Document/ExhibitDescriptionPagesSize 1: 10-Q/A Parametric Technology Corporation Form 10-Q/A HTML 422K
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 114,859,675 shares of our common stock outstanding on May 4, 2007.
This Amendment No. 1 (“Form 10-Q/A”) to our Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2007 as originally filed with the Securities and Exchange Commission (“SEC”) on
May 10, 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 March 31, 2007 and September 30, 2006 and for the three and six months ended
March 31, 2007 and April 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 May 10, 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 June 30, 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 June 30, 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
$39.5 million at both March 31, 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.
Earnings (loss) per share—Diluted, as previously reported
$
0.54
$
0.75
$
0.32
$
(0.93
)
Adjustments
(0.04
)
(0.10
)
(0.03
)
(0.03
)
Earnings (loss) per share—Diluted, as restated
$
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 $3,760
and $4,900 at March 31, 2007 and September 30, 2006, respectively
185,002
181,008
Prepaid expenses
24,779
20,495
Other current assets (Note 1)
65,907
51,824
Deferred tax assets
1,728
1,341
Total current assets
515,443
438,116
Property and equipment, net
52,284
51,603
Goodwill
262,936
249,252
Acquired intangible assets, net
79,256
77,870
Deferred tax assets
7,372
9,148
Other assets
68,844
75,398
Total assets
$
986,135
$
901,387
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
17,965
$
17,109
Accrued expenses and other current liabilities
52,791
52,128
Accrued compensation and benefits
57,497
72,632
Accrued income taxes
8,954
5,761
Customer advances (Note 2)
39,510
39,475
Deferred revenue (Note 1)
240,475
197,769
Total current liabilities
417,192
384,874
Other liabilities (Note 3)
96,957
97,413
Deferred revenue (Note 1)
9,615
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; 114,799 and
111,880 shares issued and outstanding at March 31, 2007 and September30, 2006, respectively
1,148
1,119
Additional paid-in capital
1,745,614
1,723,570
Accumulated deficit
(1,243,669
)
(1,276,221
)
Accumulated other comprehensive loss
(40,722
)
(42,596
)
Total stockholders’ equity
462,371
405,872
Total liabilities and stockholders’ equity
$
986,135
$
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 $8.4 million and $5.7 million from accounts
payable to accrued expenses and other current liabilities has been made in the March 31, 2007 and
September 30, 2006 consolidated balance sheets, respectively, 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 March 31, 2007 and September 30, 2006 were $63.7 million and $50.0 million, respectively.
The results of operations for the three and six months ended March 31, 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 March 31, 2007 and September 30, 2006, our consolidated statement
of operations for the three and six months ended
April 1, 2006, our condensed consolidated statement of cash
flows for the six months ended April 1, 2006, and our consolidated
statements of comprehensive income for the three and six months ended March 31, 2007 and April 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 $39.5 million at both March 31, 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.
The following tables present the effect of the restatement adjustments by financial statement line
item for our consolidated balance sheets as of March 31, 2007 and September 30, 2006, our
consolidated statements of operations for the three and six months ended April 1, 2006, our
consolidated statement of cash flows for the six months ended April 1, 2006, and our consolidated
statements of comprehensive income for the three and six months ended March 31, 2007 and April 1,2006:
Our consolidated statements of operations for the three and six months
ended March 31, 2007 were not affected by the restatement.
(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.
As of March 31, 2007, of the $18.8 million remaining in accrued restructuring charges, $7.4 million
was included in current liabilities and $11.4 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 $17.9
million as of March 31, 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 $41.6 million, net of committed and estimated sublease income of
approximately $23.3 million and a present value factor of $0.4 million. We have entered into signed
sublease arrangements for approximately $20.9 million, with the remaining $2.4 million based on
future estimated sublease arrangements, including $1.6 million for space currently available for
sublease.
4. Stock-based Compensation
We adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment
(SFAS 123(R)) on July 3, 2005, effective with the beginning of the fourth quarter of 2005. 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.
In the second quarter of 2007, at our Annual Meeting our shareholders voted to amend our 2000
Equity Incentive Plan to increase the number of shares of common stock authorized for issuance
under the plan by 5,000,000 shares.
We made the following restricted stock and restricted stock unit grants in the first six 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)
Second quarter of 2007
—
442,590
3,181
380,355
First six months of 2007
495,768
442,590
60,561
728,182
Second quarter of 2006
—
88,000
14,046
490,140
First six months of 2006
515,617
434,800
335,867
1,292,277
Restricted Stock
Performance-based awards. In the first six 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, if the specified performance criteria are achieved in full, the
restrictions on approximately 251,235 shares will lapse on the later of November 9, 2007 or the
date the Compensation Committee determines the extent to which the performance criteria have been
achieved, and the restrictions on the remaining 244,533 shares will lapse in substantially equal
amounts on November 9, 2008 and 2009, provided that the holder of the award remains employed by us
at those dates. 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, 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.
Restricted Stock Units
Performance-based awards. In the first and second quarters of 2007, we granted 57,380 and 3,181
performance-based restricted stock units, respectively, 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 first six months of 2006, we granted 335,867 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 November 9, 2006 based on achievement of specified
performance criteria established by the Compensation Committee.
Time-based awards. In the first and second quarters of 2007, we granted 347,827 and 380,355
restricted stock units, respectively, to employees. These restricted stock units will vest in three
substantially equal installments on the anniversary of the date of grant, provided that the holder
of the award remains employed by us at those dates. We expect to grant additional time-based
restricted stock units to employees in the third quarter of 2007. In the first and second quarters
of 2006, we granted 802,137 and 490,140 restricted stock units, respectively, to employees, which
vest in three substantially equal installments on the anniversary 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 six months of 2007, the restrictions on
664,463 restricted shares lapsed and 1,099,349 restricted stock units vested. The fair value of
restricted shares and restricted stock units granted in the first six 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 six months of 2007 was
$18.69.
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.
The following table presents the calculation for both basic and diluted EPS:
Dilutive effect of employee stock options,
restricted shares and restricted stock
units
4,641
3,664
5,047
3,425
Weighted average shares outstanding—Diluted
117,486
113,403
117,384
112,985
Earnings per share-Basic
$
0.15
$
0.06
$
0.29
$
0.13
Earnings per share-Diluted
$
0.15
$
0.06
$
0.28
$
0.12
Stock options to purchase 3.5 million, 3.5 million, 4.1 million and 4.2 million shares for the
second quarter and first six months of 2007 and the second quarter and first six 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.
On October 18, 2006, we acquired ITEDO Software GmbH and ITEDO Software LLC (together, ITEDO),
headquartered in Germany, for approximately $16.7 million in cash. 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. 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 $11.2 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 estimated average useful lives of 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 not deductible for income tax
purposes; and, as a result of recording those deferred tax liabilities, a $1.2 million for a
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 $11.2 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
On April 28, 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 March 31, 2007 and
September 30, 2006, goodwill and acquired intangible assets in the aggregate attributable to our
software products reportable segment was $314.9 million and $300.9 million, respectively, and
attributable to our services reportable segment
was $27.3 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 July 1, 2006 and concluded that no
impairment charge was required as of that date. Since that date, there have not been any events or
changes in circumstances that indicate that the carrying values of goodwill or acquired intangible
assets may not be recoverable.
Goodwill and acquired intangible assets consisted of the following:
Goodwill and intangible
assets with indefinite
lives (not amortized):
Goodwill
$
262,936
$
249,252
Trademarks
4,252
4,200
267,188
253,452
Intangible assets with
finite lives (amortized):
Purchased software
$
62,865
$
38,761
24,104
$
56,096
$
35,098
20,998
Capitalized software
22,877
22,722
155
22,877
22,252
625
Customer lists and
relationships
66,757
18,344
48,413
64,634
15,195
49,439
Trademarks and
tradenames
1,757
506
1,251
1,645
313
1,332
Other
1,946
865
1,081
1,910
634
1,276
$
156,202
$
81,198
75,004
$
147,162
$
73,492
73,670
Total goodwill and
acquired intangible assets
$
342,192
$
327,122
The changes in the carrying amounts of goodwill and intangible assets with indefinite lives at
March 31, 2007 from September 30, 2006 are due to the impact of acquisitions (described in Note 6)
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 in 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.
We operate within a single industry segment — computer software and related services. Operating
segments as defined by SFAS 131, Disclosures about Segments of an Enterprise and Related
Information, 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.
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 revenue and operating income (loss) attributable to these operating segments are summarized as
follows:
Maintenance revenue is included in Service Revenue in the consolidated statements of
operations.
(2)
The operating income (loss) reported for each operating segment does not represent the 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.
Includes revenue in the United States totaling $84.3 million and $73.7 million for the three
months ended March 31, 2007 and April 1, 2006, respectively, and $166.8 million and $146.3
million for the six months ended March 31, 2007 and April 1, 2006, respectively.
(2)
Includes revenue in Germany totaling $25.4 million and $21.9 million for the three months
ended March 31, 2007 and April 1, 2006, respectively, and $50.2 million and $41.9 million for
the six months ended March 31, 2007 and April 1, 2006, respectively.
(3)
Includes revenue in Japan totaling $25.1 million and $22.5 million for the three months ended
March 31, 2007 and April 1, 2006, respectively, and $49.6 million and $41.8 million for the
six months ended March 31, 2007 and April 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 six months ended March 31, 2007 and April 1, 2006
consist 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 include 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 in the U.S. and certain foreign jurisdictions. We concluded that as of
March 31, 2007 it was still more likely than not that our net deferred tax assets in the U.S. and
certain foreign jurisdictions would not be realized. While we have realized consolidated operating
profits over the past three years and in the first six months of 2007, we have only recently begun
to show consistent profitability in the U.S. and, as recently as the fourth quarter of 2005, our
U.S. legal entities incurred a taxable loss, due principally to the tax expense associated with the
grant and vesting of restricted stock units and our employee stock option exchange.
Significant management judgment is required to determine when the realization of our deferred tax
assets in the future is considered more likely than not. If and when we conclude that realization
is more likely than not, we will record a reduction to our valuation allowance that will result in
an increase to net income and adjustments to goodwill, accumulated other comprehensive loss, and
additional paid-in capital in the period such determination is made.
On February 21, 2006, we entered into a 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. 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 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 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 March 31, 2007.
Legal Proceedings
PTC is a party to an informal legal proceeding in which a large customer is disputing its payment
obligations to its third party financing provider on a number of purchases, including purchases of
PTC software and services during the period from 2003 to 2006. The customer is defending its
non-payment on the grounds that the customer’s employee who initiated the transactions was
unauthorized to make the purchases or to enter into the financing arrangements. PTC is not a party
to the disputed contracts between the financing provider and the customer, and PTC has been paid
for substantially all orders relating to this customer. The financing provider has indicated that,
to the extent it does not receive payment from the customer, it may seek to recover from others,
including PTC. PTC has fully performed its obligations relating to these orders and believes that
neither the customer nor its financing provider has a valid basis for recourse against PTC. PTC
would vigorously defend any effort to collect the disputed amounts from PTC. Notwithstanding this
matter, PTC continues to have a business relationship with the customer and, in the second quarter
of 2007, PTC received additional orders from the customer, for which approximately $2 million of
revenue was recognized.
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.
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
$39.5 million at both March 31, 2007 and September 30, 2006, 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.
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
$
0.54
$
0.75
$
0.32
$
(0.93
)
Adjustments
(0.04
)
(0.10
)
(0.03
)
(0.03
)
Earnings (loss) per share—Diluted, as restated
$
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.
All amounts referenced to March 31, 2007, September 30, 2006 and April 1, 2006 in the following
discussion reflect the balances and amounts on a restated basis. Also, comparisons of the three and
six months ended March 31, 2007 and April 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 May 10, 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 June30, 2007.
Forward-Looking Statements
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: our ability to increase revenues or successfully execute strategic
and other business initiatives while containing costs; our ability to optimize our sales and
services coverage and productivity through, among other means, effective use and management of our
internal resources in combination with our resellers and other strategic partners and appropriate
investment in our distribution channel; our ability to successfully integrate and achieve both
revenue and earnings growth from newly acquired businesses; our ability to successfully
differentiate our products and services from those of our competitors and to effectively pursue
opportunities within the small and medium-size business market and with strategic larger accounts;
our ability to successfully help our customers expand their product development technology
infrastructure; 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.
We delivered total revenue of $228 million in the second quarter of 2007, reflecting revenue growth
across our three major geographies and all major product categories. Revenue growth included both
organic growth and revenue from acquisitions made since the second quarter of 2006, as we expanded
our capability footprint and leveraged acquired solutions across our distribution model. PTC’s
total and organic revenue growth rates are higher than the growth rate of the overall PLM market as
estimated by leading independent analyst firms. Additionally, our second quarter of 2007 operating
margins and net income increased over those of the second quarter of 2006, reflecting increased
direct and indirect sales productivity.
We believe our 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 have created
and will continue to create competitive opportunities for us.
Looking forward to the second half of 2007, we expect to continue to grow revenue and increase our
operating margins. We will continue to focus on customer satisfaction, product capability and
quality, services profitability, and further productivity improvements from our direct and indirect
distribution model. Additionally, while we have not yet concluded that realization of our U.S.
deferred tax assets in the future is more likely than not, we will continue to review our operating
results in the U.S. to determine if it becomes more likely than not that our U.S. deferred tax
assets will be realized in the future. If this were to occur in the second half of 2007, we would
release some or all of the valuation allowance. Any reduction in our valuation allowance in the
future would result in an income tax benefit, higher
stockholders’ equity and a reduction to goodwill in the
period such determination is made and could have a negative impact on our reported net income in
future periods as we would expect to begin recording a higher provision for income taxes. Any
reduction in our valuation allowance would not impact our cash flow. We discuss this further in
Results of Operations – Costs and Expenses – Income Taxes on page 31.
Results of Operations
The following is a summary of our results of operations for the second quarters and first six
months of 2007 and 2006, which includes the results of operations of companies we acquired
beginning on their respective acquisition dates. A detailed discussion of these results follows the
table below.
Three months ended
Six months ended
March 31,
April 1,
Percent
March 31,
April 1,
Percent
2007
2006
Change
2007
2006
Change
(Dollar amounts in millions)
Total revenue
$
228.1
$
195.3
17%
(1)
$
449.8
$
388.1
16%
(1)
Total costs and expenses
206.8
185.1
12%
407.5
366.9
11%
Operating income
21.3
10.2
42.3
21.2
Other income (expense), net
1.3
0.8
2.1
1.9
Income before income
taxes
22.6
11.0
44.4
23.1
Provision for income taxes
5.2
4.4
11.8
9.2
Net income
$
17.4
$
6.6
$
32.6
$
13.9
(1)
On a consistent foreign currency basis, compared to the year-ago periods, total revenue for
the second quarter and first six months of 2007 increased 14% and 13%, respectively.
Revenue for the second quarter and first six months of 2007 reflects the following:
•
License revenue of $71.3 million and $137.9 million for the second quarter and first six
months of 2007, respectively, a 32% and 22% increase in license revenue from the second
quarter and first six months of 2006, respectively.
•
Service revenue of $156.8 million and $311.9 million for the second quarter and first six
months of 2007, respectively, an 11% and 13% increase in service revenue from the second
quarter and first six months of 2006, respectively.
Revenue by product category for the second quarter and first six months of 2007 reflects the
following:
•
Enterprise Solutions revenue of $81.8 million and $159.2 million for the second quarter and
first six months of 2007, respectively, a 21% and 19% increase from the second quarter and
first six months of 2006, respectively.
•
Desktop Solutions revenue of $146.3 million and $290.6 million, respectively, a 14% increase
from both the second quarter and first six months of 2006.
Total costs and expenses reflect increases in our operating cost structure from acquisitions and
from measured increases to support our revenue growth.
The increase in net income in the second quarter and first six months of 2007 compared to 2006
reflects improved operating margin contributions from increased revenue year over year.
The following table shows certain consolidated financial data as a percentage of our total revenue
for the second quarters and first six 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).
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
Six months ended
March 31,
April 1,
Percent
March 31,
April 1,
Percent
2007
2006
Change
2007
2006
Change
(Dollar amounts in millions)
License Revenue:
Enterprise
$
22.6
$
19.6
16
%
$
45.9
$
42.4
8
%
Desktop
48.7
34.6
41
%
92.0
70.7
30
%
Total license revenue
71.3
54.2
32
%
137.9
113.1
22
%
Maintenance revenue:
Enterprise
19.2
16.0
20
%
38.4
32.4
19
%
Desktop
79.5
72.5
10
%
160.9
145.5
11
%
Total maintenance
revenue
98.7
88.5
12
%
199.3
177.9
12
%
Consulting and training
service revenue:
Enterprise
40.0
31.9
25
%
74.9
59.5
26
%
Desktop
18.1
20.7
(13
)%
37.7
37.6
—
Total consulting and
training service
revenue
58.1
52.6
10
%
112.6
97.1
16
%
Total service revenue
156.8
141.1
11
%
311.9
275.0
13
%
Total revenue
$
228.1
$
195.3
17
%(1)
$
449.8
$
388.1
16
%(1)
Total Enterprise Solutions
revenue
$
81.8
$
67.5
21
%
$
159.2
$
134.3
19
%
Total Desktop Solutions revenue
$
146.3
$
127.8
14
%
$
290.6
$
253.8
14
%
(1)
On a consistent foreign currency basis from the comparable year-ago period, in the second
quarter and first six months of 2007 total revenue increased 14% and 13%, respectively.
In the second quarter and first six months of 2007, we achieved year-over-year revenue growth in
both Desktop Solutions and Enterprise Solutions. The revenue growth reflects both organic growth of
our Desktop Solutions and Enterprise Solutions and revenue from the recently acquired Mathsoft and
ITEDO businesses. 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 (Mathsoft on April 28, 2006 and ITEDO on
October 18, 2006). Accordingly, results for the second quarter and first six months of 2006 do not
include Mathsoft or ITEDO.
Total revenue from our Enterprise Solutions software and related services was 36% and 35% of our
total revenue in the second quarter of 2007 and 2006, respectively, and 35% of our total revenue in
the first six months of both 2007 and 2006.
The increase in Enterprise Solutions revenue in the second quarter and first six months of 2007
compared to the second quarter and first six months of 2006 was due primarily to:
•
organic growth of our Windchill solutions, which reflects our success in helping
customers and prospects 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 64% and 65% of our total
revenue in the second quarter of 2007 and 2006, respectively, and 65% of our total revenue in the
first six months of both 2007 and 2006.
The increase in Desktop Solutions revenue in the second quarter and first six months of 2007 as
compared to the second quarter and first six months of 2006 was due primarily to:
•
organic growth of our Pro/ENGINEER products and
•
revenue contribution from the recently acquired Mathsoft business.
We believe the increase in sales of our Pro/ENGINEER products reflects:
•
the success of the measures we took to better compete in the small and medium-size
business segment of our market, which included offering Pro/ENGINEER packages with differing
price points and functionality and developing a diverse, global network of reseller partners
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, typically consisting of multiple, disconnected CAD and data management
applications.
License Revenue
Total
License revenue accounted for 31% of total revenue in each of the second quarter and first six
months of 2007 and 28% and 29% of total revenue in the second quarter and first six months of 2006,
respectively.
Enterprise Solutions
The increase in Enterprise Solutions license revenue in the second quarter of 2007 as compared to
the second quarter of 2006 came primarily from sales of Windchill PDMLink® and visualization
products. Revenue growth for the first six months of 2007 was lower than the growth rate for the
second quarter of 2007. This was due primarily to the impact of revenue from a large customer
transaction recorded in the first quarter of 2006.
Desktop Solutions
The increase in Desktop Solutions license revenue in the second quarter and first six months of
2007 compared to the second quarter and first six months of 2006 was due primarily to organic
growth, primarily from sales of Pro/ENGINEER, as well as revenue contribution from Mathsoft
products. For the first six months of 2007, Pro/ENGINEER revenue grew across our high and low-end
packages, as well as upgrades and modules.
Maintenance revenue represented 43% and 45% of total revenue in the second quarter of 2007 and
2006, respectively and 44% and 46% of total revenue in the first six months of 2007 and 2006,
respectively. Growth in our maintenance revenue was due to recent acceleration in our license
revenue growth 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 higher renewal rates, the
recent growth of license revenue, 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 25% and 27% of total revenue in the second quarter of 2007 and
2006, respectively, and 25% of total revenue in the first six months of both 2007 and 2006,
respectively. Consulting and training service revenue reflects an increase in consulting service
revenue for the second quarter and first six months of 2007, partially offset by a decrease in
training service revenue for the same periods, as compared to 2006 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 the first six months of 2007, our Enterprise
Solutions consulting and training revenue included a large customer engagement 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 second quarter and first six months of 2007, partially offset by an increase in
consulting service revenue for the same periods, as compared to the second quarter and first six
months of 2006. The decrease in Desktop Solutions training service revenue was partially
attributable to a large customer training order completed in the second quarter of 2006. Desktop
Solutions consulting service revenue did not grow at the same rate as Desktop license revenue in
part because license revenue included revenue from acquired products and the reseller channel for
which we provide less consulting and training services than Pro/ENGINEER licenses sold through our
direct channel.
The following table shows our revenue by geography for the periods stated.
Three months ended
Six months ended
March 31,
April 1,
Percent
March 31,
April 1,
Percent
2007
2006
Change
2007
2006
Change
(Dollar amounts in millions)
Revenue by
geography:
North America
$
89.4
$
78.1
15
%
$
175.9
$
153.9
14
%
Europe
$
82.8
$
66.7
24
%(1)
$
165.6
$
141.8
17
%(2)
Asia-Pacific
$
55.9
$
50.5
11
%(1)
$
108.3
$
92.4
17
%(2)
(1)
On a consistent foreign currency basis from the comparable year-ago period, in the second
quarter of 2007 revenue in Europe increased 13% and revenue in Asia-Pacific increased 12%.
(2)
On a consistent foreign currency basis from the comparable year-ago period, in the first six
months of 2007 revenue in Europe increased 8% and revenue in Asia-Pacific increased 18%.
We derived 61% of our total revenue from sales to customers outside North America in the second
quarter and first six months of 2007 and 60% in the second quarter and first six months of 2006.
North America. Total revenue growth in North America was primarily due to organic growth and
contributions from the recently acquired Mathsoft business, whose revenues were concentrated in
that region. North American revenue performance reflects positive results from our strategic
account program and from our indirect channel.
Europe. The increase in European revenue in the second quarter and first six months of 2007
compared to the second quarter and first six months of 2006 reflects strong performance in both
Enterprise and Desktop Solutions and contributions from the Mathsoft and ITEDO acquisitions, and
was favorably impacted by foreign currency exchange rates. European revenue for the second quarter
and first six months of 2007 includes a large customer Enterprise Solutions consulting and training
engagement, while revenue for the first six months of 2006 included a large license transaction
from a single customer completed in the first quarter.
Asia-Pacific. Revenue performance in Asia-Pacific for the second quarter of 2007 compared to the
second quarter of 2006 reflected a 10% increase in revenue in the Pacific Rim and an 12% increase
in revenue in Japan. Revenue for the first six months of 2007 compared to the first six months of
2006 reflected a 16% increase in the Pacific Rim and a 19% 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 six 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. We continue to focus on improving
results in Japan and we expect that revenue will grow modestly there for fiscal 2007.
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 second
quarter and first six months of 2007 was $35.6 million and $63.8 million, respectively, and in the
second quarter and first six months of 2006 was $22.3 million and $49.4 million, respectively. The
second quarter of 2007 results include 16 customers with license and service revenue over $1
million each, compared to 11 such customers in the second quarter of 2006, reflective of continued
success in our strategic account program. While our customers may not continue to spend at these
levels in future periods, we believe the strong performance in 2006 and the first half 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.
Total sales from our reseller channel, which are primarily for our Desktop Solutions, grew 24% and
22% to $48.9 million and $96.2 million in the second quarter and first six months of 2007,
respectively, from $39.4 million and $78.7 million in the second quarter and first six months of
2006, respectively. Sales from our reseller channel comprised 21% of total revenue for both the
second quarter and first six months of 2007 compared to 20% of total revenue for both the second
quarter and first six months of 2006. We achieved revenue growth in our reseller channel across all
major geographies, which we attribute to our efforts to expand our reseller channel, to the success
of Pro/ENGINEER Wildfire among small and medium-size businesses, and to sales of recently acquired
products.
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.
The following table shows our costs and expenses by expense category for the periods stated.
Three months ended
Six months ended
March 31,
April 1,
Percent
March 31,
April 1,
Percent
2007
2006
Change
2007
2006
Change
(Dollar amounts in millions)
Costs and expenses:
Cost of license revenue
$
4.2
$
1.9
123
%
$
7.8
$
5.2
50
%
Cost of service revenue
68.6
63.6
8
%
137.2
122.6
12
%
Sales and marketing
71.5
64.3
11
%
141.1
128.2
10
%
Research and development
40.2
36.0
12
%
78.1
70.6
11
%
General and administrative
20.7
18.0
15
%
39.6
37.7
5
%
Amortization of acquired
intangible assets
1.6
1.3
23
%
3.7
2.6
39
%
Total costs and expenses
$
206.8
$
185.1
12
%(1)
$
407.5
$
366.9
11
%(1)
(1)
On a consistent foreign currency basis from the prior period, total costs and expenses
increased 9% in both the second quarter and first six months of 2007 compared to the second
quarter and first six months of 2006.
Headcount increased to 4,523 at March 31, 2007 from 4,309 at September 30, 2006 and 4,052 at April1, 2006. Our increases in costs and expenses in the second quarter and first six months of 2007
were primarily due to the following:
•
increases in services delivery capacity to address 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.
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.
Cost of License Revenue
Our cost of license revenue consists of fixed and variable costs associated with reproducing and
distributing software and documentation as well as royalties paid to third parties for technology
embedded in or licensed with our software products. Cost of license revenue as a percentage of
license revenue was 6% and 3% for the second quarter of 2007 and 2006, respectively, and 6% and 5%
for the first six months of 2007 and 2006, respectively. The increase in cost of license revenue in
the second quarter and first six months of 2007 compared to the second quarter and first six months
of 2006 was due primarily to higher amortization of purchased software attributable to recent
acquisitions, which was $1.1 million and $1.6 million higher, respectively. Additionally, royalty
expense was $1.1 million and $0.7 million higher in the second quarter and first six 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 44% for both the second
quarter and first six months of 2007 and 45% for both the second quarter and first six months of
2006. Service margins can vary based on the product mix sold in the period. Service-related
headcount increased to 1,340 at March 31, 2007 from 1,291 at September 30, 2006 and 1,193 at April1, 2006. Total salaries, commissions, benefits and travel costs were $2.4 million and $8.5 million
higher in the second quarter and first six months of 2007, respectively, compared to the second
quarter and first six months of 2006 due to planned increases in our services delivery capacity.
The cost of third-party consulting services was $1.7 million and $3.6 million higher in the second
quarter and first six months of 2007, respectively, compared to the second quarter and first six
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 31% for both the second quarter and first six months of 2007 and
33% for both the second quarter and first six months of 2006. Sales and marketing headcount
increased to 1,192 at March 31, 2007 from 1,145 at September 30, 2006 and 1,115 at April 1, 2006.
As a result of increases in headcount, primarily due to acquisitions, and higher commissions due to
revenue growth, our salaries and benefit costs, sales commissions and travel expenses were higher
by an aggregate of $6.0 million and $10.8 million in the second quarter and first six months of
2007 compared to the second quarter and first six 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% in both the second quarter of 2007 and 2006 and 17% and 18% in the first six
months of 2007 and 2006, respectively. Research and development headcount increased to 1,535 at
March 31, 2007 from 1,437 at September 30, 2006 and 1,335 at April 1, 2006. As a result of these
increases in headcount, total salaries, benefits and travel costs were higher in the second quarter
and first six months of 2007 compared to the second quarter and first six months of 2006 by an
aggregate of $3.8 million and $7.3 million, respectively.
General and Administrative
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 9% in both the second
quarter of 2007 and 2006 and 9% and 10% in the first six months of 2007 and 2006, respectively.
General and administrative headcount was 438 at March 31, 2007, up from 420 at September 30, 2006
and 392 at April 1, 2006. Total salaries, benefits and travel costs were higher in the second
quarter and first six months of 2007 compared to the second quarter and first six months of 2006 by
an aggregate of $1.4 million and $2.9 million, respectively. General and administrative expenses
also 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.
These costs represent the amortization of acquired intangible assets. The increase in expense in
the second quarter and first six months of 2007 compared to the second quarter and first six months
of 2006 was due to amortization of intangible assets resulting from the Mathsoft and ITEDO
acquisitions completed in the third quarter of 2006 and the first quarter of 2007, respectively.
Our acquisition of Mathsoft in the third quarter of 2006 resulted in an increase in acquired
intangible assets of $25.6 million and goodwill of $42.0 million. Acquired intangible assets
consisted of $13.9 million of customer relationship intangibles, $10.3 million of purchased
software, and $1.4 million of trademarks and distributor networks, each of which are being
amortized over estimated useful lives of 7 to 10 years, 5 years and 5 years, respectively.
Our acquisition of ITEDO in the first quarter of 2007 resulted in an increase in acquired
intangible assets of $8.1 million and goodwill of $11.2 million. Acquired intangible assets
consisted of 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 estimated useful lives of 5
years, 10 years, and 4 years, 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 $1.3
million and $0.8 million for the second quarter of 2007 and 2006, respectively, and $2.1 million
and $1.9 million for the first six months of 2007 and 2006, respectively. The increase in other
income (expense), net in the second quarter and first six 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 second quarter of 2007, our effective tax rate was 23% on pre-tax income of $22.6 million
compared to 40% in the second quarter of 2006 on pre-tax income of $11.0 million. In the first six
months of 2007, our effective tax rate was 27% on pre-tax income of $44.4 million compared to 40%
in the first six months of 2006 on pre-tax income of $23.1 million. In the second quarter and first six months of 2007, our effective tax rate was 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 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. In the second quarter and first six
months of 2006, our effective tax rate was higher than the statutory federal income tax rate of 35% due primarily to 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, offset by our use of 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 rates lower than the U.S. statutory tax rate.
In 2002, we recorded a full valuation allowance to completely reserve against our deferred tax
assets (which consist primarily of operating loss carryforwards) due to the uncertainty of their
realization. Significant management judgment is required to determine when the realization of our
deferred tax assets in the future is considered more likely than not. While we have realized
consolidated operating profits over the past three years and in the first six months of 2007, we
have only recently begun to show consistent profitability in the U.S., and as recently as the
fourth quarter of 2005, our U.S. legal entities incurred a taxable loss, due principally to the tax
expense associated
with the grant and vesting of restricted stock units and our employee stock option exchange.
Accordingly, we have not yet concluded that realization of our deferred tax assets in the future is
more likely than not in the U.S. and certain foreign jurisdictions. As of March 31, 2007, a full
valuation allowance was still recorded against remaining deferred tax assets in these
jurisdictions. For the remainder of 2007, we will continue to review our operating results to
determine if it becomes more likely than not that our deferred tax assets will be realized in the
U.S. and certain foreign jurisdictions in the future, at which time we would release some or all of
the valuation allowance. Any reduction in our valuation allowance in the future would result in an
income tax benefit, higher stockholders’ equity and a
reduction to goodwill in the period such determination is
made and could have a negative impact on our reported net income in future periods as we would
expect to begin recording a higher provision for income taxes. Any reduction in our valuation
allowance would not impact our cash flow.
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 and other charges
(3,747
)
(5,782
)
Cash used by investing activities included the following:
Cash paid to acquire businesses, net of cash acquired
(17,639
)
(10,675
)
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 cash is available to meet requirements as needed. At March 31, 2007, cash and cash
equivalents totaled $238.0 million, up from $183.4 million at September 30, 2006. The increase in
cash and cash equivalents in the first six months of 2007 is due primarily to $76.1 million of cash
provided by operations, partially offset by $17.6 million paid for acquisitions, primarily ITEDO,
and $12.4 million for additions to property and equipment.
Cash provided by operating activities
Cash provided by operating activities was $76.1 million in the first six months of 2007 compared to
cash provided by operating activities of $39.5 million in the first six months of 2006. This change
was due primarily to higher net income and improved customer collections in the first six months of
2007 compared to the first six months of 2006. In addition, cash provided by operating activities
in the first six months of 2006 was net of a cash contribution to our U.S. defined benefit pension
plan of $4.2 million.
Days sales outstanding (DSO) was 74 days as of the end of the second quarter of 2007 compared to 69
days as of the end of the second quarter of 2006 and 67 days at September 30, 2006. DSO in the
second quarter of 2007 improved from 80 days as of the end of the first quarter of 2007. DSO at the
end of the first and second quarters of 2007 compared to year-ago periods were 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 transactions accounting for approximately $51 million of
revenue in 2006 and $14 million and $12 million in the first six 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 $25.6 million and
$31.1 million at March 31, 2007 and September 30, 2006, respectively.
Cash used by investing activities
Cash used by investing activities was $30.0 million in the first six months of 2007 compared to
$18.8 million in the first six months of 2006. The increase in cash used by investing activities in
the first six months of 2007 was primarily due to disbursements for acquisitions of $17.6 million
in the first six months of 2007, including $16.7 million for the ITEDO acquisition, compared to
$10.7 million in the first six months of 2006. In addition, cash used for additions to property and
equipment increased to $12.4 million in the first six months of 2007 compared to $8.2 million in
the first six 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 $4.4 million and $1.7 million in the first six 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 $10.9
million in the first six months of 2007 compared to $2.9 million in the first six months of 2006.
During the first six 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.
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 Consolidated Financial Statements. We were in compliance with all
financial and operating covenants of the credit facility as of March 31, 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.
Since 1998, we have repurchased, at a cost of $366.8 million, a total of 12.5 million shares of the
16.0 million shares authorized. Although we have not repurchased any shares since 2003, we
periodically consider repurchasing shares. If we were to repurchase shares, it would reduce our
cash balances.
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 $4 million for
restructuring charges incurred in 2006 and prior periods, capital expenditures of approximately $10
million, and a contribution of approximately $7 million to a non-US pension plan.
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.
Critical Accounting Policies and Estimates
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.
New Accounting Pronouncements
Accounting for Uncertainty in Income Taxes
In July 2006, the 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 in 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.
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 March 31, 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 March 31, 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 March 31, 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.
Remediation Initiatives
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 March 31, 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.
