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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 March 28, 2020
OR
|
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from_ to_
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)
__________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
|
| | |
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Common Stock, $.01 par value per share | PTC | NASDAQ Global Select Market |
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 ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 | ☑ | | Accelerated filer | ☐ | | Non-accelerated filer | ☐ | | 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 ☑
There were 115,695,431 shares of our common stock outstanding on May 4, 2020.
PTC Inc.
INDEX TO FORM 10-Q
For the Quarter Ended March 28, 2020
|
| | |
| | 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)
|
| | | | | | | |
| March 28, 2020 | | September 30, 2019 |
ASSETS |
| | |
Current assets: |
| | |
Cash and cash equivalents | $ | 826,776 |
| | $ | 269,579 |
|
Short-term marketable securities | 34,254 |
| | 27,891 |
|
Accounts receivable, net of allowance for doubtful accounts of $831 and $744 at March 28, 2020 and September 30, 2019, respectively | 352,673 |
| | 372,743 |
|
Prepaid expenses | 66,854 |
| | 52,701 |
|
Other current assets | 60,869 |
| | 59,707 |
|
Total current assets | 1,341,426 |
| | 782,621 |
|
Property and equipment, net | 104,147 |
| | 105,531 |
|
Goodwill | 1,603,081 |
| | 1,238,179 |
|
Acquired intangible assets, net | 251,191 |
| | 169,949 |
|
Long-term marketable securities | 22,687 |
| | 29,544 |
|
Deferred tax assets | 202,683 |
| | 198,634 |
|
Operating right-of-use lease assets | 157,016 |
| | — |
|
Other assets | 184,240 |
| | 140,130 |
|
Total assets | $ | 3,866,471 |
| | $ | 2,664,588 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
| |
|
Current liabilities: |
| |
|
Accounts payable | $ | 33,728 |
| | $ | 42,442 |
|
Accrued expenses and other current liabilities | 115,278 |
| | 104,028 |
|
Accrued compensation and benefits | 83,904 |
| | 88,769 |
|
Accrued income taxes | 15,963 |
| | 17,407 |
|
Current portion of long-term debt | 496,435 |
| | — |
|
Deferred revenue | 407,412 |
| | 385,509 |
|
Short-term lease obligations | 39,452 |
| | — |
|
Total current liabilities | 1,192,172 |
| | 638,155 |
|
Long-term debt | 1,134,287 |
| | 669,134 |
|
Deferred tax liabilities | 19,541 |
| | 41,683 |
|
Deferred revenue | 9,790 |
| | 11,123 |
|
Long-term lease obligations | 184,706 |
| | — |
|
Other liabilities | 51,894 |
| | 102,495 |
|
Total liabilities | 2,592,390 |
| | 1,462,590 |
|
Commitments and contingencies (Note 15) |
| |
|
Stockholders’ equity: |
| |
|
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued | — |
| | — |
|
Common stock, $0.01 par value; 500,000 shares authorized; 115,695 and 114,899 shares issued and outstanding at March 28, 2020 and September 30, 2019, respectively | 1,157 |
| | 1,149 |
|
Additional paid-in capital | 1,536,770 |
| | 1,502,949 |
|
Accumulated deficit | (150,351 | ) | | (191,390 | ) |
Accumulated other comprehensive loss | (113,495 | ) | | (110,710 | ) |
Total stockholders’ equity | 1,274,081 |
| | 1,201,998 |
|
Total liabilities and stockholders’ equity | $ | 3,866,471 |
| | $ | 2,664,588 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
PTC Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
|
| | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| March 28, 2020 | | March 30, 2019 | | March 28, 2020 | | March 30, 2019 |
Revenue: | | | | | | | |
License | $ | 127,607 |
| | $ | 61,876 |
| | $ | 251,037 |
| | $ | 167,198 |
|
Support and cloud services | 196,473 |
| | 187,645 |
| | 387,409 |
| | 375,566 |
|
Total software revenue | 324,080 |
| | 249,521 |
| | 638,446 |
| | 542,764 |
|
Professional services | 35,523 |
| | 40,930 |
| | 77,267 |
| | 82,376 |
|
Total revenue | 359,603 |
| | 290,451 |
| | 715,713 |
| | 625,140 |
|
Cost of revenue: |
| |
| | | | |
Cost of license revenue | 13,873 |
| | 12,875 |
| | 27,046 |
| | 25,438 |
|
Cost of support and cloud services revenue | 34,264 |
| | 32,874 |
| | 73,192 |
| | 64,071 |
|
Total cost of software revenue | 48,137 |
| | 45,749 |
| | 100,238 |
| | 89,509 |
|
Cost of professional services revenue | 34,890 |
| | 34,155 |
| | 70,194 |
| | 67,747 |
|
Total cost of revenue | 83,027 |
| | 79,904 |
| | 170,432 |
| | 157,256 |
|
Gross margin | 276,576 |
| | 210,547 |
| | 545,281 |
| | 467,884 |
|
Operating expenses: |
|
| |
|
| | | | |
Sales and marketing | 107,438 |
| | 103,722 |
| | 215,042 |
| | 207,940 |
|
Research and development | 59,954 |
| | 61,402 |
| | 125,262 |
| | 122,184 |
|
General and administrative | 33,629 |
| | 35,371 |
| | 78,186 |
| | 73,235 |
|
Amortization of acquired intangible assets | 7,288 |
| | 5,930 |
| | 14,065 |
| | 11,866 |
|
Restructuring and other charges, net | 18,242 |
| | 26,980 |
| | 32,276 |
| | 45,473 |
|
Total operating expenses | 226,551 |
| | 233,405 |
| | 464,831 |
| | 460,698 |
|
Operating income (loss) | 50,025 |
| | (22,858 | ) | | 80,450 |
| | 7,186 |
|
Interest and debt premium expense | (32,618 | ) | | (11,383 | ) | | (44,716 | ) | | (21,659 | ) |
Other income (expense), net | (1,629 | ) | | 821 |
| | (925 | ) | | 1,475 |
|
Income (loss) before income taxes | 15,778 |
| | (33,420 | ) | | 34,809 |
| | (12,998 | ) |
Provision (benefit) for income taxes | 8,622 |
| | 10,093 |
| | (7,802 | ) | | 9,530 |
|
Net income (loss) | $ | 7,156 |
| | $ | (43,513 | ) | | $ | 42,611 |
| | $ | (22,528 | ) |
Earnings (loss) per share—Basic | $ | 0.06 |
| | $ | (0.37 | ) | | $ | 0.37 |
| | $ | (0.19 | ) |
Earnings (loss) per share—Diluted | $ | 0.06 |
| | $ | (0.37 | ) | | $ | 0.37 |
| | $ | (0.19 | ) |
Weighted-average shares outstanding—Basic | 115,606 |
| | 118,461 |
| | 115,401 |
| | 118,392 |
|
Weighted-average shares outstanding—Diluted | 116,017 |
| | 118,461 |
| | 115,856 |
| | 118,392 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
PTC Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
|
| | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| March 28, 2020 | | March 30, 2019 | | March 28, 2020 | | March 30, 2019 |
Net income (loss) | $ | 7,156 |
| | $ | (43,513 | ) | | $ | 42,611 |
| | $ | (22,528 | ) |
Other comprehensive income (loss), net of tax: | | | | | | | |
Hedge gain (loss) arising during the period, net of tax of $0.2 million in the second quarter of 2020 and 2019, respectively, and $0.9 million and $0.2 million in the first six months of 2020 and 2019, respectively | 701 |
| | 2,955 |
| | (2,642 | ) | | 826 |
|
Net hedge (gain) loss reclassified into earnings, net of tax of $0.0 million in the second quarter of 2020 and 2019, respectively, and $0.0 million and $0.1 million in the first six months of 2020 and 2019, respectively | — |
| | — |
| | — |
| | (549 | ) |
Realized and unrealized gain (loss) on hedging instruments | 701 |
| | 2,955 |
| | (2,642 | ) | | 277 |
|
Foreign currency translation adjustment, net of tax of $0 for each period | (10,559 | ) | | (4,033 | ) | | (412 | ) | | (11,602 | ) |
Unrealized gain (loss) on marketable securities, net of tax of $0 for each period | (537 | ) | | 289 |
| | (544 | ) | | 302 |
|
Amortization of net actuarial pension gain included in net income, net of tax of $0.3 million and $0.2 million in the second quarter of 2020 and 2019, respectively, and $0.6 million and $0.3 million in the first six months of 2020 and 2019, respectively | 680 |
| | 428 |
| | 1,354 |
| | 858 |
|
Change in unamortized pension gain (loss) during the period related to changes in foreign currency | 81 |
| | 345 |
| | (541 | ) | | 626 |
|
Other comprehensive loss | (9,634 | ) | | (16 | ) | | (2,785 | ) | | (9,539 | ) |
Comprehensive income (loss) | $ | (2,478 | ) | | $ | (43,529 | ) | | $ | 39,826 |
| | $ | (32,067 | ) |
The accompanying notes are an integral part of the condensed consolidated financial statements.
PTC Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
| | | | | | | |
| Six months ended |
| March 28, 2020 | | March 30, 2019 |
Cash flows from operating activities: | | | |
Net income (loss) | $ | 42,611 |
| | $ | (22,528 | ) |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 40,193 |
| | 39,558 |
|
Stock-based compensation | 48,420 |
| | 56,374 |
|
Other non-cash items, net | (1,926 | ) | | 247 |
|
Loss on disposal of fixed assets | 231 |
| | 32 |
|
Changes in operating assets and liabilities, excluding the effects of acquisitions: | | | |
Accounts receivable | 20,187 |
| | 54,501 |
|
Accounts payable and accrued expenses | 12,193 |
| | 423 |
|
Accrued compensation and benefits | (4,629 | ) | | (28,291 | ) |
Deferred revenue | 17,393 |
| | 36,947 |
|
Accrued income taxes | (43,815 | ) | | (15,677 | ) |
Other current assets and prepaid expenses | 681 |
| | 1,723 |
|
Other noncurrent assets and liabilities | (36,210 | ) | | 39,035 |
|
Net cash provided by operating activities | 95,329 |
| | 162,344 |
|
Cash flows from investing activities: | | | |
Additions to property and equipment | (10,243 | ) | | (51,268 | ) |
Purchases of short- and long-term marketable securities | (10,151 | ) | | (14,460 | ) |
Proceeds from maturities of short- and long-term marketable securities | 9,971 |
| | 14,227 |
|
Acquisitions of businesses, net of cash acquired | (468,520 | ) | | (69,453 | ) |
Purchases of investments | — |
| | (7,500 | ) |
Settlement of net investment hedges | 2,200 |
| | 114 |
|
Net cash used in investing activities | (476,743 | ) | | (128,340 | ) |
Cash flows from financing activities: | | | |
Proceeds from issuance of Senior Notes | 1,000,000 |
| | — |
|
Borrowings under credit facility | 455,000 |
| | 205,000 |
|
Repayments of borrowings under credit facility | (480,000 | ) | | (110,000 | ) |
Repurchases of common stock | — |
| | (64,994 | ) |
Proceeds from issuance of common stock | 8,980 |
| | 4,158 |
|
Payments for debt issuance costs | (16,266 | ) | | — |
|
Contingent consideration | — |
| | (1,575 | ) |
Payments of withholding taxes in connection with stock-based awards | (23,571 | ) | | (34,491 | ) |
Net cash provided by (used in) financing activities | 944,143 |
| | (1,902 | ) |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (5,740 | ) | | 2,237 |
|
Net change in cash, cash equivalents, and restricted cash | 556,989 |
| | 34,339 |
|
Cash, cash equivalents, and restricted cash, beginning of period | 270,689 |
| | 261,093 |
|
Cash, cash equivalents, and restricted cash, end of period | $ | 827,678 |
| | $ | 295,432 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
PTC Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 28, 2020 |
| Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Stockholders’ Equity |
| Shares | | Amount | |
Balance as of December 28, 2019 | 115,494 |
| | $ | 1,155 |
| | $ | 1,508,030 |
| | $ | (157,507 | ) | | $ | (103,861 | ) | | $ | 1,247,817 |
|
Common stock issued for employee stock-based awards | 55 |
| | 1 |
| | (1 | ) | | — |
| | — |
| | — |
|
Shares surrendered by employees to pay taxes related to stock-based awards | (10 | ) | | — |
| | (722 | ) | | — |
| | — |
| | (722 | ) |
Common stock issued for employee stock purchase plan | 156 |
| | 1 |
| | 8,979 |
| | — |
| | — |
| | 8,980 |
|
Compensation expense from stock-based awards | — |
| | — |
| | 20,484 |
| | — |
| | — |
| | 20,484 |
|
Net income | — |
| | — |
| | — |
| | 7,156 |
| | — |
| | 7,156 |
|
Unrealized gain on net investment hedges, net of tax | — |
| | — |
| | — |
| | — |
| | 701 |
| | 701 |
|
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | (10,559 | ) | | (10,559 | ) |
Unrealized loss on available-for-sale securities, net of tax | — |
| | — |
| | — |
| | — |
| | (537 | ) | | (537 | ) |
Change in pension benefits, net of tax | — |
| | — |
| | — |
| | — |
| | 761 |
| | 761 |
|
Balance as of March 28, 2020 | 115,695 |
| | $ | 1,157 |
| | $ | 1,536,770 |
| | $ | (150,351 | ) | | $ | (113,495 | ) | | $ | 1,274,081 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| Six months ended March 28, 2020 |
| Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Stockholders’ Equity |
| Shares | | Amount | |
Balance as of September 30, 2019 | 114,899 |
| | $ | 1,149 |
| | $ | 1,502,949 |
| | $ | (191,390 | ) | | $ | (110,710 | ) | | $ | 1,201,998 |
|
ASU 2016-02 (ASC 842) adoption | — |
| | — |
| | — |
| | (1,572 | ) | | — |
| | (1,572 | ) |
Common stock issued for employee stock-based awards | 958 |
| | 10 |
| | (10 | ) | | — |
| | — |
| | — |
|
Shares surrendered by employees to pay taxes related to stock-based awards | (318 | ) | | (3 | ) | | (23,568 | ) | | — |
| | — |
| | (23,571 | ) |
Common stock issued for employee stock purchase plan | 156 |
| | 1 |
| | 8,979 |
| | — |
| | — |
| | 8,980 |
|
Compensation expense from stock-based awards | — |
| | — |
| | 48,420 |
| | — |
| | — |
| | 48,420 |
|
Net income | — |
| | — |
| | — |
| | 42,611 |
| | — |
| | 42,611 |
|
Unrealized loss on net investment hedges, net of tax | — |
| | — |
| | — |
| | — |
| | (2,642 | ) | | (2,642 | ) |
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | (412 | ) | | (412 | ) |
Unrealized loss on marketable securities, net of tax | — |
| | — |
| | — |
| | — |
| | (544 | ) | | (544 | ) |
Change in pension benefits, net of tax | — |
| | — |
| | — |
| | — |
| | 813 |
| | 813 |
|
Balance as of March 28, 2020 | 115,695 |
| | $ | 1,157 |
| | $ | 1,536,770 |
| | $ | (150,351 | ) | | $ | (113,495 | ) | | $ | 1,274,081 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 30, 2019 |
| Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Stockholders’ Equity |
| Shares | | Amount | |
Balance as of December 29, 2018 | 118,657 |
| | $ | 1,187 |
| | $ | 1,553,875 |
| | $ | (138,785 | ) | | $ | (95,108 | ) | | $ | 1,321,169 |
|
Common stock issued for employee stock-based awards | 52 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Shares surrendered by employees to pay taxes related to stock-based awards | (8 | ) | | — |
| | (703 | ) | | — |
| | — |
| | (703 | ) |
Common stock issued for employee stock purchase plan | 122 |
| | 1 |
| | 8,797 |
| | — |
| | — |
| | 8,798 |
|
Compensation expense from stock-based awards | — |
| | — |
| | 26,967 |
| | — |
| | — |
| | 26,967 |
|
Net income (loss) | — |
| | — |
| | — |
| | (43,513 | ) | | — |
| | (43,513 | ) |
Repurchases of common stock | (725 | ) | | (7 | ) | | (64,987 | ) | | — |
| | — |
| | (64,994 | ) |
Unrealized gain on net investment hedges, net of tax | — |
| | — |
| | — |
| | — |
| | 2,955 |
| | 2,955 |
|
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | (4,033 | ) | | (4,033 | ) |
Unrealized gain on available-for-sale securities, net of tax | — |
| | — |
| | — |
| | — |
| | 289 |
| | 289 |
|
Change in pension benefits, net of tax | — |
| | — |
| | — |
| | — |
| | 773 |
| | 773 |
|
Balance as of March 30, 2019 | 118,098 |
| | $ | 1,181 |
| | $ | 1,523,949 |
| | $ | (182,298 | ) | | $ | (95,124 | ) | | $ | 1,247,708 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| Six months ended March 30, 2019 |
| 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 | 1,108 |
| | 11 |
| | (11 | ) | | — |
| | — |
| | — |
|
Shares surrendered by employees to pay taxes related to stock-based awards | (388 | ) | | (4 | ) | | (34,487 | ) | | — |
| | — |
| | (34,491 | ) |
Common stock issued | — |
| | — |
| | (140 | ) | | — |
| | — |
| | (140 | ) |
Common stock issued for employee stock purchase plan | 122 |
| | 1 |
| | 8,797 |
| | — |
| | — |
| | 8,798 |
|
Compensation expense from stock-based awards | — |
| | — |
| | 56,374 |
| | — |
| | — |
| | 56,374 |
|
Net income (loss) | — |
| | — |
| | — |
| | (22,528 | ) | | — |
| | (22,528 | ) |
Repurchases of common stock | (725 | ) | | (7 | ) | | (64,987 | ) | | — |
| | — |
| | (64,994 | ) |
Unrealized loss on cash flow hedges, net of tax | — |
| | — |
| | — |
| | — |
| | (385 | ) | | (385 | ) |
Unrealized gain on net investment hedges, net of tax | — |
| | — |
| | — |
| | — |
| | 662 |
| | 662 |
|
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | (11,602 | ) | | (11,602 | ) |
Unrealized gain on marketable securities, net of tax | — |
| | — |
| | — |
| | — |
| | 302 |
| | 302 |
|
Change in pension benefits, net of tax | — |
| | — |
| | — |
| | — |
| | 1,484 |
| | 1,484 |
|
Balance as of March 30, 2019 | 118,098 |
| | $ | 1,181 |
| | $ | 1,523,949 |
| | $ | (182,298 | ) | | $ | (95,124 | ) | | $ | 1,247,708 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
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 (U.S. GAAP) 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, 2019. 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, 2019 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 second quarter of 2020 ended on March 28, 2020 and the second quarter of 2019 ended on March 30, 2019. The results of operations for the six months ended March 28, 2020 are not necessarily indicative of the results expected for the remainder of the fiscal year.
We adjusted the $3.0 million hedge gain in the Consolidated Statement of Comprehensive Income (Loss) for the three months ended March 30, 2019 that was incorrectly reflected as a loss.
Risks and Uncertainties - COVID-19 Pandemic
In December 2019, a novel strain of coronavirus, now referred to as COVID-19, surfaced. The virus has spread to over 100 countries, including the United States, and has been declared a pandemic by the World Health Organization. The COVID-19 pandemic has significantly impacted global economic activity and has created future macroeconomic uncertainty.
We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts COVID-19 as of March 28, 2020 and through the date of this report. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, stock-based compensation, the carrying value of our goodwill and other long-lived assets, financial assets, valuation allowances for tax assets and revenue recognition. While there was not a material impact to our consolidated financial statements as of and for the quarter ended March 28, 2020, resulting from our assessments, our future assessment of our current expectations at that time of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to our consolidated financial statements in future reporting periods.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Leases
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2016-02, Leases (Topic 842) (ASC 842), which replaced 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. We adopted ASC 842 effective October 1, 2019 (the effective date). ASC 842 requires a modified retrospective transition method that could either be applied at the earliest comparative period in the financial statements or in the period of adoption. We elected to use the period of adoption (October 1, 2019) transition method and therefore did not recast prior periods.
Since we adopted the new standard using the period of adoption transition method, we are not required to present 2020 comparative disclosures under ASC 842. However, we are required to present the required annual disclosures under the previous U.S. GAAP lease accounting standard (ASC 840).
We elected the package of practical expedients as permitted under the transition guidance, which allowed us: (1) to carry forward the historical lease classification; (2) not to reassess whether expired or existing contracts are or contain leases; and, (3) not to reassess the treatment of initial direct costs for existing leases. In addition, we elected an accounting policy to not recognize leases with an initial term of one year or less on the balance sheet.
Upon the adoption of this standard on October 1, 2019, we recognized an operating lease liability of $224.0 million, representing the present value of the minimum lease payments remaining as of the adoption date, and a right-of-use asset in the amount of $167.9 million. The right-of-use asset reflects adjustments for derecognition of deferred leasing incentives. We also recorded a $1.6 million decrease to retained earnings as a result of the change in scheduling of reversal of temporary tax differences due to the adoption of ASC 842.
Pending Accounting Pronouncements
Goodwill and Other—Internal-Use Software
In August 2018, the FASB issued Accounting Standards Update (ASU) 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which aligns the requirements for capitalizing implementation costs in cloud computing arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new standard will be effective for us in the first quarter of 2021. Entities can choose to adopt the new guidance prospectively or retrospectively. We plan to adopt this standard using the prospective adoption approach. We are currently evaluating the effects of this pronouncement on our consolidated financial statements.
Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, modifies and adds disclosure requirements for fair value measurements. The new standard will be effective for us in the first quarter of 2021. We do not expect this ASU to have a material impact on our consolidated financial statements.
Financial Instruments—Credit Losses
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, along with subsequent amendments, which replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information when recording credit loss estimates. The new standard will be effective for us in the first quarter of 2021. We are currently evaluating the impact the standard will have on our consolidated financial statements, but at this time we do not expect it to be significant.
2. Revenue from Contracts with Customers
Contract Assets and Contract Liabilities |
| | | | | | | |
(in thousands) | March 28, 2020 | | September 30, 2019 |
Contract asset | $ | 19,582 |
| | $ | 21,038 |
|
Deferred revenue | $ | 417,202 |
| | $ | 396,632 |
|
As of March 28, 2020, our contract assets are expected to be transferred to receivables within the next 12 months and therefore are included in other current assets. Approximately $10.2 million of the September 30, 2019 contract asset balance was transferred to receivables during the six months ended March 28, 2020 as a result of the right to payment becoming unconditional. The majority of the contract asset balance relates to two large professional services contracts with invoicing terms based on performance milestones. Additions to contract assets of approximately $8.8 million related to revenue recognized in the period, net of billings. There were no impairments of contract assets during the six months ended March 28, 2020.
During the six months ended March 28, 2020, we recognized $283.4 million of revenue that was included in deferred revenue as of September 30, 2019 and there were additional deferrals of $301.3 million during the six months ended March 28, 2020, primarily related to new billings. In addition, deferred revenue increased by an immaterial amount as a result of the acquisition of Onshape. The balance of total short- and long-term receivables as of September 30, 2019 was $412.5 million, compared to total short- and long-term receivables as of March 28, 2020 of $431.0 million.
Our multi-year, non-cancellable on-premise subscription contracts provide customers with an annual right to exchange software within the 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 use the most likely amount method to determine the amount of variable consideration. In both circumstances, the variable consideration included in the transaction price is constrained to the extent 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 March 28, 2020 and September 30, 2019, the total refund liability was $30.2 million and $22.9 million, respectively, primarily associated with the annual right to exchange on-premise subscription software.
Costs to Obtain or Fulfill a Contract
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 (primarily commissions) 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 March 28, 2020 and September 30, 2019, deferred costs of $29.7 million and $27.7 million, respectively, were included in other current assets and $65.7 million and $64.8 million, respectively, were included in other assets (non-current).
Remaining Performance Obligations
Our contracts with customers include amounts allocated to performance obligations that will be satisfied at a later date. As of March 28, 2020, the amounts include additional performance obligations of $417.2 million recorded in deferred revenue and $608.8 million that are not yet recorded in the consolidated balance sheets. We expect to recognize approximately 90% of the total $1,026.0 million over the next 24 months, with the remaining amount thereafter. Certain of our multi-year subscription contracts with start dates on or after October 1, 2018 contain a limited annual cancellation right. For such cancellable subscription contracts, we consider each annual period a discrete contract. Early in the fourth quarter of 2019, we discontinued offering the cancellation right for substantially all new contracts. Remaining performance obligations do not include the cancellable value for subscriptions which contain this clause.
Disaggregation of Revenue
|
| | | | | | | | | | | | | | | |
(in thousands) | Three months ended | | Six months ended |
| March 28, 2020 | | March 30, 2019 | | March 28, 2020 | | March 30, 2019 |
Total recurring revenue | $ | 315,862 |
| | $ | 239,185 |
| | $ | 621,230 |
| | $ | 490,623 |
|
Perpetual license | 8,218 |
| | 10,336 |
| | 17,216 |
| | 52,141 |
|
Professional services | 35,523 |
| | 40,930 |
| | 77,267 |
| | 82,376 |
|
Total revenue | $ | 359,603 |
| | $ | 290,451 |
| | $ | 715,713 |
| | $ | 625,140 |
|
For further disaggregation of revenue by geographic region and product group see Note 11. Segment and Geographic Information.
3. Restructuring and Other Charges
Restructuring and other charges, net includes restructuring charges (credits), headquarters relocation charges and impairment and accretion expense charges related to the lease assets of exited facilities. Refer to Note 14. Leases for additional information about exited facilities.
For the second quarter and first six months ended March 28, 2020, restructuring charges and other charges, net totaled $18.2 million and $32.3 million, respectively, of which $13.2 million and $27.0 million is attributable to restructuring charges, respectively, and $4.7 million and $5.0 million is related to impairment and accretion expense related to exited lease facilities, respectively. The restructuring and other charges for the second quarter and first six months of 2020 also includes $0.3 million of accelerated depreciation related to the planned exit of a facility.
For the second quarter and first six months ended March 30, 2019, restructuring and other charges totaled $27.0 million and $45.5 million, respectively, of which $26.4 million and $43.0 million is attributable to restructuring charges, respectively, and $0.6 million and $2.5 million is related to headquarters relocation charges, respectively.
Restructuring Charges
During the first quarter of 2020, we initiated a restructuring program as part of a realignment associated with expected synergies and operational efficiencies related to the Onshape acquisition. During the six months ended March 28, 2020, we incurred $31.5 million in connection with this restructuring plan for termination benefits associated with approximately 255 employees.
During the first quarter of 2019, we initiated a restructuring plan to realign our workforce to shift investment to support Industrial Internet of Things and Augmented Reality strategic opportunities. As this was a realignment of resources rather than a cost-savings initiative, it did not 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 employees, substantially all of which has been paid. In the second quarter of 2020, we recorded $0.1 million of credits related to this restructuring plan.
During the second quarter of 2019, we relocated our worldwide headquarters to the Boston Seaport District. We incurred a restructuring charge for the former headquarters lease, which will not expire until November 2022. During the first six months ended March 28, 2020, we reversed $4.4 million of accrued variable operating facility restructuring charges associated with the exit of a portion of our former headquarters lease.
The following table summarizes restructuring accrual activity for the six months ended March 28, 2020:
|
| | | | | | | | | | | |
(in thousands) | Employee severance and related benefits | | Facility closures and related costs | | Total |
October 1, 2019 | $ | 298 |
| | $ | 30,788 |
| | $ | 31,086 |
|
ASC 842 adoption | — |
| | (16,462 | ) |
| (16,462 | ) |
Charges to operations, net | 31,358 |
| | (4,362 | ) | | 26,996 |
|
Cash disbursements | (14,324 | ) | | (2,495 | ) | | (16,819 | ) |
Other non-cash | — |
| | (281 | ) | | (281 | ) |
Foreign exchange impact | 153 |
| | (5 | ) | | 148 |
|
Accrual, March 28, 2020 | $ | 17,485 |
| | $ | 7,183 |
| | $ | 24,668 |
|
The following table summarizes restructuring accrual activity for the six months ended March 30, 2019:
|
| | | | | | | | | | | |
(in thousands) | Employee severance and related benefits | | Facility closures and related costs | | Total |
October 1, 2018 | $ | — |
| | $ | 2,415 |
| | $ | 2,415 |
|
Charges to operations, net | 16,034 |
| | 26,937 |
| | 42,971 |
|
Cash disbursements | (15,085 | ) | | (2,847 | ) | | (17,932 | ) |
Foreign exchange impact | 6 |
| | (34 | ) | | (28 | ) |
Other non-cash charges | — |
| | 4,812 |
| | 4,812 |
|
Accrual, March 30, 2019 | $ | |