NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
General
The accompanying unaudited condensed consolidated financial statements include the accounts of PTC Inc. and its wholly owned subsidiaries and have been prepared by management in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and in accordance with the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. While we believe that the disclosures presented are adequate in order to make the information not misleading, these unaudited quarterly financial statements should be read in conjunction with our annual consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair statement of our financial position, results of operations and cash flows at the dates and for the periods indicated. The September 30, 2019 Consolidated Balance Sheet included herein is derived from our audited consolidated financial statements.
Unless otherwise indicated, all references to a year mean our fiscal year, which ends on September 30. Our fiscal quarters end on a Saturday following a thirteen-week calendar and may result in different quarter end dates year to year. The second quarter of 2020 ended on March 28, 2020 and the second quarter of 2019 ended on March 30, 2019. The results of operations for the six months ended March 28, 2020 are not necessarily indicative of the results expected for the remainder of the fiscal year.
We adjusted the $3.0 million hedge gain in the Consolidated Statement of Comprehensive Income (Loss) for the three months ended March 30, 2019 that was incorrectly reflected as a loss.
Risks and Uncertainties - COVID-19 Pandemic
In December 2019, a novel strain of coronavirus, now referred to as COVID-19, surfaced. The virus has spread to over 100 countries, including the United States, and has been declared a pandemic by the World Health Organization. The COVID-19 pandemic has significantly impacted global economic activity and has created future macroeconomic uncertainty.
We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts COVID-19 as of March 28, 2020 and through the date of this report. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, stock-based compensation, the carrying value of our goodwill and other long-lived assets, financial assets, valuation allowances for tax assets and revenue recognition. While there was not a material impact to our consolidated financial statements as of and for the quarter ended March 28, 2020, resulting from our assessments, our future assessment of our current expectations at that time of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to our consolidated financial statements in future reporting periods.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Leases
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2016-02, Leases (Topic 842) (ASC 842), which replaced the existing guidance in ASC 840, Leases. The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and to disclose important information about leasing arrangements. We adopted ASC 842 effective October 1, 2019 (the effective date). ASC 842 requires a modified retrospective transition method that could either be applied at the earliest comparative period in the financial statements or in the period of adoption. We elected to use the period of adoption (October 1, 2019) transition method and therefore did not recast prior periods.
Since we adopted the new standard using the period of adoption transition method, we are not required to present 2020 comparative disclosures under ASC 842. However, we are required to present the required annual disclosures under the previous U.S. GAAP lease accounting standard (ASC 840).
We elected the package of practical expedients as permitted under the transition guidance, which allowed us: (1) to carry forward the historical lease classification; (2) not to reassess whether expired or existing contracts are or contain leases; and, (3) not to reassess the treatment of initial direct costs for existing leases. In addition, we elected an accounting policy to not recognize leases with an initial term of one year or less on the balance sheet.
Upon the adoption of this standard on October 1, 2019, we recognized an operating lease liability of $224.0 million, representing the present value of the minimum lease payments remaining as of the adoption date, and a right-of-use asset in the amount of $167.9 million. The right-of-use asset reflects adjustments for derecognition of deferred leasing incentives. We also recorded a $1.6 million decrease to retained earnings as a result of the change in scheduling of reversal of temporary tax differences due to the adoption of ASC 842.
Pending Accounting Pronouncements
Goodwill and Other—Internal-Use Software
In August 2018, the FASB issued Accounting Standards Update (ASU) 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which aligns the requirements for capitalizing implementation costs in cloud computing arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new standard will be effective for us in the first quarter of 2021. Entities can choose to adopt the new guidance prospectively or retrospectively. We plan to adopt this standard using the prospective adoption approach. We are currently evaluating the effects of this pronouncement on our consolidated financial statements.
Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, modifies and adds disclosure requirements for fair value measurements. The new standard will be effective for us in the first quarter of 2021. We do not expect this ASU to have a material impact on our consolidated financial statements.
Financial Instruments—Credit Losses
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, along with subsequent amendments, which replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information when recording credit loss estimates. The new standard will be effective for us in the first quarter of 2021. We are currently evaluating the impact the standard will have on our consolidated financial statements, but at this time we do not expect it to be significant.
2. Revenue from Contracts with Customers
Contract Assets and Contract Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 28, 2020
|
|
September 30, 2019
|
|
Contract asset
|
$
|
19,582
|
|
|
$
|
21,038
|
|
|
Deferred revenue
|
$
|
417,202
|
|
|
$
|
396,632
|
|
As of March 28, 2020, our contract assets are expected to be transferred to receivables within the next 12 months and therefore are included in other current assets. Approximately $10.2 million of the September 30, 2019 contract asset balance was transferred to receivables during the six months ended March 28, 2020 as a result of the right to payment becoming unconditional. The majority of the contract asset balance relates to two large professional services contracts with invoicing terms based on performance milestones. Additions to contract assets of approximately $8.8 million related to revenue recognized in the period, net of billings. There were no impairments of contract assets during the six months ended March 28, 2020.
During the six months ended March 28, 2020, we recognized $283.4 million of revenue that was included in deferred revenue as of September 30, 2019 and there were additional deferrals of $301.3 million during the six months ended March 28, 2020, primarily related to new billings. In addition, deferred revenue increased by an immaterial amount as a result of the acquisition of Onshape. The balance of total short- and long-term receivables as of September 30, 2019 was $412.5 million, compared to total short- and long-term receivables as of March 28, 2020 of $431.0 million.
Our multi-year, non-cancellable on-premise subscription contracts provide customers with an annual right to exchange software within the subscription with other software. Although the exchange right is limited to software products within a similar product grouping, the exchange right is not limited to products with substantially similar features and functionality as those originally delivered. We determined that this right to exchange previously delivered software for different software represents variable consideration to be accounted for as a liability. We have identified a standard portfolio of contracts with common characteristics and applied the expected value method of determining variable consideration associated with this right. Additionally, where there are isolated situations that are outside of the standard portfolio of contracts due to contract size, longer contract duration, or other unique contractual terms, we use the most likely amount method to determine the amount of variable consideration. In both circumstances, the variable consideration included in the transaction price is constrained to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. As of March 28, 2020 and September 30, 2019, the total refund liability was $30.2 million and $22.9 million, respectively, primarily associated with the annual right to exchange on-premise subscription software.
Costs to Obtain or Fulfill a Contract
We recognize an asset for the incremental costs of obtaining a contract with a customer if the benefit of those costs is expected to be longer than one year. These deferred costs (primarily commissions) are amortized proportionately related to revenue over five years, which is generally longer than the term of the initial contract because of anticipated renewals as commissions for renewals are not commensurate with commissions related to our initial contracts. As of March 28, 2020 and September 30, 2019, deferred costs of $29.7 million and $27.7 million, respectively, were included in other current assets and $65.7 million and $64.8 million, respectively, were included in other assets (non-current).
Remaining Performance Obligations
Our contracts with customers include amounts allocated to performance obligations that will be satisfied at a later date. As of March 28, 2020, the amounts include additional performance obligations of $417.2 million recorded in deferred revenue and $608.8 million that are not yet recorded in the consolidated balance sheets. We expect to recognize approximately 90% of the total $1,026.0 million over the next 24 months, with the remaining amount thereafter. Certain of our multi-year subscription contracts with start dates on or after October 1, 2018 contain a limited annual cancellation right. For such cancellable subscription contracts, we consider each annual period a discrete contract. Early in the fourth quarter of 2019, we discontinued offering the cancellation right for substantially all new contracts. Remaining performance obligations do not include the cancellable value for subscriptions which contain this clause.
Disaggregation of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Three months ended
|
|
Six months ended
|
|
|
March 28, 2020
|
|
March 30, 2019
|
|
March 28, 2020
|
|
March 30, 2019
|
|
Total recurring revenue
|
$
|
315,862
|
|
|
$
|
239,185
|
|
|
$
|
621,230
|
|
|
$
|
490,623
|
|
|
Perpetual license
|
8,218
|
|
|
10,336
|
|
|
17,216
|
|
|
52,141
|
|
|
Professional services
|
35,523
|
|
|
40,930
|
|
|
77,267
|
|
|
82,376
|
|
|
Total revenue
|
$
|
359,603
|
|
|
$
|
290,451
|
|
|
$
|
715,713
|
|
|
$
|
625,140
|
|
For further disaggregation of revenue by geographic region and product group see Note 11. Segment and Geographic Information.
3. Restructuring and Other Charges
Restructuring and other charges, net includes restructuring charges (credits), headquarters relocation charges and impairment and accretion expense charges related to the lease assets of exited facilities. Refer to Note 14. Leases for additional information about exited facilities.
For the second quarter and first six months ended March 28, 2020, restructuring charges and other charges, net totaled $18.2 million and $32.3 million, respectively, of which $13.2 million and $27.0 million is attributable to restructuring charges, respectively, and $4.7 million and $5.0 million is related to impairment and accretion expense related to exited lease facilities, respectively. The restructuring and other charges for the second quarter and first six months of 2020 also includes $0.3 million of accelerated depreciation related to the planned exit of a facility.
For the second quarter and first six months ended March 30, 2019, restructuring and other charges totaled $27.0 million and $45.5 million, respectively, of which $26.4 million and $43.0 million is attributable to restructuring charges, respectively, and $0.6 million and $2.5 million is related to headquarters relocation charges, respectively.
Restructuring Charges
During the first quarter of 2020, we initiated a restructuring program as part of a realignment associated with expected synergies and operational efficiencies related to the Onshape acquisition. During the six months ended March 28, 2020, we incurred $31.5 million in connection with this restructuring plan for termination benefits associated with approximately 255 employees.
During the first quarter of 2019, we initiated a restructuring plan to realign our workforce to shift investment to support Industrial Internet of Things and Augmented Reality strategic opportunities. As this was a realignment of resources rather than a cost-savings initiative, it did not result in significant cost savings. The restructuring plan was completed in the first quarter of 2019 and resulted in restructuring charges of $16.3 million for termination benefits associated with approximately 240 employees, substantially all of which has been paid. In the second quarter of 2020, we recorded $0.1 million of credits related to this restructuring plan.
During the second quarter of 2019, we relocated our worldwide headquarters to the Boston Seaport District. We incurred a restructuring charge for the former headquarters lease, which will not expire until November 2022. During the first six months ended March 28, 2020, we reversed $4.4 million of accrued variable operating facility restructuring charges associated with the exit of a portion of our former headquarters lease.
The following table summarizes restructuring accrual activity for the six months ended March 28, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Employee severance and related benefits
|
|
Facility closures and related costs
|
|
Total
|
|
October 1, 2019
|
$
|
298
|
|
|
$
|
30,788
|
|
|
$
|
31,086
|
|
|
ASC 842 adoption
|
—
|
|
|
(16,462
|
)
|
|
(16,462
|
)
|
|
Charges to operations, net
|
31,358
|
|
|
(4,362
|
)
|
|
26,996
|
|
|
Cash disbursements
|
(14,324
|
)
|
|
(2,495
|
)
|
|
(16,819
|
)
|
|
Other non-cash
|
—
|
|
|
(281
|
)
|
|
(281
|
)
|
|
Foreign exchange impact
|
153
|
|
|
(5
|
)
|
|
148
|
|
|
Accrual, March 28, 2020
|
$
|
17,485
|
|
|
$
|
7,183
|
|
|
$
|
24,668
|
|
The following table summarizes restructuring accrual activity for the six months ended March 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Employee severance and related benefits
|
|
Facility closures and related costs
|
|
Total
|
|
October 1, 2018
|
$
|
—
|
|
|
$
|
2,415
|
|
|
$
|
2,415
|
|
|
Charges to operations, net
|
16,034
|
|
|
26,937
|
|
|
42,971
|
|
|
Cash disbursements
|
(15,085
|
)
|
|
(2,847
|
)
|
|
(17,932
|
)
|
|
Foreign exchange impact
|
6
|
|
|
(34
|
)
|
|
(28
|
)
|
|
Other non-cash charges
|
—
|
|
|
4,812
|
|
|
4,812
|
|
|
Accrual, March 30, 2019
|
$
|
955
|
|
|
$
|
31,283
|
|
|
$
|
32,238
|
|
The accrual for employee severance and related benefits is included in accrued compensation and benefits in the Consolidated Balance Sheets.
Upon adoption of ASC 842, $16.5 million of accrued expenses and other current liabilities, representing the present value of lease commitments net of estimated sublease income, were reclassified
to lease assets and obligations: $7.6 million to lease assets, $9.2 million to short-term lease obligations and $14.9 million to long-term lease obligations.
As of March 28, 2020, the remaining restructuring facility accrual of $7.2 million relates to variable non-lease costs not subject to ASC 842, of which, $2.6 million is included in accrued expenses and other current liabilities and $4.6 million is included in other liabilities in the Consolidated Balance Sheets.
Of the accrual for facility closures and related costs, as of March 30, 2019, $12.4 million is included in accrued expenses and other current liabilities and $18.9 million is included in other liabilities in the Consolidated Balance Sheets.
Other - Headquarters Relocation Charges
Headquarters relocation charges represent other expenses associated with exiting our prior Needham headquarters facility and relocating to our new worldwide headquarters in the Boston Seaport District. In the first six months of 2019, we recorded $1.9 million of accelerated depreciation expense related to shortening the estimated useful lives of leasehold improvements related to the Needham location. In January 2019, we made rental payments for both our new and previous headquarters. Headquarters relocation charges for the second quarter of 2019 include $0.6 million of rental expense for the Needham facility that overlapped with rental expense for the new Seaport headquarters.
4. Stock-based Compensation
Our equity incentive plan provides for grants of nonqualified and incentive stock options, common stock, restricted stock, restricted stock units (RSUs) and stock appreciation rights to employees, directors, officers and consultants. We award RSUs as the principal equity incentive awards, including performance-based awards that are earned based on achievement of performance criteria established by the Compensation Committee of our Board of Directors. Each RSU represents the contingent right to receive one share of our common stock.
For performance-based awards, we recognize stock-based compensation based on expected achievement of performance criteria. We measure the cost of employee services received in exchange for RSU awards based on the fair value of the RSU awards on the date of grant. That cost is recognized over the period during which an employee is required to provide service in exchange for the award. We account for forfeitures as they occur, rather than estimate expected forfeitures.
Our employee stock purchase plan (ESPP) allows eligible employees to contribute up to 10% of their base salary, up to a maximum of $25,000 per year and subject to other plan limitations, toward the purchase of our common stock at a discounted price. The purchase price of the shares on each purchase date is equal to 85% of the lower of the fair market value of our common stock on the first and last trading days of each offering period. The ESPP is qualified under Section 423 of the Internal Revenue Code. We estimate the fair value of each purchase right under the ESPP on the date of grant using the
Black-Scholes option valuation model and use the straight-line attribution approach to record the expense over the six-month offering period.
|
|
|
|
|
|
|
|
|
|
|
Restricted stock unit activity for the six months ended March 28, 2020
|
Number of RSUs (in thousands)
|
|
Weighted-
Average
Grant Date
Fair Value
Per RSU
|
|
Balance of outstanding restricted stock units October 1, 2019
|
3,232
|
|
|
$
|
80.52
|
|
|
Granted
|
1,349
|
|
|
$
|
77.18
|
|
|
Vested
|
(958
|
)
|
|
$
|
68.79
|
|
|
Forfeited or not earned
|
(550
|
)
|
|
$
|
84.27
|
|
|
Balance of outstanding restricted stock units March 28, 2020
|
3,073
|
|
|
$
|
82.03
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Restricted Stock Units
|
|
Grant Period
|
Performance-based RSUs (1)
|
|
Service-based RSUs (2)
|
|
Total Shareholder Return RSUs (3)
|
|
First six months of 2020
|
97
|
|
1,155
|
|
97
|
_________________
|
|
|
|
(1)
|
The performance-based RSUs were granted to our executives and are eligible to vest based upon annual increasing performance measures over a three-year period. RSUs not earned in either of the first two measurement periods may be earned in the third period. To the extent earned, those performance-based RSUs will vest in three substantially equal installments on November 15, 2020, November 15, 2021 and November 15, 2022, or the date the Compensation Committee determines the extent to which the applicable performance criteria have been achieved for each performance period. Up to a maximum of two times the number of RSUs can be earned (a maximum aggregate of 195 thousand RSUs).
|
|
|
|
|
(2)
|
The service-based RSUs were granted to employees, including our executive officers. Substantially all service-based RSUs will vest in three substantially equal annual installments on or about the anniversary of the date of grant.
|
|
|
|
|
(3)
|
The Total Shareholder Return RSUs (TSR RSUs) were granted to our executives pursuant to the terms described below.
|
The number of TSR RSUs that vest over the three-year period will be determined based on the performance of PTC stock relative to the stock performance of an index of PTC peer companies established as of the grant date, as determined at the end of three measurement periods ending on September 30, 2020, 2021 and 2022, respectively. The RSUs earned for each period will vest on November 15 following each measurement period, up to a maximum of two times the number of TSR RSUs eligible to be earned for the period (up to a maximum aggregate of 195 thousand RSUs). No vesting will occur in a period unless an annual threshold requirement is achieved. If the return to PTC shareholders is negative but still meets or exceeds the peer group indexed return, a maximum of 100% of the TSR RSUs will vest for the measurement period. TSR RSUs not earned in either of the first two measurement periods are eligible to be earned in the third measurement period.
The weighted-average fair value of the TSR RSUs was $106.69 per target RSU on the grant date. The fair value of the TSR RSUs was determined using a Monte Carlo simulation model, a generally accepted statistical technique used to simulate a range of possible future stock prices for PTC and the peer group. The method uses a risk-neutral framework to model future stock price movements based upon the risk-free rate of return, the volatility of each entity, and the pairwise correlations of each entity being modeled. The fair value for each simulation is the product of the payout percentage determined by PTC’s TSR rank against the peer group, the projected price of PTC stock, and a discount factor based on the risk-free rate.
The significant assumptions used in the Monte Carlo simulation model were as follows:
|
|
|
|
|
|
|
Average volatility of peer group
|
28.0
|
%
|
|
Risk free interest rate
|
1.59
|
%
|
|
Dividend yield
|
—
|
%
|
Compensation expense recorded for our stock-based awards was classified in our Consolidated Statements of Operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Three months ended
|
|
Six months ended
|
|
|
March 28,
2020
|
|
March 30,
2019
|
|
March 28,
2020
|
|
March 30,
2019
|
|
Cost of license revenue
|
$
|
11
|
|
|
$
|
48
|
|
|
$
|
11
|
|
|
$
|
370
|
|
|
Cost of support and cloud services revenue
|
1,523
|
|
|
1,158
|
|
|
3,010
|
|
|
2,133
|
|
|
Cost of professional services revenue
|
1,466
|
|
|
1,906
|
|
|
3,022
|
|
|
3,720
|
|
|
Sales and marketing
|
7,146
|
|
|
9,522
|
|
|
14,598
|
|
|
19,244
|
|
|
Research and development
|
4,765
|
|
|
5,190
|
|
|
11,697
|
|
|
10,090
|
|
|
General and administrative
|
5,573
|
|
|
9,143
|
|
|
16,082
|
|
|
20,817
|
|
|
Total stock-based compensation expense
|
$
|
20,484
|
|
|
$
|
26,967
|
|
|
$
|
48,420
|
|
|
$
|
56,374
|
|
Stock-based compensation expense includes $1.3 million and $2.8 million in the second quarter and first six months of 2020, respectively, and $1.4 million and $2.7 million in the second quarter and first six months of 2019, respectively, related to the ESPP.
5. Earnings per Share (EPS) and Common Stock
EPS
Basic EPS is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted EPS is calculated by dividing net income by the weighted-average number of shares outstanding plus the dilutive effect, if any, of outstanding RSUs using the treasury stock method. The calculation of the dilutive effect of outstanding equity awards under the treasury stock method includes consideration of unrecognized compensation expense as additional proceeds.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
Calculation of Basic and Diluted EPS (in thousands, except per share data)
|
March 28,
2020
|
|
March 30,
2019
|
|
March 28,
2020
|
|
March 30,
2019
|
|
Net income (loss)
|
$
|
7,156
|
|
|
$
|
(43,513
|
)
|
|
$
|
42,611
|
|
|
$
|
(22,528
|
)
|
|
Weighted-average shares outstanding—Basic
|
115,606
|
|
|
118,461
|
|
|
115,401
|
|
|
118,392
|
|
|
Dilutive effect of restricted stock units
|
411
|
|
|
—
|
|
|
455
|
|
|
—
|
|
|
Weighted-average shares outstanding—Diluted
|
116,017
|
|
|
118,461
|
|
|
115,856
|
|
|
118,392
|
|
|
Earnings (loss) per share—Basic
|
$
|
0.06
|
|
|
$
|
(0.37
|
)
|
|
$
|
0.37
|
|
|
$
|
(0.19
|
)
|
|
Earnings (loss) per share—Diluted
|
$
|
0.06
|
|
|
$
|
(0.37
|
)
|
|
$
|
0.37
|
|
|
$
|
(0.19
|
)
|
There were 331,464 and 90,555 anti-dilutive shares for the three and the six months ended March 28, 2020. For the three and six months ended March 30, 2019 the diluted net loss per share is the same as the basic net loss per share as the effects of all our potential common stock equivalents are antidilutive because we reported a loss for the periods.
Common Stock Repurchases
Our Articles of Organization authorize us to issue up to 500 million shares of our common stock. Our Board of Directors has authorized us to repurchase up to $1,500 million of our common stock in the period October 1, 2017 through September 30, 2020. We did not repurchase any shares in the second quarter and first six months of 2020. We repurchased $65.0 million of our common stock in the second quarter and first six months of 2019. All shares of our common stock repurchased are automatically restored to the status of authorized and unissued.
6. Acquisitions
Acquisition-related costs in the second quarter and first six months of 2020 totaled $0.3 million and $7.4 million, respectively compared to $0.4 million and $0.8 million, respectively in the second quarter and first six months of 2019. Acquisition-related costs include direct costs of potential and completed acquisitions (e.g., investment banker fees and professional fees, including legal and valuation services) and expenses related to acquisition integration activities (e.g., professional fees and severance). In addition, subsequent adjustments to our initial estimated amount of contingent consideration associated with specific acquisitions are included within acquisition-related charges. These costs are classified in general and administrative expenses in the accompanying Consolidated Statements of Operations.
Our results of operations include the results of acquired businesses beginning on their respective acquisition date. Our results of operations for the reported periods if presented on a pro forma basis would not differ materially from our reported results.
Onshape
On November 1, 2019, we completed our acquisition of Onshape Inc. pursuant to the Agreement and Plan of Merger dated as of October 23, 2019 by and among Onshape Inc., OPAL Acquisition Corporation and the Stockholder Representative named therein, the terms of which are described in the Form 8-K filed by PTC on October 23, 2019 and which is filed as Exhibit 1.1 to that Form 8-K. PTC paid approximately $469 million, net of cash acquired, for Onshape, which amount we borrowed under our existing credit facility. Onshape is not expected to be material to our 2020 results.
The acquisition of Onshape has been accounted for as a business combination. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition date. The fair values of intangible assets were based on valuations using a discounted cash flow model which requires the use of significant estimates and assumptions, including estimating future revenues and costs. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill.
The purchase price allocation resulted in $364.9 million of goodwill, $56.8 million of customer relationships, $47.3 million of purchased software, $3.6 million of trademarks and $4.1 million of other net liabilities. The acquired customer relationships, purchased software, and trademarks are being amortized over useful lives of 10 years, 16 years, and 15 years, respectively, based on the expected benefit pattern of the assets. The acquired goodwill was allocated to our software products segment and will not be deductible for income tax purposes. The resulting amount of goodwill reflects the expected value that will be created by accelerating CAD and PLM growth, especially in the low-end of the market and participating in future growth in the CAD and PLM SaaS market.
Frustum
On November 19, 2018, we acquired Frustum Inc. for $69.5 million (net of cash acquired of $0.7 million). We financed the acquisition with borrowings under our credit facility. Frustum is engaged in next-generation computer-aided design, including generative design, an approach that leverages artificial intelligence to generate design options. At the time of the acquisition, Frustum had approximately 12 employees and historical annualized revenues were not material.
The acquisition of Frustum was accounted for as a business combination. Assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The fair values of intangible assets were based on valuations using a discounted cash flow model which requires the use of significant estimates and assumptions, including estimating future revenues and costs. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill.
The purchase price allocation resulted in $53.7 million of goodwill, $17.9 million of purchased software and $2.1 million of other net liabilities. The acquired technology is being amortized over a useful life of 15 years based on the expected benefit pattern of the assets. The acquired goodwill was allocated to our software products segment and will not be deductible for income tax purposes. The resulting amount of goodwill reflects the expected value that will be created by integrating Frustum generative design technology into our CAD solutions.
7. Goodwill and Intangible Assets
We have two operating and reportable segments: (1) Software Products and (2) Professional Services. We assess goodwill for impairment at the reporting unit level. Our reporting units are determined based on the components of our operating segments that constitute a business for which discrete financial information is available and for which operating results are regularly reviewed by segment management. Our reporting units are the same as our operating segments.
As of March 28, 2020, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was $1,809.1 million and attributable to our Professional Services segment was $45.2 million. As of September 30, 2019, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was $1,362.4 million and attributable to our Professional Services segment was $45.7 million. Acquired intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.
We completed our annual goodwill impairment review as of June 29, 2019 based on a qualitative assessment. Our qualitative assessment included company specific (financial performance and long-range plans), industry, and macroeconomic factors, and consideration of the fair value of each reporting unit relative to its carrying value at the last valuation date. Based on our qualitative assessment, we believe it is more likely than not that the fair values of our reporting units exceed their carrying values and no further impairment testing is required.
Goodwill and acquired intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 28, 2020
|
|
September 30, 2019
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
Goodwill (not amortized)
|
|
|
|
|
$
|
1,603,081
|
|
|
|
|
|
|
$
|
1,238,179
|
|
|
Intangible assets with finite lives (amortized):
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased software
|
$
|
427,092
|
|
|
$
|
292,756
|
|
|
$
|
134,336
|
|
|
$
|
377,359
|
|
|
$
|
278,144
|
|
|
$
|
99,215
|
|
|
Capitalized software
|
22,877
|
|
|
22,877
|
|
|
—
|
|
|
22,877
|
|
|
22,877
|
|
|
—
|
|
|
Customer lists and relationships
|
413,054
|
|
|
303,095
|
|
|
109,959
|
|
|
355,931
|
|
|
288,828
|
|
|
67,103
|
|
|
Trademarks and trade names
|
22,524
|
|
|
15,628
|
|
|
6,896
|
|
|
18,891
|
|
|
15,260
|
|
|
3,631
|
|
|
Other
|
3,942
|
|
|
3,942
|
|
|
—
|
|
|
3,910
|
|
|
3,910
|
|
|
—
|
|
|
|
$
|
889,489
|
|
|
$
|
638,298
|
|
|
$
|
251,191
|
|
|
$
|
778,968
|
|
|
$
|
609,019
|
|
|
$
|
169,949
|
|
|
Total goodwill and acquired intangible assets
|
|
|
|
|
$
|
1,854,272
|
|
|
|
|
|
|
$
|
1,408,128
|
|
Goodwill
Changes in goodwill presented by reportable segments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Software Products
|
|
Professional Services
|
|
Total
|
|
Balance, October 1, 2019
|
$
|
1,196,064
|
|
|
$
|
42,115
|
|
|
$
|
1,238,179
|
|
|
Onshape acquisition
|
364,910
|
|
|
—
|
|
|
364,910
|
|
|
Foreign currency translation adjustment
|
(8
|
)
|
|
—
|
|
|
(8
|
)
|
|
Balance, March 28, 2020
|
$
|
1,560,966
|
|
|
$
|
42,115
|
|
|
$
|
1,603,081
|
|
Amortization of Intangible Assets
The aggregate amortization expense for intangible assets with finite lives was classified in our Consolidated Statements of Operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Three months ended
|
|
Six months ended
|
|
|
March 28,
2020
|
|
March 30,
2019
|
|
March 28,
2020
|
|
March 30,
2019
|
|
Amortization of acquired intangible assets
|
$
|
7,288
|
|
|
$
|
5,930
|
|
|
$
|
14,065
|
|
|
$
|
11,866
|
|
|
Cost of license revenue
|
6,879
|
|
|
6,842
|
|
|
13,678
|
|
|
13,559
|
|
|
Total amortization expense
|
$
|
14,167
|
|
|
$
|
12,772
|
|
|
$
|
27,743
|
|
|
$
|
25,425
|
|
8. Fair Value Measurements
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. GAAP prescribes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs that may be used to measure fair value:
|
|
|
|
•
|
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
|
|
|
|
|
•
|
Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or
|
|
|
|
|
•
|
Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Money market funds, time deposits and corporate notes/bonds are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets.
Certificates of deposit, commercial paper and certain U.S. government agency securities are classified within Level 2 of the fair value hierarchy. These instruments are valued based on quoted prices in markets that are not active or based on other observable inputs consisting of market yields, reported trades and broker/dealer quotes.
The principal market in which we execute our foreign currency contracts is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants usually are large financial institutions. Our foreign currency contracts’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy.
Our significant financial assets and liabilities measured at fair value on a recurring basis as of March 28, 2020 and September 30, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 28, 2020
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
616,556
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
616,556
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
—
|
|
|
1,482
|
|
|
—
|
|
|
1,482
|
|
|
Corporate notes/bonds
|
55,459
|
|
|
—
|
|
|
—
|
|
|
55,459
|
|
|
Forward contracts
|
—
|
|
|
2,708
|
|
|
—
|
|
|
2,708
|
|
|
|
$
|
672,015
|
|
|
$
|
4,190
|
|
|
$
|
—
|
|
|
$
|
676,205
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
Forward contracts
|
—
|
|
|
4,074
|
|
|
—
|
|
|
4,074
|
|
|
|
$
|
—
|
|
|
$
|
4,074
|
|
|
$
|
—
|
|
|
$
|
4,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
September 30, 2019
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
108,020
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
108,020
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
—
|
|
|
999
|
|
|
—
|
|
|
999
|
|
|
Corporate notes/bonds
|
56,436
|
|
|
—
|
|
|
—
|
|
|
56,436
|
|
|
Forward contracts
|
—
|
|
|
3,064
|
|
|
—
|
|
|
3,064
|
|
|
|
$
|
164,456
|
|
|
$
|
4,063
|
|
|
$
|
—
|
|
|
$
|
168,519
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
Forward contracts
|
—
|
|
|
2,771
|
|
|
—
|
|
|
2,771
|
|
|
|
$
|
—
|
|
|
$
|
2,771
|
|
|
$
|
—
|
|
|
$
|
2,771
|
|
Non-Marketable Equity Investments
We account for non-marketable equity investments at cost, less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. We monitor non-marketable equity investments for events that could indicate that the investments are impaired, such as deterioration in the investee's financial condition and business forecasts, and lower valuations in recent or proposed financings. Changes in fair value of non-marketable equity investments are recorded in other income (expense), net on the Consolidated Statements of Operations. The carrying value of our non-marketable equity investments is recorded in other assets on the Consolidated Balance Sheets and totaled $9.4 million as of both March 28, 2020 and September 30, 2019.
9. Marketable Securities
The amortized cost and fair value of marketable securities as of March 28, 2020 and September 30, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 28, 2020
|
|
|
Amortized cost
|
|
Gross unrealized
gains
|
|
Gross unrealized losses
|
|
Fair value
|
|
Commercial paper
|
$
|
1,482
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,482
|
|
|
Corporate notes/bonds
|
55,884
|
|
|
85
|
|
|
(510
|
)
|
|
55,459
|
|
|
|
$
|
57,366
|
|
|
$
|
85
|
|
|
$
|
(510
|
)
|
|
$
|
56,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
September 30, 2019
|
|
|
Amortized cost
|
|
Gross unrealized
gains
|
|
Gross unrealized losses
|
|
Fair value
|
|
Commercial paper
|
$
|
999
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
999
|
|
|
Corporate notes/bonds
|
56,318
|
|
|
146
|
|
|
(28
|
)
|
|
56,436
|
|
|
|
$
|
57,317
|
|
|
$
|
146
|
|
|
$
|
(28
|
)
|
|
$
|
57,435
|
|
Our investment portfolio consists of certificates of deposit, commercial paper, corporate notes/bonds and government securities that have a maximum maturity of three years. The longer the duration of these securities, the more susceptible they are to changes in market interest rates and bond yields. All unrealized losses are due to changes in market interest rates, bond yields and/or credit ratings.
We review our investments to identify and evaluate investments that have an indication of possible impairment. We concluded that, at March 28, 2020, the unrealized losses were temporary.
The following tables summarize the fair value and gross unrealized losses aggregated by category and the length of time that individual securities have been in a continuous unrealized loss position as of March 28, 2020 and September 30, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 28, 2020
|
|
|
Less than twelve months
|
|
Greater than twelve months
|
|
Total
|
|
|
Fair Value
|
|
Gross unrealized loss
|
|
Fair Value
|
|
Gross unrealized loss
|
|
Fair Value
|
|
Gross unrealized loss
|
|
Corporate notes/bonds
|
$
|
44,598
|
|
|
$
|
(510
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
44,598
|
|
|
$
|
(510
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
September 30, 2019
|
|
|
Less than twelve months
|
|
Greater than twelve months
|
|
Total
|
|
|
Fair Value
|
|
Gross unrealized loss
|
|
Fair Value
|
|
Gross unrealized loss
|
|
Fair Value
|
|
Gross unrealized loss
|
|
Corporate notes/bonds
|
$
|
12,419
|
|
|
$
|
(14
|
)
|
|
$
|
16,369
|
|
|
$
|
(14
|
)
|
|
$
|
28,788
|
|
|
$
|
(28
|
)
|
The following table presents our marketable securities by contractual maturity date as of March 28, 2020 and September 30, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 28, 2020
|
|
September 30, 2019
|
|
|
Amortized cost
|
|
Fair value
|
|
Amortized cost
|
|
Fair value
|
|
Due in one year or less
|
$
|
34,305
|
|
|
$
|
34,135
|
|
|
$
|
27,725
|
|
|
$
|
27,735
|
|
|
Due after one year through three years
|
23,061
|
|
|
22,806
|
|
|
29,592
|
|
|
29,700
|
|
|
|
$
|
57,366
|
|
|
$
|
56,941
|
|
|
$
|
57,317
|
|
|
$
|
57,435
|
|
10. Derivative Financial Instruments
Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Our most significant foreign currency exposures relate to Western European countries, Japan, China, Israel, India and Canada. Our foreign currency risk management strategy is principally designed to mitigate the future potential financial impact of changes in the U.S. Dollar value of anticipated transactions and balances denominated in foreign currency resulting from changes in foreign currency exchange rates. We enter into derivative transactions, specifically foreign currency forward contracts, to manage the exposures to foreign currency exchange risk to reduce earnings volatility. We do not enter into derivatives transactions for trading or speculative purposes.
Non-Designated Hedges
We hedge our net foreign currency monetary assets and liabilities primarily resulting from foreign currency denominated receivables and payables with foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These contracts have maturities of up to approximately seven months. Generally, we
do not designate these foreign currency forward contracts as hedges for accounting purposes and changes in the fair value of these instruments are recognized immediately in earnings. Because we enter into forward contracts only as an economic hedge, any gain or loss on the underlying foreign-denominated 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 March 28, 2020 and September 30, 2019, we had outstanding forward contracts with notional amounts equivalent to the following:
|
|
|
|
|
|
|
|
|
|
|
|
Currency Hedged (in thousands)
|
March 28,
2020
|
|
September 30,
2019
|
|
Canadian / U.S. Dollar
|
$
|
5,781
|
|
|
$
|
9,408
|
|
|
Euro / U.S. Dollar
|
304,482
|
|
|
308,282
|
|
|
British Pound / U.S. Dollar
|
6,713
|
|
|
3,756
|
|
|
Israeli Sheqel / U.S. Dollar
|
8,350
|
|
|
10,272
|
|
|
Japanese Yen / U.S. Dollar
|
18,935
|
|
|
37,462
|
|
|
Swiss Franc / U.S. Dollar
|
13,986
|
|
|
12,001
|
|
|
Danish Kroner/ U.S. Dollar
|
3,877
|
|
|
—
|
|
|
Swedish Kronor / U.S. Dollar
|
6,873
|
|
|
20,636
|
|
|
Singapore Dollar / U.S. Dollar
|
41,190
|
|
|
34,585
|
|
|
Chinese Renminbi / U.S. Dollar
|
5,692
|
|
|
52,466
|
|
|
Russian Ruble / U.S. Dollar
|
6,876
|
|
|
—
|
|
|
All other
|
3,921
|
|
|
9,487
|
|
|
Total
|
$
|
426,676
|
|
|
$
|
498,355
|
|
The following table shows the effect of our non-designated hedges in the Consolidated Statements of Operations for the six months ended March 28, 2020 and March 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging Instruments (in thousands)
|
|
Location of Gain or (Loss) Recognized in Income
|
|
Net realized and unrealized gain or (loss) (excluding the underlying foreign currency exposure being hedged)
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
|
|
|
|
March 28,
2020
|
|
March 30,
2019
|
|
March 28,
2020
|
|
March 30,
2019
|
|
Forward Contracts
|
|
Other income (expense), net
|
|
$
|
2,151
|
|
|
$
|
(1,752
|
)
|
|
$
|
2,844
|
|
|
$
|
(2,739
|
)
|
In the first three and six months ended March 28, 2020 foreign currency losses, net were $2.5 million and $2.6 million, respectively. In the first three and six months ended March 30, 2019 foreign currency losses, net were $0.2 million and $0.4 million, respectively.
Net Investment Hedges
We translate balance sheet accounts of subsidiaries with foreign functional currencies into the U.S. Dollar using the exchange rate at each balance sheet date. Resulting translation adjustments are reported as a component of accumulated other comprehensive loss on the Consolidated Balance Sheet. We designate certain foreign exchange forward contracts as net investment hedges against exposure on translation of balance sheet accounts of Euro functional subsidiaries. Net investment hedges partially offset the impact of foreign currency translation adjustment recorded in accumulated other comprehensive loss on the Consolidated Balance Sheet. All foreign exchange forward contracts are carried at fair value on the Consolidated Balance Sheet and the maximum duration of foreign exchange forward contracts is approximately three months.
Net investment hedge relationships are designated at inception, and effectiveness is assessed retrospectively on a quarterly basis using the net equity position of Euro functional subsidiaries. As the forward contracts are highly effective in offsetting exchange rate exposure, we record changes in these net investment hedges in accumulated other comprehensive loss and subsequently reclassify them to
foreign currency translation adjustment in accumulated other comprehensive loss at the time of forward contract maturity. Changes in the fair value of foreign exchange forward contracts due to changes in time value are excluded from the assessment of effectiveness. Our derivatives are not subject to any credit contingent features. We manage credit risk with counterparties by trading among several counterparties and we review our counterparties’ credit at least quarterly.
As of March 28, 2020 and September 30, 2019, we had outstanding forward contracts designated as net investment hedges with notional amounts equivalent to the following:
|
|
|
|
|
|
|
|
|
|
|
|
Currency Hedged (in thousands)
|
March 28,
2020
|
|
September 30,
2019
|
|
Euro / U.S. Dollar
|
$
|
182,095
|
|
|
$
|
183,396
|
|
|
Total
|
$
|
182,095
|
|
|
$
|
183,396
|
|
The following table shows the effect of our derivative instruments designated as net investment hedges in the Consolidated Statements of Operations for the second quarter and first six months ended March 28, 2020 and March 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated as Hedging Instruments
|
|
Gain or (Loss) Recognized in OCI
|
|
Location of Gain or (Loss) Reclassified from OCI
|
Gain or (Loss) Reclassified from OCI
|
|
Location of Gain or (Loss) Excluded from Effectiveness Testing
|
Gain or (Loss) Recognized-Excluded Portion
|
|
|
|
Three months ended
|
|
|
Three months ended
|
|
|
Three months ended
|
|
|
|
March 28,
2020
|
|
March 30,
2019
|
|
|
March 28,
2020
|
|
March 30,
2019
|
|
|
March 28,
2020
|
|
March 30,
2019
|
|
Forward Contracts
|
|
$
|
(2,140
|
)
|
|
$
|
1,466
|
|
|
Accumulated other comprehensive loss
|
$
|
(6,016
|
)
|
|
$
|
(1,813
|
)
|
|
Other income (expense), net
|
$
|
962
|
|
|
$
|
1,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
Six months ended
|
|
|
Six months ended
|
|
|
|
March 28,
2020
|
|
March 30,
2019
|
|
|
March 28,
2020
|
|
March 30,
2019
|
|
|
March 28,
2020
|
|
March 30,
2019
|
|
Forward Contracts
|
|
$
|
(5,706
|
)
|
|
$
|
768
|
|
|
Accumulated other comprehensive loss
|
$
|
(6,778
|
)
|
|
$
|
(1,040
|
)
|
|
Other income (expense), net
|
$
|
2,191
|
|
|
$
|
1,593
|
|
As of March 28, 2020, we estimate that all amounts reported in accumulated other comprehensive loss will be applied against exposed balance sheet accounts upon translation within the next three months.
The following table shows our derivative instruments measured at gross fair value as reflected in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Fair Value of Derivatives Designated As Hedging Instruments
|
|
Fair Value of Derivatives Not Designated As Hedging Instruments
|
|
|
March 28,
2020
|
|
September 30,
2019
|
|
March 28,
2020
|
|
September 30,
2019
|
|
Derivative assets (1):
|
|
|
|
|
|
|
|
|
Forward Contracts
|
$
|
—
|
|
|
$
|
1,674
|
|
|
$
|
2,708
|
|
|
$
|
1,390
|
|
|
Derivative liabilities (2):
|
|
|
|
|
|
|
|
|
Forward Contracts
|
$
|
1,841
|
|
|
$
|
—
|
|
|
$
|
2,233
|
|
|
$
|
2,771
|
|
|
|
|
|
(1)
|
As of March 28, 2020 and September 30, 2019, current derivative assets of $2.7 million and $3.1 million, respectively, are recorded in other current assets in the Consolidated Balance Sheets.
|
|
|
|
|
(2)
|
As of March 28, 2020 and September 30, 2019, current derivative liabilities of $4.1 million and $2.8 million, respectively, are recorded in accrued expenses and other current liabilities in the Consolidated Balance Sheets.
|
Offsetting Derivative Assets and Liabilities
We have entered into master netting arrangements that allow net settlements under certain conditions. Although netting is permitted, it is currently our policy and practice to record all derivative assets and liabilities on a gross basis in the Consolidated Balance Sheets.
The following table sets forth the offsetting of derivative assets as of March 28, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Gross Amounts Offset in the Consolidated Balance Sheets
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets
|
|
|
|
As of March 28, 2020
|
Gross Amount of Recognized Assets
|
|
Gross Amounts Offset in the Consolidated Balance Sheets
|
|
Net Amounts of Assets Presented in the Consolidated Balance Sheets
|
|
Financial Instruments
|
|
Cash Collateral Received
|
|
Net Amount
|
|
Forward Contracts
|
$
|
2,708
|
|
|
$
|
—
|
|
|
$
|
2,708
|
|
|
$
|
(2,708
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
The following table sets forth the offsetting of derivative liabilities as of March 28, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Gross Amounts Offset in the Consolidated Balance Sheets
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets
|
|
|
|
As of March 28, 2020
|
Gross Amount of Recognized Liabilities
|
|
Gross Amounts Offset in the Consolidated Balance Sheets
|
|
Net Amounts of Liabilities Presented in the Consolidated Balance Sheets
|
|
Financial Instruments
|
|
Cash Collateral Pledged
|
|
Net Amount
|
|
Forward Contracts
|
$
|
4,074
|
|
|
$
|
—
|
|
|
$
|
4,074
|
|
|
$
|
(2,708
|
)
|
|
$
|
—
|
|
|
$
|
1,366
|
|
11. Segment and Geographic 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, subscription and related support revenue (including updates and technical support) for all our products; and (2) Professional Services, which includes consulting, implementation and training services. We do not allocate sales and marketing or general and administrative expense to our operating segments as these activities are managed on a consolidated basis. Additionally, segment profit does not include stock-based compensation, amortization of intangible assets, restructuring charges and certain other identified costs that we do not allocate to the segments for purposes of evaluating their operational performance.
The revenue and profit attributable to our operating segments are summarized below. We do not produce asset information by reportable segment; therefore, it is not reported.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Three months ended
|
|
Six months ended
|
|
|
March 28,
2020
|
|
March 30,
2019
|
|
March 28,
2020
|
|
March 30,
2019
|
|
Software Products
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
324,080
|
|
|
$
|
249,521
|
|
|
$
|
638,446
|
|
|
$
|
542,764
|
|
|
Operating Costs (1)
|
94,912
|
|
|
93,913
|
|
|
197,104
|
|
|
185,541
|
|
|
Profit
|
229,168
|
|
|
155,608
|
|
|
441,342
|
|
|
357,223
|
|
|
|
|
|
|
|
|
|
|
|
Professional Services
|
|
|
|
|
|
|
|
|
Revenue
|
35,523
|
|
|
40,930
|
|
|
77,267
|
|
|
82,376
|
|
|
Operating Costs (2)
|
33,425
|
|
|
32,326
|
|
|
67,172
|
|
|
64,189
|
|
|
Profit
|
2,098
|
|
|
8,604
|
|
|
10,095
|
|
|
18,187
|
|
|
|
|
|
|
|
|
|
|
|
Total segment revenue
|
359,603
|
|
|
290,451
|
|
|
715,713
|
|
|
625,140
|
|
|
Total segment costs
|
128,337
|
|
|
126,239
|
|
|
264,276
|
|
|
249,730
|
|
|
Total segment profit
|
231,266
|
|
|
164,212
|
|
|
451,437
|
|
|
375,410
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated operating expenses:
|
|
|
|
|
|
|
|
|
Sales and marketing expenses
|
100,292
|
|
|
94,200
|
|
|
200,444
|
|
|
188,696
|
|
|
General and administrative expenses
|
27,795
|
|
|
25,856
|
|
|
54,714
|
|
|
51,627
|
|
|
Restructuring and other charges, net
|
18,242
|
|
|
26,980
|
|
|
32,276
|
|
|
45,473
|
|
|
Intangibles amortization
|
14,167
|
|
|
12,772
|
|
|
27,743
|
|
|
25,425
|
|
|
Stock-based compensation
|
20,484
|
|
|
26,967
|
|
|
48,420
|
|
|
56,374
|
|
|
Other unallocated operating expenses (income) (3)
|
261
|
|
|
295
|
|
|
7,390
|
|
|
629
|
|
|
Total operating income (loss)
|
50,025
|
|
|
(22,858
|
)
|
|
80,450
|
|
|
7,186
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
(32,618
|
)
|
|
(11,383
|
)
|
|
(44,716
|
)
|
|
(21,659
|
)
|
|
Other income (expense), net
|
(1,629
|
)
|
|
821
|
|
|
(925
|
)
|
|
1,475
|
|
|
Income (loss) before income taxes
|
$
|
15,778
|
|
|
$
|
(33,420
|
)
|
|
$
|
34,809
|
|
|
$
|
(12,998
|
)
|
(1) Operating costs for the Software Products segment include all costs of software revenue and research and development costs, excluding stock-based compensation and intangible amortization.
(2) Operating costs for the Professional Services segment include all cost of professional services revenue, excluding stock-based compensation and fair value adjustments for deferred services costs.
(3) Other unallocated operating expenses include acquisition-related and other transactional costs and fair value adjustments for deferred services costs.
Our international revenue is presented based on the location of our customer. Revenue for the geographic regions in which we operate is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Three months ended
|
|
Six months ended
|
|
Revenue
|
March 28,
2020
|
|
March 30,
2019
|
|
March 28,
2020
|
|
March 30,
2019
|
|
Americas
|
$
|
153,993
|
|
|
$
|
119,717
|
|
|
$
|
309,967
|
|
|
$
|
261,570
|
|
|
Europe
|
146,422
|
|
|
119,045
|
|
|
282,943
|
|
|
230,397
|
|
|
Asia-Pacific
|
59,188
|
|
|
51,689
|
|
|
122,803
|
|
|
133,173
|
|
|
Total revenue
|
$
|
359,603
|
|
|
$
|
290,451
|
|
|
$
|
715,713
|
|
|
$
|
625,140
|
|
12. Income Taxes
In the second quarter and first six months of 2020, our effective tax rate was 55% on pre-tax income of $15.8 million and (22)% on a pre-tax income of $34.8 million, respectively, compared to (30)% on pre-tax loss of $(33.4) million and (73)% on a pre-tax loss of $(13.0) million in the second quarter and first six months of 2019, respectively. In the first six months of 2020 and 2019, our effective tax rate differed from the statutory federal income tax rate of 21% due to U.S. tax reform, our corporate structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate, the excess tax benefit related to stock-based compensation and the indirect effects of the adoption of ASC 606. Additionally, in the first six months of 2020 and 2019, we reduced the valuation allowance by $21.2 million and $1.8 million as the result of the Onshape and Frustum acquisitions, respectively. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland. In 2020 and 2019, the foreign rate differential predominantly relates to these Irish earnings.
On March 27, 2020, the U.S. Federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES ACT”). The CARES Act is an emergency economic stimulus package in response to the coronavirus outbreak, which among other things contains numerous income tax provisions. While we continue to evaluate the impact of the CARES Act, we do not currently believe it will have a material impact on our consolidated financial statements or related disclosures.
We have concluded, based on the weight of available evidence, that a full valuation allowance continues to be required against our U.S. net deferred tax assets as they are not more likely than not to be realized in the future. We will continue to reassess 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 in the U.S. We regularly assess the likelihood of additional assessments by tax authorities and provide for these matters as appropriate. We are currently under audit by tax authorities in several jurisdictions. Audits by tax authorities typically involve examination of the deductibility of certain permanent items, limitations on net operating losses and tax credits. Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in material changes in our estimates.
As of March 28, 2020 and September 30, 2019, we had unrecognized tax benefits of $13.2 million and $11.5 million, respectively. If all our unrecognized tax benefits as of March 28, 2020 were to become recognizable in the future, we would record a benefit to the income tax provision of $13.2 million, which would be partially offset by an increase in the U.S. valuation allowance of $6.3 million.
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 believe it is reasonably possible that within the next 12 months the amount of unrecognized tax benefits related to the resolution of multi-jurisdictional tax positions could be reduced by up to $0.5 million as audits close and statutes of limitations expire.
In the fourth quarter of 2016, we received an assessment of approximately $12 million from the tax authorities in South Korea. The assessment relates to various tax issues, primarily foreign withholding taxes. We have appealed and intend to vigorously defend our positions. We believe that upon completion of a multi-level appeal process it is more likely than not that our positions will be sustained. Accordingly, we have not recorded a tax reserve for this matter. We paid this assessment in the first quarter of 2017 and have recorded the amount in other assets, pending resolution of the appeal process. If the South Korean tax authorities were to prevail then, in addition to the $12 million already assessed, the potential additional exposure through 2019 would be approximately $13 million. We are continuing to work with our advisors during the court process and still believe our position is sustainable.
In April 2020 we became aware of a potential new interpretation of a withholding tax law in a non-U.S. jurisdiction and its application to certain transactions that was not previously reasonably knowable by us. We are evaluating this new information and the effect, if any, on our tax positions. The amount of any potential impact, if any, on our financial statements is not yet estimable at this time.
13. Debt
At March 28, 2020 and September 30, 2019, we had the following debt obligations:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 28,
2020
|
|
September 30,
2019
|
|
4.000% Senior notes due 2028(1)
|
$
|
500,000
|
|
|
$
|
—
|
|
|
3.625% Senior notes due 2025(1)
|
500,000
|
|
|
—
|
|
|
6.000% Senior notes due 2024(2)
|
500,000
|
|
|
500,000
|
|
|
Credit facility revolver(3)
|
148,125
|
|
|
173,125
|
|
|
Total debt
|
1,648,125
|
|
|
673,125
|
|
|
Unamortized debt issuance costs for the Senior notes(4)
|
(17,403
|
)
|
|
(3,991
|
)
|
|
Total debt, net of issuance costs
|
$
|
1,630,722
|
|
|
$
|
669,134
|
|
|
|
|
|
(1)
|
The 2028 and 2025 notes issued in February 2020 were classified as long-term debt as of March 28, 2020 on the Consolidated Balance Sheet.
|
|
|
|
|
(2)
|
The 2024 notes issued in May 2016 were classified as short-term debt as of March 28, 2020 and as long-term debt as of September 30, 2019 on the Consolidated Balance Sheets.
|
|
|
|
|
(3)
|
The amount outstanding under the credit facility revolver was classified as long-term debt as of March 28, 2020 and September 30, 2019 on the Consolidated Balance Sheets. Unamortized debt issuance costs related to the credit facility were $5.5 million and $3.1 million as of March 28, 2020 and September 30, 2019, respectively, and were included in other assets on the Consolidated Balance Sheets.
|
|
|
|
|
(4)
|
Unamortized debt issuance costs related to the 2024 notes were $3.6 million as of March 28, 2020 and were included in short-term debt on the Consolidated Balance Sheet. Of the $14.1 million in financing costs incurred in connection with the issuance of the 2028 and 2025 notes, unamortized debt issuance costs were $13.8 million as of March 28, 2020 and were included in long-term debt on the Consolidated Balance Sheet. Unamortized debt issuance costs as of September 30, 2019 related to the 2024 notes and were included in long-term debt on the Consolidated Balance Sheet.
|
Senior Notes
In February 2020, we issued $500 million in aggregate principal amount of 4.0% senior, unsecured long-term debt at par value, due in 2028 (the 2028 notes) and $500 million in aggregate principal amount of 3.625% senior, unsecured long-term debt at par value, due in 2025 (the 2025 notes). In the second quarter of 2020, we used $460 million of the net proceeds from the sale of the notes to repay a portion of the outstanding revolving loan under our credit facility. In the third quarter of 2020, we will use the remaining net proceeds from the sale of the notes to redeem the $500 million aggregate principal amount of our outstanding 6.0% senior notes due in 2024 (the 2024 notes). The redemption price for the 2024 notes is 103% of the aggregate principal amount of the notes, plus accrued and unpaid interest to, but excluding, May 15, 2020.
As of March 28, 2020, we recognized in interest expense $15.0 million for fees to be paid upon early redemption of the 2024 notes.
As of March 28, 2020, the total estimated fair value of the 2028, 2025 and 2024 senior notes was approximately $468.8 million, $471.0 million and $502.5 million, respectively, based on quoted prices for the notes on that date.
We were in compliance with all the covenants for all of our senior notes as of March 28, 2020.
Terms of the 2028 and 2025 Notes
Interest on the 2028 and 2025 notes is payable semi-annually on February 15 and August 15. The debt indenture for the 2028 and 2025 notes includes covenants that limit our ability to, among other things, incur additional debt, grant liens on our properties or capital stock, enter into sale and leaseback transactions or asset sales, and make capital distributions.
We may, on one or more occasions, redeem the 2025 and 2028 notes in whole or in part at specified redemption prices. In certain circumstances constituting a change of control, we will be required to make an offer to repurchase the notes at a purchase price equal to 101% of the aggregate principal amount of the notes, plus accrued and unpaid interest. Our ability to repurchase the notes upon such event may be limited by law, by the indenture associated with the notes, by our then-available financial resources or by the terms of other agreements to which we may be party at such time. If we fail to repurchase the
notes as required by the indenture, it would constitute an event of default under the indenture which, in turn, may also constitute an event of default under other obligations.
Credit Agreement
In February 2020, we entered into a Third Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as Administrative Agent, for a new secured multi-currency bank credit facility with a syndicate of banks. The new credit facility replaced our prior credit facility. As with the prior credit facility, we expect to use the credit facility for general corporate purposes, including acquisitions of businesses, share repurchases and working capital requirements. As of March 28, 2020, the fair value of our credit facility approximates its book value.
The credit facility consists of a $1 billion revolving credit facility, which may be increased by up to an additional $500 million in the aggregate if the existing or additional lenders are willing to make such increased commitments. The maturity date of the credit facility is February 13, 2025, when all remaining amounts outstanding will be due and payable. The revolving loan commitment does not require amortization of principal and may be repaid in whole or in part prior to the scheduled maturity date at our option without penalty or premium.
PTC Inc. and certain eligible foreign subsidiaries are eligible to borrow under the credit facility. The obligations under the credit facility are required to be guaranteed by PTC Inc.’s material domestic subsidiaries that become parties to the subsidiary guaranty, if any. As of the filing of this Form 10-Q, there are no subsidiary guarantors of the obligations under the credit facility. Any borrowings by eligible foreign subsidiary borrowers would be guaranteed by PTC Inc. and any subsidiary guarantors. As of the filing of this Form 10-Q, there were no borrowings by eligible foreign subsidiaries. In addition, substantially all existing and after-acquired personal property of PTC Inc. and certain of its material domestic subsidiaries that become parties to the subsidiary guaranty, if any, is or will be, in the case of such subsidiary guarantors, subject to first priority perfected liens in favor of the lenders under the credit facility. 100% of the voting equity interests of certain of PTC Inc.’s domestic subsidiaries and 65% of its material first-tier foreign subsidiaries are pledged as collateral for the obligations under the credit facility.
Loans under the credit facility bear interest at variable rates which reset every 30 to 180 days depending on the rate and period selected by PTC as described below. As of March 28, 2020, the annual rate for borrowings outstanding was 2.6%. Interest rates on borrowings outstanding under the credit facility range from 1.25% to 1.75% above an adjusted LIBO rate (or an agreed successor rate) for Euro currency borrowings or range from 0.25% to 0.75% above the defined base rate (the greater of the Prime Rate, the NYFRB rate plus 0.5%, or an adjusted LIBO rate plus 1%) for base rate borrowings, in each case based upon PTC’s total leverage ratio. Additionally, PTC may borrow certain foreign currencies at rates set in the same range above the respective LIBO rates (or agreed successor rates) for those currencies, based on PTC’s total leverage ratio. A quarterly commitment fee on the undrawn portion of the credit facility is required, ranging from 0.175% to 0.30% per annum based upon PTC’s total 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 $100 million for any purpose and an additional $200 million for acquisitions of businesses. In addition, under the credit facility, PTC and its subsidiaries must maintain the following financial ratios:
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Total leverage ratio, defined as consolidated funded indebtedness to consolidated trailing four quarters EBITDA, not to exceed 4.50 to 1.00 as of the last day of any fiscal quarter;
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•
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Senior secured leverage ratio, defined as senior consolidated total indebtedness (which excludes unsecured indebtedness) to the consolidated trailing four quarters EBITDA, not to exceed 3.00 to 1.00 as of the last day of any fiscal quarter; and
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Interest coverage ratio, defined as the ratio of consolidated trailing four quarters EBITDA to consolidated trailing four quarters of cash basis interest expense, of not less than 3.00 to 1.00 as of the last day of any fiscal quarter.
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As of March 28, 2020, our total leverage ratio was 3.36 to 1.00, our senior secured leverage ratio was 0.47 to 1.00 and our interest coverage ratio was 7.86 to 1.00 and we were in compliance with all financial and operating covenants of the credit facility.
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.
We incurred $2.0 million in financing costs in connection with the February 2020 credit facility and $1.0 million in connection with a November 2019 amendment to our prior credit facility. These origination costs are recorded as deferred debt issuance costs and are included in other assets. Financing costs are expensed over the remaining term of the obligations.
In the second quarter and first six months of 2020 we paid $6.8 million and $23.7 million, respectively, of interest on our debt. In the second quarter and first six months of 2019 we paid $3.8 million and $20.4 million of interest, respectively, on our debt. The average interest rate on borrowings outstanding in the second quarter and first six months of 2020 was approximately 4.6% and 4.8%, respectively. The average interest rate on borrowings outstanding in the second quarter and first six months of 2019 was approximately 5.3% and 5.4%, respectively.
14. Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets and operating lease obligations on our Consolidated Balance Sheets. Our operating leases are primarily for office space, cars, servers, and office equipment. We made an election not to separate lease components from non-lease components for office space, servers and office equipment. Finance leases are included in property and equipment, accrued expenses and other current liabilities, and other liabilities on our Consolidated Balance Sheets.
Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the leases. Right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The right-of-use assets include any lease payments made and exclude lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Our operating leases expire at various dates through 2037. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Certain office space leases require us to pay for taxes, insurance, maintenance and other operating expenses in addition to rent.
Our headquarters are located at 121 Seaport Boulevard, Boston, Massachusetts (the Boston lease). The Boston lease is for approximately 250,000 square feet and runs from January 1, 2019 through June 30, 2037. Base rent for the first year of the lease is $11.0 million and will increase by $1 per square foot per year thereafter ($0.3 million per year) with base rent first becoming payable on July 1, 2020. In addition to the base rent, we are required to pay our pro rata portions of building operating costs and real estate taxes (together, “Additional Rent”). Additional Rent is estimated to be approximately $7.1 million for the first year we begin paying rent. The lease provides for $25 million in landlord funding for leasehold improvements ($100 per square foot). The leasehold improvement funding provision was fully utilized by us and was reflected as a derecognition adjustment to the right-of-use asset.
The components of lease cost reflected in the Consolidated Statement of Operations for the second quarter and first six months ended March 28, 2020 were as follows:
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(in thousands)
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Three months ended
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Six months ended
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March 28, 2020
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March 28, 2020
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Operating lease cost
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$
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10,386
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$
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19,143
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Short-term lease cost
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1,017
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2,890
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Variable lease cost
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575
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2,490
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Sublease income
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(1,013
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)
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(2,025
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)
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Total lease cost
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$
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10,965
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$
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22,498
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Supplemental cash flow and right-of use assets information for the three and six months ended March 28, 2020 was as follows:
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(dollar amounts in thousands)
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Three months ended
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Six months ended
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March 28, 2020
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March 28, 2020
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Cash paid for amounts included in the measurement of lease liabilities
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Operating cash flows from operating leases
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$
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9,642
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$
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15,140
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Right-of-use assets obtained in exchange for new operating lease liabilities(1)
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$
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(1,230
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)
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$
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4,151
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Right-of-use assets obtained in exchange for new financing lease liabilities
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$
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—
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$
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1,500
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(1)
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For the three months ending March 28, 2020, right-of-use assets obtained in exchange for new operating lease liabilities is a net reduction to the right-of-use assets due to lease incentives being earned for right-of-use asset obtained in the first quarter of 2020.
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Supplemental balance sheet information related to the leases as of March 28, 2020 was as follows:
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As of
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March 28, 2020
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Weighted-average remaining lease term - operating leases
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12.32 years
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Weighted-average remaining lease term - financing leases
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5 years
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Weighted-average discount rate - operating leases
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5.5
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%
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Weighted-average discount rate - financing leases
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3.0
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%
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Maturities of lease liabilities as of March 28, 2020 are as follows:
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(in thousands)
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Operating Leases
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Remainder of 2020
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$
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22,462
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2021
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42,670
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2022
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28,457
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2023
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21,174
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2024
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17,757
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Thereafter
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186,554
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Total future lease payments
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$
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319,074
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Less: imputed interest
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(94,916
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)
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Total
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$
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224,158
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As of March 28, 2020, we have operating leases that have not yet commenced. These leases will commence in 2020 with lease terms between 3 years to 5 years and approximate future lease payments of $2.2 million.
Under the prior lease standard (ASC 840), as of September 30, 2019, future minimum lease payments under non-cancellable operating leases are as follows (in thousands):
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2020
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$
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31,868
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2021
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33,094
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2022
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25,624
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2023
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19,279
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2024
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16,909
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Thereafter
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186,037
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Total minimum lease payments
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$
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312,811
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Exited (Restructured) Facilities
As of March 28, 2020, we have net liabilities of $17.1 million related to excess facilities (compared to $16.5 million at September 30, 2019), representing $4.5 million of right-of-use assets and $21.6 million of lease obligations, of which $13.3 million is classified as short term and $8.3 million is classified as long term.
In determining the amount of right-of-use assets for restructured facilities, we are required to estimate such factors as future vacancy rates, the time required to sublet properties and sublease rates. Updates to these estimates may result in revisions to the value of right-of-use assets recorded. The amounts recorded are based on the net present value of estimated sublease income. As of March 28, 2020, the right-of-use assets for exited facilities reflects discounted committed sublease income of approximately $3.3 million and uncommitted sublease income of approximately $1.2 million. As a result of changes in our sublease income assumptions and an incremental obligation to exit a portion of our former headquarters facility early, in the three months ended March 28, 2020, we recorded a facility impairment charge of $4.0 million. In addition, in the second quarter of 2020, we exited the former Onshape headquarters lease and recorded a related $0.7 million impairment charge.
In the second quarter and the first six months ended March 28, 2020 we made payments of $2.1 million and $4.5 million, respectively, related to lease costs for exited facilities.
15. Commitments and Contingencies
Legal and Regulatory Matters
Korean Tax Audit
In July 2016, we received an assessment of approximately $12 million from the tax authorities in South Korea related to an ongoing tax audit. See Note 12. Income Taxes for additional information.
Legal Proceedings
We are subject to various other legal proceedings and claims that arise in the ordinary course of business. We do not believe that resolving the legal proceedings and claims that we are currently subject to will 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 proceedings and claims be resolved against us, the operating results for a reporting period could be adversely affected.
Accruals
With respect to legal proceedings and claims, we record an accrual for a contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. For legal proceedings and claims for which the likelihood that a liability has been incurred is more than remote but less than probable, we estimate the range of possible outcomes. As of March 28, 2020, we estimate approximately $0.8 million to $3.0 million in legal proceedings and claims, of which we had accrued $0.8 million.
Guarantees and Indemnification Obligations
We enter into standard indemnification agreements in the ordinary course of our business. Under 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 products, claims relating to property damage or personal injury resulting from the performance of services by us or our subcontractors and data breaches. The maximum potential amount of future payments we could be required to make under indemnification agreements for intellectual property and damage and injury claims is unlimited; in most cases the maximum potential amount for indemnification for data breaches is capped in those contracts. Historically, our costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and, accordingly, we believe the estimated fair value of liabilities under 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 liabilities is immaterial.
