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)


	March 31, 2024			September 30, 2023
ASSETS
Current assets:
Cash and cash equivalents	$	248,971		$	288,103
Accounts receivable, net of allowance for doubtful accounts of $1,269 and $429 at March 31, 2024 and September 30, 2023, respectively		705,493			811,398
Prepaid expenses		137,393			96,016
Other current assets		60,951			81,849
Total current assets		1,152,808			1,277,366
Property and equipment, net		81,811			88,391
Goodwill		3,446,373			3,358,511
Acquired intangible assets, net		931,471			941,249
Deferred tax assets		109,204			123,319
Operating right-of-use lease assets		135,262			143,028
Other assets		348,334			356,978
Total assets	$	6,205,263		$	6,288,842
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	19,637		$	43,480
Accrued expenses and other current liabilities		110,353			132,841
Accrued compensation and benefits		119,326			160,431
Accrued income taxes		19,348			14,919
Current portion of long-term debt		514,677			9,375
Deferred acquisition payments		—			620,040
Deferred revenue		708,839			665,362
Short-term lease obligations		22,836			24,737
Total current liabilities		1,515,016			1,671,185
Long-term debt		1,491,064			1,686,410
Deferred tax liabilities		37,568			29,508
Long-term deferred revenue		15,732			16,188
Long-term lease obligations		160,953			168,455
Other liabilities		41,798			39,806
Total liabilities		3,262,131			3,611,552
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued		—			—
Common stock, $0.01 par value; 500,000 shares authorized; 119,717 and 118,846 shares issued and outstanding at March 31, 2024 and September 30, 2023, respectively		1,197			1,188
Additional paid-in capital		1,901,109			1,820,905
Retained earnings		1,154,109			973,277
Accumulated other comprehensive loss		(113,283	)		(118,080	)
Total stockholders’ equity		2,943,132			2,677,290
Total liabilities and stockholders’ equity	$	6,205,263		$	6,288,842

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						Six months ended
	March 31, 2024			March 31, 2023			March 31, 2024			March 31, 2023
Revenue:
License	$	234,321		$	196,993		$	418,319		$	369,691
Support and cloud services		336,446			304,071			666,915			561,727
Total software revenue		570,767			501,064			1,085,234			931,418
Professional services		32,305			41,117			68,052			76,673
Total revenue		603,072			542,181			1,153,286			1,008,091
Cost of revenue:
Cost of license revenue		10,602			17,039			20,931			29,792
Cost of support and cloud services revenue		67,414			59,137			134,437			109,362
Total cost of software revenue		78,016			76,176			155,368			139,154
Cost of professional services revenue		32,039			37,330			64,707			70,142
Total cost of revenue		110,055			113,506			220,075			209,296
Gross margin		493,017			428,675			933,211			798,795
Operating expenses:
Sales and marketing		134,521			129,207			271,445			247,590
Research and development		106,998			100,349			212,781			188,526
General and administrative		61,526			65,923			130,732			116,894
Amortization of acquired intangible assets		10,424			10,656			20,787			18,682
Restructuring and other charges (credits), net		(7	)		1			(802	)		(337	)
Total operating expenses		313,462			306,136			634,943			571,355
Operating income		179,555			122,539			298,268			227,440
Interest and debt premium expense		(31,586	)		(41,525	)		(66,920	)		(57,883	)
Other income (expense), net		(2,224	)		55			(4	)		(2,064	)
Income before income taxes		145,745			81,069			231,344			167,493
Provision for income taxes		31,300			17,565			50,512			28,954
Net income	$	114,445		$	63,504		$	180,832		$	138,539
Earnings per share—Basic	$	0.96		$	0.54		$	1.52		$	1.17
Earnings per share—Diluted	$	0.95		$	0.53		$	1.50		$	1.17
Weighted-average shares outstanding—Basic		119,587			118,260			119,354			118,037
Weighted-average shares outstanding—Diluted		120,712			119,041			120,480			118,912

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						Six months ended
	March 31, 2024			March 31, 2023			March 31, 2024			March 31, 2023
Net income	$	114,445		$	63,504		$	180,832		$	138,539
Other comprehensive income (loss), net of tax:
Hedge gain (loss) arising during the period, net of tax of $(2.1) million and $0.7 million in the second quarter of 2024 and 2023, respectively, and $1.7 million and $4.5 million in the first six months of 2024 and 2023, respectively		6,432			(1,999	)		(5,079	)		(13,484	)
Foreign currency translation adjustment, net of tax of $0 for each period		(24,792	)		8,747			9,882			68,776
Change in defined benefit pension items, net of tax of $0 for each period		216			(24	)		(6	)		(332	)
Other comprehensive income (loss)		(18,144	)		6,724			4,797			54,960
Comprehensive income	$	96,301		$	70,228		$	185,629		$	193,499

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

PTC Inc.

CONSOLIDATED STATEM****ENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Six months ended
	March 31, 2024			March 31, 2023
Cash flows from operating activities:
Net income	$	180,832		$	138,539
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		54,144			49,037
Amortization of right-of-use lease assets		15,459			16,564
Stock-based compensation		113,204			93,750
Other non-cash items, net		649			(2,089	)
Changes in operating assets and liabilities, excluding the effects of acquisitions:
Accounts receivable		107,507			86,478
Accounts payable and accrued expenses		(48,345	)		11,110
Accrued compensation and benefits		(16,451	)		(18,468	)
Deferred revenue		40,971			36,092
Accrued income taxes		18,087			(12,169	)
Other current assets and prepaid expenses		(21,745	)		(786	)
Operating lease liabilities		(10,293	)		4,985
Other noncurrent assets and liabilities		4,052			(11,174	)
Net cash provided by operating activities		438,071			391,869
Cash flows from investing activities:
Additions to property and equipment		(8,202	)		(12,950	)
Acquisitions of businesses, net of cash acquired		(93,457	)		(828,271	)
Purchases of investments		—			(5,823	)
Settlement of net investment hedges		(2,224	)		(12,544	)
Divestitures of businesses and assets, net		—			(154	)
Net cash used in investing activities		(103,883	)		(859,742	)
Cash flows from financing activities:
Borrowings under credit facility		739,845			1,130,000
Repayments of borrowings under credit facility and acquired debt		(435,671	)		(564,000	)
Proceeds from issuance of common stock		12,709			10,592
Payments of withholding taxes in connection with stock-based awards		(71,184	)		(56,022	)
Payments of principal for financing leases		—			(217	)
Credit facility origination costs		—			(13,355	)
Payment of deferred acquisition consideration		(620,040	)		—
Net cash provided by (used in) financing activities		(374,341	)		506,998
Effect of exchange rate changes on cash, cash equivalents, and restricted cash		829			9,181
Net change in cash, cash equivalents, and restricted cash		(39,324	)		48,306
Cash, cash equivalents, and restricted cash, beginning of period		288,798			272,888
Cash, cash equivalents, and restricted cash, end of period	$	249,474		$	321,194
Supplemental disclosure of non-cash financing and investing activities:
Operating right-of-use assets obtained in exchange for operating lease liabilities	$	2,847		$	23,596

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 March 31, 2024
	Common Stock											Accumulated
	Shares			Amount			Additional Paid-In Capital			Retained Earnings		Other Comprehensive Loss			Total Stockholders’ Equity
Balance as of December 31, 2023		119,445		$	1,194		$	1,860,934		$	1,039,664	$	(95,139	)	$	2,806,653
Common stock issued for employee stock-based awards		266			3			(3	)		—		—			—
Shares surrendered by employees to pay taxes related to stock-based awards		(96	)		(1	)		(17,537	)		—		—			(17,538	)
Common stock issued for employee stock purchase plan		102			1			12,708			—		—			12,709
Compensation expense from stock-based awards		—			—			45,007			—		—			45,007
Net income		—			—			—			114,445		—			114,445
Gain on net investment hedges, net of tax		—			—			—			—		6,432			6,432
Foreign currency translation adjustment		—			—			—			—		(24,792	)		(24,792	)
Change in defined benefit pension items, net of tax		—			—			—			—		216			216
Balance as of March 31, 2024		119,717		$	1,197		$	1,901,109		$	1,154,109	$	(113,283	)	$	2,943,132


	Six months ended March 31, 2024
	Common Stock											Accumulated
	Shares			Amount			Additional Paid-In Capital			Retained Earnings		Other Comprehensive Loss			Total Stockholders’ Equity
Balance as of September 30, 2023		118,846		$	1,188		$	1,820,905		$	973,277	$	(118,080	)	$	2,677,290
Common stock issued for employee stock-based awards		1,216			13			(13	)		—		—			—
Shares surrendered by employees to pay taxes related to stock-based awards		(447	)		(5	)		(71,869	)		—		—			(71,874	)
Common stock issued for employee stock purchase plan		102			1			12,708			—		—			12,709
Compensation expense from stock-based awards		—			—			139,378			—		—			139,378
Net income		—			—			—			180,832		—			180,832
Loss on net investment hedges, net of tax		—			—			—			—		(5,079	)		(5,079	)
Foreign currency translation adjustment		—			—			—			—		9,882			9,882
Change in defined benefit pension items, net of tax		—			—			—			—		(6	)		(6	)
Balance as of March 31, 2024		119,717		$	1,197		$	1,901,109		$	1,154,109	$	(113,283	)	$	2,943,132


	Three months ended March 31, 2023
	Common Stock											Accumulated
	Shares			Amount			Additional Paid-In Capital			Retained Earnings		Other Comprehensive Loss			Total Stockholders’ Equity
Balance as of December 31, 2022		118,161		$	1,182		$	1,701,817		$	802,772	$	(105,222	)	$	2,400,549
Common stock issued for employee stock-based awards		94			1			(1	)		—		—			—
Shares surrendered by employees to pay taxes related to stock-based awards		(23	)		(1	)		(3,146	)		—		—			(3,147	)
Common stock issued for employee stock purchase plan		102			—			10,592			—		—			10,592
Compensation expense from stock-based awards		—			—			40,312			—		—			40,312
Net income		—			—			—			63,504		—			63,504
Loss on net investment hedges, net of tax		—			—			—			—		(1,999	)		(1,999	)
Foreign currency translation adjustment		—			—			—			—		8,747			8,747
Change in defined benefit pension items, net of tax		—			—			—			—		(24	)		(24	)
Balance as of March 31, 2023		118,334		$	1,182		$	1,749,574		$	866,276	$	(98,498	)	$	2,518,534


	Six months ended March 31, 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		1,184			12			(12	)		—		—			—
Shares surrendered by employees to pay taxes related to stock-based awards		(424	)		(5	)		(56,017	)		—		—			(56,022	)
Common stock issued for employee stock purchase plan		102			—			10,592			—		—			10,592
Compensation expense from stock-based awards		—			—			74,431			—		—			74,431
Net income		—			—			—			138,539		—			138,539
Loss on net investment hedges, net of tax		—			—			—			—		(13,484	)		(13,484	)
Foreign currency translation adjustment		—			—			—			—		68,776			68,776
Change in defined benefit pension items, net of tax		—			—			—			—		(332	)		(332	)
Balance as of March 31, 2023		118,334		$	1,182		$	1,749,574		$	866,276	$	(98,498	)	$	2,518,534

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, 2023. 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, 2023 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

Improvements to Income Tax Disclosures

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU will be effective for us in 2026. We expect the adoption to result in disclosure changes only.

Improvements to Reportable Segment Disclosures

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The ASU will be effective for us in 2025. We expect the adoption to result in disclosure changes only.

2. Revenue from Contracts with Customers

Receivables, Co**ntract Assets and Contract Liabilities


(in thousands)	March 31, 2024		September 30, 2023
Short-term and long-term receivables	$	891,853	$	997,490
Contract asset	$	12,220	$	16,465
Deferred revenue	$	724,571	$	681,550

During the six months ended March 31, 2024, we recognized $488.8 million of revenue that was included in Deferred revenue as of September 30, 2023. 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 March 31, 2024 and

September 30, 2023, our total revenue liability was $26.9 million and $23.7 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 March 31, 2024, the transaction price amounts include performance obligations of $724.6 million recorded in Deferred revenue and $1,328.9 million that are not yet recorded in the Consolidated Balance Sheets. Of the total $2,053.5 million, we expect to recognize approximately 60% over the next 12 months, 26% over the next 13 to 24 months, and the remaining amount thereafter.

Disaggregation of Revenue


(in thousands)	Three months ended				Six months ended
	March 31, 2024		March 31, 2023		March 31, 2024		March 31, 2023
Recurring revenue(1)	$	564,014	$	492,143	$	1,070,041	$	909,253
Perpetual license		6,753		8,921		15,193		22,165
Professional services		32,305		41,117		68,052		76,673
Total revenue	$	603,072	$	542,181	$	1,153,286	$	1,008,091

(1)

Recurring revenue is comprised of on-premises subscription, perpetual support, SaaS, and hosting 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				Six months ended
	March 31, 2024		March 31, 2023		March 31, 2024		March 31, 2023
Americas	$	260,622	$	256,376	$	527,889	$	483,288
Europe		257,309		209,066		454,262		376,276
Asia Pacific		85,141		76,739		171,135		148,527
Total revenue	$	603,072	$	542,181	$	1,153,286	$	1,008,091

3. Stock-based Compensation

The value of stock issued for vested restricted stock units (RSUs) is as follows:


(in thousands)	Three months ended				Six months ended
	March 31, 2024		March 31, 2023		March 31, 2024		March 31, 2023
Stock issued for vested RSUs	$	48,303	$	12,507	$	195,172	$	156,301

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


(in thousands)	Three months ended				Six months ended
	March 31, 2024		March 31, 2023		March 31, 2024		March 31, 2023
Cost of license revenue	$	29	$	51	$	67	$	88
Cost of support and cloud services revenue		3,345		3,195		6,727		5,985
Cost of professional services revenue		1,660		2,500		3,329		3,748
Sales and marketing		14,729		12,845		30,856		25,041
Research and development		13,936		15,580		28,174		27,038
General and administrative		20,492		18,075		44,051		31,850
Total stock-based compensation expense	$	54,191	$	52,246	$	113,204	$	93,750

As of March 31, 2024 and September 30, 2023, we had liability-classified awards related to stock-based compensation based on a fixed monetary amount of $18.7 million and $44.9 million, respectively.

4. 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				Six months ended
	March 31, 2024		March 31, 2023		March 31, 2024		March 31, 2023
Net income	$	114,445	$	63,504	$	180,832	$	138,539
Weighted-average shares outstanding—Basic		119,587		118,260		119,354		118,037
Dilutive effect of restricted stock units		1,125		781		1,126		875
Weighted-average shares outstanding—Diluted		120,712		119,041		120,480		118,912
Earnings per share—Basic	$	0.96	$	0.54	$	1.52	$	1.17
Earnings per share—Diluted	$	0.95	$	0.53	$	1.50	$	1.17

Anti-dilutive shares were immaterial for the three and six months ended March 31, 2024 and March 31, 2023.

5. Acquisitions

Acquisition and transaction-related costs for the second quarter and first six months of 2024 totaled $0.3 million and $2.8 million, respectively, compared to $11.9 million and $17.7 million in the second quarter and first six months of 2023, respectively. These costs are classified in General and administrative expense in the accompanying Consolidated Statements of Operations.

pure-systems

On October 4, 2023, we acquired pure-systems GmbH pursuant to a Share Purchase Agreement. pure-systems is a leading provider of product and software variant management solutions used by manufacturing companies to efficiently manage the different versions of software and systems engineering assets. The purchase price was $93.5 million, net of cash acquired, which was financed primarily with a draw on the revolving line of our credit facility. pure-systems had approximately 50 employees on the close date.

The acquisition of pure-systems has been accounted for as a business combination. Assets 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 following table outlines the purchase price allocation for pure-systems:


(in thousands)
Goodwill	$	77,118
Customer relationships		17,400
Purchased software		10,000
Trademarks		800
Net tax liability		(8,860	)
Acquired debt		(2,475	)
Other net liabilities		(526	)
Total	$	93,457

The acquired customer relationships, purchased software, and trademarks are being amortized over useful lives of 18 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 the purchase price allocation reflects the expected value that will be created

by expanding our application lifecycle management (ALM) offerings, which are included within our PLM product group.

Our results of operations for the reported periods if presented on a pro forma basis would not differ materially from our reported results.

ServiceMax

On January 3, 2023, we acquired ServiceMax, Inc. pursuant to a Share Purchase Agreement dated November 17, 2022 for $1,448.2 million, net of cash acquired. PTC paid the first installment of $828.2 million on the acquisition date. 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, was paid in October 2023. The fair value of the deferred acquisition payment was calculated based on our borrowing rate at the time of the acquisition. The purchase price allocation resulted in $974.9 million of Goodwill, $628.6 million of intangible assets, $121.7 million of net tax liabilities, and $33.6 million of other net liabilities.

ServiceMax develops and licenses cloud-native, product-centric field service management (FSM) software, which is included within our PLM product group. ServiceMax had approximately 500 employees on the close date.

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 for the pro forma three and six months ended March 31, 2023. 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. Since the acquisition took place in fiscal 2023, the unaudited pro forma financial information was prepared as though ServiceMax was acquired at the beginning of fiscal 2022. 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 for the three and six months ended March 31, 2023 presented below combines the historical results of PTC for those periods, the historical results of ServiceMax for the three months ended January 31, 2023, and the effects of the pro forma adjustments listed above.


(in thousands)	Pro forma three months ended		Pro forma six months ended
	March 31, 2023		March 31, 2023
Revenue	$	542,181	$	1,051,776
Net income	$	74,805	$	132,436

6. Goodwill and Intangible Assets

Goodwill and acquired intangible assets consisted of the following:


(in thousands)	March 31, 2024						September 30, 2023
	Gross Carrying Amount		Accumulated Amortization		Net Book Value		Gross Carrying Amount		Accumulated Amortization		Net Book Value
Goodwill (not amortized)					$	3,446,373					$	3,358,511
Intangible assets with finite lives (amortized):
Purchased software	$	627,704	$	415,352	$	212,352	$	615,915	$	395,109	$	220,806
Capitalized software		22,877		22,877		—		22,877		22,877		—
Customer lists and relationships		1,136,456		434,530		701,926		1,116,117		413,125		702,992
Trademarks and trade names		37,770		20,577		17,193		36,851		19,400		17,451
Other		3,896		3,896		—		3,867		3,867		—
Total intangible assets with finite lives	$	1,828,703	$	897,232	$	931,471	$	1,795,627	$	854,378	$	941,249
Total goodwill and acquired intangible assets					$	4,377,844					$	4,299,760

Changes in Goodwill were as follows:


(in thousands)
Balance, October 1, 2023	$	3,358,511
Acquisitions		77,118
Foreign currency translation adjustment		10,744
Balance, March 31, 2024	$	3,446,373

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				Six months ended
	March 31, 2024		March 31, 2023		March 31, 2024		March 31, 2023
Amortization of acquired intangible assets	$	10,424	$	10,656	$	20,787	$	18,682
Cost of revenue		9,584		9,834		19,150		15,976
Total amortization expense	$	20,008	$	20,490	$	39,937	$	34,658

7. 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.

Money market funds, 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 March 31, 2024 and September 30, 2023 were as follows:


(in thousands)	March 31, 2024
	Level 1		Level 2		Level 3		Total
Financial assets:
Cash equivalents(1)	$	58,171	$	—	$	—	$	58,171
Forward contracts		—		2,540		—		2,540
	$	58,171	$	2,540	$	—	$	60,711
Financial liabilities:
Forward contracts		—		1,672		—		1,672
	$	—	$	1,672	$	—	$	1,672


(in thousands)	September 30, 2023
	Level 1		Level 2		Level 3		Total
Financial assets:
Cash equivalents(1)	$	72,754	$	—	$	—	$	72,754
Convertible note		—		—		2,000		2,000
Forward contracts		—		7,340		—		7,340
	$	72,754	$	7,340	$	2,000	$	82,094
Financial liabilities:
Forward contracts		—		3,158		—		3,158
	$	—	$	3,158	$	—	$	3,158

(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 was classified as available-for-sale and included in Other assets on the Consolidated Balance Sheet. During the three months ended March 31, 2024, we recorded a $2.0 million impairment loss related to this Level 3 investment. The impairment loss is included in Other income (expense), net on the Consolidated Statements of Operations.

8. Derivative Financial Instruments

We enter into foreign currency forward contracts to manage our exposure to foreign currency exchange risk 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
	March 31, 2024		September 30, 2023		March 31, 2024		September 30, 2023
Derivative assets(1):
Forward contracts	$	1,457	$	3,770	$	1,083	$	3,570
Derivative liabilities(2):
Forward contracts	$	—	$	—	$	1,672	$	3,158

(1)

As of March 31, 2024 and September 30, 2023, current derivative assets are recorded in Other current assets in the Consolidated Balance Sheets.

(2)

As of March 31, 2024 and September 30, 2023, current derivative liabilities 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, gains or losses on the underlying foreign-denominated balance are generally offset by the losses or gains on the forward contract. Gains and losses on forward contracts and foreign denominated receivables and payables are included in Other income (expense), net.

As of March 31, 2024 and September 30, 2023, we had outstanding forward contracts not designated as hedging instruments with notional amounts equivalent to the following:


Currency Hedged (in thousands)	March 31, 2024		September 30, 2023
Canadian Dollar / U.S. Dollar	$	1,985	$	5,135
Euro / U.S. Dollar		391,383		383,227
British Pound / U.S. Dollar		9,511		6,058
Israeli Shekel / U.S. Dollar		13,732		11,852
Japanese Yen / U.S. Dollar		12,413		4,770
Swiss Franc / U.S. Dollar		22,749		32,766
Swedish Krona / U.S. Dollar		15,165		35,085
Chinese Renminbi / U.S. Dollar		4,711		16,660
New Taiwan Dollar / U.S. Dollar		10,843		11,855
Korean Won / U.S. Dollar		—		6,157
Danish Krone / U.S. Dollar		5,468		6,731
Australian Dollar / U.S. Dollar		3,588		452
Hong Kong Dollar / U.S. Dollar		3,604		449
All other		2,918		2,439
Total	$	498,070	$	523,636

The following table shows the effect of our non-designated hedges on the Consolidated Statements of Operations for the three and six months ended March 31, 2024 and March 31, 2023:


(in thousands)		Three months ended						Six months ended
	Location of Gain (Loss)	March 31, 2024			March 31, 2023			March 31, 2024			March 31, 2023
Net realized and unrealized loss, excluding the underlying foreign currency exposure being hedged	Other income (expense), net	$	(1,286	)	$	(1,422	)	$	(5,022	)	$	(12,431	)

In the three months ended March 31, 2024 and March 31, 2023, foreign currency losses, net were $1.1 million and $0.8 million, respectively. In the six months ended March 31, 2024 and March 31, 2023, foreign currency losses, net were $0.1 million and $3.9 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 March 31, 2024 and September 30, 2023, we had outstanding forward contracts designated as net investment hedges with notional amounts equivalent to the following:


Currency Hedged (in thousands)	March 31, 2024		September 30, 2023
Euro / U.S. Dollar	$	369,697	$	337,923
Japanese Yen / U.S. Dollar		10,089		10,285
Total	$	379,786	$	348,208

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 six months ended March 31, 2024 and March 31, 2023:


(in thousands)		Three months ended					Six months ended
	Location of Gain (Loss)	March 31, 2024		March 31, 2023			March 31, 2024			March 31, 2023
Gain (loss) recognized in OCI	OCI	$	8,552	$	(2,664	)	$	(6,752	)	$	(17,969	)
Gain (loss) reclassified from OCI to earnings	n/a	$	—	$	—		$	—		$	—
Gain recognized, excluded portion	Other income (expense), net	$	1,079	$	1,179		$	2,215		$	2,148

As of March 31, 2024, 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 March 31, 2024:


(in thousands)	Gross Amounts Offset in the Consolidated Balance Sheets						Gross Amounts Not Offset in the Consolidated Balance Sheets
As of March 31, 2024	Gross Amount of Recognized Assets		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts of Assets Presented in the Consolidated Balance Sheets		Financial Instruments			Cash Collateral Received		Net Amount
Forward contracts	$	2,540	$	—	$	2,540	$	(1,672	)	$	—	$	868

The following table sets forth the offsetting of derivative liabilities as of March 31, 2024:


(in thousands)	Gross Amounts Offset in the Consolidated Balance Sheets						Gross Amounts Not Offset in the Consolidated Balance Sheets
As of March 31, 2024	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	$	1,672	$	—	$	1,672	$	(1,672	)	$	—	$	—

9. Income Taxes


(in thousands)	Three months ended						Six months ended
	March 31, 2024			March 31, 2023			March 31, 2024			March 31, 2023
Income before income taxes	$	145,745		$	81,069		$	231,344		$	167,493
Provision for income taxes	$	31,300		$	17,565		$	50,512		$	28,954
Effective income tax rate		21	%		22	%		22	%		17	%

The effective tax rate for the six months ended March 31, 2024 was higher than the effective tax rate for the corresponding prior-year period primarily due to changes in the geographic mix of income before taxes in the various jurisdictions in which we operate as well as a non-cash tax expense of $3.6 million related to a tax reserve in a foreign jurisdiction.

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.

10. Debt

As of March 31, 2024 and September 30, 2023, we had the following debt obligations:


(in thousands)	March 31, 2024			September 30, 2023
4.000% Senior notes due 2028	$	500,000		$	500,000
3.625% Senior notes due 2025		500,000			500,000
Credit facility revolver line(1)(2)		514,000			202,000
Credit facility term loan(1)(2)		496,875			500,000
Total debt		2,010,875			1,702,000
Unamortized debt issuance costs for the senior notes(3)		(5,134	)		(6,215	)
Total debt, net of issuance costs(4)	$	2,005,741		$	1,695,785

(1)

Unamortized debt issuance costs related to the credit facility were $2.3 million included in Other current assets and $6.4 million included in Other assets on the Consolidated Balance Sheet as of March 31, 2024 and $2.3 million included in Other current assets and $7.5 million included in Other assets on the Consolidated Balance Sheet as of September 30, 2023.

(2)

The stated maturity date under the credit facility on which both the revolver line and the term loan will mature and all amounts then outstanding will become due and payable is January 3, 2028. However, if our outstanding 2025 Senior Notes have not been refinanced to mature on or after April 3, 2028 or redeemed by November 16, 2024, all amounts outstanding under the credit facility will become due and payable on November 16, 2024. The term loan began amortizing in March 2024, with payments of $6.3 million remaining in 2024, $21.9 million in 2025, $25.0 million in 2026 and 2027, and $418.7 million in 2028.

(3)

Of the unamortized debt issuance costs for the senior notes, $0.9 million was included in Current portion of long-term debt and $4.2 million was included in Long-term debt on the Consolidated Balance Sheet as of March 31, 2024. As of September 30, 2023, all unamortized debt issuance costs for the senior notes were included in Long-term debt on the Consolidated Balance Sheet.

(4)

As of March 31, 2024, $514.7 million of debt was classified as short term, including $499.1 million associated with the 2025 senior notes and related debt issuance costs and $15.6 million associated with the credit facility term loan. As of September 30, 2023, $9.4 million of debt associated with the credit facility term loan was classified as short term with the remaining balance classified as long term.

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 March 31, 2024, the total estimated fair value of the 2028 and 2025 notes was approximately $468.5 million and $489.8 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 March 31, 2024.

Credit Agreement

Our 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 March 31, 2024, unused commitments under our credit facility were $736.0 million and amounts available for borrowing were $719.7 million.

As of March 31, 2024, the fair value of our credit facility approximates its book value.

PTC and certain eligible foreign subsidiaries are eligible borrowers under the credit facility. As of March 31, 2024, no funds were borrowed by an eligible foreign subsidiary borrower.

Loans under the credit facility bear interest at variable rates. As of March 31, 2024, the annual rate for borrowings outstanding was 6.9%. 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.

As of March 31, 2024, we were in compliance with all financial and operating covenants of the credit facility.

Interest

We incurred interest expense on our debt of $31.6 million and $66.9 million in the second quarter and first six months of 2024, respectively, and $41.5 million and $57.9 million in the second quarter and first six months of 2023, respectively. Interest expense in the second quarter and first six months of 2023 includes $10.0 million of interest associated with the $650.0 million ServiceMax deferred acquisition payment that we settled in the first quarter of 2024. The average interest rate on borrowings outstanding was approximately 5.5% and 5.6% during the second quarter and first six months of 2024, respectively, and 5.2% and 4.7% during the second quarter and first six months of 2023, respectively.

11. 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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