UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

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

31, 2021

☐

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. Yes☑ No ☐

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

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



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

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

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

There were ~~115,695,431~~116,854,806 shares of our common stock outstanding on ~~May 4, 2020.~~

April 30, 2021.

PTC Inc.

INDEX TO FORM 10-Q

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

31, 2021

			Page Number

	~~Page~~ ~~Number~~
Part I—FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Consolidated Financial Statements:		1
	Consolidated Balance Sheets as of March ~~28, 2020~~31, 2021 and September 30, ~~2019~~2020		1
	Consolidated Statements of Operations for the three and six months ended March ~~28, 2020~~31, 2021 and March ~~30, 2019~~28, 2020		2
	Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended March ~~28, 2020~~31, 2021 and March ~~30, 2019~~28, 2020		3
	Consolidated Statements of Cash Flows for the six months ended March ~~28, 2020~~31, 2021 and March ~~30, 2019~~28, 2020		4
	Consolidated Statements of Stockholders' Equity for the three and six months ended March ~~28, 2020~~31, 2021 and March ~~30, 2019~~28, 2020		5
	Notes to Condensed Consolidated Financial Statements	6	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28	25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	40	37
Item 4.	Controls and Procedures	40	37


Part II—OTHER INFORMATION
Item 1.	Legal Proceedings		38
Item 1A.	Risk Factors	41	38
Item 6.	Exhibits	43	38
Signature		44	39

Table of Contents

PART I—FINANCIAL INFORMATION


ITEM 1.	UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PTC Inc.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)

	March 31, 2021			September 30, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	326,081		$	275,458
Short-term marketable securities		0			28,129
Accounts receivable, net of allowance for doubtful accounts of $520 and $543 at March 31, 2021 and September 30, 2020, respectively		434,533			415,221
Prepaid expenses		86,719			69,408
Other current assets		54,430			45,231
Total current assets		901,763			833,447
Property and equipment, net		97,260			101,499
Goodwill		2,193,632			1,625,786
Acquired intangible assets, net		410,310			237,570
Long-term marketable securities		0			30,970
Deferred tax assets		182,176			190,963
Operating right-of-use lease assets		148,684			149,933
Other assets		247,396			212,570
Total assets	$	4,181,221		$	3,382,738
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	22,230		$	24,910
Accrued expenses and other current liabilities		124,244			96,313
Accrued compensation and benefits		94,641			101,087
Accrued income taxes		16,707			7,011
Deferred revenue		480,861			416,804
Short-term lease obligations		28,137			34,635
Total current liabilities		766,820			680,760
Long-term debt		1,508,389			1,005,314
Deferred tax liabilities		11,270			12,431
Deferred revenue		11,560			9,661
Long-term lease obligations		178,247			180,388
Other liabilities		54,402			55,936
Total liabilities		2,530,688			1,944,490
Commitments and contingencies (Note 15)
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; NaN issued		0			0
Common stock, $0.01 par value; 500,000 shares authorized; 116,855 and 116,125 shares issued and outstanding at March 31, 2021 and September 30, 2020, respectively		1,169			1,161
Additional paid-in capital		1,676,791			1,602,728
Retained earnings (accumulated deficit)		70,510			(62,267	)
Accumulated other comprehensive loss		(97,937	)		(103,374	)
Total stockholders’ equity		1,650,533			1,438,248
Total liabilities and stockholders’ equity	$	4,181,221		$	3,382,738

~~(unaudited)~~

March 28,
2020 September 30,
2019
ASSETS

Current assets:

Cash and cash equivalents $ 826,776
$ 269,579
Short-term marketable securities 34,254
27,891
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 66,854
52,701
Other current assets 60,869
59,707
Total current assets 1,341,426
782,621
Property and equipment, net 104,147
105,531
Goodwill 1,603,081
1,238,179
Acquired intangible assets, net 251,191
169,949
Long-term marketable securities 22,687
29,544
Deferred tax assets 202,683
198,634
Operating right-of-use lease assets 157,016
—
Other assets 184,240
140,130
Total assets $ 3,866,471
$ 2,664,588
LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable $ 33,728
$ 42,442
Accrued expenses and other current liabilities 115,278
104,028
Accrued compensation and benefits 83,904
88,769
Accrued income taxes 15,963
17,407
Current portion of long-term debt 496,435
—
Deferred revenue 407,412
385,509
Short-term lease obligations 39,452
—
Total current liabilities 1,192,172
638,155
Long-term debt 1,134,287
669,134
Deferred tax liabilities 19,541
41,683
Deferred revenue 9,790
11,123
Long-term lease obligations 184,706
—
Other liabilities 51,894
102,495
Total liabilities 2,592,390
1,462,590
Commitments and contingencies (Note 15)

Stockholders’ equity:

Preferred stock, $0.01 par value; 5,000 shares authorized; none issued —
—
Common stock, $0.01 par value; 500,000 shares authorized; 115,695 and 114,899 shares issued and outstanding at March 28, 2020 and September 30, 2019, respectively 1,157
1,149
Additional paid-in capital 1,536,770
1,502,949
Accumulated deficit (150,351 ) (191,390 )
Accumulated other comprehensive loss (113,495 ) (110,710 )
Total stockholders’ equity 1,274,081
1,201,998
Total liabilities and stockholders’ equity $ 3,866,471
$ 2,664,588

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

Table of Contents

PTC Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three months ended						Six months ended
	March 31, 2021			March 28, 2020			March 31, 2021			March 28, 2020
Revenue:
License	$	198,011		$	127,607		$	375,186		$	251,037
Support and cloud services		223,756			196,473			440,002			387,409
Total software revenue		421,767			324,080			815,188			638,446
Professional services		40,018			35,523			75,648			77,267
Total revenue		461,785			359,603			890,836			715,713
Cost of revenue:
Cost of license revenue		14,160			13,873			27,416			27,046
Cost of support and cloud services revenue		39,972			34,264			78,314			73,192
Total cost of software revenue		54,132			48,137			105,730			100,238
Cost of professional services revenue		35,316			34,890			70,548			70,194
Total cost of revenue		89,448			83,027			176,278			170,432
Gross margin		372,337			276,576			714,558			545,281
Operating expenses:
Sales and marketing		129,178			107,438			253,903			215,042
Research and development		72,545			59,954			143,380			125,262
General and administrative		60,805			33,629			110,333			78,186
Amortization of acquired intangible assets		7,650			7,288			14,197			14,065
Restructuring and other charges, net		469			18,242			716			32,276
Total operating expenses		270,647			226,551			522,529			464,831
Operating income		101,690			50,025			192,029			80,450
Interest and debt premium expense		(12,925	)		(32,618	)		(24,444	)		(44,716	)
Other expense, net		(2,408	)		(1,629	)		(3,821	)		(925	)
Income before income taxes		86,357			15,778			163,764			34,809
Provision (benefit) for income taxes		(22,905	)		8,622			30,987			(7,802	)
Net income	$	109,262		$	7,156		$	132,777		$	42,611
Earnings per share—Basic	$	0.94		$	0.06		$	1.14		$	0.37
Earnings per share—Diluted	$	0.92		$	0.06		$	1.13		$	0.37
Weighted-average shares outstanding—Basic		116,777			115,606			116,587			115,401
Weighted-average shares outstanding—Diluted		118,331			116,017			117,966			115,856

~~(unaudited)~~

Three months ended Six months ended
March 28,
2020 March 30,
2019 March 28,
2020 March 30,
2019
Revenue:
License $ 127,607
$ 61,876
$ 251,037
$ 167,198
Support and cloud services 196,473
187,645
387,409
375,566
Total software revenue 324,080
249,521
638,446
542,764
Professional services 35,523
40,930
77,267
82,376
Total revenue 359,603
290,451
715,713
625,140
Cost of revenue:

Cost of license revenue 13,873
12,875
27,046
25,438
Cost of support and cloud services revenue 34,264
32,874
73,192
64,071
Total cost of software revenue 48,137
45,749
100,238
89,509
Cost of professional services revenue 34,890
34,155
70,194
67,747
Total cost of revenue 83,027
79,904
170,432
157,256
Gross margin 276,576
210,547
545,281
467,884
Operating expenses:

Sales and marketing 107,438
103,722
215,042
207,940
Research and development 59,954
61,402
125,262
122,184
General and administrative 33,629
35,371
78,186
73,235
Amortization of acquired intangible assets 7,288
5,930
14,065
11,866
Restructuring and other charges, net 18,242
26,980
32,276
45,473
Total operating expenses 226,551
233,405
464,831
460,698
Operating income (loss) 50,025
(22,858 ) 80,450
7,186
Interest and debt premium expense (32,618 ) (11,383 ) (44,716 ) (21,659 )
Other income (expense), net (1,629 ) 821
(925 ) 1,475
Income (loss) before income taxes 15,778
(33,420 ) 34,809
(12,998 )
Provision (benefit) for income taxes 8,622
10,093
(7,802 ) 9,530
Net income (loss) $ 7,156
$ (43,513 ) $ 42,611
$ (22,528 )
Earnings (loss) per share—Basic $ 0.06
$ (0.37 ) $ 0.37
$ (0.19 )
Earnings (loss) per share—Diluted $ 0.06
$ (0.37 ) $ 0.37
$ (0.19 )
Weighted-average shares outstanding—Basic 115,606
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.

Table of Contents

PTC Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

	Three months ended						Six months ended
	March 31, 2021			March 28, 2020			March 31, 2021			March 28, 2020
Net income	$	109,262		$	7,156		$	132,777		$	42,611
Other comprehensive income (loss), net of tax:
Hedge gain (loss) arising during the period, net of tax of $0 million and $0.2 million in the second quarter of 2021 and 2020, respectively, and $0 million and $0.9 million in the first six months of 2021 and 2020, respectively		7,017			701			238			(2,642	)
Foreign currency translation adjustment, net of tax of $0 for each period		(15,851	)		(10,559	)		4,124			(412	)
Unrealized loss on marketable securities, net of tax of $0 for each period		0			(537	)		(307	)		(544	)
Amortization of net actuarial pension loss included in net income, net of tax of $0.3 million and $0.3 million in the second quarter of 2021 and 2020, respectively, and $0.6 million and $0.6 million in the first six months of 2021 and 2020, respectively		744			680			1,476			1,354
Change in unamortized pension loss during the period related to changes in foreign currency		1,018			81			(94	)		(541	)
Other comprehensive income (loss)		(7,072	)		(9,634	)		5,437			(2,785	)
Comprehensive income (loss)	$	102,190		$	(2,478	)	$	138,214		$	39,826

~~(unaudited)~~

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

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

Table of Contents

PTC Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Six months ended
	March 31, 2021			March 28, 2020
Cash flows from operating activities:
Net income	$	132,777		$	42,611
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		40,169			40,193
Amortization of right-of-use lease assets		18,956			19,143
Stock-based compensation		90,828			48,420
Other non-cash items, net		(720	)		(1,695	)
Changes in operating assets and liabilities, excluding the effects of acquisitions:
Accounts receivable		(9,854	)		20,187
Accounts payable and accrued expenses		6,142			6,583
Accrued compensation and benefits		(7,038	)		(4,629	)
Deferred revenue		52,210			17,393
Accrued income taxes		(4,944	)		(43,815	)
Other current assets and prepaid expenses		(17,049	)		681
Operating lease liabilities		(9,982	)		(671	)
Other noncurrent assets and liabilities		(56,041	)		(49,072	)
Net cash provided by operating activities		235,454			95,329
Cash flows from investing activities:
Additions to property and equipment		(8,242	)		(10,243	)
Purchases of short- and long-term marketable securities		(7,562	)		(10,151	)
Proceeds from sales of short- and long-term marketable securities		56,170			0
Proceeds from maturities of short- and long-term marketable securities		9,861			9,971
Acquisitions of businesses, net of cash acquired		(717,198	)		(468,520	)
Other investing activities		(3,353	)		2,200
Net cash used in investing activities		(670,324	)		(476,743	)
Cash flows from financing activities:
Proceeds from issuance of Senior Notes		0			1,000,000
Borrowings under credit facility		600,000			455,000
Repayments of borrowings under credit facility		(98,000	)		(480,000	)
Proceeds from issuance of common stock		10,484			8,980
Debt issuance costs		0			(16,266	)
Payments of withholding taxes in connection with stock-based awards		(27,242	)		(23,571	)
Payments of principal for financing leases		(279	)		0
Net cash provided by financing activities		484,963			944,143
Effect of exchange rate changes on cash, cash equivalents and restricted cash		543			(5,740	)
Net change in cash, cash equivalents, and restricted cash		50,636			556,989
Cash, cash equivalents, and restricted cash, beginning of period		275,960			270,689
Cash, cash equivalents, and restricted cash, end of period	$	326,596		$	827,678

~~(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.

Table of Contents

PTC Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

	Three months ended March 31, 2021
	Common Stock								Retained			Accumulated
	Shares			Amount		Additional Paid-In Capital			Earnings (Accumulated Deficit)			Other Comprehensive Loss			Total Stockholders’ Equity
Balance as of December 31, 2020		116,664		$	1,167	$	1,623,379		$	(38,752	)	$	(90,865	)	$	1,494,929
Common stock issued for employee stock-based awards		60			1		(1	)		—		��	—			—
Shares surrendered by employees to pay taxes related to stock-based awards		(13	)		—		(1,810	)		—			—			(1,810	)
Common stock issued for employee stock purchase plan		144			1		10,483			—			—			10,484
Compensation expense from stock-based awards		—			—		44,740			—			—			44,740
Net income		—			—		—			109,262			—			109,262
Unrealized gain on net investment hedges, net of tax		—			—		—			—			7,017			7,017
Foreign currency translation adjustment		—			—		—			—			(15,851	)		(15,851	)
Change in pension benefits, net of tax		—			—		—			—			1,762			1,762
Balance as of March 31, 2021		116,855		$	1,169	$	1,676,791		$	70,510		$	(97,937	)	$	1,650,533

	Six months ended March 31, 2021
	Common Stock									Retained			Accumulated
	Shares			Amount			Additional Paid-In Capital			Earnings (Accumulated Deficit)			Other Comprehensive Loss			Total Stockholders’ Equity
Balance as of September 30, 2020		116,125		$	1,161		$	1,602,728		$	(62,267	)	$	(103,374	)	$	1,438,248
Common stock issued for employee stock-based awards		862			9			(9	)		—			—			—
Shares surrendered by employees to pay taxes related to stock-based awards		(276	)		(2	)		(27,239	)		—			—			(27,241	)
Common stock issued for employee stock purchase plan		144			1			10,483			—			—			10,484
Compensation expense from stock-based awards		—			—			90,828			—			—			90,828
Net income		—			—			—			132,777			—			132,777
Unrealized gain on net investment hedges, net of tax		—			—			—			—			238			238
Foreign currency translation adjustment		—			—			—			—			4,124			4,124
Unrealized loss on available-for-sale securities, net of tax		—			—			—			—			(307	)		(307	)
Change in pension benefits, net of tax		—			—			—			—			1,382			1,382
Balance as of March 31, 2021		116,855		$	1,169		$	1,676,791		$	70,510		$	(97,937	)	$	1,650,533

Table of Contents

	Three months ended March 28, 2020
	Common Stock											Accumulated
	Shares			Amount		Additional Paid-In Capital			Accumulated Deficit			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

~~(unaudited)~~

	Six months ended March 28, 2020
	Common Stock												Accumulated
	Shares			Amount			Additional Paid-In Capital			Accumulated Deficit			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 available-for-sale 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 28, 2020
Common Stock
Additional
Paid-in
Capital

Accumulated
Deficit

Accumulated
Other
Comprehensive
Loss

Total
Stockholders’
Equity
Shares Amount
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
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
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
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.

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PTC Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation

General

The accompanying unaudited condensed consolidated financial statements include the accounts of PTC Inc. and its wholly owned subsidiaries and have been prepared by management in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and in accordance with the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. While we believe that the disclosures presented are adequate in order to make the information not misleading, these unaudited quarterly financial statements should be read in conjunction with our annual consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, ~~2019.~~2020. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair statement of our financial position, results of operations and cash flows at the dates and for the periods indicated. The September 30, ~~2019~~2020 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~~In the first quarter of 2021, we changed our fiscal calendar from thirteen-week quarters ~~end~~ending on a Saturday ~~following~~to three-month quarters ending on the last calendar day of the third month. There was no change to our fiscal year-end. We do not expect that this change will materially impact comparability of our financial results for fiscal years 2021 and 2020. Because our fiscal year-end did not change, we were not required to file a ~~thirteen-week calendar~~transition report.The second quarter of 2021 ended on March 31, 2021 and ~~may result in different quarter end dates year to year. The~~ the second quarter of 2020 ended on March 28, ~~2020 and the~~ ~~second~~ ~~quarter of 2019 ended on March 30, 2019.~~2020. The results of operations for the six months ended March ~~28, 2020~~31, 2021 are not necessarily indicative of the results expected for the remainder of the fiscal year.

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

Risks and Uncertainties - COVID-19 Pandemic

In December 2019, ~~a novel strain of coronavirus, now referred to as~~the virus that causes COVID-19 surfaced. The virus has spread ~~to over 100 countries,~~worldwide, including in 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 of the COVID-19 pandemic as of March ~~28, 2020~~31, 2021 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~~our assessment did not result in a material impact to our consolidated financial statements as of and for the quarter ended March ~~28, 2020, resulting from our assessments,~~31, 2021, our future assessment ~~of our current expectations at that time of the magnitude and duration of COVID-19, as well as other factors,~~ could result in material impacts to our consolidated financial statements in future reporting periods.

~~Recent Accounting Pronouncements~~

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Recently Adopted Accounting Pronouncements

~~Leases~~

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

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

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

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

~~Pending Accounting Pronouncements~~

Intangibles—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~~We adopted the new standard ~~will be~~prospectively effective ~~for us in~~October 1, 2020. As a result of the ~~first quarter of 2021. Entities can choose~~adoption, we are required to adopt the new guidance prospectively or retrospectively. We plan to adopt this standard using the prospective adoption approach. We are currently evaluating the effects of this pronouncement on our consolidated financial statements.

~~Fair Value Measurement~~

~~In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes~~capitalize certain costs related to the ~~Disclosure Requirements for Fair Value Measurement,~~implementation of cloud computing arrangements. Capitalized costs related to cloud computing arrangements, which ~~eliminates, modifies and adds disclosure requirements for fair value measurements. The new standard will be effective for us~~are included in other assets on the ~~first quarter~~Consolidated Balance Sheets, were not material as of ~~2021. We do not expect this ASU to have a material impact on our consolidated financial statements.~~

March 31, 2020.

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 (ASC 326), which, along with subsequent amendments, ~~which replace~~replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information when recording credit loss estimates. We adopted the new standard effective October 1, 2020, with no impact on our consolidated financial statements.

Pending Accounting Pronouncements

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides optional guidance for contract modifications and certain hedging relationships associated with the transition from reference rates that are expected to be discontinued. ASU 2020-04 is effective for all entities upon issuance through December 31, 2022. We are still evaluating the impact, but do not expect the standard to have a material impact on our consolidated financial statements.

Income Taxes

In December 2019, the FASB issued Accounting Standards Update ASU 2019-12, Income Taxes (Topic 740) on Simplifying the Accounting for Income Taxes. The decisions reflected in ASU 2019-12 update specific areas of ASC 740, Income Taxes, to reduce complexity while maintaining or improving the usefulness of the information provided to users of financial statements. The new standard will be effective for us in the first quarter of ~~2021.~~ 2022, though early adoption of the amendments is permitted. We are currently evaluating the impact the standard will have on our consolidated financial statements, but at this time we do not expect it to be ~~significant.~~

material.

2. Revenue from Contracts with Customers

Contract Assets and Contract Liabilities


(in thousands)	March 28, 2020		September 30, 2019		March 31, 2021		September 30, 2020
Contract asset	$	19,582	$	21,038	$	10,328	$	11,984
Deferred revenue	$	417,202	$	396,632	$	492,421	$	426,465

As of March ~~28, 2020,~~31, 2021, $7.6 million of our contract assets are expected to be transferred to receivables within the next 12 months and therefore are included in other current assets. The remainder is included in other long-term assets and expected to be transferred within the next 24 months. Approximately ~~$10.2~~$6.3 million of the September 30, ~~2019~~2020 contract asset balance was transferred to receivables during the six months ended March ~~28, 2020~~31, 2021 as a result of the right to payment becoming unconditional.Additions to contract assets of approximately $4.6 million related to revenue recognized in the period, net of billings. The majority of the contract asset balance relates to two large professional services contracts with invoicing terms based on performance milestones. ~~Additions to contract assets of approximately $8.8 million related to revenue recognized in the period, net of billings.~~ There were no0 impairments of contract assets during the six months ended March ~~28, 2020.~~31, 2021.

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During the six months ended March ~~28, 2020,~~31, 2021, we recognized ~~$283.4~~$302.9 million of revenue that was included in deferred revenue as of September 30, ~~2019~~2020 and there were additional deferrals of ~~$301.3~~$353.3 million, ~~during the six months ended March 28, 2020,~~ primarily related to new billings. In addition, deferred revenue increased by ~~an immaterial amount~~$15.5 million as a result of the acquisition of ~~Onshape.~~Arena. For subscription contracts, we generally invoice customers annually. The balance of total short- and long-term receivables as of September 30, ~~2019~~2020 was ~~$412.5~~$511.3 million, compared to total short- and long-term receivables as of March ~~28, 2020~~31, 2021 of ~~$431.0~~$578.1 million.

Our multi-year, non-cancellable on-premise subscription contracts provide customers with an annual right to exchange software within the subscription with other software. Although the exchange right is limited to software products within a similar product grouping, the exchange right is not limited to products with substantially similar features and functionality as those originally delivered. We determined that this right to exchange previously delivered software for different software represents variable consideration to be accounted for as a liability. We have identified a standard portfolio of contracts with common characteristics and applied the expected value method of determining variable consideration associated with this right. Additionally, where there are isolated situations that are outside of the standard portfolio of contracts due to contract size, longer contract duration, or other unique contractual terms, we use the most likely amount method to determine the amount of variable consideration. In both circumstances, the variable consideration included in the transaction price is constrained to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. As of March ~~28, 2020~~31, 2021 and September 30, ~~2019,~~2020, the total refund liability was ~~$30.2~~$39.6 million and ~~$22.9~~$34.5 million, respectively, primarily associated with the annual right to exchange on-premise subscription software.

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Effective October 1, 2020, we adopted ASC 326, Financial Instruments—Credit Losses, which replaces the incurred loss impairment model with an expected loss model that requires the use of forward-looking information to calculate credit loss estimates. In determining the adequacy of the allowance for doubtful accounts, management specifically analyzes individual accounts receivable, historical bad debts, customer concentrations, customer credit-worthiness, current economic conditions, and accounts receivable aging trends. Our allowance for doubtful accounts on trade accounts receivable was $0.5 million as of March 31, 2021 and September 30, 2020. Uncollectible trade accounts receivable written-off and bad debt expense were immaterial in the three and six months ended March 31, 2021.

Costs to Obtain ~~or Fulfill~~ a Contract

We recognize an asset for the incremental costs of obtaining a contract with a customer if the benefit of those costs is expected to be longer than one year. These deferred costs ~~(primarily commissions) are amortized proportionately related~~primarily relate 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.commissions. As of March ~~28, 2020~~31, 2021 and September 30, ~~2019,~~2020, deferred costs to obtain a contract of ~~$29.7~~$41.0 million and ~~$27.7~~$33.9 million, respectively, ~~were~~are included in other current assets and ~~$65.7~~$73.4 million and ~~$64.8~~$72.9 million, respectively, ~~were~~are included in other assets (non-current).

Amortization expense related to costs to obtain a contract with a customer was $11.0 million and $21.4 million in the three and six months ended March 31, 2021, respectively, and $8.5 million and $16.2 million in the three and six months ended March 28, 2020, respectively. There were 0 impairments of the contract cost asset in the three and six months ended March 31, 2021 and March 28, 2020.

Remaining Performance Obligations

Our contracts with customers include amounts allocated to performance obligations that will be satisfied at a later date. As of March ~~28, 2020,~~31, 2021, the amounts include ~~additional~~ performance obligations of ~~$417.2~~$492.4 million recorded in deferred revenue and ~~$608.8~~$894.5 million that are not yet recorded in the ~~consolidated balance sheets.~~Consolidated Balance Sheets. We expect to recognize approximately ~~90%~~85% of the total ~~$1,026.0~~$1,386.9 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~~this cancellation right for substantially all new contracts. Remaining performance obligations do not include the cancellable value for subscriptions which contain this ~~clause.~~

cancellation right.

Disaggregation of Revenue

(in thousands)	Three months ended				Six months ended
	March 31, 2021		March 28, 2020		March 31, 2021		March 28, 2020
Recurring revenue⁽¹⁾	$	414,845	$	315,862	$	799,803	$	621,230
Perpetual license		6,922		8,218		15,385		17,216
Professional services		40,018		35,523		75,648		77,267
Total revenue	$	461,785	$	359,603	$	890,836	$	715,713

(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

(1)	Recurring revenue is comprised of subscription, perpetual support, SaaS, and cloud revenue.

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

3. Restructuring and Other Charges

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

For the ~~second quarter~~three and ~~first~~six months ended March 31, 2021, restructuring and other charges, net totaled $0.5 million and $0.7 million, respectively, of which $0.2million and $0.4 million is attributable to restructuring charges, respectively, and $0.3 million and $0.3 million is attributable to impairment and accretion expense related to exited facilities, respectively.

For the three and 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~~attributable 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~~include $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

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. The restructuring plan resulted in charges of $30.8 million through fiscal year 2020 for termination benefits associated with approximately 250 employees. During the six months ended March ~~28, 2020,~~31, 2021, we incurred ~~$31.5~~charges of $0.2 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 opportunities. As this was a realignment of resources rather than a cost-savings initiative, it did not result in significant cost savings. The restructuring plan was completed in the first quarter of 2019 and resulted in restructuring charges of $16.3 million for termination benefits associated with approximately 240 employees, substantially all of which has been paid. In the second quarter of 2020, we recorded $0.1 million of credits related to this restructuring plan.

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

The following table summarizes restructuring accrual activity for the six months ended March ~~28, 2020:~~31, 2021:

(in thousands)	Employee Severance and Related Benefits			Facility Closures and Related Costs			Total
Accrual, October 1, 2020	$	3,992		$	5,995		$	9,987
Charges to operations, net		163			199			362
Cash disbursements		(3,924	)		(1,497	)		(5,421	)
Foreign exchange impact		31			14			45
Accrual, March 31, 2021	$	262		$	4,711		$	4,973

(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

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
Accrual, October 1, 2019	$	298		$	30,788		$	31,086
ASC 842 adoption		0			(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		0			(281	)		(281	)
Foreign exchange impact		153			(5	)		148
Accrual, March 28, 2020	$	17,485		$	7,183		$	24,668

(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

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

~~Upon adoption~~Table of ~~ASC 842, $16.5 million of accrued expenses~~Contents

Of the accrual for facility closures 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.~~

Asrelated costs, 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,~~31, 2021, $2.6 million is included in accrued expenses and other current liabilities and ~~$4.6~~$2.1 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.

~~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 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, including performance-based awards, as ~~the~~our principal equity incentive ~~awards, including performance-based awards that are earned based on~~awards.

The following table shows RSU activity for the six months ended March 31, 2021:

(in thousands, except grant date fair value data)	Number of RSUs			Weighted-Average Grant Date Fair Value Per RSU
Balance of outstanding restricted stock units, October 1, 2020		3,509		$	79.13
Granted⁽¹⁾		1,004		$	103.64
Vested		(861	)	$	79.86
Forfeited or not earned		(67	)	$	80.39
Balance of outstanding restricted stock units, March 31, 2021		3,585		$	85.91

(1)	Restricted stock granted includes 33,000 shares from prior period TSR awards that were earned upon achievement of the performance criteria and vested in November 2020.

The following table presents the number of ~~performance criteria established by the Compensation Committee of our Board of Directors. Each RSU represents the contingent right to receive 1 share of our common stock.~~

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

granted by award type:

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

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

Restricted stock unit activity for the 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

(in thousands) Restricted Stock Units
Grant Period
Performance-based RSUs ⁽¹⁾

Service-based RSUs ⁽²⁾

Total Shareholder Return RSUs ⁽³⁾
First six months of 2020 97 1,155 97

~~_________________~~

(in thousands)	Six months ended March 31, 2021
Performance-based RSUs⁽¹⁾		90
Service-based RSUs⁽²⁾		791
Total Shareholder Return RSUs⁽³⁾		90

(1)

The performance-based RSUs were granted to our executives and are eligible to vest based upon annual ~~increasing~~ performance measures over a three-year~~three-year period. RSUs not earned in either of the first two measurement periods may be earned in the third~~ period. To the extent earned, those performance-based RSUs will vest in 3 substantially equal installments on November 15, ~~2020, November 15,~~ 2021, 2022 and ~~November 15, 2022,~~2023, or the date the Compensation Committee determines the extent to which the applicable performance criteria have been achieved for each performance period. Up to a maximum of two times the number of RSUs can be earned (a maximum aggregate of ~~195 thousand~~179,000 RSUs).

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

(3)

~~(3)~~

The Total Shareholder Return RSUs (TSR RSUs) were granted to our executives ~~pursuant~~and are eligible to vest based on the performance of PTC stock relative to the ~~terms described below.~~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, 2021, 2022 and 2023, respectively. The RSUs earned for each period will vest on November 15, 2021, 2022, and 2023. 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 179,000 RSUs) may vest. If the return to PTC shareholders is negative for a period but still meets or exceeds the peer group indexed return, a maximum of 100% of the eligible TSR RSUs may vest for the measurement period.

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~~$124.04 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.

model.

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



Average volatility of peer group	~~28.0~~	41.5	%
Risk free interest rate	~~1.59~~	0.21	%
Dividend yield	—	0	%

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

(in thousands)	Three months ended				Six months ended
	March 31, 2021		March 28, 2020		March 31, 2021		March 28, 2020
Cost of license revenue	$	20	$	11	$	40	$	11
Cost of support and cloud services revenue		2,309		1,524		4,611		3,010
Cost of professional services revenue		2,177		1,465		4,289		3,022
Sales and marketing		13,305		7,146		28,304		14,598
Research and development		7,921		4,765		16,364		11,697
General and administrative		19,008		5,573		37,220		16,082
Total stock-based compensation expense	$	44,740	$	20,484	$	90,828	$	48,420

(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

Stock-based compensation expense includes $1.8 million and $3.8 million in the second quarter and first six months of 2021, respectively, and $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,~~ related to ~~the ESPP.~~

our employee stock purchase plan.

5. Earnings per Share (EPS) and Common Stock

EPS

~~Basic EPS is calculated by dividing net income by~~

The following table presents the ~~weighted-average number of~~calculation for both basic and diluted EPS:

(in thousands, except per share data)	Three months ended				Six months ended
	March 31, 2021		March 28, 2020		March 31, 2021		March 28, 2020
Net income	$	109,262	$	7,156	$	132,777	$	42,611
Weighted-average shares outstanding—Basic		116,777		115,606		116,587		115,401
Dilutive effect of restricted stock units		1,554		411		1,379		455
Weighted-average shares outstanding—Diluted		118,331		116,017		117,966		115,856
Earnings per share—Basic	$	0.94	$	0.06	$	1.14	$	0.37
Earnings per share—Diluted	$	0.92	$	0.06	$	1.13	$	0.37

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

Three months ended 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 )

~~There~~ were ~~331,464 and 90,555 anti-dilutive shares~~immaterial for ~~the three and the~~ ~~six~~ ~~months ended March 28, 2020. For~~ the three and six months ended March ~~30, 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~~31, 2021, respectively, and there were 0.3 and 0.1 million anti-dilutive shares for the ~~periods.~~

three and six months ended March 28, 2020, respectively.

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~~$1 billion of our common stock in the period October 1, ~~2017~~2020 through September 30, ~~2020.~~2023. We did ~~not~~0t repurchase any shares in the second quarter and first six months of 2021 or 2020. ~~We repurchased $65.0 million of our common stock in the second quarter and first six months of 2019.~~ All shares of our common stock repurchased are automatically restored to the status of authorized and unissued.

6. Acquisitions

Acquisition-related costs in the second quarter and first six months of ~~2020~~2021 totaled $10.3 million and $14.2 million, respectively, compared to $0.3 million and $7.4 million, respectively, ~~compared to $0.4 million and $0.8 million, respectively~~ in the second quarter and first six months of 2019. Acquisition-related costs include direct costs of potential and completed acquisitions (e.g., investment banker fees and professional fees, including legal and valuation services) and expenses related to acquisition integration activities (e.g., professional fees and severance). In addition, subsequent adjustments to our initial estimated amount of contingent consideration associated with specific acquisitions are included within acquisition-related charges.2020. 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.

Arena

On January 15, 2021, we acquired Arena Holdings, Inc. (“Arena”) pursuant to the Agreement and Plan of Merger dated as of December 12, 2020 by and among PTC, Arena, Astronauts Merger Sub, Inc.,

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and the Representative named therein, the material terms of which are described in the Form 8-K filed by PTC on December 14, 2020 and which is filed as Exhibit 1.1 to that Form 8-K. PTC paid approximately $715 million, net of cash acquired of $11.3 million, for Arena, which amount was financed with cash on hand and $600 million borrowed under our existing credit facility. Arena had approximately 170 employees on the close date. The acquisition of Arena is expected to add revenue of approximately $40 millionin 2021.

The acquisition of Arena 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 $562.7 million of goodwill, $155.0 million of customer relationships, $38.3 million of purchased software, $4.2 million of trademarks, $41.3 million of deferred tax liabilities, $15.5 million of deferred revenue, $11.4 million of accounts receivable, and $0.4 million of other net liabilities. The acquired customer relationships, purchased software, and trademarks are being amortized over useful lives of 13 years, 9 years, and 12 years, respectively, based on the expected economic benefit pattern of the assets. The acquired goodwill was allocated to our software products segment and will not be deductible for income tax purposes. The resulting amount of goodwill reflects the expected value that will be created by participation in expected future growth of the PLM SaaS market and expansion into the mid-market for PLM, where SaaS solutions are becoming the standard.

Onshape

On November 1, 2019, we ~~completed our acquisition of~~acquired 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 material 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 of $7.5 million, for Onshape, which amount we borrowed under our existing credit facility. Onshape ishad approximately 110 employees on the close date.The acquisition of Onshape did not ~~expected to be~~add material ~~to our 2020 results.~~

revenue in 2020.

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 economic benefit pattern of the assets. The acquired goodwill was allocated to our software products segment and will not be deductible for income tax purposes. The resulting amount of goodwill reflects the expected value that will be created by ~~accelerating~~the expected acceleration of CAD and PLM growth, especially in the ~~low-end~~low end of the market, and ~~participating~~participation in expected future growth inof the CAD and PLM SaaS market.

~~Frustum~~

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

The acquisition of Frustum was accounted for as a business combination. Assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The fair values of intangible assets were based on valuations using a discounted cash flow model which requires the use of significant estimates and assumptions, including estimating future revenues and costs. The excess of the purchase price In addition, 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 yearslonger term, we anticipate building products based on the ~~expected benefit pattern of~~Onshape SaaS technology platform, which is the ~~assets. The acquired goodwill was allocated to our software products segment and will not be deductible~~basis 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.~~

Atlas.

7. Goodwill and Intangible Assets

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

As of March ~~28, 2020,~~31, 2021, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was ~~$1,809.1~~$2,558.7 million and attributable to our Professional Services segment was $45.2 million. As of September 30, ~~2019,~~2020, goodwill and acquired intangible assets in the aggregate

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attributable to our Software Products segment was ~~$1,362.4~~$1,818.1 million and attributable to our Professional Services segment was ~~$45.7~~$45.3 million. ~~Acquired intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.~~

We completed our annual goodwill impairment review as of June ~~29, 2019~~27, 2020 based on a ~~qualitative~~quantitative assessment. ~~Our qualitative assessment included company specific (financial performance and long-range plans), industry, and macroeconomic factors, and consideration~~To conduct these tests of goodwill, the fair value of ~~each~~a reporting unit ~~relative~~is compared to its carrying value. If the reporting unit’s carrying value atexceeds its fair value, we record an impairment loss equal to the ~~last valuation date. Based on our qualitative assessment, we believe it is more likely than not that~~difference between the carrying value of goodwill and its estimated fair value. We estimate the fair values of our reporting units ~~exceed their~~using discounted cash flow valuation models. Those models require estimates of future revenues, profits, capital expenditures, working capital, terminal values based on revenue multiples, and discount rates for each reporting unit. We estimate these amounts by evaluating historical trends; current budgets and operating plans, including consideration of the impact of the COVID-19 pandemic on our future results; and industry data. The estimated fair value of each reporting unit exceeded its carrying value as of June 27, 2020. Through March 31, 2021, there were no events or changes in circumstances that indicated that the carrying values ~~and no further impairment testing is required.~~

of goodwill or acquired intangible assets may not be recoverable.

Goodwill and acquired intangible assets consisted of the following:

(in thousands)	March 31, 2021						September 30, 2020
	Gross Carrying Amount		Accumulated Amortization		Net Book Value		Gross Carrying Amount		Accumulated Amortization		Net Book Value
Goodwill (not amortized)					$	2,193,632					$	1,625,786
Intangible assets with finite lives (amortized):
Purchased software	$	484,190	$	322,869	$	161,321	$	443,275	$	309,124	$	134,151
Capitalized software		22,877		22,877		0		22,877		22,877		0
Customer lists and relationships		575,836		337,194		238,642		418,953		322,092		96,861
Trademarks and trade names		26,959		16,612		10,347		22,687		16,129		6,558
Other		4,019		4,019		0		4,017		4,017		0
Total intangible assets with finite lives	$	1,113,881	$	703,571	$	410,310	$	911,809	$	674,239	$	237,570
Total goodwill and acquired intangible assets					$	2,603,942					$	1,863,356

(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

Goodwill

Changes in goodwill presented by reportable segments were as follows:

(in thousands)	Software Products		Professional Services		Total
Balance, October 1, 2020	$	1,583,316	$	42,470	$	1,625,786
Arena acquisition		562,657		0		562,657
Other acquisitions		963		0		963
Foreign currency translation adjustment		4,116		110		4,226
Balance, March 31, 2021	$	2,151,052	$	42,580	$	2,193,632

(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

Amortization of Intangible Assets

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

(in thousands)	Three months ended				Six months ended
	March 31, 2021		March 28, 2020		March 31, 2021		March 28, 2020
Amortization of acquired intangible assets	$	7,650	$	7,288	$	14,197	$	14,065
Cost of license revenue		7,117		6,879		13,384		13,678
Total amortization expense	$	14,767	$	14,167	$	27,581	$	27,743

(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

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~~in the principal or most advantageous market ~~in which we would transact and consider assumptions that market participants would use when pricing~~for 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. Threeliability. There are three levels of inputs that ~~may be~~are used to measure fair value:

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•

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

~~Level 1:~~

•

Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices ~~(unadjusted)~~ 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 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;

•

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.

~~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~~

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~~

Foreign currency derivative contracts are typically 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~~derivatives is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants are usually ~~are~~ large financial institutions. Our foreign currency ~~contracts’~~derivatives’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. ~~These contracts are typically classified within Level 2 of the fair value hierarchy.~~

Our significant financial assets and liabilities measured at fair value on a recurring basis as of March ~~28, 2020~~31, 2021 and September 30, ~~2019~~2020 were as follows:


(in thousands)	March 28, 2020								March 31, 2021
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Financial assets:
Cash equivalents	$	616,556	$	—	$	—	$	616,556	$	115,533	$	0	$	0	$	115,533
Marketable securities:
Commercial paper	—		1,482		—		1,482
Corporate notes/bonds	55,459		—		—		55,459
Forward contracts	—		2,708		—		2,708
	$	672,015	$	4,190	$	—	$	676,205
Derivative instruments										0		6,846		0		6,846
Convertible note										0		0		1,000		1,000
Total financial assets									$	115,533	$	6,846	$	1,000	$	123,379
Financial liabilities:
Forward contracts	—		4,074		—		4,074			0		4,259		0		4,259
	$	—	$	4,074	$	—	$	4,074
Total financial liabilities									$	0	$	4,259	$	0	$	4,259


(in thousands)	September 30, 2019								September 30, 2020
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Financial assets:
Cash equivalents	$	108,020	$	—	$	—	$	108,020	$	105,299	$	0	$	0	$	105,299
Marketable securities:
Commercial paper	—		999		—		999
Corporate notes/bonds	56,436		—		—		56,436			59,099		0		0		59,099
Forward contracts	—		3,064		—		3,064
	$	164,456	$	4,063	$	—	$	168,519
Derivative instruments										0		903		0		903
Total financial assets									$	164,398	$	903	$	0	$	165,301
Financial liabilities:
Forward contracts	—		2,771		—		2,771			0		1,073		0		1,073
	$	—	$	2,771	$	—	$	2,771
Total financial liabilities									$	0	$	1,073	$	0	$	1,073

~~Non-Marketable Equity~~

Level 3 Debt Investments

~~We account for~~

In the first quarter of 2021, we invested $1.0 million into a non-marketable ~~equity investments at cost, less~~convertible note. This debt security is classified as available-for-sale and is included in other assets on the Consolidated Balance Sheet. There were 0t 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~~this level 3 investment in ~~other income (expense), net on~~ the ~~Consolidated Statements of Operations.~~ three and six months ended March 31, 2021.

Non-Marketable Equity Investments

The carrying value of our non-marketable equity investments is recorded in other assets on the Consolidated Balance Sheets and totaled ~~$9.4~~$8.9 million as of both March ~~28, 2020~~31, 2021 and September 30, ~~2019.~~

2020.

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9. Marketable Securities

We did 0t hold any marketable securities as of March 31, 2021. In December 2020, we sold all our marketable securities to partially fund the Arena acquisition, resulting in proceeds of $56.2 million. Neither gross realized gains nor gross realized losses related to the sale were material. The amortized cost and fair value of marketable securities as of ~~March 28, 2020 and~~ September 30, ~~2019~~2020 were as follows:

(in thousands)

September 30, 2020

Amortized

cost

Gross

unrealized

gains

Gross

unrealized

losses

Fair value

Corporate notes/bonds

58,793

323

(17

)

59,099

(in thousands) March 28, 2020

Amortized cost Gross unrealized
gains Gross unrealized losses Fair value
Commercial paper $ 1,482
$ —
$ —
$ 1,482
Corporate notes/bonds 55,884
85
(510 ) 55,459

$ 57,366
$ 85
$ (510 ) $ 56,941

(in thousands) September 30, 2019

Amortized cost Gross unrealized
gains Gross unrealized losses Fair value
Commercial paper $ 999
$ —
$ —
$ 999
Corporate notes/bonds 56,318
146
(28 ) 56,436

$ 57,317
$ 146
$ (28 ) $ 57,435

Our investment portfolio consists of certificates of deposit, commercial paper, corporate notes/bonds and government securities that have a maximum maturity of 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 28, 2020, the unrealized losses were temporary.~~

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

(in thousands)	September 30, 2020
	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	$	9,841	$	(17	)	$	0	$	0	$	9,841	$	(17	)

(in thousands)

March 28, 2020
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 $ 44,598
$ (510 ) $ —
$ —
$ 44,598
$ (510 )

(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 )

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

(in thousands)	September 30, 2020
	Amortized cost		Fair value
Due in one year or less	$	27,727	$	27,899
Due after one year through three years		31,066		31,200
Total	$	58,793	$	59,099

(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

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 and options, to manage ~~the exposures~~our exposure to foreign currency exchange risk in order to reduce earnings volatility. We do not enter into derivatives transactions for trading or speculative purposes.

The following table shows our derivative instruments measured at gross fair value as reflected in the Consolidated Balance Sheets:

(in thousands)	Fair Value of Derivatives Designated As Hedging Instruments				Fair Value of Derivatives Not Designated As Hedging Instruments
	March 31, 2021		September 30, 2020		March 31, 2021		September 30, 2020
Derivative assets⁽¹⁾:
Forward Contracts	$	2,470	$	3	$	3,414	$	900
Options	$	0	$	0	$	962	$	0
Derivative liabilities⁽²⁾:
Forward Contracts	$	0	$	306	$	4,259	$	767

(1)	As of March 31, 2021 and September 30, 2020, current derivative assets of $6.8 million and $0.9 million, respectively, are recorded in other current assets in the Consolidated Balance Sheets.

(2)	As of March 31, 2021 and September 30, 2020, current derivative liabilities of $4.3 million and $1.1 million, respectively, are recorded in accrued expenses and other current liabilities in the Consolidated Balance Sheets.

Non-Designated Hedges

We hedge our net foreign currency monetary assets and liabilities primarily resulting from foreign currency denominated receivables and payables with foreign exchange forward contracts to reduce

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the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These contracts have maturities of up to approximately ~~seven~~three months. Generally, we

do not designate these foreign currency forward contracts as hedges for accounting purposes and changes in the fair value of these instruments are recognized immediately in earnings. Because we enter into forward contracts only as an economic hedge, any gain or loss on the underlying foreign-denominated balance would be offset by the loss or gain on the forward contract. Gains and losses on forward contracts and foreign denominated receivables and payables are included in other ~~income (expense),~~expense, net.

We hedge our forecasted U.S. Dollar cash flows with foreign exchange options to reduce the risk that they would be adversely affected by changes in Euro exchange rates. These contracts have maturities of up to approximately ten months. We do not designate these foreign currency options as hedges for accounting purposes and changes in the fair value of these instruments are recognized immediately in earnings. Because we enter into options only as an economic hedge, any loss on the underlying Euro-denominated forecasted plan rate would be offset by the gain on the put option. Gains on put options are included in other expense, net.

As of March ~~28, 2020~~31, 2021 and September 30, ~~2019,~~2020, we had outstanding forward contracts and options with notional amounts equivalent to the following:

Currency Hedged (in thousands)	March 31, 2021		September 30, 2020
Canadian / U.S. Dollar	$	5,824	$	6,847
Euro / U.S. Dollar⁽¹⁾		532,906		390,673
British Pound / U.S. Dollar		1,459		6,328
Israeli Shekel / U.S. Dollar		10,115		9,503
Japanese Yen / U.S. Dollar		10,186		50,379
Swiss Franc / U.S. Dollar		2,327		12,874
Swedish Krona / U.S. Dollar		25,564		18,871
Chinese Renminbi / U.S. Dollar		12,523		5,415
Taiwanese Dollar / U.S. Dollar		7,876		1,482
All other		13,506		10,090
Total	$	622,286	$	512,462

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

(1)	As of March 31, 2021, $456.7 million of the Euro to U.S. Dollar outstanding notional amount relates to forward contracts and $76.2 million relates to options. As of September 30, 2020, all of the Euro to U.S. Dollar outstanding notional amount relates to forward contracts.

The following table shows the effect of our non-designated hedges in the Consolidated Statements of Operations for the three and six months ended March ~~28, 2020~~31, 2021 and March ~~30, 2019:~~

Derivatives Not Designated as Hedging Instruments (in thousands)
Location of Gain or (Loss) Recognized in Income Net realized and unrealized gain or (loss) (excluding the underlying foreign currency exposure being hedged)
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 )

~~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.~~2020:

(in thousands)

Three months ended

Six months ended

Location of Gain (Loss)

March 31,

2021

March 28,

2020

March 31,

2021

March 28,

2020

Net realized and unrealized gain (loss), excluding the underlying foreign currency exposure being hedged

Other expense, net

(3,033

)

1,189

(4,620

)

652

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.~~Sheets. 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.~~Sheets. All foreign exchange forward contracts are carried at fair value on the Consolidated Balance ~~Sheet~~Sheets and the maximum duration of net investment hedge foreign exchange forward contracts is approximately three months.

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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 ~~28, 2020~~31, 2021 and September 30, ~~2019,~~2020, we had outstanding forward contracts designated as net investment hedges with notional amounts equivalent to the following:

Currency Hedged (in thousands)

March 31,

2021

September 30,

2020

Euro / U.S. Dollar

165,784

164,885

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

The following table shows the effect of our derivative instruments designated as net investment hedges in the Consolidated Statements of Operations for the ~~second quarter~~three and ~~first~~ six months ended March ~~28, 2020~~31, 2021 and March ~~30, 2019 (in thousands):~~28, 2020:

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

(in thousands)		Three months ended						Six months ended
	Location of Gain (Loss)	March 31, 2021			March 28, 2020			March 31, 2021			March 28, 2020
Gain (loss) recognized in OCI	OCI	$	1,462		$	(2,140	)	$	2,041		$	(5,706	)
Loss reclassified from OCI	OCI		(3,041	)		(6,016	)		(99	)		(6,778	)
Gain recognized, excluded portion	Other expense, net		426			962			733			2,191

As of March ~~28, 2020,~~31, 2021, we estimate that all amounts reported in accumulated other comprehensive loss will be applied against exposed balance sheet accounts upon translation within the next three months.

~~The following table shows our derivative instruments measured at gross fair value as reflected in the Consolidated Balance Sheets:~~

(in thousands) Fair Value of Derivatives Designated As Hedging Instruments Fair Value of Derivatives Not Designated As Hedging Instruments
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


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


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

Offsetting Derivative Assets and Liabilities

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

The following table sets forth the offsetting of derivative assets as of March ~~28, 2020:~~31, 2021:

(in thousands)

Gross Amounts Offset in the Consolidated Balance Sheets

Gross Amounts Not Offset in the Consolidated Balance Sheets

As of March 31, 2021

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

5,884

(4,259

)

1,625

(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 $ 2,708
$ —
$ 2,708
$ (2,708 ) $ —
$ —

The following table sets forth the offsetting of derivative liabilities as of March ~~28, 2020:~~31, 2021:

(in thousands)

Gross Amounts Offset in the Consolidated Balance Sheets

Gross Amounts Not Offset in the Consolidated Balance Sheets

As of March 31, 2021

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

4,259

(4,259

)

(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

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11. Segment and Geographic Information

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

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

(in thousands)	Three months ended						Six months ended
	March 31, 2021			March 28, 2020			March 31, 2021			March 28, 2020
Software Products
Revenue	$	421,767		$	324,080		$	815,188		$	638,446
Operating costs⁽¹⁾		109,310			94,912			214,711			197,104
Profit		312,457			229,168			600,477			441,342

Professional Services
Revenue		40,018			35,523			75,648			77,267
Operating costs⁽²⁾		33,139			33,425			66,259			67,172
Profit		6,879			2,098			9,389			10,095

Total segment revenue		461,785			359,603			890,836			715,713
Total segment costs		142,449			128,337			280,970			264,276
Total segment profit		319,336			231,266			609,866			451,437

Unallocated operating expenses:
Sales and marketing expenses		115,873			100,292			225,599			200,444
General and administrative expenses		31,487			27,795			58,887			54,714
Restructuring and other charges, net		469			18,242			716			32,276
Intangibles amortization		14,767			14,167			27,581			27,743
Stock-based compensation		44,740			20,484			90,828			48,420
Other unallocated operating expenses⁽³⁾		10,310			261			14,226			7,390
Total operating income		101,690			50,025			192,029			80,450

Interest and debt premium expense		(12,925	)		(32,618	)		(24,444	)		(44,716	)
Other expense, net		(2,408	)		(1,629	)		(3,821	)		(925	)
Income before income taxes	$	86,357		$	15,778		$	163,764		$	34,809

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

(2)	Operating costs for the Professional Services segment include all costs of professional services revenue, excluding stock-based compensation.

(3)	Other unallocated operating expenses include acquisition-related and other transactional costs.

(in thousands) Three months ended Six months ended
March 28,
2020 March 30,
2019 March 28,
2020 March 30,
2019
Software Products
Revenue $ 324,080
$ 249,521
$ 638,446
$ 542,764
Operating Costs ⁽¹⁾
94,912
93,913
197,104
185,541
Profit 229,168
155,608
441,342
357,223

Professional Services
Revenue 35,523
40,930
77,267
82,376
Operating Costs ⁽²⁾
33,425
32,326
67,172
64,189
Profit 2,098
8,604
10,095
18,187

Total segment revenue 359,603
290,451
715,713
625,140
Total segment costs 128,337
126,239
264,276
249,730
Total segment profit 231,266
164,212
451,437
375,410

Unallocated operating expenses:
Sales and marketing expenses 100,292
94,200
200,444
188,696
General and administrative expenses 27,795
25,856
54,714
51,627
Restructuring and other charges, net 18,242
26,980
32,276
45,473
Intangibles amortization 14,167
12,772
27,743
25,425
Stock-based compensation 20,484
26,967
48,420
56,374
Other unallocated operating expenses (income) ⁽³⁾
261
295
7,390
629
Total operating income (loss) 50,025
(22,858 ) 80,450
7,186

Interest expense (32,618 ) (11,383 ) (44,716 ) (21,659 )
Other income (expense), net (1,629 ) 821
(925 ) 1,475
Income (loss) before income taxes $ 15,778
$ (33,420 ) $ 34,809
$ (12,998 )

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

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

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

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

(in thousands)	Three months ended				Six months ended
	March 31, 2021		March 28, 2020		March 31, 2021		March 28, 2020
Americas	$	180,329	$	153,993	$	382,609	$	309,967
Europe		202,477		146,422		364,796		282,943
Asia Pacific		78,979		59,188		143,431		122,803
Total revenue	$	461,785	$	359,603	$	890,836	$	715,713

(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

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12. Income Taxes

(in thousands)	Three months ended						Six months ended
	March 31, 2021			March 28, 2020			March 31, 2021			March 28, 2020
Income before income taxes	$	86,357		$	15,778		$	163,764		$	34,809
Provision (benefit) for income taxes	$	(22,905	)	$	8,622		$	30,987		$	(7,802	)
Effective income tax rate		(27	)%		55	%		19	%		(22	)%

In the second quarter and first six months of ~~2020, our effective tax rate was 55% on pre-tax income of $15.8 million~~2021 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 in the~~ ~~second~~ ~~quarter and first~~ ~~six~~ ~~months of 2019, respectively. In the first~~ ~~six~~ ~~months of~~ 2020, ~~and 2019,~~ our effective tax rate differed from the statutory federal income tax rate of 21% due to U.S. tax reform, our corporate structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate, and the excess tax benefit related to stock-based ~~compensation and 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.~~compensation. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland. In ~~2020~~2021 and ~~2019,~~2020, the foreign rate differential predominantly relates to these Irish earnings.

On In addition, the effective tax rate was impacted by the matters described below.

Our results for the six months ended March ~~27, 2020, the U.S. Federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES ACT”). The CARES Act is an emergency economic stimulus package in response~~31, 2021 include a charge of $36.1 million related to the ~~coronavirus outbreak, which among other things contains numerous~~effects of a tax matter in the Republic of Korea (South Korea) of $33.2 million, and the resulting impact on U.S. income taxes of $2.9 million. The charge relates to an assessment with respect to various tax ~~provisions. While we~~issues, primarily foreign withholding taxes, under appeal in South Korea. We received an assessment of approximately $12 million from the tax authorities in South Korea in the fourth quarter of 2016 for the years 2011 to 2015 and paid the assessment in the first quarter of 2017. We appealed that assessment and believed that upon completion of the multi-level appeal process it was more likely than not that our positions would be sustained. However, in December 2020, our appeal to the Seoul High Court (an intermediate appellate court) was rejected. We have appealed this decision to the Supreme Court of the Republic of Korea. We continue to ~~evaluate~~believe that our position is meritorious, and we will aggressively pursue our position with the ~~impact~~Supreme Court.

In the second quarter of 2021, we reduced our previously established U.S. valuation allowance by $42.3 million as a result of the ~~CARES Act,~~Arena acquisition. In the first six months of 2020, we ~~do not currently believe it will have~~reduced our previously established U.S. valuation allowance by $21.2 million as a ~~material impact on our consolidated financial statements or related disclosures.~~

result of the Onshape acquisition.

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. However, we believe that there is a reasonable possibility that within the next 12 months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of any valuation allowance release are subject to change on the basis of the level of profitability that we are able to actually achieve. 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 ~~28, 2020~~31, 2021 and September 30, ~~2019,~~2020, we had unrecognized tax benefits of ~~$13.2~~$47.7 million and ~~$11.5~~$16.1 million, respectively. If all our unrecognized tax benefits as of March ~~28, 2020~~31, 2021 were to become recognizable in the future, we would record a benefit to the income tax provision of ~~$13.2~~$47.7 million, which would be partially offset by an increase in the U.S. valuation allowance of ~~$6.3~~$9.7 million.

Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in favorable or unfavorable changes in our estimates. We believe it is reasonably possible that within the next 12 months the amount of unrecognized tax benefits related to the resolution of multi-jurisdictional tax positions could be reduced by up to ~~$0.5 million as audits close and statutes~~$28 million.

Table 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.

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13. Debt

At March ~~28, 2020~~31, 2021 and September 30, ~~2019,~~2020, we had the following long-term debt obligations:

(in thousands)	March 31, 2021			September 30, 2020
4.000% Senior notes due 2028	$	500,000		$	500,000
3.625% Senior notes due 2025		500,000			500,000
Credit facility revolver⁽¹⁾		520,000			18,000
Total debt		1,520,000			1,018,000
Unamortized debt issuance costs for the senior notes⁽²⁾		(11,611	)		(12,686	)
Total debt, net of issuance costs	$	1,508,389		$	1,005,314

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

(1)
~~(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 ~~$5.5~~$4.4 million and ~~$3.1~~$4.9 million as of March ~~28, 2020~~31, 2021 and September 30, ~~2019,~~2020, respectively, and ~~were~~are included in other assets on the Consolidated Balance Sheets.

(2)

~~(4)~~

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

Senior Notes

In February 2020, we issued $500 million in aggregate principal amount of 4.0% senior, unsecured long-term debt at par value, due in 2028 (the 2028 notes) and $500 million in aggregate principal amount of 3.625% senior, unsecured long-term debt at par value, due in 2025 (the 2025 notes). 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 the outstanding revolving loan under our 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,~~31, 2021, the total estimated fair value of the 2028 ~~2025~~ and ~~2024 senior~~2025 notes was approximately ~~$468.8 million, $471.0~~$508.6 million and ~~$502.5~~$513.4 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 February 15 and August 15. The debt indenture for the 2028 and 2025 notes includes covenants that limit our ability to, among other things, incur additional debt, grant liens on our properties or capital stock, enter into sale and leaseback transactions or asset sales, and make capital distributions.

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

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

31, 2021.

Credit Agreement

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 banks. ~~The new credit facility replaced our prior credit facility. As with the prior credit facility, we~~We expect to use the new credit facility for general corporate purposes, including acquisitions of businesses, share repurchases and working capital requirements. ~~As of March 28, 2020, the fair value of our credit facility approximates its book value.~~

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 is February 13, 2025, when all remaining amounts outstanding will be due and payable. The revolving loan commitment does not require amortization of principal and may be repaid in whole or in part prior to the scheduled maturity date at our option without penalty or premium.

~~PTC Inc. and certain eligible foreign subsidiaries are eligible to borrow under~~ As of March 31, 2021, the ~~credit facility. The obligations under the~~fair value of our credit facility are required to be guaranteed by PTC Inc.’s material domestic subsidiaries that become parties to the subsidiary guaranty, if any. As of the filing of this Form 10-Q, there are no subsidiary guarantors of the obligations under the credit facility. Any borrowings by eligible foreign subsidiary borrowers would be guaranteed by PTC Inc. and any subsidiary guarantors. As of the filing of this Form 10-Q, there were 0 borrowings by eligible foreign subsidiaries. In addition, substantially all existing and after-acquired personal property of PTC Inc. and certain ofapproximates its material domestic subsidiaries that become parties to the subsidiary guaranty, if any, is or will be, in the case of such subsidiary guarantors, subject to first priority perfected liens in favor of the lenders under the credit facility. 100% of the voting equity interests of certain of PTC Inc.’s domestic subsidiaries and 65% of its material first-tier foreign subsidiaries are pledged as collateral for the obligations under the credit facility.

book value.

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 ~~28, 2020,~~31, 2021, the annual rate for borrowings outstanding was ~~2.6%~~1.75%. 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 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 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 million for any purpose and an additional $200 million for acquisitions of businesses. In addition, under the credit facility, PTC and its subsidiaries must maintain the following financial ratios:


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


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


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

As of March ~~28, 2020, our total leverage ratio was 3.36 to 1.00, our senior secured leverage ratio was 0.47 to 1.00 and our interest coverage ratio was 7.86 to 1.00 and~~31, 2021, we were in compliance with all financial and operating covenants of the credit facility.

~~Any failure to comply with the financial or operating covenants~~

We made interest payments on our debt of ~~the credit facility would prevent PTC from being able to borrow additional funds,~~$19.8 million 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$20.5 million in the ~~agreement, also constitutes an event of default, permitting the lenders to accelerate the indebtedness and terminate the credit facility.~~

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

~~In the~~ second quarter and first six months of ~~2020 we paid~~2021, respectively, and $6.8 million and $23.7 million ~~respectively, of interest on our debt. In~~in the second quarter and first six months of ~~2019 we paid $3.8 million and $20.4 million of interest, respectively, on our debt. The average interest rate on borrowings outstanding in the~~ ~~second~~ ~~quarter and first six months of~~ 2020, ~~was approximately 4.6% and 4.8%,~~ respectively. The average interest rate on borrowings outstanding inwas approximately 3.3% and 3.5% during the second quarter and first six months of ~~2019 was approximately 5.3%~~2021, respectively, and ~~5.4%,~~4.6% and 4.8% during the second quarter and first six months of 2020, respectively.

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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 expire at various dates through 2037 and are primarily for office space, cars, servers, and office equipment. We made an election not to separate lease components from non-lease components for office space, servers and office equipment. Finance leases are included in property and equipment, accrued expenses and other current liabilities, and other liabilities on our Consolidated Balance Sheets.

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

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

Our headquarters are located at 121 Seaport Boulevard, Boston, ~~Massachusetts (the Boston lease). The Boston lease is for approximately 250,000 square feet and runs from January 1,~~Massachusetts. In February 2019, we subleased a portion of our headquarters through June 30, ~~2037. Base rent for~~2022. We will receive approximately $9.1 million in sublease income over the ~~first year~~term 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.

sublease.

The components of lease cost reflected in the Consolidated Statement of Operations for the ~~second quarter~~three and ~~first~~ six months ended March 31, 2021 and March 28, 2020 were as follows:

(in thousands)	Three months ended						Six months ended
	March 31, 2021			March 28, 2020			March 31, 2021			March 28, 2020
Operating lease cost	$	9,565		$	10,386		$	18,956		$	19,143
Short-term lease cost		610			1,017			1,158			2,890
Variable lease cost		2,476			575			4,863			2,490
Sublease income		(1,131	)		(1,013	)		(2,215	)		(2,025	)
Total lease cost	$	11,520		$	10,965		$	22,762		$	22,498

(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 related to leases for the three and six months ended March ~~28, 2020~~31, 2021 was as follows:

(in thousands)	Three months ended				Six months ended
	March 31, 2021		March 28, 2020		March 31, 2021		March 28, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	14,016	$	9,642	$	28,076	$	15,140
Financing cash flows from financing leases	$	0	$	0	$	279	$	0
Right-of-use assets obtained in exchange for new lease obligations:
Operating leases⁽¹⁾	$	53	$	87	$	647	$	5,468
Financing leases	$	0	$	0	$	0	$	1,500

(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)

~~(1)~~

~~For~~

In the three months ~~ending~~ended March 31, 2021, operating right-of-use assets also increased by $10.8 million from modifications and extensions to existing leases and by $1.3 million from assets obtained through acquisitions. In the three months ended March 28, 2020, operating right-of-use assets ~~obtained in exchange for new operating lease liabilities is a net reduction to the right-of-use assets~~decreased by $1.3 million due to lease incentives being earned for a right-of-use asset obtained in the first quarter of 2020.

Supplemental balance sheet information related to ~~the~~ leases as of March ~~28, 2020~~31, 2021 was as follows:

	As of March 31, 2021

	~~As of~~
	~~March 28, 2020~~
Weighted-average remaining lease term - operating leases	~~12.32~~ 12.3 years
Weighted-average remaining lease term - financing leases	5 4.5 years
Weighted-average discount rate - operating leases	~~5.5~~	5.5	%
Weighted-average discount rate - financing leases	~~3.0~~	3.0	%

Maturities of operating lease liabilities as of March ~~28, 2020 are~~31, 2021 were as follows:

(in thousands)
Remainder of 2021	$	19,703
2022		34,768
2023		25,111
2024		22,057
2025		19,185
Thereafter		171,047
Total future lease payments	$	291,871
Less: imputed interest		(85,487	)
Total lease liability	$	206,384

(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

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Exited (Restructured) Facilities

As of March ~~28, 2020,~~31, 2021, 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~~had net liabilities of ~~$17.1~~$5.3 million related to excess facilities (compared to ~~$16.5~~$11.3 million at September 30, ~~2019)~~2020), representing ~~$4.5~~$1.9 million of right-of-use assets and ~~$21.6~~$7.2 million of lease obligations, of which ~~$13.3~~$4.7 million is classified as short term and ~~$8.3~~$2.5 million is classified as long term. Variable costs related to these exited facilities are included in our restructuring accrual. All expenses and income associated with exited facilities are included in restructuring and other charges, net (refer to Note 3. Restructuring and Other Charges

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,~~31, 2021, the right-of-use assets for exited facilities reflects discounted committed sublease income of approximately ~~$3.3 million~~$1.9 million.

In the three and uncommitted sublease income of approximately $1.2 million. As a result of changes in our sublease income assumptions and an incremental obligation to exit a portion of our former headquarters facility early, in the threesix months ended March ~~28, 2020,~~31, 2021, we ~~recorded a facility impairment charge~~made payments of ~~$4.0 million. In addition, in the second quarter of 2020, we~~$2.5 million and $6.3 million, respectively, related to lease costs for exited ~~the former Onshape headquarters lease and recorded a related $0.7 million impairment charge.~~

facilities. In the ~~second quarter~~three 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.~~

respectively.

15. Commitments and Contingencies

Legal and Regulatory Matters

South Korean Tax Audit

~~In July 2016, we received~~

We continue to appeal an assessment ~~of approximately $12 million~~ from the tax authorities in South ~~Korea related to an ongoing tax audit.~~ Korea. In the first quarter of 2021, we recorded a charge of $36.1 million associated with this matter. See Note 12. Income Taxes for additional information.

Legal Proceedings

~~We are subject~~

With respect to ~~various other~~ legal proceedings and claims, we record an accrual for a contingency when it is probable that ~~arise~~a liability has been incurred and the amount of the loss can be reasonably estimated.

401(k) Plan

On September 17, 2020, 3 individual plaintiffs filed a putative class action lawsuit against PTC, the Investment Committee for the PTC Inc. 401(k) Plan (“Plan”), and the Board of Directors (the “PTC Defendants”) in the U.S. District Court for the District of Massachusetts alleging claims regarding the Plan. Plaintiffs allege that the defendants breached their fiduciary duties under the Employee Retirement Income Security Act of 1974 ("ERISA") in the oversight of the Plan, principally by allegedly selecting and retaining certain investment options despite their higher fees and costs than other available investment options, causing participants in the Plan to pay excessive recordkeeping fees and suffer lower returns on their investments, and by allegedly failing to monitor other fiduciaries. The plaintiffs seek unspecified damages on behalf of a class of Plan participants from September 17, 2014 through the date of any judgment. An answer to the complaint was filed on May 4, 2021. We are currently unable to reasonably estimate what effect the ultimate outcome might have, if any, on our financial position, results of operations or cash flows.

Other Legal Proceedings

In addition to the matters listed above, we are subject to legal proceedings and claims against us in the ordinary course of business. WeAs of March 31, 2021, we estimate that the range of possible outcomes for such matters is immaterial and we do not believe that resolving ~~the legal proceedings and claims that we are currently subject to~~them will have a material adverse impact on our financial condition, results of operations or cash flows. However, the results of legal proceedings cannot be predicted with certainty. Should any of these legal proceedings and claims be resolved against us, the operating results for a reporting period could be adversely affected.

~~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~~

Table 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 28, 2020, we estimate approximately $0.8 million to $3.0 million in legal proceedings and claims, of which we had accrued $0.8 million.

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Guarantees and Indemnification Obligations

We enter into standard indemnification agreements with our customers and business partners in the ordinary course of our business. Under such agreements, ~~with our business partners or customers,~~ we typically 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,~~products. Indemnification may also cover other types of claims, including claims relating to ~~property damage or personal injury resulting from the performance of services by us or our subcontractors and~~certain data breaches. ~~The maximum potential amount of future payments we could be required to make under indemnification agreements~~Except for intellectual property ~~and damage and injury claims~~infringement indemnification, the liability for which is ~~unlimited; in most cases the maximum potential amount for~~uncapped, these agreements typically limit our liability with respect to other indemnification ~~for data breaches is capped in those contracts.~~claims. Historically, our costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and, accordingly, we believe the estimated fair value of liabilities under these agreements is immaterial.

We warrant that our software products will perform in all material respects in accordance with our standard published specifications ~~in effect at~~during the ~~time of delivery~~term of the ~~licensed products for a specified period of time.~~license/subscription. Additionally, we generally warrant that our consulting services will be performed consistent with generally accepted industry ~~standards.~~standards and, in the case of fixed price services, the agreed-upon specifications. In most cases, liability for these warranties is capped. If necessary, we would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history; however, we have not incurred significant cost under our

product or services warranties. As a result, we believe the estimated fair value of these liabilities is immaterial.

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~~ITEM 2.~~

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Overview

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

Together, these technologies power the digital thread across industrial enterprises.

Forward-Looking Statements

Statements in this ~~Quarterly Report on Form 10-Q~~document that are not historic facts, including statements about our future financial and growth expectations and targets, debt repayment and potential stock repurchases, 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 not improve when or as we expect, or 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;~~COVID-19 pandemic, which could cause customers ~~may 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 financial results, including cash flow; our businesses, including our ~~Internet of Things (IoT), Augmented Reality and Onshape~~SaaS businesses, may not expand and/or generate the revenue or ARR we expect if customers are slower to adopt ~~those~~our technologies than we expect or if they adopt competing technologies; bookings associated with minimum 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 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~~ repayment and/or ~~share repurchases.~~repurchases; foreign exchange rates may differ materially from those we expect; and orders associated with minimum purchase commitments under our Strategic Alliance Agreement with Rockwell Automation may not result in subscription contracts sold through to end-user customers, which could cause the ARR associated with those orders to churn. 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~~profits.Other risks and uncertainties that could cause actual results to differ materially from those projected are described below throughout or referenced in Part II, Item ~~1 A.~~ 1A. Risk Factors of this report.

Operating and Non-GAAP Financial Measures

Our discussion of results includes discussion of our ARR (Annual Run Rate) operating measure, ~~and~~ non-GAAP financial ~~measures.~~measures, and disclosure of our results on a constant currency basis. 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. The methodology used to calculate constant currency disclosures is described in ~~respectively.~~Results of Operations - Impact of Foreign Currency Exchange on Results of Operations. You should read those sections to understand our operating ~~and~~measure, non-GAAP financial ~~measures.~~

measures, and constant currency disclosures.

Executive Overview

~~Our Q2’20 financial results were solid, reflecting the strength~~

ARR of ~~our recurring revenue model. We delivered 10% ARR~~$1.39 billion represents 18% growth ~~(11%~~(15% on a constant currency basis) compared to Q2’20 driven by a combination of strong results in our Growth business, continued momentum in our Core business, and strong performance from Arena Solutions in its first quarter as part of PTC. Organic ARR growth year over year was 14% (11% constant currency). Second quarter revenue was up 28% year over year (22% constant currency), ~~24%~~driven by strong execution as well as the impact of up-front license revenue recognition under ASC 606 and a modest contribution from Arena. Organic revenue growth ~~(25% on~~year over year was 26% (20% constant currency).

Our Q2’21 operating margin increased over 800 bps compared to Q2’20, primarily due to strong revenue growth, as well as continued financial discipline. Our Q2’21 diluted EPS of $0.92 was up

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significantly compared to $0.06 in Q2’20, which reflects those same factors, as well as the recognition of 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~~$42 million tax benefit related to 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~~Arena acquisition and ~~varied across~~lower interest expense.

In Q2’21, we acquired Arena Solutions for approximately $715 million, net of cash acquired. Arena contributed approximately $54 million of ARR and an immaterial amount of revenue to our ~~product portfolio and geographies as companies were affected by and~~

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

Q2’21 results.

We generated ~~$88~~$122 million of cash from operations in ~~Q2'20~~Q2'21 compared to ~~$141~~$88 million in ~~Q2'19,~~Q2'20, primarily reflecting higher collections and 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. payments.We ~~used $460~~ended Q2’21 with $326 million of ~~the net proceeds from the sale~~cash and cash equivalents and $1.5 billion 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~~with a weighted average cost of ~~which will be repaid when we redeem our 6% Senior Notes due 2024 in May 2020.~~

debt of 3.1%.

Future ~~Expectations; COVID-19 Impact~~

Expectations

Our results have been impacted, and we expect will continue to be impacted, by our ability to close large ~~transactions, which has been adversely impacted by~~transactions. Additionally, under the ~~COVID-19 pandemic as~~subscription license model, particularly sales of products in our growth business, customers ~~delay purchases due to the macroeconomic uncertainty and the inability to implement many~~may place smaller initial orders than under a perpetual license model. Sales of our solutions due to the on-site work generally required to do so. The amount of revenue attributable to large transactions, and the number of such transactions, may also vary significantly from quarter to quarter based on customer purchasing decisions and macroeconomic conditions. Such transactionsproducts may have long lead times as they often follow a lengthy product selection and evaluation process and, for existing customers, are influenced by contract duration and expiration cycles. Accordingly, the amount of revenue attributable to large transactions, and the number of such transactions, may vary significantly from quarter to quarter based on customer purchasing decisions and macroeconomic conditions. This may cause volatility in our results.

We currently anticipate new bookings will be down approximately 30% year over year 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 churn rate as previously expected as customers may not renew their subscriptions or support contracts in full due to the COVID-19 pandemic if they reduce their workforces and users or due to macroeconomic and liquidity uncertainty. We expect to continue to control costs with operating expense growth of roughly 2% for the full year compared to our previous projection of 9% expense growth year over year, primarily due to the restructuring actions in the first half of 2020, savings on certain expenses due to the COVID-19 pandemic (such as converting our annual LiveWorx event to a virtual event and curtailing other travel), as well as lower anticipated variable compensation and increased cost discipline related to employee hiring.

Despite the challenges associated with the COVID-19 pandemic, we ~~are anticipating FY'20~~currently anticipate ARR, ~~growth of approximately 11%,~~ revenue, ~~growth of approximately 12%,~~ and ~~a 30-basis point increase (90-basis points on non-GAAP basis) in~~ operating margin ~~over FY'19.~~

growth in FY’21. We expect organic churn to improve slightly compared to FY’20.

Results of Operations

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

(Dollar amounts in millions, except per share data)	Three months ended						Percent Change
	March 31, 2021			March 28, 2020			Actual			Constant Currency⁽¹⁾
Recurring revenue⁽¹⁾	$	414.8		$	315.9			31	%		25	%
Perpetual license		6.9			8.2			(16	)%		(19	)%
Professional services		40.0			35.5			13	%		7	%
Total revenue		461.8			359.6			28	%		22	%
Total cost of revenue		89.4			83.0			8	%		5	%
Gross margin		372.3			276.6			35	%		28	%
Operating expenses		270.6			226.6			19	%		17	%
Total costs and expenses		360.1			309.6			16	%		14	%
Operating income	$	101.7		$	50.0			103	%		73	%
Non-GAAP operating income⁽²⁾	$	172.0		$	103.2			67	%		52	%
Operating margin		22.0	%		13.9	%
Non-GAAP operating margin⁽²⁾		37.2	%		28.7	%
Diluted earnings per share	$	0.92		$	0.06
Non-GAAP diluted earnings per share⁽²⁾⁽³⁾	$	1.08		$	0.59
Cash flow from operations⁽⁴⁾	$	121.7		$	87.8
Free cash flow⁽⁵⁾	$	116.3		$	82.3

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(Dollar amounts in millions, except per share data)	Six months ended						Percent Change
	March 31, 2021			March 28, 2020			Actual			Constant Currency⁽¹⁾
Recurring revenue⁽¹⁾	$	799.8		$	621.2			29	%		24	%
Perpetual license		15.4			17.2			(11	)%		(13	)%
Professional services		75.6			77.3			(2	)%		(7	)%
Total revenue		890.8			715.7			24	%		20	%
Total cost of revenue		176.3			170.4			3	%		1	%
Gross margin		714.6			545.3			31	%		26	%
Operating expenses		522.5			464.8			12	%		11	%
Total costs and expenses		698.8			635.3			10	%		8	%
Operating income	$	192.0		$	80.5			139	%		103	%
Non-GAAP operating income⁽²⁾	$	325.4		$	196.3			66	%		53	%
Operating margin		21.6	%		11.2	%
Non-GAAP operating margin⁽²⁾		36.5	%		27.4	%
Diluted earnings per share	$	1.13		$	0.37
Non-GAAP diluted earnings per share⁽²⁾⁽³⁾	$	2.05		$	1.16
Cash flow from operations⁽⁴⁾	$	235.5		$	95.3
Free cash flow⁽⁵⁾	$	227.2		$	85.1

(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
Percent Change
March 28, 2020 March 30, 2019 Actual Constant Currency
Total recurring revenue $ 621.2
$ 490.6
27 % 28 %
Perpetual license 17.2
52.1
(67 )% (67 )%
Professional services 77.3
82.4
(6 )% (4 )%
Total revenue 715.7
625.1
14 % 16 %
Total cost of revenue 170.4
157.3
8 % 10 %
Gross margin 545.3
467.9
17 % 18 %
Operating expenses 464.8
460.7
1 % 1 %
Total costs and expenses 635.3
618.0
3 % 3 %
Operating income 80.5
7.2
1,021 % 19,432 %
Non-GAAP operating income⁽¹⁾
$ 196.3
$ 135.6
45 % 51 %
Operating margin 11.2 % 1.1 %
Non-GAAP operating margin⁽¹⁾
27.4 % 21.7 %
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⁾
$ 95.3
$ 162.3

(1)	Recurring revenue is comprised of subscription, perpetual support, SaaS, and cloud revenue.

~~(1)~~

(2)

See Non-GAAP Financial Measures below for a reconciliation of our GAAP results to our non-GAAP ~~financial measures.~~measures and Impact of Foreign Currency Exchange on Results of Operations

below for a description of how we calculate our results on a constant currency basis.

(3)

~~(2)~~

We have recorded a full valuation allowance against our U.S. net deferred tax assets. As we are profitable on a non-GAAP basis, the ~~2020~~FY’21 and ~~2019~~FY’20 non-GAAP tax provisions are being calculated assuming there is no valuation allowance. In Q2’21 and Q1'20, our GAAP results included benefits of $42.3 million and $21.2 million, respectively, related to the release of a valuation allowance as a result of the Arena and Onshape acquisitions. As the non-GAAP tax provision is calculated assuming that there is no valuation allowance, these benefits have been excluded. 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. Additionally, our non-GAAP results for the first six months of FY’21 exclude tax expense of $34.2 million related to a non-U.S. tax exposuredescribed in Note 12. Income Taxes to the Financial Statements.

(4)

~~(3)~~

Cash flow from operations for the second quarter and first six months of ~~2020~~FY’21 includes $4.5 million and $11.7 million of restructuring payments, respectively, and $8.2 million and $11.1 million of acquisition-related payments, respectively. Cash flow from operations for the second quarter and first six months of FY’20 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~~

(5)

Free cash flow is cash from operations ~~for~~net of capital expenditures of $5.4 million and $8.2 million in the second quarter and first six months of ~~2019 includes $9.6~~FY’21, respectively, and $5.5 million and ~~$17.9~~$10.2 million in the second quarter and first six months of ~~restructuring payments,~~FY’20, 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,~~Shekel, and Rupee relative to the U.S. Dollar, affects our reported results. ~~Starting in the first quarter of 2020, our~~Our constant currency disclosures are calculated by multiplying the results in local currency for the ~~second quarter~~quarterly and ~~first six months of 2020~~year-to-date periods for FY’21 and ~~2019~~FY’20 by the exchange rates in effect on September 30, ~~2019, excluding the effect of any hedging.~~2020. The results of operations in

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

Revenue

Our revenue results quarter to quarter are impacted by contract terms, including the duration and start dates of our subscription ~~contracts. This is particularly true during the COVID-19 crisis as customers~~contracts, due to our up-front recognition of subscription license revenue. We are ~~generally electing one-year contracts given the current macroeconomic uncertainty. This may cause volatility in~~expanding our ~~results.~~

~~Our revenue results are shown by line of business, by product group and by geographic region~~SaaS offerings and are ~~discussed below.~~

releasing additional cloud functionality into our products. As a result, our revenue will be impacted over time as a higher portion of it will be recognized ratably.

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Revenue by Line of Business

(Dollar amounts in millions)	Three months ended				Percent Change						Six months ended				Percent Change
	March 31, 2021		March 28, 2020		Actual			Constant Currency			March 31, 2021		March 28, 2020		Actual			Constant Currency
License	$	198.0	$	127.6		55	%		47	%	$	375.2	$	251.0		49	%		43	%
Support and cloud services		223.8		196.5		14	%		9	%		440.0		387.4		14	%		10	%
Software revenue		421.8		324.1		30	%		24	%		815.2		638.4		28	%		23	%
Professional services		40.0		35.5		13	%		7	%		75.6		77.3		(2	)%		(7	)%
Total revenue	$	461.8	$	359.6		28	%		22	%	$	890.8	$	715.7		24	%		20	%

(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~~ in the second quarter and first six months of ~~subscription, support, and perpetual license revenue. Our subscription revenue includes an immaterial amount of Software as a Service (SaaS) and cloud services. Software revenue~~FY’21 increased compared to the year-ago periods due to subscription revenue growth, ~~during the quarter and year-to-date periods,~~partially offset by ~~declines~~a decline in perpetual support revenue due to conversions of support contracts to subscriptions. ~~For~~License revenue growth was primarily driven by contracts with longer durations. Subscription support and cloud services revenue in the second quarter and first six months of ~~2020~~FY’21 grew 39% (34% constant currency) and 38% (34% constant currency), respectively, compared to the ~~year ago~~year-ago periods, ~~subscription license~~while perpetual support revenue ~~increased 132%~~decreased 19% (22% constant currency) and ~~103%~~16% (19% constant currency), ~~respectively, in part~~primarily due to ~~the fact that we no longer provide an annual cancellation right in new multi-year contracts.~~

~~Professional Services~~

conversions of perpetual support contracts to subscriptions.

Professional services engagements typically result from sales of new licenses; revenue is recognized over the term of the engagement. ~~Professional services revenue declined in part due to an extension to complete work on a fixed price professional services contract.~~ Our 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~~growth in Q2’21 compared to Q2’20 is partially due to a Q2’20 revenue reversal related to an extension to complete work on a large fixed price professional services contract in that period, as well as the start of new contracts in Q2’21. In the first six months of FY’21, professional services revenue declined due to challenges with project scoping and implementation activities and performance ~~while~~due to social distancing measures ~~are in place due~~and facility closures implemented to ~~COVID-19.~~

address the COVID-19 pandemic, as well as the end of a few large projects.

Software Revenue by Product Group

(Dollar amounts in millions)	Three months ended				Percent Change						Six months ended				Percent Change
	March 31, 2021		March 28, 2020		Actual			Constant Currency			March 31, 2021		March 28, 2020		Actual			Constant Currency
Core (CAD and PLM)	$	298.8	$	234.4		27	%		21	%	$	588.3	$	460.5		28	%		23	%
Growth (IoT, AR, Onshape, Arena)		70.5		43.2		63	%		58	%		128.2		86.4		48	%		44	%
FSG (Focused Solutions Group)		52.5		46.5		13	%		9	%		98.7		91.5		8	%		5	%
Software revenue	$	421.8	$	324.1		30	%		24	%	$	815.2	$	638.4		28	%		23	%

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 %

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 of 2020.

~~Growth Product~~software revenue growth in the second quarter and first six months of ~~2020~~FY’21 compared to the year-ago periods was driven by subscription revenue growth of ~~38% (39%~~46% (38% constant currency) and ~~45% (46%~~46% (40% constant currency), respectively, due in part to ongoing support contract conversions to subscription, which also result in a decline in perpetual support revenue. ARR increased 13% (10% constant currency) for Q2’21 compared to Q2’20, reflecting 17% (14% constant currency) ARR growth in PLM and 11% (8% constant currency) growth in CAD as customers pursue their digital transformation initiatives.

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Growth Product software revenue increased in the second quarter and first six months of ~~2019, offset by a decline in support revenue~~FY’21 compared to the year-ago periods due to ~~conversions~~subscription revenue growth of ~~support contracts~~85% (79% constant currency) and 66% (62% constant currency), respectively. Growth Product ARR increased 64% (61% constant currency) for Q2’21 compared to ~~subscription.~~Q2’20, due in part to the acquisition of Arena. Organic ARR growth was 29% (27% constant currency), reflecting 22% (20% constant currency) growth in IoT and 63% (60% constant currency) growth in AR, driven in part by significant customer expansions.

FSG Product software revenue growth in the second quarter 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 theand first six months of ~~2020 as~~FY’21 compared to the ~~first six months~~year-ago periods reflects subscription revenue growth of ~~2019 is~~32% (27% constant currency) and 23% (19% constant currency), due in part to ongoing support contract conversions to subscription, which also result in a ~~result of the~~ decline in perpetual ~~license revenue, offset~~support revenue. ARR was flat year over year, with 1% growth (1% decrease in constant currency), due to challenges faced by ~~growth of subscription revenue of 24% (25% constant currency).~~commercial airlines and retail companies during the COVID-19 pandemic.

Software Revenue by Geographic Region

A significant portion of our ~~total~~software revenue is generated outside the U.S. In ~~2019 and in~~ the first six months of ~~2020,~~FY’21, approximately ~~40%~~45% of ~~total~~software revenue was generated in the Americas, 40% in Europe, and 15% in Asia Pacific. In FY’20, approximately 45% of software revenue was generated in the Americas, 35% in Europe, and 20% in Asia Pacific.

(Dollar amounts in millions)	Three months ended				Percent Change						Six months ended				Percent Change
	March 31, 2021		March 28, 2020		Actual			Constant Currency			March 31, 2021		March 28, 2020		Actual			Constant Currency
Americas	$	166.3	$	138.7		20	%		20	%	$	357.3	$	280.5		27	%		28	%
Europe		182.7		132.2		38	%		26	%		327.5		247.9		32	%		22	%
Asia Pacific		72.8		53.2		37	%		29	%		130.4		110.0		19	%		13	%
Software revenue	$	421.8	$	324.1		30	%		24	%	$	815.2	$	638.4		28	%		23	%

(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 %

Americas software revenue growth in the second quarter and first six months of ~~2020~~ FY’21compared to the year-ago periodswas driven by ~~growth in~~ subscription revenue growth of ~~57%~~37% (actual and ~~37%~~constant currency) and 47% (actual and constant currency), respectively, ~~compared to the second quarter and first six months of 2019,~~ partially offset by a decline in perpetual support ~~revenue, resulting in recurring~~revenue. Software revenue growth reflects consistent double-digit growth in Core and Growth products. Americas ARR growth of ~~31%~~22% (21% constant currency) was driven by the Arena acquisition, solid performance in Core products, and ~~19%, respectively,~~strong results in ~~the second quarter~~IoT and ~~first six months of 2020 compared to the year ago periods.~~AR.

Europe software revenue growth in the second quarter and first six months of ~~2020~~FY’21 compared to the year-ago periods was driven by growth in subscription revenue of ~~85% (90%~~60% (46% constant currency) and ~~88% (95%~~52% (40% constant currency), respectively, ~~compared to the second quarter and first six months of 2019,~~ partially offset by a decline in perpetual support ~~revenue, resulting in recurring~~revenue. Software revenue growth reflects strong Core products performance. Europe ARR growth of ~~37%~~14% (8% constant currency) is consistent with the past several quarters on a constant currency basis and ~~35%, respectively,~~ reflects strength in AR and IoT.

Asia Pacific software revenue growth in the second quarter and first six months of ~~2020~~FY’21 compared to the ~~year ago periods.~~

~~Asia Pacificsoftware revenue growth~~ ~~in the second quarter of 2020~~ year-ago periods was driven by growth in subscription revenue of ~~79% (81%~~60% (51% constant currency) ~~compared to the second quarter of 2019,~~ and 32% (26% constant currency), respectively, partially offset by a decline in perpetual support ~~revenue, resulting in recurring~~revenue. Software revenue growth reflects strong growth in CAD. Asia Pacific ARR growth of ~~23%~~19% (16%constant currency) was the third quarter in ~~the second quarter~~a row of ~~2020 compared to year ago period. In the first six months~~mid-teens constant currency growth, with strong performance across all segments.

Table of ~~2020, compared to the first six months of 2019, revenue declined due to a strong~~ Contents

~~first quarter of 2019, which benefited from the last-time purchases of perpetual licenses in that quarter associated with the discontinuation of perpetual license sales as of January 1, 2019.~~

Gross Margin

(Dollar amounts in millions)	Three months ended									Six months ended
	March 31, 2021			March 28, 2020			Percent Change			March 31, 2021			March 28, 2020			Percent Change
License gross margin	$	183.8		$	113.7			62	%	$	347.8		$	224.0			55	%
License gross margin percentage		93	%		89	%					93	%		89	%
Support and cloud services gross margin	$	183.8		$	162.2			13	%	$	361.7		$	314.2			15	%
Support and cloud services gross margin percentage		82	%		83	%					82	%		81	%
Professional services gross margin	$	4.7		$	0.6			643	%	$	5.1		$	7.1			(28	)%
Professional services gross margin percentage		12	%		2	%					7	%		9	%

Total gross margin	$	372.3		$	276.6			35	%	$	714.6		$	545.3			31	%
Total gross margin percentage		81	%		77	%					80	%		76	%

Non-GAAP gross margin⁽¹⁾	$	384.0		$	286.5			34	%	$	736.9		$	565.0			30	%
Non-GAAP gross margin percentage⁽¹⁾		83	%		80	%					83	%		79	%

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

(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 %

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

~~License~~ gross margin increased ~~for~~in the second quarter and first six months of ~~2020~~FY’21 compared to the FY’20 periods due to increases in license revenue while cost of license revenue remained flat.

Support and cloud services gross margin increased in the second quarter and first six months of ~~2019 as revenue increased primarily due~~FY’21compared to the year-ago periods, reflecting an increase in subscription ~~license revenue. Revenue growth in 2020 was~~support and cloud revenue, partially offset by a ~~related increase~~decrease 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~~perpetual support revenue, ~~offset by increases~~an increase in costs associated with our cloud services business due to ~~increased~~greater demand for those ~~services. Support~~services, and ~~cloud~~higher compensation costs.

Professional services gross margin increased in Q2’21 compared to Q2’20 due to an increase in revenue and a decrease in travel costs, partially offset by higher compensation costs. Professional services gross margin decreased ~~for~~in the first six months of ~~2020~~FY’21 compared to the ~~first six months of 2019~~year-ago period primarily 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 an increase in subscription support revenue.

~~Professional services gross margin decreased for the second quarter and first six months of 2020 compared to the second quarter and first six months of 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~~resulting from the ~~second quarter~~impact of ~~2020, along with~~the COVID-19 pandemic and higher compensation costs, partially offset by lower travel and outside services costs.

Operating Expenses

(Dollar amounts in millions)	Three months ended									Six months ended
	March 31, 2021			March 28, 2020			Percent Change			March 31, 2021			March 28, 2020			Percent Change
Sales and marketing	$	129.2		$	107.4			20	%	$	253.9		$	215.0			18	%
% of total revenue		28	%		30	%					29	%		30	%
Research and development	$	72.5		$	60.0			21	%	$	143.4		$	125.3			14	%
% of total revenue		16	%		17	%					16	%		18	%
General and administrative	$	60.8		$	33.6			81	%	$	110.3		$	78.2			41	%
% of total revenue		13	%		9	%					12	%		11	%
Amortization of acquired intangible assets	$	7.6		$	7.3			5	%	$	14.2		$	14.1			1	%
% of total revenue		2	%		2	%					2	%		2	%
Restructuring and other charges, net	$	0.5		$	18.2			(97	)%	$	0.7		$	32.3			(98	)%
% of total revenue		0	%		5	%					0	%		5	%
Total operating expenses	$	270.6		$	226.6			19	%	$	522.5		$	464.8			12	%

(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%9% between ~~March 30, 2019~~Q2’20 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 first six months~~Q2’21.

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

Contents

Operating expenses in ~~the~~ ~~second~~ ~~quarter of 2020~~Q2’21 compared to operating expenses in ~~the~~ ~~second~~ ~~quarter of 2019 decreased~~Q2’20 increased primarily due to the following:

•

a $47.8 million increase in compensation expense (including benefit costs), primarily driven by a $22.8 million (130%) increase in stock-based compensation expense, a $12.7 million (13%) increase in salaries due in part to the Arena acquisition, and a $5.6 million increase in bonus expense;

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

•

a $10.0 million increase in acquisition-related transaction costs, included in general and administrative; and

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

•

a $2.8 million increase in cloud services hosting costs;

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

partially offset by:

•

a $17.8 million decrease in restructuring costs; and

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

•

a $4.2 million decrease in travel costs due to the COVID-19pandemic.

~~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~~FY’21 compared to operating expenses in the first six months of ~~2019~~FY’20 increased primarily due to the following:

•

an $82.4 million increase in compensation expense (including benefit costs), primarily driven by a $39.5 million (93%) increase in stock-based compensation expense, a $23.9 million (13%) increase in salaries due in part to the Arena acquisition, and a $6.8 million (185%) increase in bonus expense;

•

a $6.8 million increase in acquisition-related transaction costs, included in general and administrative;

•

a $4.6 million increase in cloud services hosting costs; and

•

$3.8 million of expenses related to our investment in our digital transformation;

partially offset by:

•

a $31.6 million decrease in restructuring costs; and

•

a $9.8 million decrease in travel costs due to the COVID-19 pandemic.

Stock-based compensation was higher in FY’21 compared to FY’20 primarily due to higher estimated attainment under performance-based awards. In addition, an increase in ~~total sales~~time-based award grants in FY’20 and ~~marketing costs primarily related to a $7.6 million increase~~expected higher stock-based bonus attainment in ~~compensation (including benefit costs and travel expenses) due to~~FY’21 increased expense. Non-stock based bonus expense was also higher ~~salaries related to higher headcount and higher commissions due to amortization of capitalized commissions under ASC 606,~~

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

~~an increase in general and administrative expenses primarily driven by $7.4 million in acquisition-related charges recorded in the first six months of 2020 associated with the acquisition of Onshape~~FY’21 compared to ~~$0.8 million in~~FY’20 due higher estimated attainment under the ~~prior year period, and~~

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

~~partially offset by:~~

lower restructuring charges. We incurred $27.0 million of restructuring charges in the first six months of 2020, primarily related to an employee restructuring program, compared to $43.0 million incurred in the first six months of 2019 largely associating with exiting our Needham headquarters facility.

FY’21 bonus plan.

Interest Expense

(Dollar amounts in millions)	Three months ended									Six months ended
	March 31, 2021			March 28, 2020			Percent Change			March 31, 2021			March 28, 2020			Percent Change
Interest and debt premium expense	$	(12.9	)	$	(32.6	)		(60	)%	$	(24.4	)	$	(44.7	)		(45	)%

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

Interest expense includes interest under our credit facility and senior ~~notes.~~notes, as well as $15 million of expense recognized in Q2’20 related to penalties for the early redemption of debt. We had ~~$1,648 million~~$1.5 billion of total debt at March ~~28, 2020,~~31, 2021, compared to ~~$743 million~~$1.6 billion at March ~~30, 2019, which increased~~28, 2020. The average interest ~~expense in the period. Additionally, we recognized $15 million of expense in~~rate on borrowings outstanding was approximately 3.3% and 3.5% during the second quarter and first six months of ~~2020 related to penalties for~~FY’21, respectively, and 4.6% and 4.8% during the ~~planned third~~second quarter ~~early redemption~~and first six months of ~~the 6.000% Senior Notes due in 2024.~~

FY’20, respectively.

Table of Contents

Other Income (Expense)

(Dollar amounts in millions)	Three months ended									Six months ended
	March 31, 2021			March 28, 2020			Percent Change			March 31, 2021			March 28, 2020			Percent Change
Interest income	$	0.3		$	1.6			(81	)%	$	0.9		$	2.5			(65	)%
Other expense, net		(2.7	)		(3.2	)		(15	)%		(4.7	)		(3.4	)		37	%
Other expense, net	$	(2.4	)	$	(1.6	)		48	%	$	(3.8	)	$	(0.9	)		314	%

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

~~Income Taxes~~

(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 )%

Other expense, net primarily consists of foreign currency losses. In the second quarter and first six months of ~~2020~~FY’21, foreign currency losses, net were $2.4 million and ~~2019,~~$4.2 million, respectively. In the second quarter and first six months of FY’20, foreign currency losses, net were $2.5 million and $2.6 million, respectively.

Income Taxes

(Dollar amounts in millions)	Three months ended									Six months ended
	March 31, 2021			March 28, 2020			Percent Change			March 31, 2021			March 28, 2020			Percent Change
Income before income taxes	$	86.4		$	15.8			447	%	$	163.8		$	34.8			370	%
Provision (benefit) for income taxes	$	(22.9	)	$	8.6			(366	)%	$	31.0		$	(7.8	)		(497	)%
Effective income tax rate		(27	)%		55	%					19	%		(22	)%

In the second quarter and first six months of FY’21 and FY’20, our effective tax rate differed from the statutory federal income tax rate of 21% due to U.S. tax reform, our corporate structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate, and the excess tax benefit related to stock-based ~~compensation and the indirect effects of the adoption of ASC 606. Additionally, in the first~~ ~~six~~ ~~months of 2020 and 2019, we reduced the U.S. valuation allowance by $21.2 million and $1.8 million as the result of the Onshape and Frustum acquisitions, respectively.~~compensation. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland. In ~~2020~~FY’21 and ~~2019,~~FY’20, the foreign rate differential predominantly relates to these Irish earnings.

On In addition, the effective tax rate was impacted by the matters described below.

In the second quarter of FY’21, we ~~continue to evaluate the impact~~reduced our previously established U.S. valuation allowance by $42.3 million as a result of the ~~CARES Act,~~Arena acquisition. In the first six months of FY’20, we ~~do not currently believe it will have~~reduced our previously established U.S. valuation allowance by $21.2 million as a ~~material impact on our consolidated financial statements or related disclosures.~~

result of the Onshape acquisition.

Operating ~~Measures~~

Measure

ARR

ARR (Annual Run Rate) ARR represents the annualized value of our portfolio of ~~recurring customer arrangements~~active subscription software, cloud, SaaS, and support contracts as of the end of the reporting ~~period,~~period. ARR includes orders placed under our Strategic Alliance Agreement with Rockwell Automation, including ~~subscription software, cloud, and support contracts.~~

orders placed to satisfy contractual minimum commitments.

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

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

Non-GAAP Financial Measures

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

2020.

Table of Contents

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

•

free cash flow—cash flow from operations

~~non-GAAP revenue—GAAP revenue~~

•

non-GAAP gross margin—GAAP gross margin

~~non-GAAP gross margin—GAAP gross margin~~

•

non-GAAP operating income—GAAP operating income

~~non-GAAP operating income—GAAP operating income~~

•

non-GAAP operating margin—GAAP operating margin

~~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

Free cash flow is cash flow from operations net ~~income—GAAP net income~~

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

of capital expenditures, which are expenditures for property and equipment and consist primarily of facility improvements, office equipment, computer equipment, and software. We believe that free cash flow, in conjunction with cash from operations, is a useful measure of liquidity since capital expenditures are a necessary component of ongoing operations.

The non-GAAP financial measures other than free cash flow exclude, as ~~applicable, fair value adjustments related to acquired deferred revenue and deferred costs,~~applicable: stock-based ~~compensation expense,~~compensation; amortization of acquired intangible ~~assets,~~assets; acquisition-related and other transactional charges included in general and administrative ~~expenses,~~expenses; restructuring and other charges, ~~net,~~ net; certain non-operating charges;and income tax ~~adjustments as defined~~adjustments. Additional information about the items we exclude from our non-GAAP financial measures and the reasons we exclude them can be found inNon-GAAP Financial Measures on page 25 of our Annual Report on Form 10-K for the fiscal year ended September 30, ~~2019.~~2020. In the ~~second quarter~~first six months of ~~2020,~~FY’21, we ~~also~~ incurred ~~an interest penalty~~tax expense related to a reserve for a South Korean tax exposure established in the ~~early redemption of the 6.000% Senior Notes due 2024,~~period which is ~~also~~ excluded from our non-GAAP financial measures as it is related to prior periods and not included in management’s view of Q2’21 results for comparative purposes. In Q2’21, we incurred a ~~significant non-ordinary course charge.~~

tax benefit related to the release of a valuation allowance as a result of the Arena acquisition. As the non-GAAP tax provision is calculated assuming that there is no valuation allowance, this benefit has been excluded from our non-GAAP financial measures.

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

The items excluded from the non-GAAP financial measures often have a material impact on our financial results, certain of those items are recurring, and other 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.

Table of Contents

(in millions, except per share amounts)	Three months ended						Six months ended
	March 31, 2021			March 28, 2020			March 31, 2021				March 28, 2020
GAAP gross margin	$	372.3		$	276.6		$	714.6			$	545.3
Stock-based compensation		4.5			3.0			8.9				6.0
Amortization of acquired intangible assets included in cost of revenue		7.1			6.9			13.4				13.7
Non-GAAP gross margin	$	384.0		$	286.5		$	736.9		��	$	565.0
GAAP operating income	$	101.7		$	50.0		$	192.0			$	80.5
Stock-based compensation		44.7			20.5			90.8				48.4
Amortization of acquired intangible assets		14.8			14.2			27.6				27.7
Acquisition-related and other transactional charges included in general and administrative expenses		10.3			0.3			14.2				7.4
Restructuring and other charges, net		0.5			18.2			0.7				32.3
Non-GAAP operating income	$	172.0		$	103.2		$	325.4			$	196.3
GAAP net income	$	109.3		$	7.2		$	132.8			$	42.6
Stock-based compensation		44.7			20.5			90.8				48.4
Amortization of acquired intangible assets		14.8			14.2			27.6				27.7
Acquisition-related and other transactional charges included in general and administrative expenses		10.3			0.3			14.2				7.4
Restructuring and other charges, net		0.5			18.2			0.7				32.3
Non-operating charges⁽¹⁾		—			15.0			—				15.0
Income tax adjustments⁽²⁾		(51.7	)		(6.9	)		(24.6	)			(38.8	)
Non-GAAP net income	$	127.8		$	68.5		$	241.6			$	134.6
GAAP diluted earnings per share	$	0.92		$	0.06		$	1.13			$	0.37
Stock-based compensation		0.38			0.18			0.77				0.42
Amortization of acquired intangible assets		0.12			0.12			0.23				0.24
Acquisition-related and other transactional charges included in general and administrative expenses		0.09			—			0.12				0.06
Restructuring and other charges, net		—			0.16			0.01				0.28
Non-operating charges⁽¹⁾		—			0.13			—				0.13
Income tax adjustments⁽²⁾		(0.44	)		(0.06	)		(0.21	)			(0.34	)
Non-GAAP diluted earnings per share	$	1.08		$	0.59		$	2.05			$	1.16

(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 0.3
0.4
7.4
0.8
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⁾
(6.9 ) 2.1
(38.8 ) (12.7 )
Non-GAAP net income $ 68.5
$ 25.8
$ 134.6
$ 93.1

GAAP diluted earnings (loss) per share $ 0.06
$ (0.37 ) $ 0.37
$ (0.19 )
Stock-based compensation 0.18
0.23
0.42
0.47
Amortization of acquired intangible assets 0.12
0.11
0.24
0.21
Acquisition-related and other transactional charges included in general and administrative expenses —
—
0.06
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⁾
(0.06 ) 0.02
(0.34 ) (0.11 )
Non-GAAP diluted earnings per share $ 0.59
$ 0.22
$ 1.16
$ 0.78

(1)	We recognized $15 million of expense in Q2’20 related to penalties for the early redemption of the 6.000% Senior Notes due in 2024.

~~(1)~~

(2)

We have recorded a full valuation allowance against our U.S. net deferred tax assets. As we are profitable on a non-GAAP basis, the ~~2020~~FY’21 and ~~2019~~FY’20 non-GAAP tax provisions are being calculated assuming there is no valuation allowance. In Q2’21 and Q1'20, our GAAP results included benefits of $42.3 million and $21.2 million, respectively, related to the release of a valuation allowance as a result of the Arena and Onshape acquisitions. As the non-GAAP tax provision is calculated assuming that there is no valuation allowance, these benefits have been excluded. 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. Additionally, our non-GAAP results for the first six months of FY’21 exclude tax expense of $34.2 million related to the non-U.S. tax exposure described in Note 12. Income Taxes to the Financial Statements.

Operating margin impact of non-GAAP adjustments:

	Three months ended						Six months ended
	March 31, 2021			March 28, 2020			March 31, 2021			March 28, 2020
GAAP operating margin		22.0	%		13.9	%		21.6	%		11.2	%
Stock-based compensation		9.7	%		5.7	%		10.2	%		6.8	%
Amortization of acquired intangible assets		3.2	%		3.9	%		3.1	%		3.9	%
Acquisition-related and other transactional charges included in general and administrative expenses		2.2	%		0.1	%		1.6	%		1.0	%
Restructuring and other charges, net		0.1	%		5.1	%		0.1	%		4.5	%
Non-GAAP operating margin		37.2	%		28.7	%		36.5	%		27.4	%

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

Critical Accounting Policies and Estimates

The financial information included in Item 1 reflects no material changes in our critical accounting policies and estimates as set forth under the heading Critical Accounting Policies and Estimates in Part II,

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Item 7: 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our ~~2019~~2020 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. Refer to Note 1. Basis of Presentation to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q, which is incorporated herein by reference, for all recently issued accounting ~~pronouncements, which is incorporated herein by reference.~~

pronouncements.

Liquidity and Capital Resources

(in millions)	March 31, 2021			September 30, 2020
Cash and cash equivalents	$	326.1		$	275.5
Restricted cash		0.5			0.5
Short- and long-term marketable securities		—			59.1
Total	$	326.6		$	335.1

(in millions)	Six months ended
	March 31, 2021			March 28, 2020
Net cash provided by operating activities	$	235.5		$	95.3
Net cash used in investing activities	$	(670.3	)	$	(476.7	)
Net cash provided by financing activities	$	485.0		$	944.1

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

(in thousands) Six months ended
March 28, 2020 March 30, 2019
Cash provided by operating activities $ 95,329
$ 162,344
Cash used by investing activities (476,743 ) (128,340 )
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~~Cash Equivalents and ~~restricted cash~~

Restricted Cash

We invest our cash with highly rated financial ~~institutions and in diversified domestic and international money market mutual funds.~~institutions. Cash and cash equivalents include highly liquid investments with original maturities of three months or less. In ~~addition,~~December 2020, we ~~hold investments in~~sold all our marketable ~~securities totaling approximately $57 million with an average maturity of 11 months.~~securities. At March ~~28, 2020,~~31, 2021, cash and cash equivalents totaled ~~$827~~$326 million, compared to ~~$270~~$275 million at September 30, ~~2019~~2020.

A significant portion of our cash is generated and held outside the U.S. As of March ~~28, 2020,~~31, 2021, we had cash and cash equivalents of ~~$574~~$44 million in the U.S., ~~$132~~$141 million in Europe, ~~$93~~$109 million in Asia Pacific (including India), and ~~$28~~$32 million in other non-U.S. countries. ~~All the marketable securities are held in Europe.~~ We have substantial cash requirements in the ~~United States,~~U.S., 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~~Provided by ~~operating activities~~

Operating Activities

Cash provided by operating activities was $235 million in the first six months of FY’21, compared to $95 million in the first six months of ~~2020, compared to $162 million in the first~~ ~~six~~ ~~months of 2019.~~FY’20. Cash from operations for the first six months of ~~2020~~FY’21 includes ~~$21~~$11.7 million of restructuring payments and $9$11.1 million of acquisition-related payments compared to ~~$18~~$21.3 million of restructuring payments and $8.6 million of acquisition-related payments in the ~~prior year~~prior-year period. The ~~decrease~~increase in cash from operations in the first six months of ~~2020~~FY’21 compared to the same period in ~~2019~~FY’20 was ~~due~~primarily driven by increased collections, offset by higher compensation payments.

Cash Used in ~~part to lower accounts receivable collections particularly~~Investing Activities

(in millions)	Six months ended
	March 31, 2021			March 28, 2020
Additions to property and equipment	$	(8.2	)	$	(10.2	)
Proceeds from (purchases of) short- and long-term marketable securities, net		58.5			(0.2	)
Acquisitions of businesses, net of cash acquired		(717.2	)		(468.5	)
Other		(3.4	)		2.2
Net cash used in investing activities	$	(670.3	)	$	(476.7	)

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Cash used 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,~~investing activities in the first six months of ~~2019, we received tenant reimbursements related to our new Seaport headquarters.~~FY’21 reflects approximately $715 million used for the Arena acquisition and

$56 million in proceeds from the sale of marketable securities. Cash used in investing activities

~~Cash used~~ in ~~investing activities~~the first six months of FY’20 reflects $469 million used for the Onshape ~~acquisition~~acquisition.

Cash Provided by Financing Activities

(in millions)	Six months ended
	March 31, 2021			March 28, 2020
Borrowings on debt, net	$	502.0		$	975.0
Proceeds from issuance of common stock		10.5			9.0
Debt issuance costs		—			(16.3	)
Payments of withholding taxes in connection with stock-based awards		(27.2	)		(23.6	)
Other		(0.3	)		—
Net cash provided by financing activities	$	485.0		$	944.1

Cash provided by financing activities in the first six months of ~~2020,~~FY’21 reflects net borrowings of $502 million under our credit facility, compared to ~~$70~~net borrowings of $975 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~~FY’20, primarily related to the ~~first six months~~issuance of ~~2020,~~the 4.000% Senior Notes due ~~to construction expenses for our new worldwide headquarters~~2028 and 3.625% Senior Notes due 2025 in ~~the Boston Seaport District in 2019.~~

~~Cash used in financing activities~~

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

Q2’20.

Outstanding Debt

(in millions)	March 31, 2021
4.000% Senior notes due 2028	$	500.0
3.625% Senior notes due 2025		500.0
Credit facility revolver		520.0
Total debt	$	1,520.0
Unamortized debt issuance costs for the senior notes		(11.6	)
Total debt, net of issuance costs	$	1,508.4

Undrawn under credit facility revolver	$	480.0
Undrawn under credit facility revolver available to borrow	$	463.7

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

(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 28, 2020,~~31, 2021, we were in compliance with all financial and operating covenants of the credit 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 under the credit facility, and, as with any failure to comply with such covenants under the note indentures, could constitute a default that could cause all amounts outstanding to become due and payable immediately.

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

Future Expectations

~~Although we are anticipating $60 million less cash provided from operations for FY20 compared to FY'19, primarily due to the disruptive impact of COVID-19 on new bookings, we~~

We believe that existing cash and cash equivalents, together with cash generated from operations and amounts available under ~~the~~our credit facility, will be sufficient to meet our working capital and capital expenditure requirements (which capital expenditures we expect to be approximately ~~$22~~an additional $15 million in ~~2020)~~FY’21) through at least the next twelve months and to meet our known long-term capital requirements.

In January 2021, we acquired Arena Solutions for approximately $715 million, net of cash acquired. In connection with the acquisition, we borrowed $600 million under our existing credit facility. We ~~have suspended our~~plan to use available cash from operations to pay down borrowings under the credit facility. We intend to continue targeting a leverage ratio (Debt/EBITDA) of below 3x and will assess share ~~repurchase program for FY20.~~

repurchases in that context.

Our expected uses and sources of cash could change, ~~customers~~payments due to us may ~~delay payments to us~~be delayed due to the COVID-19 pandemic, our cash position could be reduced, and we could incur additional debt obligations if we decide to retire debt, to engage in strategic transactions or repurchase shares, any of which could be commenced, suspended or completed at any time. Any such repurchases or retirement of debt will depend on prevailing market conditions, our liquidity requirements, contractual restrictions

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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 or issuance, 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:~~ 7A. Quantitative and Qualitative Disclosures about Market Risk of our ~~2019~~2020 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 ~~28, 2020.~~

31, 2021.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a or 15(d) of the Exchange Act that occurred during the period ended March ~~28, 2020~~31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

Information on legal proceedings can be found in Note 15. Commitments and Contingencies – Legal Proceedings – 401(k) Plan of Notes to Consolidated Financial Statements in this Form 10-Q, which information is incorporated herein by reference.

~~ITEM 1A.~~

ITEM 1A.

RISK FACTORS

In addition to other information set forth in this report, ~~and below,~~ you should carefully consider the risk factors described in Part I. Item 1A. Risk Factors in our ~~2019~~2020 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

~~ITEM 6. EXHIBITS~~

ITEM 6.

EXHIBITS


3.1
~~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~~ 4.2		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~~ 4.3		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* 31.1		~~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 ~~28, 2020~~31, 2021 ("Q2 Form 10-Q") formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of March ~~28, 2020~~31, 2021 and September 30, ~~2019;~~2020; (ii) Condensed Consolidated Statements of Operations for the three and six months ended March ~~28, 2020~~31, 2021 and March ~~30, 2019;~~28, 2020; (iii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended March ~~28, 2020~~31, 2021 and March ~~30, 2019;~~28, 2020; (iv) Condensed Consolidated Statements of Cash Flows for the six months ended March ~~28, 2020~~31, 2021 and March ~~30, 2019;~~28, 2020; (v) Consolidated Statements of Stockholders’ Equity for the three and six months ended March ~~28, 2020~~31, 2021 and March ~~30, 2019;~~28, 2020; and (vi) Notes to Condensed Consolidated Financial Statements.
~~104~~
104		The cover page of the Q1Q2 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.

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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.

~~PTC Inc.~~

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

Date: May ~~6, 2020~~

4, 2021



	March 28, 2020			September 30, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	826,776		$	269,579
Short-term marketable securities	34,254			27,891
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	66,854			52,701
Other current assets	60,869			59,707
Total current assets	1,341,426			782,621
Property and equipment, net	104,147			105,531
Goodwill	1,603,081			1,238,179
Acquired intangible assets, net	251,191			169,949
Long-term marketable securities	22,687			29,544
Deferred tax assets	202,683			198,634
Operating right-of-use lease assets	157,016			—
Other assets	184,240			140,130
Total assets	$	3,866,471		$	2,664,588
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	33,728		$	42,442
Accrued expenses and other current liabilities	115,278			104,028
Accrued compensation and benefits	83,904			88,769
Accrued income taxes	15,963			17,407
Current portion of long-term debt	496,435			—
Deferred revenue	407,412			385,509
Short-term lease obligations	39,452			—
Total current liabilities	1,192,172			638,155
Long-term debt	1,134,287			669,134
Deferred tax liabilities	19,541			41,683
Deferred revenue	9,790			11,123
Long-term lease obligations	184,706			—
Other liabilities	51,894			102,495
Total liabilities	2,592,390			1,462,590
Commitments and contingencies (Note 15)
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued	—			—
Common stock, $0.01 par value; 500,000 shares authorized; 115,695 and 114,899 shares issued and outstanding at March 28, 2020 and September 30, 2019, respectively	1,157			1,149
Additional paid-in capital	1,536,770			1,502,949
Accumulated deficit	(150,351		)	(191,390		)
Accumulated other comprehensive loss	(113,495		)	(110,710		)
Total stockholders’ equity	1,274,081			1,201,998
Total liabilities and stockholders’ equity	$	3,866,471		$	2,664,588



	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



	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



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



(in thousands)	Restricted Stock Units
Grant Period	Performance-based RSUs ⁽¹⁾	Service-based RSUs ⁽²⁾	Total Shareholder Return RSUs ⁽³⁾
First six months of 2020	97	1,155	97



	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	)



(in thousands)	March 28, 2020
	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	$	44,598	$	(510	)	$	—	$	—	$	44,598	$	(510	)



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 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



(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



(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



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



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	%