Document/ExhibitDescriptionPagesSize 1: 10-Q/A Parametric Technology Corporation Form 10-Q/A HTML 489K
2: EX-31.1 EX-31.1 Certification of the Chief Executive HTML 11K
Officer
3: EX-31.2 EX-31.2 Certification of the Chief Financial HTML 11K
Officer
4: EX-32 EX-32 Certification of Periodic Financial Report HTML 8K
(Exact name of registrant as specified in its charter)
Massachusetts
04-2866152
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification Number)
140 Kendrick Street, Needham, MA02494
(Address of principal executive offices, including zip code)
(781) 370-5000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer þ Accelerated Filer o Non-accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). YES o NO þ
There were 114,848,255 shares of our common stock outstanding on August 3, 2007.
This Amendment No. 1 (“Form 10-Q/A”) to our Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2007 as originally filed with the Securities and Exchange Commission (“SEC”) on
August 9, 2007 (the “Original Form 10-Q”) amends certain sections of the Original Form 10-Q to
reflect the restatement of our unaudited consolidated financial statements (and related
disclosures) as of June 30, 2007 and September 30, 2006 and for the three and nine months ended
June 30, 2007 and July 1, 2006 described below. With this Form 10-Q/A, we are amending:
•
Part I, Item 1 “Unaudited Financial Statements;”
•
Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and
Results of Operations;” and
•
Part I, Item 4 “Controls and Procedures.”
This Form 10-Q/A also includes updated certifications from our Chief Executive Officer and Chief
Financial Officer required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The updated
certifications are included in this Form 10-Q/A as Exhibits 31.1, 31.2 and 32.
This Form
10-Q/A makes only the changes described above and does not modify or
update such items in any other respect, or any other items or
disclosures presented in the Original Form 10-Q. Further, this
Form 10-Q/A does not reflect any other events occurring after
August 9, 2007, the date we filed the Original Form
10-Q. Accordingly, this Form 10-Q/A should be read in conjunction with our filings made with the
SEC since the filing date of the Original Form 10-Q, including our Current Reports on Form 8-K, our
Annual Report on Form 10-K for the year ended September 30, 2007, and the amendments to our
Quarterly Reports on Form 10-Q for the quarterly periods ended December 30, 2006 and March 31,2007.
Restatement of Prior Period Financial Statements
In our Annual Report on Form 10-K for fiscal 2007, filed on November 29, 2007, we restated our
consolidated financial statements as of September 30, 2006 and for the years ended September 30,2006 and 2005 as well as our consolidated financial statements
(excluding footnotes) for the quarterly periods in fiscal
2007 and 2006, as included in Item 8 – “Financial Statements and Supplementary Data.” With the
filing of this Form 10-Q/A, we are concurrently filing amendments to our Quarterly Reports on Form
10-Q for the quarterly periods ended December 30, 2006 and March 31, 2007, as originally filed with
the SEC, to restate our unaudited financial statements and related financial information for those
periods and the comparative 2006 periods for the effects of the restatement.
We do not intend to file any other amended Annual Reports on Form 10-K or Quarterly Reports on Form
10-Q for periods affected by the restatement. For this reason, the Consolidated Financial
Statements and related financial information contained in any of our filings with the SEC prior to
November 29, 2007 should no longer be relied upon.
Background of the Restatement
As a result of an independent investigation led by the Audit Committee of our Board of Directors,
the Audit Committee concluded on October 29, 2007 that we would need to restate our previously
issued financial statements for the effect of certain transactions involving Toshiba Corporation of
Japan (“Toshiba”), for which we recorded revenue of approximately $41 million during fiscal 2001
through 2006. Based on its investigation, the Audit Committee concluded that the understanding of
the arrangement was not fully reflected in the order paperwork for these transactions because there
were additional circumstances known or knowable by one or more of our personnel in Japan. That
condition required us to change our conclusion that the transactions met the revenue recognition
criteria of Statement of Position 97-2, Software Revenue Recognition.
The results of the investigation indicate that during the period 2001 to 2006, an employee of
Toshiba Corporation initiated purchases of both software and services from our subsidiary in Japan,
PTC Japan K.K. (“PTC Japan”).
Many of these purchases were completed through a third party trading company that procured the
software and services on Toshiba’s behalf. The transactions were supported by orders that were
signed by employees of Toshiba and the third party trading company. PTC Japan delivered the items
for which revenue was recorded and was paid for the orders in question. The Toshiba employee also
allegedly entered into a series of financing agreements with third party leasing companies,
including GE Capital Leasing Corporation of Japan (“GECL”), in the name of Toshiba to fund various
purchases. As part of those transactions, the leasing companies allegedly entered into transactions
with various third party trading companies to procure the purchased items on behalf of Toshiba. We
were not a party to those financing agreements. Toshiba has disclaimed responsibility for repayment
of these financed amounts and has alleged that the Toshiba employee who entered into the financing
agreements was not authorized to do so and that Toshiba did not receive delivery of the items so
financed.
Recently, the Toshiba employee involved in the transactions was arrested and charged with
defrauding certain of the leasing companies. Among the allegations against him are that he forged
contracts in the name of Toshiba. In addition, three individuals—each employed by a different
trading company involved in the transactions—have been arrested for alleged involvement in a scheme
to defraud the leasing companies. According to published news reports, the Toshiba employee and
these other individuals are suspected of diverting some of the proceeds of the financings to a bank
account controlled by one or more of them. Following these arrests, it was reported on October 23,2007 that two former employees of PTC Japan were arrested on suspicion of demanding “hush money”
from one of the participants in the fraudulent scheme. The press accounts indicate that the former
PTC Japan employees—who left employment with PTC Japan in 2003 and 2004, respectively—were no
longer working at PTC Japan at the time of the alleged demands. According to the press accounts,
these individuals have not been charged with participating in the alleged underlying fraud.
To effect the restatement of revenue associated with the transactions placed by the Toshiba
employee, we reduced previously recorded revenue by approximately $8 million in fiscal 2006, $15
million in fiscal 2005, $9 million in fiscal 2004, $2 million in fiscal 2003 and $7 million in
prior years, and recorded related income tax effects. We did not make any adjustments to the costs
incurred in connection with these transactions due to the uncertainty regarding our ultimate
ability to retain the advances received for these transactions and our belief that all such costs
are unrecoverable. Upon restatement, the revenue reversed from those prior periods was deferred and
classified as Customer Advances in our consolidated balance sheets. That liability (which totaled
$38.0 million and $39.5 million at June 30, 2007 and September 30, 2006, respectively, after the
effects of foreign currency movements) will remain recorded until the rights and obligations of the
several companies connected with the Toshiba transactions are resolved. To the extent that matters
are resolved in our favor, we will reduce Customer Advances and record revenue or other income at
that time.
Our restatement of prior period financial statements also includes adjustments for other previously
identified errors that we had corrected in the periods they became known to us rather than in the
periods in which they originated because we believed that the amounts of such errors, individually
and in the aggregate, were not material to our financial statements for the affected periods. In
this restatement, we have now recorded those corrections in the periods in which each error
originated. Such adjustments, which have been tax effected, primarily relate to (i) recording rent
expense on a straight-line basis for one of our office facilities, (ii) recording stock-based
compensation expense due to the timing of approvals for certain stock options we granted, (iii)
deferring or reversing revenue for certain customer orders in the Asia-Pacific region, and (iv)
reversing an income tax reserve that was unwarranted when established. Our restatement also
includes an adjustment to correct our third quarter 2007 financial statements for a $10.4 million
overstatement of reported net income, which resulted from tax errors detected in the fourth quarter
of 2007 relating primarily to our release in the third quarter of a substantial portion of the
valuation allowance for our U.S. net deferred tax assets.
Earnings (loss) per share—Diluted, as previously reported
$
1.02
$
0.54
$
0.75
$
0.32
$
(0.93
)
Adjustments
(0.06
)
(0.04
)
(0.10
)
(0.03
)
(0.03
)
Earnings (loss) per share—Diluted, as restated
$
0.96
$
0.50
$
0.65
$
0.29
$
(0.96
)
The adjustments made as a result of the restatement are more fully described in Note 2 to our
consolidated financial statements included in Part I, Item 1
“Unaudited Financial Statements” of this Form 10-Q/A.
Accounts receivable, net of allowance for doubtful accounts of $4,007
and $4,900 at June 30, 2007 and September 30, 2006, respectively
171,764
181,008
Prepaid expenses
26,995
20,495
Other current assets (Note 1)
52,960
51,824
Deferred tax assets (Note 10)
23,283
1,341
Total current assets
534,958
438,116
Property and equipment, net
55,358
51,603
Goodwill (Note 7)
245,733
249,252
Acquired intangible assets, net (Note 7)
81,632
77,870
Deferred tax assets (Note 10)
63,523
9,148
Other assets
69,986
75,398
Total assets
$
1,051,190
$
901,387
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
19,004
$
17,109
Accrued expenses and other current liabilities
52,848
52,128
Accrued compensation and benefits
54,599
72,632
Accrued income taxes
8,511
5,761
Customer
advances (Note 2)
38,020
39,475
Deferred revenue (Note 1)
223,151
197,769
Total current liabilities
396,133
384,874
Other liabilities (Note 3)
96,065
97,413
Deferred revenue (Note 1)
8,225
13,228
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued
—
—
Common stock, $0.01 par value; 500,000 shares authorized; 114,990 and
111,880 shares issued and outstanding at June 30, 2007 and September30, 2006, respectively
1,150
1,119
Additional paid-in capital
1,751,907
1,723,570
Accumulated deficit
(1,163,204
)
(1,276,221
)
Accumulated other comprehensive loss
(39,086
)
(42,596
)
Total stockholders’ equity
550,767
405,872
Total liabilities and stockholders’ equity
$
1,051,190
$
901,387
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying unaudited consolidated financial statements include the accounts of Parametric
Technology Corporation (PTC) and its wholly owned subsidiaries and have been prepared by management
in accordance with accounting principles generally accepted in the United States of America and in
accordance with the rules and regulations of the Securities and Exchange Commission regarding
interim financial reporting. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial statements. While we
believe that the disclosures presented are adequate to make the information not misleading, these
unaudited quarterly financial statements should be read in
conjunction with our 2006 annual consolidated
financial statements and related notes (as restated) included in our Annual Report on Form 10-K for the fiscal
year ended September 30, 2007. A reclassification of $5.7 million from accounts payable to accrued
expenses and other current liabilities has been made in the September 30, 2006 consolidated balance
sheet for consistent presentation. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting only of those of a normal
recurring nature, necessary for a fair statement of our financial position, results of
operations and cash flows at the dates and for the periods indicated. Unless otherwise indicated,
all references to a year reflect our fiscal year, which ends on September 30. The year-end
consolidated balance sheet is derived from our audited financial statements.
Deferred revenue primarily relates to software maintenance agreements billed to customers for which
the services have not yet been provided. The liability associated with performing these services is
included in deferred revenue and the related customer receivable, if not yet paid, is included in
other current assets. Billed but uncollected maintenance-related amounts included in other current
assets at June 30, 2007 and September 30, 2006 were $45.9 million and $50.0 million, respectively.
The results of operations for the three and nine months ended June 30, 2007 are not necessarily
indicative of the results expected for the remainder of the fiscal year.
2. Restatement of Consolidated Financial Statements
In this Form 10-Q/A, we are restating our
consolidated balance sheets as of June 30, 2007 and
September 30, 2006, our consolidated statements
of operations and comprehensive income for the three and nine months
ended June 30, 2007 and July 1,2006, and our condensed consolidated statements of cash flows for the
nine months ended June 30, 2007 and July 1, 2006, as well as all related footnotes.
As a result of an independent investigation led by the Audit Committee of our Board of Directors,
the Audit Committee concluded on October 29, 2007 that we would need to restate our previously
issued financial statements for the effect of certain transactions involving Toshiba Corporation of
Japan (“Toshiba”), for which we recorded revenue of approximately $41 million during fiscal 2001
through 2006. Based on its investigation, the Audit Committee concluded that the understanding of
the arrangement was not fully reflected in the order paperwork for these transactions because there
were additional circumstances known or knowable by one or more of our personnel in Japan. That
condition required us to change our conclusion that the transactions met the revenue recognition
criteria of Statement of Position 97-2, Software Revenue Recognition.
The results of the investigation indicate that during the period 2001 to 2006, an employee of
Toshiba Corporation initiated purchases of both software and services from our subsidiary in Japan,
PTC Japan K.K. (“PTC Japan”). Many of these purchases were completed through a third party trading
company that procured the software and services on Toshiba’s behalf. The transactions were
supported by orders that were signed by employees of Toshiba and the third party trading company.
PTC Japan delivered the items for which revenue was recorded and was paid for the orders in
question. The Toshiba employee also allegedly entered into a series of financing agreements with
third party leasing companies, including GE Capital Leasing Corporation of Japan (“GECL”), in the
name of Toshiba to fund various purchases. As part of those transactions, the leasing companies
allegedly entered into transactions with various third party trading companies to procure the
purchased items on behalf of Toshiba. We were not a party to those financing agreements. Toshiba
has disclaimed responsibility for repayment of these
financed amounts and has alleged that the Toshiba employee who entered into the financing
agreements was not authorized to do so and that Toshiba did not receive delivery of the items so
financed.
Recently, the Toshiba employee involved in the transactions was arrested and charged with
defrauding certain of the leasing companies. Among the allegations against him are that he forged
contracts in the name of Toshiba. In addition, three individuals—each employed by a different
trading company involved in the transactions—have been arrested for alleged involvement in a scheme
to defraud the leasing companies. According to published news reports, the Toshiba employee and
these other individuals are suspected of diverting some of the proceeds of the financings to a bank
account controlled by one or more of them. Following these arrests, it was reported on October 23,2007 that two former employees of PTC Japan were arrested on suspicion of demanding “hush money”
from one of the participants in the fraudulent scheme. The press accounts indicate that the former
PTC Japan employees—who left employment with PTC Japan in 2003 and 2004, respectively—were no
longer working at PTC Japan at the time of the alleged demands. According to the press accounts,
these individuals have not been charged with participating in the alleged underlying fraud.
To effect the restatement of revenue associated with the transactions placed by the Toshiba
employee (the “Revenue Adjustment”), we reduced previously recorded revenue by $7.7 million in
fiscal 2006, $15.5 million in fiscal 2005, $8.5 million in fiscal 2004, $2.1 million in fiscal 2003
and $7.1 million in prior years, and recorded related income tax effects. We did not make any
adjustments to the costs incurred in connection with these transactions due to the uncertainty
regarding our ultimate ability to retain the advances received for these transactions and our
belief that all such costs are unrecoverable. Upon restatement, the revenue reversed from those
prior periods was deferred and classified as Customer Advances in our consolidated balance sheets.
That liability (which totaled $38.0 million and $39.5 million at June 30, 2007 and September 30,2006, respectively, after the effects of foreign currency movements) will remain recorded until the
rights and obligations of the several companies connected with the Toshiba transactions are
resolved. To the extent that matters are resolved in our favor, we will reduce Customer Advances
and record revenue or other income at that time.
Our restatement of prior period financial statements also includes adjustments for other previously
identified errors that we had corrected in the periods they became known to us rather than in the
periods in which they originated because we believed that the amounts of such errors, individually
and in the aggregate, were not material to our financial statements for the affected periods. In
this restatement, we have now recorded those corrections in the periods in which each error
originated. Such adjustments (the “Other Adjustments”), which have been tax effected, primarily
relate to (i) deferring or reversing revenue for certain customer orders in the Asia-Pacific region
and (ii) reversing an income tax reserve that was unwarranted when established. Our restatement
also includes an adjustment to correct our third quarter 2007 financial statements for a $10.4
million overstatement of reported net income, which resulted from tax errors detected in the fourth
quarter of 2007 relating primarily to our release in the third quarter of a substantial portion of
the valuation allowance for our U.S. net deferred tax assets.
The following tables present the effect of the restatement adjustments by financial statement line
item for our consolidated balance sheets as of June 30, 2007 and September 30, 2006, our
consolidated statements of operations for the three and nine months ended June 30, 2007 and July 1,2006, our consolidated statements of cash flows for the nine months ended June 30, 2007 and July 1,2006, and our consolidated statements of comprehensive income for the three and nine months ended
June 30, 2007 and July 1, 2006:
Consists of (i) an adjustment to correct our third quarter 2007
financial statements for the $10.4 million overstatement of reported
net income, which resulted from tax errors detected in the fourth
quarter of 2007 relating primarily to our release in the third quarter
of a substantial portion of the valuation allowance for our U.S. net
deferred tax assets and (ii) the effect of the correction we made in
2007 to reverse an income tax reserve that was unwarranted when
established in 2004.
Consists of an adjustment to correct our third quarter 2007 financial
statements for the $10.4 million overstatement of reported net income,
which resulted from tax errors detected in the fourth quarter of 2007
relating primarily to our release in the third quarter of a
substantial portion of the valuation allowance for our U.S. net
deferred tax assets.
Consists of an adjustment to correct our third quarter 2007 financial
statements for the $10.4 million overstatement of reported net income,
which resulted from tax errors detected in the fourth quarter of 2007
relating primarily to our release in the third quarter of a
substantial portion of the valuation allowance for our U.S. net
deferred tax assets.
(2)
Consists of the reversal of the corrections we made in 2006 of $0.8
million for revenue erroneously recorded from 2002 to 2004 in the
Asia-Pacific region as well as the reversal of related legal reserves
recorded in 2004, net of the related income tax effects of these two
items, which was $0 because of our full valuation allowance against
net deferred tax assets.
There were no restructuring charges recorded in the first nine months of 2007.
In the third quarter and first nine months of 2006, we recorded a net restructuring charge of $5.9
million. In the second quarter of 2006, we announced that we would undertake certain cost-reduction
initiatives. These initiatives were substantially completed in the third quarter of 2006 and
resulted in a restructuring charge of $7.4 million for severance and related costs associated with
the termination of 91 employees in the third quarter of 2006, partially offset by a credit of $1.5
million primarily related to a plan to reoccupy a portion of our headquarters facility that was
previously vacant and included in restructuring costs in prior periods. The headquarters space was
available for sublease and was being marketed, but was reoccupied due to space requirements related
to our acquisition of Mathsoft.
The following table summarizes restructuring accrual activity for the three and nine months ended
June 30, 2007:
As of June 30, 2007, of the $17.0 million remaining in accrued restructuring charges, $6.8 million
was included in current liabilities and $10.2 million was included in other long-term liabilities,
principally for facility costs to be paid out through 2014.
In determining the amount of the facilities accrual, we are required to estimate such factors as
future vacancy rates, the time required to sublet properties and sublease rates. These estimates
are reviewed quarterly based on known real estate market conditions and the credit-worthiness of
subtenants, and may result in revisions to established facility reserves. We had accrued $16.5
million as of June 30, 2007 related to excess facilities (compared to $20.7 million at September30, 2006), representing gross lease commitments with agreements expiring at various dates through
2014 of approximately $38.7 million, net of committed and estimated sublease income of
approximately $21.8 million and a present value factor of $0.4 million. We have entered into signed
sublease arrangements for approximately $19.4 million, with the remaining $2.4 million based on
future estimated sublease arrangements, including $1.5 million for space currently available for
sublease.
We are currently taking steps to improve operating margins and increase our strategic presence in
emerging geographies. In the fourth quarter of 2007, we expect to terminate the employment of
approximately 200 employees, which will result in a restructuring charge for severance and related
costs of approximately $11 million in the fourth quarter of 2007. Additionally, we are evaluating
other cost savings opportunities including optimizing the use of our leased facilities worldwide
and relocating functions and additional workforce to lower-cost geographies. This process may
result in additional restructuring costs in the fourth quarter of 2007 and in 2008.
4. Stock-based Compensation
We account for stock-based compensation under Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment (SFAS 123(R). SFAS 123(R) requires us to measure the cost of
employee services received in exchange for an award of equity instruments based on the grant-date
fair value of the award using an option pricing model. That cost is recognized over the period
during which an employee is required to provide service in exchange for the award.
Our equity incentive plans provide for grants of nonqualified and incentive stock options, common
stock, restricted stock, restricted stock units and stock appreciation rights to employees,
directors, officers and consultants. Until July 2005, we generally granted stock options. For those
options, the option exercise price was typically the fair market
value of our common stock at the date of grant and they generally vested over four years and
expired ten years from the date of grant. Since our adoption of SFAS 123(R), we have awarded
restricted stock and restricted stock units as the principal equity incentive awards, including
performance-based awards that are earned based on achievement of performance criteria established
by the Compensation Committee of our Board of Directors on or prior to the grant date. Each
restricted stock unit represents the contingent right to receive one share of our common stock. Our
equity incentive plans are described more fully in Note J to the Consolidated Financial Statements
included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2006. We made
the following restricted stock and restricted stock unit grants in the third quarter and first nine
months of 2007 and 2006:
Restricted Stock
Restricted Stock Units
Grant Period
Performance-based
Time-based
Performance-based
Time-based
(Number of Shares)
(Number of Units)
Third quarter of 2007
—
—
—
420,740
First nine months of 2007
495,768
442,590
60,561
1,148,922
Third quarter of 2006
—
—
2,991
5,351
First nine months of 2006
515,617
434,800
338,858
1,297,629
Restricted Stock
Performance-based awards. In the first nine months of 2007 and 2006, we granted to our executive
officers performance-based shares that are earned based on achievement of certain Company operating
performance criteria specified by the Compensation Committee on or prior to the date of grant. With
respect to the 2007 grants, in the third quarter of 2007, we reversed all compensation expense that
we had recorded during the first six months of 2007 as we do not currently expect that these
performance-based shares will be earned. With respect to the 2006 grants, because the specified
performance criteria were achieved in full, the restrictions on 284,417 of the shares lapsed on
November 9, 2006 and the restrictions on the remaining shares will lapse in equal installments on
November 9, 2007 and 2008, provided that the holder of the award remains employed by us at those
dates.
Time-based awards. In the second quarter of 2007, we granted 366,800 and 75,790 shares to our
executive officers and members of our Board of Directors, respectively. The restrictions on the
executive shares will lapse in substantially equal installments on February 15, 2008, 2009 and
2010, provided that the holder of the award remains employed by us at those dates. The restrictions
on the shares granted to our directors will lapse in substantially equal installments on March 7,2008, 2009 and 2010, provided that the holder of the award remains a director at those dates.
In the first quarter of 2006, we granted 346,800 shares to our executive officers. The restrictions
on one-third of these shares lapsed on November 9, 2006 and those on the remaining shares will
lapse in substantially equal installments on November 9, 2007 and 2008, provided that the holder of
the award remains employed by us at those dates. In the second quarter of 2006, we issued 88,000
shares of restricted stock to our non-employee directors, of which the restrictions on one-third of
the shares lapsed on February 15, 2007 and the restrictions on the remaining shares will lapse in
substantially equal installments on each of February 15, 2008 and 2009, provided that the holder of
the award remains a director at those dates.
Restricted Stock Units
Performance-based awards. In the first nine months of 2007, we granted 60,561 performance-based
restricted stock units to employees in connection with our employee management incentive plans for
the 2007 fiscal year. These shares will vest on the later of November 9, 2007 or the date the
Compensation Committee determines the extent to which the performance criteria have been achieved,
provided that the holder of the award remains employed by us at that date. In the third quarter of
2007, we reversed all compensation expense related to these restricted stock units that we had
recorded during the first six months of 2007 as we do not currently expect that these
performance-based restricted stock units will be earned. In the first nine months of 2006, we
granted 338,858 performance-based restricted stock units to employees in connection with our
employee management incentive plans for the 2006 fiscal year, which were earned in full on November9, 2006 based on achievement of specified performance criteria established by the Compensation
Committee.
Time-based awards. In the third quarter and first nine months of 2007, we granted 420,740 and
1,148,922 restricted stock units, respectively, to employees. The restricted stock units granted in
the third quarter of 2007 will vest in three substantially equal installments on each of March 15,2008, 2009 and 2010, provided that the holder of the award remains employed by us at those dates.
The remaining 2007 awards will vest in substantially equal installments on each of the first three
anniversaries of the date of grant, provided that the holder of the award remains employed by us at
those dates. In the third quarter and first nine months of 2006, we granted 5,351 and 1,297,629
restricted stock units, respectively, to employees, which vest in three substantially equal
installments on each of the first three anniversaries of the date of grant, provided that the
holder of the award remains employed by us at those dates.
With respect to all types of equity awards, in the first nine months of 2007, the restrictions on
664,463 restricted shares lapsed and 1,101,133 restricted stock units vested. The fair value of
restricted shares and restricted stock units granted in the first nine months of 2007 was based on
the fair market value of our common stock on the date of grant. The weighted average fair value per
share of restricted shares and restricted stock units granted in the first nine months of 2007 was
$18.55.
Stock-based compensation expense amounts presented below reflect the reversal in the third quarter
of 2007 of $3.0 million recorded in the first six months of 2007 related to performance-based
awards in connection with our executive and employee management incentive plans for the 2007 fiscal
year. These performance-based awards would be earned based on achievement of operating performance
targets which we currently do not believe will be met. The following table shows the classification
of compensation expense recorded for our stock-based awards as reflected in our consolidated
statements of operations:
Basic EPS is calculated by dividing net income by the weighted average number of shares outstanding
during the period. Unvested restricted shares, although legally issued and outstanding, are not
considered outstanding for purposes of calculating basic earnings per share. Diluted EPS is
calculated by dividing net income by the weighted average number of shares outstanding plus the
dilutive effect, if any, of outstanding stock options, restricted shares and restricted stock units
using the treasury stock method. The calculation of the dilutive effect of outstanding equity
awards under the treasury stock method includes consideration of unrecognized compensation expense
and any tax benefits as additional proceeds.
Dilutive effect of employee stock options,
restricted shares and restricted stock
units
4,346
2,924
4,813
3,258
Weighted average shares outstanding—Diluted
117,500
112,871
117,423
112,930
Earnings per share — Basic
$
0.71
$
0.14
$
1.00
$
0.27
Earnings per share — Diluted
$
0.68
$
0.14
$
0.96
$
0.26
Stock options to purchase 3.5 million shares for both the third quarter and first nine months of
2007 and 5.5 million and 4.4 million shares for the third quarter and first nine months of 2006,
respectively, were outstanding but were not included in the calculation of diluted earnings per
share because the exercise prices per share, plus the per share tax benefits and unamortized
compensation relating thereto, were greater than the average market price of our common stock for
those periods. These shares were excluded from the computation of diluted EPS as the effect would
have been anti-dilutive.
Share Repurchase Authorization
In September 1998, our Board of Directors authorized the repurchase of up to 8.0 million shares of
our common stock and in July 2000 increased the shares authorized for repurchase to 16.0 million.
We had repurchased 12.5 million shares through the end of 2004 and did not repurchase any
additional shares until the third quarter of 2007, when our Board of Directors authorized us to
resume repurchases within established parameters (described in Part II, Item 2 of this report). In
the third quarter of 2007, we repurchased 100,000 shares for $1.8 million. Through the end of the
third quarter of 2007, we had repurchased, at a cost of $368.6 million, a total of 12.6 million
shares of the 16.0 million shares authorized for repurchase. In the fourth quarter of 2007 to date,
we have repurchased an additional 457,000 shares for $8.2 million.
6. Acquisitions
NC Graphics
In the third quarter of 2007, we acquired NC Graphics (Cambridge) Limited, headquartered in
England, for $7.2 million in cash, including $0.2 million of acquisition-related transaction costs.
NC Graphics provided computer-aided manufacturing solutions for design and machining of molds,
dies, prototypes, and other high-speed precision machining applications. Results of operations for
NC Graphics have been included in the accompanying consolidated statements of operations since May3, 2007. Our results of operations prior to this acquisition if presented on a pro forma basis, as
if the companies had been combined since the beginning of fiscal 2006, would not differ materially
from our reported results.
This acquisition was accounted for as a business combination. The purchase price allocation is
preliminary pending the final valuation of the acquired assets and liabilities. The preliminary
purchase price allocation resulted in goodwill of $1.5 million; intangible assets of $5.8 million
(including purchased software of $4.3 million, customer relationships of $1.4 million, and other
intangible assets of $0.1 million, which are being amortized over useful lives ranging from 1 to 9
years); other net assets of $0.8 million; and deferred tax liabilities of $1.4 million. In
addition, the preliminary purchase price allocation resulted in a charge of $0.5 million for
in-process research and development.
ITEDO
In the first quarter of 2007, we acquired ITEDO Software GmbH and ITEDO Software LLC (together,
ITEDO), headquartered in Germany, for $16.7 million in cash, including $0.2 million of
acquisition-related costs. In addition,
we agreed to pay up to $0.5 million of additional cash consideration if specified product
integration targets are achieved within three years of the acquisition date of which $0.3 million
was paid in the third quarter of 2007. ITEDO provided software solutions for creating and
maintaining technical illustrations to customers in multiple discrete manufacturing vertical
markets such as automotive, aerospace and defense, and industrial equipment. ITEDO had
approximately 30 employees and generated revenue of approximately $5 million for the twelve months
ended July 31, 2006. Results of operations for ITEDO have been included in the accompanying
consolidated statements of operations since October 19, 2006. Our results of operations prior to
this acquisition if presented on a pro forma basis, as if the companies had been combined since the
beginning of fiscal 2006, would not differ materially from our reported results.
This acquisition was accounted for as a business combination. The purchase price allocation
resulted in goodwill of $11.5 million; intangible assets of $8.1 million (including purchased
software of $6.2 million, customer relationships of $1.8 million, and other intangible assets of
$0.1 million, which are being amortized over useful lives ranging from 4 to 10 years); other net
liabilities of $1.0 million; restructuring accruals of $0.3 million related to our planned
integration of ITEDO; deferred tax liabilities of $2.5 million, equal to the tax effect of the
amount of the acquired intangible assets other than goodwill that are not deductible for income tax
purposes; and, as a result of recording those deferred tax liabilities, a $1.2 million reduction in
our valuation allowance recorded against our pre-acquisition deferred tax assets in the U.S. and a
foreign jurisdiction. The goodwill and certain intangible assets are not deductible for tax
purposes.
This transaction resulted in $11.5 million of purchase price that exceeded the estimated fair
values of tangible and intangible assets and liabilities, all of which was allocated to goodwill.
We believe that the high amount of goodwill relative to identifiable intangible assets was the
result of several factors including the potential to sell ITEDO products into our traditional
manufacturing customer base, including leveraging our direct and indirect sales force and our
established presence in geographies not previously served by ITEDO; and our intention to integrate
our ITEDO, Arbortext, Windchill and Pro/ENGINEER solutions to enhance our technical publications
capabilities.
Mathsoft
In the third quarter of 2006, we acquired Mathsoft Corporate Holdings, Inc., including its wholly
owned subsidiary Mathsoft Engineering & Education, Inc. (together, Mathsoft). Mathsoft’s primary
product was Mathcad® software, which helps engineering organizations create, automate,
document and reuse engineering calculations in the product development process, and in other
mathematics-driven processes. Mathsoft had approximately 120 employees in offices primarily in the
U.S. and Europe and generated revenue of approximately $20 million for the twelve months ended
March 31, 2006. Results of operations for Mathsoft have been included in the accompanying
consolidated statement of operations since April 29, 2006. Our results of operations prior to this
acquisition if presented on a pro forma basis, as if the companies had been combined since the
beginning of fiscal 2006, would not differ materially from our reported results.
DENC and Cadtrain
In the first quarter of 2006, we acquired DENC AG and substantially all of the assets of Cadtrain,
Inc. for an aggregate of $9.9 million in cash. In addition, we agreed to pay up to an aggregate of
$2.0 million of additional cash consideration if specified targets, including revenue and customer
retention results, were achieved within one year of the acquisition dates. As of September 30,2006, the specified targets of the DENC contingent purchase price arrangement were met and related
payments of $0.5 million were recorded as additional goodwill. In the first quarter of 2007, the
specified targets of the Cadtrain contingent purchase price arrangement were met and related
payments of $1.5 million were recorded as additional goodwill.
7. Goodwill and Acquired Intangible Assets
We have two reportable segments: (1) software products and (2) services. As of June 30, 2007 and
September 30, 2006, goodwill and acquired intangible assets in the aggregate attributable to our
software products reportable segment was $301.9 million and $300.9 million, respectively; and
attributable to our services reportable segment was $25.5 million and $26.2 million, respectively.
Goodwill and other intangible assets are tested for impairment at least annually, or on an interim
basis if an event occurs or circumstances change that would, more likely than not,
reduce the fair value of the reporting segment below its carrying value. We completed our annual
impairment review as of June 30, 2007 and concluded that no impairment charge was required as of
that date.
Goodwill and acquired intangible assets consisted of the following:
Goodwill and intangible assets
with indefinite lives (not
amortized):
Goodwill
$
245,733
$
249,252
Trademarks
4,271
4,200
250,004
253,452
Intangible assets with finite
lives (amortized):
Purchased software
$
67,312
$
40,573
26,739
$
56,096
$
35,098
20,998
Capitalized software
22,877
22,769
108
22,877
22,252
625
Customer lists and relationships
68,239
19,933
48,306
64,634
15,195
49,439
Trademarks and tradenames
1,758
602
1,156
1,645
313
1,332
Other
2,041
989
1,052
1,910
634
1,276
$
162,227
$
84,866
77,361
$
147,162
$
73,492
73,670
Total goodwill and acquired
intangible assets
$
327,365
$
327,122
The changes in the carrying amounts of goodwill and intangible assets with indefinite lives at June30, 2007 from September 30, 2006 are due to the impact of
acquisitions (see Note 6), the $20.0
million decrease in goodwill resulting from our reversal of the valuation allowance on U.S. net
deferred tax assets (see Note 10), and to foreign currency translation adjustments related to those
asset balances that are recorded in non-U.S. currencies.
Changes in goodwill, presented by reportable segment, were as follows:
In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (FIN 48).
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with SFAS 109, Accounting for Income Taxes. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods
and disclosure relative to uncertain tax positions. FIN 48 is effective for fiscal years beginning
after December 15, 2006, with early adoption encouraged. We will adopt FIN 48 at the beginning of
fiscal 2008. We are currently evaluating whether or not the adoption of FIN 48 will have a material
effect on our consolidated financial position, results of operations or cash flows.
Fair Value Measurements
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (SFAS 157). This
Statement defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value measurements. This
Statement applies under other accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. Accordingly, this Statement does not require any new
fair value measurements. This Statement is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal years. We do not
believe the adoption of SFAS 157 in fiscal 2009 will have a material effect on our consolidated
financial position, results of operations or cash flows.
Fair Value Option for Financial Assets and Financial Liabilities
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement No. 115 (SFAS 159). This Statement
permits entities to choose to measure many financial instruments and certain other items at fair
value. The objective is to improve financial reporting by providing entities with the opportunity
to mitigate volatility in reported earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting provisions. This Statement is expected
to expand the use of fair value measurement, which is consistent with the FASB’s long-term
measurement objectives for accounting for financial instruments. The fair value option established
by this Statement permits all entities to choose to measure eligible items at fair value at
specified election dates. A business entity must report unrealized gains and losses on items for
which the fair value option has been elected in earnings at each subsequent reporting date. This
Statement is effective as of the beginning of fiscal 2009, with early adoption permitted. We do not
believe the adoption of SFAS 159 will have a material effect on our consolidated financial
position, results of operations or cash flows.
9. Segment Information
We operate within a single industry segment — computer software and related services. Operating
segments as defined by FASB Statement No. 131, Disclosures about Segments of an Enterprise and
Related Information (SFAS 131), are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating decision maker, or
decision-making group, in deciding how to allocate resources and in assessing performance. Our
chief operating decision-making group is our executive officers. We have two operating and
reportable segments: (1) Software Products, which includes license and maintenance revenue
(including new releases and technical support); and (2) Services, which includes consulting,
implementation, training and other support revenue. In our consolidated statements of operations,
maintenance revenue is included in service revenue. We do not allocate certain sales, marketing or
administrative expenses to our operating segments, as these activities are managed separately.
Enterprise Solutions, which includes Windchill®, Pro/INTRALINK®,
ProductView™, Arbortext® Publishing Engine™, Arbortext IsoView® and all
other solutions that help companies collaborate and manage and publish information across an
extended enterprise; and
•
Desktop Solutions, which includes Pro/ENGINEER®, Arbortext Editor™, Arbortext
IsoDraw®, Mathcad® and all other solutions that help companies create
content and improve desktop productivity.
The revenue and operating income (loss) attributable to these operating segments are summarized as
follows:
Maintenance revenue is included in Service Revenue in our consolidated statements of
operations.
(2)
The operating income (loss) reported for each operating segment does not represent total
operating results as it does not contain an allocation of sales, marketing, and general and
administrative expenses incurred in support of the operating segments.
(3)
As described in Note 3, for the three months and nine months ended July 1, 2006, we recorded
a net restructuring charge of $5.9 million. For the three months and nine months ended July 1,2006, Software Products included $1.5 million, Services included $1.1 million, sales and
marketing included $3.6 million, and general and administrative expenses included $(0.3)
million of the restructuring charge recorded in those periods.
Includes revenue in the United States totaling $82.7 million and $87.0 million for the three
months ended June 30, 2007 and July 1, 2006, respectively, and $249.5 million and $233.2
million for the nine months ended June 30, 2007 and July 1, 2006, respectively.
(2)
Includes revenue in Germany totaling $26.4 million and $21.5 million for the three months
ended June 30, 2007 and July 1, 2006, respectively, and $76.6 million and $63.4 million for
the nine months ended June 30, 2007 and July 1, 2006, respectively.
(3)
Includes revenue in Japan totaling $19.2 million and $22.7 million for the three months ended
June 30, 2007 and July 1, 2006, respectively, and $68.8 million and $64.5 million for the nine
months ended June 30, 2007 and July 1, 2006, respectively.
Total long-lived tangible assets by geographic region have not changed significantly since
September 30, 2006.
10. Income Taxes
Our income tax provisions for the three and nine months ended June 30, 2007 include a tax benefit
of $58.9 million recorded upon our decision in the third quarter of 2007 to release a substantial
portion of the valuation allowance recorded against net deferred tax assets in the U.S. and a
foreign jurisdiction as well as a tax benefit of $3.9 million recorded in the third quarter of 2007
upon the favorable outcome of a tax refund claim in the U.S. Our income tax provisions for the
three and nine months ended June 30, 2006 include a tax benefit of $6.1 million recorded upon the
favorable resolution of a tax audit in the U.S., in connection with which we made federal income
tax payments of $9.5 million for liabilities arising from our income tax returns for fiscal years
2001 and 2002. As a result of the tax payments made being less than the accrued income taxes that
we had recorded for those years, we recorded an income tax benefit in the third quarter of 2006 of
$6.1 million. Excluding the effect of these one-time tax benefits, our income tax provisions in the
three and nine months ended June 30, 2007 and 2006 consisted primarily of taxes owed in relation to
the income generated by our foreign subsidiaries as well as withholding taxes that we incurred in
the U.S. in connection with certain foreign operations. The tax provisions of those periods
included only insignificant amounts in relation to the income that we generated in the U.S., due to
our utilization of available net operating loss carryforwards that previously had been recorded in
our balance sheet with a full valuation allowance.
As of the end of the second quarter of 2007, a full valuation allowance was recorded against our
net deferred tax assets (consisting primarily of operating loss carryforwards) in the U.S. and
certain foreign jurisdictions. Based upon our operating results over recent years and through June30, 2007 as well as an assessment of our expected future results of operations, during the third
quarter of 2007, we determined that it had become more likely than not that we will realize a
substantial portion of our deferred tax assets in the U.S. and a foreign jurisdiction. As a result,
during the third quarter, we released a total of $79.8 million of our valuation allowances. Of the
$79.8 million valuation allowance release, $58.9 million was recorded as a one-time income tax
benefit, $20.0 million was recorded as a reduction to goodwill recorded upon prior acquisitions,
and $0.9 million was recorded as a decrease to accumulated other comprehensive loss within
stockholders’ equity.
We have a $230 million multi-currency bank revolving credit facility with a syndicate of seven
banks. The credit facility was established primarily for general corporate purposes, including
acquisitions of businesses, and may be increased by up to an additional $150 million if the
existing or additional lenders are willing to make such increased commitments. The credit facility
expires on February 20, 2011, when all amounts will be due and payable in full. Any obligations
under the credit facility are guaranteed by PTC’s material domestic subsidiaries and are
collateralized by a pledge of 65% of the capital stock of PTC’s material first-tier non-U.S.
subsidiaries. We have not borrowed any funds under the credit facility to date.
Interest rates on outstanding borrowings under the credit facility would range from 0.75% to 1.50%
above the Eurodollar rate for Eurodollar-based borrowings or would be at the defined base rate for
base rate borrowings, in each case based upon our leverage ratio. In addition, we may borrow
certain foreign currencies at the London interbank-offered interest rates for those currencies,
with the same range above such rates based on our leverage ratio. A quarterly commitment fee based
on the undrawn portion of the credit facility is required to be paid by us, ranging from 0.125% to
0.30% per year, depending upon our leverage ratio.
The credit facility limits our and our subsidiaries’ ability to, among other things: incur
additional indebtedness; incur liens or guarantee obligations; pay dividends and make other
distributions; make investments and enter into joint ventures; dispose of assets; and engage in
transactions with affiliates, except on an arms-length basis. Under the credit facility, we and our
material domestic subsidiaries may not invest cash or property in, or loan cash to, our foreign
subsidiaries in aggregate amounts exceeding $25 million for any purpose and an additional $50
million for acquisitions of businesses. In addition, under the credit facility, we and our
subsidiaries must maintain specified leverage and fixed-charge ratios. Any failure to comply with
the financial or operating covenants of the credit facility would not only prevent us from being
able to borrow additional funds, but would also constitute a default, resulting in, among other
things, the amounts outstanding, including all accrued interest and unpaid fees, becoming
immediately due and payable. A change in control of PTC (as defined in the credit facility) also
constitutes an event of default, permitting the lenders to accelerate the required payments of all
amounts due and to terminate the credit facility. We were in compliance with all financial and
operating covenants of the credit facility as of June 30, 2007.
Legal Proceedings
On August 2, 2007, GE Capital Leasing Corporation (“GELC”) filed a lawsuit against PTC in the U.S.
District Court for the District of Massachusetts. The lawsuit alleges that an employee of Toshiba
Corporation fraudulently induced GELC to provide over $60 million in financing for purchases of
third party products, including PTC software, during the period from 2003 to 2006. GELC claims that
PTC participated in the alleged scheme or, alternatively, should have been aware of the scheme and
made negligent misrepresentations that enabled the scheme to continue undetected. All of the
alleged transactions occurred in Japan. GELC claims damages of $47 million and seeks three times
that amount plus attorneys’ fees. We believe GELC’s claims against PTC are without merit and intend
to contest them vigorously.
We also are subject to various legal proceedings and claims that arise in the ordinary course of
business. We currently believe that resolving these other matters will not have a material adverse
impact on our financial condition or results of operations.
Guarantees and Indemnification Obligations
We enter into standard indemnification agreements in our ordinary course of business. Pursuant to
these agreements, we indemnify, hold harmless, and agree to reimburse the indemnified party for
losses suffered or incurred by the indemnified party, generally our business partners or customers,
in connection with patent, copyright or other intellectual property infringement claims by any
third party with respect to our products, as well as claims relating to property damage or personal
injury resulting from the performance of services by us or our subcontractors. The maximum
potential amount of future payments we could be required to make under these indemnification
agreements is unlimited. Historically, our costs to defend lawsuits or settle claims relating to
such indemnity agreements have been minimal and we accordingly believe the estimated fair value of
these agreements is immaterial.
We warrant that our software products will perform in all material respects in accordance with our
standard published specifications in effect at the time of delivery of the licensed products for a
specified period of time (generally 90 to 180 days). Additionally, we generally warrant that our
consulting services will be performed consistent with generally accepted industry standards. In
most cases, liability for these warranties is capped. If necessary, we would provide for the
estimated cost of product and service warranties based on specific warranty claims and claim
history; however, we have never incurred significant cost under our product or services warranties.
As a result, we believe the estimated fair value of these agreements is immaterial.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Restatement of Previously Issued Financial Results
As a result of an independent investigation led by the Audit Committee of our Board of Directors,
the Audit Committee concluded on October 29, 2007 that we would need to restate our previously
issued financial statements for the effect of certain transactions involving Toshiba Corporation of
Japan (“Toshiba”), for which we recorded revenue of approximately $41 million during fiscal 2001
through 2006. Based on its investigation, the Audit Committee concluded that the understanding of
the arrangement was not fully reflected in the order paperwork for these transactions because there
were additional circumstances known or knowable by one or more of our personnel in Japan. That
condition required us to change our conclusion that the transactions met the revenue recognition
criteria of Statement of Position 97-2, Software Revenue Recognition.
The results of the investigation indicate that during the period 2001 to 2006, an employee of
Toshiba Corporation initiated purchases of both software and services from our subsidiary in Japan,
PTC Japan K.K. (“PTC Japan”). Many of these purchases were completed through a third party trading
company that procured the software and services on Toshiba’s behalf. The transactions were
supported by orders that were signed by employees of Toshiba and the third party trading company.
PTC Japan delivered the items for which revenue was recorded and was paid for the orders in
question. The Toshiba employee also allegedly entered into a series of financing agreements with
third party leasing companies, including GE Capital Leasing Corporation of Japan (“GECL”), in the
name of Toshiba to fund various purchases. As part of those transactions, the leasing companies
allegedly entered into transactions with various third party trading companies to procure the
purchased items on behalf of Toshiba. We were not a party to those financing agreements. Toshiba
has disclaimed responsibility for repayment of these financed amounts and has alleged that the
Toshiba employee who entered into the financing agreements was not authorized to do so and that
Toshiba did not receive delivery of the items so financed.
Recently, the Toshiba employee involved in the transactions was arrested and charged with
defrauding certain of the leasing companies. Among the allegations against him are that he forged
contracts in the name of Toshiba. In addition, three individuals—each employed by a different
trading company involved in the transactions—have been arrested for alleged involvement in a scheme
to defraud the leasing companies. According to published news reports, the Toshiba employee and
these other individuals are suspected of diverting some of the proceeds of the financings to a bank
account controlled by one or more of them. Following these arrests, it was reported on October 23,2007 that two former employees of PTC Japan were arrested on suspicion of demanding “hush money”
from one of the participants in the fraudulent scheme. The press accounts indicate that the former
PTC Japan employees—who left employment with PTC Japan in 2003 and 2004, respectively—were no
longer working at PTC Japan at the time of the alleged demands. According to the press accounts,
these individuals have not been charged with participating in the alleged underlying fraud.
To effect the restatement of revenue associated with the transactions placed by the Toshiba
employee, we reduced previously recorded revenue by approximately $8 million in fiscal 2006, $15
million in fiscal 2005, $9 million in fiscal 2004, $2 million in fiscal 2003 and $7 million in
prior years, and recorded related income tax effects. We did not make any adjustments to the costs
incurred in connection with these transactions due to the uncertainty regarding our ultimate
ability to retain the advances received for these transactions and our belief that all such costs
are
unrecoverable. Upon restatement, the revenue reversed from those prior periods was deferred and
classified as Customer Advances in our consolidated balance sheets. That liability (which totaled
$38.0 million and $39.5 million at June 30, 2007 and September 30, 2006, respectively, after the
effects of foreign currency movements) will remain recorded until the rights and obligations of the
several companies connected with the Toshiba transactions are resolved. To the extent that matters
are resolved in our favor, we will reduce Customer Advances and record revenue or other income at
that time.
Our restatement of prior period financial statements also includes adjustments for other previously
identified errors that we had corrected in the periods they became known to us rather than in the
periods in which they originated because we believed that the amounts of such errors, individually
and in the aggregate, were not material to our financial statements for the affected periods. In
this restatement, we have now recorded those corrections in the periods in which each error
originated. Such adjustments, which have been tax effected, primarily relate to (i) recording rent
expense on a straight-line basis for one of our office facilities, (ii) recording stock-based
compensation expense due to the timing of approvals for certain stock options we granted, (iii)
deferring or reversing revenue for certain customer orders in the Asia-Pacific region, and (iv)
reversing an income tax reserve that was unwarranted when established. Our restatement also
includes an adjustment to correct our third quarter 2007 financial statements for a $10.4 million
overstatement of reported net income, which resulted from tax errors detected in the fourth quarter
of 2007 relating primarily to our release in the third quarter of a substantial portion of the
valuation allowance for our U.S. net deferred tax assets.
Summary of the Restatement Effects
A summary of the cumulative revenue and net income effects of the restatement on our consolidated
financial statements is as follows:
Earnings (loss) per share—Diluted, as previously reported
$
1.02
$
0.54
$
0.75
$
0.32
$
(0.93
)
Adjustments
(0.06
)
(0.04
)
(0.10
)
(0.03
)
(0.03
)
Earnings (loss) per share—Diluted, as restated
$
0.96
$
0.50
$
0.65
$
0.29
$
(0.96
)
The restatement had no effect on previously reported cash balances or on the amounts of net cash
flows from operating, investing and financing activities. The adjustments made as a result of the
restatement are more fully described in Note 2 to our consolidated financial statements included in
Part I, Item 1 “Unaudited Financial Statements” of this Form 10-Q/A. Our assessment of the
effectiveness of our disclosure controls and procedures is included in Part I, Item 4 “Controls and
Procedures” of this Form 10-Q/A.
Disclosure Amended by this Form 10-Q/A
All amounts referenced to June 30, 2007, September 30, 2006 and July 1, 2006 in the following
discussion reflect the balances and amounts on a restated basis. Also, comparisons of the three and
nine months ended June 30, 2007 and July 1, 2006 to any other periods have been revised from those
included in our Original Form 10-Q as necessary to reflect the restated information.
This Form 10-Q/A modifies only the disclosures described in the preceding paragraph to reflect the restatement and does
not modify or update such disclosures in any other respect, or any other disclosures presented in
the Original Form 10-Q. Further, this Form 10-Q/A does not reflect any other events occurring after August 9, 2007, the date we
filed the Original Form 10-Q. We specifically note that we have not
updated any forward-looking statements or our Risk Factors to reflect
events occurring after the date we filed the Original Form 10-Q. Accordingly, this Form 10-Q/A should be read in conjunction with our
filings made with the SEC since the filing date of the Original Form 10-Q, including our Current
Reports on Form 8-K, our Annual Report on Form 10-K for the year ended September 30, 2007, and the
amendments to our Quarterly Reports on Form 10-Q for the quarterly
periods ended December 30, 2006 and March31, 2007.
Statements in this Quarterly Report on Form 10-Q about our anticipated financial results and
growth, as well as about the development of our products and markets, are forward-looking
statements that are subject to the inherent uncertainties in predicting future results and
conditions. Risks and uncertainties that could cause actual results to differ materially from those
projected include the following: we may be unable to increase revenues or successfully execute
strategic and other business initiatives while containing expenses; our efforts to globalize our
workforce will cause us to incur additional restructuring charges and could disrupt our business
operations; we may be unable to successfully achieve both revenue and earnings growth from newly
acquired businesses; our ability to win against or displace competitors could be adversely affected
by changes in the competitive landscape; as well as other risks and uncertainties referenced in
Part II, Item 1A “Risk Factors” of this report.
Our Business
We develop, market and support product lifecycle management (PLM) and enterprise content management
(ECM) software solutions and related services that help companies improve their processes for
developing physical and information products.
Our software solutions include our Enterprise Solutions products — a range of Internet-based
collaboration, content and process management, and publishing technologies and our Desktop
Solutions products — a suite of mechanical computer-aided design, engineering calculation, and
XML-based document authoring tools. Our software solutions help customers develop products faster,
improve product quality, increase innovation and reduce product development cost.
The PLM market encompasses the mechanical computer-aided design, manufacturing and engineering
(CAD, CAM and CAE) segment and the collaboration and product data management solutions segment, as
well as many previously isolated markets that address various other phases of a product’s
lifecycle. These include but are not limited to component and supplier management, visualization
and digital mockup, enterprise application integration, program and project management, after
market service and portfolio management, requirements management, customer needs management,
manufacturing planning, and technical and marketing publications.
The ECM market includes technologies for business process management, compliance management,
document management, dynamic publishing, document archival and retrieval, knowledge management,
records management and Web content management. Within the ECM market, PTC focuses on a subset of
solutions that optimize the development of dynamic publications, such as those associated with
technical manuals, service documents, and regulatory and compliance data sets, as well as
government and financial document publishing and content management.
Executive Overview
Total revenue in the third quarter of 2007 was $224.9 million, reflecting 4% year-over-year growth.
While our revenue grew on a year-over-year basis, our license revenue and operating margins were
below our expectations and reflected mixed revenue performance across geographic areas and product
categories. Our third quarter license revenue performance reflects two major factors: (1) several
large transactions that we expected to close did not close and (2) a reduction in add-on sales of
Desktop Solutions in North America and Japan. In the third quarter of 2007, we continued to see
strong revenue growth in Enterprise Solutions and our maintenance revenue was $103.1 million, the
highest amount of quarterly maintenance revenue we have ever recorded. We believe this strong
maintenance revenue is an indicator that we have a large and loyal customer base that continues to
benefit from the use of our differentiated solutions. While our revenue performance in the third
quarter of 2007 was lower than our expectations, we continue to believe that the overall PLM market
is growing and will continue to grow as customers invest in solutions that help them improve their
product development processes.
Net income for the third quarter and first nine months of 2007 was significantly higher year over
year due to non-cash tax benefits recorded in the quarter primarily associated with our reversal of
valuation allowances in the U.S. and a foreign jurisdiction. Based upon our operating results over
recent years and through June 30, 2007 as well as an assessment of our expected future operating
results, we determined that it had become more likely than not that we will realize a substantial
portion of our deferred tax assets in the U.S. and a foreign jurisdiction. As a result, during the
third quarter of 2007, we reversed the valuation allowance against certain deferred tax assets in
the U.S. and a foreign jurisdiction, resulting in a tax benefit of $58.9 million, a decrease to
goodwill of $20.0 million, and an increase in stockholders’ equity of $0.9 million.
We believe operating results for the first nine months of 2007, during which revenue grew 12% year
over year and operating margins improved, reflect the trends in our business better than the
results of the third quarter of 2007 alone. These nine-month results reflect growth across our
lines of business, growth in both our Desktop Solutions and Enterprise solutions product
categories, growth across our three major geographies, and growth in revenue from customers of all
sizes. We believe these nine-month operating results reflect successful execution of our strategic
initiatives over the past three years as well as increased technology spending by our customers.
Those initiatives focused on improving our product and service offerings, our distribution model,
our strategic account relationships, our competitive position and our marketing programs. We
believe our strategic initiatives have created three key competitive differentiators which we
believe are causing customers to adopt our solutions: our broad product development system
capabilities, our single platform architecture, and our unique process framework for addressing our
customers’ product development challenges. In particular, we believe our strategy to offer a
product development system with fully integrated solutions on a common architecture provides us
with a significant competitive advantage and is a major factor in our increased sales of
Pro/ENGINEER® and Windchill®. We also believe that acquisitions by others of
certain of our competitors create competitive opportunities for us.
As a result of third quarter revenue being lower than our expectations and as part of our ongoing
efforts to deliver operating margin growth, we have taken recent steps to reduce costs. In the
fourth quarter of 2007, we expect to terminate the employment of approximately 200 employees, which
will result in a restructuring charge for severance and related costs of approximately $11 million
in the fourth quarter of 2007. Additionally, we are evaluating other cost savings opportunities
including optimizing the use of our leased facilities worldwide and relocating functions to
lower-cost geographies. This evaluation may result in additional restructuring costs in the fourth
quarter of 2007 and in 2008. We expect these planned restructuring initiatives will help us to
improve operating margins and increase our strategic presence in emerging geographies.
Other Important Information
On August 2, 2007, GE Capital Leasing Corporation (“GELC”) filed a lawsuit against PTC alleging
that PTC was a participant in an alleged scheme in which an employee of Toshiba Corporation
fraudulently induced GELC to provide over $60 million in financing for purchases of third party
products, including PTC software, during the period from 2003 to 2006. GELC alleges that the scheme
commenced in or about late 2000, prior to GELC’s involvement. GELC alleges that the Toshiba
employee was not authorized to undertake the orders or enter into the financing agreements. GELC
further alleges that PTC was aware of this lack of authority. All of the alleged transactions
occurred in Japan.
GELC has alleged that PTC and other alleged participants have received and recorded at least $47
million in funds from GELC. We are investigating this matter and, based on our investigation to
date, believe revenue was properly recognized on the applicable transactions. If our investigation
were to conclude that certain of GELC’s allegations were true, PTC could be required to reverse all
or a portion of the revenue associated with the applicable transactions, which could result in a
restatement of our previously issued financial statements. Additionally, we cannot predict the
ultimate resolution of the GELC lawsuit at this time, but, if determined adversely to us, this
lawsuit could have a material adverse impact on our financial condition or results of operations.
The following is a summary of our results of operations for the third quarters and first nine
months of 2007 and 2006, which includes the results of operations of companies we acquired
beginning on their respective acquisition dates.
Three months ended
Nine months ended
June 30,
July 1,
Percent
June 30,
July 1,
Percent
2007
2006
Change
2007
2006
Change
(Dollar amounts in millions)
Total revenue
$
224.9
$
215.6
4
%(1)
$
674.6
$
603.7
12
%(1)
Total costs and expenses
205.3
203.3
1
%
612.8
570.1
7
%
Operating income
19.6
12.3
61.8
33.6
Other income (expense), net
2.2
0.8
4.4
2.7
Income before income taxes
21.8
13.1
66.2
36.3
(Benefit from) provision for income taxes
(58.6
)
(2.8
)
(46.8
)
6.5
Net income
$
80.4
$
15.9
$
113.0
$
29.8
(1)
On a consistent foreign currency basis, compared to the year-ago periods, total revenue for
the third quarter and first nine months of 2007 increased 2% and 9%, respectively.
Revenue results for the third quarter and first nine months of 2007 are described below in Revenue.
Total costs and expenses reflect increases in our operating cost structure from acquisitions and
from measured increases to support planned revenue growth. Refer to Costs and Expenses beginning on
page 34 for a more detailed discussion.
The increase in operating income in the third quarter and first nine months of 2007 compared to
2006 is favorably impacted by lower stock-based compensation expense and restructuring charges in
the 2007 periods as compared to the 2006 periods. In addition, as described in Executive Overview
beginning on page 26 and in Costs and Expenses, net income in the third quarter and first nine
months of 2007 includes a $58.9 million tax benefit due to the reversal of a significant portion of
our valuation allowances against deferred tax assets in the U.S. and in a foreign jurisdiction.
The following table shows certain consolidated financial data as a percentage of our total revenue
for the third quarters and first nine months of 2007 and 2006:
Our revenue consists of software license revenue and service revenue, which includes software
maintenance revenue (consisting of providing our customers software updates and technical support)
as well as consulting and training revenue (including implementation services).
We report our revenue in two product categories:
•
Enterprise Solutions, which includes Windchill, Pro/INTRALINK, ProductView, Arbortext
Publishing Engine, Arbortext IsoView and all other solutions that help companies collaborate
and manage and publish information across an extended enterprise; and
•
Desktop Solutions, which includes Pro/ENGINEER, Arbortext Editor, Arbortext IsoDraw, Mathcad
and all other solutions that help companies create content and improve desktop productivity.
The following table shows our software license revenue and our service revenue by product category
for the periods stated.
Three months ended
Nine months ended
June 30,
July 1,
Percent
June 30,
July 1,
Percent
2007
2006
Change
2007
2006
Change
(Dollar amounts in millions)
License revenue:
Enterprise
$
23.9
$
22.2
8
%
$
69.8
$
64.6
8
%
Desktop
38.2
43.5
(12
)%
130.2
114.3
14
%
Total license revenue
62.1
65.7
(5
)%
200.0
178.9
12
%
Maintenance revenue:
Enterprise
20.5
17.5
17
%
58.9
49.9
18
%
Desktop
82.6
76.6
8
%
243.5
222.0
10
%
Total maintenance revenue
103.1
94.1
10
%
302.4
271.9
11
%
Consulting and training service revenue:
Enterprise
41.5
32.9
26
%
116.4
92.4
26
%
Desktop
18.2
22.9
(21
)%
55.8
60.5
(8
)%
Total consulting and training service revenue
59.7
55.8
7
%
172.2
152.9
13
%
Total service revenue
162.8
149.9
9
%
474.6
424.8
12
%
Total revenue
$
224.9
$
215.6
4
%(1)
$
674.6
$
603.7
12
%(1)
Total Enterprise Solutions revenue
$
85.9
$
72.6
18
%
$
245.1
$
206.9
18
%
Total Desktop Solutions revenue
$
139.0
$
143.0
(3
)%
$
429.5
$
396.8
8
%
(1)
On a consistent foreign currency basis from the comparable year-ago period, in the third
quarter and first nine months of 2007 total revenue increased 2% and 9%, respectively.
Our results include the highest amount of quarterly maintenance revenue we have recorded, as well
as growth in Europe across both product categories and all lines of business. Growth in these areas
was offset by declines in Desktop Solutions license revenue in North America and Japan and a
decline in channel revenue in Asia-Pacific. Our nine-month year-over-year revenue growth in both
Desktop Solutions and Enterprise Solutions reflects both organic growth of our Desktop Solutions
and Enterprise Solutions and revenue from the Mathsoft and ITEDO businesses acquired on April 28,2006 and October 18, 2006, respectively. Historically, Mathsoft generated revenue of approximately
$20 million for the twelve months ended March 31, 2006 and ITEDO generated revenue of approximately
$5 million for the twelve months ended July 31, 2006. The Mathsoft and ITEDO businesses have been
included in our results of operations since their acquisition dates. Accordingly, results for the
third quarter and first nine months of 2006 do not include ITEDO and include Mathsoft only since
April 28, 2006.
Total revenue from our Enterprise Solutions software and related services was 38% and 34% of our
total revenue in the third quarter of 2007 and 2006, respectively, and 36% and 34% of our total
revenue in the first nine months of 2007 and 2006, respectively. The increase in Enterprise
Solutions revenue in the third quarter and first nine months of 2007 compared to the third quarter
and first nine months of 2006 was due primarily to:
•
organic growth of our Windchill solutions, which we believe reflects our success in helping
customers understand the benefits of investing in PLM solutions, as well as our ability to
help customers adopt our solutions incrementally, which lowers customer risk, and
•
more wide-spread adoption of our solutions by both our existing and new customers, which we
believe is a result of customer recognition of the benefits of our broad set of capabilities
delivered on a single system architecture.
Total revenue from our Desktop Solutions software and related services was 62% and 66% of our total
revenue in the third quarter of 2007 and 2006, respectively, and 64% and 66% of our total revenue
in the first nine months of 2007 and 2006, respectively. The decrease in Desktop Solutions revenue
in the third quarter of 2007 as compared to the third quarter of 2006 reflects:
•
declines in license revenue in Japan and North America, which reflect decreases in sales of
new Pro/ENGINEER seats, modules and upgrades. This is due to our failure to close several
large customer transactions that we had expected to close, as well as lower-than-expected
revenue from medium-sized transactions, which typically include add-on sales of Pro/ENGINEER
modules or upgrades to existing Pro/ENGINEER customers; and
•
declines in Desktop Solutions service revenue, due to both anticipated and unplanned
reductions in revenue from training services and computer-based training products.
These decreases were partially offset by:
•
growth in maintenance revenue, which we believe reflects continued customer satisfaction with
PTC and our solutions;
•
growth in license and service revenue in the Pacific Rim, which primarily reflects increased
sales of new seats of Pro/ENGINEER as well as related training services; and
•
revenue contribution from the acquired ITEDO and Mathsoft businesses.
In addition to Desktop Solutions revenue attributable to acquisitions, the increase in sales of our
Desktop Solutions for the first nine months of 2007 was driven by increased sales of core
Pro/ENGINEER solutions and reflects:
•
increased sales to small and medium-size businesses, and
•
increasing adoption of our Pro/ENGINEER products by customers who see adopting our integrated
product development system as an advantage over maintaining their current environments, which
typically consist of multiple, disconnected CAD and data management applications.
License Revenue
Total
License revenue accounted for 28% and 30% of total revenue in the third quarter and first nine
months of 2007 and 30% and 30% of total revenue in the third quarter and first nine months of 2006,
respectively. The decline in license revenue in the third quarter of 2007 compared to 2006 was
primarily due to lower license revenue from large customer transactions. The growth in license
revenue in the first nine months of 2007 compared to 2006 was due to revenue growth in customers of
all sizes and across product categories.
Enterprise Solutions
The increase in Enterprise Solutions license revenue in the third quarter and first nine months of
2007 as compared to the third quarter and first nine months of 2006 came primarily from sales of
Windchill PDMLink®, our core Windchill content and process management solution, as both
existing and new customers adopt our Windchill solutions.
Desktop Solutions
The decrease in Desktop Solutions license revenue in the third quarter of 2007 compared to the
third quarter of 2006 was due to lower sales of Pro/ENGINEER new seats, upgrades and modules,
partially offset by higher revenue from sales of Arbortext IsoDraw and Mathcad. The increase in
Desktop Solutions license revenue in the first nine months of 2007 compared to the first nine
months of 2006 was due primarily to revenue contribution from sales of Mathcad
and Arbortext IsoDraw as well as organic growth from sales of Pro/ENGINEER. For the first nine
months of 2007, Pro/ENGINEER revenue grew across our high- and low-end packages, as well as
upgrades and modules.
Maintenance Revenue
Total
Maintenance revenue represented 46% and 44% of total revenue in the third quarter of 2007 and 2006,
respectively, and 45% of total revenue in the first nine months of both 2007 and 2006. Growth in
our maintenance revenue was due to a higher number of seats on maintenance agreements and reflects
continued success in improving customer satisfaction with our solutions, product enhancements and
technical support.
Enterprise Solutions
Increases in our Enterprise Solutions maintenance revenue were due primarily to an increase in the
number of new users of our Enterprise Solutions as new customers have been added and as existing
customers have expanded their implementations to additional users.
Desktop Solutions
The increase in our Desktop Solutions maintenance revenue was due to a higher number of seats on
maintenance agreements, growth of license revenue in prior periods, and revenue contributions from
our acquired products.
Consulting and Training Service Revenue
Total
Consulting and training service revenue, which has a lower gross profit margin than license and
maintenance revenues, accounted for 27% and 26% of total revenue in the third quarter of 2007 and
2006, respectively, and 26% and 25% of total revenue in the first nine months of 2007 and 2006,
respectively. Consulting and training service revenue reflects an increase in consulting service
revenue for each of the third quarter and first nine months of 2007, partially offset by a decrease
in training service revenue for each of the third quarter and first nine months of 2007, compared
to the year-ago periods.
Enterprise Solutions
Increases in our Enterprise Solutions consulting and training service revenue were due to increased
customer demand for process and implementation consulting services as a result of increased
adoption of our software solutions. Also, during 2007, our Enterprise Solutions consulting and
training revenue included a large customer engagement in Europe which contributed to the growth in
the 2007 periods as compared to the 2006 periods.
Desktop Solutions
Desktop Solutions consulting and training service revenue reflects a decrease in training service
revenue for the third quarter and first nine months of 2007, partially offset by an increase in
consulting service revenue for the same periods, as compared to the third quarter and first nine
months of 2006. The decrease in Desktop Solutions training service revenue for the first nine
months of 2007 was partially attributable to a large customer training order completed in the
second quarter of 2006.
The following table shows our revenue by geography for the periods stated.
Three months ended
Nine months ended
June 30,
July 1,
Percent
June 30,
July 1,
Percent
2007
2006
Change
2007
2006
Change
(Dollar amounts in millions)
Revenue by geography:
North America
$
86.9
$
91.0
(5
)%
$
262.8
$
244.9
7
%
Europe
$
86.2
$
72.0
20
%(1)
$
251.7
$
213.7
18
%(2)
Asia-Pacific
$
51.8
$
52.6
(2)
%(1)
$
160.1
$
145.1
10
%(2)
(1)
On a consistent foreign currency basis from the comparable year-ago period, in the third
quarter of 2007 revenue in Europe increased 11% and revenue in Asia-Pacific increased 1%.
(2)
On a consistent foreign currency basis from the comparable year-ago period, in the first nine
months of 2007 revenue in Europe increased 9% and revenue in Asia-Pacific increased 12%.
We derived 61% of our total revenue from sales to customers outside North America in both the third
quarter and first nine months of 2007, compared to 58% and 59% in the third quarter and first nine
months of 2006, respectively.
North America. Total revenue growth for the first nine months of 2007 in North America was
primarily due to organic growth and contributions from the acquired Mathsoft business, whose
revenues were concentrated in that region. North American revenue performance for the first nine
months of 2007 also reflects positive results from our strategic account program and from our
indirect channel. The revenue decline in North America in the third quarter of 2007 was due
primarily to lower Desktop Solutions license and service revenue, partially offset by higher
maintenance revenue in both product categories and higher Enterprise Solutions license revenue.
Europe. The increase in European revenue in the third quarter of 2007 compared to the third quarter
of 2006 reflects organic growth in Enterprise license revenue and Desktop and Enterprise Solutions
maintenance revenue, and contributions from the Mathsoft and ITEDO acquisitions, and was favorably
impacted by foreign currency exchange rates. European revenue for the first nine months of 2007
included a large customer Enterprise Solutions consulting and training engagement, while revenue
for the first nine months of 2006 included a large license transaction from the same customer
completed in the first quarter.
Asia-Pacific. Revenue performance in Asia-Pacific for the third quarter of 2007 compared to the
third quarter of 2006 reflected a 9% increase in revenue in the Pacific Rim and a 15% decrease in
revenue in Japan. Revenue for the first nine months of 2007 compared to the first nine months of
2006 reflected a 13% increase in the Pacific Rim and a 7% increase in Japan. We believe that the
growth in the Pacific Rim reflects better execution after strategic and organizational changes we
made in that region in 2006 and a growing market opportunity — particularly, strong demand for our
PLM solutions in China. Revenue performance in Japan in the first nine months of 2007 reflected
strong first quarter revenue relative to recent quarters and included revenue from a relatively
large customer transaction completed in the first quarter. Our results in Japan continue to be
adversely affected by unfavorable industry conditions, as well as our own execution challenges. We
continue to focus on improving results in Japan, but we expect that such improvement will take some
time and extend into 2008.
Revenue from Individual Customers
We enter into customer contracts that may result in revenue being recognized over multiple
reporting periods. Accordingly, revenue recognized in a current quarter may be attributable to
contracts entered into during the current period or in prior periods. License and/or consulting and
training service revenue of $1 million or more recognized from individual customers in the third
quarter and first nine months of 2007 was $34.7 million and $98.5 million, respectively, and in the
third quarter and first nine months of 2006 was $35.5 million and $84.9 million, respectively. The
third quarter of 2007 results include 17 customers with license and service revenue over $1 million
each, compared to 16 such customers in the third quarter of 2006, reflective of continued success
in our strategic account program. While the level of license and service revenue greater than $1
million from individual customers in the third quarter of 2007 was relatively flat compared to the
year-ago period, Enterprise Solutions revenue from such transactions was higher than the year-ago
period and Desktop Solutions was lower, and, overall, we experienced lower than expected revenue in
the quarter from large transactions due to the fact that some transactions
that we expected to close in the quarter did not close. Additionally, the license component of our
larger transaction revenue declined, while services revenue increased, which adversely impacted our
operating margins. While our customers may not continue to spend at these levels in future periods,
we believe the strong performance in 2006 and the first nine months of 2007 is the result of a
shift in customer priorities toward PLM solutions relative to other
IT spending initiatives, our
improved ability to provide broader solutions to our customers, and improvements in our competitive
position due to our system architecture and product development process knowledge.
Channel Revenue
Total sales from our reseller channel, which are primarily for our Desktop Solutions, grew 3% and
15% to $47.6 million and $143.8 million in the third quarter and first nine months of 2007,
respectively, from $46.0 million and $124.7 million in the third quarter and first nine months of
2006, respectively. Sales from our reseller channel comprised 21% of total revenue for both the
third quarter and first nine months of 2007 compared to 21% and 20% of total revenue for the third
quarter and first nine months of 2006, respectively. Channel revenue results reflect revenue growth
in our reseller channel in North America and Europe in the third quarter and first nine months of
2007, partially offset by lower revenue in Asia-Pacific.
Costs and Expenses
Over the past several years, we have made significant investments to transform our business from
providing a single line of technical software with a largely direct distribution model,
supplemented by a small number of channel partners, to providing integrated product development
system solutions with an expanded channel and partner-involved distribution model. As part of this
effort, we broadened our product development system through a series of eight acquisitions
completed and substantially integrated since the third quarter of 2004.
While we intend to continue to invest in our strategic initiatives to support planned revenue
growth and to fund revenue-generating initiatives, we remain focused on achieving our operating
margin goals. Accordingly, we are taking steps to improve operating margins. In the fourth quarter
of 2007, we expect to terminate the employment of approximately 200 employees, which will result in
a restructuring charge for severance and related costs of approximately $11 million in the fourth
quarter of 2007. Additionally, we are evaluating other cost savings opportunities including
optimizing the use of our leased facilities worldwide and relocating functions and additional
workforce to lower- cost geographies. This process may result in additional restructuring costs in
the fourth quarter of 2007 and in 2008. We expect these planned restructuring initiatives will help
us to improve operating margins while continuing to grow the business and increase our strategic
presence in emerging geographies.
The following table shows our costs and expenses by expense category for the periods stated.
Three months ended
Nine months ended
June 30,
July 1,
Percent
June 30,
July 1,
Percent
2007
2006
Change
2007
2006
Change
(Dollar amounts in millions)
Costs and expenses:
Cost of license revenue
$
4.1
$
3.0
36
%
$
11.9
$
8.2
45
%
Cost of service revenue
67.7
65.6
3
%
204.9
188.2
9
%
Sales and marketing
74.6
70.0
6
%
215.7
198.2
9
%
Research and development
39.8
36.9
8
%
117.9
107.5
10
%
General and administrative
16.8
18.0
(7
)%
56.5
55.7
1
%
Amortization of acquired intangible assets
1.8
1.7
7
%
5.4
4.3
27
%
Restructuring charges
—
5.9
(100
)%
—
5.9
(100
)%
In-process research and development
0.5
2.1
(74
)%
0.5
2.1
(74
)%
Total costs and expenses
$
205.3
$
203.2
1
%(1)
$
612.8
$
570.1
7
%(1)
(1)
On a consistent foreign currency basis from the prior period, total costs and expenses
decreased 1% and increased 5% in the third quarter and first nine months of 2007,
respectively, compared to the third quarter and first nine months of 2006.
Headcount increased to 4,676 at June 30, 2007 from 4,309 at September 30, 2006 and 4,233 at July 1,2006. Our increases in costs and expenses in the first nine months of 2007 were primarily due to
the following:
•
increases in services delivery capacity to address anticipated customer demand for
consulting services; and
the Mathsoft and ITEDO acquisitions completed in the third quarter of 2006 and the first
quarter of 2007, respectively, which added operating costs and increased headcount.
Cost of License Revenue
Our cost of license revenue includes fixed and variable costs associated with reproducing and
distributing software and documentation; royalties paid to third parties for technology embedded in
or licensed with our software products; and amortization of purchased software attributable to
recent acquisitions. Cost of license revenue as a percentage of license revenue was 7% and 5% for
the third quarter of 2007 and 2006, respectively, and 6% and 5% for the first nine months of 2007
and 2006, respectively. The increase in cost of license revenue in the third quarter and first nine
months of 2007 compared to the third quarter and first nine months of 2006 was due primarily to
higher amortization of purchased software attributable to recent acquisitions, which was $0.6
million and $2.2 million higher, respectively. Additionally, royalty expense was $0.2 million and
$0.9 million higher in the third quarter and first nine months of 2007, respectively, compared to
the year-ago periods. Cost of license revenue as a percent of license revenue can vary depending on
product mix sold and the effect of fixed and variable royalties and the level of amortization of
acquired software intangible assets.
Cost of Service Revenue
Our cost of service revenue includes costs associated with training, customer support and
consulting personnel, such as salaries and related costs; third-party subcontractor fees; costs
associated with the release of maintenance updates (including related royalty costs); and facility
costs. Cost of service revenue as a percentage of service revenue was 42% and 44% in the third
quarter of 2007 and 2006, respectively and 43% and 44% in the first nine months of 2007 and 2006,
respectively. Service margins can vary based on the product mix sold in the period. Service-related
headcount increased to 1,317 at June 30, 2007 from 1,291 at September 30, 2006 and 1,266 at July 1,2006. Total compensation, commissions, benefits and travel costs were $1.0 million and $9.6 million
higher in the third quarter and first nine months of 2007, respectively, compared to the third
quarter and first nine months of 2006 due to planned increases in our services delivery capacity.
The cost of third-party consulting services was $1.1 million and $4.7 million higher in the third
quarter and first nine months of 2007, respectively, compared to the third quarter and first nine
months of 2006, due to the use of such services in support of increases in consulting and training
service revenue.
Sales and Marketing
Our sales and marketing expenses primarily include salaries and benefits, sales commissions,
advertising and marketing programs, travel and facility costs. Sales and marketing expenses as a
percentage of total revenue were 33% and 32% for the third quarter and first nine months of 2007,
respectively, and 33% for both the third quarter and first nine months of 2006.
Sales and marketing headcount increased to 1,215 at June 30, 2007 from 1,145 at September 30, 2006
and 1,134 at July 1, 2006. As a result of increases in headcount, primarily due to acquisitions,
and higher commissions in the first six months of 2007 due to revenue growth, our compensation and
benefit costs, sales commissions and travel expenses were higher by an aggregate of $2.7 million
and $13.5 million in the third quarter and first nine months of 2007 compared to the third quarter
and first nine months of 2006, respectively.
Research and Development
Our research and development expenses consist principally of salaries and benefits, costs of
computer equipment and facility expenses. Major research and development activities include
developing new releases of our software that work together in a more integrated fashion and that
include functionality enhancements. Research and development expenses as a percentage of total
revenue were 18% and 17% in third quarter of 2007 and 2006, respectively, and 18% in both the
first nine months of 2007 and 2006. Research and development headcount increased to
1,656 at June 30, 2007 from 1,437 at September 30, 2006 and 1,392 at July 1, 2006. As a
result of these increases in headcount, total compensation, benefits and travel costs were higher
in the third quarter and first nine months of 2007 compared to the third quarter and first nine
months of 2006 by an aggregate of $2.4 million and $9.7 million, respectively.
Our general and administrative expenses include the costs of our corporate, finance, information
technology, human resources, legal and administrative functions as well as bad debt expense.
General and administrative expenses as a percentage of total revenue were 7% and 8% in the third
quarter of 2007 and 2006, respectively, and 8% and 9% in the first nine months of 2007 and 2006,
respectively. General and administrative headcount was 469 at June 30, 2007, up from 420 at
September 30, 2006 and 424 at July 1, 2006. Total compensation, benefits and travel costs were
lower in the third quarter of 2007 compared to the third quarter of 2006 by an aggregate of $1.7
million and higher in the first nine months of 2007 compared to the first nine months of 2006 by an
aggregate of $1.2 million. The decrease in the third quarter of 2007 was due primarily to lower
stock-based compensation expense of $2.3 million which is due primarily to the reversal in that
quarter of all expense for 2007 performance-based restricted shares and restricted stock units that
we currently do not expect will be earned. General and administrative expenses include costs
associated with outside professional services, including accounting and legal fees. The second
quarter of 2007 included higher costs for outside professional services incurred in connection with
our corporate development initiatives. The first quarter of 2006 included higher costs for outside
professional services incurred in connection with our investigation in the Asia-Pacific region
described in our 2005 Annual Report on Form 10-K.
Amortization of Acquired Intangible Assets
These costs represent the amortization of acquired intangible assets. The increase in expense in
the third quarter and first nine months of 2007 compared to the third quarter and first nine months
of 2006 was due primarily to amortization of intangible assets resulting from the NC Graphics,
ITEDO and Mathsoft acquisitions completed in the third quarter of 2007, the first quarter of 2007
and the third quarter of 2006, respectively.
Other Income (Expense), net
Other income (expense), net includes interest income, interest expense, costs of hedging contracts,
certain realized and unrealized foreign currency transaction gains or losses, charges incurred in
connection with obtaining corporate and customer contract financing, and exchange gains or losses
resulting from the required period-end currency remeasurement of the financial statements of our
subsidiaries that use the U.S. dollar as their functional currency. A large portion of our revenue
and expenses are transacted in foreign currencies. To reduce our exposure to fluctuations in
foreign exchange rates, we engage in hedging transactions involving the use of foreign currency
forward contracts, primarily in the Euro and Asian currencies. Other income (expense), net was $2.3
million and $0.8 million for the third quarter of 2007 and 2006, respectively, and $4.4 million and
$2.7 million for the first nine months of 2007 and 2006, respectively. The increase in other income
(expense), net in the third quarter and first nine months of 2007 is due primarily to higher
interest income, partially offset by higher foreign exchange losses and other expense of $0.7
million recorded in the second quarter of 2007 related to the settlement of a disputed obligation
related to a previously divested business unit.
Income Taxes
In the third quarter of 2007, our effective tax rate was a benefit of 268% on pre-tax income of
$21.8 million compared to a benefit of 21% in the third quarter of 2006 on pre-tax income of $13.2
million. In the first nine months of 2007, our effective tax rate was a benefit of 71% on pre-tax
income of $66.2 million compared to an expense of 18% in the first nine months of 2006 on pre-tax
income of $36.3 million. The net tax benefit recorded in those 2007 periods was principally due a
tax benefit of $58.9 million recorded upon our decision in the third quarter of 2007 to release a
substantial portion of the valuation allowance recorded against net deferred tax assets in the U.S.
and a foreign jurisdiction as well as a tax benefit of $3.9 million recorded in the third quarter
of 2007 from the favorable outcome of a tax refund claim in the U.S. The net tax benefit recorded
in third quarter of 2006 was due to a benefit of $6.1 million realized upon the favorable
resolution of a tax audit in the U.S. Excluding each of these one-time benefits, our effective tax
rates were 19% and 25% in the third quarters of 2007 and 2006,
respectively, and 24% and 35% in the
first nine months of 2007 and 2006, respectively. For the third
quarters of 2007 and 2006 and the first nine months of 2007, our effective tax rates excluding those
one-time tax benefits were lower than the statutory federal income tax rate of 35% due primarily to
our use of net operating loss carryforwards (NOLs) to offset our U.S. taxable income (which reduced
the valuation allowance we had previously recorded against those NOLs) and to taxes owed in foreign
jurisdictions at tax rates lower than the U.S. statutory tax rate, partially offset by the impact
of losses in foreign jurisdictions that could not be benefited, as well as withholding taxes that
we incurred in the U.S. in connection with certain foreign operations.
As of the end of the second quarter of 2007, a full valuation allowance was recorded against our
net deferred tax assets (consisting primarily of operating loss carryforwards) in the U.S. and
certain foreign jurisdictions. Based upon our operating results over recent years and through June30, 2007 as well as an assessment of our expected future results of operations, during the third
quarter of 2007, we determined that it had become more likely than not that we will realize a
substantial portion of our net deferred tax assets in the U.S. and a foreign jurisdiction. As a
result, during the third quarter, we released a total of $79.8 million of our valuation allowances.
Of the $79.8 million valuation allowance release, $58.9 million was recorded as a one-time income
tax benefit, $20.0 million was recorded as a reduction to goodwill recorded upon prior
acquisitions, and $0.9 million was recorded as a decrease to accumulated other comprehensive loss
within stockholders’ equity.
Our future effective 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 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.
Cash provided by operating activities included the following:
Cash disbursements for restructuring charges
(5,522
)
(11,227
)
Federal income tax audit settlement payments
—
(9,488
)
Cash used by investing activities included the following:
Cash paid to acquire businesses, net of cash acquired
(24,546
)
(75,084
)
Cash and cash equivalents
We invest our cash with highly-rated financial institutions and in diversified domestic and
international money market mutual funds. The portfolio is invested in short-term instruments to
ensure that cash is available to meet requirements as needed. At June 30, 2007, cash and cash
equivalents totaled $260.0 million, up from $183.4 million at September 30, 2006. The increase in
cash and cash equivalents in the first nine months of 2007 is due primarily to $115.1 million of
cash provided by operations, partially offset by $24.5 million paid for acquisitions, primarily
ITEDO and NC Graphics, and $17.1 million for additions to property and equipment.
Cash provided by operating activities
Cash provided by operating activities was $115.1 million in the first nine months of 2007 compared
to cash provided by operating activities of $53.5 million in the first nine months of 2006. This
change was due primarily to higher net income and improved customer collections in the first nine
months of 2007 compared to the first nine months of 2006. The lower cash provided by operations in
the first nine months of 2006 was also impacted by higher income tax payments in 2006, including a
$9.5 million payment to the IRS in the third quarter of 2006 as a result of the settlement of tax
audits during the third quarter. In addition, we made a cash contribution to our U.S. defined
benefit pension plan of $4.2 million in the first quarter of 2006. We did not make any
contributions to our U.S. defined benefit pension plan in 2007.
Days sales outstanding (DSO) was 69 days as of the end of the third quarter of 2007 compared to 68
days as of the end of the third quarter of 2006 and 67 days at September 30, 2006. DSO in the third
quarter of 2007 improved from 74 days and 80 days as of the end of the second quarter and first
quarters of 2007, respectively. DSO at the end of the first, second and third quarters of 2007
compared to year-ago periods were adversely affected by the amount of extended payment term deals
we offered to customers during 2006 and the first half of 2007. We offer these terms to some
customers with established payment and credit histories.
We provided extended payment terms on internally financed transactions accounting for approximately
$51 million of revenue in 2006, and $22 million and $26 million in the first nine months of 2007
and 2006, respectively. Other assets in the accompanying consolidated balance sheets include
non-current receivables from customers related to extended payment term contracts totaling $25.9
million and $31.1 million at June 30, 2007 and September 30, 2006, respectively.
Cash used by investing activities
Cash used by investing activities was $45.7 million in the first nine months of 2007 compared to
$88.1 million in the first nine months of 2006. The decrease in cash used by investing activities
in the first nine months of 2007 was primarily due to lower disbursements for acquisitions of $24.5
million in the first nine months of 2007, including $7.2 million and $16.7 million for the NC
Graphics and ITEDO acquisitions, respectively, compared to disbursements of $88.1 million in the
first nine months of 2006 which included $64.4 million for the Mathsoft acquisition. Further,
during the third quarter of 2007 we acquired the remaining equity interest in a controlled
subsidiary for $4.0 million. In addition, cash used for additions to property and equipment
increased to $17.1 million in the first nine months of 2007 compared to $13.1 million in the first
nine months of 2006, primarily as a result of increased headcount. Our expenditures for property
and equipment consist primarily of computer equipment, software, office equipment and facility
improvements.
Cash provided by financing activities
Cash provided by financing activities was $5.5 million and $2.7 million in the first nine months of
2007 and 2006, respectively. The increase in 2007 compared to 2006 is primarily due to higher
proceeds from the issuance of common stock upon the exercise of stock options, which were $13.9
million in the first nine months of 2007 compared to $4.1 million in the first nine months of 2006.
During the first nine months of 2007, we used $6.5 million to pay employee withholding taxes
related to restricted stock units that vested during the period in lieu of issuing shares to
employees with respect to those awards. In addition, in the third quarter of 2007, we repurchased
100,000 shares of our common stock for $1.8 million.
Credit Facility
On February 21, 2006, we entered into a multi-currency bank revolving credit facility. The credit
facility consists of a $230 million revolving credit facility, which may be increased by up to an
additional $150 million if the existing or additional lenders are willing to make such increased
commitments. The credit facility expires on February 20, 2011, when all amounts will be due and
payable in full. We expect to use the credit facility for general corporate purposes, including
acquisitions of businesses. We have not borrowed any funds under the credit facility to date.
The credit facility limits our and our subsidiaries’ ability to take certain actions and requires
that we and our subsidiaries maintain specified leverage and fixed-charge ratios. These limitations
are described in Note 11 to our unaudited Consolidated Financial Statements located in Part I, Item
1 of this report. We were in compliance with all financial and operating covenants of the credit
facility as of June 30, 2007.
Share Repurchase Authorization
In September 1998, our Board of Directors authorized the repurchase of up to 8.0 million shares of
our common stock and in July 2000 increased the shares authorized for repurchase to 16.0 million.
We repurchased 12.5 million shares through the end of 2004 and did not repurchase any additional
shares until the third quarter of 2007 when our Board of Directors authorized us to resume
repurchases within established parameters (described in Part II, Item 2 of this report). In the
third quarter of 2007, we repurchased 100,000 shares for $1.8 million. Through the end of the third
quarter of 2007, we had repurchased, at a cost of $368.6 million, a total of 12.6 million shares of
the 16.0 million shares authorized for repurchase. In the fourth quarter of 2007 to date, we have
repurchased an additional 457,000 shares for $8.2 million.
Liquidity Expectations for Fiscal 2007
We believe that existing cash and cash equivalents together with cash we expect to generate from
operations will be sufficient to meet our working capital and capital expenditure requirements
through at least the next twelve months.
During the remainder of 2007, we expect to make cash disbursements estimated at $9 million for
restructuring charges incurred in the fourth quarter of 2007 and for restructuring charges incurred
in 2006 and prior periods; capital expenditures of approximately $5 million; and a contribution of
approximately $7 million to a non-US pension plan. We also resolved a prior tax refund claim with
the IRS in the third quarter of 2007 for which we recorded an income tax benefit of $3.9 million
during the quarter, and we expect to receive the related tax refund of $5.6 million in the fourth
quarter of 2007.
We have evaluated, and expect to continue to 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. Our cash position could be reduced and we may incur debt
obligations to the extent we complete any significant transactions.
Our critical accounting policies and estimates are set forth under the heading “Critical Accounting
Policies and Estimates” in Part II, Item 7 Management’s Discussion and Analysis of Financial
Condition and Results of Operations of our 2006 Annual Report on Form 10-K. There have been no
changes to these policies and no significant changes to these estimates since September 30, 2006.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Effectiveness of Disclosure Controls and Procedures
Our management maintains disclosure controls and procedures as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are
designed to ensure that information required to be disclosed in our reports filed or submitted
under the Exchange Act is processed, recorded, summarized and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial Officer (our principal
executive officer and principal financial officer, respectively), as appropriate, to allow for
timely decisions regarding required disclosure.
We, under the supervision and with the participation of our management, including our principal
executive and principal financial officers, evaluated the effectiveness of the design and operation
of our disclosure controls and procedures as of June 30, 2007 in connection with the filing of the
Original Form 10-Q. Based on that evaluation, we concluded at that
time that our disclosure controls and
procedures were effective.
Subsequent to the evaluation made in connection with the filing of the Original Form 10-Q, and in
connection with the restatement of our prior period financial statements described in Part I,
Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of
this Form 10-Q/A and the filing of this Form 10-Q/A, we, under the supervision and with the
participation of our management, including our principal executive and principal financial
officers, re-evaluated the effectiveness of the design and operation of our disclosure controls and
procedures and concluded that, because the material weakness in our internal control over financial
reporting described below existed at that time, our disclosure controls and procedures were not
effective as of June 30, 2007.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a material misstatement of
our annual or interim financial statements will not be prevented or detected on a timely basis.
Subsequent to the filing of the Original Form 10-Q, we identified a material weakness in our
internal control over financial reporting in that we did not maintain effective controls over the
accounting for income taxes, including the determination and reporting of accrued income taxes,
deferred taxes and the related income tax provision. Specifically, we did not have adequate
personnel to enable us to properly consider and apply generally accepted accounting principles for
taxes, review and monitor the accuracy and completeness of the components of the income tax
provision calculations and the related deferred taxes and accrued income taxes, ensure that the
rationale for certain tax positions was appropriate, and ensure that effective oversight of the
work performed by our outside tax advisors was exercised. This material weakness resulted in the
restatement of our unaudited interim consolidated financial statements as of and for the period
ended June 30, 2007. In addition, until remediated, this material weakness could result in a
misstatement in the tax-related accounts described above that would result in a material
misstatement to our interim or annual consolidated financial statements and disclosures that would
not be prevented or detected.
Notwithstanding the existence of this material weakness, we have concluded that the consolidated
financial statements in this Form 10-Q/A fairly present, in all material
respects, our financial position, results of operations and cash flows for the periods presented.
Our management is in the process of actively addressing and remediating the material weakness in
internal control over financial reporting described above. During 2008, we will undertake the
following actions to remediate the material weakness identified:
•
Hire additional personnel and retain professional advisors trained and experienced in
income tax accounting;
•
Re-evaluate the design of income tax accounting processes and controls and implement new
and improved processes and controls, if warranted; and
•
Increase the level of review and discussion of significant tax matters and supporting
documentation with senior finance management.
As part of our 2008 assessment of internal control over financial reporting, our management will
conduct sufficient testing and evaluation of the controls to be implemented as part of this
remediation plan to ascertain that they operate effectively.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) that occurred during the third
fiscal quarter ended June 30, 2007 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned hereunto duly authorized.
