Item 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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PTC Inc.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)

		December 31, 2021				September 30, 2021
ASSETS
Current assets:
Cash and cash equivalents		$	296,125			$	326,532
Accounts receivable, net of allowance for doubtful accounts of $295 and $304 at December 31, 2021 and September 30, 2021, respectively			478,673				541,072
Prepaid expenses			89,473				69,991
Other current assets			145,051				135,415
Total current assets			1,009,322				1,073,010
Property and equipment, net			96,848				100,237
Goodwill			2,189,880				2,191,887
Acquired intangible assets, net			363,877				378,967
Deferred tax assets			292,171				297,789
Operating right-of-use lease assets			150,261				152,337
Other assets			318,261				313,333
Total assets		$	4,420,620			$	4,507,560
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	32,922			$	33,381
Accrued expenses and other current liabilities			132,806				113,067
Accrued compensation and benefits			119,928				117,784
Accrued income taxes			2,867				5,055
Deferred revenue			464,910				482,131
Short-term lease obligations			26,545				27,864
Total current liabilities			779,978				779,282
Long-term debt			1,440,014				1,439,471
Deferred tax liabilities			4,279				4,165
Long-term deferred revenue			16,160				15,546
Long-term lease obligations			179,487				180,935
Other liabilities			46,890				49,693
Total liabilities			2,466,808				2,469,092
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; 116,870 and 117,163 shares issued and outstanding at December 31, 2021 and September 30, 2021, respectively			1,169				1,172
Additional paid-in capital			1,590,285				1,718,504
Retained earnings			460,745				414,656
Accumulated other comprehensive loss			(98,387	)			(95,864	)
Total stockholders’ equity			1,953,812				2,038,468
Total liabilities and stockholders’ equity		$	4,420,620			$	4,507,560

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

PTC Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

		Three months ended
		December 31, 2021				December 31, 2020
Revenue:
License		$	169,108			$	177,175
Support and cloud services			244,485				216,245
Total software revenue			413,593				393,420
Professional services			44,128				35,630
Total revenue			457,721				429,050
Cost of revenue:
Cost of license revenue			9,794				13,256
Cost of support and cloud services revenue			45,885				38,342
Total cost of software revenue			55,679				51,598
Cost of professional services revenue			39,439				35,232
Total cost of revenue			95,118				86,830
Gross margin			362,603				342,220
Operating expenses:
Sales and marketing			125,476				124,725
Research and development			80,534				70,835
General and administrative			51,940				49,528
Amortization of acquired intangible assets			8,484				6,547
Restructuring and other charges, net			33,991				247
Total operating expenses			300,425				251,882
Operating income			62,178				90,338
Interest expense			(12,986	)			(11,518	)
Other income (expense), net			6,184				(1,413	)
Income before income taxes			55,376				77,407
Provision for income taxes			9,287				53,892
Net income		$	46,089			$	23,515
Earnings per share—Basic		$	0.39			$	0.20
Earnings per share—Diluted		$	0.39			$	0.20
Weighted-average shares outstanding—Basic			117,347				116,401
Weighted-average shares outstanding—Diluted			118,598				117,605

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

PTC Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

		Three months ended
		December 31, 2021				December 31, 2020
Net income		$	46,089			$	23,515
Other comprehensive income (loss), net of tax:
Hedge gain (loss) arising during the period, net of tax of $0.8 million and $0 million in the first quarter of 2022 and 2021, respectively			2,495				(6,779	)
Foreign currency translation adjustment, net of tax of $0 for each period			(5,668	)			19,975
Unrealized gain (loss) on marketable securities, net of tax of $0 for each period			—				(307	)
Amortization of net actuarial pension loss included in net income, net of tax of $0.1 million and $0.3 million in the first quarter of 2022 and 2021, respectively			265				732
Change in unamortized pension gain (loss) during the period related to changes in foreign currency			385				(1,112	)
Other comprehensive income (loss)			(2,523	)			12,509
Comprehensive income		$	43,566			$	36,024

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

PTC Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

		Three months ended
		December 31, 2021				December 31, 2020
Cash flows from operating activities:
Net income		$	46,089			$	23,515
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			22,088				18,835
Amortization of right-of-use lease assets			8,860				9,391
Stock-based compensation			45,942				46,088
Gain on investment			(9,766	)			—
Other non-cash items, net			(273	)			(331	)
Changes in operating assets and liabilities, excluding the effects of acquisitions:
Accounts receivable			57,316				10,315
Accounts payable and accrued expenses			12,959				12,381
Accrued compensation and benefits			2,853				(9,252	)
Deferred revenue			(13,696	)			(851	)
Accrued income taxes			(8,328	)			44,537
Other current assets and prepaid expenses			(13,474	)			4,288
Operating lease liabilities			(2,343	)			(9,501	)
Other noncurrent assets and liabilities			(10,491	)			(35,653	)
Net cash provided by operating activities			137,736				113,762
Cash flows from investing activities:
Additions to property and equipment			(3,362	)			(2,857	)
Purchases of short- and long-term marketable securities			—				(7,562	)
Proceeds from sales of short- and long-term marketable securities			—				56,170
Proceeds from maturities of short- and long-term marketable securities			—				9,861
Purchases of investments			—				(1,000	)
Purchase of intangible assets			(450	)			(550	)
Settlement of net investment hedges			6,473				(7,359	)
Net cash provided by investing activities			2,661				46,703
Cash flows from financing activities:
Repayments of borrowings under credit facility			—				(18,000	)
Repurchases of common stock			(119,739	)			—
Payments of withholding taxes in connection with stock-based awards			(49,165	)			(24,500	)
Payments of principal for financing leases			(239	)			(279	)
Net cash used in financing activities			(169,143	)			(42,779	)
Effect of exchange rate changes on cash, cash equivalents and restricted cash			(1,661	)			5,553
Net change in cash, cash equivalents, and restricted cash			(30,407	)			123,239
Cash, cash equivalents, and restricted cash, beginning of period			327,046				275,960
Cash, cash equivalents, and restricted cash, end of period		$	296,639			$	399,199
Supplemental disclosure of non-cash financing activities:
Withholding taxes in connection with stock-based awards, accrued		$	-			$	(931	)
Repurchases of common stock, accrued		$	(5,260	)		$	-

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

PTC Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

		Three months ended December 31, 2021
		Common Stock																Accumulated
		Shares				Amount				Additional Paid-In Capital				Retained Earnings				Other Comprehensive Loss				Total Stockholders’ Equity
Balance as of September 30, 2021			117,163			$	1,172			$	1,718,504			$	414,656			$	(95,864	)		$	2,038,468
Common stock issued for employee stock-based awards			1,120				11				(11	)			—				—				—
Shares surrendered by employees to pay taxes related to stock-based awards			(410	)			(4	)			(49,161	)			—				—				(49,165	)
Compensation expense from stock-based awards			—				—				45,942				—				—				45,942
Repurchases of common stock			(1,003	)			(10	)			(124,989	)			—				—				(124,999	)
Net income			—				—				—				46,089				—				46,089
Unrealized gain on net investment hedges, net of tax			—				—				—				—				2,495				2,495
Foreign currency translation adjustment			—				—				—				—				(5,668	)			(5,668	)
Change in pension benefits, net of tax			—				—				—				—				650				650
Balance as of December 31, 2021			116,870			$	1,169			$	1,590,285			$	460,745			$	(98,387	)		$	1,953,812

		Three months ended December 31, 2020
		Common Stock																Accumulated
		Shares				Amount				Additional Paid-In Capital				Accumulated Deficit				Other Comprehensive Loss				Total Stockholders’ Equity
Balance as of September 30, 2020			116,125				1,161				1,602,728				(62,267	)			(103,374	)			1,438,248
Common stock issued for employee stock-based awards			802				8				(8	)			—				—				—
Shares surrendered by employees to pay taxes related to stock-based awards			(263	)			(2	)			(25,429	)			—				—				(25,431	)
Compensation expense from stock-based awards			—				—				46,088				—				—				46,088
Net income			—				—				—				23,515				—				23,515
Unrealized loss on net investment hedges, net of tax			—				—				—				—				(6,779	)			(6,779	)
Foreign currency translation adjustment			—				—				—				—				19,975				19,975
Unrealized loss on marketable securities, net of tax			—				—				—				—				(307	)			(307	)
Change in pension benefits, net of tax			—				—				—				—				(380	)			(380	)
Balance as of December 31, 2020			116,664			$	1,167			$	1,623,379			$	(38,752	)		$	(90,865	)		$	1,494,929

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

PTC Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation

General

The accompanying unaudited condensed consolidated financial statements include the accounts of PTC Inc. and its wholly owned subsidiaries and have been prepared by management in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and in accordance with the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. While we believe that the disclosures presented are adequate in order to make the information not misleading, these unaudited quarterly financial statements should be read in conjunction with our annual consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair statement of our financial position, results of operations and cash flows at the dates and for the periods indicated. The September 30, 2021 Consolidated Balance Sheet included herein is derived from our audited consolidated financial statements.

Unless otherwise indicated, all references to a year mean our fiscal year, which ends on September 30.

Risks and Uncertainties - COVID-19 Pandemic

The COVID-19 pandemic that began in early 2020 continues to significantly affect global economic activity and create macroeconomic uncertainty.

We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of the COVID-19 pandemic as of December 31, 2021 and through the date of this report. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, stock-based compensation, the carrying value of our goodwill and other long-lived assets, financial assets, valuation allowances for tax assets and revenue recognition. While our assessment did not result in a material impact to our consolidated financial statements as of and for the quarter ended December 31, 2021, our future assessment could result in material impacts to our consolidated financial statements in future reporting periods.

Recently Adopted Accounting Pronouncements

Income Taxes

In December 2019, the FASB issued Accounting Standards Update ASU 2019-12, Income Taxes (Topic 740) on Simplifying the Accounting for Income Taxes. The decisions reflected in ASU 2019-12 update specific areas of ASC 740, Income Taxes, to reduce complexity while maintaining or improving the usefulness of the information provided to users of financial statements. The new standard became effective for us in this first quarter of 2022 ending December 31, 2021 and did not have a material impact on our consolidated financial statements.

Pending Accounting Pronouncements

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides optional guidance for contract modifications and certain hedging relationships associated with the transition from reference rates that are expected to be discontinued. ASU 2020-04 is effective for all entities upon issuance through December 31, 2022. We are still evaluating the impact, but do not expect the standard to have a material impact on our consolidated financial statements.

Business Combinations

In October 2021, the FASB issued Accounting Standards Update ASU 2021-08, Business Combinations (Topic 805) on Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU is intended to improve the accounting for acquired revenue contracts with customers in a business combination by

addressing diversity in practice and inconsistency related to 1) recognition of an acquired contract asset and liability, and 2) payment terms and their effect on subsequent revenue recognized by the acquirer. ASU 2021-08 will be effective for us in the first quarter of 2024, though early adoption of the standard is permitted. We are currently evaluating the impact the standard will have on our consolidated financial statements, but at this time we do not expect it to be material for prior acquisitions. The impact in future periods will depend on the contract assets and contract liabilities acquired in future business combinations.

2. Revenue from Contracts with Customers

Contract Assets and Contract Liabilities

(in thousands)		December 31, 2021				September 30, 2021
Contract asset		$	13,177			$	12,934
Deferred revenue		$	481,070			$	497,677

As of December 31, 2021, $8.4 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. The remainder is included in other long-term assets and expected to be transferred within the next 24 months. Approximately $5.1 million of the September 30, 2021 contract asset balance was transferred to receivables during the three months ended December 31, 2021 as a result of the right to payment becoming unconditional. Additions to contract assets of approximately $5.4 million related to revenue recognized in the period, net of billings. The majority of the contract asset balance relates to two large professional services contracts with invoicing terms based on performance milestones. There were no impairments of contract assets during the three months ended December 31, 2021.

During the three months ended December 31, 2021, we recognized $222.0 million of revenue that was included in deferred revenue as of September 30, 2021 and there were additional deferrals of $205.4 million, primarily related to new billings. For subscription contracts, we generally invoice customers annually. The balance of total short- and long-term receivables as of December 31, 2021 was $683.8 million, compared to total short- and long-term receivables as of September 30, 2021 of $744.6 million.

Our multi-year, non-cancellable on-premises subscription contracts provide customers with an annual right to exchange software within the subscription with other software. As of December 31, 2021 and September 30, 2021, the total refund liability was $40.1 million and $40.3 million, respectively, primarily associated with the annual right to exchange on-premises subscription software.

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, management specifically analyzes individual accounts receivable, historical bad debts, customer concentrations, customer credit-worthiness, current economic conditions, and accounts receivable aging trends. Our allowance for doubtful accounts on trade accounts receivable was $0.3 million as of December 31, 2021 and September 30, 2021. Uncollectible trade accounts receivable written-off and bad debt expense were immaterial in the first quarter ended December 31, 2021 and December 31, 2020.

Costs to Obtain or Fulfill a Contract

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 related to commissions. As of December 31, 2021 and September 30, 2021, deferred costs of $41.6 million and $40.2 million, respectively, are included in other current assets and $80.7 million and $81.1 million, respectively, are included in other assets (non-current). Amortization expense related to costs to obtain a contract with a customer was $11.6 million and $10.4 million in the three months ended December 31, 2021and December 31, 2020, respectively. There were no impairments of the contract cost asset in the three months ended December 31, 2021 and December 31, 2020.

Remaining Performance Obligations

Our contracts with customers include amounts allocated to performance obligations that will be satisfied at a later date. As of December 31, 2021, the amounts include additional performance obligations of $481.1 million recorded in deferred revenue and $1,140.3 million that are not yet recorded in the Consolidated Balance Sheets. We expect to recognize approximately 83% of the total $1,621.4 million over the next 24 months, with the remaining amount thereafter.

Disaggregation of Revenue

(in thousands)		Three months ended
		December 31, 2021				December 31, 2020
Recurring revenue(1)		$	405,125			$	384,957
Perpetual license			8,468				8,463
Professional services			44,128				35,630
Total revenue		$	457,721			$	429,050

	(1)	Recurring revenue is comprised of subscription, perpetual support, and SaaS revenue.

For further disaggregation of revenue by geographic region and product group see Note 11. Segment and Geographic Information.

3. Restructuring and Other Charges

Restructuring and other charges, net includes restructuring charges (credits) and impairment and accretion expense charges related to the lease assets of exited facilities. Refer to Note 14. Leases for additional information about exited facilities.

In the three months ended December 31, 2021, restructuring and other charges, net totaled $34.0 million, of which $34.1 million is attributable to restructuring charges, offset by $0.1 million attributable to sublease income related to exited lease facilities. We made cash payments related to restructuring charges of $9.8 million ($9.1 million related to the 2022 restructuring described below and $0.7 million in payments for facilities restructured in prior period).

In the three months ended December 31, 2020, restructuring and other charges, net totaled $0.2 million, of which $0.1 million is attributable to restructuring charges and $0.1 million is related to exited facilities.

Restructuring Charges

In the first quarter of 2022, we committed to a plan to restructure our workforce and consolidate select facilities to align our customer facing and product-related functions with the SaaS industry best practices and accelerate the opportunity for our on-premise customers to move to the cloud. The restructuring plan resulted in charges of $34.1 million in the first quarter of 2022 primarily associated with approximately 340 employees, in addition to the $1.7 million of professional fees recorded in the fourth quarter of 2021 in connection with the re-organization. We are anticipating total restructuring charges for this plan to be approximately $40 million to $45 million.

In the first quarter of 2020, we initiated a restructuring program as part of a realignment associated with expected synergies and operational efficiencies related to the Onshape acquisition. The restructuring plan resulted in charges of $30.8 million through fiscal year 2020 for termination benefits associated with approximately 250 employees. During the three months ended December 31, 2021 and December 31, 2020 we incurred charges of $0.1 million and $0.2 million, respectively, in connection with this restructuring plan.

The following table summarizes restructuring accrual activity for the three months ended December 31, 2021:

(in thousands)		Employee Severance and Related Benefits				Facility Closures and Related Costs				Total
Accrual, October 1, 2021		$	1,981			$	3,505			$	5,486
Charges to operations, net			34,072				72				34,144
Cash disbursements			(9,145	)			(683	)			(9,828	)
Foreign exchange impact			(117	)			—				(117	)
Accrual, December 31, 2021		$	26,791			$	2,894			$	29,685

The following table summarizes restructuring accrual activity for the three months ended December 31, 2020:

(in thousands)		Employee Severance and Related Benefits				Facility Closures and Related Costs				Total
Accrual, October 1, 2020		$	3,992			$	5,995			$	9,987
Charges to operations, net			160				(29	)			131
Cash disbursements			(2,733	)			(687	)			(3,420	)
Foreign exchange impact			42				12				54
Accrual, December 31, 2020		$	1,461			$	5,291			$	6,752

The accrual for employee severance and related benefits is included in accrued compensation and benefits in the Consolidated Balance Sheets.

The accrual for facility closures and related costs is included in accrued expenses and other current liabilities in the Consolidated Balance Sheets.

4. Stock-based Compensation

Our equity incentive plan provides for grants of nonqualified and incentive stock options, common stock, restricted stock, restricted stock units (RSUs) and stock appreciation rights to employees, directors, officers and consultants. We award RSUs as our principal equity incentive awards.

The following table shows RSU activity for the three months ended December 31, 2021:

(in thousands, except grant date fair value data)		Number of RSUs				Weighted-Average Grant Date Fair Value Per RSU
Balance of outstanding restricted stock units, October 1, 2021			3,216			$	92.83
Granted(1)			899			$	117.10
Vested			(1,119	)		$	91.64
Forfeited or not earned			(126	)		$	93.80
Balance of outstanding restricted stock units, December 31, 2021			2,869			$	100.85

(1)	Restricted stock units granted includes 37,000 shares from prior period TSR awards that were earned upon achievement of the performance criteria and vested in November 2021.

(in thousands)		Three months ended December 31, 2021
Performance-based RSUs(1)			163
Service-based RSUs(2)			623
Total Shareholder Return RSUs(3)			76

(1)

The performance-based RSUs were granted to our executives and are eligible to vest based upon annual increasing performance measures over a three-year period. To the extent earned, those performance-based RSUs will vest in three substantially equal installments on November 15, 2022, November 15, 2023 and November 15, 2024, or the date the Compensation Committee determines the extent to which the applicable performance criteria have been achieved for each performance period. Up to a maximum of two times the number of RSUs can be earned (a maximum aggregate of 152 thousand RSUs).

(2)	The service-based RSUs were granted to employees, including our executive officers. Substantially all service-based RSUs will vest in three substantially equal annual installments on or about the anniversary of the date of grant.

(3)

The Total Shareholder Return RSUs (TSR RSUs) were granted to our executives and are eligible to vest based on the performance of PTC stock relative to the stock performance of an index of PTC peer companies established as of the grant date, as determined at the end of the measurement period ending on September 30, 2024. The RSUs earned will vest on November 15, 2024. Up to a maximum of two times the number of TSR RSUs eligible to be earned for the period (up to a maximum aggregate of 152 thousand RSUs) may vest. If the return to PTC shareholders is negative for the period but still meets or exceeds the peer group indexed return, a maximum of 100% of the TSR RSUs may vest.

The weighted-average fair value of the TSR RSUs was $136.43 per target RSU on the grant date. The fair value of the TSR RSUs was determined using a Monte Carlo simulation model.

The significant assumptions used in the Monte Carlo simulation model were as follows:

Average volatility of peer group			34.67	%
Risk free interest rate			0.81	%
Dividend yield			—	%

Compensation expense recorded for our stock-based awards is classified in our Consolidated Statements of Operations as follows:

(in thousands)		Three months ended
		December 31, 2021				December 31, 2020
Cost of license revenue		$	38			$	20
Cost of support and cloud services revenue			3,478				2,302
Cost of professional services revenue			2,456				2,112
Sales and marketing			13,081				14,999
Research and development			10,176				8,443
General and administrative			16,713				18,212
Total stock-based compensation expense		$	45,942			$	46,088

Stock-based compensation expense includes $2.0 million in the first quarter of 2022 and $1.9 million in the first quarter of 2021 related to our employee stock purchase plan.

5. Earnings per Share (EPS) and Common Stock

EPS

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

(in thousands, except per share data)		Three months ended
		December 31, 2021				December 31, 2020
Net income		$	46,089			$	23,515
Weighted-average shares outstanding—Basic			117,347				116,401
Dilutive effect of restricted stock units			1,251				1,204
Weighted-average shares outstanding—Diluted			118,598				117,605
Earnings per share—Basic		$	0.39			$	0.20
Earnings per share—Diluted		$	0.39			$	0.20

There were no anti-dilutive shares for the three months ended December 31, 2021. There were 0.1 million anti-dilutive shares for the three months ended December 31, 2020.

Common Stock Repurchases

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 $1 billion of our common stock in the period October 1, 2020 through September 30, 2023. In the three months ended December 31, 2021, we repurchased 1,003 thousand shares for $119.7 million. We additionally entered into trades to purchase an incremental 43 thousand shares for $5.2 million, which will be settled in January 2022 and is included in accrued expenses and other current liabilities as of December 31, 2021. We did not repurchase any shares in the first quarter of 2021. All shares of our common stock repurchased are automatically restored to the status of authorized and unissued.

6. Acquisitions

Acquisition-related costs in the first quarter of 2022 totaled $1.0 million, compared to $3.9 million in the first quarter of 2021. These costs are classified in general and administrative expenses in the accompanying Consolidated Statements of Operations.

Acquisition-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). In addition, subsequent adjustments to our initial estimated amount of contingent consideration associated with specific acquisitions are included within acquisition-related charges.

Our results of operations include the results of acquired businesses beginning on their respective acquisition date. Our results of operations for the reported periods, if presented on a pro forma basis, would not differ materially from our reported results.

Arena

On January 15, 2021, we acquired Arena Holdings, Inc. (“Arena”) pursuant to the Agreement and Plan of Merger dated as of December 12, 2020 by and among PTC, Arena, Astronauts Merger Sub, Inc., and the Representative named therein, the material terms of which are described in the Form 8-K filed by PTC on December 14, 2020 and which is filed as Exhibit 1.1 to that Form 8-K. PTC paid approximately $715 million, net of cash acquired of $11.1 million, for Arena, which amount was financed with cash on hand and $600 million borrowed under our existing credit facility. Arena had approximately 170 employees on the close date. The acquisition of Arena added revenue of approximately $29.8 million in FY’21, which is net of approximately $9.1 million in fair value adjustments related to purchase accounting for the acquisition.

The acquisition of Arena has been accounted for as a business combination. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition date. The fair values of intangible assets were based on valuations using a discounted cash flow model which requires the use of significant estimates and assumptions, including estimating future revenues and costs. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill.

The purchase price allocation resulted in $562.8 million of goodwill, $155.0 million of customer relationships, $38.3 million of purchased software, $4.2 million of trademarks, $41.3 million of deferred tax liabilities, $15.5 million of deferred revenue, $11.4 million of accounts receivable, and $0.4 million of other net liabilities. The acquired customer relationships, purchased software, and trademarks are being amortized over useful lives of 13 years, 9 years, and 12 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 participation in expected future growth of the PLM SaaS market and expansion into the mid-market for PLM, where SaaS solutions are becoming the standard.

7. Goodwill and Intangible Assets

We have two operating and reportable segments: (1) Software Products and (2) Professional Services. We assess goodwill for impairment at the reporting unit level. Our reporting units are determined based on the components of our operating segments that constitute a business for which discrete financial information is available and for which operating results are regularly reviewed by segment management. Our reporting units are the same as our operating segments.

As of December 31, 2021, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was $2,508.8 million and attributable to our Professional Services segment was $45.0 million. As of September 30, 2021, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was $2,525.7 million and attributable to our Professional Services segment was $45.2 million. Acquired intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. We evaluate goodwill for impairment in the third quarter of our fiscal year, or on an interim basis if an event occurs or circumstances change that would, more likely than not, reduce the fair value of a reporting segment below its carrying value. 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 operating results, significant changes in our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period and a reduction of our market capitalization relative to net book value.

We completed our annual goodwill impairment review as of June 30, 2021, based on a qualitative assessment. Our qualitative assessment included company-specific (e.g., financial performance and long-range plans), industry, and macroeconomic factors, as well as consideration of the fair value of each reporting unit relative to its carrying value at the last valuation date (June 27, 2020). Based on our qualitative assessment, we believe it is more likely than not that the fair values of our reporting units exceed their carrying values and no further impairment testing is required. Through December 31, 2021, there were no events or changes in circumstances that indicated that the carrying values of goodwill or acquired intangible assets may not be recoverable.

Goodwill and acquired intangible assets consisted of the following:

(in thousands)		December 31, 2021												September 30, 2021
		Gross Carrying Amount				Accumulated Amortization				Net Book Value				Gross Carrying Amount				Accumulated Amortization				Net Book Value
Goodwill (not amortized)										$	2,189,880											$	2,191,887
Intangible assets with finite lives (amortized):
Purchased software		$	482,824			$	344,152			$	138,672			$	483,771			$	338,542			$	145,229
Capitalized software			22,877				22,877				—				22,877				22,877				—
Customer lists and relationships			573,082				357,500				215,582				574,516				350,648				223,868
Trademarks and trade names			26,864				17,241				9,623				26,906				17,036				9,870
Other			3,972				3,972				—				4,000				4,000				—
Total intangible assets with finite lives		$	1,109,619			$	745,742			$	363,877			$	1,112,070			$	733,103			$	378,967
Total goodwill and acquired intangible assets										$	2,553,757											$	2,570,854

Goodwill

Changes in goodwill presented by reportable segments were as follows:

(in thousands)		Software Products				Professional Services				Total
Balance, October 1, 2021		$	2,148,968			$	42,919			$	2,191,887
Acquisitions			691				—				691
Foreign currency translation adjustment			(2,645	)			(53	)			(2,698	)
Balance, December 31, 2021		$	2,147,014			$	42,866			$	2,189,880

Amortization of Intangible Assets

The aggregate amortization expense for intangible assets with finite lives is classified in our Consolidated Statements of Operations as follows:

(in thousands)		Three months ended
		December 31, 2021				December 31, 2020
Amortization of acquired intangible assets		$	8,484			$	6,547
Cost of license revenue			6,493				6,267
Total amortization expense		$	14,977			$	12,814

8. Fair Value Measurements

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. GAAP prescribes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There are three levels of inputs that may be used to measure fair value:

	•	Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

	•	Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or

	•	Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Time deposits and corporate notes/bonds are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets.

The principal market in which we execute our foreign currency derivatives is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants usually are 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.

Our significant financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2021 and September 30, 2021 were as follows:

(in thousands)		December 31, 2021
		Level 1				Level 2				Level 3				Total
Financial assets:
Cash equivalents (1)		$	107,320			$	—			$	—			$	107,320
Convertible note			—				—				2,000				2,000
Equity securities			—				—				87,306				87,306
Forward contracts			—				1,486				—				1,486
Options			—				2,021				—				2,021
		$	107,320			$	3,507			$	89,306			$	200,133
Financial liabilities:
Stock buyback pending settlement			5,260				—				—				5,260
Forward contracts			—				3,732				—				3,732
		$	5,260			$	3,732			$	—			$	8,992

(in thousands)		September 30, 2021
		Level 1				Level 2				Level 3				Total
Financial assets:
Cash equivalents (1)		$	114,375			$	—			$	—			$	114,375
Convertible note			—				—				2,000				2,000
Equity securities			—				—				77,500				77,500
Forward contracts			—				5,363				—				5,363
		$	114,375			$	5,363			$	79,500				199,238
Financial liabilities:
Forward contracts			—				3,318				—				3,318
		$	—			$	3,318			$	—			$	3,318

(1) Money market funds and time deposits.

Level 3 Investments

Convertible Note

In the fourth quarter of 2021, we invested $2.0 million into a non-marketable convertible note. This debt security is classified as available-for-sale and is included in other assets on the Consolidated Balance Sheet.

Non-Marketable Equity Investments

The carrying value of our non-marketable equity investments is recorded in other assets on the Consolidated Balance Sheets and totaled $2.2 million for the periods ended December 31, 2021 and September 30, 2021.

Equity Securities

As of December 31, 2021, we owned 4,316,301 common shares of Matterport, Inc., which are restricted from being able to be sold until January 2022 (six months after Matterport, Inc. became a public company). As a result of the limitations on the ability to sell, the equity securities are classified as a Level 3 financial instrument with fair value determined using the closing price of Matterport’s common stock on the Nasdaq stock market as of December 31, 2021, less a temporary discount for lack of marketability that will expire in January 2022. The discount for lack of marketability is calculated using a put-option model which includes observable and unobservable inputs. As of December 31, 2021, the investment is recorded at a fair value of $87.3 million in other current assets on the Consolidated Balance Sheets. For the three months ended December 31, 2021, we recognized a gain of $9.8 million related to the shares in other income, net on the Consolidated Statements of Operations.

The following table provides a summary of changes in the fair value of our Level 3 investment in the Matterport, Inc. shares:

(in thousands)		December 31, 2021
		Fair Values
Balance, October 1, 2021		$	77,540
Unrealized gains			7,467
Reduction in discount due to lack of marketability(1)			2,299
Balance, December 31, 2021		$	87,306

(1) The restriction on our ability to sell our shares lapsed in January 2022. Refer to Note 16. Subsequent Events for discussion regarding the expirations on the restriction and our subsequent sale of the Equity Securities in January 2022.

9. Marketable Securities

We did not hold any marketable securities as of September 30, 2021 or December 31, 2021. In December 2020, we sold our remaining marketable securities to partially fund the Arena acquisition, resulting in proceeds of $56.2 million. Neither gross realized gains nor gross realized losses related to the sale were material.

10. Derivative Financial Instruments

We enter into derivative transactions, specifically foreign currency forward contracts and options, to manage our exposure to foreign currency exchange risk in order to reduce earnings volatility. We do not enter into derivative transactions for trading or speculative purposes.

The following table shows our derivative instruments measured at gross fair value as reflected in the Consolidated Balance Sheets:

(in thousands)		Fair Value of Derivatives Designated As Hedging Instruments								Fair Value of Derivatives Not Designated As Hedging Instruments
		December 31, 2021				September 30, 2021				December 31, 2021				September 30, 2021
Derivative assets(1):
Forward Contracts		$	—			$	1,641			$	1,486			$	3,722
Options		$	—			$	—			$	2,021			$	—
Derivative liabilities(2):
Forward Contracts		$	1,248			$	—			$	2,484			$	3,318

(1)	As of December 31, 2021 and September 30, 2021, current derivative assets of $3.5 million and $5.4 million, respectively, are recorded in other current assets in the Consolidated Balance Sheets.

(2)	As of December 31, 2021 and September 30, 2021, current derivative liabilities of $3.7 million and $3.3 million, respectively, are recorded in accrued expenses and other current liabilities in the Consolidated Balance Sheets.

Non-Designated Hedges

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 three 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 gain or loss on the underlying foreign-denominated balance would be offset by the loss or gain on the forward contract. Gains and losses on forward contracts and foreign denominated receivables and payables are included in other income (expense), net.

We hedge our forecasted U.S. Dollar cash flows with foreign exchange options to reduce the risk that they will be adversely affected by changes in Euro or Japanese Yen exchange rates. These contracts have maturities of up to approximately ten months. We do not designate these foreign currency options as hedges for accounting purposes and changes in the fair value of these instruments are recognized immediately in earnings. Because we enter into options as an economic hedge, currency impacts on the Euro or Japanese Yen-denominated operations as compared to the forecasted plan rate may be partially offset by the gain on the put option. Gain on put options are included in other income (expense), net.

As of December 31, 2021 and September 30, 2021, we had outstanding forward contracts and options with notional amounts equivalent to the following:

Currency Hedged (in thousands)		December 31, 2021				September 30, 2021
Canadian / U.S. Dollar		$	5,256			$	4,894
Euro / U.S. Dollar(1)			586,301				387,466
British Pound / U.S. Dollar			5,300				23,141
Israeli Shekel / U.S. Dollar			13,859				10,475
Japanese Yen / U.S. Dollar(2)			43,066				46,450
Swiss Franc / U.S. Dollar			7,621				18,039
Swedish Krona / U.S. Dollar			16,683				34,196
Singapore Dollar / U.S. Dollar			3,806				3,498
Chinese Renminbi / U.S. Dollar			19,496				23,297
New Taiwan Dollar / U.S. Dollar			2,669				3,369
Romanian Leu/ U.S. Dollar			3,971				778
Russian Ruble/ U.S. Dollar			—				2,614
All other			7,253				5,704
Total		$	715,281			$	563,921

(1)	As of December 31, 2021, $388.7 million of the Euro to U.S. Dollar outstanding notional amount relates to forward contracts and $197.6 million relates to options. As of September 30, 2021, all of the Euro to U.S. Dollar outstanding notional amount relates to forward contracts.

(2)	As of December 31, 2021, $16.8 million of the Japanese Yen to U.S. Dollar outstanding notional amount relates to forward contracts and $26.3 million relates to options. As of September 30, 2021, all of the Japanese Yen to U.S. Dollar outstanding notional amount relates to forward contracts.

The following table shows the effect of our non-designated hedges in the Consolidated Statements of Operations for the three months ended December 31, 2021 and December 31, 2020:

(in thousands)				Three months ended
		Location of Loss		December 31, 2021				December 31, 2020
Net realized and unrealized loss, excluding the underlying foreign currency exposure being hedged		Other income (expense), net		$	(3,435	)		$	(1,587	)

In the three months ended December 31, 2021, foreign currency losses, net were $4.4 million. In the three months ended December 31, 2020, foreign currency losses, net were $1.8 million.

Net Investment Hedges

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 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 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 reclassify them to foreign currency translation adjustment in accumulated other comprehensive loss at the time of forward contract maturity. 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.

As of December 31, 2021 and September 30, 2021, we had outstanding forward contracts designated as net investment hedges with notional amounts equivalent to the following:

Currency Hedged (in thousands)		December 31, 2021				September 30, 2021
Euro / U.S. Dollar		$	179,797			$	128,103

The following table shows the effect of our derivative instruments designated as net investment hedges in the Consolidated Statements of Operations for the three months ended December 31, 2021 and December 31, 2020:

(in thousands)				Three months ended
		Location of Gain (Loss)		December 31, 2021				December 31, 2020
Gain (loss) recognized in OCI		OCI		$	(3,156	)		$	580
Gain (loss) reclassified from OCI		OCI			(5,735	)			2,942
Gain recognized, excluded portion		Other income (expense), net			267				307

As of December 31, 2021, we estimate that all amounts reported in accumulated other comprehensive loss will be applied against exposed balance sheet accounts upon translation within the next three months.

Offsetting Derivative Assets and Liabilities

We have entered into master netting arrangements for our forward contracts that allow net settlements under certain conditions. Although netting is permitted, it is currently our policy and practice to record all derivative assets and liabilities on a gross basis in the Consolidated Balance Sheets.

The following table sets forth the offsetting of derivative assets as of December 31, 2021:

(in thousands)		Gross Amounts Offset in the Consolidated Balance Sheets												Gross Amounts Not Offset in the Consolidated Balance Sheets
As of December 31, 2021		Gross Amount of Recognized Assets				Gross Amounts Offset in the Consolidated Balance Sheets				Net Amounts of Assets Presented in the Consolidated Balance Sheets				Financial Instruments				Cash Collateral Received				Net Amount
Forward Contracts		$	1,486			$	—			$	1,486			$	(1,486	)		$	—			$	—

The following table sets forth the offsetting of derivative liabilities as of December 31, 2021:

(in thousands)		Gross Amounts Offset in the Consolidated Balance Sheets												Gross Amounts Not Offset in the Consolidated Balance Sheets
As of December 31, 2021		Gross Amount of Recognized Liabilities				Gross Amounts Offset in the Consolidated Balance Sheets				Net Amounts of Liabilities Presented in the Consolidated Balance Sheets				Financial Instruments				Cash Collateral Pledged				Net Amount
Forward Contracts		$	3,732			$	—			$	3,732			$	(1,486	)		$	—			$	2,246

11. Segment and Geographic Information

We operate within a single industry segment – computer software and related services. Operating segments as defined under GAAP are 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 maker is our President and Chief Executive Officer. We have two operating and reportable segments: (1) Software Products, which includes license, subscription and related support revenue (including updates and technical support) for all our products; and (2) Professional Services, which includes consulting, implementation and training services. We do not allocate sales and marketing or general and administrative expense to our operating segments as these activities are managed on a consolidated basis. Additionally, segment profit does not include stock-based compensation, amortization of intangible assets, restructuring charges and certain other identified costs that we do not allocate to the segments for purposes of evaluating their operational performance.

The revenue and profit attributable to our operating segments are summarized below. We do not produce asset information by reportable segment; therefore, it is not reported.

(in thousands)		Three months ended
		December 31, 2021				December 31, 2020
Software Products
Revenue		$	413,593			$	393,420
Operating costs(1)			116,028				105,401
Profit			297,565				288,019
Professional Services
Revenue			44,128				35,630
Operating costs(2)			36,983				33,120
Profit			7,145				2,510
Total segment revenue			457,721				429,050
Total segment costs			153,011				138,521
Total segment profit			304,710				290,529
Unallocated operating expenses:
Sales and marketing expenses			112,395				109,726
General and administrative expenses			34,177				27,400
Restructuring and other charges, net			33,991				247
Intangibles amortization			14,977				12,814
Stock-based compensation			45,942				46,088
Other unallocated operating expenses(3)			1,050				3,916
Total operating income			62,178				90,338
Interest and debt premium expense			(12,986	)			(11,518	)
Other income (expense), net			6,184				(1,413	)
Income before income taxes		$	55,376			$	77,407

(1)	Operating costs for the Software Products segment include all costs of software revenue and research and development costs, excluding stock-based compensation and intangible amortization.

(2)	Operating costs for the Professional Services segment include all costs of professional services revenue, excluding stock-based compensation.

(3)	Other unallocated operating expenses include acquisition-related and other transactional costs.

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 thousands)		Three months ended
		December 31, 2021				December 31, 2020
Americas		$	212,881			$	202,279
Europe			162,308				162,319
Asia Pacific			82,532				64,452
Total revenue		$	457,721			$	429,050

12. Income Taxes

(in thousands)		Three months ended
		December 31, 2021				December 31, 2020
Income before income taxes		$	55,376			$	77,407
Provision for income taxes		$	9,287			$	53,892
Effective income tax rate			17	%			70	%

In the first quarter of 2022 and 2021, our effective tax rate differed from the statutory federal income tax rate of 21% due to 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 2022 and 2021, the foreign rate differential predominantly relates to these earnings.

In 2022 and 2021, in addition to the foreign rate differential, the effective tax rate was impacted by the net effects of the Global Intangible Low-Taxed Income (GILTI) and Foreign Derived Intangible Income (FDII) regimes and the excess tax benefit related to stock-based compensation.

In the first quarter of 2021, our results also include a charge of $35.3 million related to the effects of an unrecognized tax benefit in the Republic of Korea (South Korea), primarily related to foreign withholding taxes, as well as the effects of the full valuation allowance which was maintained against our U.S. net deferred tax assets at that time.

We reassess our valuation allowance requirements each financial reporting period. We assess available positive and negative evidence to estimate whether sufficient future taxable income will be generated to use our existing deferred tax assets. In the assessment for the period ended September 30, 2021, we concluded it was more likely than not that our deferred tax assets related to United States federal and state income would be realizable, and therefore, the United States federal and the majority of the state valuation allowances were released in the fourth quarter of 2021. In the first quarter of 2022, we continue to maintain this conclusion.

In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the Internal Revenue Service 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, limitations on net operating losses and tax credits.

As of December 31, 2021 and September 30, 2021, we had unrecognized tax benefits of $21.8 million and $21.2 million, respectively. If all our unrecognized tax benefits as of December 31, 2021 were to become recognizable in the future, we would record a benefit to the income tax provision of $21.8 million, which would be partially offset by an increase in the U.S. valuation allowance of $4.7 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 $1 million.

13. Debt

At December 31, 2021 and September 30, 2021, we had the following long-term debt obligations:

(in thousands)		December 31, 2021				September 30, 2021
4.000% Senior notes due 2028		$	500,000			$	500,000
3.625% Senior notes due 2025			500,000				500,000
Credit facility revolver(1)			450,000				450,000
Total debt			1,450,000				1,450,000
Unamortized debt issuance costs for the senior notes(2)			(9,986	)			(10,529	)
Total debt, net of issuance costs		$	1,440,014			$	1,439,471

(1)	Unamortized debt issuance costs related to the credit facility were $3.5 million and $3.8 million as of December 31, 2021 and September 30, 2021, respectively, and are included in other assets on the Consolidated Balance Sheets.

(2)	Unamortized debt issuance costs are included in long-term debt on the Consolidated Balance Sheets.

Senior Unsecured Notes

In February 2020, we issued $500 million in aggregate principal amount of 4.0% senior, unsecured long-term debt at par value, due in 2028 (the 2028 notes) and $500 million in aggregate principal amount of 3.625% senior, unsecured long-term debt at par value, due in 2025 (the 2025 notes).

As of December 31, 2021, the total estimated fair value of the 2028 and 2025 notes was approximately $513.0 million and $508.0 million, respectively, based on quoted prices for the notes on that date.

We were in compliance with all the covenants for all of our senior notes as of December 31, 2021.

Terms of the 2028 and 2025 Notes

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.

Credit Agreement

In February 2020, we entered into a Third Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as Administrative Agent, for a new secured multi-currency bank credit facility with a syndicate of banks. We expect to use the new credit facility for general corporate purposes, including acquisitions of businesses, share repurchases and working capital requirements.

The credit facility consists of a $1 billion revolving credit facility, which may be increased by up to an additional $500 million in the aggregate if the existing or additional lenders are willing to make such increased commitments. The maturity date of the credit facility is February 13, 2025, when all remaining amounts outstanding will be due and payable. The revolving loan commitment does not require amortization of principal and may be repaid in whole or in part prior to the scheduled maturity date at our option without penalty or premium. As of December 31, 2021, the fair value of our credit facility approximates its book value.

PTC 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. As of the filing of this Form 10-Q, there are no subsidiary guarantors of the obligations under the credit facility. Any borrowings by eligible foreign subsidiary borrowers would be guaranteed by PTC Inc. and any subsidiary guarantors. As of the filing of this Form 10-Q, no funds were borrowed by an eligible foreign subsidiary borrower. In addition, owned property (including equity interests) of PTC and certain of its material domestic subsidiaries' owned property is subject to first priority perfected liens in favor of the lenders under this credit facility. 100% of the voting equity interests of certain of PTC’s domestic subsidiaries and 65% of its material first-tier foreign subsidiaries are pledged as collateral for the obligations under the 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 PTC as described below. As of December 31, 2021, the annual rate for borrowing outstanding was 1.69%. Interest rates on borrowings outstanding under the credit facility range from 1.25% to 1.75% above an adjusted LIBO rate (or an agreed successor rate) for Euro currency borrowings or range from 0.25% to 0.75% above the defined base rate (the greater of the Prime Rate, the NYFRB rate plus 0.5%, or an adjusted LIBO rate plus 1%) for base rate borrowings, in each case based upon PTC’s total leverage ratio. A quarterly commitment fee on the undrawn portion of the credit facility is required, ranging from 0.175% to 0.30% per annum based upon PTC’s total leverage ratio.

The credit facility limits PTC’s and its subsidiaries’ ability to, among other things: incur additional indebtedness, incur liens or guarantee obligations; pay dividends (other than to PTC) 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 and its material domestic subsidiaries may not invest cash or property in, or loan to, PTC’s foreign subsidiaries in aggregate amounts exceeding $100 million for any purpose and an additional $200 million for acquisitions of businesses. In addition, under the credit facility, PTC and its subsidiaries must maintain the following financial ratios:

	•	Total leverage ratio, defined as consolidated funded indebtedness to consolidated trailing four quarters EBITDA, not to exceed 4.50 to 1.00 as of the last day of any fiscal quarter;

	•	Senior secured leverage ratio, defined as senior consolidated total indebtedness (which excludes unsecured indebtedness) to the consolidated trailing four quarters EBITDA, not to exceed 3.00 to 1.00 as of the last day of any fiscal quarter; and

	•	Interest coverage ratio, defined as the ratio of consolidated trailing four quarters EBITDA to consolidated trailing four quarters of cash basis interest expense, of not less than 3.00 to 1.00 as of the last day of any fiscal quarter.

As of December 31, 2021, our total leverage ratio was 2.23 to 1.00, our senior secured leverage ratio was 0.71 to 1.00 and our interest coverage ratio was 14.02 to 1.00 and we were in compliance with all financial and operating covenants of the credit facility.

Any failure to comply with the financial or operating covenants of the credit facility would prevent PTC from being able to borrow additional funds, and would constitute a default, permitting the lenders to, among other things, accelerate the amounts outstanding, including all accrued interest and unpaid fees, under the credit facility and to terminate the credit facility. A change in control of PTC, as defined in the agreement, also constitutes an event of default, permitting the lenders to accelerate the indebtedness and terminate the credit facility.

In the first quarter of 2022 and 2021, we paid $2.4 million and $0.7 million of interest on our debt, respectively. The average interest rate on borrowings outstanding during the first quarter of 2022 and 2021 was approximately 3.2% and 3.8%, respectively.

14. Leases

Our operating leases expire at various dates through 2037 and are primarily for office space, cars, servers, and office equipment.

Our headquarters are located at 121 Seaport Boulevard, Boston, Massachusetts. In February 2019, we subleased a portion of our headquarters through June 30, 2022. We will receive approximately $9.1 million in sublease income over the term of the sublease.

The components of lease cost reflected in the Consolidated Statement of Operations for the three months ended December 31, 2021 and December 31, 2020 were as follows:

(in thousands)		Three months ended
		December 31, 2021				December 31, 2020
Operating lease cost		$	8,860			$	9,391
Short-term lease cost			540				548
Variable lease cost			2,490				2,387
Sublease income			(1,117	)			(1,084	)
Total lease cost		$	10,773			$	11,242

Supplemental cash flow and right-of-use assets information for the three months ended December 31, 2021 and December 31, 2020 was as follows:

(in thousands)		Three months ended
		December 31, 2021				December 31, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		$	15,865			$	14,060
Financing cash flows from financing leases		$	239			$	279
Right-of-use assets obtained in exchange for new lease obligations:
Operating leases		$	601			$	594
Financing leases		$	—			$	—

Supplemental balance sheet information related to the leases as of December 31, 2021 was as follows:

Weighted-average remaining lease term - operating leases	11.8 years
Weighted-average remaining lease term - financing leases	4.0 years
Weighted-average discount rate - operating leases		5.4	%
Weighted-average discount rate - financing leases		3.0	%

Maturities of lease liabilities as of December 31, 2021 are as follows:

(in thousands)
Remainder of 2022		$	28,792
2023			29,469
2024			26,191
2025			22,652
2026			18,681
Thereafter			159,162
Total future lease payments		$	284,947
Less: imputed interest			(78,915	)
Total lease liability		$	206,032

Exited (Restructured) Facilities

As of December 31, 2021, we have net liabilities of $2.7 million related to excess facilities (compared to $3.6 million at September 30, 2021), representing $0.9 million of right-of-use assets and $3.6 million of lease obligations, of which $3.0 million is classified as short term and $0.6 million is classified as long term. Variable costs related to these exited facilities are included in our restructuring accrual. All expenses and income associated with exited facilities are included in restructuring and other charges, net (refer to Note 3. Restructuring and Other Charges).

In determining the amount of right-of-use assets for restructured facilities, we are required to estimate such factors as future vacancy rates, the time required to sublet properties and sublease rates. Updates to these estimates may result in revisions to the value of right-of-use assets recorded. The amounts recorded are based on the net present value of estimated sublease income. As of December 31, 2021, the right-of-use assets for exited facilities reflects discounted committed sublease income of approximately $0.9 million.

In the first quarter of 2022 and 2021, we made net payments of $0.7 million and $3.8 million, respectively, related to lease costs for exited facilities.

15. Commitments and Contingencies

As December 31, 2021 and December 31, 2020, we had letters of credit and bank guarantees outstanding of $15.3 million (of which $0.5 million was collateralized) and $16.5 million (of which $0.5 million was collateralized), respectively, primarily related to our corporate headquarters lease.

Legal and Regulatory Matters

Legal Proceedings

With respect to legal proceedings and claims, we record an accrual for a contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

401(k) Plan

On September 17, 2020, three individual plaintiffs filed a putative class action lawsuit against PTC, the Investment Committee for the PTC Inc. 401(k) Plan (“Plan”), and the Board of Directors (collectively, the “PTC Defendants”) in the U.S. District Court for the District of Massachusetts alleging claims regarding the Plan. Plaintiffs allege that the defendants breached their fiduciary duties under the Employee Retirement Income Security Act of 1974 ("ERISA") in the oversight of the Plan, principally by allegedly selecting and retaining certain investment options despite their higher fees and costs than other available investment options, causing participants in the Plan to pay excessive recordkeeping fees and suffer lower returns on their investments, and by allegedly failing to monitor other fiduciaries. The plaintiffs seek unspecified damages on behalf of a class of Plan participants from September 17, 2014 through the date of any judgment. The plaintiffs and the PTC Defendants reached an agreement in principle to settle the lawsuit on September 22, 2021 and filed a motion for preliminary approval on December 17, 2021. The ultimate outcome by judgment or settlement is not expected to be material to our financial position, results of operations or cash flows.

Other Legal Proceedings

In addition to the matters listed above, we are subject to legal proceedings and claims against us in the ordinary course of business. As of December 31, 2021, 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.

Guarantees and Indemnification Obligations

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. Except for intellectual property infringement indemnification, the liability for which is uncapped, these agreements typically limit our liability with respect to other indemnification 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/subscription. 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.

16. Subsequent Events

Credit Facility Loan Repayment

On February 2, 2022, we paid $40 million of outstanding balance on our revolving credit facility.

Sale of Matterport Equity Securities

In January 2022, we sold 4,316,301 common shares of Matterport for an aggregate price of $39.1 million. The sale will result in a loss to be recorded in Q2’22 of $48.2 million due to the reduction in value as of December 31, 2021 compared to the price when sold.

Stock Repurchase Settlement

In January 2022, we settled the trades we entered to purchase an incremental 43 thousand shares for an aggregate price of $5.3 million.