UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXCHANGE ACT OF 1934
FORM 10-Q
(Mark One)
For the quarterly period ended September 30, 2005
OR
Commission file number: 0-20853
ANSYS, Inc.
(exact name of registrant as specified in its charter)
724-746-3304
(Registrant’s telephone number, including area code)
Indicate by a 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 x No ¨
Indicate by a check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No ¨
Indicate by a check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ¨ No x
The number of shares of the Registrant’s Common Stock, par value $.01 per share, outstanding as of October 31, 2005 was 31,948,557 shares.
ANSYS, INC. AND SUBSIDIARIES
INDEX
PART I.
Item 1.
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
Item 6.
ANSYS, ANSYS Workbench, CFX, AUTODYN, and any and all ANSYS, Inc. product and service names are registered trademarks or trademarks of ANSYS, Inc. or its subsidiaries located in the United States or other countries. ICEM CFD is a trademark licensed by ANSYS, Inc. All other trademarks or registered trademarks are the property of their respective owners.
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PART I – UNAUDITED FINANCIAL INFORMATION
Item 1. Financial Statements:
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
(Unaudited)
September 30,
2005
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, less allowance for doubtful accounts of $2,300 and $1,890, respectively
Other receivables and current assets
Deferred income taxes
Total current assets
Property and equipment, net
Capitalized software costs, net
Goodwill
Other intangibles, net
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued bonuses
Other accrued expenses and liabilities
Deferred revenue
Total current liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized
Common stock, $.01 par value; 50,000,000 shares authorized; 33,169,516 shares issued
Additional paid-in capital
Retained earnings
Treasury stock, at cost: 1,286,015 and 1,753,391 shares, respectively
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of the condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Revenue:
Software licenses
Maintenance and service
Total revenue
Cost of sales:
Amortization of software and acquired technology
Total cost of sales
Gross profit
Operating expenses:
Selling and marketing
Research and development
Amortization
General and administrative
Total operating expenses
Operating income
Other income
Income before income tax provision
Income tax provision
Net income
Earnings per share - basic:
Basic earnings per share
Weighted average shares – basic
Earnings per share - diluted:
Diluted earnings per share
Weighted average shares - diluted
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Deferred income tax (benefit) expense
Provision for bad debts
Changes in operating assets and liabilities:
Accounts receivable
Accounts payable, accrued expenses and liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Capitalization of internally developed software costs
Purchases of short-term investments
Maturities of short-term investments
Acquisition of Century Dynamics, net of cash acquired
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from issuance of common stock under Employee Stock Purchase Plan
Proceeds from exercise of stock options
Repurchase of common stock
Net cash (used in) provided by financing activities
Effect of exchange rate fluctuations on cash and cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
ANSYS, Inc. (the “Company” or “ANSYS”) develops and globally markets engineering simulation software and technologies widely used by engineers and designers across a broad spectrum of industries, including aerospace, automotive, manufacturing, electronics and biomedical.
The Company operates as one segment, as defined by Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Given the integrated approach to the problem-solving needs of the Company’s customers, a single sale of software may contain components from multiple product areas and include combined technologies. There is no means by which the Company can provide accurate historical (or current) reporting among its various product-line segmentations. Disclosure of such information is impracticable.
The accompanying unaudited condensed consolidated financial statements have been prepared by ANSYS, Inc. in accordance with accounting principles generally accepted in the United States of America for interim financial information for commercial and industrial companies and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the accompanying statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements (and notes thereto) included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. The condensed consolidated December 31, 2004 balance sheet presented is derived from the audited December 31, 2004 balance sheet included in the most recent Form 10-K. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements have been included, and all adjustments are of a normal and recurring nature. Operating results for the three months and nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for any future period.
Concentrations of Credit Risk: The Company has a concentration of credit risk with respect to trade receivables due to the limited number of distributors through which the Company sells its products. The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral.
In addition to the concentration of credit risk with respect to trade receivables, the Company’s cash and cash equivalents are also exposed to concentration of credit risk. The Company maintains its cash accounts primarily in U.S. banks, which are insured by the F.D.I.C. up to $100,000 per bank. The Company had cash balances on deposit with a U.S. bank at September 30, 2005 that exceeded the balance insured by the F.D.I.C. in the amount of approximately $63.5 million. A significant portion of the remaining U.S. cash balances are also uninsured. As a result of the Company’s operations in international locations, it also has significant, uninsured cash balances denominated in foreign currencies and held outside of the U.S.
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Stock-Based Compensation: The Company has elected to account for stock-based compensation arrangements through the intrinsic value method under the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock-Based Compensation.” No compensation expense has been recognized in the condensed consolidated statements of income as option grants generally are made with exercise prices equal to the fair value of the underlying common stock on the award date, which is typically the date of compensation measurement. Had compensation cost been determined based on the fair value at the date of grant, in accordance with the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’s net income and basic and diluted earnings per share would have been reduced to the pro forma amounts indicated below:
Net income, as reported
Add: Stock-based employee compensation expense included in net income, net of related tax effects
Deduct: Stock-based employee compensation expense determined under the fair value-based method for all awards, net of related tax effects
Pro forma net income
Earnings per share:
Basic – as reported
Basic – pro forma
Diluted – as reported
Diluted – pro forma
In December 2004, the FASB issued a revised version of FASB Statement No. 123, “Accounting for Stock-Based Compensation.” The statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost will be recognized over the period during which an employee is required to provide service in exchange for the award, typically the vesting period. For public entities, the revised statement indicated an effective date as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. However, the Securities
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and Exchange Commission (the “Commission”) announced on April 14, 2005 a new rule which allows companies to implement FASB Statement No. 123 at the beginning of the next fiscal year. The Company intends to adopt Statement No. 123 in compliance with the revised implementation date on January 1, 2006.
Reclassifications: Certain reclassifications have been made to the 2004 geographic information in footnote 8 to conform to the 2005 presentation.
As of September 30, 2005 and December 31, 2004, accumulated other comprehensive income, as reflected on the condensed consolidated balance sheets, was comprised of foreign currency translation adjustments.
Comprehensive income for the three- and nine-month periods ended September 30, 2005 and 2004 was as follows:
Comprehensive income
The Company reports accounts receivable related to the portion of annual lease licenses and software maintenance that has not yet been recognized as revenue as a component of other current assets. These amounts totaled $16.2 million and $20.1 million as of September 30, 2005 and December 31, 2004, respectively.
8
Basic earnings per share (“EPS”) amounts are computed by dividing earnings by the average number of common shares outstanding during the period. Diluted EPS amounts assume the issuance of common stock for all potentially dilutive equivalents outstanding. The details of basic and diluted earnings per share are as follows:
Weighted average shares outstanding – basic
Effect of dilutive securities:
Shares issuable upon exercise of dilutive outstanding stock options
Weighted average shares outstanding – diluted
Anti-dilutive shares/options
On January 5, 2005, the Company acquired Century Dynamics, Inc. (hereinafter referred to as “CDI”), a leading provider of sophisticated simulation software for solving linear, nonlinear, explicit and multi-body hydro-dynamics problems, for an initial purchase price of approximately $5.1 million in cash. In addition, the agreement provides for future payments contingent upon the attainment of certain performance criteria, which may result in an increase to goodwill. The acquisition of Century Dynamics, Inc. expands the Company’s product offerings and allows it to deliver a more complete and comprehensive solution to its customers.
The total purchase price was allocated to the foreign and domestic assets and liabilities of CDI based upon estimated fair market values and foreign currency translation rates as of the date of acquisition. Approximately, $2.7 million was allocated to identifiable intangible assets (including $1.5 million to core technology, $450,000 to non-compete agreements, $300,000 to customer contracts, and $500,000 to trademarks), and $2.7 million to goodwill, which is not tax deductible. In the third quarter of 2005, a customer exercised its option to pay the Company approximately $300,000 under the contract that was valued on the acquisition date. As a result, the customer contract was removed from intangible assets as of September 30, 2005. The identified intangible assets are being amortized over three to five years. The acquisition of CDI was accounted for as a purchase, and accordingly, its operating results have been included in ANSYS, Inc.’s consolidated financial statements since the date of acquisition.
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Had the acquisition occurred on January 1, 2005, the 2005 results would not be materially different from those presented in these financial statements. The following unaudited pro forma information presents the 2004 results of operations of the Company as if the acquisition had occurred on January 1, 2004. The unaudited pro forma results are not necessarily indicative of results that would have occurred had the acquisition been in effect for the year presented, nor are they necessarily indicative of future results.
Basic
Diluted
During the first quarter of 2005, the Company completed the annual impairment test for goodwill and intangibles with indefinite lives and determined these assets had not been impaired as of January 1, 2005. No events occurred or circumstances changed during the nine months ended September 30, 2005 that required an interim goodwill impairment test.
Identifiable intangible assets with finite lives continue to be amortized on a straight-line basis over their estimated useful lives and are reviewed for impairment whenever events or circumstances indicated that the carrying amounts may not be recoverable.
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As of September 30, 2005 and December 31, 2004, the Company’s intangible assets have estimated useful lives and are classified as follows:
Amortized intangible assets:
Core technology and trademarks (3–10 years)
Non-compete agreements (4–5 years)
Customer lists and contracts (3–5 years)
Total
Unamortized intangible assets:
Trademarks
Amortization expense for the amortized intangible assets reflected above for the three months ended September 30, 2005 and September 30, 2004 was approximately $1.0 million and $895,000, respectively. Amortization expense for the amortized intangible assets reflected above for the nine months ended September 30, 2005 and September 30, 2004 was approximately $3.3 million and $2.7 million, respectively.
Amortization expense for the amortized intangible assets reflected above is expected to be approximately $4.2 million, $3.3 million, $3.3 million, $730,000 and $357,000 for the years ending December 31, 2005, 2006, 2007, 2008 and 2009, respectively.
The changes in goodwill during the nine-month period ended September 30, 2005 are as follows:
Balance – January 1, 2005
Acquisition of Century Dynamics, Inc.
Currency translation & other
Balance – September 30, 2005
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Revenue by geographic area for the three and nine months ended September 30, 2005 and 2004 is as follows:
United States
Canada
United Kingdom
Germany
Japan
Other European
Other International
Long-lived assets (excluding deferred tax assets) by geographic area are as follows:
Total long-lived assets
In October 2001, the Company announced that its Board of Directors had amended its existing stock repurchase program to acquire up to an additional one million shares, or four million shares in total under the program that was initially announced in February 2000. Under this program, ANSYS repurchased 206,477 shares in the nine-month period ended September 30, 2005. No shares were repurchased in the nine-month period ended September 30, 2004. As of September 30, 2005, 2.0 million shares remain authorized for repurchase under the program.
From time to time the Company is involved in various investigations, claims and legal proceedings that arise in the ordinary course of business activities. Management believes, after consulting with legal counsel, that the ultimate liabilities, if any, resulting from such matters will not materially affect the Company’s financial position, liquidity or results of operations.
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In October 2005, the Company acquired substantially all of the assets of Harvard Thermal, Inc. (hereafter “HTI”), a leader in thermal analysis software tools, for an up-front purchase price of approximately $1.3 million in cash and stock. In addition, the acquisition agreement provides for future payments of up to $400,000, contingent upon the attainment of certain performance criteria. The acquisition of HTI expands the Company’s product offerings and allows it to deliver a more complete and comprehensive solution to its customers. The operating results for HTI will be included with the Company’s operating results from the date of acquisition. The Company is currently in the process of completing the purchase accounting for the acquired assets and liabilities. After allocation to the identifiable assets and liabilities, the remaining excess of the purchase price over the value of net assets acquired will be attributed to goodwill.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Canonsburg, Pennsylvania
We have reviewed the accompanying condensed consolidated balance sheet of ANSYS, Inc. and subsidiaries as of September 30, 2005, and the related condensed consolidated statements of income and cash flows for the three and nine-month periods ended September 30, 2005 and 2004. These interim financial statements are the responsibility of the Corporation’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of ANSYS, Inc. and subsidiaries as of December 31, 2004, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 10, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2004 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
October 26, 2005
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview:
ANSYS Inc.’s (the “Company”) quarterly results for the three- and nine-month periods ended September 30, 2005 reflect revenue growth of 20.8% and 19.5%, respectively, and diluted earnings per share growth of 43.5% and 33.8%, respectively. These results were impacted by various factors, including higher revenues from the Company’s software products and services, the January 2005 acquisition of Century Dynamics, Inc., an improvement in operating margins, higher interest income, a third quarter 2005 adjustment to the Company’s estimate of accrued taxes and foreign currency fluctuations.
ANSYS, Inc. develops and globally markets engineering simulation software and technologies widely used by engineers and designers across a broad spectrum of industries, including aerospace, automotive, manufacturing, electronics and biomedical. Headquartered at Southpointe in Canonsburg, Pennsylvania, ANSYS, Inc. and its subsidiaries employ approximately 600 people and focus on the development of open and flexible solutions that enable users to analyze designs directly on the desktop, providing a common platform for fast, efficient and cost-conscious product development, from design concept to final-stage testing and validation. The Company distributes its ANSYS®, ANSYS WorkbenchTM, CFX®, DesignSpaceTM, ICEM CFDTM, CADOETM and AUTODYN® products through a global network of channel partners, in addition to its own direct sales offices in strategic, global locations. It is the Company’s intention to continue to maintain this mixed sales and support model.
The Company licenses its technology to businesses, educational institutions and governmental agencies. The growth in the Company’s revenues is affected by the strength of the economy, general business conditions, customer budgetary constraints and the competitive position of the Company’s products. The Company believes that the features, functionality and integrated multiphysics capabilities of its software products are as strong as they have ever been. However, the software business is generally characterized by long sales cycles. These long sales cycles increase the difficulty of predicting sales for any particular quarter. As a result, the Company believes that its overall performance is best measured by fiscal year results rather than by quarterly results.
The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto for the three- and nine-month periods ended September 30, 2005 and 2004, and with the Company’s audited financial statements and notes thereto for the year ended December 31, 2004 filed on Form 10-K with the Securities and Exchange Commission.
This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including the following statements, as well as statements which contain such words as “anticipates”, “intends”, “believes”, “plans” and other similar expressions:
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Forward-looking statements should not be unduly relied upon because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the Company’s control. The Company’s actual results could differ materially from those set forth in forward-looking statements. Certain factors that might cause such a difference include risks and uncertainties detailed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in the 2004 Annual Report to Stockholders and in “Important Factors Regarding Future Results” included herein as Exhibit 99.1 to this Form 10-Q.
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Results of Operations
Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004
(dollars in thousands)
Maintenance & service
The increase in revenue is primarily due to the following reasons:
With respect to revenue, on average, for the third quarter of 2005, the U.S. dollar was approximately a net 0.3% weaker, when measured against the Company’s primary foreign currencies, than for the third quarter of 2004. The U.S. dollar strengthened against the British Pound, the Japanese Yen, and the Euro while it weakened against the Indian Rupee and the Canadian Dollar. As a result of these fluctuations, the net impact on both revenue and operating profit during the quarter was less than $50,000.
International and domestic revenues, as a percentage of total revenue, were 65.6% and 34.4%, respectively, in the quarter ended September 30, 2005 and 65.4% and 34.6%, respectively, in the quarter ended September 30, 2004.
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Cost of Sales and Gross Profit:
The change in cost of sales is due to the following primary reasons:
The improvement in the gross profit was a result of the increase in revenue offset by a smaller increase in related cost of sales.
Operating Expenses:
Selling & marketing
Research & development
General & administrative
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Selling and Marketing Expenses: Selling and marketing expenses increased by approximately $300,000 due to CDI. Both salary and headcount, excluding the CDI personnel, and marketing and advertising costs each increased $200,000. These costs were partially offset by a decrease in third party commissions of $300,000.
The Company anticipates that it will continue to make investments throughout the remainder of 2005 and into 2006 in its global sales and marketing organization to strengthen its competitive position, to enhance major account sales activities and to support its worldwide sales distribution and marketing strategies.
Research and Development: Research and development expenses increased due to two primary reasons. First, post-acquisition CDI research and development costs were $350,000. Second, salary and headcount related expenses (excluding CDI personnel) increased by $700,000. The Company has traditionally invested significant resources in research and development activities and intends to continue to make significant investments in this area.
Amortization: Amortization remained unchanged at approximately $300,000 in both 2005 and 2004. Amortization expense related to the January 2005 CDI acquisition was substantially offset by other intangible assets which became fully amortized during the current period.
General and Administrative: General and administrative expenses increased due to $300,000 in costs related to CDI and $200,000 in higher salary and headcount related expenses. Public company expenses and costs to comply with the provisions of the Sarbanes-Oxley Act, including accounting, legal and consulting fees, will be ongoing.
Other Income: Other income increased from $415,000 during the quarter ended September 30, 2004 to $1.1 million for the quarter ended September 30, 2005. This net increase was primarily the result of an increase in interest income of $600,000 due to an increased level of funds invested, as well as higher interest rates in 2005 as compared with 2004.
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Income Tax Provision: The Company’s effective tax rate was 27.8% in the 2005 quarter as compared to 30.1% in the 2004 quarter. These rates are lower than the federal and state combined statutory rate as a result of export benefits, as well as the generation of research and experimentation credits. The Company currently expects that the effective tax rate will be in the range of 31%—32% for the year ending December 31, 2005.
During the third quarter of 2005, the Company filed its 2004 U.S. federal and state tax returns. In conjunction with the completion of these returns, the Company adjusted its estimate for 2004 taxes to reflect the actual results and recorded a $500,000 tax benefit. The effect of this adjustment reduced the third quarter effective tax rate from 31.0% to 27.8%.
Net Income: The Company’s net income in the 2005 quarter was $11.2 million as compared to $7.6 million in the 2004 quarter. Diluted earnings per share increased to $0.33 in the 2005 quarter as compared to $0.23 in the 2004 quarter as a result of the increase in net income. The weighted average shares used in computing diluted earnings per share were 33.9 million in the 2005 third quarter and 33.2 million in the 2004 third quarter.
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Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004
With respect to revenue, on average, for the nine-month period of 2005, the U.S. dollar was approximately 2.4% weaker, when measured against the Company’s primary foreign currencies, than for the same period of 2004. On a year-to-date basis, the U.S. dollar weakened against the British Pound, the Indian Rupee, the Japanese Yen, the Canadian Dollar, and the Euro. The weakening resulted in increased revenue and operating profit during the 2005 period, as compared with the corresponding 2004 period, of approximately $900,000 and $200,000, respectively.
International and domestic revenues, as a percentage of total revenue, were 66.9% and 33.1%, respectively, in the nine months ended September 30, 2005 and 66.1% and 33.9%, respectively, in the nine months ended September 30, 2004.
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Selling and Marketing Expenses: Selling and marketing expenses increased by approximately $800,000 due to CDI. Excluding the CDI personnel, salary and headcount related expenses increased by $900,000 and travel costs increased by $100,000. These costs were partially offset by a decrease in third party commissions of $700,000, and a decrease in costs associated with the biennial ANSYS Users’ Conference of $300,000, which was held in 2004.
Research and Development: Research and development expenses increased due primarily to post-acquisition costs for CDI of $1.1 million and higher salary and headcount related expenses of $1.8 million.
Amortization: Amortization expense increased due to the acquisition of CDI in January 2005.
General and Administrative: General and administrative expenses increased due to $1.0 million in costs related to CDI and $900,000 in higher salary and headcount related expenses. Public company expenses and costs to comply with the provisions of the Sarbanes-Oxley Act, including accounting, legal and consulting fees, will be ongoing.
Other Income: Other income increased from $791,000 during the nine months ended September 30, 2004 to $2.8 million for the nine months ended September 30, 2005. This net increase was primarily the result of the following two factors:
Investment Income - Interest income was $2.9 million for the nine months ended September 30, 2005, compared to $1.0 million for the nine months ended September 30, 2004. Larger cash balances invested, in addition to higher interest rates, caused the increase in interest income.
Foreign Currency Transaction - During the nine months ended September 30, 2005, the Company had a net foreign exchange loss of $200,000 as compared with a loss of $300,000 for the nine months ended September 30, 2004. Because the Company has significant operations in non-U.S. locations, the Company, for the foreseeable future, will have financial and operational exposure to volatility of foreign exchange rates. The Company is most impacted by movements among and between the Canadian Dollar, British Pound, Euro, Indian Rupee, Japanese Yen and the U.S. Dollar.
Income Tax Provision: The Company’s effective tax rate was 30.2% for the nine months ended September 30, 2005 as compared to 30.0% for the nine months ended September 30, 2004. These rates are lower than the federal and state combined statutory rate as a result of export benefits, as well as the generation of research and experimentation credits.
During the third quarter of 2005, the Company filed its 2004 U.S. federal and state tax returns. In conjunction with the completion of these returns, the Company adjusted its estimate for 2004 taxes to reflect the actual results and recorded a $500,000 tax benefit. The effect of this adjustment reduced the effective tax rate for the nine months ended September 30, 2005 from 31.3% to 30.2%.
Net Income: The Company’s net income for the nine months ended September 30, 2005 was $30.6 million as compared to $22.3 million in the 2004 nine-month period. Diluted earnings per share increased to $0.91 in the 2005 period as compared to $0.68 in the 2004 period as a result of the increase in net income. The weighted average shares used in computing diluted earnings per share were 33.7 million in the 2005 period and 32.9 million in the 2004 period.
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Liquidity and Capital Resources
As of September 30, 2005, the Company had cash, cash equivalents and short-term investments totaling $174.5 million and working capital of $151.3 million, as compared to cash, cash equivalents and short-term investments of $138.4 million and working capital of $120.1 million at December 31, 2004. The short-term investments are generally investment grade and liquid, which allows the Company to minimize interest rate risk and to facilitate liquidity in the event of an immediate cash requirement.
The Company’s operating activities provided cash of $47.1 million and $39.7 million during the nine months ended September 30, 2005 and 2004, respectively. The $7.4 million increase in the Company’s cash flow from operations in the 2005 nine-month period as compared to the comparable 2004 period was primarily the result of $7.9 million in increased earnings, adjusted for non-cash expenses such as depreciation and deferred taxes, offset by a $600,000 decrease in cash from changes in working capital balances.
The Company’s investing activities provided net cash of $37.4 million for the nine months ended September 30, 2005 and used net cash of $8.2 million for the nine months ended September 30, 2004. In 2005, maturing short-term investments exceeded related purchases by $45.3 million. In addition, during 2005, the Company had net cash outlays of approximately $4.2 million related to the acquisition of Century Dynamics, Inc. During the corresponding period of 2004, the Company’s purchases of short-term investments exceeded related maturities by $5.1 million. The Company currently plans additional capital spending of approximately $700,000 to $1.0 million throughout the remainder of 2005; however, the level of spending will be dependent upon various factors, including growth of the business and general economic conditions.
Financing activities used cash of $2.2 million in the nine months ended September 30, 2005 as compared with cash provided of $4.6 million during the nine months ended September 30, 2004. During 2005, the Company repurchased 206,477 shares of stock for $7.5 million. This cash outlay was substantially offset by cash provided by the employee stock and option plans.
The Company believes that existing cash and cash equivalent balances of $164.4 million, together with short-term investment balances and cash generated from operations, will be sufficient to meet the Company’s working capital and capital expenditure requirements through the remainder of fiscal 2005. The Company’s cash requirements in the future may also be financed through additional equity or debt financings. There can be no assurance that such financings can be obtained on favorable terms, if at all.
The Company continues to generate positive cash flows from operating activities and believes that the best use of its excess cash is to grow the business and, under certain conditions, to repurchase stock. Additionally, the Company has in the past, and expects in the future, to acquire or make investments in complementary companies, products, services and technologies. The Company believes it can fund future acquisitions with available cash and investments, cash generated from operations, existing or additional credit facilities, or from the issuance of additional securities.
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The Company does not have any special purpose entities or off-balance sheet financing arrangements.
During the quarters ended September 30, 2005 and 2004, the Company had no borrowings under an uncommitted and unsecured $10.0 million line of credit.
In the first quarter of 2005, the Company entered into a new facility lease agreement for an international office. This new agreement caused a significant change to the other office leases contractual obligations which were previously reported on the Company’s Form 10-K. Such changes are summarized below:
Payments Due by Period
as of December 31, 2004
Prior to New Lease
After New Lease
There were no other material changes to the Company’s significant contractual obligations during the nine months ended September 30, 2005.
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As the Company continues to expand its direct sales presence in international regions, the portion of its revenue, expenses, cash, accounts receivable and payment obligations denominated in foreign currencies continues to increase. As a result, changes in currency exchange rates from time to time may affect the Company’s financial position, results of operations and cash flows.
In April 2005 the Company’s British Pound-denominated intercompany loan with a U.K. subsidiary was satisfied in full.
No other material change has occurred in the Company’s market risk subsequent to December 31, 2004.
Evaluation of Disclosure Controls and Procedures. As required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, the Company has evaluated, with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures are effective in ensuring that material information relating to the Company, including its consolidated subsidiaries, is made known to the certifying officers by others within the Company and its consolidated subsidiaries during the period covered by this report.
The Company has a Disclosure Review Committee to assist in the quarterly evaluation of the Company’s internal disclosure controls and procedures and in the review of the Company’s periodic filings under the Exchange Act. The membership of the Disclosure Review Committee consists of the Company’s Chief Executive Officer, Chief Financial Officer, Controller, General Counsel, Treasurer, Vice President of Sales and Support, Vice President of Human Resources and Business Unit General Managers. This committee is advised by external counsel, particularly on SEC-related matters. Additionally, other members of the Company’s global management team advise the committee with respect to disclosure via a sub-certification process.
The Company believes, based on its knowledge, that the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report. The Company cannot provide assurance that new problems will not be found in the future, nor does it expect that its disclosure controls and procedures, or its internal controls, will prevent all errors and all fraud because no system can provide absolute assurance that the objectives of the control system are met. Because of the inherent limitations on all control systems, no evaluation of controls can provide absolute assurance that all control issues and instance of fraud within ANSYS have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some person or by collusion of two or more people. The Company is committed to both a sound internal control environment and to good corporate governance.
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The Company periodically reviews the disclosure controls and procedures, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company’s systems evolve with its business.
Changes in Internal Controls. The Company is in the process of extending its internal controls to its acquisition of Century Dynamics, Inc. Otherwise, there were no changes that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting during the nine months ended September 30, 2005.
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PART II – OTHER INFORMATION
The Company is subject to various legal proceedings from time to time that arise in the ordinary course of business. Each of these matters is subject to various uncertainties, and it is possible that these matters may be resolved unfavorably to the Company.
b) The following information is furnished in connection with securities sold by the Registrant during the period covered by this Form 10-Q which were not registered under the Securities Act. The transactions constitute sales of the Registrant’s Common Stock, par value $.01 per share, upon the exercise of vested options issued pursuant to the Company’s 1994 Stock Option and Grant Plan, issued in reliance upon the exemption from registration under Rule 701 promulgated under the Securities Act and issued prior to the Registrant becoming subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act of 1934, as amended.
Month/Year
July 2005
August 2005
September 2005
c) Issuer Purchases of Equity Securities
Period
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None.
(a) Exhibits.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
/s/ James E. Cashman, III
/s/ Maria T. Shields
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EXHIBIT INDEX
31