PTC Inc. (Parametric Technology Corporation) — FY2012 Form 10-K
Reporting period: Fiscal year ended September 30, 2012. The filing also reports fourth-quarter results for the quarter ended September 30, 2012. Amounts below are in U.S. dollars; non-GAAP measures are identified as such.
Business context
PTC develops product lifecycle management, CAD, application lifecycle management, supply chain management and service lifecycle management software, with related maintenance, consulting and training services. It sells through direct and indirect channels and reports Software Products and Services segments. Servigistics, acquired on October 2, 2012, expanded its service lifecycle management offerings and was not included in FY2012 operating results.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $1,255.7 million | $1,166.9 million |
| License revenue | $348.4 million | $342.1 million |
| Maintenance revenue | $611.9 million | $557.7 million |
| Consulting and training revenue | $295.3 million | $267.2 million |
| Gross margin | $883.6 million; 70% of revenue | $810.2 million; 69% |
| Operating income and margin | $128.1 million; 10.2% | $117.1 million; 10.0% |
| Net income (loss) | $(35.4) million | $85.4 million |
| GAAP diluted EPS | $(0.30) | $0.71 |
| Non-GAAP operating margin / diluted EPS | 19.6% / $1.51 | 17.7% / $1.26 |
| Cash from operating activities | $218.0 million | $78.7 million |
- Revenue increased 8% as reported (10% constant currency); excluding MKS and 4CS acquisition contributions, revenue grew 3% (5% constant currency). Non-GAAP EPS increased 20%.
- Cash and cash equivalents were $489.5 million, versus $167.9 million a year earlier. The FY2012 balance included $230 million borrowed in anticipation of the Servigistics acquisition. Working capital was $397.4 million.
- Debt under the credit facility was $370 million, including a $150 million term loan and $220 million revolving borrowing. The company reported a 1.40-to-1 leverage ratio and compliance with covenants. Debt bears variable interest; the reported rate was 1.8125% at year-end.
- Accounts receivable was $217.4 million, down from $230.2 million. The company reported 61 days sales outstanding. Pension plans were underfunded by $76.3 million.
Material changes versus FY2011
- Enterprise revenue grew 20% and Enterprise license revenue grew 17%, with acquired MKS and 4CS contributing to growth. Excluding those acquisitions, Enterprise revenue grew 10% and Enterprise license revenue 7%.
- Desktop revenue declined 3%; Desktop license revenue fell 10%, following strong 2011 demand associated with the PTC Creo launch. Indirect-channel revenue increased 8%.
- Maintenance grew 10% and consulting and training grew 11%. Management cited maintenance-seat growth and improved services profitability.
- Reported GAAP net income swung to a loss, primarily because of a $124.5 million non-cash tax charge to establish a valuation allowance against U.S. net deferred tax assets, alongside $24.9 million of restructuring charges. The tax provision was $156.1 million on $120.7 million of pretax income.
- Operating cash flow rose from $78.7 million to $218.0 million, reflecting improved profitability, collections and the prior-year $48 million litigation payment. FY2012 also included $21 million of restructuring cash payments.
Outlook, risks and unusual items
- For FY2013, management targeted revenue growth of 8%–10%, including Servigistics; license growth of 6%–9%, maintenance growth of about 7%, consulting and training growth of 12%–15%, and non-GAAP operating margin of about 21.5% (GAAP margin about 12%). The plan assumed $1.30 per euro and was subject to currency and economic conditions.
- Management expected to repay $120–$160 million of credit-facility borrowings, repurchase $55–$75 million of shares and spend about $28 million on capital expenditures in FY2013. It stated existing cash and operating cash flow should meet requirements for at least 12 months.
- A workforce restructuring adopted in October 2012 was expected to generate a first-quarter FY2013 charge of about $16 million and approximately $5 million in quarterly savings. PTC also expected a significant first-quarter tax benefit from releasing part of the U.S. deferred-tax valuation allowance in connection with Servigistics purchase accounting.
- PTC was investigating payments and expenses involving certain China employees and business partners for possible legal or policy violations, including potential Foreign Corrupt Practices Act issues. It had voluntarily disclosed the matter to the DOJ and SEC; fines or other sanctions were possible, but the amount, if any, could not be estimated. China represented 6%–7% of revenue.
- Management cited uncertain global conditions and weaker manufacturing activity, especially in China, as risks to customer spending. Other key risks include large-deal timing, foreign-exchange exposure, competition, fixed short-term costs, acquisition integration, tax uncertainty and covenant compliance. A $0.10 change in the dollar/euro rate was estimated to affect annual operating income by about $15 million.
Important facts for investors to verify
- Whether FY2013 revenue, license growth and margin targets were achieved, particularly on an organic and constant-currency basis.
- The actual Servigistics purchase price allocation, contribution to revenue and earnings, integration costs, and anticipated valuation-allowance release.
- Any resolution, penalties or operational effects from the China investigation.
- Debt repayment, variable-rate exposure, covenant headroom and cash deployment, including share repurchases.
- Whether U.S. taxable results support future realization of deferred tax assets and any reduction in the valuation allowance.