Item 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED CONDENSED CONSOLI****DATED FINANCIAL STATEMENTS

PTC Inc.

CONSOLIDATED B****ALANCE SHEETS

(in thousands, except per share data)

(unaudited)

		December 31, 2022				September 30, 2022
ASSETS
Current assets:
Cash and cash equivalents		$	387,588			$	272,182
Accounts receivable, net of allowance for doubtful accounts of $381 and $362 at December 31, 2022 and September 30, 2022, respectively			562,036				636,556
Prepaid expenses			110,393				88,854
Other current assets			66,777				71,065
Total current assets			1,126,794				1,068,657
Property and equipment, net			95,142				98,101
Goodwill			2,388,589				2,353,654
Acquired intangible assets, net			373,837				382,718
Deferred tax assets			266,879				256,091
Operating right-of-use lease assets			148,637				137,780
Other assets			395,891				390,267
Total assets		$	4,795,769			$	4,687,268
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	38,983			$	40,153
Accrued expenses and other current liabilities			126,002				117,158
Accrued compensation and benefits			96,487				104,022
Accrued income taxes			2,239				5,142
Deferred revenue			500,222				503,781
Short-term lease obligations			22,809				22,002
Total current liabilities			786,742				792,258
Long-term debt			1,351,171				1,350,628
Deferred tax liabilities			31,038				28,396
Deferred revenue			15,811				16,552
Long-term lease obligations			177,109				167,573
Other liabilities			33,349				35,827
Total liabilities			2,395,220				2,391,234
Commitments and contingencies (Note 14)
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued			—				—
Common stock, $0.01 par value; 500,000 shares authorized; 118,161 and 117,472 shares issued and outstanding at December 31, 2022 and September 30, 2022, respectively			1,182				1,175
Additional paid-in capital			1,701,817				1,720,580
Retained earnings			802,772				727,737
Accumulated other comprehensive loss			(105,222	)			(153,458	)
Total stockholders’ equity			2,400,549				2,296,034
Total liabilities and stockholders’ equity		$	4,795,769			$	4,687,268

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
		December 31, 2022				December 31, 2021
Revenue:
License		$	172,698			$	169,108
Support and cloud services			257,656				244,485
Total software revenue			430,354				413,593
Professional services			35,556				44,128
Total revenue			465,910				457,721
Cost of revenue:
Cost of license revenue			12,753				9,794
Cost of support and cloud services revenue			50,225				45,885
Total cost of software revenue			62,978				55,679
Cost of professional services revenue			32,812				39,439
Total cost of revenue			95,790				95,118
Gross margin			370,120				362,603
Operating expenses:
Sales and marketing			118,383				125,476
Research and development			88,177				80,534
General and administrative			50,971				51,940
Amortization of acquired intangible assets			8,026				8,484
Restructuring and other charges (credits), net			(338	)			33,991
Total operating expenses			265,219				300,425
Operating income			104,901				62,178
Interest and debt premium expense			(16,358	)			(12,986	)
Other income (expense), net			(2,119	)			6,184
Income before income taxes			86,424				55,376
Provision for income taxes			11,389				9,287
Net income		$	75,035			$	46,089
Earnings per share—Basic		$	0.64			$	0.39
Earnings per share—Diluted		$	0.63			$	0.39
Weighted-average shares outstanding—Basic			117,819				117,347
Weighted-average shares outstanding—Diluted			118,788				118,598

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
		December 31, 2022				December 31, 2021
Net income		$	75,035			$	46,089
Other comprehensive income (loss), net of tax:
Hedge gain (loss) arising during the period, net of tax of $3.8 million and $(0.8) million in the first quarter of 2023 and 2022, respectively			(11,485	)			2,495
Foreign currency translation adjustment, net of tax of $0 for each period			60,029				(5,668	)
Amortization of net actuarial pension loss included in net income, net of tax of $0.0 million and $(0.1) million in the first quarter of 2023 and 2022, respectively			41				265
Change in unamortized pension gain (loss) during the period related to changes in foreign currency			(349	)			385
Other comprehensive income (loss)			48,236				(2,523	)
Comprehensive income		$	123,271			$	43,566

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

PTC Inc.

CONSOLIDATED STATEM****ENTS OF CASH FLOWS

(in thousands)

(unaudited)

		Three months ended
		December 31, 2022				December 31, 2021
Cash flows from operating activities:
Net income		$	75,035			$	46,089
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			21,328				22,088
Amortization of right-of-use lease assets			8,054				8,860
Stock-based compensation			41,504				45,942
Gain on investment			—				(9,766	)
Other non-cash items, net			(617	)			(273	)
Changes in operating assets and liabilities, excluding the effects of acquisitions:
Accounts receivable			105,512				57,316
Accounts payable and accrued expenses			7,680				12,959
Accrued compensation and benefits			(17,530	)			2,853
Deferred revenue			(19,635	)			(13,696	)
Accrued income taxes			(16,836	)			(8,328	)
Other current assets and prepaid expenses			2,956				(13,474	)
Operating lease liabilities			7,895				(2,343	)
Other noncurrent assets and liabilities			(34,425	)			(10,491	)
Net cash provided by operating activities			180,921				137,736
Cash flows from investing activities:
Additions to property and equipment			(9,180	)			(3,362	)
Purchase of intangible assets			—				(450	)
Settlement of net investment hedges			(10,795	)			6,473
Divestitures of businesses and assets, net			(154	)			—
Net cash (used in) provided by investing activities			(20,129	)			2,661
Cash flows from financing activities:
Repurchases of common stock			—				(119,739	)
Payments of withholding taxes in connection with stock-based awards			(52,423	)			(49,165	)
Payments of principal for financing leases			(217	)			(239	)
Credit facility origination costs			(1,350	)			—
Net cash used in financing activities			(53,990	)			(169,143	)
Effect of exchange rate changes on cash, cash equivalents and restricted cash			8,616				(1,661	)
Net change in cash, cash equivalents, and restricted cash			115,418				(30,407	)
Cash, cash equivalents, and restricted cash, beginning of period			272,888				327,046
Cash, cash equivalents, and restricted cash, end of period		$	388,306			$	296,639
Supplemental disclosure of non-cash financing activities:
Withholding taxes in connection with stock-based awards, accrued		$	452			$	—
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, 2022
		Common Stock																Accumulated
		Shares				Amount				Additional Paid-In Capital				Retained Earnings				Other Comprehensive Loss				Total Stockholders’ Equity
Balance as of September 30, 2022			117,472			$	1,175			$	1,720,580			$	727,737			$	(153,458	)		$	2,296,034
Common stock issued for employee stock-based awards			1,090				11				(11	)			—				—				—
Shares surrendered by employees to pay taxes related to stock-based awards			(401	)			(4	)			(52,871	)			—				—				(52,875	)
Compensation expense from stock-based awards			—				—				34,119				—				—				34,119
Net income			—				—				—				75,035				—				75,035
Unrealized loss on net investment hedges, net of tax			—				—				—				—				(11,485	)			(11,485	)
Foreign currency translation adjustment			—				—				—				—				60,029				60,029
Change in pension benefits, net of tax			—				—				—				—				(308	)			(308	)
Balance as of December 31, 2022			118,161			$	1,182			$	1,701,817			$	802,772			$	(105,222	)		$	2,400,549

		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

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

PTC Inc.

NOTES TO CONDENSED CONSO****LIDATED 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, 2022. 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, 2022 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.

Pending Accounting Pronouncements

Reference Rate Reform

In December 2022, the FASB issued ASU 2020-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. The ASU provides an update to the previously issued ASU 2020-04 to defer the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. In conjunction with our new credit agreement in January 2023, we have transitioned off of rates subject to reference rate reform without a material impact from such transition.

2. Revenue from Contracts with Customers

Contract Assets and Contract Liabilities

(in thousands)		December 31, 2022				September 30, 2022
Contract asset		$	21,295			$	21,096
Deferred revenue		$	516,033			$	520,333

As of December 31, 2022, $16.7 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 $6.0 million of the September 30, 2022 contract asset balance was transferred to receivables during the three months ended December 31, 2022 as a result of the right to payment becoming unconditional. Additions to contract assets of approximately $6.2 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, 2022.

During the three months ended December 31, 2022, we recognized $219.7 million of revenue that was included in Deferred revenue as of September 30, 2022 and there were additional deferrals of $215.4 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, 2022 was $801.3 million, compared to total short- and long-term receivables as of September 30, 2022 of $871.0 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, 2022 and September 30, 2022, our total revenue liability was $34.6 million and $34.2 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 debt, customer concentrations, customer credit-worthiness, current economic conditions, and accounts receivable aging trends. Our allowance for doubtful accounts on trade accounts receivable was $0.4 million as of December 31, 2022 and September 30, 2022. Uncollectible trade accounts receivable written-off, net of recoveries and net bad debt expense were immaterial for the three months ended December 31, 2022 and December 31, 2021.

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, 2022 and September 30, 2022, deferred costs of $41.3 million and $40.7 million, respectively, are included in Other current assets and $77.6 million and $77.0 million, respectively, are included in Other assets (non-current). Amortization expense related to costs to obtain a contract with a customer was $12.0 million and $11.6 million in the three months ended December 31, 2022 and December 31, 2021, respectively. There were no impairments of the contract cost asset in the three months ended December 31, 2022 and December 31, 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 December 31, 2022, the transaction price amounts include performance obligations of $516.0 million recorded in Deferred revenue and $1,205.9 million that are not yet recorded in the Consolidated Balance Sheets. We expect to recognize approximately 59% of the total $1,721.9 million over the next 12 months, with the remaining amount thereafter.

Disaggregation of Revenue

(in thousands)		Three months ended
		December 31, 2022				December 31, 2021
Recurring revenue(1)		$	417,110			$	405,125
Perpetual license			13,244				8,468
Professional services			35,556				44,128
Total revenue		$	465,910			$	457,721

(1)

Recurring revenue is comprised of on-premises subscription, perpetual support, SaaS, and cloud services revenue.

For further disaggregation of revenue by geographic region see Note 10. 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.

Restructuring Charges (Credits)

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-premises customers to move to the cloud. The restructuring plan resulted in charges of $33.1 million in 2022, primarily associated with the termination benefits for approximately 330 employees.

The following table summarizes restructuring accrual activity for the three months ended December 31, 2022:

(in thousands)		Employee Severance and Related Benefits				Facility Closures and Related Costs				Total
Accrual, October 1, 2022		$	346			$	589			$	935
Credits to operations, net			(18	)			(296	)			(314	)
Cash disbursements			(71	)			(301	)			(372	)
Other non-cash			—				15				15
Foreign exchange impact			21				—				21
Accrual, December 31, 2022		$	278			$	7			$	285

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 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. In addition to the payments referenced above, In the three months ended December 31, 2022 and December 31, 2021, we made net payments of $0.2 million and $0.7 million, respectively, related to lease costs for exited facilities.

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, 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, 2022			2,754			$	105.07
Granted(1)			817			$	131.58
Vested			(1,090	)		$	103.61
Forfeited or not earned			(72	)		$	111.90
Balance of outstanding restricted stock units, December 31, 2022			2,409			$	114.54

(1)

Restricted stock units granted includes 38 thousand shares from prior period rTSR awards that were earned upon achievement of the performance criteria and vested in November 2022, and 61 thousand shares from prior period performance-based awards that were earned upon achievement of the performance criteria and vested in November 2022.

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

(in thousands)		Three months ended December 31, 2022
Performance-based RSUs(1)			69
Service-based RSUs(2)			580
Relative Total Shareholder Return RSUs(3)			69

(1)

The performance-based RSUs are primarily made up of RSUs granted to our executives and are eligible to vest based upon annual 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, 2023, November 15, 2024, and November 15, 2025, 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 (up to a maximum aggregate of 139 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 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, 2025. The RSUs earned will vest on November 15, 2025. 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 139 thousand RSUs) may vest. If the PTC stock price as of September 30, 2022 is higher than the PTC stock price as of September 30, 2025, 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 $179.60 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			41.54	%
Risk free interest rate			4.12	%
Dividend yield			—	%

Total value on vest date of RSUs vested are as follows:

(in thousands)		Three months ended
Value of stock option and stock-based award activity		December 31, 2022				December 31, 2021
Total value of restricted stock unit awards at vest		$	143,794			$	134,330

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, 2022				December 31, 2021
Cost of license revenue		$	37			$	38
Cost of support and cloud services revenue			2,790				3,478
Cost of professional services revenue			1,248				2,456
Sales and marketing			12,196				13,081
Research and development			11,458				10,176
General and administrative			13,775				16,713
Total stock-based compensation expense		$	41,504			$	45,942

Stock-based compensation expense includes $1.9 million in the first quarter of 2023 and $2.0 million in the first quarter of 2022 related to our employee stock purchase plan.

As of December 31, 2022, we had liability-classified awards related to stock-based compensation of $7.4 million.

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, 2022				December 31, 2021
Net income		$	75,035			$	46,089
Weighted-average shares outstanding—Basic			117,819				117,347
Dilutive effect of restricted stock units			969				1,251
Weighted-average shares outstanding—Diluted			118,788				118,598
Earnings per share—Basic		$	0.64			$	0.39
Earnings per share—Diluted		$	0.63			$	0.39

There were 0.2 million anti-dilutive shares for the three months ended December 31, 2022. There were no anti-dilutive shares for the three months ended December 31, 2021.

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, 2022, we did not repurchase any shares. 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 settled in January 2022 and were included in Accrued expenses and other current liabilities as of December 31, 2021. All shares of our common stock repurchased are automatically restored to the status of authorized and unissued.

6. A****cquisitions and Disposition of Business

Acquisition and transaction-related costs in the first quarter of 2023 totaled $5.8 million, compared to $1.0 million in the first quarter of 2022. 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 third-party costs related to structuring transactions.

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.

Refer to Note 15. Subsequent Events for additional information regarding the acquisition of ServiceMax Inc. in January 2023.

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 developed and marketed the Codebeamer™ Application Lifecycle Management (ALM) family of software products. The purchase price of the acquisition was $278.1 million, net of cash acquired, which was financed with cash on hand and $264 million borrowed under our existing credit facility. Intland Software had approximately 150 employees on the close date.

The acquisition of Intland Software 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 $240.9 million of goodwill, $38.8 million of customer relationships, $19.1 million of purchased software, $1.3 million of trademarks, $20.1 million of deferred tax liabilities, $0.7 million of income tax payables, $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.

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 in Q3'22, which consisted of $60.4 million of consideration received, less net assets of the business of $30.6 million. Net assets included $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 within 2 years of the disposition 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 December 31, 2022, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was $2,751.2 million and attributable to our Professional Services segment was $11.2 million. As of September 30, 2022, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was $2,725.2 million and attributable to our Professional Services segment was $11.2 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. 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). 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 Professional Services reporting unit using a discounted cash flow valuation model. Based on our qualitative assessment for the Software Products segment and quantitative assessment for the Professional Services segment as of June 30, 2022, no impairment was required. Through December 31, 2022, 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, 2022												September 30, 2022
		Gross Carrying Amount				Accumulated Amortization				Net Book Value				Gross Carrying Amount				Accumulated Amortization				Net Book Value
Goodwill (not amortized)										$	2,388,589											$	2,353,654
Intangible assets with finite lives (amortized):
Purchased software		$	508,840			$	366,149			$	142,691			$	502,859			$	355,857			$	147,002
Capitalized software			22,877				22,877				—				22,877				22,877				—
Customer lists and relationships			605,366				384,198				221,168				594,970				369,390				225,580
Trademarks and trade names			27,911				17,933				9,978				27,546				17,410				10,136
Other			3,885				3,885				—				3,766				3,766				—
Total intangible assets with finite lives		$	1,168,879			$	795,042			$	373,837			$	1,152,018			$	769,300			$	382,718
Total goodwill and acquired intangible assets										$	2,762,426											$	2,736,372

Goodwill

Changes in goodwill presented by reportable segments were as follows:

(in thousands)		Software Products				Professional Services				Total
Balance, October 1, 2022		$	2,344,019			$	9,635			$	2,353,654
Foreign currency translation adjustment			34,793				142				34,935
Balance, December 31, 2022		$	2,378,812			$	9,777			$	2,388,589

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, 2022				December 31, 2021
Amortization of acquired intangible assets		$	8,026			$	8,484
Cost of license revenue			6,142				6,493
Total amortization expense		$	14,168			$	14,977

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, 2022 and September 30, 2022 were as follows:

(in thousands)		December 31, 2022
		Level 1				Level 2				Level 3				Total
Financial assets:
Cash equivalents (1)		$	157,234			$	—			$	—			$	157,234
Convertible note			—				—				2,000				2,000
Options			—				2,688				—				2,688
Forward contracts			—				824				—				824
		$	157,234			$	3,512			$	2,000			$	162,746
Financial liabilities:
Forward contracts			—				3,841				—				3,841
		$	—			$	3,841			$	—			$	3,841

(in thousands)		September 30, 2022
		Level 1				Level 2				Level 3				Total
Financial assets:
Cash equivalents (1)		$	102,313			$	—			$	—			$	102,313
Convertible note			—				—				2,000				2,000
Forward contracts			—				9,058				—				9,058
		$	102,313			$	9,058			$	2,000			$	113,371
Financial liabilities:
Forward contracts			—				2,908				—				2,908
		$	—			$	2,908			$	—			$	2,908

(1) Money market funds and time deposits.

Level 3 Investments

Convertible Note

In the fourth quarter of 2021, we invested $2.0 million in 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 months ended December 31, 2022.

Equity Securities

During the first quarter of 2022, we recognized a gain of $9.8 million in Other income (expense), net related to an increase in value of equity securities we held Matterport, Inc., which was recorded at a fair value of $87.3 million in other current assets on the Consolidated Balance Sheets. All shares owned in Matterport were sold in 2022 and we did not hold any equity securities as of December 31, 2022 or September 30, 2022.

9. 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, 2022				September 30, 2022				December 31, 2022				September 30, 2022
Derivative assets(1):
Forward Contracts		$	—			$	1,960			$	824			$	7,098
Options		$	2,688			$	—			$	—			$	—
Derivative liabilities(2):
Forward Contracts		$	1,582			$	—			$	2,259			$	2,908

(1)

As of December 31, 2022 and September 30, 2022, current derivative assets of $3.5 million and $9.1 million, respectively, are recorded in Other current assets in the Consolidated Balance Sheets.

(2)

As of December 31, 2022 and September 30, 2022, current derivative liabilities of $3.8 million and $2.9 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 nine 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, 2022 and September 30, 2022, we had outstanding forward contracts and options with notional amounts equivalent to the following:

Currency Hedged (in thousands)		December 31, 2022				September 30, 2022
Canadian / U.S. Dollar		$	4,148			$	2,731
Euro / U.S. Dollar			511,944				316,869
British Pound / U.S. Dollar			5,857				7,368
Israeli Shekel / U.S. Dollar			9,105				12,052
Japanese Yen / U.S. Dollar			69,738				25,566
Swiss Franc / U.S. Dollar			23,481				25,559
Swedish Krona / U.S. Dollar			11,287				35,713
Singapore Dollar / U.S. Dollar			—				3,637
Chinese Renminbi / U.S. Dollar			6,547				23,965
New Taiwan Dollar / U.S. Dollar			7,090				13,906
Korean Won/ U.S. Dollar			—				4,919
Danish Krone/ U.S. Dollar			4,561				3,192
Australian Dollar/ U.S. Dollar			668				3,269
All other			3,904				4,432
Total		$	658,330			$	483,178

(1)

As of December 31, 2022, $319.6 million of the Euro to U.S. Dollar outstanding notional amount relates to forward contracts and $192.3 million relates to options. As of September 30, 2022, all the Euro to U.S. Dollar outstanding notional amount relates to forward contracts.

(2)

As of December 31, 2022, $14.5 million of the Japanese Yen to U.S. Dollar outstanding notional amount relates to forward contracts and $55.2 million relates to options. As of September 30, 2022, all 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, 2022 and December 31, 2021:

(in thousands)				Three months ended
		Location of Gain (Loss)		December 31, 2022				December 31, 2021
Net realized and unrealized loss, excluding the underlying foreign currency exposure being hedged		Other income (expense), net		$	(11,009	)		$	(3,435	)

In the three months ended December 31, 2022, foreign currency losses, net were $3.2 million. In the three months ended December 31, 2021, foreign currency losses, net were $4.4 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 and Japanese Yen 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 and Japanese Yen 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, 2022 and September 30, 2022, we had outstanding forward contracts designated as net investment hedges with notional amounts equivalent to the following:

Currency Hedged (in thousands)		December 31, 2022				September 30, 2022
Euro / U.S. Dollar		$	176,076			$	110,446
JPY/ U.S Dollar			11,437				—
Total		$	187,513			$	110,446

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, 2022 and December 31, 2021:

(in thousands)				Three months ended
		Location of Gain (Loss)		December 31, 2022				December 31, 2021
Loss recognized in OCI		OCI		$	(4,510	)		$	(3,156	)
Gain (loss) reclassified from OCI		OCI		$	7,030			$	(5,735	)
Gain recognized, excluded portion		Other income (expense), net		$	969			$	267

As of December 31, 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 December 31, 2022:

(in thousands)		Gross Amounts Offset in the Consolidated Balance Sheets												Gross Amounts Not Offset in the Consolidated Balance Sheets
As of December 31, 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		$	824			$	—			$	824			$	(824	)		$	—			$	—

The following table sets forth the offsetting of derivative liabilities as of December 31, 2022:

(in thousands)		Gross Amounts Offset in the Consolidated Balance Sheets												Gross Amounts Not Offset in the Consolidated Balance Sheets
As of December 31, 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		$	3,841			$	—			$	3,841			$	(824	)		$	—			$	3,017

10. 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
		December 31, 2022				December 31, 2021
Software Products
Revenue		$	430,354			$	413,593
Operating costs(1)			130,728				116,028
Profit			299,626				297,565
Professional Services
Revenue			35,556				44,128
Operating costs(2)			31,564				36,983
Profit			3,992				7,145
Total segment revenue			465,910				457,721
Total segment costs			162,292				153,011
Total segment profit			303,618				304,710
Unallocated operating expenses:
Sales and marketing expenses			106,187				112,395
General and administrative expenses			31,390				34,177
Restructuring and other charges (credits), net			(338	)			33,991
Intangibles amortization			14,168				14,977
Stock-based compensation			41,504				45,942
Other unallocated operating expenses(3)			5,806				1,050
Total operating income			104,901				62,178
Interest and debt premium expense			(16,358	)			(12,986	)
Other income (expense), net			(2,119	)			6,184
Income before income taxes		$	86,424			$	55,376

(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
		December 31, 2022				December 31, 2021
Americas		$	226,912			$	212,881
Europe			167,210				162,308
Asia Pacific			71,788				82,532
Total revenue		$	465,910			$	457,721

11. Income Taxes

(in thousands)		Three months ended
		December 31, 2022				December 31, 2021
Income before income taxes		$	86,424			$	55,376
Provision for income taxes		$	11,389			$	9,287
Effective income tax rate			13	%			17	%

In the first quarter of 2023 and 2022, 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 2023 and 2022, the foreign rate differential predominantly relates to these earnings.

In 2023 and 2022, 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.

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 December 31, 2022, we maintain our conclusion that it is more likely than not that our deferred tax assets related to U.S. federal and state income will be realizable.

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, 2022 and September 30, 2022, we had unrecognized tax benefits of $25.5 million and $23.9 million, respectively. If all our unrecognized tax benefits as of December 31, 2022 were to become recognizable in the future, we would record a benefit to the income tax provision of $25.5 million, which would be partially offset by an increase in the U.S. valuation allowance of $5.3 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 $5 million.

12. Debt

At December 31, 2022 and September 30, 2022, we had the following long-term debt obligations:

(in thousands)		December 31, 2022				September 30, 2022
4.000% Senior notes due 2028		$	500,000			$	500,000
3.625% Senior notes due 2025			500,000				500,000
Credit facility revolver(1)			359,000				359,000
Total debt			1,359,000				1,359,000
Unamortized debt issuance costs for the senior notes(2)			(7,829	)			(8,372	)
Total debt, net of issuance costs		$	1,351,171			$	1,350,628

(1) Unamortized debt issuance costs related to the credit facility were $3.2 million and $2.7 million as of December 31, 2022 and September 30, 2022, 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, 2022, the total estimated fair value of the 2028 and 2025 notes was approximately $455.2 million and $476.9 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, 2022. Any failure to comply with such covenants could constitute a default that could cause all amounts outstanding to become due and payable immediately.

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

We were party to the Third Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as Administrative Agent, from February 2020 through January 3, 2023 (the "Prior Credit Facility"). We used the Prior Credit Facility for general corporate purposes, including acquisitions of businesses, share repurchases and working capital requirements.

On January 3, 2023, subsequent to the end of Q1’23, we terminated the Prior Credit Facility and repaid all amounts outstanding and entered into a new credit agreement for the purpose of funding the payment of the closing purchase price of ServiceMax. Refer to Note 15. Subsequent Events for additional discussion regarding the new credit agreement and acquisition of ServiceMax.

The Prior Credit Facility, in effect as of December 31, 2022, consisted of a $1 billion revolving credit facility, which could have been increased by up to an additional $500 million in the aggregate if the existing or additional lenders were willing to make such increased commitments. The revolving loan commitment did not require amortization of principal and could have been repaid in whole or in part prior to the scheduled maturity date at our option without penalty or premium. As of December 31, 2022, the fair value of our credit facility approximated its book value.

Loans under the Prior Credit Facility bore 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, 2022, the annual rate for borrowings outstanding was 5.7%.

Under the Prior Credit Facility PTC and its subsidiaries were required to 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, 2022, our total leverage ratio was 1.79 to 1.00, our senior secured leverage ratio was 0.49 to 1.00 and our interest coverage ratio was 14.05 to 1.00 and we were in compliance with all financial and operating covenants of the Prior Credit Facility.

In the first quarters of 2023 and 2022, we paid $4.8 million and $2.4 million of interest on our debt, respectively. The average interest rate on borrowings outstanding during the first quarters of 2023 and 2022 was approximately 4.2% and 3.2%, respectively.

13. 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 months ended December 31, 2022 and December 31, 2021 were as follows:

(in thousands)		Three months ended
		December 31, 2022				December 31, 2021
Operating lease cost		$	8,054			$	8,860
Short-term lease cost			763				540
Variable lease cost			2,630				2,490
Sublease income			(1,185	)			(1,117	)
Total lease cost		$	10,262			$	10,773

Supplemental cash flow and right-of-use assets information for the three months ended December 31, 2022 and December 31, 2021 was as follows:

(in thousands)		Three months ended
		December 31, 2022				December 31, 2021**(1)**
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		$	8,261			$	15,865
Financing cash flows from financing leases		$	217			$	239
Right-of-use assets obtained in exchange for new lease obligations:
Operating leases		$	13,375			$	4,916
(1) Subsequent to filing our first quarter 2022 Form 10-Q, we identified an immaterial error in the above disclosure. Right-of-use assets obtained in exchange for new lease obligations for the three months ended December 31,2021 was incorrect. Amount presented above for the three months ended December 31, 2021 reflect the corrected amount.

Supplemental balance sheet information related to the leases as of December 31, 2022 was as follows:

Weighted-average remaining lease term - operating leases	11.5 years
Weighted-average remaining lease term - financing leases	1.8 years
Weighted-average discount rate - operating leases		5.3	%
Weighted-average discount rate - financing leases		3.0	%

Maturities of lease liabilities as of December 31, 2022 are as follows:

(in thousands)
Remainder of 2023		$	24,922
2024			29,496
2025			25,934
2026			21,687
2027			18,625
Thereafter			150,828
Total future lease payments		$	271,492
Less: imputed interest			(71,574	)
Total lease liability		$	199,918

As of December 31, 2022, we had an operating lease that had not yet commenced. The lease will commence in FY'23 with a lease term of 6 years and we will make future lease payments of approximately $2.2 million.

14. Commitments and Contingencies

As December 31, 2022 and December 31, 2021, we had letters of credit and bank guarantees outstanding of $15.1 million (of which $0.5 million was collateralized) and $15.3 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 (the “Plan”), and the PTC Board of Directors (collectively, the “PTC Defendants”) in the U.S. District Court for the District of Massachusetts alleging that the defendants breached their fiduciary duties under the Employee Retirement Income Security Act of 1974 in the oversight of the Plan. 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 Court issued an Order of final approval of the settlement on October 18, 2022. PTC's insurer fully funded the Qualified Settlement Fund, per the terms of the approved Settlement Agreement, in November 2022.

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 December 31, 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.

15. Subsequent Events

Acquisition of ServiceMax Inc.

On January 3, 2023, we acquired ServiceMax, Inc. pursuant to the Share Purchase Agreement dated November 17, 2022 by and among PTC, ServiceMax, Inc., and ServiceMax JV, LP. The preliminary purchase price is $1,478 million, net of cash acquired, which is payable in two installments. Upon closing of the transaction, PTC paid the first purchase payment installment of $835 million, as adjusted for working capital, indebtedness, cash, and transaction expenses as set forth in the Share Purchase Agreement. The remaining purchase payment installment of $650 million is payable on October 2, 2023, without interest and not subject to contingencies. The terms of the Share Price Agreement are described in the Form 8-K filed by PTC on November 17, 2022.

Entry into the Fourth Amended and Restated Credit Agreement; Termination of the Third Amended and Restated Credit Agreement

On January 3, 2023, we entered into the Fourth Amended and Restated Credit Agreement by and among PTC, PTC (IFSC) Limited, JPMorgan Chase Bank, N.A., as Administrative Agent, and the lenders party thereto (the “New Credit Facility”). The New Credit Facility consists of a $1,250 million revolving credit facility and $500 million new term loan. The terms of the New Credit Facility are described in the Form 8-K filed by PTC on January 3, 2023.

In connection with entry into the New Credit Facility, PTC terminated the Third Amended and Restated Credit Agreement dated February 13, 2020 by and among PTC, PTC (IFSC) Limited, JPMorgan Chase Bank, N.A., as Administrative Agent, and the lenders party thereto. Approximately $359 million was outstanding under the Prior Credit Facility at the time of termination, which amount was repaid with a borrowing of the same amount under the New Credit Facility upon closing of New Credit Facility.

Borrowings under the Fourth Amended and Restated Credit Agreement

On January 3, 2023, PTC borrowed $630 million under the revolving line of the New Credit Facility and $500 million under the new term loan of the New Credit Facility to repay amounts under the Prior Credit Facility and to pay the closing purchase price for, and transaction expenses related to, the acquisition of ServiceMax, Inc., including the repayment of certain indebtedness of ServiceMax or its subsidiaries, bringing our total outstanding indebtedness to approximately $2,130 million.