Form 10-Q
Table of Contents

 

 

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 March 31, 2011

OR

 

¨ 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.)
275 Technology Drive, Canonsburg, PA   15317
(Address of principal executive offices)   (Zip Code)

 

724-746-3304

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No  ¨

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   ¨

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     ¨  
  Non-accelerated filer     ¨    Smaller reporting company     ¨  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  x

The number of shares of the Registrant’s Common Stock, par value $.01 per share, outstanding as of April 30, 2011 was 91,807,599 shares.

 

 

 


Table of Contents

ANSYS, INC. AND SUBSIDIARIES

INDEX

 

          Page No.  

PART I

   UNAUDITED FINANCIAL INFORMATION   
Item 1.    Financial Statements   
   Condensed Consolidated Balance Sheets – March 31, 2011 and December 31, 2010      3   
   Condensed Consolidated Statements of Income – Three Months Ended March 31, 2011 and 2010      4   
   Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2011 and 2010      5   
   Notes to Condensed Consolidated Financial Statements      6-16   
   Report of Independent Registered Public Accounting Firm      17   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      18-33   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      34-36   
Item 4.    Controls and Procedures      37   
PART II    OTHER INFORMATION   
Item 1.    Legal Proceedings      38   
Item 1A.    Risk Factors      38   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      38   
Item 3.    Defaults Upon Senior Securities      38   
Item 4.    (Removed and Reserved)      38   
Item 5.    Other Information      38   
Item 6.    Exhibits      39   
   SIGNATURES      41   

ANSYS, ANSYS Workbench, Ansoft, AUTODYN, CFX, FLUENT, Realize Your Product Promise, and any and all ANSYS, Inc. brand, product, service and feature names, logos and slogans are registered trademarks or trademarks of ANSYS, Inc. or its subsidiaries in the United States or other countries. ICEM CFD is a trademark used by ANSYS, Inc. under license. All other brand, product, service and feature names or trademarks are the property of their respective owners.

 

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PART I – UNAUDITED FINANCIAL INFORMATION

 

Item 1. Financial Statements:

ANSYS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

      March  31,
2011
    December  31,
2010
 
(in thousands, except share and per share data)    (Unaudited)     (Audited)  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 549,934      $ 472,479   

Short-term investments

     535        455   

Accounts receivable, less allowance for doubtful accounts of $4,400 and $4,503, respectively

     71,049        76,604   

Other receivables and current assets

     146,447        147,402   

Deferred income taxes

     16,780        17,693   

Total current assets

     784,745        714,633   

Property and equipment, net

     37,436        36,921   

Goodwill

     1,035,342        1,035,083   

Other intangible assets, net

     267,392        278,320   

Other long-term assets

     51,485        56,123   

Deferred income taxes

     1,960        5,796   

Total assets

   $ 2,178,360      $ 2,126,876   

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Current portion of long-term debt and capital lease obligations

   $ 37,247      $ 31,962   

Accounts payable

     4,321        2,241   

Accrued bonuses and commissions

     14,227        29,719   

Accrued income taxes

     3,427        6,179   

Deferred income taxes

     0        216   

Other accrued expenses and liabilities

     44,878        41,247   

Deferred revenue

     226,426        199,805   

Total current liabilities

     330,526        311,369   

Long-term liabilities:

    

Long-term debt and capital lease obligations, less current portion

     116,930        127,563   

Deferred income taxes

     70,474        75,026   

Other long-term liabilities

     83,797        82,989   

Total long-term liabilities

     271,201        285,578   

Commitments and contingencies

     0        0   

Stockholders’ equity:

    

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

     0        0   

Common stock, $.01 par value; 150,000,000 shares authorized; 91,980,701 and 91,647,012 shares issued, respectively

     920        916   

Additional paid-in capital

     869,136        856,718   

Retained earnings

     697,574        655,333   

Treasury stock, at cost: 216,580 and 0 shares, respectively

     (11,098     0   

Accumulated other comprehensive income

     20,101        16,962   

Total stockholders’ equity

     1,576,633        1,529,929   

Total liabilities and stockholders’ equity

   $ 2,178,360      $ 2,126,876   

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

 

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ANSYS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three Months Ended  
(in thousands, except per share data)    March 31,
2011
    March 31,
2010
 

Revenue:

    

Software licenses

   $ 95,867      $ 81,586   

Maintenance and service

     62,180        54,467   

Total revenue

     158,047        136,053   

Cost of sales:

    

Software licenses

     2,894        2,609   

Amortization

     7,498        8,214   

Maintenance and service

     16,190        13,830   

Total cost of sales

     26,582        24,653   

Gross profit

     131,465        111,400   

Operating expenses:

    

Selling, general and administrative

     40,476        35,228   

Research and development

     24,698        22,587   

Amortization

     4,017        3,962   

Total operating expenses

     69,191        61,777   

Operating income

     62,274        49,623   

Interest expense

     (803     (1,549

Interest income

     695        368   

Other expense, net

     (514     (507

Income before income tax provision

     61,652        47,935   

Income tax provision

     19,411        15,566   

Net income

   $ 42,241      $ 32,369   

Earnings per share – basic:

    

Basic earnings per share

   $ 0.46      $ 0.36   

Weighted average shares – basic

     91,767        89,964   

Earnings per share – diluted:

    

Diluted earnings per share

   $ 0.45      $ 0.35   

Weighted average shares – diluted

     94,171        92,774   

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

 

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ANSYS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Three Months Ended  
(in thousands)    March 31,
2011
    March 31,
2010
 

Cash flows from operating activities:

    

Net income

   $ 42,241      $ 32,369   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     14,831        15,216   

Deferred income tax expense (benefit)

     3,038        (4,031

Provision for bad debts

     94        420   

Stock-based compensation expense

     5,147        4,504   

Excess tax benefits from stock options

     (1,712     (3,606

Other

     1        18   

Changes in operating assets and liabilities:

    

Accounts receivable

     6,804        (1,823

Other receivables and current assets

     1,391        (8,612

Other long-term assets

     (341     (104

Accounts payable, accrued expenses and current liabilities

     (10,596     (7,554

Accrued income taxes

     (675     7,815   

Deferred revenue

     23,945        23,488   

Other long-term liabilities

     691        1,631   

Net cash provided by operating activities

     84,859        59,731   

Cash flows from investing activities:

    

Capital expenditures

     (3,341     (1,870

Purchases of short-term investments

     (114     (839

Maturities of short-term investments

     37        7,688   

Net cash (used in) provided by investing activities

     (3,418     4,979   

Cash flows from financing activities:

    

Principal payments on long-term debt

     (5,315     (20,000

Principal payments on capital leases

     (32     (78

Purchase of treasury stock

     (12,704     0   

Proceeds from issuance of common stock under Employee Stock Purchase Plan

     938        628   

Proceeds from exercise of stock options

     6,172        7,477   

Excess tax benefits from stock options

     1,712        3,606   

Net cash used in financing activities

     (9,229     (8,367

Effect of exchange rate fluctuations on cash and cash equivalents

     5,243        (2,981

Net increase in cash and cash equivalents

     77,455        53,362   

Cash and cash equivalents, beginning of period

     472,479        335,878   

Cash and cash equivalents, end of period

   $ 549,934      $ 389,240   

Supplemental disclosures of cash flow information:

    

Income taxes paid

   $ 8,769      $ 8,945   

Interest paid

     489        1,146   

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

 

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ANSYS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

1.    Organization

ANSYS, Inc. (hereafter the “Company” or “ANSYS”) develops and globally markets engineering simulation software and technologies widely used by engineers, designers, researchers and students across a broad spectrum of industries and academia, including aerospace, automotive, manufacturing, electronics, biomedical, energy and defense.

As defined by accounting guidance issued for disclosures about segments of an enterprise, 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. 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, 2010. The condensed consolidated December 31, 2010 balance sheet presented is derived from the audited December 31, 2010 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 months ended March 31, 2011 are not necessarily indicative of the results that may be expected for any future period.

 

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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 equivalents balances comprise the following:

 

     March 31, 2011      December 31, 2010  
    (in thousands, except percentages)    Amount      % of Total      Amount      % of Total  

    Money market mutual funds

   $ 331,231         60.2       $ 273,926         58.0   

    Cash accounts

     196,861         35.8         170,765         36.1   

    Time deposits

     21,842         4.0         27,788         5.9   
                       

    Total

   $ 549,934          $ 472,479      
                       

The money market mutual fund balances reflected above are held in various funds of a single issuer. The time deposits balances are primarily invested in a pooled fund which holds a mix of third-party time deposits with varying durations of up to three months.

3.    Accumulated Other Comprehensive Income

Accumulated other comprehensive income is composed entirely of foreign currency translation adjustments.

The components of comprehensive income are as follows:

 

     Three Months Ended  
    (in thousands)    March 31,
2011
     March 31,
2010
 

    Net income

   $ 42,241       $ 32,369   

    Foreign currency translation adjustment

     3,139         (2,466

    Unrealized loss on interest rate swap, net of tax of $0 and $4, respectively

     0         (7

    Realized loss on interest rate swap reclassed into interest expense, net of tax of $0 and $218, respectively

     0         359   
                 

    Comprehensive income

   $ 45,380       $ 30,255   
                 

 

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4.    Other Current Assets

The Company reports accounts receivable, related to the portion of annual lease licenses and software maintenance that has not yet been recognized as revenue, as a component of other receivables and current assets. These amounts totaled $93.0 million and $89.9 million as of March 31, 2011 and December 31, 2010, respectively.

The Company reports income taxes receivable, including amounts related to overpayments and refunds, as a component of other receivables and current assets. These amounts totaled $39.5 million and $32.9 million as of March 31, 2011 and December 31, 2010, respectively.

5.    Earnings Per Share

Basic earnings per share (“EPS”) amounts are computed by dividing earnings by the weighted average number of common shares outstanding during the period. Diluted EPS amounts assume the issuance of common stock for all potentially dilutive equivalents outstanding. To the extent stock options are anti-dilutive, they are excluded from the calculation of diluted EPS. The details of basic and diluted EPS are as follows:

 

     Three Months Ended  
(in thousands, except per share data)    March 31,
2011
     March 31,
2010
 

Net income

   $ 42,241       $ 32,369   
                 

Weighted average shares outstanding – basic

     91,767         89,964   

Dilutive effect of outstanding stock options and deferred stock units

     2,404         2,810   
                 

Weighted average shares outstanding – diluted

     94,171         92,774   
                 

Basic earnings per share

   $ 0.46       $ 0.36   

Diluted earnings per share

   $ 0.45       $ 0.35   

Anti-dilutive options

     1,176         1,740   

 

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6.    Long-Term Debt

Borrowings consist of the following:

 

(in thousands)    March 31,
2011
    December 31,
2010
 

Term loan payable in quarterly installments with a final maturity of July 31, 2013

   $ 154,131      $ 159,446   

Capitalized lease obligations

     46        79   
                

Total

     154,177        159,525   

Less current portion

     (37,247     (31,962
                

Long-term debt and capital lease obligations, net of current portion

   $ 116,930      $ 127,563   
                

On July 31, 2008, ANSYS borrowed $355.0 million from a syndicate of banks. The interest rate on the indebtedness provides for tiered pricing with the initial rate at the prime rate + 0.50%, or the LIBOR rate + 1.50%, with step downs permitted after the initial six months under the credit agreement down to a flat prime rate or the LIBOR rate + 0.75%. Such tiered pricing is determined by the Company’s consolidated leverage ratio. The Company’s consolidated leverage ratio has been reduced to the lowest pricing tier in the debt agreement. During the three months ended March 31, 2011, the Company made the required quarterly principal payment of $5.3 million. As of March 31, 2011, required future principal payments total $26.6 million for the remainder of 2011, $74.4 million in 2012 and $53.1 million in 2013.

The Company entered into an interest rate swap agreement in order to hedge a portion of each of the first eight forecasted quarterly variable rate interest payments on the Company’s term loan. The interest rate swap agreement terminated on June 30, 2010.

 

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For the three months ended March 31, 2011 and 2010, the Company recorded interest expense related to the term loan at weighted average interest rates of 1.05% and 2.02%, respectively. If the Company did not enter into the interest rate swap agreement, the weighted average interest rate would have been 1.00% for the three months ended March 31, 2010. There was no swap-related impact to the weighted average interest rate for the three months ended March 31, 2011 as the interest rate swap agreement terminated on June 30, 2010. The interest expense on the term loan and amortization related to debt financing costs were as follows:

 

     Three Months Ended  
     March 31, 2011      March 31, 2010  
(in thousands)    Interest
Expense
     Amortization      Interest
Expense
     Amortization  

July 31, 2008 term loan (interest expense includes $0 loss and $577 loss, respectively, on interest rate swap)

   $ 420       $ 252       $ 1,139       $ 309   

The interest rate on the outstanding term loan balance of $154.1 million is set for the quarter ending June 30, 2011 at 1.06%, which is based on LIBOR + 0.75%.

The credit agreement includes covenants related to the consolidated leverage ratio and the consolidated fixed charge coverage ratio, as well as certain restrictions on additional investments and indebtedness. As of March 31, 2011, the Company is in compliance with all financial covenants as stated in the credit agreement.

7.    Goodwill and Intangible Assets

During the first quarter of 2011, the Company completed the annual impairment test for goodwill and intangible assets with indefinite lives and determined that these assets had not been impaired as of the test date, January 1, 2011. The Company tested the goodwill and identifiable intangible assets utilizing estimated cash flow methodologies and market comparable information. No events occurred or circumstances changed during the three months ended March 31, 2011 that would indicate that the fair value of the Company’s reporting unit is below its carrying amount.

 

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The Company’s intangible assets and estimated useful lives are classified as follows:

 

     March 31, 2011     December 31, 2010  
(in thousands)    Gross
Carrying
Amount
     Accumulated
Amortization
    Gross
Carrying
Amount
     Accumulated
Amortization
 

Amortized intangible assets:

          

Core technology (3 – 10 years)

   $ 205,623       $ (126,287   $ 205,137       $ (120,633

Trademarks (3 – 10 years)

     101,025         (23,823     100,994         (21,499

Non-compete agreements (5 years)

     575         (517     575         (489

Customer lists (5 – 13 years)

     173,836         (63,397     172,845         (58,967
                                  

Total

   $ 481,059       $ (214,024   $ 479,551       $ (201,588
                                  

Unamortized intangible assets:

          

Trademarks

   $ 357         $ 357      
                      

Amortization expense for the intangible assets reflected above was $11.5 million and $12.1 million for the three months ended March 31, 2011 and 2010, respectively.

Amortization expense for the amortized intangible assets reflected above is expected to be approximately $46.1 million, $42.8 million, $37.8 million, $35.6 million and $32.8 million for the years ending December 31, 2011, 2012, 2013, 2014 and 2015, respectively.

The changes in goodwill during the three months ended March 31, 2011 are as follows:

 

(in thousands)       

Beginning balance – January 1, 2011

   $ 1,035,083   

Currency translation and other

     259   
        

Ending balance – March 31, 2011

   $ 1,035,342   
        

8.    Uncertain Tax Positions

The Company’s reserve for uncertain tax positions increased from $20.0 million at December 31, 2010 to $21.0 million at March 31, 2011.

 

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9.    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 or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following tables provide the assets and liabilities carried at fair value and measured on a recurring basis:

 

            Fair Value Measurements  at
Reporting Date Using:
 
(in thousands)    March 31,
2011
     Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets

           

Cash equivalents

   $ 353,073       $ 331,231       $ 21,842       $ 0   
                                   

Short-term investments

   $ 535       $ 0       $ 535       $ 0   
                                   

Foreign currency futures

   $ 260       $ 0       $ 260       $ 0   
                                   

 

            Fair Value Measurements  at
Reporting Date Using:
 
(in thousands)    December 31,
2010
     Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets

           

Cash equivalents

   $ 301,714       $ 273,926       $ 27,788       $ 0   
                                   

Short-term investments

   $ 455       $ 0       $ 455       $ 0   
                                   

The cash equivalents in the preceding tables represent money market mutual funds and time deposits.

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. There were no unrealized gains or losses associated with these deposits for the three months ended March 31, 2011 and 2010.

 

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In January 2011, the Company entered into foreign currency futures contracts with a third-party U.S. financial institution, which will be settled in two separate installments in June and December 2011. The purpose of these contracts is to mitigate the Company’s exposure to foreign exchange risk arising from intercompany receivables from its Japanese subsidiary. As of March 31, 2011, the fair value of the Company’s foreign exchange futures was $260,000. The foreign exchange futures are measured at fair value each reporting period, with gains or losses recognized currently in earnings.

The Company had no transfers of amounts in or out of Level 1 or Level 2 fair value measurements during the three months ended March 31, 2011.

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. The carrying value of long-term debt approximates its fair value due to the variable interest rate underlying the Company’s credit facility.

10.    Geographic Information – Revenue

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  
(in thousands)    March 31,
2011
     March 31,
2010
 

United States

   $ 49,106       $ 44,107   

Japan

     26,925         23,748   

Germany

     16,960         15,350   

Canada

     2,950         2,451   

Other European

     39,205         33,022   

Other international

     22,901         17,375   
                 

Total revenue

   $ 158,047       $ 136,053   
                 

 

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11.    Geographic Information – Long-Lived Assets

Property and equipment by geographic area is as follows:

 

(in thousands)    March 31,
2011
     December 31,
2010
 

United States

   $ 25,239       $ 25,156   

United Kingdom

     2,804         2,316   

India

     2,756         2,846   

Germany

     1,741         1,709   

Japan

     1,366         1,493   

Canada

     960         1,014   

Other European

     2,043         1,959   

Other international

     527         428   
                 

Total property and equipment

   $ 37,436       $ 36,921   
                 

12.    Stock Repurchase Program

Under the Company’s stock repurchase program, during the three months ended March 31, 2011, ANSYS repurchased 247,443 shares at an average price per share of $51.34. During the three months ended March 31, 2010, the Company repurchased no shares. As of March 31, 2010, approximately 1.1 million shares remained authorized for repurchase under the program.

13.    Stock-based Compensation

Total stock-based compensation expense is as follows:

 

     Three Months Ended  
(in thousands)    March 31,
2011
    March 31,
2010
 

Cost of sales:

    

Software licenses

   $ 36      $ 32   

Maintenance and service

     460        365   

Operating expenses:

    

Selling, general and administrative

     2,956        2,768   

Research and development

     1,695        1,339   
                

Stock-based compensation expense before taxes

     5,147        4,504   

Related income tax benefits

     (1,171     (952
                

Stock-based compensation expense, net of taxes

   $ 3,976      $ 3,552   
                

The net impact of stock-based compensation reduced basic and diluted earnings per share each by $0.04, for the first quarters of 2011 and 2010.

 

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14.    Contingencies and Commitments

The Company is subject to various investigations, claims and legal proceedings that arise in the ordinary course of business, including alleged infringement of intellectual property rights, commercial disputes, labor and employment matters, tax audits 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.

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 March 31, 2011. 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.

15.    Subsidiary Merger Activities

To improve the effectiveness of the Company’s operations in Japan, the Company completed the merger of its Japan subsidiaries during the third quarter of 2010. For tax purposes in Japan, this transaction resulted in a step-up in the tax basis of certain assets and liabilities of the merged subsidiary to fair value as of the date of the merger and gave rise to a taxable gain in Japan, resulting in a liability of approximately $77.3 million which was paid during the fourth quarter of 2010. The unamortized portion of the corresponding prepaid tax, which is deductible over the succeeding five-year period in Japan for the stepped-up tax basis of the assets and liabilities, is included on the condensed consolidated balance sheet as of March 31, 2011.

For U.S. tax purposes, this taxable gain in Japan gives rise to a foreign tax credit that reduces the current U.S. tax on foreign income. The Company’s U.S. tax payments were reduced by approximately $22.2 million in 2010 as a result of this credit. The excess credit will be either carried back to previous U.S. federal tax years as a refund of taxes previously paid or applied to reduce tax payments in future periods. The Company currently expects that a refund of approximately $24.8 million will be requested for a portion of this foreign tax credit which can be carried back to reduce the tax obligation of previous years. The remaining portion of this foreign tax credit (approximately $4.8 million) will be used to reduce the amount of taxes to be paid in the U.S. in 2011 or future periods. Recognition of this foreign tax credit resulted in a deferred tax credit that will be recognized as a reduction to the Company’s U.S. taxes over the same five-year period that the prepaid tax in Japan is recognized.

 

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16.    New Accounting Guidance

Recently Adopted Accounting Guidance:

Fair Value Measurements and Disclosures: In January 2010, new accounting guidance was issued regarding fair value measurements and disclosures. This guidance requires new disclosures for fair value measurements and provides clarification for existing disclosure requirements. More specifically, this requires (1) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers, and (2) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This update clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value, and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. The Company adopted the new disclosures and clarifications as of January 1, 2010, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures were adopted by the Company as of January 1, 2011. As the Company does not measure any assets or liabilities using Level 3 inputs, this new disclosure requirement did not affect the Company’s financial statements. See Note 9 for the Company’s disclosures related to the fair value of its financial instruments.

 

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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 March 31, 2011, and the related condensed consolidated statements of income and cash flows for the three-month periods ended March 31, 2011 and 2010. 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, 2010, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 25, 2011, 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, 2010 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

May 5, 2011

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview:

ANSYS, Inc.’s results for the three months ended March 31, 2011 reflect growth in revenues of 16.2%, operating income of 25.5%, diluted earnings per share of 28.6%, and a 42.1% increase in cash flow from operations as compared to the three months ended March 31, 2010. The Company experienced higher revenues in 2011 from growth in both license and maintenance revenue. In addition, the operating results were favorably impacted by reduced interest expense and foreign currency translation fluctuations. These contributions were partially offset by increased operating expenses, including higher salaries and headcount-related costs.

To improve the effectiveness of the Company’s operations in Japan, during the third quarter of 2010, the Company completed the merger of its Japan subsidiaries. Since the date of the merger, this transaction has had a significant impact on the Company’s net income, diluted earnings per share and cash flows. The transaction is also expected to have a significant impact on these items in future periods. Refer to the section titled, “Liquidity and Capital Resources” for the estimated impact on future cash flows and the discussion titled, “Income Tax Provision” within “Results of Operations” for the estimated impact on future income tax expense.

The Company’s non-GAAP results reflect an operating income increase of 19.1% and diluted earnings per share growth of 21.3% as compared to the three months ended March 31, 2010. The non-GAAP results exclude the income statement effects of stock-based compensation and acquisition-related amortization of intangible assets. For further disclosure regarding non-GAAP results, see the section titled “Non-GAAP Results” immediately preceding the section titled “Liquidity and Capital Resources”.

During the quarter ended March 31, 2011, the Company repurchased approximately 247,000 shares of treasury stock for $12.7 million at an average price of $51.34 per share. The Company’s financial position includes $550.5 million in cash and short-term investments, and working capital of $454.2 million as of March 31, 2011. The Company has outstanding borrowings under its term loan of $154.1 million.

ANSYS develops and globally markets engineering simulation software and services widely used by engineers, designers, researchers and students across a broad spectrum of industries and academia, including aerospace, automotive, manufacturing, electronics, biomedical, energy and defense. Headquartered at Southpointe in Canonsburg, Pennsylvania, the Company and its subsidiaries employ approximately 1,720 people as of March 31, 2011 and focus on the development of open and flexible solutions that enable users to analyze designs directly on the desktop, providing a common platform for fast, efficient and cost-conscious product development, from design concept to final-stage testing and validation. The Company distributes its ANSYS 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 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.

The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto for the three months ended March 31, 2011, and with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2010 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 consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. 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 fair value of stock awards, bad debts, contract revenue, valuation of goodwill, valuation of intangible assets, income taxes, and contingencies and litigation. The Company bases its estimates on historical experience, market experience, estimated future cash flows and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, but not limited to, the following statements, as well as statements that contain such words as “anticipates,” “intends,” “believes,” “plans” and other similar expressions:

 

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The Company’s anticipation that it will continue to make targeted investments in its global sales and marketing organization and its global business infrastructure to enhance major account sales activities and to support its worldwide sales distribution and marketing strategies, and the business in general.

 

   

The Company’s intentions related to investments in research and development, particularly as it relates to expanding the capabilities of its flagship products and other products within its broad portfolio of simulation software, evolution of its ANSYS® WorkbenchTM platform, and ongoing integration.

 

   

The Company’s plans related to future capital spending.

 

   

The Company’s intentions regarding its hybrid sales and distribution model.

 

   

The sufficiency of existing cash and cash equivalent balances to meet future working capital, capital expenditure and debt service requirements.

 

   

Management’s assessment of the ultimate liabilities arising from various investigations, claims and legal proceedings.

 

   

The Company’s statements regarding the competitive position and strength of its software products.

 

   

The Company’s statements regarding increased exposure to volatility of foreign exchange rates.

 

   

The Company’s intentions related to investments in complementary companies, products, services and technologies.

 

   

The Company’s expectations regarding the impact of the merger of its Japan subsidiaries on future income tax expense and cash flows from operations.

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 March 31, 2011 Compared to Three Months Ended March 31, 2010

Revenue:

 

     Three Months Ended
March 31,
     Change  
(in thousands, except percentages)    2011      2010      Amount     %  

Revenue:

          

Lease licenses

   $ 49,549       $ 44,943       $ 4,606        10.2   

Perpetual licenses

     46,318         36,643         9,675        26.4   

Software licenses

     95,867         81,586         14,281        17.5   

Maintenance

     57,791         49,485         8,306        16.8   

Service

     4,389         4,982         (593     (11.9

Maintenance and service

     62,180         54,467         7,713        14.2   

Total revenue

   $ 158,047       $ 136,053       $ 21,994        16.2   

The Company’s revenue in the quarter ended March 31, 2011 increased 16.2% as compared to the quarter ended March 31, 2010, including significant increases in license and maintenance revenue, slightly offset by a decrease in service revenue. Perpetual license revenue, which is derived entirely from new sales during the quarter, increased 26.4% as compared to the prior year quarter. This strong growth was partially influenced by an improvement in the global economy as compared to the prior year quarter, including the effects of these economic improvements on year-end spending patterns in certain geographies, and benefits from the Company’s continued investment in its global sales and marketing organization. The annual maintenance contracts that were sold with the new perpetual licenses, along with maintenance contracts sold with new perpetual licenses in previous quarters, contributed to maintenance revenue growth of 16.8%. Revenue from lease licenses increased 10.2% as compared to the quarter ended March 31, 2010.

With respect to revenue, on average for the quarter ended March 31, 2011, the U.S. Dollar was approximately 2.8% weaker, when measured against the Company’s primary foreign currencies, than for the same quarter of 2010. The U.S. Dollar strengthened against the Euro, while it weakened against the Japanese Yen, British Pound, Indian Rupee, Canadian Dollar, Korean Won, Taiwan Dollar and the Chinese Renminbi. The net overall weakening resulted in increased revenue and operating income during the quarter ended March 31, 2011, as compared with the same quarter of 2010, of approximately $2.4 million and $1.3 million, respectively.

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

 

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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. 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 generally ships its products within 30 days after acceptance of an order and execution of a software license agreement. Accordingly, the Company does not believe that its backlog at any particular point in time is indicative of future sales levels. As of March 31, 2011, the Company had no significant backlog of orders received but not invoiced.

International and domestic revenues, as a percentage of total revenue, were 68.9% and 31.1%, respectively, during the quarter ended March 31, 2011, and 67.6% and 32.4%, respectively, during the quarter ended March 31, 2010. Approximately 26% and 25% of the Company’s total revenue was derived through the indirect sales channel in the first quarters of 2011 and 2010, respectively.

 

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Cost of Sales and Gross Profit:

 

     Three Months Ended March 31,      Change  
   2011      2010     
(in thousands, except percentages)    Amount      % of
Revenue
     Amount      % of
Revenue
     Amount     %  

Cost of sales:

                

Software licenses

   $ 2,894         1.8       $ 2,609         1.9       $ 285        10.9   

Amortization

     7,498         4.7         8,214         6.0         (716     (8.7

Maintenance and service

     16,190         10.2         13,830         10.2         2,360        17.1   

Total cost of sales

     26,582         16.8         24,653         18.1         1,929        7.8   

Gross profit

   $ 131,465         83.2       $ 111,400         81.9       $ 20,065        18.0   

Software Licenses: The increase in software license costs was primarily a result of an increase in third-party royalties of $200,000 and salaries of $90,000.

Amortization: The decrease in amortization expense was primarily a result of an $800,000 decrease in amortization of acquired software, partially offset by a $90,000 increase in amortization of an acquired trademark.

Maintenance and Service: The increase in maintenance and service costs is primarily due to the following:

 

   

Increase in salaries and headcount-related costs, including incentive compensation, of $1.9 million.

 

   

Increase in business travel expenses of $300,000.

The improvement in gross profit was a result of the increase in revenue offset by a smaller increase in related cost of sales.

 

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Operating Expenses:

 

     Three Months Ended March 31,      Change  
   2011      2010     
(in thousands, except percentages)    Amount      % of
Revenue
     Amount      % of
Revenue
     Amount      %  

Operating expenses:

                 

Selling, general and administrative

   $ 40,476         25.6       $ 35,228         25.9       $ 5,248         14.9   

Research and development

     24,698         15.6         22,587         16.6         2,111         9.3   

Amortization

     4,017         2.5         3,962         2.9         55         1.4   

Total operating expenses

   $ 69,191         43.8       $ 61,777         45.4       $ 7,414         12.0   

Selling, General and Administrative: The increase in selling, general and administrative costs was primarily a result of increased salary and headcount-related costs, including incentive compensation, of $2.3 million, increased third-party commissions of $1.0 million, increased discretionary marketing costs of $900,000, increased consulting costs of $300,000 and increased stock-based compensation expense and maintenance-related costs each of $200,000.

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 major account sales activities and to support its worldwide sales distribution and marketing strategies, and the business in general.

Research and Development: The increase in research and development costs was primarily a result of increased salary and headcount-related costs of $900,000, increased stock-based compensation expense of $400,000 and increased maintenance-related costs of $200,000.

The Company has traditionally invested significant resources in research and development activities and intends to continue to make investments in this area, particularly as it relates to expanding the capabilities of its flagship products and other products within its broad portfolio of simulation software, evolution of its ANSYS® WorkbenchTM platform, and ongoing integration.

Amortization: The increase in amortization expense was primarily the result of a net $60,000 increase in amortization of acquired customer lists.

 

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Interest Expense: The Company’s interest expense consists of the following:

 

     Three Months Ended  
(in thousands)    March 31,
2011
     March 31,
2010
 

Bank interest on term loan

   $ 420       $ 562   

Realized loss on interest rate swap agreement

     0         577   

Amortization of debt financing costs

     252         309   

Other

     131         101   

Total interest expense

   $ 803       $ 1,549   

The decreased interest expense shown above for the 2011 period is primarily a result of a lower weighted average effective interest rate of 1.05% in the quarter ended March 31, 2011 as compared to 2.02% in the quarter ended March 31, 2010, the June 30, 2010 expiration of the interest rate swap and a lower average outstanding debt balance.

Interest Income: Interest income for the quarter ended March 31, 2011 was $695,000 as compared to $368,000 during the quarter ended March 31, 2010. Interest income primarily increased as a result of additional interest income associated with an increase in invested cash balances.

Other Expense, net: The Company recorded other expense of $514,000 during the quarter ended March 31, 2011 as compared to other expense of $507,000 during the quarter ended March 31, 2010. The activity for both quarters was primarily composed of net foreign currency transaction losses. As the Company’s presence in foreign locations continues to expand, the Company will have increased exposure to volatility of foreign exchange rates for the foreseeable future.

Income Tax Provision: The Company recorded income tax expense of $19.4 million and had income before income taxes of $61.7 million for the quarter ended March 31, 2011. This represents an effective tax rate of 31.5% in the first quarter of 2011. During the quarter ended March 31, 2010, the Company recorded income tax expense of $15.6 million and had income before income taxes of $47.9 million. The Company’s effective tax rate was 32.5% in the first quarter of 2010.

When compared to the federal and state combined statutory rate, these rates are favorably impacted by lower statutory tax rates in many of the Company’s foreign jurisdictions, domestic manufacturing deductions, research and experimentation credits and tax benefits associated with the merger of the Company’s Japan subsidiaries in the third quarter of 2010. These rates are also impacted by charges or benefits associated with the Company’s uncertain tax positions.

As a result of the subsidiary merger in Japan, the Company realized a reduction in its first quarter 2011 income tax expense of $2.1 million related to tax credits in the U.S. associated with foreign taxes paid in Japan. The Company also expects that its future income tax expense will be reduced by the following amounts:

 

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Estimated Reduction in

Income Tax Expense

Q2 2011   $2.0 - $2.1 million
Q3 2011   $2.0 - $2.1 million
Q4 2011   $2.0 - $2.1 million
FY 2012   $8.0 - $8.5 million
FY 2013   $8.0 - $8.5 million
FY 2014   $8.0 - $8.5 million
FY 2015   $6.0 - $6.4 million

Net Income: The Company’s net income in the first quarter of 2011 was $42.2 million as compared to net income of $32.4 million in the first quarter of 2010. Diluted earnings per share was $0.45 in the first quarter of 2011 and $0.35 in the first quarter of 2010. The weighted average shares used in computing diluted earnings per share were 94.2 million in the first quarter of 2011 and 92.8 million in the first quarter of 2010.

 

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Non-GAAP Results

The Company provides non-GAAP revenue, non-GAAP operating income, non-GAAP operating profit margin, non-GAAP net income and non-GAAP diluted earnings per share as supplemental measures to GAAP measures regarding the Company’s operational performance. These financial measures exclude the impact of certain items and, therefore, have not been calculated in accordance with GAAP. A detailed explanation and a reconciliation of each non-GAAP financial measure to its most comparable GAAP financial measure are described below.

 

     Three Months Ended  
     March 31, 2011  
(in thousands, except percentages and per share data)    As
Reported
    Adjustments     Non-GAAP
Results
 

Total revenue

   $ 158,047      $ 0      $ 158,047   

Operating income

     62,274      $ 16,662 (1)      78,936   

Operating profit margin

     39.4       49.9

Net income

   $ 42,241      $ 11,231 (2)    $ 53,472   

Earnings per share – diluted:

      

Diluted earnings per share

   $ 0.45        $ 0.57   

Weighted average shares – diluted

     94,171          94,171   
     Three Months Ended  
     March 31, 2010  
(in thousands, except percentages and per share data)    As
Reported
    Adjustments     Non-GAAP
Results
 

Total revenue

   $ 136,053      $ 0      $ 136,053   

Operating income

     49,623      $ 16,651 (3)      66,274   

Operating profit margin

     36.5       48.7

Net income

   $ 32,369      $ 11,082 (4)    $ 43,451   

Earnings per share – diluted:

      

Diluted earnings per share

   $ 0.35        $ 0.47   

Weighted average shares – diluted

     92,774          92,774   

 

(1) Amount represents $11.5 million of amortization expense associated with intangible assets acquired in business acquisitions, including amounts primarily related to acquired software, customer list, trademarks and non-compete agreements, as well as a $5.1 million charge for stock-based compensation.

 

(2) Amount represents the impact of the adjustments to operating income referred to in (1) above, adjusted for the related income tax impact of $5.4 million.

 

(3) Amount represents $12.1 million of amortization expense associated with intangible assets acquired in business acquisitions, including amounts primarily related to acquired software, customer list, trademarks and non-compete agreements, as well as a $4.5 million charge for stock-based compensation.

 

(4) Amount represents the impact of the adjustments to operating income referred to in (3) above, adjusted for the related income tax impact of $5.6 million.

 

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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.

The adjustments to these non-GAAP financial measures, and the basis for such adjustments, are outlined below:

Purchase accounting for deferred revenue and its related tax impact. Historically, the Company has consummated acquisitions in order to support the Company’s strategic and other business objectives. In accordance with the fair value provisions applicable to the accounting for business combinations, acquired deferred revenue is often recorded on the opening balance sheet at an amount that is lower than the historical carrying value. Although this purchase accounting requirement has no impact on the Company’s business or cash flow, it adversely impacts the Company’s reported GAAP software license revenue primarily for the first twelve months post-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 purchase 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. This non-GAAP adjustment was not provided in the non-GAAP information included in this report because it had no impact on the financial results for the periods presented.

 

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Amortization of intangibles from acquisitions and its related tax impact. The Company incurs amortization of intangibles, included in its GAAP presentation of amortization expense, related to various acquisitions it has made in recent years. Management excludes these expenses and their related tax impact for the purpose of calculating non-GAAP operating income, non-GAAP operating profit margin, non-GAAP net income and non-GAAP diluted earnings per share when it evaluates the continuing operational performance of the Company because these costs are fixed at the time of an acquisition, are then amortized over a period of several years after the acquisition and generally cannot be changed or influenced by management after the acquisition. Accordingly, management does not consider these expenses for purposes of evaluating the performance of the Company during the applicable time period after the acquisition, and it excludes such expenses when making decisions to allocate resources. The Company believes that these non-GAAP financial measures are useful to investors because they allow investors to (a) evaluate the effectiveness of the methodology and information used by management in its financial and operational decision-making and (b) compare past reports of financial results of the Company as the Company has historically reported these non-GAAP financial measures.

Stock-based compensation expense and its related tax impact. The Company incurs expense related to stock-based compensation included in its GAAP presentation of cost of software licenses, cost of maintenance and service, research and development expense and selling, general and administrative expense. Although stock-based compensation is an expense of the Company and viewed as a form of compensation, management excludes these expenses for the purpose of calculating non-GAAP operating income, non-GAAP operating profit margin, non-GAAP net income and non-GAAP diluted earnings per share when it evaluates the continuing operational performance of the Company. Specifically, the Company excludes stock-based compensation during its annual budgeting process and its quarterly and annual assessments of the Company’s and management’s performance. The annual budgeting process is the primary mechanism whereby the Company allocates resources to various initiatives and operational requirements. Additionally, the annual review by the board of directors during which it compares the Company’s historical business model and profitability as it relates 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 its financial reporting, as well as comparability with competitors’ operating results.

Non-GAAP financial measures are not in accordance with, or an alternative for, generally accepted accounting principles in the United States. 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.

 

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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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Liquidity and Capital Resources

Cash, cash equivalents and short-term investments: As of March 31, 2011, the Company had cash, cash equivalents and short-term investments totaling $550.5 million and working capital of $454.2 million as compared to cash, cash equivalents and short-term investments of $472.9 million and working capital of $403.3 million at December 31, 2010.

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 increase in cash, cash equivalents and short-term investments at March 31, 2011 in comparison to December 31, 2010 was primarily due to cash generated from the Company’s operating activities. Cash, cash equivalents and short-term investments include $169.1 million held by the Company’s foreign subsidiaries as of March 31, 2011. If these foreign balances were repatriated to the U.S., they would be subject to domestic tax, resulting in a tax obligation in the period of repatriation. The amount of cash, cash equivalents and short-term investments held by these 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 income in the Company’s condensed consolidated balance sheet).

Cash flows from operating activities: The net $25.1 million increase in operating cash flows in the three months ended March 31, 2011 as compared to the three months ended March 31, 2010 was primarily related to:

 

   

A $6.4 million increase in cash flows from operating assets and liabilities whereby these fluctuations produced a net cash inflow of $21.2 million during the three months ended March 31, 2011 compared to $14.8 million during the three months ended March 31, 2010.

 

   

Included in the $21.2 million net cash inflow above was a reduction of approximately $5.0 million in the amount of income tax payments that otherwise would have been made in the first quarter as a result of the tax impact associated with the merger of the Company’s Japan subsidiaries.

 

   

An increase in net income of $9.9 million from $32.4 million for the three months ended March 31, 2010 to $42.2 million for the three months ended March 31, 2011.

 

   

An increase in other non-cash operating adjustments of $8.9 million from $12.5 million for the three months ended March 31, 2010 to $21.4 million for the three months ended March 31, 2011.

Cash flows from investing activities: The Company’s investing activities used net cash of $3.4 million for the three months ended March 31, 2011 and provided net cash of $5.0 million for the three months ended March 31, 2010. Total capital spending was $3.3 million in the first quarter of 2011 and $1.9 million in the first quarter of 2010. In the first quarter of 2011, purchases of short-term investments exceeded maturities by $77,000. In the first quarter of 2010, maturing short-term

 

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investments exceeded purchases by $6.8 million. The Company currently plans capital spending of approximately $15.0 million to $20.0 million during fiscal year 2011 as compared to $14.3 million of capital spending during fiscal year 2010. However, the level of spending will be dependent upon various factors, including growth of the business and general economic conditions.

Cash flows from financing activities: Financing activities used cash of $9.2 million and $8.4 million for the three months ended March 31, 2011 and 2010, respectively. This change of $900,000 was primarily the result of $12.7 million spent during the first quarter of 2011 to repurchase approximately 247,000 shares of treasury stock at an average price of $51.34 per share and a combined $3.2 million reduction in excess tax benefits and proceeds from the exercise of stock options, partially offset by a $14.7 million decrease in principal payments on long-term debt in the 2011 period as compared to 2010.

The Company’s term loan includes covenants related to the consolidated leverage ratio and the consolidated fixed charge coverage ratio, as well as certain restrictions on additional investments and indebtedness. As of March 31, 2011, the Company is in compliance with all financial covenants as stated in the credit agreement.

The Company believes that existing cash and cash equivalent balances of $549.9 million, together with cash generated from operations, will be sufficient to meet the Company’s working capital, capital expenditure and debt service 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.

The Company continues to generate positive cash flows from operating activities and believes that the best use of its excess cash is to repay its long-term debt, to invest in the business and, under certain favorable conditions, to repurchase stock. Additionally, the Company has in the past, and expects in the future, to acquire or make investments in complementary companies, products, services and technologies. Any future acquisitions may be funded by available cash and investments, cash generated from operations, existing or additional credit facilities, or from the issuance of additional securities.

The Company has a $2.1 million line of credit available on a purchase card.

In addition to the favorable impact on first quarter 2011 operating cash flows of approximately $5.0 million that is discussed above, the merger of the Company’s Japan subsidiaries is expected to favorably impact the Company’s cash flow from operations in future periods as follows:

 

Fiscal year 2011:

   Favorable impact of $45 - $50 million

Fiscal years 2012 - 2015:

  

Favorable impact of $14 - $16 million per year

The timing of the realization of these cash flow benefits is in part based on the U.S. government’s responsiveness to the Company’s amended tax return refund claims. Therefore, the timing of the receipt of these refunds is not predictable with certainty. Accordingly, the periods during which the estimated cash flow benefits are ultimately realized could differ from the Company’s estimates.

 

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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 three months ended March 31, 2011 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

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.

During the first quarter of 2011, the Company completed the annual impairment test for goodwill and intangible assets with indefinite lives and determined that these assets had not been impaired as of the test date, January 1, 2011. As of the test date, the fair value of the Company’s reporting unit substantially exceeded its carrying value. No events occurred or circumstances changed during the three months ended March 31, 2011 that would indicate that the fair value of the Company’s reporting unit is below its carrying amount.

 

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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 and short-term investments. For the three months ended March 31, 2011, total interest income was $695,000. Cash and cash equivalents consist primarily of highly liquid investments such as money market mutual funds and deposits held at major banks.

Interest Expense Rate Risk. In connection with the Ansoft acquisition, the Company entered into a $355.0 million term loan with variable interest rates as of July 31, 2008. The term loan is scheduled to mature on July 31, 2013 and provides for tiered pricing with the initial rate at the prime rate + 0.50%, or the LIBOR rate + 1.50%, with step downs permitted after the initial six months under the credit agreement down to a flat prime rate or the LIBOR rate + 0.75%. Such tiered pricing is determined by the Company’s consolidated leverage ratio. The Company’s consolidated leverage ratio has been reduced to the lowest pricing tier in the credit agreement. The credit agreement includes quarterly financial covenants, requiring the Company to maintain certain financial ratios and, as is customary for facilities of this type, certain events of default that permit the acceleration of the loan. Borrowings outstanding under this facility totaled $154.1 million as of March 31, 2011.

The Company entered into an interest rate swap agreement in order to hedge a portion of each of the first eight forecasted quarterly variable rate interest payments on the Company’s term loan. Under the swap agreement, the Company received the variable, three-month LIBOR rate required under its term loan and paid a fixed LIBOR interest rate of 3.32% on the notional amount. The initial notional amount of $300.0 million was amortized equally at an amount of $37.5 million per quarter over eight quarters through June 30, 2010. The interest rate swap agreement terminated on June 30, 2010.

For the three months ended March 31, 2011 and 2010, the Company recorded interest expense related to the term loan at weighted average interest rates of 1.05% and 2.02%, respectively. If the Company did not enter into the interest rate swap agreement, the weighted average interest rate would have been 1.00% for the three months ended March 31, 2010. There was no swap-related impact to the weighted average interest rate for the three months ended March 31, 2011 as the interest rate swap agreement terminated on June 30, 2010. The interest expense on the term loan and amortization related to debt financing costs were as follows:

 

     Three Months Ended  
     March 31, 2011      March 31, 2010  
(in thousands)    Interest
Expense
     Amortization      Interest
Expense
     Amortization  

July 31, 2008 term loan (interest expense includes $0 loss and $577 loss, respectively, on interest rate swap)

   $ 420       $ 252       $ 1,139       $ 309   

 

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Based on the effective interest rates and remaining outstanding borrowings at March 31, 2011, a 0.50% increase in interest rates would not impact the Company’s interest expense for the quarter ending June 30, 2011. Based on the effective interest rates and remaining outstanding borrowings at March 31, 2011, assuming contractual quarterly principal payments are made, a 0.50% increase in interest rates would increase the Company’s interest expense by approximately $400,000 for the year ending December 31, 2011.

The interest rate on the outstanding term loan balance is set for the quarter ending June 30, 2011 at 1.06%, which is based on LIBOR + 0.75%. As of March 31, 2011, the fair value of the debt approximated the recorded value.

Foreign Currency Transaction Risk. As the Company continues to expand its business presence in international regions, the portion of its revenue, expenses, cash, accounts receivable and payment obligations denominated in foreign currencies continues to increase. As a result, changes in currency exchange rates will affect the Company’s financial position, results of operations and cash flows. The Company is most impacted by movements in and among the British Pound, Euro, Japanese Yen, Canadian Dollar, Indian Rupee, Chinese Renminbi, Korean Won, Taiwan Dollar and the U.S. Dollar.

With respect to revenue, on average for the quarter ended March 31, 2011, the U.S. Dollar was approximately 2.8% weaker, when measured against the Company’s primary foreign currencies, than for the same quarter of 2010. The U.S. Dollar strengthened against the Euro, while it weakened against the Japanese Yen, British Pound, Indian Rupee, Canadian Dollar, Korean Won, Taiwan Dollar and the Chinese Renminbi. The net overall weakening resulted in increased revenue and operating income during the quarter ended March 31, 2011, as compared with the same quarter of 2010, of approximately $2.4 million and $1.3 million, respectively.

The Company’s operating results are favorably impacted when the U.S. Dollar weakens against the Company’s primary foreign currencies and are adversely impacted when the U.S. Dollar strengthens against the Company’s primary foreign currencies. Had the activity for the quarter ended June 30, 2010 been recorded at the March 31, 2011 spot rates for each subsidiary’s functional currency, the revenue and operating income for the quarter would have increased by $6.7 million and $3.6 million, respectively.

In January 2011, the Company entered into foreign currency futures contracts with a third-party U.S. financial institution, which will be settled in two separate installments in June and December 2011. The purpose of these contracts is to mitigate the Company’s exposure to foreign exchange risk arising from intercompany receivables from its Japanese subsidiary. As of March 31, 2011, the fair value of the Company’s foreign exchange futures was $260,000. The foreign exchange futures are measured at fair value each reporting period, with gains or losses recognized currently in earnings.

 

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The most significant currency impacts on revenue and operating income were primarily attributable to U.S. Dollar exchange rate changes against the Euro, British Pound and Japanese Yen as reflected in the charts below:

 

     Period End Exchange Rates  

As of

   EUR/USD      GBP/USD      USD/JPY  

March 31, 2010

     1.351         1.517         93.493   

December 31, 2010

     1.337         1.560         81.215   

March 31, 2011

     1.417         1.604         83.188   

 

     Average Exchange Rates  

Three Months Ended

   EUR/USD      GBP/USD      USD/JPY  

March 31, 2010

     1.384         1.561         90.636   

June 30, 2010

     1.273         1.492         92.000   

September 30, 2010

     1.293         1.551         85.742   

December 31, 2010

     1.359         1.580         82.535   

March 31, 2011

     1.368         1.603         82.280   

Other Risks. Based on the nature of the Company’s business, it has no direct exposure to commodity price risk.

No other material change has occurred in the Company’s market risk subsequent to December 31, 2010.

 

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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, Investor Relations and Global Insurance Officer, Vice President of Worldwide Sales and Support, Vice President of Marketing and Business Unit General Managers. This committee is advised by external counsel, particularly on SEC-related matters. Additionally, other members of the Company’s global management team advise the committee with respect to disclosure via a sub-certification process.

The Company believes, based on its knowledge, that the financial statements and other financial information included in this report fairly present, in all material respects, the financial condition, results of operations and cash flows of the Company as of and for the periods presented in this report. The Company 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. On January 1, 2011, the Company upgraded to a more current release of its global financial information system. The upgrade did not result in any significant changes to the Company’s internal control over financial reporting. There were no other changes in the Company’s internal controls during the three months ended March 31, 2011 that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

The Company is subject to various legal proceedings from time to time that arise in the ordinary course of business, including alleged infringement of intellectual property rights, commercial disputes, labor and employment matters, tax audits 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. Any material changes which occurred during the three months ended March 31, 2011 to the risk factors previously presented are discussed below.

Natural Disaster in Japan.

The Company has significant operations in Japan. During the first quarter of 2011, Japan experienced a catastrophic earthquake and tsunami. While the Company’s operating facilities in Japan were unharmed, this natural disaster has had an economic impact on the Company’s customers in Japan and on customers in other geographic regions who may rely on production or suppliers in Japan. As a result, the predictability of the timing and amounts of the Company’s sale to customers in Japan or otherwise affected by the Japan natural disaster has become less reliable than it was prior to the earthquake and tsunami. These circumstances could cause the Company to miss its revenue and earnings estimates, or those provided by independent securities analysts.

 

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
 
January 1 – January 31, 2011      –           –           –          1,340,477   
February 1 – February 28, 2011      –           –           –          1,340,477   
March 1 – March 31, 2011      247,443       $  51.34         247,443 (1)      1,093,034 (1) 
Total      247,443       $ 51.34         247,443        1,093,034   

 

  (1) The Company initially announced its share repurchase program in February 2000, and announced an amendment to the program in October 2001. The Company’s Board of Directors has approved the repurchase of up to 16,000,000 shares under the program, which does not have an expiration date.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. (Removed and Reserved)

 

Item 5. Other Information

None.

 

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Item 6. Exhibits

 

     (a) Exhibits.

 

Exhibit No.

 

Exhibit

10.1   Indemnification Agreement, dated February 17, 2011, between ANSYS, Inc. and Ajei S. Gopal, a director of the Company (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed February 23, 2011, and incorporated herein by reference).
10.2   Second Amendment of the Employment Agreement Between ANSYS, Inc. and James E. Cashman III as of March 18, 2011 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed March 18, 2011, and incorporated herein by reference).*
10.3   Form of Non-Employee Director Stock Option Agreement under the Fourth Amended and Restated ANSYS, Inc. 1996 Stock Option and Grant Plan (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K, filed March 18, 2011, and incorporated herein by reference).*
10.4   Form of Employee Incentive Stock Option Agreement under the Fourth Amended and Restated ANSYS, Inc. Stock Option and Grant Plan (filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K, filed March 18, 2011, and incorporated herein by reference).*
10.5   Form of Employee Non-Qualified Stock Option Agreement under the Fourth Amended and Restated ANSYS, Inc. Stock Option and Grant Plan (filed as Exhibit 10.6 to the Company’s Current Report on Form 8-K, filed March 18, 2011, and incorporated herein by reference).*
15   Independent Registered Public Accountants’ Letter Regarding Unaudited Financial Information.
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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101.INS    XBRL Instance Document**
101.SCH    XBRL Taxonomy Extension Schema**
101.CAL    XBRL Taxonomy Extension Calculation Linkbase**
101.LAB    XBRL Taxonomy Extension Label Linkbase**
101.PRE    XBRL Taxonomy Extension Presentation Linkbase**

 

* Indicates management contract or compensatory plan, contract or arrangement.
** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  ANSYS, Inc.

Date: May 5, 2011

  By:     /s/ James E. Cashman III
      James E. Cashman III
      President and Chief Executive Officer

Date: May 5, 2011

  By:     /s/ Maria T. Shields
      Maria T. Shields
      Chief Financial Officer

 

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