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 July 2, 2011
Commission File Number: 0-18059
Parametric Technology Corporation
(Exact name of registrant as specified in its charter)
Massachusetts | 04-2866152 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
140 Kendrick Street, Needham, MA 02494
(Address of principal executive offices, including zip code)
(781) 370-5000
(Registrants 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, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act:
Large accelerated filer | þ | Accelerated filer | ¨ | Non-accelerated filer | ¨ | Smaller reporting company | ¨ | |||||||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
There were 117,565,519 shares of our common stock outstanding on August 4, 2011.
PARAMETRIC TECHNOLOGY CORPORATION
For the Quarter Ended July 2, 2011
Page Number |
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Part IFINANCIAL INFORMATION |
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Item 1. |
Unaudited Condensed Financial Statements: | |||||
Consolidated Balance Sheets as of July 2, 2011 and September 30, 2010 | 3 | |||||
4 | ||||||
Consolidated Statements of Cash Flows for the nine months ended July 2, 2011 and July 3, 2010 |
5 | |||||
6 | ||||||
Notes to Condensed Consolidated Financial Statements | 7 | |||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
20 | ||||
Item 3. |
Quantitative and Qualitative Disclosures about Market Risk | 40 | ||||
Item 4. |
Controls and Procedures | 40 | ||||
Part IIOTHER INFORMATION |
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Item 1. |
Legal Proceedings | 41 | ||||
Item 1A. |
Risk Factors | 41 | ||||
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 41 | ||||
Item 6. |
Exhibits | 42 | ||||
43 |
2
PART IFINANCIAL INFORMATION
ITEM 1. | UNAUDITED CONDENSED FINANCIAL STATEMENTS |
PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
July 2, 2011 |
September 30, 2010 |
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ASSETS | ||||||||
Current assets: |
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Cash and cash equivalents |
$ | 260,751 | $ | 240,253 | ||||
Accounts receivable, net of allowance for doubtful accounts of $4,113 and $4,559 at July 2, 2011 and September 30, 2010, respectively |
186,874 | 169,281 | ||||||
Prepaid expenses |
42,430 | 32,116 | ||||||
Other current assets |
93,405 | 91,126 | ||||||
Deferred tax assets |
34,798 | 35,481 | ||||||
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Total current assets |
618,258 | 568,257 | ||||||
Property and equipment, net |
60,704 | 58,064 | ||||||
Goodwill |
623,638 | 418,509 | ||||||
Acquired intangible assets, net |
228,244 | 127,931 | ||||||
Deferred tax assets |
116,615 | 90,458 | ||||||
Other assets |
34,054 | 43,845 | ||||||
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Total assets |
$ | 1,681,513 | $ | 1,307,064 | ||||
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LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Current liabilities: |
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Accounts payable |
$ | 13,354 | $ | 11,734 | ||||
Accrued expenses and other current liabilities |
66,162 | 52,803 | ||||||
Accrued compensation and benefits |
86,733 | 98,476 | ||||||
Accrued income taxes |
10,933 | 516 | ||||||
Accrued litigation |
| 50,644 | ||||||
Deferred revenue |
308,048 | 238,821 | ||||||
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Total current liabilities |
485,230 | 452,994 | ||||||
Revolving credit facility |
250,000 | | ||||||
Deferred tax liabilities |
53,993 | 22,452 | ||||||
Deferred revenue |
9,592 | 7,019 | ||||||
Other liabilities |
80,554 | 77,295 | ||||||
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Total liabilities |
879,369 | 559,760 | ||||||
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Commitments and contingencies (Note 11) |
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Stockholders equity: |
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Preferred stock, $0.01 par value; 5,000 shares authorized; none issued |
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Common stock, $0.01 par value; 500,000 shares authorized; 117,517 and 115,826 shares issued and outstanding at July 2, 2011 and September 30, 2010, respectively |
1,175 | 1,158 | ||||||
Additional paid-in capital |
1,799,125 | 1,802,786 | ||||||
Accumulated deficit |
(956,358 | ) | (1,004,160 | ) | ||||
Accumulated other comprehensive loss |
(41,798 | ) | (52,480 | ) | ||||
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Total stockholders equity |
802,144 | 747,304 | ||||||
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Total liabilities and stockholders equity |
$ | 1,681,513 | $ | 1,307,064 | ||||
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The accompanying notes are an integral part of the condensed consolidated financial statements.
3
PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three months ended | Nine months ended | |||||||||||||||
July 2, 2011 |
July 3, 2010 |
July 3, 2011 |
July 3, 2010 |
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Revenue: |
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License |
$ | 81,431 | $ | 67,498 | $ | 231,119 | $ | 206,958 | ||||||||
Service |
210,352 | 175,500 | 596,405 | 535,025 | ||||||||||||
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Total revenue |
291,783 | 242,998 | 827,524 | 741,983 | ||||||||||||
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Costs and expenses: |
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Cost of license revenue |
7,617 | 7,621 | 20,129 | 24,000 | ||||||||||||
Cost of service revenue |
82,792 | 67,090 | 238,112 | 206,548 | ||||||||||||
Sales and marketing |
89,106 | 79,121 | 254,790 | 232,856 | ||||||||||||
Research and development |
51,103 | 50,597 | 155,676 | 151,247 | ||||||||||||
General and administrative |
31,882 | 22,755 | 80,078 | 69,633 | ||||||||||||
Amortization of acquired intangible assets |
4,753 | 3,836 | 12,873 | 11,869 | ||||||||||||
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Total costs and expenses |
267,253 | 231,020 | 761,658 | 696,153 | ||||||||||||
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Operating income |
24,530 | 11,978 | 65,866 | 45,830 | ||||||||||||
Interest and other (expense) income, net |
(6,271 | ) | (320 | ) | (8,979 | ) | (1,449 | ) | ||||||||
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Income before income taxes |
18,259 | 11,658 | 56,887 | 44,381 | ||||||||||||
Provision for income taxes |
2,733 | 940 | 9,084 | 6,798 | ||||||||||||
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Net income |
$ | 15,526 | $ | 10,718 | $ | 47,803 | $ | 37,583 | ||||||||
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Earnings per shareBasic |
$ | 0.13 | $ | 0.09 | $ | 0.41 | $ | 0.32 | ||||||||
Earnings per shareDiluted |
$ | 0.13 | $ | 0.09 | $ | 0.39 | $ | 0.31 | ||||||||
Weighted average shares outstandingBasic |
118,214 | 115,188 | 117,622 | 115,802 | ||||||||||||
Weighted average shares outstandingDiluted |
121,164 | 119,003 | 121,149 | 119,996 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine months ended | ||||||||
July 2, 2011 |
July 3, 2010 |
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Cash flows from operating activities: |
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Net income |
$ | 47,803 | $ | 37,583 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
44,547 | 47,538 | ||||||
Stock-based compensation |
32,458 | 37,657 | ||||||
Excess tax benefits from stock-based awards |
(2,307 | ) | (226 | ) | ||||
Other non-cash (credits) costs, net |
(135 | ) | 910 | |||||
Changes in operating assets and liabilities, excluding effects of acquisitions: |
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Accounts receivable |
18,059 | 11,228 | ||||||
Accounts payable and accrued expenses |
3,881 | 1,602 | ||||||
Accrued compensation and benefits |
(15,635 | ) | (6,850 | ) | ||||
Deferred revenue |
36,825 | 32,564 | ||||||
Accrued litigation |
(52,129 | ) | | |||||
Accrued income taxes |
(17,855 | ) | (23,049 | ) | ||||
Other current assets and prepaid expenses |
(1,196 | ) | (1,768 | ) | ||||
Other noncurrent assets and liabilities |
(15,645 | ) | 3,887 | |||||
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Net cash provided by operating activities |
78,671 | 141,076 | ||||||
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Cash flows from investing activities: |
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Additions to property and equipment |
(18,295 | ) | (21,684 | ) | ||||
Acquisitions of businesses, net of cash acquired |
(265,153 | ) | (2,087 | ) | ||||
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Net cash used by investing activities |
(283,448 | ) | (23,771 | ) | ||||
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Cash flows from financing activities: |
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Borrowings under revolving credit facility |
250,000 | | ||||||
Repayments of borrowings under revolving credit facility |
| (50,832 | ) | |||||
Repurchases of common stock |
(39,947 | ) | (60,046 | ) | ||||
Proceeds from issuance of common stock |
22,261 | 8,524 | ||||||
Excess tax benefits from stock-based awards |
2,307 | 226 | ||||||
Payments of withholding taxes in connection with settlement of restricted stock units |
(22,052 | ) | (20,250 | ) | ||||
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Net cash provided (used) by financing activities |
212,569 | (122,378 | ) | |||||
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Effect of exchange rate changes on cash and cash equivalents |
12,706 | (11,030 | ) | |||||
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Net increase (decrease) in cash and cash equivalents |
20,498 | (16,103 | ) | |||||
Cash and cash equivalents, beginning of period |
240,253 | 235,122 | ||||||
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Cash and cash equivalents, end of period |
$ | 260,751 | $ | 219,019 | ||||
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The accompanying notes are an integral part of the condensed consolidated financial statements.
5
PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
Three months ended | Nine months ended | |||||||||||||||
July 2, 2011 |
July 3, 2010 |
July 2, 2011 |
July 3, 2010 |
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Net income |
$ | 15,526 | $ | 10,718 | $ | 47,803 | $ | 37,583 | ||||||||
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Other comprehensive income (loss), net of tax: |
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Foreign currency translation adjustment |
2,812 | (15,757 | ) | 11,085 | (29,252 | ) | ||||||||||
Minimum pension liability adjustment |
(137 | ) | (60 | ) | (403 | ) | (108 | ) | ||||||||
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Other comprehensive income (loss) |
2,675 | (15,817 | ) | 10,682 | (29,360 | ) | ||||||||||
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Comprehensive income (loss) |
$ | 18,201 | $ | (5,099 | ) | $ | 58,485 | $ | 8,223 | |||||||
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The accompanying notes are an integral part of the condensed consolidated financial statements.
6
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Parametric Technology Corporation (PTC) and its wholly owned subsidiaries and have been prepared by management in accordance with accounting principles generally accepted in the United States of America and in accordance with the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. While we believe that the disclosures presented are adequate 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, 2010. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair statement of our financial position, results of operations and cash flows at the dates and for the periods indicated. Unless otherwise indicated, all references to a year mean our fiscal year, which ends on September 30. The September 30, 2010 consolidated balance sheet included herein is derived from our audited consolidated financial statements.
The results of operations for the three and nine months ended July 2, 2011 are not necessarily indicative of the results expected for the remainder of the fiscal year.
2. Deferred Revenue and Financing Receivables
Deferred Revenue
Deferred revenue primarily relates to software maintenance agreements billed to customers for which the services have not yet been provided. The liability associated with performing these services is included in deferred revenue and, if not yet paid, the related customer receivable is included in other current assets. Billed but uncollected maintenance-related amounts included in other current assets at July 2, 2011 and September 30, 2010 were $83.4 million and $76.8 million, respectively.
Financing Receivables
We periodically provide financing for software purchases to credit-worthy customers with payment terms up to 36 months. The determination on whether to offer such payment terms is based on the size, nature and credit-worthiness of the customer, and the history of collecting amounts due, without concession, from the customer. As of July 2, 2011 and September 30, 2010, amounts due from customers for contracts with extended payment terms (financing receivables) totaled $56.2 million and $44.3 million, respectively. Accounts receivable in the accompanying consolidated balance sheets include current receivables from such contracts totaling $46.2 million and $27.2 million at July 2, 2011 and September 30, 2010, respectively, and other assets in the accompanying consolidated balance sheets include long-term receivables from such contracts totaling $10.0 million and $17.1 million at July 2, 2011 and September 30, 2010, respectively. We periodically transfer future payments under certain of these contracts to third-party financial institutions on a non-recourse basis. We record such transfers as sales of the related accounts receivable when we surrender control of such receivables. We sold $4.0 million of financing receivables to third-party financial institutions in the three and nine months ended July 2, 2011. We sold $19.6 million of financing receivables to third-party financial institutions in the nine months ended July 3, 2010.
We evaluate estimated credit losses on financing receivables based on whether the customers are making payments as they become due, customer credit-worthiness and existing economic conditions. We write off
7
uncollectible trade and financing receivables when we have exhausted all collection avenues. As of July 2, 2011 and September 30, 2010, we concluded that all financing receivables were collectible and no reserve for credit losses was recorded. We did not provide a reserve for credit losses or write off any uncollectible financing receivables in the three and nine months ended July 2, 2011 and fiscal year 2010.
3. Stock-based Compensation
We measure the cost of employee services received in exchange for restricted stock and restricted stock unit (RSU) awards based on the fair value of our common stock 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.
Our equity incentive plan provides for grants of nonqualified and incentive stock options, common stock, restricted stock, RSUs and stock appreciation rights to employees, directors, officers and consultants. We award restricted stock and RSUs as the principal equity incentive awards, including certain performance-based awards that are earned based on achievement of performance criteria established by the Compensation Committee of our Board of Directors. Each RSU represents the contingent right to receive one share of our common stock.
Our equity incentive plans are described more fully in Note K to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010.
Restricted Stock Activity for the nine months ended July 2, 2011 | Shares | Weighted Average Grant Date Fair Value (Per Share) |
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(in thousands) | ||||||||
Balance of outstanding restricted stock September 30, 2010 |
329 | $ | 18.09 | |||||
Granted |
56 | $ | 23.05 | |||||
Vested |
(305 | ) | $ | 18.35 | ||||
Forfeited or not earned |
| $ | | |||||
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Balance of outstanding restricted stock July 2, 2011 |
80 | $ | 20.58 | |||||
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Restricted Stock Unit Activity for the nine months ended July 2, 2011 | Shares | Weighted Average Grant Date Fair Value (Per Share) |
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(in thousands) | ||||||||
Balance of outstanding restricted stock units September 30, 2010 |
6,053 | $ | 14.25 | |||||
Granted |
2,616 | $ | 21.91 | |||||
Vested |
(2,783 | ) | $ | 14.34 | ||||
Forfeited or not earned |
(275 | ) | $ | 11.34 | ||||
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Balance of outstanding restricted stock units July 2, 2011 |
5,611 | $ | 17.77 | |||||
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We made the following restricted stock unit grants in the first nine months of 2011:
Restricted Stock (1) | Restricted Stock Units | |||||||||||||||
Grant Period |
Performance-based | Time-based | Performance-based (2) | Time-based (3) | ||||||||||||
(in thousands) | ||||||||||||||||
(Number of Shares) | (Number of Units) | |||||||||||||||
First nine months of 2011 |
| 56 | 604 | 2,012 |
(1) | The time-based shares of restricted stock were issued to our non-employee directors as part of their annual compensation. The restrictions on these shares lapse over one or two years from the date of grant. |
8
(2) | Of these performance-based RSUs, 244,010 will vest to the extent earned in three substantially equal installments on the later of November 15, 2011 and the date the Compensation Committee determines the extent to which the performance criteria have been achieved, November 15, 2012 and November 15, 2013. The remaining 360,082 performance-based RSUs are eligible to vest in three substantially equal installments on each of the later of November 15, 2013, November 15, 2014 and November 15, 2015 and the date the Compensation Committee determines the extent to which the applicable performance criteria have been achieved; RSUs for this grant not earned in a period may be earned in a later period to the extent the cumulative performance criteria are achieved. |
(3) | The time-based RSUs were issued to employees, including some of our executive officers. Of these time-based RSUs, 1,063,707 will vest in three equal annual installments in November 2011, 2012 and 2013; 41,404 will vest in three equal annual installments in June 2012, 2013 and 2014; 17,536 will vest in three equal annual installments in May 2012, 2013, and 2014; 735,059 will vest in three equal annual installments in March 2012, 2013 and 2014; and 154,320 will vest in two substantially equal installments on September 30, 2011 and September 30, 2012. |
As described below in Note 5, in the third quarter of 2011, in connection with our acquisition of MKS Inc., we granted 146,998 stock options to employees of MKS which vest over the next three years. These stock options were replacement stock options for unvested MKS stock options outstanding as of the acquisition date. The weighted average exercise price is $6.83 and the fair value of these grants is $2.5 million, of which $0.1 million was recorded as purchase price for the pre-acquisition service period. The remaining $2.4 million will be recognized as compensation expense over the vesting period.
The following table shows the classification of compensation expense recorded for our stock-based awards as reflected in our consolidated statements of operations:
Three months ended | Nine months ended | |||||||||||||||
July 2, 2011 |
July 3, 2010 |
July 2, 2011 |
July 3, 2010 |
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(in thousands) | ||||||||||||||||
Cost of license revenue |
$ | 4 | $ | 2 | $ | 10 | $ | 21 | ||||||||
Cost of service revenue |
1,857 | 2,186 | 5,577 | 7,007 | ||||||||||||
Sales and marketing |
3,062 | 3,471 | 7,841 | 10,065 | ||||||||||||
Research and development |
2,010 | 2,252 | 6,152 | 7,294 | ||||||||||||
General and administrative |
4,627 | 3,599 | 12,878 | 13,270 | ||||||||||||
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Total stock-based compensation expense |
$ | 11,560 | $ | 11,510 | $ | 32,458 | $ | 37,657 | ||||||||
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4. 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. Unvested restricted stock, although legally issued and outstanding, is not considered outstanding for purposes of calculating basic EPS. Diluted EPS is calculated by dividing net income by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding stock options, restricted shares and RSUs using the treasury stock method. The calculation of the dilutive effect of outstanding equity awards under the treasury stock method includes consideration of proceeds from the assumed exercise of stock options, unrecognized compensation expense and any tax benefits as additional proceeds.
9
The following table presents the calculation for both basic and diluted EPS:
Three months ended | Nine months ended | |||||||||||||||
Calculation of Basic and Diluted EPS | July 2, 2011 |
July 3, 2010 |
July 2, 2011 |
July 3, 2010 |
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(in thousands, except per share data) | ||||||||||||||||
Net income |
$ | 15,526 | $ | 10,718 | $ | 47,803 | $ | 37,583 | ||||||||
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Weighted average shares outstandingBasic |
118,214 | 115,188 | 117,622 | 115,802 | ||||||||||||
Dilutive effect of employee stock options, restricted shares and restricted stock units |
2,950 | 3,815 | 3,527 | 4,194 | ||||||||||||
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Weighted average shares outstandingDiluted |
121,164 | 119,003 | 121,149 | 119,996 | ||||||||||||
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Earnings per shareBasic |
$ | 0.13 | $ | 0.09 | $ | 0.41 | $ | 0.32 | ||||||||
Earnings per shareDiluted |
$ | 0.13 | $ | 0.09 | $ | 0.39 | $ | 0.31 |
Stock options to purchase 0.1 million shares for both the third quarter and first nine months of 2011, and 1.5 million shares and 1.9 million shares for the third quarter and first nine months of 2010, respectively, were outstanding but were not included in the calculation of diluted EPS because the exercise prices per share were greater than the average market price of our common stock for those periods. These shares were excluded from the computation of diluted EPS as the effect would have been anti-dilutive.
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 use up to $200 million of cash from operations to repurchase shares of our common stock in open market purchases. This authorization will expire on September 30, 2011 unless earlier revoked. In the third quarter and first nine months of 2011, we repurchased 1.8 million shares at a cost of $39.9 million and we have $78.1 million remaining under our current authorization. In the third quarter and first nine months of 2010, we repurchased 0.8 million shares at a cost of $15.0 million and 3.6 million shares at a cost of $60.0 million, respectively. All shares of our common stock repurchased are automatically restored to the status of authorized and unissued.
5. Acquisition
On May 31, 2011, we acquired all of the outstanding common stock of MKS Inc. (MKS), a publicly held company based in Ontario, Canada, for CDN $26.20 per share. We acquired MKS to expand our product offerings by adding MKSs application lifecycle management (ALM) software used in developing software intensive products to our existing software solutions. We believe that the unification of MKSs ALM solutions with PTCs product lifecycle management solutions will enable manufacturers to better align the development and management of a products hardware and software components.
The total purchase price for MKS was comprised of:
(in thousands) | ||||
Acquisition of MKS stock |
$ | 280,397 | ||
Acquisition of MKS vested and unvested stock options |
18,040 | |||
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Total purchase price |
298,437 | |||
Less: MKS cash acquired |
(33,193 | ) | ||
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Total purchase price, net of cash acquired |
265,244 | |||
Less: Purchase price related to PTC options issued for MKS unvested options |
(91 | ) | ||
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Net cash used to acquire MKS |
$ | 265,153 | ||
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10
The purchase price included cash to settle outstanding vested stock options of MKS based on the purchase price of CDN $26.20 per share, and the conversion of unvested stock options of MKS into stock options to buy 146,998 shares of PTC common stock. We financed the transaction by drawing on our existing revolving credit facility in the amount of $250 million with the remainder funded by cash on hand.
MKSs results of operations have been included in PTCs consolidated financial statements beginning May 31, 2011. MKS had revenues of $79 million and $63 million for the twelve months ended April 30, 2011 and 2010, respectively. MKSs revenue for 2011 included a particularly large transaction. The acquisition added $6.0 million to our third quarter 2011 revenue and unfavorably impacted our operating income by approximately $7 million for the third quarter of 2011 when including acquisition-related costs of $6.0 million and amortization of acquired intangible assets of $0.9 million recorded during the quarter.
The acquisition of MKS 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, May 31, 2011. The fair values of intangible assets were based on valuations using an income approach, with estimates and assumptions provided by management of MKS and PTC. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The allocation of the purchase price is based upon a valuation of assets and liabilities acquired. Our estimates and assumptions in determining the estimated fair values of certain assets and liabilities are subject to change within the measurement period (up to one year from the acquisition date). The primary areas of the purchase price allocation that are not yet finalized relate to income taxes and the amount of resulting goodwill.
Based upon a valuation, the total purchase price allocation was as follows:
(in thousands) | ||||
Goodwill |
$ | 191,649 | ||
Identifiable intangible assets |
117,900 | |||
Cash |
33,193 | |||
Accounts receivable |
7,413 | |||
Property and equipment |
4,880 | |||
Deferred revenue |
(16,803 | ) | ||
Deferred tax assets and liabilities, net |
(34,242 | ) | ||
Net assumed liabilities |
(5,553 | ) | ||
|
|
|||
Total purchase price allocation |
298,437 | |||
Less: MKS cash acquired |
(33,193 | ) | ||
|
|
|||
Total purchase price allocation, net of cash acquired |
$ | 265,244 | ||
|
|
The purchase price allocation resulted in $191.6 million of goodwill, the majority of which will not be deductible for income tax purposes. Intangible assets of $117.9 million includes purchased software of $36.9 million, customer relationships of $78.6 million and trademarks of $2.4 million, which are being amortized over weighted average useful lives of 7 years, 11 years and 7 years, respectively, based upon the pattern in which economic benefits related to such assets are expected to be realized. As a result, we recorded in the purchase accounting deferred tax liabilities of $42.6 million, equal to the tax effect of the amount of the acquired intangible assets other than goodwill and the fair value adjustment for deferred revenue. The resulting amount of goodwill reflects our expectations of the following synergistic benefits: (1) the potential to sell MKS products into our customer base and to sell PTC products into MKSs customer base; (2) our intention to leverage our larger sales force and our intellectual property to attract new contracts and revenue; and (3) our intention to leverage our established presence in global markets.
In the three and nine months ended July 2, 2011, we incurred $6.0 million and $6.6 million, respectively, of acquisition-related costs, primarily associated with our acquisition of MKS. Acquisition-related costs include
11
direct costs of completing an acquisition (i.e., investment banker fees, professional fees, including legal and valuation services) and expenses related to acquisition integration activities (i.e., professional fees, severance, and retention bonuses) . These costs have been classified in general and administrative expenses in the accompanying consolidated statements of operations.
Pro Forma Financial Information (unaudited)
The unaudited financial information in the table below summarizes the combined results of operations of PTC and MKS, on a pro forma basis, as though the companies had been combined as of the beginning of PTCs fiscal year 2010. The pro forma information for all periods presented also includes the effects of business combination accounting resulting from the acquisition, including amortization charges from acquired intangibles assets, stock-based compensation charges for unvested stock options, interest expense on borrowings in connection with the acquisition, and the related tax effects as though the acquisition had been consummated as of the beginning of 2010. These pro forma results exclude the impact of the purchase accounting adjustment to deferred revenue and the transaction costs included in the historical results and the related tax effects. The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the results of operations that actually would have been achieved if the acquisition had taken place at the beginning of 2010. For the three months and nine months ended July 2, 2011, the pro forma financial information is based on PTCs results of operations for the three months and nine months ended July 2, 2011, which includes MKSs results beginning May 31, 2011, combined with MKSs results of operations for the two and eight months ended May 30, 2011. For the three months and nine months ended July 3, 2010, the pro forma financial information is based on PTCs results of operations for the three months and nine months ended July 3, 2010, combined with MKSs results of operations for the three and nine months ended July 31, 2010 (due to differences in reporting periods).
Three months ended | Nine months ended | |||||||||||||||
July 2, 2011 |
July 3, 2010 |
July 2, 2011 |
July 3, 2010 |
|||||||||||||
(in millions, except per share amounts) | ||||||||||||||||
Revenue |
$ | 304.4 | $ | 258.3 | $ | 886.4 | $ | 789.8 | ||||||||
Net income |
$ | 15.3 | $ | 8.8 | $ | 52.9 | $ | 39.6 | ||||||||
Earnings per shareBasic |
$ | 0.13 | $ | 0.08 | $ | 0.45 | $ | 0.34 | ||||||||
Earnings per shareDiluted |
$ | 0.13 | $ | 0.07 | $ | 0.44 | $ | 0.33 |
6. Goodwill and Intangible Assets
We have two reportable segments: (1) software products and (2) services. As of July 2, 2011 and September 30, 2010, goodwill and acquired intangible assets in the aggregate attributable to our software products reportable segment was $821.4 million and $524.3 million, respectively, and attributable to our services reportable segment was $30.5 million and $22.1 million, respectively. Goodwill is tested for impairment at least annually, or on an interim basis if an event occurs or circumstances change that would, more likely than not, reduce the fair value of the reporting segment below its carrying value. We completed our annual impairment review as of July 2, 2011 and concluded that no impairment charge was required as of that date. 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.
12
Goodwill and acquired intangible assets consisted of the following:
July 2, 2011 | September 30, 2010 | |||||||||||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net Book Value |
Gross Carrying Amount |
Accumulated Amortization |
Net Book Value |
|||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Goodwill (not amortized) |
$ | 623,638 | $ | 418,509 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Intangible assets with finite lives (amortized): |
||||||||||||||||||||||||
Purchased software |
$ | 175,633 | $ | 111,475 | 64,158 | $ | 134,375 | $ | 98,193 | 36,182 | ||||||||||||||
Capitalized software |
22,877 | 22,877 | | 22,877 | 22,877 | | ||||||||||||||||||
Customer lists and relationships |
233,148 | 72,941 | 160,207 | 148,753 | 60,490 | 88,263 | ||||||||||||||||||
Trademarks and trade names |
10,882 | 7,235 | 3,647 | 8,274 | 5,196 | 3,078 | ||||||||||||||||||
Other |
3,655 | 3,423 | 232 | 3,538 | 3,130 | 408 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 446,195 | $ | 217,951 | 228,244 | $ | 317,817 | $ | 189,886 | 127,931 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total goodwill and acquired intangible assets |
$ | 851,882 | $ | 546,440 | ||||||||||||||||||||
|
|
|
|
Goodwill
The changes in the carrying amounts of goodwill for the nine months ended July 2, 2011 are due to the impact of acquisitions (described in Note 5) and to foreign currency translation adjustments related to those asset balances that are recorded in non-U.S. currencies.
Changes in goodwill for the nine months ended July 2, 2011, presented by reportable segment, are as follows:
Software Products Segment |
Services Segment |
Total | ||||||||||
(in thousands) | ||||||||||||
Balance, September 30, 2010 |
$ | 400,965 | $ | 17,544 | $ | 418,509 | ||||||
Acquisition of MKS (1) |
183,649 | 8,000 | 191,649 | |||||||||
Foreign currency translation adjustments |
13,247 | 233 | 13,480 | |||||||||
|
|
|
|
|
|
|||||||
$ | 597,861 | $ | 25,777 | $ | 623,638 | |||||||
|
|
|
|
|
|
(1) | As described in Note 5, the allocation of goodwill for the MKS acquisition by reportable segment is preliminary and will be finalized in the fourth quarter. |
Amortization of intangible assets
The aggregate amortization expense for intangible assets with finite lives recorded for the third quarters and first nine months of 2011 and 2010 was classified in our consolidated statements of operations as follows:
Three months ended | Nine months ended | |||||||||||||||
July 2, 2011 |
July 3, 2010 |
July 2, 2011 |
July 3, 2010 |
|||||||||||||
(in thousands) | ||||||||||||||||
Amortization of acquired intangible assets |
$ | 4,753 | $ | 3,836 | $ | 12,873 | $ | 11,869 | ||||||||
Cost of license revenue |
3,895 | 4,659 | 10,597 | 14,485 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total amortization expense |
$ | 8,648 | $ | 8,495 | $ | 23,470 | $ | 26,354 | ||||||||
|
|
|
|
|
|
|
|
13
The estimated aggregate future amortization expense for intangible assets with finite lives remaining as of July 2, 2011 is $10.2 million for 2011, $36.3 million for 2012, $36.0 million for 2013, $33.7 million for 2014, $30.1 million for 2015, $22.0 million for 2016 and $59.9 million thereafter.
7. 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. Generally accepted accounting principles prescribe 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 instruments 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. |
Our significant financial assets and liabilities measured at fair value on a recurring basis as of July 2, 2011 and September 30, 2010 were as follows:
July 2, 2011 |
September 30, 2010 |
|||||||
(in thousands) | ||||||||
Financial assets |
||||||||
Cash equivalentsLevel 1 (1) |
$ | 89,182 | $ | 86,826 | ||||
|
|
|
|
|||||
Financial liabilities |
||||||||
Forward contractsLevel 2 (2) |
$ | (9,020 | ) | $ | (1,974 | ) | ||
|
|
|
|
(1) | Money market funds and time deposits. |
(2) | Includes a liability associated with forward contracts entered into in connection with our acquisition of MKS described in Note 8. |
8. Derivative Financial Instruments
Our foreign currency risk management strategy is principally designed to mitigate the future potential financial impact of changes in the value of 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 with maturities of less than three months, to manage our exposure to fluctuations in foreign exchange rates that arise primarily from our foreign currency-denominated receivables and payables.
Generally, we do not designate 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 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 other income (expense), net.
14
As of July 2, 2011 and September 30, 2010, we had outstanding forward contracts with notional amounts equivalent to the following:
Currency Hedged |
July 2, 2011 |
September 30, 2010 |
||||||
(in thousands) | ||||||||
Canadian /U.S. Dollar |
$ | 268,805 | $ | 1,280 | ||||
Euro/U.S. Dollar |
87,133 | 113,546 | ||||||
Indian Rupee/U.S. Dollar |
23,134 | 20,262 | ||||||
Chinese Renminbi/U.S. Dollar |
5,747 | 5,443 | ||||||
Japanese Yen/U.S. Dollar |
15,546 | | ||||||
All other |
8,624 | 8,282 | ||||||
|
|
|
|
|||||
Total |
$ | 408,989 | $ | 148,813 | ||||
|
|
|
|
In the third quarter of 2011, in connection with our planned acquisition of MKS, we entered into forward contracts to purchase CDN$292 million (equivalent to approximately $305 million when we entered into the contracts). We entered into these forward contracts to reduce our foreign currency exposure related to changes in the Canadian to U.S. Dollar exchange rate from the time we entered into the agreement to acquire MKS (the purchase price was in Canadian Dollars) and the expected closing date. In the third quarter of 2011, we settled these contracts and recorded a net foreign currency loss of $4.4 million related to the acquisition of MKS. During the third quarter, after the acquisition, we entered into new forward contracts to hedge foreign currency exposure on a $260 million intercompany loan denominated in Canadian Dollars related to the acquisition. Subsequent to quarter end, this intercompany loan was significantly reduced.
The accompanying consolidated balance sheets as of July 2, 2011 and September 30, 2010 include a net liability of $9.0 million and $2.0 million, respectively, in accrued expenses and other current liabilities related to the fair value of our forward contracts.
Net gains and losses on foreign currency exposures are recorded in other income (expense), net and include realized and unrealized gains and losses on forward contracts. Net gains and losses on foreign currency exposures for the three and nine months ended July 2, 2011 and July 3, 2010 were as follows:
Three months ended | Nine months ended | |||||||||||||||
July 2, 2011 |
July 3, 2010 |
July 2, 2011 |
July 3, 2010 |
|||||||||||||
(in thousands) | ||||||||||||||||
Net losses on foreign currency exposures |
$ | 6,116 | $ | 508 | $ | 9,448 | $ | 2,196 | ||||||||
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|
|
|
|
|
|
|
|||||||||
Net realized and unrealized (gain) loss on forward contracts (excluding the underlying foreign currency exposure being hedged) |
$ | 7,684 | $ | (1,807 | ) | $ | 12,897 | $ | (3,294 | ) | ||||||
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9. Segment Information
We operate within a single industry segmentcomputer software and related services. Operating segments as defined under GAAP are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our President and Chief Executive Officer. We have two operating and reportable segments: (1) Software Products, which includes license and related maintenance revenue (including updates and technical support) for all our products except training-related products; and (2) Services, which includes consulting, implementation, training, computer-based training products, including maintenance thereon, and other support revenue. In our consolidated statements of operations, maintenance revenue is included in service revenue. We do not allocate sales and marketing or administrative expenses to our operating segments as these activities are managed on a consolidated basis.
15
The revenue and operating income attributable to our operating segments are summarized as follows:
Three months ended | Nine months ended | |||||||||||||||
July 2, 2011 |
July 3, 2010 |
July 2, 2011 |
July 3, 2010 |
|||||||||||||
(in thousands) | ||||||||||||||||
Revenue: |
||||||||||||||||
Total Software Products segment revenue |
$ | 212,137 | $ | 185,336 | $ | 617,203 | $ | 563,746 | ||||||||
Total Services segment revenue |
79,646 | 57,662 | 210,321 | 178,237 | ||||||||||||
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|
|
|
|
|
|
|
|||||||||
Total revenue |
$ | 291,783 | $ | 242,998 | $ | 827,524 | $ | 741,983 | ||||||||
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|
|
|
|
|
|
|||||||||
Operating income: |
||||||||||||||||
Software Products segment |
$ | 134,157 | $ | 109,708 | $ | 385,881 | $ | 334,282 | ||||||||
Services segment (1) |
11,361 | 4,146 | 14,853 | 14,037 | ||||||||||||
Sales and marketing expenses |
(89,106 | ) | (79,121 | ) | (254,790 | ) | (232,856 | ) | ||||||||
General and administrative expenses |
(31,882 | ) | (22,755 | ) | (80,078 | ) | (69,633 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating income |
$ | 24,530 | $ | 11,978 | $ | 65,866 | $ | 45,830 | ||||||||
|
|
|
|
|
|
|
|
(1) | The improvement in operating income in the third quarter of 2011 compared to the third quarter of 2010 is due to higher revenue from our computer-based training products. In the first quarter of 2011, we made a strategic decision to enter into a contract with a customer in the automotive industry, for which we expect our costs to exceed our revenue by approximately $5 million. Services segment operating income in the first nine months of 2011 includes immediate recognition of the approximately $5 million estimated loss on this contract. |
We report revenue by product group, Desktop and Enterprise. Desktop revenue includes our CAx Solutions, primarily: Creo Elements/Pro, Creo Elements/Direct, Mathcad and Arbortext authoring products. Enterprise revenue includes our PLM solutions, primarily: Windchill, Arbortext enterprise products, Creo Elements/View and MKS Integrity. Data for the three and nine months ended July 3, 2010 includes immaterial reclassifications between product groups made to conform to the current classification.
Three months ended | Nine months ended | |||||||||||||||
July 2, 2011 |
July 3, 2010 |
July 2, 2011 |
July 3, 2010 |
|||||||||||||
(in thousands) | ||||||||||||||||
Revenue: |
||||||||||||||||
Desktop |
$ | 154,511 | $ | 127,860 | $ | 455,312 | $ | 397,833 | ||||||||
Enterprise |
137,272 | 115,138 | 372,212 | 344,150 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
$ | 291,783 | $ | 242,998 | $ | 827,524 | $ | 741,983 | ||||||||
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|
|
|
|
|
|
|
Data for the geographic regions in which we operate is presented below.
Three months ended | Nine months ended | |||||||||||||||
July 2, 2011 |
July 3, 2010 |
July 2, 2011 |
July 3, 2010 |
|||||||||||||
(in thousands) | ||||||||||||||||
Revenue: |
||||||||||||||||
Americas (1) |
$ | 104,618 | $ | 82,450 | $ | 299,111 | $ | 273,547 | ||||||||
Europe (2) |
120,302 | 101,838 | 334,132 | 294,536 | ||||||||||||
Pacific Rim |
36,873 | 33,156 | 106,694 | 95,473 | ||||||||||||
Japan |
29,990 | 25,554 | 87,587 | 78,427 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
$ | 291,783 | $ | 242,998 | $ | 827,524 | $ | 741,983 | ||||||||
|
|
|
|
|
|
|
|
16
(1) | Includes revenue in the United States totaling $98.7 million and $78.6 million for the three months ended July 2, 2011 and July 3, 2010, respectively, and $284.0 million and $263.6 million for the nine months ended July 2, 2011 and July 3, 2010, respectively. |
(2) | Includes revenue in Germany totaling $48.9 million and $44.5 million for the three months ended July 2, 2011 and July 3, 2010, respectively, and $120.6 million and $109.8 million for the nine months ended July 2, 2011 and July 3, 2010, respectively. |
10. Income Taxes
In the third quarter of 2011, our effective tax rate was a provision of 15% on pre-tax income of $18.3 million, compared to a provision of 8% on pre-tax income of $11.7 million in the third quarter of 2010. In the first nine months of 2011, our effective tax rate was a provision of 16% on pre-tax income of $56.9 million, compared to a provision of 15% on pre-tax income of $44.4 million in the first nine months of 2010. In the third quarter and first nine months of 2011, our effective tax rate was lower than the 35% statutory federal income tax rate due primarily to our corporate structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate and, in the first nine months of 2011, a $1.8 million tax benefit related to research and development (R&D) triggered by a retroactive extension of the R&D tax credit enacted in the first quarter of 2011. In the third quarter and first nine months of 2010, our effective tax rate was lower than the 35% statutory federal income tax rate due primarily to our corporate tax structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate.
As of July 2, 2011 and September 30, 2010, we had unrecognized tax benefits of $18.3 million ($18.0 million net of state tax benefits) and $15.9 million ($15.6 million net of state tax benefits), respectively. If all of our unrecognized tax benefits as of July 2, 2011 were to become recognizable in the future, we would record a $17.4 million benefit to the income tax provision.
Our policy is to record estimated interest and penalties related to the underpayment of income taxes as a component of our income tax provision. In the first nine months of 2011 and 2010, we included $0.2 million and $0.8 million of interest expense, respectively, and no tax penalty expense in our income tax provision. As of July 2, 2011, we had accrued $1.9 million of estimated interest expense and we had no accrued tax penalties, compared to $1.0 million accrued as of September 30, 2010, which was net of interest receivable of $0.7 million refunded in the first quarter of 2011. Changes in our unrecognized tax benefits in the nine months ended July 2, 2011 were as follows:
(in millions) | ||||
Balance as of October 1, 2010 |
$ | 15.9 | ||
Tax positions related to current year |
0.9 | |||
Tax positions related to prior years |
1.5 | |||
|
|
|||
Balance as of July 2, 2011 |
$ | 18.3 | ||
|
|
Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in favorable or unfavorable changes in our estimates. We anticipate the settlement of certain tax audits may be finalized within the next twelve months and could result in a decrease to our unrecognized tax benefits of up to $5 million.
17
In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the Internal Revenue Service in the United States. As of July 2, 2011, we remained subject to examination in the following major tax jurisdictions for the tax years indicated:
Major Tax Jurisdiction |
Open Years | |
United States |
2003, 2008 through 2010 | |
Germany |
2007 through 2010 | |
France |
2007 through 2010 | |
Japan |
2005 through 2010 | |
Ireland |
2006 through 2010 |
11. Commitments and Contingencies
Revolving Credit Agreement
We have a multi-currency bank revolving credit facility (the credit facility) with a syndicate of ten banks for which JPMorgan Chase Bank, N.A. acts as Administrative Agent. The credit facility matures in August 2014, when all amounts will be due and payable in full. The credit facility does not require amortization of principal and may be paid before maturity in whole or in part at PTCs option without penalty or premium. We expect to use the credit facility for general corporate purposes, including acquisitions of other businesses, and may also use it for working capital.
The credit facility consists of a $300 million revolving credit facility, which may be increased by up to an additional $150 million if the existing or additional lenders are willing to make such increased commitments (such increase may also be used, in whole or in part, for term loans). PTC is the sole borrower under the credit facility. The obligations under the credit facility are guaranteed by PTCs material domestic subsidiaries and are secured by a pledge of 65% of the voting equity interests of PTCs material first-tier foreign subsidiaries.
In May 2011, in connection with our acquisition of MKS, we borrowed $250 million under the credit facility at an annual interest rate of 2.1%. Accrued interest is due after three months at which time the interest rate will reset. As of July 2, 2011, we had $250 million outstanding under the credit facility. We did not have any borrowings outstanding under the credit facility at September 30, 2010.
Interest rates on borrowings outstanding under the credit facility range from 1.75% to 2.25% above an adjusted LIBO rate for Eurodollar-based borrowings or would range from 0.75% to 1.25% above the defined base rate (the greater of the Prime Rate, the Federal Funds Effective Rate plus .005%, or an adjusted LIBO rate plus 1%) for base rate borrowings, in each case based upon PTCs leverage ratio. Additionally, PTC may borrow certain foreign currencies at rates set in the same range above the respective London interbank offered interest rates for those currencies, based on PTCs leverage ratio. A quarterly commitment fee on the undrawn portion of the credit facility is required, ranging from 0.30% to 0.40% per annum, based upon PTCs leverage ratio.
The credit facility limits PTCs and its subsidiaries ability to, among other things: incur additional indebtedness; incur liens or guarantee obligations; pay dividends (other than to PTC) and make other distributions; make investments and enter into joint ventures; dispose of assets; and engage in transactions with affiliates, except on an arms-length basis. Under the credit facility, PTC and its material domestic subsidiaries may not invest cash or property in, or loan to, PTCs foreign subsidiaries in aggregate amounts exceeding $50 million for any purpose and an additional $75 million for acquisitions of businesses. In addition, under the credit facility, PTC and its subsidiaries must maintain the following financial ratios:
| a leverage ratio, defined as consolidated funded indebtedness to consolidated trailing four quarters EBITDA, of no greater than 2.50 to 1.00 at any time; and |
| a fixed charge coverage ratio, defined as the ratio of consolidated trailing four quarters EBITDA to consolidated fixed charges, of no less than 1.25 to 1.00 at any time. |
18
As of July 2, 2011, our leverage ratio was 1.14 to 1.00 and our fixed charge coverage ratio was 1.86 to 1.00. We were in compliance with all financial and operating covenants of the credit facility as of July 2, 2011.
Any failure to comply with the financial or operating covenants of the credit facility would prevent PTC from being able to borrow additional funds, and would constitute a default, permitting the lenders to, among other things, accelerate the amounts outstanding, including all accrued interest and unpaid fees, under the credit facility and to terminate the credit facility. A change in control of PTC, as defined in the agreement, also constitutes an event of default, permitting the lenders to accelerate the indebtedness and terminate the credit facility.
Legal Proceedings
We are subject to various legal proceedings and claims that arise in the ordinary course of business. With respect to such proceedings and claims, we record an accrual for a contingency when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We currently believe that resolving these matters will not have a material adverse impact on our financial condition, results of operations or cash flows. However, the results of legal proceedings cannot be predicted with certainty. Should any of these legal matters be resolved against us, the operating results for a particular reporting period could be adversely affected.
Guarantees and Indemnification Obligations
We enter into standard indemnification agreements in the ordinary course of our business. Pursuant to such agreements with our business partners or customers, we indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to our current products, as well as claims relating to property damage or personal injury resulting from the performance of services by us or our subcontractors. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. Historically, our costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and we accordingly believe the estimated fair value of these agreements is immaterial.
We warrant that our software products will perform in all material respects in accordance with our standard published specifications in effect at the time of delivery of the licensed products for a specified period of time. Additionally, we generally warrant that our consulting services will be performed consistent with generally accepted industry standards. In most cases, liability for these warranties is capped. If necessary, we would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history; however, we have not incurred significant cost under our product or services warranties. As a result, we believe the estimated fair value of these agreements is immaterial.
19
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward-Looking Statements
Statements in this Quarterly Report on Form 10-Q about our future financial and growth expectations, the development of our products and markets, adoption of our solutions and future purchases by customers, and the expected impact of our strategic investments and product releases on our business are forward-looking statements that are subject to the inherent uncertainties in predicting future results and conditions. Risks and uncertainties that could cause actual results to differ materially from projected results include the following: our customers may not purchase our solutions when or at the rates we expect; we may not achieve the license, service or maintenance growth rates we expect, which could result in a different mix of revenue between license, service and maintenance and could adversely affect our profitability; our strategic investments, including adding sales personnel, may not generate the revenue or have the effects we expect; we may be unable to attain or maintain a technology leadership position and any such leadership position may not generate the revenue we expect; new product releases may be delayed or may not generate the revenue we expect; the acquisition of MKS may not generate the revenue we expect; our ability to successfully differentiate our products and services from those of our competitors and otherwise compete could be adversely affected by the relatively larger size and greater resources of several of the companies with which we compete; the possibility that our investigation in China will lead to remedial actions that may have a material impact on our operations in China, as well as other risks and uncertainties described below throughout or referenced in Part II, Item 1A. Risk Factors of this report.
Our Business
Parametric Technology Corporation (PTC) develops, markets and supports product development software solutions and related services that help companies design products, manage product information and improve their product development processes. Our software solutions help customers increase innovation, improve product quality, decrease time to market, and reduce product development costs.
We offer solutions in the product development market, which encompasses the product lifecycle management, or PLM, market (product data management, collaboration and related solutions) and the CAx market (computer-aided design, manufacturing and engineering (CAD, CAM and CAE) solutions). Our software solutions provide our customers with an integral product development system that enables them to create digital product content, collaborate with others in the product development process, control product content, automate product development processes, configure products and product content, and communicate product information to people and systems across the extended enterprise and design chain.
We recently acquired MKS Inc., a global application lifecycle management (ALM) technology leader. MKS Integrity® coordinates and manages all activities and artifacts associated with developing software intensive products, including requirements, models, code and test and ensuring comprehensive lifecycle traceability. By unifying MKSs ALM solutions with PTCs industry-leading PLM solutions, PTC will enable manufacturers to better align the management of a products hardware components and related software.
We generate revenue through the sale of:
| software licenses, |
| maintenance services, which include technical support and software updates, and |
| consulting and training services, which include implementation services for our software. |
The PLM and the CAx markets we serve present different growth opportunities for us. We believe the market among large businesses for PLM solutions (which we refer to as our Enterprise Solutions) presents the
20
greatest opportunity for revenue growth for us and believe revenue from this market will constitute an increasingly greater proportion of our revenue over time. We believe that the markets for both our PLM Enterprise solutions and CAx Desktop solutions among small- and medium-size businesses also provide an opportunity for future growth. While the market for our CAx solutions among large businesses is a highly penetrated market, we believe our Creo product suite, which we released in June 2011, has created a growth opportunity for us in this market.
Our solutions are complemented by our experienced services and technical support organizations, as well as resellers and other strategic partners. Our services and technical support organizations provide consulting, implementation and training support services to customers worldwide. Our resellers supplement our direct sales force to provide greater geographic and small- and medium-size account coverage. Our strategic partners provide product and/or service offerings that complement our solutions.
Executive Overview
Revenue in the third quarter of 2011 grew 20% (13% on a constant currency basis) compared to the third quarter of 2010. We had growth in all lines of business with license revenue up 21%, maintenance revenue up 17% and consulting and training service revenue up 27%, reflecting increased demand for our products and services. We attribute this increased demand to improvement in the economy and the strength of our products. We have seen continued strength in maintenance and consulting services following a strong license revenue year in 2010. Additionally, the launch of Creo has positively impacted Desktop license revenue and maintenance revenue as customers have expanded their adoption and renewed seats under maintenance, and new customers, particularly in the small- and medium-size business space, have been added.
Additionally, we acquired MKS Inc. on May 31, 2011. MKS contributed $6.0 million to third quarter revenue ($6.7 million on a non-GAAP basis). Excluding the impact of MKS, our total revenue was $285.8 million and our license revenue was $79.4 million, which were both up 18% over the third quarter of 2010.
During the third quarter of 2011, consistent with the first two quarters of 2011, we saw a year-over-year increase in the number of customers from which license and/or consulting and training revenue exceeded $1 million, suggesting improved breadth and depth of our business. License and/or consulting and training service revenue of $1 million or more recognized from individual customers during the third quarter of 2011 totaled $61 million from 27 customers ($2.2 million average), our fourth consecutive quarter of over 20 customers, compared with $39 million from 14 customers ($2.8 million average) in the third quarter of 2010.
Further, our Desktop license revenue and total revenue grew 41% and 21%, respectively, in the third quarter of 2011 compared to the third quarter of 2010, attributable to an increase in the amount of large deals with direct customers. Enterprise license revenue and total non-GAAP revenue increased 3% and 20% (19% on GAAP total Enterprise revenue), respectively. While total organic (i.e. excluding MKS) Enterprise license revenue was down 3% year over year (against a relatively high prior year comparison), total organic Enterprise revenue was up 14% compared to the third quarter of 2010, and total organic Enterprise license and total revenue were up 40% and 15%, respectively on a sequential basis. We also saw continued overall strength in the small- and medium-size business market, with indirect license revenue and total indirect revenue up 24% and 13%, respectively, in the third quarter of 2011, compared to the third quarter of 2010. This was our sixth consecutive quarter of year-over-year indirect license revenue and total indirect revenue growth.
Our strong revenue performance led to improved profitability during the quarter. Our GAAP and non-GAAP operating income were $24.5 million (8% of total revenue) and $51.4 million (18% of total revenue), respectively, for the third quarter of 2011, compared with $12.0 million (5% of total revenue) and $32.0 million (13% of total revenue), respectively, for the third quarter of 2010.
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We acquired MKS for an aggregate cash purchase price of approximately $298 million ($265 million net of cash acquired). We financed the transaction by drawing on our existing credit facility in the amount of $250 million and using cash on hand for the remainder. Our balance sheet remained strong as of July 2, 2011, with $261 million of cash, flat with the second quarter of 2011, and $50 million available under our revolving credit facility. We generated $48 million of cash from operating activities in the third quarter of 2011 compared to $50 million in the third quarter of 2010. We resumed share repurchases in the third quarter of 2011, with $40 million of repurchases in the quarter.
Revenue, Operating Margin, Earnings per Share and Cash Flow from Operations
The following table shows the financial measures that we consider the most significant indicators of the performance of our business. In addition to providing operating income, operating margin, and diluted earnings per share as calculated under generally accepted accounting principles (GAAP), we provide non-GAAP operating income, operating margin, and diluted earnings per share for the reported periods. These measures exclude stock-based compensation, amortization of acquired intangible assets expense, acquisition-related charges, atypical gains or charges included in non-operating other income (expense), net and the related tax effects of the preceding items, and any atypical tax items. Excluding those expenses and atypical items provides investors another view of our operating results which is aligned with management budgets and with performance criteria in our incentive compensation plans. Management uses, and investors should evaluate, non-GAAP measures in conjunction with our GAAP results. We discuss the non-GAAP measures in detail under Income and Margins; Earnings per Share below.
Three Months Ended | Percent Change | Nine Months Ended | Percent Change | |||||||||||||||||||||||||||||
July 2, 2011 |
July 3, 2010 |
Actual | Constant Currency |
July 2, 2011 |
July 3, 2010 |
Actual | Constant Currency |
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(Dollar amounts in millions, except per share data) | ||||||||||||||||||||||||||||||||
License revenue |
$ | 81.4 | $ | 67.5 | 21 | % | 13 | % | $ | 231.1 | $ | 207.0 | 12 | % | 9 | % | ||||||||||||||||
Consulting and training service revenue |
68.6 | 54.2 | 27 | % | 19 | % | 191.3 | 163.2 | 17 | % | 15 | % | ||||||||||||||||||||
Maintenance revenue |
141.8 | 121.3 | 17 | % | 10 | % | 405.1 | 371.8 | 9 | % | 7 | % | ||||||||||||||||||||
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Total revenue |
291.8 | 243.0 | 20 | % | 13 | % | 827.5 | 742.0 | 12 | % | 9 | % | ||||||||||||||||||||
Total costs and expenses |
267.3 | 231.0 | 16 | % | 11 | % | 761.7 | 696.2 | 9 | % | 8 | % | ||||||||||||||||||||
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Operating income (1) |
$ | 24.5 | $ | 12.0 | 105 | % | 45 | % | $ | 65.9 | $ | 45.8 | 44 | % | 25 | % | ||||||||||||||||
Non-GAAP operating income (1) |
$ | 51.4 | $ | 32.0 | 61 | % | 37 | % | $ | 129.1 | $ | 109.8 | 18 | % | 10 | % | ||||||||||||||||
Operating margin (1) |
8 | % | 5 | % | 8 | % | 6 | % | ||||||||||||||||||||||||
Non-GAAP operating margin |
18 | % | 13 | % | 16 | % | 15 | % | ||||||||||||||||||||||||
Diluted earnings per share (2) |
$ | 0.13 | $ | 0.09 | $ | 0.39 | $ | 0.31 | ||||||||||||||||||||||||
Non-GAAP diluted earnings per share (2) |
$ | 0.32 | $ | 0.21 | $ | 0.79 | $ | 0.68 | ||||||||||||||||||||||||
Cash flow from operations (3) |
$ | 48.4 | $ | 50.4 | $ | 78.7 | $ | 141.1 |
(1) | In the first quarter of 2011 we entered into a strategic contract with an automotive customer for which we expect costs to exceed revenue by approximately $5 million. This loss was recorded in the first quarter of 2011 and resulted in a decrease in GAAP and non-GAAP operating income of approximately $5 million for the nine months ended July 2, 2011 compared to the nine months ended July 3, 2010. |
(2) | Diluted earnings per share in the third quarter and first nine months of 2011 includes foreign currency losses of $4.4 million recorded as other expense related to our acquisition of MKS. These losses have been excluded from non-GAAP diluted earnings per share. |
(3) | In the first quarter of 2011, we used $48 million, net, of cash in connection with the resolution of a litigation matter. |
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Fiscal Year 2011 Expectations, Strategies and Risks
Our Business
We are encouraged by our financial results in 2010 and the first nine months of 2011. Based on these results, improvements in the global economy, and the competitive strength of our products, we expect 2011 revenue to be 14% to 15% higher than in 2010, with license revenue growth of approximately 15% and maintenance and services revenue growth of approximately 12% and 20%, respectively. Although economic conditions have improved, we believe it is still uncertain whether a sustainable recovery is taking place on a worldwide basis. If the economy does not continue to improve, customers may delay, reduce or forego technology purchases.
Our results have been impacted, and we expect will continue to be impacted, by revenue from large customers. The amount of revenue, particularly license revenue, attributable to large transactions, and the number of such transactions, may vary significantly from quarter to quarter based on customer purchasing decisions and macroeconomic conditions. While our Desktop license revenue growth has been strong during the first nine months of 2011, our growth rates have become increasingly dependent on adoption of our PLM solutions among large direct customers. Such transactions tend to be larger in size and may have long lead times as they often follow a lengthy product selection and evaluation process. This may cause increased volatility in our results. Our revenue and operating results may also continue to be impacted by currency fluctuations.
We are currently monitoring the situation in Japan caused by the recent earthquake and tsunami and are evaluating the resulting potential risks of disruption to sales of our products and services. Net revenue from Japan was $104.1 million, or approximately 10% of our net revenue, for the fiscal year ended September 30, 2010. The majority of our revenue in Japan is from maintenance contracts and our results of operations for the second and third quarters of 2011 were not materially affected by these recent events. However, if the situation in Japan worsens, it could affect our ability to conduct normal business operations, including selling new licenses and renewing or entering into new services contracts, and could adversely affect our future operating results.
From a product portfolio perspective, we have had a number of product launches in fiscal 2011. We launched Creo 1.0 in June 2011, Mathcad® Prime 1.0 during the second quarter and Windchill® 10.0 in April. In addition, we have a new release of Arbortext® scheduled for the fall of 2011. Our acquisition of MKS, developer of MKS Integrity®, an industry-leading platform for software application lifecycle management (ALM), adds important breadth and depth to our product portfolio.
Balancing an improving but still uncertain economic climate with the longer-term opportunity for our business, we are modestly increasing investments in our business, particularly adding sales capacity to better address market demand, that we believe are critical to delivering value to our customers and will help us gain market share, drive faster top line growth and improve operating profitability over the longer term. We may reduce or delay strategic investments and/or take actions to reduce our operating costs if revenue is lower than we expect. In addition, these investments may not deliver the results we expect.
Impact of an Investigation in China
We have identified certain payments by certain business partners in China that raise questions of compliance with laws, including the Foreign Corrupt Practices Act, and/or compliance with the Companys business policies. We are conducting an internal investigation and have voluntarily disclosed this matter to the United States Department of Justice and the Securities and Exchange Commission. Based on the findings to date, we do not believe that this matter will have a material adverse effect on our results of operations or financial condition. If we determine that the replacement of certain employees and/or business partners is necessary, it could have an impact on our level of sales in China until such replacements are in place and productive. Revenue from China has historically represented 6% to 7% of our total revenue.
23
Results of Operations
MKS Acquisition
MKSs results of operations have been included in PTCs consolidated financial statements beginning May 31, 2011. MKS had revenues of $79 million and $63 million for the twelve months ended April 30, 2011 and 2010, respectively. The acquisition added $6.0 million to our third quarter 2011 revenue ($6.7 million on a non-GAAP basis) and is expected to add approximately $18 million of revenue (approximately $20 million on a non-GAAP basis) in the fourth quarter of 2011. MKSs revenue is classified as Enterprise revenue. The acquisition was neutral to our non-GAAP operating income during the third quarter of 2011 and is expected to be neutral for fiscal 2011. The MKS acquisition unfavorably impacted our GAAP operating income by approximately $7 million for the third quarter of 2011 when including acquisition-related costs of $6.0 million and amortization of acquired intangible assets of $0.9 million recorded during the quarter.
Impact of Foreign Currency Exchange on Results of Operations
Approximately two-thirds of our revenue and half of our expenses are transacted in currencies other than the U.S. Dollar. Because we report our results of operations in U.S. Dollars, currency translation, particularly changes in the Euro and Yen, relative to U.S. Dollar, affects our reported results. If actual reported results for the third quarter and first nine months of 2011 had been converted into U.S. Dollars based on the foreign currency exchange rates in effect for the comparable 2010 periods, revenue would have been lower by $17.0 million and $16.5 million in the third quarter and first nine months of 2011, respectively. For the third quarter of 2011, GAAP and non-GAAP expenses would have been lower by $9.9 million and $9.5 million, respectively, and for the first nine months of 2011, GAAP and non-GAAP expenses would have been lower by $7.7 million and $8.2 million, respectively. As a result, at foreign currency exchange rates consistent with the first nine months of 2010, GAAP and non-GAAP operating income in the third quarter of 2011 would have been $7.1 million and $7.6 million lower, respectively, and GAAP and non-GAAP operating income in the first nine months of 2011 would have been $8.8 million and $8.4 million lower, respectively. Revenue by line of business and revenue by geographic region in the tables that follow present both actual percentage changes year over year and percentage changes year over year on a constant currency basis, calculated by multiplying the actual results for 2011 by the exchange rates in effect for 2010.
Revenue
Desktop revenue includes our CAx Solutions, primarily: Creo Elements/Pro (formerly Pro/ENGINEER), Creo Elements/Direct (formerly CoCreate), Mathcad and Arbortext authoring products. Enterprise revenue includes our PLM solutions, primarily: Windchill, Arbortext enterprise products, Creo Elements/View (formerly ProductView) and MKS Integrity.
Direct revenue includes sales made primarily by our direct sales force to large businesses. Indirect revenue includes sales by our reseller channel, primarily to small- and medium-size businesses, as well as revenue from other accounts that we have classified as indirect. If the classification of a customer changes between direct and indirect, we reclassify the historical revenue associated with that customer to align with the current period classification. Revenue for the first nine months of 2011 and the third quarter and first nine months of 2010 reflected below also includes certain reclassifications between Desktop and Enterprise revenue. Such reclassifications were not material.
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Revenue by Product Group and Distribution Channel
Desktop Three Months Ended |
Enterprise Three Months Ended |
Total Revenue Three Months Ended |
||||||||||||||||||||||||||||||||||
July 2, 2011 |
July 3, 2010 |
Percent Change |
July 2, 2011 |
July 3, 2010 |
Percent Change |
July 2, 2011 |
July 3, 2010 |
Percent Change |
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(Dollar amounts in millions) | ||||||||||||||||||||||||||||||||||||
Direct |
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License revenue |
$ | 27.0 | $ | 17.1 | 57 | % | $ | 32.8 | $ | 32.9 | 0 | % | $ | 59.8 | $ | 50.0 | 19 | % | ||||||||||||||||||
Service revenue: |
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Consulting and training service revenue |
9.3 | 6.4 | 46 | % | 56.6 | 44.2 | 28 | % | 65.9 | 50.6 | 30 | % | ||||||||||||||||||||||||
Maintenance revenue |
53.0 | 47.0 | 13 | % | 34.1 | 25.6 | 33 | % | 87.1 | 72.5 | 20 | % | ||||||||||||||||||||||||
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Total service revenue |
62.3 | 53.3 | 17 | % | 90.7 | 69.8 | 30 | % | 153.0 | 123.1 | 24 | % | ||||||||||||||||||||||||
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Total revenue |
$ | 89.3 | $ | 70.5 | 27 | % | $ | 123.5 | $ | 102.7 | 20 | % | $ | 212.8 | $ | 173.2 | 23 | % | ||||||||||||||||||
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Indirect |
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License revenue |
$ | 16.9 | $ | 13.9 | 22 | % | $ | 4.8 | $ | 3.6 | 33 | % | $ | 21.7 | $ | 17.5 | 24 | % | ||||||||||||||||||
Service revenue: |
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Consulting and training service revenue |
1.5 | 1.4 | 11 | % | 1.2 | 2.2 | -46 | % | 2.7 | 3.5 | -24 | % | ||||||||||||||||||||||||
Maintenance revenue |
46.8 | 42.2 | 11 | % | 7.8 | 6.7 | 17 | % | 54.6 | 48.8 | 12 | % | ||||||||||||||||||||||||
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Total service revenue |
48.4 | 43.5 | 11 | % | 9.0 | 8.9 | 1 | % | 57.3 | 52.4 | 9 | % | ||||||||||||||||||||||||
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Total revenue |
$ | 65.3 | $ | 57.4 | 14 | % | $ | 13.7 | $ | 12.4 | 10 | % | $ | 79.0 | $ | 69.8 | 13 | % | ||||||||||||||||||
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Total Revenue |
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License revenue |
$ | 43.9 | $ | 31.0 | 41 | % | $ | 37.6 | $ | 36.5 | 3 | % | $ | 81.4 | $ | 67.5 | 21 | % | ||||||||||||||||||
Service revenue: |
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Consulting and training service revenue |
10.8 | 7.7 | 40 | % | 57.8 | 46.4 | 25 | % | 68.6 | 54.2 | 27 | % | ||||||||||||||||||||||||
Maintenance revenue |
99.8 | 89.1 | 12 | % | 41.9 | 32.3 | 30 | % | 141.8 | 121.3 | 17 | % | ||||||||||||||||||||||||
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Total service revenue |
110.6 | 96.9 | 14 | % | 99.7 | 78.6 | 27 | % | 210.4 | 175.5 | 20 | % | ||||||||||||||||||||||||
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Total revenue |
$ | 154.5 | $ | 127.9 | 21 | % | $ | 137.3 | $ | 115.1 | 19 | % | $ | 291.8 | $ | 243.0 | 20 | % | ||||||||||||||||||
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25
Desktop Nine Months Ended |
Enterprise Nine Months Ended |
Total Revenue Nine Months Ended |
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July 2, 2011 |
July 3, 2010 |
Percent Change |
July 2, 2011 |
July 3, 2010 |
Percent Change |
July 2, 2011 |
July 3, 2010 |
Percent Change |
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(Dollar amounts in millions) | ||||||||||||||||||||||||||||||||||||
Direct |
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License revenue |
$ | 82.2 | $ | 52.5 | 57 | % | $ | 82.4 | $ | 99.8 | -17 | % | $ | 164.6 | $ | 152.3 | 8 | % | ||||||||||||||||||
Service revenue: |
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Consulting and training service revenue |
28 | 23.2 | 21 | % | 155 | 131.4 | 18 | % | 182.9 | 154.5 | 18 | % | ||||||||||||||||||||||||
Maintenance revenue |
153.5 | 144.9 | 6 | % | 93.5 | 76.9 | 22 | % | 246.9 | 221.7 | 11 | % | ||||||||||||||||||||||||
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Total service revenue |
181.4 | 168 | 8 | % | 248.4 | 208.2 | 19 | % | 429.9 | 376.3 | 14 | % | ||||||||||||||||||||||||
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Total revenue |
$ | 263.6 | $ | 220.5 | 20 | % | $ | 330.9 | $ | 308.0 | 7 | % | $ | 594.5 | $ | 528.5 | 12 | % | ||||||||||||||||||
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Indirect |
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License revenue |
$ | 51.4 | $ | 43.4 | 18 | % | $ | 15.1 | $ | 11.3 | 34 | % | $ | 66.5 | $ | 54.7 | 22 | % | ||||||||||||||||||
Service revenue: |
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Consulting and training service revenue |
4.5 | 4.1 | 9 | % | 3.9 | 4.5 | -13 | % | 8.4 | 8.6 | -3 | % | ||||||||||||||||||||||||
Maintenance revenue |
135.8 | 129.8 | 5 | % | 22.3 | 20.3 | 10 | % | 158.2 | 150.2 | 5 | % | ||||||||||||||||||||||||
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Total service revenue |
140.3 | 133.9 | 5 | % | 26.3 | 24.9 | 6 | % | 166.5 | 158.8 | 5 | % | ||||||||||||||||||||||||
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Total revenue |
$ | 191.7 | $ | 177.3 | 8 | % | $ | 41.4 | $ | 36.1 | 14 | % | $ | 233.1 | $ | 213.4 | 9 | % | ||||||||||||||||||
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Total Revenue |
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License revenue |
$ | 133.6 | $ | 95.9 | 39 | % | $ | 97.5 | $ | 111.1 | -12 | % | $ | 231.1 | $ | 207.0 | 12 | % | ||||||||||||||||||
Service revenue: |
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Consulting and training service revenue |
32.4 | 27.3 | 19 | % | 158.9 | 135.9 | 17 | % | 191.3 | 163.2 | 17 | % | ||||||||||||||||||||||||
Maintenance revenue |
289.3 | 274.7 | 5 | % | 115.8 | 97.2 | 19 | % | 405.1 | 371.8 | 9 | % | ||||||||||||||||||||||||
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Total service revenue |
321.7 | 301.9 | 7 | % | 274.7 | 233.1 | 18 | % | 596.4 | 535.0 | 11 | % | ||||||||||||||||||||||||
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Total revenue |
$ | 455.3 | $ | 397.8 | 14 | % | $ | 372.2 | $ | 344.2 | 8 | % | $ | 827.5 | $ | 742.0 | 12 | % | ||||||||||||||||||
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Revenue by Line of Business
Three Months Ended | Nine Months Ended | |||||||||||||||
Revenue as a Percentage of Total Revenue | July 2, 2011 |
July 3, 2010 |
July 2, 2011 |
July 3, 2010 |
||||||||||||
License |
28 | % | 28 | % | 28 | % | 28 | % | ||||||||
Maintenance |
49 | % | 50 | % | 49 | % | 50 | % | ||||||||
Consulting and training service |
23 | % | 22 | % | 23 | % | 22 | % | ||||||||
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100 | % | 100 | % | 100 | % | 100 | % | |||||||||
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Year over Year Percentage Changes in Revenue | Three months ended July 2, 2011 compared to three months ended July 3, 2010 |
Nine months ended July 2, 2011 compared to nine months ended July 3, 2010 |
||||||||||||||
As Reported |
Constant Currency |
As Reported |
Constant Currency |
|||||||||||||
License |
21 | % | 13 | % | 12 | % | 9 | % | ||||||||
Maintenance |
17 | % | 10 | % | 9 | % | 7 | % | ||||||||
Consulting and training service |
27 | % | 19 | % | 17 | % | 15 | % | ||||||||
Total |
20 | % | 13 | % | 12 | % | 9 | % |
26
License Revenue
The increase in overall license revenue in the third quarter and first nine months of 2011 was due primarily to growth in direct Desktop revenue from sales to our large commercial customers. Additionally, we are continuing to see strength in license revenue from small- and medium-size customers, with increases in both indirect Desktop and Enterprise license revenue. We attribute the increases in Desktop license sales to the recent launch of Creo which has resulted in expansion orders from our existing customer base, and an increase in sales to new customers in our reseller channel. Additionally, we attribute the increases in Desktop license revenue to the economic recovery resulting in renewed customer demand.
MKS contributed $2.0 million to Enterprise license revenue in the third quarter. Excluding MKS, Enterprise license revenue was down 3% year over year. Enterprise license revenue results reflect decreases in revenue from sales of Windchill, which were 10% ($2.8 million) and 22% ($18.8 million) lower in the third quarter and first nine months of 2011, respectively, than in the third quarter and first nine months of 2010. The first nine months of 2010 included large Windchill transactions in North America, Europe and the Pacific Rim, resulting in a particularly strong year-ago comparative nine month period. We believe that one of the primary factors adversely impacting the Enterprise license revenue performance in 2011 is the dilutive impact of increased Desktop revenue on our Enterprise sales capacity. As a result, we plan to expand our sales capacity over the next five quarters.
Foreign currency exchange rate movements favorably impacted license revenue by $4.8 million and $5.6 million in the third quarter and first nine months of 2011, respectively, compared to the third quarter and first nine months of 2010.
Maintenance Revenue
Maintenance revenue is comprised of contracts to maintain new and/or previously purchased software. We have seen steady growth in maintenance revenue in 2011, particularly in the third quarter as maintenance revenue grew 17% (15% excluding MKS). Our recent launch of Creo has reinvigorated our base of Desktop customers and resulted in increases in our Desktop maintenance revenue. Enterprise maintenance revenue in the first nine months of 2011 benefitted from strong Enterprise license sales in fiscal 2010 (Enterprise license revenue in fiscal 2010 was 73% ($65.3 million) higher than fiscal 2009). In addition, MKS contributed $2.5 million to Enterprise maintenance revenue in the third quarter. Creo Elements/Pro and Windchill seats under maintenance increased 4% and 15%, respectively, as of the end of the third quarter of 2011, compared to the end of the third quarter of 2010.
Foreign currency exchange rate movements favorably impacted maintenance revenue by $7.8 million and $6.9 million in the third quarter and first nine months of 2011, respectively, compared to the third quarter and first nine months of 2010.
Consulting and Training Service Revenue
Consulting and training services engagements typically result from sales of new licenses, particularly of our Enterprise solutions. Accordingly, strong Enterprise license sales in 2010 had a favorable impact on services revenue in the first nine months of 2011. In the third quarter and first nine months of 2011, compared to the third quarter and first nine months of 2010, consulting revenue, which is primarily related to Windchill implementations among our direct Enterprise customers, was up 25% ($11.7 million) and 17% ($23.7 million), respectively, and training revenue, which typically represents about 15% of our total consulting and training services revenue, was up 41% ($2.8 million) and 21% ($4.5 million), respectively. In addition, MKS contributed $1.5 million to Enterprise consulting and training service revenue in the third quarter.
Foreign currency exchange rate movements favorably impacted consulting and training services revenue by $4.4 million and $4.0 million in the third quarter and first nine months of 2011, respectively, compared to the third quarter and first nine months of 2010.
27
Revenue by Distribution Channel
We derive most of our revenue from products and services sold directly by our sales force to end-user customers. We also sell products and services through third-party resellers and other strategic partners. Our sales force focuses on large accounts, while our reseller channel provides a cost-effective means of covering the small- and medium-size business market. This enables our direct sales force to focus on larger sales opportunities and ensures greater coverage of all customer segments.
Revenue results by Distribution Channel can be found in the table Revenue by Product Group and Distribution Channel above.
Direct
Our direct revenue typically comprises approximately 70% of our total revenue. Direct revenue is generated by our direct sales force which is primarily focused on large enterprise customers. We expect to expand the number of sales teams over the fourth quarter and in 2012 to address market demand and what we believe to be current capacity constraints.
Indirect
We have over 420 geographically dispersed resellers that focus on sales to small- and medium-size businesses.
Our indirect revenue (primarily sold through the reseller channel) typically comprises approximately 30% of our total revenue. This was our sixth consecutive quarter of year-over-year indirect license revenue and total indirect revenue growth. We believe that this performance reflects improving macroeconomic conditions. In addition, we have seen an increase in the number of new customers served by our channel partners which we attribute in part to our recent release of Creo 1.0.
Revenue from Individual Customers
We enter into customer contracts that may result in revenue being recognized over multiple reporting periods. Accordingly, revenue recognized in a current period may be attributable to contracts entered into during the current period or in prior periods. License and/or consulting and training service revenue of $1 million or more recognized from individual customers from contracts entered into during the current period and/or prior periods is shown in the table below. For the third quarter of 2011 and 2010, there were 27 (15 in the Americas, 8 in Europe and 4 in Asia) and 14 (6 in the Americas, 5 in Europe and 3 in Asia) of these customers, respectively, with an average size of $2.2 million and $2.8 million in the third quarter of 2011 and the third quarter of 2010, respectively.
28
The increase in license and consulting and training service revenue greater than $1 million from individual customers in the first nine months of 2011 compared to the first nine months of 2010 reflects increased revenue from Desktop licenses (mainly Creo) and Enterprise services, partially offset by lower sales of Enterprise licenses. The first nine months of 2010 included particularly large Windchill transactions in North America, Europe and the Pacific Rim.
Three months ended | Nine months ended | |||||||||||||||
July 2, 2011 |
July 3, 2010 |
July 2, 2011 |
July 3, 2010 |
|||||||||||||
(Dollar amounts in millions) | ||||||||||||||||
License and/or consulting and training service revenue greater than $1 million from individual customers in a quarter |
$ | 60.7 | $ | 38.8 | $ | 164.4 | $ | 128.1 | ||||||||
% of total license and consulting and training service revenue |
40 | % | 32 | % | 39 | % | 35 | % | ||||||||
License and consulting and training service revenue greater than $1 million from individual customers in a quarter by product group: |
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Desktop |
$ | 14.0 | $ | 2.0 | $ | 43.3 | $ | 9.6 | ||||||||
Enterprise |
$ | 46.7 | $ | 36.8 | $ | 121.1 | $ | 118.5 |
The amount of revenue, particularly license revenue, attributable to large transactions, and the number of such transactions, may vary significantly from quarter to quarter based on customer purchasing decisions and macroeconomic conditions.
Revenue by Geographic Region
Three months ended | Percent Change | Nine months ended | Percent Change | |||||||||||||||||||||||||||||
July 2, 2011 |
July 3, 2010 |
Actual | Constant Currency |
July 2, 2011 |
July 3, 2010 |
Actual | Constant Currency |
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(Dollar amounts in millions) | ||||||||||||||||||||||||||||||||
Revenue by region: |
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Americas |
$ | 104.6 | $ | 82.4 | 27 | % | 27 | % | $ | 299.1 | $ | 273.5 | 9 | % | 9 | % | ||||||||||||||||
Europe |
$ | 120.3 | $ | 101.8 | 18 | % | 6 | % | $ | 334.1 | $ | 294.5 | 13 | % | 11 | % | ||||||||||||||||
Pacific Rim |
$ | 36.9 | $ | 33.2 | 11 | % | 8 | % | $ | 106.7 | $ | 95.5 | 12 | % | 9 | % | ||||||||||||||||
Japan |
$ | 30.0 | $ | 25.6 | 17 | % | 4 | % | $ | 87.6 | $ | 78.4 | 12 | % | 1 | % | ||||||||||||||||
Revenue by region as a % of total revenue: |
||||||||||||||||||||||||||||||||
Americas |
36 | % | 34 | % | 36 | % | 37 | % | ||||||||||||||||||||||||
Europe |
41 | % | 42 | % | 40 | % | 40 | % | ||||||||||||||||||||||||
Pacific Rim |
13 | % | 14 | % | 13 | % | 13 | % | ||||||||||||||||||||||||
Japan |
10 | % | 10 | % | 11 | % | 10 | % |
Americas
The increase in revenue in the Americas in the third quarter of 2011, compared to the third quarter of 2010, consisted of an increase of 77% ($12.1 million) in license revenue, an increase of 25% ($4.8 million) in consulting and training service revenue and an increase of 11% ($5.2 million) in maintenance revenue. The increase in revenue in the Americas in the first nine months of 2011, compared to the first nine months of 2010, consisted of a 6% ($4.7 million) increase in license revenue, a 16% ($9.1 million) increase in consulting and training service revenue and an 8% ($11.7 million) increase in maintenance revenue. The relatively low license revenue growth in the first nine months of 2011 was, in part, because the first half of 2010 included particularly large Windchill transactions that closed in the first quarter of 2010.
29
Europe
The increase in revenue in the third quarter of 2011, compared to the third quarter of 2010, consisted of an increase in license revenue of 1% ($0.3 million), an increase in consulting and training service revenue of 35% ($7.6 million) and an increase in maintenance revenue of 22% ($10.6 million). The increase in revenue in the first nine months of 2011, compared to the first nine months of 2010, consisted of an increase in license revenue of 22% ($16.0 million), an increase in consulting and training service revenue of 17% ($11.3 million) and an increase in maintenance revenue of 8% ($12.3 million). The increases in license revenue reflect growth in license sales of Desktop products to large customers for both the third quarter and first nine months of 2011. Total Desktop license revenue increased 82% ($7.4 million) and 58% ($18.5 million) in the third quarter and first nine months of 2011, respectively, compared to the third quarter and first nine months of 2010. The increases in Desktop license revenue were offset by decreases in Enterprise license revenue of 32% ($7.1 million) and 6% ($2.5 million) in the third quarter and first nine months of 2011, respectively, compared to the third quarter and first nine months of 2010, reflecting a significant transaction we had in the third quarter of 2010 which drove license outperformance in the year-ago periods.
Changes in foreign currency exchange rates, particularly the Euro, impacted revenue in Europe favorably by $12.5 million and $5.9 million in the third quarter and first nine months of 2011, respectively, as compared to the third quarter and first nine months of 2010.
Pacific Rim
The increase in revenue in the Pacific Rim in the third quarter of 2011, compared to the third quarter of 2010, was due primarily to an increase of 22% ($2.0 million) in maintenance revenue and an increase of 12% ($1.1 million) in consulting and training service revenue. The increase in revenue in the Pacific Rim in the first nine months of 2011 compared to the first nine months of 2010 was due primarily to an increase of 20% ($5.2 million) in consulting and training service revenue and an increase of 20% ($5.1 million) in maintenance revenue. Revenue from China, which has historically represented 6% to 7% of our total revenue, increased 15% and 11% in the third quarter and first nine months of 2011, respectively, compared to the third quarter and first nine months of 2010.
Changes in foreign currency exchange rates favorably impacted revenue in the Pacific Rim by $1.2 million and $2.5 million in the third quarter and first nine months of 2011, respectively, as compared to the third quarter and first nine months of 2010.
Japan
The increase in revenue in Japan in the third quarter of 2011, compared to the third quarter of 2010, included increases of 17% ($0.9 million) in license revenue, 26% ($1.0 million) in consulting and training service revenue and 16% ($2.5 million) in maintenance revenue. The increase in revenue in Japan in the first nine months of 2011, compared to the first nine months of 2010, included increases of 16% ($2.5 million) in license revenue, 21% ($2.5 million) in consulting and training service revenue and 8% ($4.2 million) in maintenance revenue. Japan revenue benefitted from a large transaction in the second quarter of 2011.
Changes in the Yen to U.S. Dollar exchange rate favorably impacted revenue in Japan by $3.3 million and $8.1 million in the third quarter and first nine months of 2011, respectively, as compared to the third quarter and first nine months of 2010.
30
Costs and Expenses
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
July 2, 2011 |
July 3, 2010 |
Percent Change |
July 2, 2011 |
July 3, 2010 |
Percent Change |
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(Dollar amounts in millions) | ||||||||||||||||||||||||
Costs and expenses: |
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Cost of license revenue |
$ | 7.6 | $ | 7.6 | 0 | % | $ | 20.1 | $ | 24.0 | -16 | % | ||||||||||||
Cost of service revenue |
82.8 | 67.1 | 23 | % | 238.1 | 206.6 | 15 | % | ||||||||||||||||
Sales and marketing |
89.1 | 79.1 | 13 | % | 254.8 | 232.9 | 9 | % | ||||||||||||||||
Research and development |
51.1 | 50.6 | 1 | % | 155.7 | 151.2 | 3 | % | ||||||||||||||||
General and administrative |
31.9 | 22.8 | 40 | % | 80.1 | 69.6 | 15 | % | ||||||||||||||||
Amortization of acquired intangible assets |
4.8 | 3.8 | 24 | % | 12.9 | 11.9 | 8 | % | ||||||||||||||||
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Total costs and expenses |
$ | 267.3 | 231.0 | 16 | %(1) | $ | 761.7 | $ | 696.2 | 9 | %(1) | |||||||||||||
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Total headcount at end of period |
5,799 | 5,289 |
(1) | On a constant foreign currency basis, compared to the year-ago periods, total costs and expenses for the third quarter and first nine months of 2011 increased 11% and 8%, respectively. |
Costs and expenses in the third quarter and first nine months of 2011, compared to the third quarter and first nine months of 2010, were impacted by the following:
| an increase of 383 employees in connection with our acquisition of MKS on May 31, 2011; |
| acquisition-related costs (included in general and administrative) associated with our acquisition of MKS of $6.0 million and $6.6 million in the third quarter and first nine months of 2011, respectively; |
| higher cost of service in support of services revenue growth; |
| a company-wide salary merit pay increase effective February 1, 2011 (approximately $11 million on an annualized basis) which resulted in an increase in salary expense across all functional organizations; |
| investments in our direct sales force; |
| a contract loss of approximately $5 million recorded in the first quarter of 2011 related to estimated costs to be incurred in completing a services contract in excess of the corresponding revenue; |
| severance and related expenses of approximately $3.0 million associated with 60 employees terminated in the second quarter of 2011, primarily in research and development; and |
| higher sales and marketing expenses associated with events, including our Creo product launch. |
Cost of License Revenue
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
July 2, 2011 |
July 3, 2010 |
Percent Change |
July 2, 2011 |
July 3, 2010 |
Percent Change |
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(Dollar amounts in millions) | ||||||||||||||||||||||||
Cost of license revenue |
$ | 7.6 | $ | 7.6 | 0 | % | $ | 20.1 | $ | 24.0 | -16 | % | ||||||||||||
% of total revenue |
3 | % | 3 | % | 2 | % | 3 | % | ||||||||||||||||
% of total license revenue |
9 | % | 11 | % | 9 | % | 12 | % |
Our cost of license revenue consists of fixed and variable costs associated with reproducing and distributing software and documentation, as well as royalties paid to third parties for technology embedded in or licensed with our software products and amortization of intangible assets associated with acquired products. Cost of license revenue as a percentage of total license revenue declined in the third quarter and first nine months of
31
2011 due primarily to amortization of purchased software, which was $0.8 million and $3.9 million lower in the third quarter and first nine months of 2011, respectively, compared to the third quarter and first nine months of 2010. Cost of license revenue as a percent of license revenue can vary depending on product mix sold and the effect of fixed and variable royalties and the level of amortization of acquired software intangible assets.
Cost of Service Revenue
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
July 2, 2011 |
July 3, 2010 |
Percent Change |
July 2, 2011 |
July 3, 2010 |
Percent Change |
|||||||||||||||||||
(Dollar amounts in millions) | ||||||||||||||||||||||||
Cost of service revenue |
$ | 82.8 | $ | 67.1 | 23 | % | $ | 238.1 | $ | 206.6 | 15 | % | ||||||||||||
% of total revenue |
28 | % | 28 | % | 29 | % | 28 | % | ||||||||||||||||
% of total service revenue |
39 | % | 38 | % | 40 | % | 39 | % | ||||||||||||||||
Service headcount at end of period |
1,823 | 1,488 | 23 | % |
Our cost of service revenue includes costs such as salaries, benefits, and computer equipment and facilities for our training, customer support and consulting personnel; third-party subcontractor fees; and costs associated with the release of maintenance updates (including related royalty costs). Service margins can vary based on the product mix sold in the period. In the first quarter of 2011, we made a strategic decision to enter into a contract with an important customer in the automotive industry, for which we expect our costs to exceed our revenue by approximately $5 million. Cost of service revenue in the first quarter of 2011 included immediate recognition of this loss of approximately $5 million. In the third quarter and first nine months of 2011, compared to the third quarter and first nine months of 2010, total compensation, benefit costs and travel expenses were 27% ($11.9 million) and 14% ($18.4 million) higher, respectively, primarily due to increased headcount. Additionally, the cost of third-party consulting services was $4.2 million and $6.8 million higher in the third quarter and first nine months of 2011, respectively, compared to the third quarter and first nine months of 2010, primarily due to the increase in consulting and training service revenue in the first nine months of 2011. The cost of service headcount at the end of third quarter of 2011 includes 153 employees from the acquisition of MKS.
Sales and marketing
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
July 2, 2011 |
July 3, 2010 |
Percent Change |
July 2, 2011 |
July 3, 2010 |
Percent Change |
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(Dollar amounts in millions) | ||||||||||||||||||||||||
Sales and marketing |
$ | 89.1 | $ | 79.1 | 13 | % | $ | 254.8 | $ | 232.9 | 9 | % | ||||||||||||
% of total revenue |
31 | % | 33 | % | 31 | % | 31 | % | ||||||||||||||||
Sales and marketing headcount at end of period |
1,471 | 1,321 | 11 | % |
Our sales and marketing expenses primarily include salaries and benefits, sales commissions, advertising and marketing programs, travel and facility costs. Our compensation, benefit costs and travel expenses were higher by an aggregate of $8.7 million and $17.3 million in the third quarter and first nine months of 2011, respectively, compared to the third quarter and first nine months of 2010. Additionally, costs associated with sales meetings and marketing events were higher by approximately $3.6 million in the first nine months of 2011, compared to the first nine months of 2010, primarily due to the Creo product launch, and higher costs related to our fiscal 2011 sales kick-off meeting and worldwide PTC user conferences. The sales and marketing headcount at the end of third quarter of 2011 includes 79 employees from the acquisition of MKS.
32
Research and Development
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
July 2, 2011 |
July 3, 2010 |
Percent Change |
July 2, 2011 |
July 3, 2010 |
Percent Change |
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(Dollar amounts in millions) | ||||||||||||||||||||||||
Research and development |
$ | 51.1 | $ | 50.6 | 1 | % | $ | 155.7 | $ | 151.2 | 3 | % | ||||||||||||
% of total revenue |
18 | % | 21 | % | 19 | % | 20 | % | ||||||||||||||||
Research and development headcount at end of period |
1,920 | 1,936 | -1 | % |
Our research and development expenses consist principally of salaries and benefits, costs of computer equipment and facility expenses. Major research and development activities include developing new releases and updates of our software that enhance functionality and developing new products or features. Total compensation, benefit costs and travel expenses were higher in the third quarter and first nine months of 2011, compared to the third quarter and first nine months of 2010, by an aggregate of $1.1 million and $5.1 million, respectively. The first nine months of 2011 include approximately $2.2 million of severance and related costs incurred in the second quarter associated with a shifting of resources to support our long-term market opportunity in the Automotive vertical. The research and development headcount at the end of third quarter of 2011 includes 119 employees from the acquisition of MKS.
General and Administrative
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
July 2, 2011 |
July 3, 2010 |
Percent Change |
July 2, 2011 |
July 3, 2010 |
Percent Change |
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(Dollar amounts in millions) | ||||||||||||||||||||||||
General and administrative |
$ | 31.9 | $ | 22.8 | 40 | % | $ | 80.1 | $ | 69.6 | 15 | % | ||||||||||||
% of total revenue |
11 | % | 9 | % | 10 | % | 9 | % | ||||||||||||||||
General and administrative headcount at end of period |
573 | 531 | 8 | % |
Our general and administrative expenses include the costs of our corporate, finance, information technology, human resources, legal and administrative functions, as well as acquisition-related charges, bad debt expense and outside professional services, including accounting and legal fees. Acquisition-related costs include direct costs of acquisitions and expenses related to acquisition integration activities, including transaction fees, due diligence costs, retention bonuses and severance, and professional fees including legal and accounting costs related to the acquisition. Compared to the third quarter and first nine months of 2010, the increase in general and administrative expenses is primarily attributable to acquisition-related costs associated with our acquisition of MKS. Acquisition-related costs were $6.0 million and $6.6 million in the third quarter and first nine months of 2011. Total compensation, benefit costs and travel costs were higher in the third quarter and first nine months of 2011 by $2.5 million and $2.1 million, respectively. The general and administrative headcount at the end of third quarter of 2011 includes 32 employees from the acquisition of MKS.
Amortization of Acquired Intangible Assets
Amortization of acquired intangible assets reflects the amortization of acquired non-product related intangible assets, primarily customer and trademark-related intangible assets, recorded in connection with completed acquisitions. The increase in amortization of acquired intangible assets in the third quarter and first nine months of 2011 was due to our acquisition of MKS. This acquisition added $117.9 million of finite-lived intangible assets including $78.6 million of customer relationships, $36.9 million of purchased software (the amortization for which is recorded in Cost of License) and $2.4 million of trademarks which are being amortized over average useful lives of 11 years, 7 years and 7 years, respectively.
33
Interest and Other Income (Expense), net
Three months ended | Nine months ended | |||||||||||||||
July 2, 2011 |
July 3, 2010 |
July 2, 2011 |
July 3, 2010 |
|||||||||||||
(in millions) | ||||||||||||||||
Interest income |
$ | 1.0 | $ | 0.7 | $ | 2.7 | $ | 2.2 | ||||||||
Interest expense |
(0.8 | ) | (0.3 | ) | (1.3 | ) | (1.2 | ) | ||||||||
Other income (expense), net |
(6.5 | ) | (0.7 | ) | (10.4 | ) | (2.4 | ) | ||||||||
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Total interest and other income (expense), net |
$ | (6.3 | ) | $ | (0.3 | ) | $ | (9.0 | ) | $ | (1.4 | ) | ||||
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Interest and other income (expense), net includes interest income, interest expense, costs of hedging contracts, certain realized and unrealized foreign currency transaction gains or losses and exchange gains or losses resulting from the required period-end currency remeasurement of the financial statements of our subsidiaries that use the U.S. Dollar as their functional currency. A large portion of our revenue and expenses is transacted in foreign currencies. To reduce our exposure to fluctuations in foreign exchange rates, we engage in hedging transactions involving the use of foreign currency forward contracts, primarily in the Euro and Canadian Dollar. The increase in other income (expense), net in the third quarter and first nine months of 2011 compared to the third quarter and first nine months of 2010 was due primarily to net foreign currency losses, which were higher by $5.6 million and $7.3 million, respectively. The third quarter and first nine months of 2011 included foreign currency losses of $4.4 million related to our acquisition of MKS and the settlement of forward contracts to purchase CDN$292 million.
Income Taxes
Three months ended | Nine months ended | |||||||||||||||
July 2, 2011 |
July 3, 2010 |
July 2, 2011 |
July 3, 2010 |
|||||||||||||
(Dollar amounts in millions) | ||||||||||||||||
Pre-tax income |
$ | 18.3 | $ | 11.7 | $ | 56.9 | $ | 44.4 | ||||||||
Tax provision |
2.7 | 0.9 | 9.1 | 6.8 | ||||||||||||
Effective income tax rate |
15 | % | 8 | % | 16 | % | 15 | % |
In the third quarter and first nine months of 2011, our effective tax rate was lower than the 35% statutory federal income tax rate due primarily to our corporate structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate, and for the first nine months of 2011, a $1.8 million tax benefit related to research and development (R&D) triggered by a retroactive extension of the R&D tax credit enacted in the first quarter of 2011. In the third quarter and first nine months of 2010, our effective tax rate was lower than the 35% statutory federal income tax rate due primarily to our corporate tax structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate (including a net benefit of $0.4 million and $1.7 million in the third quarter and first nine months, respectively, related to R&D cost sharing pre-payments by a foreign subsidiary to the U.S.).
We have net deferred tax assets ($103.5 million as of September 30, 2010) primarily relating to our U.S. operations. We have concluded, based on the weight of available evidence, that our net deferred tax assets are more likely than not to be realized in the future. In arriving at this conclusion, we evaluated all available evidence, including our cumulative profitability on a pre-tax basis for the last three years (adjusted for permanent differences) and improving profitability forecasts for the U.S. operations. We will continue to reassess our valuation allowance requirements each financial reporting period.
In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the Internal Revenue Service (IRS) in the United States. We regularly assess the likelihood of
34
additional assessments by tax authorities and provide for these matters as appropriate. We are currently under audit by tax authorities in several foreign jurisdictions. Audits by tax authorities typically involve examination of the deductibility of certain permanent items, limitations on net operating losses and tax credits. Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in material changes in our estimates.
Our future effective income tax rate may be materially impacted by the amount of income taxes associated with our foreign earnings, which are taxed at rates different from the U.S. federal statutory income tax rate, as well as the timing and extent of the realization of deferred tax assets and changes in the tax law. There is pending legislation in Japan which, if enacted, could result in a change in rates and a discrete non-cash tax charge of approximately $3 million due to a change in the expected realizability of our Japan entitys deferred tax assets. The timing and likelihood of the legislation being approved are uncertain. Further, our tax rate may fluctuate within a fiscal year, including from quarter to quarter, due to items arising from discrete events, including settlements of tax audits and assessments, the resolution or identification of tax position uncertainties, and acquisitions of other companies.
Income and Margins; Earnings per Share
As shown in the table below, our operating income and operating margins in the third quarter and first nine months of 2011 increased compared to the third quarter and first nine months of 2010, primarily due to margin contribution associated with higher revenue described in Revenue above, partially offset by higher costs and expenses described in Costs and Expenses above.
The non-GAAP measures presented in the discussion of our results of operations and the respective most directly comparable GAAP measures are:
| non-GAAP revenueGAAP revenue |
| non-GAAP operating incomeGAAP operating income |
| non-GAAP net incomeGAAP net income |
| non-GAAP operating marginGAAP operating margin |
| non-GAAP diluted earnings per shareGAAP diluted earnings per share |
The non-GAAP measures exclude a fair value adjustment related to MKS deferred maintenance revenue, stock-based compensation expense, amortization of acquired intangible assets expense, acquisition-related charges, atypical gains or charges included in non-operating other income (expense), net and the related tax effects of the preceding items, and any atypical tax items. These expenses and charges are normally included in the comparable measures calculated and presented in accordance with GAAP. Our management excludes these revenue and cost items when evaluating our ongoing performance and/or predicting our earnings trends, and therefore exclude them when presenting non-GAAP financial measures. Management uses, and investors should consider, non-GAAP measures in conjunction with our GAAP results.
Stock-based compensation expense is a non-cash expense relating to stock-based awards issued to executive officers, employees and outside directors, consisting of restricted stock and restricted stock units.
Amortization of acquired intangible assets expense is a non-cash expense that is impacted by the timing and magnitude of our acquisitions.
We use these non-GAAP measures, and we believe that they assist our investors, to make period-to-period comparisons of our operational performance because they provide a view of our operating results without items that are not, in our view, indicative of our core operating results. We believe that these non-GAAP measures help illustrate underlying trends in our business, and we use the measures to establish budgets and operational goals
35
(communicated internally and externally) for managing our business and evaluating our performance. We believe that providing non-GAAP measures affords investors a view of our operating results that may be more easily compared to the results of peer companies. In addition, compensation of our executives is based in part on the performance of our business based on these non-GAAP measures.
The items excluded from the non-GAAP measures often have a material impact on our financial results and such items often recur. Accordingly, the non-GAAP measures included in this Quarterly Report should be considered in addition to, and not as a substitute for or superior to, the comparable measures prepared in accordance with GAAP.
The following tables reconcile each of these non-GAAP measures to its most closely comparable GAAP measure on our financial statements.
Three Months Ended | Nine Months Ended | |||||||||||||||
July 2, 2011 |
July 3, 2010 |
July 2, 2011 |
July 3, 2010 |
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(Dollar amounts in millions) | ||||||||||||||||
GAAP revenue |
$ | 291.8 | $ | 243.0 | $ | 827.5 | $ | 742.0 | ||||||||
Fair value of acquired MKS deferred maintenance |
0.7 | | 0.7 | | ||||||||||||
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Non-GAAP revenue |
$ | 292.5 | $ | 243.0 | $ | 828.2 | $ | 742.0 | ||||||||
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GAAP operating income |
$ | 24.5 | $ | 12.0 | $ | 65.9 | $ | 45.8 | ||||||||
Fair value of acquired MKS deferred maintenance revenue |
0.7 | | 0.7 | | ||||||||||||
Stock-based compensation (1) |
11.6 | 11.5 | 32.4 | 37.7 | ||||||||||||
Amortization of acquired intangible assets |
8.6 | 8.5 | 23.5 | 26.3 | ||||||||||||
Acquisition-related charges included in general and administrative expenses |
6.0 | | 6.6 | | ||||||||||||
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Non-GAAP operating income (2) |
$ | 51.4 | $ | 32.0 | $ | 129.1 | $ | 109.8 | ||||||||
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GAAP net income |
$ | 15.5 | $ | 10.7 | $ | 47.8 | $ | 37.6 | ||||||||
Fair value of acquired MKS deferred maintenance |
0.7 | | 0.7 | | ||||||||||||
Stock-based compensation (1) |
11.6 | 11.5 | 32.4 | 37.7 | ||||||||||||
Amortization of acquired intangible assets |
8.6 | 8.5 | 23.5 | 26.3 | ||||||||||||
Acquisition-related charges included in general and administrative expenses |
6.0 | | 6.6 | | ||||||||||||
Non-operating foreign currency transaction loss (2) |
4.4 | | 5.1 | | ||||||||||||
Income tax adjustments (3) |
(8.5 | ) | (6.1 | ) | (20.1 | ) | (20.2 | ) | ||||||||
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Non-GAAP net income |
$ | 38.3 | $ | 24.6 | $ | 96.0 | $ | 81.4 | ||||||||
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GAAP diluted earnings per share |
$ | 0.13 | $ | 0.09 | $ | 0.39 | $ | 0.31 | ||||||||
Stock-based compensation |
0.10 | 0.10 | 0.27 | 0.31 | ||||||||||||
Amortization of acquired intangible assets |
0.07 | 0.07 | 0.19 | 0.22 | ||||||||||||
Acquisition-related charges |
0.05 | | 0.05 | | ||||||||||||
Income tax adjustments |
(0.07 | ) | (0.05 | ) | (0.17 | ) | (0.17 | ) | ||||||||
All other items identified above |
0.04 | | 0.06 | 0.01 | ||||||||||||
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Non-GAAP diluted earnings per share |
$ | 0.32 | $ | 0.21 | $ | 0.79 | $ | 0.68 | ||||||||
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Operating margin impact of non-GAAP adjustments:
Three Months Ended | Nine Months Ended | |||||||||||||||
July 2, 2011 |
July 3, 2010 |
July 2, 2011 |
July 3, 2010 |
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GAAP operating margin |
8.4 | % | 4.9 | % | 8.0 | % | 6.2 | % | ||||||||
Fair value of deferred maintenance revenue |
0.2 | % | 0.0 | % | 0.1 | % | 0.0 | % | ||||||||
Stock-based compensation |
4.0 | % | 4.8 | % | 3.9 | % | 5.0 | % | ||||||||
Amortization of acquired intangibles |
3.0 | % | 3.5 | % | 2.8 | % | 3.6 | % | ||||||||
Acquisition-related charges |
2.0 | % | 0.0 | % | 0.8 | % | 0.0 | % | ||||||||
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Non-GAAP operating margin |
17.6 | % | 13.2 | % | 15.6 | % | 14.8 | % | ||||||||
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(1) | The decrease in stock-based compensation in the first nine months of 2011 compared to the first nine months of 2010 was due primarily to grants of fiscal 2010 stock-based awards being made in November 2009, our usual timing, while a portion of the fiscal 2011 stock-based awards were delayed until the second and third quarters of 2011 due to the limited number of shares that were available under the 2000 Equity Incentive Plan. |
(2) | In the third quarter of 2011, in connection with our planned acquisition of MKS, we entered into forward contracts to purchase CDN$292 million (equivalent to approximately $305 million when the contracts were entered into). We entered into these forward contracts to reduce our foreign currency exposure related to changes in the Canadian to US Dollar exchange rate from the time we entered into the agreement in early April to acquire MKS (the purchase price is in Canadian Dollars) and the closing date which occurred on May 31, 2011. We realized foreign currency losses of $4.4 million in the third quarter of 2011 recorded as other expense related to the acquisition of MKS. In the first quarter of 2011 we recorded $0.7 million of foreign currency losses related to a previously announced litigation settlement in Japan. |
(3) | Income tax adjustments reflect the tax effects of non-GAAP adjustments which are calculated by applying the applicable tax rate by jurisdiction to the non-GAAP adjustments listed above, as well as any atypical tax items. |
Liquidity and Capital Resources
July 2, 2011 |
July 3, 2010 |
|||||||
(in thousands) | ||||||||
Cash and cash equivalents |
$ | 260,751 | $ | 219,019 | ||||
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Amounts below are for the nine months ended: |
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Cash provided by operating activities |
$ | 78,671 | $ | 141,076 | ||||
Cash used by investing activities |
(283,448 | ) | (23,771 | ) | ||||
Cash provided (used) by financing activities |
212,569 | (122,378 | ) |
Cash and cash equivalents
We invest our cash with highly rated financial institutions and in diversified domestic and international money market mutual funds. Cash and cash equivalents include highly liquid investments with original maturities of three months or less. At July 2, 2011, cash and cash equivalents totaled $260.8 million, up from $240.3 million at September 30, 2010 due primarily to $78.7 million of cash provided by operating activities in the first nine months of 2011.
Cash provided by operating activities
Cash provided by operating activities was $78.7 million in the first nine months of 2011, compared to $141.1 million of cash provided by operating activities in the first nine months of 2010. This decrease was
37
primarily due to the resolution, as previously disclosed, of a litigation matter, which reduced our cash balance by approximately $48 million in the first quarter of 2011, including $52.1 million paid to settle the matter. In addition, in the first nine months of 2011, net cash outflows related to compensation accruals were approximately $8.8 million higher than the comparable year-ago period due primarily to performance-based and incentive cash plan targets, which were fully achieved in 2010 (paid in 2011) while such targets were not achieved in full in 2009 (paid in 2010). Additionally, year-end commission accruals were higher at the end of 2010 compared to the end of 2009 due to higher revenue in the fourth quarter of 2010 compared to the fourth quarter of 2009. Cash collections on accounts receivable remained strong with days sales outstanding of 56 days as of the end of the third quarter of 2011 compared to 57 days as of September 30, 2010 and 56 days at the end of the third quarter of 2010.
Cash used by investing activities
Nine months ended | ||||||||
July 2, 2011 |
July 3, 2010 |
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(in thousands) | ||||||||
Cash used by investing activities included the following: |
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Acquisitions of businesses, net of cash acquired |
$ | (265,153 | ) | $ | (2,087 | ) | ||
Additions to property and equipment |
(18,295 | ) | (21,684 | ) | ||||
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$ | (283,448 | ) | $ | (23,771 | ) | |||
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In May 2011, we acquired MKS for an aggregate cash purchase price of approximately $298 million ($265.2 million net of cash acquired). Our expenditures for property and equipment consist primarily of computer equipment, software, office equipment and facility improvements.
Cash used by financing activities
Nine months ended | ||||||||
July 2, 2011 |
July 3, 2010 |
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(in thousands) | ||||||||
Cash used by financing activities included the following: |
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Borrowings (repayments) under revolving credit facility |
$ | 250,000 | $ | (50,832 | ) | |||
Repurchases of common stock |
(39,947 | ) | (60,046 | ) | ||||
Payments of withholding taxes in connection with vesting of stock-based awards |
(22,052 | ) | (20,250 | ) | ||||
Proceeds from issuance of common stock |
22,261 | 8,524 | ||||||
Excess tax benefits from stock-based awards |
2,307 | 226 | ||||||
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$ | 212,569 | $ | (122,378 | ) | ||||
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The increase in proceeds from issuance of common stock was due to higher stock option exercises in the first nine months of 2011 (1.6 million options) compared to the first nine months of 2010 (0.8 million options). As of July 2, 2011, we had approximately 3.3 million stock options outstanding (including 0.1 million shares granted in connection with our acquisition of MKS), all of which expire by the end of 2014.
Credit Facility
We have a revolving credit facility with a bank syndicate under which we may borrow funds up to $300 million (with an accordion feature that allows us to borrow up to an additional $150 million if the existing or additional lenders agree), repay the same in whole or in part, and re-borrow at any time through August 22, 2014, when all amounts outstanding will be due and payable in full.
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In May 2011, in connection with our acquisition of MKS, we borrowed $250 million under the credit facility at an annual interest rate of 2.1%. Accrued interest is due after three months at which time the interest rate will reset. As of July 2, 2011, we had $250 million outstanding under the credit facility. We did not have any borrowings outstanding under the credit facility at September 30, 2010.
The credit facility limits PTCs and its subsidiaries ability to, among other things: incur additional indebtedness; incur liens or guarantee obligations; pay dividends (other than to PTC) and make other distributions; make investments and enter into joint ventures; dispose of assets; and engage in transactions with affiliates, except on an arms-length basis. Under the credit facility, PTC and its material domestic subsidiaries may not invest cash or property in, or loan to, PTCs foreign subsidiaries in aggregate amounts exceeding $50 million for any purpose and an additional $75 million for acquisitions of businesses. In addition, under the credit facility, PTC and its subsidiaries must maintain the following financial ratios:
| a leverage ratio, defined as consolidated funded indebtedness to consolidated trailing four quarters EBITDA, of no greater than 2.50 to 1.00 at any time; and |
| a fixed charge coverage ratio, defined as the ratio of consolidated trailing four quarters EBITDA to consolidated fixed charges, of no less than 1.25 to 1.00 at any time. |
As of July 2, 2011, our leverage ratio was 1.14 to 1.00 and our fixed charge coverage ratio was 1.86 to 1.00. We were in compliance with all financial and operating covenants of the credit facility as of July 2, 2011.
For a description of additional terms and conditions of the credit facility, including limitations on our ability to undertake certain actions, see Note 11. Commitments and Contingencies in the Notes to Consolidated Financial Statements of this Form 10-Q.
Share 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 use up to $200 million of cash from operations to repurchase shares of our common stock in open market purchases. This authorization will expire on September 30, 2011 unless earlier revoked. In the first nine months of 2011, we repurchased 1.8 million shares at a cost of $39.9 million. We have $78.1 million remaining under our current authorization and we expect to repurchase $15 million worth of our common stock in the fourth quarter of 2011. In the first nine months of 2010, we repurchased 3.6 million shares at a cost of $60.0 million. All shares of our common stock repurchased are automatically restored to the status of authorized and unissued.
Future Expectations
We believe that existing cash and cash equivalents, together with cash generated from operations, will be sufficient to meet our working capital and capital expenditure requirements through at least the next twelve months.
In the fourth quarter of 2011, we expect to use cash flow from operations to repay a portion of the balance outstanding under our revolving credit facility and to use $15 million to repurchase shares of our common stock. Capital expenditures for the remainder of 2011 are currently anticipated to be approximately $8 million.
We have evaluated, and expect to continue to evaluate, possible strategic transactions on an ongoing basis and at any given time may be engaged in discussions or negotiations with respect to possible strategic transactions. Our expected uses of cash could change, our cash position could be reduced and we may incur additional debt obligations to the extent we complete any significant acquisitions.
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Critical Accounting Policies and Estimates
The financial information included in Item 1 reflects no material changes in our critical accounting policies and estimates as set forth under the heading Critical Accounting Policies and Estimates in Part II, Item 7: Managements Discussion and Analysis of Financial Condition and Results of Operations of our 2010 Annual Report on Form 10-K. We did not make any changes to these policies or to these estimates during the quarter ended July 2, 2011.
Valuation of Goodwill
Our goodwill totaled $623.6 million and $418.5 million as of July 2, 2011 and September 30, 2010, respectively. We assess the impairment of goodwill on at least an annual basis and whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. We conduct our annual impairment test of goodwill as of the end of the third quarter of each fiscal year. We estimate the fair values of our reporting units using discounted cash flow valuation models. We completed our annual impairment review as of July 2, 2011 and concluded that no impairment charge was required as of that date. The estimated fair value of each reporting unit was approximately double or better than its carrying value. Revenue growth and operating margin projections are significant assumptions in our analysis. A 10% decrease in those assumptions would not have had an impact on the results of our impairment analysis.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Except as described below, there have been no significant changes in our market risk exposure as described in Item 7A: Quantitative and Qualitative Disclosures about Market Risk of our 2010 Annual Report on Form 10-K.
In the third quarter of 2011, in connection with our planned acquisition of MKS, we entered into forward contracts to purchase CDN$292 million (equivalent to approximately $305 million when the contracts were entered into). We entered into these forward contracts to reduce our foreign currency exposure related to changes in the Canadian to US Dollar exchange rate from the time we entered into the agreement to acquire MKS (the purchase price was in Canadian Dollars) and the expected closing date. In the third quarter of 2011, we settled these contracts and recorded a net foreign currency loss of $4.4 million in other income (expense), net related to the acquisition of MKS.
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Effectiveness of Disclosure Controls and Procedures
Our management maintains disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), as appropriate, to allow for timely decisions regarding required disclosure.
We evaluated, under the supervision and with the participation of management, including our principal executive and principal financial officers, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of July 2, 2011.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended July 2, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART IIOTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
The European Commission is conducting an investigation of allegedly anti-competitive practices within the European Economic Area with respect to CAD and related software. In connection with its investigation, the Commission has requested information from PTC and, we understand, from other vendors as well. PTC is cooperating to provide the requested information. No charges or proceedings have been initiated by the Commission against PTC; however, the Commission has authority to impose significant fines if it identifies violations of European competition laws as a result of its investigation.
ITEM 1A. | RISK FACTORS |
In addition to other information set forth in this report, you should carefully consider the factors described in Part I. Item 1A. Risk Factors in our 2010 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. The risks described in our 2010 Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
We are investigating whether certain payments by certain business partners in China may violate applicable laws, including the Foreign Corrupt Practices Act, which could have an adverse impact on our results of operations or financial condition, and remedial actions we may take as a result of our investigation could adversely affect our sales in China.
In the third quarter of 2011, we identified certain payments by certain business partners in China that raised questions of compliance with laws, including the Foreign Corrupt Practices Act, and/or compliance with our business policies. We are conducting an internal investigation and have voluntarily disclosed this matter to the United States Department of Justice and the Securities and Exchange Commission. We are unable to estimate the potential penalties and/or sanctions, if any, that might be assessed in connection with this matter. If we determine that the replacement of certain employees and/or business partners is necessary, it could have an impact on our level of sales in China until such replacements are in place and productive. Revenue from China has historically represented 6% to 7% of our total revenue.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
The table below shows the shares of our common stock we repurchased in the third quarter of 2011.
ISSUER PURCHASES OF EQUITY SECURITIES
Period (1) |
Total Number of Shares (or Units) Purchased |
Average Price Paid per Share (or Unit) |
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
Approximate Dollar Value of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
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April 3 April 30, 2011 |
| | | $ | 118,012,208 | (2) | ||||||||||
May 1 May 28, 2011 |
1,200,552 | $ | 22.61 | 1,200,552 | $ | 90,871,517 | (2) | |||||||||
May 29 July 2, 2011 |
570,494 | $ | 22.45 | 570,494 | $ | 78,065,345 | (2) | |||||||||
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Total |
1,771,046 | $ | 22.56 | 1,771,046 | $ | 78,065,345 | (2) | |||||||||
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(1) | Periods are our fiscal months within the fiscal quarter. |
(2) | On May 20, 2008, we announced our share repurchase program in the amount of $50 million, and on November 26, 2008, we announced that the repurchase program had been increased to $100 million. On March 3, 2010, our Board of Directors extended the share repurchase authorization through May 31, 2011, and on September 15, 2010, our Board of Directors increased the amount authorized to be repurchased to $200 million and extended the authorization to September 30, 2011. Such authorization will remain in effect unless earlier revoked or extended. |
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ITEM 6. | EXHIBITS |
2 | Arrangement Agreement dated as of April 6, 2011 by and among Parametric Technology Corporation (PTC), PTC NS ULC (Acquireco), and MKS Inc. (MKS) (filed as Exhibit 10.1 to our Current Report on Form 8-K filed on April 7, 2011 (File No. 0-18059) and incorporated herein by reference). | |
3.1(a) | Restated Articles of Organization of Parametric Technology Corporation adopted February 4, 1993 (filed as Exhibit 3.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 1996 (File No. 0-18059) and incorporated herein by reference). | |
3.1(b) | Articles of Amendment to Restated Articles of Organization adopted February 9, 1996 (filed as Exhibit 4.1(b) to our Registration Statement on Form S-8 (Registration No. 333-01297) and incorporated herein by reference). | |
3.1(c) | Articles of Amendment to Restated Articles of Organization adopted February 13, 1997 (filed as Exhibit 4.1(b) to our Registration Statement on Form S-8 (Registration No. 333-22169) and incorporated herein by reference). | |
3.1(d) | Articles of Amendment to Restated Articles of Organization adopted February 10, 2000 (filed as Exhibit 3.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended April 1, 2000 (File No. 0-18059) and incorporated herein by reference). | |
3.1(e) | Certificate of Vote of Directors establishing Series A Junior Participating Preferred Stock (filed as Exhibit 3.1(e) to our Annual Report on Form 10-K for the fiscal year ended September 30, 2000 (File No. 0-18059) and incorporated herein by reference). | |
3.1(f) | Articles of Amendment to Restated Articles of Organization adopted February 28, 2006 (filed as Exhibit 3.1(f) to our Quarterly Report on Form 10-Q for the fiscal quarter ended April 1, 2006 (File No. 0-18059) and incorporated herein by reference). | |
3.2 | By-Laws, as amended and restated, of Parametric Technology Corporation (filed as Exhibit 3.2 to our Quarterly Report on Form 10-Q for the fiscal quarter ended July 4, 2009 (File No. 0-18059) and incorporated herein by reference). | |
10.1 | Amendment No. 2 dated as of May 9, 2011 to Credit Agreement dated as of August 23, 2010 by and among Parametric Technology Corporation, JPMorgan Chase Bank, N.A., KeyBank National Association, Sovereign Bank, RBS Citizens, N.A., Wells Fargo Bank, N.A., Silicon Valley Bank, The Huntington National Bank, HSBC Bank USA, N.A., TD Bank, N.A., and Bank of America, N.A. | |
10.2* | Separation Agreement dated April 26, 2011 by and between Parametric Technology Corporation and Paul Cunningham. | |
10.3* | Form of Executive Agreement by and between Parametric Technology Corporation and each of Robert Ranaldi and William Berutti, respectively, entered into May 6, 2011 and June 8, 2011, respectively. | |
10.4 | Voting Agreement dated as of April 6, 2011 between Parametric Technology Corporation (PTC), PTC NS ULC (Acquireco), and MKS Inc. (MKS) (filed as Exhibit 10.2 to our Current Report on Form 8-K filed on April 7, 2011 (File No. 0-18059) and incorporated herein by reference). | |
31.1 | Certification of the Chief Executive Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a). | |
31.2 | Certification of the Chief Financial Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a). | |
32** | Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350. | |
101*** | The following materials from Parametric Technology Corporations Quarterly Report on Form 10-Q for the quarter ended July 2, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of July 2, 2011 and September 30, 2010; (ii) Condensed Consolidated Statements of Operations for the three and nine months ended July 2, 2011 and July 3, 2010; (iii) Condensed Consolidated Statements of Cash Flows for the nine months ended July 2, 2011 and July 3, 2010; (iv) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended July 2, 2011 and July 3, 2010; and (v) Notes to Condensed Consolidated Financial Statements. |
* | Indicates a management contract or compensatory plan or arrangement in which an executive officer or director of Parametric Technology Corporation participates. |
** | Indicates that the exhibit is being furnished with this report and is not filed as a part of it. |
*** | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
PARAMETRIC TECHNOLOGY CORPORATION | ||
By: | /S/ JEFFREY D. GLIDDEN | |
Jeffrey D. Glidden Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
Date: August 10, 2011
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Exhibit 10.1
EXECUTION COPY
AMENDMENT NO. 2
Dated as of May 9, 2011
to
CREDIT AGREEMENT
Dated as of August 23, 2010
THIS AMENDMENT NO. 2 (this Amendment) is made as of May 9, 2011 by and among Parametric Technology Corporation, a Massachusetts corporation (the Borrower), the financial institutions listed on the signature pages hereof and JPMorgan Chase Bank, N.A., as Administrative Agent (the Administrative Agent), under that certain Credit Agreement dated as of August 23, 2010 by and among the Borrower, the Lenders and the Administrative Agent as amended by Amendment No. 1 to Credit Agreement dated as of December 20, 2010 (as further amended, restated, supplemented or otherwise modified from time to time, the Credit Agreement). Capitalized terms used herein and not otherwise defined herein shall have the respective meanings given to them in the Credit Agreement.
WHEREAS, the Borrower has requested that the requisite Lenders and the Administrative Agent agree to an amendment to the Credit Agreement;
WHEREAS, the Borrower, the Lenders party hereto and the Administrative Agent have so agreed on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower, the Lenders party hereto and the Administrative Agent hereby agree to enter into this Amendment.
1. Amendment to the Credit Agreement. Effective as of the date of satisfaction of the conditions precedent set forth in Section 2 below, the parties hereto agree that clause (d) of the definition of Permitted Foreign Subsidiary Loans and Investments set forth in Section 1.01 of the Credit Agreement is hereby amended to (x) insert (i) immediately after the reference to Effective Date, appearing therein and (y) add the following at the end thereof:
and (ii) in addition to the foregoing, to the extent used to consummate the acquisition by PTC NS ULC, an unlimited liability company organized under the laws of Nova Scotia, of all of the outstanding shares of MKS Inc., a corporation organized under the laws of Ontario, pursuant to and in accordance with the Arrangement Agreement, dated as of April 6, 2011, by and among the Borrower, PTC NS ULC and MKS Inc.
2. Conditions of Effectiveness. The effectiveness of this Amendment is subject to the conditions precedent that the Administrative Agent shall have received (i) counterparts of this Amendment duly executed by the Borrower, the Required Lenders and the Administrative Agent and (ii) counterparts of the Consent and Reaffirmation attached as Exhibit A hereto duly executed by the Subsidiary Guarantors.
3. Representations and Warranties of the Borrower. The Borrower hereby represents and warrants as follows:
(a) This Amendment and the Credit Agreement as modified hereby constitute valid and binding obligations of the Borrower and are enforceable against the Borrower in accordance with their terms.
(b) As of the date hereof and after giving effect to the terms of this Amendment, (i) no Default or Event of Default shall have occurred and be continuing, and (ii) the representations and warranties of the Borrower set forth in the Credit Agreement are true and correct in all material respects (or, if a representation or warranty is expressly stated to have been made as of a specific date, such representation or warranty shall be true and correct in all material respects as of such specific date).
4. Reference to and Effect on the Credit Agreement.
(a) Upon the effectiveness hereof, each reference to the Credit Agreement in the Credit Agreement or any other Loan Document shall mean and be a reference to the Credit Agreement as amended hereby.
(b) Each Loan Document and all other documents, instruments and agreements executed and/or delivered in connection therewith shall remain in full force and effect and are hereby ratified and confirmed.
(c) Except with respect to the subject matter hereof, the execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Administrative Agent or the Lenders, nor constitute a waiver of any provision of the Credit Agreement, the Loan Documents or any other documents, instruments and agreements executed and/or delivered in connection therewith.
5. Governing Law. This Amendment shall be construed in accordance with and governed by the law of the State of New York.
6. Headings. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose.
7. Counterparts. This Amendment may be executed by one or more of the parties hereto on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument.
[Signature Pages Follow]
2
IN WITNESS WHEREOF, this Amendment has been duly executed as of the day and year first above written.
PARAMETRIC TECHNOLOGY CORPORATION, | ||
as the Borrower | ||
By: | /s/ Stephen G. Bouchard | |
Name: | Stephen G. Bouchard | |
Title: | Treasurer |
Signature Page to Amendment No. 2 to
Credit Agreement dated as of August 23, 2010
Parametric Technology Corporation
JPMORGAN CHASE BANK, N.A., | ||
individually as a Lender, as the Swingline Lender, as an Issuing Bank and as Administrative Agent | ||
By: | /s/ D. Scott Farquhar | |
Name: | D. Scott Farquhar | |
Title: | Senior Vice President |
Signature Page to Amendment No. 2 to
Credit Agreement dated as of August 23, 2010
Parametric Technology Corporation
KEYBANK NATIONAL ASSOCIATION, | ||
as a Lender | ||
By: | /s/ David A. Wild | |
Name: | David A. Wild | |
Title: | Senior Vice President |
Signature Page to Amendment No. 2 to
Credit Agreement dated as of August 23, 2010
Parametric Technology Corporation
SOVEREIGN BANK, | ||
as a Lender | ||
By: | /s/ A. Neil Sweeny | |
Name: | A. Neil Sweeny | |
Title: | Senior Vice President |
Signature Page to Amendment No. 2 to
Credit Agreement dated as of August 23, 2010
Parametric Technology Corporation
RBS CITIZENS, NATIONAL ASSOCIATION, | ||
as a Lender | ||
By: | /s/ William M. Clossey | |
Name: | William M. Clossey | |
Title: | Vice President |
Signature Page to Amendment No. 2 to
Credit Agreement dated as of August 23, 2010
Parametric Technology Corporation
WELLS FARGO BANK, NATIONAL ASSOCIATION, | ||
as a Lender | ||
By: | /s/ Denis Waltrich | |
Name: | Denis Waltrich | |
Title: | Vice President |
Signature Page to Amendment No. 2 to
Credit Agreement dated as of August 23, 2010
Parametric Technology Corporation
SILICON VALLEY BANK, | ||
as a Lender | ||
By: | /s/ Philip T. Silvia III | |
Name: | Philip T. Silvia III | |
Title: | Vice President |
Signature Page to Amendment No. 2 to
Credit Agreement dated as of August 23, 2010
Parametric Technology Corporation
THE HUNTINGTON NATIONAL BANK, | ||
as a Lender | ||
By: | /s/ Joe Tonges | |
Name: | Joe Tonges | |
Title: | Vice President |
Signature Page to Amendment No. 2 to
Credit Agreement dated as of August 23, 2010
Parametric Technology Corporation
HSBC BANK USA, NATIONAL ASSOCIATION, | ||
as a Lender | ||
By: | /s/ Kerry Anne OCallaghan | |
Name: | Kerry Anne OCallaghan | |
Title: | Senior AVP |
Signature Page to Amendment No. 2 to
Credit Agreement dated as of August 23, 2010
Parametric Technology Corporation
TD BANK, N.A., | ||
as a Lender | ||
By: | /s/ Marla Willner | |
Name: | Marla Willner | |
Title: | Senior Vice President |
Signature Page to Amendment No. 2 to
Credit Agreement dated as of August 23, 2010
Parametric Technology Corporation
BANK OF AMERICA, N.A., | ||
as a Lender | ||
By: | /s/ William S. Rowe | |
Name: | William S. Rowe | |
Title: | Director |
Signature Page to Amendment No. 2 to
Credit Agreement dated as of August 23, 2010
Parametric Technology Corporation
EXHIBIT A
Consent and Reaffirmation
Each of the undersigned hereby acknowledges receipt of a copy of the foregoing Amendment No. 2 to the Credit Agreement (as the same may be amended, restated, supplemented or otherwise modified from time to time, the Credit Agreement) by and among Parametric Technology Corporation, a Massachusetts corporation (the Borrower) the Lenders and JPMorgan Chase Bank, N.A., as Administrative Agent (the Administrative Agent), which Amendment No. 2 is dated as of May 9, 2011 and is by and among the Borrower, the financial institutions listed on the signature pages thereof and the Administrative Agent (the Amendment). Capitalized terms used in this Consent and Reaffirmation and not defined herein shall have the meanings given to them in the Credit Agreement. Without in any way establishing a course of dealing by the Administrative Agent or any Lender, each of the undersigned consents to the Amendment and reaffirms the terms and conditions of the Subsidiary Guaranty and any other Loan Document executed by it and acknowledges and agrees that the Subsidiary Guaranty and each and every such Loan Document executed by the undersigned in connection with the Credit Agreement remains in full force and effect and is hereby reaffirmed, ratified and confirmed. All references to the Credit Agreement contained in the above-referenced documents shall be a reference to the Credit Agreement as so modified by the Amendment and as the same may from time to time hereafter be amended, modified or restated.
Dated May 9, 2011
[Signature Page Follows]
IN WITNESS WHEREOF, this Consent and Reaffirmation has been duly executed as of the day and year above written.
PARAMETRIC HOLDINGS INC. | COMPUTERVISION LLC, by its sole member | |||||||
PARAMETRIC TECHNOLOGY CORPORATION | ||||||||
By: | /s/ Stephen G. Bouchard |
|||||||
Name: | Stephen G. Bouchard | |||||||
Title: | Treasurer | By: | /s/ Stephen G. Bouchard | |||||
Name: | Stephen G. Bouchard | |||||||
Title: | Treasurer | |||||||
PTC INTERNATIONAL, INC. | PTC NETHERLANDS LLC | |||||||
By: | /s/ Stephen G. Bouchard |
By: | /s/ Stephen G. Bouchard | |||||
Name: | Stephen G. Bouchard | Name: | Stephen G. Bouchard | |||||
Title: | Treasurer | Title: | Treasurer | |||||
ARBORTEXT, INC. | RELEX SOFTWARE CORPORATION | |||||||
By: | /s/ Stephen G. Bouchard |
By: | /s/ Stephen G. Bouchard | |||||
Name: | Stephen G. Bouchard | Name: | Stephen G. Bouchard | |||||
Title: | Treasurer | Title: | Treasurer |
Signature Page to Consent and Reaffirmation to Amendment No. 2 to
Credit Agreement dated as of August 23, 2010
Parametric Technology Corporation
Exhibit 10.2
PTC the product development company | 140 Kendrick Street, Needham, MA 02494 |
April 26, 2011
Paul Cunningham
3 Howard Munroe Place
Lexington, MA 02420
Re: Resignation from PTC
Dear Paul:
This letter (Separation Agreement) confirms your resignation from Parametric Technology Corporation (PTC) effective November 15, 2011 and sets forth the specific terms that will govern your resignation.
1. | You hereby acknowledge and confirm your irrevocable decision to resign from PTC effective November 15, 2011 (Resignation Date), and PTC hereby accepts your resignation effective on said date. |
2. | Commencing April 28, 2011 and ending on the Resignation Date or earlier termination of your employment, you will remain an at will employee of PTC in a new position as Executive Advisor with equivalent salary and benefits to your current position as Executive Vice President, Worldwide Sales. During the remaining period of your employment, you shall perform such services for PTC as PTC may request from time to time with respect to the transition of your duties and responsibilities as Executive Vice President, Worldwide Sales. PTC will provide you with secretarial support and access to the PTC telephone and email systems through the Resignation Date. Except in the case of a termination of your employment for Cause as defined in the Amended and Restated Executive Agreement between you and PTC dated as of May 7, 2010 (the Executive Agreement), PTC will provide you with executive outplacement services through Right Management for a six (6) month period following the Resignation Date. You agree to cooperate with and assist PTC in a responsible, positive and professional manner and you hereby acknowledge that PTCs obligations under this Agreement are expressly contingent upon your fulfillment of your obligations in this regard, and on your dealing with any issues relating to your employment with and separation from PTC in a similarly responsible, positive and professional manner. |
3. | PTC acknowledges that in connection with your duties as Executive Vice President, Worldwide Sales, you had executive responsibility for both the Arbortext Business Unit and the PTC Japan Business Unit from October 2009. |
4. | In consideration of PTCs agreement in paragraph 2 and the other provisions of this Separation Agreement, you hereby release PTC from any and all claims you may now have or ever have had against PTC, including without limitation any claims arising out of your employment relationship with PTC and your resignation from PTC, as detailed in the General Release and Covenant Not To Sue in Exhibit A hereto (the First General Release) and incorporated into this Separation Agreement as if fully set forth herein, and which you will also execute herewith. Your signature on this Separation Agreement and |
Paul Cunningham
Separation Agreement
Page 2
on the First General Release constitutes your acknowledgment that you have signed these documents knowingly, willingly and voluntarily in exchange for PTCs agreements set forth herein and for other valuable consideration. |
5. | Provided that (a) you remain employed by PTC through November 15, 2011 or, if earlier, the date on which PTCs Compensation Committee determines the extent to which fiscal 2011 performance metrics have been achieved under the 2011 Executive Cash Incentive Performance Plan (FY11 EIP Plan), and (b) you execute a General Release and Covenant Not To Sue in a form substantially identical to the attached Exhibit B (subject only to such modifications, if any, as may be necessary to comply with then-existing law) upon termination of your employment, and the seven day revocation period with respect to Exhibit B shall have lapsed thereafter without revocation, you will remain eligible to participate in the FY11 EIP Plan with a target incentive bonus of $300,000. Actual bonus payout, if any, shall be determined by PTCs Compensation Committee based on PTCs fiscal 2011 financial performance in accordance with the FY 2011 EIP Plan. You agree that you will not be eligible to participate in PTCs Fiscal 2012 Executive Incentive Plan. |
6. | Provided that you remain employed with PTC through November 15, 2011, restricted stock units previously granted to you that are scheduled to vest on such date will vest in accordance with their terms. |
7. | You agree to return all PTC property, documents and information upon your last day of employment or upon PTCs earlier request. To the extent that you have any PTC information stored on a personal home computer, personal thumb drive or other personal electronic storage device, you shall forward a copy of such information to PTCs Senior Vice President of Human Resources, and then shall irretrievably delete any PTC information from your personal home computer, as well as from any personal thumb drive or other personal electronic storage device. |
8. | You and PTC agree that the Proprietary Information, Invention and Non-Competition Agreement between you and PTC dated August 29, 2006, a copy of which is attached hereto as Exhibit C (the NDA), is hereby as amended as set forth on Schedule 1 to Exhibit C. You hereby confirm your agreement to comply with your obligations under the NDA, as so amended. |
9. | The terms and conditions set forth in this letter agreement constitute the full and complete understanding between you and PTC regarding your resignation from PTC; provided that the terms of the Executive Agreement shall continue in effect through the termination of your employment with PTC. |
10. | You will be afforded twenty-one days to consider the meaning and effect of this Separation Agreement and the First General Release. You are advised to consult with an attorney and you acknowledge that you have had the opportunity to do so. |
11. | You may revoke this Separation Agreement and the First General Release for a period of seven business days following your execution of these documents. This Separation Agreement and the First General Release shall not become effective or enforceable until the seven day revocation period has expired. Any revocation within this period must be submitted, in writing, to PTC and must state, I hereby revoke my acceptance of the Separation Agreement. The revocation must be sent to: Senior Vice President, PTC |
Paul Cunningham
Separation Agreement
Page 3
Human Resources, Parametric Technology Corporation, 140 Kendrick Street, Needham, MA 02494 and postmarked within seven business days of your execution of this document. |
12. | If any provision in this Separation Agreement is held to be unenforceable, such unenforceability shall not affect any other provision and the parties agree to substitute for such unenforceable provision a valid and enforceable provision that most clearly approximates the interest and economic intent of such unenforceable provision. |
13. | This Agreement may not be modified altered or changed except upon signed written consent of both parties. |
14. | Please acknowledge your agreement to the foregoing terms by signing this letter in the space provided below and returning the original to me. |
Sincerely,
/s/ James Heppelmann
James Heppelmann
President and Chief Executive Officer
on behalf of Parametric Technology Corporation
I acknowledge that I have been given ample opportunity to consider the terms of this Separation Agreement and the General Release and Covenant Not To Sue and that I have been given ample opportunity to consult an attorney in connection with this matter. I knowingly and voluntarily agree to and accept the terms outlined herein.
Acknowledged and Agreed: | /s/ Paul Cunningham |
4/26/2011 |
||||
Paul Cunningham | Date |
Paul Cunningham
Separation Agreement
Page 4
Exhibit A
General Release and Covenant Not To Sue
1. Release. I hereby voluntarily release PTC, and any and all of its subsidiaries, branches, divisions, affiliates, insurers, successors, assigns or related entities, as well as its or their present and former officers, directors, trustees, employees and agents, individually and in their official capacities, and their employee benefit plans and programs and their administrators and fiduciaries (collectively, the Released Parties), of and from any and all claims, known and unknown, that I, my heirs, executors, administrators, successors, and assigns, have had or may have as of the date of execution of this General Release and Covenant Not To Sue, including, but not limited to, any alleged violation of any of the following (in each case, as amended):
| Title VII of the Civil Rights Act of 1964; |
| Sections 1981 through 1988 of Title 42 of the United States Code; |
| The Employee Retirement Income Security Act of 1974; |
| The Age Discrimination in Employment Act of 1967; |
| The Immigration Reform Control Act; |
| The Americans with Disabilities Act of 1990; |
| The Workers Adjustment Retraining Notification Act; |
| The Sarbanes-Oxley Act; |
| The Fair Credit Reporting Act; |
| The Massachusetts Fair Employment Practices Act; |
| The Massachusetts State Wage and Hour Laws; |
| The Massachusetts Occupational Safety and Health Laws; |
| The Massachusetts Equal Rights Act; |
| The Massachusetts Civil Rights Act; |
| The Massachusetts Privacy Law; |
| The Massachusetts Sexual Harassment Statute; |
| The Massachusetts Small Necessities Leave Act |
| any other federal, state or local civil or human rights law or any other local, state or federal law, regulation or ordinance; |
| any public policy, contract, tort, or common law; or |
| any allegation for costs, fees, or other expenses including attorneys fees incurred in these matters. |
It is agreed and understood that the release does not waive any of the following rights: (a) to the pay or benefits to be provided as set forth in the Separation Agreement between me and PTC dated April 26, 2011 (the Separation Agreement); (b) to enforce the terms of the Separation Agreement; (c) to access any benefit to which I am entitled under PTCs pension and welfare plans or arrangements; (d) to avail myself of any rights to insurance or indemnification that I may have (including with respect to matters that are the subject of this release) under PTCs articles of organization, by-laws or applicable insurance policies, under applicable law, and under any indemnification agreement with PTC; (e) to pursue claims arising out of any matter or thing that occur after the date hereof, and; (f) to pursue any claims which I may not release pursuant to applicable laws and regulations.
2. Affirmations. I affirm that I have not filed or caused to be filed, and that I am not presently a party to, any claim, complaint, charge or action against PTC in any forum or form. I further affirm that I have been paid and/or have received all compensation, wages, bonuses,
Paul Cunningham
Separation Agreement
Page 5
commissions, and/or benefits to which I may be due and that no other compensation, wages, bonuses, commissions and/or benefits are due to me as of the date I execute this General Release, except as provided in the Separation Agreement. I further affirm that I have no known workplace injuries, and that I have been granted any leave to which I was entitled under the Family and Medical Leave Act or related state or local leave or disability accommodation laws. I also affirm that I have not been retaliated against by PTC or its officers. This General Release does not limit either partys right, where applicable, to participate in or cooperate with an investigative proceeding of any federal, state or local governmental agency, including the United States Equal Employment Opportunity Commission and the Massachusetts Commission Against Discrimination. To the extent permitted by law, I agree that if such an administrative claim is made, I shall not be entitled to recover any individual monetary relief or other individual remedies.
3. No Admission of Wrongdoing. I agree that neither this General Release and Covenant Not To Sue nor the furnishing of the consideration for this General Release and Covenant Not To Sue shall be deemed or construed at any time for any purpose as an admission by the Released Parties of any liability or unlawful conduct of any kind.
4. Post Employment Obligations. I acknowledge that my obligations to PTC under the Proprietary Information, Invention and Non-Competition Agreement between PTC and me dated as of August 29, 2006, as amended by the Separation Agreement, shall continue in effect following my separation from PTC. I hereby reaffirm my commitment to abide by the terms of such agreement as modified, which is incorporated by reference.
5. Governing Law and Interpretation. This General Release and Covenant Not To Sue shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts without regard to its conflict of laws provisions. Should any provision of this General Release and Covenant Not To Sue be declared illegal or unenforceable by a court of competent jurisdiction and if it cannot be modified to be enforceable, excluding general release language, such provision shall immediately become null and void, leaving the remainder of such agreements in effect.
6. Entire Agreement. The Separation Agreement and its Exhibits, including this General Release and Covenant Not To Sue, and the Proprietary Information, Invention and Non-Competition Agreement as amended set forth the entire agreement between me and the Released Parties. I acknowledge that I have not relied on any representations, promises, or agreements of any kind made to me in connection with my decision to sign this General Release and Covenant Not To Sue, except for those set forth in the Separation Agreement.
7. Right to Revoke. I confirm that I have been advised to consult an attorney and have been provided up to twenty one (21) calendar days to consider this General Release and Covenant Not To Sue before signing it. I further understand that I have the right to revoke this General Release and Covenant Not To Sue at any time during the seven (7) calendar day period following the date on which I sign it. If I want to revoke, I must make a revocation in writing which states: I hereby revoke the General Release and Covenant Not To Sue. This written revocation must be delivered by hand or sent by certified mail with a postmark dated before the end of the seven-day revocation period to: Senior Vice President, PTC Human Resources, Parametric Technology Corporation, 140 Kendrick Street, Needham, MA 02494.
Paul Cunningham
Separation Agreement
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Paul Cunningham |
###-##-#### |
|||||
Name (Please Print) | Social Security Number | |||||
/s/ Paul Cunningham |
4/26/2011 |
|||||
Signature | Date |
Paul Cunningham
Separation Agreement
Page 7
Exhibit B
General Release and Covenant Not To Sue
1. General Release of Claims. I hereby voluntarily release PTC, and any and all of its subsidiaries, branches, divisions, affiliates, insurers, successors, assigns or related entities, as well as its or their present and former officers, directors, trustees, employees and agents, individually and in their official capacities, and their employee benefit plans and programs and their administrators and fiduciaries (collectively, the Released Parties), of and from any and all claims, known and unknown, that I, my heirs, executors, administrators, successors, and assigns, have had or may have as of the date of execution of this General Release and Covenant Not To Sue, including, but not limited to, any alleged violation of any of the following (in each case, as amended):
| Title VII of the Civil Rights Act of 1964; |
| Sections 1981 through 1988 of Title 42 of the United States Code; |
| The Employee Retirement Income Security Act of 1974; |
| The Age Discrimination in Employment Act of 1967 (ADEA); |
| The Immigration and Reform Control Act; |
| The Americans with Disabilities Act of 1990; |
| The Workers Adjustment and Retraining Notification Act; |
| The Sarbanes-Oxley Act; |
| The Fair Credit Reporting Act; |
| The Family and Medical Leave Act of 1993; |
| The Equal Pay Act; |
| The Genetic Information Nondiscrimination Act of 2008; |
| The Massachusetts Fair Employment Practices Act; |
| The Massachusetts State Wage and Hour Laws; |
| The Massachusetts Occupational Safety and Health Laws; |
| The Massachusetts Equal Rights Act; |
| The Massachusetts Civil Rights Act; |
| The Massachusetts Privacy Law; |
| The Massachusetts Sexual Harassment Statute; |
| The Massachusetts Small Necessities Leave Act |
| any other federal, state or local civil or human rights law or any other local, state or federal law, regulation or ordinance; |
| Any claim that PTC or any of the Released Parties or any of their respective current or former managers, officers, owners, executives, employees, directors or supervisors, breached or interfered with any express or implied contract, duty, promise, term or condition towards you; |
| Any claim for promissory estoppel, violation of public policy, infliction of emotional distress, loss of consortium, invasion of privacy, false light, fraud, intentional tort, breach of express or implied contract, or defamation; and/or |
| Any allegation for costs, fees, or other expenses including attorneys fees incurred in these matters. |
Paul Cunningham
Separation Agreement
Page 8
It is agreed and understood that the release does not waive any of the following rights: (a) to the pay or benefits to be provided as set forth in the Separation Agreement between me and PTC dated April 26, 2011 (the Separation Agreement); (b) to enforce the terms of the Separation Agreement; (c) to access any benefit to which I am entitled under PTCs pension and welfare plans or arrangements; (d) to avail myself of any rights to insurance or indemnification that I may have (including with respect to matters that are the subject of this release) under PTCs articles of organization, by-laws or applicable insurance policies, under applicable law, and under any indemnification agreement with PTC; (e) to pursue claims arising after the date hereof, and; (f) to pursue any claims which I may not release pursuant to applicable laws and regulations.
2. Affirmations. I affirm that I have not filed or caused to be filed, and that I am not presently a party to, any claim, complaint, charge or action against PTC in any forum or form. I further affirm that I have been paid and/or have received all compensation, wages, bonuses, commissions, and/or benefits to which I may be due and that no other compensation, wages, bonuses, commissions and/or benefits are due to me, except as provided in the Separation Agreement. I further affirm that I have no known workplace injuries, and that I have been granted any leave to which I was entitled under the Family and Medical Leave Act or related state or local leave or disability accommodation laws. I also affirm that I have not been retaliated against by PTC or its officers. This General Release and Covenant Not To Sue does not limit my right or the right of PTC, as applicable, to participate in or cooperate with an investigative proceeding of any federal, state or local governmental agency, including the United States Equal Employment Opportunity Commission and the Massachusetts Commission Against Discrimination. To the extent permitted by law, I agree that if such an administrative claim is made, I shall not be entitled to recover any individual monetary relief or other individual remedies. I hereby agree that I will not re-apply for employment with PTC.
3. No Admission of Wrongdoing. I agree that neither this General Release and Covenant Not To Sue nor the furnishing of the consideration therefor set forth in the Separation Agreement shall be deemed or construed at any time for any purpose as an admission by the Released Parties of any liability or unlawful conduct of any kind.
4. Post Employment Obligations. I acknowledge that my obligations to PTC under the Proprietary Information, Invention and Non-Competition Agreement between PTC and me dated as of August 29, 2006, as amended by the Separation Agreement, shall continue in effect following my separation from PTC. I hereby reaffirm my commitment to abide by the terms of such amended agreement, which is incorporated by reference.
5. Governing Law and Interpretation. This General Release and Covenant Not To Sue shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts without regard to its conflict of laws provisions. Should any provision of this General Release and Covenant Not To Sue be declared illegal or unenforceable by a court of competent jurisdiction and if it cannot be modified to be enforceable, excluding general release language, such provision shall immediately become null and void, leaving the remainder of such agreements in effect.
6. Entire Agreement. The Separation Agreement and its Exhibits, including this General Release and Covenant Not To Sue, and the Proprietary Information, Invention and Non-Competition Agreement as amended, set forth the entire agreement between me and the Released Parties. I acknowledge that I have not relied on any representations, promises, or agreements of any kind made to me in connection with my decision to sign this General Release and Covenant Not To Sue, except for those set forth in the Separation Agreement.
Paul Cunningham
Separation Agreement
Page 9
7. Right to Revoke. I confirm that I have been advised to consult an attorney and have been provided up to twenty one (21) calendar days to consider this General Release and Covenant Not To Sue before signing it. I further understand that I have the right to revoke this General Release and Covenant Not To Sue at any time during the seven (7) calendar day period following the date on which I sign it. If I want to revoke, I must make a revocation in writing which states: I hereby revoke the General Release and Covenant Not To Sue. This written revocation must be delivered by hand or sent by certified mail with a postmark dated before the end of the seven-day revocation period to: Senior Vice President, PTC Human Resources, Parametric Technology Corporation, 140 Kendrick Street, Needham, MA 02494.
8. Effective Date. This General Release and Covenant Not To Sue and PTCs agreement to pay any bonus under paragraph 4 of the Separation Agreement shall not become effective or enforceable until the expiration of the 7-day revocation period described in Section 7 above.
IN WITNESS WHEREOF, I have executed this Agreement and General Release as of [ ], 2011.
Signed: |
|
Name: |
| |
PRINT FULL NAME |
EXHIBIT C
NON-DISCLOSURE, NON-COMPETITION AND INVENTION
AGREEMENT
In consideration of my employment relationship by Parametric Technology Corporation (herein referred to as PTC), I hereby agree as follows:
1. | I understand that as a result of my employment relationship with PTC, I will be exposed to proprietary and confidential information. Proprietary information is information belonging to PTC and includes, but is not limited to, such information as business, financial and marketing plans associated with the Companys products and/or markets; product documentation; pricing data; customer lists and information; inventions; designs; engineering and manufacturing know-how and processes of PTC and/or its customers; earnings information; PTC business and product plans with outside vendors and cooperative software partners; and personnel information, medical records, and salary data. Confidential information includes any proprietary information that PTC has not made public as well as information provided to PTC from its customers and business partners on a confidential basis. |
2. | I will not disclose at any time during my employment or thereafter directly or indirectly, to any third party or parties, any proprietary or confidential information without prior written approval of PTC or use any such information other than in the course of my employment with PTC. |
3. | I understand that any release (either during or after my employment with PTC) of the above mentioned information or technical data to any destination/individual is deemed an export or reexport by the United States Department of Commerce and may constitute a violation of U.S. Export laws and regulations. I hereby certify that I will not export or reexport, any commodities, software, documentation, or technical data received from PTC or any direct product thereof, directly or indirectly, without obtaining the written authorization to do so from PTC. |
4. | I agree that all data, including drawings, prints, specifications, designs, notes, records, documents, reproductions and other information either furnished by PTC to me or prepared by me in connection with my employment are the sole property of PTC and I will turn over same to PTC upon request and in any such event upon my termination of employment with PTC. |
5. | I agree that any invention, modification, discovery, design, development, improvement, process, software program, work of authorship, documentation, formula, data, technique, know-how, secret or intellectual property right whatsoever, or any interest therein (whether or not patentable or registrable under copyright or similar statutes or subject to analogous protection) (each, a Development) made, conceived or reduced to practice by me alone or in conjunction with others during my employment (i) that relates to products or services of PTC or to customers relationships with PTC, or (ii) the conception, discovery, or reduction to practice of which makes use of premises or intellectual or other property (whether tangible or intangible) owned, leased or contracted for PTC, and the benefits of each Development, shall immediately become the sole and absolute property of PTC and its assigns, and I will promptly disclose to PTC all such Developments. I hereby assign and agree to assign to PTC and its assigns without further compensation any and all rights I have or may in the future acquire in any and all Developments and the benefits and/or rights resulting therefrom, including any and all related patents, copyrights, trademarks and tradenames, and applications therefor in the United States and elsewhere, and I shall communicate, without cost or delay, and without publishing the same, all available information relating thereto (with all necessary plans and models) to PTC. |
6. | I will execute all papers and documents as requested by PTC to apply for United States and foreign patents and copyrights relating to any such inventions, improvements, or discoveries in my name or PTCs name as the case may be, and to vest such title to such patents or copyrights in PTC, or its nominee, at PTCs expense. I also agree, if requested by PTC, to defend and/or give testimony in the event of contested proceedings involving patent application or patents maturing therefrom upon reasonable reimbursement for time so expended. I hereby irrevocably designate and appoint PTC and its duly authorized officers and agents as my agent and attorney-in-fact, for |
and in my behalf and stead, in the event PTC is unable, after reasonable effort, to secure my signature on any letters patent, copyrights or other analogous protection relating to a Development, whether because of my physical or mental incapacity or for any other reason whatsoever, to execute and file any such application or applications and to do all other lawfully permitted acts or further the prosecution thereon with the same legal force and effect as if executed by me, provided, however, that, if I notified PTC in writing in advance of my objection to the use of my signature on any specific application or applications, the designation and appointment contained herein shall be void and ineffective with regard to such application or applications. |
7. | I agree that the obligations imposed herein upon me shall survive the termination of my employment, and further agree that for a period of one (1) year after the termination of my employment with PTC (whether voluntary or involuntary), I shall not either directly or indirectly, whether individually or as principal, agent, officer, director, employee, consultant, partner, member or shareholder (other than as the passive holder of less than 5% of the shares of a publicly traded company) of any firm, corporation or other entity or group or otherwise, alone or in association with any other individual, firm, corporation or other entity or group: |
(i) | Make known to any person, firm or corporation the names and addresses of any of the customers of PTC or any other information pertaining to them. |
(ii) | Solicit, divert or take away, or attempt to divert or take away, the business or patronage of any of the clients, customers or accounts, or prospective clients, customers or accounts, of PTC, whether or not they were contacted, solicited or served by me while I was employed by PTC. |
(iii) | Engage in developing, offering, selling, or providing, or attempting to develop, offer, sell, or provide, directly or indirectly, to any person located anywhere in the world, any (A) products, technology, or the intellectual property rights thereto, or (B) services, in either case, that are the same as or similar to, or otherwise competing with, the products, technology or services provided or proposed to be provided by PTC. |
(iv) | Interfere with the business of PTC in any manner including the recruiting or hiring of any employee of PTC or ex-employee whose employment with PTC was terminated less than one (1) year prior to the date of such interference. |
8. | I understand that the restrictions imposed by Section 7 are necessary to protect PTCs trade secrets, proprietary information, confidential information, know-how, business and goodwill. I agree that, in light of PTCs globally competitive business and my role within PTC, the non-competition agreement in Section 7 is reasonable in duration, geographical area and scope. I acknowledge that the provisions hereof are legally enforceable, and that they are a material term of my employment relationship with PTC such that PTC would not have entered into this transaction absent this agreement. |
9. | I understand that I may terminate the employment relationship at any time upon not less than fourteen (14) days notice. PTC agrees that it may terminate the employment at any time upon not less than 14 days notice unless the termination is for cause, in which case no notice shall be required. |
10. | This Agreement shall be binding upon the parties, their heirs, executors, administrators, legal representatives, successors and assigns. |
11. | This Agreement shall be governed and construed in accordance with the laws of the Commonwealth of Massachusetts. |
12. | I recognize that any violation by me of the provisions of the Agreement would cause PTC irreparable damage for which other remedies would be inadequate, and I therefore agree that PTC shall have the right to obtain, in addition to all other remedies, such injunctive and other equitable |
relief from a court of competent jurisdiction as may be necessary or appropriate to prevent any violation of this Agreement, without the need for proving damages or posting any bond. I further agree that should I violate any obligation imposed on me in Section 7, I shall continue to be bound by that obligation until a period equal to the term of such obligation has expired without violation of such obligation. |
13. | All headings and subdivision of this Agreement are for reference only and shall not affect its interpretation. If any provision of this Agreement shall be held or deemed to be invalid, inoperative or unenforceable in any jurisdiction or jurisdictions, for any reason, such circumstance shall not have the effect of rendering the provision in question unenforceable in any other jurisdiction or in any other case or circumstance or of rendering any other provision hereof unenforceable, but this Agreement shall be reformed and construed in any such jurisdiction or case as if such invalid, inoperative, or unenforceable provision had never been contained herein and such provision shall be deemed reformed so that it would be enforceable to the maximum extent permitted in such jurisdiction or in such case. |
IN WITNESS WHEREOF, the parties have hereunto affixed their hands and seals this 29 day of August, 2006.
Parametric Technology Corporation | Paul J. Cunningham | |||||||
By: | /s/ C. Richard Harrison |
/s/ Paul J. Cunningham |
||||||
C. Richard Harrison | Signature |
Schedule 1 To
Exhibit C
Amendment to Non-Disclosure, Non-Competition and Invention Agreement dated August 29, 2006
(the NDA)
Parametric Technology Corporation (PTC) and Paul J. Cunningham (Employee) hereby agree that the NDA refrenced above shall be amended as follows:
1. | Section 7 of the NDA is hereby deleted and replaced with the following: |
7. I agree that the obligations imposed herein upon me shall survive the termination of my employment, and further agree that commencing on April 27, 2011 and continuing for a period of one (1) year after the termination of my employment with PTC (whether voluntary or involuntary), I shall not either directly or indirectly, whether individually or as principal, agent, officer, director, employee, consultant, partner, member or shareholder (other than as the passive holder of less than 5% of the shares of a publicly traded company) of any firm, corporation or other entity or group or otherwise, alone or in association with any other individual, firm, corporation or other entity or group:
(i) | Make known to any person, firm or corporation the names and addresses of any of the customers of PTC or any other information pertaining to them. |
(ii) | Solicit, divert or take away, or attempt to divert or take away, the business or patronage of any of the clients, customers or accounts, or prospective clients, customers or accounts, of PTC, whether or not they were contacted, solicited or served by me while I was employed by PTC. |
(iii) | On behalf of or for the benefit of SAP AG, Oracle Corp., Siemens AG, Dassault Systemes, Autodesk Inc., SpaceClaim Inc., or MKS, Inc., or any of their subsidiaries or any affiliates of or successor to any of the foregoing, engage in developing, offering, selling, or providing, or attempting to develop, offer, sell, or provide, directly or indirectly, to any person located anywhere in the world, any (A) products, technology, or the intellectual property rights thereto, or (B) services, in either case, that are the same as or similar to, or otherwise competing with, the products, technology or services provided or proposed to be provided by PTC. |
(iv) | Interfere with the business of PTC in any manner including the recruiting or hiring of any employee of PTC or ex-employee whose employment with PTC was terminated less than one (1) year prior to the date of such interference. |
Executed as of the 26th day of April, 2011.
Parametric Technology Corporation | Paul J. Cunningham | |||||||
By: | /s/ James Heppelmann |
/s/ Paul J. Cunningham |
||||||
James Heppelmann | Signature |
Exhibit 10.3
EXECUTIVE AGREEMENT
This Executive Agreement dated as of [date] is by and between Parametric Technology Corporation, a Massachusetts corporation (the Company), and [executive] (the Executive).
WHEREAS, the Executive is [title]; and
WHEREAS, the Company wishes to make the following arrangements with the Executive concerning certain payments and benefits to be provided to the Executive if his employment with the Company is terminated without Cause or if certain other events specified herein occur;
NOW, THEREFORE, the Company and the Executive hereby agree as follows:
1. | Definitions. |
For the purposes of this Agreement:
(a) Board means the Companys board of directors.
(b) Code means the U.S. Internal Revenue Code of 1986, as amended.
(c) Cause means
(i) the Executives willful and continued failure to substantially perform his duties to the Company (other than any such failure resulting from the Employees incapacity due to physical or mental illness), provided that the Company has delivered a written demand for performance to the Executive specifically identifying the manner in which the Company believes that the Executive has not substantially performed his duties and the Executive does not cure such failure within thirty (30) days after such demand;
(ii) willful conduct by the Executive which is demonstrably and materially injurious to the Company;
(iii) the Executives conviction of, or pleading of guilty or nolo contendere to, a felony;
(iv) the Executives entry in his personal capacity into a consent decree relating to the business of the Company with any government body; or
(v) the Executives willful violation of any material provision of his Non-Disclosure, Non-Competition and Invention Agreement with the Company; provided that, if such violation is able to be cured, the Executive has not, within thirty (30) days after written demand by the Company, cured such violation.
For purposes of this definition, no act or failure to act on the Executives part shall be deemed willful unless done or omitted to be done by the Executive not in good faith and without reasonable belief that his action or omission was in the best interests of the Company.
(d) Change in Control means the occurrence of any of the following events:
(i) any person, as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act) (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of stock in the Company) is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Companys then outstanding securities (other than as a result of acquisitions of such securities from the Company);
(ii) individuals who, as of the date hereof, constitute the Board (the Incumbent Board) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Companys stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company) shall be, for purposes of this Agreement, considered to be a member of the Incumbent Board;
(iii) the consummation of a merger, share exchange or consolidation of the Company or any subsidiary of the Company with any other entity (each a Business Combination), other than (A) a Business Combination that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of another entity) beneficial ownership, directly or indirectly, of a majority of the combined voting power of the Company or the surviving entity (including any person that, as a result of such transaction, owns all or substantially all of the Companys assets either directly or through one or more subsidiaries) outstanding immediately after such Business Combination or (B) a merger, share exchange or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (as defined above) is or becomes the beneficial owner of fifty percent (50%) or more of the combined voting power of the Companys then outstanding securities; or
(iv) the stockholders of the Company approve (A) a plan of complete liquidation of the Company; or (B) an agreement for the sale or disposition by the Company of all or substantially all of the Companys assets but excluding a sale or spin-off of a product line, business unit or line of business of the Company if the remaining business is significant as determined by the Companys board of directors in its sole discretion.
(e) Change in Control Termination means any of the following terminations of the Executives employment:
(i) termination of the Executives employment by the Company during the period from the date of a Change in Control through the second anniversary thereof, other than for Cause or as a result of the Executives Disability;
(ii) resignation by the Executive for Good Reason during the period from the date of a Change in Control through the second anniversary thereof; or
(iii) termination of the Executives employment by the Company within one hundred eighty (180) days prior to a Change in Control, other than for Cause or as a result of the Executives Disability, if it is reasonably demonstrated by the Executive that such termination of employment (A) was at the request of a third party that has taken steps reasonably calculated to effect the Change in Control or (B) was otherwise related to or in anticipation of the Change in Control. A Change in Control Termination under this Section 1(e)(iii) shall be deemed to have occurred if and when the Change in Control occurs.
(f) Disability means such physical or mental incapacity as to make the Executive unable to perform the essential functions of his employment duties for a period of at least sixty (60) consecutive days with or without reasonable accommodation. If any question shall arise as to whether during any period the Executive is so disabled as to be unable to perform the essential functions of his employment duties with or without reasonable accommodation, the Executive may, and at the request of the Company shall, submit to the Company a certification in reasonable detail by a physician selected by the Company to whom the Executive or the Executives guardian has no reasonable objection as to whether the Executive is so disabled or how long such disability is expected to continue, and such certification shall for the purposes of this Agreement be conclusive of the issue. The Executive
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shall cooperate with any reasonable request of the physician in connection with such certification. If such question shall arise and the Executive shall fail to submit such certification, the Companys determination of such issue shall be binding on the Executive.
(g) Good Reason means the occurrence, without the Executives consent and without Cause, of any of the following events after or in connection with a Change in Control (provided that the Executive shall have given the Company written notice describing such event within ninety (90) days of its initial existence and the matter shall not have been fully remedied by the Company within thirty (30) days after receipt of such notice):
(i) any reduction of the Executives annual base salary or target bonus as in effect at the date of the Change in Control; provided that any such reduction (not exceeding fifteen percent (15%) of either (A) such base salary or (B) the sum of such base salary and such target bonus) that is consistent with similar actions taken with respect to the base salaries and/or target bonuses of the other senior executives of the Company shall not constitute Good Reason;
(ii) any material reduction in the aggregate benefits for which the Executive is eligible under the Companys benefit plans, including medical, dental, vision, basic life insurance, retirement, paid time off, long-term disability and short-term disability plans; provided that any such reduction or other action that is consistent with similar actions taken with respect to comparable benefits of the Company employees generally shall not constitute Good Reason;
(iii) a material diminution in the substantive responsibilities or the scope of the Executives position, taking into consideration, without limitation, the dollar amount of the budget and the number of employees for which the Executive has responsibility (and a reduction of more than ten percent (10%) in such dollar amount or such number from that which was applicable at the date of the Change in Control shall be deemed a material diminution unless it is comparable to similar reductions then applicable to the Companys executive officers generally);
(iv) any breach by the Company of its material obligations under this Agreement;
(v) any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company; or
(vi) any requirement that the Executive relocate to a primary work site that would increase the Executives one-way commute distance by more than fifty (50) miles from the Executives then principal residence.
(h) Stock Plan means any stock option or equity compensation plan of the Company in effect at any time, including without limitation the 2000 Equity Incentive Plan.
2. | Termination of Employment without Cause. |
If the Company terminates the Executives employment without Cause, other than a termination constituting a Change in Control Termination or a termination due to his Disability, the Executive shall be entitled to the following:
(a) a lump sum payment in an amount equal to one times the highest annual salary (excluding any bonuses) in effect with respect to the Executive during the six-month period immediately preceding the termination date, payable within forty-five (45) days after the termination date; and
(b) continued participation in the Companys medical, dental, vision and basic life insurance benefit plans (the Benefit Plans), subject to the terms and conditions of the respective plans and applicable law, for a period of one year following the termination date; provided that, to the extent that any of the Benefit Plans does not
3
permit such continuation of the Executives participation following his termination or any such plan is terminated, the Company shall pay the Executive an amount which is sufficient for him to purchase equivalent benefits, such amount to be paid quarterly in advance; provided further, however, that to the extent the Executive becomes eligible to receive medical, dental, vision and/or basic life insurance benefits under a plan provided by another employer, the Executives entitlement to participate in the corresponding Benefit Plans or to receive such corresponding alternate payments shall cease as of the date the Executive is eligible to participate in such other plan, and the Executive shall promptly notify the Company of his eligibility under such plan.
3. | Change in Control. |
(a) Equity Awards. Effective upon a Change in Control that occurs during the Executives employment, except as provided in Section 3(b), the following shall occur:
(i) any performance criteria applicable to any stock options, stock appreciation rights, restricted stock units, restricted stock or other equity awards issued under any Stock Plan and held by the Executive shall be deemed to have been met in full;
(ii) any of the restrictions on any shares of restricted stock issued under any Stock Plan and held by Executive that are scheduled by their terms (after giving effect to clause (i) of this Section 3(a)) to lapse after the second anniversary of the Change in Control shall lapse immediately so that the portion of such shares formerly subject to such restrictions shall become unrestricted (and any such restrictions that are scheduled by their terms to lapse on or before the second anniversary of the Change in Control shall remain unchanged except as provided in clause (i));
(iii) any other equity awards (including without limitation any stock options, stock appreciation rights and restricted stock units) issued under any Stock Plan and held by Executive that are scheduled by their terms (after giving effect to clause (i) of this Section 3(a)) to vest after the second anniversary of the Change in Control shall vest immediately and become exercisable or distributable (and any such awards that are scheduled by their terms to vest on or before the second anniversary of the Change in Control shall remain unchanged except as provided in clause (i) of this Section 3(a)); provided that if any such stock option, stock appreciation right, restricted stock unit or other equity award is not assumed or a cash payment of equivalent value is not substituted therefor (in either case with vesting terms no more restrictive than those of the assumed or substituted award) by any acquirer of or successor to the Company, then such stock option, stock appreciation right, restricted stock unit or other equity award shall become vested and exercisable in full upon such Change in Control; and
(iv) each outstanding equity award held by the Executive shall be deemed amended automatically to provide that, notwithstanding any provision of any Stock Plan, no outstanding share of restricted stock, stock option, stock appreciation right, restricted stock unit or other equity award held by the Executive may be terminated or forfeited without the Executives written consent (provided that this shall not prevent termination of (A) any unvested portion thereof that is terminated or forfeited upon termination of the Executives employment as provided in any agreement or certificate executed in connection with any such equity award, (B) a stock option the termination of which is covered by Section 8(i) of the Companys 2000 Equity Incentive Plan, or (C) upon payment of a cash payment equivalent to the value of such terminated award).
The foregoing notwithstanding, this Section 3(a) shall not apply to any shares of restricted stock, restricted stock units or other equity awards granted to the Executive as an incentive bonus under any of the Companys short-term incentive programs which are subject to performance criteria with a performance period of one year or less and time-based vesting with an original vesting term of less than fifteen (15) months (collectively, Bonus Equity), which shall be treated as provided in Section 3(b)(ii).
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(b) Bonus. Effective upon (x) a Change in Control that occurs during the Executives employment or (y) a Change in Control Termination under Section 1(e)(iii):
(i) the Executive shall be entitled to payment of a pro-rata portion of any annual cash incentive award for which the Executive is eligible for the fiscal year in which the Change in Control occurs, based on the Executives target cash bonus for such year and the percentage of the year completed through the date of the Change in Control, for the purposes of which any performance criteria applicable to such award shall be deemed to have been met in full, which payment shall be made in one lump sum within forty-five (45) days of the date of the Change in Control; and
(ii) the vesting schedule applicable to any Bonus Equity held by the Executive shall be amended automatically so that a pro-rata portion of any such Bonus Equity equal to the percentage of the respective fiscal year completed through the date of the Change in Control shall thereupon be vested and subject to no further restrictions, exercisable or distributable, as the case may be, and the portion not so vested shall thereupon automatically be cancelled and forfeited to the Company.
(c) Change in Control Termination Benefits.
(i) Equity Awards. Effective upon a Change in Control Termination, the following shall occur:
(A) all outstanding stock options, stock appreciation rights, restricted stock units and other equity awards issued under any Stock Plan and held by the Executive (other than any Bonus Equity) shall immediately become vested and exercisable or distributable in full; and
(B) all restrictions applicable to restricted stock issued under any Stock Plan and held by the Executive (other than any Bonus Equity) shall immediately lapse.
(ii) Make-Up Payment. Effective upon a Change in Control Termination under Section 1(e)(iii), the Company shall pay the Executive in a lump sum the amount equal to the sum of:
(x) the excess, if any, of (A) the product of (1) the number of additional shares of the Companys Common Stock that either were subject to options, stock appreciation rights or other awards that would have become vested and exercisable and/or were restricted stock or restricted stock units as to which the restrictions would have lapsed, in each case solely as a result of Section 3(c)(i), and for which the Executive would have been entitled to receive consideration in the Change in Control (on the same basis as other holders of Common Stock), had the Executive remained employed on the date of the Change in Control and was deemed to have exercised all the stock options that would then have become exercisable under Section 3(c)(i)(A) times (2) the amount per share of the Companys Common Stock (if any) received by the Companys stockholders generally pursuant to the Change in Control (the Shareholder Price) over (B) the aggregate exercise price of all such additional stock options that the Executive would then have become able to exercise upon the Change in Control as a result of Section 3(c)(i)(A) (whereupon all such stock options, stock appreciation rights, and other awards shall terminate and shall no longer be exercisable); and
(y) the excess, if any, of (A) the product of (1) the number of shares of the Companys Common Stock that the Executive (a) held on the date of termination of his employment or acquired upon exercise of stock options held on such date and (b) sold before the consummation of the Change in Control (the Pre-Sold Shares) times (2) the Shareholder Price over (B) the aggregate amount received by the Executive in the sale(s) of the Pre-Sold Shares.
The Company shall pay this lump sum payment within forty-five (45) days following the Executives termination date.
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(iii) Salary, Bonus and Benefits. Effective upon a Change in Control Termination, the Executive shall be entitled to the following:
(A) a lump sum payment in an amount equal to one times his base salary plus his target bonus, such salary to be the highest annual salary (excluding any bonuses) in effect with respect to the Executive during the six-month period immediately preceding the Executives termination and such target bonus to be the highest target bonus in effect with respect to the Executive for (1) the fiscal year in which the Change in Control occurs, (2) the fiscal year following the year in which the Change in Control occurs, or (3) the fiscal year in which the Change in Control Termination occurs, whichever is highest, payable within forty-five (45) days after the termination date; and
(B) continued participation in the Benefit Plans, subject to the terms and conditions of the respective plans and applicable law, for a period of one year following the termination date; provided that, to the extent that any of the Benefit Plans does not permit such continuation of the Executives participation following his termination or any such plan is terminated, the Company shall pay the Executive an amount which is sufficient for him to purchase equivalent benefits, such amount to be paid quarterly in advance; provided, further, however, that to the extent the Executive becomes eligible to receive medical, dental, vision and/or basic life insurance benefits under a plan provided by another employer, the Executives entitlement to participate in the corresponding Benefit Plans or to receive such corresponding alternate payments shall cease as of the date the Executive is eligible to participate in such other plan, and the Executive shall promptly notify the Company of his eligibility under such plan.
(iv) Payments and benefits under this Section 3(c) shall be in lieu and without duplication of any amounts or benefits under Section 2, and the Executive shall be entitled to any such payments and benefits for no more than one year even if both such sections apply. If, in the event of a Change in Control Termination under Section 1(c)(iii), the Executive becomes entitled to payments under this Section 3(c) after he has begun to receive payments under Section 2, he shall be entitled to a make-up payment to ensure that he receives the higher amount payable hereunder, with such make-up payment being made within forty-five (45) days following the Change in Control Termination.
(d) Deemed Amendment of Equity Awards. The Company and the Executive hereby agree that the agreements evidencing any equity awards to the Executive are hereby and will be deemed amended to give effect to the provisions of Sections 3 and 4 of this Agreement.
4. | Death or Disability. |
Effective upon termination of the Executives employment due to his death or by the Company due to his Disability, the following shall occur:
(a) all performance criteria applicable to any stock options, stock appreciation rights, restricted stock units, restricted stock or other equity awards issued under any Stock Plan and held by the Executive shall be deemed to have been met in full;
(b) all outstanding stock options, stock appreciation rights, restricted stock units and other equity awards issued under any Stock Plan shall immediately become vested and exercisable or distributable in full; and
(c) all restrictions applicable to restricted stock issued under any Stock Plan and held by the Executive shall immediately lapse;
(d) provided that this Section 4 shall not apply to any Bonus Equity.
5. | Certain Payments to Specified Employees. |
Notwithstanding anything to the contrary in this Agreement, if the Executive is a specified employee within the meaning of Code Section 409A(a)(2)(B)(i) at the time of the Executives separation from service with the
6
Company (in connection with a Change in Control Termination or otherwise), no payment or benefit payable or provided to the Executive pursuant to this Agreement that constitutes an item of deferred compensation under Code Section 409A and becomes payable by reason of the Executives termination of employment with the Company will be paid or provided to the Executive prior to the earlier of (i) the expiration of the six (6) month period following the date of the Executives separation from service (as such term is defined by Code Section 409A and the regulations promulgated thereunder), or (ii) the date of the Executives death, but only to the extent such delayed commencement is otherwise required in order to avoid a prohibited distribution under Code Section 409A(a)(2). The payments and benefits to which the Executive would otherwise be entitled during the first six (6) months following his separation from service shall be accumulated and paid or provided, as applicable, in a lump sum, on the date that is six (6) months and one day following the Executives separation from service (or if such date does not fall on a business day of the Company, the next following business day) and any remaining payments or benefits will be paid in accordance with the normal payment dates specified for them herein.
6. | Taxes. |
(a) Withholding. All payments to be made to the Executive under this Agreement will be subject to any required withholding of federal, state and local income and employment taxes. In addition, the Company may withhold from any payments hereunder any amounts attributable to withholding taxes applicable to the vesting of or lapse of restrictions on restricted stock or restricted stock units held by the Executive or the exercise of any nonqualified stock options held by the Executive, including, in its discretion withholding from any shares deliverable to the Executive such number of shares as the Company determines is necessary to satisfy such tax obligations, valued at their fair market value (determined pursuant to the respective Company equity compensation plan) as of the date of such vesting or lapse of restrictions.
(b) Limitations on Payments.
(i) If it is determined that any payment, benefit or distribution provided for in this Agreement or otherwise (for the purposes of this Section 6(b), each, a Payment and collectively, the Payments) from the Company to or for the benefit of the Executive (x) constitutes a parachute payment within the meaning of Section 280G of the Code and (y) but for this subsection (b), would be subject to the excise tax imposed by Section 4999 of the Code (the Excise Tax), such Payments shall be either:
(A) delivered in full, or
(B) delivered to such lesser extent that would result in no portion of the Payments being subject to the Excise Tax,
whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the Excise Tax, results in the receipt by the Executive on an after tax basis, of the greatest amount of Payments, notwithstanding that all or some portion of the Payments may be taxable under Section 4999 of the Code. Unless the Company and Executive otherwise agree in writing, any determination required under this Section 6(b)(i) shall be made in writing in good faith by an independent accounting firm selected by the Company, whose determinations shall be binding upon the Company and the Executive (the Accountants), in good faith consultation with the Executive.
(ii) In the event a reduction in the Payments is required hereunder, the Company shall promptly give the Executive notice to that effect and the Executive may then determine, in his sole discretion, which and how much of the Payments shall be eliminated or reduced (as long as, after such election, none of the Payments are subject to the Excise Tax), and shall advise the Company in writing of his election within ten (10) days of his receipt of the Companys notice. If no such election is made by the Executive within such period, the Company may determine which and how much of the Payments shall be eliminated or reduced (as long as, after such determination, none of the Payments are subject to the Excise Tax) and shall notify the Executive promptly of such determination.
7
(iii) For purposes of making the calculations required by this Section 6(b), the Accountants may make reasonable assumptions and approximations concerning the application taxes and may rely on reasonable good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Executive shall furnish to the Accountants such information and documents as the Accountants may reasonable request in order to make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 6(b).
(iv) If the Payments are reduced to avoid the Excise Tax pursuant to Section 6(b)(i) hereof and notwithstanding such reduction, the IRS determines that the Executive is liable for the Excise Tax as a result of the receipt of Payments from the Company, then the Executive shall be obligated to pay to the Company (the Repayment Obligation) an amount of money equal to the Repayment Amount. The Repayment Amount shall be the smallest such amount, if any, as shall be required to be paid to the Company so that the Executives net proceeds with respect to the Payments (after taking into account the payment of the Excise Tax imposed on such benefits) shall be maximized. Notwithstanding the foregoing, the Repayment Amount shall be zero if a Repayment Amount of more than zero would not eliminate the Excise Tax in accordance with the principles of Section 6(b)(i). If the Excise Tax is not eliminated through the performance of the Repayment Obligation, the Executive shall pay the Excise Tax. The Repayment Obligation shall be discharged within 30 days of either (A) the Executives entering into a binding agreement with the IRS as to the amount of Excise Tax liability, or (B) a final determination by the IRS or a court decision requiring the Executive to pay the Excise Tax from which no appeal is available or is timely taken.
7. | Term. |
Unless the Executives employment is earlier terminated, this Agreement shall continue in effect until 11:59 p.m. on September 30, 2011 and shall automatically renew thereafter on an annual basis for additional twelve-month terms unless either party provides written notice to the other party of non-renewal at least ninety (90) days prior to the expiration of the then current term. If a Change in Control occurs while this Agreement is in effect, the term of this Agreement shall automatically be extended to the second anniversary of the Change in Control. Upon the termination of this Agreement, the respective rights and obligations of the parties shall survive to the extent necessary to carry out the intentions of the parties as embodied herein.
8. | Successors and Assigns. |
(a) This Agreement is personal to the Executive and is not assignable by the Executive, other than by will or the laws of descent and distribution, without the prior written consent of the Company.
(b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.
(c) The Company will require any successor or acquirer (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, Company shall mean the Company as defined above and any successor to or acquirer of its business and/or assets that assumes and agrees to perform this Agreement.
8
9. | No Duty to Mitigate. |
In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as contemplated by Sections 2(b) and 3(c)(iii)(B) hereof, any benefits payable to the Executive hereunder shall not be subject to reduction for any compensation received from other employment.
10. | Conditions to Payment of Severance. |
Notwithstanding any other provision of this Agreement, the Executives entitlement to receive any of the payments and other benefits contemplated by Sections 2, 3 or 4 (with respect to Disability) hereof shall be contingent upon:
(a) execution by the Executive within forty-five (45) days of the termination of a general release in substantially the form of Appendix A hereto (the Release), which has not subsequently been revoked, and the Executive hereby acknowledges and agrees that the Companys entering into this Agreement and agreement to make such payments are and shall be good and sufficient consideration for such Release; and
(b) the Executives continued compliance with the material terms of this Agreement, as applicable, and those of his Non-Disclosure, Non-Competition and Invention Agreement with the Company.
11. | Miscellaneous. |
(a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, except any such laws that would render such choice of law ineffective.
(b) Compliance with Section 409A. This Agreement is intended, to the extent applicable, to constitute good faith compliance with the requirements of Section 409A of the Code. The Company and the Executive agree that they shall cooperate in good faith to amend any provision hereof to the extent required to maintain compliance with the provisions of Section 409A of the Code as they may be modified hereafter (including by subsequent regulations or other guidance of the Internal Revenue Service).
(c) Amendment. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.
(d) Partial Invalidity. If any provision in this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remaining provisions will nevertheless continue in full force without being impaired or invalidated in any way.
(e) Entire Agreement; Effect of Current Agreement. This Agreement constitutes the entire understanding and agreement between the parties hereto with regard to the compensation and benefits payable to the Executive in the respective circumstances described herein, superseding all prior understandings and agreements, whether oral or written.
(f) Expenses. The Company agrees to pay as incurred and within twenty (20) days after submission of supporting documentation, to the full extent permitted by law, all legal fees and expenses the Executive may reasonably incur as a result of any contest by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement) with respect to which the Executive is successful on the merits, plus, in each case, interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code. The Companys payment of any eligible expenses must be made no later than December 31 of the year after the year in which the expense was incurred.
9
(g) Notices. All notices and other communications hereunder shall be in writing and shall be delivered by hand delivery, by a reputable overnight courier service, or by registered or certified mail, return receipt requested, postage prepaid. Notice to the Executive shall be addressed to the Executive at his last address contained in the records of the Company, and notice to the Company shall be addressed to:
Parametric Technology Corporation
140 Kendrick Street
Needham, MA 02494
Attention: General Counsel
Notice shall be addressed to such other address as either party shall have furnished to the other in writing in accordance herewith. Any notice or communication shall be deemed to be delivered upon the date of hand delivery, one day following delivery to an overnight courier service, or three days following mailing by registered or certified mail.
EXECUTED as of the date first written above.
PARAMETRIC TECHNOLOGY CORPORATION | [EXECUTIVE] | |||||
By: |
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Title: |
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10
EXHIBIT 31.1
CERTIFICATION
I, James E. Heppelmann, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Parametric Technology Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: August 10, 2011 | /S/ JAMES E. HEPPELMANN | |||
James E. Heppelmann | ||||
President and Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION
I, Jeffrey D. Glidden, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Parametric Technology Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: August 10, 2011 | /S/ JEFFREY D. GLIDDEN | |||
Jeffrey D. Glidden | ||||
Executive Vice President and Chief Financial Officer |
EXHIBIT 32
Certification of Periodic Financial Report
Pursuant to 18 U.S.C. Section 1350
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Parametric Technology Corporation (the Company) certifies that, to his knowledge, the Quarterly Report on Form 10-Q of the Company for the quarter ended July 2, 2011 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in that Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 10, 2011 | /S/ JAMES E. HEPPELMANN | |||
James E. Heppelmann President and Chief Executive Officer | ||||
Date: August 10, 2011 | /S/ JEFFREY D. GLIDDEN | |||
Jeffrey D. Glidden | ||||
Executive Vice President and Chief Financial Officer |
Income Taxes (Summary Of Income Tax Examinations Years) (Details)
|
9 Months Ended |
---|---|
Jul. 02, 2011
|
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United States [Member]
|
|
Income tax years subject to examination | 2003, 2008 through 2010 |
Germany [Member]
|
|
Income tax years subject to examination | 2007 through 2010 |
France [Member]
|
|
Income tax years subject to examination | 2007 through 2010 |
Japan [Member]
|
|
Income tax years subject to examination | 2005 through 2010 |
Ireland [Member]
|
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Income tax years subject to examination | 2006 through 2010 |
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Per Share data |
Jul. 02, 2011
|
Sep. 30, 2010
|
---|---|---|
Consolidated Balance Sheets | ||
Allowance for doubtful accounts receivable | $ 4,113 | $ 4,559 |
Preferred stock, par value | $ 0.01 | $ 0.01 |
Preferred stock, shares authorized | 5,000 | 5,000 |
Preferred stock, shares issued | 0 | 0 |
Common stock, par value | $ 0.01 | $ 0.01 |
Common stock, shares authorized | 500,000 | 500,000 |
Common stock, shares issued | 117,517 | 115,826 |
Common stock, shares outstanding | 117,517 | 115,826 |
Consolidated Statements Of Operations (USD $)
In Thousands, except Per Share data |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Jul. 02, 2011
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Jul. 03, 2010
|
Jul. 02, 2011
|
Jul. 03, 2010
|
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Revenue: | ||||
License | $ 81,431 | $ 67,498 | $ 231,119 | $ 206,958 |
Service | 210,352 | 175,500 | 596,405 | 535,025 |
Total revenue | 291,783 | 242,998 | 827,524 | 741,983 |
Costs and expenses: | ||||
Cost of license revenue | 7,617 | 7,621 | 20,129 | 24,000 |
Cost of service revenue | 82,792 | 67,090 | 238,112 | 206,548 |
Sales and marketing | 89,106 | 79,121 | 254,790 | 232,856 |
Research and development | 51,103 | 50,597 | 155,676 | 151,247 |
General and administrative | 31,882 | 22,755 | 80,078 | 69,633 |
Amortization of acquired intangible assets | 4,753 | 3,836 | 12,873 | 11,869 |
Total costs and expenses | 267,253 | 231,020 | 761,658 | 696,153 |
Operating income | 24,530 | 11,978 | 65,866 | 45,830 |
Interest and other (expense) income, net | (6,271) | (320) | (8,979) | (1,449) |
Income before income taxes | 18,259 | 11,658 | 56,887 | 44,381 |
Provision for income taxes | 2,733 | 940 | 9,084 | 6,798 |
Net income | $ 15,526 | $ 10,718 | $ 47,803 | $ 37,583 |
Earnings per share-Basic | $ 0.13 | $ 0.09 | $ 0.41 | $ 0.32 |
Earnings per share-Diluted | $ 0.13 | $ 0.09 | $ 0.39 | $ 0.31 |
Weighted average shares outstanding-Basic | 118,214 | 115,188 | 117,622 | 115,802 |
Weighted average shares outstanding-Diluted | 121,164 | 119,003 | 121,149 | 119,996 |
Derivative Financial Instruments (Tables)
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9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jul. 02, 2011
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Derivative Financial Instruments | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Notional Amounts Of Outstanding Forward Contracts |
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Net Gains And Losses On Foreign Currency Exposures |
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Document And Entity Information
|
9 Months Ended | |
---|---|---|
Jul. 02, 2011
|
Aug. 04, 2011
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Document And Entity Information | ||
Document Type | 10-Q | |
Amendment Flag | false | |
Document Period End Date | Jul. 02, 2011 | |
Entity Registrant Name | PARAMETRIC TECHNOLOGY CORP | |
Entity Central Index Key | 0000857005 | |
Current Fiscal Year End Date | --09-30 | |
Document Fiscal Year Focus | 2011 | |
Document Fiscal Period Focus | Q3 | |
Entity Filer Category | Large Accelerated Filer | |
Entity Common Stock, Shares Outstanding | 117,565,519 |
Income Taxes (Narrative) (Details) (USD $)
|
3 Months Ended | 9 Months Ended | 12 Months Ended | ||
---|---|---|---|---|---|
Jul. 02, 2011
|
Jul. 03, 2010
|
Jul. 02, 2011
|
Jul. 03, 2010
|
Sep. 30, 2010
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Income Taxes | |||||
Effective income tax rate | 15.00% | 8.00% | 16.00% | 15.00% | |
Income before income taxes | $ 18,259,000 | $ 11,658,000 | $ 56,887,000 | $ 44,381,000 | |
Statutory Federal income tax rate | 35.00% | 35.00% | 35.00% | ||
Tax benefit related to research and development | 1,800,000 | ||||
Unrecognized tax benefit | 18,300,000 | 18,300,000 | 15,900,000 | ||
Unrecognized tax benefits, net of state tax benefits | 18,000,000 | 15,600,000 | |||
Income tax provision upon recognition of unrecognized tax benefit | 17,400,000 | 17,400,000 | |||
Income tax interest expenses | 200,000 | 800,000 | |||
Income tax penalty | 0 | ||||
Income tax accrued interest | 1,900,000 | 1,900,000 | 1,000,000 | ||
Income tax accrued penalty | 0 | ||||
Income tax refund interest receivable | 700,000 | ||||
Decreases in unrecognized tax benefits due to settlements of tax audit within 12 months | $ 5,000,000 | $ 5,000,000 |
Deferred Revenue And Financing Receivables (Details) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | 9 Months Ended | 12 Months Ended | |
---|---|---|---|---|
Jul. 02, 2011
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Jul. 02, 2011
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Jul. 03, 2010
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Sep. 30, 2010
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Maximum payment terms on software purchases for credit-worthy customers (in months) | 36 | |||
Amounts due from customers for contracts with extended payment terms | $ 56.2 | $ 56.2 | $ 44.3 | |
Sale of finance receivable | 4.0 | 4.0 | 19.6 | |
Reserve for credit losses | 0 | 0 | 0 | |
Uncollectible financing receivables written off | 0 | 0 | 0 | |
Accounts Receivable [Member]
|
||||
Current receivables from contracts | 46.2 | 46.2 | 27.2 | |
Other Assets [Member]
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||||
Billed but uncollected maintenance receivable | 83.4 | 83.4 | 76.8 | |
Long-term receivables from contracts | $ 10.0 | $ 10.0 | $ 17.1 |
Segment Information (Revenue By Geographic Segment) (Details) (USD $)
In Thousands |
3 Months Ended | 9 Months Ended | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Jul. 02, 2011
|
Jul. 03, 2010
|
Jul. 02, 2011
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Jul. 03, 2010
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|||||||||
Revenue | $ 291,783 | $ 242,998 | $ 827,524 | $ 741,983 | ||||||||
Americas [Member]
|
||||||||||||
Revenue | 104,618 | [1] | 82,450 | [1] | 299,111 | [1] | 273,547 | [1] | ||||
Europe [Member]
|
||||||||||||
Revenue | 120,302 | [2] | 101,838 | [2] | 334,132 | [2] | 294,536 | [2] | ||||
Pacific Rim [Member]
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||||||||||||
Revenue | 36,873 | 33,156 | 106,694 | 95,473 | ||||||||
Japan [Member]
|
||||||||||||
Revenue | 29,990 | 25,554 | 87,587 | 78,427 | ||||||||
United States [Member]
|
||||||||||||
Revenue | 98,700 | 78,600 | 284,000 | 263,600 | ||||||||
Germany [Member]
|
||||||||||||
Revenue | $ 48,900 | $ 44,500 | $ 120,600 | $ 109,800 | ||||||||
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Goodwill And Intangible Assets
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9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jul. 02, 2011
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Goodwill And Intangible Assets |
6. Goodwill and Intangible Assets We have two reportable segments: (1) software products and (2) services. As of July 2, 2011 and September 30, 2010, goodwill and acquired intangible assets in the aggregate attributable to our software products reportable segment was $821.4 million and $524.3 million, respectively, and attributable to our services reportable segment was $30.5 million and $22.1 million, respectively. Goodwill is tested for impairment at least annually, or on an interim basis if an event occurs or circumstances change that would, more likely than not, reduce the fair value of the reporting segment below its carrying value. We completed our annual impairment review as of July 2, 2011 and concluded that no impairment charge was required as of that date. 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.
Goodwill and acquired intangible assets consisted of the following:
Goodwill The changes in the carrying amounts of goodwill for the nine months ended July 2, 2011 are due to the impact of acquisitions (described in Note 5) and to foreign currency translation adjustments related to those asset balances that are recorded in non-U.S. currencies. Changes in goodwill for the nine months ended July 2, 2011, presented by reportable segment, are as follows:
Amortization of intangible assets The aggregate amortization expense for intangible assets with finite lives recorded for the third quarters and first nine months of 2011 and 2010 was classified in our consolidated statements of operations as follows:
The estimated aggregate future amortization expense for intangible assets with finite lives remaining as of July 2, 2011 is $10.2 million for 2011, $36.3 million for 2012, $36.0 million for 2013, $33.7 million for 2014, $30.1 million for 2015, $22.0 million for 2016 and $59.9 million thereafter. |
Stock-Based Compensation (Narrative) (Details) (USD $)
In Millions, except Per Share data |
3 Months Ended | 9 Months Ended |
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Jul. 02, 2011
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Jul. 02, 2011
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Stock-Based Compensation | ||
Number of options granted | 146,998 | |
Weighted average exercise price | $ 6.83 | $ 6.83 |
Intrinsic value of options | $ 2.5 | |
Purchase price for the pre acquisition service period | 0.1 | 0.1 |
Compensation expense over the vest period | $ 2.4 | $ 2.4 |
Vesting period of stock options for employees of MKS | 3Y |
Derivative Financial Instruments (Notional Amounts Of Outstanding Forward Contracts) (Details) (USD $)
In Thousands |
Jul. 02, 2011
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Sep. 30, 2010
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Notional amounts of outstanding forward contracts | $ 408,989 | $ 148,813 |
Canadian /U.S. Dollar [Member]
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Notional amounts of outstanding forward contracts | 268,805 | 1,280 |
Euro/U.S. Dollar [Member]
|
||
Notional amounts of outstanding forward contracts | 87,133 | 113,546 |
Indian Rupee/U.S. Dollar [Member]
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||
Notional amounts of outstanding forward contracts | 23,134 | 20,262 |
Chinese Renminbi/U.S. Dollar [Member]
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||
Notional amounts of outstanding forward contracts | 5,747 | 5,443 |
Japanese Yen/U.S. Dollar [Member]
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Notional amounts of outstanding forward contracts | 15,546 | |
All Other [Member]
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Notional amounts of outstanding forward contracts | $ 8,624 | $ 8,282 |
Income Taxes (Tables)
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Jul. 02, 2011
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Schedule Of Unrecognized Tax Benefit |
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Summary Of Income Tax Examinations Years |
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Commitments And Contingencies
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9 Months Ended | ||||||||
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Jul. 02, 2011
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Commitments And Contingencies | |||||||||
Commitments And Contingencies |
11. Commitments and Contingencies Revolving Credit Agreement We have a multi-currency bank revolving credit facility (the credit facility) with a syndicate of ten banks for which JPMorgan Chase Bank, N.A. acts as Administrative Agent. The credit facility matures in August 2014, when all amounts will be due and payable in full. The credit facility does not require amortization of principal and may be paid before maturity in whole or in part at PTC's option without penalty or premium. We expect to use the credit facility for general corporate purposes, including acquisitions of other businesses, and may also use it for working capital. The credit facility consists of a $300 million revolving credit facility, which may be increased by up to an additional $150 million if the existing or additional lenders are willing to make such increased commitments (such increase may also be used, in whole or in part, for term loans). PTC is the sole borrower under the credit facility. The obligations under the credit facility are guaranteed by PTC's material domestic subsidiaries and are secured by a pledge of 65% of the voting equity interests of PTC's material first-tier foreign subsidiaries. In May 2011, in connection with our acquisition of MKS, we borrowed $250 million under the credit facility at an annual interest rate of 2.1%. Accrued interest is due after three months at which time the interest rate will reset. As of July 2, 2011, we had $250 million outstanding under the credit facility. We did not have any borrowings outstanding under the credit facility at September 30, 2010. Interest rates on borrowings outstanding under the credit facility range from 1.75% to 2.25% above an adjusted LIBO rate for Eurodollar-based borrowings or would range from 0.75% to 1.25% above the defined base rate (the greater of the Prime Rate, the Federal Funds Effective Rate plus .005%, or an adjusted LIBO rate plus 1%) for base rate borrowings, in each case based upon PTC's leverage ratio. Additionally, PTC may borrow certain foreign currencies at rates set in the same range above the respective London interbank offered interest rates for those currencies, based on PTC's leverage ratio. A quarterly commitment fee on the undrawn portion of the credit facility is required, ranging from 0.30% to 0.40% per annum, based upon PTC's leverage ratio. The credit facility limits PTC's and its subsidiaries' ability to, among other things: incur additional indebtedness; incur liens or guarantee obligations; pay dividends (other than to PTC) and make other distributions; make investments and enter into joint ventures; dispose of assets; and engage in transactions with affiliates, except on an arms-length basis. Under the credit facility, PTC and its material domestic subsidiaries may not invest cash or property in, or loan to, PTC's foreign subsidiaries in aggregate amounts exceeding $50 million for any purpose and an additional $75 million for acquisitions of businesses. In addition, under the credit facility, PTC and its subsidiaries must maintain the following financial ratios:
As of July 2, 2011, our leverage ratio was 1.14 to 1.00 and our fixed charge coverage ratio was 1.86 to 1.00. We were in compliance with all financial and operating covenants of the credit facility as of July 2, 2011. Any failure to comply with the financial or operating covenants of the credit facility would prevent PTC from being able to borrow additional funds, and would constitute a default, permitting the lenders to, among other things, accelerate the amounts outstanding, including all accrued interest and unpaid fees, under the credit facility and to terminate the credit facility. A change in control of PTC, as defined in the agreement, also constitutes an event of default, permitting the lenders to accelerate the indebtedness and terminate the credit facility. Legal Proceedings We are subject to various legal proceedings and claims that arise in the ordinary course of business. With respect to such proceedings and claims, we record an accrual for a contingency when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We currently believe that resolving these matters will not have a material adverse impact on our financial condition, results of operations or cash flows. However, the results of legal proceedings cannot be predicted with certainty. Should any of these legal matters be resolved against us, the operating results for a particular reporting period could be adversely affected. Guarantees and Indemnification Obligations We enter into standard indemnification agreements in the ordinary course of our business. Pursuant to such agreements with our business partners or customers, we indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to our current products, as well as claims relating to property damage or personal injury resulting from the performance of services by us or our subcontractors. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. Historically, our costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and we accordingly believe the estimated fair value of these agreements is immaterial. We warrant that our software products will perform in all material respects in accordance with our standard published specifications in effect at the time of delivery of the licensed products for a specified period of time. Additionally, we generally warrant that our consulting services will be performed consistent with generally accepted industry standards. In most cases, liability for these warranties is capped. If necessary, we would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history; however, we have not incurred significant cost under our product or services warranties. As a result, we believe the estimated fair value of these agreements is immaterial. |
Deferred Revenue And Financing Receivables
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9 Months Ended |
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Jul. 02, 2011
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Deferred Revenue And Financing Receivables | |
Deferred Revenue And Financing Receivables | 2. Deferred Revenue and Financing Receivables Deferred Revenue Deferred revenue primarily relates to software maintenance agreements billed to customers for which the services have not yet been provided. The liability associated with performing these services is included in deferred revenue and, if not yet paid, the related customer receivable is included in other current assets. Billed but uncollected maintenance-related amounts included in other current assets at July 2, 2011 and September 30, 2010 were $83.4 million and $76.8 million, respectively. Financing Receivables We periodically provide financing for software purchases to credit-worthy customers with payment terms up to 36 months. The determination on whether to offer such payment terms is based on the size, nature and credit-worthiness of the customer, and the history of collecting amounts due, without concession, from the customer. As of July 2, 2011 and September 30, 2010, amounts due from customers for contracts with extended payment terms (financing receivables) totaled $56.2 million and $44.3 million, respectively. Accounts receivable in the accompanying consolidated balance sheets include current receivables from such contracts totaling $46.2 million and $27.2 million at July 2, 2011 and September 30, 2010, respectively, and other assets in the accompanying consolidated balance sheets include long-term receivables from such contracts totaling $10.0 million and $17.1 million at July 2, 2011 and September 30, 2010, respectively. We periodically transfer future payments under certain of these contracts to third-party financial institutions on a non-recourse basis. We record such transfers as sales of the related accounts receivable when we surrender control of such receivables. We sold $4.0 million of financing receivables to third-party financial institutions in the three and nine months ended July 2, 2011. We sold $19.6 million of financing receivables to third-party financial institutions in the nine months ended July 3, 2010. We evaluate estimated credit losses on financing receivables based on whether the customers are making payments as they become due, customer credit-worthiness and existing economic conditions. We write off uncollectible trade and financing receivables when we have exhausted all collection avenues. As of July 2, 2011 and September 30, 2010, we concluded that all financing receivables were collectible and no reserve for credit losses was recorded. We did not provide a reserve for credit losses or write off any uncollectible financing receivables in the three and nine months ended July 2, 2011 and fiscal year 2010. |
Acquisition (Schedule Of Total Preliminary Purchase Price) (Details) (USD $)
In Thousands |
Jul. 02, 2011
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Acquisition | |
Goodwill | $ 191,649 |
Identifiable intangible assets | 117,900 |
Cash | 33,193 |
Accounts receivable | 7,413 |
Property and equipment | 4,880 |
Deferred revenue | (16,803) |
Deferred tax assets and liabilities, net | (34,242) |
Net assumed liabilities | (5,553) |
Total purchase price | 298,437 |
Less: MKS cash acquired | (33,193) |
Total preliminary purchase price allocation, net of cash acquired | $ 265,244 |
Derivative Financial Instruments
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Jul. 02, 2011
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Derivative Financial Instruments | 8. Derivative Financial Instruments Our foreign currency risk management strategy is principally designed to mitigate the future potential financial impact of changes in the value of 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 with maturities of less than three months, to manage our exposure to fluctuations in foreign exchange rates that arise primarily from our foreign currency-denominated receivables and payables. Generally, we do not designate 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 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 other income (expense), net.
As of July 2, 2011 and September 30, 2010, we had outstanding forward contracts with notional amounts equivalent to the following:
In the third quarter of 2011, in connection with our planned acquisition of MKS, we entered into forward contracts to purchase CDN$292 million (equivalent to approximately $305 million when we entered into the contracts). We entered into these forward contracts to reduce our foreign currency exposure related to changes in the Canadian to U.S. Dollar exchange rate from the time we entered into the agreement to acquire MKS (the purchase price was in Canadian Dollars) and the expected closing date. In the third quarter of 2011, we settled these contracts and recorded a net foreign currency loss of $4.4 million related to the acquisition of MKS. During the third quarter, after the acquisition, we entered into new forward contracts to hedge foreign currency exposure on a $260 million intercompany loan denominated in Canadian Dollars related to the acquisition. Subsequent to quarter end, this intercompany loan was significantly reduced. The accompanying consolidated balance sheets as of July 2, 2011 and September 30, 2010 include a net liability of $9.0 million and $2.0 million, respectively, in accrued expenses and other current liabilities related to the fair value of our forward contracts. Net gains and losses on foreign currency exposures are recorded in other income (expense), net and include realized and unrealized gains and losses on forward contracts. Net gains and losses on foreign currency exposures for the three and nine months ended July 2, 2011 and July 3, 2010 were as follows:
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Earnings Per Share (EPS) and Common Stock (Tables)
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Earnings Per Share Basic and Diluted |
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Segment Information
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Jul. 02, 2011
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Segment Information | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Segment Information | 9. Segment Information We operate within a single industry segment—computer software and related services. Operating segments as defined under GAAP are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our President and Chief Executive Officer. We have two operating and reportable segments: (1) Software Products, which includes license and related maintenance revenue (including updates and technical support) for all our products except training-related products; and (2) Services, which includes consulting, implementation, training, computer-based training products, including maintenance thereon, and other support revenue. In our consolidated statements of operations, maintenance revenue is included in service revenue. We do not allocate sales and marketing or administrative expenses to our operating segments as these activities are managed on a consolidated basis.
The revenue and operating income attributable to our operating segments are summarized as follows:
We report revenue by product group, Desktop and Enterprise. Desktop revenue includes our CAx Solutions, primarily: Creo Elements/Pro, Creo Elements/Direct, Mathcad and Arbortext authoring products. Enterprise revenue includes our PLM solutions, primarily: Windchill, Arbortext enterprise products, Creo Elements/View and MKS Integrity. Data for the three and nine months ended July 3, 2010 includes immaterial reclassifications between product groups made to conform to the current classification.
Data for the geographic regions in which we operate is presented below.
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Earnings Per Share (EPS) And Common Stock (Earnings Per Share Basic And Diluted) (Details) (USD $)
In Thousands, except Per Share data |
3 Months Ended | 9 Months Ended | ||
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Jul. 02, 2011
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Jul. 03, 2010
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Jul. 02, 2011
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Jul. 03, 2010
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Earnings Per Share (EPS) And Common Stock | ||||
Net income | $ 15,526 | $ 10,718 | $ 47,803 | $ 37,583 |
Weighted average shares outstanding-Basic | 118,214 | 115,188 | 117,622 | 115,802 |
Dilutive effect of employee stock options, restricted shares and restricted stock units | 2,950 | 3,815 | 3,527 | 4,194 |
Weighted average shares outstanding-Diluted | 121,164 | 119,003 | 121,149 | 119,996 |
Earnings per share-Basic | $ 0.13 | $ 0.09 | $ 0.41 | $ 0.32 |
Earnings per share-Diluted | $ 0.13 | $ 0.09 | $ 0.39 | $ 0.31 |
Fair Value Measurements
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Jul. 02, 2011
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Fair Value Measurements | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Measurements | 7. 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. Generally accepted accounting principles prescribe 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:
Our significant financial assets and liabilities measured at fair value on a recurring basis as of July 2, 2011 and September 30, 2010 were as follows:
|
Consolidated Statements Of Comprehensive Income (USD $)
In Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Jul. 02, 2011
|
Jul. 03, 2010
|
Jul. 02, 2011
|
Jul. 03, 2010
|
|
Consolidated Statements Of Comprehensive Income | ||||
Net income | $ 15,526 | $ 10,718 | $ 47,803 | $ 37,583 |
Other comprehensive income (loss), net of tax: | ||||
Foreign currency translation adjustment | 2,812 | (15,757) | 11,085 | (29,252) |
Minimum pension liability adjustment | (137) | (60) | (403) | (108) |
Other comprehensive income (loss) | 2,675 | (15,817) | 10,682 | (29,360) |
Comprehensive income (loss) | $ 18,201 | $ (5,099) | $ 58,485 | $ 8,223 |
Stock-Based Compensation
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9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jul. 02, 2011
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Stock-Based Compensation | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-Based Compensation | 3. Stock-based Compensation We measure the cost of employee services received in exchange for restricted stock and restricted stock unit (RSU) awards based on the fair value of our common stock 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. Our equity incentive plan provides for grants of nonqualified and incentive stock options, common stock, restricted stock, RSUs and stock appreciation rights to employees, directors, officers and consultants. We award restricted stock and RSUs as the principal equity incentive awards, including certain performance-based awards that are earned based on achievement of performance criteria established by the Compensation Committee of our Board of Directors. Each RSU represents the contingent right to receive one share of our common stock. Our equity incentive plans are described more fully in Note K to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010.
We made the following restricted stock unit grants in the first nine months of 2011:
As described below in Note 5, in the third quarter of 2011, in connection with our acquisition of MKS Inc., we granted 146,998 stock options to employees of MKS which vest over the next three years. These stock options were replacement stock options for unvested MKS stock options outstanding as of the acquisition date. The weighted average exercise price is $6.83 and the fair value of these grants is $2.5 million, of which $0.1 million was recorded as purchase price for the pre-acquisition service period. The remaining $2.4 million will be recognized as compensation expense over the vesting period. The following table shows the classification of compensation expense recorded for our stock-based awards as reflected in our consolidated statements of operations:
|
Goodwill And Intangible Assets (Amortization Of Intangible Assets) (Details) (USD $)
In Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Jul. 02, 2011
|
Jul. 03, 2010
|
Jul. 02, 2011
|
Jul. 03, 2010
|
|
Goodwill And Intangible Assets | ||||
Amortization of acquired intangible assets | $ 4,753 | $ 3,836 | $ 12,873 | $ 11,869 |
Cost of license revenue | 3,895 | 4,659 | 10,597 | 14,485 |
Total amortization expense | $ 8,648 | $ 8,495 | $ 23,470 | $ 26,354 |
Earnings Per Share (EPS) And Common Stock (Narrative) (Details) (USD $)
In Millions, except Share data |
3 Months Ended | 9 Months Ended | |||
---|---|---|---|---|---|
Jul. 02, 2011
|
Jul. 03, 2010
|
Jul. 02, 2011
|
Jul. 03, 2010
|
Sep. 30, 2010
|
|
Earnings Per Share (EPS) And Common Stock | |||||
Stock option excluded from computation of EPS | 100,000 | 1,500,000 | 100,000 | 1,900,000 | |
Common stock, shares authorized | 500,000,000 | 500,000,000 | 500,000,000 | ||
Stock authorized to repurchase | $ 200 | ||||
Number of stock repurchased during the period | 1,800,000 | 800,000 | 1,800,000 | 3,600,000 | |
Repurchases of common stock, value | 39.9 | 15.0 | 39.9 | 60.0 | |
Remaining stock authorized to repurchase | $ 78.1 |
Commitments And Contingencies (Details) (USD $)
|
9 Months Ended | 1 Months Ended | 9 Months Ended | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Jul. 02, 2011
|
Sep. 30, 2010
|
May 31, 2011
MKS Acquisition [Member]
|
Jul. 02, 2011
MKS Acquisition [Member]
|
Jul. 02, 2011
Leverage Ratio [Member]
Maximum [Member]
|
Jul. 02, 2011
Leverage Ratio [Member]
Minimum [Member]
|
Jul. 02, 2011
Fixed Charge Coverage Ratio [Member]
Maximum [Member]
|
Jul. 02, 2011
Fixed Charge Coverage Ratio [Member]
Minimum [Member]
|
Jul. 02, 2011
Maximum [Member]
|
Jul. 02, 2011
Minimum [Member]
|
|
Credit facility amount | $ 300,000,000 | |||||||||
Revolving credit facility, additional borrowings | 250,000,000 | |||||||||
Revolving credit facility additional borrowing limit | 150,000,000 | |||||||||
Voting interest in foreign subsidiaries pledged against credit facility | 65.00% | |||||||||
Borrowings outstanding | 0 | 250,000,000 | ||||||||
Credit facility interest rate | 2.10% | 2.25% | 1.75% | |||||||
Federal funds effective rate | 0.005% | |||||||||
Adjusted LIBO rate | LIBO rate plus 1% | |||||||||
Stated interest rate on base rate borrowings | 1.25% | 0.75% | ||||||||
Credit facility commitment fees percentage | 0.40% | 0.30% | ||||||||
Investment limit in foreign subsidiaries | 50,000,000 | |||||||||
Cash investment limit for acquisition of business | $ 75,000,000 | |||||||||
Ratio, terms | 2.50 | 1.00 | 1.25 | 1.00 | ||||||
Ratio, actual | 1.14 | 1.00 | 1.86 | 1.00 |
Earnings Per Share (EPS) And Common Stock
|
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jul. 02, 2011
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Earnings Per Share (EPS) And Common Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings Per Share (EPS) And Common Stock |
4. 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. Unvested restricted stock, although legally issued and outstanding, is not considered outstanding for purposes of calculating basic EPS. Diluted EPS is calculated by dividing net income by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding stock options, restricted shares and RSUs using the treasury stock method. The calculation of the dilutive effect of outstanding equity awards under the treasury stock method includes consideration of proceeds from the assumed exercise of stock options, unrecognized compensation expense and any tax benefits as additional proceeds.
The following table presents the calculation for both basic and diluted EPS:
Stock options to purchase 0.1 million shares for both the third quarter and first nine months of 2011, and 1.5 million shares and 1.9 million shares for the third quarter and first nine months of 2010, respectively, were outstanding but were not included in the calculation of diluted EPS because the exercise prices per share were greater than the average market price of our common stock for those periods. These shares were excluded from the computation of diluted EPS as the effect would have been anti-dilutive. 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 use up to $200 million of cash from operations to repurchase shares of our common stock in open market purchases. This authorization will expire on September 30, 2011 unless earlier revoked. In the third quarter and first nine months of 2011, we repurchased 1.8 million shares at a cost of $39.9 million and we have $78.1 million remaining under our current authorization. In the third quarter and first nine months of 2010, we repurchased 0.8 million shares at a cost of $15.0 million and 3.6 million shares at a cost of $60.0 million, respectively. All shares of our common stock repurchased are automatically restored to the status of authorized and unissued. |
Derivative Financial Instruments (Narrative) (Details)
|
3 Months Ended | 9 Months Ended | 3 Months Ended | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Jul. 02, 2011
USD ($)
|
Jul. 03, 2010
USD ($)
|
Jul. 02, 2011
USD ($)
|
Jul. 03, 2010
USD ($)
|
Sep. 30, 2010
USD ($)
|
Jul. 02, 2011
Canadian /U.S. Dollar [Member]
USD ($)
|
Sep. 30, 2010
Canadian /U.S. Dollar [Member]
USD ($)
|
Jul. 02, 2011
MKS Inc [Member]
USD ($)
|
Jul. 02, 2011
MKS Inc [Member]
CAD
|
Jul. 02, 2011
MKS Acquisition [Member]
USD ($)
|
Jul. 02, 2011
Accrued Expenses and Other Current Liabilities [Member]
USD ($)
|
Sep. 30, 2010
Accrued Expenses and Other Current Liabilities [Member]
USD ($)
|
|
Forward contract to purchase foreign currency | $ 408,989,000 | $ 408,989,000 | $ 148,813,000 | $ 268,805,000 | $ 1,280,000 | $ 305,000,000 | 292,000,000 | |||||
Fair value of our forward contracts | 9,000,000 | 2,000,000 | ||||||||||
Net losses on foreign currency exposures | 6,116,000 | 508,000 | 9,448,000 | 2,196,000 | 4,400,000 | |||||||
New forward contracts to hedge exposure to foreign currency gains and losses | $ 260,000,000 |
Acquisition (Narrative) (Details)
|
3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | 12 Months Ended | 9 Months Ended | ||||
---|---|---|---|---|---|---|---|---|---|---|
Jul. 02, 2011
USD ($)
|
Jul. 02, 2011
USD ($)
|
Jul. 02, 2011
MKS Inc [Member]
USD ($)
|
Jul. 02, 2011
MKS Inc [Member]
USD ($)
|
Apr. 30, 2011
MKS Inc [Member]
USD ($)
|
Apr. 30, 2010
MKS Inc [Member]
USD ($)
|
Jul. 02, 2011
MKS Inc [Member]
CAD
|
Jul. 02, 2011
Trademarks And Trade Names [Member]
USD ($)
years
|
Jul. 02, 2011
Purchased Software [Member]
USD ($)
years
|
Jul. 02, 2011
Customer Relationships [Member]
USD ($)
|
|
Business acquisition date | May 31, 2011 | |||||||||
Business acquisition cost of acquired entity, cash paid per share | 26.20 | |||||||||
Revenue from acquisition | $ 6,000,000 | |||||||||
Unfavorable impact of acquisition on operating income | 7,000,000 | |||||||||
Amortization of intangibles acquired in business acquisition | 900,000 | |||||||||
Conversion of stock options acquired | 146,998 | 146,998 | ||||||||
Amount of existing credit facility used for acquisition | 250,000,000 | 250,000,000 | ||||||||
Purchase price allocation of goodwill | 191,649,000 | 191,649,000 | ||||||||
Revenue of acquired entity | 79,000,000 | 63,000,000 | ||||||||
Identifiable intangible assets | 117,900,000 | 117,900,000 | 2,400,000 | 36,900,000 | 78,600,000 | |||||
Amortized over weighted average useful lives | 7 | 7 | 11 | |||||||
Acquisition-related cost | 6,000,000 | 6,000,000 | 6,600,000 | |||||||
Deferred tax liabilities | $ 42,600,000 | $ 42,600,000 |
Fair Value Measurements (Financial Assets And Liabilities Measured At Fair Value On Recurring Basis) (Details) (USD $)
In Thousands |
Jul. 02, 2011
|
Sep. 30, 2010
|
||||||
---|---|---|---|---|---|---|---|---|
Level 1 [Member]
|
||||||||
Cash equivalents-Level 1 | $ 89,182 | [1] | $ 86,826 | [1] | ||||
Level 2 [Member]
|
||||||||
Forward contracts-Level 2 | $ (9,020) | [2] | $ (1,974) | [2] | ||||
|
Stock-Based Compensation (Schedule Of Classification Of Compensation Expense) (Details) (USD $)
In Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Jul. 02, 2011
|
Jul. 03, 2010
|
Jul. 02, 2011
|
Jul. 03, 2010
|
|
Total stock-based compensation expense | $ 11,560 | $ 11,510 | $ 32,458 | $ 37,657 |
Cost Of License Revenue [Member]
|
||||
Total stock-based compensation expense | 4 | 2 | 10 | 21 |
Cost Of Service Revenue [Member]
|
||||
Total stock-based compensation expense | 1,857 | 2,186 | 5,577 | 7,007 |
Sales And Marketing [Member]
|
||||
Total stock-based compensation expense | 3,062 | 3,471 | 7,841 | 10,065 |
Research And Development [Member]
|
||||
Total stock-based compensation expense | 2,010 | 2,252 | 6,152 | 7,294 |
General And Administrative [Member]
|
||||
Total stock-based compensation expense | $ 4,627 | $ 3,599 | $ 12,878 | $ 13,270 |
Stock-Based Compensation (Tables)
|
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jul. 02, 2011
|
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Stock-Based Compensation | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule Of Restricted Stock And Restricted Stock Unit Activity |
|
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Schedule Of Restricted Stock Unit Grants For The Period |
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Schedule Of Classification Of Compensation Expense |
|
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