Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________
FORM 10-Q
____________________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 29, 2018
Commission File Number: 0-18059
____________________________________________________
PTC Inc.
(Exact name of registrant as specified in its charter)
____________________________________________________

Massachusetts
 
04-2866152
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
121 Seaport Boulevard, Boston, MA 02210
(Address of principal executive offices, including zip code)
(781) 370-5000
(Registrant’s telephone number, including area code)
____________________________________________________
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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act:

Large accelerated filer
þ
  
Accelerated filer
¨
  
Non-accelerated filer
¨
  
Smaller reporting company
¨
 
 
 
  
 
 
  
(Do not check if a smaller
reporting company)
  
 
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
¨
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
There were 118,627,720 shares of our common stock outstanding on February 5, 2019.



PTC Inc.
INDEX TO FORM 10-Q
For the Quarter Ended December 29, 2018

 
 
Page
Number
Part I—FINANCIAL INFORMATION
 
Item 1.
 
 

 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Part II—OTHER INFORMATION
 
Item 1A.
Item 6.




PART I—FINANCIAL INFORMATION

ITEM 1.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PTC Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
 
December 29,
2018
 
September 30,
2018
ASSETS

 
 
Current assets:

 
 
Cash and cash equivalents
$
276,990

 
$
259,946

Short-term marketable securities
25,598

 
25,836

Accounts receivable, net of allowance for doubtful accounts of $564 and $607 at December 29, 2018 and September 30, 2018, respectively
385,670

 
129,297

Prepaid expenses
63,045

 
48,997

Other current assets
48,682

 
169,708

Total current assets
799,985

 
633,784

Property and equipment, net
107,359

 
80,613

Goodwill
1,230,901

 
1,182,457

Acquired intangible assets, net
205,084

 
200,202

Long-term marketable securities
30,054

 
30,115

Deferred tax assets
201,149

 
165,566

Other assets
178,437

 
36,285

Total assets
$
2,752,969

 
$
2,329,022

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

 

Accounts payable
$
57,249

 
$
53,473

Accrued expenses and other current liabilities
83,721

 
74,388

Accrued compensation and benefits
74,483

 
101,784

Accrued income taxes
405

 
18,044

Deferred revenue
325,111

 
487,590

Total current liabilities
540,969

 
735,279

Long-term debt
778,484

 
643,268

Deferred tax liabilities
36,261

 
5,589

Deferred revenue
10,197

 
11,852

Other liabilities
65,889

 
58,445

Total liabilities
1,431,800

 
1,454,433

Commitments and contingencies (Note 14)

 

Stockholders’ equity:

 

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

 

Common stock, $0.01 par value; 500,000 shares authorized; 118,657 and 117,981 shares issued and outstanding at December 29, 2018 and September 30, 2018, respectively
1,187

 
1,180

Additional paid-in capital
1,553,875

 
1,558,403

Accumulated deficit
(138,785
)
 
(599,409
)
Accumulated other comprehensive loss
(95,108
)
 
(85,585
)
Total stockholders’ equity
1,321,169

 
874,589

Total liabilities and stockholders’ equity
$
2,752,969

 
$
2,329,022








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

1


PTC Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

 
Three months ended
 
December 29,
2018
 
December 30,
2017
Revenue:
 
 
 
License
$
105,322

 
$
119,518

Support and cloud services
187,921

 
145,672

Total software revenue
293,243

 
265,190

Professional services
41,446

 
41,454

Total revenue
334,689

 
306,644

Cost of revenue:

 

Cost of license revenue
12,563

 
12,114

Cost of support and cloud services revenue
31,197

 
34,502

Total cost of software revenue
43,760

 
46,616

Cost of professional services revenue
33,592

 
36,419

Total cost of revenue
77,352

 
83,035

Gross margin
257,337

 
223,609

Operating expenses:


 


Sales and marketing
104,218

 
99,375

Research and development
60,782

 
63,972

General and administrative
37,864

 
35,020

Amortization of acquired intangible assets
5,936

 
7,821

Restructuring and other charges, net
18,493

 
105

Total operating expenses
227,293

 
206,293

Operating income
30,044

 
17,316

Interest expense
(10,276
)
 
(10,047
)
Other income (expense), net
655

 
(798
)
Income before income taxes
20,423

 
6,471

Benefit for income taxes
(562
)
 
(7,406
)
Net income
$
20,985

 
$
13,877

Earnings per share—Basic
$
0.18

 
$
0.12

Earnings per share—Diluted
$
0.18

 
$
0.12

Weighted average shares outstanding—Basic
118,323

 
115,731

Weighted average shares outstanding—Diluted
119,638

 
117,656








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

2


PTC Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
 
 
Three months ended
 
December 29,
2018
 
December 30,
2017
Net income
$
20,985

 
$
13,877

Other comprehensive income (loss), net of tax:
 
 
 
Realized and unrealized hedge gain (loss) arising during the period, net of tax of $0 million and $0.1 million in the first quarter of 2019 and 2018, respectively
(2,129
)
 
(913
)
Net hedge (gain) loss reclassified into earnings, net of tax of $0.1 million in the first quarter of 2019 and $0.1 million in the first quarter of 2018
(549
)
 
573

Unrealized loss on hedging instruments
(2,678
)
 
(340
)
Foreign currency translation adjustment, net of tax of $0 for each period
(7,569
)
 
5,229

Unrealized gain (loss) on marketable securities, net of tax of $0 for each period
13

 
(179
)
Amortization of net actuarial pension loss included in net income, net of tax of $0.2 million and $0.2 million in the first quarter of 2019 and 2018, respectively
430

 
371

Change in unamortized pension loss during the period related to changes in foreign currency
281

 
(263
)
Other comprehensive income (loss)
(9,523
)
 
4,818

Comprehensive income
$
11,462

 
$
18,695




























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

3


PTC Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
Three months ended
 
December 29,
2018
 
December 30,
2017
Cash flows from operating activities:
 
 
 
Net income
$
20,985

 
$
13,877

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
20,053

 
21,046

Stock-based compensation
29,407

 
18,331

Other non-cash items, net
(5
)
 
361

Changes in operating assets and liabilities, excluding the effects of acquisitions:
 
 
 
Accounts receivable
24,025

 
21,603

Accounts payable and accrued expenses
(9,628
)
 
(12,885
)
Accrued compensation and benefits
(27,504
)
 
(40,172
)
Deferred revenue
(21,820
)
 
22,055

Accrued income taxes
(21,668
)
 
(14,272
)
Other current assets and prepaid expenses
849

 
(8,575
)
Other noncurrent assets and liabilities
6,520

 
4,146

Net cash provided by operating activities
21,214

 
25,515

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(30,332
)
 
(6,377
)
Purchase of intangible asset

 
(2,500
)
Purchases of short- and long-term marketable securities
(6,736
)
 
(4,248
)
Proceeds from maturities of short- and long-term marketable securities
7,007

 
3,740

Acquisitions of businesses, net of cash acquired
(69,556
)
 

Settlement of net investment hedges
(1,595
)
 

Net cash used in investing activities
(101,212
)
 
(9,385
)
Cash flows from financing activities:
 
 
 
Borrowings under credit facility
155,000

 
50,000

Repayments of borrowings under credit facility
(20,000
)
 
(20,000
)
Proceeds (costs) from issuance of common stock
(4,640
)
 

Contingent consideration
(1,575
)
 
(3,176
)
Payments of withholding taxes in connection with stock-based awards
(33,788
)
 
(33,488
)
Net cash provided by (used in) financing activities
94,997

 
(6,664
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
2,041

 
2,598

Net increase in cash, cash equivalents, and restricted cash
17,040

 
12,064

Cash, cash equivalents, and restricted cash, beginning of period
261,093

 
281,209

Cash, cash equivalents, and restricted cash, end of period
$
278,133

 
$
293,273


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

4


PTC Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands) 
(unaudited)
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Balance as of September 30, 2018
117,981

 
$
1,180

 
$
1,558,403

 
$
(599,409
)
 
$
(85,585
)
 
$
874,589

ASU 2016-16 adoption

 

 

 
72,261

 

 
72,261

ASC 606 adoption

 

 

 
367,378

 

 
367,378

Common stock issued for employee stock-based awards
1,056

 
11

 
(11
)
 

 

 

Shares surrendered by employees to pay taxes related to stock-based awards
(380
)
 
(4
)
 
(33,784
)
 

 

 
(33,788
)
Common stock issued

 

 
(140
)
 


 


 
(140
)
Compensation expense from stock-based awards

 

 
29,407

 

 

 
29,407

Net income

 

 

 
20,985

 

 
20,985

Unrealized loss on cash flow hedges, net of tax

 

 

 

 
(385
)
 
(385
)
Unrealized loss on net investment hedges, net of tax

 

 

 

 
(2,293
)
 
(2,293
)
Foreign currency translation adjustment

 

 

 

 
(7,569
)
 
(7,569
)
Unrealized loss on available-for-sale securities, net of tax

 

 

 

 
13

 
13

Change in pension benefits, net of tax

 

 

 

 
711

 
711

Balance as of December 29, 2018
118,657

 
$
1,187

 
$
1,553,875

 
$
(138,785
)
 
$
(95,108
)
 
$
1,321,169


 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Balance as of September 30, 2017
115,333

 
$
1,153

 
$
1,609,030

 
$
(650,840
)
 
$
(73,907
)
 
$
885,436

ASU 2016-09 adoption

 

 
681

 
(556
)
 

 
125

Common stock issued for employee stock-based awards
1,317

 
13

 
(13
)
 

 

 

Shares surrendered by employees to pay taxes related to stock-based awards
(524
)
 
(5
)
 
(33,483
)
 

 

 
(33,488
)
Compensation expense from stock-based awards

 

 
18,331

 

 

 
18,331

Net income

 

 

 
13,877

 

 
13,877

Unrealized loss on cash flow hedges, net of tax

 

 

 

 
(340
)
 
(340
)
Foreign currency translation adjustment

 

 

 

 
5,229

 
5,229

Unrealized loss on available-for-sale securities, net of tax

 

 

 

 
(179
)
 
(179
)
Change in pension benefits, net of tax

 

 

 

 
108

 
108

Balance as of December 30, 2017
116,126

 
$
1,161

 
$
1,594,546

 
$
(637,519
)
 
$
(69,089
)
 
$
889,099


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

5


PTC Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
General
The accompanying unaudited condensed consolidated financial statements include the accounts of PTC Inc. and its wholly owned subsidiaries and have been prepared by management in accordance with accounting principles generally accepted in the United States of America and in accordance with the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. While we believe that the disclosures presented are adequate in order to make the information not misleading, these unaudited quarterly financial statements should be read in conjunction with our annual consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair statement of our financial position, results of operations and cash flows at the dates and for the periods indicated. The September 30, 2018 Consolidated Balance Sheet included herein is derived from our audited consolidated financial statements.
Unless otherwise indicated, all references to a year mean our fiscal year, which ends on September 30. Our fiscal quarters end on a Saturday following a thirteen-week calendar, and may result in different quarter end dates year to year. The first quarter of 2019 ended on December 29, 2018 and the first quarter of 2018 ended on December 30, 2017. The results of operations for the three months ended December 29, 2018 are not necessarily indicative of the results expected for the remainder of the fiscal year.
Changes in Presentation and Reclassifications
On October 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASC 606). Results for reporting periods beginning on or after October 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the guidance provided by ASC 985-605, Software-Revenue Recognition and revenues for non-software deliverables in accordance with ASC 605-25, Revenue Recognition, Multiple-Element Arrangements (ASC 605). In connection with the adoption, we changed our presentation of the statement of operations to reflect revenue and associated costs as license, support and cloud services, and professional services. For the prior year period, all components of subscription licenses (including support) are included in license revenue. Prior to our adoption of 606, revenues from subscription licenses and support thereon were not separated and were previously included in subscription revenue in our consolidated statement of operations since we did not have VSOE of fair value for support on subscription sales. In addition, revenue and costs associated with our cloud services, which are immaterial and were previously reported in subscription revenue, are classified as support and cloud services for all periods presented.
Effective at the beginning of fiscal 2019, in accordance with the adoption of ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, all non-service net periodic pension costs are now presented in Other income (expense), net on the Consolidated Statement of Operations. The prior period non-service net periodic pension cost amounts have been reclassified for comparability.
Effective at the beginning of fiscal 2019, in accordance with the adoption of ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, restricted cash is now included with cash and cash equivalents in the net cash increase (decrease), beginning of period total amount and end of period total amount on the Consolidated Statements of Cash Flows. The prior period restricted cash amounts have been reclassified for comparability. As of December 29, 2018 and September 30, 2018, $1.1 million of restricted cash was included in other current assets.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Revenue Recognition

6


On October 1, 2018, we adopted ASC 606, which supersedes substantially all existing revenue recognition guidance under U.S. GAAP. We adopted ASC 606 using the modified retrospective method, under which the cumulative effect of initially applying ASC 606 was recorded as a reduction to accumulated deficit with no restatement of comparative periods.
The core principle of ASC 606 is to recognize revenue when promised goods or services are transferred to a customer in an amount that reflects the consideration that is expected to be received for those goods or services. Under the new guidance, an entity is required to evaluate revenue recognition through a five-step process: (1) identifying a contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations in the contract; and (5) recognizing revenue when (or as) the entity satisfies a performance obligation. The standard also requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In applying the principles of ASC 606, more judgment and estimates are required within the revenue recognition process than is required under previous U.S. GAAP, including identifying performance obligations, estimating the amount of variable consideration to include in the transaction price, and estimating the value of each performance obligation to allocate the total transaction price to each separate performance obligation.
The most significant impact of ASC 606 relates to accounting for our subscription arrangements that include term-based on-premise software licenses bundled with support. Under previous GAAP (through September 30, 2018), revenue attributable to these subscription licenses was recognized ratably over the term of the arrangement because VSOE does not exist for the undelivered support element as it is not sold separately. Under the new standard, the requirement to have VSOE for undelivered elements to enable the separation of revenue for the delivered software licenses is eliminated. Accordingly, under the new standard we recognize as revenue a portion of the subscription fee upon delivery of the software license. Revenue recognition related to our perpetual licenses and related support contracts, professional services and cloud offerings is substantially unchanged, with support and cloud revenue being recorded ratably over the contract term. Due to the complexity of certain of our contracts, the actual revenue recognition treatment required under the new standard may be dependent on contract-specific terms and, therefore, may vary in some instances.
Upon implementation of the new standard in fiscal 2019, we made prospective revisions to contract terms with our customers that will result in shortening the initial, non-cancellable term of our multi-year subscriptions to one year for contract periods that begin on or after October 1, 2018. This change will result in annual contractual periods for most of our software subscriptions, the license portion of which will be recognized at the beginning of each annual contract period upon delivery of the licenses and the support portion of which will be recognized ratably over the one-year contractual period. As a result, we anticipate one year of subscription revenue will be recognized for each contract each year; however, more of the revenue will be recognized in the quarter that the contract period begins and less will be recognized in the subsequent three quarters of the contract than under ASC 605.
Under the modified retrospective method, we evaluated each contract that was ongoing on October 1, 2018 as if that contract had been accounted for under ASC 606 from contract inception. Some license revenue related to subscription arrangements that would have been recognized in future periods under current GAAP was recast under ASC 606 as if the revenue had been recognized in prior periods. Under this transition method, we did not adjust historical reported revenue amounts. Instead, the revenue that would have been recognized under this method prior to the adoption date was recorded as an adjustment to accumulated deficit and will not be recognized as revenue in future periods as previously expected. Because license revenue associated with subscription contracts is recognized up front instead of over time under ASC 606, a material portion of our deferred revenue was adjusted to accumulated deficit upon adoption.
Another significant provision under ASC 606 includes the capitalization and amortization of costs associated with obtaining a contract, such as sales commissions. Prior to October 1, 2018, we expensed commissions in the period incurred. Under ASC 606, direct and incremental costs to acquire a contract are capitalized and amortized using a systematic basis over the pattern of transfer of the goods and services to which the asset relates.
Refer to Note 2. Revenue from Contracts with Customers for further detail about the impact of the adoption of ASC 606 and further disclosures.
Income Taxes

7


In October 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The purpose of ASU 2016-16 is to simplify the income tax accounting of an intra-entity transfer of an asset other than inventory and to record its effect when the transfer occurs. We adopted this amendment beginning in the first quarter of 2019 using the modified retrospective method with a cumulative effect adjustment to accumulated deficit of $72.3 million, with a corresponding increase of $75.3 million to deferred tax assets, $6.0 million decrease to income tax assets and a $3.0 million decrease to income tax liabilities. The adjustment primarily relates to deductible amortization of intangible assets in Ireland.  Post adoption, our effective tax rate no longer includes the benefit of this amortization.
Pension Accounting
In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which provides guidance on the capitalization, presentation and disclosure of net benefit costs related to postretirement benefit plans. We adopted the new guidance in the first quarter of 2019 on a full retrospective basis, which resulted in the retrospective reclassification of $0.2 million of non-service net periodic pension cost for the three months ended December 30, 2017 from line items within cost of revenue and operating expenses into Other income (expense), net on the Consolidated Statement of Operations.
Equity Investments
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities and requires equity securities to be measured at fair value, unless the measurement alternative method has been elected for equity investments without readily determinable fair values. Adoption of this guidance in the first quarter of fiscal 2019 did not have a material impact on our consolidated financial statements.
Restricted Cash
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The new guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Statement of Cash Flows. Adoption of this guidance in the first quarter of fiscal 2019 did not have a material impact on our consolidated financial statements.

Pending Accounting Pronouncements
Derivative Financial Instruments
In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedging Activities", which amends and simplifies existing guidance to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The guidance is effective for annual reporting periods beginning after December 15, 2018 (our fiscal 2020) including interim reporting periods within those annual reporting periods and early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will replace the existing guidance in ASC 840, Leases. The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and to disclose important information about leasing arrangements. ASU 2016-02 is effective for annual periods beginning after December 15, 2018 (our fiscal 2020) and interim periods within those annual periods. Early adoption is permitted and modified retrospective application is required. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
2. Revenue from Contracts with Customers

8


Upon adoption of ASC 606, we recorded a decrease in accumulated deficit of $431.9 million ($367.4 million, net of tax) due to the cumulative effect of the ASC 606 adoption, with the impact primarily derived from revenue related to on-premise subscription software licenses.
Nature of Products and Services
Our sources of revenue include: (1) subscription, (2) perpetual license, (3) perpetual support and (4) professional services. Revenue is derived from the licensing of computer software products and from related support contracts. We enter into contracts that include combinations of products, support and professional services, which are accounted for as separate performance obligations with differing revenue recognition patterns.
Performance Obligation
When Performance Obligation is Typically Satisfied
Term-based subscriptions
 
     On-premise software licenses
Point in Time: Upon the later of when the software is made available or the subscription term commences
     Support and cloud-based offerings
Over Time: Ratably over the contractual term; commencing upon the later of when the software is made available or the subscription term commences
Perpetual software licenses
Point in Time: when the software is made available
Support for perpetual software licenses
Over Time: Ratably over the contractual term
Professional services
Over time: As services are provided
Judgments and Estimates
Our contracts with customers for subscriptions typically include commitments to transfer term-based on-premise software licenses bundled with support and/or cloud services. On-premise software is determined to be a distinct performance obligation from support which is sold for the same term of the subscription. For subscription arrangements which include cloud services, we assessed whether the cloud component was highly interrelated with on-premise term software licenses. Other than a limited population of subscriptions, the cloud component is not currently deemed to be interrelated with the on-premise term software and, as a result, cloud services will be accounted for as a distinct performance obligation from the software and support components of the subscription.
Judgment is required to allocate the transaction price to each performance obligation. We use the estimated standalone selling price method to allocate the transaction price for items that are not sold separately. The estimated standalone selling price is determined using all information reasonably available to us, including market conditions and other observable inputs. The corresponding revenues are recognized as the related performance obligations are satisfied. We determined that 50% to 55% of the estimated standalone selling price for subscriptions that contain distinct license and support performance obligations are attributable to software licenses and 45% to 50%, depending upon the product offering, is attributable to support for those licenses.
Our standard multi-year, non-cancellable on-premise subscription contracts provide customers with an annual right to exchange software within the original subscription with other software. Although the exchange right is limited to software products within a similar product grouping, the exchange right is not limited to products with substantially similar features and functionality as those originally delivered. We determined that this right to exchange previously delivered software for different software represents variable consideration to be accounted for as a liability. We have identified a standard portfolio of contracts with common characteristics and applied the expected value method of determining variable consideration associated with this right. Additionally, where there are isolated situations that are outside of the standard portfolio of contracts due to contract size, longer contract duration, or other unique contractual terms, we used the most likely amount method to determine the amount of variable consideration. In both circumstances, the amount of variable consideration included in the transaction price is constrained by an amount where it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. As of December 29, 2018, the total refund liability was $23.6 million, primarily associated with the annual right to exchange on-premise subscription software.

9


Contract Assets and Contract Liabilities
 
December 29, 2018
 
October 1, 2018, as adjusted
 
(in thousands)
Contract asset
$
14,513

 
$
26,265

Deferred revenue
$
335,119

 
$
357,490

As of December 29, 2018, our contract assets are expected to be transferred to receivables within the next 12 months and therefore are included in other current assets. Approximately $12.2 million of the October 1, 2018 contract asset balance was transferred to receivables during the current period as a result of the right to payment becoming unconditional. The majority of both the contract asset balance and the amounts transferred to receivables relates to two large professional services contracts with invoicing terms based on performance milestones. Additions to contract assets of approximately $0.4 million related to revenue recognized in the period, net of period billings. There were no impairments of contract assets during the three months ended December 29, 2018.
During the three months ended December 29, 2018, $153.7 million of revenue that was included in the deferred revenue opening balance was recognized. There were additional deferrals of $131.3 million, which were primarily related to new billings.
Costs to Obtain or Fulfill a Contract
The new revenue recognition standard requires the capitalization of certain incremental costs of obtaining a contract, which impacts the period in which we record our commission expense. Prior to our adoption of the new revenue standard, we recognized commissions expense as incurred. Under the new revenue recognition standard, we are required to recognize these expenses over the period of benefit associated with these costs. This results in a deferral of certain commission expenses each period. Upon adoption, we reduced our accumulated deficit by $70.0 million and recognized an offsetting asset for deferred commission related to contracts that were not completed prior to October 1, 2018.
We recognize an asset for the incremental costs of obtaining a contract with a customer if the benefit of those costs is expected to be longer than one year. These deferred costs are amortized proportionately related to revenue over five years, which is generally longer than the term of the initial contract because of anticipated renewals as commissions for renewals are not commensurate with commissions related to our initial contracts. As of December 29, 2018, deferred costs of $19.9 million were included in other current assets and $52.5 million were included in other assets (non-current).
As the revenue recognition pattern has changed under ASC 606, the costs to fulfill contracts has also changed to match this pattern of expense recognition. As of October 1, 2018, this resulted in a $2.8 million increase in our accumulated deficit with recognition of an offsetting current liability.
Remaining Performance Obligations
Our contracts with customers include amounts allocated to performance obligations that will be satisfied at a later date. As of December 29, 2018, amounts allocated to these remaining performance obligations are $938 million, of which we expect to recognize 90% over the next 24 months with the remaining amount thereafter.

10


Disaggregation of Revenue
 
 
Three months ended
 
 
 
 
 
 
 
 
 
As Reported ASC 606
 
ASC 605
 
As Reported ASC 605
 
 
December 29, 2018
 
December 29, 2018
 
December 30, 2017
Revenue
 
 
 
 
 
(in thousands)
Subscription license
 
$
63,517

 
 
 
 
Subscription support & cloud services
 
77,424

 
 
 
 
Total Subscription
 
140,941

 
$
148,413

 
$
100,008

Perpetual support
 
110,497

 
109,225

 
131,197

Total recurring revenue
 
251,438

 
257,638

 
231,205

Perpetual license
 
41,805

 
41,750

 
33,985

Total software revenue
 
293,243

 
299,388

 
265,190

Professional services
 
41,446

 
39,369

 
41,454

Total revenue
 
$
334,689

 
$
338,757

 
$
306,644

For further disaggregation of revenue by geographic region and product area see Note 11. Segment and Geographical Information.
Practical Expedients
We elected certain practical expedients with the adoption of the new revenue standard. We do not account for significant financing components if the period between revenue recognition and when the customer pays for the products or services will be one year or less. Additionally, we recognize revenue equal to the amount we have a right to invoice, when the amount corresponds directly with the value to the customer of our performance date.
Transition Disclosures
In accordance with the modified retrospective method transition requirements, we will present the financial statement line items impacted and adjusted to compare to presentation under ASC 605 for each of the interim and annual periods during the first year of adoption of ASC 606.

11


The following tables present our Balance Sheets and Statements of Operations as reported under ASC 606 for the current period with comparative periods reported under ASC 605:
 
As Reported ASC 606
 
ASC 605
 
As Reported ASC 605
 
December 29,
2018
 
December 29,
2018
 
September 30,
2018
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
276,990

 
$
276,990

 
$
259,946

Short-term marketable securities
25,598

 
25,598

 
25,836

Accounts receivable (1)
385,670

 
138,989

 
129,297

Prepaid expenses
63,045

 
63,045

 
48,997

Other current assets (2)
48,682

 
143,104

 
169,708

Total current assets
799,985

 
647,726

 
633,784

Property and equipment, net
107,359

 
107,359

 
80,613

Goodwill
1,230,901

 
1,230,901

 
1,182,457

Acquired intangible assets, net
205,084

 
205,084

 
200,202

Long-term marketable securities
30,054

 
30,054

 
30,115

Deferred tax assets (3)
201,149

 
234,558

 
165,566

Other assets (4)
178,437

 
34,328

 
36,285

Total assets
$
2,752,969

 
$
2,490,010

 
$
2,329,022

LIABILITIES AND STOCKHOLDERS’ EQUITY

 
 
 

Current liabilities:

 
 
 

Accounts payable
$
57,249

 
$
57,249

 
$
53,473

Accrued expenses and other current liabilities (5)
83,721

 
56,897

 
74,388

Accrued compensation and benefits
74,483

 
74,483

 
101,784

Accrued income taxes (3)
405

 
4,958

 
18,044

Deferred revenue (6)
325,111

 
484,613

 
487,590

Total current liabilities
540,969

 
678,200

 
735,279

Long-term debt
778,484

 
778,484

 
643,268

Deferred tax liabilities (3)
36,261

 
5,731

 
5,589

Deferred revenue (6)
10,197

 
8,324

 
11,852

Other liabilities
65,889

 
65,889

 
58,445

Total liabilities
1,431,800

 
1,536,628

 
1,454,433

 

 
 
 

Stockholders’ equity:

 
 
 

Preferred stock

 

 

Common stock
1,187

 
1,187

 
1,180

Additional paid-in capital
1,553,875

 
1,553,875

 
1,558,403

Accumulated deficit
(138,785
)
 
(507,900
)
 
(599,409
)
Accumulated other comprehensive loss
(95,108
)
 
(93,780
)
 
(85,585
)
Total stockholders’ equity
1,321,169

 
953,382

 
874,589

Total liabilities and stockholders’ equity
$
2,752,969

 
$
2,490,010

 
$
2,329,022

The changes in balance sheet accounts due to the adoption of 606 are due primarily to the following:
(1)
Up front license recognition under our subscription contracts and billed but uncollected support and subscription receivables that had corresponding deferred revenue, which were included in other current assets prior to our adoption of 606.
(2) Contract assets and capitalized commission costs.
(3)
The tax effect of the accumulated deficit impact related to the acceleration of revenue and deferral of costs (primarily commissions).
(4) The long-term portion of unbilled receivables due to the acceleration of license revenue on multi-year subscription contracts and the long-term portion of capitalized commission costs.
(5) Refund liability, primarily associated with the annual right to exchange on-premise subscription software described above in Judgments and Estimates.
(6) The decrease in deferred revenue recorded to accumulated deficit upon adoption of ASC 606 primarily related to on-premise subscription software licenses.

12


 
Three months ended
 
As Reported ASC 606
 
ASC 605
 
As Reported ASC 605
 
December 29,
2018
 
December 29,
2018
 
December 30,
2017
Revenue:
 
 
 
 
 
License (1)
$
105,322

 
$
173,905

 
$
119,518

Support and cloud services (1)
187,921

 
125,483

 
145,672

Total software revenue
293,243

 
299,388

 
265,190

Professional services 
41,446

 
39,369

 
41,454

Total revenue
334,689

 
338,757

 
306,644

Cost of revenue:

 
 
 

Cost of license revenue
12,563

 
12,347

 
12,114

Cost of support and cloud services revenue 
31,197

 
30,630

 
34,502

Total cost of software revenue
43,760

 
42,977

 
46,616

Cost of professional services revenue
33,592

 
32,219

 
36,419

Total cost of revenue (2)
77,352

 
75,196

 
83,035

Gross margin
257,337

 
263,561

 
223,609

Operating expenses:


 
 
 


Sales and marketing (3)
104,218

 
107,304

 
99,375

Research and development
60,782

 
60,782

 
63,972

General and administrative
37,864

 
37,864

 
35,020

Amortization of acquired intangible assets
5,936

 
5,936

 
7,821

Restructuring and other charges, net
18,493

 
18,493

 
105

Total operating expenses
227,293

 
230,379

 
206,293

Operating income
30,044

 
33,182

 
17,316

Interest expense
(10,276
)
 
(10,276
)
 
(10,047
)
Other income (expense), net
655

 
548

 
(798
)
Income before income taxes
20,423

 
23,454

 
6,471

Provision (benefit) for income taxes (4)
(562
)
 
4,206

 
(7,406
)
Net income
$
20,985

 
$
19,248

 
$
13,877

(1)
The reduction in license revenue and increase in support revenue is a result of the support component of subscription licenses which is included in license revenue under ASC 605. Additionally, license revenue decreased by approximately $65 million as a result of the revenue recorded to accumulated deficit, which would have been recognized during the quarter, partially offset by approximately $59 million of upfront license revenue recognition on new and renewal bookings.
(2) Cost of revenue under ASC 606 is higher under ASC 606 due to the treatment of deferred professional services costs under the new accounting guidance, partially offset by the timing of revenue recognition under ASC 606 resulting in lower associated royalty costs.
(3) Sales and marketing costs are lower under ASC 606 due to the amortization of commissions costs capitalized upon adoption of ASC 606, offset by the deferral of ongoing commission expenses under the new accounting guidance.
(4) The benefit for income taxes under ASC 606 includes indirect effects of the adoption.
3. Restructuring and Other Charges
Restructuring and other charges, net includes restructuring charges (credits) and headquarters relocation charges.
Restructuring Charges (Credits)
In October 2018, we initiated a restructuring plan to realign our workforce to shift investment to support Industrial Internet of Things and Augmented Reality strategic high growth opportunities. As this is a realignment of resources rather than a cost-savings initiative, we do not expect this realignment to result in significant cost savings. The restructuring plan was completed in the first quarter of 2019 and resulted in restructuring charges of $16.3 million for termination benefits associated with approximately 240

13


employees, substantially all of which we expect will be paid in fiscal 2019. We also recorded $0.3 million of charges related to prior restructuring actions.
The following table summarizes restructuring accrual activity for the three months ended December 29, 2018:
 
Employee severance and related benefits
 
Facility closures and related costs
 
Total
 
(in thousands)
October 1, 2018
$

 
$
2,415

 
$
2,415

Charges to operations, net
16,343

 
243

 
16,586

Cash disbursements
(8,019
)
 
(264
)
 
(8,283
)
Foreign exchange impact
32

 
(59
)
 
(27
)
Accrual, December 29, 2018
$
8,356

 
$
2,335

 
$
10,691


The following table summarizes restructuring accrual activity for the three months ended December 30, 2017:
 
Employee severance and related benefits
 
Facility closures and related costs
 
Total
 
(in thousands)
October 1, 2017
$
1,736

 
$
4,508

 
$
6,244

Charges (credit) to operations, net
(212
)
 
317

 
105

Cash disbursements
(198
)
 
(537
)
 
(735
)
Foreign exchange impact
17

 
(18
)
 
(1
)
Accrual, December 30, 2017
$
1,343

 
$
4,270

 
$
5,613

Of the accrual for facility closures and related costs, as of December 29, 2018, $1.3 million is included in accrued expenses and other current liabilities and $1.0 million is included in other liabilities in the Consolidated Balance Sheets. The accrual for facility closures is net of assumed sublease income of $1.9 million. The accrual for employee severance and related benefits is included in accrued compensation and benefits in the Consolidated Balance Sheets.
Of the accrual for facility closures and related costs, as of December 30, 2017 $2.2 million is included in accrued expenses and other current liabilities and $2.1 million is included in other liabilities in the Consolidated Balance Sheets.
Other - Headquarters Relocation Charges
Headquarters relocation charges represent accelerated depreciation expense associated with exiting our Needham headquarters facility and relocating to our new worldwide headquarters in the Boston Seaport District, which occurred in January 2019. Because our prior headquarters lease will not expire until November 2022, we are seeking to sublease that space, but have not yet done so. As a result, we will bear overlapping rent obligations for those premises and, in the second quarter of 2019, we expect to incur a restructuring charge of approximately $24 million, based on the net present value of remaining lease commitments net of estimated sublease income. From a cash perspective, the free rent and estimated sublease income on the Seaport headquarters total approximately $30 million, as compared to the estimated cash outflows of $29 million on the prior headquarters (rent obligations and operating expenses net of estimated sublease income). Restructuring charges could increase and estimated cash outflows could increase if we are unable to sublease our prior headquarters as we expect. Additionally, we will incur other costs associated with the move which will be recorded as incurred. In the first quarter of 2019 we recorded $1.9 million of accelerated depreciation expense related to shortening the estimated useful lives of leasehold improvements related to the Needham location.
4. Stock-based Compensation
Our equity incentive plan provides for grants of nonqualified and incentive stock options, common stock, restricted stock, restricted stock units (RSUs) and stock appreciation rights to employees, directors, officers and consultants. We award RSUs as the principal equity incentive awards, including performance-based awards that are earned based on achievement of performance criteria established

14


by the Compensation Committee of our Board of Directors. Each RSU represents the contingent right to receive one share of our common stock.
We measure the cost of employee services received in exchange for RSU awards based on the fair value of RSU awards on the date of grant. That cost is recognized over the period during which an employee is required to provide service in exchange for the award. We account for forfeitures as they occur, rather than estimate expected forfeitures.
Our employee stock purchase plan (ESPP), initiated in the fourth quarter of 2016, allows eligible employees to contribute up to 10% of their base salary, up to a maximum of $25,000 per year and subject to other plan limitations, toward the purchase of our common stock at a discounted price. The purchase price of the shares on each purchase date is equal to 85% of the lower of the fair market value of our common stock on the first and last trading days of each offering period. The ESPP is qualified under Section 423 of the Internal Revenue Code. We estimate the fair value of each purchase right under the ESPP on the date of grant using the Black-Scholes option valuation model and use the straight-line attribution approach to record the expense over the six-month offering period. 
Restricted stock unit activity for the three months ended December 29, 2018
Shares
 
Weighted
Average
Grant Date
Fair Value
(Per Share)
 
(in thousands)
 
 
Balance of outstanding restricted stock units October 1, 2018
3,284

 
$
65.93

Granted (1)
979

 
$
81.34

Vested
(1,056
)
 
$
53.40

Forfeited or not earned
(266
)
 
$
63.60

Balance of outstanding restricted stock units December 29, 2018
2,941

 
$
75.85

 _________________
(1) Restricted stock granted includes 141,000 shares from prior period TSR awards that were earned upon achievement of the performance criteria and vested in November 2018.
 
Restricted Stock Units
Grant Period
Performance-based RSUs (1)
 
Service-based RSUs (2)
 
(Number of Units in thousands)
First three months of 2019
344
 
494
_________________
(1)
Substantially all the performance-based RSUs were granted to our executive officers. Approximately 145,000 shares are eligible to vest based upon annual performance measures over a three-year period. RSUs not earned for a period may be earned in the third period. To the extent earned, those performance-based RSUs will vest in three substantially equal installments on November 15, 2019, November 15, 2020 and November 15, 2021, or the date the Compensation Committee determines the extent to which the applicable performance criteria have been achieved for each performance period. An additional 199,000 performance-based RSU's are eligible to vest based upon a 2019 performance measure, which RSUs will be forfeited to the extend the performance measure is not achieved. These RSUs will vest, to the extent earned, in three substantially equal installments on November 15, 2019, 2020 and 2021.
(2)
The service-based RSUs were granted to employees, including our executive officers. Substantially all service-based RSUs will vest in three substantially equal annual installments on or about the anniversary of the date of grant.
Compensation expense recorded for our stock-based awards was classified in our Consolidated Statements of Operations as follows:

15


 
Three months ended
 
December 29,
2018
 
December 30,
2017
 
(in thousands)
Cost of license revenue
$
322

 
$
(90
)
Cost of support and cloud services revenue
975

 
1,311

Cost of professional services revenue
1,814

 
1,706

Sales and marketing
9,722

 
4,879

Research and development
4,900

 
2,960

General and administrative
11,674

 
7,565

Total stock-based compensation expense
$
29,407

 
$
18,331

Stock-based compensation expense in the first quarter of 2019 and 2018 includes $1.3 million and $1.1 million, respectively, related to the ESPP.
5. Earnings per Share (EPS) and Common Stock
EPS
Basic EPS is calculated by dividing net income by the weighted average number of shares outstanding during the period. Diluted EPS is calculated by dividing net income by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding RSUs using the treasury stock method. The calculation of the dilutive effect of outstanding equity awards under the treasury stock method includes consideration of unrecognized compensation expense as additional proceeds.
 
Three months ended
Calculation of Basic and Diluted EPS
December 29,
2018
 
December 30,
2017
 
(in thousands, except per share data)
Net income
$
20,985

 
$
13,877

Weighted average shares outstanding—Basic
118,323

 
115,731

Dilutive effect of restricted stock units
1,315

 
1,925

Weighted average shares outstanding—Diluted
119,638

 
117,656

Earnings per share—Basic
$
0.18

 
$
0.12

Earnings per share—Diluted
$
0.18

 
$
0.12


There were no antidilutive shares for the three months ended December 29, 2018 and 0.3 million of antidilutive shares for the three months ended December 30, 2017.
Common Stock Repurchases
Our Articles of Organization authorize us to issue up to 500 million shares of our common stock.
Our Board of Directors has authorized us to repurchase up to $1,500 million of our common stock in the period October 1, 2017 through September 30, 2020. We did not repurchase any shares in the first quarter of either 2019 or 2018, but resumed repurchases in the second quarter of 2019 as described in Note 15. Subsequent Events. All shares of our common stock repurchased are automatically restored to the status of authorized and unissued.
6. Acquisitions
Acquisition-related costs in the first quarter of 2019 totaled $0.4 million, compared to less than $0.1 million in the first quarter of 2018. Acquisition-related costs include direct costs of potential and completed acquisitions (e.g., investment banker fees and professional fees, including legal and valuation services) and expenses related to acquisition integration activities (e.g., professional fees and severance). 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

16


classified in general and administrative expenses in the accompanying Consolidated Statements of Operations.
Frustum
On November 19, 2018, we acquired Frustum Inc. for $69.6 million (net of cash acquired of $0.7 million). We financed the acquisition with borrowings under our credit facility. Frustum is engaged in next-generation computer-aided design, including generative design, an approach that leverages artificial intelligence to generate design options. At the time of the acquisition, Frustum had approximately 12 employees and historical annualized revenues were not material. We do not expect the acquisition to add material revenue in fiscal 2019.
The acquisition of Frustum has been accounted for as a business combination. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition date. The fair values of intangible assets were based on valuations using a discounted cash flow model which requires the use of significant estimates and assumptions, including estimating future revenues and costs. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. 
The purchase price allocation resulted in $53.8 million of goodwill, $17.9 million of purchased software and $2.1 million of other net liabilities. The acquired technology is being amortized over a useful life of 15 years based on the expected benefit pattern of the assets. The acquired goodwill was allocated to our software products segment and will not be deductible for income tax purposes. The resulting amount of goodwill reflects the expected value that will be created by integrating Frustum generative design technology into our CAD solutions.
7. Goodwill and Intangible Assets
We have two operating and reportable segments: (1) Software Products and (2) Professional Services. We assess goodwill for impairment at the reporting unit level. Our reporting units are determined based on the components of our operating segments that constitute a business for which discrete financial information is available and for which operating results are regularly reviewed by segment management. Our reporting units are the same as our operating segments.
As of December 29, 2018, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was $1,405.9 million and our Professional Services segment was $30.1 million. As of September 30, 2018, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was $1,352.4 million and our Professional Services segment was $30.2 million. Acquired intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.
We completed our annual goodwill impairment review as of June 30, 2018 based on a qualitative assessment. Our qualitative assessment included company specific (financial performance and long-range plans), industry, and macroeconomic factors, and consideration of the fair value of each reporting unit relative to its carrying value at the last valuation date. Based on our qualitative assessment, we believe it is more likely than not that the fair values of our reporting units exceed their carrying values and no further impairment testing is required.

17


Goodwill and acquired intangible assets consisted of the following:
 
December 29, 2018
 
September 30, 2018
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
 
(in thousands)
Goodwill (not amortized)
 
 
 
 
$
1,230,901

 
 
 
 
 
$
1,182,457

Intangible assets with finite lives (amortized) (1):
 
 
 
 
 
 
 
 
 
 
 
Purchased software
$
379,653

 
$
259,850

 
$
119,803

 
$
362,679

 
$
254,059

 
$
108,620

Capitalized software
22,877

 
22,877

 

 
22,877

 
22,877

 

Customer lists and relationships
355,412

 
274,239

 
81,173

 
357,586

 
270,272

 
87,314

Trademarks and trade names
18,987

 
14,879

 
4,108

 
19,054

 
14,786

 
4,268

Other
3,981

 
3,981

 

 
4,003

 
4,003

 

 
$
780,910

 
$
575,826

 
$
205,084

 
$
766,199

 
$
565,997

 
$
200,202

Total goodwill and acquired intangible assets
 
 
 
 
$
1,435,985

 
 
 
 
 
$
1,382,659

(1) The weighted-average useful lives of purchased software, customer lists and relationships, and trademarks and trade names with a remaining net book value are 10 years, 10 years, and 11 years, respectively.
Goodwill
Changes in goodwill presented by reportable segments were as follows: 
 
Software Products
 
Professional Services
 
Total
 
(in thousands)
Balance, October 1, 2018
$
1,152,720

 
$
29,737

 
$
1,182,457

Frustum acquisition
53,777

 

 
53,777

Foreign currency translation adjustment
(5,199
)
 
(134
)
 
(5,333
)
Balance, December 29, 2018
$
1,201,298

 
$
29,603

 
$
1,230,901

Amortization of Intangible Assets
The aggregate amortization expense for intangible assets with finite lives was classified in our Consolidated Statements of Operations as follows:
 
Three months ended
 
December 29,
2018
 
December 30,
2017
 
(in thousands)
Amortization of acquired intangible assets
$
5,936

 
$
7,821

Cost of license revenue
6,717

 
6,675

Total amortization expense
$
12,653

 
$
14,496


18


8. Fair Value Measurements
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. GAAP prescribes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs that may be used to measure fair value:
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or
Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Money market funds, time deposits and corporate notes/bonds are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets.
Certificates of deposit, commercial paper and certain U.S. government agency securities are classified within Level 2 of the fair value hierarchy. These instruments are valued based on quoted prices in markets that are not active or based on other observable inputs consisting of market yields, reported trades and broker/dealer quotes.
The principal market in which we execute our foreign currency contracts is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants usually are large financial institutions. Our foreign currency contracts’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy.
The fair value of our contingent consideration arrangements is determined based on our evaluation of the probability and amount of any earn-out that will be achieved based on expected future performances by the acquired entities. These arrangements are classified within Level 3 of the fair value hierarchy.

19


Our significant financial assets and liabilities measured at fair value on a recurring basis as of December 29, 2018 and September 30, 2018 were as follows:
 
December 29, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
Cash equivalents
$
89,023

 
$

 
$

 
$
89,023

Marketable securities

 


 

 

Certificates of deposit

 
220

 

 
220

Commercial paper

 
1,956

 

 
1,956

Corporate notes/bonds
52,480

 

 

 
52,480

U.S. government agency securities

 
995

 

 
995

Forward contracts

 
1,216

 

 
1,216

 
$
141,503

 
$
4,387

 
$

 
$
145,890

Financial liabilities:


 


 

 

Contingent consideration related to acquisitions
$

 
$

 
$

 
$

Forward contracts

 
584

 

 
584

 
$

 
$
584

 
$

 
$
584

 
September 30, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
Cash equivalents
$
93,058

 
$

 
$

 
$
93,058

Marketable securities

 


 

 

Certificates of deposit

 
219

 

 
219

Corporate notes/bonds
54,737

 

 

 
54,737

U.S. government agency securities

 
995

 

 
995

Forward contracts

 
2,889

 

 
2,889

 
$
147,795

 
$
4,103

 
$

 
$
151,898

Financial liabilities:


 


 

 

Contingent consideration related to acquisitions
$

 
$

 
$
1,575

 
$
1,575

Forward contracts

 
3,419

 

 
3,419

 
$

 
$
3,419

 
$
1,575

 
$
4,994


Changes in the fair value of Level 3 contingent consideration liability associated with our acquisitions were as follows:
 
Contingent Consideration
 
(in thousands)
 
Other
Balance, October 1, 2018
$
1,575

Payment of contingent consideration
(1,575
)
Balance, December 29, 2018
$


20


 
Contingent Consideration
 
(in thousands)
 
Kepware
Balance, October 1, 2017
$
8,400

Payment of contingent consideration
(3,757
)
Balance, December 30, 2017
$
4,643

 In the Consolidated Balance Sheet as of December 29, 2018, there is no accrued contingent consideration.  In the Consolidated Balance Sheet as of December 30, 2017, there was $4.6 million of the contingent consideration liability included in accrued expenses and other current liabilities.
Of the $1.6 million payments in the first three months of 2019, $1.6 million represents the fair value of the liabilities recorded at the acquisition date and is included in financing activities in the Consolidated Statements of Cash Flows. Of the $3.8 million payments in the first three months of 2018, $3.2 million represents the fair value of the liabilities recorded at the acquisition date and is included in financing activities in the Consolidated Statements of Cash Flows.
9. Marketable Securities
The amortized cost and fair value of marketable securities as of December 29, 2018 and September 30, 2018 were as follows:

December 29, 2018

Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair value
 
(in thousands)
Certificates of deposit
$
221

 
$

 
$
(1
)
 
$
220

Commercial paper
1,961

 

 
(5
)
 
1,956

Corporate notes/bonds
52,868

 
6

 
(394
)
 
52,480

U.S. government agency securities
1,000

 

 
(5
)
 
995


$
56,050

 
$
6

 
$
(405
)
 
$
55,651


September 30, 2018

Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair value
 
(in thousands)
Certificates of deposit
$
220

 
$

 
$
(1
)
 
$
219

Corporate notes/bonds
55,140

 

 
(403
)
 
54,737

U.S. government agency securities
1,004

 

 
(9
)
 
995


$
56,364

 
$

 
$
(413
)
 
$
55,951

Our investment portfolio consists of certificates of deposit, commercial paper, corporate notes/bonds and government securities that have a maximum maturity of two years. The longer the duration of these securities, the more susceptible they are to changes in market interest rates and bond yields. All unrealized losses are due to changes in market interest rates, bond yields and/or credit ratings.
We review our investments to identify and evaluate investments that have an indication of possible impairment. We concluded that, at December 29, 2018, the unrealized losses were temporary. The following tables summarize the fair value and gross unrealized losses aggregated by category and the length of time that individual securities have been in a continuous unrealized loss position as of
December 29, 2018 and September 30, 2018.
 
December 29, 2018
 
Less than twelve months
 
Greater than twelve months
 
Total
 
Fair Value
 
Gross unrealized loss
 
Fair Value
 
Gross unrealized loss
 
Fair Value
 
Gross unrealized loss
 
(in thousands)
Certificates of deposit
$

 
$

 
$
220

 
$
(1
)
 
$
220

 
$
(1
)
Commercial paper
1,956

 
(5
)
 

 

 
1,956

 
(5
)
Corporate notes/bonds
22,303

 
(119
)
 
27,695

 
(275
)
 
49,998

 
(394
)
U.S. government agency securities

 

 
995

 
(5
)
 
995

 
(5
)
 
$
24,259

 
$
(124
)
 
$
28,910

 
$
(281
)
 
$
53,169

 
$
(405
)

 
September 30, 2018
 
Less than twelve months
 
Greater than twelve months
 
Total
 
Fair Value
 
Gross unrealized loss
 
Fair Value
 
Gross unrealized loss
 
Fair Value
 
Gross unrealized loss
 
(in thousands)
Certificates of deposit
$
219

 
$
(1
)
 
$

 
$

 
$
219

 
$
(1
)
Corporate notes/bonds
24,067

 
(70
)
 
30,670

 
(333
)
 
54,737

 
(403
)
U.S. government agency securities

 

 
995

 
(9
)
 
995

 
(9
)
 
$
24,286

 
$
(71
)
 
$
31,665

 
$
(342
)
 
$
55,951

 
$
(413
)

The following table presents our available-for-sale marketable securities by contractual maturity date as of December 29, 2018 and September 30, 2018.

December 29, 2018
 
September 30, 2018

Amortized cost
 
Fair value
 
Amortized cost
 
Fair value
 
(in thousands)
 
(in thousands)
Due in one year or less
$
25,544

 
$
25,430

 
$
25,792

 
$
25,670

Due after one year through three years
30,506

 
30,221

 
30,572

 
30,281


$
56,050

 
$
55,651

 
$
56,364

 
$
55,951

10. Derivative Financial Instruments
Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Our most significant foreign currency exposures relate to Western European countries, Japan, China, Israel, India and Canada. Our foreign currency risk management strategy is principally designed to mitigate the future potential financial impact of changes in the U.S. Dollar value of anticipated transactions and balances denominated in foreign currency, resulting from changes in foreign currency exchange rates. We enter into derivative transactions, specifically foreign currency forward contracts, to manage the exposures to foreign currency exchange risk to reduce earnings volatility. We do not enter into derivatives transactions for trading or speculative purposes.
Non-Designated Hedges
We hedge our net foreign currency monetary assets and liabilities primarily resulting from foreign currency denominated receivables and payables with foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These contracts have maturities of up to approximately three months. Generally, we do not designate these foreign currency forward contracts as hedges for accounting purposes and changes in the fair value of these instruments are recognized immediately in earnings. Because we enter into forward contracts only as an economic hedge, any gain or loss on the underlying foreign-denominated

21


balance would be offset by the loss or gain on the forward contract. Gains and losses on forward contracts and foreign denominated receivables and payables are included in interest income and other expense, net.
As of December 29, 2018 and September 30, 2018, we had outstanding forward contracts with notional amounts equivalent to the following:
Currency Hedged
December 29,
2018
 
September 30,
2018
 
(in thousands)
Canadian / U.S. Dollar
7,195

 
7,334

Euro / U.S. Dollar
249,703

 
297,730

British Pound / U.S. Dollar
7,616

 
7,074

Israeli Sheqel / U.S. Dollar
7,424

 
9,778

Japanese Yen / U.S. Dollar
27,810

 
37,456

Swiss Franc / U.S. Dollar
12,875

 
11,944

Danish Kroner/ U.S. Dollar
3,067

 
1,902

Swedish Kronor / U.S. Dollar
13,562

 
18,207

Chinese Renminbi / U.S. Dollar
8,981

 
9,010

All other
9,282

 
5,521

Total
$
347,515

 
$
405,956

The following table shows the effect of our non-designated hedges in the Consolidated Statements of Operations for the three months ended December 29, 2018 and December 30, 2017:
Derivatives Not Designated as Hedging Instruments
 
Location of Gain or (Loss) Recognized in Income
 
Net realized and unrealized gain or (loss) (excluding the underlying foreign currency exposure being hedged)
 
 
 
 
Three months ended
 
 
 
 
December 29,
2018
 
December 30,
2017
 
 
 
 
(in thousands)
Forward Contracts
 
Interest income and other expense, net
 
$
(987
)
 
$
587

In the three months ended December 29, 2018 and December 30, 2017, foreign currency losses, net were $0.2 million and $1.5 million, respectively.
Cash Flow Hedges
Our foreign exchange risk management program objective is to identify foreign exchange exposures and implement appropriate hedging strategies to minimize earnings fluctuations resulting from foreign exchange rate movements. We designate certain foreign exchange forward contracts as cash flow hedges of Euro, Yen and SEK denominated intercompany forecasted revenue transactions (supported by third party sales). All foreign exchange forward contracts are carried at fair value on the Consolidated Balance Sheets and the maximum duration of foreign exchange forward contracts is 15 months.
Cash flow hedge relationships are designated at inception, and effectiveness is assessed prospectively and retrospectively using regression analysis monthly. As the forward contracts are highly effective in offsetting changes to future cash flows on the hedged transactions, we record the effective portion of changes in these cash flow hedges in accumulated other comprehensive income and subsequently reclassify it into earnings in the period during which the hedged transactions are recognized in earnings. Changes in the fair value of foreign exchange forward contracts due to changes in time value are included in the assessment of effectiveness. Our derivatives are not subject to any credit contingent features. We manage credit risk with counterparties by trading among several counterparties and we review our counterparties’ credit at least quarterly.

22


As of December 29, 2018 and September 30, 2018, we had outstanding forward contracts designated as cash flow hedges with notional amounts equivalent to the following:
Currency Hedged
December 29,
2018
 
September 30,
2018
 
(in thousands)
Euro / U.S. Dollar
$

 
$
8,495

Japanese Yen / U.S. Dollar

 
2,193

Swedish Kronor / U.S. Dollar

 
1,708

Total
$

 
$
12,396

The following table shows the effect of our derivative instruments designated as cash flow hedges in the Consolidated Statements of Operations for the three months ended December 29, 2018 and December 30, 2017 (in thousands):

Derivatives Designated as Hedging Instruments
 
Gain or (Loss) Recognized in OCI-Effective Portion
 
Location of Gain or (Loss) Reclassified from OCI into Income-Effective Portion
 
Gain or (Loss) Reclassified from OCI into Income-Effective Portion
 
Location of Gain or (Loss) Recognized-Ineffective Portion
 
Gain or (Loss) Recognized-Ineffective Portion


Three months ended



Three months ended



Three months ended


December 29,
2018

December 30,
2017



December 29,
2018

December 30,
2017



December 29,
2018

December 30,
2017
Forward Contracts
 
$
187

 
$
(1,044
)
 
Total software revenue
 
$
627

 
$
(655
)
 
Interest income and other expense, net
 
$

 
$
(19
)

As of December 29, 2018, we estimated that all amounts reported in accumulated other comprehensive income will be reclassified to income within the next twelve months.
If an underlying forecast transaction does not occur, or it becomes probable that it will not occur, the related hedge gains and losses on the cash flow hedge would be immediately reclassified to interest income and other expense, net on the Consolidated Statements of Operations. For the three months ended December 29, 2018 and December 30, 2017, there were no such gains or losses.
Net Investment Hedges
We translate balance sheet accounts of subsidiaries with foreign functional currencies into the U.S. Dollar using the exchange rate at each balance sheet date. Resulting translation adjustments are reported as a component of accumulated other comprehensive income on the Consolidated Balance Sheet. We designate certain foreign exchange forward contracts as net investment hedges against exposure on translation of balance sheet accounts of Euro functional subsidiaries. Net investment hedges partially offset the impact of foreign currency translation adjustment recorded in accumulated other comprehensive income on the Consolidated Balance Sheet. All foreign exchange forward contracts are carried at fair value on the Consolidated Balance Sheet and the maximum duration of foreign exchange forward contracts is approximately three months.
Net investment hedge relationships are designated at inception, and effectiveness is assessed retrospectively on a quarterly basis using net equity position of Euro functional subsidiaries. As the forward contracts are highly effective in offsetting exchange rate exposure, we record changes in these net investment hedges in accumulated other comprehensive income and subsequently reclassify them to foreign currency translation adjustment in accumulated other comprehensive income at the time of forward contract maturity. Changes in the fair value of foreign exchange forward contracts due to changes in time value are excluded from the assessment of effectiveness. Our derivatives are not subject to any credit contingent features. We manage credit risk with counterparties by trading among several counterparties and we review our counterparties’ credit at least quarterly.

23


As of December 29, 2018 and September 30, 2018, we had outstanding forward contracts designated as net investment hedges with notional amounts equivalent to the following:
Currency Hedged
December 29,
2018
 
September 30,
2018
 
(in thousands)
Euro / U.S. Dollar
$
140,492

 
$

Total
$
140,492

 
$

The following table shows the effect of our derivative instruments designated as net investment hedges in the Consolidated Statements of Operations for the three months ended December 29, 2018 and December 30, 2017 (in thousands):
Derivatives Designated as Hedging Instruments
 
Gain or (Loss) Recognized in OCI-Effective Portion
 
Location of Gain or (Loss) Reclassified from OCI into Income-Effective Portion
Gain or (Loss) Reclassified from OCI into Income-Effective Portion
 
Location of Gain or (Loss) Excluded from Effectiveness Testing
Gain or (Loss) Recognized-Ineffective Portion

 
Three months ended
 

Three months ended
 

Three months ended