PTC (PTC) 10-Q 2000 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: January 1, 2000

Commission File Number: 0-18059

Parametric Technology Corporation

(Exact name of registrant as specified in its charter)

Massachusetts	04-2866152
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

128 Technology Drive, Waltham, MA 02453

(Address of principal executive offices, including zip code)

(781) 398-5000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES      x NO    ¨

There were 274,962,701 shares of our common stock outstanding on January 1, 2000.

PARAMETRIC TECHNOLOGY CORPORATION

INDEX TO FORM 10-Q

For the Quarter Ended January 1, 2000

		Page Number
Part I—FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of September 30, 1999 and January 1, 2000	1
	Consolidated Statements of Income for the three months ended January 2, 1999 and January 1, 2000	2
	Consolidated Statements of Cash Flows for the three months ended January 2, 1999 and January 1, 2000	3
	Consolidated Statements of Comprehensive Income for the three months ended January 2, 1999 and January 1, 2000	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	7
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Part II—OTHER INFORMATION
Item 1.	Legal Proceedings	19
Item 6.	Exhibits and Reports on Form 8-K	19
Signature		19

PART I—FINANCIAL INFORMATION

PARAMETRIC TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands)

	September 30, 1999		January 1, 2000
ASSETS
Current assets:
Cash and cash equivalents	$     239,789		$     315,351
Short-term investments	101,217		95,347
Accounts receivable, net	221,889		189,340
Other current assets	142,209		119,345
Total current assets	705,104		719,383
Marketable investments	12,889		9,730
Property and equipment, net	64,176		66,601
Goodwill, net	113,011		110,317
Other intangible assets, net	53,836		51,818
Other assets	67,604		66,185
Total assets	$1,016,620		$1,024,034
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$       40,879		$       35,982
Accrued expenses	67,135		52,748
Accrued compensation and severance	55,590		48,637
Deferred revenue	213,059		208,939
Income taxes	80,520		44,219
Total current liabilities	457,183		390,525
Other liabilities	38,333		34,458
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued	—		—
Common stock, $0.01 par value; 350,000 shares authorized; 272,277 and                 274,963 shares issued, respectively	2,723		2,750
Additional paid-in capital	1,583,846		1,621,400
Treasury stock, at cost, 2,113 and 0 shares, respectively	(27,727	)	—
Accumulated deficit	(1,022,357	)	(1,011,954	)
Accumulated other comprehensive loss	(15,381	)	(13,145	)
Total stockholders’ equity	521,104		599,051
Total liabilities and stockholders’ equity	$1,016,620		$1,024,034

The accompanying notes are an integral part of the consolidated financial statements.

PARAMETRIC TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

	Three months ended
	January 2, 1999	January 1, 2000
Revenue:
License	$136,080	$104,874
Service	114,037	134,163
Total revenue	250,117	239,037
Costs and expenses:
Cost of license revenue	4,139	4,128
Cost of service revenue	41,716	56,027
Sales and marketing	96,115	104,940
Research and development	29,180	34,067
General and administrative	16,554	16,471
Amortization of goodwill and other intangible assets	2,487	9,428
Acquisition and nonrecurring charges	13,829	—
Total costs and expenses	204,020	225,061
Operating income	46,097	13,976
Other income, net	1,944	643
Income before income taxes	48,041	14,619
Provision for income taxes	18,050	4,238
Net income	$  29,991	$  10,381
Earnings per share (Note 2):
Basic	$       0.11	$       0.04
Diluted	$       0.11	$       0.04

The accompanying notes are an integral part of the consolidated financial statements.

PARAMETRIC TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Three months ended
	January 2, 1999		January 1, 2000
Cash flows from operating activities:
Net income	$  29,991		$  10,381
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization	12,283		18,185
Charge for purchased in-process research and development	10,600		—
Changes in assets and liabilities which provided (used) cash, net of effects of                 purchased businesses:
Accounts receivable	(8,291	)	32,549
Accounts payable and accrued expenses	(18,997	)	(17,300	)
Accrued compensation and severance	(8,218	)	(10,353	)
Deferred revenue	7,208		(4,120	)
Income taxes	(24,559	)
Other current assets	(4,099	)	(3,428	)
Other noncurrent assets and liabilities	(6,823	)	683
Net cash provided by operating activities	30,847		2,038
Cash flows from investing activities:
Additions to property and equipment	(8,536	)	(10,782	)
Additions to other intangible assets	(2,440	)	—
Acquisitions of businesses	—		(7,922	)
Construction in progress	—		(4,106	)
Proceeds from sale of land and improvements	—		30,836
Purchases of investments	(11,705	)	(11,831	)
Proceeds from sales and maturities of investments	24,993		20,857
Net cash provided by investing activities	2,312		17,052
Cash flows from financing activities:
Proceeds from issuance of common stock	4,493		53,845
Purchases of treasury stock	(49,963	)	—
Net cash provided (used) by financing activities	(45,470	)	53,845
Effect of exchange rate changes on cash	3,144		2,627
Net increase (decrease) in cash and cash equivalents	(9,167	)	75,562
Cash and cash equivalents, beginning of period	205,971		239,789
Cash and cash equivalents, end of period	$196,804		$315,351

The accompanying notes are an integral part of the consolidated financial statements.

PARAMETRIC TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

	Three months ended
	January 2, 1999	January 1, 2000
Net income	$29,991	$10,381
Other comprehensive income (loss), net of tax provision (benefit):
Foreign currency translation adjustment, net of tax of $847 and $1,205	1,573	2,239
Unrealized gain (loss) on securities, net of tax of $111 and $0	205	(3	)
Other comprehensive income	1,778	2,236
Comprehensive income	$31,769	$12,617

The accompanying notes are an integral part of the consolidated financial statements.

PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Parametric Technology Corporation and its wholly owned subsidiaries and have been prepared by us in accordance with generally accepted accounting principles. Our fiscal year end is September 30. Certain reclassifications have been made to the prior year’s statements to conform with the fiscal 2000 presentation. The year end consolidated balance sheet was derived from our audited financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair presentation of our financial position, results of operations and cash flows at the dates and for the periods indicated. While we believe that the disclosures presented are adequate to make the information not misleading, these financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 1999.

The results of operations for the three month period ended January 1, 2000 are not necessarily indicative of the results expected for the remainder of the fiscal year.

2.    Earnings Per Share

Basic earnings per share (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 of outstanding stock options using the “treasury stock” method and any other potential dilution. The following table presents the calculation for both basic and diluted EPS:

	Three months ended
	January 2, 1999	January 1, 2000
	(in thousands, except per share data)
Net income	$  29,991	$  10,381
Weighted average shares outstanding	268,429	272,436
Dilutive effect of employee stock options	4,933	14,434
Contingently issuable shares related to InPart acquisition	418	—
Diluted shares outstanding	273,780	286,870
Basic EPS	$       0.11	$       0.04
Diluted EPS	$       0.11	$       0.04

Options to purchase 17.9 million shares for the three months ended January 2, 1999 and 5.4 million shares for the three months ended January 1, 2000 were outstanding but were excluded from the computations of diluted shares outstanding because the price of the options was greater than the average market price of the common stock for the period reported.

3.    Facilities

In December 1999, we sold land and certain improvements under construction for $30.8 million and entered into a lease covering approximately 381,000 square feet of office space in the Boston area that will allow us to consolidate and replace our Waltham operations. Occupancy and rent should begin in December 2000 and expire in December 2012, subject to completion of construction.

PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

4.    New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. SFAS No. 133 requires companies to recognize all derivatives as either assets or liabilities, with the instruments measured at fair value. The accounting for changes in fair value, gains or losses, depends on the intended use of the derivative and its resulting designation. Originally, the statement had been effective for all quarters of fiscal years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities, which postponed the adoption of SFAS No. 133 until fiscal years beginning after June 15, 2000. We plan to implement SFAS No. 133 in our fiscal year 2001. We believe that the adoption of this statement will not have a significant effect on our consolidated financial statements.

5.    Segment Information

During 1999, we adopted SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information, which changes the way public companies report information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision making group is made up of our executive officers.

We operate within a single industry segment—computer software and related services. We have two major product categories within that one segment: (1) our computer-aided design, manufacturing and engineering (CAD/CAM/CAE) solutions, including our flagship Pro/ENGINEER® design software, which provides flexible engineering solutions to our customers and (2) our Web-based Windchill® information management software which provides collaborative product commerce (CPC) solutions to our customers using Internet technologies to collaboratively develop, build and manage products throughout their entire lifecycle. Our products are sold worldwide by our sales force and distributors.

Our revenue by product category and from unaffiliated customers for the geographic regions in which we operate is presented below:

	Three months ended
	January 2, 1999	January 1, 2000
	(in thousands)
Revenue:
CAD/CAM/CAE solutions	$245,417	$200,784
Windchill CPC solutions	4,700	38,253
Total revenue	$250,117	$239,037
Revenue:
North America	$115,855	$104,256
Europe	98,583	90,964
Asia/Pacific	35,679	43,817
Total revenue	$250,117	$239,037

Total long-lived assets by geographic region have not changed significantly from September 30, 1999.

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that describe our anticipated financial results and growth based on our plans and assumptions. Important information about the basis for these plans and assumptions and certain factors that may cause our actual results to differ materially from these statements is contained below and in “Important Factors That May Affect Future Results” beginning on page 13.

Business Overview

Historically, our core business focus has been to provide mechanical CAD/CAM/CAE solutions to customers through our flagship Pro/ENGINEER® design software, and we remain committed to providing our customers with industry leading flexible engineering solutions based on this software. Additionally, we believe that there is growing demand for collaborative product commerce (CPC) solutions from manufacturers who, in order to stay competitive, must deliver more custom-tailored goods faster and at lower prices while relying more than ever before on geographically dispersed and dynamic supply chains. CPC solutions include software and services that use Internet technologies to permit individuals—no matter what role they have in the commercialization of a product, no matter what computer-based tools they use, no matter where they are located geographically or in the supply chain—to collaboratively develop, build and manage products throughout their entire lifecycle. In order to pursue this opportunity, we expanded our focus in 1999 to encompass the complete CPC solution offered by our Web-based Windchill® information management software and plan to continue this focus in 2000. This expanded focus going forward allows us to increase the business impact our customers derive from our flexible engineering solutions and provides our customers with the additional tools they need to elevate their products into enterprise assets and to leverage these assets into new business opportunities.

Results of Operations

The following is an overview of our results of operations:

· Total revenue was $250.1 million for the first quarter of 1999 and $239.0 million for the first quarter of 2000.

· Our year-over-year first quarter revenue declined 4% reflecting a 23% decrease in software license revenue offset by an 18% increase in service revenue.

· Net income decreased 65% to $10.4 million for the first quarter of 2000.

· Pro forma net income, which excludes the amortization of goodwill and intangible assets and acquisition and nonrecurring charges, decreased 61% to $17.6 million for the first quarter of 2000.

The following table shows certain consolidated financial data as a percentage of our total revenue for the first quarter of 1999 and 2000.

	Three months ended
	January 2, 1999		January 1, 2000
Revenue:
License	54	%	44	%
Service	46		56
Total revenue	100		100
Costs and expenses:
Cost of license revenue	2		2
Cost of service revenue	17		23
Sales and marketing	38		44
Research and development	12		14
General and administrative	7		7
Amortization of goodwill and other intangible assets	1		4
Acquisition and nonrecurring charges	5		—
Total costs and expenses	82		94
Operating income	18		6
Other income, net	1		—
Income before income taxes	19		6
Provision for income taxes	7		2
Net income	12	%	4	%
Pro forma, excluding amortization of goodwill and intangible assets and      acquisition and nonrecurring charges:
Operating income	25	%	10	%
Net income	18	%	7	%

REVENUE.    As a result of our expanded focus on providing CPC solutions, software and service revenue from our Windchill products grew to 16% of total revenue in the first quarter of 2000, up from 2% in the first quarter of 1999. Overall, however, total revenue decreased 4% for the first quarter of 2000, compared to the first quarter of 1999.

License revenue decreased 23% for the first quarter of 2000 compared to the first quarter of 1999. While we continue to derive our license revenue primarily from software related to the mechanical CAD/CAM/CAE industry, we have channeled significant resources into transforming ourselves from a CAD/CAM/CAE-only company to one that is strategically positioned to provide Internet-based CPC solutions. This fundamental transformation, which has taken place over the past six quarters, has impacted every aspect of our business, most notably our sales organization.

In fiscal 1999, we implemented a company-wide reorganization of our sales force. This reorganization has taken longer to be effective than we initially anticipated, and our results in this quarter reflect this. The transition to a two-product company has resulted in a greater Windchill CPC focus, reduced sales capacity for the CAD/CAM/CAE product line and resultant loss of market share. Given that the first quarter is seasonally our most challenging one, the reduced capacity for the CAD/CAM/CAE product line had an even more acute impact on revenue this quarter, as evidenced by the fact that unit sales of our core Pro/ENGINEER design software were down 32% in the first quarter of 2000 compared to the first quarter of 1999.

An integral part of the sales force reorganization encompassed changing the way we distribute our CAD/CAM/CAE products to smaller business segments. We licensed approximately 90% of our products directly to end-user customers in each of the first quarters of 1999 and 2000 with the remainder licensed through third-party distributors, primarily Rand A Technology Corporation.

In the first quarter of 1999, we entered into a master distribution arrangement with Rand to address certain smaller business segments. Rand ’s performance has been impacted by the transition required by this new relationship, and, while their performance is improving, their level of revenue contribution has been lower than anticipated. We believe, however, that this strategy will enhance our long-term growth. In the first quarter of 2000, we amended the distribution agreement with Rand to expand its distribution into a broader segment of small businesses. Providing this broader base of business opportunity should continue to assist Rand in further developing its distribution network, growing sales of our products and enhancing our long-term growth. Our results could be adversely affected if Rand is unable to achieve certain sales levels or make existing or future payments.

During this quarter we closed fewer large deals than we expected and experienced some weakness with existing customers, particularly in Japan and Europe. In addition, market demand in certain segments of the CAD/CAM/CAE industry appears to have slowed. We also experienced a lower average selling price of our Pro/ENGINEER software, which decreased by 10% in the first quarter of 2000 compared to the first quarter of 1999. Additional factors affecting our revenue and operating results are included in “Important Factors That May Affect Future Results” below.

Our service revenue is derived from the sale of software maintenance contracts and the performance of training and consulting services. Service revenue, which has a lower gross profit margin than license revenue, accounted for 46% and 56% of total revenue in the first quarter of 1999 and 2000, respectively. Service revenue increased 18% in the first quarter of 2000 compared to the same period in 1999. This increase is the result of growth in our installed customer base and increased training and consulting services performed for these customers. We expect service revenue to continue to increase in absolute dollars for the remainder of 2000.

We derived 54% and 56% of our total revenue from sales to international customers in the first quarter of 1999 and 2000, respectively.

[CHART SHOWING REVENUE BY GEOGRAPHY (in millions)]

                         North America    Europe   Asia/Pacific

                  Q1 99      $115.9        $98.6        $35.7
                  Q1 00      $104.3        $91.0        $43.8

                      REVENUE BY GEOGRAPHY (IN MILLIONS)
          

Looking forward, our overall revenue levels will be affected by our ability to capitalize on the CPC opportunity while balancing our sales capacity between Pro/ENGINEER and Windchill. Our challenge is to manage and maintain leadership in our traditional mechanical CAD/CAM/CAE business while investing aggressively in a new product area that presents significant growth opportunities. Because our transition to a two-product business model is not yet complete, we are cautious in our overall near-term outlook. Nevertheless, we believe that our Windchill business may further differentiate our mechanical CAD/CAM/CAE products and ultimately invigorate our mechanical CAD/CAM/CAE business.

COSTS AND EXPENSES.    Our operating expenses are based on anticipated future revenue and are relatively fixed for the short term. We are incurring expenses that would support revenues in excess of current levels in order to implement our strategic initiatives, particularly as they relate to our Windchill CPC solutions. Although these expense levels have adversely affected net income, we continue to believe that these initiatives will provide a foundation for future growth.

COST OF LICENSE REVENUE.    Our cost of license revenue consists of costs associated with reproducing and distributing software and documentation and the payment of royalties. Cost of license revenue as a percent of license revenue was 3% and 4% for the first quarter of 1999 and 2000, respectively.

COST OF SERVICE REVENUE.    Our cost of service revenue includes costs associated with training and consulting personnel, such as salaries and related costs and travel, and costs related to software maintenance, including costs incurred for customer support personnel and the release of maintenance updates. The increase in our cost of service revenue resulted primarily from growth in the staffing necessary to generate increased worldwide service revenue and to provide ongoing high-quality customer support to our growing installed base. Cost of service revenue as a percent of service revenue was 37% and 42% for the first quarter of 1999 and 2000, respectively. This increase reflects our investment in the staffing necessary to support our new product offerings, principally our Windchill CPC solutions.

SALES AND MARKETING.    Our sales and marketing expenses primarily include salaries and benefits, sales commissions, travel and facility costs. These costs increased 9% in the first quarter of 2000 compared to 1999 primarily due to the higher average cost per sales employee, as we are hiring a more experienced Windchill CPC solutions sales force. Total sales and marketing employees decreased from 2,180 at January 2, 1999 to 1,898 at January 1, 2000 primarily due to the sales force reorganizations during 1999.

RESEARCH AND DEVELOPMENT.    Our research and development expenses consist principally of salaries and benefits, expenses associated with product translations, costs of computer equipment used in software development and facility expenses. Compared to the first quarter of 1999, research and development expenses increased 17% in the first quarter of 2000. This is primarily attributable to our continued investment in research and development, particularly in connection with our Windchill CPC solutions and the impact of our InPart, Division and auxilium acquisitions in 1999. We expect our investment in research and development to increase in absolute dollars for the remainder of 2000.

GENERAL AND ADMINISTRATIVE.    Our general and administrative expenses include costs of our corporate, finance, information technology, human resources and administrative functions. These costs were flat in the first quarter of 2000 compared to the first quarter of 1999.

AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS.     These costs represent the amortization of intangible assets acquired, including developed technology, goodwill, customer lists, assembled work force and trade names. The increased amortization of $6.9 million in the first quarter of 2000 compared to 1999 primarily resulted from our 1999 acquisitions of InPart, Division and auxilium.

[CHART SHOWING COSTS AND EXPENSES (in millions)]

                                                          Q1 99      Q1 00
                                                         -------    -------
   Cost of License Revenue                               $  4.1     $  4.1
   Cost of Service Revenue                                 41.7       56.0
   Sales and Marketing                                     96.1      104.9
   Research and Development                                29.2       34.1
   General and Administrative                              16.6       16.5
   Amortization of Goodwill and Intangible Assets           2.5        9.4
   Acquisition and Nonrecurring Charges                    13.8          -