PTC Inc.
PTC INC. (Form: 10-K, Received: 11/23/2015 17:27:36)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: September 30, 2015
Commission File Number: 0-18059
 
PTC Inc.
(Exact name of registrant as specified in its charter)
 
 
Massachusetts
 
04-2866152
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
140 Kendrick Street, Needham, MA 02494
(Address of principal executive offices, including zip code)
(781) 370-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $.01 par value per share
 
NASDAQ Global Select Market
Securities registered pursuant
to Section 12(g) of the Act:
None
(Title of Class)
 
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES   þ     NO   ¨
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    YES   ¨     NO   þ
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   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   þ     No   ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer   þ
Accelerated Filer   o
Non-accelerated Filer   o
Smaller Reporting Company   o
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     YES   ¨     NO   þ
The aggregate market value of our voting stock held by non-affiliates was approximately $4,159,706,082 on April 4, 2015 based on the last reported sale price of our common stock on the Nasdaq Global Select Market on April 2, 2015. There were 113,933,336  shares of our common stock outstanding on that day and 114,529,462 shares of our common stock outstanding on November 20, 2015 .
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement in connection with the 2016 Annual Meeting of Stockholders (2016 Proxy Statement) are incorporated by reference into Part III.




Important Update Regarding Year-End Results
Our results for the year ended September 30, 2015 included in this Annual Report on Form 10-K reflect an accrual of $28.2 million related to a previously disclosed matter in China, as described in Management’s Discussion and Analysis of Financial Condition and Results of Operations Impact of an Investigation in China. This accrual includes $14.6 million recorded in the fourth quarter of 2015 after we initially reported our results for the fourth quarter and fiscal year 2015 in our Earnings Release on Form 8-K on October 28, 2015. As a result, GAAP operating income and net income for the quarter and year ended September 30, 2015 are $14.6 million lower than initially reported, and earnings per share is $0.13 lower.

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PTC Inc.
ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR 2015
Table of Contents
 
 
 
Page
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
Item 15.
 
 
 
 
 
 






Forward-Looking Statements
Statements in this Annual Report about our anticipated financial results and growth, as well as about the development of our products and markets, are forward-looking statements that are based on our current plans and assumptions. Important information about factors that may cause our actual results to differ materially from these statements is discussed in Item 1A. “Risk Factors” and generally throughout this Annual Report.
Unless otherwise indicated, all references to a year reflect our fiscal year that ends on September 30.
PART I

ITEM 1.
Business
PTC Inc. develops and delivers technology solutions, comprised of software and services, that enable our customers to transform the way they create, operate and service their products for a smart, connected world.
Our solutions and software products address the challenges our customers face in the following areas:
Computer-Aided Design (CAD)
Effective and collaborative product design across the globe.
Product Lifecycle Management (PLM)
Management of product development from concept to retirement across functional processes and distributed teams.
Application Lifecycle Management (ALM)
Management of global software development from concept to delivery.
Service Lifecycle Management (SLM)
Planning and delivery of service, and analysis of product intelligence at the point of service.
Internet of Things (IoT)
Enabling connectivity and development of software applications for smart, connected products.
Business Developments
Subscription Model
In 2015, we began offering our customers the option to purchase most of our products as a subscription, whereby a fee is paid for the right to use our software and receive support for a specified period. A small but growing percentage of our licenses are being sold as subscriptions. Transitioning a substantial portion of our business from a perpetual licensing model to a subscription model is a top priority for us in the coming year and for several years to follow.
Acquisitions
In May 2015 we acquired ColdLight Solutions, LLC. ColdLight offers solutions for data machine learning and predictive analytics, which expanded our Technology Platform business.
In November 2015, we acquired the Vuforia business from Qualcomm Connected Experiences, Inc. Vuforia is an augmented reality technology platform that adds to our Technology Platform business.
In 2014, we acquired ThingWorx (December), Atego (June) and Axeda (August).
Corporate Organizational Changes
As we expand into new technologies, our business is becoming more complex and our newer business differs in important ways from our traditional core business. The core and new businesses have different strategies and business models, and each has its own needs with respect to how to best build, market, sell, and service its products.  For example, we believe that the new IoT analytics and augmented reality business is best addressed through a large developer and partner ecosystem cultivated through marketing-led approaches, whereas we believe our traditional business is best served by leveraging direct sales efforts. Given the differing go-to-market strategies and the growth opportunities we see in both our core and new businesses, we have made changes to our organizational structure that will allow us to more effectively manage these two

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different but complementary business models. As of October 1, 2015, we reorganized the company into two main business units:
the Solutions Group comprised of our core CAD, PLM, ALM and SLM; and
the Technology Platform Group comprised of our IoT, analytics and augmented reality business.
Each of the units will be led by a group president and will have separate research and development and go-to-market resources, while the other corporate functions will support both. We believe that this new structure will allow us to optimize our focus and our balance on each of these two businesses, providing focused leadership, improved execution, and performance-oriented accountability that will enable us to leverage our assets and capabilities, with the goal of increasing growth.
Our Markets
The markets we serve present different growth opportunities for us. We see greater opportunity for market growth in our Technology Platform solutions, followed by SLM, PLM and ALM solutions. CAD, which is a more highly penetrated market, likely presents a lower growth opportunity over time.
Our Principal Products and Services
We generate revenue through the sale of software licenses, subscriptions (which include license access and support for a period of time and optional cloud services), support (which includes technical support and software updates when and if available), and services (which include consulting and implementation and training). We report revenue by line of business (license and subscription, services and support), by geographic region, and by product (CAD, Extended PLM, SLM, & IoT).
Solutions Group
CAD
Our CAD products enable users to create conceptual and detailed designs, analyze designs, perform engineering calculations and leverage the information created downstream using 2D, 3D, parametric and direct modeling. Our principal CAD products are described below.
PTC Creo ® is an interoperable suite of product design software that provides a scalable set of packages for design engineers to meet a variety of specialized needs. PTC Creo provides capabilities for design flexibility, advanced assembly design, piping and cabling design, advanced surfacing, comprehensive virtual prototyping and other essential design functions.
PTC Mathcad ® is software for solving, analyzing and sharing vital engineering calculations. PTC Mathcad combines the ease and familiarity of an engineering notebook with the powerful features of a dedicated engineering calculations application.
Extended PLM
Extended PLM (ePLM) includes our PLM and ALM products.
PLM: Our PLM products are designed to address common challenges that companies, particularly manufacturing companies, face over the life of the product, from concept to retirement. These software products help customers manage product configuration information through each stage of the product lifecycle, and communicate and collaborate across the entire enterprise including product development, manufacturing and the supply chain, including sourcing and procurement.
Our principal PLM products are described below.
PTC Windchill ® is a suite of PLM software that offers lifecycle intelligence - from design to service. PTC Windchill offers a single repository for all product information. As such, it is designed to create a “single source of truth” for all product-related content such as CAD models, documents, technical illustrations, embedded software, calculations and requirement specifications for all phases of the product lifecycle to help companies streamline enterprise-wide communication and make informed decisions.
Additionally, our PTC Windchill product family includes supply chain management (SCM) solutions that allow manufacturers, distributors and retailers to collaborate across product development, and the supply chain, including sourcing and procurement, to identify an optimal set of parts, materials and suppliers. This functionality provides

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automated cost modeling and visibility into supply chain risk information to balance cost and quality, and enables customers to design products that meet compliance requirements and performance targets.
PTC Creo ® View ™ enables enterprise-wide visualization, verification, annotation and automated comparison of a wide variety of product development data formats, including CAD (2D and 3D), ECAD, and documents. PTC Creo View provides access to designs and related data without requiring the original authoring tool.
ALM: Our ALM products are designed for discrete manufacturers where coordination and collaboration between software and hardware teams is critical to understand product release readiness, support variant complexity, automate development processes, ensure complete lifecycle traceability and manage change.
Our principal ALM product suite is PTC Integrity™ which includes solutions added with our acquisition of the Atego business.
PTC Integrity enables users to manage system models, software configurations, test plans and defects. With PTC Integrity, engineering teams can improve productivity and quality, streamline compliance, and gain greater product visibility, ultimately enabling them to bring more innovative products to market.
Our Model-Based Systems Engineering (MBSE) solution connects requirements engineering, architecture modeling, physical product definition, and system verification functions. Our solution allows multi-functional teams to work in concert while modeling the interdependencies of mechanical, electrical, and software engineering components. In doing so, it enables customers to drive efficiencies and process standardization and allows distributed teams to collaboratively build digital models of complex systems, while managing system variability and enabling reuse.
SLM
Our SLM products help manufacturers and their service providers improve service efficiency and quality.  These include capabilities to support product service and maintenance requirements, service information delivery, service parts planning and optimization, service knowledge management, and service analytics. Our principal SLM products are described below.
PTC Servigistics® is a suite of SLM software products that integrate service planning, delivery and analysis to optimize service outcomes. PTC Servigistics products enable a systematic approach to service lifecycle management by providing a single view of service throughout the service network enabling customers to continuously improve their products and services and increase customer satisfaction. 
PTC Arbortext® is an enterprise software suite that allows manufacturers to create, illustrate, manage and publish technical and service parts information to improve the operation, maintenance, service and upgrade of equipment throughout its lifecycle.  These products are available in stand-alone configurations as well as integrated with PTC Windchill Service Information Manager and PTC Creo Illustrate to deliver dynamic, product-centric service and parts information.
Technology Platform Group
Our IoT products allow manufacturers and their service providers to enable connectivity and optimize data intelligence. With our acquisitions of ThingWorx, Axeda, ColdLight and Vuforia, we have expanded our solutions to support the development of applications to gather, analyze and visualize product data, which in turn helps our customers design, operate and service smart, connected products.
Our principal IoT products are described below.
ThingWorx® is a technology platform that enables users to create and deploy applications and solutions for today’s smart, connected world, enabling customers to transform their products and services, innovate, and unlock new business models. ThingWorx allows customers to reduce the time, cost, and risk required to connect, manage, and develop innovative applications for smart, connected products such as predictive maintenance, system monitoring, and usage-based product design requirements. Our ThingWorx solutions include tools added through our acquisition of Axeda, including cloud-based tools that allow customers to easily and more securely connect products and devices to the cloud, and intelligently process, transform, organize and store product and sensor data.
ThingWorx Machine Learning™ is a predictive intelligence tool that uses artificial intelligence technology to simplify and automate the processes of creating and operationalizing predictions inside ThingWorx-powered solutions and other systems of record. ThingWorx Machine Learning complements our IoT portfolio by introducing data analytics to information collected from smart, connected products.

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Vuforia™ is an augmented reality technology platform that enables applications to see things in the real world and then interact with them. Using computer vision technologies, and building them for mobile platforms, the technology is accessible through an application programming interface and developer workflows.
PTC Global Support
We offer global support plans for our software products. Participating customers receive updates that we make generally available to our support customers and also have direct access to our global technical support team of certified engineers for issue resolution. We also provide self-service support tools that allow our customers access to extensive technical support information. When products are purchased as a subscription, support is included as part of the subscription.
PTC Global Services
We offer consulting, implementation, training and cloud services through our Global Services Organization, with approximately 1,200 professionals worldwide, as well as through third-party resellers and other strategic partners. Our services create value by helping customers improve product development performance through technology enabled process improvement and multiple deployment paths. Our cloud services customers receive hosting and 24/7 application management.
  
Geographic and Segment Information
In 2015, 2014 and 2013, we had two reportable segments: Software Products, which included license and subscription and related support revenue for all our products except computer-based training products, and Services, which included consulting, implementation, training, cloud services and license and support revenue for computer-based training products. Financial information about our segments and international and domestic operations may be found in Note N Segment Information of “Notes to Consolidated Financial Statements” in this Annual Report, which information is incorporated herein by reference.
Research and Development
We invest heavily in research and development to improve the quality and expand the functionality of our products. Approximately one third of our employees are dedicated to research and development initiatives, conducted primarily in the United States, India and Israel.
Our research and development expenses were $ 227.5 million in 2015, $226.5 million in 2014, and $221.9 million in 2013. Additional information about our research and development expenditures may be found in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations-Costs and Expenses-Research and Development.”
Sales and Marketing
We derive most of our revenue from products and services sold directly by our sales force to end-user customers. Approximately 20% to 25% of our products and services are sold through third-party resellers and other strategic partners. Our sales force focuses on large accounts, while our reseller channel provides a cost-effective means of covering the small- and medium-size business market. Our strategic services partners provide service offerings to help customers implement our product offerings. As we grow our Technology Platform business, we expect our go-to-market strategy will rely more on channel partners and marketing directly to end users and developers.
Strategic Partners

Building an ecosystem of strategic partners will become increasingly important as we expand our Technology Platform offerings and seek to improve the efficiency with which we deliver our traditional products and services. With this in mind, we have recently entered into strategic partner relationships to jointly market, sell, and develop integrated products and services.
Competition
We compete with technology providers who target discrete manufacturers. We compete with a number of companies that offer solutions that address one or more specific functional areas covered by our solutions, including Dassault Systèmes SA and Siemens AG for traditional CAD solutions, PLM solutions, manufacturing planning solutions and visualization and digital mock-up solutions; Oracle Corporation and SAP AG for PLM solutions and SLM solutions; and IBM Corporation and Hewlett Packard for ALM solutions. We believe our products are more specifically targeted toward the business process challenges of

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manufacturing companies and offer broader and deeper functionality for those processes than ERP-based solutions. We also compete in the CAD market with design products such as Autodesk, Inc.'s Inventor, Siemens AG's Solid Edge and Dassault Systemes SA's SolidWorks for sales to smaller manufacturing customers. In our Technology Platform business, we compete with large established companies like IBM Corporation, Microsoft, Cisco, Oracle, SAP, and General Electric. Additionally, there are a number of small companies that compete in the market for IoT products.
Proprietary Rights
Our software products and related technical know-how, along with our trademarks, including our company names, product names and logos, are proprietary. We protect our intellectual property rights in these items by relying on copyrights, trademarks, patents and common law safeguards, including trade secret protection. The nature and extent of such legal protection depends in part on the type of intellectual property right and the relevant jurisdiction. In the U.S., we are generally able to maintain our trademark registrations for as long as the trademarks are in use and to maintain our patents for up to 20 years from the earliest effective filing date. We also use license management and other anti-piracy technology measures, as well as contractual restrictions, to curtail the unauthorized use and distribution of our products.
Our proprietary rights are subject to risks and uncertainties described under Item 1A. “Risk Factors” below. You should read that discussion, which is incorporated into this section by reference.
Backlog
We define backlog as contractually committed orders for license, subscription and support with a customer for which the associated revenue has not been recognized and the customer has not been invoiced. Deferred revenue primarily relates to software support agreements invoiced to customers for which the revenue has not yet been recognized. Customer commitments for amounts that are not in deferred revenue and have not yet been invoiced to customers related to multi-year support and subscription contracts totaled approximately $210 million at September 30, 2015 (compared to approximately $185 million at September 30, 2014), of which we expect to invoice customers approximately $140 million within the next twelve months.
Employees
As of September 30, 2015, we had 5,982 employees, including 1,998 in product development; 1,857 in customer support, training, consulting, cloud services and product distribution; 1,416 in sales and marketing; and 711 in general and administration. Of these employees, 2,263 were located in the United States and 3,719 were located outside the United States.
Website Access to Reports and Code of Business Conduct and Ethics
We make available free of charge on our website at www.ptc.com the following reports as soon as reasonably practicable after electronically filing them with, or furnishing them to, the SEC: our Annual Reports on Form 10-K; our Quarterly Reports on Form 10-Q; our Current Reports on Form 8-K; and amendments to those reports filed or furnished pursuant to Sections  13(a) or 15(d) of the Securities Exchange Act of 1934. Our Proxy Statements for our Annual Meetings and Section 16 trading reports on SEC Forms 3, 4 and 5 also are available on our website. The reference to our website is not intended to incorporate information on our website into this Annual Report by reference.
Our Code of Ethics for Senior Executive Officers is also available on our website. Additional information about this code and amendments and waivers thereto can be found below in Part III, Item 10 of this Annual Report.
Executive Officers
Information about our executive officers is incorporated by reference from Part III, Item 10 of this Annual Report.
Corporate Information
PTC was incorporated in Massachusetts in 1985 and is headquartered in Needham, Massachusetts.
 
ITEM 1A.
Risk Factors

The following are important factors we have identified that could affect our future results. You should consider them carefully when evaluating an investment in PTC’s securities or any forward-looking statements made by us, including those contained in this Annual Report, because these factors could cause actual results to differ materially from historical results or

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the performance projected in forward-looking statements. The risks described below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition and/or operating results.

I. Operational Considerations

Our operating results fluctuate from quarter to quarter, making future operating results difficult to predict; failure to meet market expectations could cause the price of our securities to decline.

Our quarterly operating results historically have fluctuated and are likely to continue to fluctuate depending on a number of factors, including:
a high percentage of our revenue historically has been generated in the third month of each fiscal quarter and any failure to receive, complete or process orders at the end of any quarter could cause us to fall short of our revenue targets;
a significant percentage of our revenue comes from transactions with large customers, which tend to have long lead times that are less predictable;
one or more industries that we serve may have weak or negative growth;
our operating expenses are largely fixed in the short term and are based on expected revenues and any failure to achieve our revenue targets could cause us to miss our earnings targets as well;
our mix of license, subscription and service revenues can vary from quarter to quarter, creating variability in our operating margins;
because a significant portion of our revenue comes from outside the U.S. and a significant portion of our expense structure is located internationally, shifts in foreign currency exchange rates could adversely affect our reported results; and
we may incur significant expenses in a quarter in connection with corporate development initiatives, restructuring efforts or the investigation, defense or settlement of legal actions that would increase our operating expenses and reduce our earnings for the quarter in which those expenses are incurred.
Accordingly, our quarterly results are difficult to predict prior to the end of the quarter and we may be unable to confirm or adjust expectations with respect to our operating results for a particular quarter until that quarter has closed. Any failure to meet our quarterly revenue or earnings targets could adversely impact the market price of our securities.

We now offer our solutions as subscriptions, which will adversely affect our revenue and earnings in the transition period and make predicting our revenue and earnings more difficult.

We began offering most of our solutions under a subscription option in 2015, in addition to our perpetual license option. Under a subscription, customers pay a periodic fee for the right to use our software and receive support, or to use our cloud services and have us manage the application for a specified period. We believe that a significant number of our customers will elect to purchase our solutions as subscriptions rather than under a perpetual license (if available). Until we have fully transitioned to a stable mix of subscription and perpetual license purchases, we expect that our license revenue will decrease due to the difference in revenue recognition for a subscription license (revenue is recognized ratably over the term of the license) and a perpetual license (revenue is generally recognized upon purchase) and that our support revenue (which comprises a significant portion of our revenue) may also decrease due to support services being included in the subscription offering.

Our revenue and earnings targets are based on assumptions about the mix of revenue that will be attributable to subscription and perpetual license revenue. If a greater percentage of our customers elect to purchase our solutions as subscriptions in a period than we assumed, our revenue and earnings will likely fall below our expectations for that period, which could cause our stock price to decline.

Our long range financial targets are predicated on revenue growth and operating margin improvements that we may fail to achieve, which could reduce our expected earnings and cause us to fail to meet the expectations of analysts or investors and cause the price of our securities to decline.

We are projecting long-term revenue and earnings growth. However, as we transition to a subscription model, our plan through 2021 assumes that our license revenue and earnings will decrease in 2016, 2017 and 2018 due to lower up-front revenue recognized for a subscription license compared to a perpetual license, and assumes increases in revenue from a recurring subscription revenue stream beginning in 2019. Our projections are based on the expected growth potential in the IoT and SLM markets, with more modest growth expectations for CAD and ePLM. We may not achieve the expected bookings and

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revenue growth if the markets we serve do not grow at expected rates, if we are not able to deliver solutions desired by customers and potential customers, and/or if acquired businesses do not generate the revenue growth that we expect.

Our long-term operating margin improvement is predicated on operating leverage as long range revenue increases, improved operating efficiencies, particularly within our sales organization and service margin improvements. Services margins are significantly lower than license and support margins. Future projected improvements in our operating margin as a percent of revenue are based in part on our ability to improve services margins by reducing the amount of direct services that we perform through expansion of our service partner program, and improving the profitability of services that we perform. If our services revenue increases as a percentage of total revenue and/or if we are unable to improve our services margins, our overall operating margin may not increase to the levels we expect or may decrease. Additionally, if we do not achieve lower sales and marketing expenses as a percentage of revenue through productivity initiatives, we may not achieve our operating margin targets. If operating margins do not improve, our earnings could be adversely affected and the price of our securities could decline.

Our significant investment in our Technology Platform business may not generate the revenues we expect.
 
We have made a significant investment in recent years in our Technology Platform business, including four acquisitions  totaling approximately $450 million. Our Technology Platform business provides technology solutions that enable customers to transform their businesses and leverage the opportunities created by the Internet of Things (IoT).  
 
The Technology Platform market is a new market for us that requires us to adopt a new sales approach.  The go-to-market approach for the Technology Platform business relies on an extensive and differentiated partner ecosystem to enable us to access markets and customers beyond our traditional markets, customers and buyers.  We also expect to focus on marketing directly to software application developers to become the Technology Platform of choice for the IoT.  We may be unable to expand our partner ecosystem as we expect and developers may not adopt our Technology Platform solutions as we expect, which would adversely affect our ability to realize revenue from our investments in this business.  
 
Further, the Internet of Things  is a relatively new market and there are a significant number of competitors in the market.  If the market does not expand as rapidly as we or others expect or if customers adopt competitive solutions rather than our solutions, our Technology Platform business may not generate the revenues we expect.  

Businesses we acquire may not generate the revenue and earnings we anticipate and may otherwise adversely affect our business.

We have acquired, and intend to continue to acquire, new businesses and technologies. If we fail to successfully integrate and manage the businesses and technologies we acquire, or if an acquisition does not further our business strategy as we expect, our operating results will be adversely affected.

Moreover, business combinations also involve a number of risks and uncertainties that can adversely affect our operations and operating results, including:
difficulties managing an acquired company’s technologies or lines of business or entering new markets where we have limited or no prior experience or where competitors may have stronger market positions;
unanticipated operating difficulties in connection with the acquired entities, including potential declines in revenue of the acquired entity;
failure to achieve the expected return on our investments which could adversely affect our business or operating results and impair the assets that we recorded as a part of an acquisition including intangible assets and goodwill;
diversion of management and employee attention;
loss of key personnel;
assumption of unanticipated legal or financial liabilities or other unidentified issues with the acquired business;
potential incompatibility of business cultures;
significant increases in our interest expense, leverage and debt service requirements if we incur additional debt to pay for an acquisition; and
if we were to issue a significant amount of equity securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease.

Our restructuring actions and reorganization may be disruptive and could harm our operations.

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Over the past few years, we have taken a number of restructuring actions and reorganizations designed to realign our global workforce to our business needs, reduce our expenses and enable us to increase investment in our Technology Platform business. These actions may not have the expected long-term effect on our expenses or may not be sufficient to fully offset additional investments we may make in our business. Disruptions in operations have occurred and will likely continue to occur as a result of these actions. Disruptions may include attrition beyond our planned reduction in workforce, a negative effect on employee morale or our ability to attract highly skilled employees. Further, we could experience delays, business disruptions, decreased productivity, unanticipated employee turnover and increased litigation related costs in connection with the restructuring and other efficiency initiatives.

We recently committed to a plan to reduce costs and realign investments with what we believe are our high growth opportunities by reducing our workforce and consolidating facilities. This restructuring may result in higher charges than anticipated and / or our actual projected expense reductions may fall below our expectations.

We depend on sales within the discrete manufacturing sector and our business could be adversely affected if manufacturing activity does not grow or if it contracts.

A large amount of our revenue is related to sales to customers in the discrete manufacturing sector. If this economic sector does not grow, or if it contracts, our customers in this sector may, as they have in the past, reduce or defer purchases of our products and services, which adversely affects our business. In 2015, the manufacturing sector was weak, particularly in the Americas and China, which we believe adversely impacted our sales and operating results in those regions in 2015. We expect global manufacturing economic conditions could continue to adversely impact our results in 2016, particularly in the U.S. and China.

We face significant competition, which may reduce our profits and limit or reduce our market share.

The market for product development solutions and IoT solutions is rapidly changing and characterized by vigorous competition, both by entry of competitors with innovative technologies and by consolidation of companies with complementary products and technologies. This competition could result in price reductions for our products and services, reduced margins, loss of customers and loss of market share. Our primary competition comes from:
larger companies that offer competitive solutions;
larger, more well-known enterprise software providers with greater financial, technical, sales and marketing, and other resources; and
other vendors of various competitive point solutions or IoT platforms.

In addition, barriers to entry into certain segments of the software industry have declined and the ability of customers to adopt software solutions has increased with the ability to offer software in the cloud and the increasing prevalence of subscription license models and customer acceptance of both those models. Because of these and other factors, competitive conditions in the industry are likely to intensify in the future.

Increased competition could result in price reductions, reduced net revenue and profit margins and loss of market share, any of which would likely harm our business.

A breach of security in our products or computer systems, or those of our third-party service providers, could compromise the integrity of our products, harm our reputation, create additional liability and adversely impact our financial results .

We have implemented and continue to implement measures intended to maintain the security and integrity of our products, source code and computer systems. The potential consequences of a security breach or system disruption (particularly through cyber-attack or cyber-intrusion, including by computer hackers, foreign governments and cyber terrorists) have increased in scope as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Despite efforts to create security barriers to such threats, it is virtually impossible for us to entirely eliminate this risk. In addition, we offer cloud services to our customers and some of our products are hosted by third-party service providers, which expose us to additional risks as those repositories of our customers’ proprietary data may be targeted by such hackers. A significant breach of the security and/or integrity of our products or systems, or those of our third-party service providers, could prevent our products from functioning properly, could enable access to sensitive, proprietary or confidential information, including that of our customers, without authorization, or could disrupt our business operations or those of our customers. This could require us to incur significant costs of remediation, harm our reputation, cause customers to stop buying our products,

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and cause us to face lawsuits and potential liability, which could have a material adverse effect on our financial condition and results of operations.

Our sales and operations are globally dispersed, which exposes us to additional compliance risks.

We sell and deliver software and services, and maintain support operations, in a large number of countries whose laws and practices differ from one another and are subject to unexpected changes. Managing these geographically dispersed operations requires significant attention and resources to ensure compliance with laws of those countries and those of the U.S. governing our activities in non-U.S. countries.

Those laws include, but are not limited to, anti-corruption laws and regulations (including the U.S. Foreign Corrupt Practices Act (FCPA) and the U.K. Bribery Act 2010) and trade and economic sanctions laws and regulations (including laws administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control, the U.S. State Department, the U.S. Department of Commerce, the United Nations Security Council and other relevant sanctions authorities). The FCPA and UK Bribery Act prohibit us and business partners or agents acting on our behalf from offering or providing anything of value to persons considered to be foreign officials under those laws for the purposes of obtaining favorable treatment. The UK Bribery Act also prohibits commercial bribery and accepting bribes. Our compliance risks with these laws are heightened due to the global nature of our business, the fact that we operate in, and are expanding into, countries with a higher incidence of corruption and fraudulent business practices than others, and the fact that we deal with governments and state-owned business enterprises, the employees and representatives of which may be considered foreign officials for purposes of the FCPA and the UK Bribery Act.

Accordingly, while we strive to maintain a comprehensive compliance program, we cannot guarantee that an employee, agent or business partner will not act in violation of our policies or U.S. or other applicable laws. Investigations of alleged violations of those laws can be expensive and disruptive. Violations of such laws can lead to civil and/or criminal prosecutions, substantial fines and other sanctions, including the revocation of our rights to continue certain operations and also cause business and reputation loss. For example, as discussed in Risk Factors II. Other Considerations, we are currently in discussions with the U.S. Securities and Exchange Commission and U.S. Department of Justice to attempt to resolve an investigation concerning certain payments and expenses by certain business partners and employees in China that raise questions of compliance with laws, including the U.S. Foreign Corrupt Practices Act, and/or compliance with our business policies.

Our international businesses present economic and operating risks.

We expect that our international operations will continue to expand and to account for a significant portion of our total revenue. Because we transact business in various foreign currencies, the volatility of foreign exchange rates has had and may in the future have a material adverse effect on our revenue, expenses and operating results.

Other risks inherent in our international operations include, but are not limited to, the following:
difficulties in staffing and managing foreign sales and development operations;
possible future limitations upon foreign-owned businesses;
increased financial accounting and reporting burdens and complexities;
inadequate local infrastructure; and
greater difficulty in protecting our intellectual property.

We may be unable to adequately protect our proprietary rights.

Our software products are proprietary. We protect our intellectual property rights in these items by relying on copyrights, trademarks, patents and common law safeguards, including trade secret protection, as well as restrictions on disclosures and transferability contained in our agreements with other parties. Despite these measures, the laws of all relevant jurisdictions may not afford adequate protection to our products and other intellectual property. In addition, we frequently encounter attempts by individuals and companies to pirate our software. If our measures to protect our intellectual property rights fail, others may be able to use those rights, which could reduce our competitiveness and revenues.

In addition, any legal action to protect our intellectual property rights that we may bring or be engaged in could be costly, may distract management from day-to-day operations and may lead to additional claims against us, and we may not succeed, all of which would materially adversely affect our operating results.


9



Intellectual property infringement claims could be asserted against us, which could be expensive to defend and could result in limitations on our use of the claimed intellectual property.

The software industry is characterized by frequent litigation regarding copyright, patent and other intellectual property rights, as well as improper disclosure of confidential or proprietary information. If a lawsuit of this type is filed, it could result in significant expense to us and divert the efforts of our technical and management personnel. We cannot be sure that we would prevail against any such asserted claims. If we did not prevail, we could be prevented from using the claimed intellectual property or be required to enter into royalty or licensing agreements, which might not be available on terms acceptable to us. In addition to possible claims with respect to our proprietary products, some of our products contain technology developed by and licensed from third parties and we may likewise be susceptible to infringement claims with respect to these third-party technologies.

Some of our products contain “open source” software, and any failure to comply with the terms of one or more of these open source licenses could negatively affect our business and subject us to possible litigation.

Some of our products incorporate so-called “open source” software and we may incorporate open source software into other products in the future. Such open source software is generally licensed by its authors or other third parties under open source licenses. We monitor our use of open source software in an effort to avoid subjecting our products to conditions we do not intend. Although we believe that we have complied with our obligations under the various applicable licenses for open source software that we use, our processes used to monitor how open source software is used could be improperly followed or subject to error.

If an author or other third party that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal expenses defending against such allegations. If our defenses were not successful, we could be subject to significant damages. We could also be enjoined from the distribution of our products that contained the open source software or be required to modify our products in order to comply with the conditions of the open source license(s) in question, thereby disrupting the distribution and sale of some of our products. In addition, if we combine our proprietary software with open source software in a certain manner, under some open source licenses we could be required to release the source code of our proprietary software, which would adversely affect our ability to derive revenue from the affected products.

Our financial condition could be adversely affected if significant errors or defects are found in our software.

Sophisticated software can sometimes contain errors, defects or other performance problems. If errors or defects are discovered in our products, we may need to expend significant financial, technical and management resources, or divert some of our development resources, in order to resolve or work around those defects, and we may not be able to correct them in a timely manner or provide an adequate response to our customers.

Errors, defects or other performance problems in our products could also cause us to lose revenue, lose customers and lose market share, and could subject to liability. Such defects or problems could also damage our business reputation and cause us to lose new business opportunities.

We may have exposure to additional tax liabilities and our effective tax rate may increase or fluctuate, which could increase our income tax expense and reduce our net income.

As a multinational organization, we are subject to income taxes as well as non-income based taxes in the U.S. and in various foreign jurisdictions. Significant judgment is required in determining our worldwide income tax provision and other tax liabilities. In the ordinary course of a global business, there are many intercompany transactions and calculations where the ultimate tax determination is uncertain. Our tax returns are subject to review by various taxing authorities. Although we believe that our tax estimates are reasonable, the final determination of tax audits or tax disputes could be different from what is reflected in our historical income tax provisions and accruals.

Our effective tax rate can be adversely affected by several factors, many of which are outside of our control, including:
changes in tax laws, regulations, and interpretations in multiple jurisdictions in which we operate;
assessments, and any related tax interest or penalties, by taxing authorities;
changes in the relative proportions of revenues and income before taxes in the various jurisdictions in which we operate that have differing statutory tax rates;
changes to the financial accounting rules for income taxes;

10



unanticipated changes in tax rates; and
changes to a valuation allowance on net deferred tax assets, if any.

Because we have substantial cash requirements in the United States and a significant portion of our cash is generated and held outside of the United States, if our cash available in the United States and the cash available under our credit facility is insufficient to meet our operating expenses and debt repayment obligations in the United States, we may be required to raise cash in ways that could negatively affect our financial condition, results of operations and the market price of our securities.

We have significant operations outside the United States. As of September 30, 2015, approximately 72% of our cash and cash equivalents balance was held by subsidiaries outside the United States, with the remainder of the balance held by the U.S. parent or its subsidiaries in the United States. We believe that the combination of our existing United States cash and cash equivalents, future United States operating cash flows and cash available under our credit facility, are sufficient to meet our ongoing United States operating expenses and known capital requirements. However, if these sources of cash are insufficient to meet our future financial obligations in the United States, we will be required to seek other available funding sources or means to repatriate cash to the United States, which could negatively impact our results of operations, financial position and the market price of our securities.

II. Other Considerations

We have been investigating certain matters in China, the resolution of which could have a material adverse effect on our business and our results.

We have been in discussions with the U.S. Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) to resolve an investigation concerning expenditures by our business partners in China and by our China business, including for travel and entertainment, that apparently benefited employees of customers regarded as state owned enterprises in China. This matter involves issues regarding compliance with laws, including the U.S. Foreign Corrupt Practices Act. We have recorded liabilities of $28.2 million as a result of our agreements in principle with those agencies to settle the matter. There can be no assurance that we will enter into final settlements on the agreed terms with these agencies or, if not, that the cost of any final settlements, if reached, would not exceed the existing accrual. Further, any settlement or other resolution of this matter could have collateral effects on our business in China, the United States and elsewhere.

We are required to comply with certain financial and operating covenants under our credit facility and to make scheduled debt payments as they become due; any failure to comply with those covenants or to make scheduled payments could cause amounts borrowed under the facility to become immediately due and payable and/or prevent us from borrowing under the facility.

Our credit facility consists of a $1 billion revolving loan commitment that matures on September 15, 2019, at which time all remaining amounts outstanding will be due and payable in full. As of November 4, 2015, we had $718 million outstanding under the credit facility. We may wish to borrow additional amounts under the facility in the future to support our operations, including for strategic acquisitions and share repurchases.

We are required to comply with specified financial and operating covenants and to make payments under the facility, which limit our ability to operate our business as we otherwise might operate it. Our failure to comply with any of these covenants or to meet any payment obligations under the facility could result in an event of default which, if not cured or waived, would result in any amounts outstanding, including any accrued interest and unpaid fees, becoming immediately due and payable. We might not have sufficient working capital or liquidity to satisfy any repayment obligations in the event of an acceleration of those obligations. In addition, if we are not in compliance with the financial and operating covenants at the time we wish to borrow funds, we will be unable to borrow funds.

We may be unable to meet our goal of returning 40% of free cash flow to shareholders through share repurchases, which could decrease your expected return on investment in PTC stock.

In August 2014, we announced a new capital allocation strategy, a component of which is a long-term goal of returning approximately 40% of free cash flow (cash flow from operations less capital expenditures) to shareholders through share repurchases. Meeting this goal requires PTC to generate consistent free cash flow in the years ahead in an amount sufficient to enable us to continue investing in organic and inorganic growth as well as to return a significant portion of the cash generated to stockholders in the form of share repurchases. We may not meet this goal if we do not generate the free cash flow we expect or if we use our available cash to satisfy other priorities. In addition, our cash flow fluctuates over the course of the year and over multiple years, so, although our goal is to return 40% of free cash flow to shareholders, that is an average over a longer

11



term and the number of shares repurchased and amount of free cash flow returned in any given period will vary and may be more or less than 40% in any such period. Finally, the number of shares repurchased for a given amount of cash will vary based on PTC’s stock price, so the number of shares repurchased will not be a consistent or predictable number or percentage of outstanding stock.

Our stock price has been volatile, which may make it harder to resell your shares at a time and at a price that is favorable to you.

Market prices for securities of software companies are generally volatile and are subject to significant fluctuations that may be unrelated or disproportionate to the operating performance of these companies. The trading prices and valuations of these stocks, and of ours, may not be predictable. Negative changes in the public’s perception of the prospects of software companies, or of PTC or the markets we serve, could depress our stock price regardless of our operating results.

Also, a large percentage of our common stock is held by institutional investors. Purchases and sales of our common stock by these institutional investors could have a significant impact on the market price of the stock. For more information about those investors, please see our proxy statement with respect to our most recent annual meeting of stockholders and Schedules 13D and 13G filed with the SEC with respect to our common stock.


ITEM 1B.
Unresolved Staff Comments

None.

ITEM 2.
Properties

We currently lease 99 offices used in operations in the United States and internationally, predominately as sales and/or support offices and for research and development work. Of our total of approximately 1,369,000 square feet of leased facilities used in operations, approximately 579,000 square feet are located in the U.S., including 321,000 square feet at our headquarters facility located in Needham, Massachusetts, and approximately 222,000 square feet are located in India, where a significant amount of our research and development is conducted. We believe that our facilities are adequate for our present and foreseeable needs.
ITEM 3.
Legal Proceedings
We are subject to various legal proceedings and claims that arise in the ordinary course of business. Except for the China matter described in ITEM 1. Risk Factors II. Other Considerations and Note I Commitments and Contingencies of "Notes to Consolidated Financial Statements" in this Annual Report , which information is incorporated herein by reference, we currently believe that resolving these matters will not have a material adverse impact on our financial condition, results of operations or cash flows. However, the results of legal proceedings cannot be predicted with certainty. Should any of these legal matters be resolved against us, the operating results for a particular reporting period could be adversely affected.
 
ITEM 4.
Mine Safety Disclosures

Not applicable.
PART II
 
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Information with respect to the market for our common stock is located in Selected Consolidated Financial Data beginning on page A-1 of this Form 10-K and is incorporated herein by reference.
On September 30, 2015 , the close of our fiscal year, as well as on November 13, 2015, our common stock was held by 1,355 shareholders of record.
We do not pay cash dividends on our common stock and we retain earnings for use in our business or to repurchase our shares. Although we review our dividend policy periodically, our review may not cause us to pay any dividends in the future. Further, our credit facility requires us to maintain specified leverage and fixed-charge ratios that limit the amount of dividends that we could pay.
The table below shows the shares of our common stock we repurchased in the fourth quarter of 2015.
ISSUER PURCHASES OF EQUITY SECURITIES

12



Period (1)
 
Total Number of Shares (or Units) Purchased  
 
Average Price Paid per Share (or Unit)  
 
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs  
 
Approximate
Dollar Value of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans or Programs  
 
 
July 5 - August 1, 2015



$425,038,003
(2)
August 2 - August 29, 2015
434,300

$
34.49

434,300

$410,059,854
(2)
August 30 - September 30, 2015



$410,059,854
(2)
Total
434,300

$
34.49

434,300

$410,059,854
(2)
 
(1) Periods are our fiscal months within the fiscal quarter.
(2) In August 2014, our Board authorized us to repurchase up to $600 million worth of our shares in the period August 4, 2014 through September 30, 2017, which repurchase program we announced on August 4, 2014.

ITEM 6.
Selected Financial Data
Our five-year summary of selected financial data and quarterly financial data for the past two years is located on pages A-1 and A-2 at the end of this Form 10-K and incorporated herein by reference.

ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Statements in this Annual Report about anticipated financial results and growth, as well as about the development of our products and markets, are forward-looking statements that are based on our current plans and assumptions. Important information about the bases for these plans and assumptions and factors that may cause our actual results to differ materially from these statements is contained below and in Item 1A. “Risk Factors” of this Annual Report.
Unless otherwise indicated, all references to a year reflect our fiscal year that ends on September 30.
Executive Overview
Results for 2015
Revenue was down year over year due to changes within our business including a higher mix of subscription revenue in 2015 compared to 2014 as we transition from selling perpetual licenses to a subscription-based licensing model, as well as external factors, including a challenging macroeconomic environment and the impact of foreign currency exchange rates on our reported revenue due to an increase in the strength of the U.S. Dollar relative to international currencies, most notably the Euro and the Yen.
 
 
Year Ended
 
 
 
Constant Currency Change
 
 
 
September 30, 2015
 
September 30, 2014
 
 
 
 
Revenue
 
 
 
Change
 
 
 
 
(in millions)
 
 
 
 
 
License and Subscription
 
$
348.0

 
$
389.7

 
(11
)%
 
(4
)%
 
Support
 
681.5

 
688.5

 
(1
)%
 
7
 %
 
Total Software
 
1,029.5

 
1,078.2

 
(5
)%
 
3
 %
 
Professional Services
 
225.7

 
278.7

 
(19
)%
 
(12
)%
 
Total
 
$
1,255.2

 
$
1,357.0

 
(8
)%
 
 %
 

Software revenue declined due to unfavorable currency movements and fewer large license transactions in the year than in the prior year. Perpetual license revenue declined $80 million in 2015 compared to 2014 ($56 million on a constant currency basis). We believe that challenging macroeconomic conditions and execution issues impacted our ability to close large license transactions in our core business. Additionally, 2015 was a difficult comparison in relation to 2014, in which CAD and ePLM had double digit software revenue growth due in part to customer contract cycles.

13



Year-over-year revenue declines were partially offset by revenue from businesses acquired in 2014. On an organic basis (excluding revenue from acquired businesses), total license and subscription (L&S) revenue was down 18% year over year. 
Professional services revenue declined primarily due to a shift of services to our partners in accordance with our margin improvement strategy.
We delivered strong growth in our Internet of Things business, closing a number of significant deals with large, industrial companies that are adopting our platform for their IoT initiatives. IoT license revenue represented more than 10% of our total L&S revenue in 2015, compared to 1% in 2014.
Approximately 58% of our revenue in 2015 came from recurring revenue streams (subscription solutions and support), compared to approximately 52% in 2014.
From a geographic perspective, we believe macroeconomic challenges in the Americas and Europe impacted our ability to close large CAD and ePLM deals, which, given the maturity of these markets, tend to be more cyclical. Total Software revenue was flat in the Americas as growth in our IoT and SLM businesses offset our weaker results in CAD and ePLM. In Europe, we saw 4% software revenue growth on a constant currency basis, driven by IoT, SLM, and ePLM with a decline in CAD. Pacific Rim software revenue declined modestly due to weak results in ePLM and SLM, which we believe was primarily due to the overall economic slowdown in China. Japan software revenue increased 9% in 2015 on a constant currency basis from 2014 due to L&S revenue growth in IoT, SLM and ePLM, offset by a decline in CAD.
 
 
Year Ended
 
 
 
Constant Currency Change
 
 
 
September 30, 2015
 
September 30, 2014
 
 
 
 
Other Operating Measures
 
 
 
Change
 
 
 
 
 
 
 
 
 
 
Operating Margin
 
3.3
%
 
14.5
%
 
(77
)%
 
(64
)%
 
EPS
 
$0.41
 
$1.34
 
(69
)%
 
(57
)%
 
 
 
 
 
 
 

 
 
 
Non-GAAP Operating Margin (1)
 
24.2
%
 
25.1
%
 
(4
)%
 
5
 %
 
Non-GAAP EPS (1)
 
$2.23
 
$2.17
 
3
 %
 
21
 %
 
(1) Non-GAAP measures are reconciled to GAAP results under Results of Operations - Non-GAAP Measures  below.
GAAP and non-GAAP operating income reflect lower revenue, offset by reductions in operating expenses driven by cost savings from restructuring actions and by lower incentive compensation accruals associated with performance based incentive compensation plans for which the associated performance metrics were not achieved. Additionally, our GAAP operating margin includes a $66 million pension settlement loss due to the termination of our U.S. pension plan, a $28 million accrual associated with the pending China matter and restructuring charges of $43 million due to our April 2015 restructuring plan. Currency movements reduced GAAP EPS by approximately $0.26. Both GAAP and non-GAAP EPS benefited from a lower tax rate.
Our GAAP results reflect a tax benefit of $19 million related to the reversal of a portion of the U.S. valuation allowance related to reducing deferred tax assets in connection with settling the U.S. pension plan and a tax benefit of $18 million in 2014 related to the reversal of a portion of the valuation allowance on net deferred tax assets in the U.S. and a foreign jurisdiction as a result of accounting for acquisitions.
We generated $180 million of cash from operations in 2015, down 41% from $305 million in 2014, and we borrowed $56 million under our credit facility to fund acquisitions and stock repurchases. The decrease in cash from operations in 2015 compared to 2014 was due in part to pension funding which was higher by $34 million and restructuring payments which were higher by $33 million. We used $99 million of cash to acquire ColdLight and $65 million to repurchase stock. At September 30, 2015, the balance outstanding under our credit facility was $668 million and we had $155 million available to borrow under the revolving loan portion of our credit facility. We ended 2015 with $273 million of cash, down from $294 million at the end 2014.
Acquisitions
I n 2015, we acquired ColdLight Solutions, LLC for $99 million . ColdLight offers solutions for data machine learning and predictive analytics, which expanded our technology portfolio in the IoT market. ColdLight was not material to our results for 2015.
2015 Restructuring of Our Workforce

14



In April 2015, we committed to a plan to restructure our global workforce and consolidate select facilities to increase investment in our IoT business and to reduce our cost structure through organizational efficiencies in the face of significant foreign currency depreciation relative to the U.S. Dollar and a more cautious outlook on global macroeconomic conditions. The restructuring actions resulted in charges of $43 million during 2015, including $1 million of facility related charges and $42 million of employee related termination costs, primarily related to termination benefits associated with 411 employees. This reorganization resulted in net annualized expense reductions of approximately $30 million. We recently announced a 2016 restructuring plan as described below in Future Expectations, Strategies and Risks.
Pension Termination
We maintained a U.S. defined benefit pension plan that covered certain persons who were employees of Computervision Corporation (acquired by us in 1998). Benefits under the plan were frozen in 1990. In the second quarter of 2014, we began the process of terminating the plan, which included settling plan liabilities by offering lump sum distributions to certain plan participants and purchasing annuity contracts to cover vested benefits. We completed the termination in the fourth quarter of 2015. In connection with the termination, we contributed $25.5 million to the plan and recorded a settlement loss of $66 million.
Future Expectations, Strategies and Risks
The slowdown in the global manufacturing industry, uncertainty about the economic environment, volatility in foreign currency exchange rates, and our transition to a subscription model were headwinds for revenue and earnings growth in fiscal 2015. While we saw indications of improvements in global manufacturing economic conditions early in 2015, recent economic indicators raise continued concerns about the economic climate and current indicators suggest the global manufacturing economy is weaker than we experienced entering 2015, with foreign currency depreciation and other acute macro factors potentially weighing on our multinational customers, particularly in the Americas, China and Japan.
Looking forward, as we move into 2016, we have three overriding goals: 1) to focus on driving sustainable growth, 2) to expand our subscription-based licensing, and 3) to continue to control costs and improve margins.
Sustainable Growth
Our goals for overall growth are predicated on continuing to expand our IoT technology footprint and making structural changes to our business to improve operational performance and increase growth potential for both our new IoT solutions as well as our core solutions. We continue to invest in IoT solutions, most recently with our acquisitions of ColdLight and Vuforia. As described in 2015 Business Developments, Corporate Organizational Changes above , effective in 2016, we have reorganized the company into two main business units: the Solutions Group, comprised of our core CAD, ePLM and SLM business, and the Technology Platform Group, comprised of our IoT, analytics and augmented reality business. This new structure will allow for appropriate focus on both the core Solutions and the Technology Platform business.
Subscription
A majority of our software license sales to date have been perpetual licenses, where customers own the software license and revenue is recognized at the time of sale. Due to evolving customer preferences, our plan to increase our recurring revenue base, as well as acquisitions we have made in the IoT and cloud services space, we began offering our products under a subscription license model in 2015. A small but growing percentage of our business now consists of ratably recognized subscriptions. Under a subscription, customers do not own the software license but pay a periodic fee for the right to use our software, including access to technical support. Beginning October 1, 2015 we launched the second phase of our subscription program with the goal of accelerating our transition to a predominantly subscription-based licensing model. To drive that acceleration, we launched new pricing and packaging for subscriptions and new sales incentive compensation plans to drive our business toward subscription. We are targeting that by 2018, a significant majority of our L&S bookings could be subscription. In 2016, we expect that subscription bookings will increase over 2015, but will still constitute significantly less than a majority of bookings. If a greater percentage of our customers elect our subscription offering in 2016 than our base case assumption, it will have an adverse impact on revenue, operating margin, cash flow and EPS growth relative to our expectations. In addition, subscription orders tend to be smaller in size than perpetual deals.

Cost Controls and Margin Expansion
We continue to proactively manage our cost structure and invest in what we believe are high return opportunities in our business. Our goal is to drive continued margin expansion over the long term. To that end, on October 23, 2015, we committed to a plan to restructure our workforce and consolidate select facilities in order to reduce our cost structure and to realign our investments with our identified growth opportunities.  The restructuring is expected to result in a charge of approximately

15



$40 million to $50 million, which is primarily attributable to termination benefits, substantially all of which will be recorded in our first fiscal quarter ending January 2, 2016.  The restructuring will result in cash expenditures of approximately $40 million to $50 million, which we expect will primarily be paid over the first three quarters of fiscal 2016. We expect that the effect of the expense reductions, offset by certain planned cost increases and investments in our business, will result in a decrease in costs and expenses of approximately $17 million in 2016, as compared to 2015, which effect is contemplated in our financial guidance for fiscal 2016.

2016 Guidance

For 2016, we expect year-over-year revenue to decrease 3% to 5% due to our subscription transition and expected decrease in professional services revenue. While Subscription revenue is expected to grow by approximately 35% in 2016, the subscription transition is expected to result in a 2% decrease in support revenue and 8% to 15% decrease in perpetual revenue.  Professional services revenue is expected to decrease 12% due to further transition of certain customers to our partners and ongoing development of solutions that require less professional services to deploy. Our results will differ materially from our guidance if economic conditions do not improve or deteriorate further, if foreign currency exchange rates relative to the U.S. Dollar differ significantly from our current assumed rates, if customers do not purchase subscriptions at the rate we expect, if our businesses do not grow as we have assumed, or if our cost reductions do not achieve the expected results.

In November 2015, we acquired the Vuforia business from Qualcomm Connected Experiences, Inc. for $65 million in cash. Vuforia is an augmented reality technology platform that expands our Technology Platform portfolio.
Our results have been impacted, and we expect will continue to be impacted, by our ability to close large transactions. The amount of bookings and revenue, particularly license and subscriptions, attributable to large transactions, and the number of such transactions, may vary significantly from quarter to quarter based on customer purchasing decisions and macroeconomic conditions. Such transactions may have long lead times as they often follow a lengthy product selection and evaluation process, and for existing customers, are influenced by contract expiration cycles. This may cause volatility in our results. In 2016, we expect large license transactions will continue to be unfavorably impacted by a challenging global manufacturing economy, particularly affecting our CAD and ePLM businesses. In addition, we expect that deal sizes will decrease as we expect that customers will purchase more of our solutions as subscriptions, which may involve smaller purchases than perpetual license purchases.
Impact of an Investigation in China
As previously announced, we have been in discussions with the U.S. Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) to resolve an investigation concerning expenditures by our business partners in China and by our China business, including for travel and entertainment, that apparently benefited employees of customers regarded as state owned enterprises in China. This matter involves issues regarding compliance with laws, including the U.S. Foreign Corrupt Practices Act. We have recorded liabilities of $28.2 million as a result of our agreements in principle with those agencies to settle the matter. There can be no assurance that we will enter into final settlements on the agreed terms with these agencies or if not, that the cost of any final settlements, if reached, would not exceed the existing accrual. Further, any settlement or other resolution of this matter could have collateral effects on our business in China, the United States and elsewhere.
Revenue, Operating Margin, Earnings per Share and Cash Flow
The following table shows the financial measures that we consider the most significant indicators of the performance of our business. In addition to providing operating income, operating margin, and diluted earnings per share as calculated under generally accepted accounting principles (“GAAP”), it shows non-GAAP operating income, operating margin, and diluted earnings per share for the reported periods. These non-GAAP measures exclude fair value adjustments related to acquired deferred revenue, acquired deferred costs, stock-based compensation expense, amortization of acquired intangible assets expense, acquisition-related and pension plan termination costs, restructuring charges, certain identified gains or charges included in non-operating other income (expense) and the related tax effects of the preceding items, as well as the tax items identified. These non-GAAP measures provide investors another view of our operating results that is aligned with management budgets and with performance criteria in our incentive compensation plans. Management uses, and investors should use, non-GAAP measures in conjunction with our GAAP results. We discuss the non-GAAP measures in detail under Non-GAAP Measures below.
 

16



 
2015
 
2014
 
Percent Change  2014 to 2015
 
2013
 
Percent Change  2013 to 2014
Actual
 
Constant
Currency
 
Actual
 
Constant
Currency
 
(Dollar amounts in millions, except per share data)
L&S revenue
$
348.0

 
$
389.7

 
(11
)%
 
(4
)%
 
$
354.3

 
10
 %
 
10
 %
Support revenue
681.5

 
688.5

 
(1
)%
 
7
 %
 
654.7

 
5
 %
 
5
 %
Total software revenue
1,029.5

 
1,078.2

 
 
 
 
 
1,009.0

 
 
 
 
Professional services revenue
225.7

 
278.7

 
(19
)%
 
(12
)%
 
284.6

 
(2
)%
 
(2
)%
Total revenue
1,255.2

 
1,357.0

 
(7
)%
 
 %
 
1,293.5

 
5
 %
 
5
 %
Cost of L&S
53.2

 
45.0

 
 
 
 
 
39.0

 
 
 
 
Cost of support
82.8

 
84.7

 
 
 
 
 
81.1

 
 
 
 
Cost of professional service
198.7

 
244.0

 
 
 
 
 
252.9

 
 
 
 
Total cost of revenue
334.7

 
373.7

 
 
 
 
 
373.0

 
 
 
 
Gross margin
920.5

 
983.3

 
 
 
 
 
920.5

 
 
 
 
Operating expenses
878.9

 
786.7

 
 
 
 
 
793.2

 
 
 
 
Total costs and expenses (1)
1,213.6

 
1,160.4

 
5
 %
 
9
 %
 
1,166.2

 
 %
 
 %
Operating income (1)
$
41.6

 
$
196.6

 
(79
)%
 
(57
)%
 
$
127.3

 
54
 %
 
52
 %
Non-GAAP operating income (1)
$
304.3

 
$
340.3

 
(11
)%
 
5
 %
 
$
286.3

 
19
 %
 
18
 %
Operating margin (1)
3.3
%
 
14.5
%
 
 
 
 
 
9.8
%
 
 
 
 
Non-GAAP operating margin (1)
24.2
%
 
25.1
%
 
 
 
 
 
22.1
%
 
 
 
 
GAAP diluted earnings (loss) per share (2)
$
0.41

 
$
1.34

 
 
 
 
 
$
1.19

 
 
 
 
Non-GAAP diluted earnings per share (2)
$
2.23

 
$
2.17

 
 
 
 
 
$
1.81

 
 
 
 
Cash flow from operations
$
179.9

 
$
304.6

 
 
 
 
 
$
224.7

 
 
 
 
 
(1)
Costs and expenses in 2015 included $73.2 million of pension plan termination-related costs, $43.4 million of restructuring charges, a $28.2 million legal accrual, and $8.9 million of acquisition-related costs. Costs and expenses in 2014 included $28.4 million of restructuring charges and $13.1 million of acquisition-related and pension plan termination costs. Costs and expenses in 2013 included $52.2 million of restructuring charges and $9.9 million of acquisition-related costs. These restructuring, acquisition-related, pension plan termination costs and legal accrual have been excluded from non-GAAP operating income, non-GAAP operating margin and non-GAAP diluted EPS.
(2)
Income taxes for non-GAAP diluted earnings per share reflect the tax effects of non-GAAP adjustments which are calculated by applying the applicable tax rate by jurisdiction to the non-GAAP adjustments described in Non-GAAP Measures , and also exclude the following non-operating income and tax items: The GAAP earnings per share in 2015 reflect a tax benefit of $18.7 million related to the reversal of a portion of the U.S. valuation allowance related to reducing deferred tax assets in connection with settling the U.S. pension plan. GAAP diluted earnings per share in 2014 includes (i) tax benefits of $18.1 million related to the release of a portion of the valuation allowance as a result of deferred tax liabilities established for acquisitions recorded in 2014 and (ii) a tax charge of $3.5 million to establish valuation allowances against net deferred tax assets in two foreign jurisdictions. GAAP diluted earnings per share in 2013 includes (i) tax benefits of $36.7 million related to the release of a portion of the valuation allowance as a result of deferred tax liabilities established for acquisitions recorded in 2013, (ii) tax benefits of $3.2 million relating to the final resolution of a long standing tax litigation matter and completion of an international jurisdiction tax audit, (iii) a tax benefit of $7.9 million related to the release of a portion of the valuation allowance in the U.S. as a result of a pension gain (decrease in unrecognized actuarial loss) recorded in accumulated other comprehensive income, and (iv) a tax benefit of $2.6 million relating to a tax audit in a foreign jurisdiction of an acquired company. GAAP diluted earnings per share in 2013 also includes a gain on investment of $0.6 million and a legal settlement gain of $5.1 million.

Results of Operations
Acquisitions

17



In 2015, we acquired ColdLight (on May 7). In 2014, we acquired ThingWorx (on December 30), Atego (on June 30) and Axeda (on August 11). These acquisitions collectively added $69.2 million of revenue in 2015 and $9.8 million of revenue in 2014.
Impact of Foreign Currency Exchange on Results of Operations
Approximately two thirds of our revenue and half of our expenses are transacted in currencies other than the U.S. dollar. Currency translation affects our reported results, which are in U.S. Dollars. Changes in currency exchange rates, particularly for the Yen and the Euro, compared to the prior year decreased revenue and decreased expenses in 2015, and increased revenue and decreased expenses in 2014. If actual reported results were converted into U.S. dollars based on the corresponding prior year’s foreign currency exchange rates, 2015 and 2014 revenue would have been higher by $99.7 million and lower by $2.1 million, respectively, and expenses would have been higher by $56.6 million and $0.9 million, respectively. The net impact on year-over-year results would have been an increase in operating income of $43.1 million in 2015 and a decrease in operating income of $3.0 million in 2014. The results of operations, revenue by line of business and revenue by geographic region in the tables that follow present both actual percentage changes year over year and percentage changes on a constant currency basis.
Reclassifications
Through 2014, we classified revenue in three categories: 1) license; 2) service; and 3) support. Because we introduced subscription-based licenses in 2015, we have revised our revenue reporting. Effective with the beginning of the first quarter of 2015, we report revenue as follows: 1) license and subscriptions (L&S); 2) support; and 3) professional services. L&S revenue includes perpetual license revenue, subscription revenue and cloud services revenue. Cloud service offerings were previously reflected in service revenue and cost of service revenue. Consulting and training service revenue and consulting and training cost of service revenue are now referred to as professional services revenue and cost of professional services revenue. The discussion that follows reflects our revised reporting structure.
Revenue
Revenue is reported below by line of business (license and subscription, support, and professional services), by solution area (CAD, Extended PLM (ePLM), SLM and IoT) and by geographic region (Americas, Europe, Pacific Rim and Japan).
Results include combined revenue from direct sales and our channel.
Revenue by Line of Business
 
Year ended September 30,
 
2015
 
Percent Change 2014 to 2015
 
2014
 
Percent Change 2013 to 2014
 
2013
 
$ Amount
 
% of Total Revenue
 
Actual
 
Constant Currency
 
$ Amount
 
% of Total Revenue
 
Actual
 
Constant Currency
 
$ Amount
 
% of Total Revenue
 
(Dollar amounts in millions)
L&S revenue
$
348.0

 
28
%
 
(11
)%
 
(4
)%
 
$
389.7

 
29
%
 
10
 %
 
10
 %
 
$
354.3

 
27
%
Support revenue
681.5

 
54
%
 
(1
)%
 
7
 %
 
688.5

 
51
%
 
5
 %
 
5
 %
 
654.7

 
51
%
Total software revenue
1,029.5

 
 
 
 
 
 
 
1,078.2

 
 
 
 
 
 
 
1,009.0

 
 
Professional Services revenue
225.7

 
18
%
 
(19
)%
 
(12
)%
 
278.7

 
21
%
 
(2
)%
 
(2
)%
 
284.6

 
22
%
Total revenue
$
1,255.2

 
100
%
 
(7
)%
 
 %
 
$
1,357.0

 
100
%
 
5
 %
 
5
 %
 
$
1,293.5

 
100
%


18



Revenue by Solution
Year ended September 30,
 
 
 
Percent Change
 
 
 
Percent Change
 
 
 
2015
 
Actual
 
Constant Currency
 
2014
 
Actual
 
Constant Currency
 
2013
 
(Dollar amounts in millions)
CAD
 
 
 
 
 
 
 
 
 
 
 
 
 
L&S revenue
$
125.8

 
(26
)%
 
(20
)%
 
$
170.5

 
13
 %
 
13
 %
 
$
150.4

Support revenue
366.8

 
(5
)%
 
3
 %
 
386.8

 
2
 %
 
2
 %
 
378.1

Total software revenue
492.7

 
 
 
 
 
557.3

 
 
 
 
 
528.5

Professional Services revenue
18.9

 
(22
)%
 
(14
)%
 
24.2

 
1
 %
 
1
 %
 
24.0

Total revenue
$
511.6

 
(12
)%
 
(4
)%
 
$
581.5

 
5
 %
 
5
 %
 
$
552.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Extended PLM (ePLM)
 
 
 
 
 
 
 
 
 
 
 
 
 
L&S revenue
$
134.2

 
(22
)%
 
(14
)%
 
$
171.4

 
12
 %
 
12
 %
 
$
152.6

Support revenue
239.2

 
4
 %
 
10
 %
 
231.0

 
7
 %
 
6
 %
 
216.6

Total software revenue
373.4

 
 
 
 
 
402.4

 
 
 
 
 
369.2

Professional Services revenue
151.3

 
(23
)%
 
(15
)%
 
196.9

 
(2
)%
 
(3
)%
 
201.9

Total revenue
$
524.7

 
(12
)%
 
(5
)%
 
$
599.3

 
5
 %
 
5
 %
 
$
571.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
SLM
 
 
 
 
 
 
 
 
 
 
 
 
 
  L&S revenue
$
43.8

 
1
 %
 
7
 %
 
$
43.4

 
(15
)%
 
(16
)%
 
$
51.3

  Support revenue
70.4

 
 %
 
5
 %
 
70.3

 
17
 %
 
17
 %
 
60.0

Total software revenue
114.2

 
 
 
 
 
113.8

 
 
 
 
 
111.3

Professional Services revenue
51.8

 
(9
)%
 
(4
)%
 
57.2

 
(3
)%
 
(2
)%
 
58.8

Total revenue
$
166.1

 
(3
)%
 
2
 %
 
$
171.0

 
1
 %
 
1
 %
 
$
170.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
IoT
 
 
 
 
 
 
 
 
 
 
 
 
 
L&S revenue
$
44.1

 
893
 %
 
904
 %
 
$
4.4

 


 
 
 
$

Support revenue
5.1

 
1,272
 %
 
1,297
 %
 
0.4

 


 
 
 

Total software revenue
49.2

 
 
 
 
 
4.8

 
 
 
 
 

Professional Services revenue
3.6

 
928
 %
 
962
 %
 
0.4

 


 
 
 

Total revenue
$
52.9

 


 
 
 
$
5.2

 


 
 
 
$


L&S Revenue
2015 compared to 2014
The decline in L&S revenue in 2015 reflected year-over-year declines of 12% in the Americas, 15% in Europe (down 1% on a constant currency basis), and 5% in the Pacific Rim. Year-over-year amounts in Japan were flat and increased on a constant currency basis by 16%. The decreases were partially related to a higher mix of subscription bookings in 2015. Results also reflected lower L&S revenue, primarily due to fewer large license transactions in 2015. This was particularly true for CAD and PLM in Europe and the Americas. IoT revenue increased significantly, primarily as a result of our acquisition of Axeda.
Changes in foreign currency exchange rates unfavorably impacted L&S revenue by $27.5 million in 2015 compared to 2014.
2014 compared to 2013

19



L&S revenue was strongest in Europe and the Americas, with 33% and 12% year-over-year growth, respectively, offsetting year-over-year declines in the Pacific Rim region, which was down 17%. CAD L&S revenue was driven by double digit year-over-year growth in Creo modules and upgrades, training software, and certain heritage products. SLM L&S revenue in 2014 decreased due to a slower-than-expected rebuilding of our pipeline after a strong 2013.
Changes in foreign currency exchange rates favorably impacted L&S revenue by $0.7 million in 2014 compared to 2013.
Support Revenue
Support revenue is comprised of contracts to maintain new and/or previously purchased software. Support revenue has tended to be fairly stable and predictable year-to-year. However, with our transition to subscription sales, we expect support revenue will decline as customers purchase our solutions as subscriptions.
Support revenue decreased in 2015 compared to 2014 due to the effect of foreign currency exchange rates. Changes in currency unfavorably impacted support revenue by $51.8 million in 2015 compared to 2014.
Support revenue increased 5% ($33.8 million) in 2014 compared to 2013. Changes in foreign exchange rates did not have a significant effect on support revenue in 2014.
Professional Services Revenue
Consulting and training services engagements typically result from sales of new licenses, particularly of our ePLM and SLM solutions. Expanding our service partner program, under which service engagements are referred to third party service providers, is part of our overall margin expansion strategy. Additionally, over time, we anticipate implementing solutions that require fewer services. As a result, we do not expect that the amount of services we deliver will increase proportionately with any L&S revenue increases.
2015 compared to 2014
The decrease in professional services revenue for 2015 was primarily due to a 25% decrease in PLM-related services and changes in foreign currency exchange rates. We attribute the decline in total professional services revenue to lower PLM and, to a lesser extent, CAD L&S revenue and to success in expanding our service partner program.
Changes in foreign currency exchange rates unfavorably impacted professional services revenue by $20.4 million in 2015 compared to 2014.
2014 compared to 2013
In 2014, professional services revenue declined slightly due to the expansion of our services partner program.
Revenue by Geographic Region
 
 
2015
 
 
 
Percent Change
 
2014
 
 
 
Percent Change
 
2013
 
% of Total Revenue
 
Actual
 
Constant
Currency
 
% of Total Revenue
 
Actual
 
Constant
Currency
 
% of Total Revenue
 
(Dollar amounts in millions)
 
Revenue by region:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
$
530.3

 
42
%
 
(5
)%
 
(4
)%
 
$
558.7

 
41
%
 
7
 %
 
7
 %
 
$
522.8

40
%
Europe
$
467.8

 
37
%
 
(11
)%
 
3
 %
 
$
528.1

 
39
%
 
10
 %
 
7
 %
 
$
479.9

37
%
Pacific Rim
$
139.2

 
11
%
 
(6
)%
 
(4
)%
 
$
148.2

 
11
%
 
(8
)%
 
(9
)%
 
$
161.6

13
%
Japan
$
118.0

 
9
%
 
(3
)%
 
12
 %
 
$
122.1

 
9
%
 
(6
)%
 
4
 %
 
$
129.3

10
%
A significant percentage of our annual revenue comes from large customers in the broader manufacturing space. As a result, L&S revenue growth in our core CAD and ePLM products historically has correlated to growth in broader measures of the global manufacturing economy, including GDP, industrial production and manufacturing PMI. PMI data in the fourth quarter of 2015, compared to the fourth quarter of 2014, suggests manufacturing economies in the U.S., China and Japan are slowing, while manufacturing activity in Europe has increased. For 2016, our financial guidance assumes a slower rate of growth in the manufacturing economies in the U.S., Japan, and the Pacific Rim.
Americas

20



In 2015, compared to 2014, Americas L&S revenue decreased 12% due primarily to a decrease in CAD and PLM L&S revenue, offset in part by increases in IoT L&S revenue (primarily due to our acquisition of Axeda) and SLM L&S revenue. Professional services revenue decreased by 23% and support revenue increased by 6%.
Americas revenue increased in 2014 compared to 2013 due to increases in all lines of business, primarily a 7% increase in support and a 12% increase in L&S revenue.
Europe
In 2015, compared to 2014, changes in foreign currency exchange rates, particularly the Euro, unfavorably impacted revenue by $73.6 million. In 2015, Europe L&S revenue decreased 15% year over year (down 1% on a constant currency basis) with constant currency growth in IoT and ePLM and modest constant currency growth in SLM, offset by a decline in CAD. Europe support revenue decreased 7% year over year and increased 7% year-over-year on a constant currency basis.
In 2014 compared to 2013, Europe L&S revenue increased 33% and support revenue increased 7%. Europe professional services revenue decreased 3% year over year. Changes in foreign currency exchange rates, particularly the Euro, favorably impacted revenue in Europe by $15.7 million in 2014 as compared to 2013.
Pacific Rim
In 2015, compared to 2014, Pacific Rim L&S revenue declined 5% year over year with growth in IoT and modest growth in CAD, offset by declines in ePLM and SLM. Pacific Rim support revenue increased 5% year over year and professional services revenue decreased 29%. Changes in foreign currency exchange rates unfavorably impacted revenue in the Pacific Rim by $3.2 million in 2015 compared to 2014.
In 2014, compared to 2013, Pacific Rim L&S revenue declined 17% year over year and professional services revenue decreased 11%. Pacific Rim support revenue increased 7% year over year. Changes in foreign currency exchange rates favorably impacted revenue in the Pacific Rim by $0.6 million in 2014 compared to 2013.
In 2015 and 2014, compared to the prior year, revenue in China decreased 14% and 12%, respectively, and represented 4% and 5%, respectively, of total revenue.
Japan
In 2015 and 2014 declines in Japan revenue were due to changes in foreign currency rates. In 2015 compared to 2014, Japan L&S revenue was flat, support revenue decreased 10% and professional services revenue increased 15%. On a constant currency basis, L&S revenue increased 16%, support revenue increased 5% and professional services revenue increased 34%. Changes in foreign currency exchange rates unfavorably impacted revenue in Japan by $19.2 million in 2015 as compared to 2014.
In 2014 compared to 2013, Japan L&S revenue decreased 2%, support revenue decreased 8% and professional services revenue decreased 1%. On a constant currency basis, L&S revenue increased 5%, professional services revenue increased 9% and support revenue increased 3%. Changes in foreign currency exchange rates unfavorably impacted revenue in Japan by $12.8 million in 2014 as compared to 2013.

Gross Margin

 
2015
 
Percent
Change
 
2014
 
Percent
Change
 
2013
 
(Dollar amounts in millions)
Gross margin
$
920.5

 
(6
)%
 
$
983.3

 
7
%
 
$
920.5

Non-GAAP gross margin
953.4

 
(6
)%
 
1,013.0

 
6
%
 
951.6

Gross margin as a % of revenue:
 
 
 
 
 
 
 
 
 
L&S
85
%
 
 
 
88
%
 
 
 
89
%
Support
88
%
 
 
 
88
%
 
 
 
88
%
Professional Services
12
%
 
 
 
12
%
 
 
 
11
%
Gross margin as a % of total revenue
73
%
 
 
 
72
%
 
 
 
71
%
Non-GAAP gross margin as a % of total non-GAAP revenue
76
%
 
 
 
75
%
 
 
 
73
%


21



Gross margin as a percentage of total revenue in 2015 compared to 2014 reflects lower L&S margins due to a higher mix of cloud services revenue (due to our acquisition of Axeda), which has lower margins than license revenue, and higher support volume. Support revenue comprised 54% of our total revenue in 2015 compared to 51% in both 2014 and 2013.
Gross margin as a percentage of total revenue in 2014 compared to 2013 reflects higher service margins, partially offset by lower L&S margins primarily attributable to lower L&S revenue and higher amortization of acquired purchased software. The increase in our GAAP service gross margin in 2014 was due in part to improved consulting margin. Service margins have improved due to cost reductions and a reduction in the amount of direct services that we perform through expansion of our service partner program.
Costs and Expenses
 
 
2015
 
Percent
Change
 
 
2014
 
Percent
Change
 
 
2013
 
 
 
 
 
 
 
 
 
 
 
 
Cost of L&S revenue
$
53.2

 
18
 %
 
 
$
45.0

 
15
 %
 
 
$
39.0

Cost of support revenue
82.8

 
(2
)%
 
 
84.7

 
4
 %
 
 
81.1

Cost of professional services revenue
198.7

 
(19
)%
 
 
244.0

 
(4
)%
 
 
252.9

Sales and marketing
338.8

 
(5
)%
 
 
357.4

 
(1
)%
 
 
360.6

Research and development
227.5

 
 %
 
 
226.5

 
2
 %
 
 
221.9

General and administrative
166.7

 
17
 %
 
 
142.2

 
8
 %
 
 
131.9

U.S. pension settlement loss
66.3

 


 
 

 
 
 
 

Amortization of acquired intangible assets
36.1

 
12
 %
 
 
32.1

 
21
 %
 
 
26.5

Restructuring charges
43.4

 
53
 %
 
 
28.4

 
(46
)%
 
 
52.2

Total costs and expenses
$
1,213.6

 
5
 %
(1) 
 
$
1,160.4

 
 %
(1) 
 
$
1,166.2

Total headcount at end of period
5,982

 
(7
)%
 
 
6,444

(2)
7
 %
 
 
6,000

 
 
(1)
On a constant currency basis from the prior period, total costs and expenses increased 9% from 2014 to 2015 and were flat from 2013 to 2014.
(2)
Headcount at September 30, 2014 included approximately 250 employees with termination dates after September 30, 2014 that were included in our fourth quarter of 2014 restructuring actions.
2015 compared to 2014
Costs and expenses in 2015 compared to 2014 increased primarily as a result of the following:
restructuring charges of $43.4 million in 2015 compared to $28.4 million in 2014, primarily for severance and other related costs associated with the termination of 411 employees;
costs from acquired businesses (Axeda, Atego, Thingworx and ColdLight added approximately 360 employees at the date of the acquisitions);
costs associated with terminating our U.S. Pension Plan which totaled $73.2 million (including a $66.3 million settlement loss);
a litigation accrual of $28.2 million related to our previously disclosed China investigation; and
amortization of acquired intangible assets (including amortization of purchased software which is included in cost of revenue), primarily related to our acquisitions in 2014 and 2015, which was higher by $5.3 million.
These cost increases were partially offset by
cost savings associated with restructuring actions in 2014 and 2015;
the impact of foreign currency movements which favorably impacted costs and expenses by $56.6 million in 2015; and
a decrease in cash-based incentive compensation of $18.1 million.

2014 compared to 2013
Costs and expenses in 2014, compared to 2013, decreased primarily as a result of:
restructuring charges, which were $23.8 million lower in 2014; and

22



cost savings resulting from restructuring actions in 2013.
These cost decreases were offset by:
costs from acquired businesses (approximately 300 employees);
investments we made in our Internet of Things business;
company-wide merit pay increases totaling approximately $12 million on an annualized basis, which were effective February 1, 2014;
increased amortization of acquired intangible assets, which was $5.2 million higher in 2014; and
increased acquisition-related and pension plan termination costs, which were $3.2 million higher.
Cost of L&S Revenue
 
 
2015
 
Percent
Change
 
2014
 
Percent
Change
 
2013
 
(Dollar amounts in millions)
Cost of L&S revenue
$
53.2

 
18
%
 
$
45.0

 
15
%
 
$
39.0

% of total revenue
4
%
 
 
 
3
%
 
 
 
3
%
% of total L&S revenue
15
%
 
 
 
12
%
 
 
 
11
%
L&S headcount at end of period
115

 
55
%
 
74

 
80
%
 
41

Our cost of L&S revenue primarily consists of amortization of acquired purchased software intangible assets, fixed and variable costs associated with reproducing and distributing software and documentation and royalties paid to third parties for technology embedded in or licensed with our software products. Cost of L&S revenue as a percent of L&S revenue can vary depending on product mix sold, the effect of fixed and variable royalties, and the level of amortization of acquired software intangible assets. Amortization of acquired purchased software totaled $19.4 million, $18.1 million and $18.6 million in 2015, 2014, and 2013, respectively. Costs to perform cloud services were $19.0 million, $12.9 million, and $6.0 million in 2015, 2014, and 2013, respectively. The increase in costs to perform cloud services in 2015 is attributable to our acquisition of Axeda.
Cost of Support Revenue
 
2015
 
Percent
Change
 
2014
 
Percent
Change
 
2013
 
(Dollar amounts in millions)
Cost of support revenue
$
82.8

 
(2
)%
 
$
84.7

 
4
%
 
$
81.1

% of total revenue
7
%
 
 
 
6
%
 
 
 
6
%
% of total support revenue
12
%
 
 
 
12
%
 
 
 
12
%
Support headcount at end of period
668

 
1
 %
 
659

 
4
%
 
634


Our cost of support revenue includes costs such as salaries, benefits, and computer equipment and facilities associated with customer support and the release of support updates (including related royalty costs).
In 2015 compared to 2014, total compensation, benefit costs and travel expenses were 4% ($2.7 million) lower.
In 2014 compared to 2013, total compensation, benefit costs and travel expenses were higher by 5% ($2.8 million). Support headcount at the end of 2014 included approximately 30 employees added from 2014 acquisitions.
Cost of Professional Services Revenue


23



 
2015
 
Percent
Change
 
2014
 
Percent
Change
 
2013
 
(Dollar amounts in millions)
Cost of professional services revenue
$
198.7

 
(19
)%
 
$
244.0

 
(4
)%
 
$
252.9

% of total revenue
16
%
 
 
 
18
%
 
 
 
20
%
% of total professional services revenue
88
%
 
 
 
88
%
 
 
 
89
%
Service headcount at end of period
1,074

 
(23
)%
 
1,388

 
4
 %
 
1,336


Our cost of professional services revenue includes costs such as salaries, benefits, and computer equipment and facilities for our training and consulting personnel, and third-party subcontractor fees.
In 2015, compared to 2014, total compensation, benefit costs and travel expenses decreased 21% ($36.9 million) primarily due to reduced headcount. Additionally, the cost of third-party consulting services was $7.4 million lower in 2015 compared to 2014.
In 2014 compared to 2013, total compensation, benefit costs and travel expenses were higher by $0.7 million. Service headcount at the end of 2014 included approximately 40 employees added from 2014 acquisitions. The cost of third-party consulting services was $6.9 million lower in 2014, compared to 2013.
The decreases in 2015 and 2014, compared to the prior years, in the cost of third-party consulting services is a result of our strategy to have our strategic services partners perform services for customers directly, which has contributed to improving services margins.
Sales and Marketing
 
2015
 
Percent
Change
 
2014
 
Percent
Change
 
2013
 
(Dollar amounts in millions)
Sales and marketing expenses
$
338.8

 
(5
)%
 
$
357.4

 
(1
)%
 
$
360.6

% of total revenue
27
%
 
 
 
26
%
 
 
 
28
%
Sales and marketing headcount at end of period
1,416

 
(4
)%
 
1,481

 
9
 %
 
1,362


Our sales and marketing expenses primarily include salaries and benefits, sales commissions, advertising and marketing programs, travel and facility costs.
Our compensation, benefit costs and travel expenses were lower by an aggregate of 7% ($20.3 million) in 2015 compared to 2014, primarily due to lower headcount.
In 2014, compared to 2013, our compensation, benefit costs and travel expenses were flat, which reflects higher commission and salary expense offset by lower benefit costs. Sales and marketing headcount at the end of 2014 included approximately 70 employees added from 2014 acquisitions. In 2014, compared to 2013, total depreciation and telecommunication costs decreased by $2.5 million.
Research and Development
 
 
2015
 
Percent
Change
 
2014
 
Percent
Change
 
2013
 
(Dollar amounts in millions)
Research and development expenses
$
227.5

 
 %
 
$
226.5

 
2
%
 
$
221.9

% of total revenue
18
%
 
 
 
17
%
 
 
 
17
%
Research and development headcount at end of period
1,998

 
(7
)%
 
2,156

 
8
%
 
2,001

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.
Total compensation, benefit costs and travel expenses were lower by 1% ($1.9 million) in 2015, compared to 2014. Research and development headcount at the end of 2015 included approximately 20 employees added from 2015 acquisitions.

24



Total compensation, benefit costs and travel expenses were higher by 3% ($5.9 million) in 2014, compared to 2013. Headcount in 2014, excluding employees added from 2014 acquisitions, included a higher mix of research and development headcount in lower cost geographic regions as compared to 2013. Additionally, research and development headcount at the end of 2014 included approximately 100 employees added from companies acquired in 2014, primarily added in the fourth quarter of 2014. Total depreciation and telecommunication costs in 2014 decreased by $1.8 million, compared to 2013.
General and Administrative
 
 
2015
 
Percent
Change
 
2014
 
Percent
Change
 
2013
 
(Dollar amounts in millions)
General and administrative
$
166.7

 
17
%
 
$
142.2

 
8
%
 
$
131.9

% of total revenue
13
%
 
 
 
10
%
 
 
 
10
%
General and administrative headcount at end of period
711

 
4
%
 
686

 
10
%
 
626

Our general and administrative expenses include the costs of our corporate, finance, information technology, human resources, legal and administrative functions, as well as acquisition-related charges, bad debt expense and outside professional services, including accounting and legal fees. Acquisition-related costs include direct costs of acquisitions and expenses related to acquisition integration activities, including transaction fees, due diligence costs, retention bonuses and severance, and professional fees, including legal and accounting costs, related to the acquisition. In addition, subsequent adjustments to our initial estimated amount of contingent consideration associated with specific acquisitions are included in acquisition-related charges. Acquisition-related and pension plan termination-related costs were $15.8 million, $13.1 million, and $9.9 million in 2015, 2014, and 2013, respectively. The increase in overall general and administrative costs in 2015, compared to 2014, was due primarily to a $28.2 million reserve recorded related to our previously disclosed China investigation . I n 2014 compared to 2013, costs for outside professional services including legal, tax, audit and consulting services were higher by $7.0 million. Cost increases in 2014 were partially offset by certain business taxes in a foreign jurisdiction which were lower by $1.0 million in 2014 compared to 2013.
U.S. pension settlement loss
 
2015
 
Percent
Change
 
2014
 
Percent
Change
 
2013
 
(Dollar amounts in millions)
U.S. pension termination loss
$
66.3

 
 
 
$

 
 
 
$

% of total revenue
5
%
 
 
 
%
 
 
 
%
U.S. pension settlement loss reflects the loss recognized in the fourth quarter of 2015 related to the termination of our U.S. pension plan, due to the amortization of actuarial losses previously recorded in equity.
Amortization of Acquired Intangible Assets
 
 
2015
 
Percent
Change
 
2014
 
Percent
Change
 
2013
 
(Dollar amounts in millions)
Amortization of acquired intangible assets
$
36.1

 
12
%
 
$
32.1

 
21
%
 
$
26.5

% of total revenue
3
%
 
 
 
2
%
 
 
 
2
%
Amortization of acquired intangible assets reflects the amortization of acquired non-product related intangible assets, primarily customer and trademark-related intangible assets, recorded in connection with completed acquisitions. The increase in amortization of acquired intangible assets in 2015 includes our acquisitions of ColdLight in the third quarter of 2015, Axeda and Atego in the fourth quarter of 2014, our acquisition of ThingWorx in the second quarter of 2014 and our acquisitions of Enigma and NetIDEAS in the fourth quarter of 2013.
Restructuring Charges
 

25



 
2015
 
2014
 
2013
 
(Dollar amounts in millions)
Restructuring charges
$
43.4

 
$
28.4

 
$
52.2

% of total revenue
3
%
 
2
%
 
4
%

In April 2015, we committed to a plan to restructure our global workforce and consolidate select facilities to increase investment in our IoT business and to reduce our cost structure through organizational efficiencies in the face of significant foreign currency depreciation relative to the U.S. Dollar and a more cautious outlook on global macroeconomic conditions. The restructuring actions resulted in charges of $43.4 million during 2015, including $1.4 million of facility related charges and $42.0 million of employee related termination costs, primarily related to termination benefits associated with 411 employees. This reorganization resulted in net annualized expense reductions of approximately $30 million.
In September 2014, in support of integrating businesses acquired in the prior year and the continued evolution of our business model, we committed to a plan to restructure our workforce and recorded a restructuring charge of $26.8 million attributable to termination benefits associated with 283 employees which were primarily paid in fiscal 2015. This restructuring action resulted in annualized cost savings of approximately $30 million. In addition, in 2014 we recorded restructuring charges of $1.6 million, primarily associated with the completion of the restructuring actions initiated in the fourth quarter of 2013.
In 2013, to improve profitability, we implemented restructuring actions and recorded restructuring charges of $52.2 million, including $50.9 million for severance and related costs associated with approximately 550 employees and $1.3 million related to facility consolidations. These restructuring actions were substantially completed in 2013 and resulted in $16 million per quarter reduction in operating expenses (which was reflected in our results for 2014).
In 2015, 2014, and 2013, we made cash payments related to restructuring charges of $53.6 million, $20.6 million, and $37.2 million, respectively. At September 30, 2015, accrued expenses for unpaid restructuring charges totaled $15.3 million, which we expect to pay within the next twelve months.
Non-Operating Income (Expense)
 
2015
 
2014
 
2013
 
(Dollar amounts in millions)
Foreign currency losses, net
$
(2.7
)
 
$
(4.5
)
 
$
(2.0
)
Interest income
3.7

 
3.1

 
2.9

Interest expense
(14.7
)
 
(8.2
)
 
(7.0
)
Other income (expense), net
(1.3
)
 
(1.0
)
 
5.0

 
$
(15.1
)
 
$
(10.5
)
 
$
(1.1
)
Foreign Currency Net Losses: Foreign currency net losses include costs of hedging contracts, certain realized and unrealized foreign currency transaction gains or losses, and foreign exchange gains or losses resulting from the required period-end currency re-measurement of the assets and liabilities of our subsidiaries that use the U.S. dollar as their functional currency. Because a large portion of our revenue and expenses is transacted in foreign currencies, we engage in hedging transactions involving the use of foreign currency forward contracts to reduce our exposure to fluctuations in foreign exchange rates.
Interest Income: Interest income represents earnings on the investment of our available cash balances and interest on financing provided to customers as described in Note B Summary of Significant Accounting Policies of "Notes to Consolidated Financial Statements" in this Annual Report.
Interest Expense: Interest expense is primarily related to interest on borrowings under our credit facility. The increase in interest expense in 2015 from 2014 and 2013 is due to higher average amounts outstanding under our credit facility. We had $668 million outstanding under the credit facility at September 30, 2015, compared to $612 million at September 30, 2014 (including $295 million borrowed in the fourth quarter of 2014 to fund our acquisition of Axeda and to fund an accelerated share repurchase program) and $258 million at September 30, 2013. The balance outstanding at September 30, 2015 reflects amounts borrowed in 2015 as a result of our acquisition of ColdLight. The average interest rate on amounts outstanding under the credit facility was 1.7% in 2015, 1.6% in 2014 and 1.7% in 2013.
Other Income (Expense), Net: The change in other income (expense), net in 2013 compared to 2014 and 2015, was due primarily to a legal settlement gain of $5.1 million recorded in 2013.

26



Income Taxes
 
Year ended September 30,
 
2015
 
2014
 
2013
 
(in millions)
Pre-tax income
$
26.5

 
$
186.1

 
$
126.2

Tax (benefit) provision
(21.0
)
 
25.9

 
(17.5
)
Effective income tax rate
(79
)%
 
14
%
 
(14
)%

In 2015, our effective tax rate was lower than the 35% statutory federal income tax rate due, in large part, to our corporate structure in which our foreign taxes are at an effective tax rate lower than the U.S. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland. In 2015, 2014 and 2013, the foreign rate differential predominantly relates to these Irish earnings. Our foreign rate differential in 2015 includes a rate benefit from a business realignment completed on September 30, 2014 in which intellectual property was transferred between two wholly-owned foreign subsidiaries. The realignment allows us to more efficiently manage the distribution of our products to European customers. In 2015, this realignment resulted in a tax benefit of approximately $24.0 million . We expect this realignment to result in an annual tax benefit of approximately $15 million to $20 million for the next several years, declining annually thereafter through 2021. U.S. permanent items include the tax effect of a $14.5 million expense related to a pending legal settlement . Other factors impacting the effective tax rate include: the release of a valuation allowance totaling $18.7 million relating to the U.S. pension plan termination, foreign withholding taxes of $3.8 million , a tax benefit of $3.1 million relating to the reassessment of our reserve requirements and a benefit of $1.4 million in conjunction with the reorganization of our Atego U.S. subsidiaries. Additionally, our provision reflects a $2.1 million tax benefit related to a retroactive extension of the U.S. research and development tax credit enacted in the first quarter of 2015. This benefit was offset by a corresponding provision to increase our U.S. valuation allowance.
In 2014, our effective tax rate was lower than the 35% statutory federal income tax rate due to our corporate structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate and the reversal of a portion of our valuation allowance against net deferred tax assets described below. Other factors impacting the rate include foreign withholding taxes of $5.1 million and the establishment of a valuation allowance totaling $3.5 million in two foreign subsidiaries. 
In 2013, our effective tax rate was lower than the 35% statutory federal income tax rate due, in large part, to the reversal of a portion of the valuation allowance against deferred tax assets (primarily the U.S.). We recorded benefits resulting from 2013 acquisitions as described below, and a benefit of $7.9 million related to the release of a valuation allowance as a result of a pension gain recorded in accumulated other comprehensive income in equity.  Additionally, our 2013 tax provision reflected a $2.0 million provision related to a research and development (R&D) cost sharing prepayment by a foreign subsidiary to the U.S. A similar prepayment was made in 2012, resulting in a $7.8 million provision in that year. This impact was offset by a corresponding increase in our valuation allowance in the U.S. Other factors impacting the rate include our corporate structure in which our foreign taxes are at an effective tax rate lower than the U.S. rate, foreign withholding taxes of $6.0 million and non-cash tax benefits of $5.3 million recorded as a result of the conclusion of tax audits in several foreign jurisdictions. 
Acquisitions in 2014 and 2013 were accounted for as business combinations.  Assets acquired, including the fair value of acquired tangible assets, intangible assets and assumed liabilities were recorded, and we recorded net deferred tax liabilities of $21.6 million and $38.7 million in 2014 and 2013, respectively, primarily related to the tax effect of the acquired intangible assets that are not deductible for income tax purposes.  These deferred tax liabilities reduced our net deferred tax asset balance and resulted in a tax benefit of $18.1 million and $36.7 million in 2014 and 2013, respectively, to decrease our valuation allowance in jurisdictions where we have recorded a valuation allowance.  As these decreases in the valuation allowance are not part of the accounting for business combinations (the fair value of the assets acquired and liabilities assumed), they were recorded as an income tax benefit.

We have concluded, based on the weight of available evidence, that a full valuation allowance continues to be required against our U.S. net deferred tax assets as they are not more likely than not to be realized in the future. We will continue to reassess whether a valuation allowance is required each financial reporting period.
In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the Internal Revenue Service (IRS) in the United States. We regularly assess the likelihood of additional assessments by tax authorities and provide for these matters as appropriate. We are currently under audit by tax authorities in several jurisdictions. Audits by tax authorities typically involve examination of the deductibility of certain permanent items, limitations on net operating losses and tax credits. Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in material changes in our estimates.

27



Our future effective income tax rate may be materially impacted by the amount of income taxes associated with our foreign earnings, which are taxed at rates different from the U.S. federal statutory income tax rate, as well as the timing and extent of the realization of deferred tax assets and changes in the tax law. Further, our tax rate may fluctuate within a fiscal year, including from quarter to quarter, due to items arising from discrete events, including settlements of tax audits and assessments, the resolution or identification of tax position uncertainties, and acquisitions of other companies.
Non-GAAP Measures
The non-GAAP measures presented in the above discussion of our results of operations and the respective most directly comparable GAAP measures are:
non-GAAP revenue—GAAP revenue
non-GAAP gross margin—GAAP gross margin
non-GAAP operating income—GAAP operating income
non-GAAP operating margin—GAAP operating margin
non-GAAP net income—GAAP net income (loss)
non-GAAP diluted earnings per share—GAAP diluted earnings (loss) per share
The non-GAAP measures exclude fair value adjustments related to acquired deferred revenue, acquired deferred costs, stock-based compensation expense, amortization of acquired intangible assets expense, acquisition-related charges, restructuring charges, pension plan termination-related costs, identified discrete items included in non-operating other income (expense), net and the related tax effects of the preceding items, and any other identified tax items. These items are normally included in the comparable measures calculated and presented in accordance with GAAP.
Fair value of acquired deferred revenue is a purchase accounting adjustment recorded to reduce acquired deferred revenue to the fair value of the remaining obligation.
Stock-based compensation expense is non-cash expense relating to stock-based awards issued to executive officers, employees and outside directors, consisting of restricted stock, stock options and restricted stock units.
Amortization of acquired intangible assets expense is a non-cash expense that is impacted by the timing and magnitude of our acquisitions. We believe the assessment of our operations excluding these costs is relevant to our assessment of internal operations and comparisons to the performance of other companies in our industry.
Acquisition-related charges included in general and administrative expenses include direct costs of potential and completed acquisitions and expenses related to acquisition integration activities, including transaction fees, due diligence costs, severance and professional fees. In addition, subsequent adjustments to our initial estimated amount of contingent consideration associated with specific acquisitions are included within acquisition-related charges. These costs are not considered part of our normal operations as the occurrence and amount will vary depending on the timing and size of acquisitions.
U.S. pension plan termination-related costs include charges related to our plan that we began terminating in the second quarter of 2014. Costs associated with the termination are not considered part of our ongoing operations.
Pending legal settlement accrual includes amounts related to the China matter described in Impact of an Investigation in China.
Restructuring charges include excess facility restructuring charges and severance costs resulting from reductions of personnel driven by modifications to our business strategy and not as part of our normal operations. These costs may vary in size based on our restructuring plan.
We use these non-GAAP measures, and we believe that they assist our investors, to make period-to-period comparisons of our operational performance because they provide a view of our operating results without items that are not, in our view, indicative of our core operating results. We believe that these non-GAAP measures help illustrate underlying trends in our business, and we use the measures to establish budgets and operational goals, communicated internally and externally, for managing our business and evaluating our performance. We believe that providing non-GAAP measures affords investors a view of our operating results that may be more easily compared to the results of peer companies. In addition, compensation of our executives is based in part on the performance of our business based on these non-GAAP measures.
The items excluded from the non-GAAP measures often have a material impact on our financial results and such items often recur. Accordingly, the non-GAAP measures included in this Annual Report should be considered in addition to, and not as a substitute for or superior to, the comparable measures prepared in accordance with GAAP.

28



The following tables reconcile each of these non-GAAP measures to its most closely comparable GAAP measure on our financial statements.
 
 
Year ended September 30,
 
2015
 
2014
 
2013
 
(Dollar amounts in millions)
GAAP revenue
$
1,255.2

 
$
1,357.0

 
$
1,293.5

Fair value of acquired deferred revenue
3.9

 
1.2

 
3.0

Non-GAAP revenue
$
1,259.1

 
$
1,358.2

 
$
1,296.5

 
 
 
 
 
 
GAAP gross margin
$
920.5

 
$
983.3

 
$
920.5

Fair value of acquired deferred revenue
3.9

 
1.2

 
3.0

Fair value adjustment to acquired deferred costs
(0.5
)
 
(0.1
)
 

Stock-based compensation
10.2

 
10.4

 
9.5

Amortization of acquired intangible assets included in cost of revenue
19.4

 
18.1

 
18.6

Non-GAAP gross margin
$
953.4

 
$
1,013.0

 
$
951.6

 
 
 
 
 
 
GAAP operating income
$
41.6

 
$
196.6

 
$
127.3

Fair value of acquired deferred revenue
3.9

 
1.2

 
3.0

Fair value adjustment to acquired deferred costs
(0.5
)
 
(0.2
)
 

Stock-based compensation
50.2

 
50.9

 
48.8

Amortization of acquired intangible assets
55.5

 
50.2

 
45.1

Acquisition-related charges included in general and administrative expenses
8.9

 
12.7

 
9.9

U.S. pension plan termination-related costs (1)
73.2

 
0.4

 

Pending legal settlement accrual
28.2

 

 

Restructuring charges
43.4

 
28.4

 
52.2

Non-GAAP operating income
$
304.3

 
$
340.3

 
$
286.3

 
 
 
 
 
 
GAAP net income
$
47.6

 
$
160.2

 
$
143.8

Fair value of acquired deferred revenue
3.9

 
1.2

 
3.0

Fair value adjustment to acquired deferred costs
(0.5
)
 
(0.2
)
 

Stock-based compensation
50.2

 
50.9

 
48.8

Amortization of acquired intangible assets
55.5

 
50.2

 
45.1

Acquisition-related charges included in general and administrative expenses
8.9

 
12.7

 
9.9

U.S. pension plan termination-related costs (1)
73.2

 
0.4

 

Pending legal settlement accrual
28.2

 

 

Restructuring charges
43.4

 
28.4

 
52.2

Non-operating (gain) loss (2)

 

 
(5.7
)
Income tax adjustments (3)
(51.1
)
 
(43.5
)
 
(77.8
)
Non-GAAP net income
$
259.2

 
$
260.4

 
$
219.2

GAAP diluted earnings (loss) per share
$
0.41

 
$
1.34

 
$
1.19

Stock-based compensation
0.43

 
0.42

 
0.40

Amortization of acquired intangible assets
0.48

 
0.42

 
0.37

Restructuring charges
0.37

 
0.24

 
0.43

Acquisition-related charges included in general and administrative expenses
0.08

 
0.11

 
0.08

U.S. pension plan termination-related costs
0.63

 

 

Pending legal settlement accrual
0.24

 

 

Non-operating (gain) loss

 

 
(0.05
)
Income tax adjustments (3)
(0.44
)
 
(0.36
)
 
(0.64
)

29



Fair value of acquired deferred revenue
0.03

 
0.01

 
0.03

Non-GAAP diluted earnings per share (4)
$
2.23

 
$
2.17

 
$
1.81

Operating margin impact of non-GAAP adjustments:
 
 
 
 
 
GAAP operating margin
3.3
%
 
14.5
%
 
9.8
%
Fair value of acquired deferred revenue
0.3
%
 
0.1
%
 
0.2
%
Stock-based compensation
4.0
%
 
3.8
%
 
3.8
%
Amortization of acquired intangible assets
4.4
%
 
3.7
%
 
3.5
%
Acquisition-related charges included in general and administrative expenses
0.7
%
 
0.9
%
 
0.8
%
U.S. pension plan termination-related costs
5.8
%
 
%
 
%
Pending legal settlement accrual
2.2
%