UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF~~



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

For the quarterly period ended March ~~30, 2019~~28, 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, MA02210

(Address of principal executive offices, including zip code)

~~(781)~~ (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. Yesþ☑ 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). Yesþ☑ 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	þ☑	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 þ☑

~~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 ~~115,041,840~~115,695,431 shares of our common stock outstanding on May ~~7, 2019.~~4, 2020.

PTC Inc.

INDEX TO FORM 10-Q

For the Quarter Ended March ~~30, 2019~~28, 2020



		Page Number
Part I—FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Consolidated Financial Statements:
	Consolidated Balance Sheets as of March ~~30, 2019~~28, 2020 and September 30, ~~2018~~2019	1
	Consolidated Statements of Operations for the three and six months ended March ~~30, 2019~~28, 2020 and March ~~31, 2018~~30, 2019	2
	Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended March ~~30, 2019~~28, 2020 and March ~~31, 2018~~30, 2019	3
	Consolidated Statements of Cash Flows for the six months ended March ~~30, 2019~~28, 2020 and March ~~31, 2018~~30, 2019	4
	Consolidated Statements of Stockholders' Equity for the three and six months ended March ~~30, 2019~~28, 2020 and March ~~31, 2018~~30, 2019	5
	Notes to Condensed Consolidated Financial Statements	76
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3328
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	5840
Item 4.	Controls and Procedures	5840


Part II—OTHER INFORMATION
Item 1A.	Risk Factors	59
~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	5941
Item 6.	Exhibits	5943
Signature		6144

PART I—FINANCIAL INFORMATION


ITEM 1.	UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PTC Inc.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)


	March 30, 2019			September 30, 2018			March 28, 2020			September 30, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	294,299		$	259,946		$	826,776		$	269,579
Short-term marketable securities	25,428			25,836			34,254			27,891
Accounts receivable, net of allowance for doubtful accounts of $719 and $607 at March 30, 2019 and September 30, 2018, respectively	352,217			129,297
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	66,210			48,997			66,854			52,701
Other current assets	52,448			169,708			60,869			59,707
Total current assets	790,602			633,784			1,341,426			782,621
Property and equipment, net	106,837			80,613			104,147			105,531
Goodwill	1,229,541			1,182,457			1,603,081			1,238,179
Acquired intangible assets, net	192,372			200,202			251,191			169,949
Long-term marketable securities	30,987			30,115			22,687			29,544
Deferred tax assets	195,884			165,566			202,683			198,634
Operating right-of-use lease assets							157,016			—
Other assets	169,596			36,285			184,240			140,130
Total assets	$	2,715,819		$	2,329,022		$	3,866,471		$	2,664,588
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	36,685		$	53,473		$	33,728		$	42,442
Accrued expenses and other current liabilities	100,319			74,388			115,278			104,028
Accrued compensation and benefits	73,408			101,784			83,904			88,769
Accrued income taxes	6,579			18,044			15,963			17,407
Current portion of long-term debt							496,435			—
Deferred revenue	381,392			487,590			407,412			385,509
Short-term lease obligations							39,452			—
Total current liabilities	598,383			735,279			1,192,172			638,155
Long-term debt	738,700			643,268			1,134,287			669,134
Deferred tax liabilities	36,326			5,589			19,541			41,683
Deferred revenue	10,415			11,852			9,790			11,123
Long-term lease obligations							184,706			—
Other liabilities	84,287			58,445			51,894			102,495
Total liabilities	1,468,111			1,454,433			2,592,390			1,462,590
Commitments and contingencies (Note 14)
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; 118,098 and 117,981 shares issued and outstanding at March 30, 2019 and September 30, 2018, respectively	1,181			1,180
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	1,523,949			1,558,403			1,536,770			1,502,949
Accumulated deficit	(182,298		)	(599,409		)	(150,351		)	(191,390		)
Accumulated other comprehensive loss	(95,124		)	(85,585		)	(113,495		)	(110,710		)
Total stockholders’ equity	1,247,708			874,589			1,274,081			1,201,998
Total liabilities and stockholders’ equity	$	2,715,819		$	2,329,022		$	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						Six months ended						Three months ended						Six months ended
	March 30, 2019			March 31, 2018			March 30, 2019			March 31, 2018			March 28, 2020			March 30, 2019			March 28, 2020			March 30, 2019
Revenue:
License	$	61,876		$	120,505		$	167,198		$	240,023		$	127,607		$	61,876		$	251,037		$	167,198
Support and cloud services	187,645			141,948			375,566			287,620			196,473			187,645			387,409			375,566
Total software revenue	249,521			262,453			542,764			527,643			324,080			249,521			638,446			542,764
Professional services	40,930			45,430			82,376			86,884			35,523			40,930			77,267			82,376
Total revenue	290,451			307,883			625,140			614,527			359,603			290,451			715,713			625,140
Cost of revenue:
Cost of license revenue	12,875			11,854			25,438			23,968			13,873			12,875			27,046			25,438
Cost of support and cloud services revenue	32,874			34,335			64,071			68,837			34,264			32,874			73,192			64,071
Total cost of software revenue	45,749			46,189			89,509			92,805			48,137			45,749			100,238			89,509
Cost of professional services revenue	34,155			37,519			67,747			73,938			34,890			34,155			70,194			67,747
Total cost of revenue	79,904			83,708			157,256			166,743			83,027			79,904			170,432			157,256
Gross margin	210,547			224,175			467,884			447,784			276,576			210,547			545,281			467,884
Operating expenses:
Sales and marketing	103,722			98,390			207,940			197,765			107,438			103,722			215,042			207,940
Research and development	61,402			62,197			122,184			126,169			59,954			61,402			125,262			122,184
General and administrative	35,371			33,369			73,235			68,389			33,629			35,371			78,186			73,235
Amortization of acquired intangible assets	5,930			7,895			11,866			15,716			7,288			5,930			14,065			11,866
Restructuring and other charges, net	26,980			114			45,473			219			18,242			26,980			32,276			45,473
Total operating expenses	233,405			201,965			460,698			408,258			226,551			233,405			464,831			460,698
Operating income (loss)	(22,858		)	22,210			7,186			39,526			50,025			(22,858		)	80,450			7,186
Interest expense	(11,383		)	(10,379		)	(21,659		)	(20,426		)
Interest and debt premium expense													(32,618		)	(11,383		)	(44,716		)	(21,659		)
Other income (expense), net	821			(285		)	1,475			(1,083		)	(1,629		)	821			(925		)	1,475
Income (loss) before income taxes	(33,420		)	11,546			(12,998		)	18,017			15,778			(33,420		)	34,809			(12,998		)
Provision (benefit) for income taxes	10,093			3,624			9,530			(3,782		)	8,622			10,093			(7,802		)	9,530
Net income (loss)	$	(43,513	)	$	7,922		$	(22,528	)	$	21,799		$	7,156		$	(43,513	)	$	42,611		$	(22,528	)
Earnings (loss) per share—Basic	$	(0.37	)	$	0.07		$	(0.19	)	$	0.19		$	0.06		$	(0.37	)	$	0.37		$	(0.19	)
Earnings (loss) per share—Diluted	$	(0.37	)	$	0.07		$	(0.19	)	$	0.19		$	0.06		$	(0.37	)	$	0.37		$	(0.19	)
Weighted average shares outstanding—Basic	118,461			116,241			118,392			115,986
Weighted average shares outstanding—Diluted	118,461			117,905			118,392			117,780
Weighted-average shares outstanding—Basic													115,606			118,461			115,401			118,392
Weighted-average shares outstanding—Diluted													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						Six months ended						Three months ended						Six months ended
	March 30, 2019			March 31, 2018			March 30, 2019			March 31, 2018			March 28, 2020			March 30, 2019			March 28, 2020			March 30, 2019
Net income (loss)	$	(43,513	)	$	7,922		$	(22,528	)	$	21,799		$	7,156		$	(43,513	)	$	42,611		$	(22,528	)
Other comprehensive income (loss), net of tax:
Realized and unrealized hedge gain (loss) arising during the period, net of tax of $0.2 million and $0.3 million in the second quarter of 2019 and 2018, respectively, and $0.2 million and $0.4 million in the first six months of 2019 and 2018, respectively	(2,955		)	(2,046		)	826			(2,959		)
Net hedge (gain) loss reclassified into earnings, net of tax of $0 million and $0.2 million in the second quarter of 2019 and 2018, respectively, and $0.1 million and $0.3 million in the first six months of 2019 and 2018, respectively	—			1,511			(549		)	2,084
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	(2,955		)	(535		)	277			(875		)	701			2,955			(2,642		)	277
Foreign currency translation adjustment, net of tax of $0 for each period	(4,033		)	7,540			(11,602		)	12,769			(10,559		)	(4,033		)	(412		)	(11,602		)
Unrealized gain (loss) on marketable securities, net of tax of $0 for each period	289			(267		)	302			(446		)	(537		)	289			(544		)	302
Amortization of net actuarial pension loss included in net income, net of tax of $0.2 million and $0.2 million in the second quarter of 2019 and 2018, respectively and $0.3 million and $0.3 million in the first six months of 2019 and 2018, respectively	428			386			858			757
Change in unamortized pension loss during the period related to changes in foreign currency	345			(465		)	626			(728		)
Other comprehensive income (loss)	(5,926		)	6,659			(9,539		)	11,477
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)	$	(49,439	)	$	14,581		$	(32,067	)	$	33,276		$	(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)~~

Six months ended
March 30,
2019 March 31,
2018
Cash flows from operating activities:
Net income (loss) $ (22,528 ) $ 21,799
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 39,558
42,727
Stock-based compensation 56,374
35,357
Other non-cash items, net 247
189
Loss on disposal of fixed assets 32
22
Changes in operating assets and liabilities, excluding the effects of acquisitions:
Accounts receivable 54,501
32,027
Accounts payable and accrued expenses 423
(9,474 )
Accrued compensation and benefits (28,291 ) (29,656 )
Deferred revenue 36,947
59,027
Accrued income taxes (15,677 ) (14,134 )
Other current assets and prepaid expenses 1,723
(7,217 )
Other noncurrent assets and liabilities 39,035
5,931
Net cash provided by operating activities 162,344
136,598
Cash flows from investing activities:
Additions to property and equipment (51,268 ) (11,139 )
Purchase of intangible asset —
(3,000 )
Purchases of short- and long-term marketable securities (14,460 ) (13,794 )
Proceeds from maturities of short- and long-term marketable securities 14,227
8,240
Acquisitions of businesses, net of cash acquired (69,453 ) (3,000 )
Purchases of investments (7,500 ) —
Settlement of net investment hedges 114
—
Net cash used in investing activities (128,340 ) (22,693 )
Cash flows from financing activities:
Borrowings under credit facility 205,000
50,000
Repayments of borrowings under credit facility (110,000 ) (120,000 )
Repurchases of common stock (64,994 ) —
Proceeds from issuance of common stock 4,158
7,472
Contingent consideration (1,575 ) (3,176 )
Payments of withholding taxes in connection with stock-based awards (34,491 ) (33,942 )
Net cash used in financing activities (1,902 ) (99,646 )
Effect of exchange rate changes on cash, cash equivalents and restricted cash 2,237
5,837
Net increase in cash, cash equivalents, and restricted cash 34,339
20,096
Cash, cash equivalents, and restricted cash, beginning of period 261,093
281,209
Cash, cash equivalents, and restricted cash, end of period $ 295,432
$ 301,305

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

~~PTC Inc.~~

~~CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY~~

~~(in thousands)~~

~~(unaudited)~~

Three months ended March 30, 2019
Common Stock
Additional
Paid-in
Capital

Accumulated
Deficit

Accumulated
Other
Comprehensive
Loss

Total
Stockholders’
Equity
Shares Amount
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 —
—
—
(43,513 ) —
(43,513 )
Repurchases of common stock (725 ) (7 ) (64,987 ) —
—
(64,994 )
Unrealized loss on net investment hedges, net of tax —
—
—
—
2,955
2,955
Foreign currency translation adjustment —
—
—
—
(4,033 ) (4,033 )
Unrealized loss 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
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 —
—
—
(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 loss on net investment hedges, net of tax —
—
—
—
662
662
Foreign currency translation adjustment —
—
—
—
(11,602 ) (11,602 )
Unrealized loss on available-for-sale 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

Three months ended March 31, 2018
Common Stock
Additional
Paid-in
Capital

Accumulated
Deficit

Accumulated
Other
Comprehensive
Loss

Total
Stockholders’
Equity
Shares Amount
Balance as of December 30, 2017 116,126
$ 1,161
$ 1,594,546
$ (637,519 ) $ (69,089 ) $ 889,099
Common stock issued for employee stock-based awards 60
1
(1 ) —
—
—
Shares surrendered by employees to pay taxes related to stock-based awards (6 ) —
(454 ) —
—
(454 )
Common stock issued for employee stock purchase plan 158
1
7,471
—
—
7,472
Compensation expense from stock-based awards —
—
17,026
—
—
17,026
Net income —
—
—
7,922
—
7,922
Unrealized loss on hedging instruments, net of tax —
—
—
—
(535 ) (535 )
Foreign currency translation adjustment —
—
—
—
7,540
7,540
Unrealized loss on available-for-sale securities, net of tax —
—
—
—
(267 ) (267 )
Change in pension benefits, net of tax —
—
—
—
(79 ) (79 )
Balance as of March 31, 2018 116,338
$ 1,163
$ 1,618,588
$ (629,597 ) $ (62,430 ) $ 927,724

Six months ended March 31, 2018
Common Stock
Additional
Paid-in
Capital

Accumulated
Deficit

Accumulated
Other
Comprehensive
Loss

Total
Stockholders’
Equity
Shares Amount
Balance as of September 30, 2017 115,333
$ 1,153
$ 1,609,030
$ (650,840 ) $ (73,907 ) $ 885,436
ASU 2016-09 adoption —
—
681
(556 ) —
125
Common stock issued for employee stock-based awards 1,377
14
(14 ) —
—
—
Shares surrendered by employees to pay taxes related to stock-based awards (530 ) (5 ) (33,937 ) —
—
(33,942 )
Common stock issued for employee stock purchase plan 158
1
7,471
—
—
7,472
Compensation expense from stock-based awards —
—
35,357
—
—
35,357
Net income —
—
—
21,799
—
21,799
Unrealized loss on cash flow hedges, net of tax —
—
—
—
(875 ) (875 )
Foreign currency translation adjustment —
—
—
—
12,769
12,769
Unrealized loss on available-for-sale securities, net of tax —
—
—
—
(446 ) (446 )
Change in pension benefits, net of tax —
—
—
—
29
29
Balance as of March 31, 2018 116,338
$ 1,163
$ 1,618,588
$ (629,597 ) $ (62,430 ) $ 927,724

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

PTC Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Six months ended
	March 28, 2020			March 30, 2019
Cash flows from operating activities:
Net income (loss)	$	42,611		$	(22,528	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	40,193			39,558
Stock-based compensation	48,420			56,374
Other non-cash items, net	(1,926		)	247
Loss on disposal of fixed assets	231			32
Changes in operating assets and liabilities, excluding the effects of acquisitions:
Accounts receivable	20,187			54,501
Accounts payable and accrued expenses	12,193			423
Accrued compensation and benefits	(4,629		)	(28,291		)
Deferred revenue	17,393			36,947
Accrued income taxes	(43,815		)	(15,677		)
Other current assets and prepaid expenses	681			1,723
Other noncurrent assets and liabilities	(36,210		)	39,035
Net cash provided by operating activities	95,329			162,344
Cash flows from investing activities:
Additions to property and equipment	(10,243		)	(51,268		)
Purchases of short- and long-term marketable securities	(10,151		)	(14,460		)
Proceeds from maturities of short- and long-term marketable securities	9,971			14,227
Acquisitions of businesses, net of cash acquired	(468,520		)	(69,453		)
Purchases of investments	—			(7,500		)
Settlement of net investment hedges	2,200			114
Net cash used in investing activities	(476,743		)	(128,340		)
Cash flows from financing activities:
Proceeds from issuance of Senior Notes	1,000,000			—
Borrowings under credit facility	455,000			205,000
Repayments of borrowings under credit facility	(480,000		)	(110,000		)
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		)
Payments of withholding taxes in connection with stock-based awards	(23,571		)	(34,491		)
Net cash provided by (used in) financing activities	944,143			(1,902		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(5,740		)	2,237
Net change in cash, cash equivalents, and restricted cash	556,989			34,339
Cash, cash equivalents, and restricted cash, beginning of period	270,689			261,093
Cash, cash equivalents, and restricted cash, end of period	$	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 March 28, 2020
	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 28, 2019	115,494		$	1,155	$	1,508,030		$	(157,507	)	$	(103,861	)	$	1,247,817
Common stock issued for employee stock-based awards	55		1		(1		)	—			—			—
Shares surrendered by employees to pay taxes related to stock-based awards	(10	)	—		(722		)	—			—			(722		)
Common stock issued for employee stock purchase plan	156		1		8,979			—			—			8,980
Compensation expense from stock-based awards	—		—		20,484			—			—			20,484
Net income	—		—		—			7,156			—			7,156
Unrealized gain on net investment hedges, net of tax	—		—		—			—			701			701
Foreign currency translation adjustment	—		—		—			—			(10,559		)	(10,559		)
Unrealized loss on available-for-sale securities, net of tax	—		—		—			—			(537		)	(537		)
Change in pension benefits, net of tax	—		—		—			—			761			761
Balance as of March 28, 2020	115,695		$	1,157	$	1,536,770		$	(150,351	)	$	(113,495	)	$	1,274,081



	Six months ended March 28, 2020
	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, 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	958		10			(10		)	—			—			—
Shares surrendered by employees to pay taxes related to stock-based awards	(318	)	(3		)	(23,568		)	—			—			(23,571		)
Common stock issued for employee stock purchase plan	156		1			8,979			—			—			8,980
Compensation expense from stock-based awards	—		—			48,420			—			—			48,420
Net income	—		—			—			42,611			—			42,611
Unrealized loss on net investment hedges, net of tax	—		—			—			—			(2,642		)	(2,642		)
Foreign currency translation adjustment	—		—			—			—			(412		)	(412		)
Unrealized loss on marketable securities, net of tax	—		—			—			—			(544		)	(544		)
Change in pension benefits, net of tax	—		—			—			—			813			813
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, ~~2018.~~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, ~~2018~~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 second quarter of 2020 ended on March 28, 2020 and the second quarter of 2019 ended on March 30, ~~2019 and the second quarter of 2018 ended on March 31, 2018.~~2019. The results of operations for the six months ended March ~~30, 2019~~28, 2020 are not necessarily indicative of the results expected for the remainder of the fiscal year.

~~Changes~~We adjusted the $3.0 million hedge gain in ~~Presentation and Reclassifications~~

On October 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASC 606). Results for reporting periods beginning on or after October 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the guidance provided by ASC 985-605, ~~Software-Revenue Recognition~~ ~~and revenues for non-software deliverables in accordance with ASC 605-25,~~ ~~Revenue Recognition, Multiple-Element Arrangements~~ (ASC 605). In connection with the adoption of ASC 606, we changed our presentation of the statement of operations to reflect revenue and associated costs as license, support and cloud services, and professional services. For the prior year period, all components of subscription licenses (including support) are included in license revenue. Prior to our adoption of ASC 606, revenues from subscription licenses and support thereon were not separated and were previously included in subscription revenue in our consolidated statement of operations since we did not have VSOE of fair value for support on subscription sales. In addition, revenue and costs associated with our cloud services, which are immaterial and were previously reported in subscription revenue, are classified as support and cloud services for all periods presented.

Effective at the beginning of fiscal 2019, in accordance with the adoption of ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, all non-service net periodic pension costs are now presented in Other income (expense), net on the Consolidated Statement of ~~Operations. The prior period non-service net periodic pension cost amounts have been reclassified~~Comprehensive Income (Loss) for ~~comparability.~~

~~Effective at~~ the beginning of fiscal 2019, in accordance with the adoption of ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, restricted cash is now included with cash and cash equivalents in the net cash increase (decrease), beginning of period total amount and end of period total amount on the Consolidated Statements of Cash Flows. The prior period restricted cash amounts have been reclassified for comparability. As ofthree months ended March 30, 2019 that was incorrectly reflected as a loss.

Risks and ~~September 30, 2018, $1.1 million~~Uncertainties - COVID-19 Pandemic

In December 2019, a novel strain of ~~restricted cash~~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 ~~included~~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 ~~other current assets.~~material impacts to our consolidated financial statements in future reporting periods.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

~~Revenue Recognition~~

On October 1, 2018, we adopted ASC 606, which supersedes substantially all existing revenue recognition guidance under U.S. GAAP. We adopted ASC 606 using the modified retrospective method, under which the cumulative effect of initially applying ASC 606 was recorded as a reduction to accumulated deficit with no restatement of comparative periods.

The core principle of ASC 606 is to recognize revenue when promised goods or services are transferred to a customer in an amount that reflects the consideration that is expected to be received for those goods or services. Under the new guidance, an entity is required to evaluate revenue recognition through a five-step process: (1) identifying a contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations in the contract; and (5) recognizing revenue when (or as) the entity satisfies a performance obligation. The standard also requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In applying the principles of ASC 606, more judgment and estimates are required within the revenue recognition process than is required under previous U.S. GAAP, including identifying performance obligations, estimating the amount of variable consideration to include in the transaction price, and estimating the value of each performance obligation to allocate the total transaction price to each separate performance obligation.

The most significant impact of ASC 606 relates to accounting for our subscription arrangements that include term-based on-premise software licenses bundled with support. Under previous GAAP (ASC 605, through September 30, 2018), revenue attributable to these subscription licenses was recognized ratably over the term of the arrangement because VSOE does not exist for the undelivered support element as it is not sold separately. Under the new standard, the requirement to have VSOE for undelivered elements to enable the separation of revenue for the delivered software licenses is eliminated. Accordingly, under the new standard we recognize as revenue a portion of the subscription fee upon delivery of the software license. Revenue recognition related to our perpetual licenses and related support contracts, professional services and cloud offerings is substantially unchanged, with support and cloud revenue being recorded ratably over the contract term. Due to the complexity of certain of our contracts, the actual revenue recognition treatment required under the new standard may be dependent on contract-specific terms and, therefore, may vary in some instances.

Upon implementation of the new standard in fiscal 2019, we made prospective revisions to contract terms with our customers that will result in shortening the initial, non-cancellable term of our multi-year subscriptions to one year for contract periods that begin on or after October 1, 2018. This change will result in annual contractual periods for most of our software subscriptions, the license portion of which will be recognized at the beginning of each annual contract period and the support portion of which will be recognized ratably over the one-year contractual period. As a result, we anticipate one year of subscription revenue will be recognized for each contract each year; however, more of the revenue will be recognized in the quarter that the contract period begins and less will be recognized in the subsequent three quarters of the contract than under ASC 605.

Under the modified retrospective method, we evaluated each contract that was ongoing on October 1, 2018 as if that contract had been accounted for under ASC 606 from contract inception. Some license revenue related to subscription arrangements that would have been recognized in future periods under current GAAP was recast under ASC 606 as if the revenue had been recognized in prior periods. Under this transition method, we did not adjust historical reported revenue amounts. Instead, the revenue that would have been recognized under this method prior to the adoption date was recorded as an adjustment to accumulated deficit and will not be recognized as revenue in future periods as previously expected. Because license revenue associated with subscription contracts is recognized up front instead of over time under ASC 606, a material portion of our deferred revenue was adjusted to accumulated deficit upon adoption.

Another significant provision under ASC 606 includes the capitalization and amortization of costs associated with obtaining a contract, such as sales commissions. Prior to October 1, 2018, we expensed commissions in the period incurred. Under ASC 606, direct and incremental costs to acquire a contract are capitalized and amortized using a systematic basis over the pattern of transfer of the goods and services to which the asset relates.

~~Refer to~~ ~~Note 2. Revenue from Contracts with Customers~~ ~~for further detail about the impact of the adoption of ASC 606 and further disclosures.~~

~~Income Taxes~~

Leases

In ~~October~~February 2016, the Financial Accounting Standards Board (FASB) issued Accounting ~~Standards~~Standard Update (ASU) 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The purpose of ASU 2016-16 is to simplify the income tax accounting of an intra-entity transfer of an asset other than inventory and to record its effect when the transfer occurs. We adopted this amendment beginning in the first quarter of 2019 using the modified retrospective method with a cumulative effect adjustment to accumulated deficit of $72.3 million, with a corresponding increase of $75.3 million to deferred tax assets, $6.0 million decrease to income tax assets and a $3.0 million decrease to income tax liabilities. The adjustment primarily relates to deductible amortization of intangible assets in Ireland. Post adoption, our effective tax rate no longer includes the benefit of this amortization.

~~Pension Accounting~~

In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which provides guidance on the capitalization, presentation and disclosure of net benefit costs related to post-retirement benefit plans. We adopted the new guidance in the first quarter of 2019 on a full retrospective basis, which resulted in the retrospective reclassification of $0.2 million and $0.3 million of non-service net periodic pension cost for the three and six months ended March 31, 2018, respectively, from line items within cost of revenue and operating expenses into Other income (expense), net on the Consolidated Statement of Operations.

~~Equity Investments~~

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities and requires equity securities to be measured at fair value, unless the measurement alternative method has been elected for equity investments without readily determinable fair values. Adoption of this guidance in the first quarter of fiscal 2019 did not have a material impact on our consolidated financial statements.

~~Restricted Cash~~

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The new guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Statement of Cash Flows. Adoption of this guidance in the first quarter of fiscal 2019 did not have a material impact on our consolidated financial statements.

~~Pending Accounting Pronouncements~~

~~Derivative Financial Instruments~~

In August 2017, the FASB issued ASU No. 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. The guidance is effective for annual reporting periods beginning after December 15, 2018 (our fiscal 2020) including interim reporting periods within those annual reporting periods and early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

~~Leases~~

~~In February 2016, the FASB issued ASU No.~~ 2016-02, Leases (Topic 842) (ASC 842), which ~~will replace~~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. ~~ASU 2016-02~~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.

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 ~~annual periods beginning after December 15,~~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, ~~(our fiscal 2020)~~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 ~~interim periods within those annual periods. Early adoption is permitted~~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 ~~modified retrospective application is required.~~ 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 of the ~~new guidance~~standard will have on our consolidated financial ~~statements.~~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)	March 28, 2020		September 30, 2019
Contract asset	$	19,582	$	21,038
Deferred revenue	$	417,202	$	396,632

~~Upon adoption~~As of ~~ASC 606, we recorded a decrease~~March 28, 2020, our contract assets are expected to be transferred to receivables within the next 12 months and therefore are included in ~~accumulated deficit of $431.9~~other current assets. Approximately $10.2 million ~~($367.4 million, net of tax) due to the cumulative effect~~ of the ~~ASC 606 adoption, with~~September 30, 2019 contract asset balance was transferred to receivables during the ~~impact primarily derived from revenue related to on-premise subscription software licenses.~~

~~Nature of Products and Services~~

Our sources of revenue include: (1) subscription, (2) perpetual license, (3) perpetual support and (4) professional services. Revenue is derived from the licensing of computer software products and from related support and/or professional services contracts. We enter into contracts that include combinations of products, support and professional services, which are accounted for as separate performance obligations with differing revenue recognition patterns.



~~Performance Obligation~~	~~When Performance Obligation is Typically Satisfied~~
~~Term-based subscriptions~~
~~On-premise software licenses~~	~~Point in Time: Upon the later of when the software is made available or the subscription term commences~~
~~Support and cloud-based offerings~~	~~Over Time: Ratably over the contractual term; commencing upon the later of when the software is made available or the subscription term commences~~
~~Perpetual software licenses~~	~~Point in Time: when the software is made available~~
~~Support for perpetual software licenses~~	~~Over Time: Ratably over the contractual term~~
~~Professional services~~	~~Over time: As services are provided~~

~~Judgments and Estimates~~

Our contracts with customers for subscriptions typically include commitments to transfer term-based on-premise software licenses bundled with support and/or cloud services. On-premise software is determined to be a distinct performance obligation from support which is sold for the same term of the subscription. For subscription arrangements which include cloud services, we assessed whether the cloud component was highly interrelated with on-premise term software licenses. Other than a limited population of subscriptions, the cloud component is not currently deemed to be interrelated with the on-premise term software and,six months ended March 28, 2020 as a result ~~cloud~~of the right to payment becoming unconditional. The majority of the contract asset balance relates to two large professional services ~~will be accounted for~~contracts with invoicing terms based on performance milestones. Additions to contract assets of approximately $8.8 million related to revenue recognized in the period, net of billings. There were no impairments of contract assets during the six months ended March 28, 2020.

During the six months ended March 28, 2020, we recognized $283.4 million of revenue that was included in deferred revenue as of September 30, 2019 and there were additional deferrals of $301.3 million during the six months ended March 28, 2020, primarily related to new billings. In addition, deferred revenue increased by an immaterial amount as a ~~distinct performance obligation from the software and support components~~result of the ~~subscription.~~

~~Judgment is required~~acquisition of Onshape. The balance of total short- and long-term receivables as of September 30, 2019 was $412.5 million, compared to allocate the transaction price to each performance obligation. We use the estimated standalone selling price method to allocate the transaction price for items that are not sold separately. The estimated standalone selling price is determined using all information reasonably available to us, including market conditionstotal short- and ~~other observable inputs. The corresponding revenues are recognized~~long-term receivables as ~~the related performance obligations are satisfied. We determined that 50% to 55%~~ of the estimated standalone selling price for subscriptions that contain distinct license and support performance obligations are attributable to software licenses and 45% to 50%, depending upon the product offering, is attributable to support for those licenses.March 28, 2020 of $431.0 million.

Our multi-year, non-cancellable on-premise subscription contracts provide customers with an annual right to exchange software within the ~~original~~ 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 ~~used~~use the most likely amount method to determine the amount of variable consideration. In both circumstances, the ~~amount of~~ variable consideration included in the transaction price is constrained ~~by an amount where~~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 March 28, 2020 and September 30, 2019, the total refund liability was ~~$23.4~~$30.2 million and $22.9 million, respectively, primarily associated with the annual right to exchange on-premise subscription software.

~~Contract Assets and Contract Liabilities~~

March 30, 2019 October 1, 2018, as adjusted
(in thousands)
Contract asset $ 19,628
$ 26,265
Deferred revenue $ 391,807
$ 357,490

As of March 30, 2019, our contract assets are expected to be transferred to receivables within the next 12 months and therefore are included in other current assets. Approximately $14.1 million of the October 1, 2018 contract asset balance was transferred to receivables during the six months ended March 30, 2019 as a result of the right to payment becoming unconditional. The majority of both the contract asset balance and the amounts transferred to receivables relates to two large professional services contracts with invoicing terms based on performance milestones. Additions to contract assets of approximately $7.5 million related to revenue recognized in the period, net of period billings. There were no impairments of contract assets during the six months ended March 30, 2019.

During the six months ended March 30, 2019, $246.1 million of revenue that was included in the deferred revenue opening balance was recognized. There were additional deferrals of $280.4 million, which were primarily related to new billings.

Costs to Obtain or Fulfill a Contract

The new revenue recognition standard requires the capitalization of certain incremental costs of obtaining a contract, which impacts the period in which we record our commission expense. Prior to our adoption of the new revenue standard, we recognized commissions expense as incurred. Under the new revenue recognition standard, we are required to recognize these expenses over the period of benefit associated with these costs. This results in a deferral of certain commission expenses each period. Upon adoption, we reduced our accumulated deficit by $70.0 million and recognized an offsetting asset for deferred commission related to contracts that were not completed prior to October 1, 2018.

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 March 28, 2020 and September 30, 2019, deferred costs of ~~$20.1~~$29.7 million and $27.7 million, respectively, were included in other current assets and ~~$57.6~~$65.7 million and $64.8 million, respectively, were included in other assets (non-current).

As the revenue recognition pattern has changed under ASC 606, the costs to fulfill contracts has also changed to match this pattern of expense recognition. As of October 1, 2018, this resulted in a $2.8 million increase in our accumulated deficit with recognition of an offsetting current liability.

Remaining Performance Obligations

Our contracts with customers include amounts allocated to performance obligations that will be satisfied at a later date. ~~The~~As of March 28, 2020, the amounts include additional performance obligations of $417.2 million recorded in deferred revenue and $608.8 million that are not yet recorded in the consolidated balance sheets.~~As of March 30, 2019, amounts allocated to these additional contractual obligations are $883.7 million, of which we~~ We expect to recognize approximately 90% of the total $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

Three months ended Six months ended
As Reported ASC 606 ASC 605 As Reported ASC 605 As Reported ASC 606 ASC 605 As Reported ASC 605
March 30, 2019 March 30, 2019 March 31, 2018 March 30, 2019 March 30, 2019 March 31, 2018
Revenue
(in thousands)
Subscription license $ 51,540
$ 115,057

Subscription support & cloud services 83,228
160,652

Total Subscription 134,768
$ 162,070
$ 112,931
275,709
$ 310,483
$ 212,939
Perpetual support 104,417
103,564
126,683
214,914
212,789
257,880
Total recurring revenue 239,185
265,634
239,614
490,623
523,272
470,819
Perpetual license 10,336
11,267
22,839
52,141
53,017
56,824
Total software revenue 249,521
276,901
262,453
542,764
576,289
527,643
Professional services 40,930
38,598
45,430
82,376
77,967
86,884
Total revenue $ 290,451
$ 315,499
$ 307,883
$ 625,140
$ 654,256
$ 614,527



(in thousands)	Three months ended				Six months ended
	March 28, 2020		March 30, 2019		March 28, 2020		March 30, 2019
Total recurring revenue	$	315,862	$	239,185	$	621,230	$	490,623
Perpetual license	8,218		10,336		17,216		52,141
Professional services	35,523		40,930		77,267		82,376
Total revenue	$	359,603	$	290,451	$	715,713	$	625,140

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

~~Practical Expedients~~

We elected certain practical expedients with the adoption of the new revenue standard. We do not account for significant financing components if the period between revenue recognition and when the customer pays for the products or services will be one year or less. Additionally, we recognize revenue equal to the amount we have a right to invoice, when the amount corresponds directly with the value to the customer of our performance date.

~~Transition Disclosures~~

In accordance with the modified retrospective method transition requirements, we will present the financial statement line items impacted and adjusted to compare to presentation under ASC 605 for each of the interim and annual periods during the first year of adoption of ASC 606.

~~The following tables present our Balance Sheets and Statements of Operations as reported under ASC 606 for the current period with comparative periods reported under ASC 605:~~

As Reported ASC 606 ASC 605 As Reported ASC 605
March 30,
2019 March 30,
2019 September 30,
2018
ASSETS
Current assets:
Cash and cash equivalents $ 294,299
$ 294,299
$ 259,946
Short-term marketable securities 25,428
25,428
25,836
Accounts receivable⁽¹⁾
352,217
110,510
129,297
Prepaid expenses 66,210
66,509
48,997
Other current assets ⁽²⁾
52,448
153,687
169,708
Total current assets 790,602
650,433
633,784
Property and equipment, net 106,837
106,837
80,613
Goodwill 1,229,541
1,229,541
1,182,457
Acquired intangible assets, net 192,372
192,372
200,202
Long-term marketable securities 30,987
30,987
30,115
Deferred tax assets⁽³⁾
195,884
228,776
165,566
Other assets ⁽⁴⁾
169,596
41,750
36,285
Total assets $ 2,715,819
$ 2,480,696
$ 2,329,022
LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable $ 36,685
$ 36,685
$ 53,473
Accrued expenses and other current liabilities⁽⁵⁾
100,319
73,719
74,388
Accrued compensation and benefits 73,408
73,408
101,784
Accrued income taxes⁽³⁾
6,579
1,181
18,044
Deferred revenue⁽⁶⁾
381,392
545,168
487,590
Total current liabilities 598,383
730,161
735,279
Long-term debt 738,700
738,700
643,268
Deferred tax liabilities⁽³⁾
36,326
6,079
5,589
Deferred revenue⁽⁶⁾
10,415
8,541
11,852
Other liabilities 84,287
84,287
58,445
Total liabilities 1,468,111
1,567,768
1,454,433

Stockholders’ equity:

Preferred stock —
—
—
Common stock 1,181
1,181
1,180
Additional paid-in capital 1,523,949
1,523,949
1,558,403
Accumulated deficit (182,298 ) (519,930 ) (599,409 )
Accumulated other comprehensive loss (95,124 ) (92,272 ) (85,585 )
Total stockholders’ equity 1,247,708
912,928
874,589
Total liabilities and stockholders’ equity $ 2,715,819
$ 2,480,696
$ 2,329,022

~~The changes in balance sheet accounts due to the adoption of ASC 606 are due primarily to the following:~~


~~(1)~~	Up front license recognition under our subscription contracts and billed but uncollected support and subscription receivables that had corresponding deferred revenue, which were included in other current assets prior to our adoption of ASC 606.

~~(2) Contract assets and capitalized commission costs.~~


~~(3)~~	~~The tax effect of the accumulated deficit impact related to the acceleration of revenue and deferral of costs (primarily commissions).~~

~~(4) The long-term portion of unbilled receivables due to the acceleration of license revenue on multi-year subscription contracts and the long-term portion of capitalized commission costs.~~

~~(5) Refund liability, primarily associated with the annual right to exchange on-premise subscription software described above in~~ ~~Judgments and Estimates~~.

~~(6) The decrease in deferred revenue recorded to accumulated deficit upon adoption of ASC 606 primarily related to on-premise subscription software licenses.~~

Three months ended Six months ended
As Reported ASC 606 ASC 605 As Reported ASC 605 As Reported ASC 606 ASC 605 As Reported ASC 605
March 30,
2019 March 30,
2019 March 31,
2018 March 30,
2019 March 30,
2019 March 31,
2018
Revenue:
License⁽¹⁾
$ 61,876
$ 156,131
$ 120,505
$ 167,198
$ 330,036
$ 240,023
Support and cloud services⁽¹⁾
187,645
120,770
141,948
375,566
246,253
287,620
Total software revenue 249,521
276,901
262,453
542,764
576,289
527,643
Professional services
40,930
38,598
45,430
82,376
77,967
86,884
Total revenue 290,451
315,499
307,883
625,140
654,256
614,527
Cost of revenue:

Cost of license revenue 12,875
12,245
11,854
25,438
24,592
23,968
Cost of support and cloud services revenue
32,874
32,977
34,335
64,071
63,607
68,837
Total cost of software revenue 45,749
45,222
46,189
89,509
88,199
92,805
Cost of professional services revenue 34,155
32,745
37,519
67,747
64,964
73,938
Total cost of revenue⁽²⁾
79,904
77,967
83,708
157,256
153,163
166,743
Gross margin 210,547
237,532
224,175
467,884
501,093
447,784
Operating expenses:

Sales and marketing⁽³⁾
103,722
109,421
98,390
207,940
216,725
197,765
Research and development 61,402
61,402
62,197
122,184
122,184
126,169
General and administrative 35,371
35,371
33,369
73,235
73,235
68,389
Amortization of acquired intangible assets 5,930
5,930
7,895
11,866
11,866
15,716
Restructuring and other charges, net 26,980
26,980
114
45,473
45,473
219
Total operating expenses 233,405
239,104
201,965
460,698
469,483
408,258
Operating income (22,858 ) (1,572 ) 22,210
7,186
31,610
39,526
Interest expense (11,383 ) (11,383 ) (10,379 ) (21,659 ) (21,659 ) (20,426 )
Other income (expense), net 821
1,065
(285 ) 1,475
1,613
(1,083 )
Income (loss) before income taxes (33,420 ) (11,890 ) 11,546
(12,998 ) 11,564
18,017
Provision (benefit) for income taxes⁽⁴⁾
10,093
140
3,624
9,530
4,346
(3,782 )
Net income (loss) $ (43,513 ) $ (12,030 ) $ 7,922
$ (22,528 ) $ 7,218
$ 21,799

~~(1)~~

The reduction in license revenue and increase in support revenue is a result of the support component of subscription licenses which is included in license revenue under ASC 605. Additionally, for the three months ended March 30, 2019, license revenue decreased by approximately $58.3 million as a result of the revenue recorded to accumulated deficit, which would have been recognized during the period and approximately $15.0 million as a result of revenue recognized during the first quarter of 2019 which would have been recognized during the period. For the six months ended March 30, 2019, license revenue decreased by approximately $123.3 million as a result of the revenue recorded to accumulated deficit which would have been recognized during the period. This was partially offset by approximately $48.5 million and $92.0 million of upfront license revenue recognition on new and renewal bookings for the three- and six-months ending March 30, 2019, respectively.

(2) Cost of revenue under ASC 606 is higher than under ASC 605 due to the treatment of deferred professional services costs under the new accounting guidance, partially offset by the timing of revenue recognition under ASC 606 resulting in lower associated royalty costs.

(3) Sales and marketing costs are lower under ASC 606 due to the amortization of commissions costs capitalized upon adoption of ASC 606, offset by the deferral of ongoing commission expenses under the new accounting guidance.

~~(4) The benefit for income taxes under ASC 606 includes indirect effects of the adoption.~~

3. Restructuring and Other Charges

Restructuring and other charges, net includes restructuring charges (credits) ~~and~~, headquarters relocation ~~charges.~~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 six months ended March 28, 2020, restructuring charges and other charges, net totaled $18.2 million and $32.3 million, respectively, of which $13.2 million and $27.0 million is attributable to restructuring charges, respectively, and $4.7 million and $5.0 million is related to impairment 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 six months ended March 30, 2019, restructuring and other charges totaled $27.0 million and $45.5 million, respectively, of which $26.4 million and $43.0 million is attributable to restructuring charges, respectively, and $0.6 million and $2.5 million is related to headquarters relocation charges, respectively.

Restructuring Charges ~~(Credits)~~

~~In October 2018,~~During the first quarter of 2020, we initiated a restructuring program as part of a realignment associated with expected synergies and operational efficiencies related to the Onshape acquisition. During the six months ended March 28, 2020, we incurred $31.5 million in connection with this restructuring plan for termination benefits associated with approximately 255 employees.

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 iswas a realignment of resources rather than a cost-savings initiative, ~~we do~~it did not ~~expect this realignment to~~ result in significant cost savings. The restructuring plan was completed in the first quarter of 2019 and resulted in restructuring charges of ~~$16~~$16.3 million for termination benefits associated with approximately 240 employees, substantially all of which ~~we expect will be paid in fiscal 2019.~~has been paid. In the second quarter of ~~2019,~~2020, we ~~also~~ recorded ~~$0.3~~$0.1 million of ~~charges~~credits related to ~~prior facility~~this restructuring ~~actions.~~plan.

~~In January~~During the second quarter of 2019, we relocated our worldwide headquarters to the Boston Seaport District. ~~Because our prior~~We incurred a restructuring charge for the former headquarters lease, which will not expire until November 2022, we are seeking to sublease that space, but have not yet done so. As a result, we will bear overlapping rent obligations for those premises and, in the second quarter of 2019, we incurred a restructuring charge of approximately $26.7 million, based on the net present value of remaining lease commitments net of estimated sublease income. From a cash perspective, the free rent and estimated sublease income over2022. During the first 18six months ~~on the Seaport headquarters total approximately $30~~ended March 28, 2020, we reversed $4.4 million ~~as compared to the estimated cash outflows~~ of ~~$34 million on the prior headquarters, which will be incurred over the next 44 months (rent obligations and~~accrued variable operating ~~expenses net of estimated sublease income). Restructuring~~facility restructuring charges ~~and estimated cash outflows could increase if we are unable to sublease our prior headquarters as we expect. Other costs~~ associated with the ~~move were recorded as incurred.~~exit of a portion of our former headquarters lease.

The following table summarizes restructuring accrual activity for the six months ended March ~~30, 2019:~~28, 2020:



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

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

The following table summarizes restructuring accrual activity for the six months ended March ~~31, 2018:~~30, 2019:



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

Employee severance and related benefits Facility closures and related costs Total
(in thousands)
October 1, 2017 $ 1,736
$ 4,508
$ 6,244
Charges (credit) to operations, net (395 ) (339 ) (734 )
Cash disbursements (1,120 ) (806 ) (1,926 )
Foreign exchange impact 22
(47 ) (25 )
Accrual, March 31, 2018 $ 243
$ 3,316
$ 3,559
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.

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

Of the accrual for facility closures and related costs, as of March 30, 2019, $12.4 million is included in accrued expenses and other current liabilities and $18.9 million is included in other liabilities in the Consolidated Balance Sheets. The accrual for facility closures is net of assumed sublease income of $13.9 million. The accrual for employee severance and related benefits is included in accrued compensation and benefits in the Consolidated Balance Sheets.

Of the accrual for facility closures and related costs, as of March 31, 2018, $1.9 million is included in accrued expenses and other current liabilities and $1.4 million is included in other liabilities in the Consolidated Balance Sheets.

In determining the amount of the facilities accrual, we are required to estimate such factors as future vacancy rates, the time required to sublet properties and sublease rates. These estimates are reviewed quarterly based on known real estate market conditions and the credit-worthiness of subtenants, and may result in revisions to established facility reserves. The accrual is based on the net present value of remaining lease commitments net of estimated sublease income. We had $31.3 million accrued as of March 30, 2019 related to excess facilities (compared to $2.4 million at September 30, 2018), representing gross lease commitments with agreements expiring at various dates through 2023 of approximately $43.6 million, net of committed sublease income of approximately $1.0 million and uncommitted sublease income of approximately $11.3 million.

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 six months of 2019, we recorded ~~$1.9~~$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 ~~one~~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)~~, initiated in the fourth quarter of 2016,~~ 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 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
Granted	1,349		$	77.18
Vested	(958	)	$	68.79
Forfeited or not earned	(550	)	$	84.27
Balance of outstanding restricted stock units March 28, 2020	3,073		$	82.03

Restricted stock unit activity for the six months ended March 30, 2019 Shares
Weighted
Average
Grant Date
Fair Value
(Per Share)
(in thousands)
Balance of outstanding restricted stock units October 1, 2018 3,284
$ 65.93
Granted (1) 1,061
$ 82.09
Vested (1,108 ) $ 54.42
Forfeited or not earned (322 ) $ 63.98
Balance of outstanding restricted stock units March 31, 2019 2,915
$ 76.48

~~_________________~~

~~(1) Restricted stock granted includes 141,000 shares from prior period TSR awards that were earned upon achievement of the performance criteria and vested in November 2018.~~

Restricted Stock Units

(in thousands)

Restricted Stock Units

Grant Period

Performance-based RSUs (1)

Service-based RSUs (2)

Performance-based RSUs ⁽¹⁾

Service-based RSUs ⁽²⁾

Total Shareholder Return RSUs ⁽³⁾

(Number of Units in thousands)

First six months of 2019

347

573

First six months of 2020

1,155

_________________

(1)

~~Substantially all the~~The performance-based RSUs were granted to our ~~executive officers. Approximately~~ ~~147,000~~ ~~shares~~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~~three~~3 substantially equal installments on November 15, ~~2019,~~2020, November 15, ~~2020~~2021 and November 15, ~~2021,~~2022, or the date the Compensation Committee determines the extent to which the applicable performance criteria have been achieved for each performance period. ~~An additional~~ ~~200,000~~ ~~performance-based~~Up to a maximum of two times the number of RSUs ~~are eligible to vest based upon a 2019 performance measure, which RSUs will~~can be ~~forfeited to the extent the performance measure is not achieved. These RSUs will vest, to the extent~~ earned ~~in three substantially equal installments on November 15, 2019, 2020 and 2021.~~(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 ~~three~~3 substantially equal annual installments on or about the anniversary of the date of grant.


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

The number of TSR 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 RSUs earned for each period will vest on November 15 following each measurement period, up to a maximum of two times the number of TSR RSUs eligible to be earned for the period (up to a maximum aggregate of 195 thousand 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 TSR RSUs will vest for the measurement period. TSR 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 RSUs was $106.69 per target RSU on the grant date. The fair value of the TSR 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				Six months ended
	March 28, 2020		March 30, 2019		March 28, 2020		March 30, 2019
Cost of license revenue	$	11	$	48	$	11	$	370
Cost of support and cloud services revenue	1,523		1,158		3,010		2,133
Cost of professional services revenue	1,466		1,906		3,022		3,720
Sales and marketing	7,146		9,522		14,598		19,244
Research and development	4,765		5,190		11,697		10,090
General and administrative	5,573		9,143		16,082		20,817
Total stock-based compensation expense	$	20,484	$	26,967	$	48,420	$	56,374

Three months ended Six months ended
March 30,
2019 March 31,
2018 March 30,
2019 March 31,
2018
(in thousands)
Cost of license revenue $ 48
$ 106
$ 370
$ 16
Cost of support and cloud services revenue 1,158
992
2,133
2,303
Cost of professional services revenue 1,906
1,669
3,720
3,375
Sales and marketing 9,522
5,038
19,244
9,917
Research and development 5,190
3,383
10,090
6,343
General and administrative 9,143
5,838
20,817
13,403
Total stock-based compensation expense $ 26,967
$ 17,026
$ 56,374
$ 35,357

Stock-based compensation expense includes $1.3 million and $2.8 million in the second quarter and first six months of 2020, respectively, and $1.4 million and $2.7 million in the second quarter and first six monthsof 2019, ~~respectively and $1.0 million and $2.1 million in the second quarter and first six months of 2018,~~ 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~~weighted-average number of shares outstanding during the period. Diluted EPS is calculated by dividing net income by the ~~weighted average~~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					Six months ended
Calculation of Basic and Diluted EPS (in thousands, except per share data)	March 28, 2020		March 30, 2019			March 28, 2020		March 30, 2019
Net income (loss)	$	7,156	$	(43,513	)	$	42,611	$	(22,528	)
Weighted-average shares outstanding—Basic	115,606		118,461			115,401		118,392
Dilutive effect of restricted stock units	411		—			455		—
Weighted-average shares outstanding—Diluted	116,017		118,461			115,856		118,392
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	)

Three months ended Six months ended
Calculation of Basic and Diluted EPS March 30,
2019 March 31,
2018 March 30,
2019 March 31,
2018
(in thousands, except per share data)
Net income (loss) $ (43,513 ) $ 7,922
$ (22,528 ) $ 21,799
Weighted average shares outstanding—Basic 118,461
116,241
118,392
115,986
Dilutive effect of restricted stock units —
1,664
—
1,794
Weighted average shares outstanding—Diluted 118,461
117,905
118,392
117,780
Earnings (loss) per share—Basic $ (0.37 ) $ 0.07
$ (0.19 ) $ 0.19
Earnings (loss) per share—Diluted $ (0.37 ) $ 0.07
$ (0.19 ) $ 0.19

There were ~~23,000~~331,464 and 90,555 anti-dilutive shares for the three and the six months ended March 28, 2020. For the three and six months ended March 30, ~~2019. There were no anti-dilutive shares~~2019 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 ~~six months ended March 31, 2018.~~periods.

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 2019. ~~We did not repurchase any shares in the second quarter and first six months of 2018.~~ All shares of our common stock repurchased are automatically restored to the status of authorized and unissued.

6. Acquisitions

Acquisition-related costs in the second quarter and first six months of ~~2019~~2020 totaled $0.3 million and $7.4 million, respectively compared to $0.4 million and $0.8 million, respectively ~~compared to $0.1 million~~ in the second quarter and first six months of ~~2018, respectively.~~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 $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 resulted in $364.9 million of goodwill, $56.8 million of customer relationships, $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 trademarks are being amortized over useful lives 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. ~~We do not expect the acquisition to add material revenue in fiscal 2019.~~

The acquisition of Frustum ~~has been~~was accounted for as a business combination. Assets acquired and liabilities assumed ~~have been~~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 ~~two~~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 March 28, 2020, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was $1,809.1 million and attributable to our Professional Services segment was $45.2 million. As of September 30, 2019, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was ~~$1,391.9~~$1,362.4 million and attributable to our Professional Services segment was $30.0 million. As of September 30, 2018, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was $1,352.4 million and attributable to our Professional Services segment was $30.2$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 ~~30, 2018~~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)	March 28, 2020						September 30, 2019
	Gross Carrying Amount		Accumulated Amortization		Net Book Value		Gross Carrying Amount		Accumulated Amortization		Net Book Value
Goodwill (not amortized)					$	1,603,081					$	1,238,179
Intangible assets with finite lives (amortized):
Purchased software	$	427,092	$	292,756	$	134,336	$	377,359	$	278,144	$	99,215
Capitalized software	22,877		22,877		—		22,877		22,877		—
Customer lists and relationships	413,054		303,095		109,959		355,931		288,828		67,103
Trademarks and trade names	22,524		15,628		6,896		18,891		15,260		3,631
Other	3,942		3,942		—		3,910		3,910		—
	$	889,489	$	638,298	$	251,191	$	778,968	$	609,019	$	169,949
Total goodwill and acquired intangible assets					$	1,854,272					$	1,408,128

March 30, 2019 September 30, 2018

Gross
Carrying
Amount

Accumulated
Amortization

Net Book
Value

Gross
Carrying
Amount

Accumulated
Amortization

Net Book
Value
(in thousands)
Goodwill (not amortized) $ 1,229,541
$ 1,182,457
Intangible assets with finite lives (amortized) (1):
Purchased software $ 378,842
$ 265,881
$ 112,961
$ 362,679
$ 254,059
$ 108,620
Capitalized software 22,877
22,877
—
22,877
22,877
—
Customer lists and relationships 354,600
279,139
75,461
357,586
270,272
87,314
Trademarks and trade names 18,994
15,044
3,950
19,054
14,786
4,268
Other 3,952
3,952
—
4,003
4,003
—
$ 779,265
$ 586,893
$ 192,372
$ 766,199
$ 565,997
$ 200,202
Total goodwill and acquired intangible assets $ 1,421,913
$ 1,382,659

(1) The weighted-average useful lives of purchased software, customer lists and relationships, and trademarks and trade names with a remaining net book value are 9 years, 10 years, and 11 years, respectively.

Goodwill

Changes in goodwill presented by reportable segments were as follows:



(in thousands)	Software Products			Professional Services		Total
Balance, October 1, 2019	$	1,196,064		$	42,115	$	1,238,179
Onshape acquisition	364,910			—		364,910
Foreign currency translation adjustment	(8		)	—		(8		)
Balance, March 28, 2020	$	1,560,966		$	42,115	$	1,603,081

Software Products Professional Services Total
(in thousands)
Balance, October 1, 2018 $ 1,152,720
$ 29,737
$ 1,182,457
Frustum acquisition 53,673
—
53,673
Foreign currency translation adjustment (6,423 ) (166 ) (6,589 )
Balance, March 30, 2019 $ 1,199,970
$ 29,571
$ 1,229,541

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					Six months ended
	March 28, 2020		March 30, 2019		��	March 28, 2020		March 30, 2019
Amortization of acquired intangible assets	$	7,288	$	5,930		$	14,065	$	11,866
Cost of license revenue	6,879		6,842			13,678		13,559
Total amortization expense	$	14,167	$	12,772		$	27,743	$	25,425

Three months ended Six months ended
March 30,
2019 March 31,
2018 March 30,
2019 March 31,
2018
(in thousands)
Amortization of acquired intangible assets $ 5,930
$ 7,895
$ 11,866
$ 15,716
Cost of license revenue 6,842
6,556
13,559
13,231
Total amortization expense $ 12,772
$ 14,451
$ 25,425
$ 28,947

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.

The fair value of our contingent consideration arrangements is determined based on our evaluation of the probability and amount of any earn-out that will be achieved based on expected future performances by the acquired entities. These arrangements are classified within Level 3 of the fair value hierarchy.

Our significant financial assets and liabilities measured at fair value on a recurring basis as of March ~~30, 2019~~28, 2020 and September 30, ~~2018~~2019 were as follows:


	March 30, 2019
	Level 1		Level 2		Level 3		Total
(in thousands)									March 28, 2020
	(in thousands)								Level 1		Level 2		Level 3		Total
Financial assets:
Cash equivalents	$	97,748	$	—	$	—	$	97,748	$	616,556	$	—	$	—	$	616,556
Marketable securities
Marketable securities:
Commercial paper	—		1,975		—		1,975		—		1,482		—		1,482
Corporate notes/bonds	53,439		—		—		53,439		55,459		—		—		55,459
U.S. government agency securities	—		1,001		—		1,001
Forward contracts	—		3,900		—		3,900		—		2,708		—		2,708
	$	151,187	$	6,876	$	—	$	158,063	$	672,015	$	4,190	$	—	$	676,205
Financial liabilities:
Contingent consideration related to acquisitions	$	—	$	—	$	—	$	—
Forward contracts	—		3,014		—		3,014		—		4,074		—		4,074
	$	—	$	3,014	$	—	$	3,014	$	—	$	4,074	$	—	$	4,074


	September 30, 2018
	Level 1		Level 2		Level 3		Total
(in thousands)									September 30, 2019
	(in thousands)								Level 1		Level 2		Level 3		Total
Financial assets:
Cash equivalents	$	93,058	$	—	$	—	$	93,058	$	108,020	$	—	$	—	$	108,020
Marketable securities
Certificates of deposit	—		219		—		219
Marketable securities:
Commercial paper									—		999		—		999
Corporate notes/bonds	54,737		—		—		54,737		56,436		—		—		56,436
U.S. government agency securities	—		995		—		995
Forward contracts	—		2,889		—		2,889		—		3,064		—		3,064
	$	147,795	$	4,103	$	—	$	151,898	$	164,456	$	4,063	$	—	$	168,519
Financial liabilities:
Contingent consideration related to acquisitions	$	—	$	—	$	1,575	$	1,575
Forward contracts	—		3,419		—		3,419		—		2,771		—		2,771
	$	—	$	3,419	$	1,575	$	4,994	$	—	$	2,771	$	—	$	2,771

~~Changes in the fair value of Level 3 contingent consideration liability associated with our acquisitions were as follows:~~

Contingent Consideration
(in thousands)
Other
Balance, October 1, 2018 $ 1,575
Payment of contingent consideration (1,575 )
Balance, March 30, 2019 $ —

Contingent Consideration
(in thousands)
Kepware Other Total
Balance, October 1, 2017 $ 8,400
$ —
$ 8,400
Addition to contingent consideration —
2,100
2,100
Payment of contingent consideration (3,757 ) —
(3,757 )
Balance, March 31, 2018 $ 4,643
$ 2,100
$ 6,743

In the Consolidated Balance Sheet as of March 30, 2019, there is no accrued contingent consideration. In the Consolidated Balance Sheet as of March 31, 2018, there was $5.7 million of the contingent consideration liability included in accrued expenses and other current liabilities with the remaining $1.1 million in other liabilities.

Of the $1.6 million payments in the first six months of 2019, $1.6 million represents the fair value of the liabilities recorded at the acquisition date and is included in financing activities in the Consolidated Statements of Cash Flows. Of the $3.8 million payments in the first six months of 2018, $3.2 million represents the fair value of the liabilities recorded at the acquisition date and is included in financing activities in the Consolidated Statements of Cash Flows.

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 ~~and $1.7 million~~ as of both March ~~30, 2019~~28, 2020 and September 30, ~~2018, respectively.~~2019.

9. Marketable Securities

The amortized cost and fair value of marketable securities as of March ~~30, 2019~~28, 2020 and September 30, ~~2018~~2019 were as follows:


	March 30, 2019
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
(in thousands)										March 28, 2020
	(in thousands)									Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Commercial paper	1,975		—		—			1,975		$	1,482	$	—	$	—		$	1,482
Corporate notes/bonds	53,546		52		(159		)	53,439		55,884		85		(510		)	55,459
U.S. government agency securities	1,003		—		(2		)	1,001
	$	56,524	$	52	$	(161	)	$	56,415	$	57,366	$	85	$	(510	)	$	56,941

September 30, 2018

Amortized cost Gross unrealized gains Gross unrealized losses Fair value
(in thousands)
Certificates of deposit $ 220
$ —
$ (1 ) $ 219
Corporate notes/bonds 55,140
—
(403 ) 54,737
U.S. government agency securities 1,004
—
(9 ) 995

$ 56,364
$ —
$ (413 ) $ 55,951



(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 March ~~30, 2019,~~28, 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 March ~~30, 2019~~28, 2020 and September 30, ~~2018.~~2019.


	March 30, 2019
	Less than twelve months					Greater than twelve months					Total
(in thousands)																March 28, 2020
	Fair Value		Gross unrealized loss			Fair Value		Gross unrealized loss			Fair Value		Gross unrealized loss			Less than twelve months					Greater than twelve months				Total
	(in thousands)															Fair Value		Gross unrealized loss			Fair Value		Gross unrealized loss		Fair Value		Gross unrealized loss
Corporate notes/bonds	10,810		(15		)	26,784		(144		)	37,594		(159		)	$	44,598	$	(510	)	$	—	$	—	$	44,598	$	(510	)
U.S. government agency securities	—		—			1,001		(2		)	1,001		(2		)
	$	10,810	$	(15	)	$	27,785	$	(146	)	$	38,595	$	(161	)



(in thousands)	September 30, 2019
	Less than twelve months					Greater than twelve months					Total
	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	)

September 30, 2018
Less than twelve months Greater than twelve months Total
Fair Value Gross unrealized loss Fair Value Gross unrealized loss Fair Value Gross unrealized loss
(in thousands)
Certificates of deposit $ 219
$ (1 ) $ —
$ —
$ 219
$ (1 )
Corporate notes/bonds 24,067
(70 ) 30,670
(333 ) 54,737
(403 )
U.S. government agency securities —
—
995
(9 ) 995
(9 )
$ 24,286
$ (71 ) $ 31,665
$ (342 ) $ 55,951
$ (413 )

The following table presents our ~~available-for-sale~~ marketable securities by contractual maturity date as of March ~~30, 2019~~28, 2020 and September 30, ~~2018.~~2019.



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

March 30, 2019 September 30, 2018

Amortized cost Fair value Amortized cost Fair value
(in thousands)
Due in one year or less $ 25,296
$ 25,238
$ 25,792
$ 25,670
Due after one year through three years 31,228
31,177
30,572
30,281

$ 56,524
$ 56,415
$ 56,364
$ 55,951

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 ~~three~~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 March ~~30, 2019~~28, 2020 and September 30, ~~2018,~~2019, we had outstanding forward contracts with notional amounts equivalent to the following:



Currency Hedged (in thousands)	March 28, 2020		September 30, 2019
Canadian / U.S. Dollar	$	5,781	$	9,408
Euro / U.S. Dollar	304,482		308,282
British Pound / U.S. Dollar	6,713		3,756
Israeli Sheqel / U.S. Dollar	8,350		10,272
Japanese Yen / U.S. Dollar	18,935		37,462
Swiss Franc / U.S. Dollar	13,986		12,001
Danish Kroner/ U.S. Dollar	3,877		—
Swedish Kronor / U.S. Dollar	6,873		20,636
Singapore Dollar / U.S. Dollar	41,190		34,585
Chinese Renminbi / U.S. Dollar	5,692		52,466
Russian Ruble / U.S. Dollar	6,876		—
All other	3,921		9,487
Total	$	426,676	$	498,355

Currency Hedged March 30,
2019 September 30,
2018
(in thousands)
Canadian / U.S. Dollar 8,053
7,334
Euro / U.S. Dollar 336,070
297,730
British Pound / U.S. Dollar 8,769
7,074
Israeli Sheqel / U.S. Dollar 7,399
9,778
Japanese Yen / U.S. Dollar 27,101
37,456
Swiss Franc / U.S. Dollar 7,046
11,944
Danish Kroner/ U.S. Dollar 4,044
1,902
Swedish Kronor / U.S. Dollar 19,509
18,207
Chinese Renminbi / U.S. Dollar 9,409
9,010
All other 10,978
5,521
Total $ 438,378
$ 405,956

The following table shows the effect of our non-designated hedges in the Consolidated Statements of Operations for the ~~three and~~ six months ended March ~~30, 2019~~28, 2020 and March ~~31, 2018:~~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)
		Three months ended					Six months ended
		March 28, 2020		March 30, 2019			March 28, 2020		March 30, 2019
Forward Contracts	Other income (expense), net	$	2,151	$	(1,752	)	$	2,844	$	(2,739	)

Derivatives Not Designated as Hedging Instruments 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 Six months ended
March 30,
2019 March 31,
2018 March 30,
2019 March 31,
2018
(in thousands)
Forward Contracts Other income (expense), net $ (1,752 ) $ 2,435
$ (2,739 ) $ 3,022

In the first three and six months ended March 28, 2020 foreign currency losses, net were $2.5 million and $2.6 million, respectively. In the first three and six months ended March 30, 2019 foreign currency losses, net were $0.2 million and $0.4 million, respectively. ~~In the first three and six months ended March 31, 2018 foreign currency losses, net were $1.8 million and $3.2 million, respectively.~~

~~Cash Flow Hedges~~

Our foreign exchange risk management program objective is to identify foreign exchange exposures and implement appropriate hedging strategies to minimize earnings fluctuations resulting from foreign exchange rate movements. We designate certain foreign exchange forward contracts as cash flow hedges of Euro, Yen and SEK denominated intercompany forecasted revenue transactions (supported by third-party sales). All foreign exchange forward contracts are carried at fair value on the Consolidated Balance Sheets and the maximum duration of foreign exchange forward contracts is 15 months.

Cash flow hedge relationships are designated at inception, and effectiveness is assessed prospectively and retrospectively using regression analysis monthly. As the forward contracts are highly effective in offsetting changes to future cash flows on the hedged transactions, we record the effective portion of changes in these cash flow hedges in accumulated other comprehensive income and subsequently reclassify it into earnings in the period during which the hedged transactions are recognized in earnings. Changes in the fair value of foreign exchange forward contracts due to changes in time

value are included in the assessment of effectiveness. Our derivatives are not subject to any credit contingent features. We manage credit risk with counterparties by trading among several counterparties and we review our counterparties’ credit at least quarterly.

~~As of March 30, 2019 and September 30, 2018, we had outstanding forward contracts designated as cash flow hedges with notional amounts equivalent to the following:~~

Currency Hedged March 30,
2019 September 30,
2018
(in thousands)
Euro / U.S. Dollar $ —
$ 8,495
Japanese Yen / U.S. Dollar —
2,193
Swedish Kronor / U.S. Dollar —
1,708
Total $ —
$ 12,396

The following table shows the effect of our derivative instruments designated as cash flow hedges in the Consolidated Statements of Operations for the three and six months ended March 30, 2019 and March 31, 2018 (in thousands):

Derivatives Designated as Hedging Instruments Gain or (Loss) Recognized in OCI-Effective Portion Location of Gain or (Loss) Reclassified from OCI into Income-Effective Portion Gain or (Loss) Reclassified from OCI into Income-Effective Portion Location of Gain or (Loss) Recognized-Ineffective Portion Gain or (Loss) Recognized-Ineffective Portion

Three months ended

Three months ended

Three months ended

March 30,
2019
March 31,
2018

March 30,
2019
March 31,
2018

March 30,
2019
March 31,
2018
Forward Contracts $ —
$ (2,339 ) Total software revenue $ —
$ (1,728 ) Other income (expense), net $ —
$ (16 )

Six months ended

Six months ended

Six months ended

March 30,
2019
March 31,
2018

March 30,
2019
March 31,
2018

March 30,
2019
March 31,
2018
Forward Contracts $ 187
$ (3,382 ) Total software revenue $ 627
$ (2,382 ) Other income (expense), net $ —
$ (35 )

~~As of March 30, 2019, we have no cash flow hedges outstanding and no balance in accumulated other comprehensive loss.~~

If an underlying forecast transaction does not occur, or it becomes probable that it will not occur, the related hedge gains and losses on the cash flow hedge would be immediately reclassified to Other income (expense), net on the Consolidated Statements of Operations. For the six months ended March 30, 2019 and March 31, 2018, there were no such gains or losses.

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 March ~~30, 2019~~28, 2020 and September 30, ~~2018,~~2019, we had outstanding forward contracts designated as net investment hedges with notional amounts equivalent to the following:


Currency Hedged	March 30, 2019		September 30, 2018
	(in thousands)
Currency Hedged (in thousands)					March 28, 2020		September 30, 2019
Euro / U.S. Dollar	$	219,995	$	—	$	182,095	$	183,396
Total	$	219,995	$	—	$	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 ~~three~~second quarter and first six months ended March 28, 2020 and March 30, 2019 ~~and March 31, 2018~~ (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
	Three months ended						Three months ended							Three months ended
	March 28, 2020			March 30, 2019			March 28, 2020			March 30, 2019				March 28, 2020		March 30, 2019
Forward Contracts	$	(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

Derivatives Designated as Hedging Instruments Gain or (Loss) Recognized in OCI-Effective Portion Location of Gain or (Loss) Reclassified from OCI into Income-Effective Portion Gain or (Loss) Reclassified from OCI into Income-Effective Portion Location of Gain or (Loss) Excluded from Effectiveness Testing Gain or (Loss) Recognized-Ineffective Portion

Three months ended
Three months ended
Three months ended

March 30,
2019
March 31,
2018
March 30,
2019
March 31,
2018
March 30,
2019
March 31,
2018
Forward Contracts $ 1,466
$ —
Accumulated other comprehensive loss $ (1,813 ) $ —
Other income (expense), net $ 1,107
$ —

Six months ended
Six months ended
Six months ended

March 30,
2019
March 31,
2018
March 30,
2019
March 31,
2018
March 30,
2019 March 31,
2018
Forward Contracts $ 768
$ —
Accumulated other comprehensive loss $ (1,040 ) $ —
Other income (expense), net $ 1,593
$ —

As of March ~~30, 2019,~~28, 2020, we estimate that all amounts reported in accumulated other comprehensive loss will be ~~reclassified to income~~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
	March 28, 2020		September 30, 2019		March 28, 2020		September 30, 2019
Derivative assets ⁽¹⁾:
Forward Contracts	$	—	$	1,674	$	2,708	$	1,390
Derivative liabilities ⁽²⁾:
Forward Contracts	$	1,841	$	—	$	2,233	$	2,771

Fair Value of Derivatives Designated As Hedging Instruments Fair Value of Derivatives Not Designated As Hedging Instruments
March 30,
2019 September 30,
2018 March 30,
2019 September 30,
2018
(in thousands)
Derivative assets (1):
Forward Contracts $ 2,361
$ 440
$ 1,539
$ 2,449
Derivative liabilities (2):
Forward Contracts $ —
$ —
$ 3,014
$ 3,419


(1)	As of March ~~30, 2019~~28, 2020 and September 30, ~~2018,~~2019, current derivative assets of $~~3.9~~2.7 million and $~~2.9~~3.1 million, respectively, are recorded in other current assets in the Consolidated Balance Sheets.


(2)	As of March ~~30, 2019~~28, 2020 and September 30, ~~2018,~~2019, current derivative liabilities of $~~3.0~~4.1 million and $~~3.4~~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 March ~~30, 2019:~~28, 2020:


	Gross Amounts Offset in the Consolidated Balance Sheets						Gross Amounts Not Offset in the Consolidated Balance Sheets
As of March 30, 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
	(in thousands)
(in thousands)														Gross Amounts Offset in the Consolidated Balance Sheets						Gross Amounts Not Offset in the Consolidated Balance Sheets
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	$	3,900	$	—	$	3,900	$	(3,014	)	$	—	$	886	$	2,708	$	—	$	2,708	$	(2,708	)	$	—	$	—

The following table sets forth the offsetting of derivative liabilities as of March ~~30, 2019:~~28, 2020:



(in thousands)	Gross Amounts Offset in the Consolidated Balance Sheets						Gross Amounts Not Offset in the Consolidated Balance Sheets
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	$	4,074	$	—	$	4,074	$	(2,708	)	$	—	$	1,366

Gross Amounts Offset in the Consolidated Balance Sheets Gross Amounts Not Offset in the Consolidated Balance Sheets
As of March 30, 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
(in thousands)
Forward Contracts $ 3,014
$ —
$ 3,014
$ (3,014 ) $ —
$ —

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 ~~two~~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.


	Three months ended										Six months ended
	As Reported ASC 606			ASC 605			As Reported ASC 605				As Reported ASC 606			ASC 605			As Reported ASC 605
	March 30, 2019			March 30, 2019			March 31, 2018				March 30, 2019			March 30, 2019			March 31, 2018
(in thousands)																				Three months ended						Six months ended
	(in thousands)																			March 28, 2020			March 30, 2019			March 28, 2020			March 30, 2019
Software Products
Revenue	$	249,521		$	276,901		$	262,453			$	542,764		$	576,289		$	527,643		$	324,080		$	249,521		$	638,446		$	542,764
Operating Costs (1)	93,913			93,386			97,349				185,541			184,231			197,081			94,912			93,913			197,104			185,541
Profit	155,608			183,515			165,104				357,223			392,058			330,562			229,168			155,608			441,342			357,223

Professional Services
Revenue	40,930			38,598			45,430				82,376			77,967			86,884			35,523			40,930			77,267			82,376
Operating Costs (2)	32,326			30,916			35,946				64,189			61,406			70,763			33,425			32,326			67,172			64,189
Profit	8,604			7,682			9,484				18,187			16,561			16,121			2,098			8,604			10,095			18,187

Total segment revenue	290,451			315,499			307,883				625,140			654,256			614,527			359,603			290,451			715,713			625,140
Total segment costs	126,239			124,302			133,295				249,730			245,637			267,844			128,337			126,239			264,276			249,730
Total segment profit	164,212			191,197			174,588				375,410			408,619			346,683			231,266			164,212			451,437			375,410

Unallocated operating expenses:
Sales and marketing expenses	94,200			99,899			93,352				188,696			197,481			187,848			100,292			94,200			200,444			188,696
General and administrative expenses	25,856			25,856			27,398				51,627			51,627			54,846			27,795			25,856			54,714			51,627
Restructuring and other charges, net	26,980			26,980			114				45,473			45,473			219			18,242			26,980			32,276			45,473
Intangibles amortization	12,772			12,772			14,451				25,425			25,425			28,947			14,167			12,772			27,743			25,425
Stock-based compensation	26,967			26,967			17,026				56,374			56,374			35,357			20,484			26,967			48,420			56,374
Other unallocated operating expenses (income) (3)	295			295			37			��	629			629			(60		)	261			295			7,390			629
Total operating income	(22,858		)	(1,572		)	22,210				7,186			31,610			39,526
Total operating income (loss)																				50,025			(22,858		)	80,450			7,186

Interest expense	(11,383		)	(11,383		)	(10,379		)		(21,659		)	(21,659		)	(20,426		)	(32,618		)	(11,383		)	(44,716		)	(21,659		)
Other income (expense), net	821			1,065			(285		)		1,475			1,613			(1,083		)	(1,629		)	821			(925		)	1,475
Income before income taxes	$	(33,420	)	$	(11,890	)	$	11,546			$	(12,998	)	$	11,564		$	18,017
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 ~~intangible amortization~~ and fair value adjustments for deferred services costs.

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

~~We report revenue by the following two product groups:~~

Three months ended Six months ended
As Reported ASC 606 ASC 605 As Reported ASC 605 As Reported ASC 606 ASC 605 As Reported ASC 605
March 30,
2019 March 30,
2019 March 31,
2018 March 30,
2019 March 30,
2019 March 31,
2018
(in thousands)
Solutions $ 251,171
$ 272,936
$ 274,994
$ 550,413
$ 571,098
$ 552,663
IoT 39,280
42,563
32,889
74,727
83,158
61,864
Total revenue $ 290,451
$ 315,499
$ 307,883
$ 625,140
$ 654,256
$ 614,527

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



(in thousands)	Three months ended				Six months ended
Revenue	March 28, 2020		March 30, 2019		March 28, 2020		March 30, 2019
Americas	$	153,993	$	119,717	$	309,967	$	261,570
Europe	146,422		119,045		282,943		230,397
Asia-Pacific	59,188		51,689		122,803		133,173
Total revenue	$	359,603	$	290,451	$	715,713	$	625,140

Three months ended Six months ended
As Reported ASC 606 ASC 605 As Reported ASC 605 As Reported ASC 606 ASC 605 As Reported ASC 605
March 30,
2019 March 30,
2019 March 31,
2018 March 30,
2019 March 30,
2019 March 31,
2018
(in thousands)
Revenue:
Americas $ 119,717
$ 137,774
$ 128,479
$ 261,570
$ 272,671
$ 255,485
Europe 119,045
123,247
121,641
230,397
243,404
243,107
Asia-Pacific 51,689
54,478
57,763
133,173
138,181
115,935
Total revenue $ 290,451
$ 315,499
$ 307,883
$ 625,140
$ 654,256
$ 614,527

12. Income Taxes

In the second quarter and first six months of ~~2019,~~2020, our effective tax rate was ~~(30)~~55% on pre-tax income of $15.8 million and (22)% on a pre-tax income of $34.8 million, respectively, compared to (30)% on pre-tax loss of $(33.4) million and (73)% on a pre-tax loss of $(13.0) million ~~respectively, compared to 31% on pre-tax income of $11.5 million and~~ ~~(21)% on pre-tax income of $18.0 million~~ in the second quarter and first six months of ~~2018,~~2019, respectively. In the first six months of ~~2019~~2020 and ~~2018,~~2019, our effective tax rate differed from the statutory federal income tax rate of 21% due to U.S. tax reform, ~~(as described below),~~ 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 in the first six months of 2019, the reduction of a valuation allowance of $1.8 million as the result of the Frustum acquisition. Additionally, in the second quarter and first six months of 2019 our effective rate includes the indirect effects of the adoption of ASC 606. Additionally, in the first six months of 2020 and 2019, we reduced the valuation allowance by $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 ~~2019~~2020 and ~~2018,~~2019, the foreign rate differential predominantly relates to these Irish earnings.

~~beginning after December 31, 2017 can only reduce taxable income by up~~continue to 80% when utilized in a future period. The Tax Act includes a provision to tax global intangible low-tax income (GILTI) of foreign subsidiaries and a base erosion anti-abuse tax (BEAT) measure that taxes certain payments between a U.S. corporation and its foreign subsidiaries. The GILTI and BEAT provisions were effective for us beginning October 1, 2018. Our accounting policy is to treat tax on GILTI as a current period cost included in tax expense in the year incurred.

In the first six months of 2018, we provided no federal income taxes payable as a result of the deemed repatriation of undistributed earnings as the tax was offset by a combination of current year losses and existing attributes which had a full valuation allowance recorded against the related deferred tax assets. We recorded state income taxes payable of $7.1 million on the deemed repatriation. This was subsequently reduced to $1.5 million to reflect additional guidance on the state implications of the Tax Act. We also recorded a deferred tax benefit of $14.1 million forevaluate the impact of the ~~Tax~~CARES Act, we do not currently believe it will have a material impact on our net U.S. deferred income tax balances. This was primarily attributable to the reduction of the federal tax rate on the net deferred tax liability in the U.S., and the ability to realize net operating losses from the reversal of existing deferred tax assets which can now be carried forward indefinitely and can therefore be netted against deferred tax liabilities for indefinite lived intangible assets.

~~The U.S. Securities and Exchange Commission issued rules that allow for a period of up to one year after the enactment date of the Tax Act to finalize the recording of the~~consolidated financial statements or related ~~tax impacts. We finalized recording the impacts of the Tax Act in the quarter ended December 29, 2018 and did not record any significant adjustments.~~

In October 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The purpose of ASU 2016-16 is to simplify the income tax accounting of an intra-entity transfer of an asset other than inventory and to record its effect when the transfer occurs. We adopted this amendment beginning in the first quarter of 2019 using the modified retrospective method with a cumulative effect adjustment to accumulated deficit of $72.3 million, with a corresponding increase of $75.3 million to deferred tax assets, $6.0 million decrease to income tax assets and a $3.0 million decrease to income tax liabilities. The adjustment primarily relates to deductible amortization of intangible assets in Ireland. Post adoption, our effective tax rate no longer includes the benefit of this amortization.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.

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 March ~~30, 2019~~28, 2020 and September 30, ~~2018,~~2019, we had unrecognized tax benefits of ~~$10.3~~$13.2 million and ~~$9.8~~$11.5 million, respectively. If all our unrecognized tax benefits as of March ~~30, 2019~~28, 2020 were to become recognizable in the future, we would record a benefit to the income tax provision of ~~$10.3~~$13.2 million, which would be partially offset by an increase in the U.S. valuation allowance of ~~$3.8~~$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 $2$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 March ~~30, 2019~~28, 2020 and September 30, ~~2018,~~2019, we had the following ~~long-term~~ debt obligations:



(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

March 30,
2019 September 30,
2018
(in thousands)
6.000% Senior notes due 2024 $ 500,000
$ 500,000
Credit facility revolver 243,125
148,125
Total debt 743,125
648,125
Unamortized debt issuance costs for the Senior notes (1) (4,425 ) (4,857 )
Total debt, net of issuance costs (2) $ 738,700
$ 643,268


(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 ~~$3.5~~$5.5 million and ~~$3.8~~$3.1 million as of March ~~30, 2019~~28, 2020 and September 30, ~~2018,~~2019, respectively, and were included in other assets inon the Consolidated Balance Sheets.

~~(2)~~(4)

AsUnamortized debt issuance costs related to the 2024 notes were $3.6 million as of March ~~30, 2019~~28, 2020 and ~~September 30, 2018, all~~were included in short-term debt ~~was~~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 inon the Consolidated Balance ~~Sheets.~~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 March 30, 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 March 30, 2019, the total estimated fair value of the Notes was approximately $524.4 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 ~~sixteen 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 March ~~30, 2019,~~28, 2020, the fair value of our credit facility approximates its book value.

~~In September 2018, we amended and restated~~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 $600 million to $700 million~~is February 13, 2025, when all remaining amounts outstanding will be due and ~~amend other provisions, including replacing the fixed charge coverage ratio with an interest coverage ratio.~~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 no0 borrowings by eligible foreign subsidiaries. In addition, ~~owned~~substantially all existing and after-acquired personal property ~~(including equity interests)~~ of PTC Inc. and certain of its material domestic ~~subsidiaries' owned property~~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 ~~this~~the credit facility. 100% of the voting equity interests of certain of ~~PTC’s~~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 March ~~30, 2019,~~28, 2020, the annual rate for borrowings outstanding was ~~4.2%~~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 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 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 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.~~


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


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


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

As of March ~~30, 2019,~~28, 2020, our total leverage ratio was ~~2.14~~3.36 to 1.00, our senior secured leverage ratio was ~~0.73~~0.47 to 1.00 and our interest coverage ratio was ~~8.64~~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 ~~$2.9~~$2.0 million in financing costs in connection with the ~~September 2018~~February 2020 credit facility and $1.0 million in connection with a November 2019 amendment ~~and restatement.~~to our prior credit 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~~.obligations.

In the second quarter and first six months of 2020 we paid $6.8 million and $23.7 million, respectively, of interest on our debt. In the second quarter and first six months of 2019 we paid $3.8 million and $20.4 million ~~respectively,~~ of interest, ~~on our debt. In the second quarter and first six months of 2018 we paid $2.5 million and $19.2 million,~~ respectively, ~~of interest~~ on our debt. The average interest rate on borrowings outstanding ~~during~~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 in the second quarter and first six months of 2019 was approximately 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 ~~average interest rate~~right-of-use assets include any lease payments made and exclude lease incentives received. Lease expense for lease payments is recognized on ~~borrowings outstanding during~~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, we are required to pay 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). 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 Consolidated Statement of Operations for the second quarter and first six months ended March 28, 2020 were as follows:



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

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



(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 ~~2018~~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 March 28, 2020 are as follows:



(in thousands)	Operating Leases
Remainder of 2020	$	22,462
2021	42,670
2022	28,457
2023	21,174
2024	17,757
Thereafter	186,554
Total future lease payments	$	319,074
Less: imputed interest	(94,916		)
Total	$	224,158

As of March 28, 2020, we have operating leases that have not yet commenced. These leases will commence in 2020 with lease terms between 3 years to 5 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 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 ~~5.1%~~$3.3 million and ~~5.0%, respectively.~~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.

~~14.~~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 March ~~30, 2019,~~28, 2020, we estimate approximately ~~$0.5~~$0.8 million to ~~$4.2~~$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.

~~15. Subsequent Events~~

~~Acquisition~~

~~In April 2019, we purchased a services company with expertise in industrial IoT for approximately $8 million. We do not expect the acquisition to have a material impact in fiscal 2019.~~

~~Common Stock Repurchases~~

~~In the third quarter of 2019, we continued our share repurchase program. We expect to repurchase approximately $25 million of our common stock in the quarter.~~

On July 20, 2018, we entered into an accelerated share repurchase (“ASR”) agreement with a major financial institution (“Bank”). The ASR allowed us to buy a large number of shares immediately at a purchase price determined by an average market price over a period of time. Under the ASR, we agreed to purchase $1,000 million of our common stock, in total, with an initial delivery to us in July 2018 of 8.2 million shares. We settled the ASR in May 2019 and the Bank delivered to us 3.0 million additional shares.

~~Appointment of New Chief Financial Officer~~

On April 24, 2019, we announced the appointment of Kristian Talvitie as our Executive Vice President and Chief Financial Officer effective May 15, 2019. Andrew Miller, our current Executive Vice President, Chief Financial Officer, whose intention to retire we announced on January 23, 2019, will remain with PTC for an undetermined period to ensure a smooth transition of the role to Mr. Talvitie. The departure of Mr. Miller may have an impact on the timing and amount of stock-based compensation expense for outstanding unvested awards.

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 ~~enable~~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 ~~are focused on Smart Connected Processes, Smart Connected Products and Smart Connected People that~~ enable companies to connect factories and plants, smart products, and enterprise systems ~~bridging the physical, digital and human worlds,~~ to transform their businesses. ~~Our Solutions~~These products, along with Onshape, are considered our Growth Products. The primary products in our Core Products portfolio ofare innovative Computer-Aided Design (CAD) and Product Lifecycle Management (PLM) solutions that enable manufacturers to create, innovate, ~~operate,~~ 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 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) ~~business, and~~, Augmented Reality ~~business,~~and Onshape businesses, may not expand and/or generate the revenue we expect; 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 differentexpect if customers are slower to adopt those technologies than we expect which could impact our EPS results; our transition to subscription-only licensing could adversely affect sales and revenue; sales of our solutions as subscriptions may not have the longer-term effect on revenue and earnings that we expect;or adopt competing technologies; 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; we may be unable to generate sufficient operating cash flow to repay our outstanding debt when or as we expect or to return ~~40%~~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 preclude such repayments or 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.

~~Future Expectations, Strategies~~Operating and ~~Risks~~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 our operating and non-GAAP financial measures.

Executive Overview

Our ~~2019 strategic goals are~~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 ~~deliver sustainable growth, expand subscription licensing~~the COVID-19 pandemic resulting in new license bookings being down mid-teens over Q2’19. The impact on new bookings was late in the quarter and ~~expand~~varied across our ~~margins.~~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.



	~~Sustainable Growth~~	We are focused on continuing to drive bookings growth both in the high-growth Industrial IoT and AR markets and in our core CAD and PLM markets. We expect that IoT and AR adoption rates will continue to expand and will be the most significant drivers of growth.
	~~Expand Subscription Licensing~~	Our goal is to continue to increase the percentage of licenses sold as subscriptions to increase our recurring revenue. Effective January 1, 2019, new software licenses for our core solutions and ThingWorx solutions are available only by subscription worldwide. Kepware will continue to be available under perpetual license. We expect to exit the year with subscription mix of 94%, and an increase of 1000 basis points over 2018.
	~~Cost Controls and Margin Expansion~~	Our goal is to drive continued margin expansion over the long term. We continue to proactively manage our cost structure and invest in what we believe are high return opportunities in our business. With the growth opportunities in Industrial IoT and AR, and other strategic initiatives we’ve undertaken, as well as our continued commitment to operating margin improvement, we realigned our workforce in the beginning of 2019 to shift investment to support these strategic, high growth opportunities. We expect to deliver continued operating margin expansion in 2019 and beyond, as we realize the compounding benefit of our maturing subscription business.

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 perpetual license sales in the first quarter of 2019 in Asia Pacific as well as higher restructuring payments during the quarter. In Q2'20, we 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 net proceeds from the sale of the notes to repay a portion of the outstanding revolving loan under our credit facility. As of March 28, 2020, the balance outstanding under our credit facility was $148 million and total debt outstanding was $1,648 million, $500 million of which will be repaid when we redeem our 6% Senior Notes due 2024 in May 2020.

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.~~transactions, which has been adversely impacted by the COVID-19 pandemic as customers delay purchases due to the macroeconomic uncertainty and the inability to implement many of our solutions due to the on-site work generally required to do so. The amount of ~~bookings and~~ revenue ~~particularly license and subscriptions,~~ attributable to large transactions, and the number of such transactions, may also 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. This may cause volatility in our results. ~~In addition, our adoption of ASC 606~~

We currently anticipate new bookings will ~~increase the volatility of our revenue results as a significant portion of subscription revenue is recognized at the time of delivery, rather than being recognized ratably over the commitment period.~~

~~Operating and Non-GAAP Financial Measures~~

Our discussion of results includes discussion of our operating measures (including “license and subscription bookings” and other subscription-related measures) and non-GAAP financial measures. Our operating measures and non-GAAP financial measures, including the reasons we use those measures, are described below in ~~Results of Operations - Operating Measures~~ ~~and~~ ~~Results of Operations - Non-GAAP Financial Measures,~~ ~~respectively. You should read those sections to understand those operating and non-GAAP financial measures.~~

~~Revenue Sources and Recognition~~

~~We sell software subscription and perpetual licenses, support for perpetual licenses, cloud services and professional services.~~

Subscription revenue is comprised of time-based licenses whereby customers use our software and receive related support for a specified term. Results for reporting periods beginning on or after October 1, 2018 are presented under the Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASC 606), while prior period amounts are not adjusted and continue to be ~~reported in accordance with the guidance provided by ASC 985-605,~~ ~~Software-Revenue Recognition~~ ~~and revenues for non-software deliverables in accordance with ASC 605-25,~~ ~~Revenue Recognition, Multiple-~~

~~Element Arrangements~~ (ASC 605). Through 2018, revenue for our subscription contracts was recognized ratably over the term of the contract under ASC 605; this differs from how revenue for such contracts is recognized under ASC 606. Under ASC 606, revenue is recognized for each performance obligation that can be separately identified under the contract. Accordingly, our on-premise subscription contracts are unbundled into multiple performance obligations (i.e., license, cloud and support). The license portion of such subscription contracts (approximately 50% to 55%) is recognized upfront and the cloud and support portions (approximately 45% to 50%) are recognized ratably over the term. Our subscription revenue includes an immaterial amount of Software as a Service (SaaS) and cloud services for which revenue is generally recognized ratably over the term of the contract.

Perpetual licenses are a perpetual right to use the software, for which revenue is generally recognized upfront upon shipment to the customer. Support revenue is comprised of contracts to maintain new and/or previously purchased licenses, for which revenue is recognized ratably over the term of the contract. Professional services engagements typically result from sales of new licenses, and for which revenue is recognized as the services are performed.

~~The effects of our adoption of ASC 606, including adjustments to accumulated deficit related to billed and unbilled deferred revenue, are described in “Recent Accounting Pronouncements” in~~ ~~Note 1.Basis of Presentation~~ ~~and in~~ ~~Note 2. Revenue from Contracts with Customers~~ ~~in the Notes to Consolidated Financial Statements in this Quarterly Report.~~

~~Executive Overview~~

Our revenue results in the quarter reflect the adoption of subscription licensing by our customers and the compounding effect of the subscription business model as subscription revenue generally recurs and new subscription revenue is added. Under ASC 605, subscription revenue, software revenue and total revenue were all up over the second quarter of 2018. Perpetual license and support revenue decreaseddown approximately 30% year over year ~~because, effective January 1,~~for the second half of 2020 due to the COVID-19 pandemic as described above. We also anticipate that our churn rate may deteriorate to approximately 8% for the year rather than a modest improvement over the fiscal 2019 ~~we discontinued offering perpetual licenses~~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 ~~core solutions and ThingWorx solutions which are now only available by subscription worldwide. Under ASC 605, changes in our operating margin and EPS~~previous projection of 9% expense growth year over year, were driven by our revenue growth resulting from the compounding effect of our subscription transition, partially offset by restructuring charges associated with the relocation of our corporate headquarters.

Three months ended
Percent Change
As Reported ASC 606 ASC 605 As Reported ASC 605 ASC 605
March 30, 2019 March 30, 2019 March 31, 2018 Change Constant Currency
Revenue
(in millions)
Subscription license $ 51.5

Subscription support & cloud services 83.2

Total Subscription 134.8
$ 162.1
$ 112.9
44 % 47 %
Perpetual support 104.4
103.6
126.7
(18 )% (16 )%
Total recurring revenue 239.2
265.6
239.6
11 % 14 %
Perpetual license 10.3
11.3
22.8
(51 )% (49 )%
Total software revenue (1) 249.5
276.9
262.5
6 % 8 %
Professional services 40.9
38.6
45.4
(15 )% (10 )%
Total revenue $ 290.5
$ 315.5
$ 307.9
2 % 6 %

(1) Total software revenue includes:
License $ 61.9
$ 156.1
$ 120.5
30 % 33 %
Support and cloud services 187.6
120.8
141.9
(15 )% (12 )%
Total software revenue 249.5
276.9
262.5
6 % 8 %

Six months ended
Percent Change
As Reported ASC 606 ASC 605 As Reported ASC 605 ASC 605
March 30, 2019 March 30, 2019 March 31, 2018 Change Constant Currency
Revenue
(in millions)
Subscription license $ 115.1

Subscription support & cloud services 160.7

Total Subscription 275.7
$ 310.5
$ 212.9
46 % 48 %
Perpetual support 214.9
212.8
257.9
(17 )% (16 )%
Total recurring revenue 490.6
523.3
470.8
11 % 13 %
Perpetual license 52.1
53.0
56.8
(7 )% (4 )%
Total software revenue (1) 542.8
576.3
527.6
9 % 12 %
Professional services 82.4
78.0
86.9
(10 )% (6 )%
Total revenue $ 625.1
$ 654.3
$ 614.5
6 % 9 %

(1) Total software revenue includes:
License $ 167.2
$ 330.0
$ 240.0
38 % 40 %
Support and cloud services 375.6
246.3
287.6
(14 )% (12 )%
Total software revenue 542.8
576.3
527.6
9 % 12 %

Three months ended Six months ended
As Reported ASC 606 ASC 605 As Reported ASC 605 As Reported ASC 606 ASC 605 As Reported ASC 605
Earnings Measures March 30,
2019 March 30,
2019 March 31,
2018 March 30,
2019 March 30,
2019 March 31,
2018

Operating Margin (7.9 )% (0.5 )% 7.2 % 1.1 % 4.8 % 6.4 %
Earnings (Loss) Per Share $ (0.37 ) $ (0.10 ) $ 0.07
$ (0.19 ) $ 0.06
$ 0.19
Non-GAAP Operating Margin⁽¹⁾
15.3 % 20.8 % 17.6 % 21.7 % 24.4 % 17.0 %
Non-GAAP Earnings Per Share⁽¹⁾
$ 0.22
$ 0.38
$ 0.34
$ 0.78
$ 0.95
$ 0.64

~~(1) Non-GAAP measures are reconciled to GAAP results under~~ ~~Results of Operations - Non-GAAP Financial Measures~~ ~~below.~~

We ended the second quarter of 2019 with cash, cash equivalents and marketable securities of $351 million, up from $316 million at the end of 2018. We generated $162 million of cash from operations in the first six months of 2019 compared to $137 million in the first six months of 2018. Cash from operations for

the first six months of 2019 includes $18 million of restructuring payments compared to $2 million in the year-ago period. Cash used by investing activities in the first six months of 2019 includes $70 million, net of cash acquired, used to acquire Frustum Inc., an artificial design and generative design technology platform, and $51 million of capitalized expenditures used primarily ~~for construction costs at our new headquarters in the Boston Seaport District.At March 30, 2019, the balance outstanding under our credit facility was $243 million and total debt outstanding was $743 million.~~

~~Operating Measures~~

We provide these operating measures to help investors understand the progress of our subscription transition. These measures are not necessarily indicative of revenue for the period or any future period.

~~License and Subscription Bookings~~

~~License and subscription bookings for the second quarter of 2019 were $112 million, up 13% (18% on a constant currency basis) from the year ago period~~ due to ~~an exceptionally strong quarter for IoT, which surpassed bookings for both CAD and PLM for~~ the ~~first time.~~

On a year-to-date basis, license and subscription bookings were $213 million, up 5% (9% on a constant currency basis) over the first six months of 2018. In the second quarter of 2019, license and subscription bookings were adversely impacted by final perpetual license purchasesrestructuring actions in ~~Asia Pacific before they were discontinued on January 1, 2019 and due to realignment of our sales force in the first quarter of 2019. For~~ the first half of ~~the year, combined core CAD and PLM bookings grew in the high single digits~~2020, savings on a constant currency basis over the year-ago period, IoT (inclusive of Augmented Reality) grew at the high end of the 30-40% market growth rate, offset by a mid-30% constant currency decline in our productivity zone businesses (which includes ALM and parts of SLM). We anticipate that our second-half growth rates will approximate our first-half performance.

Our second quarter 2019 bookings include a $7.5 million IoT booking for which the contract terms were approved on March 30, but for which the electronic signature process was not fully complete until the morning of March 31.

~~Subscription ACV~~

~~Subscription ACV was $51 million for the quarter, up from $38.5 million in the year-ago period.~~

~~Annualized Recurring Revenue (ARR)~~

ASC 605 ARR was approximately $1,065 million as of the end of the second quarter of 2019, an increase of 11% compared to the second quarter of 2018 (15% year over year on a constant currency basis); the ninth consecutive quarter of double-digit year-over-year growth.

~~Deferred Revenue and Backlog (Unbilled Deferred Revenue)~~

Deferred revenue primarily relates to software agreements invoiced to customers for which the revenue has not yet been recognized. Unbilled deferred revenue (backlog) is the aggregate of booked orders for license, support and subscription (including multi-year subscription contracts with start dates

after October 1, 2018 that are subject to a limited annual cancellation right, of which approximately $146 million was cancellable at March 30, 2019) for which the associated revenue has not been recognized and the customer has not yet been invoiced. We do not record unbilled deferred revenue on our Consolidated Balance Sheets; such amounts are recorded as deferred revenue when we invoice the customer. We provide this view of deferred revenue and backlog to enable investors to understand the significant contractual commitments we have to customers and to provide a view of future revenue that we expect will be recognized, even if those commitments are not reflected on our balance sheet.

As Reported ASC 606 ⁽¹⁾
ASC 605 As Reported ASC 605 As Reported ASC 605
March 30, 2019 March 30, 2019 September 30, 2018 March 31, 2018
(Dollar amounts in millions)
Deferred revenue (billed) $ 392
$ 554
$ 499
$ 498
Unbilled deferred revenue ⁽²⁾
579
769
911
765
Total $ 971
$ 1,323
$ 1,410
$ 1,263

(1) Upon adoption of ASC 606, approximately $366 million of total deferred revenue was recorded as a decrease to accumulated deficit with an offsetting $218 million increase to unbilled accounts receivable, a $142 million decrease to deferred revenue and a $6 million increase in other assets net of liabilities, primarily as a result of the acceleration of subscription license revenue under ASC 606.

~~(2) Of the unbilled deferred revenue balance at March 30, 2019, we expect to invoice customers approximately $460 million within the next twelve months.~~

~~We expect that the amount of deferred revenue and unbilled deferred revenue will fluctuate from quarter to quarter~~certain expenses due to the ~~specific timing, duration~~COVID-19 pandemic (such as converting our annual LiveWorx event to a virtual event and ~~size of customer subscription~~curtailing other travel), as well as lower anticipated variable compensation and support agreements, varying billing cycles of such agreements, the specific timing of customer renewals (which are typically for one year), foreign currency fluctuations, the timing of when deferred revenue is recognized as revenue and the timing of our fiscal quarter ends. The average contract duration was approximately 2 years for new subscription contracts in 2018 and 2017.

~~The effects of our adoption of ASC 606, including the adjustments to accumulated deficit~~increased cost discipline related to ~~billed and unbilled deferred revenue, are described in~~ ~~Note 2. Revenue from Contracts~~employee hiring. Despite the challenges associated with ~~Customers~~ ~~in the Notes to Consolidated Financial Statements.~~

~~Second Quarter Restructuring Charge~~

In the second quarter of 2019, we moved into our new worldwide headquarters in the Boston Seaport District and vacated our prior headquarters space. Because our prior headquarters lease will not expire until November 2022,COVID-19, we are seeking to sublease that space, but have not yet done so. As a result, we will bear overlapping rent obligations for those premises and, in the second quarter of 2019, we incurred a restructuring chargeanticipating FY'20 ARR growth of approximately ~~$27 million, based~~11%, revenue growth of approximately 12%, and a 30-basis point increase (90-basis points on ~~the net present value of remaining lease commitments net of estimated sublease income. From a cash perspective, the free rent and estimated sublease income~~non-GAAP basis) in operating margin over the first 18 months on the Seaport headquarters total approximately $30 million, as compared to the estimated cash outflows of $34 million on the prior headquarters, which will be incurred over the next 44 months (rent obligations and operating expenses net of estimated sublease income). Restructuring charges could increase and estimated cash outflows could increase if we are unable to sublease our prior headquarters as we expect. Additionally, we incurred other costs associated with the move which were recorded as incurred.FY'19.

Results of Operations

The following table shows the financial measures that we consider the most significant indicators of ~~the performance of~~ our ~~business.~~business performance. In addition to providing operating income, operating margin, ~~and~~ 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 for the reported periods. These non-GAAP financial measures exclude the items described in Non-GAAP Financial Measures below. ~~These non-GAAP financial measures provide investors a view of our operating results that is aligned with management budgets and with performance measures in our incentive compensation plans.~~ Investors should use these non-GAAP financial measures only in conjunction with our GAAP results.

Three months ended
Percent Change
As Reported ASC 606 ASC 605 As Reported ASC 605 ASC 605
March 30, 2019 March 30, 2019 March 31, 2018 Actual Constant Currency
(Dollar amounts in millions, except per share data)
Subscription $ 134.8
$ 162.1
$ 112.9
44 % 47 %
Perpetual support 104.4
103.6
126.7
(18 )% (16 )%
Total recurring revenue 239.2
265.6
239.6
11 % 14 %
Perpetual license 10.3
11.3
22.8
(51 )% (49 )%
Total software revenue 249.5
276.9
262.5
6 % 8 %
Professional services 40.9
38.6
45.4
(15 )% (10 )%
Total revenue 290.5
315.5
307.9
2 % 6 %
Total cost of revenue 79.9
78.0
83.7
(7 )%
Gross margin 210.5
237.5
224.2
6 %
Operating expenses 233.4
239.1
202.0
18 %
Total costs and expenses 313.3
317.1
285.7
11 % 14 %
Operating income (22.9 ) (1.6 ) 22.2
(107 )% (89 )%
Non-GAAP operating income⁽¹⁾
$ 44.4
$ 65.6
$ 54.1
21 % 24 %
Operating margin (7.9 )% (0.5 )% 7.2 %
Non-GAAP operating margin⁽¹⁾
15.3 % 20.8 % 17.6 %
Diluted earnings per share $ (0.37 ) $ (0.10 ) $ 0.07

Non-GAAP diluted earnings per share ⁽²⁾
$ 0.22
$ 0.38
$ 0.34

Cash flow from operations⁽³⁾
$ 141.1
$ 141.1
$ 111.1



(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)														Six months ended
	Six months ended																			Percent Change
										Percent Change				March 28, 2020			March 30, 2019			Actual		Constant Currency
	As Reported ASC 606			ASC 605			As Reported ASC 605			ASC 605
	March 30, 2019			March 30, 2019			March 31, 2018			Actual		Constant Currency
	(Dollar amounts in millions, except per share data)
Subscription	$	275.7		$	310.5		$	212.9		46	%	48	%
Perpetual support	214.9			212.8			257.9			(17	)%	(16	)%
Total recurring revenue	490.6			523.3			470.8			11	%	13	%	$	621.2		$	490.6		27	%	28	%
Perpetual license	52.1			53.0			56.8			(7	)%	(4	)%	17.2			52.1			(67	)%	(67	)%
Total software revenue	542.8			576.3			527.6			9	%	12	%
Professional services	82.4			78.0			86.9			(10	)%	(6	)%	77.3			82.4			(6	)%	(4	)%
Total revenue	625.1			654.3			614.5			6	%	9	%	715.7			625.1			14	%	16	%
Total cost of revenue	157.3			153.2			166.7			(8	)%			170.4			157.3			8	%	10	%
Gross margin	467.9			501.1			447.8			12	%			545.3			467.9			17	%	18	%
Operating expenses	460.7			469.5			408.3			15	%			464.8			460.7			1	%	1	%
Total costs and expenses	618.0			622.6			575.0			8	%	11	%	635.3			618.0			3	%	3	%
Operating income	7.2			31.6			39.5			(20	)%	(12	)%	80.5			7.2			1,021	%	19,432	%
Non-GAAP operating income⁽¹⁾	$	135.6		$	160.0		$	104.7		53	%	55	%	$	196.3		$	135.6		45	%	51	%
Operating margin	1.1		%	4.8		%	6.4		%					11.2		%	1.1		%
Non-GAAP operating margin⁽¹⁾	21.7		%	24.4		%	17.0		%					27.4		%	21.7		%
Diluted earnings per share	$	(0.19	)	$	0.06		$	0.19
Non-GAAP diluted earnings per share ⁽²⁾	$	0.78		$	0.95		$	0.64
Diluted earnings (loss) per share														$	0.37		$	(0.19	)
Non-GAAP diluted earnings per share ^{(1) (2)}														$	1.16		$	0.78
Cash flow from operations⁽³⁾	$	162.3		$	162.3		$	136.6						$	95.3		$	162.3


(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 ~~2019~~2020 and ~~2018~~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. ~~We recorded the impact of the Tax Cuts and Jobs Act in our Q1 2018 GAAP earnings, resulting in a non-cash benefit of approximately $7 million. We have excluded this benefit from our non-GAAP results.~~

(3)

Cash flow from operations for the second quarter and first six months of 2020 includes $18.0 million and $21.3 million of restructuring payments, respectively, and $2.1 million and $8.6 million of acquisition-related payments, respectively. Cash flow from operations for the second quarter and first six months of 2019 includes ~~$18~~$9.6 million and $17.9 million of restructuring ~~payments. Cash flow from operations for the first six months of 2018 includes $2 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. ~~If actual~~Starting in the first quarter of 2020, our constant currency disclosures are calculated by multiplying the results ~~under ASC 605~~in local currency for the second quarter and first six months of ~~2019 had been converted into U.S. Dollars based on the foreign currency exchange rates in effect for the second quarter~~2020 and first six months of 2018, revenue would have been higher by $11.7 million and $18.9 million, respectively, costs and expenses would have been higher by $7.6 million and $13.2 million, respectively, and operating income would have been higher by $4.1 million and $5.7 million, respectively. Our constant currency disclosures are calculated by multiplying the actual results for the second quarter and first six months of 2019 by the exchange rates in effect ~~for the comparable periods of 2018,~~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

~~We discuss~~Our revenue results quarter to quarter are impacted by contract terms, including duration and start dates of our subscription contracts. 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.

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								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
Software revenue	$	324.1	$	249.5	30	%	31	%	$	638.4	$	542.8	18	%	19	%
Professional services	35.5		40.9		(13	)%	(11	)%	77.3		82.4		(6	)%	(4	)%
Total revenue	$	359.6	$	290.5	24	%	25	%	$	715.7	$	625.1	14	%	16	%

Software

Software revenue consists of subscription, support, and perpetual license revenue. ~~Recurring software revenue consists of subscription and support revenue and approximates 80% of total revenue~~

~~and 91% of software revenue for the six months ended March 30, 2019.~~ Our subscription revenue includes an immaterial amount of Software as a Service (SaaS) and cloud services.

~~As our mix of~~ Software revenue increased due to subscription ~~sales relative to~~revenue growth during the quarter and year-to-date periods, offset by declines in perpetual ~~license sales has increased, perpetual license revenue and~~ support revenue ~~have declined and are expected~~due to ~~continue to decline as customers purchase our solutions as subscriptions and convert existing perpetual licenses with~~conversions of support contracts to subscriptions. ~~As our~~For the second quarter and first six months of 2020 compared to the year ago periods, subscription ~~business matures, recurring software~~license revenue ~~growth is expected to accelerate~~increased 132% and 103%, respectively, in part due to the ~~compounding benefit of a subscription business model.~~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 ~~the second quarter and first six months of 2019 was down 15% (10% constant currency) and 10% (6% constant currency), respectively, compared~~part due to ~~the year-ago periods. These results are in line with our~~an extension to complete work on a fixed price professional services contract. 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

Three months ended
Percent Change
As Reported ASC 606 ASC 605 As Reported ASC 605 ASC 605
March 30, 2019 March 30, 2019 March 31, 2018 Actual
Constant
Currency
(Dollar amounts in millions)
Solutions Products
Software revenue 214.1
240.1
233.6
3 % 6 %
Professional services 37.1
32.9
41.4
(21 )% (16 )%
Total revenue $ 251.2
$ 272.9
$ 275.0
(1 )% 3 %
IoT Products
Software revenue 35.4
36.8
28.9
27 % 30 %
Professional services 3.8
5.7
4.0
44 % 49 %
Total revenue $ 39.3
$ 42.6
$ 32.9
29 % 32 %

Six months ended
Percent Change
As Reported ASC 606 ASC 605 As Reported ASC 605 ASC 605
March 30, 2019 March 30, 2019 March 31, 2018 Actual
Constant
Currency
(Dollar amounts in millions)
Solutions Products
Software revenue 475.5
505.0
472.3
7 % 9 %
Professional services 75.0
66.1
80.3
(18 )% (14 )%
Total revenue $ 550.4
$ 571.1
$ 552.7
3 % 6 %
IoT Products
Software revenue 67.3
71.3
55.3
29 % 31 %
Professional services 7.4
11.8
6.6
81 % 86 %
Total revenue $ 74.7
$ 83.2
$ 61.9
34 % 37 %



Software Revenue by Product Group
(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)	$	234.4	$	172.5	36	%	38	%	$	460.5	$	386.1	19	%	21	%
Growth (IoT, AR, Onshape)	43.2		35.4		22	%	23	%	86.4		67.3		28	%	29	%
FSG (Focused Solutions Group)	46.5		41.5		12	%	13	%	91.5		89.4		2	%	3	%
Software revenue	$	324.1	$	249.5	30	%	31	%	$	638.4	$	542.8	18	%	19	%

~~Solutions Group~~

~~Under ASC 605, Solutions Group software~~



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. In the second quarter and first six months of 2020, total recurring revenue for Core Products grew 36% (38% on a constant currency basis) and 30% (32% on a constant currency basis), respectively, compared to the 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 ago periods due in part to an extension to complete work on a fixed price professional services contract in the second quarter ~~due to the acceleration~~ of ~~our subscription model and strong bookings in CAD and core PLM, offset by declines in our productivity zone businesses. Solutions recurring software~~2020.

Growth Product revenue ~~under ASC 605~~growth in the second quarter and first six months of ~~2019 grew 9%~~2020 was driven by subscription revenue growth of 38% (39% constant currency) and 45% (46% constant currency), respectively, compared to ~~the year-ago periods (12% and 11%,~~

~~respectively, on a constant currency basis), reflecting the bookings growth over the past several years and the compounding benefit of our maturing subscription model.~~

~~Solutions professional services revenue for~~ the second quarter and first six months of 2019, ~~declined compared to the year-ago periods~~offset by a decline in support revenue due to ~~our strategy~~conversions of support contracts to ~~limit the amount of professional services we provide.~~subscription.

~~IoT Group~~

~~Under ASC 605, IoT software~~FSG Product revenue ~~grew~~growth in the second quarter ~~and~~of 2020 reflects growth of subscription revenue of 41% (42% constant currency) compared to the second quarter of 2019, 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. The revenue decrease for the first six months of 2020 as compared to the first six months of 2019 is a result of the decline in perpetual license revenue, offset by ~~27% and 29%, respectively, due to~~ growth of ~~recurring IoT software~~subscription revenue ~~(31% and 33%, respectively, on a~~of 24% (25% constant ~~currency basis), reflecting the strong bookings growth over the past several years and the compounding benefit of our maturing subscription model.~~currency).

IoT professional services revenue increased in the second quarter and first six months of 2019 due in part to implementation and adoption services we provide to our IoT customers as part of our efforts to help their IoT initiatives succeed.

Software Revenue by Geographic Region

A significant portion of our total revenue is generated outside of the U.S. In 2019 and ~~2018, we had~~in the first six months of 2020, approximately 40% of total revenue was generated in the Americas, 40% in Europe, and 20% in Asia Pacific.

Three months ended
Percent Change
As Reported ASC 606 ASC 605 As Reported ASC 605 ASC 605
March 30, 2019 March 30, 2019 March 31, 2018 Actual
Constant
Currency
(Dollar amounts in millions)
Americas
Software revenue 108.0
125.9
113.3
11 % 11 %
Professional services 11.8
11.8
15.1
(22 )% (22 )%
Total revenue $ 119.7
$ 137.8
$ 128.5
7 % 8 %
Europe
Software revenue 97.3
104.0
98.0
6 % 12 %
Professional services 21.7
19.3
23.6
(18 )% (11 )%
Total revenue $ 119.0
$ 123.2
$ 121.6
1 % 8 %
Asia Pacific
Software revenue 44.3
47.0
51.1
(8 )% (5 )%
Professional services 7.4
7.5
6.7
12 % 17 %
Total revenue $ 51.7
$ 54.5
$ 57.8
(6 )% (3 )%



(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
Americas	$	138.7	$	108.0	28	%	29	%	$	280.5	$	237.5	18	%	18	%
Europe	132.2		97.3		36	%	39	%	247.9		186.7		33	%	37	%
Asia Pacific	53.2		44.3		20	%	22	%	110.0		118.6		(7	)%	(7	)%
Total software revenue	$	324.1	$	249.5	30	%	31	%	$	638.4	$	542.8	18	%	19	%

Six months ended
Percent Change
As Reported ASC 606 ASC 605 As Reported ASC 605 ASC 605
March 30, 2019 March 30, 2019 March 31, 2018 Actual
Constant
Currency
(Dollar amounts in millions)
Americas
Software revenue 237.5
248.5
226.3
10 % 10 %
Professional services 24.1
24.2
29.2
(17 )% (17 )%
Total revenue $ 261.6
$ 272.7
$ 255.5
7 % 7 %
Europe ��
Software revenue 186.7
204.4
198.9
3 % 7 %
Professional services 43.7
39.0
44.2
(12 )% (6 )%
Total revenue $ 230.4
$ 243.4
$ 243.1
— % 5 %
Asia Pacific
Software revenue 118.6
123.4
102.5
20 % 24 %
Professional services 14.5
14.8
13.5
10 % 14 %
Total revenue $ 133.2
$ 138.2
$ 115.9
19 % 23 %

Americas

~~Software~~ software revenue ~~grew~~ growth in the second quarter and first six months of ~~2019 over the year-ago periods due to~~2020 was driven by growth in ~~recurring software~~subscription revenue of ~~12% in each period.~~

~~Europe~~

~~Software revenue grew in the second quarter~~57% and ~~first six months of 2019 over the year-ago periods due to recurring software revenue growth of 6% and 7%~~37%, respectively, (12% and 11%, respectively, on a constant currency basis) driven by the compounding benefit of the subscription transition. This growth was offset in part by the decline of 49% (46% on a constant currency basis) in perpetual license revenue for the first six months of 2019 due to the end of life of perpetual licenses in Europe as of January 1, 2018.

~~Asia Pacific~~

In the second quarter and first six months of 2019, Asia Pacific recurring software revenue grew 18% and 19%, respectively, (22% on a constant currency basis) compared to the year ago periods driven by the compounding benefit of the subscription transition. Software revenue declined in the second quarter of 2019 compared to the year ago period due to an 85% decline in perpetual license revenue following the end of life of perpetual licenses on January 1, 2019.

~~Gross Margin~~

Three months ended Six months ended
As Reported ASC 606 ASC 605 As Reported ASC 605 ASC 605 As Reported ASC 606 ASC 605 As Reported ASC 605 ASC 605
March 30, 2019 March 30, 2019 March 31, 2018 Percent
Change March 30, 2019 March 30, 2019 March 31, 2018 Percent
Change
(Dollar amounts in millions)
Gross margin $ 210.5
$ 237.5
$ 224.2
6 % $ 467.9
$ 501.1
$ 447.8
12 %
Non-GAAP gross margin ⁽¹⁾
220.6
247.6
233.7
6 % 488.0
521.2
467.2
12 %
Gross margin as a % of revenue:
License gross margin 79 % 92 % 90 % 85 % 93 % 90 %
Support and cloud gross margin 82 % 73 % 76 % 83 % 74 % 76 %
Professional services gross margin 17 % 15 % 17 % 18 % 17 % 15 %
Gross margin as a % of total revenue 72 % 75 % 73 % 75 % 77 % 73 %
Non-GAAP gross margin as a % of total revenue ⁽¹⁾
76 % 78 % 76 % 78 % 80 % 76 %
(1) Non-GAAP financial measures are reconciled to GAAP results under Non-GAAP Financial Measures below.

~~The increase in total gross margin in the second quarter and first six months of 2019~~ compared to the second quarter and first six months of ~~2018 reflects higher software~~2019, partially offset by a decline in support revenue, ~~driven by the maturing subscription model. Total~~resulting in recurring revenue growth of 31% and 19%, respectively, in the second quarter and first six months of ~~2019 grew 2% and 6% respectively, over~~2020 compared to the ~~second quarter and first six months of 2018. Margins for license and subscription are beginning to expand as the subscription model matures and~~year ago periods.

Europe software revenue ~~that has been deferred begins to contribute to each quarterly period. Support gross margins are down~~ growth in the second quarter and first six months of ~~2019~~2020 was driven by 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 ~~2018 primarily due to the decrease~~2019, partially offset by a decline in ~~perpetual~~ support revenue, resulting in recurring revenue growth of ~~18%~~37% and ~~17%~~35%, ~~respectively.~~

~~Professional services gross margin increased 200 basis points for the first six months of 2019 compared to the first six months of 2018 due to cost management.~~

~~Total Costs and Expenses~~

Three months ended Six months ended
As Reported ASC 606 ASC 605 As Reported ASC 605 ASC 605 As Reported ASC 606 ASC 605 As Reported ASC 605 ASC 605
March 30, 2019 March 30, 2019 March 31, 2018 Percent
Change March 30, 2019 March 30, 2019 March 31, 2018
Percent
Change
(Dollar amounts in millions)
Costs and expenses:
Cost of license revenue $ 12.9

$ 12.2
$ 11.9

3 % $ 25.4
$ 24.6
$ 24.0
3 %
Cost of support and cloud services revenue 32.9
33.0
34.3
(4 )% 64.1
63.6
68.8
(8 )%
Cost of professional services revenue 34.2
32.7
37.5

(13 )% 67.7
65.0
73.9
(12 )%
Sales and marketing 103.7

109.4
98.4

11 % 207.9
216.7
197.8
10 %
Research and development 61.4

61.4
62.2

(1 )% 122.2
122.2
126.2
(3 )%
General and administrative 35.4

35.4
33.4

6 % 73.2
73.2
68.4
7 %
Amortization of acquired intangible assets 5.9
5.9
7.9
(25 )% 11.9
11.9
15.7
(24 )%
Restructuring and other charges, net 27.0
27.0
0.1

45.5
45.5
0.2

Total costs and expenses $ 313.3
$ 317.1
$ 285.7
11 % $ 618.0
$ 622.6
$ 575.0
8 %
Total headcount at end of period 5,921
5,921
6,060
(2 )%

~~ASC 605 costs and expenses in the second quarter of 2019 compared to costs and expenses in the second quarter of 2018 increased primarily due to the following:~~

~~a $26.9 million restructuring charge associated with exiting our Needham headquarters facility,~~

~~a $3.2 million increase in cloud services hosting costs,~~

a $2.8 million increase in total compensation, benefit costs and travel expenses, primarily driven by a $9.9 million increase in stock-based compensation and a $1.4 million increase in commissions, offset by an $8.5 million decrease in cash-based bonus, salary and travel expenses, and

~~a $1.1 million increase in rent expense primarily due to one month of overlapping rent in Needham and the new Seaport location in January,~~

~~primarily offset by:~~

~~a $1.7 million decrease in amortization of intangible assets, and~~

~~a $1.4 million decrease in event costs.~~

~~Costs and expenses for the second quarter of 2019 compared to the year-ago period include an $7.6 million decrease due to changes in foreign currency exchange rates.~~

~~ASC 605 costs and expenses for the first six months of 2019 compared to costs and expenses for the first six months of 2018 increased primarily as a result of the following:~~

a $26.9 million restructuring charge associated with exiting our Needham headquarters facility in the second quarter of 2019 and a $16.3 million restructuring charge for our workforce realignment in the first quarter of 2019,

~~a $5.0 million increase in cloud services hosting costs,~~

a $5.2 million increase in total compensation, benefit costs and travel expenses, primarily driven by a $21.0 million increase in stock-based compensation and a $2.2 million increase in commissions, offset by an $18.1 million decrease in cash-based bonus, salary and travel expenses, and

~~a $1.0 million increase in rent expense primarily due to one month of overlapping rent in Needham and the new Seaport location in January,~~

~~primarily offset by:~~

~~a $3.5 million decrease in meeting and events costs,~~

~~a $3.5 million decrease in amortization of intangible assets, and~~

~~a $2.1 million decrease in professional service fees.~~

~~Costs and expenses for the first six months of 2019 compared to the year ago period include a $13.2 million decrease due to changes in foreign currency exchange rates.~~

Cost of License Revenue Three months ended Six months ended
As Reported ASC 606 ASC 605 As Reported ASC 605 ASC 605 As Reported ASC 606 ASC 605 As Reported ASC 605 ASC 605
March 30, 2019 March 30, 2019 March 31, 2018
Percent
Change
March 30, 2019 March 30, 2019 March 31, 2018
Percent
Change
(Dollar amounts in millions)
Cost of license revenue $ 12.9
$ 12.2
$ 11.9
3 % $ 25.4
$ 24.6
$ 24.0
3 %
% of total revenue 4 % 4 % 4 % 4 % 4 % 4 %
% of total license revenue 21 % 8 % 10 % 15 % 7 % 10 %

Our cost of license revenue consists of fixed and variable costs associated with reproducing and distributing software and documentation, as well as royalties paid to third parties for technology embedded in or licensed with our software products, amortization of intangible assets associated with acquired products, and cost of subscription licensing. Costs associated with providing post-contract support such as providing software updates and technical support for both our subscription offerings and our perpetual licenses are included in cost of support and cloud service revenue. Cost of license revenue as a percent of license revenue can vary depending on the subscription mix percentage, the product mix sold, the effect of fixed and variable royalties, headcount and the level of amortization of acquired software intangible assets.

~~Cost of license revenue under ASC 606 is higher~~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) compared to the second quarter of 2019, ~~than under ASC 605~~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 first six months of 2019, revenue declined due to a strong first quarter of 2019, which benefited from the ~~timing~~last-time purchases of ~~revenue recognition~~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						Six months ended
	March 28, 2020			March 30, 2019			March 28, 2020			March 30, 2019
Gross margin:
License gross margin	$	113.7		$	49.0		$	224.0		$	141.8
License gross margin percentage	89		%	79		%	89		%	85		%
Support and cloud services gross margin	$	162.2		$	154.8		$	314.2		311.5
Support and cloud services gross margin percentage	83		%	82		%	81		%	83		%
Professional services	0.6			6.8			7.1			14.6
Professional services gross margin percentage	2		%	17		%	9		%	18		%

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

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

(1) Non-GAAP financial measures are reconciled to GAAP results under ASC 606, resulting in earlier recognition of the associated royalty costs. Under ASC 605, the support component of subscription revenue is included in license revenue, which reduces cost of license as a percentage of total license revenue.Non-GAAP Financial Measures below.

~~Cost of license revenue in~~License gross margin increased for the second quarter and first six months of ~~2019~~2020 compared to the second quarter and first six months of ~~2018~~2019 as revenue increased primarily due to an increase in subscription license revenue. Revenue growth in 2020 was offset by 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 six months of 2020 compared to the first six months of 2019 due to increases in costs associated with our cloud services business due to increased demand for those services, royalty expenses, and compensation costs, offset by ~~lower compensation costs.~~an increase in subscription support revenue.

~~Cost of license revenue as a percentage of license revenue under ASC 605~~Professional services gross margin decreased infor the second quarter and first six months of ~~2019~~2020 compared to the second quarter and first six months of ~~2018~~ 2019due in part to a decrease in revenue due in part to an extension to complete work on a fixed price professional services contract in the second quarter of 2020, along with higher ~~revenue as we realize the benefit of our maturing subscription model.~~

Cost of Support and Cloud Service Revenue Three months ended Six months ended
As Reported ASC 606 ASC 605 As Reported ASC 605 ASC 605 As Reported ASC 606 ASC 605 As Reported ASC 605 ASC 605
March 30, 2019 March 30, 2019 March 31, 2018
Percent
Change
March 30, 2019 March 30, 2019 March 31, 2018
Percent
Change
(Dollar amounts in millions)
Cost of support and cloud services revenue $ 32.9
$ 33.0
$ 34.3
(4 )% $ 64.1
$ 63.6
$ 68.8
(8 )%
% of total revenue 11 % 10 % 11 % 10 % 10 % 11 %
% of total support and cloud services revenue 18 % 27 % 24 % 17 % 26 % 24 %

Our cost of support and cloud services revenue includes costs associated with providing post-contract support such as providing software updates and technical support for both our subscription offerings and our perpetual licenses, cost of cloud services, and cost of software as service revenue. Cost of support and cloud services revenue consists of costs such as salaries, benefits, and computer equipment and facilities associated with customer support and cloud services and the release of support updates (including related royalty costs).compensation costs.

~~Under ASC 605,~~Operating Expenses



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

Headcount increased 3% between March 30, 2019 and March 28, 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 ~~support component~~first six months of ~~subscription revenue is included~~2020, we reduced costs more than originally planned, which will result in ~~license revenue,~~greater than expected cost savings over the remainder of the year. We expect to prudently hire to expand our workforce as necessary, which ~~increases the cost~~we expect will return some of ~~support and cloud services as a percentage of total support and cloud services revenue.~~

Inthose costs to our run-rate in fiscal 2021. Variable compensation costs were lower for the second quarter and first six months of ~~2019~~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 second quarter of 2020 compared to operating expenses in the second quarter of 2019 decreased primarily due to the following:

a decrease in total research and ~~first six months of 2018, total support and cloud services~~development costs primarily related to a $1.1 million decrease in compensation, benefit costs and travel expenses, ~~decreased~~

a decrease in total general and administrative costs driven by ~~4% ($0.8 million)~~a $3.8 million decrease in compensation (primarily lower stock compensation), benefit costs and ~~7% ($2.8 million), respectively, due~~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 lower headcount, as well as lower third-party consulting costs, which decreased by 34% ($0.7 million) and 36% ($1.3 million), respectively. Offsetting these lower costs, cloud services hosting costs increased by 52% ($1.4 million) and 24% ($1.6 million), respectively.

Cost of Professional Services Revenue Three months ended Six months ended
As Reported ASC 606 ASC 605 As Reported ASC 605 ASC 605 As Reported ASC 606 ASC 605 As Reported ASC 605 ASC 605
March 30, 2019 March 30, 2019 March 31, 2018
Percent
Change
March 30, 2019 March 30, 2019 March 31, 2018
Percent
Change
(Dollar amounts in millions)
Cost of professional services revenue $ 34.2
$ 32.7
$ 37.5
(13 )% $ 67.7
$ 65.0
$ 73.9
(12 )%
% of total revenue 12 % 10 % 12 % 11 % 10 % 12 %
% of total professional services revenue 83 % 85 % 83 % 82 % 83 % 85 %

Our cost of professional services revenue includes costs such as salaries, benefits, and computer equipment and facilities for our training and consulting personnel, and third-party subcontractor fees.

~~Cost of professional services revenue is higher~~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 $4.6 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, 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 ~~under ASC 606 than under ASC 605~~increased primarily due to the ~~timing~~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 ~~professional services revenue recognition~~capitalized commissions under ASC 606,

an increase in research and ~~associated professional services costs.~~

~~In the second quarter and first six months of 2019 compared~~development costs primarily related to ~~the second quarter and first six months of 2018, total professional services~~a $2.1 million increase in compensation, benefit costs and travel expenses ~~decreased by 20% ($5.4 million) and 17% ($9.2 million) respectively,~~ due to ~~lower headcount, partially offset by~~ higher ~~third-party subcontractor fees, which increased by 22% ($1.4 million)~~salaries and ~~15% ($2.0 million), respectively.~~stock-based compensation,

Sales and Marketing Three months ended Six months ended
As Reported ASC 606 ASC 605 As Reported ASC 605 ASC 605 As Reported ASC 606 ASC 605 As Reported ASC 605 ASC 605
March 30, 2019 March 30, 2019 March 31, 2018 Percent
Change March 30, 2019 March 30, 2019 March 31, 2018 Percent
Change
(Dollar amounts in millions)
Sales and marketing $ 103.7
$ 109.4
$ 98.4
11 % $ 207.9
$ 216.7
$ 197.8
10 %
% of total revenue 36 % 35 % 32 % 33 % 33 % 32 %

~~Our sales~~an increase in general and ~~marketing~~administrative expenses primarily ~~include salaries and benefits, sales commissions, advertising and marketing programs, travel and facility costs.~~

~~Sales and marketing costs are lower under ASC 606 than under ASC 605 due to~~driven by $7.4 million in acquisition-related charges recorded in the ~~deferral of ongoing commission expenses, offset by the amortization of commissions costs capitalized upon adoption of ASC 606.~~

~~In the second quarter and~~ first six months of ~~2019~~2020 associated with the acquisition of Onshape compared to $0.8 million in the ~~second quarter~~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 incurred $27.0 million of restructuring charges in the first six months of ~~2018, total sales and marketing compensation, benefit costs and travel expenses increased 13% ($9.9 million) and 12% ($18.0 million), respectively, due~~2020, primarily related to an ~~increase in headcount, salary increases and stock-based compensation increases, partially offset by lower event costs, which decreased by 48% ($1.4 million) and 38% ($2.0 million), respectively.~~

Research and Development Three months ended Six months ended
As Reported ASC 606 ASC 605 As Reported ASC 605 ASC 605 As Reported ASC 606 ASC 605 As Reported ASC 605 ASC 605
March 30, 2019 March 30, 2019 March 31, 2018 Percent
Change March 30, 2019 March 30, 2019 March 31, 2018 Percent
Change
(Dollar amounts in millions)
Research and development $ 61.4
$ 61.4
$ 62.2
(1 )% $ 122.2
$ 122.2
$ 126.2
(3 )%
% of total revenue 21 % 19 % 20 % 20 % 19 % 21 %

Our research and development expenses consist principally of salaries and benefits, costs of computer equipment and facility expenses. Major research and development activities include developing new products and releases and updates of our software that enhance functionality and add features. In the second quarter and first six months of 2019employee restructuring program, compared to the second quarter and first six months of 2018, total research and development compensation, benefit costs and travel expenses decreased 3% ($1.6 million) and 4% ($3.8 million), respectively, primarily due to a decrease$43.0 million incurred in ~~headcount.~~

General and Administrative Three months ended Six months ended
As Reported ASC 606 ASC 605 As Reported ASC 605 ASC 605 As Reported ASC 606 ASC 605 As Reported ASC 605 ASC 605
March 30, 2019 March 30, 2019 March 31, 2018 Percent
Change March 30, 2019 March 30, 2019 March 31, 2018 Percent
Change
(Dollar amounts in millions)
General and administrative $ 35.4
$ 35.4
$ 33.4
6 % $ 73.2
$ 73.2
$ 68.4
7 %
% of total revenue 12 % 11 % 11 % 12 % 11 % 11 %

Our general and administrative expenses include the costs of our corporate, finance, information technology, human resources, legal and administrative functions, as well as acquisition-related charges, bad debt expense and outside professional services, including accounting and legal fees.

In the second quarter and first six months of 2019 compared to the second quarter and first six months of 2018 total general and administrative compensation, benefit costs and travel expenses increased by 7% ($1.9 million) and 8% ($4.3 million), respectively, primarily due to higher stock-based compensation expense, offset by lower bonus expenses due to a portion of the annual bonus being payable in stock for 2019.

Amortization of Acquired Intangible Assets Three months ended Six months ended
As Reported ASC 606 ASC 605 As Reported ASC 605 ASC 605 As Reported ASC 606 ASC 605 As Reported ASC 605 ASC 605
March 30, 2019 March 30, 2019 March 31, 2018 Percent
Change March 30, 2019 March 30, 2019 March 31, 2018 Percent
Change
(Dollar amounts in millions)
Amortization of acquired intangible assets $ 5.9
$ 5.9
$ 7.9
(25 )% $ 11.9
$ 11.9
$ 15.7
(24 )%
% of total revenue 2 % 2 % 3 % 2 % 2 % 3 %

Amortization of acquired intangible assets reflects the amortization of acquired non-product related intangible assets, primarily customer and trademark-related intangible assets, recorded in connection with completed acquisitions. The decrease in amortization of acquired intangible assets in the second quarter and first six months of 2019 compared to the second quarter and first six months of 2018 is due to some assets being fully amortized as well as the impact of foreign currency exchange rates.

Restructuring and Other Charges, Net Three months ended Six months ended
As Reported ASC 606 ASC 605 As Reported ASC 605 As Reported ASC 606 ASC 605 As Reported ASC 605
March 30, 2019 March 30, 2019 March 31, 2018 March 30, 2019 March 30, 2019 March 31, 2018
(in millions)
Restructuring charges (credits), net $ 26.4
$ 26.4
$ (0.9 ) $ 43.0
$ 43.0
$ (0.7 )
Headquarters relocation charges 0.6
0.6
1.0
2.5
2.5
1.0
Restructuring and Other Charges, Net $ 27.0
$ 27.0
$ 0.1
$ 45.5
$ 45.5
$ 0.2

In January 2019 we relocated to our new worldwide headquarters in the Boston Seaport District. Because our prior headquarters lease will not expire until November 2022, we are seeking to sublease that space, but have not yet done so. As a result, we bear overlapping rent obligations for those premises. In the second quarter of 2019 we incurred a restructuring charge of $26.9 million associated with the restructuring of our prior headquarters. The facility restructuring charge is based on the net present value of remaining lease commitments net of estimated sublease income. From a cash perspective, the free rent and estimated sublease income over the first 18 months on our Seaport headquarters total approximately $30 million, as compared to the estimated cash outflows of $34 million on the prior headquarters, which will be incurred over the next 44 months (rent obligations and operating expenses net of estimated sublease income). Restructuring charges and estimated cash outflows could increase if we are unable to sublease our prior headquarters as we expect.

~~The headquarters relocation charges include accelerated depreciation expense and double rent for January associated with exiting our prior headquarters facility and relocating to the Seaport.~~

In 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 opportunities. As this is a realignment of resources rather than a cost-savings initiative, we do not expect this realignment to result in significant cost savings. The restructuring plan was completed in the first quarter of 2019. In the first six months of 2019 ~~we recorded restructuring charges of $16.0 million related to this restructuring plan.~~largely associating with exiting our Needham headquarters facility.

In the second quarter and first six months of 2019, we made cash payments related to restructuring charges of $9.6 million and $17.9 million, respectively. At March 30, 2019, accrued restructuring totaled $32.2 million, of which we expect to pay $13.4 million within the next twelve months.

Interest Expense


Interest Expense	Three months ended									Six months ended
	As Reported ASC 606			ASC 605			As Reported ASC 605			As Reported ASC 606			ASC 605			As Reported ASC 605
	March 30, 2019			March 30, 2019			March 31, 2018			March 30, 2019			March 30, 2019			March 31, 2018
(in millions)																			Three months ended						Six months ended
	(in millions)																		March 28, 2020			March 30, 2019			March 28, 2020			March 30, 2019
Interest expense	$	(11.4	)	$	(11.4	)	$	(10.4	)	$	(21.7	)	$	(21.7	)	$	(20.4	)	$	(32.6	)	$	(11.4	)	$	(44.7	)	$	(21.7	)

Interest expense includes interest under our credit facility and senior notes. We had ~~$743~~$1,648 million of total debt at March ~~30, 2019,~~28, 2020, compared to ~~$648~~$743 million at March ~~31, 2018.~~30, 2019, which increased interest expense in the period. Additionally, we recognized $15 million of expense in 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)


Other Income (Expense), net	Three months ended								Six months ended
	As Reported ASC 606			ASC 605		As Reported ASC 605			As Reported ASC 606			ASC 605			As Reported ASC 605
	March 30, 2019			March 30, 2019		March 31, 2018			March 30, 2019			March 30, 2019			March 31, 2018
(in millions)																		Three months ended						Six months ended
	(in millions)																	March 28, 2020			March 30, 2019			March 28, 2020			March 30, 2019
Interest income	$	1.0		$	1.0	$	0.9		$	1.9		$	1.9		$	1.6		$	1.6		$	1.0		$	2.5		$	1.9
Other expense, net	(0.1		)	0.1		(1.1		)	(0.5		)	(0.3		)	(2.7		)	(3.2		)	(0.1		)	(3.4		)	(0.5		)
Other income (expense), net	$	0.8		$	1.1	$	(0.3	)	$	1.5		$	1.6		$	(1.1	)	$	(1.6	)	$	0.8		$	(0.9	)	$	1.5

Other income (expense), net includes interest income, foreign currency net losses and other non-operating gains and losses. Foreign currency net losses include costs of forward contracts, certain realized and unrealized foreign currency transaction gains or losses, and foreign exchange gains or losses resulting from the required period-end currency re-measurement of the assets and liabilities of our subsidiaries that use the U.S. Dollar as their functional currency. We use foreign currency forward contracts to reduce our exposure to fluctuations in foreign currency exchange rates.

Income Taxes

Income Taxes
Three months ended Six months ended
As Reported ASC 606 ASC 605 As Reported ASC 605 As Reported ASC 606 ASC 605 As Reported ASC 605
March 30, 2019 March 30, 2019 March 31, 2018 March 30, 2019 March 30, 2019 March 31, 2018
(Dollar amounts in millions)
Income before income taxes $ (33.4 ) $ (11.9 ) $ 11.5
$ (13.0 ) $ 11.6
$ 18.0
Provision (benefit) for income taxes 10.1
0.1
3.6
9.5
4.3
(3.8 )
Effective income tax rate (30 )% (1 )% 31 % (73 )% 38 % (21 )%



(Dollar amounts in millions)	Three months ended						Six months ended
	March 28, 2020			March 30, 2019			March 28, 2020			March 30, 2019
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	55		%	(30		)%	(22		)%	(73		)%

In the first six months of ~~2019~~2020 and ~~2018,~~2019, our effective tax rate differed from the statutory federal income tax rate of 21% due to U.S. tax reform, ~~(as described below),~~ 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 ~~quarter~~six months of 2020 and 2019, we reduced the ~~reduction of a~~U.S. valuation allowance ofby $21.2 million and $1.8 million as the result of the Onshape and Frustum ~~acquisition. Additionally, ASC 606 includes indirect effects of the adoption at the beginning of the first quarter of fiscal 2019.~~acquisitions, respectively. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland. In ~~2019~~2020 and ~~2018,~~2019, the foreign rate differential predominantly relates to these Irish earnings.

On ~~December 22, 2017,~~March 27, 2020, the ~~United States~~U.S. Federal government enacted ~~tax reform legislation through~~ the ~~Tax Cuts~~Coronavirus Aid, Relief, and ~~Jobs~~Economic Security Act (the ~~"Tax Act"~~“CARES ACT”),. The CARES Act is an emergency economic stimulus package in response to the coronavirus outbreak, which ~~significantly changed existing U.S.~~among other things contains numerous income tax laws by a reduction of the corporate tax rate, the implementation of a new system of taxation for non-U.S. earnings, the imposition of a one-time tax on the deemed repatriation of undistributed earnings of non-U.S. subsidiaries, and the expansion of the limitations on the deductibility of executive compensation and interest expense. Asprovisions. While we have a September 30 fiscal year-end, there is a blended U.S. statutory federal rate of approximately 24.5% for our fiscal year ending September 30, 2018 and 21% for subsequent fiscal years. The Tax Act also provides that net operating losses generated in years ending after December 31, 2017 may be carried forward indefinitely and can no longer be carried back, and that net operating losses generated in years beginning after December 31, 2017 can only reduce taxable income by upcontinue to 80% when utilized in a future period. The Tax Act includes a provision to tax global intangible low-tax income (GILTI) of foreign subsidiaries and a base erosion anti-abuse tax (BEAT) measure that taxes certain payments between a U.S. corporation and its foreign subsidiaries. The GILTI and BEAT provisions were effective for us beginning October 1, 2018. Our accounting policy is to treat tax on GILTI as a current period cost included in tax expense in the year incurred.

In the first quarter of 2018, we provided no federal income taxes payable as a result of the deemed repatriation of undistributed earnings as the tax was offset by a combination of current year losses and existing attributes which had a full valuation allowance recorded against the related deferred tax assets. We recorded state income taxes payable of $7.1 million on the deemed repatriation. This was subsequently reduced to $1.5 million to reflect additional guidance on the state implications of the Tax Act. We also recorded a deferred tax benefit of $14.1 million forevaluate the impact of the ~~Tax~~CARES Act, we do not currently believe it will have a material impact on our net U.S. deferred income tax balances. This was primarily attributable to the reduction of the federal tax rate on the net deferred tax liability in the U.S., and the ability to realize net operating losses from the reversal of existing deferred tax assets which can now be carried forward indefinitely and can therefore be netted against deferred tax liabilities for indefinite lived intangible assets.

~~In October 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The~~

purpose of ASU 2016-16 is to simplify the income tax accounting of an intra-entity transfer of an asset other than inventory and to record its effect when the transfer occurs. We adopted this amendment beginning in the first quarter of 2019 using the modified retrospective method with a cumulate effect adjustment to accumulated deficit of $72.3 million, with a corresponding increase of $75.3 million to deferred tax assets, a $6.0 million decrease to income tax assets and a $3.0 million decrease to income tax liabilities. The adjustment primarily relates to deductible amortization of intangible assets in Ireland. Post adoption, our effective tax rate no longer includes the benefit of this amortization.

Operating Measures

~~Subscription Bookings~~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 ~~Subscription ACV~~support contracts.

~~Given~~

We believe ARR is a valuable operating metric to measure the ~~difference in revenue recognition between the sale~~health of a ~~perpetual software license~~subscription business because it captures expected subscription and ~~a subscription, we use bookings for internal planning, forecasting~~support cash generation from customers, existing customer expansions, and ~~reporting~~includes the impact of ~~new license and cloud services transaction (as subscription bookings includes cloud services bookings).~~net total churn, which reflects gross churn, offset by the impact of any pricing increases.

~~In order to normalize between perpetual and subscription licenses, we define~~ ~~subscription bookings~~ asBecause this measure represents the ~~subscription~~ annualized contract value (subscription ACV) of new subscription contracts multiplied by a conversion factor of 2. We arrived at the conversion factor of 2 by considering a number of variables, including pricing, support, length of term, and renewal rates. In 2018 and 2017, the average subscription contract term was approximately two years.

~~We define~~ ~~subscription ACV~~ ~~as the total~~ value of ~~a new subscription contract (which may include annual values that increase over time) divided by the term~~recurring customer contracts as of the ~~contract (in days), multiplied by 365. If the term~~end of ~~the subscription contract is less than~~ a year, and is not associated with an existing contract, the booking is equal to the total contract value. Beginning in the third quarter of 2018, minimum ACV commitments under our Strategic Alliance Agreement with Rockwell Automation are included in subscription ACV if the period-to-date minimum ACV commitment exceeds actual ACV sold under the Agreement.

~~We define~~ ~~license and subscription bookings~~ ~~as subscription bookings plus perpetual license bookings.~~

~~Because subscription bookings is a metric we use to approximate the value of subscription sales if sold as perpetual licenses, it~~reporting period, ARR does not represent ~~the actual~~revenue for any particular period or remaining revenue that will be recognized with respect to subscription sales or that would be recognized if the sales were perpetual licenses, nor does the annualized value of monthly software rental bookings represent the value of any such booking.

~~Annualized Recurring Revenue (ARR)~~

Annualized Recurring Revenue (ARR) for a given quarter is calculated by dividing the portion of ASC 605 non-GAAP software revenue attributable to subscription and support for the quarter by the number of days in the quarter and multiplying by 365. ARR should be viewed independently of revenue and deferred revenue as it is an operating measure and is not intended to be combined with or to replace either of those items.

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 ~~charges, restructuring~~ and ~~headquarters relocation charges, pension plan termination-related costs, non-operating credit facility refinancing costs, identified discrete~~other transactional charges included in ~~non-operating~~general and administrative expenses, restructuring and other ~~expense,~~charges, net, and income tax adjustments as defined in our Annual Report on Form 10-K for the ~~related tax effects~~fiscal year ended September 30, 2019. In the second quarter of 2020, we also incurred an interest penalty for the early redemption of the ~~preceding~~6.000% Senior Notes due 2024, which is also excluded from our non-GAAP financial measures as it is a significant non-ordinary course charge.

The items ~~and any other identified tax items.~~

~~These 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 ~~from our~~when presenting non-GAAP financial measures. ~~Investors should consider~~Management uses non-GAAP financial measures ~~only~~ in conjunction with our GAAP ~~results.~~results, as should investors.

~~Fair value of acquired deferred revenue~~ is a purchase accounting adjustment recorded to reduce acquired deferred revenue to the fair value of the remaining obligation, so our GAAP revenue for the periods after an acquisition do not reflect the full amount of revenue that would have been reported if the acquired deferred revenue was not written down to fair value. We believe excluding these adjustments to revenue from these contracts (and associated costs in ~~fair value of acquired deferred costs) is useful to investors as an additional means to assess revenue trends of our business.~~

~~Stock-based compensation~~ is a non-cash expense relating to stock-based awards issued to executive officers, employees and outside directors and to our employee stock purchase program. We exclude this expense as it is a non-cash expense and we assess our internal operations excluding this expense and believe it facilitates comparisons to the performance of other companies in our industry.

~~Amortization of acquired intangible assets~~ is a non-cash expense that is impacted by the timing and magnitude of our acquisitions. We believe the assessment of our operations excluding these costs is relevant to our assessment of internal operations and comparisons to the performance of other companies in our industry.

~~Acquisition-related and other transactional charges included in general and administrative costs~~ ~~are~~direct costs of potential and completed acquisitions and expenses related to acquisition integration activities, including transaction fees, due diligence costs, severance and professional fees. Subsequent adjustments to our initial estimated amount of contingent consideration associated with specific acquisitions are also included within acquisition-related charges. Other transactional charges include third-party costs related to structuring unusual transactions. We do not include these costs when reviewing our operating results internally. The occurrence and amount of these costs will vary depending on the timing and size of acquisitions.

~~Restructuring charges~~ include excess facility restructuring charges and severance costs resulting from reductions of personnel driven by modifications to our business strategy. We do not include these costs when reviewing our operating results internally. These costs may vary in size based on our restructuring plan.

~~Headquarters relocation charges~~ include non-cash accelerated depreciation expense recorded in anticipation of exiting our current headquarters facility due to changes in the estimated useful lives of fixed assets. We do not include these costs when reviewing our operating results internally.

~~Income tax adjustments~~ ~~include the tax impact of the items above and assumes that we are profitable on a non-GAAP basis in the U.S. and one foreign jurisdiction. It also eliminates the effect of the valuation~~

allowance recorded against our net deferred tax assets in those jurisdictions. Additionally, we exclude other material tax items that we do not include when reviewing our operating results internally.

We use these non-GAAP measures, and we believe that they assist our investors, to make period-to-period comparisons of our operational performance because they provide a view of our operating results without items that are not, in our view, indicative of our core operating results. We believe that these non-GAAP measures help illustrate underlying trends in our business, and we use the measures to establish budgets and operational goals (communicated internally and externally) for managing our business and evaluating our performance. We believe that providing non-GAAP measures also affords investors a view of our operating results that may be more easily compared to the results of other companies in our industry that use similar financial measures to supplement their GAAP results.

The items excluded from the non-GAAP financial measures often have a material impact on our financial results and ~~many of~~ 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.

Three months ended Six months ended
As Reported ASC 606 ASC 605 As Reported ASC 605 As Reported ASC 606 ASC 605 As Reported ASC 605
March 30, 2019 March 30, 2019 March 31, 2018 March 30, 2019 March 30, 2019 March 31, 2018
(in millions, except per share amounts)
GAAP revenue $ 290.5
$ 315.5
$ 307.9
$ 625.1
$ 654.3
$ 614.5
Fair value of acquired deferred revenue 0.2
0.2
0.3
0.5
0.5
0.7
Non-GAAP revenue $ 290.7
$ 315.7
$ 308.2
$ 625.6
$ 654.7
$ 615.2

GAAP gross margin $ 210.5
$ 237.5
$ 224.2
$ 467.9
$ 501.1
$ 447.8
Fair value of acquired deferred revenue 0.2
0.2
0.3
0.5
0.5
0.7
Fair value of acquired deferred costs (0.1 ) (0.1 ) (0.1 ) (0.2 ) (0.2 ) (0.2 )
Stock-based compensation 3.1
3.1
2.8
6.2
6.2
5.7
Amortization of acquired intangible assets included in cost of revenue 6.8
6.8
6.6
13.6
13.6
13.2
Non-GAAP gross margin $ 220.6
$ 247.6
$ 233.7
$ 488.0
$ 521.2
$ 467.2

GAAP operating income $ (22.9 ) $ (1.6 ) $ 22.2
$ 7.2
$ 31.6
$ 39.5
Fair value of acquired deferred revenue 0.2
0.2
0.3
0.5
0.5
0.7
Fair value of acquired deferred costs (0.1 ) (0.1 ) (0.1 ) (0.2 ) (0.2 ) (0.2 )
Stock-based compensation 27.0
27.0
17.0
56.4
56.4
35.4
Amortization of acquired intangible assets included in cost of revenue 6.8
6.8
6.6
13.6
13.6
13.2
Amortization of acquired intangible assets 5.9
5.9
7.9
11.9
11.9
15.7
Acquisition-related and other transactional charges included in general and administrative expenses 0.4
0.4
0.1
0.8
0.8
0.1
Headquarters relocation charges 0.6

0.6
1.0
2.5
2.5
1.0
Restructuring charges, net 26.4
26.4
(0.8 ) 43.0
43.0
(0.7 )
Non-GAAP operating income $ 44.4
$ 65.6
$ 54.1
$ 135.6
$ 160.0
$ 104.7

GAAP net income $ (43.5 ) $ (12.0 ) $ 7.9
$ (22.5 ) $ 7.2
$ 21.8
Fair value of acquired deferred revenue 0.2
0.2
0.3
0.5
0.5
0.7
Fair value of acquired deferred costs (0.1 ) (0.1 ) (0.1 ) (0.2 ) (0.2 ) (0.2 )
Stock-based compensation 27.0
27.0
17.0
56.4
56.4
35.4
Amortization of acquired intangible assets included in cost of revenue 6.8
6.8
6.6
13.6
13.6
13.2
Amortization of acquired intangible assets 5.9
5.9
7.9
11.9
11.9
15.7


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

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

GAAP operating income (loss)																			$	50.0		$	(22.9	)	$	80.5		$	7.2
Fair value of acquired deferred revenue																			—			0.2			—			0.5
Fair value of acquired deferred costs																			—			(0.1		)	—			(0.2		)
Stock-based compensation																			20.5			27.0			48.4			56.4
Amortization of acquired intangible assets included in cost of revenue																			6.9			6.8			13.7			13.6
Amortization of acquired intangible assets																			7.3			5.9			14.0			11.9
Acquisition-related and other transactional charges included in general and administrative expenses	0.4			0.4			0.1			0.8			0.8			0.1			0.3			0.4			7.4			0.8
Headquarters relocation charges	0.6			0.6			1.0			2.5			2.5			1.0
Restructuring charges, net	26.4			26.4			(0.8		)	43.0			43.0			(0.7		)
Restructuring and other charges, net																			18.2			27.0			32.3			45.5
Non-GAAP operating income																			$	103.2		$	44.4		$	196.3		$	135.6

GAAP net income (loss)																			$	7.2		$	(43.5	)	$	42.6		$	(22.5	)
Fair value of acquired deferred revenue																			—			0.2			—			0.5
Fair value of acquired deferred costs																			—			(0.1		)	—			(0.2		)
Stock-based compensation																			20.5			27.0			48.4			56.4
Amortization of acquired intangible assets included in cost of revenue																			6.9			6.8			13.7			13.6
Amortization of acquired intangible assets																			7.3			5.9			14.0			11.9
Acquisition-related and other transactional charges included in general and administrative expenses																			0.3			0.4			7.4			0.8
Restructuring and other charges, net																			18.2			27.0			32.3			45.5
Debt early redemption premium																			15.0			—			15.0			—
Income tax adjustments ⁽¹⁾	2.1			(10.4		)	(0.1		)	(12.7		)	(22.5		)	(11.1		)	(6.9		)	2.1			(38.8		)	(12.7		)
Non-GAAP net income	$	25.8		$	44.8		$	39.8		$	93.1		$	113.1		$	75.9		$	68.5		$	25.8		$	134.6		$	93.1

GAAP diluted earnings per share	$	(0.37	)	$	(0.10	)	$	0.07		$	(0.19	)	$	0.06		$	0.19
Fair value of acquired deferred revenue	—			—			—			—			—			0.01
GAAP diluted earnings (loss) per share																			$	0.06		$	(0.37	)	$	0.37		$	(0.19	)
Stock-based compensation	0.23			0.23			0.14			0.47			0.47			0.30			0.18			0.23			0.42			0.47
Amortization of acquired intangible assets	0.11			0.11			0.12			0.21			0.21			0.25			0.12			0.11			0.24			0.21
Acquisition-related and other transactional charges included in general and administrative expenses	—			—			—			0.01			0.01			—			—			—			0.06			0.01
Headquarters relocation charges	—			—			0.01			0.02			0.02			0.01
Restructuring charges, net	0.22			0.22			(0.01		)	0.36			0.36			(0.01		)
Restructuring and other charges, net																			0.16			0.22			0.28			0.38
Debt early redemption premium																			0.13			—			0.13			—
Income tax adjustments ⁽¹⁾	0.02			(0.09		)	—			(0.11		)	(0.19		)	(0.09		)	(0.06		)	0.02			(0.34		)	(0.11		)
Non-GAAP diluted earnings per share	$	0.22		$	0.38		$	0.34		$	0.78		$	0.95		$	0.64		$	0.59		$	0.22		$	1.16		$	0.78

(1)

Operating margin impact of non-GAAP adjustments:


	Three months ended						Six months ended
	As Reported ASC 606		ASC 605		As Reported ASC 605		As Reported ASC 606		ASC 605		As Reported ASC 605		Three months ended				Six months ended
	March 30, 2019		March 30, 2019		March 31, 2018		March 30, 2019		March 30, 2019		March 31, 2018		March 28, 2020		March 30, 2019		March 28, 2020		March 30, 2019
GAAP operating margin	(7.9	)%	(0.5	)%	7.2	%	1.1	%	4.8	%	6.4	%	13.9	%	(7.9	)%	11.2	%	1.1	%
Fair value of acquired deferred revenue	0.1	%	0.1	%	0.1	%	0.1	%	0.1	%	0.1	%	—	%	0.1	%	—	%	0.1	%
Stock-based compensation	9.3	%	8.5	%	5.5	%	9.0	%	8.6	%	5.8	%	5.7	%	9.3	%	6.8	%	9.0	%
Amortization of acquired intangible assets	4.4	%	4.0	%	4.7	%	4.1	%	3.9	%	4.7	%	3.9	%	4.4	%	3.9	%	4.1	%
Acquisition-related and other transactional charges included in general and administrative expenses	0.1	%	0.1	%	—	%	0.1	%	0.1	%	—	%	0.1	%	0.1	%	1.2	%	0.1	%
Headquarters relocation charges	0.2	%	0.2	%	0.3	%	0.4	%	0.4	%	0.2	%
Restructuring charges, net	9.1	%	8.4	%	(0.3	)%	6.9	%	6.6	%	(0.1	)%
Restructuring and other charges, net													5.1	%	9.3	%	4.5	%	7.3	%
Non-GAAP operating margin	15.3	%	20.8	%	17.6	%	21.7	%	24.4	%	17.0	%	28.7	%	15.3	%	27.4	%	21.7	%

Critical Accounting Policies and Estimates

~~On October 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASC 606). Refer to~~ ~~Note 1. Basis of Presentation~~ ~~and~~ ~~Note 2. Revenue from Contracts with Customers~~ ~~to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for estimates related to our adoption of ASC 606.~~ The financial information included in Item 1 reflects no ~~other~~ 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 ~~2018~~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


	March 30, 2019			March 31, 2018
	(in thousands)
Cash and cash equivalents	$	294,299		$	299,776
(in thousands)							March 28, 2020			March 30, 2019
Cash and cash equivalents⁽¹⁾							$	826,776		$	294,299
Restricted cash	1,133			1,529			902			1,133
Short- and long-term marketable securities	56,415			55,264			56,941			56,415
Total	$	351,847		$	356,569		$	884,619		$	351,847

	Six months ended
	March 30, 2019			March 31, 2018
(in thousands)							Six months ended
	(in thousands)						March 28, 2020			March 30, 2019
Cash provided by operating activities	$	162,344		$	136,598		$	95,329		$	162,344
Cash used by investing activities	(128,340		)	(22,693		)	(476,743		)	(128,340		)
Cash used by financing activities	(1,902		)	(99,646		)
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 ~~$56~~$57 million with an average maturity of 1211 months. At March ~~30, 2019,~~28, 2020, cash and cash equivalents totaled ~~$294~~$827 million, compared to ~~$260~~$270 million at September 30, 2018, reflecting $162 million in operating cash flows and $95 million in net borrowings under our credit facility, offset by $69 million used for the Frustum acquisition, $51 million used to acquire capital assets, $35 million used to pay withholding taxes on stock-based awards, $4 million from the issuance of common stock, ~~and $2 million used to pay for contingent consideration.~~2019.

A significant portion of our cash is generated and held outside the U.S. AtAs of March ~~30, 2019,~~28, 2020, we had cash and cash equivalents of ~~$25~~$574 million in the U.S., ~~$105~~$132 million in Europe, ~~$134~~$93 million in Asia Pacific (including India), and ~~$30~~$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 $95 million in the first six months of 2020, compared to $162 million in the first six months of 2019. Cash from operations for the first six months of 2020 includes $21 million of restructuring payments and $9 million of acquisition-related payments compared to $18 million of restructuring payments in the prior year period. The decrease in cash from operations in the first six months of 2020 compared to the same period in 2019 was due in part to lower accounts receivable collections 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 quarter of 2019 in that region. In addition, in the first six months of 2019, we received tenant reimbursements related to our new Seaport headquarters.

Cash used in investing activities

Cash used in investing activities reflects $469 million used for the Onshape acquisition in the first six months of 2020, compared to $70 million used for the Frustum acquisition in the first six months of 2019. Capital expenditures were approximately $41 million higher for the first six months of 2019 compared to ~~$137 million in~~ the first six months of ~~2018. The increase is primarily~~2020, due to ~~higher accounts receivable collections of $40 million, offset by restructuring payments of $18 million.~~

~~Net loss~~construction expenses for ~~the first six months of 2019 was $23 million compared to net income of $22 million for the first six months of 2018.~~

~~Cash used in investing activities~~

Six months ended
March 30, 2019 March 31, 2018
(in thousands)
Cash used in investing activities included the following:
Additions to property and equipment $ (51,268 ) $ (11,139 )
Acquisitions of businesses, net of cash acquired (69,453 ) (3,000 )
Purchase of intangible asset —
(3,000 )
Purchases of short- and long-term marketable securities (14,460 ) (13,794 )
Proceeds from maturities of short- and long-term marketable securities 14,227
8,240
Settlement of net investment hedges 114
—
$ (128,340 ) $ (22,693 )

~~The increase in property, plant and equipment payments is primarily attributable to expenditures made for construction of~~ our new worldwide headquarters in the Boston Seaport District ~~(a portion of which is offset by landlord reimbursements included~~ in ~~cash from operations above).~~ ~~In the first six months of 2019 we also used $69.5 million to acquire Frustum.~~2019.

Cash used in financing activities

Six months ended
March 30, 2019 March 31, 2018
(in thousands)
Cash used in financing activities included the following:
Net borrowings (repayments) of debt $ 95,000
$ (70,000 )
Repurchases of common stock (64,994 ) —
Payments of withholding taxes in connection with stock-based awards (34,491 ) (33,942 )
Proceeds from issuance of common stock 4,158
7,472
Contingent consideration (1,575 ) (3,176 )
$ (1,902 ) $ (99,646 )

The net borrowings in the first six months of ~~2019~~2020 primarily reflect $1 billion in new notes issued in February 2020, compared to net borrowings of ~~$205~~$95 million under our revolving credit facility ~~to fund the working capital requirements and Frustum acquisition, offset by repayments of $110 million. In~~in the first six months of 2019 we paid $34.5 million in withholding taxes in connection with stock-based awards, received $4.2 million in proceeds from issuance of common stock under our ESPP, and made $1.6 million in contingent consideration payments.

~~Credit Agreement~~

~~Our credit facility is a multi-currency credit facility with a syndicate of sixteen banks~~ for which JPMorgan Chase Bank, N.A. acts as Administrative Agent. The total revolving loan commitment under the facility is $700 million. Outstanding revolving loan amounts may be repaid in whole or in part, without penalty or premium, prior to the September 13, 2023 maturity date, when all remaining amounts outstanding will be due and payable in full.

~~We use the credit facility for general corporate purposes, including acquisitions of businesses, share repurchases and~~ working capital ~~requirements.~~ requirements and the Frustum acquisition.

Outstanding Debt

As of March ~~30, 2019,~~28, 2020, we had $243.1 million in revolving loans outstanding under the credit facility, the fair value of which approximated its book value. As of March 30, 2019, we have approximately $456.9 million undrawn, of which $441.4 million would be available to borrow, the availability of which is reduced by letters of credit and certain other long-term liabilities.

Any borrowings by PTC Inc. or certain of our foreign subsidiaries under the credit facility would be guaranteed, respectively, by our material domestic subsidiaries that become parties to the subsidiary guaranty, if any, and/or by PTC Inc. Borrowings are also secured by first priority liens on property of PTC and certain of our material domestic subsidiaries, including 100% of the voting equity interests of certain of

our domestic subsidiaries and 65% of our material first-tier foreign subsidiaries. Loans under the credit facility bear interest at variable rates that reset every 30 to 180 days depending on the rate and period selected by us and based upon our total leverage ratio. In the second quarter and first six months of 2019, the weighted average annual interest rate for amounts outstanding was 5.3% and 5.4% respectively. We are currently evaluating the anticipated impact of the phase-out of LIBOR in 2021, which may be material. We also pay a quarterly commitment fee on the undrawn portion of the credit facility ranging from 0.175% to 0.30% per year based on our total leverage ratio.

The credit facility imposes customary covenants that limit our ability to incur liens or guarantee obligations, pay dividends and make other distributions, make investments and engage in certain other transactions. In addition, we and our material domestic subsidiaries may not invest in, or loan to, our foreign subsidiaries in aggregate amounts exceeding $100 million for any purpose and an additional $200 million for acquisitions of businesses. We also must maintain the following financial ratios:

had:



	~~Required Ratio~~	~~Ratio as of March 30, 2019~~
~~Total Leverage Ratio~~ ~~Ratio of consolidated total indebtedness to the consolidated trailing four quarters EBITDA.~~	~~Not > 4.50:1.00~~	~~2.14 to 1.00~~
~~Interest Coverage Ratio~~ ~~Ratio of consolidated trailing four quarters EBITDA to consolidated trailing four quarters cash basis interest expense.~~	~~> 3.00:1.00~~	~~8.64 to 1.00~~
~~Senior Secured Leverage Ratio~~ ~~Ratio of senior consolidated total indebtedness (which excludes unsecured indebtedness) to consolidated trailing four quarters EBITDA as of the last day of any fiscal quarter.~~	~~Not > 3.00:1.00~~	~~0.73 to 1.00~~



(in millions)	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
Credit facility revolver	148.1
Total debt	1,648.1
Unamortized debt issuance costs for the Senior notes	(17.4		)
Total debt, net of issuance costs	$	1,630.7

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

As of March ~~30, 2019,~~28, 2020, we were in compliance with all financial and operating covenants of the credit ~~facility.~~

facility and the note indentures. Any failure to comply with such covenants under the credit facility would prevent us from being able to borrow additional funds ~~and would constitute a default, permitting the lenders to, among other things, accelerate the amounts outstanding and terminate the credit facility.~~

~~The terms and conditions of~~under the credit facility, ~~are described in~~ ~~Note 13. Debt~~ ~~in the Financial Statements.~~

~~Outstanding Notes~~

~~On May 12, 2016, we issued $500 million of 6.00% senior unsecured notes due 2024. Interest on the notes is payable twice per year in May~~ and, ~~November.~~

We may redeem the notes, in whole or in part, subject to certain conditions, including in some cases a payment of premium, prior to their maturity date. In addition, if we undergo a change of control, we will be required to make an offer to purchase all the notes at a price equal to 101% of the principal amount of the notes plus accrued and unpaid interest.

The notes were issued under an indenture that contains customary covenants. Subject to certain exceptions, our ability to incur certain additional debt is limited unless, after giving pro forma effect to such incurrence and the application of the proceeds thereof, the ratio of our EBITDA to our Consolidated Fixed Charges is not greater than 2.00 to 1.00. The indenture also restricts our ability to incur liens, pay dividends or make certain other distributions, sell assets or engage in sale/leaseback transactions. Anyas with any failure to comply with ~~these and other~~such covenants ~~included in~~under the ~~indenture~~note indentures, could constitute ~~an event of~~a default that could ~~result in the acceleration of the payment of the aggregate principal amount of the notes then~~cause all amounts outstanding to become due and ~~accrued interest. As of March 30, 2019, we were in compliance with all such covenants.~~payable immediately.

~~Share 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 repurchased $65 million of our common stock in the second quarter and first six months of 2019. We did not repurchase any stock under the current authorization in the second quarter and first six months of 2018. We expect to repurchase

~~additional material amounts over the remainder of 2019. We intend to use cash from operations and borrowings under our~~ credit facility ~~to make such repurchases. All shares of~~and our ~~common stock repurchased~~Senior Notes due 2024, 2025, and 2028 are ~~automatically restored~~ described in Note 13. to the ~~status~~Condensed Consolidated Financial Statements of ~~authorized and unissued.~~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 ~~$40~~$22 million in ~~2019, net of expected landlord funding of leasehold improvements) and fund our intended share repurchases~~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.

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, or to engage in strategic transactions or repurchase shares, any of which could be commenced, suspended or completed at any time. Any such ~~purchases~~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 ~~2018~~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 March ~~30, 2019.~~28, 2020.

Changes in Internal Control over Financial Reporting

Effective October 1, 2018, we adopted Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, as amended (ASC 606). In connection with our adoption of ASC 606, we implemented changes to our systems, processes, policies and internal controls. These changes will have a material effect on our internal control over financial reporting in 2019.

There ~~were~~was no ~~other changes~~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 March ~~30, 2019~~28, 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 ~~2018~~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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~

~~The table below shows the shares of our common stock we repurchased in the second quarter of 2019.~~

Period (1) Total Number of Shares (or Units) Purchased Average Price Paid per Share (or Unit) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
December 30, 2018 - January 26, 2019 18,430
$ 81.77
18,430
$398,500,360 (2)
January 27, 2019 - February 23, 2019 367,368
$ 87.76
367,368
$366,252,574 (2)
February 24, 2019 - March 30, 2019 339,689
$ 91.89
339,689
$335,005,304 (2)
Total 725,397
$ 89.83
725,397
$335,005,304 (2)

~~(1) Periods are our fiscal months within the fiscal quarter.~~

(2) Our Board of Directors has authorized us to repurchase up to $1,500 million of our common stock for the period October 1, 2017 through September 30, 2020, which program we initially announced on September 19, 2017 and expanded in July 2018.

ITEM 6. EXHIBITS




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).

4.4		Indenture, dated as of February 13, 2020, between PTC Inc. and Wells Fargo Bank, National Association, as trustee (filed as Exhibit 4.1 to our Current Report on Form 8-K filed on 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 March ~~30, 2019~~28, 2020 ("Q2 Form 10-Q") formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of March ~~30, 2019~~28, 2020 and September 30, ~~2018;~~2019; (ii) Condensed Consolidated Statements of Operations for the three and six months ended March ~~30, 2019~~28, 2020 and March ~~31, 2018;~~30, 2019; (iii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended March ~~30, 2019~~28, 2020 and March ~~31, 2018;~~30, 2019; (iv) Condensed Consolidated Statements of Cash Flows for the six months ended March ~~30, 2019~~28, 2020 and March ~~31, 2018;~~30, 2019; (v) Consolidated Statements of Stockholders’ Equity for the three and six months ended March ~~30, 2019~~28, 2020 and March ~~31, 2018;~~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/ ~~ANDREW MILLER~~KRISTIAN TALVITIE
		~~Andrew Miller~~Kristian Talvitie Executive Vice President and Chief Financial Officer (Principal Financial Officer)

Date: May ~~9, 2019~~6, 2020

6144



	Three months ended March 31, 2018
	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 30, 2017	116,126		$	1,161	$	1,594,546		$	(637,519	)	$	(69,089	)	$	889,099
Common stock issued for employee stock-based awards	60		1		(1		)	—			—			—
Shares surrendered by employees to pay taxes related to stock-based awards	(6	)	—		(454		)	—			—			(454		)
Common stock issued for employee stock purchase plan	158		1		7,471			—			—			7,472
Compensation expense from stock-based awards	—		—		17,026			—			—			17,026
Net income	—		—		—			7,922			—			7,922
Unrealized loss on hedging instruments, net of tax	—		—		—			—			(535		)	(535		)
Foreign currency translation adjustment	—		—		—			—			7,540			7,540
Unrealized loss on available-for-sale securities, net of tax	—		—		—			—			(267		)	(267		)
Change in pension benefits, net of tax	—		—		—			—			(79		)	(79		)
Balance as of March 31, 2018	116,338		$	1,163	$	1,618,588		$	(629,597	)	$	(62,430	)	$	927,724



	Six months ended March 31, 2018
	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, 2017	115,333		$	1,153		$	1,609,030		$	(650,840	)	$	(73,907	)	$	885,436
ASU 2016-09 adoption	—		—			681			(556		)	—			125
Common stock issued for employee stock-based awards	1,377		14			(14		)	—			—			—
Shares surrendered by employees to pay taxes related to stock-based awards	(530	)	(5		)	(33,937		)	—			—			(33,942		)
Common stock issued for employee stock purchase plan	158		1			7,471			—			—			7,472
Compensation expense from stock-based awards	—		—			35,357			—			—			35,357
Net income	—		—			—			21,799			—			21,799
Unrealized loss on cash flow hedges, net of tax	—		—			—			—			(875		)	(875		)
Foreign currency translation adjustment	—		—			—			—			12,769			12,769
Unrealized loss on available-for-sale securities, net of tax	—		—			—			—			(446		)	(446		)
Change in pension benefits, net of tax	—		—			—			—			29			29
Balance as of March 31, 2018	116,338		$	1,163		$	1,618,588		$	(629,597	)	$	(62,430	)	$	927,724



	March 30, 2019		October 1, 2018, as adjusted
	(in thousands)
Contract asset	$	19,628	$	26,265
Deferred revenue	$	391,807	$	357,490



Restricted stock unit activity for the six months ended March 30, 2019	Shares		Weighted Average Grant Date Fair Value (Per Share)
	(in thousands)
Balance of outstanding restricted stock units October 1, 2018	3,284		$	65.93
Granted (1)	1,061		$	82.09
Vested	(1,108	)	$	54.42
Forfeited or not earned	(322	)	$	63.98
Balance of outstanding restricted stock units March 31, 2019	2,915		$	76.48



	Three months ended					Six months ended
Calculation of Basic and Diluted EPS	March 30, 2019			March 31, 2018		March 30, 2019			March 31, 2018
	(in thousands, except per share data)
Net income (loss)	$	(43,513	)	$	7,922	$	(22,528	)	$	21,799
Weighted average shares outstanding—Basic	118,461			116,241		118,392			115,986
Dilutive effect of restricted stock units	—			1,664		—			1,794
Weighted average shares outstanding—Diluted	118,461			117,905		118,392			117,780
Earnings (loss) per share—Basic	$	(0.37	)	$	0.07	$	(0.19	)	$	0.19
Earnings (loss) per share—Diluted	$	(0.37	)	$	0.07	$	(0.19	)	$	0.19



	Contingent Consideration
	(in thousands)
	Kepware			Other		Total
Balance, October 1, 2017	$	8,400		$	—	$	8,400
Addition to contingent consideration	—			2,100		2,100
Payment of contingent consideration	(3,757		)	—		(3,757		)
Balance, March 31, 2018	$	4,643		$	2,100	$	6,743



Derivatives Designated as Hedging Instruments	Gain or (Loss) Recognized in OCI-Effective Portion					Location of Gain or (Loss) Reclassified from OCI into Income-Effective Portion	Gain or (Loss) Reclassified from OCI into Income-Effective Portion					Location of Gain or (Loss) Recognized-Ineffective Portion	Gain or (Loss) Recognized-Ineffective Portion
	Three months ended						Three months ended						Three months ended
	March 30, 2019		March 31, 2018				March 30, 2019		March 31, 2018				March 30, 2019		March 31, 2018
Forward Contracts	$	—	$	(2,339	)	Total software revenue	$	—	$	(1,728	)	Other income (expense), net	$	—	$	(16	)

	Six months ended						Six months ended						Six months ended
	March 30, 2019		March 31, 2018				March 30, 2019		March 31, 2018				March 30, 2019		March 31, 2018
Forward Contracts	$	187	$	(3,382	)	Total software revenue	$	627	$	(2,382	)	Other income (expense), net	$	—	$	(35	)



	As Reported ASC 606 ⁽¹⁾		ASC 605		As Reported ASC 605		As Reported ASC 605
	March 30, 2019		March 30, 2019		September 30, 2018		March 31, 2018
	(Dollar amounts in millions)
Deferred revenue (billed)	$	392	$	554	$	499	$	498
Unbilled deferred revenue ⁽²⁾	579		769		911		765
Total	$	971	$	1,323	$	1,410	$	1,263



Period (1)	Total Number of Shares (or Units) Purchased	Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
December 30, 2018 - January 26, 2019	18,430	$	81.77	18,430	$398,500,360 (2)
January 27, 2019 - February 23, 2019	367,368	$	87.76	367,368	$366,252,574 (2)
February 24, 2019 - March 30, 2019	339,689	$	91.89	339,689	$335,005,304 (2)
Total	725,397	$	89.83	725,397	$335,005,304 (2)