UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~December~~March 28, ~~2019~~2020



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from_ to_

Commission File Number: 0-18059

PTC Inc.

(Exact name of registrant as specified in its charter)



Massachusetts		04-2866152
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

121 Seaport Boulevard, Boston, MA 02210

(Address of principal executive offices, including zip code)

(781) 370-5000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, $.01 par value per share	PTC	NASDAQ Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act:



Large accelerated filer	☑	Accelerated filer	☐	Non-accelerated filer	☐	Smaller reporting company	☐
						Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

~~Securities registered pursuant to Section 12(b) of the Act:~~



~~Title of each class~~	~~Trading symbol(s)~~	~~Name of each exchange on which registered~~
~~Common Stock, $.01 par value per share~~	~~PTC~~	~~NASDAQ Global Select Market~~

There were ~~115,494,475~~115,695,431 shares of our common stock outstanding on ~~January 23,~~May 4, 2020.

PTC Inc.

INDEX TO FORM 10-Q

For the Quarter Ended ~~December~~March 28, ~~2019~~2020



		Page Number
Part I—FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Consolidated Financial Statements:
	Consolidated Balance Sheets as of ~~December~~March 28, ~~2019~~2020 and September 30, 2019	1
	Consolidated Statements of Operations for the three and six months ended ~~December~~March 28, ~~2019~~2020 and ~~December 29, 2018~~March 30, 2019	2
	Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended ~~December~~March 28, ~~2019~~2020 and ~~December 29, 2018~~March 30, 2019	3
	Consolidated Statements of Cash Flows for the ~~three~~six months ended ~~December~~March 28, ~~2019~~2020 and ~~December 29, 2018~~March 30, 2019	4
	Consolidated Statements of Stockholders' Equity for the three and six months ended ~~December~~March 28, ~~2019~~2020 and ~~December 29, 2018~~March 30, 2019	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2628
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3640
Item 4.	Controls and Procedures	3640


Part II—OTHER INFORMATION
Item 1A.	Risk Factors	3841
Item 6.	Exhibits	3843
Signature		3944

PART I—FINANCIAL INFORMATION


ITEM 1.	UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PTC Inc.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)


	December 28, 2019			September 30, 2019			March 28, 2020			September 30, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	237,017		$	269,579		$	826,776		$	269,579
Short-term marketable securities	29,260			27,891			34,254			27,891
Accounts receivable, net of allowance for doubtful accounts of $668 and $744 at December 28, 2019 and September 30, 2019, respectively	344,412			372,743
Accounts receivable, net of allowance for doubtful accounts of $831 and $744 at March 28, 2020 and September 30, 2019, respectively							352,673			372,743
Prepaid expenses	70,323			52,701			66,854			52,701
Other current assets	58,157			59,707			60,869			59,707
Total current assets	739,169			782,621			1,341,426			782,621
Property and equipment, net	105,171			105,531			104,147			105,531
Goodwill	1,606,050			1,238,179			1,603,081			1,238,179
Acquired intangible assets, net	266,009			169,949			251,191			169,949
Long-term marketable securities	28,220			29,544			22,687			29,544
Deferred tax assets	207,865			198,634			202,683			198,634
Lease assets, net	165,484			—
Operating right-of-use lease assets							157,016			—
Other assets	161,859			140,130			184,240			140,130
Total assets	$	3,279,827		$	2,664,588		$	3,866,471		$	2,664,588
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	42,452		$	42,442		$	33,728		$	42,442
Accrued expenses and other current liabilities	87,156			104,028			115,278			104,028
Accrued compensation and benefits	86,027			88,769			83,904			88,769
Accrued income taxes	22,472			17,407			15,963			17,407
Current portion of long-term debt							496,435			—
Deferred revenue	359,496			385,509			407,412			385,509
Short-term lease obligations	33,909			—			39,452			—
Total current liabilities	631,512			638,155			1,192,172			638,155
Long-term debt	1,124,345			669,134			1,134,287			669,134
Deferred tax liabilities	20,568			41,683			19,541			41,683
Deferred revenue	8,593			11,123			9,790			11,123
Long-term lease obligations	191,354			—			184,706			—
Other liabilities	55,638			102,495			51,894			102,495
Total liabilities	2,032,010			1,462,590			2,592,390			1,462,590
Commitments and contingencies (Note 15)
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued	—			—			—			—
Common stock, $0.01 par value; 500,000 shares authorized; 115,494 and 114,899 shares issued and outstanding at December 28, 2019 and September 30, 2019, respectively	1,155			1,149
Common stock, $0.01 par value; 500,000 shares authorized; 115,695 and 114,899 shares issued and outstanding at March 28, 2020 and September 30, 2019, respectively							1,157			1,149
Additional paid-in capital	1,508,030			1,502,949			1,536,770			1,502,949
Accumulated deficit	(157,507		)	(191,390		)	(150,351		)	(191,390		)
Accumulated other comprehensive loss	(103,861		)	(110,710		)	(113,495		)	(110,710		)
Total stockholders’ equity	1,247,817			1,201,998			1,274,081			1,201,998
Total liabilities and stockholders’ equity	$	3,279,827		$	2,664,588		$	3,866,471		$	2,664,588

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

PTC Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)


	Three months ended						Three months ended						Six months ended
	December 28, 2019			December 29, 2018			March 28, 2020			March 30, 2019			March 28, 2020			March 30, 2019
Revenue:
License	$	123,430		$	105,322		$	127,607		$	61,876		$	251,037		$	167,198
Support and cloud services	190,936			187,921			196,473			187,645			387,409			375,566
Total software revenue	314,366			293,243			324,080			249,521			638,446			542,764
Professional services	41,744			41,446			35,523			40,930			77,267			82,376
Total revenue	356,110			334,689			359,603			290,451			715,713			625,140
Cost of revenue:
Cost of license revenue	13,173			12,563			13,873			12,875			27,046			25,438
Cost of support and cloud services revenue	38,928			31,197			34,264			32,874			73,192			64,071
Total cost of software revenue	52,101			43,760			48,137			45,749			100,238			89,509
Cost of professional services revenue	35,304			33,592			34,890			34,155			70,194			67,747
Total cost of revenue	87,405			77,352			83,027			79,904			170,432			157,256
Gross margin	268,705			257,337			276,576			210,547			545,281			467,884
Operating expenses:
Sales and marketing	107,604			104,218			107,438			103,722			215,042			207,940
Research and development	65,308			60,782			59,954			61,402			125,262			122,184
General and administrative	44,557			37,864			33,629			35,371			78,186			73,235
Amortization of acquired intangible assets	6,777			5,936			7,288			5,930			14,065			11,866
Restructuring and other charges, net	14,034			18,493			18,242			26,980			32,276			45,473
Total operating expenses	238,280			227,293			226,551			233,405			464,831			460,698
Operating income	30,425			30,044
Interest expense	(12,098		)	(10,276		)
Operating income (loss)							50,025			(22,858		)	80,450			7,186
Interest and debt premium expense							(32,618		)	(11,383		)	(44,716		)	(21,659		)
Other income (expense), net	704			655			(1,629		)	821			(925		)	1,475
Income before income taxes	19,031			20,423
Benefit from income taxes	(16,424		)	(562		)
Net income	$	35,455		$	20,985
Earnings per share��Basic	$	0.31		$	0.18
Earnings per share—Diluted	$	0.31		$	0.18
Income (loss) before income taxes							15,778			(33,420		)	34,809			(12,998		)
Provision (benefit) for income taxes							8,622			10,093			(7,802		)	9,530
Net income (loss)							$	7,156		$	(43,513	)	$	42,611		$	(22,528	)
Earnings (loss) per share—Basic							$	0.06		$	(0.37	)	$	0.37		$	(0.19	)
Earnings (loss) per share—Diluted							$	0.06		$	(0.37	)	$	0.37		$	(0.19	)
Weighted-average shares outstanding—Basic	115,190			118,323			115,606			118,461			115,401			118,392
Weighted-average shares outstanding—Diluted	115,691			119,638			116,017			118,461			115,856			118,392

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

PTC Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

Three months ended
December 28,
2019 December 29,
2018
Net income $ 35,455
$ 20,985
Other comprehensive income (loss), net of tax:
Hedge gain (loss) arising during the period, net of tax of $1.1 million and $0 million in the first quarter of 2020 and 2019, respectively (3,343 ) (2,129 )
Net hedge (gain) loss reclassified into earnings, net of tax of $0 million and $0.1 million in the first quarter of 2020 and 2019, respectively —
(549 )
Realized and unrealized loss on hedging instruments (3,343 ) (2,678 )
Foreign currency translation adjustment, net of tax of $0 for each period 10,147
(7,569 )
Unrealized gain (loss) on marketable securities, net of tax of $0 for each period (7 ) 13
Amortization of net actuarial pension loss included in net income, net of tax of $0.3 million and $0.2 million in the first quarter of 2020 and 2019, respectively 674
430
Change in unamortized pension loss during the period related to changes in foreign currency (622 ) 281
Other comprehensive income (loss) 6,849
(9,523 )
Comprehensive income $ 42,304
$ 11,462



	Three months ended						Six months ended
	March 28, 2020			March 30, 2019			March 28, 2020			March 30, 2019
Net income (loss)	$	7,156		$	(43,513	)	$	42,611		$	(22,528	)
Other comprehensive income (loss), net of tax:
Hedge gain (loss) arising during the period, net of tax of $0.2 million in the second quarter of 2020 and 2019, respectively, and $0.9 million and $0.2 million in the first six months of 2020 and 2019, respectively	701			2,955			(2,642		)	826
Net hedge (gain) loss reclassified into earnings, net of tax of $0.0 million in the second quarter of 2020 and 2019, respectively, and $0.0 million and $0.1 million in the first six months of 2020 and 2019, respectively	—			—			—			(549		)
Realized and unrealized gain (loss) on hedging instruments	701			2,955			(2,642		)	277
Foreign currency translation adjustment, net of tax of $0 for each period	(10,559		)	(4,033		)	(412		)	(11,602		)
Unrealized gain (loss) on marketable securities, net of tax of $0 for each period	(537		)	289			(544		)	302
Amortization of net actuarial pension gain included in net income, net of tax of $0.3 million and $0.2 million in the second quarter of 2020 and 2019, respectively, and $0.6 million and $0.3 million in the first six months of 2020 and 2019, respectively	680			428			1,354			858
Change in unamortized pension gain (loss) during the period related to changes in foreign currency	81			345			(541		)	626
Other comprehensive loss	(9,634		)	(16		)	(2,785		)	(9,539		)
Comprehensive income (loss)	$	(2,478	)	$	(43,529	)	$	39,826		$	(32,067	)

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

PTC Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Three months ended						Six months ended
	December 28, 2019			December 29, 2018			March 28, 2020			March 30, 2019
Cash flows from operating activities:
Net income	$	35,455		$	20,985
Net income (loss)							$	42,611		$	(22,528	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	19,588			20,053			40,193			39,558
Stock-based compensation	27,936			29,407			48,420			56,374
Other non-cash items, net	(1,223		)	(5		)	(1,926		)	247
Loss on disposal of fixed assets							231			32
Changes in operating assets and liabilities, excluding the effects of acquisitions:
Accounts receivable	34,314			24,025			20,187			54,501
Accounts payable and accrued expenses	(11,959		)	(9,628		)	12,193			423
Accrued compensation and benefits	(3,563		)	(27,504		)	(4,629		)	(28,291		)
Deferred revenue	(34,952		)	(21,820		)	17,393			36,947
Accrued income taxes	(42,702		)	(21,668		)	(43,815		)	(15,677		)
Other current assets and prepaid expenses	1,680			849			681			1,723
Other noncurrent assets and liabilities	(17,062		)	6,520			(36,210		)	39,035
Net cash provided by operating activities	7,512			21,214			95,329			162,344
Cash flows from investing activities:
Additions to property and equipment	(4,707		)	(30,332		)	(10,243		)	(51,268		)
Purchases of short- and long-term marketable securities	(5,592		)	(6,736		)	(10,151		)	(14,460		)
Proceeds from maturities of short- and long-term marketable securities	5,499			7,007			9,971			14,227
Acquisitions of businesses, net of cash acquired	(467,749		)	(69,556		)	(468,520		)	(69,453		)
Purchases of investments							—			(7,500		)
Settlement of net investment hedges	(870		)	(1,595		)	2,200			114
Net cash used in investing activities	(473,419		)	(101,212		)	(476,743		)	(128,340		)
Cash flows from financing activities:
Proceeds from issuance of Senior Notes							1,000,000			—
Borrowings under credit facility	455,000			155,000			455,000			205,000
Repayments of borrowings under credit facility	—			(20,000		)	(480,000		)	(110,000		)
Proceeds (costs) from issuance of common stock	—			(4,640		)
Credit facility origination costs	(1,005		)	—
Repurchases of common stock							—			(64,994		)
Proceeds from issuance of common stock							8,980			4,158
Payments for debt issuance costs							(16,266		)	—
Contingent consideration	—			(1,575		)	—			(1,575		)
Payments of withholding taxes in connection with stock-based awards	(22,849		)	(33,788		)	(23,571		)	(34,491		)
Net cash provided by financing activities	431,146			94,997
Net cash provided by (used in) financing activities							944,143			(1,902		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	1,991			2,041			(5,740		)	2,237
Net change in cash, cash equivalents, and restricted cash	(32,770		)	17,040			556,989			34,339
Cash, cash equivalents, and restricted cash, beginning of period	270,689			261,093			270,689			261,093
Cash, cash equivalents, and restricted cash, end of period	$	237,919		$	278,133		$	827,678		$	295,432

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

PTC Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)


	Three months ended December 28, 2019																	Three months ended March 28, 2020
	Common Stock					Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity			Common Stock				Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Shares		Amount			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity			Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
Balance as of September 30, 2019	114,899		$	1,149		$	1,502,949		$	(191,390	)	$	(110,710	)	$	1,201,998
ASU 2016-02 (ASC 842) adoption	—		—			—			(1,572		)	—			(1,572		)
Balance as of December 28, 2019																		115,494		$	1,155	$	1,508,030		$	(157,507	)	$	(103,861	)	$	1,247,817
Common stock issued for employee stock-based awards	903		9			(9		)	—			—			—			55		1		(1		)	—			—			—
Shares surrendered by employees to pay taxes related to stock-based awards	(308	)	(3		)	(22,846		)	—			—			(22,849		)	(10	)	—		(722		)	—			—			(722		)
Common stock issued for employee stock purchase plan																		156		1		8,979			—			—			8,980
Compensation expense from stock-based awards	—		—			27,936			—			—			27,936			—		—		20,484			—			—			20,484
Net income	—		—			—			35,455			—			35,455			—		—		—			7,156			—			7,156
Unrealized loss on net investment hedges, net of tax	—		—			—			—			(3,343		)	(3,343		)
Unrealized gain on net investment hedges, net of tax																		—		—		—			—			701			701
Foreign currency translation adjustment	—		—			—			—			10,147			10,147			—		—		—			—			(10,559		)	(10,559		)
Unrealized loss on available-for-sale securities, net of tax	—		—			—			—			(7		)	(7		)	—		—		—			—			(537		)	(537		)
Change in pension benefits, net of tax	—		—			—			—			52			52			—		—		—			—			761			761
Balance as of December 28, 2019	115,494		$	1,155		$	1,508,030		$	(157,507	)	$	(103,861	)	$	1,247,817
Balance as of March 28, 2020																		115,695		$	1,157	$	1,536,770		$	(150,351	)	$	(113,495	)	$	1,274,081


	Three months ended December 29, 2018																	Six months ended March 28, 2020
	Common Stock					Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity			Common Stock					Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Shares		Amount			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity			Shares		Amount			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
Balance as of September 30, 2018	117,981		$	1,180		$	1,558,403		$	(599,409	)	$	(85,585	)	$	874,589
ASU 2016-16 adoption	—		—			—			72,261			—			72,261
ASC 606 adoption	—		—			—			367,378			—			367,378
Balance as of September 30, 2019																		114,899		$	1,149		$	1,502,949		$	(191,390	)	$	(110,710	)	$	1,201,998
ASU 2016-02 (ASC 842) adoption																		—		—			—			(1,572		)	—			(1,572		)
Common stock issued for employee stock-based awards	1,056		11			(11		)	—			—			—			958		10			(10		)	—			—			—
Shares surrendered by employees to pay taxes related to stock-based awards	(380	)	(4		)	(33,784		)	—			—			(33,788		)	(318	)	(3		)	(23,568		)	—			—			(23,571		)
Common stock issued						(140		)							(140		)
Common stock issued for employee stock purchase plan																		156		1			8,979			—			—			8,980
Compensation expense from stock-based awards	—		—			29,407			—			—			29,407			—		—			48,420			—			—			48,420
Net income	—		—			—			20,985			—			20,985			—		—			—			42,611			—			42,611
Unrealized loss on cash flow hedges, net of tax	—		—			—			—			(385		)	(385		)
Unrealized loss on net investment hedges, net of tax	—		—			—			—			(2,293		)	(2,293		)	—		—			—			—			(2,642		)	(2,642		)
Foreign currency translation adjustment	—		—			—			—			(7,569		)	(7,569		)	—		—			—			—			(412		)	(412		)
Unrealized gain on available-for-sale securities, net of tax	—		—			—			—			13			13
Unrealized loss on marketable securities, net of tax																		—		—			—			—			(544		)	(544		)
Change in pension benefits, net of tax	—		—			—			—			711			711			—		—			—			—			813			813
Balance as of December 29, 2018	118,657		$	1,187		$	1,553,875		$	(138,785	)	$	(95,108	)	$	1,321,169
Balance as of March 28, 2020																		115,695		$	1,157		$	1,536,770		$	(150,351	)	$	(113,495	)	$	1,274,081



	Three months ended March 30, 2019
	Common Stock					Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Shares		Amount			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
Balance as of December 29, 2018	118,657		$	1,187		$	1,553,875		$	(138,785	)	$	(95,108	)	$	1,321,169
Common stock issued for employee stock-based awards	52		—			—			—			—			—
Shares surrendered by employees to pay taxes related to stock-based awards	(8	)	—			(703		)	—			—			(703		)
Common stock issued for employee stock purchase plan	122		1			8,797			—			—			8,798
Compensation expense from stock-based awards	—		—			26,967			—			—			26,967
Net income (loss)	—		—			—			(43,513		)	—			(43,513		)
Repurchases of common stock	(725	)	(7		)	(64,987		)	—			—			(64,994		)
Unrealized gain on net investment hedges, net of tax	—		—			—			—			2,955			2,955
Foreign currency translation adjustment	—		—			—			—			(4,033		)	(4,033		)
Unrealized gain on available-for-sale securities, net of tax	—		—			—			—			289			289
Change in pension benefits, net of tax	—		—			—			—			773			773
Balance as of March 30, 2019	118,098		$	1,181		$	1,523,949		$	(182,298	)	$	(95,124	)	$	1,247,708



	Six months ended March 30, 2019
	Common Stock					Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Shares		Amount			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
Balance as of September 30, 2018	117,981		$	1,180		$	1,558,403		$	(599,409	)	$	(85,585	)	$	874,589
ASU 2016-16 adoption	—		—			—			72,261			—			72,261
ASC 606 adoption	—		—			—			367,378			—			367,378
Common stock issued for employee stock-based awards	1,108		11			(11		)	—			—			—
Shares surrendered by employees to pay taxes related to stock-based awards	(388	)	(4		)	(34,487		)	—			—			(34,491		)
Common stock issued	—		—			(140		)	—			—			(140		)
Common stock issued for employee stock purchase plan	122		1			8,797			—			—			8,798
Compensation expense from stock-based awards	—		—			56,374			—			—			56,374
Net income (loss)	—		—			—			(22,528		)	—			(22,528		)
Repurchases of common stock	(725	)	(7		)	(64,987		)	—			—			(64,994		)
Unrealized loss on cash flow hedges, net of tax	—		—			—			—			(385		)	(385		)
Unrealized gain on net investment hedges, net of tax	—		—			—			—			662			662
Foreign currency translation adjustment	—		—			—			—			(11,602		)	(11,602		)
Unrealized gain on marketable securities, net of tax	—		—			—			—			302			302
Change in pension benefits, net of tax	—		—			—			—			1,484			1,484
Balance as of March 30, 2019	118,098		$	1,181		$	1,523,949		$	(182,298	)	$	(95,124	)	$	1,247,708

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

PTC Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation

General

The accompanying unaudited condensed consolidated financial statements include the accounts of PTC Inc. and its wholly owned subsidiaries and have been prepared by management in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and in accordance with the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. While we believe that the disclosures presented are adequate in order to make the information not misleading, these unaudited quarterly financial statements should be read in conjunction with our annual consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair statement of our financial position, results of operations and cash flows at the dates and for the periods indicated. The September 30, 2019 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. Our fiscal quarters end on a Saturday following a thirteen-week calendar and may result in different quarter end dates year to year. The ~~first~~second quarter of 2020 ended on ~~December~~March 28, ~~2019~~2020 and the ~~first~~second quarter of 2019 ended on ~~December 29, 2018.~~March 30, 2019. The results of operations for the ~~three~~six months ended ~~December~~March 28, ~~2019~~2020 are not necessarily indicative of the results expected for the remainder of the fiscal year.

We adjusted the $3.0 million hedge gain in the Consolidated Statement of Comprehensive Income (Loss) for the three months ended March 30, 2019 that was incorrectly reflected as a loss.

Risks and Uncertainties - COVID-19 Pandemic

In December 2019, a novel strain of coronavirus, now referred to as COVID-19, surfaced. The virus has spread to over 100 countries, including the United States, and has been declared a pandemic by the World Health Organization. The COVID-19 pandemic has significantly impacted global economic activity and has created future macroeconomic uncertainty.

We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts COVID-19 as of March 28, 2020 and through the date of this report. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, stock-based compensation, the carrying value of our goodwill and other long-lived assets, financial assets, valuation allowances for tax assets and revenue recognition. While there was not a material impact to our consolidated financial statements as of and for the quarter ended March 28, 2020, resulting from our assessments, our future assessment of our current expectations at that time of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to our consolidated financial statements in future reporting periods.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Leases

In February 2016, the ~~FASB~~Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2016-02, Leases (Topic 842) (ASC 842), which replaced the existing guidance in ASC 840, Leases. The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and to disclose important information about leasing arrangements. We adopted ASC 842 effective October 1, 2019 (the effective date). ASC 842 requires a modified retrospective transition method that could either be applied at the earliest comparative period in the financial statements or in the period of adoption. We elected to use the period of adoption (October 1, 2019) transition method and therefore did not recast prior periods.

Since we adopted the new standard using the period of adoption transition method, we are not required to present 2020 comparative disclosures under ASC 842. However, we are required to present the required annual disclosures under the previous U.S. GAAP lease accounting standard (ASC 840).

We elected the package of practical expedients as permitted under the transition guidance, which allowed us: (1) to carry forward the historical lease classification; (2) not to reassess whether expired or existing contracts are or contain leases; and, (3) not to reassess the treatment of initial direct costs for existing leases. In addition, we elected an accounting policy to not recognize leases with an initial term of one year or less on the balance sheet.

Upon the adoption of this standard on October 1, 2019, we recognized an operating lease liability of $224.0 million, representing the present value of the minimum lease payments remaining as of the adoption date, and a right-of-use asset in the amount of $167.9 million. The right-of-use asset reflects adjustments for derecognition of deferred leasing incentives. We also recorded a $1.6 million decrease to retained earnings as a result of the change in scheduling of reversal of temporary tax differences due to the adoption of ASC 842.

~~Derivative Financial Instruments~~

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedging Activities", which amends and simplifies existing guidance to allow companies to more accurately present the economic effects of risk management activities in the financial statements. We adopted ASU 2017-12 effective October 1, 2019 (the effective date). Adoption of this guidance in the first quarter of fiscal 2020 did not have an impact on our consolidated financial statements.

Pending Accounting Pronouncements

Goodwill and Other—Internal-Use Software

In August 2018, the FASB issued Accounting Standards Update (ASU) 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which aligns the requirements for capitalizing implementation costs in cloud computing arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new standard will be effective for us in the first quarter of 2021. Entities can choose to adopt the new guidance prospectively or retrospectively. We plan to adopt this standard using the prospective adoption approach. We are currently evaluating the effects of this pronouncement on our consolidated financial statements.

Fair Value Measurement

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, modifies and adds disclosure requirements for fair value measurements. The new standard will be effective for us in the first quarter of 2021. We do not expect this ASU to have a material impact on our consolidated financial statements.

Financial Instruments—Credit Losses

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, along with subsequent amendments, which replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information when recording credit loss estimates. The new standard will be effective for us in the first quarter of 2021. We are currently evaluating the impact the standard will have on our consolidated financial statements, but at this time we do not expect it to be significant.

2. Revenue from Contracts with Customers

Contract Assets and Contract Liabilities


(in thousands)	December 28, 2019		September 30, 2019		March 28, 2020		September 30, 2019
Contract asset	$	20,917	$	21,038	$	19,582	$	21,038
Deferred revenue	$	368,089	$	396,632	$	417,202	$	396,632

As of ~~December~~March 28, ~~2019,~~2020, our contract assets are expected to be transferred to receivables within the next 12 months and therefore are included in other current assets. Approximately ~~$6.8~~$10.2 million of the September 30, 2019 contract asset balance was transferred to receivables during the ~~three~~six months ended ~~December~~March 28, ~~2019~~2020 as a result of the right to payment becoming unconditional. The majority of the contract asset balance relates to two large professional services contracts with invoicing terms based on performance milestones. Additions to contract assets of approximately ~~$6.7~~$8.8 million related to revenue recognized in the period, net of billings. There were no impairments of contract assets during the ~~three~~six months ended ~~December~~March 28, ~~2019.~~2020.

During the ~~three~~six months ended ~~December~~March 28, ~~2019,~~2020, we recognized ~~$178.2~~$283.4 million of revenue that was included in deferred revenue as of September 30, 2019 and there were additional deferrals of ~~$147.0~~$301.3 million during the ~~three~~six months ended ~~December~~March 28, ~~2019,~~2020, primarily related to new billings. In addition, deferred revenue increased by ~~$2.7 million~~an immaterial amount as a result of the acquisition of Onshape. The balance of total short- and long-term receivables as of September 30, 2019 was $412.5 million, compared to total short- and long-term receivables as of ~~December~~March 28, ~~2019~~2020 of ~~$400.8~~$431.0 million.

Our multi-year, non-cancellable on-premise subscription contracts provide customers with an annual right to exchange software within the subscription with other software. Although the exchange right is limited to software products within a similar product grouping, the exchange right is not limited to products with substantially similar features and functionality as those originally delivered. We determined that this right to exchange previously delivered software for different software represents variable consideration to be accounted for as a liability. We have identified a standard portfolio of contracts with common characteristics and applied the expected value method of determining variable consideration associated with this right. Additionally, where there are isolated situations that are outside of the standard portfolio of contracts due to contract size, longer contract duration, or other unique contractual terms, we use the most likely amount method to determine the amount of variable consideration. In both circumstances, the variable consideration included in the transaction price is constrained to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur

when the uncertainty associated with the variable consideration is subsequently resolved. As of ~~December~~March 28, ~~2019~~2020 and September 30, 2019, the total refund liability was ~~$25.9~~$30.2 million and $22.9 million, respectively, primarily associated with the annual right to exchange on-premise subscription software.

Costs to Obtain or Fulfill a Contract

We recognize an asset for the incremental costs of obtaining a contract with a customer if the benefit of those costs is expected to be longer than one year. These deferred costs (primarily commissions) are amortized proportionately related to revenue over five years, which is generally longer than the term of the initial contract because of anticipated renewals as commissions for renewals are not commensurate with commissions related to our initial contracts. As of ~~December~~March 28, ~~2019~~2020 and September 30, 2019, deferred costs of ~~$29.8~~$29.7 million and $27.7 million, respectively, were included in other current assets and ~~$67.3~~$65.7 million and $64.8 million, respectively, were included in other assets (non-current).

Remaining Performance Obligations

Our contracts with customers include amounts allocated to performance obligations that will be satisfied at a later date. As of ~~December~~March 28, ~~2019,~~2020, the amounts include additional performance obligations of ~~$368.1~~$417.2 million recorded in deferred revenue and ~~$709.7~~$608.8 million that are not yet recorded in the consolidated balance sheets. We expect to recognize approximately 90% of the total ~~$1,077.8~~$1,026.0 million over the next 24 months, with the remaining amount thereafter. Certain of our multi-year subscription contracts with start dates on or after October 1, 2018 contain a limited annual cancellation right. For such cancellable subscription contracts, we consider each annual period a discrete contract. Early in the fourth quarter of 2019, we discontinued offering the cancellation right for substantially all new contracts. Remaining performance obligations do not include the cancellable value for subscriptions which contain this clause.

Disaggregation of Revenue


(in thousands)	Three months ended				Three months ended				Six months ended
	December 28, 2019		December 29, 2018		March 28, 2020		March 30, 2019		March 28, 2020		March 30, 2019
Total recurring revenue	305,368		251,438		$	315,862	$	239,185	$	621,230	$	490,623
Perpetual license	8,998		41,805		8,218		10,336		17,216		52,141
Professional services	41,744		41,446		35,523		40,930		77,267		82,376
Total revenue	$	356,110	$	334,689	$	359,603	$	290,451	$	715,713	$	625,140

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

3. Restructuring and Other Charges

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

For the second quarter and first ~~three~~six months ended ~~December~~March 28, ~~2019,~~2020, restructuring charges and other charges, net totaled ~~$14.0~~$18.2 million and $32.3 million, respectively, of which ~~$13.8~~$13.2 million and $27.0 million is attributable to restructuring charges, respectively, and ~~$0.2~~$4.7 million and $5.0 million is related to an impairment ~~of an~~and accretion expense related to exited lease facilities, respectively. The restructuring and other charges for the second quarter and first six months of 2020 also includes $0.3 million of accelerated depreciation related to the planned exit of a facility.

For the second quarter and first ~~three~~six months ended ~~December 29, 2018,~~March 30, 2019, restructuring and other charges totaled ~~$18.5~~$27.0 million ~~comprised~~and $45.5 million, respectively, of ~~$16.6~~which $26.4 million and $43.0 million is attributable to ~~a workforce realignment~~restructuring charges, respectively, and ~~facility closures~~$0.6 million and ~~$1.9~~$2.5 million ~~attributable~~is related to headquarters relocation ~~charges.~~charges, respectively.

Restructuring Charges

During the first quarter of 2020, we initiated a ~~voluntary~~ restructuring program as part of a realignment associated with expected synergies and operational efficiencies related to the Onshape acquisition. During the ~~three~~six months ended ~~December~~March 28, ~~2019,~~2020, we incurred ~~$13.6~~$31.5 million ~~of an estimated $21.0 million charge~~ in connection with this restructuring plan for termination benefits associated with approximately ~~175~~255 employees. ~~We are estimating $30 million of total restructuring charges in 2020.~~

During the first quarter of 2019, we initiated a restructuring plan to realign our workforce to shift investment to support Industrial Internet of Things and Augmented Reality strategic ~~high growth~~ opportunities. As this was a realignment of resources rather than a cost-savings initiative, it did not result in significant cost savings. The restructuring plan was completed in the first quarter of 2019 and resulted in restructuring charges of $16.3 million for termination benefits associated with approximately 240 employees, substantially all of which has been paid. In the second quarter of 2020, we recorded $0.1 million of credits related to this restructuring plan.

During the second quarter of 2019, we relocated our worldwide headquarters to the Boston Seaport District. We incurred a restructuring charge for the former headquarters lease, which will not expire until November 2022. During the first six months ended March 28, 2020, we reversed $4.4 million of accrued variable operating facility restructuring charges associated with the exit of a portion of our former headquarters lease.

The following table summarizes restructuring accrual activity for the ~~three~~six months ended ~~December~~March 28, ~~2019:~~2020:


(in thousands)	Employee severance and related benefits			Facility closures and related costs			Total			Employee severance and related benefits			Facility closures and related costs			Total
September 30, 2019	$	298		$	30,788		$	31,086
October 1, 2019										$	298		$	30,788		$	31,086
ASC 842 adoption	—			(16,462		)	(16,462		)	—			(16,462		)	(16,462		)
Charges to operations, net	13,631			127			13,758			31,358			(4,362		)	26,996
Cash disbursements	(58		)	(873		)	(931		)	(14,324		)	(2,495		)	(16,819		)
Other non-cash										—			(281		)	(281		)
Foreign exchange impact	156			(1		)	155			153			(5		)	148
Accrual, December 28, 2019	$	14,027		$	13,579		$	27,606
Accrual, March 28, 2020										$	17,485		$	7,183		$	24,668

The following table summarizes restructuring accrual activity for the ~~three~~six months ended ~~December 29, 2018:~~March 30, 2019:


(in thousands)	Employee severance and related benefits			Facility closures and related costs			Total			Employee severance and related benefits			Facility closures and related costs			Total
October 1, 2018	$	—		$	2,415		$	2,415		$	—		$	2,415		$	2,415
Charges to operations, net	16,343			243			16,586			16,034			26,937			42,971
Cash disbursements	(8,019		)	(264		)	(8,283		)	(15,085		)	(2,847		)	(17,932		)
Foreign exchange impact	32			(59		)	(27		)	6			(34		)	(28		)
Accrual, December 29, 2018	$	8,356		$	2,335		$	10,691
Other non-cash charges										—			4,812			4,812
Accrual, March 30, 2019										$	955		$	31,283		$	32,238

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

Upon adoption of ASC 842, $16.5 million of accrued expenses and other current liabilities, representing the present value of lease commitments net of estimated sublease income, were reclassified

to lease assets and obligations: $7.6 million to lease assets, $9.2 million to short-term lease obligations and $14.9 million to long-term lease obligations.

In determining the amount of right-of-use assets and lease obligations for restructured facilities, we are required to estimate such factors as future vacancy rates, the time required to sublet properties and sublease rates. Updates to these estimates may result in revisions to the value of right of use assets recorded. The amounts recorded are based on the net present value of remaining lease commitments and estimated sublease income.~~As of~~December 28, 2019, we have net liabilities of $28.0 million related to excess facilities (compared to $30.8 million at September 30, 2019), representing discounted lease and non-lease commitments with agreements expiring at various dates through 2023 of approximately $35.1 million, net of committed sublease income of approximately $3.7 million and uncommitted sublease income of approximately $3.4 million. As a result of changes in our sublease income assumptions, in the three months ended December 28, 2019, we recorded a facility impairment charge of $0.2 million against the lease assets. For exited facilities we made $2.4 million in payments related to lease costs in the three months ended December 28, 2019.

As of ~~December~~March 28, ~~2019,~~2020, the remaining restructuring facility accrual of ~~$13.6~~$7.2 million relates to variable non-lease costs not subject to ASC 842, of which, ~~$4.7~~$2.6 million is included in accrued expenses and other current liabilities and ~~$8.8~~$4.6 million is included in other liabilities in the Consolidated Balance Sheets.

Of the accrual for facility closures and related costs, as of ~~December 29, 2018, $1.3~~March 30, 2019, $12.4 million is included in accrued expenses and other current liabilities and ~~$1.0~~$18.9 million is included in other liabilities in the Consolidated Balance Sheets.

Other - Headquarters Relocation Charges

Headquarters relocation charges represent other expenses associated with exiting our prior Needham headquarters facility and relocating to our new worldwide headquarters in the Boston Seaport District. In the first ~~three~~six months of 2019, we recorded $1.9 million of accelerated depreciation expense related to shortening the estimated useful lives of leasehold improvements related to the Needham location. In January 2019, we made rental payments for both our new and previous headquarters. Headquarters relocation charges for the second quarter of 2019 include $0.6 million of rental expense for the Needham facility that overlapped with rental expense for the new Seaport headquarters.

4. Stock-based Compensation

Our equity incentive plan provides for grants of nonqualified and incentive stock options, common stock, restricted stock, restricted stock units (RSUs) and stock appreciation rights to employees, directors, officers and consultants. We award RSUs as the principal equity incentive awards, including performance-based awards that are earned based on achievement of performance criteria established by the Compensation Committee of our Board of Directors. Each RSU represents the contingent right to receive 1 share of our common stock.

For performance-based awards, we recognize stock-based compensation based on expected achievement of performance criteria. We measure the cost of employee services received in exchange for RSU awards based on the fair value of the RSU awards on the date of grant. That cost is recognized over the period during which an employee is required to provide service in exchange for the award. We account for forfeitures as they occur, rather than estimate expected forfeitures.

Our employee stock purchase plan (ESPP) allows eligible employees to contribute up to 10% of their base salary, up to a maximum of $25,000 per year and subject to other plan limitations, toward the purchase of our common stock at a discounted price. The purchase price of the shares on each purchase date is equal to 85% of the lower of the fair market value of our common stock on the first and last trading days of each offering period. The ESPP is qualified under Section 423 of the Internal Revenue Code. We estimate the fair value of each purchase right under the ESPP on the date of grant using the

Black-Scholes option valuation model and use the straight-line attribution approach to record the expense over the six-month offering period.


Restricted stock unit activity for the three months ended December 28, 2019	Number of RSUs (in thousands)		Weighted- Average Grant Date Fair Value Per RSU
Restricted stock unit activity for the six months ended March 28, 2020					Number of RSUs (in thousands)		Weighted- Average Grant Date Fair Value Per RSU
Balance of outstanding restricted stock units October 1, 2019	3,232		$	80.52	3,232		$	80.52
Granted	1,266		$	76.65	1,349		$	77.18
Vested	(903	)	$	67.64	(958	)	$	68.79
Forfeited or not earned	(477	)	$	85.15	(550	)	$	84.27
Balance of outstanding restricted stock units December 28, 2019	3,118		$	81.94
Balance of outstanding restricted stock units March 28, 2020					3,073		$	82.03

(in thousands)

Restricted Stock Units

Grant Period

Performance-based RSUs ⁽¹⁾

Service-based RSUs ⁽²⁾

Total Shareholder Return RSUs ⁽³⁾

Performance-based RSUs ⁽¹⁾

Service-based RSUs ⁽²⁾

Total Shareholder Return RSUs ⁽³⁾

First three months of 2020

1,088

First six months of 2020

1,155

_________________

(1)

The performance-based RSUs were granted to our ~~executive officers~~executives and are eligible to vest based upon annual increasing performance measures over a three-year period. RSUs not earned ~~for a period~~in either of the first two measurement periods may be earned in the third period. To the extent earned, those performance-based RSUs will vest in 3 substantially equal installments on November 15, 2020, November 15, 2021 and November 15, 2022, or the date the Compensation Committee determines the extent to which the applicable performance criteria have been achieved for each performance period. Up to a maximum of two times the number of RSUs can be earned (a maximum aggregate of 195 thousand RSUs).


(2)	The service-based RSUs were granted to employees, including our executive officers. Substantially all service-based RSUs will vest in 3 substantially equal annual installments on or about the anniversary of the date of grant.


(3)	The Total Shareholder Return ~~(TSR) units~~RSUs (TSR RSUs) were granted to our ~~executive officers~~executives pursuant to the terms described below.

~~In the first~~ ~~three~~ months of 2020, we granted the target performance-based TSR units ("target RSUs") shown in the table above to our executive officers. These RSUs are eligible to vest based upon our total shareholder return relative to a peer group (the “TSR units”), measured annually over a three-year period. The number of TSR ~~units to~~RSUs that vest over the three-year period will be determined based on the performance of PTC stock relative to the stock performance of an index of PTC peer companies established as of the grant date, as determined at the end of three measurement periods ending on September 30, 2020, 2021 and 2022, respectively. The ~~shares~~RSUs earned for each period will vest on November 15 following each measurement period, up to a maximum of two times the number of ~~target~~TSR RSUs eligible to be earned for the period (up to a maximum aggregate of ~~178~~195 thousand ~~shares)~~RSUs). No vesting will occur in a period unless an annual threshold requirement is achieved. If the return to PTC shareholders is negative but still meets or exceeds the peer group indexed return, a maximum of 100% of the ~~target~~TSR RSUs will vest for the measurement period. TSR ~~units~~RSUs not earned in either of the first two measurement periods are eligible to be earned in the third measurement period.

The weighted-average fair value of the TSR ~~units~~RSUs was $106.69 per target RSU on the grant date. The fair value of the TSR ~~units~~RSUs was determined using a Monte Carlo simulation model, a generally accepted statistical technique used to simulate a range of possible future stock prices for PTC and the peer group. The method uses a risk-neutral framework to model future stock price movements based upon the risk-free rate of return, the volatility of each entity, and the pairwise correlations of each entity being modeled. The fair value for each simulation is the product of the payout percentage determined by PTC’s TSR rank against the peer group, the projected price of PTC stock, and a discount factor based on the risk-free rate.

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



Average volatility of peer group	28.0	%
Risk free interest rate	1.59	%
Dividend yield	—	%

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


(in thousands)	Three months ended				Three months ended				Six months ended
	December 28, 2019		December 29, 2018		March 28, 2020		March 30, 2019		March 28, 2020		March 30, 2019
Cost of license revenue	$	—	$	322	$	11	$	48	$	11	$	370
Cost of support and cloud services revenue	1,486		975		1,523		1,158		3,010		2,133
Cost of professional services revenue	1,557		1,814		1,466		1,906		3,022		3,720
Sales and marketing	7,452		9,722		7,146		9,522		14,598		19,244
Research and development	6,932		4,900		4,765		5,190		11,697		10,090
General and administrative	10,509		11,674		5,573		9,143		16,082		20,817
Total stock-based compensation expense	$	27,936	$	29,407	$	20,484	$	26,967	$	48,420	$	56,374

Stock-based compensation expense includes ~~$1.5~~$1.3 million and $2.8 million in the ~~first~~second quarter and first six months of 2020, respectively, and ~~$1.3~~$1.4 million and $2.7 million in the ~~first~~second quarter and first six months of 2019, respectively, related to the ESPP.

5. Earnings per Share (EPS) and Common Stock

EPS

Basic EPS is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted EPS is calculated by dividing net income by the weighted-average number of shares outstanding plus the dilutive effect, if any, of outstanding RSUs using the treasury stock method. The calculation of the dilutive effect of outstanding equity awards under the treasury stock method includes consideration of unrecognized compensation expense as additional proceeds.


	Three months ended				Three months ended					Six months ended
Calculation of Basic and Diluted EPS (in thousands, except per share data)	December 28, 2019		December 29, 2018		March 28, 2020		March 30, 2019			March 28, 2020		March 30, 2019
Net income	$	35,455	$	20,985
Net income (loss)					$	7,156	$	(43,513	)	$	42,611	$	(22,528	)
Weighted-average shares outstanding—Basic	115,190		118,323		115,606		118,461			115,401		118,392
Dilutive effect of restricted stock units	501		1,315		411		—			455		—
Weighted-average shares outstanding—Diluted	115,691		119,638		116,017		118,461			115,856		118,392
Earnings per share—Basic	$	0.31	$	0.18
Earnings per share—Diluted	$	0.31	$	0.18
Earnings (loss) per share—Basic					$	0.06	$	(0.37	)	$	0.37	$	(0.19	)
Earnings (loss) per share—Diluted					$	0.06	$	(0.37	)	$	0.37	$	(0.19	)

There were ~~1.3 million~~331,464 and 90,555 anti-dilutive shares for the three and the ~~three~~six months ended ~~December~~March 28, 2020. For the three and six months ended March 30, 2019 ~~and 0 anti-dilutive shares~~the diluted net loss per share is the same as the basic net loss per share as the effects of all our potential common stock equivalents are antidilutive because we reported a loss for the periods.~~three~~ ~~months ended December 29, 2018.~~

Common Stock Repurchases

Our Articles of Organization authorize us to issue up to 500 million shares of our common stock. Our Board of Directors has authorized us to repurchase up to $1,500 million of our common stock in the period October 1, 2017 through September 30, 2020. We did not repurchase any shares in the second quarter and first six months of 2020. We repurchased $65.0 million of our common stock in the second quarter and first six months of ~~2020 or~~ 2019. All shares of our common stock repurchased are automatically restored to the status of authorized and unissued.

6. Acquisitions

Acquisition-related costs in the ~~first~~second ~~three~~quarter and first six months of 2020 totaled ~~$7.1~~$0.3 million and $7.4 million, respectively compared to $0.4 million and $0.8 million, respectively in the ~~first~~second ~~three~~quarter and first six months of 2019. Acquisition-related costs include direct costs of potential and completed acquisitions (e.g., investment banker fees and professional fees, including legal and valuation services) and expenses related to acquisition integration activities (e.g., professional fees and severance). In addition, subsequent adjustments to our initial estimated amount of contingent consideration associated with specific acquisitions are included within acquisition-related charges. These costs are classified in general and administrative expenses in the accompanying Consolidated Statements of Operations.

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

Onshape

On November 1, 2019, we completed our acquisition of Onshape Inc. pursuant to the Agreement and Plan of Merger dated as of October 23, 2019 by and among Onshape Inc., OPAL Acquisition Corporation and the Stockholder Representative named therein, the terms of which are described in the Form 8-K filed by PTC on October 23, 2019 and which is filed as Exhibit 1.1 to that Form 8-K. PTC paid approximately ~~$468~~$469 million, net of cash acquired, for Onshape, which amount we borrowed under our existing credit facility. Onshape is not expected to be material to our 2020 results.

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

The ~~purchase price allocation is preliminary, pending finalization of the valuation and allocation of the acquired intangible assets, as well as related deferred tax liabilities. The preliminary~~ purchase price allocation resulted in ~~$363.2~~$364.9 million of goodwill, ~~$61.6~~$56.8 million of customer relationships, ~~$44.2~~$47.3 million of purchased software, $3.6 million of trademarks and $4.1 million of other net liabilities. The acquired customer relationships, purchased software, and ~~trademark~~trademarks are being amortized over useful lives ~~of10~~of 10 years, 16 years, and 15 years, respectively, based on the expected benefit pattern of the assets. The acquired goodwill was allocated to our software products segment and will not be deductible for income tax purposes. The resulting amount of goodwill reflects the expected value that will be created by accelerating CAD and PLM growth, especially in the low-end of the market and participating in future growth in the CAD and PLM SaaS market.

Frustum

On November 19, 2018, we acquired Frustum Inc. for $69.5 million (net of cash acquired of $0.7 million). We financed the acquisition with borrowings under our credit facility. Frustum is engaged in next-generation computer-aided design, including generative design, an approach that leverages artificial intelligence to generate design options. At the time of the acquisition, Frustum had approximately 12 employees and historical annualized revenues were not material.

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

The purchase price allocation resulted in $53.7 million of goodwill, $17.9 million of purchased software and $2.1 million of other net liabilities. The acquired technology is being amortized over a useful life of 15 years based on the expected benefit pattern of the assets. The acquired goodwill was allocated to our software products segment and will not be deductible for income tax purposes. The resulting amount of goodwill reflects the expected value that will be created by integrating Frustum generative design technology into our CAD solutions.

7. Goodwill and Intangible Assets

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

As of ~~December~~March 28, ~~2019,~~2020, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was ~~$1,826.4~~$1,809.1 million and attributable to our Professional Services segment was ~~$45.7~~$45.2 million. As of September 30, 2019, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was $1,362.4 million and attributable to our Professional Services segment was $45.7 million. Acquired intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.

We completed our annual goodwill impairment review as of June 29, 2019 based on a qualitative assessment. Our qualitative assessment included company specific (financial performance and long-range plans), industry, and macroeconomic factors, and consideration of the fair value of each reporting unit relative to its carrying value at the last valuation date. Based on our qualitative assessment, we believe it is more likely than not that the fair values of our reporting units exceed their carrying values and no further impairment testing is required.

Goodwill and acquired intangible assets consisted of the following:


(in thousands)	December 28, 2019						September 30, 2019						March 28, 2020						September 30, 2019
	Gross Carrying Amount		Accumulated Amortization		Net Book Value		Gross Carrying Amount		Accumulated Amortization		Net Book Value		Gross Carrying Amount		Accumulated Amortization		Net Book Value		Gross Carrying Amount		Accumulated Amortization		Net Book Value
Goodwill (not amortized)					$	1,606,050					$	1,238,179					$	1,603,081					$	1,238,179
Intangible assets with finite lives (amortized) ⁽¹⁾:
Intangible assets with finite lives (amortized):
Purchased software	$	422,922	$	286,307	$	136,615	$	377,359	$	278,144	$	99,215	$	427,092	$	292,756	$	134,336	$	377,359	$	278,144	$	99,215
Capitalized software	22,877		22,877		—		22,877		22,877		—		22,877		22,877		—		22,877		22,877		—
Customer lists and relationships	419,906		297,574		122,332		355,931		288,828		67,103		413,054		303,095		109,959		355,931		288,828		67,103
Trademarks and trade names	22,597		15,535		7,062		18,891		15,260		3,631		22,524		15,628		6,896		18,891		15,260		3,631
Other	3,946		3,946		—		3,910		3,910		—		3,942		3,942		—		3,910		3,910		—
	$	892,248	$	626,239	$	266,009	$	778,968	$	609,019	$	169,949	$	889,489	$	638,298	$	251,191	$	778,968	$	609,019	$	169,949
Total goodwill and acquired intangible assets					$	1,872,059					$	1,408,128					$	1,854,272					$	1,408,128

Goodwill

Changes in goodwill presented by reportable segments were as follows:


(in thousands)	Software Products		Professional Services		Total		Software Products			Professional Services		Total
Balance, October 1, 2019	$	1,196,064	$	42,115	$	1,238,179	$	1,196,064		$	42,115	$	1,238,179
Onshape acquisition	363,161		—		363,161		364,910			—		364,910
Foreign currency translation adjustment	4,550		160		4,710		(8		)	—		(8		)
Balance, December 28, 2019	$	1,563,775	$	42,275	$	1,606,050
Balance, March 28, 2020							$	1,560,966		$	42,115	$	1,603,081

Amortization of Intangible Assets

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


(in thousands)	Three months ended				Three months ended					Six months ended
	December 28, 2019		December 29, 2018		March 28, 2020		March 30, 2019		��	March 28, 2020		March 30, 2019
Amortization of acquired intangible assets	$	6,777	$	5,936	$	7,288	$	5,930		$	14,065	$	11,866
Cost of license revenue	6,799		6,717		6,879		6,842			13,678		13,559
Total amortization expense	$	13,576	$	12,653	$	14,167	$	12,772		$	27,743	$	25,425

8. Fair Value Measurements

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

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

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

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

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

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.

Certificates of deposit, commercial paper and certain U.S. government agency securities are classified within Level 2 of the fair value hierarchy. These instruments are valued based on quoted prices in markets that are not active or based on other observable inputs consisting of market yields, reported trades and broker/dealer quotes.

The principal market in which we execute our foreign currency contracts 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 contracts’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy.

Our significant financial assets and liabilities measured at fair value on a recurring basis as of ~~December~~March 28, ~~2019~~2020 and September 30, 2019 were as follows:


(in thousands)	December 28, 2019								March 28, 2020
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Financial assets:
Cash equivalents	$	83,044	$	—	$	—	$	83,044	$	616,556	$	—	$	—	$	616,556
Marketable securities:
Commercial paper									—		1,482		—		1,482
Corporate notes/bonds	57,480		—		—		57,480		55,459		—		—		55,459
Forward contracts	—		757		—		757		—		2,708		—		2,708
	$	140,524	$	757	$	—	$	141,281	$	672,015	$	4,190	$	—	$	676,205
Financial liabilities:
Forward contracts	—		1,694		—		1,694		—		4,074		—		4,074
	$	—	$	1,694	$	—	$	1,694	$	—	$	4,074	$	—	$	4,074



(in thousands)	September 30, 2019
	Level 1		Level 2		Level 3		Total
Financial assets:
Cash equivalents	$	108,020	$	—	$	—	$	108,020
Marketable securities:
Commercial paper	—		999		—		999
Corporate notes/bonds	56,436		—		—		56,436
Forward contracts	—		3,064		—		3,064
	$	164,456	$	4,063	$	—	$	168,519
Financial liabilities:
Forward contracts	—		2,771		—		2,771
	$	—	$	2,771	$	—	$	2,771

Non-Marketable Equity Investments

We account for non-marketable equity investments at cost, less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. We monitor non-marketable equity investments for events that could indicate that the investments are impaired, such as deterioration in the investee's financial condition and business forecasts, and lower valuations in recent or proposed financings. Changes in fair value of non-marketable equity investments are recorded in ~~Other~~other income (expense), net on the Consolidated Statements of Operations. The carrying value of our non-marketable equity investments is recorded in other assets on the Consolidated Balance Sheets and totaled $9.4 million as of both ~~December~~March 28, ~~2019~~2020 and September 30, 2019.

9. Marketable Securities

The amortized cost and fair value of marketable securities as of ~~December~~March 28, ~~2019~~2020 and September 30, 2019 were as follows:

(in thousands) December 28, 2019

Amortized cost Gross unrealized
gains Gross unrealized losses Fair value
Corporate notes/bonds 57,369
130
(19 ) 57,480

$ 57,369
$ 130
$ (19 ) $ 57,480


(in thousands)	September 30, 2019									March 28, 2020
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value		Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Commercial paper	999		—		—			999		$	1,482	$	—	$	—		$	1,482
Corporate notes/bonds	56,318		146		(28		)	56,436		55,884		85		(510		)	55,459
	$	57,317	$	146	$	(28	)	$	57,435	$	57,366	$	85	$	(510	)	$	56,941



(in thousands)	September 30, 2019
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Commercial paper	$	999	$	—	$	—		$	999
Corporate notes/bonds	56,318		146		(28		)	56,436
	$	57,317	$	146	$	(28	)	$	57,435

Our investment portfolio consists of certificates of deposit, commercial paper, corporate notes/bonds and government securities that have a maximum maturity of ~~two~~three years. The longer the duration of these securities, the more susceptible they are to changes in market interest rates and bond yields. All unrealized losses are due to changes in market interest rates, bond yields and/or credit ratings.

We review our investments to identify and evaluate investments that have an indication of possible impairment. We concluded that, at ~~December~~March 28, ~~2019,~~2020, the unrealized losses were temporary.

The following tables summarize the fair value and gross unrealized losses aggregated by category and the length of time that individual securities have been in a continuous unrealized loss position as of ~~December~~March 28, ~~2019~~2020 and September 30, 2019.


(in thousands)	December 28, 2019															March 28, 2020
	Less than twelve months					Greater than twelve months					Total					Less than twelve months					Greater than twelve months				Total
	Fair Value		Gross unrealized loss			Fair Value		Gross unrealized loss			Fair Value		Gross unrealized loss			Fair Value		Gross unrealized loss			Fair Value		Gross unrealized loss		Fair Value		Gross unrealized loss
Corporate notes/bonds	$	17,718	$	(13	)	$	12,814	$	(6	)	$	30,532	$	(19	)	$	44,598	$	(510	)	$	—	$	—	$	44,598	$	(510	)


(in thousands)	September 30, 2019									September 30, 2019
	Less than twelve months			Greater than twelve months			Total			Less than twelve months					Greater than twelve months					Total
	Fair Value	Gross unrealized loss		Fair Value	Gross unrealized loss		Fair Value	Gross unrealized loss		Fair Value		Gross unrealized loss			Fair Value		Gross unrealized loss			Fair Value		Gross unrealized loss
Corporate notes/bonds	12,419	(14	)	16,369	(14	)	28,788	(28	)	$	12,419	$	(14	)	$	16,369	$	(14	)	$	28,788	$	(28	)

The following table presents our marketable securities by contractual maturity date as of ~~December~~March 28, ~~2019~~2020 and September 30, 2019.


(in thousands)	December 28, 2019				September 30, 2019				March 28, 2020				September 30, 2019
	Amortized cost		Fair value		Amortized cost		Fair value		Amortized cost		Fair value		Amortized cost		Fair value
Due in one year or less	$	29,035	$	29,075	$	27,725	$	27,735	$	34,305	$	34,135	$	27,725	$	27,735
Due after one year through three years	28,334		28,405		29,592		29,700		23,061		22,806		29,592		29,700
	$	57,369	$	57,480	$	57,317	$	57,435	$	57,366	$	56,941	$	57,317	$	57,435

10. Derivative Financial Instruments

Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Our most significant foreign currency exposures relate to Western European countries, Japan, China, Israel, India and Canada. Our foreign currency risk management strategy is principally designed to mitigate the future potential financial impact of changes in the U.S. Dollar value of

anticipated transactions and balances denominated in foreign currency resulting from changes in foreign currency exchange rates. We enter into derivative transactions, specifically foreign currency forward contracts, to manage the exposures to foreign currency exchange risk to reduce earnings volatility. We do not enter into derivatives transactions for trading or speculative purposes.

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 seven 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~~other income (expense), net.

As of ~~December~~March 28, ~~2019~~2020 and September 30, 2019, we had outstanding forward contracts with notional amounts equivalent to the following:


Currency Hedged (in thousands)	December 28, 2019		September 30, 2019		March 28, 2020		September 30, 2019
Canadian / U.S. Dollar	$	7,962	$	9,408	$	5,781	$	9,408
Euro / U.S. Dollar	273,748		308,282		304,482		308,282
British Pound / U.S. Dollar	4,344		3,756		6,713		3,756
Israeli Sheqel / U.S. Dollar	7,824		10,272		8,350		10,272
Japanese Yen / U.S. Dollar	34,103		37,462		18,935		37,462
Swiss Franc / U.S. Dollar	8,116		12,001		13,986		12,001
Danish Kroner/ U.S. Dollar					3,877		—
Swedish Kronor / U.S. Dollar	4,837		20,636		6,873		20,636
Chinese Yuan offshore / U.S. Dollar	1,238		43,387
Singapore Dollar / U.S. Dollar	44,617		34,585		41,190		34,585
Chinese Renminbi / U.S. Dollar	14,369		9,079		5,692		52,466
Russian Ruble / U.S. Dollar	6,360		—		6,876		—
All other	7,837		9,487		3,921		9,487
Total	$	415,355	$	498,355	$	426,676	$	498,355

The following table shows the effect of our non-designated hedges in the Consolidated Statements of Operations for the ~~three~~six months ended ~~December~~March 28, ~~2019~~2020 and ~~December 29, 2018:~~March 30, 2019:


Derivatives Not Designated as Hedging Instruments (in thousands)	Location of Gain or (Loss) Recognized in Income	Net realized and unrealized gain or (loss) (excluding the underlying foreign currency exposure being hedged)					Location of Gain or (Loss) Recognized in Income	Net realized and unrealized gain or (loss) (excluding the underlying foreign currency exposure being hedged)
		Three months ended						Three months ended					Six months ended
		December 28, 2019		December 29, 2018				March 28, 2020		March 30, 2019			March 28, 2020		March 30, 2019
Forward Contracts	Other income (expense), net	$	693	$	(987	)	Other income (expense), net	$	2,151	$	(1,752	)	$	2,844	$	(2,739	)

In the first three and ~~three~~six months ended ~~December~~March 28, ~~2019 there~~2020 foreign currency losses, net were ~~0 gains or losses on foreign currency.~~$2.5 million and $2.6 million, respectively. In the first three and ~~three~~six months ended ~~December 29, 2018~~March 30, 2019 foreign currency losses, net were $0.2 ~~million.~~million and $0.4 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 Sheet. We designate certain foreign exchange forward contracts as net investment hedges against exposure on translation of balance sheet accounts of Euro functional subsidiaries. Net investment hedges

partially offset the impact of foreign currency translation adjustment recorded in accumulated other comprehensive loss on the Consolidated Balance Sheet. All foreign exchange forward contracts are carried at fair value on the Consolidated Balance Sheet and the maximum duration of foreign exchange forward contracts is approximately three months.

Net investment hedge relationships are designated at inception, and effectiveness is assessed retrospectively on a quarterly basis using the net equity position of Euro functional subsidiaries. As the forward contracts are highly effective in offsetting exchange rate exposure, we record changes in these net investment hedges in accumulated other comprehensive loss and subsequently reclassify them to

foreign currency translation adjustment in accumulated other comprehensive loss at the time of forward contract maturity. Changes in the fair value of foreign exchange forward contracts due to changes in time value are excluded from the assessment of effectiveness. Our derivatives are not subject to any credit contingent features. We manage credit risk with counterparties by trading among several counterparties and we review our counterparties’ credit at least quarterly.

As of ~~December~~March 28, ~~2019~~2020 and September 30, 2019, we had outstanding forward contracts designated as net investment hedges with notional amounts equivalent to the following:


Currency Hedged (in thousands)	December 28, 2019		September 30, 2019		March 28, 2020		September 30, 2019
Euro / U.S. Dollar	$	151,595	$	183,396	$	182,095	$	183,396
Total	$	151,595	$	183,396	$	182,095	$	183,396

The following table shows the effect of our derivative instruments designated as net investment hedges in the Consolidated Statements of Operations for the second quarter and first ~~three~~six months ended ~~December~~March 28, ~~2019~~2020 and ~~December 29, 2018~~March 30, 2019 (in thousands):


Derivatives Designated as Hedging Instruments	Gain or (Loss) Recognized in OCI						Location of Gain or (Loss) Reclassified from OCI	Gain or (Loss) Reclassified from OCI					Location of Gain or (Loss) Excluded from Effectiveness Testing	Gain or (Loss) Recognized-Excluded Portion				Gain or (Loss) Recognized in OCI					Location of Gain or (Loss) Reclassified from OCI	Gain or (Loss) Reclassified from OCI						Location of Gain or (Loss) Excluded from Effectiveness Testing	Gain or (Loss) Recognized-Excluded Portion
	Three months ended							Three months ended						Three months ended				Three months ended						Three months ended							Three months ended
	December 28, 2019			December 29, 2018				December 28, 2019			December 29, 2018			December 28, 2019		December 29, 2018		March 28, 2020			March 30, 2019			March 28, 2020			March 30, 2019				March 28, 2020		March 30, 2019
Forward Contracts	$	(3,565	)	$	(698	)	Accumulated other comprehensive loss	$	(762	)	$	773	Other income (expense), net	$	1,229	$	486	$	(2,140	)	$	1,466	Accumulated other comprehensive loss	$	(6,016	)	$	(1,813	)	Other income (expense), net	$	962	$	1,107

																		Six months ended						Six months ended							Six months ended
																		March 28, 2020			March 30, 2019			March 28, 2020			March 30, 2019				March 28, 2020		March 30, 2019
Forward Contracts																		$	(5,706	)	$	768	Accumulated other comprehensive loss	$	(6,778	)	$	(1,040	)	Other income (expense), net	$	2,191	$	1,593

As of ~~December~~March 28, ~~2019,~~2020, 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.

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				Fair Value of Derivatives Designated As Hedging Instruments				Fair Value of Derivatives Not Designated As Hedging Instruments
	December 28, 2019		September 30, 2019		December 28, 2019		September 30, 2019		March 28, 2020		September 30, 2019		March 28, 2020		September 30, 2019
Derivative assets ⁽¹⁾:
Forward Contracts	$	—	$	1,674	$	757	$	1,390	$	—	$	1,674	$	2,708	$	1,390
Derivative liabilities ⁽²⁾:
Forward Contracts	$	663	$	—	$	1,031	$	2,771	$	1,841	$	—	$	2,233	$	2,771


(1)	As of ~~December~~March 28, ~~2019~~2020 and September 30, 2019, current derivative assets of $~~0.8~~2.7 million and $3.1 million, respectively, are recorded in other current assets in the Consolidated Balance Sheets.


(2)	As of ~~December~~March 28, ~~2019~~2020 and September 30, 2019, current derivative liabilities of $~~1.7~~4.1 million and $2.8 million, respectively, are recorded in accrued expenses and other current liabilities in the Consolidated Balance Sheets.

Offsetting Derivative Assets and Liabilities

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

The following table sets forth the offsetting of derivative assets as of ~~December~~March 28, ~~2019:~~2020:


(in thousands)	Gross Amounts Offset in the Consolidated Balance Sheets						Gross Amounts Not Offset in the Consolidated Balance Sheets							Gross Amounts Offset in the Consolidated Balance Sheets						Gross Amounts Not Offset in the Consolidated Balance Sheets
As of December 28, 2019	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
As of March 28, 2020														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	$	757	$	—	$	757	$	(757	)	$	—	$	—	$	2,708	$	—	$	2,708	$	(2,708	)	$	—	$	—

The following table sets forth the offsetting of derivative liabilities as of ~~December~~March 28, ~~2019:~~2020:


(in thousands)	Gross Amounts Offset in the Consolidated Balance Sheets						Gross Amounts Not Offset in the Consolidated Balance Sheets							Gross Amounts Offset in the Consolidated Balance Sheets						Gross Amounts Not Offset in the Consolidated Balance Sheets
As of December 28, 2019	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
As of March 28, 2020														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	$	1,694	$	—	$	1,694	$	(757	)	$	—	$	937	$	4,074	$	—	$	4,074	$	(2,708	)	$	—	$	1,366

11. Segment and Geographic Information

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

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


(in thousands)	Three months ended						Three months ended						Six months ended
	December 28, 2019			December 29, 2018			March 28, 2020			March 30, 2019			March 28, 2020			March 30, 2019
Software Products
Revenue	$	314,366		$	293,243		$	324,080		$	249,521		$	638,446		$	542,764
Operating Costs ⁽¹⁾	102,192			91,628			94,912			93,913			197,104			185,541
Profit	212,174			201,615			229,168			155,608			441,342			357,223

Professional Services
Revenue	41,744			41,446			35,523			40,930			77,267			82,376
Operating Costs ⁽²⁾	33,747			31,863			33,425			32,326			67,172			64,189
Profit	7,997			9,583			2,098			8,604			10,095			18,187

Total segment revenue	356,110			334,689			359,603			290,451			715,713			625,140
Total segment costs	135,939			123,491			128,337			126,239			264,276			249,730
Total segment profit	220,171			211,198			231,266			164,212			451,437			375,410

Unallocated operating expenses:
Sales and marketing expenses	100,152			94,496			100,292			94,200			200,444			188,696
General and administrative expenses	26,919			25,771			27,795			25,856			54,714			51,627
Restructuring charges, net	14,034			16,586
Restructuring and other charges, net	—			1,907			18,242			26,980			32,276			45,473
Intangibles amortization	13,576			12,653			14,167			12,772			27,743			25,425
Stock-based compensation	27,936			29,407			20,484			26,967			48,420			56,374
Other unallocated operating expenses (income) ⁽³⁾	7,129			334			261			295			7,390			629
Total operating income	30,425			30,044
Total operating income (loss)							50,025			(22,858		)	80,450			7,186

Interest expense	(12,098		)	(10,276		)	(32,618		)	(11,383		)	(44,716		)	(21,659		)
Other income (expense), net	704			655			(1,629		)	821			(925		)	1,475
Income before income taxes	$	19,031		$	20,423
Income (loss) before income taxes							$	15,778		$	(33,420	)	$	34,809		$	(12,998	)

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

(2) Operating costs for the Professional Services segment include all cost of professional services revenue, excluding stock-based compensation and fair value adjustments for deferred services costs.

(3) Other unallocated operating expenses include acquisition-related and other transactional costs and fair value adjustments for deferred services costs.

Our international revenue is presented based on the location of our customer. Revenue for the geographic regions in which we operate is presented below.


(in thousands)	Three months ended				Three months ended				Six months ended
Revenue	December 28, 2019		December 29, 2018		March 28, 2020		March 30, 2019		March 28, 2020		March 30, 2019
Americas	$	155,973	$	141,853	$	153,993	$	119,717	$	309,967	$	261,570
Europe	136,521		111,352		146,422		119,045		282,943		230,397
Asia-Pacific	63,616		81,484		59,188		51,689		122,803		133,173
Total revenue	$	356,110	$	334,689	$	359,603	$	290,451	$	715,713	$	625,140

12. Income Taxes

In the ~~first~~second ~~three~~quarter and first six months of 2020, our effective tax rate was ~~(86)%~~55% on pre-tax income of ~~$19.0~~$15.8 million and (22)% on a pre-tax income of $34.8 million, respectively, compared to ~~(3)~~(30)% on pre-tax ~~income~~loss of ~~$20.4~~$(33.4) million and (73)% on a pre-tax loss of $(13.0) million in the ~~first~~second quarter and first ~~three~~six months of 2019, respectively. In the first ~~three~~six months of 2020 and 2019, our effective tax rate differed from the statutory federal income tax rate of 21% due to U.S. tax reform, our corporate structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate, the excess tax benefit related to stock-based compensation and the indirect effects of the adoption of ASC 606. Additionally, in the first ~~three~~six months of 2020 and 2019, we reduced the valuation allowance by ~~$21.0~~$21.2 million and $1.8 million as the result of the Onshape and Frustum acquisitions, respectively. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland. In 2020 and 2019, the foreign rate differential predominantly relates to these Irish earnings.

On March 27, 2020, the U.S. Federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES ACT”). The CARES Act is an emergency economic stimulus package in response to the coronavirus outbreak, which among other things contains numerous income tax provisions. While we continue to evaluate the impact of the CARES Act, we do not currently believe it will have a material impact on our consolidated financial statements or related disclosures.

We have concluded, based on the weight of available evidence, that a full valuation allowance continues to be required against our U.S. net deferred tax assets as they are not more likely than not to be realized in the future. We will continue to reassess our valuation allowance requirements each financial reporting period. However, we believe that there is a reasonable possibility that within the next 12 months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of any valuation allowance release are subject to change on the basis of the level of profitability that we are able to actually achieve.

In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the Internal Revenue Service in the U.S. We regularly assess the likelihood of additional assessments by tax authorities and provide for these matters as appropriate. We are currently under audit by tax authorities in several jurisdictions. Audits by tax authorities typically involve examination of the deductibility of certain permanent items, limitations on net operating losses and tax credits. Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in material changes in our estimates.

As of ~~December~~March 28, ~~2019~~2020 and September 30, 2019, we had unrecognized tax benefits of ~~$12.5~~$13.2 million and $11.5 million, respectively. If all our unrecognized tax benefits as of ~~December~~March 28, ~~2019~~2020 were to become recognizable in the future, we would record a benefit to the income tax provision of ~~$12.5~~$13.2 million, which would be partially offset by an increase in the U.S. valuation allowance of ~~$6.1~~$6.3 million.

Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in favorable or unfavorable changes in our estimates. We believe it is reasonably possible that within the next 12 months the amount of unrecognized tax benefits related to the resolution of multi-jurisdictional tax positions could be reduced by up to $0.5 million as audits close and statutes of limitations expire.

In the fourth quarter of 2016, we received an assessment of approximately $12 million from the tax authorities in South Korea. The assessment relates to various tax issues, primarily foreign withholding taxes. We have appealed and intend to vigorously defend our positions. We believe that upon completion of a multi-level appeal process it is more likely than not that our positions will be sustained. Accordingly, we have not recorded a tax reserve for this matter. We paid this assessment in the first quarter of 2017 and have recorded the amount in other assets, pending resolution of the appeal process. If the South Korean tax authorities were to prevail then, in addition to the $12 million already assessed, the potential additional exposure through 2019 would be approximately $13 million. We are continuing to work with our advisors during the court process and still believe our position is sustainable.

In April 2020 we became aware of a potential new interpretation of a withholding tax law in a non-U.S. jurisdiction and its application to certain transactions that was not previously reasonably knowable by us. We are evaluating this new information and the effect, if any, on our tax positions. The amount of any potential impact, if any, on our financial statements is not yet estimable at this time.

13. Debt

At ~~December~~March 28, ~~2019~~2020 and September 30, 2019, we had the following ~~long-term~~ debt obligations:

(in thousands) December 28,
2019 September 30,
2019
6.000% Senior notes due 2024 $ 500,000
$ 500,000
Credit facility revolver 628,125
173,125
Total debt 1,128,125
673,125
Unamortized debt issuance costs for the Senior notes⁽¹⁾
(3,780 ) (3,991 )
Total debt (all long term), net of issuance costs $ 1,124,345
$ 669,134



(in thousands)	March 28, 2020			September 30, 2019
4.000% Senior notes due 2028⁽¹⁾	$	500,000		$	—
3.625% Senior notes due 2025⁽¹⁾	500,000			—
6.000% Senior notes due 2024⁽²⁾	500,000			500,000
Credit facility revolver⁽³⁾	148,125			173,125
Total debt	1,648,125			673,125
Unamortized debt issuance costs for the Senior notes⁽⁴⁾	(17,403		)	(3,991		)
Total debt, net of issuance costs	$	1,630,722		$	669,134


(1)	The 2028 and 2025 notes issued in February 2020 were classified as long-term debt as of March 28, 2020 on the Consolidated Balance Sheet.


(2)	The 2024 notes issued in May 2016 were classified as short-term debt as of March 28, 2020 and as long-term debt as of September 30, 2019 on the Consolidated Balance Sheets.

(3)

The amount outstanding under the credit facility revolver was classified as long-term debt as of March 28, 2020 and September 30, 2019 on the Consolidated Balance Sheets. Unamortized debt issuance costs related to the credit facility were ~~$3.9~~$5.5 million and $3.1 million as of ~~December~~March 28, ~~2019~~2020 and September 30, 2019, respectively, and were included in other assets inon the Consolidated Balance Sheets.

(4)

Unamortized debt issuance costs related to the 2024 notes were $3.6 million as of March 28, 2020 and were included in short-term debt on the Consolidated Balance Sheet. Of the $14.1 million in financing costs incurred in connection with the issuance of the 2028 and 2025 notes, unamortized debt issuance costs were $13.8 million as of March 28, 2020 and were included in long-term debt on the Consolidated Balance Sheet. Unamortized debt issuance costs as of September 30, 2019 related to the 2024 notes and were included in long-term debt on the Consolidated Balance Sheet.

Senior Notes

In ~~May 2016,~~February 2020, we issued $500 million in aggregate principal amount of ~~6.0%~~4.0% senior, unsecured long-term debt at par value, due in ~~2024. We~~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). In the second quarter of 2020, we used $460 million of the net proceeds from the sale of the notes to repay a portion of ~~our~~the outstanding revolving loan under our ~~current~~ credit facility. In the third quarter of 2020, we will use the remaining net proceeds from the sale of the notes to redeem the $500 million aggregate principal amount of our outstanding 6.0% senior notes due in 2024 (the 2024 notes). The redemption price for the 2024 notes is 103% of the aggregate principal amount of the notes, plus accrued and unpaid interest to, but excluding, May 15, 2020.

As of March 28, 2020, we recognized in interest expense $15.0 million for fees to be paid upon early redemption of the 2024 notes.

As of March 28, 2020, the total estimated fair value of the 2028, 2025 and 2024 senior notes was approximately $468.8 million, $471.0 million and $502.5 million, respectively, based on quoted prices for the notes on that date.

We were in compliance with all the covenants for all of our senior notes as of March 28, 2020.

Terms of the 2028 and 2025 Notes

Interest on the 2028 and 2025 notes is payable semi-annually on ~~November~~February 15 and ~~May~~August 15. The debt indenture for the 2028 and 2025 notes includes covenants that limit our ability to, among other things, incur additional debt, grant liens on our properties or capital stock, enter into sale and leaseback transactions or asset sales, and make capital distributions.

We ~~were in compliance with all the covenants as of December 28, 2019.~~

~~On and after May 15, 2019, we~~ may, on one or more occasions, redeem the ~~senior~~2025 and 2028 notes ~~at any time~~ in whole or ~~from time to time~~ in part at specified redemption prices. In certain circumstances constituting a change of control, we will be required to make an offer to repurchase the ~~senior~~ notes at a purchase price equal to 101% of the aggregate principal amount of the notes, plus accrued and unpaid interest. Our ability to repurchase the ~~senior~~ notes inupon such event may be limited by law, by the indenture associated with the ~~senior~~ notes, by our then-available financial resources or by the terms of other agreements to which we may be party at such time. If we fail to repurchase the ~~senior~~

notes as required by the indenture, it would constitute an event of default under the indenture which, in turn, may also constitute an event of default under other obligations.

~~As of December 28, 2019, the total estimated fair value of the senior notes was approximately $522.5 million, based on quoted prices for the notes on that date.~~

Credit Agreement

~~We maintain~~In February 2020, we entered into a Third Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as Administrative Agent, for a new secured multi-currency bank credit facility with a syndicate of ~~16 banks for which JPMorgan Chase Bank, N.A. acts as Administrative Agent. We~~banks. The new credit facility replaced our prior credit facility. As with the prior credit facility, we expect to use the credit facility for general corporate purposes, including acquisitions of businesses, share repurchases and working capital requirements. As of ~~December~~March 28, ~~2019,~~2020, the fair value of our credit facility approximates its book value.

~~In November 2019, we amended~~The credit facility consists of a $1 billion revolving credit facility, which may be increased by up to an additional $500 million in the aggregate if the existing or additional lenders are willing to make such increased commitments. The maturity date of the credit facility ~~to increase the revolving loan commitment from $700 million to $1 billion.~~is February 13, 2025, when all remaining amounts outstanding will be due and payable. The revolving loan commitment does not require amortization of principal and may be repaid in whole or in part prior to the scheduled maturity date at our option without penalty or premium. ~~The credit facility matures on September 13, 2023, when all remaining amounts outstanding will be due and payable in full.~~

PTC Inc. and certain eligible foreign subsidiaries are eligible to borrow under the credit facility. ~~Any borrowings by PTC Inc.~~The obligations under the credit facility ~~would~~are required to be guaranteed by PTC Inc.’s material domestic subsidiaries that become parties to the subsidiary guaranty, if any. As of the filing of this Form 10-Q, there are no subsidiary guarantors of the obligations under the credit facility. Any borrowings by eligible foreign subsidiary borrowers would be guaranteed by PTC Inc. and any subsidiary guarantors. As of the filing of this Form 10-Q, there were 0 borrowings by eligible foreign subsidiaries. In addition, substantially all existing and after-acquired personal property of PTC Inc. and certain of its material domestic subsidiaries that become parties to the subsidiary guaranty, if any, is or will be, in the case of such subsidiary guarantors, subject to first priority perfected liens in favor of the lenders under the credit facility. 100% of the voting equity interests of certain of PTC Inc.’s domestic subsidiaries and 65% of its material first-tier foreign subsidiaries are pledged as collateral for the obligations under the credit facility.

Loans under the credit facility bear interest at variable rates which reset every 30 to 180 days depending on the rate and period selected by PTC as described below. As of ~~December~~March 28, ~~2019,~~2020, the annual rate for borrowings outstanding was ~~3.7%~~2.6%. Interest rates on borrowings outstanding under the credit facility range from 1.25% to 1.75% above an adjusted LIBO rate (or an agreed successor rate) for Euro currency borrowings or ~~would~~ range from 0.25% to 0.75% above the defined base rate (the greater of the Prime Rate, the NYFRB rate plus 0.5%, or an adjusted LIBO rate plus 1%) for base rate borrowings, in each case based upon PTC’s total leverage ratio. Additionally, PTC may borrow certain foreign currencies at rates set in the same range above the respective ~~London interbank offered interest~~LIBO rates (or agreed successor rates) for those currencies, based on PTC’s total leverage ratio. A quarterly commitment fee on the undrawn portion of the credit facility is required, ranging from 0.175% to 0.30% per annum based upon PTC’s total leverage ratio.

The credit facility limits PTC’s and its subsidiaries’ ability to, among other things: incur additional indebtedness, incur liens or guarantee obligations; pay dividends (other than to PTC) and make other distributions; make investments and enter into joint ventures; dispose of assets; and engage in transactions with affiliates, except on an arms-length basis. Under the credit facility, PTC and its material domestic subsidiaries may not invest cash or property in, or loan to, PTC’s foreign subsidiaries in aggregate amounts exceeding ~~$100.0~~$100 million for any purpose and an additional ~~$200.0~~$200 million for acquisitions of businesses. In addition, under the credit facility, PTC and its subsidiaries must maintain the following financial ratios:


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


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


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

As of ~~December~~March 28, ~~2019,~~2020, our total leverage ratio was ~~3.63~~3.36 to 1.00, our senior secured leverage ratio was ~~2.04~~0.47 to 1.00 and our interest coverage ratio was ~~7.69~~7.86 to 1.00 and we were in compliance with all financial and operating covenants of the credit facility.

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

We incurred ~~$1.0~~$2.0 million in financing costs in connection with the February 2020 credit facility and $1.0 million in connection with a November 2019 amendment to our prior credit ~~facility amendment.~~facility. These origination costs are recorded as deferred debt issuance costs and are included in other assets. Financing costs are expensed over the remaining term of the obligations.

In the ~~first~~second quarter and first six months of 2020 ~~and 2019~~ we paid ~~$16.9~~$6.8 million and ~~$16.7~~$23.7 million, respectively, of interest on our ~~debt,~~debt. In the second quarter and first six months of 2019 we paid $3.8 million and $20.4 million of interest, respectively, on our debt. The average interest rate on borrowings outstanding in the second quarter and first six months of 2020 was approximately 4.6% and 4.8%, respectively. The average interest rate on borrowings outstanding ~~during~~in the ~~first~~second quarter and first six months of ~~2020 and~~ 2019 ~~and~~ was approximately ~~4.9%~~5.3% and 5.4%, respectively.

14. Leases

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets and operating lease obligations on our Consolidated Balance Sheets. Our operating leases are primarily for office space, cars, servers, and office equipment. We made an election not to separate lease components from non-lease components for office space, servers and office equipment. Finance leases are included in property and equipment, accrued expenses and other current liabilities, and other liabilities on our Consolidated Balance Sheets.

Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the leases. Right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The right-of-use assets include any lease payments made and exclude lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Our operating leases expire at various dates through 2037. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Certain office space leases require us to pay for taxes, insurance, maintenance and other operating expenses in addition to rent.

Our headquarters are located at 121 Seaport Boulevard, Boston, Massachusetts (the Boston lease). The Boston lease is for approximately 250,000 square feet and runs from January 1, 2019 through June 30, 2037. Base rent for the first year of the lease is $11.0 million and will increase by $1 per square foot per year thereafter ($0.3 million per year) with base rent first becoming payable on July 1, 2020. In addition to the base rent, ~~PTC is~~we are required to pay ~~its~~our pro rata portions of building operating costs and real estate taxes (together, “Additional Rent”). Additional Rent is estimated to be approximately $7.1 million for the first year we begin paying rent. The lease provides for $25 million in landlord funding for leasehold improvements ($100 per square foot). ~~Leasehold~~The leasehold improvement funding provision was fully utilized by us and was reflected as a derecognition adjustment to the right-of-use asset.

The components of lease cost reflected in the ~~Consolidate~~Consolidated Statement of Operations for the ~~three~~second quarter and first six months ended ~~December~~March 28, ~~2019~~2020 were as follows:


(in thousands)	Three months ended			Three months ended			Six months ended
	December 28, 2019			March 28, 2020			March 28, 2020
Operating lease cost	$	8,757		$	10,386		$	19,143
Short-term lease cost	1,874			1,017			2,890
Variable lease cost	1,914			575			2,490
Sublease income	(1,012		)	(1,013		)	(2,025		)
Total lease cost	$	11,533		$	10,965		$	22,498

~~Other~~

Supplemental cash flow and right-of use assets information ~~related to leases~~ for the three and six months ended ~~December~~March 28, ~~2019~~2020 was as follows:

(dollar amounts in thousands) Three months ended
December 28, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases $ 5,498

Right-of-use assets obtained in exchange for new operating lease liabilities $ 5,380
Right-of-use assets obtained in exchange for new financing lease liabilities $ 1,500
Weighted-average remaining lease term - operating leases 12.4 years
Weighted-average remaining lease term - financing leases 5 years
Weighted-average discount rate - operating leases 5.6 %
Weighted-average discount rate - financing leases 3.0 %



(dollar amounts in thousands)	Three months ended			Six months ended
	March 28, 2020			March 28, 2020
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	9,642		$	15,140

Right-of-use assets obtained in exchange for new operating lease liabilities⁽¹⁾	$	(1,230	)	$	4,151
Right-of-use assets obtained in exchange for new financing lease liabilities	$	—		$	1,500


(1)	For the three months ending March 28, 2020, right-of-use assets obtained in exchange for new operating lease liabilities is a net reduction to the right-of-use assets due to lease incentives being earned for right-of-use asset obtained in the first quarter of 2020.

Supplemental balance sheet information related to the leases as of March 28, 2020 was as follows:



	As of
	March 28, 2020
Weighted-average remaining lease term - operating leases	12.32 years
Weighted-average remaining lease term - financing leases	5 years
Weighted-average discount rate - operating leases	5.5	%
Weighted-average discount rate - financing leases	3.0	%

Maturities of lease liabilities as of ~~December~~March 28, ~~2019~~2020 are as follows:


(in thousands)	Operating Leases			Operating Leases
Remainder of 2020	$	21,863		$	22,462
2021	30,858			42,670
2022	22,045			28,457
2023	18,939			21,174
2024	17,965			17,757
Thereafter	185,847			186,554
Total future lease payments	$	297,517		$	319,074
Less: imputed interest	(72,254		)	(94,916		)
Total	$	225,263		$	224,158

As of ~~December~~March 28, ~~2019,~~2020, we have ~~additional~~ operating ~~and finance~~ leases that have not yet ~~commenced of $3.8 million and $1.5 million, respectively.~~commenced. These leases will commence in 2020 with lease terms ~~of 7~~between 3 years to 5 ~~years.~~years and approximate future lease payments of $2.2 million.

Under the prior lease standard (ASC 840), as of September 30, 2019, future minimum lease payments under ~~noncancellable~~non-cancellable operating leases are as follows (in thousands):



2020	$	31,868
2021	33,094
2022	25,624
2023	19,279
2024	16,909
Thereafter	186,037
Total minimum lease payments	$	312,811

Exited (Restructured) Facilities

As ofMarch 28, 2020, we have net liabilities of $17.1 million related to excess facilities (compared to $16.5 million at September 30, 2019), representing $4.5 million of right-of-use assets and $21.6 million of lease obligations, of which $13.3 million is classified as short term and $8.3 million is classified as long term.

In determining the amount of right-of-use assets for restructured facilities, we are required to estimate such factors as future vacancy rates, the time required to sublet properties and sublease rates. Updates to these estimates may result in revisions to the value of right-of-use assets recorded. The amounts recorded are based on the net present value of estimated sublease income.As of March 28, 2020, the right-of-use assets for exited facilities reflects discounted committed sublease income of approximately $3.3 million and uncommitted sublease income of approximately $1.2 million. As a result of changes in our sublease income assumptions and an incremental obligation to exit a portion of our former headquarters facility early, in the three months ended March 28, 2020, we recorded a facility impairment charge of $4.0 million. In addition, in the second quarter of 2020, we exited the former Onshape headquarters lease and recorded a related $0.7 million impairment charge.

In the second quarter and the first six months ended March 28, 2020 we made payments of $2.1 million and $4.5 million, respectively, related to lease costs for exited facilities.

15. Commitments and Contingencies

Legal and Regulatory Matters

Korean Tax Audit

In July 2016, we received an assessment of approximately $12 million from the tax authorities in South Korea related to an ongoing tax audit. See Note 12. Income Taxes for additional information.

Legal Proceedings

We are subject to various other legal proceedings and claims that arise in the ordinary course of business. We do not believe that resolving the legal proceedings and claims that we are currently subject to will have a material adverse impact on our financial condition, results of operations or cash flows. However, the results of legal proceedings cannot be predicted with certainty. Should any of these legal proceedings and claims be resolved against us, the operating results for a reporting period could be adversely affected.

Accruals

With respect to legal proceedings and claims, we record an accrual for a contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. For legal proceedings and claims for which the likelihood that a liability has been incurred is more than remote but less than probable, we estimate the range of possible outcomes. As of ~~December~~March 28, ~~2019,~~2020, we estimate approximately ~~$0.6~~$0.8 million to ~~$2.3~~$3.0 million in legal proceedings and claims, of which we had accrued ~~$0.4~~$0.8 million.

Guarantees and Indemnification Obligations

We enter into standard indemnification agreements in the ordinary course of our business. Under such agreements with our business partners or customers, we indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to our products, claims relating to property damage or personal injury resulting from the performance of services by us or our subcontractors and data breaches. The maximum potential amount of future payments we could be required to make under indemnification agreements for intellectual property and damage and injury claims is unlimited; in most cases the maximum potential amount for indemnification for data breaches is capped in those contracts. 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 in effect at the time of delivery of the licensed products for a specified period of time. Additionally, we generally warrant that our consulting services will be performed consistent with generally accepted industry standards. 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.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Overview

PTC is a global software and services company that delivers solutions to power our industrial customers' digital transformations, helping them to better design, manufacture, operate, and service their products. Our Internet of Things (IoT) and Augmented Reality (AR) solutions enable companies to connect factories and plants, smart products, and enterprise systems to transform their businesses. These products, along with Onshape, are considered our Growth Products. The primary products in our Core Products portfolio are innovative Computer-Aided Design (CAD) and Product Lifecycle Management (PLM) solutions that enable manufacturers to create, innovate, and service products. Our Focused Solutions Group (FSG) is a family of software products that target specific vertical industries where we can deliver unique domain expertise and a competitive advantage with Application Lifecycle Management (ALM) products, Service Lifecycle Management (SLM) products, and other niche tailored solutions.

Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q that are not historic facts, including statements about our future financial and growth expectations and targets, are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. These risks include: the COVID-19 pandemic's impact on the global macroeconomic environment and our business could be more severe and prolonged than we expect; the macroeconomic and/or global manufacturing climates may deteriorate further due to, among other factors, the geopolitical environment, including the ~~U.S. Administration's~~ focus on technology transactions with non-U.S. entities and potential expanded prohibitions, and ongoing trade tensions and tariffs; customers may ~~not purchase~~continue to delay or reduce purchases of new software, to reduce the number of subscriptions they carry, or delay payments to us due to the COVID-19 pandemic, all of which would adversely affect ARR and our ~~solutions or convert existing support contracts to subscription when or at the rates we expect;~~financial results, including cash flow; our businesses, including our Internet of Things (IoT), Augmented Reality and Onshape businesses, may not expand and/or generate the revenue we ~~expect;~~expect if customers are slower to adopt ~~these~~those technologies than we expect or adopt competing technologies, which would adversely affect our ARR, revenue and cash flows; customers may not renew subscription or support contracts with us as we expect if they elect to switch to competing technologies or otherwise cease using our software, which would adversely affect our ARR, revenue and cash flows; foreign currency exchange rates may vary from our expectations and thereby affect our reported revenue and expense; the mix of revenue between license and subscription solutions, support and professional services could be different than we expect, which could impact our EPS results; license purchasestechnologies; bookings associated with minimum ~~ACV~~purchase commitments under our Strategic Alliance Agreement with Rockwell Automation may not result in subscription contracts sold through to end-user customers; our strategic initiatives and investments may not generate the revenue we expect; we may be unable to expand our partner ecosystem as we expect and our partners may not generate the revenue we expect; ~~and technologies we acquire may not provide the access to new customers and markets that we expect if those customers and markets are not receptive to the technology;~~ we may be unable to ~~integrate the acquired technologies or entities~~generate sufficient operating cash flow to repay our outstanding debt when or as we expect ~~which~~or to return 50% of free cash flow to shareholders under our long-term capital plan, and other uses of cash or our credit facility limits or other matters could ~~adversely affect our ability to offer additional products~~preclude such repayments or ~~solutions; customers may not adopt acquired technologies as we expect, which would adversely affect our revenue.~~share repurchases. In addition, our assumptions concerning our future GAAP and non-GAAP effective income tax rates are based on estimates and other factors that could change, including the geographic mix of our revenue, expenses and profits, as well as other risks and uncertainties described below throughout or referenced in Part II, Item 1 A. Risk Factors of this report.

Operating and Non-GAAP Financial Measures

Our discussion of results includes discussion of our ARR operating measure and non-GAAP financial measures. ARR and our non-GAAP financial measures, including the reasons we use those measures, are described below in Results of Operations - Operating Measure and Results of Operations - Non-GAAP Financial Measures, respectively. You should read those sections to understand ~~those~~our operating and non-GAAP financial measures.

Executive Overview

~~Revenue~~Our Q2’20 financial results were solid, reflecting the strength of our recurring revenue model. We delivered 10% ARR growth (11% on a constant currency basis), 24% revenue growth (25% on a constant currency basis), and 117% EPS growth (173% non-GAAP EPS growth) over Q2’19. We experienced some pressure on new bookings in the final weeks of the quarter related to the COVID-19 pandemic resulting in new license bookings being down mid-teens over Q2’19. The impact on new bookings was ~~up 6% year over year (8% constant currency), despite a 78% decrease year over year~~late in ~~perpetual software revenue~~the quarter and varied across our product portfolio and geographies as companies were affected by and

responded to the COVID-19 pandemic in regions around the world at different times. However, renewals were essentially unaffected by the crisis in Q2’20.

We generated $88 million of cash from operations in Q2'20 compared to $141 million in Q2'19, primarily reflecting lower accounts receivable collections in the second quarter of 2020 than in the second quarter of 2019 due to the last time ~~purchases of~~ perpetual ~~licenses~~license sales in the first quarter of 2019

at the end of which we ceased substantially all perpetual license sales. Operating margin for the quarter was flat year over year despite $7.1 million of acquisition-related charges and increased intangible asset amortization expense associated with our acquisition of Onshape, a SaaS CAD and data management platform. Non-GAAP operating margin of 26% increased 200 basis points over the fourth quarter of 2019 and declined 100 basis points compared to the prior year period due to the significant amount of perpetual license revenue in the first quarter of 2019. EPS was up year over year, primarily due to a $21 million tax benefit related to the reversal of the U.S. valuation allowance associated with the acquisition of Onshape, and lower share count due to share buybacks in 2019. Non-GAAP EPS was up 2% year over year.

We generated $8 million of cash from operations in the first three months of 2020 compared to $21 million in the first three months of 2019. Cash from operations for the first three months of 2020 includes $3 million ofAsia Pacific as well as higher restructuring payments ~~and $6 million of acquisition-related payments compared to $8 million of restructuring payments in~~during the ~~prior year period.~~quarter. In ~~the first quarter of 2020,~~Q2'20, we ~~amended our credit facility to increase the revolving loan commitment from $700 million to $1 billion (which may be increased by up to an additional~~issued $500 million in aggregate principal amount of 4.0% Senior Notes due in 2028 and $500 million in aggregate principal amount of 3.625% Senior Notes due in 2025. We used $460 million of the ~~aggregate if~~net proceeds from the ~~existing or additional lenders are willing~~sale of the notes to ~~make such increased commitments).~~repay a portion of the outstanding revolving loan under our credit facility. As of ~~December~~March 28, ~~2019,~~2020, the balance outstanding under our credit facility was ~~$628~~$148 million and total debt outstanding was ~~$1,128 million.~~$1,648 million, $500 million of which will be repaid when we redeem our 6% Senior Notes due 2024 in May 2020.

~~ARR was $1,158 million~~Future Expectations; COVID-19 Impact

Our results have been impacted, and we expect will continue to be impacted, by our ability to close large transactions, which has been adversely impacted by the COVID-19 pandemic as ~~of the end of the first quarter of 2020. This represents 11% growth (11% constant currency) compared~~customers delay purchases due to the ~~end~~macroeconomic uncertainty and the inability to implement many of our solutions due to the ~~first~~on-site work generally required to do so. The amount of revenue attributable to large transactions, and the number of such transactions, may also vary significantly from quarter ~~of 2019, reflecting solid performance~~to quarter based on customer purchasing decisions and macroeconomic conditions. Such transactions may have long lead times as they often follow a lengthy product selection and evaluation process and, for existing customers, are influenced by contract expiration cycles. This may cause volatility in our ~~Growth and Core Product groups and in our global channel. ARR growth in our Growth Products was up 35%~~results.

We currently anticipate new bookings will be down approximately 30% year over year ~~(36% constant currency). ARR~~ for the second half of 2020 due to the COVID-19 pandemic as described above. We also anticipate that our ~~Core Products was up~~churn rate may deteriorate to approximately 8% for the year rather than a modest improvement over the fiscal 2019 churn rate as previously expected as customers may not renew their subscriptions or support contracts in full due to the COVID-19 pandemic if they reduce their workforces and users or due to macroeconomic and liquidity uncertainty. We expect to continue to control costs with operating expense growth of roughly 2% for the full year compared to our previous projection of 9% expense growth year over year, ~~(10% constant currency).~~primarily due to the restructuring actions in the first half of 2020, savings on certain expenses due to the COVID-19 pandemic (such as converting our annual LiveWorx event to a virtual event and curtailing other travel), as well as lower anticipated variable compensation and increased cost discipline related to employee hiring. Despite the challenges associated with COVID-19, we are anticipating FY'20 ARR growth of approximately 11%, revenue growth of approximately 12%, and a 30-basis point increase (90-basis points on non-GAAP basis) in ~~FSG was up 1% year~~operating margin over ~~year (1% constant currency).~~

We acquired Onshape on November 1, 2019 for $468 million, net of cash acquired. The acquisition is expected to accelerate our ability to attract new customers with a SaaS-based product offering and position the company to capitalize on an industry transition to SaaS. In connection with the acquisition, we borrowed $455 million under our credit facility. Onshape is not expected to be material to our 2020 results.FY'19.

Results of Operations

The following table shows the financial measures that we consider the most significant indicators of our business performance. In addition to providing operating income, operating margin, diluted earnings per share and cash from operations as calculated under GAAP, we provide non-GAAP operating income, non-GAAP operating margin, and non-GAAP diluted earnings per share ~~and adjusted free cash flow~~ for the reported periods. These non-GAAP financial measures exclude the items described in Non-GAAP Financial Measures below. Investors should use these non-GAAP financial measures only in conjunction with our GAAP results.



(Dollar amounts in millions, except per share data)	Three months ended
							Percent Change
	March 28, 2020			March 30, 2019			Actual		Constant Currency
Total recurring revenue	$	315.9		$	239.2		32	%	34	%
Perpetual license	8.2			10.3			(21	)%	(19	)%
Professional services	35.5			40.9			(13	)%	(11	)%
Total revenue	359.6			290.5			24	%	25	%
Total cost of revenue	83.0			79.9			4	%	5	%
Gross margin	276.6			210.5			31	%	33	%
Operating expenses	226.6			233.4			(3	)%	(3	)%
Total costs and expenses	309.6			313.3			(1	)%	(1	)%
Operating income (loss)	50.0			(22.9		)	(319	)%	(288	)%
Non-GAAP operating income⁽¹⁾	$	103.2		$	44.4		133	%	146	%
Operating margin	13.9		%	(7.9		)%
Non-GAAP operating margin⁽¹⁾	28.7		%	15.3		%
Diluted earnings (loss) per share	$	0.06		$	(0.37	)
Non-GAAP diluted earnings per share ^{(1) (2)}	$	0.59		$	0.22
Cash flow from operations ⁽³⁾	$	87.8		$	141.1


(Dollar amounts in millions, except per share data)	Three months ended										Six months ended
							Percent Change										Percent Change
	December 28, 2019			December 29, 2018			Actual		Constant Currency		March 28, 2020			March 30, 2019			Actual		Constant Currency
Total recurring revenue	$	305.4		$	251.4		21	%	23	%	$	621.2		$	490.6		27	%	28	%
Perpetual license	9.0			41.8			(78	)%	(78	)%	17.2			52.1			(67	)%	(67	)%
Professional services	41.7			41.4			1	%	2	%	77.3			82.4			(6	)%	(4	)%
Total revenue	356.1			334.7			6	%	8	%	715.7			625.1			14	%	16	%
Total cost of revenue	87.4			77.4			13	%	14	%	170.4			157.3			8	%	10	%
Gross margin	268.7			257.3			4	%	6	%	545.3			467.9			17	%	18	%
Operating expenses	238.3			227.3			5	%	5	%	464.8			460.7			1	%	1	%
Total costs and expenses	325.7			304.6			7	%	7	%	635.3			618.0			3	%	3	%
Operating income	30.4			30.0			1	%	12	%	80.5			7.2			1,021	%	19,432	%
Non-GAAP operating income⁽¹⁾	$	93.1		$	91.2		2	%	6	%	$	196.3		$	135.6		45	%	51	%
Operating margin	8.5		%	9.0		%					11.2		%	1.1		%
Non-GAAP operating margin⁽¹⁾	26.1		%	27.2		%					27.4		%	21.7		%
Diluted earnings (loss) per share	$	0.31		$	0.18						$	0.37		$	(0.19	)
Non-GAAP diluted earnings per share ^{(1) (2)}	$	0.57		$	0.56						$	1.16		$	0.78
Cash flow from operations ⁽³⁾	$	7.5		$	21.2						$	95.3		$	162.3
Adjusted free cash flow ⁽¹⁾	$	12.5		$	(0.8	)


(1)	See Non-GAAP Financial Measures below for a reconciliation of our GAAP results to our non-GAAP financial measures.

(2)

We have recorded a full valuation allowance against our U.S. net deferred tax assets. As we are profitable on a non-GAAP basis, the 2020 and 2019 non-GAAP tax provisions are calculated assuming there is no valuation allowance. Income tax adjustments reflect the tax effects of non-GAAP adjustments, which are calculated by applying the applicable tax rate by jurisdiction to the non-GAAP adjustments listed above.

(3)

Cash flow from operations for the second quarter and first ~~three~~six months of 2020 includes ~~$3.3~~$18.0 million and $21.3 million of restructuring payments, respectively, and ~~$6.4~~$2.1 million and $8.6 million of acquisition-related ~~payments.~~payments, respectively. Cash flow from operations for the second quarter and first ~~three~~six months of 2019 includes ~~$8.3~~$9.6 million and $17.9 million of restructuring ~~payments.~~payments, respectively.

Impact of Foreign Currency Exchange on Results of Operations

Approximately 60% of our revenue and 40% of our expenses are transacted in currencies other than the U.S. Dollar. Because we report our results of operations in U.S. Dollars, currency translation, particularly changes in the Euro, Yen, Sheqel, and Rupee relative to the U.S. Dollar, affects our reported results. Starting in the first quarter of 2020, our constant currency disclosures are calculated by multiplying the results in local currency for the second quarter and first ~~three~~six months of 2020 and 2019 by the exchange rates in effect on September 30, 2019, excluding the effect of any hedging. The results of operations in

the table above and revenue by line of business, product group, and geographic region in the tables that follow present both actual percentage changes year over year and percentage changes on a constant currency basis.

Revenue

Our results have been impacted, and we expect will continue to be impacted, by our ability to close large transactions. The amount of revenue attributable to large transactions, and the number of such transactions, may vary significantly from quarter to quarter based on customer purchasing decisions and macroeconomic conditions. Such transactions may have long lead times as they often follow a lengthy product selection and evaluation process and, for existing customers, are influenced by contract expiration cycles. In addition, our revenue results quarter to quarter are impacted by contract terms, including duration and start dates of our subscription contracts. ~~These factors~~This is particularly true during the COVID-19 crisis as customers are generally electing one-year contracts given the current macroeconomic uncertainty. This may cause volatility in our results.

~~We discuss our~~Our revenue results are shown by line of business, by product group and by geographic region and are discussed below.

Revenue by Line of Business


(Dollar amounts in millions)	Three months ended								Three months ended								Six months ended
					Percent Change								Percent Change								Percent Change
	December 28, 2019		December 29, 2018		Actual		Constant Currency		March 28, 2020		March 30, 2019		Actual		Constant Currency		March 28, 2020		March 30, 2019		Actual		Constant Currency
Software revenue	$	314.4	$	293.2	7	%	9	%	$	324.1	$	249.5	30	%	31	%	$	638.4	$	542.8	18	%	19	%
Professional services	41.8		41.4		1	%	2	%	35.5		40.9		(13	)%	(11	)%	77.3		82.4		(6	)%	(4	)%
Total revenue	$	356.1	$	334.7	6	%	8	%	$	359.6	$	290.5	24	%	25	%	$	715.7	$	625.1	14	%	16	%

Software

Software revenue consists of subscription, support, and perpetual license revenue. Our subscription revenue includes an immaterial amount of Software as a Service (SaaS) and cloud services. Software revenue increased due to subscription revenue growth during the quarter and year-to-date periods, offset by declines in perpetual support revenue due to conversions of support contracts to subscriptions. For the second quarter and first six months of 2020 compared to the year ago periods, subscription license revenue increased 132% and 103%, respectively, in part due to the fact that we no longer provide an annual cancellation right in new multi-year contracts.

Professional Services

Professional services engagements typically result from sales of new licenses; revenue is recognized over the term of the engagement. Professional services revenue declined in part due to an extension to complete work on a fixed price professional services contract. Our ~~results are in line with our~~ expectation is that professional services revenue will trend flat-to-down over time due to our strategy to expand margins by migrating more services engagements to our partners and delivering products that require less consulting and training services. Professional services revenue may be further negatively impacted due to challenges with project scoping and implementation activities and performance while social distancing measures are in place due to COVID-19.

Revenue by Product Group


Software Revenue by Product Group									Software Revenue by Product Group
(Dollar amounts in millions)	Three months ended								Three months ended								Six months ended
					Percent Change								Percent Change								Percent Change
	December 28, 2019		December 29, 2018		Actual		Constant Currency		March 28, 2020		March 30, 2019		Actual		Constant Currency		March 28, 2020		March 30, 2019		Actual		Constant Currency
Core (CAD and PLM)	$	262.6	$	250.9	5	%	6	%	$	234.4	$	172.5	36	%	38	%	$	460.5	$	386.1	19	%	21	%
Growth (IoT, AR, Onshape)	48.2		35.4		36	%	37	%	43.2		35.4		22	%	23	%	86.4		67.3		28	%	29	%
FSG (Focused Solutions Group)	45.3		48.4		(6	)%	(5	)%	46.5		41.5		12	%	13	%	91.5		89.4		2	%	3	%
Total revenue	$	356.1	$	334.7	6	%	8	%
Software revenue									$	324.1	$	249.5	30	%	31	%	$	638.4	$	542.8	18	%	19	%



Total Revenue by Product Group ⁽¹⁾
(Dollar amounts in millions)	Three months ended								Six months ended
					Percent Change								Percent Change
	March 28, 2020		March 30, 2019		Actual		Constant Currency		March 28, 2020		March 30, 2019		Actual		Constant Currency
Core (CAD and PLM)	$	252.8	$	198.5	27	%	29	%	$	504.6	$	438.7	15	%	17	%
Growth (IoT, AR, Onshape)	53.3		41.3		29	%	31	%	106.0		79.1		34	%	35	%
FSG (Focused Solutions Group)	53.5		50.7		6	%	7	%	105.1		107.3		(2	)%	(1	)%
Total revenue	$	359.6	$	290.5	24	%	25	%	$	715.7	$	625.1	14	%	16	%


(1)	In the second quarter of 2020, we identified an immaterial misclassification of professional services revenue between the reported product groups from the first quarter of 2019 through the first quarter of 2020. Total professional services revenue was unaffected. Total revenue by product group in the table reflects the appropriate classifications for the periods presented.

Core Product revenue growth was driven by growth in subscription revenue, offset by an expected decline in perpetual license revenue due to the end of sales of perpetual licenses at the end of the first quarter of 2019. ~~Total~~In the second quarter and first six months of 2020, total recurring revenue for Core Products grew ~~24% (26%~~36% (38% on a constant currency basis) and 30% (32% on a constant currency basis), respectively, compared to the ~~prior~~second quarter and first six months of 2019. In the second quarter and first six months of 2020, Core Product professional services revenue declined 29% (27% on a constant currency basis) and 16% (14% on a constant currency basis), respectively, compared to the year ~~period.~~ago periods due in part to an extension to complete work on a fixed price professional services contract in the second quarter of 2020.

Growth Product revenue growth in the second quarter and first six months of 2020 was driven by ~~54% (55% constant currency)~~ subscription revenue growth of 38% (39% constant currency) and 45% (46% constant currency), respectively, compared to the ~~prior year period,~~second quarter and first six months of 2019, offset by a decline in support ~~revenue.~~revenue due to conversions of support contracts to subscription.

~~The decline~~FSG Product revenue growth in ~~FSG~~the second quarter of 2020 reflects growth of subscription revenue ~~reflects~~of 41% (42% constant currency) compared to the second quarter of 2019, offset by an ~~80%~~expected decline in perpetual license revenue ~~partially offset by 9% growth in subscription~~due to the end of sales of perpetual licenses at the end of the first quarter of 2019. The revenue decrease for the first six months of 2020 as compared to the ~~prior year period.~~first six months of 2019 is a result of the decline in perpetual license revenue, offset by growth of subscription revenue of 24% (25% constant currency).

Software Revenue by Geographic Region

A significant portion of our total revenue is generated outside the U.S. In 2019 and in the first ~~three~~six months of 2020, approximately 40% of total revenue was generated in the Americas, 40% in Europe, and 20% in Asia Pacific.


(Dollar amounts in millions)	Three months ended								Three months ended								Six months ended
					Percent Change								Percent Change								Percent Change
	December 28, 2019		December 29, 2018		Actual		Constant Currency		March 28, 2020		March 30, 2019		Actual		Constant Currency		March 28, 2020		March 30, 2019		Actual		Constant Currency
Americas	$	156.0	$	141.9	10	%	10	%	$	138.7	$	108.0	28	%	29	%	$	280.5	$	237.5	18	%	18	%
Europe	136.5		111.4		23	%	28	%	132.2		97.3		36	%	39	%	247.9		186.7		33	%	37	%
Asia Pacific	63.6		81.5		(22	)%	(22	)%	53.2		44.3		20	%	22	%	110.0		118.6		(7	)%	(7	)%
Total revenue	$	356.1	$	334.7	6	%	8	%
Total software revenue									$	324.1	$	249.5	30	%	31	%	$	638.4	$	542.8	18	%	19	%

Americas software revenue growth in the second quarter and first six months of 2020 was driven by ~~22%~~ growth in subscription revenue of 57% and 37%, respectively, compared to the second quarter and first six months of 2019, partially offset by a decline in support revenue, resulting in ~~10% overall~~recurring revenue growth of 31% and 19%, respectively, in ~~recurring revenue~~the second quarter and first six months of 2020 compared to the ~~prior~~ year ~~period.~~ago periods.

Europe software revenue growthin the second quarter and first six months of 2020 was driven by ~~92% (101% constant currency)~~ growth in subscription revenue of 85% (90% constant currency) and 88% (95% constant currency), respectively, compared to the second quarter and first six months of 2019, partially offset by a decline in support revenue, resulting in ~~33% (39%~~recurring revenue growth of 37% and 35%, respectively, in the second quarter and first six months of 2020 compared to the year ago periods.

Asia Pacificsoftware revenue growth in the second quarter of 2020 was driven by growth in subscription revenue of 79% (81% constant currency) ~~growth~~ compared to the second quarter of 2019, partially offset by a decline in support revenue, resulting in recurring revenue growth of 23% in the second quarter of 2020 compared to year ago period. In the first six months of 2020, compared to the ~~prior year period.~~

~~Asia Pacific~~first six months of 2019, revenue declined ~~primarily~~ due to ~~comparison to the~~a strong first quarter of 2019, which benefited from the ~~last time~~last-time purchases of perpetual licenses in that quarter associated with the discontinuation of perpetual license sales as of January 1, 2019.

Gross Margin


(Dollar amounts in millions)	Three months ended						Three months ended						Six months ended
	December 28, 2019			December 29, 2018			March 28, 2020			March 30, 2019			March 28, 2020			March 30, 2019
Gross margin:
License gross margin	$	110.3		$	92.8		$	113.7		$	49.0		$	224.0		$	141.8
License gross margin percentage	89		%	88		%	89		%	79		%	89		%	85		%
Support and cloud services gross margin	152.0			156.7			$	162.2		$	154.8		$	314.2		311.5
Support and cloud services gross margin percentage	80		%	83		%	83		%	82		%	81		%	83		%
Professional services	6.4			7.9			0.6			6.8			7.1			14.6
Professional services gross margin percentage	15		%	19		%	2		%	17		%	9		%	18		%

Total gross margin	$	268.7		$	257.3		$	276.6		$	210.5		$	545.3		$	467.9
Total gross margin percentage	75		%	77		%	77		%	72		%	76		%	75		%

Non-GAAP gross margin ⁽¹⁾	$	278.5		$	267.4		$	286.5		$	220.6		$	565.0		$	488.0
Non-GAAP gross margin percentage	78		%	80		%	80		%	76		%	79		%	78		%

(1) Non-GAAP financial measures are reconciled to GAAP results under Non-GAAP Financial Measures below.

License gross margin increased for the second quarter and first ~~three~~six months of 2020 compared to the second quarter and first ~~three~~six months of 2019 as revenue increased primarily due to ~~the maturity of the~~an increase in subscription ~~model, expenses decreased due to lower compensation costs related to lower headcount,~~license revenue. Revenue growth in 2020 was offset by ~~increasing~~a related increase in royalty expenses.

Support and cloud services gross margin increased for the second quarter of 2020 compared to the second quarter of 2019 due to higher subscription support revenue, offset by increases in costs associated with our cloud services business due to increased demand for those services. Support and cloud services gross margin decreased for the first ~~three~~six months of 2020 compared to the first ~~three~~six months of 2019 ~~primarily~~ due to ~~an increase~~increases in costs associated with our cloud services ~~business.~~business due to increased demand for those services, royalty expenses, and compensation costs, offset by an increase in subscription support revenue.

Professional services gross margin decreased for the second quarter and first ~~three~~six months of 2020 compared to the second quarter and first ~~three~~six months of 2019 ~~primarily~~ due in part to a decrease in revenue due in part to an ~~increase~~extension to complete work on a fixed price professional services contract in the second quarter of 2020, along with higher compensation ~~costs related to higher headcount.~~costs.

Operating Expenses


(Dollar amounts in millions)	Three months ended								Three months ended								Six months ended
	December 28, 2019			December 29, 2018			Percent Change		March 28, 2020			March 30, 2019			Percent Change		March 28, 2020			March 30, 2019			Percent Change
Sales and marketing	$	107.6		$	104.2		3	%	$	107.4		$	103.7		4	%	$	215.0		$	207.9		3	%
% of Total Revenue	30		%	31		%			30		%	36		%			30		%	33		%
Research and development	65.3			60.8			7	%	60.0			61.4			(2	)%	125.3			122.2			3	%
% of Total Revenue	18		%	18		%			17		%	21		%			18		%	20		%
General and administrative	44.6			37.9			18	%	33.6			35.4			(5	)%	78.2			73.2			7	%
% of Total Revenue	13		%	11		%			9		%	12		%			11		%	12		%
Amortization of acquired intangible assets	6.8			5.9			14	%	7.3			5.9			23	%	14.1			11.9			19	%
% of Total Revenue	2		%	2		%			2		%	2		%			2		%	2		%
Restructuring and other charges, net	14.0			18.5			(24	)%	18.2			27.0			(32	)%	32.3			45.5			(29	)%
% of Total Revenue	4		%	6		%			5		%	9		%			5		%	7		%
Total operating expenses	$	238.3		$	227.3		5	%	$	226.6		$	233.4		(3	)%	$	464.8		$	460.7		1	%

Headcount increased 4%3% between ~~December 29, 2018~~March 30, 2019 and ~~December~~March 28, ~~2019.~~2020.

As we entered fiscal 2020, we announced a restructuring plan to shift resources into our SaaS initiatives. As we executed our restructuring strategy during the first six months of 2020, we reduced costs more than originally planned, which will result in greater than expected cost savings over the remainder of the year. We expect to prudently hire to expand our workforce as necessary, which we expect will return some of those costs to our run-rate in fiscal 2021. Variable compensation costs were lower for the second quarter and first six months of 2020 compared to the year ago periods and are expected to be lower for the remainder of the year due to lower expected achievement under our performance-based compensation plans due to the effect of COVID-19 on our business.

Operating expenses in the ~~first~~second ~~three months~~quarter of 2020 compared to operating expenses in the ~~first~~second ~~three months~~quarter of 2019 ~~increased~~decreased primarily due to the following:

a decrease in total research and development costs primarily related to a $1.1 million decrease in compensation, benefit costs and travel expenses,

a decrease in total general and administrative costs driven by a $3.8 million decrease in compensation (primarily lower stock compensation), benefit costs and travel expenses, which was partially offset by a $1.3 million increase in outside services costs, and

lower restructuring charges. We incurred $18.2 million of restructuring and other charges during the quarter, primarily related to an employee restructuring program, compared to $27.0 million incurred in the second quarter of 2019 largely associated with exiting our Needham headquarters facility.

partially offset by:

an increase in total sales and marketing costs primarily related to a ~~$3.0~~$4.6 million increase in compensation (including benefit costs and travel ~~expenses~~expenses) due to higher salaries related to higher headcount and higher commissions due to amortization of capitalized commissions under ASC 606, and

an increase of $1.4 million in intangible amortization primarily related to the acquisition of Onshape.

Operating expenses in the first six months of 2020 compared to operating expenses in the first six months of 2019 increased primarily due to the following:

an increase in total sales and marketing costs primarily related to a $7.6 million increase in compensation (including benefit costs and travel expenses) due to higher salaries related to higher headcount and higher commissions due to amortization of capitalized commissions under ASC 606,

an increase in research and development costs primarily related to a ~~$3.3~~$2.1 million increase in compensation, benefit costs and travel expenses due to higher salaries and ~~stock~~stock-based compensation,

an increase in general and administrative expenses primarily driven by ~~$7.1~~$7.4 million in acquisition-related charges recorded in the first ~~three~~six months of 2020 associated with the acquisition of Onshape compared to ~~$0.4~~$0.8 million in the prior year period, and

an increase of $2.2 million in intangible amortization related to the acquisition of Onshape,

partially offset by:

lower restructuring charges. We ~~initiated a voluntary restructuring program in the quarter, which resulted in $13.6 million of charges in the first three months of 2020, compared to $16.3 million~~ incurred ~~in the first three months of 2019 related to a prior restructuring plan. We expect to incur an additional $16.0~~$27.0 million of restructuring charges in the ~~remainder~~first six months of ~~fiscal 2020. The anticipated cost savings resulting from~~ 2020, primarily related to an employee restructuring ~~actions are expected~~program, compared to ~~partially offset~~$43.0 million incurred in the ~~expected 2020 operating run rate~~first six months of ~~the Onshape business.~~2019 largely associating with exiting our Needham headquarters facility.

Interest Expense


(in millions)	Three months ended						Three months ended						Six months ended
	December 28, 2019			December 29, 2018			March 28, 2020			March 30, 2019			March 28, 2020			March 30, 2019
Interest expense	$	(12.1	)	$	(10.3	)	$	(32.6	)	$	(11.4	)	$	(44.7	)	$	(21.7	)

Interest expense includes interest under our credit facility and senior notes. We had ~~$1,128~~$1,648 million of total debt at ~~December~~March 28, ~~2019,~~2020, compared to ~~$783~~$743 million at ~~December 29, 2018,~~March 30, 2019, which ~~drove~~increased interest expense in the ~~increase~~period. Additionally, we recognized $15 million of expense in ~~interest expense.~~the second quarter of 2020 related to penalties for the planned third quarter early redemption of the 6.000% Senior Notes due in 2024.

Other Income (Expense)


(in millions)	Three months ended						Three months ended						Six months ended
	December 28, 2019			December 29, 2018			March 28, 2020			March 30, 2019			March 28, 2020			March 30, 2019
Interest income	$	0.9		$	1.0		$	1.6		$	1.0		$	2.5		$	1.9
Other expense, net	(0.2		)	(0.3		)	(3.2		)	(0.1		)	(3.4		)	(0.5		)
Other income (expense), net	$	0.7		$	0.7		$	(1.6	)	$	0.8		$	(0.9	)	$	1.5

Income Taxes


(Dollar amounts in millions)	Three months ended						Three months ended						Six months ended
	December 28, 2019			December 29, 2018			March 28, 2020			March 30, 2019			March 28, 2020			March 30, 2019
Income before income taxes	$	19.0		$	20.4
Benefit from income taxes	$	(16.4	)	$	(0.6	)
Income (loss) before income taxes							$	15.8		$	(33.4	)	$	34.8		$	(13.0	)
Provision (benefit) from income taxes							$	8.6		$	10.1		(7.8		)	9.5
Effective income tax rate	(86		)%	(3		)%	55		%	(30		)%	(22		)%	(73		)%

In the first ~~three~~six months of 2020 and 2019, our effective tax rate differed from the statutory federal income tax rate of 21% due to U.S. tax reform, our corporate structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate, the excess tax benefit related to stock-based compensation and the indirect effects of the adoption of ASC 606. Additionally, in the first ~~three~~six months of 2020 and 2019, we reduced the U.S. valuation allowance by ~~$21.0~~$21.2 million and $1.8 million as the result of the Onshape and Frustum acquisitions, respectively. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland. In 2020 and 2019, the foreign rate differential predominantly relates to these Irish earnings.

Operating Measures

ARR

ARR represents the annualized value of our portfolio of recurring customer arrangements as of the end of the reporting period, including subscription software, cloud, and support contracts.

We believe ARR is a valuable operating metric to measure the health of a subscription business because it captures expected subscription and support cash generation from customers, existing customer expansions, and includes the impact of net total churn, which reflects gross churn, offset by the impact of any pricing increases.

Because this measure represents the annualized value of recurring customer contracts as of the end of a reporting period, ARR does not represent revenue for any particular period or remaining revenue that will be recognized in future periods.

Non-GAAP Financial Measures

Our non-GAAP financial measures and the reasons we use them and the reasons we exclude the items identified below are described in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended September 30, 2019.

The non-GAAP financial measures presented in the discussion of our results of operations and the respective most directly comparable GAAP measures are:

non-GAAP revenue—GAAP revenue

non-GAAP gross margin—GAAP gross margin

non-GAAP operating income—GAAP operating income

non-GAAP operating margin—GAAP operating margin

non-GAAP net income—GAAP net income

non-GAAP diluted earnings or loss per share—GAAP diluted earnings or loss per share

The non-GAAP financial measures exclude, as applicable, fair value adjustments related to acquired deferred revenue and deferred costs, stock-based compensation expense, amortization of acquired intangible assets, acquisition-related and other transactional charges included in general and administrative expenses, restructuring and other charges, net, and income tax adjustments as defined in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.

~~Free cash flow~~ In the second quarter of 2020, we also incurred an interest penalty for the early redemption of the 6.000% Senior Notes due 2024, which is ~~net cash provided by (used in) operating activities less capital expenditures; adjusted free cash flow~~also excluded from our non-GAAP financial measures as it is ~~free cash flow excluding restructuring payments, certain acquisition-related payments and certain identified~~a significant non-ordinary course payments. Free cash flow and adjusted free cash flow are not measures of cash available for discretionary expenditures. We provide information on “free cash flow” and “adjusted free cash flow” to enable investors to assess our ability to generate cash without incurring additional external financings and to evaluate our performance against our announced long-term goals.charge.

The items excluded from these non-GAAP financial measures are normally included in the comparable measures calculated and presented in accordance with GAAP. Our management excludes these items when evaluating our ongoing performance and/or predicting our earnings trends, and therefore excludes them when presenting non-GAAP financial measures. Management uses non-GAAP financial measures in conjunction with our GAAP results, as should investors.

The items excluded from the non-GAAP financial measures often have a material impact on our financial results and such items often recur. Accordingly, the non-GAAP financial measures included in this Quarterly Report on Form 10-Q should be considered in addition to, and not as a substitute for or superior to, the comparable measures prepared in accordance with GAAP. The following tables reconcile each of these non-GAAP financial measures to its most closely comparable GAAP measure on our financial statements.


(in millions, except per share amounts)	Three months ended						Three months ended						Six months ended
	December 28, 2019			December 29, 2018			March 28, 2020			March 30, 2019			March 28, 2020			March 30, 2019
GAAP revenue	$	356.1		$	334.7		$	359.6		$	290.5		$	715.7		$	625.1
Fair value of acquired deferred revenue	—			0.3			—			0.2			—			0.5
Non-GAAP revenue	$	356.1		$	335.0		$	359.6		$	290.7		$	715.7		$	625.6

GAAP gross margin	$	268.7		$	257.3		$	276.6		$	210.5		$	545.3		$	467.9
Fair value of acquired deferred revenue	—			0.3			—			0.2			—			0.5
Fair value of acquired deferred costs	—			(0.1		)	—			(0.1		)	—			(0.2		)
Stock-based compensation	3.0			3.1			3.0			3.1			6.0			6.2
Amortization of acquired intangible assets included in cost of revenue	6.8			6.7			6.9			6.8			13.7			13.6
Non-GAAP gross margin	$	278.5		$	267.4		$	286.5		$	220.6		$	565.0		$	488.0

GAAP operating income	$	30.4		$	30.0
GAAP operating income (loss)							$	50.0		$	(22.9	)	$	80.5		$	7.2
Fair value of acquired deferred revenue	—			0.3			—			0.2			—			0.5
Fair value of acquired deferred costs	—			(0.1		)	—			(0.1		)	—			(0.2		)
Stock-based compensation	27.9			29.4			20.5			27.0			48.4			56.4
Amortization of acquired intangible assets included in cost of revenue	6.8			6.7			6.9			6.8			13.7			13.6
Amortization of acquired intangible assets	6.8			5.9			7.3			5.9			14.0			11.9
Acquisition-related and other transactional charges included in general and administrative expenses	7.1			0.4			0.3			0.4			7.4			0.8
Restructuring and other charges, net	14.0			18.5			18.2			27.0			32.3			45.5
Non-GAAP operating income	$	93.1		$	91.2		$	103.2		$	44.4		$	196.3		$	135.6

GAAP net income	$	35.5		$	21.0
GAAP net income (loss)							$	7.2		$	(43.5	)	$	42.6		$	(22.5	)
Fair value of acquired deferred revenue	—			0.3			—			0.2			—			0.5
Fair value of acquired deferred costs	—			(0.1		)	—			(0.1		)	—			(0.2		)
Stock-based compensation	27.9			29.4			20.5			27.0			48.4			56.4
Amortization of acquired intangible assets included in cost of revenue	6.8			6.7			6.9			6.8			13.7			13.6
Amortization of acquired intangible assets	6.8			5.9			7.3			5.9			14.0			11.9
Acquisition-related and other transactional charges included in general and administrative expenses	7.1			0.4			0.3			0.4			7.4			0.8
Restructuring and other charges, net	14.0			18.5			18.2			27.0			32.3			45.5
Debt early redemption premium							15.0			—			15.0			—
Income tax adjustments ⁽¹⁾	(32.0		)	(14.9		)	(6.9		)	2.1			(38.8		)	(12.7		)
Non-GAAP net income	$	66.2		$	67.3		$	68.5		$	25.8		$	134.6		$	93.1

GAAP diluted earnings per share	$	0.31		$	0.18
GAAP diluted earnings (loss) per share							$	0.06		$	(0.37	)	$	0.37		$	(0.19	)
Stock-based compensation	0.24			0.25			0.18			0.23			0.42			0.47
Amortization of acquired intangible assets	0.12			0.11			0.12			0.11			0.24			0.21
Acquisition-related and other transactional charges included in general and administrative expenses	0.06			—			—			—			0.06			0.01
Restructuring and other charges, net	0.12			0.16			0.16			0.22			0.28			0.38
Debt early redemption premium							0.13			—			0.13			—
Income tax adjustments ⁽¹⁾	(0.28		)	(0.12		)	(0.06		)	0.02			(0.34		)	(0.11		)
Non-GAAP diluted earnings per share	$	0.57		$	0.56		$	0.59		$	0.22		$	1.16		$	0.78

(1)

Operating margin impact of non-GAAP adjustments:


	Three months ended				Three months ended				Six months ended
	December 28, 2019		December 29, 2018		March 28, 2020		March 30, 2019		March 28, 2020		March 30, 2019
GAAP operating margin	8.5	%	9.0	%	13.9	%	(7.9	)%	11.2	%	1.1	%
Fair value of acquired deferred revenue	—	%	0.1	%	—	%	0.1	%	—	%	0.1	%
Stock-based compensation	7.8	%	8.8	%	5.7	%	9.3	%	6.8	%	9.0	%
Amortization of acquired intangible assets	3.8	%	3.8	%	3.9	%	4.4	%	3.9	%	4.1	%
Acquisition-related and other transactional charges included in general and administrative expenses	2.0	%	0.1	%	0.1	%	0.1	%	1.2	%	0.1	%
Restructuring and other charges, net	3.9	%	5.6	%	5.1	%	9.3	%	4.5	%	7.3	%
Non-GAAP operating margin	26.1	%	27.2	%	28.7	%	15.3	%	27.4	%	21.7	%

~~Reconciliation from cash from operations to adjusted free cash flow:~~

(in millions, except per share amounts) Three months ended
December 28, 2019 December 29, 2018
Cash provided by operating activities $ 7.5
$ 21.2
Capital expenditures (4.7 ) (30.3 )
Free cash flow 2.8
(9.1 )
Restructuring payments ⁽¹⁾
3.3
8.3
Acquisition-related payments 6.4
—
Adjusted free cash flow $ 12.5
$ (0.8 )


~~(1)~~	~~Restructuring payments include lease payments associated with exited facilities.~~

Critical Accounting Policies and Estimates

The financial information included in Item 1 reflects no material changes in our critical accounting policies and estimates as set forth under the heading Critical Accounting Policies and Estimates in Part II, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2019 Annual Report on Form 10-K.

Recent Accounting Pronouncements

In accordance with recently issued accounting pronouncements, we will be required to comply with certain changes in accounting rules and ~~regulations, some of which are expected to have a material impact on our consolidated financial statements.~~regulations. Refer to Note 1. Basis of Presentation to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for all recently issued accounting pronouncements, which is incorporated herein by reference.

Liquidity and Capital Resources


(in thousands)	December 28, 2019			December 29, 2018			March 28, 2020			March 30, 2019
Cash and cash equivalents(1)	$	237,017		$	276,990		$	826,776		$	294,299
Restricted cash	902			1,143			902			1,133
Short- and long-term marketable securities	57,480			55,652			56,941			56,415
Total	$	295,399		$	333,785		$	884,619		$	351,847

(in thousands)	Three months ended						Six months ended
	December 28, 2019			December 29, 2018			March 28, 2020			March 30, 2019
Cash provided by operating activities	$	7,512		$	21,214		$	95,329		$	162,344
Cash used by investing activities	(473,419		)	(101,212		)	(476,743		)	(128,340		)
Cash provided by financing activities	431,146			94,997
Cash provided (used) by financing activities							944,143			(1,902		)


(1)	The March 28, 2020 cash balance includes $530 million to be used for the redemption of our 6.000% Senior Notes due 2024 in May 2020.

Cash, cash equivalents and restricted cash

We invest our cash with highly rated financial institutions and in diversified domestic and international money market mutual funds. Cash and cash equivalents include highly liquid investments with original maturities of three months or less. In addition, we hold investments in marketable securities totaling approximately $57 million with an average maturity of 11 months. At ~~December~~March 28, ~~2019,~~2020, cash and cash equivalents totaled ~~$237~~$827 million, compared to $270 million at September 30, 2019.

A significant portion of our cash is generated and held outside the U.S. ~~At December~~As of March 28, ~~2019,~~2020, we had cash and cash equivalents of ~~$44~~$574 million in the U.S., ~~$89~~$132 million in Europe, ~~$83~~$93 million in Asia Pacific (including India), and ~~$21~~$28 million in other non-U.S. countries. All the marketable securities are held in Europe. We have substantial cash requirements in the United States, but we believe that the combination of our existing U.S. cash and cash equivalents after use of $530 million to redeem the aggregate principal amount of 6.000% Senior Notes due 2024 on May 15, 2020 (such redemption to include $500 million in principal plus $30 million, which includes interest and an early redemption premium), marketable securities, our ability to repatriate cash to the U.S. more cost effectively with the recent U.S. tax law changes, future U.S. operating cash flows and cash available under our credit facility, will be sufficient to meet our ongoing U.S. operating expenses and known capital requirements.

Cash provided by operating activities

Cash provided by operating activities was $8$95 million in the first ~~three~~six months of 2020, compared to ~~$21~~$162 million in the first ~~three~~six months of 2019. Cash from operations for the first ~~three~~six months of 2020 includes $3$21 million of restructuring payments and $6$9 million of acquisition-related payments compared to $8$18 million of restructuring payments in the prior year period. The decrease in cash from operations in the first ~~three~~six months of 2020 ~~over~~compared to the same period in 2019 ~~is primarily~~was due in part to lower accounts receivable collections ~~partially offset by lower accounts payable payments during~~particularly in Asia Pacific in the second quarter of 2020 compared to the second quarter of 2019 due to the last-time perpetual license sales in the first ~~three~~quarter of 2019 in that region. In addition, in the first six months of ~~2020.~~

~~Net income for the first~~ ~~three~~ ~~months of 2020 was $35 million compared~~2019, we received tenant reimbursements related to ~~net income of $21 million for the first~~ ~~three~~ ~~months of 2019.~~our new Seaport headquarters.

Cash used in investing activities

Cash used in investing activities reflects ~~$468~~$469 million used for the Onshape acquisition in the first ~~three~~six months of 2020, compared to $70 million used for the Frustum acquisition in the first ~~three~~six months of 2019. Capital expenditures were ~~down~~ approximately ~~$25~~$41 million higher for the first ~~three~~six months of ~~2020,~~2019 compared to the first ~~three~~six months of ~~2019, which included~~2020, due to construction ofexpenses for our new worldwide headquarters in the Boston Seaport District in 2019.

Cash used in financing activities

The net borrowings in the first ~~three~~six months of 2020 primarily reflect ~~borrowings of $455 million under our credit facility to fund the acquisition of Onshape,~~$1 billion in new notes issued in February 2020, compared to net borrowings of ~~$135~~$95 million under our revolving credit facility in the first ~~three~~six months of 2019 for working capital requirements and the Frustum acquisition.

We amended the credit facility in November 2019 to increase the borrowing capacity from $700 million to $1 billion (which may be increased up to an additional $500 million in the aggregate if the existing or additional lenders are willing to make such increased commitments).

Outstanding Debt

As of ~~December~~March 28, ~~2019,~~2020, we had:


(in millions)	December 28, 2019			March 28, 2020
4.000% Senior notes due 2028				$	500.0
3.625% Senior notes due 2025				500.0
6.000% Senior notes due 2024	$	500.0		500.0
Credit facility revolver	628.1			148.1
Total debt	1,128.1			1,648.1
Unamortized debt issuance costs for the Senior notes	(3.8		)	(17.4		)
Total debt, net of issuance costs	$	1,124.3		$	1,630.7

Undrawn under credit facility revolver	$	355.7		$	835.7
Undrawn under credit facility revolver available for borrowing	$	275.2		$	393.1

As of ~~December~~March 28, ~~2019,~~2020, we were in compliance with all financial and operating covenants of the credit facility and the note ~~indenture.~~indentures. Any failure to comply with such covenants under the credit facility would prevent us from being able to borrow additional funds under the credit facility, and, as with any

failure to comply with such covenants under the note ~~indenture,~~indentures, could constitute a default that could cause all amounts outstanding to become due and payable immediately.

Our credit facility and our ~~6.00%~~ Senior Notes due 2024, 2025, and 2028 are described in Note 13. to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Future Expectations

Although we are anticipating $60 million less cash provided from operations for FY20 compared to FY'19, primarily due to the disruptive impact of COVID-19 on new bookings, we believe that existing cash and cash equivalents, together with cash generated from operations and amounts available under the credit facility, will be sufficient to meet our working capital and capital expenditure requirements (which capital expenditures we expect to be approximately ~~$27~~$22 million in 2020) through at least the next twelve months and to meet our known long-term capital requirements. We have suspended our share repurchase program for FY20.

Cash outflows related to our prior headquarters, which we exited in January 2019, could be higher than we expect if we are unable to sublease our prior headquarters as estimated. We currently estimate the undiscounted cash outflows related to the remaining term of the lease at our prior headquarters (through November 2022) to be approximately $30 million (reflecting rent obligations and operating expenses net of estimated sublease income of approximately $7 million). Additional expense could be incurred and net cash outflows could be higher if we do not generate the estimated sublease income. The $30 million and any additional amounts will be paid over the remaining term of the lease; we expect those amounts will not materially adversely affect our ability to fund our working capital and capital expenditure requirements over the period.

~~Further, our~~Our expected uses of cash could change, customers may delay payments to us due to the COVID-19 pandemic, our cash position could be reduced, and we could incur additional debt obligations if we decide to retire debt, to engage in strategic transactions or repurchase shares, any of which could be commenced, suspended or completed at any time. Any such repurchases or retirement of debt will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. We also evaluate possible strategic transactions on an ongoing basis and at any given time may be engaged in discussions or negotiations with respect to possible strategic transactions. The amounts involved in any debt retirement, share repurchases, or strategic transactions may be material.


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes in our market risk exposure as described in Item 7A: Quantitative and Qualitative Disclosures about Market Risk of our 2019 Annual Report on Form 10-K.


ITEM 4.	CONTROLS AND PROCEDURES

Evaluation of Effectiveness of Disclosure Controls and Procedures

Our management maintains disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), as appropriate, to allow for timely decisions regarding required disclosure.

We evaluated, under the supervision and with the participation of management, including our principal executive and principal financial officers, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of ~~December~~March 28, ~~2019.~~2020.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a or 15(d) of the Exchange Act that occurred during the period ended ~~December~~March 28, ~~2019~~2020 that ~~have~~has materially affected, or ~~are~~is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1A. RISK FACTORS

In addition to other information set forth in this report and below, you should carefully consider the risk factors described in Part I. Item 1A. Risk Factors in our 2019 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.

The extent to which the novel coronavirus COVID-19 may impact our business is uncertain and it could materially adversely affect our financial condition and results of operations.

The COVID-19 pandemic has significantly impacted global economic activity and has created future macroeconomic uncertainty. Public and private sector policies and initiatives to reduce the transmission of COVID-19, such as the imposition of travel restrictions, temporary closures of businesses, and the adoption of remote working, have significantly changed the way we and our customers work. The effects and duration of this disruption are uncertain.

While PTC has been able to transition to remote working without significant disruption to our day-to-day operations, prolonged disruption and/or a slow recovery could negatively impact the businesses of our customers and, therefore, our business and financial condition.

For example, demand for our solutions has declined and could further decline due to challenges associated with conducting in person sales meetings and project scoping and implementation activities while social distancing measures are in place, which has deterred or prevented, and could further deter or prevent, customers from proceeding with new software purchases and deployments. Likewise, temporary plant closures, layoffs and furloughs at our customers and the challenges they face forecasting business needs in this time of global economic uncertainty have caused, and could continue to cause, our customers to delay or reduce new license purchases.

In addition, longer term plant closures and layoffs among our customer base could cause existing subscription customers to renew fewer existing licenses when their subscriptions come up for renewal and could cause existing support customers to discontinue support at the time of renewal. Although we have not experienced a significant increase in churn so far in FY20, we anticipate the possibility of an increase in churn to 8% for FY20. If actual churn exceeds these levels, our ARR and financial results and condition could be negatively impacted.

Reductions in new license sales and/or renewals and in professional services delivered could reduce our ARR growth or cause our ARR to decline, and would reduce our professional services revenue, all of which would adversely affect our revenue, earnings and cash flow.

The economic uncertainty caused by the COVID-19 pandemic has also caused our customers to focus on their liquidity. This focus on liquidity, or our customers’ lack of liquidity, could adversely affect our cash flows if we make concessions in the amount or timing of payments due from customers or if our customers do not pay when or as expected. Moreover, some of our resellers may face liquidity challenges, which could adversely affect our cash flows if they do not pay us when or as expected.

If our business declines due to the above, we could be required to reduce our expenses, which could result in material restructuring charges and/or reduce or delay investments in our business, including hiring. Reductions in our workforce and/or investments in our business could hamper our ability to recover and compete successfully, which could adversely affect our business and results of operations.

Finally, while we expect to have sufficient liquidity with cash on hand, cash generated from operations and amounts available under our credit facility to meet our working capital and capital expenditure requirements through at least the next twelve months and our known long-term capital requirements, declines in cash flows could adversely affect our liquidity and we may be unable to draw on our credit facility as we expect due to covenants under the credit facility. If our liquidity is significantly impaired, it would significantly adversely affect our business due to our inability to pay our suppliers and our employees. Further, a significant liquidity impairment could cause us to be unable to make the required periodic interest payments due on our outstanding Senior Notes due 2028 and 2025, which would constitute an event of default under the applicable notes, and cause the aggregate principal amount of those notes on which we defaulted to become due and payable.

We face significant competition, which may reduce our profitability and limit or reduce our market share.

The markets for our products and solutions are rapidly changing and characterized by intense competition, disruptive technology developments, evolving distribution models and increasingly lower barriers to entry. If we are unable to provide products and solutions that address customers’ needs as well as our competitors’ products and solutions do, or to align our pricing, licensing and delivery models with customer preferences, we could lose customers and/or fail to attract new customers, which could cause us to lose revenue and market share.

For example, the COVID-19 pandemic has caused companies worldwide to close their offices and their employees to have to work remotely from their homes, which has focused companies on the need for solutions that empower and support remote work by employees. We believe customers and potential customers will increasingly seek software solutions that support remote work by employees. Although many of our solutions support remote work, others are less efficient at doing so. We have embarked on an effort to make our solutions available on a SaaS platform, however, this will require significant effort and investment and we cannot be sure that we will be able to make our solutions available as SaaS solutions as quickly as we expect. If we are unable to compete successfully with competitors offering SaaS solutions, we could lose customers and/or fail to attract new customers, which could cause us to lose revenue and market share, which would adversely affect our business and financial results.

In addition, competitive pressures could cause us to reduce our prices, which could reduce our revenue and margins.

Finally, our current and potential competitors range from large and well-established companies to emerging start-ups. Some of our competitors and potential competitors have greater name recognition in the markets we serve and greater financial, technical, sales and marketing, and other resources, which could limit our ability to gain customer recognition and confidence in our products and solutions and successfully sell our products and solutions, which could adversely affect our ability to grow our business.

ITEM 6. EXHIBITS




2		Agreement and Plan of Merger dated as of October 23, 2019 by and among PTC Inc., Onshape, Inc., OPAL Acquisition Corporation and the Stockholder Representative named therein (filed as Exhibit 1.1 to our Current Report on Form 8-K filed on October 23, 2019 (File No 0-18059) and incorporated herein by reference).

3.1		Restated Articles of Organization of PTC Inc. adopted August 4, 2015 (filed as Exhibit 3.1 to our Annual Report on Form 10-K for the fiscal year ended September 30, 2015 (File No. 0-18059) and incorporated herein by reference).

3.2		By-Laws, as amended and restated, of PTC Inc. (filed as Exhibit 3.2 to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 2014 (File No. 0-18059) and incorporated herein by reference).

4.1		Indenture, dated as of May 12, 2016, by and between the Company and The Bank of New York Mellon, as Trustee (filed as Exhibit 4.1 to our Current Report on Form 8-K filed on May 18, 2016 (File No. 0-18059) and incorporated herein by reference).

4.2		First Supplemental Indenture, dated as of May 12, 2016, by and between the Company and The Bank of New York Mellon, as Trustee (filed as Exhibit 4.2 to our Current Report on Form 8-K filed on May 18, 2016 (File No. 0-18059) and incorporated herein by reference).

4.3		6.000% Senior Notes due 2024 (filed as Exhibit 4.3 to our Current Report on Form 8-K filed on May 18, 2016 (File No. 0-18059) and incorporated herein by reference).

10.1*4.4		~~2016 Employee Stock Purchase Plan.~~

10.2*		~~Amended and Restated Executive Agreement~~Indenture, dated as of ~~December 23, 2019 by~~February 13, 2020, between PTC Inc. and ~~between the Company and James Heppelmann.~~

10.3*		~~Form of Amended and Restated Executive Agreement between the Company and each of Kristian Talvitie, Kathleen Mitford and Aaron von Staats.~~

~~10.4~~		~~Amendment No. 1 dated November 13, 2019 to Second Amended and Restated Credit Agreement dated~~Wells Fargo Bank, National Association, as ~~of September 13, 2018 by and among PTC Inc., JP Morgan Chase Bank, N.A., as Administrative Agent, and the lenders party thereto~~trustee (filed as Exhibit 104.1 to our Current Report on ~~Form-8-K~~Form 8-K filed on ~~November 3, 2019~~February 13, 2020 (File No. 0-18059) and incorporated herein by reference).

4.5		Form of 3.625% senior unsecured notes due 2025 (filed as Exhibit 4.2 to our Current Report on Form 8-K filed on February 13, 2020 (File No. 0-18059) and incorporated herein by reference).

4.6		Form of 4.000% senior unsecured notes due 2028 (filed as Exhibit 4.3 to our Current Report on Form 8-K filed on February 13, 2020 (File No. 0-18059) and incorporated herein by reference).

10.1*		Form of Executive Agreement between the Company and each of Eduarda Camacho, Michael DiTullio and Kevin Wrenn.

10.2		Fifth Amendment dated April 10, 2020 to Lease dated December 14, 1999 by and between PTC Inc. and Boston Properties Limited Partnership.

10.3		Third Amended and Restated Credit Agreement, by and among the Company, PTC (IFSC) Limited, the lenders listed thereto and JPMorgan Chase Bank, N.A., as administrative agent (filed as Exhibit 4.4 to our Current Report on Form 8-K filed on February 13, 2020 (File No. 0-18059) and incorporated herein by reference).

31.1		Certification of the Chief Executive Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a).

31.2		Certification of the Chief Financial Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a).

32**		Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350.

101		The following materials from PTC Inc.'s Quarterly Report on Form 10-Q for the quarter ended ~~December~~March 28, ~~2019~~2020 ("Q1Q2 Form 10-Q") formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of ~~December~~March 28, ~~2019~~2020 and September 30, 2019; (ii) Condensed Consolidated Statements of Operations for the three and six months ended ~~December~~March 28, ~~2019~~2020 and ~~December 29, 2018;~~March 30, 2019; (iii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended ~~December~~March 28, ~~2019~~2020 and ~~December 29, 2018;~~March 30, 2019; (iv) Condensed Consolidated Statements of Cash Flows for the ~~three~~six months ended ~~December~~March 28, ~~2019~~2020 and ~~December 29, 2018;~~March 30, 2019; (v) Consolidated Statements of Stockholders’ Equity for the three and six months ended ~~December~~March 28, ~~2019~~2020 and ~~December 29, 2018;~~March 30, 2019; and (vi) Notes to Condensed Consolidated Financial Statements.
104		The cover page of the Q1 Form 10-Q formatted in Inline XBRL (included in Exhibit 101).

_________________

* Indicates a management contract or arrangement in which an executive officer of PTC participates.


**	Indicates that the exhibit is being furnished, not filed, with this report.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.



PTC Inc.

By:		/S/ KRISTIAN TALVITIE
		Kristian Talvitie Executive Vice President and Chief Financial Officer (Principal Financial Officer)

Date: ~~January 27,~~May 6, 2020

3944