Document

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 June 30, 2016
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)
844-462-6797
(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 July 31, 2016 was 87,218,326 shares.




ANSYS, INC. AND SUBSIDIARIES
INDEX
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents

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

 
June 30,
2016
 
December 31,
2015
(in thousands, except share and per share data)
(Unaudited)
 
(Audited)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
843,355

 
$
784,168

Short-term investments
410

 
446

Accounts receivable, less allowance for doubtful accounts of $5,100 and $5,200, respectively
85,506

 
91,579

Other receivables and current assets
180,471

 
200,233

Total current assets
1,109,742

 
1,076,426

Property and equipment, net
58,095

 
61,924

Goodwill
1,333,397

 
1,332,348

Other intangible assets, net
196,933

 
220,553

Other long-term assets
16,926

 
5,757

Deferred income taxes
32,568

 
32,896

Total assets
$
2,747,661

 
$
2,729,904

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
4,218

 
$
4,865

Accrued bonuses and commissions
23,929

 
46,141

Accrued income taxes
3,124

 
4,695

Other accrued expenses and liabilities
60,637

 
63,801

Deferred revenue
375,802

 
364,644

Total current liabilities
467,710

 
484,146

Long-term liabilities:
 
 
 
Deferred income taxes
2,160

 
2,091

Other long-term liabilities
41,931

 
49,240

Total long-term liabilities
44,091

 
51,331

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
884,675

 
894,469

Retained earnings
1,918,125

 
1,792,029

Treasury stock, at cost: 6,078,052 and 5,096,505 shares, respectively
(527,931
)
 
(440,839
)
Accumulated other comprehensive loss
(39,941
)
 
(52,164
)
Total stockholders' equity
2,235,860

 
2,194,427

Total liabilities and stockholders' equity
$
2,747,661

 
$
2,729,904

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

3

Table of Contents

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

 
Three Months Ended
 
Six Months Ended
(in thousands, except per share data)
June 30,
2016
 
June 30,
2015
 
June 30,
2016
 
June 30,
2015
Revenue:
 
 
 
 
 
 
 
Software licenses
$
141,087

 
$
140,489

 
$
267,138

 
$
265,458

Maintenance and service
104,982

 
94,996

 
204,837

 
187,808

Total revenue
246,069

 
235,485

 
471,975

 
453,266

Cost of sales:
 
 
 
 
 
 
 
Software licenses
6,534

 
6,950

 
13,272

 
14,159

Amortization
9,520

 
9,743

 
19,031

 
19,100

Maintenance and service
20,957

 
21,092

 
39,993

 
40,414

Total cost of sales
37,011

 
37,785

 
72,296

 
73,673

Gross profit
209,058

 
197,700

 
399,679

 
379,593

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
64,259

 
63,524

 
122,028

 
120,273

Research and development
47,443

 
42,646

 
92,115

 
82,655

Amortization
3,201

 
5,035

 
6,359

 
10,112

Total operating expenses
114,903

 
111,205

 
220,502

 
213,040

Operating income
94,155

 
86,495

 
179,177

 
166,553

Interest expense
(59
)
 
(122
)
 
(145
)
 
(276
)
Interest income
1,077

 
795

 
2,027

 
1,451

Other income, net
305

 
91

 
197

 
858

Income before income tax provision
95,478

 
87,259

 
181,256

 
168,586

Income tax provision
25,850

 
24,924

 
55,160

 
50,119

Net income
$
69,628

 
$
62,335

 
$
126,096

 
$
118,467

Earnings per share – basic:
 
 
 
 
 
 
 
Basic earnings per share
$
0.79

 
$
0.69

 
$
1.43

 
$
1.32

Weighted average shares – basic
87,638

 
89,866

 
87,876

 
89,962

Earnings per share – diluted:
 
 
 
 
 
 
 
Diluted earnings per share
$
0.78

 
$
0.68

 
$
1.41

 
$
1.29

Weighted average shares – diluted
89,305

 
91,726

 
89,694

 
91,933

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

4

Table of Contents

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

 
Three Months Ended
 
Six Months Ended
(in thousands)
June 30,
2016
 
June 30,
2015
 
June 30,
2016
 
June 30,
2015
Net income
$
69,628

 
$
62,335

 
$
126,096

 
$
118,467

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
1,152

 
4,872

 
12,223

 
(12,758
)
Comprehensive income
$
70,780

 
$
67,207

 
$
138,319

 
$
105,709

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

5

Table of Contents

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

 
Six Months Ended
(in thousands)
June 30,
2016
 
June 30,
2015
Cash flows from operating activities:
 
 
 
Net income
$
126,096

 
$
118,467

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
34,876

 
39,135

Deferred income tax expense
3,382

 
3,275

Provision for bad debts
695

 
833

Stock-based compensation expense
15,612

 
16,861

Excess tax benefits from stock-based compensation
(3,768
)
 
(5,703
)
Other
(141
)
 
(134
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
6,121

 
11,252

Other receivables and current assets
22,021

 
25,497

Other long-term assets
(705
)
 
15

Accounts payable, accrued expenses and current liabilities
(25,627
)
 
(33,726
)
Accrued income taxes
2,438

 
2,263

Deferred revenue
5,245

 
10,839

Other long-term liabilities
(7,641
)
 
(8,342
)
Net cash provided by operating activities
178,604

 
180,532

Cash flows from investing activities:
 
 
 
Acquisitions, net of cash acquired

 
(10,376
)
Capital expenditures
(6,068
)
 
(7,682
)
Other investing activities
(10,256
)
 
(111
)
Net cash used in investing activities
(16,324
)
 
(18,169
)
Cash flows from financing activities:
 
 
 
Purchase of treasury stock
(128,760
)

(128,716
)
Restricted stock withholding taxes paid in lieu of issued shares
(5,004
)
 
(4,382
)
Contingent consideration payments
(1,048
)
 
(1,173
)
Proceeds from shares issued for stock-based compensation
17,419

 
29,675

Excess tax benefits from stock-based compensation
3,768

 
5,703

Other financing activities
(1
)
 
(10
)
Net cash used in financing activities
(113,626
)
 
(98,903
)
Effect of exchange rate fluctuations on cash and cash equivalents
10,533

 
(11,170
)
Net increase in cash and cash equivalents
59,187

 
52,290

Cash and cash equivalents, beginning of period
784,168

 
788,064

Cash and cash equivalents, end of period
$
843,355

 
$
840,354

Supplemental disclosures of cash flow information:
 
 
 
Income taxes paid
$
65,873

 
$
55,018

Interest paid
$
727

 
$
609

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
June 30, 2016
(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 and defense, automotive, industrial equipment, electronics, biomedical, energy, materials and chemical processing, and semiconductors.
As defined by the accounting guidance for segment reporting, the Company operates as one segment.
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, 2015. The condensed consolidated December 31, 2015 balance sheet presented is derived from the audited December 31, 2015 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 six months ended June 30, 2016 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:
 
June 30, 2016
 
December 31, 2015
(in thousands, except percentages)
Amount
 
% of Total
 
Amount
 
% of Total
Cash accounts
$
488,600

 
57.9
 
$
427,244

 
54.5
Money market mutual funds
354,755

 
42.1
 
356,924

 
45.5
Total
$
843,355

 
 
 
$
784,168

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


7

Table of Contents

3.
Other Receivables and Current Assets
The Company's other receivables and current assets comprise the following balances:
(in thousands)
June 30,
2016
 
December 31,
2015
Receivables related to unrecognized revenue
$
125,076

 
$
170,186

Income taxes receivable, including overpayments and refunds
30,412

 
7,877

Prepaid expenses and other current assets
24,983

 
22,170

Total other receivables and current assets
$
180,471

 
$
200,233

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.

4.
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
 
Six Months Ended
(in thousands, except per share data)
June 30,
2016
 
June 30,
2015
 
June 30,
2016
 
June 30,
2015
Net income
$
69,628

 
$
62,335

 
$
126,096

 
$
118,467

Weighted average shares outstanding – basic
87,638

 
89,866

 
87,876

 
89,962

Dilutive effect of stock plans
1,667

 
1,860

 
1,818

 
1,971

Weighted average shares outstanding – diluted
89,305

 
91,726

 
89,694

 
91,933

Basic earnings per share
$
0.79

 
$
0.69

 
$
1.43

 
$
1.32

Diluted earnings per share
$
0.78

 
$
0.68

 
$
1.41

 
$
1.29

Anti-dilutive shares
169

 
223

 
228

 
230


5.
Goodwill and Intangible Assets
The Company's intangible assets and estimated useful lives are classified as follows:
 
June 30, 2016
 
December 31, 2015
(in thousands)
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Finite-lived intangible assets:
 
 
 
 
 
 
 
Developed software and core technologies (3 – 11 years)
$
336,562

 
$
(263,383
)
 
$
336,262

 
$
(251,201
)
Customer lists and contract backlog (5 – 15 years)
163,622

 
(84,676
)
 
159,885

 
(76,160
)
Trade names (2 – 10 years)
127,857

 
(83,406
)
 
127,903

 
(76,493
)
Total
$
628,041

 
$
(431,465
)
 
$
624,050

 
$
(403,854
)
Indefinite-lived intangible assets:
 
 
 
 
 
 
 
Trade name
$
357

 
 
 
$
357

 
 
Amortization expense for the intangible assets reflected above was $12.7 million and $14.8 million for the three months ended June 30, 2016 and 2015, respectively. Amortization expense for the intangible assets reflected above was $25.4 million and $29.2 million for the six months ended June 30, 2016 and 2015, respectively.

8

Table of Contents

As of June 30, 2016, estimated future amortization expense for the intangible assets reflected above is as follows:
(in thousands)
 
Remainder of 2016
$
25,442

2017
48,022

2018
34,668

2019
21,190

2020
20,083

2021
15,911

Thereafter
31,260

Total intangible assets subject to amortization
196,576

Indefinite-lived trade name
357

Other intangible assets, net
$
196,933

The changes in goodwill during the six months ended June 30, 2016 and 2015 were as follows:
(in thousands)
2016
 
2015
Beginning balance – January 1
$
1,332,348

 
$
1,312,182

Acquisitions

 
5,411

Adjustments(1)
(1
)
 
(3,601
)
Currency translation
1,050

 
(1,871
)
Ending balance – June 30
$
1,333,397

 
$
1,312,121

(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 2016, the Company completed the annual impairment test for goodwill and the indefinite-lived intangible asset and determined that these assets had not been impaired as of the test date, January 1, 2016. No other events or circumstances changed during the six months ended June 30, 2016 that would indicate that the fair values of the Company's reporting unit and indefinite-lived intangible asset are below their carrying amounts.

6.
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.

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Table of Contents

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)
June 30,
2016
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Cash equivalents
$
354,755

 
$
354,755

 
$

 
$

Short-term investments
$
410

 
$

 
$
410

 
$

 
 
 
Fair Value Measurements at Reporting Date Using:
(in thousands)
December 31, 2015
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Cash equivalents
$
356,924

 
$
356,924

 
$

 
$

Short-term investments
$
446

 
$

 
$
446

 
$

Liabilities
 
 
 
 
 
 
 
Contingent consideration
$
(1,376
)
 
$

 
$

 
$
(1,376
)
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 table above represents the final payment related to the 2013 acquisition of EVEN - Evolutionary Engineering AG ("EVEN"). The net present value calculation for the contingent consideration, which was paid during the quarter ended March 31, 2016, included significant unobservable inputs as of December 31, 2015 in the assumption that the remaining payment would be made, and, therefore, the liability was classified as Level 3 in the fair value hierarchy.
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 six months ended June 30, 2016 and 2015:
 
Fair Value Measurement Using
Significant Unobservable Inputs
(in thousands)
Contingent
Consideration
Balance as of January 1, 2016
$
1,376

Contingent payment
(1,448
)
Interest expense and foreign exchange activity included in earnings
72

Balance as of June 30, 2016
$

The final payment related to the EVEN contingent consideration was paid in the first quarter of 2016. As a result of making this final payment, the Company no longer has a contingent consideration liability at June 30, 2016.
 
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


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Table of Contents

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.

7.
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
 
Six Months Ended
(in thousands)
June 30,
2016
 
June 30,
2015
 
June 30,
2016
 
June 30,
2015
United States
$
89,267

 
$
87,372

 
$
174,644

 
$
168,841

Japan
31,250

 
25,840

 
59,105

 
52,538

Germany
24,662

 
22,365

 
48,029

 
45,592

South Korea
16,357

 
16,005

 
28,248

 
27,151

France
12,338

 
12,616

 
24,052

 
24,156

Canada
3,293

 
3,345

 
6,676

 
6,628

Other European
35,785

 
36,990

 
69,774

 
70,558

Other international
33,117

 
30,952

 
61,447

 
57,802

Total revenue
$
246,069

 
$
235,485

 
$
471,975

 
$
453,266

Property and equipment by geographic area is as follows:
(in thousands)
June 30,
2016
 
December 31,
2015
United States
$
45,454

 
$
47,971

Europe
5,489

 
6,808

India
3,376

 
3,286

Other international
3,776

 
3,859

Total property and equipment, net
$
58,095

 
$
61,924


8.
Stock-Based Compensation
In May 2016, the Company received shareholder approval for the Fifth Amended and Restated ANSYS, Inc. 1996 Stock Option and Grant Plan (the “Restated Plan”). The Restated Plan increases the maximum number of shares available for awards to a total of 39,768,912 shares. The Company also received approval for the Third Amended and Restated Employee Stock Purchase Plan (the “Restated ESPP”). The Restated ESPP increases the number of shares available for offerings to a total of 1.8 million shares.

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Table of Contents

Total stock-based compensation expense and its net impact on basic and diluted earnings per share are as follows:
 
Three Months Ended
 
Six Months Ended
(in thousands, except per share data)
June 30,
2016

June 30,
2015
 
June 30,
2016
 
June 30,
2015
Cost of sales:
 
 
 
 
 
 
 
Software licenses
$
182

 
$
182

 
$
337

 
$
375

Maintenance and service
416

 
486

 
783

 
902

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
3,944

 
4,722

 
6,868

 
8,789

Research and development
3,992

 
3,640

 
7,624

 
6,795

Stock-based compensation expense before taxes
8,534

 
9,030

 
15,612

 
16,861

Related income tax benefits
(2,892
)
 
(2,911
)
 
(4,935
)
 
(5,729
)
Stock-based compensation expense, net of taxes
$
5,642

 
$
6,119

 
$
10,677

 
$
11,132

Net impact on earnings per share:
 
 
 
 
 
 
 
Basic earnings per share
$
(0.06
)
 
$
(0.07
)
 
$
(0.12
)
 
$
(0.12
)
Diluted earnings per share
$
(0.06
)
 
$
(0.07
)
 
$
(0.12
)
 
$
(0.12
)

9.
Stock Repurchase Program
Under the Company's stock repurchase program, the Company repurchased shares during the six months ended June 30, 2016 and 2015, as follows:
 
Six Months Ended
(in thousands, except per share data)
June 30,
2016
 
June 30,
2015
Number of shares repurchased
1,500

 
1,543

Average price paid per share
$
85.84

 
$
83.42

Total cost
$
128,760

 
$
128,716

In February 2016, 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 June 30, 2016, 3.5 million shares remained available for repurchase under the program.

10.
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.
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 $7 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.
A French subsidiary of the Company received notice that the French taxing authority rejected the Company's 2012 research and development credit. The Company intends to contest the decision. However, if the Company does not receive a favorable outcome, it could incur charges of approximately $0.8 million.  In addition, an unfavorable outcome could call into question $3.8 million of similar research and development credits currently reflected as an asset for 2013 through the current quarter. The Company can provide no assurances on the timing or outcome of this matter.

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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 June 30, 2016. 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.

11.
New Accounting Guidance
Employee share-based payment accounting: In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). This update includes various areas for simplification related to aspects of the accounting for share-based payment transactions. One simplification is that the tax effects of share-based payment settlements will be recorded in the income statement. Prior guidance required tax windfalls at settlement, and tax shortfalls to the extent of previous windfalls, to be recorded in equity. This provision is required to be adopted prospectively. These tax effects will be reported as operating cash flows according to the new guidance as opposed to financing cash flows in the prior guidance. Other simplifications involve the classification of awards as either equity or liabilities and classification on the statements of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the effect that implementation of this update will have on its financial results upon adoption.
Leases: In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 requires virtually all leases, other than leases that meet the definition of a short-term lease, to be recorded on the balance sheet with a right-of-use asset and corresponding lease liability. Leases will be classified as either operating or finance leases based on certain criteria. This classification will determine the timing and presentation of expenses on the income statement, as well as the presentation of related cash flows. The standard is effective for annual periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted and a modified retrospective transition is required upon adoption. The Company is currently evaluating the effect that implementation of this update will have on its financial results upon adoption.
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 June 30, 2016, and the related condensed consolidated statements of income and comprehensive income for the three-month and six-month periods ended June 30, 2016 and 2015, and of cash flows for the six-month periods ended June 30, 2016 and 2015. 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, 2015, 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 25, 2016, 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, 2015 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
August 4, 2016

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview:
The Company's GAAP results for the three months ended June 30, 2016 reflect growth in revenue of 4.5%, operating income of 8.9% and diluted earnings per share of 14.7% as compared to the three months ended June 30, 2015. The Company's GAAP results for the six months ended June 30, 2016 reflect growth in revenue of 4.1%, operating income of 7.6% and diluted earnings per share of 9.3% as compared to the six months ended June 30, 2015. The Company experienced higher revenue in 2016 primarily from growth in lease license and maintenance revenue, partially offset by decreased perpetual license revenue. The Company also experienced increased operating expenses primarily due to increased personnel costs. In addition, the Company's GAAP and non-GAAP results for the six months ended June 30, 2016 as compared to the six months ended June 30, 2015 were negatively impacted by a stronger U.S. Dollar.
The Company's non-GAAP results for the three months ended June 30, 2016 reflect growth in revenue of 4.3%, operating income of 4.0% and diluted earnings per share of 9.4% as compared to the three months ended June 30, 2015. The Company's non-GAAP results for the six months ended June 30, 2016 reflect growth in revenue of 3.9%, operating income of 2.8% and diluted earnings per share of 4.9% as compared to the six months ended June 30, 2015. 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 Company's comparative financial results were impacted by fluctuations in the U.S. Dollar during the three and six months ended June 30, 2016 as compared to the three and six months ended June 30, 2015. The impacts on the Company's revenue and operating income due to currency fluctuations are reflected in the table below.
The amounts in the table represent the difference between the actual 2016 results and the same results calculated at the 2015 exchange rates. Amounts in brackets indicate a net adverse impact from currency fluctuations.
 
Three Months Ended June 30, 2016
 
Six Months Ended June 30, 2016
(in thousands)
GAAP
 
Non-GAAP
 
GAAP
 
Non-GAAP
Revenue
$
193

 
$
193

 
$
(3,933
)
 
$
(3,933
)
Operating income
$
277

 
$
315

 
$
(2,280
)
 
$
(2,274
)
In constant currency(1), the Company's growth rates were as follows:
 
Three Months Ended June 30, 2016
 
Six Months Ended June 30, 2016
 
GAAP
 
Non-GAAP
 
GAAP
 
Non-GAAP
Revenue
4.4
%
 
4.2
%
 
5.0
%
 
4.8
%
Operating income
8.5
%
 
3.7
%
 
8.9
%
 
3.9
%
(1) Constant currency amounts exclude the effect of foreign currency fluctuations on the reported results. To present this information, the results for 2016 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 2015, rather than the actual exchange rates in effect for 2016.
The Company’s financial position includes $843.8 million in cash and short-term investments, and working capital of $642.0 million as of June 30, 2016.
During the three months ended June 30, 2016, the Company repurchased 1.0 million shares for $86.1 million at an average price of $86.08 per share under the Company's stock repurchase program. During the six months ended June 30, 2016, the Company repurchased 1.5 million shares for $128.8 million at an average price of $85.84 per share.
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 and defense, automotive, industrial equipment, electronics, biomedical, energy, materials and chemical processing, and semiconductors. Headquartered south of Pittsburgh, Pennsylvania, the Company employed approximately 2,800 people as of June 30, 2016. ANSYS focuses on the development of open and flexible solutions that enable users to analyze designs directly on the desktop, providing a common platform for fast, efficient and cost-conscious product development, from design concept to final-stage testing and validation. The Company distributes its 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.

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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 six months ended June 30, 2016 as compared to the three and six months ended June 30, 2015:
 
Three Months Ended June 30, 2016
 
Six Months Ended June 30, 2016
North America
2.1
%
 
3.5
%
Europe
3.0
%
 
4.2
%
Asia-Pacific
8.7
%
 
7.7
%
Total
4.4
%
 
5.0
%
In North America, the Company experienced strength in the aerospace and defense, automotive, and electronics industries. High-tech companies in the mobile and IT space invested heavily in research and development to drive the Internet of Things ("IoT") and proliferate their solutions across industry sectors, including connected and autonomous vehicles, medical devices and aerospace. However, certain areas in the U.S. and Canada have been negatively affected by the low price of oil, which resulted in the contraction of the oil and gas business and the related supply chains. 
Europe reflected continued economic and geopolitical challenges. Germany was comparatively the strongest market, partially offset by continued weakness in France, the United Kingdom and Russia. From an industry perspective, the Company experienced strength from automotive and healthcare companies. The Company's strong performance in the healthcare sector validates the potential of the medical and IoT markets where there is a growing awareness of the importance of predictive medicine and the need for simulation of these increasingly complex products.
Asia-Pacific experienced strength in Japan, China and Taiwan. China's growth was largely driven by the commercial sectors, partially offset by slower growth in the state-owned enterprises. Investments by industrial equipment, aerospace and defense, and automotive electronics companies drove the performance. The Company benefited from the rising defense spending, rapidly maturing space sectors and a sales and technical focus within these sectors, particularly in India. 
A number of sales improvement activities are ongoing across the geographic regions, including sales hiring, pipeline building, productivity initiatives and customer engagement activities.
Note About Forward-Looking Statements
The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto for the six months ended June 30, 2016, and with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2015 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 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 values of stock awards, bad debts, contract revenue, the 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

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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 values 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 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 expectations regarding the realization of the French research and development credits.
The Company's expectations regarding future claims related to indemnification obligations.
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 expectations regarding the adverse impact on license and maintenance revenue growth in the near term due to an increased customer preference for time-based licenses.
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. More specifically, this includes the evolution of its ANSYS® Workbench platform, expansion of high-performance computing capabilities, ANSYS® AIM immersive user interface, offerings on ANSYS Enterprise Cloud, 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.
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 June 30, 2016 Compared to Three Months Ended June 30, 2015
Revenue:
 
Three Months Ended June 30,
 
Change
(in thousands, except percentages)
2016
 
2015
 
Amount
 
%
Revenue:
 
 
 
 
 
 
 
Lease licenses
$
83,169

 
$
78,011

 
$
5,158

 
6.6

Perpetual licenses
57,918

 
62,478

 
(4,560
)
 
(7.3
)
Software licenses
141,087

 
140,489

 
598

 
0.4

Maintenance
98,869

 
89,883

 
8,986

 
10.0

Service
6,113

 
5,113

 
1,000

 
19.6

Maintenance and service
104,982

 
94,996

 
9,986

 
10.5

Total revenue
$
246,069

 
$
235,485

 
$
10,584

 
4.5

The Company’s revenue in the quarter ended June 30, 2016 increased 4.5% as compared to the quarter ended June 30, 2015, while revenue grew 4.4% in constant currency. The growth rate was favorably impacted by the Company’s continued investment in its global sales, support and marketing organizations. Lease license revenue increased 6.6% as compared to the prior-year quarter. Perpetual license revenue, which is derived primarily from new sales during the quarter, decreased 7.3% as compared to the prior-year quarter primarily due to a decrease in perpetual license revenue of electronics simulation 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 10.0%.
With respect to revenue, on average for the quarter ended June 30, 2016, the U.S. Dollar was approximately 0.2% weaker, when measured against the Company’s primary foreign currencies, than for the quarter ended June 30, 2015. The net overall weakening resulted in increased revenue of $0.2 million during the quarter ended June 30, 2016 as compared with the same quarter of 2015. The impact on revenue was primarily driven by $2.9 million of favorable impact due to a stronger Japanese Yen, partially offset by $0.9 million, $0.7 million and $0.6 million of adverse impact due to a weaker South Korean Won, Euro and British Pound, respectively. The net overall weaker U.S. Dollar also resulted in increased operating income of $0.3 million during the quarter ended June 30, 2016 as compared with the same quarter of 2015.
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 some of its larger customers in enterprise 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. 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. The Company is similarly experiencing a shifting preference from perpetual licenses to time-based licenses across a broader spectrum of its customers, particularly in the more mature geographic markets, such as the U.S. and Japan. To the extent this shift continues or becomes more prevalent, the result could be a similar and incremental near-term adverse impact on software license and maintenance revenue growth.
International and domestic revenues, as a percentage of total revenue, were 63.7% and 36.3%, respectively, during the quarter ended June 30, 2016, and 62.9% and 37.1%, respectively, during the quarter ended June 30, 2015. The Company derived 24.4% and 24.2% of its total revenue through the indirect sales channel for the quarters ended June 30, 2016 and 2015, 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

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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 impact on reported revenue was $0.4 million for the quarter ended June 30, 2015. There was no impact during the quarter ended June 30, 2016.
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 June 30, 2016 and December 31, 2015 consist of the following:
 
Balance at June 30, 2016
(in thousands)
Total
 
Current
 
Long-Term
Deferred revenue
$
385,716

 
$
375,802

 
$
9,914

Backlog
137,897

 
57,523

 
80,374

Total
$
523,613

 
$
433,325

 
$
90,288

 
Balance at December 31, 2015
(in thousands)
Total
 
Current
 
Long-Term
Deferred revenue
$
379,740

 
$
364,644

 
$
15,096

Backlog
124,290

 
47,015

 
77,275

Total
$
504,030

 
$
411,659

 
$
92,371

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.
Cost of Sales and Gross Profit:
The table below reflects 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 are provided in constant currency. The impact, where material, of foreign exchange translation on each expense line is provided separately.
 
Three Months Ended June 30,
 
 
 
 
2016
 
2015
 
Change
(in thousands, except percentages)
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
Amount
 
%
Cost of sales:
 
 
 
 
 
 
 
 
 
 
 
Software licenses
$
6,534

 
2.7
 
$
6,950

 
3.0
 
$
(416
)
 
(6.0
)
Amortization
9,520

 
3.9
 
9,743

 
4.1
 
(223
)
 
(2.3
)
Maintenance and service
20,957

 
8.5
 
21,092

 
9.0
 
(135
)
 
(0.6
)
Total cost of sales
37,011

 
15.0
 
37,785

 
16.0
 
(774
)
 
(2.0
)
Gross profit
$
209,058

 
85.0
 
$
197,700

 
84.0
 
$
11,358

 
5.7

Software Licenses: The decrease in the cost of software licenses was primarily due to the following:
Decreased salaries, incentive compensation and other headcount-related costs of $0.5 million, primarily due to a decrease in headcount.
Amortization: The decrease in amortization expense was primarily due to a net decrease in the amortization of acquired technology.
Maintenance and Service: The net decrease in maintenance and service costs was primarily due to the following:
Decreased severance costs of $0.7 million.
Decreased depreciation and business travel, each of $0.2 million.
Net increase in salaries and other headcount-related costs of $0.8 million.

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Increased IT-related maintenance and software hosting costs of $0.2 million.
The improvement in gross profit was a result of the increase in revenue and the decrease in related cost of sales.
Operating Expenses:
The table below reflects 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 are provided in constant currency. The impact, where material, of foreign exchange translation on each expense line is provided separately.
 
Three Months Ended June 30,
 
 
 
 
2016
 
2015
 
Change
(in thousands, except percentages)
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
Amount
 
%
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
$
64,259

 
26.1
 
$
63,524

 
27.0
 
$
735

 
1.2

Research and development
47,443

 
19.3
 
42,646

 
18.1
 
4,797

 
11.2

Amortization
3,201

 
1.3
 
5,035

 
2.1
 
(1,834
)
 
(36.4
)
Total operating expenses
$
114,903

 
46.7
 
$
111,205

 
47.2
 
$
3,698

 
3.3

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 of $0.8 million, primarily due to an increase in sales headcount.
Increased IT-related maintenance and software hosting costs of $0.6 million.
Increased consulting costs of $0.4 million.
Increased professional fees of $0.3 million.
Decreased stock-based compensation of $0.8 million.
Decreased third-party commissions of $0.6 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 increase in research and development costs was primarily due to the following:
Increased salaries, incentive compensation and other headcount-related costs of $3.5 million.
Increased IT-related maintenance and software hosting costs of $0.8 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 the ANSYS Workbench platform, expansion of high-performance computing capabilities, ANSYS AIM immersive user interface, offerings on ANSYS Enterprise Cloud, robust design and ongoing integration of acquired technology.
Amortization: The decrease in amortization expense was primarily due to a net decrease in the amortization of acquired customer lists that became fully amortized.
Interest Income: Interest income for the quarter ended June 30, 2016 was $1.1 million as compared to $0.8 million for the quarter ended June 30, 2015. Interest income increased as a result of an increase in both the Company's average invested cash balances and the average rate of return on those balances.

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Other Income, net: The Company's other income consists of the following:
 
Three Months Ended
(in thousands)
June 30,
2016
 
June 30,
2015
Foreign currency gains (losses), net
$
297

 
$
(96
)
Other
8

 
187

Total other income, net
$
305

 
$
91

Income Tax Provision: The Company recorded income tax expense of $25.9 million and had income before income taxes of $95.5 million for the quarter ended June 30, 2016. During the quarter ended June 30, 2015, the Company recorded income tax expense of $24.9 million and had income before income taxes of $87.3 million. The effective tax rates were 27.1% and 28.6% for the second quarters of 2016 and 2015, respectively.
The decrease in the effective tax rate is primarily due to tax benefits of approximately $5.4 million related to entity structuring and related repatriation activities, partially offset by tax benefits occurring in the second quarter of 2015 related to the merger of the Company's Japan subsidiaries in 2010 that did not recur in the second quarter of 2016. This quarterly benefit of approximately $3.1 million was fully amortized in the third quarter of 2015. There will be no additional ongoing benefit from this transaction. When compared to the federal and state combined statutory rate, the effective tax rates for the quarters ended June 30, 2016 and 2015 were favorably impacted by the domestic manufacturing deduction and lower statutory tax rates in many of the Company's foreign jurisdictions.
Net Income: The Company’s net income in the second quarter of 2016 was $69.6 million as compared to net income of $62.3 million in the second quarter of 2015. Diluted earnings per share was $0.78 in the second quarter of 2016 and $0.68 in the second quarter of 2015. The weighted average shares used in computing diluted earnings per share were 89.3 million and 91.7 million in the second quarters of 2016 and 2015, respectively.

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Table of Contents

Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015
Revenue:
 
Six Months Ended June 30,
 
Change
(in thousands, except percentages)
2016
 
2015
 
Amount
 
%
Revenue:
 
 
 
 
 
 
 
Lease licenses
$
164,808

 
$
156,249

 
$
8,559

 
5.5

Perpetual licenses
102,330

 
109,209

 
(6,879
)
 
(6.3
)
Software licenses
267,138

 
265,458

 
1,680

 
0.6

Maintenance
192,487

 
177,534

 
14,953

 
8.4

Service
12,350

 
10,274

 
2,076

 
20.2

Maintenance and service
204,837

 
187,808

 
17,029

 
9.1

Total revenue
$
471,975

 
$
453,266

 
$
18,709

 
4.1

The Company’s revenue in the six months ended June 30, 2016 increased 4.1% as compared to the six months ended June 30, 2015, while revenue grew 5.0% in constant currency. The growth rate was favorably impacted by the Company’s continued investment in its global sales, support and marketing organizations. Lease license revenue increased 5.5% as compared to the six months ended June 30, 2015. Perpetual license revenue, which is derived primarily from new sales during the period, decreased 6.3% as compared to the six months ended June 30, 2015. 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 8.4%.
With respect to revenue, on average for the six months ended June 30, 2016, the U.S. Dollar was approximately 1.7% stronger, when measured against the Company’s primary foreign currencies, than for the six months ended June 30, 2015. The net overall strengthening resulted in decreased revenue of $3.9 million during the six months ended June 30, 2016 as compared with the six months ended June 30, 2015. The impact on revenue was primarily driven by $3.2 million, $1.6 million, $1.1 million and $0.7 million of adverse impact due to a weaker Euro, South Korean Won, British Pound and Indian Rupee, respectively, partially offset by $3.3 million of favorable impact due to a stronger Japanese Yen. The net overall stronger U.S. Dollar also resulted in decreased operating income of $2.3 million during the six months ended June 30, 2016 as compared with the six months ended June 30, 2015.
International and domestic revenues, as a percentage of total revenue, were 63.0% and 37.0%, respectively, during the six months ended June 30, 2016, and 62.8% and 37.2%, respectively, during the six months ended June 30, 2015. The Company derived 24.0% and 24.2% of its total revenue through the indirect sales channel for the six months ended June 30, 2016 and 2015, 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 impacts on reported revenue were $0.1 million and $1.0 million for the six months ended June 30, 2016 and 2015, respectively.

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Table of Contents

Cost of Sales and Gross Profit:
The table below reflects 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 are provided in constant currency. The impact, where material, of foreign exchange translation on each expense line is provided separately.
 
Six Months Ended June 30,
 
 
 
 
2016
 
2015
 
Change
(in thousands, except percentages)
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
Amount
 
%
Cost of sales:
 
 
 
 
 
 
 
 
 
 
 
Software licenses
$
13,272

 
2.8
 
$
14,159

 
3.1
 
$
(887
)
 
(6.3
)
Amortization
19,031

 
4.0
 
19,100

 
4.2
 
(69
)
 
(0.4
)
Maintenance and service
39,993

 
8.5
 
40,414

 
8.9
 
(421
)
 
(1.0
)
Total cost of sales
72,296

 
15.3
 
73,673

 
16.3
 
(1,377
)
 
(1.9
)
Gross profit
$
399,679

 
84.7
 
$
379,593

 
83.7
 
$
20,086

 
5.3

Software Licenses: The decrease in the cost of software licenses was primarily due to the following:
Decreased salaries, incentive compensation and other headcount-related costs of $0.8 million, primarily due to a decrease in headcount.
Maintenance and Service: The net decrease in maintenance and service costs was primarily due to the following:
Decreased severance costs of $0.7 million.
Decreased depreciation of $0.4 million.
Decreased business travel of $0.3 million.
Cost reduction related to foreign exchange translation of $0.2 million due to a stronger U.S. Dollar.
Decreased facility costs of $0.2 million.
Net increase in salaries, incentive compensation and other headcount-related costs of $1.6 million.
The improvement in gross profit was a result of the increase in revenue and the decrease in related cost of sales.
Operating Expenses:
The table below reflects 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 are provided in constant currency. The impact, where material, of foreign exchange translation on each expense line is provided separately.
 
Six Months Ended June 30,
 
 
 
 
2016
 
2015
 
Change
(in thousands, except percentages)
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
Amount
 
%
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
$
122,028

 
25.9
 
$
120,273

 
26.5
 
$
1,755

 
1.5

Research and development
92,115

 
19.5
 
82,655

 
18.2
 
9,460

 
11.4

Amortization
6,359

 
1.3
 
10,112

 
2.2
 
(3,753
)
 
(37.1
)
Total operating expenses
$
220,502

 
46.7
 
$
213,040

 
47.0
 
$
7,462

 
3.5

Selling, General and Administrative: The net increase in selling, general and administrative costs was primarily due to the following:
Increased salaries, incentive compensation and other headcount-related costs of $3.0 million, primarily due to an increase in sales headcount.
Increased IT-related maintenance and software hosting costs of $0.9 million.
Increased consulting costs and professional fees, each of $0.6 million.

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Table of Contents

Increased facility costs of $0.4 million.
Decreased stock-based compensation of $1.9 million.
Decreased third-party commissions of $1.1 million.
Cost reduction related to foreign exchange translation of $0.6 million.
Research and Development: The increase in research and development costs was primarily due to the following:
Increased salaries, incentive compensation and other headcount-related costs of $7.5 million.
Increased IT-related maintenance and software hosting costs of $1.1 million.
Amortization: The decrease in amortization expense was primarily due to a net decrease in the amortization of acquired customer lists that became fully amortized.
Interest Income: Interest income for the six months ended June 30, 2016 was $2.0 million as compared to $1.5 million for the six months ended June 30, 2015. Interest income increased as a result of an increase in the average rate of return on invested cash balances.
Other Income, net: The Company's other income consists of the following:
 
Six Months Ended
(in thousands)
June 30,
2016
 
June 30,
2015
Foreign currency gains, net
$
190

 
$
666

Other
7

 
192

Total other income, net
$
197

 
$
858

Income Tax Provision: The Company recorded income tax expense of $55.2 million and had income before income taxes of $181.3 million for the six months ended June 30, 2016. During the six months ended June 30, 2015, the Company recorded income tax expense of $50.1 million and had income before income taxes of $168.6 million. The effective tax rates were 30.4% and 29.7% for the six months ended June 30, 2016 and 2015, respectively.
The increase in the effective tax rate is primarily due to tax benefits occurring in the first half of 2015 related to the merger of the Company's Japan subsidiaries in 2010 that did not recur in the first half of 2016, partially offset by 2016 benefits related to entity structuring and repatriation activities. The 2015 quarterly benefit of approximately $3.1 million was fully amortized in the third quarter of 2015. There will be no additional ongoing benefit from this transaction. When compared to the federal and state combined statutory rate, the effective tax rates for the six months ended June 30, 2016 and 2015 were favorably impacted by the domestic manufacturing deduction and lower statutory tax rates in many of the Company's foreign jurisdictions.
Net Income: The Company’s net income for the six months ended June 30, 2016 was $126.1 million as compared to net income of $118.5 million for the six months ended June 30, 2015. Diluted earnings per share was $1.41 for the six months ended June 30, 2016 and $1.29 for the six months ended June 30, 2015. The weighted average shares used in computing diluted earnings per share were 89.7 million and 91.9 million for the six months ended June 30, 2016 and 2015, respectively.

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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 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
 
June 30, 2016
 
June 30, 2015
(in thousands, except percentages and per share data)
As
Reported
 
Adjustments
 
Non-GAAP
Results
 
As
Reported
 
Adjustments
 
Non-GAAP
Results
Total revenue
$
246,069

 
$

 
$
246,069

 
$
235,485

 
$
393

(3)
$
235,878

Operating income
94,155

 
21,255

(1)
115,410

 
86,495

 
24,495

(4)
110,990

Operating profit margin
38.3
%
 
 
 
46.9
%
 
36.7
%
 
 
 
47.1
%
Net income
$
69,628

 
$
13,542

(2)
$
83,170

 
$
62,335

 
$
15,798

(5)
$
78,133

Earnings per share – diluted:
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.78

 
 
 
$
0.93

 
$
0.68

 
 
 
$
0.85

Weighted average shares – diluted
89,305

 
 
 
89,305

 
91,726

 
 
 
91,726

(1)
Amount represents $12.7 million of amortization expense associated with intangible assets acquired in business combinations and $8.5 million of stock-based compensation expense.
(2)
Amount represents the impact of the adjustments to operating income referred to in (1) above, adjusted for the related income tax impact of $7.7 million.
(3)
Amount represents the revenue not reported during the period as a result of the acquisition accounting adjustment associated with the accounting for deferred revenue in business combinations.
(4)
Amount represents $14.8 million of amortization expense associated with intangible assets acquired in business combinations, $9.0 million of stock-based compensation expense, the $0.4 million adjustment to revenue as reflected in (3) above and $0.3 million of transaction expenses related to business combinations.
(5)
Amount represents the impact of the adjustments to operating income referred to in (4) above, adjusted for the related income tax impact of $8.7 million.

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Table of Contents

 
Six Months Ended
 
June 30, 2016
 
June 30, 2015
(in thousands, except percentages and per share data)
As
Reported
 
Adjustments
 
Non-GAAP
Results
 
As
Reported
 
Adjustments
 
Non-GAAP
Results
Total revenue
$
471,975

 
$
103

(1)
$
472,078

 
$
453,266

 
$
986

(4)
$
454,252

Operating income
179,177

 
41,105

(2)
220,282

 
166,553

 
47,628

(5)
214,181

Operating profit margin
38.0
%
 
 
 
46.7
%
 
36.7
%
 
 
 
47.2
%
Net income
$
126,096

 
$
26,507

(3)
$
152,603

 
$
118,467

 
$
30,480

(6)
$
148,947

Earnings per share – diluted:
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
$
1.41

 
 
 
$
1.70

 
$
1.29

 
 
 
$
1.62

Weighted average shares – diluted
89,694

 
 
 
89,694

 
91,933

 
 
 
91,933

(1)
Amount represents the revenue not reported during the period as a result of the acquisition accounting adjustment associated with the accounting for deferred revenue in business combinations.
(2)
Amount represents $25.4 million of amortization expense associated with intangible assets acquired in business combinations, $15.6 million of stock-based compensation expense and the $0.1 million adjustment to revenue as reflected in (1) above.
(3)
Amount represents the impact of the adjustments to operating income referred to in (2) above, adjusted for the related income tax impact of $14.6 million.
(4)
Amount represents the revenue not reported during the period as a result of the acquisition accounting adjustment associated with the accounting for deferred revenue in business combinations.
(5)
Amount represents $29.2 million of amortization expense associated with intangible assets acquired in business combinations, $16.9 million of stock-based compensation expense, the $1.0 million adjustment to revenue as reflected in (4) above and $0.6 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 $17.1 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.

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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 acquisition 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 intangible assets from acquisitions and its related tax impact. The Company incurs amortization of intangible assets, included in its GAAP presentation of amortization expense, related to various acquisitions it has made. 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


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Table of Contents

Liquidity and Capital Resources
(in thousands)
June 30,
2016
 
December 31,
2015
 
Change
Cash, cash equivalents and short-term investments
$
843,765

 
$
784,614

 
$
59,151

Working capital
$
642,032

 
$
592,280

 
$
49,752

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 June 30, 2016 and December 31, 2015:
(in thousands, except percentages)
June 30,
2016
 
% of Total
 
December 31,
2015
 
% of Total
Domestic
$
610,559

 
72.4
 
$
539,031

 
68.7
Foreign
233,206

 
27.6
 
245,583

 
31.3
Total
$
843,765

 
 
 
$
784,614

 
 
If the foreign balances were repatriated to the U.S., unless previously taxed in 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
 
Six Months Ended June 30,
 
 
(in thousands)
2016
 
2015
 
Change
Net cash provided by operating activities
$
178,604

 
$
180,532

 
$
(1,928
)
Net cash provided by operating activities decreased during the current fiscal year due to decreased net cash flows from operating assets and liabilities of $5.9 million, partially offset by increased net income (net of non-cash operating adjustments) of $4.0 million.
Cash Flows from Investing Activities
 
Six Months Ended June 30,
 
 
(in thousands)
2016
 
2015
 
Change
Net cash used in investing activities
$
(16,324
)
 
$
(18,169
)
 
$
1,845

Net cash used in investing activities decreased during the current fiscal year due primarily to decreased acquisition-related net cash outlays of $10.4 million and decreased capital expenditures of $1.6 million, partially offset by increased net cash outlays from other investing activities of $10.1 million. The Company currently plans capital spending of $15 million to $20 million for the 2016 fiscal year as compared to the $16.1 million that was spent in 2015. The level of spending will depend on various factors, including growth of the business and general economic conditions.
Cash Flows from Financing Activities
 
Six Months Ended June 30,
 
 
(in thousands)
2016
 
2015
 
Change
Net cash used in financing activities
$
(113,626
)
 
$
(98,903
)
 
$
(14,723
)
Net cash used in financing activities increased during the current fiscal year due primarily to decreased proceeds from shares issued for stock-based compensation of $12.3 million.

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Table of Contents

Other Cash Flow Information
The Company believes that existing cash and cash equivalent balances of $843.4 million, together with cash generated from operations, will be sufficient to meet the Company’s working capital and capital expenditure requirements through the next twelve months. The Company’s cash requirements in the future may also be financed through additional equity or debt financings. There can be no assurance that such financings can be obtained on favorable terms, if at all.
Under the Company's stock repurchase program, the Company repurchased shares during the six months ended June 30, 2016 and 2015, as follows:
 
Six Months Ended
(in thousands, except per share data)
June 30,
2016
 
June 30,
2015
Number of shares repurchased
1,500

 
1,543

Average price paid per share
$
85.84

 
$
83.42

Total cost
$
128,760

 
$
128,716

In February 2016, 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 June 30, 2016, 3.5 million shares remained available for repurchase under the program.
The Company's repurchase authorization does not have an expiration date and the pace of the repurchase activity will depend on factors such as working capital needs, cash requirements for acquisitions, the Company's stock price, and economic and market conditions. The Company's stock repurchases may be effected from time to time through open market purchases or pursuant to a Rule 10b5-1 plan.
The Company continues to generate positive cash flows from operating activities and believes 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, in excess of its requirements, to stockholders with the goal of increasing stockholder value. Additionally, the Company has in the past, and expects in the future, to acquire or make investments in complementary companies, products, services and technologies. Any future acquisitions may be funded by available cash and investments, cash generated from operations, credit facilities or the issuance of additional securities.
Off-Balance-Sheet Arrangements
The Company does not have any special-purpose entities or off-balance-sheet financing.
Contractual Obligations
There were no material changes to the Company’s significant contractual obligations during the six months ended June 30, 2016 as compared to those previously reported in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” within the Company’s most recent Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
During the first quarter of 2016, the Company completed the annual impairment test for goodwill and the indefinite-lived intangible asset and determined that these assets had not been impaired as of the test date, January 1, 2016. No other events or circumstances changed during the six months ended June 30, 2016 that would indicate that the fair values of the Company's reporting unit and indefinite-lived intangible asset are below their carrying amounts.
No significant changes have occurred to the Company’s critical accounting policies and estimates as previously reported within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s most recent Annual Report on Form 10-K.



30

Table of Contents

Item 3.Quantitative and Qualitative Disclosures About Market Risk
Interest Income Rate Risk. Changes in the overall level of interest rates affect the interest income that is generated from the Company’s cash, cash equivalents and short-term investments. For the three and six months ended June 30, 2016, total interest income was $1.1 million and $2.0 million, respectively. 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.
Foreign Currency Transaction Risk. As the Company operates in international regions, a portion of its revenue, expenses, cash, accounts receivable and payment obligations are denominated in foreign currencies. As a result, changes in currency exchange rates will affect the Company’s financial position, results of operations and cash flows. The Company is most impacted by movements in and among the Japanese Yen, Euro, South Korean Won, British Pound, Indian Rupee, Canadian Dollar and U.S. Dollar.
With respect to revenue, on average for the quarter ended June 30, 2016, the U.S. Dollar was approximately 0.2% weaker, when measured against the Company’s primary foreign currencies, than for the quarter ended June 30, 2015. The net overall weakening resulted in increased revenue of $0.2 million during the quarter ended June 30, 2016 as compared with the same quarter of 2015. The impact on revenue was primarily driven by $2.9 million of favorable impact due to a stronger Japanese Yen, partially offset by $0.9 million, $0.7 million and $0.6 million of adverse impact due to a weaker South Korean Won, Euro and British Pound, respectively. The net overall weaker U.S. Dollar also resulted in increased operating income of $0.3 million during the quarter ended June 30, 2016 as compared with the same quarter of 2015.
With respect to revenue, on average for the six months ended June 30, 2016, the U.S. Dollar was approximately 1.7% stronger, when measured against the Company’s primary foreign currencies, than for the six months ended June 30, 2015. The net overall strengthening resulted in decreased revenue of $3.9 million during the six months ended June 30, 2016 as compared with the six months ended June 30, 2015. The impact on revenue was primarily driven by $3.2 million, $1.6 million, $1.1 million and $0.7 million of adverse impact due to a weaker Euro, South Korean Won, British Pound and Indian Rupee, respectively, partially offset by $3.3 million of favorable impact due to a stronger Japanese Yen. The net overall stronger U.S. Dollar also resulted in decreased operating income of $2.3 million during the six months ended June 30, 2016 as compared with the six months ended June 30, 2015.
The most significant currency impacts on revenue and operating income are typically attributable to U.S. Dollar exchange rate changes against the British Pound, Euro, Japanese Yen and South Korean Won as reflected in the charts below:
 
Period-End Exchange Rates
As of
GBP/USD
 
EUR/USD
 
USD/JPY
 
USD/KRW
June 30, 2015
1.571

 
1.114

 
122.504

 
1,121.076

December 31, 2015
1.474

 
1.086

 
120.337

 
1,176.886

June 30, 2016
1.331

 
1.110

 
103.327

 
1,153.669

 
 
Average Exchange Rates
Three Months Ended
GBP/USD
 
EUR/USD
 
USD/JPY
 
USD/KRW
June 30, 2015
1.533

 
1.107

 
121.336

 
1,098.499

December 31, 2015
1.517

 
1.095

 
121.469

 
1,158.167

June 30, 2016
1.435

 
1.129

 
107.967

 
1,163.964

No other material change has occurred in the Company’s market risk subsequent to December 31, 2015.


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Table of Contents

Item 4.Controls and Procedures
Evaluation of Disclosure Controls and ProceduresAs required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Company has evaluated, with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures are effective, as defined in Rule 13a-15(e) of the Exchange Act.
The Company has a Disclosure Review Committee to assist in the quarterly evaluation of the Company’s internal disclosure controls and procedures and in the review of the Company’s periodic filings under the Exchange Act. The membership of the Disclosure Review Committee consists of the Company’s Chief Executive Officer; Chief Financial Officer; Global Controller; General Counsel; Senior Director, Global Investor Relations; Vice President of Worldwide Sales and Support; Vice President of Human Resources; Vice President of Marketing; and Chief Product Officer. This committee is advised by external counsel, particularly on SEC-related matters. Additionally, other members of the Company’s global management team advise the committee with respect to disclosure via a sub-certification process.
The Company believes, based on its knowledge, that the financial statements and other financial information included in this report fairly present, in all material respects, the financial condition, results of operations and cash flows of the Company as of and for the periods presented in this report. The Company is committed to both a sound internal control environment and to good corporate governance.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
From time to time, the Company reviews the disclosure controls and procedures and may make changes to enhance their effectiveness and to ensure that the Company’s systems evolve with its business.
Changes in Internal Control. There were no changes in the Company’s internal control over financial reporting that occurred during the three months ended June 30, 2016 that materially affected, or were reasonably likely to materially affect, the Company's internal control over financial reporting.


32

Table of Contents

PART II – OTHER INFORMATION
 
Item 1.Legal Proceedings
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, in the future, materially affect the Company’s results of operations, cash flows or financial position.

Item 1A.Risk Factors
The Company cautions investors that its performance (and, therefore, any forward-looking statement) is subject to risks and uncertainties. Various important factors may cause the Company’s future results to differ materially from those projected in any forward-looking statement. These factors were disclosed in, but are not limited to, the items within the Company’s most recent Annual Report on Form 10-K, Part I, Item 1A. No material changes have occurred regarding the Company's risk factors subsequent to December 31, 2015.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Equity Securities
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under Plans or Programs(1)
April 1 - April 30, 2016
 

 
$

 

 
4,500,000

May 1 - May 31, 2016