10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-20853
ANSYS, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
04-3219960
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
2600 ANSYS Drive, Canonsburg, PA
 
15317
(Address of principal executive offices)
 
(Zip Code)
724-746-3304
(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   x     No  o
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  x     No  o
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Exchange Act Rule 12b-2). (Check one):
Large accelerated filer
x
 
Accelerated filer
o
Non-accelerated filer
o
 
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o    No  x
The number of shares of the Registrant’s Common Stock, par value $.01 per share, outstanding as of October 31, 2015 was 88,992,196 shares.




ANSYS, INC. AND SUBSIDIARIES
INDEX
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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Table of Contents

PART I – UNAUDITED FINANCIAL INFORMATION
Item 1.Financial Statements:
ANSYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

 
September 30,
2015
 
December 31,
2014
(in thousands, except share and per share data)
(Unaudited)
 
(Audited)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
776,239

 
$
788,064

Short-term investments
684

 
714

Accounts receivable, less allowance for doubtful accounts of $5,400 and $5,500, respectively
91,470

 
101,229

Other receivables and current assets
148,160

 
192,308

Deferred income taxes
28,711

 
28,178

Total current assets
1,045,264

 
1,110,493

Property and equipment, net
58,590

 
64,643

Goodwill
1,334,509

 
1,312,182

Other intangible assets, net
233,262

 
259,312

Other long-term assets
5,665

 
6,187

Deferred income taxes
24,276

 
21,286

Total assets
$
2,701,566

 
$
2,774,103

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
3,220

 
$
3,421

Accrued bonuses and commissions
32,159

 
47,001

Accrued income taxes
3,000

 
7,127

Deferred income taxes
23

 
24

Other accrued expenses and liabilities
53,850

 
74,862

Deferred revenue
319,705

 
332,664

Total current liabilities
411,957

 
465,099

Long-term liabilities:
 
 
 
Deferred income taxes
29,396

 
37,390

Other long-term liabilities
48,617

 
54,113

Total long-term liabilities
78,013

 
91,503

Commitments and contingencies


 


Stockholders’ equity:
 
 
 
Preferred stock, $.01 par value; 2,000,000 shares authorized; zero shares issued or outstanding

 

Common stock, $.01 par value; 300,000,000 shares authorized; 93,236,023 shares issued
932

 
932

Additional paid-in capital
891,920

 
904,825

Retained earnings
1,724,008

 
1,539,508

Treasury stock, at cost: 4,222,634 and 2,470,675 shares, respectively
(358,898
)
 
(196,010
)
Accumulated other comprehensive loss
(46,366
)
 
(31,754
)
Total stockholders' equity
2,211,596

 
2,217,501

Total liabilities and stockholders' equity
$
2,701,566

 
$
2,774,103

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

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Table of Contents

ANSYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
(in thousands, except per share data)
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
Revenue:
 
 
 
 
 
 
 
Software licenses
$
140,197

 
$
139,965

 
$
405,655

 
$
406,883

Maintenance and service
97,643

 
94,035

 
285,451

 
274,763

Total revenue
237,840

 
234,000

 
691,106

 
681,646

Cost of sales:
 
 
 
 
 
 
 
Software licenses
6,889

 
7,095

 
21,048

 
21,603

Amortization
9,818

 
9,477

 
28,918

 
28,198

Maintenance and service
19,874

 
20,622

 
60,288

 
63,816

Total cost of sales
36,581

 
37,194

 
110,254

 
113,617

Gross profit
201,259

 
196,806

 
580,852

 
568,029

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
61,367

 
58,172

 
181,640

 
174,002

Research and development
44,784

 
41,033

 
127,439

 
123,251

Amortization
4,925

 
6,793

 
15,037

 
17,374

Total operating expenses
111,076

 
105,998

 
324,116

 
314,627

Operating income
90,183

 
90,808

 
256,736

 
253,402

Interest expense
(95
)
 
(149
)
 
(371
)
 
(578
)
Interest income
674

 
655

 
2,125

 
2,206

Other (expense) income, net
(383
)
 
(395
)
 
475

 
(772
)
Income before income tax provision
90,379

 
90,919

 
258,965

 
254,258

Income tax provision
24,346

 
25,440

 
74,465

 
69,201

Net income
$
66,033

 
$
65,479

 
$
184,500

 
$
185,057

Earnings per share – basic:
 
 
 
 
 
 
 
Basic earnings per share
$
0.74

 
$
0.71

 
$
2.05

 
$
2.01

Weighted average shares – basic
89,694

 
91,875

 
89,873

 
92,224

Earnings per share – diluted:
 
 
 
 
 
 
 
Diluted earnings per share
$
0.72

 
$
0.70

 
$
2.01

 
$
1.96

Weighted average shares – diluted
91,593

 
93,905

 
91,820

 
94,397

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

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ANSYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
(in thousands)
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
Net income
$
66,033

 
$
65,479

 
$
184,500

 
$
185,057

Other comprehensive loss:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(1,854
)
 
(19,348
)
 
(14,612
)
 
(15,890
)
Comprehensive income
$
64,179

 
$
46,131

 
$
169,888

 
$
169,167

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

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ANSYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
Nine Months Ended
(in thousands)
September 30,
2015
 
September 30,
2014
Cash flows from operating activities:
 
 
 
Net income
$
184,500

 
$
185,057

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
58,782

 
61,223

Deferred income tax benefit
(7,301
)
 
(13,698
)
Provision for bad debts
1,286

 
1,645

Stock-based compensation expense
25,731

 
27,583

Excess tax benefits from stock-based compensation
(6,366
)
 
(9,619
)
Other
1,473

 
20

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
6,707

 
14,093

Other receivables and current assets
35,330

 
48,561

Other long-term assets
396

 
434

Accounts payable, accrued expenses and current liabilities
(33,255
)
 
(18,859
)
Accrued income taxes
2,389

 
5,856

Deferred revenue
(6,557
)
 
(2,080
)
Other long-term liabilities
(4,788
)
 
(7,182
)
Net cash provided by operating activities
258,327

 
293,034

Cash flows from investing activities:
 
 
 
Acquisitions, net of cash acquired
(40,892
)
 
(102,517
)
Capital expenditures
(10,765
)
 
(20,628
)
Other investing activities
(2
)
 
(169
)
Net cash used in investing activities
(51,659
)
 
(123,314
)
Cash flows from financing activities:
 
 
 
Principal payments on capital leases
(15
)
 
(86
)
Purchase of treasury stock
(242,748
)

(108,613
)
Restricted stock withholding taxes paid in lieu of issued shares
(4,431
)
 
(5,108
)
Contingent consideration payments
(1,173
)
 
(4,504
)
Proceeds from shares issued for stock-based compensation
36,563

 
26,723

Excess tax benefits from stock-based compensation
6,366

 
9,619

Net cash used in financing activities
(205,438
)
 
(81,969
)
Effect of exchange rate fluctuations on cash and cash equivalents
(13,055
)
 
(13,432
)
Net (decrease) increase in cash and cash equivalents
(11,825
)
 
74,319

Cash and cash equivalents, beginning of period
788,064

 
742,486

Cash and cash equivalents, end of period
$
776,239

 
$
816,805

Supplemental disclosures of cash flow information:
 
 
 
Income taxes paid
$
77,867

 
$
90,606

Interest paid
$
609

 
$
633

Fair value of stock options and restricted stock awards assumed in connection with acquisitions
$
3,528

 
$
68

Construction-in-progress - leased facility
$

 
$
13,873

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

6

Table of Contents

ANSYS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)

1.
Organization
ANSYS, Inc. (hereafter the "Company" or "ANSYS") develops and globally markets engineering simulation software and technologies widely used by engineers, designers, researchers and students across a broad spectrum of industries and academia, including aerospace, automotive, manufacturing, electronics, biomedical, energy and defense.
As of January 1, 2015, the Company began to operate as one segment when two legal entities merged and a third insignificant acquired segment was no longer separately reported internally. Given the integrated approach to the multi-discipline problem-solving needs of the Company's customers, a single sale of software may contain components from multiple product areas and include combined technologies. The Company also has a multi-year product and integration strategy that will result in new, combined products or changes to or discontinuation of the historical product offerings. As a result, it is impracticable for the Company to provide accurate historical or current reporting among its various product lines.

2.
Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by ANSYS in accordance with accounting principles generally accepted in the United States for interim financial information for commercial and industrial companies and the instructions to the Quarterly Report on 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 for complete financial statements. The accompanying condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements (and notes thereto) included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014. The condensed consolidated December 31, 2014 balance sheet presented is derived from the audited December 31, 2014 balance sheet included in the most recent Annual Report on 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 and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for any future period.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of highly liquid investments such as deposits held at major banks and money market mutual funds. Cash equivalents are carried at cost, which approximates fair value. The Company’s cash and cash equivalent balances comprise the following:
 
September 30, 2015
 
December 31, 2014
(in thousands, except percentages)
Amount
 
% of Total
 
Amount
 
% of Total
Cash accounts
$
423,132

 
54.5
 
$
506,731

 
64.3
Money market mutual funds
353,107

 
45.5
 
281,333

 
35.7
Total
$
776,239

 
 
 
$
788,064

 
 
The Company's money market mutual fund balances are held in various funds of a single issuer.

3.
Acquisitions
2015 Acquisitions
During the nine months ended September 30, 2015, the Company completed various acquisitions to accelerate development of new and innovative products to the marketplace while lowering design and engineering costs for customers. The acquisitions were not individually significant. The combined purchase price of the acquisitions was approximately $44.4 million, which included cash and equity.
The operating results of each acquisition have been included in the Company's condensed consolidated financial statements since each respective date of acquisition. The effects of the business combinations were not individually material to the Company's consolidated results of operations.

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The total consideration transferred was allocated to the assets and liabilities of each acquisition based on management's estimates of the fair values of the assets acquired and liabilities assumed. The allocation included $19.1 million to identifiable intangible assets to be amortized over periods between five and ten years, and $28.5 million to goodwill, inclusive of any measurement-period adjustments recorded since the respective acquisition dates. The fair values of the assets acquired and liabilities assumed are based on provisional calculations and the estimates and assumptions for these items are subject to change during the measurement period (up to one year from the acquisition date) as the Company obtains new information about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.
In valuing deferred revenue on the balance sheet as of each acquisition date, the Company applied the fair value provisions applicable to the accounting for business combinations. Acquired deferred revenues with a combined historical carrying value of $0.9 million were ascribed no fair value on the opening balance sheets. As a result, the Company's post-acquisition revenue will be less than the sum of what would have otherwise been reported by ANSYS and each acquiree absent the acquisitions. The impacts on reported revenue for the three and nine months ended September 30, 2015 were $0.2 million and $0.6 million, respectively. The expected impacts on reported revenue are $0.2 million for the quarter ending December 31, 2015 and $0.1 million for the year ending December 31, 2016.
SpaceClaim Corporation
On April 30, 2014, the Company completed the acquisition of SpaceClaim Corporation ("SpaceClaim"), a leading provider of 3-D modeling technology. Under the terms of the agreement, the Company acquired SpaceClaim for a purchase price of $85.0 million, which was paid almost entirely in cash.
SpaceClaim's software provides customers with a powerful and intuitive 3-D direct modeling solution to author new concepts and then leverage the power of simulation to rapidly iterate on these designs to drive innovation. The broad appeal of the SpaceClaim technology can help the Company deliver simulation tools to any engineer in any industry.
The operating results of SpaceClaim have been included in the Company's condensed consolidated financial statements since April 30, 2014, the date of acquisition.

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The assets and liabilities of SpaceClaim have been recorded based upon management's estimates of their fair market values as of the acquisition date. The following tables summarize the fair value of consideration transferred and the fair values of identified assets acquired and liabilities assumed at the acquisition date, as adjusted within the one-year measurement period:
Fair Value of Consideration Transferred:
(in thousands)
 
Cash
$
84,892

ANSYS replacement stock options
68

Total consideration transferred at fair value
$
84,960

Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed:
(in thousands)
 
Cash
$
723

Accounts receivable and other tangible assets
1,857

Developed technology (10-year life)
15,800

Customer relationships (6-year life)
9,400

Trade name (6-year life)
1,300

Contract backlog (6-year life)
550

Non-compete agreement (2-year life)
300

Net deferred tax assets
9,288

Accounts payable and other liabilities
(2,011
)
Deferred revenue
(700
)
Total identifiable net assets
$
36,507

Goodwill
$
48,453

The goodwill, which is not tax-deductible, is attributed to intangible assets that do not qualify for separate recognition, including the assembled workforce of the acquired business and the synergies expected to arise as a result of the acquisition of SpaceClaim.
During the one-year measurement period since the SpaceClaim acquisition date, the Company adjusted the fair values of the assets acquired and liabilities assumed, with the offset recorded as a $4.8 million decrease to goodwill. These adjustments were made as the Company obtained new information about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.
In valuing deferred revenue on the SpaceClaim balance sheet as of the acquisition date, the Company applied the fair value provisions applicable to the accounting for business combinations. Acquired deferred revenue with a historical carrying value of $3.3 million was ascribed a fair value of $0.7 million on the opening balance sheet. As a result, the Company's post-acquisition revenue will be less than the sum of what would have otherwise been reported by ANSYS and SpaceClaim absent the acquisition. The impacts on reported revenue for the three and nine months ended September 30, 2015 were $0.1 million and $0.6 million, respectively.
Reaction Design
On January 3, 2014, the Company completed the acquisition of Reaction Design, a leading developer of chemistry simulation software. Under the terms of the agreement, the Company acquired Reaction Design for a purchase price of $19.1 million in cash. Reaction Design's solutions enable transportation manufacturers and energy companies to rapidly achieve their clean technology goals by automating the analysis of chemical processes via computer simulation and modeling solutions.
The operating results of Reaction Design have been included in the Company's condensed consolidated financial statements since January 3, 2014, the date of acquisition. The total consideration transferred was allocated to the assets and liabilities of Reaction Design based on management's estimates of the fair values of the assets acquired and liabilities assumed. The allocation included $7.0 million to identifiable intangible assets, including core technology, customer lists and trade names, to be amortized over periods between two and eleven years, and $9.2 million to goodwill, which is not tax-deductible. These amounts include measurement-period adjustments. During the one-year measurement period since the Reaction Design acquisition date, the Company adjusted the fair values of the assets acquired and liabilities assumed, with the offset recorded as an increase to goodwill of $1.9 million and a reduction in noncontrolling interest of $0.6 million. These adjustments were made

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as the Company obtained new information about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.
In valuing deferred revenue on the Reaction Design balance sheet as of the acquisition date, the Company applied the fair value provisions applicable to the accounting for business combinations. Acquired deferred revenue with a historical carrying value of $2.3 million was ascribed no fair value on the opening balance sheet. As a result, the Company's post-acquisition revenue will be less than the sum of what would have otherwise been reported by ANSYS and Reaction Design absent the acquisition. The impact on reported revenue for the nine months ended September 30, 2015 was $0.2 million.

4.
Other Receivables and Current Assets
The Company's other receivables and current assets comprise the following balances:
(in thousands)
September 30,
2015
 
December 31,
2014
Receivables related to unrecognized revenue
$
115,689

 
$
152,830

Income taxes receivable, including overpayments and refunds
10,201

 
18,276

Prepaid expenses and other current assets
22,270

 
21,202

Total other receivables and current assets
$
148,160

 
$
192,308

Receivables for unrecognized revenue represent the current portion of billings made for annual lease licenses and software maintenance that have not yet been recognized as revenue.

5.
Earnings Per Share
Basic earnings per share ("EPS") amounts are computed by dividing earnings by the weighted average number of common shares outstanding during the period. Diluted EPS amounts assume the issuance of common stock for all potentially dilutive equivalents outstanding. To the extent stock options are anti-dilutive, they are excluded from the calculation of diluted EPS.
The details of basic and diluted EPS are as follows:
 
Three Months Ended
 
Nine Months Ended
(in thousands, except per share data)
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
Net income
$
66,033

 
$
65,479

 
$
184,500

 
$
185,057

Weighted average shares outstanding – basic
89,694

 
91,875

 
89,873

 
92,224

Dilutive effect of stock plans
1,899

 
2,030

 
1,947

 
2,173

Weighted average shares outstanding – diluted
91,593

 
93,905

 
91,820

 
94,397

Basic earnings per share
$
0.74

 
$
0.71

 
$
2.05

 
$
2.01

Diluted earnings per share
$
0.72

 
$
0.70

 
$
2.01

 
$
1.96

Anti-dilutive shares
204

 
237

 
221

 
877



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6.
Goodwill and Intangible Assets
The Company's intangible assets and estimated useful lives are classified as follows:
 
September 30, 2015
 
December 31, 2014
(in thousands)
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Amortized intangible assets:
 
 
 
 
 
 
 
Developed software and core technologies (3 – 11 years)
$
339,745

 
$
(245,039
)
 
$
321,076

 
$
(227,298
)
Customer lists and contract backlog (5 – 15 years)
217,111

 
(133,903
)
 
221,159

 
(121,380
)
Trade names (2 – 10 years)
127,999

 
(73,070
)
 
114,432

 
(63,082
)
Non-compete agreement (2 years)
300

 
(238
)
 
300

 
(52
)
Total
$
685,155

 
$
(452,250
)
 
$
656,967

 
$
(411,812
)
Unamortized intangible assets:
 
 
 
 
 
 
 
Trade names
$
357

 
 
 
$
14,157

 
 
The decrease in unamortized trade names in the table above was due to the determination that a trade name no longer had an indefinite life. Amortization expense for the intangible assets reflected above was $14.7 million and $16.3 million for the three months ended September 30, 2015 and 2014, respectively. Amortization expense for the intangible assets reflected above was $44.0 million and $45.6 million for the nine months ended September 30, 2015 and 2014, respectively.
As of September 30, 2015, estimated future amortization expense for the intangible assets reflected above is as follows:
(in thousands)
 
Remainder of 2015
$
13,946

2016
50,227

2017
47,370

2018
34,015

2019
20,533

2020
19,696

Thereafter
47,118

Total intangible assets subject to amortization
232,905

Indefinite-lived trade name
357

Other intangible assets, net
$
233,262

The changes in goodwill during the nine months ended September 30, 2015 and 2014 were as follows:
(in thousands)
2015
 
2014
Beginning balance – January 1
$
1,312,182

 
$
1,255,704

Acquisitions
28,561

 
60,484

Adjustments(1)
(3,601
)
 
547

Currency translation
(2,633
)
 
(2,981
)
Ending balance – September 30
$
1,334,509

 
$
1,313,754

(1) In accordance with the accounting for business combinations, the Company recorded adjustments to goodwill for the effect of changes in the provisional fair values of the assets acquired and liabilities assumed during the measurement period (up to one year from the acquisition date) as the Company obtained new information about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.
During the first quarter of 2015, the Company completed the annual impairment test for goodwill and indefinite-lived intangible assets and determined that these assets had not been impaired as of the test date, January 1, 2015. The Company tested the previously unamortized trade name discussed above for impairment during the first quarter of 2015 and determined that its fair value exceeded its carrying value, so no impairment was recorded. No other events or circumstances changed during the nine months ended September 30, 2015 that would indicate that the fair values of the Company's reporting unit and indefinite-lived intangible asset are below their carrying amounts.

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7.
Fair Value Measurement
The valuation hierarchy for disclosure of assets and liabilities reported at fair value prioritizes the inputs for such valuations into three broad levels:
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2: quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; or
Level 3: unobservable inputs based on the Company's own assumptions used to measure assets and liabilities at fair value.
A financial asset's or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The following tables provide the assets and liabilities carried at fair value and measured on a recurring basis:
 
 
 
Fair Value Measurements at Reporting Date Using:
(in thousands)
September 30,
2015
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Cash equivalents
$
353,107

 
$
353,107

 
$

 
$

Short-term investments
$
684

 
$

 
$
684

 
$

Liabilities
 
 
 
 
 
 
 
Contingent consideration
$
(1,377
)
 
$

 
$

 
$
(1,377
)
 
 
 
Fair Value Measurements at Reporting Date Using:
(in thousands)
December 31, 2014
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Cash equivalents
$
281,333

 
$
281,333

 
$

 
$

Short-term investments
$
714

 
$

 
$
714

 
$

Liabilities
 
 
 
 
 
 
 
Contingent consideration
$
(2,621
)
 
$

 
$

 
$
(2,621
)
The cash equivalents in the preceding tables represent money market mutual funds.
The short-term investments in the preceding tables represent deposits held by certain foreign subsidiaries of the Company. The deposits have fixed interest rates with maturity dates ranging from three months to one year.
The contingent consideration in the tables above represents potential future payments related to the EVEN - Evolutionary Engineering AG ("EVEN") acquisition in accordance with the 2013 merger agreement. The net present value calculations for the contingent consideration include significant unobservable inputs in the assumption that all remaining payments will be made, and, therefore, the liabilities were classified as Level 3 in the fair value hierarchy.

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The following tables present the changes in the Company’s Level 3 liabilities that are measured at fair value on a recurring basis during the three and nine months ended September 30, 2015 and 2014:
 
Fair Value Measurement Using
Significant Unobservable Inputs
(in thousands)
Contingent
Consideration
Balance as of January 1, 2015
$
2,621

Interest expense and foreign exchange activity included in earnings
122

Balance as of March 31, 2015
$
2,743

Contingent payment
(1,456
)
Interest expense and foreign exchange activity included in earnings
107

Balance as of June 30, 2015
$
1,394

Interest expense and foreign exchange activity included in earnings
(17
)
Balance as of September 30, 2015
$
1,377

 
Fair Value Measurement Using
Significant Unobservable Inputs
(in thousands)
Contingent
Consideration
 
Deferred
Compensation
Balance as of January 1, 2014
$
7,389

 
$
704

Contingent payment
(1,578
)
 

Interest expense and foreign exchange activity included in earnings
164

 
3

Balance as of March 31, 2014
$
5,975

 
$
707

Interest expense and foreign exchange activity included in earnings
87

 
4

Balance as of June 30, 2014
$
6,062

 
$
711

Contingent payments
(3,288
)
 
(712
)
Interest expense and foreign exchange activity included in earnings
(121
)
 
1

Balance as of September 30, 2014
$
2,653

 
$

The carrying values of cash, accounts receivable, accounts payable, accrued expenses, other accrued liabilities and short-term obligations approximate their fair values because of their short-term nature.

8.
Geographic Information
Revenue to external customers is attributed to individual countries based upon the location of the customer. Revenue by geographic area is as follows:
 
Three Months Ended
 
Nine Months Ended
(in thousands)
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
United States
$
93,374

 
$
81,833

 
$
262,215

 
$
233,612

Japan
24,981

 
25,823

 
77,519

 
82,543

Germany
23,484

 
23,835

 
69,076

 
73,337

South Korea
12,758

 
14,180

 
39,909

 
39,661

France
11,626

 
13,870

 
35,782

 
43,596

Canada
3,254

 
3,246

 
9,882

 
9,735

Other European
36,341

 
38,966

 
106,899

 
114,396

Other international
32,022

 
32,247

 
89,824

 
84,766

Total revenue
$
237,840

 
$
234,000

 
$
691,106

 
$
681,646


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Property and equipment by geographic area is as follows:
(in thousands)
September 30,
2015
 
December 31,
2014
United States
$
44,677

 
$
49,957

Europe
6,705

 
7,840

India
2,963

 
3,123

Other international
4,245

 
3,723

Total property and equipment
$
58,590

 
$
64,643


9.
Stock-Based Compensation
Total stock-based compensation expense and its net impact on basic and diluted earnings per share are as follows:
 
Three Months Ended
 
Nine Months Ended
(in thousands, except per share data)
September 30,
2015

September 30,
2014
 
September 30,
2015
 
September 30,
2014
Cost of sales:
 
 
 
 
 
 
 
Software licenses
$
174

 
$
490

 
$
549

 
$
1,289

Maintenance and service
530

 
549

 
1,432

 
1,587

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
4,249

 
4,520

 
13,038

 
12,766

Research and development
3,917

 
4,394

 
10,712

 
11,941

Stock-based compensation expense before taxes
8,870

 
9,953

 
25,731

 
27,583

Related income tax benefits
(2,725
)
 
(2,843
)
 
(8,454
)
 
(7,703
)
Stock-based compensation expense, net of taxes
$
6,145

 
$
7,110

 
$
17,277

 
$
19,880

Net impact on earnings per share:
 
 
 
 
 
 
 
Basic earnings per share
$
(0.07
)
 
$
(0.08
)
 
$
(0.19
)
 
$
(0.22
)
Diluted earnings per share
$
(0.07
)
 
$
(0.08
)
 
$
(0.19
)
 
$
(0.21
)

10.
Stock Repurchase Program
Under the Company's stock repurchase program, the Company repurchased shares during the nine months ended September 30, 2015 and 2014, as follows:
 
Nine Months Ended
(in thousands, except per share data)
September 30,
2015
 
September 30,
2014
Number of shares repurchased
2,793

 
1,432

Average price paid per share
$
86.92

 
$
75.87

Total cost
$
242,748

 
$
108,613

In February 2015, the Company's Board of Directors increased the number of shares authorized for repurchase to a total of 5.0 million shares under the stock repurchase program. As of September 30, 2015, 3.1 million shares remained available for repurchase under the program.

11.
Contingencies and Commitments
The Company is subject to various investigations, claims and legal proceedings that arise in the ordinary course of business, including commercial disputes, labor and employment matters, tax audits, alleged infringement of intellectual property rights and other matters. In the opinion of the Company, the resolution of pending matters is not expected to have a material, adverse effect on the Company’s consolidated results of operations, cash flows or financial position. However, each of these matters is subject to various uncertainties and it is possible that an unfavorable resolution of one or more of these proceedings could materially affect the Company’s results of operations, cash flows or financial position.

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An Indian subsidiary of the Company received a formal inquiry after a service tax audit was held in 2011. The Company could incur tax charges and related liabilities, including those related to the service tax audit case, of approximately $6 million. The service tax issues raised in the Company’s notice are very similar to the case, M/s Microsoft Corporation (I) (P) Ltd. Vs Commissioner of Service Tax, New Delhi, wherein the Delhi Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has passed a favorable ruling to Microsoft. The Company can provide no assurances on whether the Microsoft case’s favorable ruling will be challenged in higher courts or on the impact that the present Microsoft case’s decision will have on the Company’s audit case. The Company is uncertain as to when the service tax audit will be completed.
The Company sells software licenses and services to its customers under proprietary software license agreements. Each license agreement contains the relevant terms of the contractual arrangement with the customer, and generally includes certain provisions for indemnifying the customer against losses, expenses and liabilities from damages that are incurred by or awarded against the customer in the event the Company’s software or services are found to infringe upon a patent, copyright or other proprietary right of a third party. To date, the Company has not had to reimburse any of its customers for any losses related to these indemnification provisions and no material claims asserted under these indemnification provisions are outstanding as of September 30, 2015. For several reasons, including the lack of prior material indemnification claims, the Company cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.

12.
New Accounting Guidance
Measurement-period adjustments related to business combinations: In September 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments (ASU 2015-16). ASU 2015-16 requires adjustments to provisional amounts that are identified during the measurement period to be recognized in the period in which the adjustments are determined. The acquirer must record the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. Prior guidance required the restatement of prior periods if the adjustments impacted those periods. The guidance was early adopted by the Company during the quarter ended September 30, 2015 and applied prospectively. The impact on the Company's financial position, results of operations and cash flows was not material.
Revenue from contracts with customers: In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09). ASU 2014-09 supersedes most current revenue recognition guidance, including industry-specific guidance. Previous guidance requires an entity to recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller's price to the buyer is fixed or determinable, and collectibility is reasonably assured. Under the new guidance, an entity is required to evaluate revenue recognition by identifying a contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract and recognizing revenue when (or as) the entity satisfies a performance obligation. ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, delayed the effective date of ASU 2014-09 to annual periods beginning after December 15, 2017, including interim periods within that reporting period. Entities have the option of using a full retrospective, cumulative effect or modified approach to adopt ASU 2014-09. This update will impact the timing and amounts of revenue recognized. The Company is currently evaluating the effect that implementation of this update will have on its financial results upon adoption.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
ANSYS, Inc.
Canonsburg, Pennsylvania
We have reviewed the accompanying condensed consolidated balance sheet of ANSYS, Inc. and subsidiaries (the "Company") as of September 30, 2015, and the related condensed consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2015 and 2014, and of cash flows for the nine-month periods ended September 30, 2015 and 2014. These interim financial statements are the responsibility of the Company’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, 2014, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 26, 2015, 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, 2014 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
November 5, 2015

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview:
The Company's GAAP and non-GAAP results for the quarter ended September 30, 2015 as compared to the quarter ended September 30, 2014 were significantly impacted by a stronger U.S. Dollar. The Company's GAAP results for the three months ended September 30, 2015 reflect increased revenue of 1.6%, decreased operating income of 0.7% and increased diluted earnings per share of 2.9% as compared to the three months ended September 30, 2014. The Company's GAAP results for the nine months ended September 30, 2015 reflect growth in revenue of 1.4%, operating income of 1.3% and diluted earnings per share of 2.6% as compared to the nine months ended September 30, 2014. The Company experienced higher revenue in 2015 primarily from growth in maintenance revenue, partially offset by decreased lease license revenue. The Company also experienced increased operating expenses primarily due to increased employee compensation and other headcount-related costs, partially offset by cost reductions from foreign exchange translation as a result of the stronger U.S. Dollar.
The Company's non-GAAP results for the three months ended September 30, 2015 reflect increased revenue of 1.1%, decreased operating income of 3.5% and increased diluted earnings per share of 1.1% as compared to the three months ended September 30, 2014. The Company's non-GAAP results for the nine months ended September 30, 2015 reflect increased revenue of 1.0%, decreased operating income of 1.0% and increased diluted earnings per share of 0.4% as compared to the nine months ended September 30, 2014. The non-GAAP results exclude the income statement effects of acquisition accounting adjustments to deferred revenue, stock-based compensation, acquisition-related amortization of intangible assets and transaction costs related to business combinations. For further disclosure regarding non-GAAP results, see the section titled "Non-GAAP Results" immediately preceding the section titled "Liquidity and Capital Resources".
The impacts on the Company's revenue and operating income due to the stronger U.S. Dollar for the three and nine months ended September 30, 2015 as compared to the three and nine months ended September 30, 2014 were as follows:
 
Three Months Ended September 30, 2015
 
Nine Months Ended September 30, 2015
(in thousands)
GAAP
 
Non-GAAP
 
GAAP
 
Non-GAAP
Revenue
$
(17,839
)
 
$
(17,841
)
 
$
(52,599
)
 
$
(52,603
)
Operating income
$
(11,113
)
 
$
(11,486
)
 
$
(29,949
)
 
$
(31,134
)
In constant currency(1), the Company's growth rates were as follows:
 
Three Months Ended September 30, 2015
 
Nine Months Ended September 30, 2015
 
GAAP
 
Non-GAAP
 
GAAP
 
Non-GAAP
Revenue
9
%
 
9
%
 
9
%
 
9
%
Operating income
12
%
 
6
%
 
13
%
 
8
%
(1) Constant currency amounts exclude the effect of foreign currency fluctuations on the reported results. To present this information, the results for 2015 for entities whose functional currency is a currency other than the U.S. Dollar were converted to U.S. Dollars at rates that were in effect for 2014, rather than the actual exchange rates in effect for 2015.
The Company’s financial position includes $776.9 million in cash and short-term investments, and working capital of $633.3 million as of September 30, 2015.
Under the Company’s stock repurchase program, the Company repurchased 1,250,000 shares during the three months ended September 30, 2015 at an average price per share of $91.23, for a total cost of $114.0 million. The Company repurchased 2,792,911 shares during the nine months ended September 30, 2015 at an average price per share of $86.92, for a total cost of $242.7 million.
During the nine months ended September 30, 2015, the Company completed various acquisitions to accelerate development of new and innovative products to the marketplace while lowering design and engineering costs for customers. The acquisitions were not individually significant. The combined purchase price of the acquisitions was approximately $44.4 million, which included cash and equity. The operating results of each acquisition have been included in the Company's condensed consolidated financial statements since each respective date of acquisition.
ANSYS develops and globally markets engineering simulation software and services widely used by engineers, designers, researchers and students across a broad spectrum of industries and academia, including aerospace, automotive, materials and chemical processing, turbomachinery, consumer products, electronics, biomedical, energy, defense and others. Headquartered south of Pittsburgh, Pennsylvania, the Company employed approximately 2,800 people as of September 30, 2015. ANSYS focuses on the development of open and flexible solutions that enable users to analyze designs directly on the desktop,

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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 suite of simulation technologies through a global network of independent channel partners and direct sales offices in strategic, global locations. It is the Company’s intention to continue to maintain this hybrid sales and distribution model.
The Company licenses its technology to businesses, educational institutions and governmental agencies. Growth in the Company’s revenue is affected by the strength of global economies, general business conditions, currency exchange rate fluctuations, 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. The Company makes many operational and strategic decisions based upon short- and long-term sales forecasts that are impacted not only by these long sales cycles but also by current global economic conditions. As a result, the Company believes that its overall performance is best measured by fiscal-year results rather than by quarterly results.
The Company’s management considers the competition and price pressure that it faces in the short- and long-term by focusing on expanding the breadth, depth, ease of use and quality of the technologies, features, functionality and integrated multiphysics capabilities of its software products as compared to its competitors; investing in research and development to develop new and innovative products and increase the capabilities of its existing products; supplying new products and services; focusing on customer needs, training, consulting and support; and enhancing its distribution channels. From time to time, the Company also considers acquisitions to supplement its global engineering talent, product offerings and distribution channels.
Geographic Trends:
The following table presents the Company's geographic constant currency revenue growth during the three and nine months ended September 30, 2015 as compared to the three and nine months ended September 30, 2014:
 
Three Months Ended September 30, 2015
 
Nine Months Ended September 30, 2015
North America
14
%
 
12
%
Europe
8
%
 
7
%
General International Area
5
%
 
8
%
Total
9
%
 
9
%
In North America, strong performance was observed in the electronics, high-tech, aerospace and defense, and automotive industries as companies continued to rely on ANSYS technology to meet the needs of energy and fuel efficiency, safety and comfort, and the cost-effective delivery of more innovative products in the face of evolving competition and customer requirements. The low price of oil negatively impacted the energy industry as energy companies held back investments, reduced their workforce and considered consolidation and realignment. Healthcare industry market leaders continued to invest in ANSYS solutions throughout the quarter, but performance was negatively impacted by a macroeconomic downturn in the healthcare technology industry.
Europe continued to show progress and overall revenue growth, but with mixed results and pockets of lingering economic and geopolitical issues. The Company experienced strong performance in Germany, Italy, Switzerland, Spain and the Netherlands. However, the Company's performance in Europe continued to be adversely impacted in the third quarter as a result of weakness in markets such as the United Kingdom, France, Sweden and Russia. The ANSYS industry performance trends for the quarter were similar to those in North America. Additionally, weakness in channel partner new business production and a cautious spending environment continued to have an adverse impact. Sales hiring and sales pipeline building activities continued to be a major focus.
The results in the General International Area, which primarily consists of the Asia-Pacific region, continued to demonstrate strength in Japan and India. The growth was adversely impacted by declines in the Company's business in South Korea, Taiwan and Brazil. Additionally, business momentum in the Chinese state-owned enterprises has been slower. In the automotive industry, the economic issues in China negatively impacted the off-road segment. In the industrial equipment industry, continued focus on power generation had a positive impact. The Company continues to focus on improving direct sales execution and the new business production of the channel partner network.
The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto for the nine months ended September 30, 2015, and with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2014 filed on the Annual Report on Form 10-K with the Securities and Exchange Commission. The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s condensed consolidated financial statements, which have been prepared in

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accordance with GAAP. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to the fair value of stock awards, bad debts, contract revenue, valuation of goodwill and other intangible assets, contingent consideration, deferred compensation, income taxes, uncertain tax positions, tax valuation reserves, useful lives for depreciation and amortization, and contingencies and litigation. The Company bases its estimates on historical experience, market experience, estimated future cash flows and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates.
This Quarterly Report on 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, but not limited to, the following statements, as well as statements that contain such words as "anticipates", "intends", "believes", "plans" and other similar expressions:
The Company's expectations regarding the accelerated development of new and innovative products to the marketplace while lowering design and engineering costs for customers as a result of the Company's acquisitions.
The Company's estimates regarding the expected impact on reported revenue related to the acquisition accounting treatment of deferred revenue.
The Company's estimation that it is probable that all remaining payments will be made for contingent consideration related to the EVEN acquisition.
The Company's assessment of the ultimate liabilities arising from various investigations, claims and legal proceedings.
The Company's expectations regarding the outcome of its service tax audit case.
The Company's intentions regarding its hybrid sales and distribution model.
The Company's statement regarding the strength of the features, functionality and integrated multiphysics capabilities of its software products.
The Company's belief that its overall performance is best measured by fiscal-year results rather than by quarterly results.
The Company's expectation that it will continue to make targeted investments in its global sales and marketing organization and its global business infrastructure to enhance and support its revenue-generating activities.
The Company's intentions related to investments in research and development, particularly as it relates to expanding the ease of use and capabilities of its broad portfolio of simulation software products, including the evolution of its ANSYS® Workbench platform, expansion of high-performance computing capabilities, ANSYS® AIM immersive user interface, robust design and ongoing integration of acquired technology.
The Company's intention to repatriate previously taxed earnings and to reinvest all other earnings of its non-U.S. subsidiaries.
The Company's plans related to future capital spending.
The sufficiency of existing cash and cash equivalent balances to meet future working capital and capital expenditure requirements.
The Company's belief that the best uses of its excess cash are to invest in the business and to repurchase stock in order to both offset dilution and return capital to stockholders in excess of its requirements with the goal of increasing stockholder value.
The Company's intentions related to investments in complementary companies, products, services and technologies.
The Company's statement regarding increased exposure to volatility of foreign exchange rates.
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, among others, that might cause such a difference include risks and uncertainties disclosed in the Company’s most recent Annual Report on Form 10-K, Part I, Item 1A. Information regarding new risk factors or material changes to these risk factors have been included within Part II, Item 1A of this Quarterly Report on Form 10-Q.

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Results of Operations
Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014
Revenue:
 
Three Months Ended September 30,
 
Change
(in thousands, except percentages)
2015
 
2014
 
Amount
 
%
Revenue:
 
 
 
 
 
 
 
Lease licenses
$
78,487

 
$
80,530

 
$
(2,043
)
 
(2.5
)
Perpetual licenses
61,710

 
59,435

 
2,275

 
3.8

Software licenses
140,197

 
139,965

 
232

 
0.2

Maintenance
91,979

 
88,562

 
3,417

 
3.9

Service
5,664

 
5,473

 
191

 
3.5

Maintenance and service
97,643

 
94,035

 
3,608

 
3.8

Total revenue
$
237,840

 
$
234,000

 
$
3,840

 
1.6

The Company’s revenue in the quarter ended September 30, 2015 increased 1.6% as compared to the quarter ended September 30, 2014. The growth rate was adversely impacted by 7.6% due to a strengthening U.S. Dollar and was favorably impacted by the Company’s continued investment in its global sales, support and marketing organizations. Perpetual license revenue, which is derived primarily from new sales during the quarter, increased 3.8% as compared to the prior-year quarter due primarily to growth in perpetual license revenue of electronics products. Annual maintenance contracts that were sold with new perpetual licenses, along with maintenance contracts sold with new perpetual licenses in previous quarters, contributed to maintenance revenue growth of 3.9%.
With respect to revenue, on average for the quarter ended September 30, 2015, the U.S. Dollar was approximately 13.5% stronger, when measured against the Company’s primary foreign currencies, than for the quarter ended September 30, 2014. The net overall strengthening resulted in decreased revenue of $17.8 million during the quarter ended September 30, 2015 as compared with the same quarter of 2014. The impact on revenue was primarily driven by $10.6 million, $4.3 million and $1.2 million of adverse impact due to a weakening Euro, Japanese Yen and South Korean Won, respectively. The net overall strengthening also resulted in decreased operating income of $11.1 million during the quarter ended September 30, 2015 as compared with the same quarter of 2014.
A substantial portion of the Company’s license and maintenance revenue is derived from annual lease and maintenance contracts. These contracts are generally renewed on an annual basis and typically have a high rate of customer renewal. In addition to the recurring revenue base associated with these contracts, a majority of customers purchasing new perpetual licenses also purchase related annual maintenance contracts. As a result of the significant recurring revenue base, the Company’s license and maintenance revenue growth rate in any period does not necessarily correlate to the growth rate of new license and maintenance contracts sold during that period. To the extent the rate of customer renewal for lease and maintenance contracts is high, incremental lease contracts, and maintenance contracts sold with new perpetual licenses, will result in license and maintenance revenue growth in constant currency. Conversely, if the rate of renewal for these contracts is adversely affected by economic or other factors, the Company’s license and maintenance growth will be adversely affected over the term that the revenue for those contracts would have otherwise been recognized.
The Company is starting to experience an increased interest by its customers in enterprise license agreements that often include longer-term, time-based licenses involving a larger number of the Company's software products. While these arrangements typically involve a higher overall transaction price, the revenue from these contracts is typically deferred and recognized over the period of the contract, resulting in increased deferred revenue and backlog. However, to the extent these types of contracts replace sales of perpetual licenses, there could be a near-term adverse impact on software license and maintenance revenue growth.
International and domestic revenues, as a percentage of total revenue, were 60.7% and 39.3%, respectively, during the quarter ended September 30, 2015, and 65.0% and 35.0%, respectively, during the quarter ended September 30, 2014. The Company derived 24.4% and 24.8% of its total revenue through the indirect sales channel for the quarters ended September 30, 2015 and 2014, respectively.
In valuing deferred revenue on the balance sheets of the Company's recent acquisitions as of their respective acquisition dates, the Company applied the fair value provisions applicable to the accounting for business combinations, resulting in a reduction of deferred revenue as compared to its historical carrying amount. As a result, the Company's post-acquisition revenue will be less than the sum of what would have otherwise been reported by ANSYS and each acquiree absent the acquisitions. The

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impacts on reported revenue were $0.4 million and $1.5 million for the quarters ended September 30, 2015 and 2014, respectively. The expected impact on reported revenue is $0.3 million and $0.2 million for the quarter ending December 31, 2015 and for the year ending December 31, 2016, respectively.
Deferred Revenue and Backlog:
Deferred revenue consists of billings made or payments received in advance of revenue recognition from lease license and maintenance agreements. The deferred revenue on the Company's condensed consolidated balance sheets does not represent the total value of annual or multi-year, noncancellable lease license and maintenance agreements. The Company's backlog represents installment billings for periods beyond the current quarterly billing cycle and customer orders received but not processed. The Company's deferred revenue and backlog as of September 30, 2015 and December 31, 2014 consist of the following:
 
Balance at September 30, 2015
(in thousands)
Total
 
Current
 
Long-Term
Deferred revenue
$
334,185

 
$
319,705

 
$
14,480

Backlog
102,016

 
43,701

 
58,315

Total
$
436,201

 
$
363,406

 
$
72,795

 
Balance at December 31, 2014
(in thousands)
Total
 
Current
 
Long-Term
Deferred revenue
$
345,305

 
$
332,664

 
$
12,641

Backlog
122,985

 
41,390

 
81,595

Total
$
468,290

 
$
374,054

 
$
94,236

Revenue associated with deferred revenue and backlog that is expected to be recognized in the subsequent twelve months is classified as current in the table above.
Constant Currency Impact:
The tables below reflect the Company's operating results as presented on the condensed consolidated statements of income, which are inclusive of foreign currency translation impacts. Amounts included in the discussion that follows each table are provided in constant currency. The impact, where material, of foreign exchange translation on each expense line is provided separately.
Cost of Sales and Gross Profit:
 
Three Months Ended September 30,
 
 
 
 
2015
 
2014
 
Change
(in thousands, except percentages)
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
Amount
 
%
Cost of sales:
 
 
 
 
 
 
 
 
 
 
 
Software licenses
$
6,889

 
2.9
 
$
7,095

 
3.0
 
$
(206
)
 
(2.9
)
Amortization
9,818

 
4.1
 
9,477

 
4.1
 
341

 
3.6

Maintenance and service
19,874

 
8.4
 
20,622

 
8.8
 
(748
)
 
(3.6
)
Total cost of sales
36,581

 
15.4
 
37,194

 
15.9
 
(613
)
 
(1.6
)
Gross profit
$
201,259

 
84.6
 
$
196,806

 
84.1
 
$
4,453

 
2.3

Software Licenses: The net decrease in the cost of software licenses was primarily due to the following:
Decreased stock-based compensation of $0.3 million.
Cost reduction from foreign exchange translation of $0.2 million due to a stronger U.S. Dollar.
Decreased salaries of $0.2 million.
Increased third-party royalties of $0.4 million.
Amortization: The increase in amortization expense was primarily due to an increase in amortization of trade names, partially offset by a cost reduction related to foreign exchange translation.

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Table of Contents

Maintenance and Service: The net decrease in maintenance and service costs was primarily due to the following:
Cost reduction related to foreign exchange translation of $2.0 million.
Increased salaries and incentive compensation of $0.8 million.
Increased third-party technical support costs of $0.4 million.
The improvement in gross profit was a result of the increase in revenue and the decrease in related cost of sales.
Operating Expenses:
 
Three Months Ended September 30,
 
 
 
 
2015
 
2014
 
Change
(in thousands, except percentages)
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
Amount
 
%
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
$
61,367

 
25.8
 
$
58,172

 
24.9
 
$
3,195

 
5.5

Research and development
44,784

 
18.8
 
41,033

 
17.5
 
3,751

 
9.1

Amortization
4,925

 
2.1
 
6,793

 
2.9
 
(1,868
)
 
(27.5
)
Total operating expenses
$
111,076

 
46.7
 
$
105,998

 
45.3
 
$
5,078

 
4.8

Selling, General and Administrative: The net increase in selling, general and administrative costs was primarily due to the following:
Increased salaries and other headcount-related costs, including incentive compensation, of $5.3 million.
Increased consulting and marketing costs, each of $0.5 million.
Cost reduction related to foreign exchange translation of $3.2 million.
The Company anticipates that it will continue to make targeted investments in its global sales and marketing organization and its global business infrastructure to enhance and support its revenue-generating activities.
Research and Development: The net increase in research and development costs was primarily due to the following:
Increased salaries and other headcount-related costs, including incentive compensation, of $4.8 million.
Increased office lease and utility costs of $0.3 million.
Cost reduction related to foreign exchange translation of $1.2 million.
Decreased stock-based compensation of $0.5 million.
The Company has traditionally invested significant resources in research and development activities and intends to continue to make investments in expanding the ease of use and capabilities of its broad portfolio of simulation software products. More specifically, this includes the evolution of its ANSYS® Workbench platform, expansion of high-performance computing capabilities, ANSYS® AIM immersive user interface, robust design and ongoing integration of acquired technology.
Amortization: The decrease in amortization expense was primarily due to a net decrease in amortization of acquired customer lists and a cost reduction related to foreign exchange translation.


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Table of Contents

Interest Expense: The Company’s interest expense consists of the following:
 
Three Months Ended
(in thousands)
September 30,
2015
 
September 30,
2014
Discounted obligations
$
79

 
$
139

Other
16

 
10

Total interest expense
$
95

 
$
149

Other Expense, net: The Company's other expense consists of the following:
 
Three Months Ended
(in thousands)
September 30,
2015
 
September 30,
2014
Foreign currency losses, net
$
(304
)
 
$
(487
)
Noncontrolling interest in loss

 
39

Other
(79
)
 
53

Total other expense, net
$
(383
)
 
$
(395
)
Income Tax Provision: The Company recorded income tax expense of $24.3 million and had income before income taxes of $90.4 million for the quarter ended September 30, 2015. During the quarter ended September 30, 2014, the Company recorded income tax expense of $25.4 million and had income before income taxes of $90.9 million. The effective tax rates were 26.9% and 28.0% for the third quarters of 2015 and 2014, respectively.
The decrease in the effective tax rate is primarily due to tax benefits related to restructuring in a foreign jurisdiction. When compared to the federal and state combined statutory rate, the effective tax rates for the quarters ended September 30, 2015 and 2014 were favorably impacted by the domestic manufacturing deduction and tax benefits associated with the merger of the Company’s Japan subsidiaries in 2010. The quarterly benefit of approximately $3.1 million related to the merger of the Company's Japan subsidiaries was exhausted in the third quarter of 2015 and will not recur in future periods. The rates were also favorably impacted by the lower statutory tax rates in many of the Company's foreign jurisdictions.
Net Income: The Company’s net income in the third quarter of 2015 was $66.0 million as compared to net income of $65.5 million in the third quarter of 2014. Diluted earnings per share was $0.72 in the third quarter of 2015 and $0.70 in the third quarter of 2014. The weighted average shares used in computing diluted earnings per share were 91.6 million and 93.9 million in the third quarters of 2015 and 2014, respectively.

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Table of Contents

Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014
Revenue:
 
Nine Months Ended September 30,
 
Change
(in thousands, except percentages)
2015
 
2014
 
Amount
 
%
Revenue:
 
 
 
 
 
 
 
Lease licenses
$
234,736

 
$
238,050

 
$
(3,314
)
 
(1.4
)
Perpetual licenses
170,919

 
168,833

 
2,086

 
1.2

Software licenses
405,655

 
406,883

 
(1,228
)
 
(0.3
)
Maintenance
269,513

 
257,791

 
11,722

 
4.5

Service
15,938

 
16,972

 
(1,034
)
 
(6.1
)
Maintenance and service
285,451

 
274,763

 
10,688

 
3.9

Total revenue
$
691,106

 
$
681,646

 
$
9,460

 
1.4

The Company’s revenue in the nine months ended September 30, 2015 increased 1.4% as compared to the nine months ended September 30, 2014. The growth rate was adversely impacted by 7.7% due to a strengthening U.S. Dollar and was favorably impacted by the Company’s continued investment in its global sales, support and marketing organizations. Annual maintenance contracts that were sold with new perpetual licenses, along with maintenance contracts sold with new perpetual licenses in previous quarters, contributed to maintenance revenue growth of 4.5%. This growth was primarily due to maintenance contracts sold with electronics products.
With respect to revenue, on average for the nine months ended September 30, 2015, the U.S. Dollar was approximately 13.4% stronger, when measured against the Company’s primary foreign currencies, than for the nine months ended September 30, 2014. The net overall strengthening resulted in decreased revenue of $52.6 million during the nine months ended September 30, 2015 as compared with the nine months ended September 30, 2014. The impact on revenue was primarily driven by $33.2 million, $12.8 million, $2.4 million and $2.2 million of adverse impact due to a weakening Euro, Japanese Yen, British Pound and South Korean Won, respectively. The net overall strengthening also resulted in decreased operating income of $29.9 million during the nine months ended September 30, 2015 as compared with the nine months ended September 30, 2014.
International and domestic revenues, as a percentage of total revenue, were 62.1% and 37.9%, respectively, during the nine months ended September 30, 2015, and 65.7% and 34.3%, respectively, during the nine months ended September 30, 2014. The Company derived 24.3% of its total revenue through the indirect sales channel for both the nine months ended September 30, 2015 and 2014.
In valuing deferred revenue on the balance sheets of the Company's recent acquisitions as of their respective acquisition dates, the Company applied the fair value provisions applicable to the accounting for business combinations, resulting in a reduction of deferred revenue as compared to its historical carrying amount. As a result, the Company's post-acquisition revenue will be less than the sum of what would have otherwise been reported by ANSYS and each acquiree absent the acquisitions. The impacts on reported revenue were $1.4 million and $4.3 million for the nine months ended September 30, 2015 and 2014, respectively.
Constant Currency Impact:
The tables below reflect the Company's operating results as presented on the condensed consolidated statements of income, which are inclusive of foreign currency translation impacts. Amounts included in the discussion that follows each table are provided in constant currency. The impact, where material, of foreign exchange translation on each expense line is provided separately.

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Table of Contents

Cost of Sales and Gross Profit:
 
Nine Months Ended September 30,
 
 
 
 
2015
 
2014
 
Change
(in thousands, except percentages)
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
Amount
 
%
Cost of sales:
 
 
 
 
 
 
 
 
 
 
 
Software licenses
$
21,048

 
3.0
 
$
21,603

 
3.2
 
$
(555
)
 
(2.6
)
Amortization
28,918

 
4.2
 
28,198

 
4.1
 
720

 
2.6

Maintenance and service
60,288

 
8.7
 
63,816

 
9.4
 
(3,528
)
 
(5.5
)
Total cost of sales
110,254

 
16.0
 
113,617

 
16.7
 
(3,363
)
 
(3.0
)
Gross profit
$
580,852

 
84.0
 
$
568,029

 
83.3
 
$
12,823

 
2.3

Software Licenses: The net decrease in the cost of software licenses was primarily due to the following:
Decreased stock-based compensation of $0.7 million.
Cost reduction related to foreign exchange translation of $0.7 million.
Decreased incentive compensation of $0.4 million.
Increased third-party royalties of $0.7 million.
Increased SpaceClaim-related cost of software licenses of $0.4 million, primarily as a result of nine months of SpaceClaim activity in the current year as compared to five months of activity in the prior year.
Increased facilities and IT-related maintenance of $0.3 million.
Amortization: The increase in amortization expense was primarily due to an increase in amortization of trade names, partially offset by a cost reduction related to foreign exchange translation.
Maintenance and Service: The net decrease in maintenance and service costs was primarily due to the following:
Cost reduction related to foreign exchange translation of $6.4 million.
Increased salaries and other headcount-related costs of $1.3 million.
Increased third-party technical support and severance costs, each of $0.8 million.
The improvement in gross profit was a result of the increase in revenue and the decrease in related cost of sales.
Operating Expenses:
 
Nine Months Ended September 30,
 
 
 
 
2015
 
2014
 
Change
(in thousands, except percentages)
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
Amount
 
%
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
$
181,640

 
26.3
 
$
174,002

 
25.5
 
$
7,638

 
4.4

Research and development
127,439

 
18.4
 
123,251

 
18.1
 
4,188

 
3.4

Amortization
15,037

 
2.2
 
17,374

 
2.5
 
(2,337
)
 
(13.5
)
Total operating expenses
$
324,116

 
46.9
 
$
314,627

 
46.2
 
$
9,489

 
3.0

Selling, General and Administrative: The net increase in selling, general and administrative costs was primarily due to the following:
Increased salaries and other headcount-related costs, including incentive compensation, of $11.8 million, primarily due to an increase in headcount.
Increased third-party commissions of $1.5 million.
Increased business travel and meals of $1.4 million.

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Table of Contents

Increased SpaceClaim-related selling, general and administrative expenses of $1.2 million, primarily as a result of nine months of SpaceClaim activity in the current year as compared to five months of activity in the prior year.
Increased office lease and utility costs of $1.1 million.
Cost reduction related to foreign exchange translation of $10.4 million.
Research and Development: The net increase in research and development costs was primarily due to the following:
Increased salaries and other headcount-related costs of $5.9 million.
Increased SpaceClaim-related research and development expenses of $1.8 million, primarily as a result of nine months of SpaceClaim activity in the current year as compared to five months of activity in the prior year.
Increased office lease and utility costs of $0.8 million.
Increased facilities and IT-related maintenance of $0.7 million.
Cost reduction related to foreign exchange translation of $4.3 million.
Decreased stock-based compensation of $1.2 million.
Amortization: The decrease in amortization expense was primarily due to a net decrease in amortization of acquired customer lists and a cost reduction related to foreign exchange translation.
Interest Expense: The Company’s interest expense consists of the following:
 
Nine Months Ended
(in thousands)
September 30,
2015
 
September 30,
2014
Discounted obligations
$
303

 
$
497

Other
68

 
81

Total interest expense
$
371

 
$
578

Other Income (Expense), net: The Company's other income (expense) consists of the following:
 
Nine Months Ended
(in thousands)
September 30,
2015
 
September 30,
2014
Foreign currency gains (losses), net
$
362

 
$
(875
)
Noncontrolling interest in loss

 
87

Other
113

 
16

Total other income (expense), net
$
475

 
$
(772
)
Income Tax Provision: The Company recorded income tax expense of $74.5 million and had income before income taxes of $259.0 million for the nine months ended September 30, 2015. During the nine months ended September 30, 2014, the Company recorded income tax expense of $69.2 million and had income before income taxes of $254.3 million. The effective tax rates were 28.8% and 27.2% for the nine months ended September 30, 2015 and 2014, respectively.
The increase in the effective tax rate is primarily due to tax benefits that occurred in 2014 related to restructuring in a foreign jurisdiction and the reversal of uncertain tax benefits. These benefits did not recur in 2015. When compared to the federal and state combined statutory rate, the effective tax rates for the nine months ended September 30, 2015 and 2014 were favorably impacted by the domestic manufacturing deduction and tax benefits associated with the merger of the Company’s Japan subsidiaries in 2010. The quarterly benefit of approximately $3.1 million related to the merger of the Company's Japan subsidiaries was exhausted in the third quarter of 2015 and will not recur in future periods. The rates were also favorably impacted by the lower statutory tax rates in many of the Company's foreign jurisdictions.
Net Income: The Company’s net income for the nine months ended September 30, 2015 was $184.5 million as compared to net income of $185.1 million for the nine months ended September 30, 2014. Diluted earnings per share was $2.01 for the nine months ended September 30, 2015 and $1.96 for the nine months ended September 30, 2014. The weighted average shares used in computing diluted earnings per share were 91.8 million and 94.4 million for the nine months ended September 30, 2015 and 2014, respectively.


26

Table of Contents

Non-GAAP Results
The Company provides non-GAAP revenue, non-GAAP operating income, non-GAAP operating profit margin, non-GAAP net income and non-GAAP diluted earnings per share as supplemental measures to GAAP measures regarding the Company’s operational performance. These financial measures exclude the impact of certain items and, therefore, have not been calculated in accordance with GAAP. A detailed explanation and a reconciliation of each non-GAAP financial measure to its most comparable GAAP financial measure are described below.
 
Three Months Ended
 
September 30, 2015
 
September 30, 2014
(in thousands, except percentages and per share data)
As
Reported
 
Adjustments
 
Non-GAAP
Results
 
As
Reported
 
Adjustments
 
Non-GAAP
Results
Total revenue
$
237,840

 
$
379

(1)
$
238,219

 
$
234,000

 
$
1,528

(4)
$
235,528

Operating income
90,183

 
24,257

(2)
114,440

 
90,808

 
27,794

(5)
118,602

Operating profit margin
37.9
%
 
 
 
48.0
%
 
38.8
%
 
 
 
50.4
%
Net income
$
66,033

 
$
15,978

(3)
$
82,011

 
$
65,479

 
$
18,176

(6)
$
83,655

Earnings per share – diluted:
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.72

 
 
 
$
0.90

 
$
0.70

 
 
 
$
0.89

Weighted average shares – diluted
91,593

 
 
 
91,593

 
93,905

 
 
 
93,905

(1)
Amount represents the revenue not reported during the period as a result of the acquisition accounting adjustment associated with accounting for deferred revenue in business combinations.
(2)
Amount represents $14.7 million of amortization expense associated with intangible assets acquired in business combinations, $8.9 million of stock-based compensation expense, the $0.4 million adjustment to revenue as reflected in (1) above and $0.3 million of transaction expenses related to business combinations.
(3)
Amount represents the impact of the adjustments to operating income referred to in (2) above, adjusted for the related income tax impact of $8.3 million.
(4)
Amount represents the revenue not reported during the period as a result of the acquisition accounting adjustment associated with accounting for deferred revenue in business combinations.
(5)
Amount represents $16.3 million of amortization expense associated with intangible assets acquired in business combinations, $10.0 million of stock-based compensation expense and the $1.5 million adjustment to revenue as reflected in (4) above.
(6)
Amount represents the impact of the adjustments to operating income referred to in (5) above, adjusted for the related income tax impact of $9.6 million.

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Table of Contents

 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
(in thousands, except percentages and per share data)
As
Reported
 
Adjustments
 
Non-GAAP
Results
 
As
Reported
 
Adjustments
 
Non-GAAP
Results
Total revenue
$
691,106

 
$
1,365

(1)
$
692,471

 
$
681,646

 
$
4,307

(4)
$
685,953

Operating income
256,736

 
71,885

(2)
328,621

 
253,402

 
78,430

(5)
331,832

Operating profit margin
37.1
%
 
 
 
47.5
%
 
37.2
%
 
 
 
48.4
%
Net income
$
184,500

 
$
46,458

(3)
$
230,958

 
$
185,057

 
$
52,063

(6)
$
237,120

Earnings per share – diluted:
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
$
2.01

 
 
 
$
2.52

 
$
1.96

 
 
 
$
2.51

Weighted average shares – diluted
91,820

 
 
 
91,820

 
94,397

 
 
 
94,397

(1)
Amount represents the revenue not reported during the period as a result of the acquisition accounting adjustment associated with accounting for deferred revenue in business combinations.
(2)
Amount represents $44.0 million of amortization expense associated with intangible assets acquired in business combinations, $25.7 million of stock-based compensation expense, the $1.4 million adjustment to revenue as reflected in (1) above and $0.8 million of transaction expenses related to business combinations.
(3)
Amount represents the impact of the adjustments to operating income referred to in (2) above, adjusted for the related income tax impact of $25.4 million.
(4)
Amount represents the revenue not reported during the period as a result of the acquisition accounting adjustment associated with accounting for deferred revenue in business combinations.
(5)
Amount represents $45.6 million of amortization expense associated with intangible assets acquired in business combinations, $27.6 million of stock-based compensation expense, the $4.3 million adjustment to revenue as reflected in (4) above and $1.0 million of transaction expenses related to business combinations.
(6)
Amount represents the impact of the adjustments to operating income referred to in (5) above, adjusted for the related income tax impact of $26.4 million.
Non-GAAP Measures
Management uses non-GAAP financial measures (a) to evaluate the Company's historical and prospective financial performance as well as its performance relative to its competitors, (b) to set internal sales targets and spending budgets, (c) to allocate resources, (d) to measure operational profitability and the accuracy of forecasting, (e) to assess financial discipline over operational expenditures and (f) as an important factor in determining variable compensation for management and its employees. In addition, many financial analysts that follow the Company focus on and publish both historical results and future projections based on non-GAAP financial measures. The Company believes that it is in the best interest of its investors to provide this information to analysts so that they accurately report the non-GAAP financial information. Moreover, investors have historically requested and the Company has historically reported these non-GAAP financial measures as a means of providing consistent and comparable information with past reports of financial results.
While management believes that these non-GAAP financial measures provide useful supplemental information to investors, there are limitations associated with the use of these non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with GAAP, are not reported by all of the Company’s competitors and may not be directly comparable to similarly titled measures of the Company’s competitors due to potential differences in the exact method of calculation. The Company compensates for these limitations by using these non-GAAP financial measures as supplements to GAAP financial measures and by reviewing the reconciliations of the non-GAAP financial measures to their most comparable GAAP financial measures.

28

Table of Contents

The adjustments to these non-GAAP financial measures, and the basis for such adjustments, are outlined below:
Acquisition accounting for deferred revenue and its related tax impact. Historically, the Company has consummated acquisitions in order to support its strategic and other business objectives. In accordance with the fair value provisions applicable to the accounting for business combinations, acquired deferred revenue is often recorded on the opening balance sheet at an amount that is lower than the historical carrying value. Although this purchase accounting requirement has no impact on the Company’s business or cash flow, it adversely impacts the Company’s reported GAAP revenue in the reporting periods following an acquisition. In order to provide investors with financial information that facilitates comparison of both historical and future results, the Company provides non-GAAP financial measures which exclude the impact of the acquisition accounting adjustment. The Company believes that this non-GAAP financial adjustment is useful to investors because it allows investors to (a) evaluate the effectiveness of the methodology and information used by management in its financial and operational decision-making, and (b) compare past and future reports of financial results of the Company as the revenue reduction related to acquired deferred revenue will not recur when related annual lease licenses and software maintenance contracts are renewed in future periods.
Amortization of intangibles from acquisitions and its related tax impact. The Company incurs amortization of intangibles, included in its GAAP presentation of amortization expense, related to various acquisitions it has made in recent years. Management excludes these expenses and their related tax impact for the purpose of calculating non-GAAP operating income, non-GAAP operating profit margin, non-GAAP net income and non-GAAP diluted earnings per share when it evaluates the continuing operational performance of the Company because these costs are fixed at the time of an acquisition, are then amortized over a period of several years after the acquisition and generally cannot be changed or influenced by management after the acquisition. Accordingly, management does not consider these expenses for purposes of evaluating the performance of the Company during the applicable time period after the acquisition, and it excludes such expenses when making decisions to allocate resources. The Company believes that these non-GAAP financial measures are useful to investors because they allow investors to (a) evaluate the effectiveness of the methodology and information used by management in its financial and operational decision-making, and (b) compare past reports of financial results of the Company as the Company has historically reported these non-GAAP financial measures.
Stock-based compensation expense and its related tax impact. The Company incurs expense related to stock-based compensation included in its GAAP presentation of cost of software licenses; cost of maintenance and service; research and development expense and selling, general and administrative expense. Although stock-based compensation is an expense of the Company and viewed as a form of compensation, management excludes these expenses for the purpose of calculating non-GAAP operating income, non-GAAP operating profit margin, non-GAAP net income and non-GAAP diluted earnings per share when it evaluates the continuing operational performance of the Company. Specifically, the Company excludes stock-based compensation during its annual budgeting process and its quarterly and annual assessments of the Company’s and management’s performance. The annual budgeting process is the primary mechanism whereby the Company allocates resources to various initiatives and operational requirements. Additionally, the annual review by the board of directors during which it compares the Company's historical business model and profitability to the planned business model and profitability for the forthcoming year excludes the impact of stock-based compensation. In evaluating the performance of senior management and department managers, charges related to stock-based compensation are excluded from expenditure and profitability results. In fact, the Company records stock-based compensation expense into a stand-alone cost center for which no single operational manager is responsible or accountable. In this way, management is able to review, on a period-to-period basis, each manager’s performance and assess financial discipline over operational expenditures without the effect of stock-based compensation. The Company believes that these non-GAAP financial measures are useful to investors because they allow investors to (a) evaluate the Company's operating results and the effectiveness of the methodology used by management to review the Company's operating results, and (b) review historical comparability in the Company's financial reporting as well as comparability with competitors' operating results.
Transaction costs related to business combinations. The Company incurs expenses for professional services rendered in connection with business combinations, which are included in its GAAP presentation of selling, general and administrative expense. These expenses are generally not tax-deductible. Management excludes these acquisition-related transaction expenses for the purpose of calculating non-GAAP operating income, non-GAAP operating profit margin, non-GAAP net income and non-GAAP diluted earnings per share when it evaluates the continuing operational performance of the Company, as it generally would not have otherwise incurred these expenses in the periods presented as a part of its continuing operations. The Company believes that these non-GAAP financial measures are useful to investors because they allow investors to (a) evaluate the Company's operating results and the effectiveness of the methodology used by management to review the Company's operating results, and (b) review historical comparability in the Company's financial reporting as well as comparability with competitors' operating results.

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Table of Contents

Non-GAAP financial measures are not in accordance with, or an alternative for, GAAP. The Company's non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP financial measures, and should be read only in conjunction with the Company's consolidated financial statements prepared in accordance with GAAP.
The Company has provided a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures as listed below:
GAAP Reporting Measure
Non-GAAP Reporting Measure
Revenue
Non-GAAP Revenue
Operating Income
Non-GAAP Operating Income
Operating Profit Margin
Non-GAAP Operating Profit Margin
Net Income
Non-GAAP Net Income
Diluted Earnings Per Share
Non-GAAP Diluted Earnings Per Share


30

Table of Contents

Liquidity and Capital Resources
(in thousands)
September 30,
2015
 
December 31,
2014
 
Change
Cash, cash equivalents and short-term investments
$
776,923

 
$
788,778

 
$
(11,855
)
Working capital
$
633,307

 
$
645,394

 
$
(12,087
)
Cash, Cash Equivalents and Short-Term Investments
Cash and cash equivalents consist primarily of highly liquid investments such as money market mutual funds and deposits held at major banks. Short-term investments consist primarily of deposits held by certain foreign subsidiaries of the Company with original maturities of three months to one year. The following table presents the Company's foreign and domestic holdings of cash, cash equivalents and short-term investments as of September 30, 2015 and December 31, 2014:
(in thousands)
September 30,
2015
 
% of Total
 
December 31,
2014
 
% of Total
Domestic
$
532,995

 
68.6
%
 
$
556,328

 
70.5
%
Foreign
243,928

 
31.4
%
 
232,450

 
29.5
%
Total
$
776,923

 
 
 
$
788,778

 
 
If the foreign balances were repatriated to the U.S., they would be subject to domestic tax, resulting in a tax obligation in the period of repatriation. In general, it is the practice and intention of the Company to repatriate previously taxed earnings and to reinvest all other earnings of its non-U.S. subsidiaries. The amount of cash, cash equivalents and short-term investments held by foreign subsidiaries is subject to translation adjustments caused by changes in foreign currency exchange rates as of the end of each respective reporting period, the offset to which is recorded in accumulated other comprehensive loss on the Company’s condensed consolidated balance sheet.
Cash Flows from Operating Activities
 
Nine Months Ended September 30,
 
 
(in thousands)
2015
 
2014
 
Change
Net cash provided by operating activities
$
258,327

 
$
293,034

 
$
(34,707
)
Net cash provided by operating activities decreased during the current fiscal year due to decreased net cash flows from operating assets and liabilities of $40.6 million, primarily due to a $26.8 million refund received in 2014 related to the Company's 2009 and 2010 federal income tax years. These amounts were partially offset by increased net income (net of non-cash operating adjustments) of $5.9 million.

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Table of Contents

Cash Flows from Investing Activities
 
Nine Months Ended September 30,