Attached files

file filename
EX-32 - EXHIBIT 32 CERTIFICATE OF PERIODIC FINANCIAL REPORT - PTC INC.ptc04012017ex32q2.htm
EX-31.2 - EXHIBIT 31.2 CERTIFICATE OF CHIEF FINANCIAL OFFICER - PTC INC.ptc04012017ex312q2.htm
EX-31.1 - EXHIBIT 31.1 CERTIFICATE OF CHIEF EXECUTIVE OFFICER - PTC INC.ptc04012017ex311q2.htm


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 April 1, 2017
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)
140 Kendrick Street, Needham, MA 02494
(Address of principal executive offices, including zip code)
(781) 370-5000
(Registrant’s telephone number, including area code)
____________________________________________________
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  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act:

Large accelerated filer
þ
  
Accelerated filer
¨
  
Non-accelerated filer
¨
  
Smaller reporting company
¨
 
 
 
  
 
 
  
(Do not check if a smaller
reporting company)
  
 
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
¨
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
There were 115,521,649 shares of our common stock outstanding on May 9, 2017.



PTC Inc.
INDEX TO FORM 10-Q
For the Quarter Ended April 1, 2017

 
 
Page
Number
Part I—FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Part II—OTHER INFORMATION
 
Item 1.
Item 1A.
Item 6.




PART I—FINANCIAL INFORMATION

ITEM 1.
UNAUDITED CONDENSED FINANCIAL STATEMENTS

PTC Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
 
 
April 1,
2017
 
September 30,
2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
243,316

 
$
277,935

Short term marketable securities
23,555

 
18,695

Accounts receivable, net of allowance for doubtful accounts of $1,230 and $1,012 at April 1, 2017 and September 30, 2016, respectively
142,620

 
161,357

Prepaid expenses
71,068

 
52,819

Other current assets
191,164

 
131,783

Total current assets
671,723

 
642,589

Property and equipment, net
63,429

 
67,113

Goodwill
1,161,731

 
1,169,813

Acquired intangible assets, net
279,846

 
310,305

Long term marketable securities
24,636

 
30,921

Deferred tax assets
99,087

 
89,692

Other assets
33,296

 
35,296

Total assets
$
2,333,748

 
$
2,345,729

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
18,381

 
$
18,022

Accrued expenses and other current liabilities
83,534

 
84,141

Accrued compensation and benefits
91,651

 
145,633

Accrued income taxes
8,494

 
6,303

Deferred revenue
481,885

 
400,420

Total current liabilities
683,945

 
654,519

Long term debt
711,976

 
751,601

Deferred tax liabilities
15,630

 
13,754

Deferred revenue
10,587

 
13,237

Other liabilities
64,266

 
69,952

Total liabilities
1,486,404

 
1,503,063

Commitments and contingencies (Note 14)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued

 

Common stock, $0.01 par value; 500,000 shares authorized; 115,808 and 114,968 shares issued and outstanding at April 1, 2017 and September 30, 2016, respectively
1,158

 
1,150

Additional paid-in capital
1,623,056

 
1,598,548

Accumulated deficit
(667,324
)
 
(657,079
)
Accumulated other comprehensive loss
(109,546
)
 
(99,953
)
Total stockholders’ equity
847,344

 
842,666

Total liabilities and stockholders’ equity
$
2,333,748

 
$
2,345,729




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



1


PTC Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

 
Three months ended
 
Six months ended
 
April 1,
2017
 
April 2,
2016
 
April 1,
2017
 
April 2,
2016
Revenue:
 
 
 
 
 
 
 
Subscription
$
65,780

 
$
23,659

 
$
120,142

 
$
45,835

Support
141,718

 
160,625

 
293,196

 
332,381

Total recurring revenue
207,498

 
184,284

 
413,338

 
378,216

Perpetual license
27,372

 
39,689

 
61,751

 
87,452

Total subscription, support and license revenue
234,870

 
223,973

 
475,089

 
465,668

Professional services
45,170

 
48,654

 
91,278

 
97,976

Total revenue
280,040

 
272,627

 
566,367

 
563,644

Cost of revenue:
 
 
 
 
 
 
 
Cost of subscription, support and license revenue
43,131

 
38,613

 
86,078

 
75,427

Cost of professional services revenue
38,699

 
41,578

 
77,867

 
84,912

Total cost of revenue
81,830

 
80,191

 
163,945

 
160,339

Gross margin
198,210

 
192,436

 
402,422

 
403,305

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
87,777

 
87,177

 
178,467

 
169,606

Research and development
57,710

 
56,610

 
115,624

 
114,279

General and administrative
36,800

 
33,916

 
73,495

 
72,483

Amortization of acquired intangible assets
7,946

 
8,396

 
16,013

 
16,746

Restructuring charges
464

 
4,579

 
6,749

 
41,726

Total operating expenses
190,697

 
190,678

 
390,348

 
414,840

Operating income (loss)
7,513

 
1,758

 
12,074

 
(11,535
)
Interest expense
(11,725
)
 
(4,760
)
 
(22,040
)
 
(11,347
)
Interest income and other expense, net
3,156

 
(567
)
 
2,407

 
(233
)
Loss before income taxes
(1,056
)
 
(3,569
)
 
(7,559
)
 
(23,115
)
Provision for income taxes
48

 
1,604

 
2,686

 
5,950

Net loss
$
(1,104
)
 
$
(5,173
)
 
$
(10,245
)
 
$
(29,065
)
Loss per share—Basic
$
(0.01
)
 
$
(0.05
)
 
$
(0.09
)
 
$
(0.25
)
Loss per share—Diluted
$
(0.01
)
 
$
(0.05
)
 
$
(0.09
)
 
$
(0.25
)
Weighted average shares outstanding—Basic
115,709

 
114,563

 
115,498

 
114,354

Weighted average shares outstanding—Diluted
115,709

 
114,563

 
115,498

 
114,354

`










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

2


PTC Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
 
 
Three months ended
 
Six months ended
 
April 1,
2017
 
April 2,
2016
 
April 1,
2017
 
April 2,
2016
Net loss
$
(1,104
)
 
$
(5,173
)
 
$
(10,245
)
 
$
(29,065
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized hedge gain (loss) arising during the period, net of tax of $0.1 million and $0 million in the second quarter of 2017 and 2016, respectively, and $0.4 million and $0 million in the first six months of 2017 and 2016, respectively
(515
)
 
(5,637
)
 
2,522

 
(3,994
)
Net hedge (gain) loss reclassified into earnings, net of tax of $0.1 million and $0 in the second quarter of 2017 and 2016, respectively, and $0.1 million and $0 million in the first six months of 2017 and 2016, respectively
(496
)
 
13

 
(852
)
 
(833
)
Change in unrealized gain (loss) on hedging instruments
(1,011
)
 
(5,624
)
 
1,670

 
(4,827
)
Foreign currency translation adjustment, net of tax of $0 for each period
4,992

 
15,247

 
(13,660
)
 
4,743

Unrealized gain (loss) on marketable securities
68

 

 
(71
)
 

Amortization of net actuarial pension loss included in net income, net of tax of $0.2 million in both the first quarter of 2017 and 2016, and $0.4 million and $0.3 million in the first six months of 2017 and 2016, respectively
574

 
400

 
1,090

 
802

Change in unamortized pension income (loss) during the period related to changes in foreign currency
(312
)
 
(881
)
 
1,378

 
(331
)
Total other comprehensive income (loss)
4,311

 
9,142

 
(9,593
)
 
387

Comprehensive income (loss)
$
3,207

 
$
3,969

 
$
(19,838
)
 
$
(28,678
)






















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

3


PTC Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
Six months ended
 
April 1,
2017
 
April 2,
2016
Cash flows from operating activities:
 
 
 
Net loss
$
(10,245
)
 
$
(29,065
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
42,683

 
42,904

Stock-based compensation
39,565

 
38,025

Excess tax benefits from stock-based awards
(139
)
 
(56
)
Non-cash portion of restructuring charges
260

 

Other non-cash items, net
479

 
204

Changes in operating assets and liabilities, excluding the effects of acquisitions:
 
 
 
Accounts receivable
15,373

 
63,617

Accounts payable, accrued expenses and other current liabilities
11,183

 
(25,907
)
Accrued compensation and benefits
(51,769
)
 
8,215

Deferred revenue
27,457

 
24,019

Accrued and deferred income taxes
(14,680
)
 
(8,826
)
Other current assets and prepaid expenses
(11,424
)
 
(1,882
)
Other noncurrent assets and liabilities
(20,332
)
 
(1,109
)
Net cash provided by operating activities
28,411

 
110,139

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(14,789
)
 
(8,866
)
Purchases of short- and long-term marketable securities
(3,420
)
 

Proceeds from sales and maturities of short- and long-term marketable securities
4,700

 

Acquisitions of businesses, net of cash acquired

 
(164,191
)
Proceeds from sales of investments
15,218

 

Net cash provided by (used in) investing activities
1,709

 
(173,057
)
Cash flows from financing activities:
 
 
 
Borrowings
100,000

 
170,000

Repayments of borrowings under credit facility
(140,000
)
 

Proceeds from issuance of common stock
3,978

 
1

Excess tax benefits from stock-based awards
139

 
56

Credit facility origination costs
(184
)
 
(1,050
)
Contingent consideration
(2,711
)
 
(1,250
)
Payments of withholding taxes in connection with vesting of stock-based awards
(19,166
)
 
(15,471
)
Net cash provided by (used in) financing activities
(57,944
)
 
152,286

Effect of exchange rate changes on cash and cash equivalents
(6,795
)
 
5,671

Net increase (decrease) in cash and cash equivalents
(34,619
)
 
95,039

Cash and cash equivalents, beginning of period
277,935

 
273,417

Cash and cash equivalents, end of period
$
243,316

 
$
368,456

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

4


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 and in accordance with the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of 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, 2016. 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. Unless otherwise indicated, all references to a year mean our fiscal year, which ends on September 30. The September 30, 2016 Consolidated Balance Sheet included herein is derived from our audited consolidated financial statements.
Our fiscal year ends on September 30th. Our fiscal quarters end on a Saturday following a thirteen week calendar, and may result in different quarter end dates year to year. The second quarter of 2017 ended on April 1, 2017 and the second quarter of 2016 ended on April 2, 2016. The results of operations for the three and six months ended April 1, 2017 are not necessarily indicative of the results expected for the remainder of the fiscal year.
Segments
Through the second quarter of 2016, we had two operating and reportable segments: (1) Software Products, which included license and related support revenue (including updates and technical support) for all our products except training-related products; and (2) Services, which included consulting, implementation, training, cloud services, computer-based training products, including support on these products, and other services revenue.
In an effort to create more effective and efficient operations and to improve customer and product focus, we implemented changes to our organizational structure, and consequently, during the three months ended July 2, 2016, we revised the information that our chief executive officer, who is also our chief operating decision maker, regularly reviews for purposes of allocating resources and assessing performance. As a result, effective with the beginning of the third quarter of 2016, we changed our operating and reportable segments from two to three: (1) the Solutions Group, which includes license, subscription, support and cloud services revenue for our core CAD, SLM and PLM products; (2) the Internet of Things (IoT) Group, which includes license, subscription, support and cloud services revenue for our IoT, analytics and augmented reality solutions; and (3) Professional Services, which includes consulting, implementation and training revenue.
Revenue and earnings in Note 11. Segment Information have been reclassified to conform to the current period presentation.
Recent Accounting Pronouncements
Goodwill
In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-04 to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance will be applied prospectively and is effective for annual reporting periods ending December 31, 2020 and thereafter with early adoption permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
Income Taxes
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). The purpose of ASU 2016-16 is to simplify the income tax accounting of an intra-entity transfer of an asset other than inventory and to record its effect when the transfer occurs. The guidance is effective for annual reporting periods beginning after December 15, 2017, our fiscal 2019, including interim reporting periods within those annual reporting periods and early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.


5


Cash Flows
In August 2016, the FASB issued ASU 2016-15 to clarify whether the following items should be categorized as operating, investing or financing in the statement of cash flows: (i) debt prepayments and extinguishment costs, (ii) settlement of zero-coupon debt, (iii) settlement of contingent consideration, (iv) insurance proceeds, (v) settlement of corporate-owned life insurance (COLI) and bank-owned life insurance (BOLI) policies, (vi) distributions from equity method investees, (vii) beneficial interests in securitization transactions, and (viii) receipts and payments with aspects of more than one class of cash flows. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017, our fiscal 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
Financial Instruments - Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update introduces a current expected credit loss model for measuring expected credit losses for certain types of financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. ASU 2016-13 replaces the current incurred loss model for measuring expected credit losses, requires expected losses on available-for-sale debt securities to be recognized through an allowance for credit losses rather than as reductions in the amortized cost of the securities, and provides for additional disclosure requirements. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019, our fiscal 2021, with early adoption permitted for interim and annual reporting periods beginning after December 15, 2018. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
Stock Compensation
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments, including accounting for income taxes, earnings per share, and forfeitures. The ASU is effective for public companies in annual periods beginning after December 15, 2016, our fiscal 2018, and interim periods within those years. Early adoption is permitted in any interim period, with all adjustments applied as of the beginning of the fiscal year of adoption. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will replace the existing guidance in ASC 840, Leases. The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and to disclose important information about leasing arrangements. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, our fiscal 2020, and interim periods within those annual periods. Early adoption is permitted and modified retrospective application is required. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
Financial Instruments
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which requires equity investments to be measured at fair value with changes in fair value recognized in net income and simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. Entities may choose a practical expedient, to estimate the fair value of certain equity securities that do not have readily determinable fair values. If the practical expedient is elected, these investments would be recorded at cost, less impairment and subsequently adjusted for observable price changes. The guidance also updates certain presentation and disclosure requirements. ASU 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, our fiscal 2019, and interim periods within those fiscal years. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In July 2015, the FASB approved a one-year delay in the effective date. ASU 2014-09 is effective for us in our first quarter of fiscal 2019 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially

6


applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. Subsequently, the FASB has issued the following standards to provide additional clarification and implementation guidance on ASU 2014-09: ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations; ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; and ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. We are currently evaluating the impact of these new standards on our consolidated financial statements.
Debt Issuance Costs
In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30), to simplify the required presentation of debt issuance costs. The amended guidance requires that debt issuance costs be presented in the balance sheet as a direct reduction from the carrying amount of the related debt liability rather than as an asset. It is effective for financial statements issued for fiscal years beginning after December 15, 2015, our fiscal 2017, with early adoption permitted. The new guidance will be applied retrospectively to each prior period presented. We adopted this new guidance in our first quarter ended December 31, 2016 and applied this guidance retrospectively. As a result, the debt issuance costs of $6.5 million previously included in other long-term assets on the Consolidated Balance Sheet as of September 30, 2016 have been reclassified.
Going Concern
In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern," which requires management to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern and, if so, provide certain footnote disclosures. This ASU is effective for annual periods ending after December 15, 2016, including interim reporting periods thereafter. We do not anticipate that adopting this standard will have an impact on the financial statements and are currently evaluating the potential impact to our footnote disclosures.
2. Deferred Revenue and Financing Receivables
Deferred Revenue
Deferred revenue primarily relates to software agreements billed to customers for which the subscription and support services have not yet been provided. The liability associated with performing these subscription and support services is included in deferred revenue and, if not yet paid, the related customer receivable is included in prepaid expenses and other current assets. Billed but uncollected support and subscription-related amounts included in other current assets at April 1, 2017 and September 30, 2016 were $185.5 million and $126.3 million, respectively.
Financing Receivables
We periodically provide extended payment terms to credit-worthy customers for software purchases with payment terms up to 24 months. The determination of whether to offer such payment terms is based on the size, nature and credit-worthiness of the customer, and the history of collecting amounts due, without concession, from the customer and customers generally. This determination is based on an internal credit assessment.
As of April 1, 2017 and September 30, 2016, amounts due from customers for contracts with original payment terms greater than twelve months (financing receivables) totaled $5.8 million and $7.1 million, respectively, all of which was due within twelve months and included in accounts receivable in the Consolidated Balance Sheets.
We evaluate the need for an allowance for doubtful accounts for estimated losses resulting from the inability of these customers to make required payments. As of April 1, 2017 and September 30, 2016, we concluded that all financing receivables were collectible and no reserve for credit losses was recorded. We did not provide a reserve for credit losses or write off any uncollectible financing receivables in the six months ended April 1, 2017 or April 2, 2016. We write off uncollectible trade and financing receivables when we have exhausted all collection avenues.

3. Restructuring Charges
On October 23, 2015, we initiated a plan to restructure our workforce and consolidate select facilities in order to reduce our cost structure and to realign our investments with what we believe to be our higher growth opportunities. The actions resulted in total restructuring charges of $83.7 million, primarily associated with termination benefits associated with 795 employees. In the first and second quarters of 2017, we recorded additional charges of $6.3 million and $0.4 million, respectively, of which $3.9 million is related to the closure of excess facilities. As of April 1, 2017, this restructuring plan was substantially complete, with all employee-related charges recorded. We expect to record an additional $3 million in

7


restructuring charges in the third quarter of 2017 related to closing a facility, portions of which had been previously restructured.
Additionally, in 2016 and the first six months of 2017, we recorded credits of $0.6 million and $0.1 million, respectively, related to prior restructuring actions included in charge to operations.
The following table summarizes restructuring accrual activity for the six months ended April 1, 2017:
 
Employee severance and related benefits
 
Facility closures and related costs
 
Total
 
(in thousands)
October 1, 2016
$
35,177

 
$
1,431

 
$
36,608

Charge to operations, net
2,861

 
3,888

 
6,749

Cash disbursements
(28,060
)
 
(880
)
 
(28,940
)
Other non-cash charges

 
(260
)
 
(260
)
Foreign exchange impact
(1,002
)
 
(6
)
 
(1,008
)
Accrual, April 1, 2017
$
8,976

 
$
4,173

 
$
13,149


The following table summarizes restructuring accrual activity for the six months ended April 2, 2016:
 
Employee severance and related benefits
 
Facility closures and related costs
 
Total
 
(in thousands)
October 1, 2015
$
14,086

 
$
1,168

 
$
15,254

Charges to operations, net
41,362

 
364

 
41,726

Cash disbursements
(41,183
)
 
(585
)
 
(41,768
)
Foreign exchange impact
252

 
10

 
262

Accrual, April 2, 2016
$
14,517

 
$
957

 
$
15,474


Of the accrual for facility closures and related costs, $2.2 million is included in accrued expenses and other current liabilities and $2.0 million is included in other liabilities in the Consolidated Balance Sheets. The accrual for facility closures assumed sublease income of $2.2 million over the remaining lease periods. The accrual for employee severance and related benefits is included in accrued compensation and benefits in the Consolidated Balance Sheets.
4. Stock-based Compensation
We measure the cost of employee services received in exchange for restricted stock unit (RSU) awards based on the fair value of 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.
Our equity incentive plan provides for grants of nonqualified and incentive stock options, common stock, restricted stock, RSUs and stock appreciation rights to employees, directors, officers and consultants. We award RSUs as the principal equity incentive awards, including certain performance-based awards that are earned based on achievement of performance criteria established by the Compensation Committee of our Board of Directors. Each RSU represents the contingent right to receive one share of our common stock.
Our employee stock purchase plan (ESPP), initiated in the fourth quarter of 2016, allows eligible employees to contribute up to 10% of their base salary, up to a maximum of $25,000 per year and subject to any 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. 

8


Restricted stock unit activity for the six months ended April 1, 2017
Shares
 
Weighted
Average
Grant Date
Fair Value
(Per Share)
 
(in thousands)
 
 
Balance of outstanding restricted stock units October 1, 2016
3,776

 
$
37.30

Granted
1,457

 
$
50.78

Vested
(1,125
)
 
$
35.83

Forfeited or not earned
(583
)
 
$
37.31

Balance of outstanding restricted stock units April 1, 2017
3,525

 
$
43.34

 

 
Restricted Stock Units
Grant Period
Target
TSR Units (1)
 
Performance-based RSUs (2)
 
Service-based RSUs (3)
 
(Number of Units in thousands)
First six months of 2017
358
 
325
 
773
_________________
(1)
The TSR units were granted to our executive officers pursuant to the terms described below.
(2)
The performance-based RSUs were granted to our executive officers and are eligible to vest based on the achievement of performance criteria for fiscal 2017 established by the Compensation Committee at the time of grant. Shares not earned will be forfeited. The shares earned will vest in three substantially equal installments on November 15, 2017, November 15, 2018 and November 15, 2019.
(3)
The service-based RSUs were granted to employees and our executive officers. All service-based RSUs will vest in three substantially equal annual installments on or about the anniversary of the date of grant.
In the first six months of 2017, we granted the target performance-based TSR units ("target RSUs") shown in the table above to our executive officers. These RSUs are eligible to vest based upon our total shareholder return relative to a peer group (the “TSR units”), measured annually over a three year period. The number of TSR units to 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, 2017, 2018 and 2019, respectively. The shares earned for each period will vest on November 15 following each measurement period, up to a maximum of two times the number of target RSUs (up to a maximum of 499 thousand shares). No vesting will occur in a period unless an annual threshold requirement is achieved. The employee, subject to certain retirement provisions, must remain employed by PTC through the applicable vest date for any RSUs to vest, but in no event will any RSUs vest if the performance criteria are not achieved. If the return to PTC shareholders is negative but still meets or exceeds the peer group indexed return, a maximum of 100% of the target RSUs will vest for the measurement period. TSR units not earned in either of the first two measurement periods are eligible to be earned in the third measurement period.
The weighted average fair value of the TSR units was $68.02 per target RSU on the grant date. The fair value of the TSR units was determined using a Monte Carlo simulation model, a generally accepted statistical technique used to simulate a range of possible future stock prices for PTC and the peer group. The method uses a risk-neutral framework to model future stock price movements based upon the risk-free rate of return, the volatility of each entity, and the pairwise correlations of each entity being modeled. The fair value for each simulation is the product of the payout percentage determined by PTC’s TSR rank against the peer group, the projected price of PTC stock, and a discount factor based on the risk-free rate.
The significant assumptions used in the Monte Carlo simulation model were as follows:
Average volatility of peer group
29.3
%
Risk free interest rate
0.99
%
Dividend yield
%
Compensation expense recorded for our stock-based awards was classified in our Consolidated Statements of Operations as follows:

9


 
Three months ended
 
Six months ended
 
April 1,
2017
 
April 2,
2016
 
April 1,
2017
 
April 2,
2016
 
(in thousands)
Cost of software revenue
$
1,669

 
$
1,100

 
$
3,106

 
$
3,005

Cost of professional services revenue
1,539

 
1,279

 
2,995

 
2,730

Sales and marketing
4,130

 
3,777

 
7,751

 
8,059

Research and development
3,951

 
2,534

 
6,948

 
5,047

General and administrative
10,288

 
6,146

 
18,765

 
19,184

Total stock-based compensation expense
$
21,577

 
$
14,836

 
$
39,565

 
$
38,025


The stock-based compensation expense in the second quarter and first six months of 2017 includes $0.7 million and $1.3 million, respectively, related to the ESPP. The stock-based compensation expense in the first quarter of 2016 included $10 million of expense related to modifications of certain performance-based RSUs previously granted under our long-term incentive programs. The Compensation Committee of our Board of Directors amended these equity awards due to the impact of changes in our business model and strategy and foreign currency on our financial results.
5. Earnings per Share (EPS) and Common Stock
EPS
Basic EPS is calculated by dividing net income by the weighted average number of shares outstanding during the period. Diluted EPS is calculated by dividing net income by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding RSUs using the treasury stock method. The calculation of the dilutive effect of outstanding equity awards under the treasury stock method includes consideration of unrecognized compensation expense and any tax benefits as additional proceeds.

 
Three months ended
 
Six months ended
Calculation of Basic and Diluted EPS
April 1,
2017
 
April 2,
2016
 
April 1,
2017
 
April 2,
2016
 
(in thousands, except per share data)
Net loss
$
(1,104
)
 
$
(5,173
)
 
$
(10,245
)
 
$
(29,065
)
Weighted average shares outstanding—Basic
115,709

 
114,563

 
115,498

 
114,354

Dilutive effect of restricted stock units

 

 

 

Weighted average shares outstanding—Diluted
115,709

 
114,563

 
115,498

 
114,354

Loss per share—Basic
$
(0.01
)
 
$
(0.05
)
 
$
(0.09
)
 
$
(0.25
)
Loss per share—Diluted
$
(0.01
)
 
$
(0.05
)
 
$
(0.09
)
 
$
(0.25
)

For the six months ended April 1, 2017 and April 2, 2016 diluted net loss per share is the same as basic net loss per share as the effects of our potential common stock equivalents are antidilutive. Total antidilutive shares were 1.8 million and 2.1 million for the six months ended April 1, 2017 and April 2, 2016, 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 periodically authorized the repurchase of shares of our common stock. On August 4, 2014, our Board of Directors authorized us to repurchase up to $600 million of our common stock through September 30, 2017. We have repurchased $189.9 million of our common stock under this authorization. We did not repurchase any shares in the second quarter and first six months of 2017 and 2016. We have resumed share repurchases early in the third quarter of 2017. All shares of our common stock repurchased are automatically restored to the status of authorized and unissued.
6. Acquisitions
Acquisition-related costs were $0.6 million and $0.7 million for the second quarter and first six months of 2017, respectively and $1.1 million and $2.3 million for the second quarter and first six months of 2016, respectively. Acquisition-related costs include direct costs of potential and completed acquisitions (e.g., investment banker fees and professional fees,

10


including legal and valuation services) and expenses related to acquisition integration activities (e.g., professional fees and severance). In addition, subsequent adjustments to our initial estimated amount of contingent consideration associated with specific acquisitions are included within acquisition-related charges. These costs have been classified in general and administrative expenses in the accompanying Consolidated Statements of Operations.
Kepware
On January 12, 2016, we acquired all of the ownership interest in Kepware, Inc. for $99.4 million in cash (net of cash acquired of $0.6 million) and $16.9 million representing the fair value of contingent consideration payable upon achievement of targets described below. We borrowed $100.0 million under our existing credit facility in January 2016 to fund the acquisition.
The results of operations of Kepware have been included in our consolidated financial statements beginning on the acquisition date. Our results of operations prior to this acquisition, if presented on a pro forma basis, would not differ materially from our reported results.
The acquisition of Kepware has been 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 an income approach, with estimates and assumptions provided by management of Kepware and PTC. The process for estimating the fair values of identifiable intangible assets and the contingent consideration liability requires the use of significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The former shareholders of Kepware are eligible to receive additional consideration of up to $18.0 million, which is contingent on the achievement of certain Financial Performance, Product Integration and Business Integration targets (as defined in the Stock Purchase Agreement) within 24 months from April 3, 2016 to April 2, 2018. If such targets are achieved within the defined 12 month, 18 month and 24 month earn-out periods, the consideration corresponding to each target will be earned and payable in cash. Up to $9.6 million of the total contingent consideration will become payable in 2017, and the remainder, if subsequently earned, will become payable in 2018.
In connection with accounting for the business combination, we recorded a liability of $16.9 million representing the fair value of the contingent consideration. The liability was valued using a discounted cash flow method and a probability weighted estimate of achievement of the targets. The estimated undiscounted range of outcomes for the contingent consideration is $16.9 million to $18.0 million. We assess the probability that the targets will be met and at what level each reporting period. Subsequent changes in the estimated fair value of the liability are reflected in earnings until the liability is fully settled. As of April 1, 2017, our estimate of the liability was $15.4 million, after a $1.8 million payment made in December 2016.
The purchase price allocation resulted in $77.1 million of goodwill, which will be deductible for income tax purposes, and intangible assets of $34.5 million. Intangible assets include purchased software of $28.7 million, customer relationships of $5.2 million and trademarks of $0.6 million, which are being amortized over weighted average useful lives of 10 years, 10 years and 6 years, respectively, based upon the pattern in which economic benefits related to such assets are expected to be realized.
The resulting amount of goodwill reflects our expectations of the following benefits: 1) Kepware’s protocol translators and connectivity platform strengthen the ThingWorx technology platform and accelerate our entry into the factory setting and Industrial IoT (IIoT); 2) cross-selling opportunities for our integrated technology platforms in the critical infrastructure markets to drive revenue growth; and 3) Kepware’s 20 years of manufacturing experience strengthens our manufacturing talent and domain expertise and provides support for our manufacturing strategy initiatives.
Vuforia
On November 3, 2015, pursuant to an Asset Purchase Agreement, PTC acquired the Vuforia business from Qualcomm Connected Experiences, Inc., a subsidiary of Qualcomm Incorporated, for $64.8 million in cash (net of cash acquired of $4.5 million). We borrowed $50 million under our credit facility to finance this acquisition. At the time of the acquisition, Vuforia had approximately 80 employees and historical annualized revenues were not material.
The acquisition of Vuforia 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 cost approach which requires the use of significant estimates and assumptions, including estimating costs to reproduce an asset. 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 $23.3 million of goodwill, $41.2 million of technology and $4.7 million of net tangible assets. The acquired technology is being amortized over a useful life of 6 years. All of the acquired goodwill was allocated to our software products segment and will be deductible for income tax purposes. The resulting amount of goodwill reflects the value of the synergies created by integrating Vuforia’s augmented technology platform into IoT solutions.

11



7. Goodwill and Intangible Assets
Through the second quarter of 2016, we had two operating and reportable segments: (1) Software Products and (2) Services. Effective with the beginning of the third quarter of 2016, we changed our operating and reportable segments from two to three: (1) Solutions Group, (2) IoT Group and (3) 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 April 1, 2017, goodwill and acquired intangible assets in the aggregate attributable to our Solutions Group, IoT Group and Professional Services segment were $1,169.7 million, $241.5 million and $30.4 million, respectively. As of September 30, 2016, goodwill and acquired intangible assets in the aggregate attributable to our Solutions Group, IoT Group and Professional Services segment were $1,196.6 million, $252.8 million and $30.7 million, respectively. 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 evaluate goodwill for impairment in the third quarter of our fiscal year, or on an interim basis if an event occurs or circumstances change that would, more likely than not, reduce the fair value of a reporting segment below its carrying value. Factors that could trigger an impairment review include significant under-performance relative to historical or projected future operating results, significant changes in our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period and a reduction of our market capitalization relative to net book value. We completed our annual goodwill impairment review as of July 2, 2016 and concluded that no impairment charge was required as of that date.
Goodwill and acquired intangible assets consisted of the following:
 
 
April 1, 2017
 
September 30, 2016
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
 
(in thousands)
Goodwill (not amortized)
 
 
 
 
$
1,161,731

 
 
 
 
 
$
1,169,813

Intangible assets with finite lives (amortized) (1):
 
 
 
 
 
 
 
 
 
 
 
Purchased software
$
351,671

 
$
209,295

 
$
142,376

 
$
354,595

 
$
199,192

 
$
155,403

Capitalized software
22,877

 
22,877

 

 
22,877

 
22,877

 

Customer lists and relationships
350,994

 
218,841

 
132,153

 
355,698

 
206,515

 
149,183

Trademarks and trade names
18,843

 
13,526

 
5,317

 
19,007

 
13,323

 
5,684

Other
3,878

 
3,878

 

 
3,955

 
3,920

 
35

 
$
748,263

 
$
468,417

 
$
279,846

 
$
756,132

 
$
445,827

 
$
310,305

Total goodwill and acquired intangible assets
 
 
 
 
$
1,441,577

 
 
 
 
 
$
1,480,118

(1) The weighted average useful lives of purchased software, customer lists and relationships, and trademarks and trade names with a remaining net book value are 9 years, 10 years, and 10 years, respectively.
Goodwill
Changes in goodwill presented by reportable segments were as follows: 

12


 
Solutions Group
 
IoT Group
 
Professional Services
 
Total
 
(in thousands)
Balance, October 1, 2016
$
1,050,150

 
$
90,065

 
$
29,598

 
$
1,169,813

Foreign currency translation adjustment
(7,255
)
 
(623
)
 
(204
)
 
(8,082
)
Balance, April 1, 2017
$
1,042,895

 
$
89,442

 
$
29,394

 
$
1,161,731

Amortization of Intangible Assets
The aggregate amortization expense for intangible assets with finite lives was classified in our Consolidated Statements of Operations as follows:
 
Three months ended
 
Six months ended
 
April 1,
2017
 
April 2,
2016
 
April 1,
2017
 
April 2,
2016
 
(in thousands)
Amortization of acquired intangible assets
$
7,946

 
$
8,396

 
$
16,013

 
$
16,746

Cost of software revenue
6,389

 
6,725

 
12,777

 
11,852

Total amortization expense
$
14,335

 
$
15,121

 
$
28,790

 
$
28,598

8. Fair Value Measurements
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. Generally accepted accounting principles prescribe a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs that may be used to measure fair value:
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or
Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Money market funds, time deposits and corporate notes/bonds are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets.
Certificates of deposit, commercial paper and certain U.S. government agency securities are classified within Level 2 of the fair value hierarchy. These instruments are valued based on quoted prices in markets that are not active or based on other observable inputs consisting of market yields, reported trades and broker/dealer quotes.
The principal market in which we execute our foreign currency contracts is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants usually are large financial institutions. Our foreign currency contracts’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy.
The fair value of our contingent consideration arrangements is determined based on our evaluation as to the probability and amount of any earn-out that will be achieved based on expected future performances by the acquired entities. These arrangements are classified within Level 3 of the fair value hierarchy.

13


Our significant financial assets and liabilities measured at fair value on a recurring basis as of April 1, 2017 and September 30, 2016 were as follows:
 
April 1, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
Cash equivalents
$
62,889

 
$

 
$

 
$
62,889

Marketable securities

 


 

 

Certificates of deposit

 
682

 

 
682

Commercial paper

 
7,490

 

 
7,490

Corporate notes/bonds
37,617

 

 

 
37,617

U.S. government agency securities

 
2,402

 

 
2,402

Forward contracts

 
1,607

 

 
1,607

 
$
100,506

 
$
12,181

 
$

 
$
112,687

Financial liabilities:


 


 

 

Contingent consideration related to acquisitions
$

 
$

 
$
16,668

 
$
16,668

Forward contracts

 
2,762

 

 
2,762

 
$

 
$
2,762

 
$
16,668

 
$
19,430

 
September 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
Cash equivalents
$
60,139

 
$

 
$

 
$
60,139

Marketable securities

 


 

 

Certificates of deposit

 
681

 

 
681

Commercial paper

 
11,925

 

 
11,925

Corporate notes/bonds
34,601

 

 

 
34,601

U.S. government agency securities

 
2,409

 

 
2,409

Forward contracts

 
260

 

 
260

 
$
94,740

 
$
15,275

 
$

 
$
110,015

Financial liabilities:


 


 

 

Contingent consideration related to acquisitions
$

 
$

 
$
19,570

 
$
19,570

Forward contracts

 
3,170

 

 
3,170

 
$

 
$
3,170

 
$
19,570

 
$
22,740


Changes in the fair value of Level 3 contingent consideration liability associated with our acquisitions of ColdLight and Kepware were as follows:
 
Contingent Consideration
 
(in thousands)
 
ColdLight
 
Kepware
 
Total
Balance, October 1, 2016
$
2,500

 
$
17,070

 
$
19,570

Change in present value of contingent consideration

 
148

 
148

Payment of contingent consideration
(1,250
)
 
(1,800
)
 
(3,050
)
Balance, April 1, 2017
$
1,250

 
$
15,418

 
$
16,668


14


 
Contingent Consideration
 
(in thousands)
 
ThingWorx
 
ColdLight
 
Kepware
 
Total
Balance, October 1, 2015
$
9,000

 
$
4,000

 
$

 
$
13,000

Addition to contingent consideration

 

 
16,900

 
16,900

Change in present value of contingent consideration

 
540

 

 
540

Payment of contingent consideration

 
(1,250
)
 

 
(1,250
)
Balance, April 2, 2016
$
9,000

 
$
3,290

 
$
16,900

 
$
29,190

 Of the total, $12.0 million of the contingent consideration liabilities is included in accrued expenses and other current liabilities, with the remaining $4.7 million in other liabilities in the Consolidated Balance Sheet as of April 1, 2017.
Of the $3.1 million payments in the first six months of 2017, $2.7 million represents the fair value of the liabilities recorded at the acquisition date and is included in financing activities in the Consolidated Statements of Cash Flows. In the first six months of 2016, we paid $1.3 million of contingent consideration, which equaled the fair value of the liabilities recorded at the acquisition date.
9. Marketable Securities
The amortized cost and fair value of marketable securities as of April 1, 2017 and September 30, 2016 were as follows:

April 1, 2017

Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair value
 
(in thousands)
Certificates of deposit
$
682

 
$

 
$

 
$
682

Commercial paper
7,492

 

 
(2
)
 
7,490

Corporate notes/bonds
37,801

 

 
(184
)
 
37,617

US government agency securities
2,409

 

 
(7
)
 
2,402


$
48,384

 
$

 
$
(193
)
 
$
48,191


September 30, 2016

Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair value
 
(in thousands)
Certificates of deposit
$
681

 
$

 
$

 
$
681

Commercial paper
11,945

 

 
(20
)
 
11,925

Corporate notes/bonds
34,701

 

 
(100
)
 
34,601

US government agency securities
2,411

 

 
(2
)
 
2,409


$
49,738

 
$

 
$
(122
)
 
$
49,616


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.
The following table presents our available-for-sale marketable securities by contractual maturity date, as of April 1, 2017 and September 30, 2016.

April 1, 2017
 
September 30, 2016

Amortized cost
 
Fair value
 
Amortized cost
 
Fair value
 
(in thousands)
 
(in thousands)
Due in one year or less
$
23,492

 
$
23,449

 
$
18,585

 
$
18,549

Due after one year through three years
24,892

 
24,742

 
31,153

 
31,067


$
48,384

 
$
48,191

 
$
49,738

 
$
49,616


15


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 and Canada. Our foreign currency risk management strategy is principally designed to mitigate the future potential financial impact of changes in the U.S. Dollar value of anticipated transactions and balances denominated in foreign currency, resulting from changes in foreign currency exchange rates. We enter into derivative transactions, specifically foreign currency forward contracts, to manage the exposures to foreign currency exchange risk to reduce earnings volatility. We do not enter into derivatives transactions for trading or speculative purposes.
Non-Designated Hedges
We hedge our net foreign currency monetary assets and liabilities primarily resulting from foreign currency denominated receivables and payables with foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These contracts have maturities of up to approximately three 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 interest and other expense, net.
As of April 1, 2017 and September 30, 2016, we had outstanding forward contracts with notional amounts equivalent to the following:
Currency Hedged
April 1,
2017
 
September 30,
2016
 
(in thousands)
Canadian / U.S. Dollar
$
8,475

 
$
14,685

Swiss Franc / Euro
11,956

 

Chinese Yuan offshore / Euro
9,762

 

Euro / U.S. Dollar
206,995

 
174,120

Japanese Yen / Euro
15,062

 
32,782

Israeli Shekel / U.S. Dollar
7,504

 
7,271

Japanese Yen / U.S. Dollar
2,585

 
6,716

Swedish Krona / U.S. Dollar
4,973

 
3,852

Danish Krona / U.S. Dollar
3,089

 
1,183

All other
7,585

 
8,925

Total
$
277,986

 
$
249,534

The following table shows the effect of our non-designated hedges in the Consolidated Statements of Operations for the three and six months ended April 1, 2017 and April 2, 2016:
Derivatives Not Designated as Hedging Instruments
 
Location of Gain or (Loss) Recognized in Income
 
Net realized and unrealized gain or (loss) (excluding the underlying foreign currency exposure being hedged)
 
 
 
 
Three months ended
 
Six months ended
 
 
 
 
April 1,
2017
 
April 2,
2016
 
April 1,
2017
 
April 2,
2016
 
 
 
 
(in thousands)
Forward Contracts
 
Interest and other expense, net
 
$
238

 
$
428

 
$
(8,091
)
 
$
(586
)
In the three and six months ended April 1, 2017, foreign currency losses, net were $1.0 million and $2.5 million, respectively. In the three and six months ended April 2, 2016, foreign currency losses, net were $1.0 million and $0.9 million, respectively.
Cash Flow Hedges

16


Our foreign exchange risk management program objective is to identify foreign exchange exposures and implement appropriate hedging strategies to minimize earnings fluctuations resulting from foreign exchange rate movements. We designate certain foreign exchange forward contracts as cash flow hedges of Euro, Yen and SEK denominated intercompany forecasted revenue transactions (supported by third party sales). All foreign exchange forward contracts are carried at fair value on the Consolidated Balance Sheets and the maximum duration of foreign exchange forward contracts is 13 months.
Cash flow hedge relationships are designated at inception, and effectiveness is assessed prospectively and retrospectively using regression analysis on a monthly basis. As the forward contracts are highly effective in offsetting changes to future cash flows on the hedged transactions, we record the effective portion of changes in these cash flow hedges in accumulated other comprehensive income and subsequently reclassify it into earnings in the period during which the hedged transactions are recognized in earnings. Changes in the fair value of foreign exchange forward contracts due to changes in time value are included in the assessment of effectiveness. Our derivatives are not subject to any credit contingent features. We manage credit risk with counterparties by trading among several counterparties and we review our counterparties’ credit at least quarterly.
As of April 1, 2017 and September 30, 2016, we had outstanding forward contracts designated as cash flow hedges with notional amounts equivalent to the following:
Currency Hedged
April 1,
2017
 
September 30,
2016
 
(in thousands)
Euro / U.S. Dollar
$
53,116

 
$
26,181

Japanese Yen / U.S. Dollar
16,499

 
8,800

SEK / U.S. Dollar
3,722

 
4,078

Total
$
73,337

 
$
39,059

The following table shows the effect of our derivative instruments designated as cash flow hedges in the Consolidated Statements of Operations for the six months ended April 1, 2017 and April 2, 2016 (in thousands):

Derivatives Designated as Hedging Instruments
 
Gain or (Loss) Recognized in OCI-Effective Portion
 
Location of Gain or (Loss) Reclassified from OCI into Income-Effective Portion
 
Gain or (Loss) Reclassified from OCI into Income-Effective Portion
 
Location of Gain or (Loss) Recognized-Ineffective Portion
 
Gain or (Loss) Recognized-Ineffective Portion
 
 
Three Months Ended
 
 
 
Three Months Ended
 
 
 
Three Months Ended
 
 
April 1,
2017
 
April 2,
2016
 
 
 
April 1,
2017
 
April 2,
2016
 
 
 
April 1,
2017
 
April 2,
2016
Forward Contracts
 
$
(589
)
 
$
(5,637
)
 
Subscription, support and license revenue
 
$
567

 
$
(13
)
 
Interest and other expense, net
 
$
(4
)
 
$
(37
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended
 
 
 
Six months ended
 
 
 
Six months ended
 
 
April 1,
2017
 
April 2,
2016
 
 
 
April 1,
2017
 
April 2,
2016
 
 
 
April 1,
2017
 
April 2,
2016
Forward Contracts
 
$
2,882

 
$
(3,994
)
 
Subscription, support and license revenue
 
$
974

 
$
833

 
Interest and other expense, net
 
$
5

 
$
(37
)

As of April 1, 2017, we estimated that all amounts reported in accumulated other comprehensive income will be reclassified to income within the next twelve months.
In the event that an underlying forecast transaction does not occur, or it becomes probable that it will not occur, the related hedge gains and losses on the cash flow hedge would be immediately reclassified to interest and other expense, net on the Consolidated Statements of Operations. For the three and six months ended April 1, 2017 and April 2, 2016, there were no such gains or losses.
The following table shows our derivative instruments measured at gross fair value as reflected in the Consolidated Balance Sheets:

17


 
Fair Value of Derivatives Designated As Hedging Instruments
 
Fair Value of Derivatives Not Designated As Hedging Instruments
 
April 1,
2017
 
September 30,
2016
 
April 1,
2017
 
September 30,
2016
 
(in thousands)
 
(in thousands)
Derivative assets (1):
 
 
 
 
 
 
 
       Forward Contracts
$
526

 
$
44

 
$
1,081

 
$
216

Derivative liabilities (2):
 
 
 
 
 
 
 
       Forward Contracts
$
45

 
$
1,477

 
$
2,717

 
$
1,693

(1) As of April 1, 2017 $1,597 thousand current derivative assets are recorded in other current assets, and $10 thousand long term derivative assets are recorded in other assets in the Consolidated Balance Sheets. As of September 30, 2016, all derivative assets were recorded in other current assets in the Consolidated Balance Sheet.
(2) As of April 1, 2017, $2,758 thousand current derivative liabilities are recorded in accrued expenses and other current liabilities, and $4 thousand long term derivative liabilities are recorded in other liabilities in the Consolidated Balance Sheets. As of September 30, 2016, all derivative liabilities were 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 which 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 April 1, 2017:
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
 
 
Gross Amounts Not Offset in the Consolidated Balance Sheets
 
 
As of April 1, 2017
Gross Amount of Recognized Assets
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Amounts of Assets Presented in the Consolidated Balance Sheets
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
 
(in thousands)
Forward Contracts
$
1,607

 
$

 
$
1,607

 
$
(1,607
)
 
$

 
$


The following table sets forth the offsetting of derivative liabilities as of April 1, 2017:
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
 
 
Gross Amounts Not Offset in the Consolidated Balance Sheets
 
 
As of April 1, 2017
Gross Amount of Recognized Liabilities
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Amounts of Liabilities Presented in the Consolidated Balance Sheets
 
Financial Instruments
 
Cash Collateral Pledged
 
Net Amount
 
(in thousands)
Forward Contracts
$
2,762

 
$

 
$
2,762

 
$
(1,607
)
 
$

 
$
1,155


11. Segment 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 three operating and reportable segments: (1) the Solutions Group, which includes license, subscription, support and cloud services revenue for our core CAD, SLM and PLM products; (2) the IoT Group, which includes license, subscription, support and cloud services revenue for our IoT, analytics and augmented reality solutions, and (3) Professional Services, which includes consulting, implementation and training revenue. Our reported segment profit includes revenue from third party sales of our products and services, less direct controllable segment costs. Direct costs of the segments include certain costs of revenue, research and development and certain marketing costs. Costs excluded from segment margin include cost of revenue, selling expenses, corporate marketing and general and administrative costs that are incurred in support of all of our segments and are not specifically allocated to our segments for management reporting. Additionally, the segment profit does not include stock-based

18


compensation, amortization of intangible assets, restructuring charges and certain other identified costs that we do not allocate to the segments for purposes of evaluating their operational performance.
The revenue and profit attributable to our operating segments are summarized below. We do not produce asset information by reportable segment; therefore, it is not reported.
 
Three months ended
 
Six months ended
 
April 1,
2017
 
April 2,
2016
 
April 1,
2017
 
April 2,
2016
 
(in thousands)
Solutions Group
 
 
 
 
 
 
 
Revenue
$
213,148

 
$
206,718

 
$
431,884

 
$
435,312

Direct costs
45,258

 
45,839

 
91,190

 
95,583

Profit
167,890

 
160,879

 
340,694

 
339,729

 
 
 
 
 
 
 
 
IoT Group
 
 
 
 
 
 
 
Revenue
21,722

 
17,255

 
43,205

 
30,356

Direct costs
23,147

 
22,786

 
46,597

 
39,223

Loss
(1,425
)
 
(5,531
)
 
(3,392
)
 
(8,867
)
 
 
 
 
 
 
 
 
Professional Services
 
 
 
 
 
 
 
Revenue
45,170

 
48,654

 
91,278

 
97,976

Direct costs
37,269

 
40,424

 
75,093

 
82,439

Profit
7,901

 
8,230

 
16,185

 
15,537

 
 
 
 
 
 
 
 
Total segment revenue
280,040

 
272,627

 
566,367

 
563,644

Total segment costs
105,674

 
109,049

 
212,880

 
217,245

Total segment profit
174,366

 
163,578

 
353,487

 
346,399

 
 
 
 
 
 
 
 
Other unallocated operating expenses
166,389

 
157,241

 
334,664

 
316,208

Restructuring charges
464

 
4,579

 
6,749

 
41,726

Total operating income (loss)
7,513

 
1,758

 
12,074

 
(11,535
)
 
 
 
 
 
 
 
 
Interest expense
(11,725
)
 
(4,760
)
 
(22,040
)
 
(11,347
)
Interest income and other expense, net
3,156

 
(567
)
 
2,407

 
(233
)
Loss before income taxes
$
(1,056
)
 
$
(3,569
)
 
$
(7,559
)
 
$
(23,115
)

12. Income Taxes
In the second quarter and first six months of 2017, our effective tax rate was (5)% on a pre-tax loss of $1.1 million, and (36)% on a pre-tax loss of $7.6 million, respectively, compared to (45)% on pre-tax loss of $3.6 million and (26)% on a pre-tax loss $23.1 million in the second quarter and first six months of 2016, respectively. In the second quarter and first six months of 2017 and 2016, our effective tax rate was lower than the 35% statutory federal income tax rate due to our corporate structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland. In 2017 and 2016, the foreign rate differential predominantly relates to these Irish earnings. Our foreign rate differential in 2017 and 2016 includes the continuing rate benefit from a business realignment completed on September 30, 2014 in which intellectual property was transferred between two wholly-owned foreign subsidiaries. For the second quarter and first six months of 2017 and 2016, this realignment resulted in tax benefits of approximately $4 million, and $12 million and $4 million and $7 million, respectively. Also, in the second quarter and first six months of 2017, we recorded a tax benefit of $1.8 million related to a favorable agreement in a foreign jurisdiction. Additionally, in the first six months of 2016, our provision reflects a tax benefit of $2.6 million related to a retroactive

19


extension of the U.S. research and development tax credit enacted in the first quarter of 2016. This benefit was offset by a corresponding provision to increase our U.S. valuation allowance.
We have concluded, based on the weight of available evidence, that a full valuation allowance continues to be required against our U.S. net deferred tax assets as they are not more likely than not to be realized in the future. We will continue to reassess our valuation allowance requirements each financial reporting period.
In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the Internal Revenue Service in the U.S. We regularly assess the likelihood of additional assessments by tax authorities and provide for these matters as appropriate. We are currently under audit by tax authorities in several jurisdictions. Audits by tax authorities typically involve examination of the deductibility of certain permanent items, limitations on net operating losses and tax credits. Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in material changes in our estimates.
As of April 1, 2017 and September 30, 2016, we had unrecognized tax benefits of $14.3 million and $15.5 million, respectively. If all of our unrecognized tax benefits as of April 1, 2017 were to become recognizable in the future, we would record a benefit to the income tax provision of $12.6 million, which would be partially offset by an increase in the U.S. valuation allowance of $5.1 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 $6 million as audits close and statutes of limitations expire.  
In the fourth quarter of 2016, we received an assessment of approximately $12 million from the tax authorities in Korea related to a tax audit.  The assessment relates to various tax issues but primarily to foreign withholding taxes. We have appealed and will vigorously defend our positions. We believe that it is more likely than not that our positions will be sustained upon appeal. 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.
13. Debt
At April 1, 2017 and September 30, 2016, we had the following long-term borrowing obligations:
 
April 1,
2017
 
September 30,
2016
 
(in thousands)
6.000% Senior notes due 2024
$
500,000

 
$
500,000

Credit facility-revolver
218,125

 
258,125

Total debt
718,125

 
758,125

Unamortized debt issuance costs for the Senior notes (1)
(6,149
)
 
(6,524
)
Total debt, net of issuance costs
$
711,976

 
$
751,601

 
 
 
 
Reported as
 
 
 
Current portion of long-term debt
$

 
$

Long-term debt
718,125

 
758,125

Total debt
$
718,125

 
$
758,125

(1) Unamortized debt issuance costs related to the credit facility were $2.5 million and $4.2 million as of April 1, 2017 and September 30, 2016, respectively, and were included in other assets.
Senior Notes
In May 2016, we issued $500 million in aggregate principal amount of 6.0% senior, unsecured long-term debt at par value, due in 2024. We used the net proceeds from the sale of the notes to repay a portion of our outstanding revolving loan under our current credit facility. Interest is payable semi-annually on November 15 and May 15. The debt indenture includes covenants that limit our ability to, among other things, incur additional debt, grant liens on our properties or capital stock, enter into sale and leaseback transactions or asset sales, and make capital distributions. We were in compliance with all of the covenants as of April 1, 2017.

20


On or after May 15, 2019, we may redeem the senior notes at any time in whole or from time to time in part at specified redemption prices. In certain circumstances constituting a change of control, we would be required to make an offer to repurchase the senior notes at a purchase price equal to 101% of the aggregate principal amount of the notes, plus accrued and unpaid interest. Our ability to repurchase the senior notes in such event may be limited by law, by the indenture associated with the senior notes, by our then-available financial resources or by the terms of other agreements to which we may be party at such time. If we fail to repurchase the senior notes as required by the indenture, it would constitute an event of default under the indenture governing the senior notes which, in turn, may also constitute an event of default under other obligations.
As of April 1, 2017, the total estimated fair value of the Notes was approximately $528.3 million, which is based on quoted prices for the notes on that date.
Credit Agreement
In November 2015, we entered into a multi-currency credit facility with a syndicate of sixteen banks for which JPMorgan Chase Bank, N.A. acts as Administrative Agent. We use the credit facility for general corporate purposes, including acquisitions of businesses, share repurchases and working capital requirements. As of April 1, 2017, the fair value of our credit facility approximates its book value.
The credit facility initially consisted of a $1 billion revolving loan commitment, which was reduced to $900 million in June 2016 and further reduced to $600 million in March 2017 pursuant to amendments to the Credit Agreement. The March 2017 amendment also increased the maximum permissible leverage ratio, defined as consolidated total indebtedness to the consolidated trailing four quarters EBITDA, from 4.00 to 1.00 to 4.50 to 1.00. The loan commitment may be increased by an additional $500 million (in the form of revolving loans or term loans, or a combination thereof) if the existing or additional lenders are willing to make such increased commitments. The revolving loan commitment does not require amortization of principal and may be repaid in whole or in part prior to the scheduled maturity date at our option without penalty or premium. The credit facility matures on September 15, 2019, when all remaining amounts outstanding will be due and payable in full.
PTC and certain eligible foreign subsidiaries are eligible borrowers under the credit facility. Any borrowings by PTC Inc. under the credit facility would be guaranteed by PTC Inc.’s material domestic subsidiaries that become parties to the subsidiary guaranty, if any. As of the filing of this Form 10-Q, 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, no amounts under the credit facility have been borrowed by an eligible foreign subsidiary borrower. In addition, PTC and certain of its material domestic subsidiaries' owned property (including equity interests) is subject to first priority perfected liens in favor of the lenders of this credit facility. 100% of the voting equity interests of certain of PTC’s domestic subsidiaries and 65% of its material first-tier foreign subsidiaries are pledged as collateral for the obligations under the credit facility.
As of April 1, 2017, we had $218.1 million in loans outstanding under the credit facility. Loans under the credit facility bear interest at variable rates which reset every 30 to 180 days depending on the rate and period selected by PTC as described below. As of April 1, 2017, the annual interest rate for borrowing outstanding was 2.82%. Interest rates on borrowings outstanding under the credit facility range from 1.25% to 1.75% above an adjusted LIBO rate for Euro currency borrowings or would range from 0.25% to 0.75% above the defined base rate (the greater of the Prime Rate, the FRBNY rate plus 0.5%, or an adjusted LIBO rate plus 1%) for base rate borrowings, in each case based upon PTC’s total leverage ratio. Additionally, PTC may borrow certain foreign currencies at rates set in the same range above the respective London interbank offered interest 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 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 $75.0 million for any purpose and an additional $200.0 million for acquisitions of businesses. In addition, under the credit facility, PTC and its subsidiaries must maintain the following financial ratios:
a total leverage ratio, defined as consolidated total indebtedness to the consolidated trailing four quarters EBITDA, not to exceed 4.50 to 1.00 as of the last day of any fiscal quarter;
a senior secured leverage ratio, defined as senior consolidated total indebtedness (which excludes unsecured indebtedness) to the consolidated trailing four quarters EBITDA, not to exceed 3.00 to 1.00 as of the last day of any fiscal quarter; and
a fixed charge coverage ratio, defined as the ratio of consolidated trailing four quarters EBITDA less consolidated capital expenditures to consolidated fixed charges, of not less than 3.50 to 1.00 as of the last day of any fiscal quarter.

21


As of April 1, 2017, our total leverage ratio was 3.25 to 1.00, our senior secured leverage ratio was 0.98 to 1.00 and our fixed charge coverage ratio was 5.23 to 1.00 and we were in compliance with all financial and operating covenants of the credit facility.
Any failure to comply with the financial or operating covenants of the credit facility would prevent PTC from being able to borrow additional funds, and would constitute a default, permitting the lenders to, among other things, accelerate the amounts outstanding, including all accrued interest and unpaid fees, under the credit facility and to terminate the credit facility. A change in control of PTC, as defined in the agreement, also constitutes an event of default, permitting the lenders to accelerate the indebtedness and terminate the credit facility.
Interest expense was $11.7 million and $22.0 million for the second quarter and first six months of 2017, respectively, and $4.8 million and $11.3 million for the second quarter and first six months 2016, respectively.
14. Commitments and Contingencies
Legal and Regulatory Matters
Korean Tax Audit
In July 2016, we received an assessment of approximately $12 million from the tax authorities in Korea related to an ongoing tax audit. See Note 12. Income Taxes for additional information.
Legal Proceedings
On March 7, 2016, a putative class action lawsuit captioned Matthew Crandall v. PTC Inc. et al., No. 1:16-cv-10471, was filed against us and certain of our current and former officers and directors in the U.S. District Court for the District of Massachusetts, ostensibly on behalf of purchasers of our stock during the period November 24, 2011 through July 29, 2015. The lawsuit, which seeks unspecified damages, interest, attorneys’ fees and costs, alleges (among other things) that, during that period, PTC’s public disclosures concerning investigations by the U.S. Securities and Exchange Commission and the U.S. Department of Justice into U.S. Foreign Corrupt Practices Act matters in China (the "China Investigation") were false and/or misleading.  The parties have agreed to settle this lawsuit for an amount that is not material to our results of operations and the associated liability was accrued in our fiscal 2016 results. A joint stipulation of settlement received preliminary court approval on March 23, 2017 and a hearing to consider final approval is scheduled for July 13, 2017. We cannot predict the outcome of that hearing.
We are subject to various other legal proceedings and claims that arise in the ordinary course of business. We do not believe that resolving the legal proceedings and claims that we are currently subject to will have a material adverse impact on our financial condition, results of operations or cash flows. However, the results of legal proceedings cannot be predicted with certainty. Should any of these legal proceedings and claims be resolved against us, the operating results for a particular reporting period could be adversely affected.
Accruals
With respect to legal proceedings and claims, we record an accrual for a contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. For legal proceedings and claims for which the likelihood that a liability has been incurred is more than remote but less than probable, we estimate the range of possible outcomes. As of April 1, 2017, we had a legal proceedings and claims accrual of $2.6 million.
Accounts Receivable
Accounts receivable as of April 1, 2017 includes an amount invoiced under a multi-year contract for which the period of performance, and related revenue recognized, has spanned a number of years (with no revenue recognized in the second quarter of 2017). The invoiced amount is being disputed by the customer. We intend to vigorously pursue collection of the full invoiced amount. If we are unsuccessful in collecting the full invoiced amount, there could be a write-down of accounts receivable and professional services revenue, which could range from $0 to $17.3 million.
Guarantees and Indemnification Obligations
We enter into standard indemnification agreements in the ordinary course of our business. Pursuant to such agreements with our business partners or customers, we indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to our products, as well as claims relating to property damage or personal injury resulting from the performance of services by us or our subcontractors. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. 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.

22


We warrant that our software products will perform in all material respects in accordance with our standard published specifications in effect at the time of delivery of the licensed products for a specified period of time. Additionally, we generally warrant that our consulting services will be performed consistent with generally accepted industry standards. In most cases, liability for these warranties is capped. If necessary, we would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history; however, we have not incurred significant cost under our product or services warranties. As a result, we believe the estimated fair value of these liabilities is immaterial.
15. Subsequent Events
Common Stock Repurchases
In the third quarter of 2017, we resumed our share repurchase program. Through May 10, 2017, we have repurchased $19 million of our common stock.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Statements in this Quarterly Report on Form 10-Q that are not historic facts, including statements about our third quarter and full fiscal 2017 targets and other future financial and growth expectations, and anticipated tax rates, are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. These risks include: the macroeconomic and/or global manufacturing climates may not improve or may deteriorate; customers may not purchase our solutions when or at the rates we expect; our businesses, including our Internet of Things (IoT) business, may not expand and/or generate the revenue we expect; foreign currency exchange rates may vary from our expectations and thereby affect our reported revenue and expense; the mix of revenue between license & subscription solutions, support and professional services could be different than we expect, which could impact our EPS results; our customers may purchase more of our solutions as subscriptions than we expect, which would adversely affect near-term revenue, operating margins, and EPS; customers may not purchase subscriptions at the rate we expect, which could impact our ability to achieve expected subscription bookings and delay our exit from the revenue and earnings trough associated with our subscription business model transition (the "subscription trough"); sales of our solutions as subscriptions may not have the longer-term effect on revenue that we expect; our workforce realignment may not achieve the expense savings we expect and may adversely affect our operations; we may be unable to generate sufficient operating cash flow to return 40% of free cash flow to shareholders and other uses of cash or our credit facility limits could preclude share repurchases; and any repatriation of cash held outside the U.S., which constitutes a significant portion of our cash, could be subject to significant taxes. 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 and loans and cash repatriations from foreign subsidiaries; as well as other risks and uncertainties described below throughout or referenced in Part II, Item 1A. Risk Factors of this report.

Operating and Non-GAAP Measures

Our discussion of results includes discussion of our operating measures (including “subscription bookings” and “license and subscription bookings”) and non-GAAP financial measures. You can find an explanation of these measures in Results of Operations - Subscription Measures and Results of Operations - Non-GAAP Financial Measures below.
Business Overview
PTC is a global computer software and services company. We are organized in two primary businesses: the Internet of Things and Solutions.
Internet of Things (IoT)
IoT and Augmented Reality
Our IoT portfolio is comprised of our IoT, analytics and augmented reality software. This software enables connectivity, rapid application development, machine learning and predictive analysis, and augmented reality software applications for smart, connected products, factory operations, and other environments.
As the IoT gains momentum, software, sensors, and IP-enabled connectivity are increasingly embedded into the design and build of products and are becoming integral to the manufacturing and post-sales service processes. This transformation is taking shape across all manufacturing and industrial sectors.

23


Solutions
Our Solutions portfolio is comprised of our innovative Computer-Aided Design (CAD), Product Lifecycle Management (PLM) and Service Lifecycle Management (SLM) solutions for manufacturers to create, operate, and service smart, connected products.
Computer-Aided Design (CAD)
Effective and collaborative product design across the globe.
Product Lifecycle Management (PLM)
Efficient and consistent management of product development, including embedded software development, from concept to retirement across functional processes and distributed teams.
Service Lifecycle Management (SLM)
Planning and delivery of service, including service parts management, product intelligence, connected service, predictive service, and remote diagnostics.


Executive Overview
Our transition to a subscription business model continued to gain momentum in the second quarter of 2017; subscription revenue grew 178% over the second quarter of 2016 and subscription bookings were 71% of total bookings, compared to 54% in the second quarter of 2016. License and subscription bookings in the second quarter and first six months of 2017 grew 11% and 20% over the second quarter of 2016 and first six months of 2016, respectively. Approximately 88% of our total license, subscription and support revenue in the second quarter of 2017 was recurring, up from 82% a year ago. Total revenue in the quarter grew 3% over the second quarter of 2016, the first quarter in which revenue has increased year over year since we began our subscription transition in 2015, which evidences our exit from the subscription trough.
Given the continued growth of subscription bookings, revenue and earnings continued to be adversely affected relative to prior periods. We ended the quarter with a cash balance of $243 million and marketable securities of $48 million. We generated $76 million of cash from operations in the second quarter of 2017, which includes restructuring payments of $13 million. At April 1, 2017, the balance outstanding under our credit facility was $218 million and total debt outstanding was $718 million. In the second quarter of 2017, we repaid $20 million, net of borrowings, under the credit facility.
Results for the Second Quarter
Revenue was up year over year, despite continued growth in the mix of subscription bookings, which has had an adverse impact on perpetual license revenue and support revenue. The modest revenue growth is indicative of the maturity of the transition to a subscription business model. The continued decline in professional services revenue is consistent with our strategy to migrate more service engagements to our partners, to deliver products that require less consulting and training services, and with our transition to subscription licensing, for which deals tend to be smaller than perpetual license deals and require less associated services.
 
 
Three months ended
 
 
 
Constant Currency Change
 
Six months ended
 
 
 
Constant Currency Change
 
 
April 1, 2017
 
April 2, 2016
 
 
 
 
April 1, 2017
 
April 2, 2016
 
 
 
Revenue
 
 
 
Change
 
 
 
 
Change
 
 
 
(in millions)
Subscription
 
$
65.8

 
$
23.7

 
178
 %
 
180
 %
 
$
120.1

 
$
45.8

 
162
 %
 
162
 %
Support
 
141.7

 
160.6

 
(12
)%
 
(11
)%
 
293.2

 
332.4

 
(12
)%
 
(12
)%
Total recurring revenue
 
207.5

 
184.3

 
13
 %
 
13
 %
 
413.3

 
378.2

 
9
 %
 
9
 %
Perpetual license
 
27.4

 
39.7

 
(31
)%
 
(31
)%
 
61.8

 
87.5

 
(29
)%
 
(29
)%
Total subscription, support and license revenue
 
234.9

 
224.0

 
5
 %
 
5
 %
 
475.1

 
465.7

 
2
 %
 
2
 %
Professional services
 
45.2

 
48.7

 
(7
)%
 
(7
)%
 
91.3

 
98.0

 
(7
)%
 
(7
)%
Total revenue
 
$
280.0

 
$
272.6

 
3
 %
 
3
 %
 
$
566.4

 
$
563.6

 
 %
 
1
 %


24


 
 
Three months ended