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UNITED STATES-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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 (IRS Employer
incorporation or organization) 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 a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
---- ----
The number of shares of the Registrant's Common Stock, par value $.01 per
share, outstanding as of November 12, 2002 was 14,559,159 shares.
1
ANSYS, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION ---------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
September 30, 2002 and December 31, 2001 3
Condensed Consolidated Statements of
Income - Three and Nine Months Ended
September 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash
Flows - Nine Months Ended September 30,
2002 and 2001 5
Notes to Condensed Consolidated Financial
Statements 6-9
Independent Accountants' Report 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11-18
Item 3. Quantitative and Qualitative Disclosures
Regarding Market Risk 19
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 4. Submission of Matters to a Vote of
Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports Filed on Form 8-K 21
SIGNATURES 22
CERTIFICATIONS 23-24
EXHIBIT INDEX 25
Trademarks used in this Form 10-Q: ANSYS(R)and DesignSpace(R)are registered
trademarks of SAS IP, Inc., a wholly-owned subsidiary of ANSYS, Inc.
2
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements:
ANSYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
(Unaudited)
September 30, Dec. 31,
2002 2001
----------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 25,429 $ 28,545
Short-term investments 29,840 24,903
Accounts receivable, less allowance for
doubtful accounts of $1,690 and $1,610,
respectively 12,785 15,352
Other current assets 11,775 12,803
Deferred income taxes 2,030 1,799
----------------- --------------
Total current assets 81,859 83,402
----------------- --------------
Long-term investments 1,018 500
Property and equipment, net 4,667 4,915
Capitalized software costs, net 709 817
Goodwill, net 17,806 16,937
Other intangibles, net 5,164 6,499
Deferred income taxes 5,051 4,692
----------------- --------------
Total assets $ 116,274 $ 117,762
================= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 578 $ 624
Accrued bonuses 2,653 4,578
Other accrued expenses and liabilities 5,914 13,047
Deferred revenue 23,218 25,120
----------------- --------------
Total current liabilities 32,363 43,369
----------------- --------------
Stockholders' equity:
Preferred stock, $.01 par value, 2,000,000
shares authorized - -
Common stock, $.01 par value; 50,000,000
shares authorized; 16,584,758 shares
issued 166 166
Additional paid-in capital 41,154 37,822
Less treasury stock, at cost: 2,037,776 and
2,071,123 shares, respectively (30,567) (23,953)
Retained earnings 73,119 60,429
Accumulated other comprehensive income
(loss) 39 (71)
----------------- --------------
Total stockholders' equity 83,911 74,393
----------------- --------------
Total liabilities and
stockholders' equity $ 116,274 $ 117,762
================= ==============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
ANSYS, INC. AND SUBIDARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
Three months ended Nine months ended
---------- --------- ---------- ---------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2002 2001 2002 2001
---------- --------- ---------- ---------
Revenue:
Software licenses $ 11,017 $ 10,377 $ 34,125 $ 30,937
Maintenance and service 10,728 10,233 31,619 28,826
---------- --------- ---------- ---------
Total revenue 21,745 20,610 65,744 59,763
Cost of sales:
Software licenses 904 1,042 2,856 3,485
Maintenance and service 2,117 1,669 5,825 4,835
---------- --------- ---------- ---------
Total cost of sales 3,021 2,711 8,681 8,320
---------- --------- ---------- ---------
Gross profit 18,724 17,899 57,063 51,443
Operating expenses:
Selling and marketing 4,690 4,370 15,092 14,416
Research and development 5,155 4,358 14,912 12,571
Amortization 557 1,281 1,724 3,924
General and administrative 2,522 4,523 7,562 9,646
---------- --------- ---------- ---------
Total operating expenses 12,924 14,532 39,290 40,557
---------- --------- ---------- ---------
Operating income 5,800 3,367 17,773 10,886
Other income 32 483 526 1,594
---------- --------- ---------- ---------
Income before income tax provision 5,832 3,850 18,299 12,480
Income tax provision 1,750 1,196 5,609 3,886
---------- --------- ---------- ---------
Net income $ 4,082 $ 2,654 $ 12,690 $ 8,594
========== ========= ========== =========
Earnings per share - basic:
Basic earnings per share $ 0.28 $ 0.18 $ 0.87 $ 0.59
Weighted average shares -
basic 14,578 14,532 14,612 14,596
Earnings per share - diluted:
Diluted earnings per share $ 0.26 $ 0.17 $ 0.81 $ 0.56
Weighted average shares -
diluted 15,475 15,577 15,677 15,393
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
ANSYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine months ended
-----------------
Sept. 30, Sept. 30,
2002 2001
--------- ---------
Cash flows from operating activities:
Net income $ 12,690 $ 8,594
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 3,411 5,695
Deferred income tax provision (65) (669)
Provision for bad debts 228 281
Loss from investment 82 -
Changes in operating assets and liabilities:
Accounts receivable 2,338 1,174
Other current assets 3,232 515
Accounts payable, accrued expenses and
liabilities (4,023) (1,098)
Deferred revenue (1,903) 358
-------- --------
Net cash provided by operating activities 15,990 14,850
-------- --------
Cash flows from investing activities:
Capital expenditures (1,430) (1,817)
Capitalization of internally developed
software costs (241) (116)
Acquisition payments (1,686) (150)
Net (purchases) maturities of short-term investments (4,937) 11,452
ICEM CFD acquisition (2,591) (183)
Purchase of long-term investment (600) (500)
-------- --------
Net cash (used in) provided by investing activities (11,485) 8,686
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock
under Employee Stock Purchase Plan 333 205
Purchase of treasury stock (11,919) (15,410)
Proceeds from exercise of stock options 3,932 3,523
-------- --------
Net cash used in financing activities (7,654) (11,682)
-------- --------
Effect of exchange rate changes on cash 33 (172)
-------- --------
Net (decrease) increase in cash and cash equivalents
(3,116) 11,682
Cash and cash equivalents, beginning of period 28,545 6,313
-------- --------
Cash and cash equivalents, end of period $ 25,429 $ 17,995
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $ 3,706 $ 4,594
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
ANSYS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements included
herein have been prepared by ANSYS, Inc. (the "Company") in accordance with
accounting principles generally accepted in the United States of America for
interim financial information for commercial and industrial companies and the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The financial
statements as of and for the three and nine months ended September 30, 2002
should be read in conjunction with the Company's consolidated financial
statements (and notes thereto) included in the Company's Annual Report on Form
10-K for the year ended December 31, 2001. Accordingly, the accompanying
statements do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation of the financial statements have
been included, and all adjustments are of a normal and recurring nature.
Operating results for the three and nine months ended September 30, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002.
2. Accumulated Other Comprehensive Income
As of September 30, 2002 and December 31, 2001, accumulated other comprehensive
income, as reflected on the condensed consolidated balance sheets, was comprised
of foreign currency translation adjustments.
Comprehensive income for the three- and nine-month periods ended September 30,
2002 and 2001 was as follows:
Three months ended Nine months ended
--------- --------- -------- --------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Comprehensive Income $ 4,119 $ 2,722 $ 12,800 $ 8,422
3. 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 current assets. These amounts totaled $7.4 million and
$10.3 million as of September 30, 2002 and December 31, 2001, respectively.
6
4. Recently Issued Accounting Pronouncements
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standard No. 142 (Statement 142), "Goodwill and Other Intangible Assets," for
existing goodwill and other intangible assets, including the non-amortization
provisions of this standard arising from business combinations after June 30,
2001. This standard eliminates the amortization of goodwill and intangible
assets with indefinite useful lives and requires annual testing for impairment.
This standard also requires the assignment of assets acquired and liabilities
assumed, including goodwill, to reporting units for purposes of the annual
impairment test. As of September 30, 2002 and December 31, 2001, ANSYS had
goodwill of $17.8 million and $16.9 million, respectively. The Company completed
the required transitional goodwill impairment test during the quarter ended June
30, 2002 and determined that goodwill had not been impaired as of the date of
the transitional test, January 1, 2002. The following table sets forth the
condensed consolidated pro forma results of operations for the three- and
nine-month periods ended September 30, 2002 and 2001 as if Statement 142
had been in effect for both periods:
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2002 2001 2002 2001
---------- ----------- ----------- -----------
Reported net income $ 4,082 $ 2,654 $ 12,690 $ 8,594
Add back: Goodwill
and trademark
amortization, net
of tax - 656 - 1,945
Adjusted net income $ 4,082 $ 3,310 $ 12,690 $ 10,539
Earnings per share-
basic:
Reported earnings
per share $ 0.28 $ 0.18 $ 0.87 $ 0.59
Goodwill and
trademark
amortization - .05 - .13
Adjusted earnings
per share $ 0.28 $ 0.23 $ 0.87 $ 0.72
Earnings per share-
diluted:
Reported earnings
per share $ 0.26 $ 0.17 $ 0.81 $ 0.56
Goodwill and
trademark
amortization - .04 - .12
Adjusted earnings
per share $ 0.26 $ 0.21 $ 0.81 $ 0.68
7
As of September 30, 2002, the Company's intangible assets are classified as
follows:
Gross Carrying Accumulated
(in thousands) Amount Amortization
Amortized intangible
assets:
Core technology $ 4,335 $ (1,890)
Non-compete agreements 2,280 (739)
Customer list 1,407 (586)
-------------- --------------
Total $ 8,022 $ (3,215)
============== ==============
Unamortized intangible
assets:
Trademark $ 357
==============
Prior to the adoption of Statement 142, the Company had separately identified
and valued the assembled workforce associated with the acquisition of ICEM CFD
Engineering as an intangible asset. In accordance with the guidance in Statement
142, the net unamortized balance of $1,500,000 was reclassified to goodwill.
The increase in goodwill from December 31, 2001 to September 30, 2002 primarily
relates to a territory acquisition payment in France.
Amortization expense for the amortized intangible assets reflected above is
expected to be approximately $1,743,000, $1,482,000, $961,000, $738,000 and
$199,000 for the years ending December 31, 2002, 2003, 2004, 2005 and 2006,
respectively.
8
5. Earnings Per Share
Basic earnings per share ("EPS") amounts are computed by dividing earnings by
the average number of common shares outstanding during the period. Diluted EPS
amounts assume the issuance of common stock for all potentially dilutive
equivalents outstanding.
The details of basic and diluted earnings per share are as follows:
(in thousands, Three Three Nine Nine
except per share Months Months Months Months
amounts) Ended Ended Ended Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2002 2001 2002 2001
-------------- --------------- --------------- --------------
Net income $ 4,082 $ 2,654 $ 12,690 $ 8,594
Weighted average
shares outstanding
- basic 14,578 14,532 14,612 14,596
Basic earnings per
share $ 0.28 $ 0.18 $ 0.87 $ 0.59
============== ============== ============== ==============
Effect of dilutive
securities -
shares issuable
upon exercise of
dilutive
outstanding stock
options 897 1,045 1,065 797
Weighted average
shares outstanding
- diluted 15,475 15,577 15,677 15,393
Diluted earnings
per share $ 0.26 $ 0.17 $ 0.81 $ 0.56
============== ============== ============== ==============
Anti-dilutive stock
options 177 456 83 456
============== ============== ============== ==============
6. Reclassifications
Certain reclassifications have been made to the 2001 condensed consolidated
financial statements to conform to the 2002 presentation.
9
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
ANSYS, Inc.
Canonsburg, Pennsylvania
We have reviewed the accompanying condensed consolidated balance sheet of ANSYS,
Inc. and subsidiaries (the "Company") as of September 30, 2002, and the related
condensed consolidated statements of income and cash flows for the three-month
and nine-month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, 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 review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements as of September 30,
2002, and for the three-month and nine-month periods then ended for them to be
in conformity with accounting principles generally accepted in the United States
of America.
The accompanying condensed financial information as of December 31, 2001, and
for the three-month and nine-month periods ended September 30, 2001, were not
audited or reviewed by us and, accordingly, we do not express an opinion or any
other form of assurance on them.
/s/ Deloitte & Touche LLP
- -----------------------------
Pittsburgh, Pennsylvania
October 11, 2002
10
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ANSYS, Inc. (the "Company") develops and globally markets engineering simulation
software and technologies widely used by engineers and designers across a broad
spectrum of industries, including aerospace, automotive, manufacturing,
electronics and biomedical. Headquartered at Southpointe in Canonsburg,
Pennsylvania, the Company employs approximately 460 people and focuses on the
development of open and flexible solutions that enable users to analyze designs
directly on the desktop, providing a common platform for fast, efficient and
cost-conscious product development, from design concept to final-stage testing
and validation. The Company distributes its ANSYS(R), DesignSpace(R),
AI*Solutions, ICEM CFD Engineering and CADOE products and services through a
network of channel partners in 37 countries, in addition to its own direct sales
offices in 18 strategic locations throughout the world. The following discussion
should be read in conjunction with the accompanying unaudited condensed
consolidated financial statements and notes thereto for the three-month and
nine-month periods ended September 30, 2002 and 2001, and with the Company's
audited financial statements and notes thereto for the year ended December 31,
2001 filed on Form 10-K with the Securities and Exchange Commission.
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including statements below concerning future trends regarding the
Company's intentions related to continued investments in sales and marketing and
research and development, regarding increased general and administrative
expenses due to additional legal and accounting compliance costs, plans related
to future capital spending, potential changes in the Company's effective tax
rate, the sufficiency of existing cash and cash equivalent balances to meet
future working capital and capital expenditure requirements, estimates of tax
rates in future periods, as well as statements which contain such words as
"anticipates", "intends", "believes", "plans" and other similar expressions. The
Company's actual results could differ materially from those set forth in
forward-looking statements. Certain factors that might cause such a difference
include risks and uncertainties detailed in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section in the 2001
Annual Report to Shareholders and in "Certain Factors Regarding Future Results"
included herein as Exhibit 99 to this Form 10-Q.
11
Results of Operations
Three Months Ended September 30, 2002 Compared to Three Months Ended September
30, 2001
Revenue. The Company's total revenue increased 5.5% in the 2002 third quarter to
$21.7 million from $20.6 million in the 2001 third quarter. Reported revenue for
the prior year was affected by a modification of the Company's revenue
recognition policy related to noncancellable annual software leases.
As previously disclosed, in 2001 the Company modified its revenue recognition
policy for annual software leases to comply with Technical Practice Aid ("TPA")
5100.53 "Fair Value of PCS in a Short-Term Time-Based License and Software
Revenue Recognition," issued by the American Institute of Certified Public
Accountants. Prior to the revenue recognition modification, the Company
recognized a portion of the license fee from annual software leases upon
inception or renewal of the lease, while the remaining portion was recognized
ratably over the lease period. The TPA requires all revenue from noncancellable
annual software lease licenses to be recognized ratably over the lease term. Had
this revenue recognition policy modification been initially made in January
2002, third quarter 2002 revenue would have been approximately $21.0 million.
Software license revenue increased 6.2% in the 2002 quarter to $11.0 million
from $10.4 million in the 2001 quarter. The quarterly revenue increase in 2002
was primarily the result of an increase in license revenue related to annual
software leases, which resulted from the adverse impact of the revenue
recognition policy modification discussed above on reported revenue in the third
quarter of 2001. Also contributing to the increase in the 2002 quarter was
higher license revenue from the Company's ICEM CFD Engineering product line.
Maintenance and service revenue increased 4.8% in the 2002 quarter to $10.7
million from $10.2 million in the 2001 quarter. This increase was primarily the
result of maintenance contracts sold in association with paid-up license sales
in recent quarters.
The Company has recently developed and introduced many new software products.
Certain of these products require a higher level of sales and support expertise.
The ability of the Company's sales channel, in particular the indirect channel,
to obtain this expertise and sell the new product offerings could have an effect
on the Company's sales in future periods. Additionally, royalties and consulting
engagements associated with the new software products may result in the
Company's cost of sales increasing as a percentage of revenue in future periods.
12
As the Company has grown, it has become increasingly subject to the risks
arising from adverse changes in domestic and global economic conditions. As a
result of the current economic slowdown, many companies are delaying or reducing
technology purchases, which has had an impact on the Company's visibility into
the closing of new business, as opposed to our recurring business. This slowdown
has also contributed to, and may continue to contribute to, reductions in sales,
longer sales cycles and increased price competition. Each of these items could
adversely affect the Company's sales in future periods.
Of the Company's total revenue in the 2002 quarter, approximately 56.5% and
43.5%, respectively, were attributable to international and domestic sales, as
compared to 58.3% and 41.7%, respectively, in the 2001 quarter.
Cost of Sales and Gross Profit. The Company's total cost of sales increased
11.4% to $3.0 million, or 13.9% of total revenue, in the 2002 third quarter from
$2.7 million, or 13.2% of total revenue, in the 2001 third quarter. The increase
in the 2002 quarter was principally attributable to contracted technical support
costs in France, as well as service costs associated with the Company's recently
acquired CADOE subsidiary.
As a result of the foregoing, the Company's gross profit increased 4.6% to $18.7
million in the 2002 quarter from $17.9 million in the 2001 quarter.
Selling and Marketing. Total selling and marketing expenses increased from $4.4
million, or 21.2% of total revenue in the 2001 quarter, to $4.7 million, or
21.6% of total revenue in the 2002 quarter. The increase primarily resulted from
higher salaries and related headcount costs associated with the addition of
personnel within the Company's direct sales and sales support organization.
These additions include personnel associated with the Company's recently
established direct sales offices in India and France. These increases were
partially offset by a reduction in discretionary advertising and promotion
expenditures.
Research and Development. Research and development expenses increased 18.3% in
the 2002 third quarter to $5.2 million, or 23.7% of total revenue, from $4.4
million, or 21.1% of total revenue, in the 2001 quarter. The increase primarily
resulted from additional headcount and related costs, including those associated
with the CADOE acquisition, as well as resources necessary to support the
continued expansion of our various product offerings. The Company has
traditionally invested significant resources in research and development
activities and intends to continue to make significant investments in this area.
Amortization. Amortization expense decreased to $557,000 in the 2002 third
quarter from $1.3 million in the prior year quarter. The reduction primarily
related to the adoption of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets. This standard eliminates the amortization
of goodwill and other intangible assets with indefinite useful lives and
requires annual testing for impairment. Had this standard been in effect for the
third quarter of 2001, amortization expense in that quarter would have been
approximately $440,000.
13
General and Administrative. General and administrative expenses decreased from
$4.5 million, or 21.9% of total revenue in the 2001 quarter, to $2.5 million, or
11.6% of total revenue in the 2002 quarter. The decrease was primarily related
to a $2.0 million non-recurring charge in the prior year quarter related to the
settlement of a dispute with a former distributor.
The Company maintains commercial insurance to protect against and manage the
risks involved in conducting business. The cost to obtain insurance coverage for
such risks has significantly increased due to the environment within the
commercial insurance industry. Additionally, the Company has recently renewed
its contract for employee health insurance coverage in 2003. The new contract
results in significantly higher health insurance costs than in prior years.
Because these insurance costs relate to personnel, they are allocated to each
functional area of the Company and will increase cost of sales, sales and
marketing, research and development, and general and administrative expenses in
future periods.
On July 30, the Sarbanes-Oxley Act of 2002 (the "Act") was signed into law. The
Act contains far-reaching corporate governance reforms and new disclosure
requirements for public companies. Certain of the Act's provisions became
effective immediately, while other provisions will be implemented over the
course of the next twelve months. Costs to comply with the provisions of the
Act, including legal and accounting fees, could result in higher general and
administrative expenses in future periods.
Other Income. Other income decreased to $32,000 in the 2002 third quarter from
$483,000 in the prior year quarter. The decrease was primarily attributable to a
reduced interest rate environment in the 2002 third quarter as compared to that
in the 2001 third quarter, and, to a lesser extent, equity affiliate and foreign
currency transaction losses in the current year period.
Income Tax Provision. The Company's effective rates of taxation were 30.0% in
the 2002 quarter and 31.1% in the 2001 quarter. These rates are lower than the
federal and state combined statutory rate as a result of benefits related to
export sales, as well as the generation of research and experimentation credits.
The Company expects that the effective tax rate will remain in the range of
30.0% - 31.0% for the remainder of the year.
In November 2000, the United States enacted the FSC Repeal and Extraterritorial
Income Exclusion Act (the "Act") in response to a challenge from the World Trade
Organization ("WTO") that the existing tax benefits provided by foreign sales
corporations were prohibited tax subsidies. The Act generally repeals the
foreign sales corporation and implements an extraterritorial income ("ETI") tax
benefit. Recently, the European Union stated that it did not believe the ETI
provisions bring U.S. tax law into WTO-compliance and asked the WTO to rule on
the matter. On August 30, 2002, the WTO ruled that the European Union may impose
up to $4 billion per year in retaliatory duties against U.S. exports. As a
result, there may be further related changes to U.S. export tax law in
connection with this ruling. In 2001, export benefits reduced the Company's
effective tax rate by 6.6%. Any such prospective changes regarding tax benefits
associated with the Company's export sales may result in an increase in the
Company's effective tax rate and decrease its net income in future periods.
Net Income. The Company's net income in the 2002 quarter was $4.1 million as
compared to $2.7 million in the 2001 quarter. Diluted earnings per share
increased to $.26 in the 2002 quarter as compared to $.17 in the 2001 quarter as
a result of the increase in net income. The weighted average shares used in
computing diluted earnings per share were 15.5 million in the 2002 quarter and
15.6 million in the 2001 quarter.
14
Excluding acquisition-related amortization, net income increased 25.1% to $4.4
million, or diluted earnings per share of $0.28, in the 2002 quarter as compared
with $3.5 million, or diluted earnings per share of $0.23, in the 2001 quarter.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30,
2001
Revenue. The Company's total revenue increased 10.0% for the 2002 nine months to
$65.7 million from $59.8 million for the 2001 nine months. Reported revenue for
the first nine months of 2001 was affected by a modification of the Company's
revenue recognition policy related to noncancellable annual software leases.
As previously disclosed, in 2001 the Company modified its revenue recognition
policy for annual software leases. Had this revenue recognition policy
modification been initially made in January 2002, revenue for the first nine
months of 2002 would have been approximately $62.3 million.
Software license revenue totaled $34.1 million in the 2002 nine months as
compared to $30.9 million in the 2001 nine months, an increase of 10.3%. The
revenue increase was primarily the result of an increase in license revenue
related to annual software leases, which resulted from the adverse impact of the
revenue recognition policy modification on reported revenue during 2001.
Maintenance and service revenue increased 9.7% for the nine months ended
September 30, 2002 to $31.6 million from $28.8 million in the comparable 2001
period. This increase was primarily the result of maintenance contracts sold in
association with paid-up license sales in recent quarters, and, to a lesser
extent, an increase in consulting revenue.
Of the Company's total revenue in the 2002 nine months, approximately 55.3% and
44.7%, respectively, were attributable to international and domestic sales, as
compared to 55.1% and 44.9%, respectively, in the 2001 nine months.
Cost of Sales and Gross Profit. The Company's total cost of sales increased 4.3%
to $8.7 million, or 13.2% of total revenue, for the 2002 nine months as compared
to $8.3 million, or 13.9% of total revenue, for the 2001 nine months. The
increase in 2002 was principally attributable to contracted technical support
costs in France, as well as service costs associated with the Company's recently
acquired CADOE subsidiary.
As a result of the foregoing, the Company's gross profit increased 10.9% to
$57.1 million in the 2002 nine-month period from $51.4 million in the comparable
2001 period.
15
Selling and Marketing. Selling and marketing expenses increased 4.7% in the nine
months ended September 30, 2002 to $15.1 million, or 23.0% of total revenue,
from $14.4 million, or 24.1% of total revenue, in the comparable 2001 period.
The increase primarily resulted from higher salaries and related headcount costs
associated with the addition of personnel within the Company's direct sales and
sales support organization. These additions include personnel associated with
the Company's recently established direct sales offices in India and France.
Also contributing were costs associated with the Company's biennial worldwide
users' conference, which occurred in the second quarter. These increases were
partially offset by a reduction in discretionary advertising and promotion
expenditures, as well as reduced commissions related to major account sales.
Research and Development. Research and development expenses increased 18.6% in
the 2002 nine months to $14.9 million, or 22.7% of total revenue, from $12.6
million, or 21.0% of total revenue, in the 2001 nine months. The increase
primarily resulted from additional headcount and related costs, including those
associated with the CADOE acquisition, related to the development and
introduction of new and enhanced products. The Company has traditionally
invested significant resources in research and development activities and
intends to continue to make significant investments in this area.
Amortization. Amortization expense decreased to $1.7 million in the 2002
nine-month period from $3.9 million in the comparable prior year period. The
reduction primarily related to the adoption of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets. This standard
eliminates the amortization of goodwill and other intangible assets with
indefinite useful lives and requires annual testing for impairment. Had this
standard been in effect for the first nine months of 2001, amortization expense
in that period would have been approximately $1.4 million.
General and Administrative. General and administrative expenses decreased 21.6%
to $7.6 million, or 11.5% of total revenue, in the 2002 nine months, as compared
to $9.6 million, or 16.1% of total revenue, in the 2001 nine months. The
decrease was primarily related to a $2.0 million non-recurring charge in the
prior year related to the settlement of a dispute with a former distributor.
Other Income. Other income decreased from $1.6 million in the 2001 nine-month
period to $526,000 in the comparable 2002 period. The decrease was primarily
attributable to a declining interest rate environment, and, to a lesser extent,
equity affiliate and foreign currency transaction losses in the current year.
Income Tax Provision. The Company's effective rates of taxation were 30.7% for
the 2002 nine months and 31.1% for the 2001 nine months. These rates are lower
than the federal and state combined statutory rate as a result of benefits
related to export sales, as well as the generation of research and
experimentation credits. The Company expects that the effective tax rate will be
in the range of 30.0% - 31.0% for the remainder of the year.
16
Net Income. The Company's net income in the 2002 nine months was $12.7 million
as compared to $8.6 million in the 2001 nine months. Diluted earnings per share
increased to $.81 in the 2002 period as compared to $.56 in the 2001 period as a
result of the increase in net income. The weighted average shares used in
computing diluted earnings per share were 15.7 million and 15.4 million in the
2002 and 2001 nine-month periods, respectively.
Excluding acquisition-related amortization, net income increased 21.2% to $13.5
million, or diluted earnings per share of $0.86, in the 2002 nine months as
compared with $11.2 million, or diluted earnings per share of $0.73, in the 2001
nine months.
Liquidity and Capital Resources
As of September 30, 2002, the Company had cash, cash equivalents and short-term
investments totaling $55.3 million and working capital of $49.5 million, as
compared to cash, cash equivalents and short-term investments of $53.4 million
and working capital of $40.0 million at December 31, 2001. The short-term
investments are generally investment grade and liquid, which allows the Company
to minimize interest rate risk and to facilitate liquidity in the event an
immediate cash need arises.
The Company's operating activities provided cash of $16.0 million for the nine
months ended September 30, 2002 and $14.9 million for the nine months ended
September 30, 2001. The increase in the Company's cash flow from operations in
the 2002 nine-month period as compared to the comparable 2001 period was
primarily a result of increased earnings after the effect of non-cash expenses
such as depreciation, amortization and deferred income taxes. This increase was
partially offset by the payment in 2002 of approximately $2.0 million associated
with the settlement of a dispute with a former distributor. This settlement
amount was fully accrued in the third quarter of 2001. Net cash generated by
operating activities provided sufficient resources to fund increased headcount
and capital needs, as well as to sustain share repurchase activity under the
Company's ongoing share repurchase program.
The Company's investing activities used cash of $11.5 million in the nine months
ended September 30, 2002 and provided cash of $8.7 million in the nine months
ended September 30, 2001. In the 2002 nine-month period, cash outlays primarily
related to net purchases of short-term investments and a final payment of $2.6
million related to the 2000 acquisition of ICEM CFD Engineering. In the 2001
nine-month period, cash was primarily generated from net maturities of
short-term investments. The Company currently plans additional capital spending
of approximately $400,000 throughout the remainder of 2002; however, the level
of spending will be dependent upon various factors, including growth of the
business and general economic conditions.
Financing activities used cash of approximately $7.7 million and $11.7 million
in the nine months ended September 30, 2002 and 2001, respectively. In both
periods, cash outlays related to the Company's share repurchase program were
partially offset by proceeds from the issuance of common stock under employee
stock purchase and option plans. The Company repurchased 504,900 shares during
the first nine months of 2002.
17
The Company believes that existing cash and cash equivalent balances, together
with cash generated from operations, will be sufficient to meet the Company's
working capital and capital expenditure requirements through the remainder of
fiscal 2002. 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.
Critical Accounting Policies
ANSYS believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements. ANSYS recognizes revenue in accordance with SOP 97-2,
Software Revenue Recognition, and related interpretations. Revenue for perpetual
licenses is recognized upon delivery of the utility which enables the customer
to request authorization keys, acceptance by the customer and receipt of a
signed contractual obligation, provided that no significant Company obligations
remain and collection of the receivable is probable. Revenue for software lease
licenses is recognized ratably over the period of the lease contract. Revenue is
recorded at the net price to ANSYS for sales through the ANSYS distribution
network. The Company estimates the value of post-contract customer support sold
together with perpetual licenses by reference to published price lists which
generally represent the prices at which customers could purchase renewal
contracts for such services.
ANSYS maintains allowances for doubtful accounts for estimated losses resulting
from the inability of its customers to make required payments. Management
specifically analyzes accounts receivable, historical bad debts, credit
concentrations and customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. If the financial condition of ANSYS customers,
including ANSYS distributors, were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
ANSYS capitalizes internal labor costs associated with the development of
product enhancements subsequent to the determination of technological
feasibility. Amortization of capitalized software costs, both for internally
developed as well as for purchased software products, is computed on a
product-by-product basis over the estimated economic life of the product, which
is generally three years. The Company periodically reviews the carrying value of
capitalized software and impairments will be recognized in the results of
operations if the expected future undiscounted operating cash flow derived from
the capitalized software is less than its carrying value.
18
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in the Company's exposure to market risk from
December 31, 2001.
Item 4.
CONTROLS AND PROCEDURES
(a) Disclosure controls and procedures. As required by new Rule 13a-15 under
the Securities Exchange Act of 1934, within the 90 days prior to the date
of this report, the Company carried out an evaluation of the effectiveness
of the design and operation of the Company's disclosure controls and
procedures under the supervision and with the participation of the
Company's management, including James E. Cashman, III, the Company's
President and Chief Executive Officer, and Maria T. Shields, the Company's
Chief Financial Officer. In advance of this evaluation, the Company created
a Disclosure Review Committee to assist in the quarterly evaluation of the
Company's internal disclosure controls and procedures and in the review of
the Company's periodic filings under the Exchange Act. The membership of
the Disclosure Review Committee consists of the Company's Chief Executive
Officer, Chief Financial Officer, Controller, Corporate Counsel, Treasurer,
Vice President of Sales and Services, Vice President of Human Resources,
and Business Unit General Managers. Based upon that evaluation, Mr. Cashman
and Ms. Shields concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be
disclosed by the Company in the reports it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the Securities and Exchange Commission's rules
and forms. In connection with the new rules, the Company will continue to
review and document its disclosure controls and procedures, including its
internal controls and procedures for financial reporting, and may from time
to time make changes aimed at enhancing their effectiveness and to ensure
that its systems evolve with its business.
(b) Internal controls. Since the date of the evaluation described above, there
have not been any significant changes in our internal accounting controls
or in other factors that could significantly affect those controls.
19
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. Each of these matters is
subject to various uncertainties, and it is possible that these matters
may be resolved unfavorably to the Company.
Item 2. Changes in Securities and Use of Proceeds
(c) The following information is furnished in connection with
securities sold by the Registrant during the period covered by this
Form 10-Q which were not registered under the Securities Act. The
transactions constitute sales of the Registrant's Common Stock, par
value $.01 per share, upon the exercise of vested options issued
pursuant to the Company's 1994 Stock Option and Grant Plan, issued in
reliance upon the exemption from registration under Rule 701
promulgated under the Securities Act and issued prior to the Registrant
becoming subject to the reporting requirements of Section 13 or 15(d)
of the Exchange Act of 1934, as amended.
Number of Number of Aggregate
Month/Year Shares Individuals Exercise Price
---------- ------ ----------- --------------
August 2002 100 1 $ 1,000.00
Item 3. Defaults upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other information
The Company's Chief Executive Officer and Chief Financial Officer have
furnished to the SEC the certification with respect to this Form 10-Q
that is required by Section 906 of the Sarbanes-Oxley Act of 2002. See
Exhibits 99.2 and 99.3 attached hereto.
20
Item 6. Exhibits and Reports Filed on Form 8-K
(a) Exhibits.
15 Independent Accountants' Letter Regarding Unaudited
Financial Information
99.1 Certain Factors Regarding Future Results
99.2 Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 Of The Sarbanes-Oxley Act
of 2002
99.3 Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 Of The Sarbanes-Oxley Act
of 2002
(b) Reports on Form 8-K.
Not Applicable.
21
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: November 12, 2002 By: /s/ James E. Cashman, III
------------------------------
James E. Cashman, III
President and Chief
Executive Officer
Date: November 12, 2002 By: /s/ Maria T. Shields
-------------------------
Maria T. Shields
Chief Financial Officer
22
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, James E. Cashman, III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ANSYS, Inc.
("ANSYS");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of ANSYS as of, and for, the periods presented in this quarterly
report;
4. ANSYS's other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for ANSYS and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to ANSYS, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of ANSYS's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. ANSYS's other certifying officer and I have disclosed, based on our most
recent evaluation, to ANSYS's auditors and the audit committee of ANSYS's
Board of Directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect ANSYS's ability to record,
process, summarize and report financial data and have identified for
ANSYS's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in ANSYS's internal controls;
and
6. ANSYS's other certifying officer and I have indicated in this quarterly
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002 /s/ James E. Cashman, III
-------------------------
James E. Cashman, III
President and Chief
Executive Officer
23
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Maria T. Shields, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ANSYS, Inc.
("ANSYS");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of ANSYS as of, and for, the periods presented in this quarterly
report;
4. ANSYS's other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for ANSYS and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to ANSYS, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of ANSYS's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. ANSYS's other certifying officer and I have disclosed, based on our most
recent evaluation, to ANSYS's auditors and the audit committee of ANSYS's
Board of Directors:
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect ANSYS's ability to record,
process, summarize and report financial data and have identified for
ANSYS's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in ANSYS's internal controls;
and
6. ANSYS's other certifying officer and I have indicated in this quarterly
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002 /s/ Maria T. Shields
-------------------
Maria T. Shields
Chief Financial Officer
24
Item 6.
EXHIBIT INDEX
Exhibit No.
-----------
15 Independent Accountants' Letter Regarding Unaudited
Financial Information
99.1 Certain Factors Regarding Future Results
99.2 Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 Of The Sarbanes-Oxley
Act of 2002
99.3 Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 Of The Sarbanes-Oxley
Act of 2002
25