Item 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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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, 2023			September 30, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	281,513		$	272,182
Accounts receivable, net of allowance for doubtful accounts of $429 and $362 at June 30, 2023 and September 30, 2022, respectively		625,471			636,556
Prepaid expenses		118,872			88,854
Other current assets		77,421			71,065
Total current assets		1,103,277			1,068,657
Property and equipment, net		89,180			98,101
Goodwill		3,377,319			2,353,654
Acquired intangible assets, net		959,120			382,718
Deferred tax assets		146,307			256,091
Operating right-of-use lease assets		144,860			137,780
Other assets		387,586			390,267
Total assets	$	6,207,649		$	4,687,268
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	18,492		$	40,153
Accrued expenses and other current liabilities		148,784			117,158
Accrued compensation and benefits		150,774			104,022
Accrued income taxes		19,198			5,142
Deferred acquisition payments		620,040			—
Deferred revenue		631,325			503,781
Short-term lease obligations		23,042			22,002
Total current liabilities		1,611,655			792,258
Long-term debt		1,738,241			1,350,628
Deferred tax liabilities		35,077			28,396
Deferred revenue		19,102			16,552
Long-term lease obligations		171,777			167,573
Other liabilities		33,133			35,827
Total liabilities		3,608,985			2,391,234
Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued		—			—
Common stock, $0.01 par value; 500,000 shares authorized; 118,731 and 117,472 shares issued and outstanding at June 30, 2023 and September 30, 2022, respectively		1,186			1,175
Additional paid-in capital		1,767,442			1,720,580
Retained earnings		927,674			727,737
Accumulated other comprehensive loss		(97,638	)		(153,458	)
Total stockholders’ equity		2,598,664			2,296,034
Total liabilities and stockholders’ equity	$	6,207,649		$	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						Nine months ended
	June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022
Revenue:
License	$	192,940		$	175,163		$	562,631		$	562,646
Support and cloud services		313,721			248,237			875,448			736,597
Total software revenue		506,661			423,400			1,438,079			1,299,243
Professional services		35,681			39,074			112,354			126,179
Total revenue		542,342			462,474			1,550,433			1,425,422
Cost of revenue:
Cost of license revenue		11,501			13,676			41,293			35,406
Cost of support and cloud services revenue		68,264			46,598			177,626			137,251
Total cost of software revenue		79,765			60,274			218,919			172,657
Cost of professional services revenue		36,089			41,721			106,231			117,793
Total cost of revenue		115,854			101,995			325,150			290,450
Gross margin		426,488			360,479			1,225,283			1,134,972
Operating expenses:
Sales and marketing		145,083			124,325			392,673			366,209
Research and development		103,819			88,170			292,345			250,639
General and administrative		57,055			54,618			173,949			154,027
Amortization of acquired intangible assets		10,670			8,931			29,352			25,865
Restructuring and other charges (credits), net		(39	)		4,458			(376	)		36,887
Total operating expenses		316,588			280,502			887,943			833,627
Operating income		109,900			79,977			337,340			301,345
Interest and debt premium expense		(35,836	)		(13,758	)		(93,719	)		(38,983	)
Other income (expense), net		2,462			34,559			398			(2,642	)
Income before income taxes		76,526			100,778			244,019			259,720
Provision for income taxes		15,128			30,302			44,082			53,476
Net income	$	61,398		$	70,476		$	199,937		$	206,244
Earnings per share—Basic	$	0.52		$	0.60		$	1.69		$	1.76
Earnings per share—Diluted	$	0.51		$	0.60		$	1.68		$	1.75
Weighted-average shares outstanding—Basic		118,483			117,073			118,186			117,114
Weighted-average shares outstanding—Diluted		119,392			117,968			119,072			118,097

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, 2023			June 30, 2022			June 30, 2023			June 30, 2022
Net income	$	61,398		$	70,476		$	199,937		$	206,244
Other comprehensive income (loss), net of tax:
Hedge gain (loss) arising during the period, net of tax of $0.2 million and $(1.9) million in the third quarter of 2023 and 2022, respectively, and $4.7 million and $(4.0) million in the first nine months of 2023 and 2022, respectively		(521	)		5,880			(14,005	)		12,072
Foreign currency translation adjustment, net of tax of $0 for each period		1,405			(35,795	)		70,181			(52,819	)
Amortization of net actuarial pension loss included in net income, net of tax of $0.0 million and $0.0 million in the third quarter of 2023 and 2022, respectively, and $0.0 million and $(0.2) million in the first nine months of 2023 and 2022, respectively		43			(78	)		125			447
Change in unamortized pension loss during the period related to changes in foreign currency		(67	)		1,354			(481	)		2,277
Other comprehensive income (loss)		860			(28,639	)		55,820			(38,023	)
Comprehensive income	$	62,258		$	41,837		$	255,757		$	168,221

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, 2023			June 30, 2022
Cash flows from operating activities:
Net income	$	199,937		$	206,244
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		76,943			65,456
Amortization of right-of-use lease assets		24,705			26,149
Stock-based compensation		147,568			133,283
Loss on investment		—			31,854
Gain on divestiture of business		—			(29,808	)
Other non-cash items, net		(3,114	)		(645	)
Changes in operating assets and liabilities, excluding the effects of acquisitions:
Accounts receivable		99,521			25,228
Accounts payable and accrued expenses		5,407			(7,434	)
Accrued compensation and benefits		5,961			(9,334	)
Deferred revenue		18,696			18,038
Accrued income taxes		(9,910	)		6,124
Other current assets and prepaid expenses		8,670			(26,933	)
Operating lease liabilities		(1,360	)		(10,544	)
Other noncurrent assets and liabilities		(11,932	)		(30,851	)
Net cash provided by operating activities		561,092			396,827
Cash flows from investing activities:
Additions to property and equipment		(18,035	)		(9,979	)
Acquisitions of businesses, net of cash acquired		(828,271	)		(274,974	)
Proceeds from sale of investments		349			46,906
Purchases of investments		(5,823	)		—
Purchase of intangible assets		—			(5,453	)
Settlement of net investment hedges		(14,204	)		18,043
Divestitures of businesses and assets, net		(154	)		32,518
Net cash used in investing activities		(866,138	)		(192,939	)
Cash flows from financing activities:
Borrowings under credit facility		1,130,000			264,000
Repayments of borrowings under credit facility		(744,000	)		(280,000	)
Repurchases of common stock		—			(125,000	)
Proceeds from issuance of common stock		10,592			10,857
Payments of withholding taxes in connection with stock-based awards		(75,489	)		(62,856	)
Payments of principal for financing leases		(217	)		(239	)
Credit facility origination costs		(13,355	)		—
Net cash provided by (used in) financing activities		307,531			(193,238	)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash		6,835			(14,654	)
Net change in cash, cash equivalents, and restricted cash		9,320			(4,004	)
Cash, cash equivalents, and restricted cash, beginning of period		272,888			327,046
Cash, cash equivalents, and restricted cash, end of period	$	282,208		$	323,042
Supplemental disclosure of non-cash financing and investing activities:
Withholding taxes in connection with stock-based awards, accrued		5,705			5,803
Operating right-of-use assets obtained in exchange for operating lease liabilities		23,142			11,825

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, 2023
	Common Stock											Accumulated
	Shares			Amount			Additional Paid-In Capital			Retained Earnings		Other Comprehensive Loss			Total Stockholders’ Equity
Balance as of March 31, 2023		118,334		$	1,182		$	1,749,574		$	866,276	$	(98,498	)	$	2,518,534
Common stock issued for employee stock-based awards		582			6			(6	)		—		—			—
Shares surrendered by employees to pay taxes related to stock-based awards		(185	)		(2	)		(25,170	)		—		—			(25,172	)
Compensation expense from stock-based awards		—			—			43,044			—		—			43,044
Net income		—			—			—			61,398		—			61,398
Loss on net investment hedges, net of tax		—			—			—			—		(521	)		(521	)
Foreign currency translation adjustment		—			—			—			—		1,405			1,405
Change in pension benefits, net of tax		—			—			—			—		(24	)		(24	)
Balance as of June 30, 2023		118,731		$	1,186		$	1,767,442		$	927,674	$	(97,638	)	$	2,598,664


	Nine months ended June 30, 2023
	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		1,766			18			(18	)		—		—			—
Shares surrendered by employees to pay taxes related to stock-based awards		(609	)		(7	)		(81,187	)		—		—			(81,194	)
Common stock issued for employee stock purchase plan		102			—			10,592			—		—			10,592
Compensation expense from stock-based awards		—			—			117,475			—		—			117,475
Net income		—			—			—			199,937		—			199,937
Loss on net investment hedges, net of tax		—			—			—			—		(14,005	)		(14,005	)
Foreign currency translation adjustment		—			—			—			—		70,181			70,181
Change in pension benefits, net of tax		—			—			—			—		(356	)		(356	)
Balance as of June 30, 2023		118,731		$	1,186		$	1,767,442		$	927,674	$	(97,638	)	$	2,598,664


	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
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
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

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, 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 as of 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.

2. Revenue from Contracts with Customers

Receivables, Co**ntract Assets and Contract Liabilities


(in thousands)	June 30, 2023		September 30, 2022
Short-term and long-term receivables	$	844,941	$	870,962
Contract assets	$	17,826	$	21,096
Deferred revenue	$	650,427	$	520,333

During the nine months ended June 30, 2023, we recognized $457.0 million of revenue that was included in Deferred revenue as of September 30, 2022. In addition, Deferred revenue increased by $97.8 million as a result of the acquisition of ServiceMax. The remainder of the change was driven by additional deferrals, primarily from new billings.

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 June 30, 2023 and September 30, 2022, our total revenue liability was $25.2 million and $34.2 million, respectively, primarily associated with the annual right to exchange on-premises subscription software.

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, 2023, the transaction price amounts include performance obligations of $650.4 million recorded in Deferred revenue and $1,246.5 million that are not yet recorded in the Consolidated Balance Sheets. We expect to recognize approximately 58% of the total $1,896.9 million over the next 12 months, with the remaining amount thereafter.

Disaggregation of Revenue


(in thousands)	Three months ended				Nine months ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Recurring revenue(1)	$	498,410	$	415,197	$	1,407,662	$	1,273,032
Perpetual license		8,251		8,203		30,417		26,211
Professional services		35,681		39,074		112,354		126,179
Total revenue	$	542,342	$	462,474	$	1,550,433	$	1,425,422

(1)

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

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, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Americas	$	278,329	$	193,043	$	761,617	$	608,924
Europe		173,559		176,419		549,835		561,690
Asia Pacific		90,454		93,012		238,981		254,808
Total revenue	$	542,342	$	462,474	$	1,550,433	$	1,425,422

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)

Restructuring accrual balances as of June 30, 2023 and September 30, 2022 and activity for the nine months ended June 30, 2023 were immaterial. 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 (credits) 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 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, payments related to lease costs for exited facilities were $0.7 million and $1.9 million in the third quarter and first nine months of 2022, respectively.

4. Stock-based Compensation

The value of stock issued for RSUs vested is as follows:


(in thousands)	Three months ended				Nine months ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Stock issued for vested RSUs	$	79,129	$	58,544	$	235,430	$	198,712

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, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Cost of license revenue	$	53	$	338	$	141	$	413
Cost of support and cloud services revenue		3,479		2,544		9,464		8,183
Cost of professional services revenue		2,315		5,547		6,063		10,069
Sales and marketing		14,513		14,029		39,554		38,556
Research and development		14,801		11,002		41,839		30,682
General and administrative		18,657		15,960		50,507		45,380
Total stock-based compensation expense	$	53,818	$	49,420	$	147,568	$	133,283

As of June 30, 2023, we had liability-classified awards related to stock-based compensation of $30.1 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				Nine months ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Net income	$	61,398	$	70,476	$	199,937	$	206,244
Weighted-average shares outstanding—Basic		118,483		117,073		118,186		117,114
Dilutive effect of restricted stock units		909		895		886		983
Weighted-average shares outstanding—Diluted		119,392		117,968		119,072		118,097
Earnings per share—Basic	$	0.52	$	0.60	$	1.69	$	1.76
Earnings per share—Diluted	$	0.51	$	0.60	$	1.68	$	1.75

Anti-dilutive shares were immaterial for the three and nine months ended June 30, 2023 and June 30, 2022.

6. Acquisitions

Acquisition and transaction-related costs in the third quarter and first nine months of 2023 totaled $0.8 million and $18.5 million, respectively, compared to $6.4 million and $11.3 million in the third quarter and first nine months of 2022, respectively. These costs are classified in General and administrative expense in the accompanying Consolidated Statements of Operations.

Our results of operations include or exclude, as applicable, the results of acquired or sold businesses beginning on their respective acquisition or sale date.

ServiceMax

On January 3, 2023, we acquired ServiceMax, Inc. pursuant to a Share Purchase Agreement dated November 17, 2022 by and among PTC, ServiceMax, Inc., and ServiceMax JV, LP. ServiceMax develops and licenses cloud-native, product-centric field service management (FSM) software, which is included within our PLM product group. The purchase price of $1,448.2 million, net of cash acquired, is payable in two installments. Upon closing of the transaction, PTC paid the first installment of $828.2 million, as adjusted for working capital, indebtedness, cash, and transaction expenses as set forth in the Share Purchase Agreement. The remaining installment of $650.0 million, of which $620.0 million represents the fair value as of the acquisition date and $30.0 million is imputed interest, is payable on October 2, 2023. The fair value of the deferred acquisition payment was calculated based on our borrowing rate at the time of the acquisition.

PTC borrowed $630 million under the revolving line of our new credit facility and $500 million under the term loan of the new credit facility to repay amounts under the prior credit facility and to pay the closing purchase price and transaction expenses related to the acquisition. ServiceMax had approximately 500 employees on the close date. In the three and nine months ended June 30, 2023, ServiceMax revenue was $46.6 million and $91.7 million, respectively, and ServiceMax earnings were immaterial.

The acquisition of ServiceMax 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, future costs, and an applicable discount rate. 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 we receive additional information relevant to the value of deferred tax assets and liabilities.

The following table sets forth the preliminary purchase price allocation for ServiceMax. We have also recorded a liability of $620.0 million related to the fair value of the $650.0 million deferred purchase price payment.


(in thousands)
Goodwill(1)	$	979,349
Customer relationships		509,200
Purchased software		106,900
Accounts receivable		58,722
Trademarks		9,000
Other net assets		5,540
Net tax liability(1)		(122,654	)
Deferred revenue		(97,829	)
Total	$	1,448,228

(1)

Includes a measurement period adjustment of $4.2 million to Goodwill and $(4.2) million to Net tax liability in the third quarter of 2023 related to deferred tax liabilities.

The acquired customer relationships, purchased software, and trademarks are being amortized over useful lives of 19 years, 10 years, and 10 years, respectively, based on the expected economic benefit pattern of the assets. The acquired goodwill will not be deductible for income tax purposes. The amount of goodwill resulting from purchase price allocation reflects expected future growth as ServiceMax expands our closed-loop product lifecycle management (PLM) strategy.

Unaudited Pro Forma Financial Information

The unaudited pro forma financial information in the table below summarizes the combined results of operations for PTC and ServiceMax. The unaudited pro forma financial information for all periods presented includes adjustments to reflect certain business combination effects, including: amortization of acquired intangible assets, including the elimination of related ServiceMax expenses; acquisition-related costs incurred by both parties; reversal of certain costs incurred by ServiceMax which would not have been incurred had the acquisition occurred at the beginning of fiscal 2022; interest expense under the new combined capital structure; stock-based compensation charges; and the related tax effects as though ServiceMax was acquired as of the beginning of fiscal 2022. The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2022.

The unaudited pro forma financial information for the three and nine months ended June 30, 2023 and 2022 presented below combines the historical results of PTC for those periods and the historical results of ServiceMax for the three and nine months ended July 31, 2022, respectively, and the effects of the pro forma adjustments listed above.


(in thousands)	Pro forma three months ended				Pro forma nine months ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Revenue	$	542,342	$	506,367	$	1,594,118	$	1,550,767
Net income	$	61,398	$	59,905	$	193,834	$	136,495

The impact from acquisitions other than ServiceMax for the reported periods if presented on a pro forma basis would not differ materially from our reported results.

7. Goodwill and Intangible Assets

Our reporting units are the same as our operating segments. In the third quarter of 2023, we reevaluated our operating segments to better align with how our chief operating decision maker ("CODM") evaluates performance and allocates resources, which resulted in a change from two operating segments—Software Products and Professional Services—to a single operating segment. As part of this reevaluation, we determined that our reporting unit is the same as our operating segment.

Before combining the reporting units, we performed a step zero qualitative assessment of the Software Products reporting unit and a step one quantitative assessment of the Professional Services reporting unit. As of June 30, 2023 and prior to the reporting unit change, goodwill attributable to the Software Products segment was $3,367.5 million and to the Professional Services segment was $9.8 million.

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 the 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 Professional Services 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. 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. Based on a comparison of the estimated fair value to the carrying value of the Professional Services reporting unit as of June 30, 2023, no impairment was required.

After combining the reporting units, we performed a step zero qualitative assessment on the combined goodwill balance and determined that it is more likely than not that the fair value of the combined reporting unit exceeds its carrying value and no further impairment testing is required.

Goodwill and acquired intangible assets consisted of the following:


(in thousands)	June 30, 2023						September 30, 2022
	Gross Carrying Amount		Accumulated Amortization		Net Book Value		Gross Carrying Amount		Accumulated Amortization		Net Book Value
Goodwill (not amortized)					$	3,377,319					$	2,353,654
Intangible assets with finite lives (amortized):
Purchased software	$	617,241	$	386,917	$	230,324	$	502,859	$	355,857	$	147,002
Capitalized software		22,877		22,877		—		22,877		22,877		—
Customer lists and relationships		1,116,980		406,177		710,803		594,970		369,390		225,580
Trademarks and trade names		37,005		19,012		17,993		27,546		17,410		10,136
Other		3,912		3,912		—		3,766		3,766		—
Total intangible assets with finite lives	$	1,798,015	$	838,895	$	959,120	$	1,152,018	$	769,300	$	382,718
Total goodwill and acquired intangible assets					$	4,336,439					$	2,736,372

Goodwill

Changes in goodwill were as follows:


(in thousands)
Balance, October 1, 2022	$	2,353,654
Acquisitions		979,349
Foreign currency translation adjustment		44,316
Balance, June 30, 2023	$	3,377,319

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, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Amortization of acquired intangible assets	$	10,670	$	8,931	$	29,352	$	25,865
Cost of revenue		9,841		6,596		25,817		19,010
Total amortization expense	$	20,511	$	15,527	$	55,169	$	44,875

8. Fair Value Measurements

The valuation hierarchy for disclosure of assets and liabilities reported at fair value prioritizes the inputs for such valuations into three broad levels:

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

Level 2: quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; or

Level 3: unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.

A financial asset's or liability's classification within the hierarchy is determined based on the lowest level 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, 2023 and September 30, 2022 were as follows:


(in thousands)	June 30, 2023
	Level 1		Level 2		Level 3		Total
Financial assets:
Cash equivalents(1)	$	70,583	$	—	$	—	$	70,583
Convertible note		—		—		2,000		2,000
Forward contracts		—		1,747		—		1,747
Options		—		594		—		594
	$	70,583	$	2,341	$	2,000	$	74,924
Financial liabilities:
Forward contracts		—		1,537		—		1,537
	$	—	$	1,537	$	—	$	1,537


(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 and nine months ended June 30, 2023.

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 $6.1 million as of June 30, 2023 and $1.0 million as of September 30, 2022.

Equity Securities

During the nine months ended June 30, 2022, we recognized a loss of $34.8 million in Other income (expense), net related to fluctuations in the value of equity securities we held in Matterport, Inc. All shares owned in Matterport were sold in the second quarter of 2022 for an aggregate price of $42.7 million. We did not hold any equity securities as of June 30, 2023 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
	June 30, 2023		September 30, 2022		June 30, 2023		September 30, 2022
Derivative assets(1):
Forward Contracts	$	773	$	1,960	$	974	$	7,098
Options	$	—	$	—	$	594	$	—
Derivative liabilities(2):
Forward Contracts	$	—	$	—	$	1,537	$	2,908

(1)

As of June 30, 2023 and September 30, 2022, current derivative assets of $2.3 million and $9.1 million, respectively, are recorded in Other current assets in the Consolidated Balance Sheets.

(2)

As of June 30, 2023 and September 30, 2022, current derivative liabilities of $1.5 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 June 30, 2023 and September 30, 2022, we had outstanding forward contracts and options with notional amounts equivalent to the following:


Currency Hedged (in thousands)	June 30, 2023		September 30, 2022
Canadian Dollar / U.S. Dollar	$	9,470	$	2,731
Euro / U.S. Dollar(1)		613,619		316,869
British Pound / U.S. Dollar		509		7,368
Israeli Shekel / U.S. Dollar		10,854		12,052
Japanese Yen / U.S. Dollar(2)		12,353		25,566
Swiss Franc / U.S. Dollar		6,002		25,559
Swedish Krona / U.S. Dollar		6,188		35,713
Singapore Dollar / U.S. Dollar		—		3,637
Chinese Renminbi / U.S. Dollar		6,054		23,965
New Taiwan Dollar / U.S. Dollar		5,428		13,906
Korean Won/ U.S. Dollar		—		4,919
Danish Krone/ U.S. Dollar		1,487		3,192
Australian Dollar/ U.S. Dollar		2,273		3,269
Hong Kong Dollar/U.S. Dollar		2,263		785
All other		2,464		3,647
Total	$	678,964	$	483,178

(1)

As of June 30, 2023, $573.8 million of the Euro to U.S. Dollar outstanding notional amount relates to forward contracts and $39.8 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 June 30, 2023, $1.5 million of the Japanese Yen to U.S. Dollar outstanding notional amount relates to forward contracts and $10.9 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 and nine months ended June 30, 2023 and June 30, 2022:


(in thousands)		Three months ended					Nine months ended
	Location of Gain (Loss)	June 30, 2023			June 30, 2022		June 30, 2023			June 30, 2022
Net realized and unrealized gain (loss), excluding the underlying foreign currency exposure being hedged	Other income (expense), net	$	(1,006	)	$	3,399	$	(13,437	)	$	3,761

In the three months ended June 30, 2023 and June 30, 2022, foreign currency gains, net were $0.5 million and $0.9 million, respectively. In the nine months ended June 30, 2023 and June 30, 2022, foreign currency losses, net were $3.4 million and $3.1 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 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 June 30, 2023 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)	June 30, 2023		September 30, 2022
Euro / U.S. Dollar	$	236,246	$	110,466
Japanese Yen / U.S. Dollar		10,575		—
Total	$	246,821	$	110,466

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, 2023 and June 30, 2022:


(in thousands)		Three months ended					Nine months ended
	Location of Gain (Loss)	June 30, 2023			June 30, 2022		June 30, 2023			June 30, 2022
Gain (loss) recognized in OCI	OCI	$	(695	)	$	7,818	$	(18,663	)	$	16,050
Gain (loss) reclassified from OCI to earnings	n/a		—			—		—			—
Gain recognized, excluded portion	Other income (expense), net		1,124			515		3,272			1,124

As of June 30, 2023, 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, 2023:


(in thousands)	Gross Amounts Offset in the Consolidated Balance Sheets						Gross Amounts Not Offset in the Consolidated Balance Sheets
As of June 30, 2023	Gross Amount of Recognized Assets		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts of Assets Presented in the Consolidated Balance Sheets		Financial Instruments			Cash Collateral Received		Net Amount
Forward Contracts	$	1,747	$	—	$	1,747	$	(1,537	)	$	—	$	210

The following table sets forth the offsetting of derivative liabilities as of June 30, 2023:


(in thousands)	Gross Amounts Offset in the Consolidated Balance Sheets						Gross Amounts Not Offset in the Consolidated Balance Sheets
As of June 30, 2023	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	$	1,537	$	—	$	1,537	$	(1,537	)	$	—	$	—

10. Segment Information

In the third quarter of 2023, we reevaluated our operating segments to better align with how our CODM, who is our Chief Executive Officer, evaluates performance and allocates resources. The key factors evaluated included our organization structure, financial results reviewed by the CODM, and compensation structure, among others. As a result, we consolidated our operating segment structure from two segments to one. This change reflects our strategy to focus our professional services business on high-value services and to leverage partners to provide services, while delivering products that require fewer consulting and training services. Based on this change, we determined we have a single reportable segment.

11. Income Taxes


(in thousands)	Three months ended						Nine months ended
	June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022
Income before income taxes	$	76,526		$	100,778		$	244,019		$	259,720
Provision for income taxes	$	15,128		$	30,302		$	44,082		$	53,476
Effective income tax rate		20	%		30	%		18	%		21	%

The effective tax rate for the three and nine months ended June 30, 2023 was lower than the effective tax rate for the corresponding prior-year periods primarily due to $8.1 million of tax expense in the quarter ended June 30, 2022 arising from the basis difference on goodwill related to the sale of a portion of our PLM business.

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, transfer pricing, limitations on net operating losses and tax credits.

12. Debt

As of June 30, 2023 and September 30, 2022, we had the following long-term debt obligations:


(in thousands)	June 30, 2023			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 revolving line(1)(2)		245,000			359,000
Credit facility term loan(1)(2)		500,000			—
Total debt		1,745,000			1,359,000
Unamortized debt issuance costs for the senior notes(3)		(6,759	)		(8,372	)
Total debt, net of issuance costs	$	1,738,241		$	1,350,628

(1)

Unamortized debt issuance costs related to the credit facility were $2.3 million included in Other current assets and $8.1 million included in Other assets on the Consolidated Balance Sheet as of June 30, 2023 and $2.7 million included in Other assets on the Consolidated Balance Sheet as of September 30, 2022.

(2)

Both the revolving line and the term loan will mature and all amounts then outstanding will become due and payable on January 3, 2028, unless the 2025 notes have not been refinanced to mature on or after April 3, 2028, in which case the amounts will become due on November 16, 2024. The term loan will begin amortizing in March 2024, with payments of $9.4 million in 2024, $21.9 million in 2025, and $25.0 million in each year thereafter.

(3)

Unamortized debt issuance costs for the senior notes 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, 2023, the total estimated fair value of the 2028 and 2025 notes was approximately $463.8 million and $482.7 million, respectively, based on quoted prices for the notes on that date.

We were in compliance with all the covenants for all our senior notes as of June 30, 2023.

Credit Agreement

In January 2023, we entered into an amended and restated credit agreement for a new secured multi-currency bank credit facility with a syndicate of banks. Pursuant to the agreement, all prior revolving commitments under the prior credit agreement were replaced with the revolving commitments under the new credit facility. The new credit facility consists of (i) a $1.25 billion revolving credit facility, (ii) a $500 million term loan credit facility, and (iii) an incremental facility pursuant to which we may incur additional term loan tranches or increase the revolving credit facility. As of June 30, 2023, unused commitments under our credit facility were approximately $1,005 million.

As of June 30, 2023, 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, ServiceMax, Inc. was the only subsidiary guarantor. Any borrowings by eligible foreign subsidiary borrowers would be guaranteed by PTC Inc. and any subsidiary guarantors and secured, subject to exceptions, by a first priority perfected security interest in substantially all existing and after-acquired personal property owned by PTC and its material domestic subsidiaries (except for certain indirect material domestic subsidiaries). As of the filing of this Form 10-Q, no funds were borrowed by an eligible foreign subsidiary borrower.

Loans under the credit facility bear interest at variable rates that reset every 30 to 180 days depending on the base rate (for USD borrowings, either the adjusted Daily Simple RFR or adjusted Term SOFR) and period selected by us. The spread over the base rate depends on our total leverage ratio. As

of June 30, 2023, the annual rate for borrowings outstanding was 6.93%. A quarterly revolving commitment fee on the undrawn portion of the revolving credit facility is required, ranging from 0.175% to 0.325% per annum, based upon our total leverage ratio.

The credit facility limits our ability to, among other things: incur additional indebtedness; incur liens or guarantee obligations; pay dividends 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 Inc. and its material domestic subsidiaries may not invest cash or property in, or loan amounts to, PTC’s foreign subsidiaries in aggregate amounts exceeding $100 million for purposes other than acquisitions of businesses. The credit facility also requires that we maintain certain financial ratios.

As of June 30, 2023, we were in compliance with all financial and operating covenants of the credit facility.

In the first nine months of 2023, we incurred $13.4 million in financing costs in connection with the January 2023 credit facility and related arrangements, of which $4.2 million (related to a since-extinguished bridge loan) was expensed in the period and $9.2 million is recorded as deferred debt issuance costs and included in Other assets and Other current assets on the Consolidated Balance Sheet. Deferred debt issuance costs are expensed over the term of the obligations.

Interest

In the third quarter and first nine months of 2023, we incurred interest expense on our debt of $35.8 million and $93.7 million, respectively, and $13.8 million and $39.0 million in the third quarter and first nine months of 2022, respectively. Interest expense in the three and nine months ended June 30, 2023 includes $10.0 million and $20.0 million, respectively, of interest associated with the $620.0 million fair value of a $650.0 million deferred acquisition payment related to the ServiceMax acquisition. In the third quarter and first nine months of 2023, we paid $22.6 million and $51.9 million of interest on our debt, respectively, and $2.1 million and $25.9 million in the third quarter and first nine months of 2022, respectively. The average interest rate on borrowings outstanding was approximately 5.2% and 4.8% during the third quarter and first nine months of 2023, respectively, and 3.4% and 3.3% during the third quarter and first nine months of 2022, respectively.

13. Commitments and Contingencies

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. These agreements typically limit our liability with respect to indemnification claims other than intellectual property infringement 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. 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.

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