Item 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED CONDENSED CONS****OLIDATED FINANCIAL STATEMENTS

PTC Inc.

CONSOLIDATED B****ALANCE SHEETS

(in thousands, except per share data)

(unaudited)

		June 30, 2022				September 30, 2021
ASSETS
Current assets:
Cash and cash equivalents		$	322,326			$	326,532
Accounts receivable, net of allowance for doubtful accounts of $715 and $304 at June 30, 2022 and September 30, 2021, respectively			473,298				541,072
Prepaid expenses			91,734				69,991
Other current assets			61,074				135,415
Total current assets			948,432				1,073,010
Property and equipment, net			90,815				100,237
Goodwill			2,382,680				2,191,887
Acquired intangible assets, net			398,634				378,967
Deferred tax assets			282,556				297,789
Operating right-of-use lease assets			143,388				152,337
Other assets			359,033				313,333
Total assets		$	4,605,538			$	4,507,560
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	16,462			$	33,381
Accrued expenses and other current liabilities			124,342				113,067
Accrued compensation and benefits			109,732				117,784
Accrued income taxes			15,703				5,055
Deferred revenue			481,360				482,131
Short-term lease obligations			22,072				27,864
Total current liabilities			769,671				779,282
Long-term debt			1,425,084				1,439,471
Deferred tax liabilities			24,362				4,165
Deferred revenue			14,113				15,546
Long-term lease obligations			172,764				180,935
Other liabilities			42,374				49,693
Total liabilities			2,448,368				2,469,092
Commitments and contingencies (Note 15)
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued			—				—
Common stock, $0.01 par value; 500,000 shares authorized; 117,362 and 117,163 shares issued and outstanding at June 30, 2022 and September 30, 2021, respectively			1,174				1,172
Additional paid-in capital			1,668,983				1,718,504
Retained earnings			620,900				414,656
Accumulated other comprehensive loss			(133,887	)			(95,864	)
Total stockholders’ equity			2,157,170				2,038,468
Total liabilities and stockholders’ equity		$	4,605,538			$	4,507,560

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

PTC Inc.

CONSOLIDATED STATEM****ENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

		Three months ended								Nine months ended
		June 30, 2022				June 30, 2021				June 30, 2022				June 30, 2021
Revenue:
License		$	175,163			$	163,583			$	562,646			$	538,769
Support and cloud services			248,237				230,851				736,597				670,853
Total software revenue			423,400				394,434				1,299,243				1,209,622
Professional services			39,074				41,234				126,179				116,882
Total revenue			462,474				435,668				1,425,422				1,326,504
Cost of revenue:
Cost of license revenue			13,676				15,502				35,406				42,918
Cost of support and cloud services revenue			46,598				42,392				137,251				120,706
Total cost of software revenue			60,274				57,894				172,657				163,624
Cost of professional services revenue			41,721				37,183				117,793				107,731
Total cost of revenue			101,995				95,077				290,450				271,355
Gross margin			360,479				340,591				1,134,972				1,055,149
Operating expenses:
Sales and marketing			124,325				134,412				366,209				388,315
Research and development			88,170				78,134				250,639				221,514
General and administrative			54,618				47,084				154,027				157,417
Amortization of acquired intangible assets			8,931				7,511				25,865				21,708
Restructuring and other charges (credits), net			4,458				(132	)			36,887				584
Total operating expenses			280,502				267,009				833,627				789,538
Operating income			79,977				73,582				301,345				265,611
Interest and debt premium expense			(13,758	)			(13,178	)			(38,983	)			(37,622	)
Other income (expense), net			34,559				(1,935	)			(2,642	)			(5,756	)
Income before income taxes			100,778				58,469				259,720				222,233
Provision for income taxes			30,302				7,266				53,476				38,253
Net income		$	70,476			$	51,203			$	206,244			$	183,980
Earnings per share—Basic		$	0.60			$	0.44			$	1.76			$	1.58
Earnings per share—Diluted		$	0.60			$	0.43			$	1.75			$	1.56
Weighted-average shares outstanding—Basic			117,073				116,934				117,114				116,702
Weighted-average shares outstanding—Diluted			117,968				118,611				118,097				118,181

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

PTC Inc.

CONSOLIDATED STATEMENTS OF C****OMPREHENSIVE INCOME

(in thousands)

(unaudited)

		Three months ended								Nine months ended
		June 30, 2022				June 30, 2021				June 30, 2022				June 30, 2021
Net income		$	70,476			$	51,203			$	206,244			$	183,980
Other comprehensive income (loss), net of tax:
Hedge gain (loss) arising during the period, net of tax of $1.9 million and $0 million in the third quarter of 2022 and 2021, respectively, and $4.0 million and $0 million in the first nine months of 2022 and 2021, respectively			5,880				(1,797	)			12,072				(1,559	)
Foreign currency translation adjustment, net of tax of $0 for each period			(35,795	)			6,457				(52,819	)			10,581
Unrealized 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 million and $0.3 million in the third quarter of 2022 and 2021, respectively, and $0.2 million and $0.9 million in the first nine months of 2022 and 2021, respectively			(78	)			738				447				2,214
Change in unamortized pension gain (loss) during the period related to changes in foreign currency			1,354				(291	)			2,277				(385	)
Other comprehensive income (loss)			(28,639	)			5,107				(38,023	)			10,544
Comprehensive income		$	41,837			$	56,310			$	168,221			$	194,524

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

PTC Inc.

CONSOLIDATED STATEM****ENTS OF CASH FLOWS

(in thousands)

(unaudited)

		Nine months ended
		June 30, 2022				June 30, 2021
Cash flows from operating activities:
Net income		$	206,244			$	183,980
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			65,456				62,670
Amortization of right-of-use lease assets			26,149				28,031
Stock-based compensation			133,283				133,896
Loss on investment			31,854				—
Gain on divestiture of business			(29,808	)			—
Other non-cash items, net			(645	)			(1,108	)
Changes in operating assets and liabilities, excluding the effects of acquisitions:
Accounts receivable			25,228				(4,110	)
Accounts payable and accrued expenses			(7,434	)			15,834
Accrued compensation and benefits			(9,334	)			121
Deferred revenue			18,038				30,733
Accrued income taxes			6,124				(13,524	)
Other current assets and prepaid expenses			(26,933	)			426
Operating lease liabilities			(10,544	)			(13,106	)
Other noncurrent assets and liabilities			(30,851	)			(100,355	)
Net cash provided by operating activities			396,827				323,488
Cash flows from investing activities:
Additions to property and equipment			(9,979	)			(11,662	)
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
Acquisitions of businesses, net of cash acquired			(274,974	)			(717,779	)
Proceeds from sale of investments			46,906				—
Purchases of investments			—				(2,000	)
Purchase of intangible assets			(5,453	)			(550	)
Settlement of net investment hedges			18,043				(1,291	)
Divestiture of business, net			32,518				—
Net cash used in investing activities			(192,939	)			(674,813	)
Cash flows from financing activities:
Borrowings under credit facility			264,000				600,000
Repayments of borrowings under credit facility			(280,000	)			(128,000	)
Repurchases of common stock			(125,000	)			—
Proceeds from issuance of common stock			10,857				10,484
Payments of withholding taxes in connection with stock-based awards			(62,856	)			(42,215	)
Payments of principal for financing leases			(239	)			(279	)
Net cash (used in) provided by financing activities			(193,238	)			439,990
Effect of exchange rate changes on cash, cash equivalents and restricted cash			(14,654	)			1,646
Net change in cash, cash equivalents, and restricted cash			(4,004	)			90,311
Cash, cash equivalents, and restricted cash, beginning of period			327,046				275,960
Cash, cash equivalents, and restricted cash, end of period		$	323,042			$	366,271
Supplemental disclosure of non-cash financing activities:
Withholding taxes in connection with stock-based awards, accrued			5,803				9,979

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 June 30, 2022
		Common Stock																Accumulated
		Shares				Amount				Additional Paid-In Capital				Retained Earnings				Other Comprehensive Loss				Total Stockholders’ Equity
Balance as of March 31, 2022			116,976			$	1,170			$	1,637,631			$	550,424			$	(105,248	)		$	2,083,977
Common stock issued for employee stock-based awards			558				6				(6	)			—				—				—
Shares surrendered by employees to pay taxes related to stock-based awards			(172	)			(2	)			(18,062	)			—				—				(18,064	)
Compensation expense from stock-based awards			—				—				49,420				—								49,420
Net income			—				—				—				70,476				—				70,476
Unrealized gain on net investment hedges, net of tax			—				—				—				—				5,880				5,880
Foreign currency translation adjustment			—				—				—				—				(35,795	)			(35,795	)
Change in pension benefits, net of tax			—				—				—				—				1,276				1,276
Balance as of June 30, 2022			117,362			$	1,174			$	1,668,983			$	620,900			$	(133,887	)		$	2,157,170

		Nine months ended June 30, 2022
		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			1,729				18				(18	)			—				—				—
Shares surrendered by employees to pay taxes related to stock-based awards			(594	)			(6	)			(68,653	)			—				—				(68,659	)
Common stock issued for employee stock purchase plan			110				1				10,856				—				—				10,857
Compensation expense from stock-based awards			—				—				133,283				—				—				133,283
Repurchases of common stock			(1,046	)			(11	)			(124,989	)			—				—				(125,000	)
Net income			—				—				—				206,244				—				206,244
Unrealized gain on net investment hedges, net of tax			—				—				—				—				12,072				12,072
Foreign currency translation adjustment			—				—				—				—				(52,819	)			(52,819	)
Change in pension benefits, net of tax			—				—				—				—				2,724				2,724
Balance as of June 30, 2022			117,362			$	1,174			$	1,668,983			$	620,900			$	(133,887	)		$	2,157,170

		Three months ended June 30, 2021
		Common Stock																Accumulated
		Shares				Amount				Additional Paid-In Capital				Retained Earnings				Other Comprehensive Loss				Total Stockholders’ Equity
Balance as of March 31, 2021			116,855			$	1,169			$	1,676,791			$	70,510			$	(97,937	)		$	1,650,533
Common stock issued for employee stock-based awards			608				6				(6	)			—				—				—
Shares surrendered by employees to pay taxes related to stock-based awards			(183	)			(2	)			(24,951	)			—				—				(24,953	)
Compensation expense from stock-based awards			—				—				43,068				—				—				43,068
Net income			—				—				—				51,203				—				51,203
Unrealized loss on net investment hedges, net of tax			—				—				—				—				(1,797	)			(1,797	)
Foreign currency translation adjustment			—				—				—				—				6,457				6,457
Change in pension benefits, net of tax			—				—				—				—				447				447
Balance as of June 30, 2021			117,280			$	1,173			$	1,694,902			$	121,713			$	(92,830	)		$	1,724,958

		Nine months ended June 30, 2021
		Common Stock																Accumulated
		Shares				Amount				Additional Paid-In Capital				Retained Earnings (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			1,470				15				(15	)			—				—				—
Shares surrendered by employees to pay taxes related to stock-based awards			(459	)			(4	)			(52,190	)			—				—				(52,194	)
Common stock issued for employee stock purchase plan			144				1				10,483				—				—				10,484
Compensation expense from stock-based awards			—				—				133,896				—				—				133,896
Net income			—				—				—				183,980				—				183,980
Unrealized loss on net investment hedges, net of tax			—				—				—				—				(1,559	)			(1,559	)
Foreign currency translation adjustment			—				—				—				—				10,581				10,581
Unrealized loss on marketable securities, net of tax			—				—				—				—				(307	)			(307	)
Change in pension benefits, net of tax			—				—				—				—				1,829				1,829
Balance as of June 30, 2021			117,280			$	1,173			$	1,694,902			$	121,713			$	(92,830	)		$	1,724,958

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

PTC Inc.

NOTES TO CON****DENSED 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 June 30, 2022 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 June 30, 2022, 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 the first quarter of 2022 ending December 31, 2021 and did not 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. We have adopted ASU 2021-08 early as of the third quarter of 2022 and applied it to our acquisition of Intland Software, which was completed in the quarter. The adoption of ASU 2021-08 did not have a material impact on our consolidated financial statements. Refer to Note 6. Acquisitions and Disposition of Business for additional discussion regarding the accounting for the acquisition of Intland Software.

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.

2. Revenue from Contracts with Customers

Contract Assets and Contract Liabilities

(in thousands)		June 30, 2022				September 30, 2021
Contract asset		$	17,869			$	12,934
Deferred revenue		$	495,473			$	497,677

As of June 30, 2022, $13.4 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 $6.9 million of the September 30, 2021 contract asset balance was transferred to receivables during the nine months ended June 30, 2022 as a result of the right to payment becoming unconditional. Additions to contract assets of approximately $11.9 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 nine months ended June 30, 2022.

During the nine months ended June 30, 2022, we recognized $443.5 million of revenue that was included in deferred revenue as of September 30, 2021 and there were additional deferrals of $434.4 million, primarily related to new billings. In addition, deferred revenue increased by $6.9 million as a result of the acquisition of Intland. For subscription contracts, we generally invoice customers annually. The balance of total short- and long-term receivables as of June 30, 2022 was $696.9 million, compared to total short- and long-term receivables as of September 30, 2021 of $744.6 million.

Our multi-year, non-cancellable on-premise subscription contracts provide customers with an annual right to exchange software within the subscription with other software. As of June 30, 2022 and September 30, 2021, the total refund liability was $36.4 million and $40.3 million, respectively, primarily associated with the annual right to exchange on-premise 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 debt, customer concentrations, customer credit-worthiness, current economic conditions, and accounts receivable aging trends. Our allowance for doubtful accounts on trade accounts receivable was $0.7 million as of June 30, 2022 and $0.3 million as of September 30, 2021. Uncollectible trade accounts receivable written-off and bad debt expense were immaterial in the three and nine months ended June 30, 2022.

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 are primarily related to commissions. As of June 30, 2022 and September 30, 2021, deferred costs of $39.7 million and $40.2 million, respectively, are included in other current assets and $75.9 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 $11.9 million and $36.2 million in the three and nine months ended June 30, 2022, respectively, and $11.7 million and $33.1 million in the three and nine months ended June 30, 2021, respectively. There were no impairments of the contract cost asset in the three and nine months ended June 30, 2022 and June 30, 2021.

Remaining Performance Obligations

Our contracts with customers include transaction price amounts allocated to performance obligations that will be satisfied and recognized as revenue at a later date. As of June 30, 2022, the transaction price amounts include performance obligations of $495.5 million recorded in deferred revenue and $916.9 million that are not yet recorded in the Consolidated Balance Sheets. We expect to recognize approximately 83% of the total $1,412.4 million over the next 24 months, with the remaining amount thereafter.

Disaggregation of Revenue

(in thousands)		Three months ended								Nine months ended
		June 30, 2022				June 30, 2021				June 30, 2022				June 30, 2021
Recurring revenue(1)		$	415,197			$	387,175			$	1,273,032			$	1,186,978
Perpetual license			8,203				7,259				26,211				22,644
Professional services			39,074				41,234				126,179				116,882
Total revenue		$	462,474			$	435,668			$	1,425,422			$	1,326,504

(1)

Recurring revenue is comprised of on-premise subscription, perpetual support, SaaS, and cloud services 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 June 30, 2022, restructuring and other charges, net totaled $4.5 million, of which $5.1 million is attributable to other charges for professional fees included in restructuring related to our SaaS transformation, offset by a $0.6 million credit, primarily attributable to sublease income and the reversal of lease liabilities related to exited lease facilities. We made cash payments related to restructuring and other charges of $9.5 million ($6.2 million related to employee charges, $2.5 million in payments for other professional fees included in restructuring related to our SaaS transformation, and $0.8 million in net payments for variable costs related to restructured facilities).

In the nine months ended June 30, 2022, restructuring and other charges, net totaled $36.9 million of which $32.8 million is attributable to restructuring charges, $5.1 million is attributable to other charges for professional fees included in restructuring related to our SaaS transformation, offset by a $1.0 million credit attributable to sublease income and the reversal of lease liabilities related to exited lease facilities. We made cash payments related to restructuring charges of $36.6 million ($32.0 million related to employee charges, $2.5 million in payments for other professional fees included in restructuring related to our SaaS transformation, and $2.1 million in net payments for variable costs related to restructured facilities).

In the three and nine months ended June 30, 2021, restructuring and other charges, net totaled $(0.1) million and $0.6 million, respectively, which is attributable to restructuring charges and impairment and accretion expense 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 $0.1 million and $33.6 million in the third quarter and first nine months of 2022, primarily associated with the termination benefits of approximately 330 employees. We are anticipating total restructuring charges for this plan to be approximately $37 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 nine months ended June 30, 2022 and June 30, 2021, we incurred credits of $0.1 million and charges of $0.2 million, respectively, in connection with this restructuring plan.

The following table summarizes restructuring accrual activity for the nine months ended June 30, 2022:

(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			33,471				(721	)			32,750
Cash disbursements			(31,965	)			(2,159	)			(34,124	)
Foreign exchange impact			(550	)			—				(550	)
Accrual, June 30, 2022		$	2,937			$	625			$	3,562

The following table summarizes restructuring accrual activity for the nine months ended June 30, 2021:

(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			162				183				345
Cash disbursements			(3,925	)			(2,303	)			(6,228	)
Foreign exchange impact			33				17				50
Accrual, June 30, 2021		$	262			$	3,892			$	4,154

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 nine months ended June 30, 2022:

(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			3,217			$	92.46
Granted(1)			1,609			$	114.18
Vested			(1,728	)		$	92.83
Forfeited or not earned			(318	)		$	98.55
Balance of outstanding restricted stock units, June 30, 2022			2,780			$	104.93

(1)

Restricted stock units granted includes 37 shares from prior period rTSR awards that were earned upon achievement of the performance criteria and vested in November 2021, and 87 shares from prior period Performance-based awards that were earned upon achievement of the performance criteria and vested in November 2021.

The following table presents the number of RSU awards granted by award type:

(in thousands)		Nine months ended June 30, 2022
Performance-based RSUs(1)			89
Service-based RSUs(2)			1,320
Relative 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 165 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 relative Total Shareholder Return RSUs (rTSR 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 rTSR RSUs eligible to be earned for the period (up to a maximum aggregate of 152 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 rTSR RSUs may vest.

The weighted-average fair value of the rTSR RSUs was 136.43 per target RSU on the grant date. The fair value of the rTSR 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								Nine months ended
		June 30, 2022				June 30, 2021				June 30, 2022				June 30, 2021
Cost of license revenue		$	338			$	26			$	413			$	66
Cost of support and cloud services revenue			2,544				2,611				8,183				7,222
Cost of professional services revenue			5,547				2,457				10,069				6,746
Sales and marketing			14,029				14,229				38,556				42,533
Research and development			11,002				8,514				30,682				24,878
General and administrative			15,960				15,231				45,380				52,451
Total stock-based compensation expense		$	49,420			$	43,068			$	133,283			$	133,896

Stock-based compensation expense includes $1.6 million and $4.8 million in the third quarter and first nine months of 2022, respectively, and $1.8 million and $5.6 million in the third quarter and first nine months of 2021, respectively, 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								Nine months ended
		June 30, 2022				June 30, 2021				June 30, 2022				June 30, 2021
Net income		$	70,476			$	51,203			$	206,244			$	183,980
Weighted-average shares outstanding—Basic			117,073				116,934				117,114				116,702
Dilutive effect of restricted stock units			895				1,677				983				1,479
Weighted-average shares outstanding—Diluted			117,968				118,611				118,097				118,181
Earnings per share—Basic		$	0.60			$	0.44			$	1.76			$	1.58
Earnings per share—Diluted		$	0.60			$	0.43			$	1.75			$	1.56

Anti-dilutive shares for the three and nine months ended June 30, 2022 and 2021 were immaterial.

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 third quarter ended June 30, 2022, we did not repurchase any shares. In the nine months ended June 30, 2022, we repurchased 1,046 thousand shares for $125 million. We did not repurchase any shares in the third quarter and first nine months of 2021. All shares of our common stock repurchased are automatically restored to the status of authorized and unissued.

6. Acquisitions and Disposition of Business

Acquisition and transaction-related costs in the third quarter and first nine months of 2022 totaled $6.4 million and $11.3 million, respectively, compared to $0.6 million and $14.8 million in the third quarter and first nine months of 2021, respectively. These costs are classified in general and administrative expenses in the accompanying Consolidated Statements of Operations.

Acquisition and transaction-related costs include direct costs of potential and completed acquisitions and dispositions (e.g., investment banker fees and professional fees, including diligence, legal and valuation services), expenses related to acquisition integration activities (e.g., professional fees and severance), and other transactional charges include third-party costs related to structuring unusual transactions. 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 or sold businesses beginning on their respective acquisition or sale date. Our results of operations for the reported periods if presented on a pro forma basis would not differ materially from our reported results.

Intland Software

On April 29, 2022, we acquired Intland Software, GmbH, and Eger Invest GmbH (together, “Intland Software”) pursuant to a Share Sale and Purchase Agreement. Intland Software develops and markets the Codebeamer™ Application Lifecycle Management (ALM) family of software products. The preliminary purchase price of the acquisition is $277.2 million, of which approximately $274.8 million has been paid, net of cash acquired, which was financed with cash on hand and $264 million borrowed under our existing credit facility. Intland had approximately 150 employees on the close date.

The acquisition of Intland 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 is considered preliminary, and additional adjustments may be recorded during the measurement period as the company receives additional information relevant to the acquisition related to the finalization of working capital adjustments to the purchase price and deferred tax assets and liabilities.

The preliminary purchase price allocation resulted in $240.0 million of goodwill, $38.8 million of customer relationships, $19.1 million of purchased software, $1.3 million of trademarks, $20.8 million of deferred tax liabilities, $6.9 million of deferred revenue, $6.5 million of accounts receivable, and $0.8 million of other net liabilities. The acquired customer relationships, purchased software, and trademarks are being amortized over useful lives of 11 years, 10 years, and 10 years, respectively, based on the expected economic benefit pattern of the assets. The acquired goodwill was allocated to our software products segment and will not be deductible for income tax purposes. The resulting amount of goodwill reflects the expected value that will be created by expanding our ALM offerings, which are complementary to our PLM offerings.

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. We 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 were 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.

PLM Services Business Disposition

On June 1, 2022, we sold a portion of our PLM services business to ITC Infotech India Limited ("ITC Infotech") pursuant to the Strategic Partner Agreement dated as of April 20, 2022 by and among PTC and ITC Infotech India Limited. Consideration received from ITC Infotech for the sale was approximately $60.4 million, consisting of $32.5 million cash paid on closing and $28.0 million of services to be provided by ITC Infotech to PTC for no additional charge.

We recognized a gain on the sale of $29.8 million, which is included within Other income (expense), net. The recognized gain consists of $60.4 million of consideration received, less net assets of the business of $30.6 million. Net assets include $33.0 million of goodwill allocated to the business, less $2.4 million of liabilities associated with approximately 160 employees who transferred to ITC Infotech. Goodwill was allocated to the sold business based on a relative fair value allocation of total goodwill of the Professional Services segment.

Additional future contingent consideration of up to $20 million may be received by PTC based on certain performance milestones. We have elected to defer the recognition of gains associated with contingent consideration until they become realizable.

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 June 30, 2022, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was $2,769.8 million and attributable to our Professional Services segment was $11.5 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. If a reporting unit's carrying value exceeds its fair value, we record an impairment loss equal to the difference between the carrying value of goodwill and its estimated fair value. 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, 2022, which consisted of a qualitative assessment of our Software Products segment and a quantitative assessment of our Professional Services segment in conjunction with the sale of a portion of that business to ITC Infotech. Our qualitative assessment for Software Products 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 value of our Software Products reporting unit exceeds its carrying value and no further impairment testing is required. Our quantitative assessment for the Professional Services segment compared the fair value of the reporting unit to its carrying value. We estimated the fair value of the reporting unit using a discounted cash flow valuation model. This model requires estimates of future revenues, profits, capital expenditures, working capital, and a terminal value based on a residual cash flow valuation model. We estimated this amount by evaluating historical trends, current budgets and operating plans, including consideration of the completed transaction with ITC Infotech. Based on a comparison of the estimated fair value to the carrying value of the Professional Services reporting unit as of June 30, 2022, no impairment was required.

Goodwill and acquired intangible assets consisted of the following:

(in thousands)		June 30, 2022												September 30, 2021
		Gross Carrying Amount				Accumulated Amortization				Net Book Value				Gross Carrying Amount				Accumulated Amortization				Net Book Value
Goodwill (not amortized)										$	2,382,680											$	2,191,887
Intangible assets with finite lives (amortized):
Purchased software			503,579				352,587				150,992			$	483,771			$	338,542			$	145,229
Capitalized software			22,877				22,877				—				22,877				22,877				—
Customer lists and relationships			604,261				367,082				237,179				574,516				350,648				223,868
Trademarks and trade names			27,865				17,402				10,463				26,906				17,036				9,870
Other			3,856				3,856				—				4,000				4,000				—
Total intangible assets with finite lives		$	1,162,438			$	763,804			$	398,634			$	1,112,070			$	733,103			$	378,967
Total goodwill and acquired intangible assets										$	2,781,314											$	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
Acquisition			240,709				—				240,709
Divestiture of business			—				(32,992	)			(32,992	)
Foreign currency translation adjustment			(16,755	)			(169	)			(16,924	)
Balance, June 30, 2022		$	2,372,922			$	9,758			$	2,382,680

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								Nine months ended
		June 30, 2022				June 30, 2021				June 30, 2022				June 30, 2021
Amortization of acquired intangible assets		$	8,931			$	7,511			$	25,865			$	21,708
Cost of license revenue			6,596				8,260				19,010				21,644
Total amortization expense		$	15,527			$	15,771			$	44,875			$	43,352

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 June 30, 2022 and September 30, 2021 were as follows:

(in thousands)		June 30, 2022
		Level 1				Level 2				Level 3				Total
Financial assets:
Cash equivalents(1)		$	124,879			$	—			$	—			$	124,879
Convertible note			—				—				2,000				2,000
Forward contracts			—				2,392				—				2,392
		$	124,879			$	2,392			$	2,000			$	129,271
Financial liabilities:
Forward contracts			—				1,572				—				1,572
		$	—			$	1,572			$	—			$	1,572

(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			—				—				77,540				77,540
Forward contracts			—				5,363				—				5,363
		$	114,375			$	5,363			$	79,540			$	199,278
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. There were no changes in the fair value of this level 3 investment in the three and nine months ended June 30, 2022.

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 $1.0 million for the period ended June 30, 2022 and $2.2 million for the period ended September 30, 2021. During the three months ended June 30, 2022, PTC sold a non-marketable equity investment for $4.2 million, which had been held at a cost of $1.2 million. The $3.0 million gain recognized on the sale is included in Other income (expense), net for the three and nine months ended June 30, 2022.

Equity Securities

As of June 30, 2022, PTC held no remaining shares in Matterport, Inc., a publicly traded company, as we sold all previously held shares during the three months ended March 31, 2022. The shares sold included those held as of September 30, 2021, as well as additional shares which PTC earned during the second quarter of FY22 based on contingent earn-outs achieved in January. Shares related to the original investment were restricted from sale until January 2022 (six months after Matterport became a public company). At expiration of this lock-out, we sold all shares held from the original investment for $39.1 million at an average price of $9.1 per share. In February 2022, we sold an additional $3.6 million shares at an average share price of $7.6 per share. Due to the decline in the price per share during the first six months of fiscal 2022, we recognized a loss of $34.8 million in Other income (expense), net on the Consolidated Statements of Operations. No additional gains or losses have been recognized in the three months ended June 30, 2022 and the aggregate realized gain from the original investment of $8.7 million was $34.0 million.

The following table provides a summary of changes in the fair value of our Level 3 investment in the Matterport, Inc. shares from October 1, 2021 to June 30, 2022:

(in thousands)		June 30, 2022
		Fair Values
Balance, October 1, 2021		$	77,540
Realized loss			(38,468	)
Sale of investment			(39,072	)
Balance, June 30, 2022		$	—

9. Marketable Securities

We did not hold any marketable securities as of September 30, 2021 or June 30, 2022. 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
		June 30, 2022				September 30, 2021				June 30, 2022				September 30, 2021
Derivative assets(1):
Forward Contracts		$	771			$	1,641			$	1,621			$	3,722
Derivative liabilities(2):
Forward Contracts		$	—			$	—			$	1,572			$	3,318

(1)

As of June 30, 2022 and September 30, 2021, current derivative assets of $2.4 million and $5.4 million, respectively, are recorded in other current assets in the Consolidated Balance Sheets.

(2)

As of June 30, 2022 and September 30, 2021, current derivative liabilities of $1.6 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.

As of June 30, 2022 and September 30, 2021, we had outstanding forward contracts with notional amounts equivalent to the following:

Currency Hedged (in thousands)		June 30, 2022				September 30, 2021
Canadian / U.S. Dollar		$	4,837			$	4,894
Euro / U.S. Dollar			362,686				387,466
British Pound / U.S. Dollar			6,095				23,141
Israeli Shekel / U.S. Dollar			11,415				10,475
Japanese Yen / U.S. Dollar			—				46,450
Swiss Franc / U.S. Dollar			9,272				18,039
Swedish Krona / U.S. Dollar			13,182				34,196
Singapore Dollar / U.S. Dollar			3,397				3,498
Chinese Renminbi / U.S. Dollar			7,975				23,297
New Taiwan Dollar / U.S. Dollar			15,758				3,369
Danish krone/ U.S. Dollar			2,900				2,380
Australian Dollar/ U.S. Dollar			3,068				2,086
All other			3,524				4,630
Total		$	444,109			$	563,921

The following table shows the effect of our non-designated hedges in the Consolidated Statements of Operations for the three and nine months ended June 30, 2022 and June 30, 2021:

(in thousands)				Three months ended								Nine months ended
		Location of Gain (Loss)		June 30, 2022				June 30, 2021				June 30, 2022				June 30, 2021
Net realized and unrealized (gain) loss, excluding the underlying foreign currency exposure being hedged		Other income (expense), net		$	3,399			$	(2,508	)		$	3,761			$	(7,128	)

In the three months ended June 30, 2022 and June 30, 2021, foreign currency gains, net were $0.9 million and foreign currency losses, net were $2.0 million, respectively. In the nine months ended June 30, 2022 and June 30, 2021 foreign currency losses, net were $3.1 million and $6.1 million, respectively.

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 June 30, 2022 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)		June 30, 2022				September 30, 2021
Euro / U.S. Dollar		$	114,651			$	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 and nine months ended June 30, 2022 and June 30, 2021:

(in thousands)				Three months ended								Nine months ended
		Location of Gain (Loss)		June 30, 2022				June 30, 2021				June 30, 2022				June 30, 2021
Gain (loss) recognized in OCI		OCI		$	1,082			$	(2,309	)		$	(1,993	)		$	(268	)
Gain (loss) reclassified from OCI		OCI			(4,281	)			4,143				(11,431	)			4,044
Gain recognized, excluded portion		Other income (expense), net			515				267				1,124				1,000

As of June 30, 2022, 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 June 30, 2022:

(in thousands)		Gross Amounts Offset in the Consolidated Balance Sheets												Gross Amounts Not Offset in the Consolidated Balance Sheets
As of June 30, 2022		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		$	2,392			$	—			$	2,392			$	(1,572	)		$	—			$	820

The following table sets forth the offsetting of derivative liabilities as of June 30, 2022:

(in thousands)		Gross Amounts Offset in the Consolidated Balance Sheets												Gross Amounts Not Offset in the Consolidated Balance Sheets
As of June 30, 2022		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		$	1,572			$	—			$	1,572			$	(1,572	)		$	—			$	—

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 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								Nine months ended
		June 30, 2022				June 30, 2021				June 30, 2022				June 30, 2021
Software Products
Revenue		$	423,400			$	394,434			$	1,299,243			$	1,209,622
Operating costs(1)			127,964				116,617				365,008				331,328
Profit			295,436				277,817				934,235				878,294
Professional Services
Revenue			39,074				41,234				126,179				116,882
Operating costs(2)			36,174				34,726				107,724				100,985
Profit			2,900				6,508				18,455				15,897
Total segment revenue			462,474				435,668				1,425,422				1,326,504
Total segment costs			164,138				151,343				472,732				432,313
Total segment profit			298,336				284,325				952,690				894,191
Unallocated operating expenses:
Sales and marketing expenses			110,296				120,183				327,653				345,782
General and administrative expenses			32,303				31,235				97,339				90,122
Restructuring and other charges, net			4,458				(132	)			36,887				584
Intangibles amortization			15,527				15,771				44,875				43,352
Stock-based compensation			49,420				43,068				133,283				133,896
Other unallocated operating expenses(3)			6,355				618				11,308				14,844
Total operating income			79,977				73,582				301,345				265,611
Interest and debt premium expense			(13,758	)			(13,178	)			(38,983	)			(37,622	)
Other income (expense), net			34,559				(1,935	)			(2,642	)			(5,756	)
Income before income taxes		$	100,778			$	58,469			$	259,720			$	222,233

(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 and transaction-related 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								Nine months ended
		June 30, 2022				June 30, 2021				June 30, 2022**(1)**				June 30, 2021
Americas		$	193,043			$	180,154			$	608,924			$	562,763
Europe			176,419				159,558				561,690				524,354
Asia Pacific			93,012				95,956				254,808				239,387
Total revenue		$	462,474			$	435,668			$	1,425,422			$	1,326,504
(1) Subsequent to filing our second quarter 2022 Form 10-Q, we identified an immaterial typographical error in the above disclosure. Revenue by region was transposed for Europe and Asia Pacific for the three and six-months ended March 31, 2022. Amounts presented above for the nine months ended June 30, 2022 reflect the corrected amounts.

12. Income Taxes

(in thousands)		Three months ended								Nine months ended
		June 30, 2022				June 30, 2021				June 30, 2022				June 30, 2021
Income before income taxes		$	100,778			$	58,469			$	259,720			$	222,233
Provision for income taxes		$	30,302			$	7,266			$	53,476			$	38,253
Effective income tax rate			30	%			12	%			21	%			17	%

In the third quarter and first nine months 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.

Additionally, in the third quarter and first nine months of FY’22 our results include tax expense related to the sale of a portion of our PLM services business of $15.5 million, including $8.1 million of expense which relates to the basis difference on goodwill. In the third quarter and first nine months of 2021, our results also include the effects of the full valuation allowance, which was maintained against our U.S. net deferred tax assets at that time. Additionally, in the first nine months of 2021, our results include the reduction of our previously established U.S. valuation allowance by $42.3 million as a result of the Arena acquisition and a charge of $37.3 million related to the effects of an unrecognized tax benefit in the Republic of Korea (South Korea), primarily related to foreign withholding taxes.

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 third 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 June 30, 2022 and September 30, 2021, we had unrecognized tax benefits of $24.1 million and $21.2 million, respectively. If all our unrecognized tax benefits as of June 30, 2022 were to become recognizable in the future, we would record a benefit to the income tax provision of $24.1 million, which would be partially offset by an increase in the U.S. valuation allowance of $4.9 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 $3 million.

13. Debt

At June 30, 2022 and September 30, 2021, we had the following long-term debt obligations:

(in thousands)		June 30, 2022				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)			434,000				450,000
Total debt			1,434,000				1,450,000
Unamortized debt issuance costs for the senior notes(2)			(8,916	)			(10,529	)
Total debt, net of issuance costs		$	1,425,084			$	1,439,471

(1) Unamortized debt issuance costs related to the credit facility were $3.0 million and $3.8 million as of June 30, 2022 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 June 30, 2022, the total estimated fair value of the 2028 and 2025 notes was approximately $462.4 million and $476.2 million, respectively, based on quoted prices for the notes on that date.

We were in compliance with all the covenants for our senior notes as of June 30, 2022.

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 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 June 30, 2022, 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 June 30, 2022, the annual rate for borrowings outstanding was 2.67%. 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 June 30, 2022, our total leverage ratio was 1.97 to 1.00, our senior secured leverage ratio was 0.61 to 1.00 and our interest coverage ratio was 13.74 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 third quarter and first nine months of 2022, we paid $2.1 million and $25.9 million of interest on our debt, respectively, and $3.2 million and $23.7 million in the third quarter and first nine months of 2021, respectively. The average interest rate on borrowings outstanding was approximately 3.4% and 3.3% during the third quarter and first nine months of 2022, respectively, and 3.1% and 3.4% during the third quarter and first nine months of 2021, respectively.

14. Leases

Our operating leases expire at various dates through 2037 and are primarily for office space, automobiles, 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, and received approximately $9.1 million in sublease income over the term of the sublease. In March 2022, we extended the sublease through June 30, 2023, and we will receive $2.9 million in sublease income over the term of the extension.

The components of lease cost reflected in the Consolidated Statement of Operations for the three and nine months ended June 30, 2022 and June 30, 2021 were as follows:

(in thousands)		Three months ended								Nine months ended
		June 30, 2022				June 30, 2021				June 30, 2022				June 30, 2021
Operating lease cost		$	8,613			$	9,075			$	26,149			$	28,031
Short-term lease cost			812				627				1,935				1,785
Variable lease cost			2,608				2,443				7,694				7,306
Sublease income			(1,176	)			(1,114	)			(3,406	)			(3,329	)
Total lease cost		$	10,857			$	11,031			$	32,372			$	33,793

Supplemental cash flow and right-of-use assets information for the three and nine months ended June 30, 2022 was as follows:

(in thousands)		Three months ended								Nine months ended
		June 30, 2022				June 30, 2021				June 30, 2022				June 30, 2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		$	10,087			$	12,319			$	35,200			$	40,396
Financing cash flows from financing leases		$	—			$	—			$	239			$	279
Right-of-use assets obtained in exchange for new lease obligations:
Operating leases		$	730			$	126			$	11,825			$	773
Financing leases		$	—			$	—			$	—			$	—

Supplemental balance sheet information related to the leases as of June 30, 2022 was as follows:

Weighted-average remaining lease term - operating leases	11.9 years
Weighted-average remaining lease term - financing leases	2.1 years
Weighted-average discount rate - operating leases		5.4	%
Weighted-average discount rate - financing leases		3.0	%

Maturities of lease liabilities as of June 30, 2022 are as follows:

(in thousands)
Remainder of 2022		$	9,139
2023			30,971
2024			26,710
2025			23,816
2026			19,853
Thereafter			160,184
Total future lease payments		$	270,673
Less: imputed interest			(75,837	)
Total lease liability		$	194,836

As of June 30, 2022 we had an operating lease that had not yet commenced. The lease will commence in FY'23 with a lease term of 10 years and we will make future lease payments of approximately $11.6 million.

Exited (Restructured) Facilities

As of June 30, 2022, we had net liabilities of $0.7 million related to excess facilities (compared to $3.6 million at September 30, 2021), representing $0.2 million of right-of-use assets and $0.9 million of lease obligations, all of which is classified as short 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 June 30, 2022, the right-of-use assets for exited facilities reflects discounted committed sublease income of approximately $0.2 million.

In the three and nine months ended June 30, 2022, we made payments of $0.7 million and $1.9 million, respectively, related to lease costs for exited facilities. In the three and nine months ended June 30, 2021, we made payments of $1.2 million and $7.5 million, respectively.

15. Commitments and Contingencies

As June 30, 2022 and June 30, 2021, we had letters of credit and bank guarantees outstanding of $15.2 million (of which $0.5 million was collateralized) and $16.3 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 fees and costs that were higher 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 sought unspecified damages on behalf of a class of Plan participants from September 17, 2014 through the date of any judgment. On September 22, 2021, the plaintiffs and the PTC Defendants reached an agreement in principle to settle the lawsuit for a gross settlement amount of $1.725 million. The settlement received preliminary approval from the Court on May 12, 2022, and a Fairness Hearing is scheduled for September 14, 2022. 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 matter listed above, we are subject to legal proceedings and claims against us in the ordinary course of business. As of June 30, 2022, 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, 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.