PTC Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended September 30, 2013. The filing also reports unaudited fourth-quarter results. PTC develops software and services for product design and lifecycle management, including CAD, PLM, ALM, SCM and service lifecycle management (SLM).
Financial performance
| Metric | FY2013 | FY2012 | Change / context |
|---|---|---|---|
| Revenue | $1,293.5 million | $1,255.7 million | Up 3% reported; up 4% constant currency. Organic revenue, excluding 2013 acquisitions, declined 5%. |
| License revenue | $344.2 million | $348.4 million | Down 1% reported; organic license revenue declined 9%. |
| Service revenue | $294.7 million | $295.3 million | Approximately flat reported; organic service revenue declined 13%. |
| Support revenue | $654.7 million | $611.9 million | Up 7%; represented 50% of revenue. |
| GAAP operating income / margin | $127.3 million / 9.8% | $128.1 million / 10.2% | Operating income down 1% reported. |
| Non-GAAP operating income / margin | $286.3 million / 22.1% | $246.8 million / 19.6% | Up 16%; non-GAAP measures exclude specified costs and tax items. |
| GAAP net income (loss) | $143.8 million | $(35.4) million | FY2013 included a $17.5 million tax benefit; FY2012 included a $124.5 million non-cash tax charge. |
| Diluted EPS | $1.19 GAAP; $1.81 non-GAAP | $(0.30) GAAP; $1.51 non-GAAP | Non-GAAP diluted EPS rose 20%. |
| Cash from operations | $224.7 million | $218.0 million | Operating cash flow increased modestly. |
Gross margin was 71%, versus 70% in FY2012. Service gross margin improved to 12% from 10%, while license gross margin decreased to 90% from 91%; support gross margin remained 88%.
Fourth-quarter revenue was $344.8 million, operating income $49.0 million and net income $56.5 million. In the year-earlier fourth quarter, revenue was $325.3 million and net loss was $84.0 million, largely reflecting the deferred-tax valuation allowance charge.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $241.9 million at year-end, down from $489.5 million. FY2013 cash uses included $245.8 million for acquisitions, $111.9 million of credit-facility repayments and $74.9 million of share repurchases.
- Debt under the credit facility was $258.1 million: $142.5 million term loan and $115.6 million revolving loan. The facility matures August 2017; required term-loan principal payments include $15 million in each of 2014 and 2015, $22.5 million in 2016 and $90 million in 2017.
- PTC reported $184 million available under the revolving loan, compliance with covenants, a leverage ratio of 0.94 and fixed-charge coverage of 18.43. The facility’s limits are 2.50 and minimum 3.50, respectively.
- About 85% of cash was held outside the United States. Management cited existing U.S. cash, a $154.4 million intercompany receivable repayable without tax cost, future U.S. operating cash flows and facility availability as sources for U.S. needs.
- Management expected FY2014 operating cash flow to support approximately $100 million of debt repayment, $75 million of repurchases and about $29 million of capital expenditures. PTC pays no cash dividend.
Material changes and business developments
- Servigistics, Enigma and NetIDEAS were acquired in FY2013 for a combined net cash outlay of $245.8 million and contributed $94.9 million of reported revenue, primarily in SLM. SLM revenue more than doubled to $168.7 million; CAD revenue declined 4% and Extended PLM declined 5%.
- Excluding FY2013 acquisitions, revenue fell 5%; organic license revenue fell 9%. Manufacturing-sector weakness, particularly in Europe and the Americas, and currency movements weighed on results. Support growth and acquired SLM revenue offset some weakness.
- FY2013 restructuring charges were $52.2 million, including workforce reductions of approximately 550 employees. Management expected these actions to lower quarterly operating expenses by about $16 million.
- Revenue was geographically diversified: Americas 40%, Europe 37%, Pacific Rim 13% and Japan 10%. Approximately two-thirds of revenue and half of expenses were denominated in currencies other than the U.S. dollar.
Outlook, risks and unusual items
- FY2014 targets: revenue growth of 2%–3%, license revenue growth of 2%–6%, support growth of about 3%, service growth of about 2%, non-GAAP operating margin of approximately 25% and non-GAAP diluted EPS of $2.00–$2.10. GAAP operating margin guidance was approximately 17% and GAAP diluted EPS $1.29–$1.37.
- Targets assumed $1.35 per euro and 98 yen per U.S. dollar and depended on economic recovery, sales productivity, cost controls, service-margin improvement and large transactions. Management cautioned that weak manufacturing conditions, currency changes and deal timing could cause material variance.
- The SEC and Department of Justice were investigating payments and expenses by certain China business partners and employees for possible compliance issues, including under the Foreign Corrupt Practices Act. Resolution could involve fines, penalties, litigation or collateral business effects. The amount could not be estimated, and no liability was recorded. China represented 6% of FY2013 revenue; certain employees and partners had been terminated.
- Other key exposures include competition, reliance on support renewals and large customer transactions, acquisition integration and potential goodwill impairment, software defects or cybersecurity incidents, tax audits and deferred-tax realizability, variable-rate debt, and customer/government spending conditions.
- FY2013 results included a $5.1 million legal settlement gain and significant tax benefits from partial valuation-allowance releases. Non-GAAP results exclude restructuring, acquisition costs, stock compensation, acquired-intangible amortization and identified tax/non-operating items; these adjustments are material and may recur.
Most important facts for investors to verify
- Progress against FY2014 revenue, margin and EPS targets, including the assumptions for currencies and the contribution from acquired businesses.
- Organic license demand, support renewal and seat growth, and whether SLM growth can offset declines in CAD and Extended PLM.
- Cash conversion and the planned debt repayments, repurchases and capital expenditures, alongside the amount and location of available cash.
- Developments, potential financial exposure and any recorded liability related to the China investigation.
- Reconciliation of GAAP and non-GAAP performance, particularly the impact of restructuring charges, acquisition-related amortization and valuation-allowance changes.