UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2023
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from _________ to _________
Commission File Number: 0-20853
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||||||||
(Address of Principal Executive Offices) | (Zip Code) | ||||||||||||||||
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||||||||
| Title of each class | Trading Symbol(s) | Name of exchange on which registered | ||||||||||||
| (Nasdaq Global Select Market) | ||||||||||||||
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | ||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The number of shares of the Registrant's Common Stock, $0.01 par value per share, outstanding as of April 28, 2023 was 86,661,338 shares.
ANSYS, INC. AND SUBSIDIARIES
INDEX
| Page No. | ||||||||
2
PART I – FINANCIAL INFORMATION
Item 1.Financial Statements:
ANSYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| (in thousands, except share and per share data) | March 31, 2023 | December 31, 2022 | |||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term investments | |||||||||||
Accounts receivable, less allowance for doubtful accounts of $ | |||||||||||
| Other receivables and current assets | |||||||||||
| Total current assets | |||||||||||
| Long-term assets: | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net | |||||||||||
| Other long-term assets | |||||||||||
| Deferred income taxes | |||||||||||
| Total long-term assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued bonuses and commissions | |||||||||||
| Accrued income taxes | |||||||||||
| Other accrued expenses and liabilities | |||||||||||
| Deferred revenue | |||||||||||
| Total current liabilities | |||||||||||
| Long-term liabilities: | |||||||||||
| Deferred income taxes | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Long-term debt | |||||||||||
| Other long-term liabilities | |||||||||||
| Total long-term liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Stockholders' equity: | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
Treasury stock, at cost: | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total stockholders' equity | |||||||||||
| Total liabilities and stockholders' equity | $ | $ | |||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
ANSYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| Three Months Ended | |||||||||||
| (in thousands, except per share data) | March 31, 2023 | March 31, 2022 | |||||||||
| Revenue: | |||||||||||
| Software licenses | $ | $ | |||||||||
| Maintenance and service | |||||||||||
| Total revenue | |||||||||||
| Cost of sales: | |||||||||||
| Software licenses | |||||||||||
| Amortization | |||||||||||
| Maintenance and service | |||||||||||
| Total cost of sales | |||||||||||
| Gross profit | |||||||||||
| Operating expenses: | |||||||||||
| Selling, general and administrative | |||||||||||
| Research and development | |||||||||||
| Amortization | |||||||||||
| Total operating expenses | |||||||||||
| Operating income | |||||||||||
| Interest income | |||||||||||
| Interest expense | ( | ( | |||||||||
| Other expense, net | ( | ( | |||||||||
| Income before income tax provision | |||||||||||
| Income tax provision | |||||||||||
| Net income | $ | $ | |||||||||
| Earnings per share – basic: | |||||||||||
| Earnings per share | $ | $ | |||||||||
| Weighted average shares | |||||||||||
| Earnings per share – diluted: | |||||||||||
| Earnings per share | $ | $ | |||||||||
| Weighted average shares | |||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
ANSYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| Three Months Ended | |||||||||||
| (in thousands) | March 31, 2023 | March 31, 2022 | |||||||||
| Net income | $ | $ | |||||||||
| Other comprehensive income (loss): | |||||||||||
| Foreign currency translation adjustments | ( | ||||||||||
| Comprehensive income | $ | $ | |||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
ANSYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months Ended | |||||||||||
| (in thousands) | March 31, 2023 | March 31, 2022 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and intangible assets amortization | |||||||||||
| Operating lease right-of-use assets expense | |||||||||||
| Deferred income tax benefit | ( | ( | |||||||||
| Provision for bad debts | ( | ||||||||||
| Stock-based compensation expense | |||||||||||
| Other | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | |||||||||||
| Other receivables and current assets | |||||||||||
| Other long-term assets | ( | ( | |||||||||
| Accounts payable, accrued expenses and current liabilities | ( | ( | |||||||||
| Accrued income taxes | ( | ||||||||||
| Deferred revenue | ( | ||||||||||
| Other long-term liabilities | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Acquisitions, net of cash acquired | ( | ( | |||||||||
| Capital expenditures | ( | ( | |||||||||
| Other investing activities | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Purchase of treasury stock | ( | ( | |||||||||
| Restricted stock withholding taxes paid in lieu of issued shares | ( | ( | |||||||||
| Proceeds from shares issued for stock-based compensation | |||||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rate fluctuations on cash and cash equivalents | ( | ||||||||||
| Net decrease in cash and cash equivalents | ( | ( | |||||||||
| Cash and cash equivalents, beginning of period | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Income taxes paid | $ | $ | |||||||||
| Interest paid | $ | $ | |||||||||
| Fair value of non-cash consideration in connection with acquisitions | $ | $ | |||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
ANSYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
| Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive (Loss) Income | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| Treasury shares acquired | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation activity | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| Treasury shares acquired | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation activity | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
7
ANSYS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023
(Unaudited)
1.Organization
ANSYS, Inc. (Ansys, we, us, our) 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 high-tech, aerospace and defense, automotive, energy, industrial equipment, materials and chemicals, consumer products, healthcare and construction.
As defined by the accounting guidance for segment reporting, we operate as one segment.
Given the integrated approach to the multi-discipline problem-solving needs of our customers, a single sale may contain components from multiple product areas and include combined technologies. We also have a multi-year product and integration strategy that will result in new, combined products or changes to the historical product offerings. As a result, it is impracticable for us to provide accurate historical or current reporting among our various product lines.
2.Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information for commercial and industrial companies, the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the accompanying unaudited condensed consolidated financial 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 unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements (and notes thereto) included in our Annual Report on Form 10-K for the year ended December 31, 2022 (2022 Form 10-K). The condensed consolidated December 31, 2022 balance sheet presented is derived from the audited December 31, 2022 balance sheet included in the 2022 Form 10-K. In our opinion, 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, 2023 are not necessarily indicative of the results that may be expected for any future period. Certain items in the notes to the condensed consolidated financial statements of prior years have been reclassified to conform to the current year's presentation. These reclassifications had no effect on reported net income, comprehensive income, cash flows, total assets or total liabilities and stockholders' equity.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of highly liquid investments such as deposits held at major banks and money market funds. Cash equivalents are carried at cost, which approximates fair value. Our cash and cash equivalents balances comprise the following:
| March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||
| (in thousands, except percentages) | Amount | % of Total | Amount | % of Total | |||||||||||||||||||
| Cash accounts | $ | $ | |||||||||||||||||||||
| Money market funds | |||||||||||||||||||||||
| Total | $ | $ | |||||||||||||||||||||
Our money market fund balances are held in various funds of two issuers.
8
3.Revenue from Contracts with Customers
Disaggregation of Revenue
The following table summarizes revenue:
| Three Months Ended | |||||||||||
| (in thousands, except percentages) | March 31, 2023 | March 31, 2022 | |||||||||
| Revenue: | |||||||||||
| Subscription lease licenses | $ | $ | |||||||||
| Perpetual licenses | |||||||||||
| Software licenses | |||||||||||
| Maintenance | |||||||||||
| Service | |||||||||||
| Maintenance and service | |||||||||||
| Total revenue | $ | $ | |||||||||
| Direct revenue, as a percentage of total revenue | % | % | |||||||||
| Indirect revenue, as a percentage of total revenue | % | % | |||||||||
Our software license revenue is recognized up front, while maintenance and service revenue is generally recognized over the term of the contract. The shift reflected above from indirect to direct revenue was driven primarily by our previously announced acquisition of DYNAmore, a channel partner that was formerly captured in our indirect business.
Deferred Revenue
Deferred revenue consists of billings made or payments received in advance of revenue recognition from customer agreements. The timing of revenue recognition may differ from the timing of billings to customers. Payment terms vary by the type and location of customer and the products or services offered. The time between invoicing and when payment is due is not significant.
The changes in deferred revenue, inclusive of both current and long-term deferred revenue, during the three months ended March 31, 2023 and 2022 were as follows:
| (in thousands) | 2023 | 2022 | |||||||||
| Beginning balance – January 1 | $ | $ | |||||||||
| Acquired deferred revenue | |||||||||||
| Deferral of revenue | |||||||||||
| Recognition of revenue | ( | ( | |||||||||
| Currency translation | ( | ||||||||||
| Ending balance – March 31 | $ | $ | |||||||||
Total revenue allocated to remaining performance obligations as of March 31, 2023 will be recognized as revenue as follows:
| (in thousands) | |||||
| Next 12 months | $ | ||||
| Months 13-24 | |||||
| Months 25-36 | |||||
| Thereafter | |||||
| Total revenue allocated to remaining performance obligations | $ | ||||
9
4.Acquisitions
During the quarter ended March 31, 2023, we completed the acquisition of DYNAmore for a purchase price of $139.2 million, or $126.4 million net of cash acquired. The acquisition expands our position as a simulation solution provider within the automotive industry. The effects of the acquisition were not material to our condensed consolidated results of operations.
During the three months ended March 31, 2023, we incurred acquisition-related expenses of $2.2 million. Acquisition-related expenses are recognized as selling, general and administrative and research and development expenses on the condensed consolidated statements of income.
The assets acquired and liabilities assumed in connection with the acquisition have been recorded based upon management's estimates of the fair market value as of the date of acquisition. The following tables summarize the fair value of consideration and the fair value of identified assets acquired and liabilities assumed for the acquisition at the date of acquisition:
| (in thousands) | |||||
| Cash | $ | ||||
| Non-cash consideration | |||||
| Total consideration | $ | ||||
Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed:
| (in thousands) | |||||
| Cash | $ | ||||
| Accounts receivable and other tangible assets | |||||
| Developed software and core technologies | |||||
| Customer lists | |||||
| Trade names | |||||
| Accounts payable and other liabilities | ( | ||||
| Deferred revenue | ( | ||||
| Net deferred tax liabilities | ( | ||||
| Total identifiable net assets | $ | ||||
| Goodwill | $ | ||||
The goodwill, which is not tax-deductible, is attributed to intangible assets that do not qualify for separate recognition, including the assembled workforce of the acquired business and the synergies expected to arise as a result of the acquisition.
The fair value of the assets acquired and liabilities assumed are based on preliminary calculations. The estimates and assumptions for these items are subject to change as additional information about what was known and knowable at the acquisition date is obtained during the measurement period (up to one year from the acquisition date).
We determined the fair value of our intangible assets using various valuation techniques, including the relief-from-royalty method and the multi-period excess earnings method. These models utilize certain unobservable inputs classified as Level 3 measurements as defined by ASC 820, Fair Value Measurements and Disclosures. The determination of fair value requires considerable judgment and is sensitive to changes in underlying assumptions, estimates and market factors. Estimating fair value requires us to make assumptions and estimates regarding our future plans, as well as industry and economic conditions. These assumptions and estimates include, but are not limited to: selection of a valuation methodology, royalty rate, discount rate and attrition rate.
10
The weighted-average useful life, valuation method and assumptions used to determine the fair value of the intangible assets acquired are as follows:
| Intangible Asset | Weighted-Average Useful Life | Valuation Method | Assumptions | |||||||||||||||||
| Developed software and core technologies | Relief-from-royalty | Royalty rate: Discount rate: | ||||||||||||||||||
| Trade names | Relief-from-royalty | Royalty rate: Discount rate: | ||||||||||||||||||
| Customer lists | Multi-period excess earnings | Attrition rate: Discount rate: | ||||||||||||||||||
2022 Acquisitions
During the year ended December 31, 2022, we completed several acquisitions to enhance our customers' experience. These acquisitions were not individually significant. The combined purchase price of these acquisitions during the year ended December 31, 2022 was $401.7 million, or $390.9 million net of cash acquired.
The operating results of each acquisition have been included in our condensed consolidated financial statements since each respective date of acquisition. The effects of the acquisitions were not material to our condensed consolidated results of operations.
5.Other Receivables and Current Assets and Other Accrued Expenses and Liabilities
Our other receivables and current assets and other accrued expenses and liabilities comprise the following balances:
| (in thousands) | March 31, 2023 | December 31, 2022 | |||||||||
| Receivables related to unrecognized revenue | $ | $ | |||||||||
| Income taxes receivable, including overpayments and refunds | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total other receivables and current assets | $ | $ | |||||||||
| Accrued vacation | |||||||||||
| Payroll-related accruals | |||||||||||
| Consumption, VAT and sales tax liabilities | |||||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Total other accrued expenses and liabilities | $ | $ | |||||||||
Receivables related to unrecognized revenue represent the current portion of billings made for customer contracts that have not yet been recognized as revenue.
11
6.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 awards 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, 2023 | March 31, 2022 | |||||||||
| Net income | $ | $ | |||||||||
| Weighted average shares outstanding – basic | |||||||||||
| Dilutive effect of stock plans | |||||||||||
| Weighted average shares outstanding – diluted | |||||||||||
| Basic earnings per share | $ | $ | |||||||||
| Diluted earnings per share | $ | $ | |||||||||
| Anti-dilutive shares | |||||||||||
7.Goodwill and Intangible Assets
Intangible assets are classified as follows:
| March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||
| (in thousands) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||||||||
| Finite-lived intangible assets: | |||||||||||||||||||||||
Developed software and core technologies | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Customer lists | ( | ( | |||||||||||||||||||||
| Trade names | ( | ( | |||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Indefinite-lived intangible asset: | |||||||||||||||||||||||
| Trade name | $ | $ | |||||||||||||||||||||
Finite-lived intangible assets are amortized over their estimated useful lives of two years to seventeen years .
As of March 31, 2023, estimated future amortization expense for the intangible assets reflected above was as follows:
| (in thousands) | |||||
| Remainder of 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Thereafter | |||||
| Total intangible assets subject to amortization | |||||
| Indefinite-lived trade name | |||||
| Other intangible assets, net | $ | ||||
12
The changes in goodwill during the three months ended March 31, 2023 and 2022 were as follows:
| (in thousands) | 2023 | 2022 | |||||||||
| Beginning balance – January 1 | $ | $ | |||||||||
Acquisitions and adjustments(1) | |||||||||||
| Currency translation | ( | ||||||||||
| Ending balance – March 31 | $ | $ | |||||||||
(1) In accordance with the accounting for business combinations, we recorded adjustments to goodwill for the effect of changes in the provisional fair values of the assets acquired and liabilities assumed during the measurement period (up to one year from the acquisition date) as we obtained new information about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.
During the first quarter of 2023, we completed the annual impairment test for goodwill and the indefinite-lived intangible asset and determined that these assets had not been impaired as of the test date, January 1, 2023. No events or circumstances changed during the three months ended March 31, 2023 that would indicate that the fair values of our reporting unit and indefinite-lived intangible asset are below their carrying amounts.
13
8.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 our own assumptions used to measure assets and liabilities at fair value.
A financial asset's or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
Our debt is classified within Level 2 of the fair value hierarchy because these borrowings are not actively traded and have a variable interest rate structure based upon market rates. The carrying amount of our debt approximates the estimated fair value. See Note 10, "Debt", for additional information on our borrowings.
The following tables provide the assets carried at fair value and measured on a recurring basis:
| Fair Value Measurements at Reporting Date Using: | |||||||||||||||||||||||
| (in thousands) | March 31, 2023 | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Cash equivalents | $ | $ | $ | $ | |||||||||||||||||||
| Short-term investments | $ | $ | $ | $ | |||||||||||||||||||
| Deferred compensation plan investments | $ | $ | $ | $ | |||||||||||||||||||
| Equity securities | $ | $ | $ | $ | |||||||||||||||||||
| Fair Value Measurements at Reporting Date Using: | |||||||||||||||||||||||
| (in thousands) | December 31, 2022 | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Cash equivalents | $ | $ | $ | $ | |||||||||||||||||||
| Short-term investments | $ | $ | $ | $ | |||||||||||||||||||
| Deferred compensation plan investments | $ | $ | $ | $ | |||||||||||||||||||
| Equity securities | $ | $ | $ | $ | |||||||||||||||||||
The cash equivalents in the preceding tables represent money market funds, valued at net asset value, with carrying values which approximate their fair values because of their short-term nature.
The short-term investments in the preceding tables represent deposits held by certain foreign subsidiaries. The deposits have fixed interest rates with original maturities ranging from three months to one year .
The deferred compensation plan investments in the preceding tables represent trading securities held in a rabbi trust for the benefit of non-employee directors. These securities consist of mutual funds traded in an active market with quoted prices. As a result, the plan assets are classified as Level 1 in the fair value hierarchy. The plan assets are recorded within other long-term assets on our condensed consolidated balance sheets.
The equity securities represent our investment in a publicly traded company. These securities are traded in an active market with quoted prices. As a result, the securities are classified as Level 1 in the fair value hierarchy. The securities are recorded within other long-term assets on our condensed consolidated balance sheets.
14
9.Leases
Our right-of-use assets and lease liabilities primarily include operating leases for office space. Our executive offices and those related to certain domestic product development, marketing, production and administration are located in a 186,000 square foot office facility in Canonsburg, Pennsylvania. The term of the lease is 183 months, which began on October 1, 2014 and expires on December 31, 2029. The lease agreement includes options to renew the contract through August 2044, an option to lease additional space in January 2025 and an option to terminate the lease in December 2025. No options are included in the lease liability as renewal is not reasonably certain. In addition, we are reasonably certain we will not terminate the lease agreement. Absent the exercise of options in the lease, our remaining base rent (inclusive of property taxes and certain operating costs) is $4.5 million per annum through 2024 and $4.7 million per annum for 2025 - 2029.
The components of our global lease cost reflected in the condensed consolidated statements of income are as follows:
| Three Months Ended | |||||||||||
| (in thousands) | March 31, 2023 | March 31, 2022 | |||||||||
| Lease liability cost | $ | $ | |||||||||
Variable lease cost not included in the lease liability(1) | |||||||||||
| Total lease cost | $ | $ | |||||||||
(1) Variable lease cost includes common area maintenance, property taxes, utilities and fluctuations in rent due to a change in an index or rate.
Other information related to operating leases is as follows:
| Three Months Ended | |||||||||||
| (in thousands) | March 31, 2023 | March 31, 2022 | |||||||||
| Cash paid for amounts included in the measurement of the lease liability: | |||||||||||
| Operating cash flows from operating leases | $ | ( | $ | ( | |||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | $ | |||||||||
| As of March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
Weighted-average remaining lease term of operating leases | |||||||||||
Weighted-average discount rate of operating leases | % | % | |||||||||
The maturity schedule of the operating lease liabilities as of March 31, 2023 is as follows:
| (in thousands) | |||||
| Remainder of 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Total future lease payments | |||||
| Less: Present value adjustment | ( | ||||
Present value of future lease payments(1) | $ | ||||
(1) Includes the current portion of operating lease liabilities of $23.6 million, which is reflected in other accrued expenses and liabilities in the condensed consolidated balance sheets.
There were no material leases that have been signed but not yet commenced as of March 31, 2023.
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10.Debt
On June 30, 2022, we entered into a credit agreement (2022 Credit Agreement) with PNC Bank, National Association, as administrative agent, swing line lender, and an L/C issuer, the lenders party thereto, and the other L/C issuers party thereto. The 2022 Credit Agreement refinanced our previous credit agreements in their entirety. Terms used in this description of the 2022 Credit Agreement with initial capital letters that are not otherwise defined herein are as defined in the 2022 Credit Agreement.
The 2022 Credit Agreement provides for a $755.0 million unsecured term loan facility and a $500.0 million unsecured revolving loan facility, which includes a $50.0 million sublimit for the issuance of letters of credit. The revolving loan facility is available for working capital and general corporate purposes. Each of the term loan facility and the revolving loan facility matures on June 30, 2027.
Borrowings under the term loan and revolving loan facilities accrue interest at a rate that is based on the Term SOFR plus an applicable margin or at the base rate plus an applicable margin, at our election. The base rate is the highest of (i) the Overnight Bank Funding Rate, plus 0.500 %, (ii) the PNC Bank, National Association prime rate, and (iii) Daily Simple SOFR plus an adjustment for SOFR plus 1.00 %. The applicable margin for the borrowings is a percentage per annum based on the lower of (1) a pricing level determined by our then-current consolidated net leverage ratio and (2) a pricing level determined by our public debt rating (if available).
The 2022 Credit Agreement also provides for the option to add certain foreign subsidiaries as borrowers and to borrow in Euros, Sterling, Yen and Swiss Francs under the revolving loan facility, up to a sublimit of $150.0 million. Borrowings under the revolving loan facility denominated in these currencies will accrue interest at a rate that is based on (a) for Euros, €STR, (b) for Sterling, SONIA, (c) for Yen, TONAR and (d) for Swiss Francs, SARON, plus an applicable margin calculated as described above.
Under the 2022 Credit Agreement, the weighted average interest rate in effect for the three months ended March 31, 2023 was 5.56 %. Under the prior credit agreements, the weighted average interest rate in effect for the three months ended March 31, 2022 was 1.35 %. The rate in effect as of March 31, 2023 and for the second quarter of 2023 under the 2022 Credit Agreement is 5.87 %.
The 2022 Credit Agreement contains customary representations and warranties, affirmative and negative covenants and events of default. The 2022 Credit Agreement also contains a financial covenant requiring us and our subsidiaries to maintain a consolidated net leverage ratio not in excess of 3.50 to 1.00 as of the end of any fiscal quarter (for the four-quarter period ending on such date) with an opportunity for a temporary increase in such consolidated net leverage ratio to 4.00 to 1.00 upon the consummation of certain qualified acquisitions for which the aggregate consideration is at least $250.0 million.
As of March 31, 2023, we had $755.0 million of borrowings outstanding under the term loan, with a carrying value of $753.7 million, which is net of $1.3 million of unamortized debt discounts and issuance costs. The total amount was included in long-term debt. As of March 31, 2023, no borrowings were outstanding under the revolving loan facility.
As of December 31, 2022, we had $755.0 million of borrowings outstanding under the term loan, with a carrying value of $753.6 million, which is net of $1.4 million of unamortized debt discounts and issuance costs. The total amount was included in long-term debt. As of December 31, 2022, no borrowings were outstanding under the revolving loan facility.
We were in compliance with all covenants under the 2022 Credit Agreement as of March 31, 2023 and December 31, 2022.
11.Income Taxes
Our income before income tax provision, income tax provision and effective tax rates were as follows:
| Three Months Ended | |||||||||||
| (in thousands, except percentages) | March 31, 2023 | March 31, 2022 | |||||||||
| Income before income tax provision | $ | $ | |||||||||
| Income tax provision | $ | $ | |||||||||
| Effective tax rate | % | % | |||||||||
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12.Stock Repurchase Program
Under our stock repurchase program, we repurchased shares as follows:
| Three Months Ended | |||||||||||
| (in thousands, except per share data) | March 31, 2023 | March 31, 2022 | |||||||||
| Number of shares repurchased | |||||||||||
| Average price paid per share | $ | $ | |||||||||
| Total cost | $ | $ | |||||||||
13.Stock-Based Compensation
Total stock-based compensation expense and its net impact on basic and diluted earnings per share are as follows:
| Three Months Ended | |||||||||||
| (in thousands, except per share data) | March 31, 2023 | March 31, 2022 | |||||||||
| Cost of sales: | |||||||||||
| Maintenance and service | $ | $ | |||||||||
| Operating expenses: | |||||||||||
| Selling, general and administrative | |||||||||||
| Research and development | |||||||||||
| Stock-based compensation expense before taxes | |||||||||||
| Related income tax benefits | ( | ( | |||||||||
| Stock-based compensation expense, net of taxes | $ | $ | |||||||||
| Net impact on earnings per share: | |||||||||||
| Basic earnings per share | $ | ( | $ | ( | |||||||
| Diluted earnings per share | $ | ( | $ | ( | |||||||
14.Geographic Information
Revenue to external customers is attributed to individual countries based upon the location of the customer. Revenue by geographic area is as follows:
| Three Months Ended | |||||||||||
| (in thousands) | March 31, 2023 | March 31, 2022 | |||||||||
| United States | $ | $ | |||||||||
| China | |||||||||||
| Germany | |||||||||||
| Japan | |||||||||||
| South Korea | |||||||||||
| Other Europe, Middle East and Africa (EMEA) | |||||||||||
| Other international | |||||||||||
| Total revenue | $ | $ | |||||||||
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Property and equipment by geographic area is as follows:
| (in thousands) | March 31, 2023 | December 31, 2022 | |||||||||
| United States | $ | $ | |||||||||
| India | |||||||||||
| EMEA | |||||||||||
| Other international | |||||||||||
| Total property and equipment, net | $ | $ | |||||||||
15.Contingencies and Commitments
We are subject to various claims, investigations, and legal and regulatory proceedings that arise in the ordinary course of business, including, but not limited to, commercial disputes, labor and employment matters, tax audits, alleged infringement of third parties' intellectual property rights and other matters. In our opinion, the resolution of pending matters is not expected to have a material adverse effect on our consolidated results of operations, cash flows or financial position. However, each of these matters is subject to various uncertainties and it is possible that an unfavorable resolution of one or more of these proceedings could materially affect our consolidated results of operations, cash flows or financial position.
Our Indian subsidiary has several service tax audits pending that have resulted in formal inquiries being received on transactions through mid-2012. We could incur tax charges and related liabilities of $7.1 million. As such charges are not probable at this time, a reserve has not been recorded on the condensed consolidated balance sheet as of March 31, 2023. The service tax issues raised in our notices and inquiries are very similar to the case, M/s Microsoft Corporation (I) (P) Ltd. Vs. Commissioner of Service Tax, New Delhi, wherein the Delhi Customs, Excise and Service Tax Appellate Tribunal (CESTAT) issued a favorable ruling to Microsoft. The Microsoft ruling was subsequently challenged in the Supreme Court by the Indian tax authority and a decision is still pending. We can provide no assurances on the impact that the present Microsoft case's decision will have on our cases, however, an unfavorable ruling in the Microsoft case may impact our assessment of probability and result in the recording of a $7.1 million reserve. We are uncertain as to when these service tax matters will be concluded.
We sell software licenses and services to our customers under contractual agreements. Such agreements generally include certain provisions indemnifying the customer against claims, by third parties, of infringement or misappropriation of their intellectual property rights arising from such customer's usage of our products or services. To date, payments related to these indemnification provisions have been immaterial. For several reasons, including the lack of prior material indemnification claims, we cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.
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Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto for the three months ended March 31, 2023, and with our audited consolidated financial statements and notes thereto for the year ended December 31, 2022 included in the 2022 Form 10-K filed with the Securities and Exchange Commission (SEC). The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles (GAAP).
Business
Ansys, a corporation formed in 1994, 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 high-tech, aerospace and defense, automotive, energy, industrial equipment, materials and chemicals, consumer products, healthcare and construction. Headquartered south of Pittsburgh, Pennsylvania, we employed 5,900 and 5,600 people as of March 31, 2023 and December 31, 2022, respectively. We focus on the development of open and flexible solutions that enable users to analyze designs on-premises and/or via the cloud, providing a common platform for fast, efficient and cost-conscious product development, from design concept to final-stage testing, validation and deployment. We distribute our suite of simulation technologies through direct sales offices in strategic, global locations and a global network of independent resellers and distributors (collectively, channel partners). It is our intention to continue to maintain this hybrid sales and distribution model. We operate and report as one segment.
When visionary companies need to know how their world-changing ideas will perform, they close the gap between design and reality using Ansys simulation. For more than 50 years, Ansys software has enabled innovators across industries to push the boundaries of product design by using the predictive power of simulation. From sustainable transportation and advanced satellite systems to life-saving medical devices, Ansys powers innovation that drives human advancement.
Our strategy of Pervasive Insights seeks to deepen the use of simulation in our core market, to inject simulation throughout the product lifecycle and extend the accessibility to a broader set of users and use cases. Our business has three vectors of growth:
•More products. Our broad and deep multiphysics portfolio enables us to grow with customers as they use simulation to solve more complex problems across a broad set of industries.
•More users. Investments in simulation education and user experience simplification has made simulation more accessible to a broader user base.
•More computations. Larger and more complex simulations drive more computation, requiring customers to use more Ansys licenses to complete their simulations.
Through decades of investments in the academic community and enhanced user experiences, our solutions have become accessible and relevant beyond our core "engineering" end user, to reach more users upstream and downstream from our core, which is the product validation process. Our multiphysics solutions enable our customers to address increasingly complex R&D challenges from the component through the system and mission level of analysis. Our products seamlessly enable access to high performance compute capacity to run simulations, on-premises or in the cloud, which means our customers' R&D teams are unencumbered by compute capacity limitations that can hinder R&D cycle times.
The engineering software simulation market is strong and growing. The market growth is driven by customers' need for rapid, quality innovation in a cost efficient manner, enabling faster time to market for new products and lower warranty costs. Increasing product complexity is driving sustained demand for simulations. Key industry trends fueling customers' increasing needs for simulation include:
•Electrification;
•Autonomy;
•Connectivity;
•The industrial internet of things; and
•Sustainability, including minimizing waste and physical prototyping, and improving circularity and development time.
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We have been investing and intend to continue to invest in our portfolio to broaden the range of physics and enable customers to analyze the interactions among physics at the component, system and mission level. Our strategy of Pervasive Insights is aligned with the near-term market growth opportunities and is laying the foundation for a future where simulation can be further democratized to broader classes of end-users and end-use cases.
To augment our organic development roadmaps, we intend to continue our strategic and disciplined acquisition strategy to grow our business. Our strategy is to partner with industry leaders to extend simulation into other ecosystems and customer R&D workflows. Our business is built on a culture of high ethical standards and commitment to diversity, equity, inclusion and belonging.
We license our technology to businesses in a diverse set of industries, educational institutions and governmental agencies. We believe that the features, functionality and integrated multiphysics capabilities of our software products are as strong as they have ever been. The software business is generally characterized by long sales cycles which increase the difficulty of predicting sales for any particular quarter. We make many operational and strategic decisions based upon short- and long-term sales forecasts that are impacted not only by these long sales cycles, but also by current global economic conditions. As a result, we believe that our overall performance is best measured by fiscal year results rather than by quarterly results.
We address the competition and price pressure that we face 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 our software products as compared to our competitors; investing in research and development to develop new and innovative products and increasing the capabilities of our existing products; maintaining a diverse industry footprint and focusing on customer needs, training, consulting and support; and enhancing our distribution channels. We also evaluate and execute strategic acquisitions to supplement our global engineering talent, product offerings and distribution channels.
Overview
Overall GAAP and Non-GAAP Results
This section includes a discussion of GAAP and non-GAAP results. For reconciliations of non-GAAP results to GAAP results, see the section titled "Non-GAAP Results" herein.
The 2023 period non-GAAP results exclude the income statement effects of stock-based compensation, excess payroll taxes related to stock-based compensation, amortization of acquired intangible assets, expenses related to business combinations and adjustments for the income tax effect of the excluded items. The 2022 period non-GAAP results also exclude the income statement effects of acquisition accounting adjustments to deferred revenue from business combinations closed prior to 2022. There is no adjustment in 2023 as the impact is not material.
Our GAAP and non-GAAP results for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 reflected the following growth rates:
| Three Months Ended March 31, 2023 | ||||||||||||||
| GAAP | Non-GAAP | |||||||||||||
| Revenue | 19.8 | % | 18.9 | % | ||||||||||
| Operating income | 57.3 | % | 36.6 | % | ||||||||||
| Diluted earnings per share | 42.0 | % | 36.0 | % | ||||||||||
Our strong results reflect an increase in revenue during the three months ended March 31, 2023 due to broad-based growth across all license types. We also experienced increased operating expenses during the three months ended March 31, 2023, primarily due to increased personnel costs. Additionally, the actual U.S. Dollar reported results were negatively impacted by a stronger U.S. Dollar.
This section also includes a discussion of constant currency results, which we use for financial and operational decision-making and as a means to evaluate period-to-period comparisons by excluding the effects of foreign currency fluctuations on the reported results. All constant currency results presented in this Item 2 exclude the effects of foreign currency fluctuations on the reported results. To present this information, the 2023 period results for entities whose functional currency is a currency other than the U.S. Dollar were converted to U.S. Dollars at rates that were in effect for the 2022 comparable period, rather than the actual exchange rates in effect for the 2023 period. Constant currency growth rates are calculated by adjusting the 2023 period reported amounts by the 2023 period currency fluctuation impacts and comparing to the 2022 comparable period reported amounts.
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Impact of Foreign Currency
Our comparative financial results were impacted by fluctuations in the U.S. Dollar during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. The impacts on our revenue and operating income as a result of the fluctuations of the U.S. Dollar when measured against our foreign currencies based on 2022 period exchange rates are reflected in the table below. Amounts in brackets indicate an adverse impact from currency fluctuations.
| Three Months Ended March 31, 2023 | ||||||||||||||
| (in thousands) | GAAP | Non-GAAP | ||||||||||||
| Revenue | $ | (13,891) | $ | (13,891) | ||||||||||
| Operating income | $ | (3,903) | $ | (4,392) | ||||||||||
In constant currency, our growth was as follows:
| Three Months Ended March 31, 2023 | ||||||||||||||
| GAAP | Non-GAAP | |||||||||||||
| Revenue | 23.1 | % | 22.1 | % | ||||||||||
| Operating income | 62.1 | % | 39.6 | % | ||||||||||
Other Key Business Metric
Annual Contract Value (ACV) is a key performance metric and is useful to investors in assessing the strength and trajectory of our business. ACV is a supplemental metric to help evaluate the annual performance of the business. Over the life of the contract, ACV equals the total value realized from a customer. ACV is not impacted by the timing of license revenue recognition. ACV is used by management in financial and operational decision-making and in setting sales targets used for compensation. ACV is not a replacement for, and should be viewed independently of, GAAP revenue and deferred revenue as ACV is a performance metric and is not intended to be combined with any of these items. There is no GAAP measure comparable to ACV. ACV is composed of the following:
•the annualized value of maintenance and subscription lease contracts with start dates or anniversary dates during the period, plus
•the value of perpetual license contracts with start dates during the period, plus
•the annualized value of fixed-term services contracts with start dates or anniversary dates during the period, plus
•the value of work performed during the period on fixed-deliverable services contracts.
When we refer to the anniversary dates in the definition of ACV above, we are referencing the date of the beginning of the next twelve-month period in a contractually committed multi-year contract. If a contract is three years in duration, with a start date of July 1, 2023, the anniversary dates would be July 1, 2024 and July 1, 2025. We label these anniversary dates as they are contractually committed. While this contract would be up for renewal on July 1, 2026, our ACV performance metric does not assume any contract renewals.
Example 1: For purposes of calculating ACV, a $100,000 subscription lease contract or a $100,000 maintenance contract with a term of July 1, 2023 – June 30, 2024, would each contribute $100,000 to ACV for fiscal year 2023 with no contribution to ACV for fiscal year 2024.
Example 2: For purposes of calculating ACV, a $300,000 subscription lease contract or a $300,000 maintenance contract with a term of July 1, 2023 – June 30, 2026, would each contribute $100,000 to ACV in each of fiscal years 2023, 2024 and 2025. There would be no contribution to ACV for fiscal year 2026 as each period captures the full annual value upon the anniversary date.
Example 3: A perpetual license valued at $200,000 with a contract start date of March 1, 2023 would contribute $200,000 to ACV in fiscal year 2023.
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Our ACV was as follows:
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||||||||||
| Actual | Constant Currency | Actual | Actual | Constant Currency | |||||||||||||||||||||||||||||||||||||
| Amount | Amount | % | Amount | % | |||||||||||||||||||||||||||||||||||||
| ACV | $ | 399,407 | $ | 411,001 | $ | 344,145 | $ | 55,262 | 16.1 | % | $ | 66,856 | 19.4 | ||||||||||||||||||||||||||||
Our trailing twelve-month recurring ACV, converted from the functional currency to U.S. Dollars at the 2022 period monthly average exchange rates, was as follows:
Twelve Months Ended March 31, | Change | ||||||||||||||||||||||
| (in thousands, except percentages) | 2023 | 2022 | Amount | % | |||||||||||||||||||
| Recurring ACV at 2022 monthly average exchange rates | $ | 1,713,249 | $ | 1,457,904 | $ | 255,345 | 17.5 | ||||||||||||||||
Recurring ACV includes both subscription lease license and maintenance ACV and excludes perpetual license and service ACV.
Industry Commentary:
High-tech, aerospace & defense (A&D) and automotive continue to be our leading industries in 2023 as our value proposition remains highly attractive as companies seek to produce more competitive products while increasing the productivity and efficiency of engineering resources. Customers are heightening their focus on artificial intelligence and machine learning, driving growth in the high-tech industry. Mobile communications, automotive applications and three-di