PTC Inc. (Parametric Technology Corporation) — FY2011 Form 10-K
Reporting period: Fiscal year ended September 30, 2011. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. PTC sells product lifecycle management, application lifecycle management and computer-aided design software, alongside maintenance, consulting and training services.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $1,166.9 million | $1,010.0 million |
| License revenue | $342.1 million | $296.0 million |
| Consulting and training revenue | $267.1 million | $217.6 million |
| Maintenance revenue | $557.7 million | $496.4 million |
| GAAP operating income / margin | $117.1 million / 10.0% | $74.8 million / 7.4% |
| Non-GAAP operating income / margin | $206.6 million / 17.7% | $157.7 million / 15.6% |
| Net income | $85.4 million | $24.4 million |
| Diluted EPS | $0.71 | $0.20 |
| Non-GAAP diluted EPS | $1.26 | $1.00 |
| Cash from operating activities | $78.7 million | $156.6 million |
- Revenue increased 16% year over year, or 12% at constant currency. Desktop revenue rose 15%; Enterprise revenue rose 16%, including acquired businesses. Excluding MKS and 4CS, Enterprise revenue increased 10%, while Enterprise license revenue declined 7%.
- Fourth-quarter revenue was $339.4 million, operating income $51.2 million and net income $37.6 million; diluted EPS was $0.31.
- Maintenance represented 48% of revenue. Reported profitability improved, but the GAAP tax rate fell to 18% from 70% in 2010, when a $43.4 million one-time tax provision materially affected earnings.
- Operating cash flow fell by about half, mainly reflecting the Japan litigation settlement cash payment and the timing of receivable collections. Accounts receivable rose to $230.2 million from $169.3 million; days sales outstanding increased to 62 from 57.
- Cash and cash equivalents were $167.9 million at year-end. Revolving credit borrowings were $200 million at September 30; PTC borrowed another $40 million in October 2011. Working capital was $122.9 million. The credit facility allows up to $300 million, with a conditional $150 million accordion; PTC reported compliance with covenants at year-end.
Material changes and notable items
- PTC acquired MKS, an application lifecycle management provider, in May 2011, and 4C Solutions in September. The acquisitions added $26.8 million of reported FY2011 revenue and increased goodwill and intangible assets; MKS accounted for most of the acquisition contribution.
- PTC launched its Creo product family in June 2011. Management cited improved Desktop license demand, particularly from large direct customers and the reseller channel. Enterprise license revenue improved in the second half, with fourth-quarter growth of 30% including acquisitions and 11% excluding them.
- FY2011 included a roughly $5 million expected loss on an automotive services contract, $7.8 million in acquisition-related costs, and $12.3 million in net foreign currency losses. A $9.0 million litigation-resolution gain had benefited FY2010.
- PTC repurchased $54.9 million of stock in FY2011. The board authorized up to $100 million of additional repurchases from October 2011 through September 2012. PTC does not pay a cash dividend.
Outlook, risks and contingencies
- For FY2012, management expected revenue growth of 14%–15%, including approximately 20% license growth, 11% maintenance growth and 14% services growth, and targeted a 100-basis-point improvement in operating margin. Management expected MKS and 4CS to contribute approximately $90–$100 million of non-GAAP revenue and be slightly accretive to non-GAAP EPS.
- Management said it expected cash and operating cash generation to meet needs for at least the next 12 months, planned about $31 million of FY2012 capital expenditures, expected $55 million of share repurchases, and targeted reducing credit-facility borrowings to $100 million by September 30, 2012. These are expectations, not assurances.
- PTC voluntarily disclosed its investigation of China-related payments by certain business partners and expenses by employees to the U.S. Department of Justice and SEC. Outcomes could include fines or other sanctions; the company said China historically represented 6%–7% of revenue.
- The European Commission was investigating alleged anticompetitive practices in the CAD sector; PTC reported no charges or proceedings against it as of the filing. Other ordinary-course legal matters were not expected by management to have a material adverse effect, but outcomes are uncertain.
- Key risks include volatile quarterly results and reliance on large, late-quarter transactions; macroeconomic and manufacturing-sector weakness; competition and product adoption; foreign-exchange exposure; maintenance renewal levels; integration and impairment risks from acquisitions; tax audits and deferred-tax-asset realization; credit-facility covenants; and pension underfunding. Pension plans were underfunded by $68.2 million at year-end.
Important facts for investors to verify
- Whether FY2012 growth and margin targets were achieved, and whether reported growth reflects organic performance, currency effects or acquisitions.
- Enterprise license momentum excluding acquired revenue, and the sustainability of Creo-driven Desktop growth and maintenance renewals.
- Operating cash conversion, receivable balances and collections, and progress toward the stated debt-reduction target after the October borrowing.
- Results of the China investigation and any DOJ or SEC action, as well as developments in the European Commission inquiry.
- The assumptions behind adjusted results: non-GAAP measures exclude stock compensation, acquired-intangible amortization and other items that can recur; GAAP results should be considered alongside them.
- The complete audited financial statements and notes for acquisition accounting, tax exposures, contingent obligations, pension estimates and credit-facility terms.