FinanceLooker

Excrept from filing document 2024-09-30

The aggregate market value of our voting stock held by non affiliates was approximately 22 558 974 797 on March 28 2024 based on the last reported sale price of our common stock on the Nasdaq Global Select Market on that date There were 119 716 947 shares of our common stock outstanding on that day and 120 129 080 shares of our common stock outstanding on November 12 2024
This Annual Report contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended We intend such forward looking statements to be covered by the safe harbor provisions for forward looking statements contained in the Private Securities Litigation Reform Act of 1995 In particular statements that are not historical facts including but not limited to statements about our anticipated financial results capital development and growth stock repurchases our environmental sustainability initiatives and the development of our products markets and workforce are forward looking statements These forward looking statements are generally identifiable by use of the words believe expect intend anticipate estimate project or similar expressions whether in the negative or affirmative Forward looking statements are based on our current plans expectations and assumptions and are not guarantees of future performance Factors that may cause our actual results to differ materially from these statements include but are not limited to the risks and uncertainties discussed in Item 1A Risk Factors and elsewhere throughout this Annual Report Such factors among others could have a material adverse effect upon our business results of operations and financial condition We caution readers not to place undue reliance on any forward looking statements which only speak as of the date made We undertake no obligation to update any forward looking statement to reflect events or circumstances after the date on which such statement is made
PTC is a global software company that enables manufacturers and product companies to digitally transform how they design manufacture and service the physical products that the world relies on Headquartered in Boston Massachusetts PTC employs over 7 000 people and supports more than 30 000 customers globally
Our customers are focused on improving their competitiveness in the face of global competition and increasing product complexity and our suite of software offerings is a strategic enabler of this and their digital transformation initiatives We enable our customers to establish a strong product data foundation and leverage that foundation to drive cross functional collaboration accelerate new product introduction timelines and deliver higher product quality
Given the breadth and openness of our portfolio we can enable end to end digital thread initiatives which leverage a connected flow of product data across design manufacturing service and ultimately reuse A digital thread enables product companies to break down silos streamline workflows and achieve interoperability across departments functions and systems with a single version of truth It also secures the quality consistency and traceability of product related data ensuring that the data is up to date accessible reliable and actionable With a digital thread the right data is delivered to the right people at the right time and in the right context across the value chain
Our business is based on a subscription model with 93 of our 2024 revenue being recurring in nature Compared to a perpetual license model our subscription model naturally drives higher customer engagement and retention and provides better business predictability This in turn enables us to make steady and sustained investments to pursue mid to long term growth opportunities
Our Windchill PLM application suite manages all aspects of the product development lifecycle from concept through service and end of life Windchill provides real time information sharing dynamic data visualization and the ability to collaborate across geographically distributed teams enabling manufacturers to elevate their product development manufacturing field service and end of life processes
Our Arena Software as a Service SaaS PLM solution enables product teams to collaborate virtually anytime and anywhere making it easier to share the latest product and quality information with internal teams and supply chain partners and deliver innovative products to customers faster Our Arena quality management system software connects quality and product designs into a single system to simplify regulatory compliance
Our Creo 3D CAD technology enables the digital design testing and modification of product models With its design simulation additive manufacturing and generative design innovations we enable our customers to be first to market with differentiated products From initial concept to design simulation and analysis Creo provides designers with innovative tools to efficiently create better products faster
Our Onshape SaaS product development platform unites computer aided design with data management collaboration tools and real time analytics A cloud native multi tenant solution that can be instantly deployed on virtually any computer or mobile device Onshape enables teams to work together from just about anywhere Real time design reviews commenting and simultaneous editing enable a collaborative workflow where multiple design iterations can be completed in parallel and merged into the final design
Our principal products and services are enhanced by a collection of enabling technologies including SaaS versions of our Creo CAD and Windchill PLM software artificial intelligence software our ThingWorx Internet of Things software and our Vuforia augmented reality software The primary focus of these technologies is to deliver value added capabilities to our principal products and services such as the improved security and collaboration environment of a SaaS platform unlocking productivity with artificial intelligence moving product data more quickly across engineering manufacturing and service using IoT or automatically analyzing the quality of a manufactured product with augmented reality
We derive approximately 75 of our sales from products and services sold directly by our sales force to end user customers The rest of our sales of products and services are through third party resellers Our sales force focuses on large accounts while our reseller channel provides a cost effective means of covering the small and medium size business markets Our strategic reseller and software partners enable us to increase our market reach offer broader solutions and add compelling technology to our offerings Our strategic services partners provide service offerings to help customers implement our product offerings and transition to SaaS
We compete with a number of companies whose offerings address one or more specific functional areas covered by our solutions For enterprise CAD and PLM solutions we compete with large established companies including Autodesk Dassault Systèmes SA and Siemens AG For our ALM products we compete with IBM Jama Software Inc and Siemens AG For our SLM products we compete with enterprise software companies such as Oracle SAP and IFS AB and with companies that offer point solutions
Our software products and related technical know how along with our trademarks including our company names product names and logos are proprietary We protect our intellectual property rights in these items by relying on copyrights trademarks patents and common law safeguards including trade secret protection The nature and extent of such legal protection depends in part on the type of intellectual property right and the relevant jurisdiction In the U S we are generally able to maintain our trademark registrations for as long as the trademarks are in use and to maintain our patents for up to 20 years from the earliest effective filing date We also use license management and other anti piracy technology measures as well as contractual restrictions to curtail the unauthorized use and distribution of our products
At PTC we re working to contribute to the decarbonization and circularity of global manufacturing While we have a climate action plan committed to reducing our company s footprint we believe far larger benefits will flow from our handprint stemming from our software offerings Our software solutions enable manufacturers to design build and service their products more sustainably
Our emission reduction plan was validated by the Science Based Targets initiative SBTi in September 2024 Our near term commitment is to reduce by 2030 combined Scope 1 direct emissions from owned controlled operations and Scope 2 indirect energy use emissions by 50 and reduce Scope 3 Category 1 Purchased Goods and Services by 25 compared to our 2022 baseline Our long term net zero commitment is to reach net zero across all scope emissions by 2050 with absolute reductions of over 90 across Scopes 1 3 with accredited carbon removal offsets for the remaining 10 or less as needed
Environmental sustainability is integral to our product offerings With our software manufacturers can support their sustainability and compliance initiatives including by designing with less material enhancing product repairability and circularity improving factory efficiency and enabling remote service
PTC provides a comprehensive and competitive compensation and benefits package designed to attract retain motivate and engage talent around the world including base salaries and for eligible roles incentive and equity compensation Employees also have the opportunity to purchase PTC stock at a discount through our Employee Stock Purchase Plan
Our benefit offerings are designed to meet the needs of our employees and their families around the world Specific offerings differ country by country due to cultural norms market dynamics and legal requirements but we provide a wide variety of core health and financial programs such as healthcare life and disability insurance employee assistance plans retirement savings and pension benefit plans and generous paid family leave and vacation time
As we focus on enhancing the employee experience we are increasing our efforts to invest in our people and create meaningful opportunities to learn grow develop and advance their careers We have specific development programs and coaching programs as well as numerous other self led learning paths The variety of options means that employees have the ability to focus on the development path most meaningful to them
Commitment to our values and diversity in our workforce is supported by various ongoing efforts We mitigate bias by coaching managers and leaders in fostering psychologically safe environments We also review and revise our processes based on feedback and engagement scores from employee pulse surveys We embed equitable practices into the planning and execution of how we attract select develop and retain talent Meanwhile our DEI ambassadors are aligned with business functions to amplify and enhance our efforts in these areas Finally to cultivate a community of belonging our 11 Employee Resource Groups foster an inclusive culture and facilitate safe spaces for employees to navigate social issues and challenges
We make available free of charge on our website at www ptc com the following reports as soon as reasonably practicable after electronically filing them with or furnishing them to the SEC our Annual Reports on Form 10 K our Quarterly Reports on Form 10 Q our Current Reports on Form 8 K and amendments to those reports filed or furnished pursuant to Sections 13 a or 15 d of the Securities Exchange Act of 1934 Our Proxy Statements for our Annual Meetings and Section 16 trading reports on SEC Forms 3 4 and 5 also are available on our website
The following are important factors we have identified that could affect an investment in our securities You should consider them carefully when evaluating an investment in PTC securities because these factors could cause actual results to differ materially from historical results or any forward looking statements The risks described below are not the only risks we face Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business financial condition operating results and prospects
The markets for our products and solutions are rapidly changing and characterized by intense competition disruptive technology developments evolving distribution models and increasingly lower barriers to entry If we are unable to provide products and solutions that address customers needs as well as our competitors products and solutions do or to align our pricing licensing and delivery models with customer preferences we could lose customers and or fail to attract new customers which could adversely affect our business financial condition operating results and prospects
For example customer demand for SaaS solutions is increasing While our Arena ServiceMax and Onshape solutions are cloud native SaaS solutions and we have introduced our Windchill Creo and Kepware SaaS solutions customers may not adopt them as we expect If we are unable to compete successfully with competitors offering SaaS solutions we could lose customers and or fail to attract new customers which could adversely affect our business financial condition operating results and prospects
Our current and potential competitors range from large and well established companies to emerging start ups Some of our competitors and potential competitors have greater name recognition in the markets we serve and greater financial technical sales and marketing and other resources which could limit our ability to gain customer recognition and confidence in our products and solutions and successfully sell our products and solutions which could adversely affect our ability to grow our business
A breach of security in our products or computer systems or those of our third party service providers could compromise the integrity of our products cause loss of data harm our reputation create additional liability and adversely affect our business financial condition operating results and prospects
We have implemented and continue to implement measures intended to maintain the security and integrity of our products source code and IT systems The potential for a security breach or system disruption has significantly increased over time as the scope number intensity and sophistication of attempted cyberattacks and cyber intrusions have increased particularly cyberattacks and intrusions designed to access and exfiltrate information and to disrupt and lock up access to systems for the purpose of demanding a ransom payment It is impossible for us to eliminate the risk of a successful cyberattack or intrusion and in fact we regularly deal with security issues and have experienced security incidents from time to time Accordingly there is a risk that a cyberattack or intrusion will be successful and that such event will be material
In addition we offer cloud services to our customers and some of our products including our SaaS products are hosted by third party service providers which expose us to additional risks as those repositories of our customers proprietary data may be targeted and a cyberattack or intrusion may be successful and material Interception of data transmission misappropriation or modification of data corruption of data and attacks against our service providers may adversely affect our products or product and service delivery Malicious code viruses or vulnerabilities that are undetected by us or our service providers may disrupt our business operations generally and may have a disproportionate effect on those of our products that are developed and delivered in the cloud environment
While we devote resources to maintaining the security and integrity of our products and systems as well as performing due diligence of our third party service providers security breaches that have not had a material effect on our business or that of our customers have occurred and we will continue to face cybersecurity threats and exposure A significant breach of the security and or integrity of our products or systems or those of our third party service providers whether intentional or by human error by our employees or others could disrupt our business operations or those of our customers could prevent our products from functioning properly could enable access to sensitive proprietary or confidential information of our customers or could enable access to our sensitive proprietary or confidential information This could require us to incur significant costs of investigation remediation and or payment of a ransom harm our reputation cause customers to stop buying our products and cause us to face lawsuits and potential liability any of which could have a material adverse effect on our business financial condition operating results and prospects
We have a large ecosystem of strategic technology and software partners and system integrators that enable us to enhance our products and offerings expand our market reach and accelerate our customers digital transformation journeys Failures by those partners or termination of those relationships could adversely affect our business financial condition operating results and prospects
We have many strategic technology and software partner and system integrator relationships with other companies that provide technologies and software that we embed in our solutions that provide implementation services to our customers that we work with to offer complementary solutions and services and that market and sell our solutions If these companies fail to perform as we expect or if a company terminates or substantially alters the terms of the relationship we could experience delays in product development reduced or delayed sales customer dissatisfaction and additional expenses and our business financial condition results of operations and prospects could be materially adversely affected
Our continued growth depends in part on the ability of our existing and potential customers to use and access our cloud services or our website in order to download our software or encrypted access keys for our software within an acceptable amount of time We use a number of third party service providers that we do not control for key components of our infrastructure particularly with respect to development and delivery of our cloud based products The use of these service providers gives us greater flexibility in efficiently delivering a more tailored scalable customer experience but also exposes us to additional risks and vulnerabilities Third party service providers operate their own platforms that we access and we are therefore vulnerable to their service interruptions We may experience interruptions delays and outages in service and availability from time to time as a result of problems with our third party service providers infrastructure Lack of availability of this infrastructure could be due to a number of potential causes including technical failures natural disasters fraud or security attacks that we cannot predict or prevent Such outages could adversely impact our business financial condition results of operations and prospects
If we are unable to renew our agreements with our cloud service providers on commercially reasonable terms or any of our agreements are prematurely terminated or we need to add new cloud services providers to increase capacity and uptime we could experience interruptions downtime delays and additional expenses related to transferring to and providing support for these new platforms Any of the above circumstances or events may harm our reputation and brand reduce the availability or usage of our platforms and impair our ability to attract new users any of which could adversely affect our business financial condition results of operations and prospects
If we are unable to attract and retain employees with the requisite skills to develop and sell our products and solutions or to guide operate and support our business we may be unable to compete successfully which would adversely affect our business financial condition results of operations and prospects
A large amount of our sales are to customers in the discrete manufacturing sector Manufacturers worldwide continue to face uncertainty about the global macroeconomic environment due to among other factors the effects of earlier and ongoing supply chain disruptions high interest rates and inflation volatile foreign exchange rates and the current relative strength of the U S Dollar and the U S government s focus on technology transactions with non U S entities Customers may delay reduce or forego purchases of our solutions due to these challenges and concerns which could adversely affect our business financial condition results of operations and prospects
Transforming our business to offer and support SaaS solutions requires considerable additional investment in our organization Whether we will be successful and will accomplish our business and financial objectives is subject to risks and uncertainties including but not limited to our ability to further develop and scale infrastructure our ability to include functionality and usability in such offerings that address customer requirements our ability and the ability of our partners to transition existing customer implementations to SaaS customer demand attach and renewal rates channel adoption and our costs If we are unable to successfully establish these new offerings and navigate our business transition our business financial condition results of operations and prospects could be adversely affected
We sell and deliver software and services and maintain support operations in many countries whose laws and practices differ from one another and are subject to unexpected changes Managing these geographically dispersed operations requires significant attention and resources to ensure compliance with laws of those countries and those of the U S governing our activities in non U S countries
Those laws include but are not limited to anti corruption laws and regulations including the U S Foreign Corrupt Practices Act FCPA and the U K Bribery Act 2010 data privacy laws and regulations including the European Union s General Data Privacy Regulation and trade and economic sanctions laws and regulations including laws administered by the U S Department of the Treasury s Office of Foreign Assets Control the U S State Department the U S Department of Commerce the United Nations Security Council and other sanctions authorities Our compliance risks are heightened due to the go to market approach for our business that relies heavily on a partner ecosystem the fact that some of the countries we operate in have a higher incidence of corruption and fraudulent business practices the fact that we sell to governments and state owned business enterprises and the fact that global enforcement of laws has significantly increased
Accordingly while we strive to maintain a comprehensive compliance program an employee agent or business partner may violate our policies or U S or other applicable laws as has occurred in the past or we may inadvertently violate such laws Investigations of alleged violations of those laws can be expensive and disruptive Violations of such laws can lead to civil and or criminal prosecutions substantial fines and other sanctions including the revocation of our rights to continue certain operations and also cause business loss and reputational harm which could adversely affect our business financial condition results of operations and prospects
We are subject to an increasing number of laws and regulations promulgated by multiple countries and jurisdictions that require new and expansive disclosure on sustainability topics and in some cases remediation of adverse effects that will increase our compliance costs and expose us to risks associated with regulatory compliance
These laws and regulations include those promulgated pursuant to the European Union s Corporate Sustainability Reporting Directive CSRD and its Corporate Sustainability Due Diligence Directive CSDDD CSRD requires new and expansive disclosures related to sustainability risks and opportunities CSDDD will require us to conduct due diligence to identify prevent mitigate and account for actual and potential adverse impacts on human rights and the environment arising from our own operations and our value chains and to remediate any such adverse impacts Compliance with these directives requires significant investment in resources including the implementation of new reporting systems data collection processes and due diligence procedures
As many of our customers and potential customers particularly those in Germany and elsewhere in the European Union are also subject to such laws and directives those companies will increasingly be required to assess our sustainability efforts and impacts if we are unable to satisfactorily address their requests for information or other sustainability related requests contracting periods with those companies may be extended or those companies may elect to use other suppliers or switch suppliers which could adversely affect our business financial condition results of operations and prospects
The regulatory landscape for sustainability continues to evolve and expand and the introduction of additional laws or regulatory requirements may impose further compliance burdens and further increase our compliance costs We are committed to meeting existing and future regulatory requirements however the financial and operational impact of current and future laws and regulations remains uncertain and could materially adversely affect our business financial condition results of operations and prospects
Our stakeholders including investors customers suppliers and employees are placing greater emphasis on our ESG performance and transparency This increasing stakeholder attention to and expectations around ESG matters particularly sustainability matters and our response to the same may result in higher costs including higher costs related to compliance stakeholder engagement and contracting adversely impact our reputation or otherwise negatively affect our business performance and prospects
Our statements about our sustainability environmental and human capital initiatives and goals and progress against those goals may be based on standards for measuring progress that are still developing internal controls and processes that continue to evolve and assumptions that are subject to change If our related data processing and reporting are incomplete or otherwise inaccurate or if we fail to achieve progress on our stated targets or initiatives when or as expected our business financial condition operating results and prospects could be adversely affected
Our software products are proprietary We protect our intellectual property rights in these items by relying on copyrights trademarks patents and common law safeguards including trade secret protection as well as restrictions on disclosures and transferability contained in our agreements with other parties Despite these measures the laws of all relevant jurisdictions may not afford adequate protection to our products and other intellectual property In addition we frequently encounter attempts by individuals and companies to pirate our software If our measures to protect our intellectual property rights fail others may be able to use those rights which could reduce our competitiveness and adversely affect our business financial condition operating results and prospects
In addition any legal action to protect our intellectual property rights that we may bring or be engaged in could be costly may distract management from day to day operations and may lead to additional claims against us and we may not succeed all of which could adversely affect our business financial condition operating results and prospects
The software industry is characterized by frequent litigation regarding copyright patent and other intellectual property rights We have faced such lawsuits from time to time Any such claim could result in significant expense to us and divert the efforts of our technical and management personnel We cannot be sure that we would prevail against any such asserted claims If we did not prevail we could be prevented from using the claimed intellectual property or be required to enter into royalty or licensing agreements which might not be available on terms acceptable to us In addition to possible claims with respect to our proprietary products some of our products contain technology developed by and licensed from third parties and we may likewise be susceptible to infringement claims with respect to these third party technologies
We have acquired and intend to continue to acquire new businesses and technologies If we fail to successfully integrate and manage the businesses and technologies we acquire if an acquisition does not further our business strategy or return a level of sales as we expect or if a business we acquire has unexpected legal or financial liabilities our business financial condition results of operations and prospects could be adversely affected
If we were to incur a significant amount of debt whether by borrowing funds under our credit facility or otherwise or issuing new debt securities to finance an acquisition our interest expense debt service requirements and leverage would increase significantly The increases in these expenses and in our leverage could constrain our ability to operate as we might otherwise or to borrow additional amounts and could adversely affect our business financial condition results of operations and prospects
We have a substantial amount of indebtedness As of November 14 2024 our total debt outstanding was approximately 1 668 million 1 billion of which was associated with the 3 625 Senior Notes and 4 000 Senior Notes together Senior Notes issued in February 2020 which mature in February 2025 and 2028 respectively and are unsecured 177 million of which was borrowed under our credit facility revolving line which matures in January 2028 and 491 million of which was borrowed under our credit facility term loan which began amortizing in March 2024 All amounts outstanding under the credit facility and the Senior Notes will be due and payable in full on their respective maturity dates As of November 14 2024 we had unused commitments under our credit facility of approximately 1 073 million PTC Inc and one of our foreign subsidiaries are eligible borrowers under the credit facility and certain other foreign subsidiaries may become borrowers under our credit facility in the future subject to certain conditions
We and our subsidiaries might incur significant additional indebtedness and other obligations in the future including secured debt Although the credit agreement governing our credit facility contains restrictions on the incurrence of additional indebtedness these restrictions are subject to a number of qualifications and exceptions The additional indebtedness incurred in compliance with these restrictions could be substantial In addition the credit agreement and the indenture governing our Senior Notes due 2025 and 2028 will not prevent us from incurring obligations that do not constitute indebtedness If new
Our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and operating performance which are subject to prevailing economic and competitive conditions and to certain financial business legislative regulatory and other factors some of which are beyond our control We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal premium if any and interest on our indebtedness
If our cash flows and capital resources are insufficient to fund our debt service obligations we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations seek additional debt or equity capital or restructure or refinance our indebtedness We may not be able to effect any such alternative measures if necessary on commercially reasonable terms or at all and even if successful those alternative actions may not allow us to meet our scheduled debt service obligations Our debt agreements restrict our ability to dispose of assets and use the proceeds from those dispositions and may also restrict our ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due
If we cannot make scheduled payments on our debt we will be in default and the lenders under our credit facility could terminate their commitments to loan money the lenders could foreclose against the assets securing their borrowings the holders of our Senior Notes could declare all outstanding principal premium if any and interest to be due and payable and we could be forced into bankruptcy or liquidation These events could result in a loss of your investment
We are required to comply with specified financial and operating covenants under our debt agreements and to make payments under our debt which limit our ability to operate our business as we otherwise might operate it Our failure to comply with any of these covenants or to meet any debt payment obligations could result in an event of default which if not cured or waived would result in any amounts outstanding including any accrued interest and or unpaid fees becoming immediately due and payable We might not have enough working capital or liquidity to satisfy any repayment obligations if those obligations were accelerated In addition if we are not in compliance with the financial and operating covenants under the credit facility when we wish to borrow funds we will be unable to borrow funds to pursue certain corporate initiatives including strategic acquisitions which could adversely affect our business and prospects
Market prices for securities of software companies are generally volatile and are subject to significant fluctuations that may be unrelated or disproportionate to the operating performance of these companies Accordingly the trading prices and valuations of software companies stocks and of ours may not be predictable Negative changes in the public s perception of the prospects of software companies or of PTC or the markets we serve could depress our stock price regardless of our operating results
Our quarterly operating results fluctuate depending on many factors including the effect of ASC 606 on revenue recognition for the on premises software subscriptions we offer variability in the timing of start dates for our subscription offerings length of contracts and renewals and significant unexpected expenses in a quarter Accordingly our quarterly results are difficult to predict and we may be unable to confirm or adjust expectations with respect to our operating results for a quarter until that quarter has closed If our quarterly operating results do not meet market or analysts expectations our stock price could decline
We expect that our international operations will continue to expand and to account for a significant portion of our total revenue Because we transact business in various foreign currencies the volatility of foreign exchange rates has had and may in the future have a material adverse effect on our revenue expenses cash flows and operating results
As a multinational organization we are subject to income taxes as well as non income based taxes in the U S and in various foreign jurisdictions Significant judgment is required in determining our worldwide income tax provision and other tax liabilities In the ordinary course of a global business there are many intercompany transactions and calculations where the ultimate tax determination is uncertain Our tax returns are subject to review by various taxing authorities Although we believe that our tax estimates are reasonable the final determination of tax audits or tax disputes could be different from what is reflected in our reported income tax provisions and accruals
PTC takes a holistic multi layered approach to cybersecurity and privacy that combines traditional Defense in Depth methods with next generation Zero Trust principles In today s globally interconnected world we consider every entry point on the attack surface critical and we aim to secure the points under our control In developing our cybersecurity risk management program we are informed by industry benchmarks and standards including the cybersecurity framework created by the National Institute of Standards and Technology NIST We also have various security related certifications and authorizations including ISO 27001 SOC 2 Type II and FedRAMP for certain of our products and services
People PTC recognizes that technology alone cannot mitigate all security threats so we focus on developing our most critical resource our people Security is the responsibility of everyone employed by PTC and is independent of departmental affiliation PTC s corporate cybersecurity awareness activities are combined with enterprise wide and department specific tools and mandatory employee training providing everyone employed by PTC with the knowledge and resources to support our efforts to mitigate security threats
Process An educated workforce needs a governance framework to guide and monitor its activities PTC has processes and policies in place to try to anticipate security risks and facilitate compliance with applicable contractual obligations regulations and standards as well as address any incidents or violations PTC focuses on continuous improvement and is constantly maturing its processes to keep pace with the rapidly evolving cybersecurity threat landscape
Technology PTC seeks to automate these processes and remove the potential for human error to the extent feasible by implementing technology solutions From fundamental IT security to development of our software products and keeping our customers data safe in the cloud PTC aims to maintain a secure infrastructure that is continuously monitored for possible threats
Cybersecurity is a risk area with oversight at the highest levels of the organization including the Executive and Board Level The overall operational program is led by the Cybersecurity Strategy Council a cross functional team of executives and subject matter experts including our Chief Product Security Officer Chief Information Security Officer and Chief Compliance Officer The Cybersecurity Strategy Council oversees a Three Lines Model of Operations Risk Monitoring and Oversight and Audit to effectively address cybersecurity risk management and control All Cybersecurity Risk and Internal Audit functions report to the PTC Executive Leadership Team
PTC s Cybersecurity Program is supported by robust processes and procedures at all levels Our matrixed cybersecurity organization is governed by industry standard frameworks and to ensure that they are executed we involve the Executive Leadership Team the Cybersecurity Strategy Council and business unit security leads and cybersecurity analysts across the enterprise We provide regular updates on our cybersecurity strategic plans programs and initiatives and vulnerabilities and any applicable remediation efforts to the Cybersecurity Committee of the Board of Directors at its four regularly scheduled meetings per year Our Incident Response Plans provide for notice and continued updates to the Cybersecurity Committee of applicable incidents on a timely basis Ongoing program assessments are performed to monitor progress and identify opportunities for growth
PTC conducts an annual cybersecurity maturity assessment Periodically we engage a third party security consulting firm to conduct an Enterprise Security Maturity Assessment This independent assessment provides a mechanism to benchmark our current risk profile and enables us to measure progress as we make program improvements Identified cybersecurity risks are reviewed by the Cybersecurity Strategy Council which ensures that risk tolerances are established and used to appropriately manage risks
Our Vendor Risk Management VRM program supports PTC in meeting its cybersecurity privacy regulatory and compliance obligations and managing risk associated with third party vendors who have access to PTC IT systems and data Prior to outsourcing or allowing third party access to PTC or customer systems IP or data risks associated with such activity are clearly identified and documented The process of selecting a third party vendor includes due diligence of the vendor service or product in question Third party companies using PTC facilities or accessing PTC s IT Systems are subject to PTC s VRM review and are required to demonstrate that proper security measures are in place before they have access to any PTC IT systems or data All such vendors are to be approved by PTC s VRM process and contractually bound to maintain appropriate cybersecurity technical and organization measures and to protect PTC s data to which they may have access
PTC maintains a formal Cybersecurity Incident Response Policy to address cybersecurity incidents The Policy is tested on a regular basis including a continuous improvement program involving periodic tabletop exercises Cybersecurity incident handling is managed by individual organizations with cybersecurity responsibility and monitored guided by applicable corporate functions All Cybersecurity Incident Response Plans under the Policy are based on industry standards such as the NIST Computer Security Incident Handling Guide Special Publication 800 61
Our Cybersecurity Program is overseen by executives on our Executive Leadership Team and managed by our Cybersecurity Strategy Council including our Senior Vice President Chief Information Security Officer CISO who reports to our Executive Vice President Chief Digital Officer CDO Our CISO is responsible for day to day risk management activities including staying informed about and monitoring prevention detection mitigation and remediation efforts through regular communication and reporting from professionals in the information security team and the use of technological tools and software Our CDO is responsible for our broader IT program which includes PTC s ability to remediate and recover from a cybersecurity incident while reducing impacts to the business and operations Our CDO and CISO regularly report directly to the Cybersecurity Committee of the Board of Directors on our Cybersecurity Program and efforts to prevent detect mitigate and remediate issues In addition we have an escalation process in place to inform senior management and the Cybersecurity Committee and the Board of Directors of material issues
Our CDO and CISO have extensive experience assessing and managing cybersecurity programs and cybersecurity risk Our CDO joined PTC as Chief Digital Officer in January 2022 and is responsible for PTC s global information technology IT team overseeing PTC s digital infrastructure and working with business leaders to guide PTC s digital process optimization strategy He has more than two decades of IT and operations leadership Before joining PTC he served as Global Vice President and Chief Information Officer for Avaya where he led a globally dispersed team of 1 200 IT professionals to support the entire global Avaya enterprise Prior to Avaya he held technology leadership roles at Arise Virtual Solutions Inc Oracle and Colorado College
We currently have 75 office locations used in operations in the United States and internationally predominately as sales and or support offices and for research and development work Of our total of approximately 1 060 000 square feet of leased facilities used in operations approximately 401 000 square feet are located in the U S including approximately 250 000 square feet at our headquarters facility located in Boston Massachusetts and approximately 268 000 square feet are located in India where a significant amount of our research and development is conducted
Our discussion of results includes discussion of our ARR Annual Run Rate operating measure non GAAP financial measures and disclosure of our results on a constant currency basis ARR and our non GAAP financial measures including the reasons we use those measures are described below in Results of Operations Operating Measure and Results of Operations Non GAAP Financial Measures respectively The methodology used to calculate constant currency disclosures is described in Results of Operations Impact of Foreign Currency Exchange on Results of Operations You should read those sections to understand our operating measure non GAAP financial measures and constant currency disclosures
Cash provided by operating activities grew 23 to 750 million in FY 24 compared to FY 23 Free cash flow grew 25 to 736 million in FY 24 compared to FY 23 Our cash flow growth is attributable to solid top line growth due to our subscription business model and operational discipline Interest payments were 47 million higher in FY 24 compared to FY 23 mainly due to the payment of 30 million of imputed interest on a deferred acquisition payment associated with our 2023 acquisition of ServiceMax and incremental interest expense associated with borrowings in FY 23 and FY 24 We ended FY 24 with cash and cash equivalents of 266 million and gross debt of 1 75 billion which debt carried an aggregate weighted average interest rate of 5 1
The following table shows the measures that we consider the most significant indicators of our business performance In addition to providing operating income operating margin diluted earnings per share and cash from operations as calculated under GAAP we provide our ARR operating measure and non GAAP operating income non GAAP operating margin non GAAP diluted earnings per share and free cash flow for the reported periods We also provide a view of our actual results on a constant currency basis Our non GAAP financial measures exclude the items described in Non GAAP Financial Measures below Investors should use our non GAAP financial measures only in conjunction with our GAAP results
Approximately 50 of our revenue and 35 of our expenses are transacted in currencies other than the U S Dollar Because we report our results of operations in U S Dollars currency translation particularly changes in the Euro Yen Shekel and Rupee relative to the U S Dollar affects our reported results Changes in foreign currency exchange rates were a slight tailwind to reported income statement results in FY 24 ARR was positively impacted by improvements in currency exchange rates particularly the Euro to U S Dollar exchange rate as of September 30 2024 compared to September 30 2023
The results of operations in the table above and the tables and discussions below about revenue by line of business and product group present both actual percentage changes year over year and percentage changes on a constant currency basis Our constant currency disclosures are calculated by multiplying the results in local currency for FY 24 and FY 23 by the exchange rates in effect on September 30 2023 If FY 24 reported results were converted into U S Dollars using the rates in effect as of September 30 2023 ARR would have been lower by 47 million revenue would have been lower by 22 million and expenses would have been lower by 10 million If FY 23 reported results were converted into U S Dollars using the rates in effect as of September 30 2023 ARR would have been the same revenue would have been lower by 17 million and expenses would have been lower by 12 million
Under ASC 606 the volume mix and duration of contract types support SaaS on premises subscription starting or renewing in any given period can have a material impact on revenue in the period and as a result can impact the comparability of reported revenue period over period We recognize revenue for the license portion of on premises subscription contracts up front when we deliver the licenses to the customer typically on the start date and we recognize revenue on the support portion of on premises subscription contracts and stand alone support contracts ratably over the term We continue to convert existing support contracts to on premises subscriptions resulting in a shift to up front recognition of on premises subscription license revenue in the period converted compared to ratable recognition for a perpetual support contract Revenue from our cloud services primarily SaaS contracts is recognized ratably We expect that over time a higher portion of our revenue will be recognized ratably as we expand our SaaS offerings release additional cloud functionality into our products and migrate customers from on premises subscriptions to SaaS Given the different mix duration and volume of new and renewing contracts in any period year over year or sequential revenue can vary significantly
Professional services gross margin increased in FY 24 compared to FY 23 primarily due to lower outside service costs partially offset by decreases in professional services revenue The decreases in professional services revenue and costs are due to our continued execution on our strategy of leveraging partners to deliver services rather than contracting to deliver services ourselves
Interest expense includes interest on our credit facility loans and our Senior Notes due 2025 and 2028 Interest expense in FY 23 also included 30 million of interest on a deferred acquisition payment associated with the ServiceMax acquisition The decrease in interest expense was driven by the lower aggregate average of debt and deferred acquisition payment liability balances outstanding in FY 24 compared to FY 23
The effective tax rate for FY 24 was lower than the effective rate for FY 23 In FY 24 the rate was impacted by a U S Tax Court ruling in Varian Medical Systems Inc v Commissioner issued on August 26 2024 The ruling related to the U S taxation of deemed foreign dividends in the transition year of the Tax Act our fiscal 2018 As a result we recorded a 14 4 million benefit for additional foreign tax credits that have become available to us Additionally our rate included a net benefit of 4 4 million for the effects of Internal Revenue Service IRS procedural guidance requiring consent for previously automatic changes of accounting method The IRS procedural guidance change significantly increased our estimated taxable income in the year ended September 30 2024 resulting in an increase to the estimated tax benefit for the deductions associated with Global Intangible Low Taxed Income and Foreign Derived Intangible Income The benefit from this IRS procedural guidance change will reverse in a future fiscal period if we receive IRS consent for a change in the treatment of these deductions These benefits were offset by a tax expense of 4 6 million related to a tax reserve in a foreign jurisdiction FY 23 included tax expense of 21 8 million related to an uncertain tax position regarding transfer pricing in a foreign jurisdiction where we are currently under audit Our FY 23 rate was also impacted by tax expense of 6 3 million related to non deductible imputed interest related to the deferred payment on the acquisition of ServiceMax
In the normal course of business PTC and its subsidiaries are examined by various taxing authorities including the IRS in the United States 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 including Germany Ireland and Italy Audits by tax authorities typically involve examination of the deductibility of certain permanent items transfer pricing limitations on net operating losses and tax credits
Due to the stability of our subscription model and consistency of annual up front billing we aim to maintain a low cash balance A significant portion of our cash is generated and held outside the U S As of September 30 2024 we had cash and cash equivalents of 36 million in the U S 127 million in Europe 86 million in Asia Pacific including India and 17 million in other non U S countries We have substantial cash requirements in the U S but believe that the combination of our existing U S cash and cash equivalents cash available under our revolving credit facility future U S operating cash flows and our ability to repatriate cash to the U S will be sufficient to meet our ongoing U S operating expenses and known capital requirements
Cash provided by operating activities increased by 139 1 million in FY 24 compared to FY 23 This increase was driven by higher collections including contribution from ServiceMax which were partially offset by higher salary related and interest payments Interest payments in FY 24 were approximately 47 2 million higher than in FY 23 and include the payment of 30 0 million of imputed interest on the ServiceMax deferred acquisition payment
Cash used in investing activities in FY 24 was driven by the acquisition of pure systems for 93 5 million in Q1 24 Cash used in investing activities in FY 23 was driven by a payment of 828 2 million in Q2 23 related to the acquisition of ServiceMax Capital expenditures in FY 24 were lower than in FY 23 as we invest more in cloud based rather than on premises software
In addition to the debt shown in the above table as of September 30 2023 we had a 620 million deferred acquisition payment liability related to the fair value of the 650 million installment paid in October 2023 for the ServiceMax acquisition Of the 650 million paid 620 million was recorded as a financing outflow and the 30 million of imputed interest was recorded as an operating cash outflow
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 2 billion of our common stock in the period October 1 2024 through September 30 2027 We may use cash from operations and borrowings under our credit facility to make any such repurchases All shares of our common stock repurchased are automatically restored to the status of authorized and unissued
Our long term goal is to return approximately 50 of our free cash flow to shareholders via share repurchases while also taking into consideration the interest rate environment and strategic initiatives and acquisitions which could cause us to reduce suspend or cease repurchases We currently intend to repurchase approximately 300 million of our common stock in FY 25
We believe that existing cash and cash equivalents together with cash generated from operations and amounts available under the credit facility will be sufficient to meet our working capital and capital expenditure requirements through at least the next twelve months including redemption of the 3 625 Senior Notes in February 2025 and to meet our known long term capital requirements
Our expected uses and sources of cash could change our cash position could be reduced and we could incur additional debt obligations if we retire other debt engage in strategic transactions or repurchase shares any of which could be commenced suspended or completed at any time Any such repurchases or retirement of debt will depend on prevailing market conditions our liquidity requirements contractual restrictions and other factors The amounts involved in any debt retirement or issuance share repurchases or strategic transactions may be material
At September 30 2024 our future contractual obligations were related to debt leases pension liabilities unrecognized tax benefits and purchase obligations See Note 9 Debt Note 17 Leases Note 14 Pension Plans and Note 8 Income Taxes of Notes to Consolidated Financial Statements in this Annual Report for information about those obligations which Notes are incorporated by reference into this section Our purchase obligations were approximately 163 2 million with 88 2 million expected to be paid in FY 25 and 75 0 million thereafter Purchase obligations represent minimum commitments due to third parties including royalty contracts research and development contracts telecommunication contracts information technology maintenance contracts in support of internal use software and hardware financing leases operating leases with original terms of less than 12 months and other marketing and consulting contracts Contracts for which our commitment is variable or based on volumes with no fixed minimum quantities and contracts that can be canceled without payment penalties are not included in the purchase obligation amounts above The purchase obligations included above are in addition to amounts included in Current liabilities and Prepaid expenses recorded on our September 30 2024 Consolidated Balance Sheet
We believe ARR is a valuable operating measure to assess the health of a subscription business because it is aligned with the amount that we invoice the customer on an annual basis We generally invoice customers annually for the current year of the contract A customer with a one year contract will typically be invoiced for the total value of the contract at the beginning of the contractual term while a customer with a multi year contract will be invoiced for each annual period at the beginning of each year of the contract
As ARR is not annualized recurring revenue it is not calculated based on recognized or unearned revenue and is not affected by variability in the timing of revenue under ASC 606 particularly for on premises license subscriptions where a substantial portion of the total value of the contract is recognized as revenue at a point in time upon the later of when the software is made available or the subscription term commences
Free cash flow is cash flow from operations net of capital expenditures which are expenditures for property and equipment and consist primarily of facility improvements office equipment computer equipment and software We believe that free cash flow in conjunction with cash from operations is a useful measure of liquidity since capital expenditures are a necessary component of ongoing operations Free cash flow is not a measure of cash available for discretionary expenditures
The non GAAP financial measures other than free cash flow exclude as applicable stock based compensation expense amortization of acquired intangible assets acquisition and transaction related charges included in General and administrative expenses Restructuring and other charges credits net non operating charges credits net and income tax adjustments
Stock based compensation is a non cash expense relating to stock based awards issued to executive officers employees and outside directors consisting of restricted stock units We exclude this expense as it is a non cash expense and we assess our internal operations excluding this expense and believe it facilitates comparisons to the performance of other companies in our industry
Amortization of acquired intangible assets is a non cash expense that is impacted by the timing and magnitude of our acquisitions We believe the assessment of our operations excluding these costs is relevant to our assessment of internal operations and comparisons to the performance of other companies in our industry
Acquisition and transaction related charges included in General and administrative expenses are direct costs of potential and completed acquisitions and expenses related to acquisition integration activities including transaction fees due diligence costs severance and professional fees Subsequent adjustments to our initial estimated amount of contingent consideration associated with specific acquisitions are also included within acquisition and transaction related charges Other transactional charges include third party costs related to structuring merger and acquisition transactions outside of ordinary business operations We do not include these costs when reviewing our operating results internally The occurrence and amount of these costs varies depending on the timing and size of acquisitions and transactions
Restructuring and other charges credits net includes excess facility restructuring charges credits impairment and accretion expense charges related to the lease assets of exited facilities sublease income from previously impaired facilities severance charges resulting from substantial employee reduction actions and third party professional consulting fees related to modifications of our business strategy These costs may vary in size based on our restructuring plan
Non operating charges credits net are gains or losses associated with sales or changes in value of assets or liabilities that are generally investing or financing in nature and are not indicative of our ongoing ordinary operating activities In FY 24 we recognized an impairment charge related to an available for sale debt security In FY 23 we recognized a financing charge for a debt commitment agreement associated with our acquisition of ServiceMax
Income tax adjustments include the tax impact of the items above Additionally we exclude other material tax items that we do not include when reviewing our operating results internally For example in FY 24 adjustments include a charge related to a tax reserve related to prior years in a foreign jurisdiction Adjustments in FY 23 include a charge related to an uncertain tax position in a foreign jurisdiction
We use these non GAAP financial measures and we believe that they assist our investors to make period to period comparisons of our operational performance because they provide a view of our operating results without items that are not in our view indicative of our core operating results We believe that these non GAAP financial measures help illustrate underlying trends in our business and we use the measures to establish budgets and operational goals communicated internally and externally
for managing our business and evaluating our performance We believe that providing non GAAP financial measures also affords investors a view of our operating results that may be more easily compared to the results of other companies in our industry that use similar financial measures to supplement their GAAP results
The items excluded from the non GAAP financial measures often have a material impact on our financial results certain of those items are recurring and other such items often recur Accordingly the non GAAP financial measures included in this Annual Report should be considered in addition to and not as a substitute for or superior to the comparable measures prepared in accordance with GAAP The following tables reconcile each of these non GAAP financial measures to its most closely comparable GAAP measure on our financial statements
We have prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America In preparing our financial statements we make estimates assumptions and judgments that can have a significant impact on our reported revenues results of operations and net income as well as on the value of certain assets and liabilities on our balance sheet These estimates assumptions and judgments are made based on our historical experience and on other assumptions that we believe to be reasonable under the circumstances These estimates may change as new events occur or additional information is obtained and we may periodically be faced with uncertainties the outcomes of which are not within our control and may not be known for a prolonged period of time
The accounting policies methods and estimates used to prepare our financial statements are described generally in Note 2 Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements in this Annual Report The most important accounting judgments and estimates that we made in preparing the financial statements involved
A critical accounting policy is one that is both material to the presentation of our financial statements and requires us to make subjective or complex judgments that could have a material effect on our financial condition and results of operations Critical accounting policies require us to make assumptions about matters that are uncertain at the time of the estimate and different estimates that we could have used or changes in the estimates that are reasonably likely to occur may have a material impact on our financial condition or results of operations Because the use of estimates is inherent in the financial reporting process actual results could differ from those estimates
Accounting policies guidelines and interpretations related to our critical accounting policies and estimates are generally subject to numerous sources of authoritative guidance and are often reexamined by accounting standards rule makers and regulators These rule makers and or regulators may promulgate interpretations guidance or regulations that may result in changes to our accounting policies which could have a material impact on our financial position and results of operations
We record revenues in accordance with the guidance provided by ASC 606 Revenue from Contracts with Customers For a full description of our revenue accounting policy refer to Note 2 Summary of Significant Accounting Policies included in the Notes to Consolidated Financial Statements in this Annual Report
Determination of performance obligations Our subscriptions are frequently sold as a bundle of products and services typically pairing on premises term software licenses with support and for certain offerings cloud services over the same term Significant judgment is used in determining the performance obligations related to these bundled products and services On premises software is typically determined to be a distinct performance obligation and is thus recognized separately from the support and cloud components On premises software revenue is generally recognized at the point in time that the software is made available to the customer while the support and cloud software revenue components are recognized ratably over the term of the contract In cases where subscriptions include cloud functionality and on premises software an assessment has been performed to determine whether the cloud services are distinct from the on premises software In the substantial majority of instances cloud services provide incremental functionality to customers and have been considered distinct and recognized separately from the on premises software This assessment could have a significant impact on the timing of revenue recognition and may change as our product offerings evolve
Allocation of transaction price We estimate the standalone selling price of each identified performance obligation and use that estimate to allocate the transaction price among said performance obligations The estimated standalone selling price is determined using all information reasonably available to us including market conditions and other observable inputs Significant judgment is used in determining the standalone selling prices of the on premises license support and cloud components of our subscription products These estimates are subject to change as our product offerings change and could have a significant impact due to the difference in the timing of revenue recognition for on premises licenses versus support and cloud
Right to exchange Our multi year non cancellable subscription contracts provide customers with an annual right to exchange software within the original subscription with other software When it applies to on premises licenses we account for this right as a liability For most contracts we use the expected value method to determine the liability associated with this right across a portfolio of contracts Where contracts 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 liability for each individual contract In both circumstances the transaction price is constrained based on our estimates which impacts the amount of revenue recognized Changes in these estimates could significantly impact revenue for any given period
As part of the process of preparing our consolidated financial statements we are required to calculate our income tax expense based on taxable income by jurisdiction There are many transactions and calculations about which the ultimate tax outcome is uncertain as a result our calculations involve estimates by management Some of these uncertainties arise as a consequence of revenue sharing cost reimbursement and transfer pricing arrangements among related entities and the differing tax treatment of revenue and cost items across various jurisdictions If tax authorities compelled us to revise or to account differently for our arrangements that revision could affect our recorded tax liabilities
The income tax accounting process also involves estimating our actual current tax liability together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes These differences result in deferred tax assets and liabilities which are included within our consolidated balance sheets We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that it is more likely than not that all or a portion of our deferred tax assets will not be realized we must establish a valuation allowance as a charge to income tax expense
We have unrecognized tax benefits as of September 30 2024 of 65 0 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 27 0 million as audits close and statutes of limitations expire
As of September 30 2024 we have a valuation allowance of 17 4 million against net deferred tax assets in the U S and a valuation allowance of 4 4 million against net deferred tax assets in certain foreign jurisdictions The valuation allowance recorded in the U S relates to Massachusetts tax credit carryforwards that we do not expect to realize a benefit from prior to expiration
The valuation allowance recorded against net deferred tax assets of certain foreign jurisdictions is established primarily for our capital loss carryforwards the majority of which do not expire However there are limitations imposed on the utilization of such capital losses that could further restrict the recognition of any tax benefits We will continue to reassess our valuation allowance requirements each financial reporting period
Prior to the passage of the U S Tax Act we asserted that substantially all of the undistributed earnings of our foreign subsidiaries were considered indefinitely invested and accordingly no deferred taxes were provided Pursuant to the provisions of the U S Tax Act these earnings were subjected to a one time transition tax and there is therefore no longer a material cumulative basis difference associated with the undistributed earnings We maintain our assertion to permanently reinvest these earnings outside the U S unless repatriation can be done substantially tax free with the exception of our Taiwan subsidiary If we decide to repatriate any additional non U S earnings in the future we may be required to establish a deferred tax liability on such earnings The amount of unrecognized deferred tax liability on the undistributed earnings would not be material
In the normal course of business PTC and its subsidiaries are examined by various taxing authorities including the Internal Revenue Service IRS 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 transfer pricing 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
In accordance with business combination accounting we allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values Determining these fair values requires management to make significant estimates and assumptions especially with respect to intangible assets
Our identifiable intangible assets acquired consist of purchased software trademarks customer lists and contracts and software support agreements and related relationships Purchased software consists of products that have reached technological feasibility and the combination of processes inventions and trade secrets related to the design and development of acquired products Customer lists and contracts and software support agreements and related relationships represent the underlying relationships and agreements with customers of the acquired company s installed base We have generally valued intangible assets using discounted cash flow models Critical estimates in valuing certain of the intangible assets include but are not limited to
Net tangible assets consist of the fair values of tangible assets less the fair values of assumed liabilities and obligations Except for deferred revenues net tangible assets were generally valued by us at the respective carrying amounts recorded by the acquired company if we believed that their carrying values approximated their fair values at the acquisition date Deferred revenue for acquisitions reflect the amounts that would have been deferred as of the acquisition date in accordance with ASC 606
In addition uncertain tax positions and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date We reevaluate these items quarterly with any adjustments to our preliminary estimates being recorded to goodwill provided that we are within the measurement period up to one year from the acquisition date and we continue to collect information in order to determine their estimated values Subsequent to the measurement period or our final determination of the estimated value of uncertain tax positions or tax related valuation allowances whichever comes first changes to these uncertain tax positions and tax related valuation allowances will affect our provision for income taxes in our Consolidated Statements of Operations
Our estimates of fair value are based upon assumptions believed to be reasonable at that time but which are inherently uncertain and unpredictable Assumptions may be incomplete or inaccurate and unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions estimates or actual results
When events or changes in circumstances indicate that the carrying value of a finite lived intangible asset may not be recoverable we perform an assessment of the asset for potential impairment This assessment is based on projected undiscounted future cash flows over the asset s remaining life If the carrying value of the asset exceeds its undiscounted cash flows we record an impairment loss equal to the excess of the carrying value over the fair value of the asset determined using projected discounted future cash flows of the asset
In accordance with recently issued accounting pronouncements we will be required to comply with certain changes in accounting rules and regulations Refer to Note 2 Summary of Significant Accounting Policies included in the Notes to Consolidated Financial Statements of this Annual Report which is incorporated herein by reference for all recently issued accounting pronouncements none of which are expected to have a material effect
We have not created and are not party to any special purpose or off balance sheet entities for the purpose of raising capital incurring debt or operating parts of our business that are not consolidated to the extent of our ownership interest therein into our financial statements We have not entered into any transactions with unconsolidated entities whereby we have subordinated retained interests derivative instruments or other contingent arrangements that expose us to material continuing risks contingent liabilities or any other obligation under a variable interest in an unconsolidated entity that provides financing liquidity market risk or credit risk support to us
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 Eurozone countries Japan Sweden Switzerland China and India We enter into foreign currency forward contracts to manage our exposure to fluctuations in foreign exchange rates that arise from receivables and payables denominated in foreign currencies We do not enter into or hold foreign currency derivative financial instruments for trading or speculative purposes
Our non U S revenues are generally transacted through our non U S subsidiaries and typically are denominated in their local currency In addition expenses that are incurred by our non U S subsidiaries typically are denominated in their local currency Approximately 50 of our revenue and 35 of our expenses were transacted in currencies other than the U S Dollar Currency translation affects our reported results because we report our results of operations in U S Dollars Historically our most significant currency risk has been changes in the Euro and Japanese Yen relative to the U S Dollar Based on current revenue and expense levels excluding restructuring charges and stock based compensation a 0 10 change in the USD to EUR exchange rate and a 10 Yen change in the Yen to USD exchange rate would impact operating income by approximately 38 million and 6 million respectively
Our exposure to foreign currency exchange rate fluctuations arises in part from intercompany transactions with most intercompany transactions occurring between a U S Dollar functional currency entity and a foreign currency denominated entity Intercompany transactions typically are denominated in the local currency of the non U S Dollar functional currency subsidiary in order to centralize foreign currency risk Also both PTC the parent company and our non U S subsidiaries may transact business with our customers and vendors in a currency other than their functional currency transaction risk In addition we are exposed to foreign exchange rate fluctuations as the financial results and balances of our non U S subsidiaries are translated into U S Dollars translation risk If sales to customers outside the United States increase our exposure to fluctuations in foreign currency exchange rates will increase
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 balances denominated in foreign currency resulting from changes in foreign currency exchange rates Our foreign currency hedging program uses forward contracts to manage the foreign currency exposures that exist as part of our ongoing business operations The contracts are primarily denominated in the Euro Swiss Franc and Swedish Krona currencies and have maturities of less than four months
The majority of our foreign currency forward contracts are not designated as hedges for accounting purposes and changes in the fair value of these instruments are recognized immediately in earnings Because we enter into these derivative contracts only as an economic hedge any gains or losses on the underlying foreign denominated balance are generally offset by the losses or gains on the derivative contract Gains and losses on these derivatives and foreign currency denominated receivables and payables are included in Other income net
In addition to the 1 billion due under our 2025 and 2028 Senior Notes as of September 30 2024 we had 753 million outstanding under our 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 us These loans are subject to interest rate risk as interest rates will be adjusted at each rollover date to the extent such amounts are not repaid As of September 30 2024 the weighted average annual rate on the credit facility loans was 6 9 Based on the borrowings outstanding and interest rates in effect as of September 30 2024 a 100 basis point per annum change in interest rate applied over a one year period would have an 8 million impact on annual earnings and cash flows
As of September 30 2024 cash equivalents were invested in highly liquid investments with maturities of three months or less when purchased We invest our cash with highly rated financial institutions in North America Europe and Asia Pacific and in diversified domestic and international money market mutual funds At September 30 2024 we had cash and cash equivalents of 36 million in the United States 127 million in Europe 86 million in Asia Pacific including India and 17 million in other non U S countries Given the short maturities and investment grade quality of the portfolio holdings at September 30 2024 a hypothetical 10 change in interest rates would not materially affect the fair value of our cash and cash equivalents
Our invested cash is subject to interest rate fluctuations and for non U S operations foreign currency exchange rate risk In a declining interest rate environment we would experience a decrease in interest income The opposite holds true in a rising interest rate environment Over the past several years the U S Federal Reserve Board European Central Bank and Bank of England have changed certain benchmark interest rates which has led to declines and increases in market interest rates These changes in market interest rates have resulted in fluctuations in interest income earned on our cash and cash equivalents Interest income will continue to fluctuate based on changes in market interest rates and levels of cash available for investment Changes in foreign currencies relative to the U S Dollar had a favorable impact of 3 2 million and 2 9 million on our consolidated cash balances in FY 24 and FY 23 respectively The impact in FY 24 was due in particular to changes in the Brazilian Real Swedish Krona Chinese Renminbi and New Taiwan Dollar
Our management maintains disclosure controls and procedures as defined in Rules 13a 15 e and 15d 15 e under the Securities Exchange Act of 1934 as amended the Exchange Act that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is processed recorded summarized and reported within the time periods specified in the SEC s rules and forms and that such information is accumulated and communicated to our management including our Chief Executive Officer and Chief Financial Officer our principal executive officer and principal financial officer respectively as appropriate to allow for timely decisions regarding required disclosure
We evaluated under the supervision and with the participation of management including our principal executive and principal financial officers the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report Based on this evaluation we concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30 2024
Our management is responsible for establishing and maintaining adequate internal control over financial reporting Internal control over financial reporting is defined in Rules 13a 15 f and 15d 15 f of the Exchange Act as a process designed by or under the supervision of our principal executive and principal financial officers and effected by our board of directors management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that
Because of its inherent limitations internal control over financial reporting may not prevent or detect misstatements Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate
Our management assessed the effectiveness of our internal control over financial reporting as of September 30 2024 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission COSO in Internal Control Integrated Framework 2013 Based on this assessment and those criteria our management concluded that as of September 30 2024 our internal control over financial reporting was effective
On November 14 2024 in connection with a periodic review of corporate governance matters and certain recent changes to Securities and Exchange Commission rules and the Massachusetts Business Corporation Act the MBCA the Board of Directors the Board of PTC approved and adopted an amendment and restatement of the Company s By Laws as so amended the Amended and Restated By Laws which became effective upon approval The Amended and Restated By Laws amend and restate the By Laws in their entirety to among other things i permit virtual only meetings of shareholders ii revise the advance notice provisions of the By Laws to expand the informational and other requirements for shareholder proponents and director nominees in connection with shareholder proposals and shareholder director nominations iii address matters relating to Rule 14a 19 under the Securities Exchange Act of 1934 as amended iv provide processes and procedures for shareholders seeking to call a special meeting of shareholders and obligations and rights of the Board with respect to such requests and the conduct of such meetings v state how abstentions and broker non votes are treated with respect to the determination of whether a quorum of shareholders exists and of the number of shares voting on a matter vi provide that any shareholder soliciting proxies from other shareholders must use a proxy card color other than white with the white proxy card being reserved for the exclusive use by the Board vii provide that the Board may adopt such rules regulations and procedures as the Board may deem appropriate for the conduct of any meeting of shareholders viii clarify and confirm that the Board except as otherwise provided by law and to the extent permitted by law may limit its exercise of the powers of the corporation pursuant to an agreement approved by the Board ix provide that removal of a director may occur only at a meeting called for the purpose of removing such director the meeting notice for which must state that the purpose or a purpose of the meeting is the removal of the director and x make various updates throughout to conform to the MBCA and to make ministerial changes clarifications and other conforming revisions
Our Section 16 officers and directors may enter into plans or arrangements for the purchase or sale of our securities that are intended to satisfy the affirmative defense conditions of Rule 10b5 1 c of the Exchange Act Such plans and arrangements must comply in all respects with our insider trading policies including our policy governing entry into and operation of 10b5 1 plans and arrangements
6 580 plus all net vested shares issued for the FY2024 Corporate Incentive Plan plus 15 of all net vested shares that vest on November 15 2024 under performance based RSU awards granted on November 17 2021 November 16 2022 and November 15 2023 plus all shares purchased under the 2016 Employee Stock Purchase Plan for the offering periods ending on January 31 2025 and July 31 2025 1 2 3
8 618 plus all net vested shares issued for the FY2024 Corporate Incentive Plan plus 10 of total shares that vest on November 15 2024 under performance based RSU awards granted on November 17 2021 November 16 2022 and November 15 2023 plus 80 of all net vested shares that vest on November 15 2024 under performance based RSU awards granted on November 17 2021 November 16 2022 and November 15 2023 1 2
The information required by this item not set forth below may be found under the headings Corporate Governance and the Board of Directors Insider Trading Policies and Procedures Our Executive Officers Delinquent Section 16 a Reports and Transactions with Related Persons appearing in our 2025 Proxy Statement Such information is incorporated herein by reference
We have adopted a Code of Ethics for Senior Executive Officers that applies to our President and Chief Executive Officer Chief Financial Officer and Chief Accounting Officer as well as others The Code is embedded in our Code of Business Conduct and Ethics applicable to all employees A copy of the Code of Business Conduct and Ethics is publicly available on our website at www ptc com If we make any substantive amendments to or grant any waiver from including any implicit waiver the Code of Ethics for Senior Executive Officers to or for our President and Chief Executive Officer Chief Financial Officer or Chief Accounting Officer we will disclose the nature of such amendment or waiver in a current report on Form 8 K
As described in Item 9B of this Annual Report our By Laws were amended and restated on November 14 2024 to among other things revise the advance notice provisions of the By Laws to expand the informational and other requirements for shareholder proponents and director nominees in connection with shareholder director nominations Those provisions are set forth in Section 2 3 of the Amended and Restated By Laws filed as Exhibit 3 2 to this Annual Report and incorporated herein by reference
Information with respect to director and executive compensation may be found under the headings Director Compensation Compensation Discussion and Analysis Compensation Tables Compensation Committee Report and Pay Ratio Disclosure appearing in our 2025 Proxy Statement Such information is incorporated herein by reference
We have audited the accompanying consolidated balance sheets of PTC Inc and its subsidiaries the Company as of September 30 2024 and 2023 and the related consolidated statements of operations of comprehensive income of stockholders equity and of cash flows for each of the three years in the period ended September 30 2024 including the related notes collectively referred to as the consolidated financial statements We also have audited the Company s internal control over financial reporting as of September 30 2024 based on criteria established in Internal Control Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission COSO
In our opinion the consolidated financial statements referred to above present fairly in all material respects the financial position of the Company as of September 30 2024 and 2023 and the results of its operations and its cash flows for each of the three years in the period ended September 30 2024 in conformity with accounting principles generally accepted in the United States of America Also in our opinion the Company maintained in all material respects effective internal control over financial reporting as of September 30 2024 based on criteria established in Internal Control Integrated Framework 2013 issued by the COSO
The Company s management is responsible for these consolidated financial statements for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in Management s Annual Report on Internal Control over Financial Reporting appearing under Item 9A Our responsibility is to express opinions on the Company s consolidated financial statements and on the Company s internal control over financial reporting based on our audits We are a public accounting firm registered with the Public Company Accounting Oversight Board United States PCAOB and are required to be independent with respect to the Company in accordance with the U S federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB
We conducted our audits in accordance with the standards of the PCAOB Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement whether due to error or fraud and whether effective internal control over financial reporting was maintained in all material respects
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements whether due to error or fraud and performing procedures that respond to those risks Such procedures included examining on a test basis evidence regarding the amounts and disclosures in the consolidated financial statements Our audits also included evaluating the accounting principles used and significant estimates made by management as well as evaluating the overall presentation of the consolidated financial statements Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk Our audits also included performing such other procedures as we considered necessary in the circumstances We believe that our audits provide a reasonable basis for our opinions
A company s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles A company s internal control over financial reporting includes those policies and procedures that i pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company ii provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company and iii provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition use or disposition of the company s assets that could have a material effect on the financial statements
Because of its inherent limitations internal control over financial reporting may not prevent or detect misstatements Also projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that i relates to accounts or disclosures that are material to the consolidated financial statements and ii involved our especially challenging subjective or complex judgments The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements taken as a whole and we are not by communicating the critical audit matter below providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates
As described in Note 2 to the consolidated financial statements the Company s sources of revenue include 1 subscriptions 2 perpetual licenses 3 support for perpetual licenses and 4 professional services Revenue is derived from the licensing of computer software products cloud based offerings and related support and professional services contracts During the year ended September 30 2024 the Company recognized revenue from contracts with customers of 2 298 million The Company s contracts with customers for subscriptions typically include commitments to transfer term based on premises software licenses bundled with support and or cloud services On premises software is determined to be a distinct performance obligation from support As disclosed by management significant judgment is used in determining the performance obligations related to these bundled products and services The corresponding revenues are recognized as the related performance obligations are satisfied
The principal considerations for our determination that performing procedures relating to revenue recognition identification of distinct performance obligations is a critical audit matter are the i significant judgment by management when identifying the distinct performance obligations and ii a high degree of auditor judgment subjectivity and effort in performing procedures and evaluating audit evidence related to management s identification of distinct performance obligations within contracts with customers
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements These procedures included testing the effectiveness of controls relating to the revenue recognition process including controls over the identification of distinct performance obligations These procedures also included among others i evaluating the Company s revenue recognition accounting policy and ii testing management s identification of distinct performance obligations in its contracts with customers by examining revenue contracts on a sample basis and evaluating whether these performance obligations are satisfied at a point in time or satisfied over time
For our non U S operations where the functional currency is the local currency we translate assets and liabilities at exchange rates in effect at the balance sheet date and record translation adjustments in stockholders equity For our non U S operations where the U S Dollar is the functional currency we remeasure monetary assets and liabilities using exchange rates in effect at the balance sheet date and non monetary assets and liabilities at historical rates and record resulting exchange gains or losses in Other income net in the Consolidated Statements of Operations We translate income statement amounts at average rates for the period Transaction gains and losses are recorded in Other income net in the Consolidated Statements of Operations
Our sources of revenue include 1 subscriptions 2 perpetual licenses 3 support for perpetual licenses and 4 professional services Subscriptions include term based on premises licenses and related support Software as a Service SaaS and hosting services Revenue is derived from the licensing of computer software products cloud based offerings and related support and professional services contracts In accordance with ASC 606 Revenue from Contracts with Customers revenue is recognized when a customer obtains control of promised products or services The amount of revenue recognized reflects the consideration that we expect to be entitled to receive in exchange for these products or services To achieve the core principle of this standard we apply the following five steps
Our contracts with customers for subscriptions typically include commitments to transfer term based on premises software licenses bundled with support and or cloud services Significant judgment is used in determining the performance obligations related to these bundled products and services On premises software is determined to be a distinct performance obligation from support which is sold for the same term of the subscription For subscription arrangements which include cloud services and on premises licenses we assess whether the cloud component is highly interrelated with the on premises term based software licenses Other than a limited population of subscriptions the cloud component is not currently deemed to be interrelated with the on premises term software and as a result cloud services are accounted for as a distinct performance obligation from the software and support components of the subscription
Judgment is required to allocate the transaction price to each performance obligation We use the estimated standalone selling price method to allocate the transaction price for items that are not sold separately The estimated standalone selling price is determined using all information reasonably available to us including market conditions and other observable inputs The corresponding revenues are recognized as the related performance obligations are satisfied Where subscriptions include on premises software and support only we determined that approximately 55 of the estimated standalone selling price for subscriptions is attributable to software licenses and approximately 45 is attributable to support for those licenses Some of our subscription offerings include a combination of on premises and cloud based technology In such cases the cloud based technology is generally considered distinct and receives an allocation of approximately 5 to 50 of the estimated standalone selling price of the subscription The amounts allocated to cloud are based on assessment of the relative value of the cloud functionality in the subscription with the remaining amounts allocated between software and support
Our multi year non cancellable 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 for on premises licenses 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 in 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 September 30 2024 and 2023 the total liability was 26 0 million and 23 7 million respectively primarily associated with the annual right to exchange on premises subscription software
We have elected certain practical expedients associated with our revenue recognition policy We do not account for significant financing components if the period between revenue recognition and when the customer pays for the products or services is one year or less Additionally we recognize revenue equal to the amount we have a right to invoice when the amount corresponds directly with the value to the customer of our performance to date Finally revenue is recognized net of any taxes collected from customers that are subsequently remitted to governmental authorities
Our cash equivalents are invested in money market accounts and time deposits of financial institutions We have established guidelines relative to credit ratings diversification and maturities that are intended to maintain safety and liquidity Cash equivalents include highly liquid investments with original maturity periods of three months or less when purchased
In 2022 we sold shares of a common stock investment in Matterport for a total of 42 7 million The aggregate realized gain from the original investment of 8 7 million was 34 0 million including cumulative recognized gains prior to 2022 partially offset by a recognized loss of 34 8 million in 2022 The loss in 2022 was recognized in Other income net in the Consolidated Statements of Operations As of and subsequent to September 30 2022 PTC held no shares in Matterport
The amounts reflected in the Consolidated Balance Sheets for Cash and cash equivalents Accounts receivable and Accounts payable approximate their fair value due to their short maturities Financial instruments that potentially subject us to concentration of credit risk consist primarily of investments trade accounts receivable and foreign currency derivative instruments Our cash cash equivalents and foreign currency derivatives are placed with financial institutions with high credit standings Our credit risk for derivatives is also mitigated due to the short term nature of the contracts Our customer base consists of many geographically diverse customers dispersed across many industries No individual customer comprised more than 10 of our trade accounts receivable as of September 30 2024 or 2023 or more than 10 of our revenue for the years ended September 30 2024 2023 or 2022
Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date When determining the fair value measurements for assets and liabilities required to be recorded at fair value we consider assumptions that market participants would use when pricing the asset or liability such as inherent risk transfer restrictions and risk of nonperformance
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments In determining the adequacy of the allowance for doubtful accounts we analyze specific individual accounts receivable historical bad debts customer concentrations customer credit worthiness current economic conditions and accounts receivable aging trends
Generally accepted accounting principles require all derivatives whether designated in a hedging relationship or not to be recorded on the balance sheet at fair value 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 Eurozone countries Japan Sweden Switzerland China and India 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 currencies resulting from changes in foreign currency exchange rates We enter into derivative transactions specifically foreign currency forward contracts and options to manage our exposure to foreign currency exchange risk to reduce earnings volatility We do not enter into derivative transactions for trading or speculative purposes For a description of our non designated hedge and net investment hedge activity see Note 16 Derivative Financial Instruments
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 four 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 gains or losses on the underlying foreign denominated balance are generally offset by the losses or gains on the forward contract Gains and losses on forward contracts and foreign denominated receivables and payables are included in Other income net
In 2023 we hedged our forecasted U S Dollar cash flows with foreign exchange options to reduce the risk that they would be adversely affected by changes in Euro or Japanese Yen exchange rates We did not hold any foreign currency option contracts as of September 30 2023 or 2024 We did not designate these foreign currency options as hedges for accounting purposes and changes in the fair value of these instruments were recognized immediately in earnings Because we entered into options as an economic hedge currency impacts on the Euro or Japanese Yen denominated operations as compared to the forecasted plan rate may have been partially offset by gains on the options Gains and losses on foreign exchange options were included in Other income net
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 Sheets We designate certain foreign exchange forward contracts as net investment hedges against exposure on translation of balance sheet accounts of Euro and Japanese Yen functional subsidiaries Net investment hedges partially offset the impact of Foreign currency translation adjustment recorded in Accumulated other comprehensive loss on the Consolidated Balance Sheets All foreign exchange forward contracts are carried at fair value on the Consolidated Balance Sheets and the maximum duration of net investment hedge 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 and Japanese Yen 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 upon contract maturity reclassify them to Foreign currency translation adjustment in Accumulated other comprehensive loss 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
We determine if an arrangement is a lease at inception Operating leases are included in Operating right of use lease assets Short term lease obligations and Long term lease obligations on our Consolidated Balance Sheets Our operating leases are primarily for office space automobiles servers and office equipment We made an election not to separate lease components from non lease components for office space servers and office equipment We combine fixed payments for non lease components with lease payments and account for them together as a single lease component which increases the amount of our lease assets and liabilities 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 the lease 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 as that of the lease payments at the commencement date The right of use assets include any lease payments made and exclude lease incentives received Operating lease expense is recognized on a straight line basis over the lease term
Property and equipment are recorded at cost and depreciated using the straight line method over their estimated useful lives Computer hardware and software are typically amortized over three to five years and furniture and fixtures over three to twelve years Leasehold improvements are amortized over the shorter of their useful lives or the remaining terms of the related leases Maintenance and repairs are charged to expense when incurred additions and improvements are capitalized When an item is sold or retired the cost and related accumulated depreciation is relieved and the resulting gain or loss if any is recognized in income
We incur costs to develop computer software to be licensed or otherwise marketed to customers Our research and development expenses consist principally of salaries and benefits costs of computer software and equipment and facility expenses Research and development costs are expensed as incurred except for costs of internally developed or externally purchased software that qualify for capitalization Development costs for software to be sold externally incurred subsequent to the establishment of technological feasibility but prior to the general release of the product are capitalized and upon general release are amortized using the greater of either the straight line method over the expected life of the related products or based upon the pattern in which economic benefits related to such assets are realized The straight line method is used if it approximates the same amount of expense as that calculated using the ratio that current period gross product revenues bear to total anticipated gross product revenues No internal development costs for software to be sold externally were capitalized in 2024 2023 or 2022 We purchased software of 4 1 million 1 0 million and 6 0 million in 2024 2023 and 2022 respectively Additionally we acquired capitalized software through business combinations for further detail see Note 6 Acquisitions and Disposition of Businesses These assets are included in Acquired intangible assets net in the accompanying Consolidated Balance Sheets
We allocate the purchase price of acquisitions to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair value Goodwill is measured as the excess of the purchase price over the value of net identifiable assets acquired While best estimates and assumptions are used to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration where applicable our estimates are inherently uncertain and subject to refinement Any adjustments to estimated fair value are recorded to goodwill provided that we are within the measurement period up to one year from the acquisition date and that we continue to collect information to determine estimated fair value Subsequent to the measurement period or our final determination of estimated fair value whichever comes first adjustments are recorded in the Consolidated Statements of Operations
We operate as a single operating and reportable segment Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker CODM in deciding how to allocate resources and in assessing performance Our CODM is our Chief Executive Officer
Goodwill is evaluated for impairment annually as of the end of the third quarter or more frequently if events or changes in circumstances indicate that the asset might be impaired Factors we consider important on an overall company basis and segment basis when applicable that could trigger an impairment review include significant under performance relative to historical or projected future
Our annual goodwill impairment test is based on either a quantitative or qualitative assessment A quantitative assessment compares the fair value of the reporting unit to its carrying value If the reporting unit s carrying value exceeds its fair value we record an impairment loss equal to the difference between the carrying value of goodwill and its estimated fair value We estimate the fair values of our reporting unit using discounted cash flow valuation models Those models require estimates of future revenues profits capital expenditures working capital terminal values based on revenue multiples and discount rates for the reporting unit We estimate these amounts by evaluating historical trends current budgets and operating plans and industry data A qualitative assessment is designed to determine whether we believe it is more likely than not that the fair value of our reporting unit exceeds its carrying value A qualitative assessment includes a review of qualitative factors including company specific financial performance and long range plans industry and macroeconomic factors and a consideration of the fair value of the reporting unit at the last valuation date
During the third fiscal quarter of 2024 we completed our annual impairment test of goodwill which was based on a qualitative assessment and concluded that there was no impairment Through September 30 2024 there were no events or changes in circumstances that indicated that the carrying values of goodwill or acquired intangible assets may not be recoverable
Long lived assets primarily include property and equipment right of use lease assets and acquired intangible assets with finite lives including purchased software customer lists and trademarks Purchased software is amortized over periods up to 16 years customer lists are amortized over periods up to 20 years and trademarks are amortized over periods up to 15 years We review long lived assets for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of those assets are no longer appropriate There were no such events or changes in business circumstances in 2024 An impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset or asset group If impairment is indicated the asset is written down to its estimated fair value based on a discounted cash flow analysis
Our income tax expense includes U S and international income taxes Certain items of income and expense are not reported in tax returns and financial statements in the same year The tax effects of these differences are reported as deferred tax assets and liabilities Deferred tax assets are recognized for the estimated future tax effects of deductible temporary differences and tax operating loss and credit carryforwards Changes in deferred tax assets and liabilities are recorded in the provision for income taxes We assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that it is more likely than not that all or a portion of deferred tax assets will not be realized we establish a valuation allowance To the extent we establish a valuation allowance or increase this allowance in a period we include an expense within Provision for income taxes in the Consolidated Statements of Operations
Comprehensive income consists of Net income and Other comprehensive income loss which includes foreign currency translation adjustments changes in unrecognized actuarial gains and losses net of tax related to pension benefits unrealized gains and losses on hedging instruments and unrealized gains and losses on marketable securities We do not record tax provisions or benefits for the
net changes in the foreign currency translation adjustment as we intend to reinvest permanently undistributed earnings of our foreign subsidiaries Accumulated other comprehensive loss is reported as a component of Stockholders equity and comprised the following as of September 30 2024 cumulative translation adjustment losses of 78 1 million unrecognized actuarial losses related to pension benefits of 15 2 million 10 5 million net of tax and accumulated net losses from net investment hedges of 14 8 million 13 1 million net of tax As of September 30 2023 Accumulated other comprehensive loss comprised the following cumulative translation adjustment losses of 114 5 million unrecognized actuarial losses related to pension benefits of 9 6 million 6 7 million net of tax and accumulated net gains from net investment hedges of 6 9 million 3 1 million net of tax
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 stock options restricted shares and restricted stock units using the treasury stock method The calculation of the dilutive effect of outstanding equity awards under the treasury stock method includes consideration of proceeds from the assumed exercise of stock options unrecognized compensation expense and any tax benefits as additional proceeds Anti dilutive shares excluded from the calculations of diluted EPS were immaterial in the years ended September 30 2024 2023 and 2022
We measure the compensation cost of employee services received in exchange for an award of equity based on the grant date fair value of the award That cost is recognized over the period during which an employee is required to provide service in exchange for the award See Note 12 Equity Incentive Plans for a description of the types of equity awards granted the compensation expense related to such awards and detail of such awards outstanding See Note 8 Income Taxes for detail of the tax benefit related to stock based compensation recognized in the Consolidated Statements of Operations
In November 2024 the FASB issued ASU 2024 03 Income Statement Reporting Comprehensive Income Expense Disaggregation Disclosures Subtopic 220 40 Disaggregation of Income Statement Expenses The ASU will be effective for us in the second quarter of 2028 ending March 31 2028 We are still evaluating the impact of this new guidance on our consolidated financial statements but we expect the adoption to result in disclosure changes only
As of September 30 2024 14 4 million of our contract assets are expected to be transferred to receivables within the next 12 months and therefore are included in Other current assets As of September 30 2023 16 1 million of our contract asset balance was included in Other current assets with the remainder included in Other assets
Approximately 12 3 million of the September 30 2023 contract asset balance was transferred to receivables during the year ended September 30 2024 as a result of the right to payment becoming unconditional Additions to contract asset of approximately 10 2 million primarily related to revenue recognized in the period net of billings There were no impairments of contract assets in the year ended September 30 2024
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 5 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 September 30 2024 and September 30 2023 deferred costs of 42 5 million and 41 8 million respectively were included in Other current assets and 76 4 million and 78 7 million respectively were included in Other assets Amortization expense related to costs to obtain a contract with a customer was 52 0 million 53 4 million and 50 9 million in the years ended September 30 2024 2023 and 2022 respectively There were no substantial impairments of the contract cost asset in the years ended September 30 2024 and 2023
Our contracts with customers include transaction price amounts allocated to performance obligations that will be satisfied and recognized as revenue at a later date As of September 30 2024 the transaction price amounts include additional performance obligations of 775 3 million recorded in deferred revenue and 1 494 0 million that are not yet recorded in the Consolidated Balance Sheets Of the total 2 269 3 million we expect to recognize approximately 57 over the next 12 months 25 over the next 13 to 24 months and the remaining amount thereafter
We license products to customers worldwide Our sales and marketing operations outside the United States are conducted principally through our international sales subsidiaries throughout Europe and the Asia Pacific region 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 2022 Restructuring and other charges credits net totaled 36 2 million of which 32 4 million is attributable to restructuring charges primarily related to employee termination benefits 5 1 million is attributable to other charges for professional fees included in restructuring related to our SaaS transformation offset by a 1 3 million credit attributable to sublease income and the reversal of lease liabilities related to exited lease facilities These charges substantially relate to a plan to restructure our workforce and consolidate select facilities to align our customer facing and product related functions with SaaS industry best practices and accelerate the opportunity for our on premises customers to move to the cloud We made cash payments related to restructuring charges of 40 8 million 34 0 million related to employee charges 2 5 million in payments for other professional fees and 4 3 million in net payments for variable costs related to restructured facilities
Acquisition and transaction related costs were 3 1 million 18 7 million and 13 2 million in 2024 2023 and 2022 respectively Acquisition and transaction 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 Other transactional charges include third party costs related to structuring unusual transactions such as the divestiture of a portion of our business These costs are classified in General and administrative expenses in the accompanying Consolidated Statements of Operations
The acquisitions described below have been accounted for as business combinations Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the respective acquisition date The fair values of intangible assets were based on valuations using discounted cash flow models which require the use of significant estimates and assumptions including estimating future
On October 4 2023 we acquired pure systems GmbH pursuant to a Share Purchase Agreement pure systems is a leading provider of product and software variant management solutions used by manufacturing companies to efficiently manage the different versions of software and systems engineering assets The purchase price was 93 5 million net of cash acquired which we financed primarily with a draw on the revolving line of our credit facility pure systems had approximately 50 employees on the close date
The acquired customer relationships purchased software and trademarks are being amortized over useful lives of 18 years 10 years and 10 years respectively based on the expected economic benefit pattern of the assets The acquired goodwill will not be deductible for income tax purposes The amount of goodwill resulting from the purchase price allocation reflects the expected value that will be created by expanding our application lifecycle management ALM offerings which are included within our PLM product group
On January 3 2023 we acquired ServiceMax Inc pursuant to a Share Purchase Agreement dated November 17 2022 by and among PTC ServiceMax Inc and ServiceMax JV LP ServiceMax develops and licenses cloud native product centric field service management FSM software which is included within our PLM product group The purchase price of 1 448 2 million net of cash acquired was payable in two installments Upon closing of the transaction PTC paid the first installment of 828 2 million as adjusted for working capital indebtedness cash and transaction expenses as set forth in the Share Purchase Agreement The remaining installment of 650 0 million of which 620 0 million represents the fair value as of the acquisition date and 30 0 million is imputed interest was paid in October 2023 The fair value of the deferred acquisition payment was calculated based on our borrowing rate at the time of the acquisition
PTC borrowed 630 million under the revolving line of our new credit facility and 500 million under the term loan of the new credit facility to repay amounts under the prior credit facility and to pay the closing purchase price and transaction expenses related to the acquisition ServiceMax had approximately 500 employees on the close date In the year ended September 30 2023 ServiceMax revenue was 137 6 million and ServiceMax earnings were immaterial
The following table sets forth the purchase price allocation for ServiceMax The purchase price allocation includes the finalization of measurement period adjustments related to intangibles and deferred tax liabilities that resulted in a 3 5 million increase in customer relationships a 3 2 million increase in net tax liability and a 0 3 million decrease in goodwill compared to the balances reported as of March 31 2023 We also recorded a liability of 620 0 million related to the fair value of the 650 0 million deferred purchase price payment
The acquired customer relationships purchased software and trademarks are being amortized over useful lives of 20 years 10 years and 10 years respectively based on the expected economic benefit pattern of the assets The acquired goodwill will not be deductible for income tax purposes The amount of goodwill resulting from the purchase price allocation reflects expected future growth as ServiceMax expands our closed loop product lifecycle management PLM strategy
The unaudited pro forma financial information in the table below summarizes the combined results of operations for PTC and ServiceMax for the pro forma years ended September 30 2023 and 2022 The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2022 Since the acquisition took place in fiscal 2023 the unaudited pro forma financial information was prepared as though ServiceMax was acquired at the beginning of fiscal 2022 The unaudited pro forma financial information for all periods presented includes adjustments to reflect certain business combination effects including amortization of acquired intangible assets including the elimination of related ServiceMax expenses acquisition related costs incurred by both parties reversal of certain costs incurred by ServiceMax which would not have been incurred had the acquisition occurred at the beginning of fiscal 2022 interest expense under the new combined capital structure stock based compensation charges and the related tax effects as though ServiceMax was acquired as of the beginning of fiscal 2022
The unaudited pro forma financial information for the years ended September 30 2023 and 2022 presented below combines the historical results of PTC for those periods the historical results of ServiceMax for the year ended October 31 2022 and the three months ended January 31 2023 and the effects of the pro forma adjustments listed above
On April 29 2022 we acquired Intland Software GmbH and Eger Invest GmbH together Intland Software pursuant to a Share Sale and Purchase Agreement Intland Software developed and marketed the Codebeamer Application Lifecycle Management ALM family of software products The purchase price of the acquisition was 278 1 million net of cash acquired which was financed with cash on hand and 264 million borrowed under our existing credit facility Intland Software had approximately 150 employees on the close date
The acquired customer relationships purchased software and trademarks are being amortized over useful lives of 11 years 10 years and 10 years respectively based on the expected economic 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 expanding our ALM offerings which are complementary to our PLM offerings
On June 1 2022 we sold a portion of our PLM services business to ITC Infotech India Limited pursuant to a Strategic Partner Agreement dated as of April 20 2022 by and between PTC and ITC Infotech Consideration received from ITC Infotech for the sale was approximately 60 4 million consisting of 32 5 million cash paid on closing and 28 0 million of services to be provided by ITC Infotech to PTC for no additional charge
We recognized a gain on the sale of 29 8 million which is included within Other income net The recognized gain consists of 60 4 million of consideration received less net assets of the business of 30 6 million Net assets include 33 0 million of goodwill allocated to the business less 2 4 million of liabilities associated with approximately 160 employees who transferred to ITC Infotech Goodwill was allocated to the sold business based on a relative fair value allocation of total goodwill of the Professional Services segment
In 2024 2023 and 2022 our effective tax rate is impacted by our corporate structure in which our foreign taxes are at a net effective tax rate lower than the U S rate A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland and the Cayman Islands In 2024 2023 and 2022 the foreign rate differential predominantly relates to these earnings In addition to the foreign rate differential our tax rate differed from the U S statutory federal income tax due to the net effects of the Global Intangible Low Taxed Income GILTI and Foreign Derived Intangible Income FDII regimes together referred to as U S Tax reform and the excess tax benefit related to stock based compensation
In 2024 the rate was impacted by a U S Tax Court ruling in Varian Medical Systems Inc v Commissioner issued on August 26 2024 The ruling related to the U S taxation of deemed foreign dividends in the transition year of the Tax Act our fiscal 2018 As a result we recorded a 14 4 million benefit for additional foreign tax credits that have become available to us Additionally our rate included a net benefit of 4 4 million for the effects of IRS procedural guidance requiring consent for previously automatic changes of accounting method The IRS procedural guidance change significantly increased our estimated taxable income in the year ended September 30 2024 resulting in an increase to the estimated tax benefit for the deductions associated with Global Intangible Low Taxed Income and Foreign Derived Intangible Income The benefit from this IRS procedural guidance change will reverse in a future fiscal period if we receive IRS consent for a change in the treatment of these deductions These benefits were offset by a tax expense of 4 6 million related to a tax reserve in a foreign jurisdiction
Additionally in 2023 our results include tax expense of 21 8 million relating to an uncertain tax position regarding transfer pricing in a foreign jurisdiction where we are currently under audit Our rate was also impacted by non deductible imputed interest related to the deferred payment on the acquisition of ServiceMax Inc
At September 30 2024 and 2023 income taxes payable and income tax accruals recorded on the accompanying Consolidated Balance Sheets were 75 3 million 40 0 million in Accrued income taxes 6 2 million in Accrued expenses and other current liabilities and 29 1 million in Other liabilities and 30 4 million 14 9 million in Accrued income taxes 4 8 million in Accrued expenses and other current liabilities and 10 7 million in Other liabilities respectively At September 30 2024 and 2023 prepaid taxes recorded in Prepaid expenses on the accompanying Consolidated Balance Sheets were 14 0 million and 22 7 million respectively We made net income tax payments of 68 6 million 65 9 million and 55 0 million in 2024 2023 and 2022 respectively
For U S tax return purposes net operating loss NOL carryforwards and tax credits are generally available to be carried forward to future years subject to certain limitations At September 30 2024 we had U S federal tax effected NOL carryforwards from acquisitions of 0 8 million which expire in 2025 to 2034 The use of these NOL carryforwards is limited as a result of the change in ownership rules under Internal Revenue Code Section 382 Additionally we have state NOL carryforwards net of federal benefit of 6 9 million with various expiration dates beginning in 2027 a number of which never expire
As of September 30 2024 we had federal R D credit carryforwards of 4 6 million which expire beginning in 2026 and ending in 2044 and Massachusetts R D credit carryforwards of 29 2 million which expire beginning in 2025 and ending in 2039 We also had foreign tax credits of 2 0 million which expire beginning in 2032 and ending in 2034
We also have tax effected NOL carryforwards in non U S jurisdictions totaling 6 9 million the majority of which do not expire and non U S tax credit carryforwards of 2 2 million that expire beginning in 2031 and ending in 2042 Additionally we have tax effected amortization carryforwards of 66 1 million in a foreign jurisdiction There are limitations imposed on the use of such attributes that could restrict the recognition of any tax benefits
As of September 30 2024 we have a valuation allowance of 17 4 million against net deferred tax assets in the United States and a valuation allowance of 4 4 million against net deferred tax assets in certain foreign jurisdictions The 17 4 million U S valuation allowance relates to Massachusetts tax credit carryforwards which we do not expect to realize a benefit from prior to expiration The valuation allowance recorded against net deferred tax assets of certain foreign jurisdictions is established primarily
Our policy is to record estimated interest and penalties related to the underpayment of income taxes as a component of our income tax provision In 2024 2023 and 2022 we recorded interest expense of 3 3 million 0 5 million and 0 2 million respectively In 2024 2023 and 2022 we had no penalty expenses in our income tax provision As of September 30 2024 and 2023 we had accrued 3 1 million and 1 4 million of net estimated interest expense respectively We had no accrued tax penalties as of September 30 2024 2023 or 2022
If all of our unrecognized tax benefits as of September 30 2024 were to become recognizable in the future we would record a benefit to the income tax provision of 65 0 million which would be partially offset by an increase in the U S valuation allowance of 6 2 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 27 0 million as audits close and statutes of limitations expire
In the normal course of business PTC and its subsidiaries are examined by various taxing authorities including the IRS in the United States 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 including Germany Ireland and Italy Audits by tax authorities typically involve examination of the deductibility of certain permanent items transfer pricing 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 September 30 2024 we remained subject to examination in the following major tax jurisdictions for the tax years indicated
We incurred expenses related to stock based compensation in 2024 2023 and 2022 of 223 5 million 206 5 million and 174 9 million respectively Accounting for the tax effects of stock based awards requires that we establish a deferred tax asset as the compensation is recognized for financial reporting prior to recognizing the tax deductions The tax benefit recognized in the Consolidated Statements of Operations related to stock based compensation totaled 27 5 million 33 4 million and 27 1 million in 2024 2023 and 2022 respectively Upon vesting of the stock based awards the actual tax deduction is compared with the cumulative financial reporting compensation cost and any excess tax deduction is considered a windfall tax benefit and is recorded to the tax provision In 2024 2023 and 2022 net windfall tax benefits of 10 2 million 7 8 million and 5 2 million were recorded to the tax provision
Prior to the passage of the U S Tax Cuts and Jobs Act in December of 2017 the Tax Act we asserted that substantially all of the undistributed earnings of our foreign subsidiaries were considered indefinitely reinvested and accordingly no deferred taxes were provided Pursuant to the provisions of the U S Tax Act these earnings were subjected to U S federal taxation via a one time transition tax and there is therefore no longer a material cumulative basis difference associated with the undistributed earnings We maintain our assertion of our intention to permanently reinvest these earnings outside the United States unless repatriation can be done substantially tax free with the exception of our Taiwan subsidiary If we decide to repatriate any additional non U S earnings in the future we may be required to establish a deferred tax liability on such earnings The amount of unrecognized deferred tax liability on the undistributed earnings would not be material
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 2028 and 2025 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
In January 2023 we entered into an amended and restated credit agreement for a new secured multi currency bank credit facility with a syndicate of banks Pursuant to the agreement all revolving commitments under the prior credit agreement were replaced with the revolving commitments under the new credit facility The new credit facility consists of i a 1 25 billion revolving credit facility ii a 500 million term loan credit facility and iii an incremental facility pursuant to which we may incur additional term loan tranches or increase the revolving credit facility As of September 30 2024 unused commitments under our credit facility were approximately 988 0 million and amounts available for borrowing were 972 1 million
PTC Inc and certain eligible foreign subsidiaries are eligible borrowers under the credit facility Any borrowings by PTC Inc under the credit facility would be guaranteed by PTC Inc s material domestic subsidiaries that become parties to the subsidiary guaranty if any Any borrowings by eligible foreign subsidiary borrowers would be guaranteed by PTC Inc and any subsidiary guarantors and secured subject to exceptions by a first priority perfected security interest in substantially all existing and after acquired personal property owned by PTC Inc and its material domestic subsidiaries except for certain indirect material domestic subsidiaries As of September 30 2024 83 0 million was borrowed by an eligible foreign subsidiary borrower
Loans under the credit facility bear interest at variable rates that reset every 30 to 180 days depending on the base rate for USD borrowings either the adjusted Daily Simple RFR or adjusted Term SOFR and period selected by us The spread over the base rate depends on our total leverage ratio As of September 30 2024 the annual rate for borrowings outstanding was 6 9 A quarterly revolving commitment fee on the undrawn portion of the revolving credit facility is required ranging from 0 175 to 0 325 per annum based upon our total leverage ratio
The credit facility limits our ability to among other things incur additional indebtedness incur liens or guarantee obligations pay dividends 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 Inc and its material domestic subsidiaries may not invest cash or property in or loan amounts to PTC Inc s foreign subsidiaries in aggregate amounts exceeding 100 million for purposes other than acquisitions of businesses The credit facility also requires that we maintain certain
In 2023 we incurred 13 4 million in financing costs in connection with the January 2023 credit facility and related arrangements of which 4 2 million related to a since extinguished bridge loan was expensed in the period and 9 2 million was recorded as deferred debt issuance costs and included in Other assets and Other current assets on the Consolidated Balance Sheet Deferred debt issuance costs are expensed over the term of the obligations
In 2024 2023 and 2022 we incurred interest expense of 119 7 million 129 4 million and 54 3 million respectively and paid 137 0 million 89 8 million and 48 5 million respectively of interest on our debt Interest expense in the year ended 2023 includes 30 0 million of interest imputed on the 650 0 million deferred acquisition payment related to the ServiceMax acquisition The average interest rate on borrowings outstanding during 2024 2023 and 2022 was approximately 5 4 4 9 and 3 4 respectively
We are subject to legal proceedings and claims against us in the ordinary course of business As of September 30 2024 we estimate that the range of possible outcomes for such matters is immaterial and we do not believe that resolving them 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
We enter into standard indemnification agreements with our customers and business partners in the ordinary course of our business Under such agreements we typically indemnify hold harmless and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with patent copyright or other intellectual property infringement claims by any third party with respect to our products Indemnification may also cover other types of claims including claims relating to certain data breaches These agreements typically limit our liability with respect to indemnification claims other than intellectual property infringement claims 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 during the term of the license Additionally we generally warrant that our consulting services will be performed consistent with generally accepted industry standards and in the case of fixed price services the agreed upon specifications 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
We may issue up to 5 0 million shares of our preferred stock in one or more series Of these shares 0 5 million are designated as Series A Junior Participating Preferred Stock Our Board of Directors is authorized to fix the rights and terms for any series of preferred stock without additional shareholder approval
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 2 billion of our common stock in the period October 1 2024 through September 30 2027 We use cash from operations and borrowings under our credit facility to make such repurchases All shares of our common stock repurchased are automatically restored to the status of authorized and unissued
Our 2000 Equity Incentive Plan provides for grants of nonqualified and incentive stock options common stock restricted stock restricted stock units and stock appreciation rights to employees directors officers and consultants We award restricted stock units RSUs as the principal equity incentive awards including certain performance based awards that are earned based on achieving performance criteria established by the Compensation Committee of our Board of Directors on or prior to the grant date Each RSU represents the contingent right to receive one share of our common stock
Our 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 any 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
The fair value of RSUs granted in 2024 2023 and 2022 was based on the fair market value of our stock on the date of grant for service and certain performance based RSUs and based on a Monte Carlo simulation model for relative total shareholder return rTSR performance RSUs The weighted average fair value per share of RSUs granted in 2024 2023 and 2022 was 164 73 130 64 and 114 31 respectively
As of September 30 2024 total unrecognized compensation cost related to unvested RSUs expected to vest was approximately 190 3 million and the weighted average remaining recognition period for unvested RSUs was 17 months As of September 30 2024 the weighted average remaining vesting term for outstanding awards is 1 0 years
The weighted average fair value of the rTSR RSUs was 209 16 per target RSU on the grant date The fair value of the rTSR 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 historical 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 rTSR rank against the peer group the projected price of PTC stock and a discount factor based on the risk free rate
In 2024 shares issued upon vesting of restricted stock units were net of 0 6 million shares retained by us to cover employee tax withholdings of 101 9 million In 2023 shares issued upon vesting of restricted stock units were net of 0 6 million shares retained by us to cover employee tax withholdings of 82 8 million In 2022 shares issued upon vesting of restricted stock and restricted stock units were net of 0 6 million shares retained by us to cover employee tax withholdings of 69 0 million
We offer a savings plan to eligible U S employees The plan is qualified under Section 401 k of the Internal Revenue Code Participating employees may defer a portion of their pre tax compensation as defined but not more than statutory limits We contribute 50 of the amount contributed by the employee up to a maximum of 3 of the employee s earnings Our matching contributions vest immediately We made matching contributions of 9 2 million 8 6 million and 7 8 million in 2024 2023 and 2022 respectively
We maintain several international defined benefit pension plans primarily covering certain employees of Computervision which we acquired in 1998 and CoCreate which we acquired in 2008 and covering employees in Japan Benefits are based upon length of service and average compensation with vesting after one to five years of service The pension cost was actuarially computed using assumptions applicable to each subsidiary plan and economic environment We adjust our pension liability related to our plans due to changes in actuarial assumptions and performance of plan investments as shown below The vested benefit obligation is determined as the actuarial present value of the vested benefits to which the employee is currently entitled to but based on the employee s expected date of separation or retirement Effective in 1998 benefits under one of the international plans were frozen indefinitely
In selecting the expected long term rate of return on assets we considered the current investment portfolio and the investment return goals in the plans investment policy statements We with input from the plans professional investment managers and actuaries also considered the average rate of earnings expected on the funds invested or to be invested to provide plan benefits This process included determining expected returns for the various asset classes that comprise the plans target asset
allocation This basis for selecting the long term asset return assumptions is consistent with the prior year Using generally accepted diversification techniques the plans assets in aggregate and at the individual portfolio level are invested so that the total portfolio risk exposure and risk adjusted returns best meet the plans long term liabilities to employees Plan asset allocations are reviewed periodically and rebalanced to achieve target allocation among the asset categories when necessary The discount rate is based on yield curves for highly rated corporate fixed income securities matched against cash flows for each future year
We periodically review the pension plans investments in the various asset classes For the CoCreate plans in Germany assets are actively allocated between equity and fixed income securities to achieve target return For the other international plans assets are allocated 100 to fixed income securities The fixed income securities for the other international plans primarily include investments held with insurance companies with fixed returns The plans investment managers are provided specific guidelines under which they are to invest the assets assigned to them In general investment managers are expected to remain fully invested in their asset class with further limitations on risk as related to investments in a single security portfolio turnover and credit quality
The German CoCreate plan s investment policy prohibits the use of derivatives associated with leverage and speculation or investments in securities issued by PTC except through index related strategies and or commingled funds An investment committee oversees management of the pension plans assets Plan assets consist primarily of investments in equity and fixed income securities
The international plan assets are comprised primarily of investments in a trust and an insurance company The underlying investments in the trust are primarily governmental fixed income securities and equities in funds and exchange traded funds ETFs They are classified as Level 1 because the underlying units of the trust are traded in open public markets The fair value of the underlying investments in equity securities and fixed income are based upon publicly traded exchange prices
The principal market in which we execute our foreign currency forward contracts is the institutional market in an over the counter environment with a relatively high level of price transparency The market participants are generally large financial institutions Our foreign currency derivatives 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
In the fourth quarter of 2021 we invested 2 0 million in a non marketable convertible note This debt security was classified as available for sale and included in Other assets on the Consolidated Balance Sheet During the twelve months ended September 30 2024 we recorded a 2 0 million impairment loss related to this Level 3 investment The impairment loss is included in Other income net on the Consolidated Statements of Operations
Our headquarters are located at 121 Seaport Boulevard Boston Massachusetts The lease is for approximately 250 000 square feet and runs through June 30 2037 We subleased a portion of the leased space through January 31 2024 Base rent for the first year of the lease was 11 0 million and increases by 1 per square foot per year thereafter 0 3 million per year Base rent first became 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 Annual Additional Rent is estimated to be approximately 8 0 million
On October 1 2024 we entered into an amendment to our credit agreement Prior to the amendment if our outstanding 2025 Senior Notes had not been refinanced to mature on or after April 3 2028 or redeemed by November 16 2024 all amounts outstanding under the credit facility would become due and payable on November 16 2024 After the amendment the amount outstanding under the credit facility will not become due and payable on November 16 2024 if on that date our total cash and cash equivalent investments readily marketable securities and available revolving commitments under the credit agreement are greater than or equal to 600 million

Company Name	PTC INC. Vist SEC web-site
Category	SERVICES-PREPACKAGED SOFTWARE
Trading Symbol	PTC