Why did PTC restate its prior financial statements?

An Audit Committee investigation concluded on October 29, 2007 that the understanding of certain Toshiba Corporation of Japan transactions was not fully reflected in order paperwork, so the revenue recognition criteria of SOP 97-2 were not met. The company had recorded about $41 million of revenue from these transactions during fiscal 2001 through 2006. The restatement also corrected other previously identified errors, including rent expense, stock-based compensation timing, Asia-Pacific revenue and an unwarranted income tax reserve.

How did the restatement change reported results?

For fiscal 2006, revenue was restated to $847.98 million from $854.92 million as previously reported, and net income to $56.8 million from $60.9 million. Diluted EPS for 2006 was restated to $0.50 from $0.54. For fiscal 2005, net income was restated to $73.2 million from $83.6 million. Cumulatively, the adjustments reduced revenue by $41.3 million and net income by $40.3 million.

What is the Customer Advances liability and when will it be resolved?

The deferred Toshiba-related revenue is classified as Customer Advances, totaling $40.3 million at September 30, 2007 and $39.5 million at September 30, 2006. It will remain recorded until the rights and obligations of the companies involved in the Toshiba transactions are resolved. If matters are resolved in PTC's favor, the company will reduce Customer Advances and record revenue or other income at that time. The filing does not give a resolution timeline.

What drove the large 2007 net income increase?

Net income of $143.7 million in 2007 included a one-time income tax benefit of $58.9 million from releasing a substantial portion of the valuation allowance against U.S. and a foreign jurisdiction's deferred tax assets, plus a $3.9 million benefit from a U.S. tax refund claim. Operating income also improved to $92.8 million from $66.5 million. The company states that net income and EPS would have improved from 2006 to 2007 even excluding the valuation allowance reversal.

What is the status of the GE Capital Leasing lawsuit and the CoCreate acquisition?

GE Capital Leasing Corporation filed suit on August 2, 2007 in the U.S. District Court for the District of Massachusetts, claiming damages of $47 million, trebled, plus attorneys' fees, and PTC disputes the claims and intends to defend vigorously. No liability beyond the Customer Advances has been accrued. PTC borrowed about $220 million on November 28, 2007 under its revolving credit facility to finance the planned CoCreate acquisition, which is expected to close in the first quarter of 2008.

PTC 10-K FY2007 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed November 29, 2007. Cited figures are marked; the original filing is the authoritative source.

Parametric Technology Corporation (PTC) filed this Form 10-K for the fiscal year ended September 30, 2007, a year in which it restated its fiscal 2006 and 2005 financial statements.

The restatement stems from an Audit Committee investigation into transactions involving Toshiba Corporation of Japan, for which the company had recorded about $41 million^a of revenue during fiscal 2001 through 2006. The company reduced previously recorded revenue by about $8 million in fiscal 2006, $15 million in fiscal 2005, $9 million in fiscal 2004, $2 million in fiscal 2003 and $7 million in prior years. The related $40.3 million Customer Advances liability remains on the balance sheet until the Toshiba matters are resolved.

Restated net income was $143.7 million^b, or $1.22 per diluted share, for 2007, compared with $56.8 million, or $0.50 per diluted share, for 2006. Results were boosted by a one-time $58.9 million tax benefit from releasing part of the U.S. deferred tax valuation allowance. Total revenue rose 11% to $941.3 million, with license revenue up 12% to $296.1 million and Enterprise Solutions revenue up 21%.

Operating income increased from $66.5 million to $92.8 million^c. The company recorded a $15.3 million restructuring charge in the fourth quarter and expects about $10 million more in 2008. Management also reported a material weakness in internal control over income tax accounting, and the disclosure controls conclusion was that they were not effective as of September 30, 2007.

The company is defending a lawsuit filed by GE Capital Leasing Corporation seeking $47 million^d in damages, which it asks to be trebled plus attorneys' fees. On November 28, 2007, PTC borrowed about $220 million under its revolving credit facility to fund the planned $250 million acquisition of CoCreate Software GmbH, which is expected to close in the first quarter of 2008.

02—Key points

Key Highlights

Restated prior periods: revenue reduced by about $41 million cumulatively across fiscal 2001 through 2006 tied to Toshiba Corporation transactions; 2006 net income restated to $56.8 million from $60.9 million as previously reported.
Fiscal 2007 total revenue of $941.3 million, up 11%; license revenue of $296.1 million, up 12%; Enterprise Solutions revenue up 21% to $354.4 million.
Operating income of $92.8 million in 2007, up from $66.5 million in 2006; net income of $143.7 million, or $1.22 per diluted share, including a one-time $58.9 million tax benefit from valuation allowance release.
Material weakness in internal control over financial reporting related to accounting for income taxes; disclosure controls concluded not effective as of September 30, 2007.
GE Capital Leasing Corporation lawsuit seeks $47 million in damages, trebled, plus attorneys' fees; approximately $41 million of related revenue is deferred as Customer Advances.
Pending CoCreate Software GmbH acquisition for about $250 million net of cash acquired, funded in part by a roughly $220 million revolving credit borrowing on November 28, 2007; LBS acquired in Q1 2008 for about $16 million.
Restructuring charge of $15.3 million in Q4 2007 covering severance for 262 employees and excess facilities, with about $10 million more expected in 2008 as functions relocate to lower-cost locations including China.

03—Questions

Frequently Asked Questions

Why did PTC restate its prior financial statements?
An Audit Committee investigation concluded on October 29, 2007 that the understanding of certain Toshiba Corporation of Japan transactions was not fully reflected in order paperwork, so the revenue recognition criteria of SOP 97-2 were not met. The company had recorded about $41 million of revenue from these transactions during fiscal 2001 through 2006. The restatement also corrected other previously identified errors, including rent expense, stock-based compensation timing, Asia-Pacific revenue and an unwarranted income tax reserve.
How did the restatement change reported results?
For fiscal 2006, revenue was restated to $847.98 million from $854.92 million as previously reported, and net income to $56.8 million from $60.9 million. Diluted EPS for 2006 was restated to $0.50 from $0.54. For fiscal 2005, net income was restated to $73.2 million from $83.6 million. Cumulatively, the adjustments reduced revenue by $41.3 million and net income by $40.3 million.
What is the Customer Advances liability and when will it be resolved?
The deferred Toshiba-related revenue is classified as Customer Advances, totaling $40.3 million at September 30, 2007 and $39.5 million at September 30, 2006. It will remain recorded until the rights and obligations of the companies involved in the Toshiba transactions are resolved. If matters are resolved in PTC's favor, the company will reduce Customer Advances and record revenue or other income at that time. The filing does not give a resolution timeline.
What drove the large 2007 net income increase?
Net income of $143.7 million in 2007 included a one-time income tax benefit of $58.9 million from releasing a substantial portion of the valuation allowance against U.S. and a foreign jurisdiction's deferred tax assets, plus a $3.9 million benefit from a U.S. tax refund claim. Operating income also improved to $92.8 million from $66.5 million. The company states that net income and EPS would have improved from 2006 to 2007 even excluding the valuation allowance reversal.
What is the status of the GE Capital Leasing lawsuit and the CoCreate acquisition?
GE Capital Leasing Corporation filed suit on August 2, 2007 in the U.S. District Court for the District of Massachusetts, claiming damages of $47 million, trebled, plus attorneys' fees, and PTC disputes the claims and intends to defend vigorously. No liability beyond the Customer Advances has been accrued. PTC borrowed about $220 million on November 28, 2007 under its revolving credit facility to finance the planned CoCreate acquisition, which is expected to close in the first quarter of 2008.

04—Continue

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