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 March 31, 2007

Commission File Number: 0-18059

Parametric Technology Corporation

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

     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 þ NO o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer þ     Accelerated Filer o     Non-accelerated Filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

There were 114,859,675 shares of our common stock outstanding on May 4, 2007.

 

 

PARAMETRIC TECHNOLOGY CORPORATION

INDEX TO FORM 10-Q

For the Quarter Ended March 31, 2007

				Page
				Number
Part I FINANCIAL INFORMATION
Item 1.		Unaudited Financial Statements:
		Consolidated Balance Sheets as of March 31, 2007 and September 30, 2006			1
		Consolidated Statements of Operations for the three and six months ended March 31, 2007 and April 1, 2006			2
		Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2007 and April 1, 2006			3
		Consolidated Statements of Comprehensive Income for the three and six months ended March 31, 2007 and April 1, 2006			4
		Notes to Consolidated Financial Statements			5
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			27
Item 4.		Controls and Procedures			27
Part II OTHER INFORMATION
Item 1.		Legal Proceedings			28
Item 1A.		Risk Factors			28
Item 4.		Submission of Matters to a Vote of Security Holders			28
Item 6.		Exhibits			29
		Signature			30
Ex-10 Compensatory Arrangements with Directors
Ex-31.1 Section 302 Certification of CEO
Ex-31.2 Section 302 Certification of CFO
Ex-32 Section 906 Certification of CEO & CFO

PART I—FINANCIAL INFORMATION

PARAMETRIC TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS

		March 31,				September 30,
		2007				2006
ASSETS
Current assets:
Cash and cash equivalents		$	238,027			$	183,448
Accounts receivable, net of allowance for doubtful accounts of $3,760 and $4,900 at March 31, 2007 and September 30, 2006, respectively			185,002				181,008
Prepaid expenses			24,779				20,495
Other current assets (Note 1)			65,907				51,824
Deferred tax assets			1,728				1,341
Total current assets			515,443				438,116
Property and equipment, net			52,284				51,603
Goodwill			262,936				249,252
Acquired intangible assets, net			79,256				77,870
Deferred tax assets			1,420				3,205
Other assets			68,844				75,398
Total assets		$	980,183			$	895,444
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	26,393			$	22,793
Accrued expenses and other current liabilities			44,363				46,444
Accrued compensation and benefits			57,497				72,632
Accrued income taxes			10,259				7,066
Deferred revenue (Note 1)			240,475				197,769
Total current liabilities			378,987				346,704
Other liabilities (Note 2)			96,957				97,413
Deferred revenue (Note 1)			9,615				13,228
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued			—				—
Common stock, $0.01 par value; 500,000 shares authorized; 114,799 and 111,880 shares issued and outstanding at March 31, 2007 and September 30, 2006, respectively			1,148				1,119
Additional paid-in capital			1,745,614				1,723,570
Accumulated deficit			(1,210,140	)			(1,242,692	)
Accumulated other comprehensive loss			(41,998	)			(43,898	)
Total stockholders’ equity			494,624				438,099
Total liabilities and stockholders’ equity		$	980,183			$	895,444

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

PARAMETRIC TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

		Three months ended								Six months ended
		March 31,				April 1,				March 31,				April 1,
		2007				2006				2007				2006
Revenue:
License		$	71,336			$	54,614			$	137,924			$	113,141
Service			156,760				145,580				311,839				279,571
Total revenue			228,096				200,194				449,763				392,712
Costs and expenses:
Cost of license revenue			4,211				1,889				7,771				5,192
Cost of service revenue			68,614				63,641				137,182				122,363
Sales and marketing			71,560				64,260				141,121				127,905
Research and development			40,153				35,989				78,137				70,572
General and administrative			20,711				18,039				39,634				37,668
Amortization of acquired intangible assets			1,588				1,288				3,676				2,646
Total costs and expenses			206,837				185,106				407,521				366,346
Operating income			21,259				15,088				42,242				26,366
Other income (expense), net			1,348				804				2,128				1,903
Income before income taxes			22,607				15,892				44,370				28,269
Provision for income taxes			5,208				5,141				11,818				10,002
Net income		$	17,399			$	10,751			$	32,552			$	18,267
Earnings per share—Basic (Note 4)		$	0.15			$	0.10			$	0.29			$	0.17
Earnings per share— Diluted (Note 4)		$	0.15			$	0.09			$	0.28			$	0.16
Weighted average shares outstanding—Basic			112,845				109,739				112,337				109,560
Weighted average shares outstanding—Diluted			117,486				113,403				117,384				112,985

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

PARAMETRIC TECHNOLOGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Six months ended
		March 31,				April 1,
		2007				2006
Cash flows from operating activities:
Net income		$	32,552			$	18,267
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			19,223				16,124
Stock-based compensation			17,477				19,204
Other non-cash expenses, net			1,529				1,057
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable			14,732				5,721
Accounts payable and accrued expenses			(3,122	)			(10,862	)
Accrued compensation and benefits			(17,932	)			(17,974	)
Deferred revenue			21,004				21,311
Accrued income taxes			3,072				(5,069	)
Other current assets and prepaid expenses			(2,877	)			(437	)
Other noncurrent assets and liabilities			(9,535	)			(7,970	)
Net cash provided by operating activities			76,123				39,372
Cash flows from investing activities:
Additions to property and equipment			(12,393	)			(8,154	)
Acquisitions of businesses, net of cash acquired			(17,639	)			(10,675	)
Net cash used by investing activities			(30,032	)			(18,829	)
Cash flows from financing activities:
Proceeds from issuance of common stock			10,889				2,902
Payments of withholding taxes in connection with settlement of restricted stock units			(6,486	)			—
Tax benefit from stock-based awards			194				—
Credit facility origination costs			—				(881	)
Payments of capital lease obligations			(244	)			(220	)
Net cash provided by financing activities			4,353				1,801
Effect of exchange rate changes on cash and cash equivalents			4,135				(2,602	)
Net increase in cash and cash equivalents			54,579				19,742
Cash and cash equivalents, beginning of period			183,448				204,423
Cash and cash equivalents, end of period		$	238,027			$	224,165
Supplemental disclosures of cash flow information:
Property and equipment acquired under capital leases		$	—			$	243

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

PARAMETRIC TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

		Three months ended								Six months ended
		March 31,				April 1,				March 31,				April 1,
		2007				2006				2007				2006
Net income		$	17,399			$	10,751			$	32,552			$	18,267
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment, net of tax of $0 for all periods			772				153				2,580				(426	)
Net unrealized gain (loss) on securities, net of tax of $0 for all periods			(655	)			(560	)			(680	)			(233	)
Other comprehensive income (loss)			117				(407	)			1,900				(659	)
Comprehensive income		$	17,516			$	10,344			$	34,452			$	17,608

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 (PTC) and its wholly owned subsidiaries and have been prepared by management in accordance with accounting principles generally accepted in the United States of America and in accordance with the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. While we believe that the disclosures presented are adequate to make the information not misleading, these unaudited quarterly 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, 2006. 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. Unless otherwise indicated, all references to a year reflect our fiscal year, which ends on September 30. The year-end consolidated balance sheet is derived from our audited financial statements.

Deferred revenue primarily relates to software maintenance agreements billed to customers for which the services have not yet been provided. The liability associated with performing these services is included in deferred revenue and the related customer receivable, if not yet paid, is included in other current assets. Billed but uncollected maintenance-related amounts included in other current assets at March 31, 2007 and September 30, 2006 were $63.7 million and $50.0 million, respectively.

The results of operations for the three and six months ended March 31, 2007 are not necessarily indicative of the results expected for the remainder of the fiscal year.

2. Restructuring and Other Charges

There were no restructuring and other charges recorded in the first six months of 2007 and 2006.

The following table summarizes restructuring accrual activity for the three and six months ended March 31, 2007:

		Three months ended March 31, 2007												Six months ended March 31, 2007
		Employee				Facility								Employee				Facility
		Severance				Closures								Severance				Closures
		and Related				and Other								and Related				and Other
		Benefits				Costs				Total				Benefits				Costs				Total
		(in thousands)
Beginning balance		$	974			$	19,969			$	20,943			$	1,084			$	21,293			$	22,377
Cash disbursements			(679	)			(1,527	)			(2,206	)			(821	)			(2,926	)			(3,747	)
Foreign exchange impact			7				9				16				39				84				123
Balance, March 31, 2007		$	302			$	18,451			$	18,753			$	302			$	18,451			$	18,753

As of March 31, 2007, of the $18.8 million remaining in accrued restructuring charges, $7.4 million was included in current liabilities and $11.4 million was included in other long-term liabilities, principally for facility costs to be paid out through 2014.

In determining the amount of the facilities accrual, we are required to estimate such factors as future vacancy rates, the time required to sublet properties and sublease rates. These estimates are reviewed quarterly based on known real estate market conditions and the credit-worthiness of subtenants, and may result in revisions to established facility reserves. We had accrued $17.9 million as of March 31, 2007 related to excess facilities (compared to $20.7

million at September 30, 2006), representing gross lease commitments with agreements expiring at various dates through 2014 of approximately $41.6 million, net of committed and estimated sublease income of approximately $23.3 million and a present value factor of $0.4 million. We have entered into signed sublease arrangements for approximately $20.9 million, with the remaining $2.4 million based on future estimated sublease arrangements, including $1.6 million for space currently available for sublease.

3. Stock-based Compensation

We adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)) on July 3, 2005, effective with the beginning of the fourth quarter of 2005. SFAS 123(R) requires us to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award using an option pricing model. That cost is recognized over the period during which an employee is required to provide service in exchange for the award.

Our equity incentive plans provide 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. Until July 2005, we generally granted stock options. For those options, the option exercise price was typically the fair market value of our common stock at the date of grant and they generally vested over four years and expired ten years from the date of grant. Since our adoption of SFAS 123(R), we have awarded restricted stock and restricted stock units as the principal equity incentive awards, including performance-based awards that are earned based on achievement of performance criteria established by the Compensation Committee of our Board of Directors on or prior to the grant date. Each restricted stock unit represents the contingent right to receive one share of our common stock. Our equity incentive plans are described more fully in Note J to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2006.

In the second quarter of 2007, at our Annual Meeting our shareholders voted to amend our 2000 Equity Incentive Plan to increase the number of shares of common stock authorized for issuance under the plan by 5,000,000 shares.

We made the following restricted stock and restricted stock unit grants in the first six months of 2007 and 2006:

		Restricted Stock								Restricted Stock Units
Grant Period		Performance-based				Time-based				Performance-based				Time-based
		(Number of Shares)								(Number of Units)
Second quarter of 2007			—				442,590				3,181				380,355
First six months of 2007			495,768				442,590				60,561				728,182
Second quarter of 2006			—				88,000				14,046				490,140
First six months of 2006			515,617				434,800				335,867				1,292,277

Restricted Stock

Performance-based awards. In the first six months of 2007 and 2006, we granted to our executive officers performance-based shares that are earned based on achievement of certain company operating performance criteria specified by the Compensation Committee on or prior to the date of grant. With respect to the 2007 grants, if the specified performance criteria are achieved in full, the restrictions on approximately 251,235 shares will lapse on the later of November 9, 2007 or the date the Compensation Committee determines the extent to which the performance criteria have been achieved, and the restrictions on the remaining 244,533 shares will lapse in substantially equal amounts on November 9, 2008 and 2009, provided that the holder of the award remains employed by us at those dates. With respect to the 2006 grants, because the specified performance criteria were achieved in full, the restrictions on 284,417 of the shares lapsed on November 9, 2006 and the restrictions on the remaining shares will lapse in equal installments on November 9, 2007 and 2008, provided that the holder of the award remains employed by us at those dates.

Time-based awards. In the second quarter of 2007, we granted 366,800 and 75,790 shares to our executive officers and members of our Board of Directors, respectively. The restrictions on the executive shares will lapse in substantially equal installments on February 15, 2008, 2009 and 2010, provided that the holder of the award remains employed by us at those dates. The restrictions on the shares granted to our directors will lapse in substantially equal installments on March 7, 2008, 2009 and 2010, provided that the holder of the award remains a director at those dates.

In the first quarter of 2006, we granted 346,800 shares to our executive officers. The restrictions on one-third of these shares lapsed on November 9, 2006 and those on the remaining shares will lapse in substantially equal installments on November 9, 2007 and 2008, provided that the holder of the award remains employed by us at those dates. In the second quarter of 2006, we issued 88,000 shares of restricted stock to our non-employee directors, the restrictions on one-third of the shares lapsed on February 15, 2007 and the restrictions on the remaining shares will lapse in substantially equal installments on each of February 15, 2008 and 2009.

Performance-based awards. In the first and second quarters of 2007, we granted 57,380 and 3,181 performance-based restricted stock units, respectively, to employees in connection with our employee management incentive plans for the 2007 fiscal year. These shares will vest on the later of November 9, 2007 or the date the Compensation Committee determines the extent to which the performance criteria have been achieved, provided that the holder of the award remains employed by us at that date. In the first six months of 2006, we granted 335,867 performance-based restricted stock units to employees in connection with our employee management incentive plans for the 2006 fiscal year which were earned in full on November 9, 2006 based on achievement of specified performance criteria established by the Compensation Committee.

Time-based awards. In the first and second quarters of 2007, we granted 347,827 and 380,355 restricted stock units, respectively, to employees. These restricted stock units will vest in three substantially equal installments on the anniversary of the date of grant, provided that the holder of the award remains employed by us at those dates. We expect to grant additional time-based restricted stock units to employees in the third quarter of 2007. In the first and second quarters of 2006, we granted 802,137 and 490,140 restricted stock units, respectively, to employees, which vest in three substantially equal installments on the anniversary of the date of grant, provided that the holder of the award remains employed by us at those dates.

With respect to all types of equity awards, in the first six months of 2007, the restrictions on 664,463 restricted shares lapsed and 1,099,349 restricted stock units vested. The fair value of restricted shares and restricted stock units granted in the first six months of 2007 was based on the fair market value of our common stock on the date of grant. The weighted average fair value per share of restricted shares and restricted stock units granted in the first six months of 2007 was $18.69.

The following table shows the classification of compensation expense recorded for our stock-based awards as reflected in our consolidated statements of operations:

		Three months ended								Six months ended
		March 31,				April 1,				March 31,				April 1,
		2007				2006				2007				2006
		(in thousands)
Cost of license revenue		$	19			$	27			$	40			$	67
Cost of service revenue			1,768				1,914				3,678				3,861
Sales and marketing			2,326				2,379				3,891				4,694
Research and development			1,629				2,212				3,471				4,317
General and administrative			3,105				3,008				6,397				6,265
Total stock-based compensation expense		$	8,847			$	9,540			$	17,477			$	19,204

4. Common Stock and Earnings Per Share (EPS)

Basic EPS is calculated by dividing net income by the weighted average number of shares outstanding during the period. Unvested restricted shares, although legally issued and outstanding, are not considered outstanding for purposes of calculating basic earnings per share. 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 unrecognized compensation expense and any tax benefits as additional proceeds.

The following table presents the calculation for both basic and diluted EPS:

		Three months ended								Six months ended
		March 31,				April 1,				March 31,				April 1,
		2007				2006				2007				2006
		(in thousands, except per share data)
Net income		$	17,399			$	10,751			$	32,552			$	18,267
Weighted average shares outstanding—Basic			112,845				109,739				112,337				109,560
Dilutive effect of employee stock options, restricted shares and restricted stock units			4,641				3,664				5,047				3,425
Weighted average shares outstanding—Diluted			117,486				113,403				117,384				112,985
Earnings per share-Basic		$	0.15			$	0.10			$	0.29			$	0.17
Earnings per share-Diluted		$	0.15			$	0.09			$	0.28			$	0.16

Stock options to purchase 3.5 million, 3.5 million, 4.1 million and 4.2 million shares for the second quarter and first six months of 2007 and the second quarter and first six months of 2006, respectively, were outstanding but were not included in the calculation of diluted earnings per share because the exercise prices per share, plus the per share tax benefits and unamortized compensation relating thereto, were greater than the average market price of our common stock for those periods. These shares were excluded from the computation of diluted EPS as the effect would have been anti-dilutive.

5. Acquisitions

ITEDO

On October 18, 2006, we acquired ITEDO Software GmbH and ITEDO Software LLC (together, ITEDO), headquartered in Germany, for approximately $16.7 million in cash. In addition, we agreed to pay up to $0.5 million of additional cash consideration if specified product integration targets are achieved within three years of the acquisition date. ITEDO provided software solutions for creating and maintaining technical illustrations to customers in multiple discrete manufacturing vertical markets such as automotive, aerospace and defense, and industrial equipment. ITEDO had approximately 30 employees and generated revenue of approximately $5 million for the twelve months ended July 31, 2006. Results of operations for ITEDO have been included in the accompanying consolidated statements of operations since October 19, 2006. Our results of operations prior to this acquisition if presented on a pro forma basis, as if the companies had been combined since the beginning of fiscal 2006, would not differ materially from our reported results.

This acquisition was accounted for as a business combination. The purchase price allocation resulted in goodwill of $11.2 million; intangible assets of $8.1 million (including purchased software of $6.2 million, customer relationships of $1.8 million, and other intangible assets of $0.1 million, which are being amortized over estimated average useful lives of 4 to 10 years); other net liabilities of $1.0 million; restructuring accruals of $0.3 million related to our planned integration of ITEDO; deferred tax liabilities of $2.5 million, equal to the tax effect of the amount of the acquired intangible assets other than goodwill not deductible for income tax purposes; and, as a result of recording those deferred tax liabilities, a $1.2 million for a reduction in our valuation allowance recorded against our pre-acquisition deferred tax assets in the U.S. and a foreign jurisdiction. The goodwill and certain intangible assets are not deductible for tax purposes.

This transaction resulted in $11.2 million of purchase price that exceeded the estimated fair values of tangible and intangible assets and liabilities, all of which was allocated to goodwill. We believe that the high amount of goodwill relative to identifiable intangible assets was the result of several factors including the potential to sell ITEDO products into our traditional manufacturing customer base, including leveraging our direct and indirect sales force and our established presence in geographies not previously served by ITEDO; and our intention to integrate our ITEDO, Arbortext, Windchill and Pro/ENGINEER solutions to enhance our technical publications capabilities.

Mathsoft

On April 28, 2006, we acquired Mathsoft Corporate Holdings, Inc., including its wholly owned subsidiary Mathsoft Engineering & Education, Inc. (together, Mathsoft). Mathsoft’s primary product was Mathcad^® software, which helps engineering organizations create, automate, document and reuse engineering calculations in the product development process, and in other mathematics-driven processes. Mathsoft had approximately 120 employees in offices primarily in the U.S. and Europe and generated revenue of approximately $20 million for the twelve months ended March 31, 2006. Results of operations for Mathsoft have been included in the accompanying consolidated statement of operations since April 29, 2006. Our results of operations prior to this acquisition, if presented on a pro forma basis as if the companies had been combined since the beginning of fiscal 2006, would not differ materially from our reported results.

DENC and Cadtrain

In the first quarter of 2006, we acquired DENC AG and substantially all of the assets of Cadtrain, Inc. for an aggregate of $9.9 million in cash. In addition, we agreed to pay up to an aggregate of $2.0 million of additional cash consideration if specified targets, including revenue and customer retention results, were achieved within one year of the acquisition dates. As of September 30, 2006, the specified targets of the DENC contingent purchase price arrangement were met and related payments of $0.5 million were recorded as additional goodwill. In the first quarter of 2007, the specified targets of the Cadtrain contingent purchase price arrangement were met and related payments of $1.5 million were recorded as additional goodwill.

6. Goodwill and Acquired Intangible Assets

We have two reportable segments: (1) software products and (2) services. As of March 31, 2007 and September 30, 2006, goodwill and acquired intangible assets in the aggregate attributable to our software products reportable segment was $314.9 million and $300.9 million, respectively, and attributable to our services reportable segment was $27.3 million and $26.2 million, respectively. Goodwill and other intangible assets are tested for impairment at least annually, or on an interim basis if an event occurs or circumstances change that would, more likely than not, reduce the fair value of the reporting segment below its carrying value. We completed our annual impairment review as of July 1, 2006 and concluded that no impairment charge was required as of that date. Since that date, there have not been any events or changes in circumstances that indicate that the carrying values of goodwill or acquired intangible assets may not be recoverable.

Goodwill and acquired intangible assets consisted of the following:

March 31, 2007

September 30, 2006

Gross

Gross

Carrying

Accumulated

Net Book

Carrying

Accumulated

Net Book

Amount

Amortization

Value

Amount

Amortization

Value

(in thousands)

Goodwill and intangible assets with indefinite lives (not amortized):

Goodwill

$

262,936

$

249,252

Trademarks

4,252