
|
101,597
|
|
|
$
|
39,059
|
|
Debt
In addition to amounts due under our 2024 6% Notes as described above, as of
September 30, 2017
, we had
$218.1 million
outstanding under our variable-rate credit facility. Loans under the credit facility bear interest at variable rates which reset every
30
to
180
days depending on the rate and period selected by us. These loans are subject to interest rate risk as interest rates will be adjusted at each rollover date to the extent such amounts are not repaid. As of
September 30, 2017
, the annual rate on the credit facility loans was
3.125%
. If there was a hypothetical 100 basis point change in interest rates, the annual net impact to earnings and cash flows would be $2.2 million. This hypothetical change in cash flows and earnings has been calculated based on the borrowings outstanding at September 30, 2017 and a 100 basis point per annum change in interest rate applied over a one-year period.
Cash and cash equivalents
As of
September 30, 2017
, cash equivalents were invested in highly liquid investments with maturities of three months or less when purchased. We invest our cash with highly rated financial institutions in North America, Europe and Asia-Pacific and in diversified domestic and international money market mutual funds. At
September 30, 2017
, we had cash and cash equivalents of
$26.8 million
in the United States,
$128.1 million
in Europe,
$68.1 million
in the Pacific Rim (including India),
$30.2 million
in Japan and
$26.8 million
in other non-U.S. countries. Given the short maturities and investment grade quality of the portfolio holdings at
September 30, 2017
, a hypothetical 10% change in interest rates would not materially affect the fair value of our cash and cash equivalents.
Our invested cash is subject to interest rate fluctuations and, for non-U.S. operations, foreign currency risk. In a declining interest rate environment, we would experience a decrease in interest income. The opposite holds true in a rising interest rate environment. Over the past several years, the U.S. Federal Reserve Board, European Central Bank and Bank of England have changed certain benchmark interest rates, which have led to declines and increases in market interest rates. These changes in market interest rates have resulted in fluctuations in interest income earned on our cash and cash equivalents. Interest income will continue to fluctuate based on changes in market interest rates and levels of cash available for investment. Our consolidated cash balances were impacted favorably by
$1.1 million
and
$6.8 million
in
2017
and
2016
, respectively and unfavorably by
$17.9 million
in
2015
, due to changes in foreign currencies relative to the U.S. dollar, particularly the Euro and the Japanese Yen.
ITEM 8.
Financial Statements and Supplementary Data
The consolidated financial statements and notes to the consolidated financial statements are attached as APPENDIX A.