SUBSCRIBE TO TMCnet
TMCnet - World's Largest Communications and Technology Community

TMCNet:  ANSYS INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[February 27, 2014]

ANSYS INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) Overview ANSYS, Inc.'s results for the year ended December 31, 2013 reflect growth in revenues of 7.9%, operating income of 9.4% and diluted earnings per share of 20.6% as compared to the year ended December 31, 2012. The Company experienced higher revenues in 2013 from growth in both license and maintenance revenue, and from the acquisition of Esterel in 2012. The 2013 results of operations include a full year of Esterel results, as compared to five months of activity in 2012.


The growth in revenue was adversely impacted by the overall strengthening of the U.S. Dollar against the Company's primary foreign currencies, primarily the Japanese Yen. The net overall strengthening resulted in decreased revenue and operating income of $17.6 million and $12.2 million, respectively, for the year ended December 31, 2013 as compared to the year ended December 31, 2012. The operating results were also impacted by an increase in Esterel operating expenses, excluding amortization, of $8.9 million associated with a full year of activity in the current year as compared to five months of activity in the prior year.

The Company's non-GAAP results for the year ended December 31, 2013 reflect increases in revenue of 7.2%, operating income of 4.6% and diluted earnings per share of 12.4% as compared to the year ended December 31, 2012. The non-GAAP results exclude the income statement effects of the acquisition accounting adjustment to deferred revenue, stock-based compensation, acquisition-related amortization of intangible assets and transaction costs related to business combinations. For further disclosure regarding non-GAAP results, see the section titled "Non-GAAP Results" immediately preceding the section titled "Liquidity and Capital Resources".

In December 2013, the Company received a notice from the Internal Revenue Service ("IRS") that the Joint Committee on Taxation took no exception to the Company's tax returns that were filed for 2009 and 2010. As the Company has effectively settled uncertainty regarding the realization of refund claims filed in connection with the 2009 and 2010 returns, an $11.0 million tax benefit was recognized in the Company's 2013 financial results.

During the year ended December 31, 2013, the Company repurchased 1.5 million shares of treasury stock for $116.1 million at an average price of $77.73 per share. The Company's financial position includes $743.0 million in cash and short-term investments, and working capital of $627.2 million as of December 31, 2013. The Company paid off the outstanding balance of its term loan at maturity on July 31, 2013.

ANSYS develops and globally markets engineering simulation software and services widely used by engineers, designers, researchers and students across a broad spectrum of industries and academia, including aerospace, automotive, manufacturing, electronics, biomedical, energy and defense. Headquartered south of Pittsburgh, Pennsylvania, the Company and its subsidiaries employed approximately 2,600 people as of December 31, 2013 and focus on the development of open and flexible solutions that enable users to analyze designs directly on the desktop, providing a common platform for fast, efficient and cost-conscious product development, from design concept to final-stage testing and validation.

The Company distributes its ANSYS suite of simulation technologies through a global network of independent channel partners and direct sales offices in strategic, global locations. It is the Company's intention to continue to maintain this hybrid sales and distribution model.

The Company licenses its technology to businesses, educational institutions and governmental agencies. Growth in the Company's revenue is affected by the strength of global economies, general business conditions, currency exchange rate fluctuations, customer budgetary constraints and the competitive position of the Company's products. Please see the sub-sections entitled "Global Economic Conditions," "Decline in Customers' Business," "Risks Associated with International Activities," "Rapidly Changing Technology; New Products; Risk of Product Defects" and "Competition" under Item 1A. Risk Factors for a complete discussion of how these factors might impact the Company's financial condition and operating results. The Company believes that the features, functionality and integrated multiphysics capabilities of its software products are as strong as they have ever been. However, the software business is generally characterized by long sales cycles. These long sales cycles increase the difficulty of predicting sales for any particular quarter. The Company makes many operational and strategic decisions based upon short- and long-term sales forecasts that are impacted not only by these long sales cycles but by current global economic conditions. As a result, the Company believes that its overall performance is best measured by fiscal year results rather than by quarterly results. Please see the sub-section entitled "Sales Forecasts" under Item 1A. Risk Factors for a complete discussion of the potential impact of the Company's sales forecasts on the Company's financial condition, cash flows and operating results.

The Company's management considers the competition and price pressure that it faces in the short- and long-term by focusing on expanding the breadth, depth, ease of use and quality of the technologies, features, functionality and integrated multiphysics capabilities of its software products as compared to its competitors; investing in research and development to develop new and innovative products and increase the capabilities of its existing products; supplying new products and services; focusing on 22-------------------------------------------------------------------------------- Table of Contents customer needs, training, consulting and support; and enhancing its distribution channels. From time to time, the Company also considers acquisitions to supplement its global engineering talent, product offerings and distribution channels.

Geographic Trends In North America, while the Company continued to experience customer caution in certain markets, the aerospace and defense, automotive electronics, mobile electronics, and petrochemical sectors continued to make investments in 2013.

This resulted in consistent and strong revenue growth for the region in 2013.

The sales pipelines and customer engagement activities in North America remain strong.

Despite ongoing macroeconomic concerns throughout 2013, the overall sales pipeline, customer renewal rates and customer engagements in Europe remained intact. Revenue growth in Germany was particularly strong for the year, with the region also benefiting from increased business in Italy, Spain and Russia.

The Company's 2013 results for the General International Area, which includes all geographies other than North America and Europe, were mixed across the different markets. Overall, the region showed the weakest growth for the year. While the Company continued to experience strong growth in South Korea, it was offset by relative weakness in Japan, China, India and Brazil. In support of the Company's sales improvement initiatives, new senior sales leadership was added for the overall region, as well as new leadership additions in Japan and India.

Note About Forward-Looking Statements The following discussion should be read in conjunction with the audited consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to fair value of stock, bad debts, contract revenue, valuation of goodwill, valuation of intangible assets, income taxes, and contingencies and litigation. The Company bases its estimates on historical experience, market experience, estimated future cash flows and on various other assumptions that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, but not limited to, the following statements, as well as statements that contain such words as "anticipates," "intends," "believes," "plans" and other similar expressions: • The Company's expectation that it will continue to make targeted investments in its global sales and marketing organization and its global business infrastructure to enhance major account sales activities and to support its worldwide sales distribution and marketing strategies, and the business in general.

• The Company's intentions related to investments in research and development, particularly as it relates to expanding the capabilities of its flagship products and other products within its broad portfolio of simulation software, evolution of its ANSYS Workbench platform, expanding its HPC capabilities, robust design and ongoing integration.

• The Company's plans related to future capital spending.

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

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

• The Company's assessment of the ultimate liabilities arising from various investigations, claims and legal proceedings.

• The Company's statement regarding the strength of the features, functionality and integrated multiphysics capabilities of its software products.

• The Company's assessment of its ability to realize deferred tax assets.

• The Company's expectation that it can renew existing leases as they expire, or find alternative facilities without difficulty as needed.

23-------------------------------------------------------------------------------- Table of Contents • The Company's expectations regarding future claims related to indemnification obligations.

• The Company's statements regarding the impact of global economic conditions.

• The Company's statement regarding increased exposure to volatility of foreign exchange rates.

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

• The Company's estimates regarding the expected impact on reported revenue related to the acquisition accounting treatment of deferred revenue.

• The Company's assumption that all remaining payments will be made for deferred compensation related to the Apache acquisition and contingent consideration related to both the Apache and EVEN acquisitions.

• The Company's expectation that the combination of ANSYS's CFD solutions with Reaction Design's chemistry solvers will provide the best-in-class combustion simulation tools available on the market.

• The Company's expectations regarding the outcome of its service tax audit case.

• The Company's estimates regarding total compensation expense associated with granted stock-based awards for future years.

• The Company's estimates regarding a tax benefit due to planned repatriation of cash from a foreign subsidiary.

Forward-looking statements should not be unduly relied upon because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the Company's control. The Company's actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause such a difference include risks and uncertainties detailed in Item 1A. Risk Factors.

Acquisitions Date of closing Company Details January 3, 2014 Reaction Design Reaction Design, a leading developer of chemistry simulation software, was acquired for approximately $19 million. The combination of ANSYS's computational fluid dynamics ("CFD") solutions with Reaction Design's chemistry solvers is expected to provide the best-in-class combustion simulation tools available on the market.

April 2, 2013 EVEN - EVEN, a leading provider of composite analysis and Evolutionary optimization technology relying on cloud Engineering AG computing, was acquired for $8.1 million. The acquisition strengthens the Company's simulation solutions for composites technology, which has become a standard in manufacturing in a wide range of industries due to its combination of light weight, high strength and outstanding flexibility.August 1, 2012 Esterel Esterel, a leading provider of embedded software Technologies, simulation solutions for mission critical S.A. applications, was acquired for $58.2 million.

Esterel's software enables software and systems engineers to design, simulate and automatically produce certified embedded software, which is the control code built into the electronics in aircraft, rail transportation, automotive, energy systems, medical devices and other industrial products that have central processing units. The acquisition extends the Company's vision to encompass both hardware and software systems.

August 1, 2011 Apache Design, Apache, a leading simulation software provider for Inc. advanced, low-power solutions for electronics, was acquired for $314.0 million. Apache's software enables engineers to design power-efficient devices while satisfying ever-increasing performance requirements. The acquisition complements the Company's software solutions by bringing together best-in-class products that drive the Company's system vision for ICs, electronic packages and PCBs.

For further information on the Company's business combinations, see Note 3 to the consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

24-------------------------------------------------------------------------------- Table of Contents Results of Operations For purposes of the following discussion and analysis, the table below sets forth certain consolidated financial data for the years 2013, 2012 and 2011. The operating results of Esterel and Apache have been included in the results of operations since their respective acquisition dates of August 1, 2012 and 2011.

Year Ended December 31, (in thousands) 2013 2012 2011 Revenue: Software licenses $ 528,944 $ 501,870 $ 425,881 Maintenance and service 332,316 296,148 265,568 Total revenue 861,260 798,018 691,449 Cost of sales: Software licenses 28,363 24,512 15,884 Amortization 38,298 40,889 33,728 Maintenance and service 80,031 74,115 69,402 Total cost of sales 146,692 139,516 119,014 Gross profit 714,568 658,502 572,435 Operating expenses: Selling, general and administrative 218,907 205,178 180,357 Research and development 151,439 132,628 108,530 Amortization 22,359 26,443 17,989 Total operating expenses 392,705 364,249 306,876 Operating income 321,863 294,253 265,559 Interest expense (1,169 ) (2,661 ) (3,332 ) Interest income 2,841 3,360 3,000 Other expense, net (1,046 ) (1,405 ) (369 ) Income before income tax provision 322,489 293,547 264,858 Income tax provision 77,162 90,064 84,183 Net income $ 245,327 $ 203,483 $ 180,675 25-------------------------------------------------------------------------------- Table of Contents Year Ended December 31, 2013 Compared to Year Ended December 31, 2012 Revenue: Year Ended December 31, Change (in thousands, except percentages) 2013 2012 Amount % Revenue: Lease licenses $ 297,658 $ 279,283 $ 18,375 6.6 Perpetual licenses 231,286 222,587 8,699 3.9 Software licenses 528,944 501,870 27,074 5.4 Maintenance 309,085 275,498 33,587 12.2 Service 23,231 20,650 2,581 12.5 Maintenance and service 332,316 296,148 36,168 12.2 Total revenue $ 861,260 $ 798,018 $ 63,242 7.9 The Company's revenue increased 7.9% in 2013 as compared to 2012, including increases in all major revenue categories. The Company's revenue included Esterel operations for the full year in 2013 of $18.8 million as compared to five months in 2012 of $3.3 million. The growth was partially influenced by benefits from the Company's continued investment in its global sales and marketing organization. Annual maintenance contracts that were sold with new perpetual licenses, along with maintenance contracts sold with new perpetual licenses in previous years, contributed to maintenance revenue growth of 12.2%.

Revenue from lease licenses increased 6.6% as compared to the prior year due to an increase in Apache-related lease license revenue and growth in sales of other lease licenses. Perpetual license revenue, which is derived entirely from new sales during the period, increased 3.9% as compared to the prior year, due to increased perpetual license sales across most product lines, as well as a full year of Esterel activity in 2013 as compared to five months in 2012. Service revenue increased 12.5% as compared to the prior year due to an increase in engineering consulting projects.

With respect to revenue, on average for the year ended December 31, 2013, the U.S. Dollar was 4.0% stronger, when measured against the Company's primary foreign currencies, than for the year ended December 31, 2012. The net overall strengthening, primarily related to the Japanese Yen, resulted in decreased revenue and operating income during 2013, as compared to 2012, of $17.6 million and $12.2 million, respectively.

A substantial portion of the Company's license and maintenance revenue is derived from annual lease and maintenance contracts. These contracts are generally renewed on an annual basis and typically have a high rate of customer renewal. In addition to the recurring revenue base associated with these contracts, a majority of customers purchasing new perpetual licenses also purchase related annual maintenance contracts. As a result of the significant recurring revenue base, the Company's license and maintenance revenue growth rate in any period does not necessarily correlate to the growth rate of new license and maintenance contracts sold during that period. To the extent the rate of customer renewal for lease and maintenance contracts is high, incremental lease contracts, and maintenance contracts sold with new perpetual licenses, will result in license and maintenance revenue growth. Conversely, if the rate of renewal for these contracts is adversely affected by economic or other factors, the Company's license and maintenance growth will be adversely affected over the term that the revenue for those contracts would have otherwise been recognized.

International and domestic revenues, as a percentage of total revenue, were 66.1% and 33.9%, respectively, during the year ended December 31, 2013, and 66.7% and 33.3%, respectively, during the year ended December 31, 2012. The Company derived 25.3% and 26.0% of its total revenue through the indirect sales channel for the years ended December 31, 2013 and 2012, respectively.

In valuing deferred revenue on the Esterel and Apache balance sheets as of their respective acquisition dates, the Company applied the fair value provisions applicable to the accounting for business combinations, resulting in lower amounts of revenue than Esterel and Apache would have recognized absent the acquisitions. The impact on reported revenue for the year ended December 31, 2013 was $4.6 million. The expected impact on reported revenue is $0.4 million and $1.4 million for the quarter ending March 31, 2014 and the year ending December 31, 2014, respectively.

26-------------------------------------------------------------------------------- Table of Contents Cost of Sales and Gross Profit: Year Ended December 31, 2013 2012 Change (in thousands, except % of % of percentages) Amount Revenue Amount Revenue Amount % Cost of sales: Software licenses $ 28,363 3.3 $ 24,512 3.1 $ 3,851 15.7 Amortization 38,298 4.4 40,889 5.1 (2,591 ) (6.3 ) Maintenance and service 80,031 9.3 74,115 9.3 5,916 8.0 Total cost of sales 146,692 17.0 139,516 17.5 7,176 5.1 Gross profit $ 714,568 83.0 $ 658,502 82.5 $ 56,066 8.5 Software Licenses: The increase in software license costs was primarily due to the following: • Increased salaries and incentive compensation of $2.2 million.

• Increased third-party royalties of $0.9 million.

• Increased Esterel-related costs of $0.7 million, primarily as a result of a full year of Esterel activity in 2013 as compared to five months of activity in 2012.

Amortization: The decrease in amortization expense was primarily due to a net decrease in amortization of acquired technology.

Maintenance and Service: The increase in maintenance and service costs was primarily due to the following: • Increased salaries and headcount-related costs of $2.6 million.

• Increased third-party technical support of $1.4 million.

• Increased Esterel-related costs of $0.6 million, primarily as a result of a full year of Esterel activity in 2013 as compared to five months of activity in 2012.

• Increased depreciation expense of $0.5 million.

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

27-------------------------------------------------------------------------------- Table of Contents Operating Expenses: Year Ended December 31, 2013 2012 Change (in thousands, except % of % of percentages) Amount Revenue Amount Revenue Amount % Operating expenses: Selling, general and administrative $ 218,907 25.4 $ 205,178 25.7 $ 13,729 6.7 Research and development 151,439 17.6 132,628 16.6 18,811 14.2 Amortization 22,359 2.6 26,443 3.3 (4,084 ) (15.4 ) Total operating expenses $ 392,705 45.6 $ 364,249 45.6 $ 28,456 7.8 Selling, General and Administrative: The increase in selling, general and administrative costs was primarily due to the following: • Increased salaries of $4.9 million.

• Increased Esterel-related expenses of $4.5 million, primarily as a result of a full year of Esterel activity in 2013 as compared to five months of activity in 2012.

• Increased stock-based compensation of $1.6 million.

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

Research and Development: The increase in research and development costs was primarily due to the following: • Increased salaries, incentive compensation and other headcount related costs of $11.0 million.

• Increased Esterel-related expenses of $3.1 million, primarily as a result of a full year of Esterel activity in 2013 as compared to five months of activity in 2012.

• Increased facilities and IT-related maintenance costs of $1.7 million.

• Increased stock-based compensation of $1.4 million.

• EVEN-related research and development expenses of $1.4 million.

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

Amortization: The decrease in amortization expense was primarily due to a net decrease in amortization of acquired intangible assets, including contract backlog and customer lists.

Interest Expense: The Company's interest expense consists of the following: Year Ended December 31, (in thousands) 2013 2012 Discounted obligations $ 722 $ 546 Term loan 230 1,342 Amortization of debt financing costs 149 698 Other 68 75 Total interest expense $ 1,169 $ 2,661 Interest Income: Interest income for the year ended December 31, 2013 was $2.8 million as compared to $3.4 million during the year ended December 31, 2012.

Interest income decreased as a result of a decrease in the average rate of return on invested cash balances.

28-------------------------------------------------------------------------------- Table of Contents Other Expense, net: The Company recorded other expense of $1.0 million during the year ended December 31, 2013 as compared to $1.4 million during the year ended December 31, 2012. The activity for both years was primarily composed of net foreign currency transaction losses.

Income Tax Provision: The Company recorded income tax expense of $77.2 million and had income before income taxes of $322.5 million for the year ended December 31, 2013, representing an effective tax rate of 23.9%. During the year ended December 31, 2012, the Company recorded income tax expense of $90.1 million and had income before income taxes of $293.5 million, representing an effective tax rate of 30.7%.

In December 2013, the Company received notice from the IRS that the Joint Committee on Taxation took no exception to the Company's tax returns that were filed for 2009 and 2010. An $11.0 million tax benefit was recognized in the Company's 2013 financial results as the Company has effectively settled uncertainty regarding the realization of refund claims filed in connection with the 2009 and 2010 returns.

In the U.S., which is the largest jurisdiction where the Company receives such a tax credit, the availability of the research and development credit expired at the end of the 2011 tax year. In January 2013, the U.S. Congress passed legislation that reinstated the research and development credit retroactive to 2012. The income tax provision for the year ended December 31, 2013 includes approximately $2.3 million related to the reinstated research and development credit for 2012 activity. The 2014 research and development credit is currently not available unless legislation is passed by the U.S. Congress.

The decrease in the effective tax rate from the prior year is primarily due to the release of an uncertain tax position mentioned above, the reinstatement of the U.S. research and development credit mentioned above, and cash repatriation activities. When compared to the federal and state combined statutory rate, the effective tax rates for the years ended December 31, 2013 and 2012 were favorably impacted by lower statutory tax rates in many of the Company's foreign jurisdictions, the domestic manufacturing deduction and tax benefits associated with the merger of the Company's Japan subsidiaries in 2010.

Net Income: The Company's net income for the year ended December 31, 2013 was $245.3 million as compared to net income of $203.5 million for the year ended December 31, 2012. Diluted earnings per share was $2.58 for the year ended December 31, 2013 and $2.14 for the year ended December 31, 2012. The weighted average shares used in computing diluted earnings per share were 95.1 million and 95.0 million for the years ended December 31, 2013 and 2012, respectively.

29-------------------------------------------------------------------------------- Table of Contents Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Revenue: Year Ended December 31, Change (in thousands, except percentages) 2012 2011 Amount % Revenue: Lease licenses $ 279,283 $ 218,005 $ 61,278 28.1 Perpetual licenses 222,587 207,876 14,711 7.1 Software licenses 501,870 425,881 75,989 17.8 Maintenance 275,498 246,546 28,952 11.7 Service 20,650 19,022 1,628 8.6 Maintenance and service 296,148 265,568 30,580 11.5 Total revenue $ 798,018 $ 691,449 $ 106,569 15.4 The Company's revenue increased 15.4% in 2012 as compared to 2011, including increases in all major revenue categories. The Company's revenue included Apache operations for the full year in 2012 of $62.0 million as compared to five months in 2011 of $14.5 million. The growth was partially influenced by benefits from the Company's continued investment in its global sales and marketing organization. Revenue from lease licenses increased 28.1% as compared to the prior year due to an increase in Apache-related lease license revenue and growth in sales of other lease licenses. Annual maintenance contracts that were sold with new perpetual licenses, along with maintenance contracts sold with new perpetual licenses in previous years, contributed to maintenance revenue growth of 11.7%. Perpetual license revenue, which is derived entirely from new sales during the period, increased 7.1% as compared to the prior year. Esterel-related revenue for the period from the acquisition date (August 1, 2012) through December 31, 2012 was $3.3 million. Service revenue increased 8.6% as compared to the prior year, primarily from increased revenue associated with engineering consulting services.

With respect to revenue, on average for the year ended December 31, 2012, the U.S. Dollar was 3.7% stronger, when measured against the Company's primary foreign currencies, than for the year ended December 31, 2011. The net overall strengthening of the U.S. Dollar resulted in decreased revenue and operating income during 2012, as compared to 2011, of $15.4 million and $7.4 million, respectively.

International and domestic revenues, as a percentage of total revenue, were 66.7% and 33.3%, respectively, during the year ended December 31, 2012, and 68.8% and 31.2%, respectively, during the year ended December 31, 2011. The Company derived 26.0% and 26.4% of its total revenue through the indirect sales channel for the years ended December 31, 2012 and 2011, respectively.

In valuing deferred revenue on the Esterel and Apache balance sheets as of their respective acquisition dates, the Company applied the fair value provisions applicable to the accounting for business combinations, resulting in lower amounts of revenue than Esterel and Apache would have recognized absent the acquisitions. The impact on reported revenue for the year ended December 31, 2012 was $9.6 million.

30-------------------------------------------------------------------------------- Table of Contents Cost of Sales and Gross Profit: Year Ended December 31, 2012 2011 Change (in thousands, except % of % of percentages) Amount Revenue Amount Revenue Amount % Cost of sales: Software licenses $ 24,512 3.1 $ 15,884 2.3 $ 8,628 54.3 Amortization 40,889 5.1 33,728 4.9 7,161 21.2 Maintenance and service 74,115 9.3 69,402 10.0 4,713 6.8 Total cost of sales 139,516 17.5 119,014 17.2 20,502 17.2 Gross profit $ 658,502 82.5 $ 572,435 82.8 $ 86,067 15.0 Software Licenses: The increase in software license costs was primarily due to the following: • Increased Apache-related costs of $7.3 million, primarily as a result of a full year of Apache activity in 2012 as compared to five months of activity in 2011.

• A $900,000 increase in stock-based compensation.

• Esterel-related cost of sales of $600,000.

Amortization: The increase in amortization expense was primarily due to the following: • An additional $9.5 million of amortization of acquired Apache software as a result of a full year of Apache activity in 2012 as compared to five months of activity in 2011.

• A net $2.8 million decrease in amortization of other acquired software.

Maintenance and Service: The increase in maintenance and service costs was primarily due to the following: • Increased salaries and headcount-related costs of $2.3 million.

• Increased depreciation expense of $700,000.

• Esterel-related maintenance and service expenses of $600,000.

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

31-------------------------------------------------------------------------------- Table of Contents Operating Expenses: Year Ended December 31, 2012 2011 Change (in thousands, except % of % of percentages) Amount Revenue Amount Revenue Amount % Operating expenses: Selling, general and administrative $ 205,178 25.7 $ 180,357 26.1 $ 24,821 13.8 Research and development 132,628 16.6 108,530 15.7 24,098 22.2 Amortization 26,443 3.3 17,989 2.6 8,454 47.0 Total operating expenses $ 364,249 45.6 $ 306,876 44.4 $ 57,373 18.7 Selling, General and Administrative: The increase in selling, general and administrative costs was primarily due to the following: • Increased salaries and headcount-related costs of $9.6 million.

• Increased Apache-related expenses of $6.2 million, primarily as a result of a full year of Apache activity in 2012 as compared to five months of activity in 2011.

• Esterel-related selling, general and administrative expenses of $5.5 million.

• Increased stock-based compensation of $2.8 million.

Research and Development: The increase in research and development costs was primarily due to the following: • Increased Apache-related expenses of $9.2 million, primarily as a result of a full year of Apache activity in 2012 as compared to five months of activity in 2011.

• Increased salaries and headcount-related costs of $6.6 million.

• Increased stock-based compensation of $5.3 million.

• Increased depreciation expense of $1.5 million.

• Esterel-related research and development expenses of $1.4 million.

• Decreased incentive compensation of $1.7 million.

Amortization: The increase in amortization expense was primarily due to the following: • An additional $9.1 million of amortization of acquired Apache intangible assets, including customer lists, contract backlog and a trade name, as a result of a full year of Apache activity in 2012 as compared to five months of activity in 2011.

• A net $500,000 decrease in amortization of other acquired customer lists, including Esterel.

Interest Expense: The Company's interest expense consisted of the following: Year Ended December 31, (in thousands) 2012 2011 Term loan $ 1,342 $ 1,605 Amortization of debt financing costs 698 953 Discounted obligations 546 462 Other 75 312 Total interest expense $ 2,661 $ 3,332 Interest Income: Interest income for the year ended December 31, 2012 was $3.4 million as compared to $3.0 million during the year ended December 31, 2011.

Interest income increased as a result of both an increase in the average cash balances and the rate of return on those balances.

32-------------------------------------------------------------------------------- Table of Contents Other Expense, net: The Company recorded other expense of $1.4 million during the year ended December 31, 2012 as compared to $0.4 million during the year ended December 31, 2011. The activity for both years was primarily composed of net foreign currency transaction losses.

Income Tax Provision: The Company recorded income tax expense of $90.1 million and had income before income taxes of $293.5 million for the year ended December 31, 2012, representing an effective tax rate of 30.7%. During the year ended December 31, 2011, the Company recorded income tax expense of $84.2 million and had income before income taxes of $264.9 million, representing an effective tax rate of 31.8%.

Net Income: The Company's net income for the year ended December 31, 2012 was $203.5 million as compared to net income of $180.7 million for the year ended December 31, 2011. Diluted earnings per share was $2.14 for the year ended December 31, 2012 and $1.91 for the year ended December 31, 2011. The weighted average shares used in computing diluted earnings per share were 95.0 million and 94.4 million for the years ended December 31, 2012 and 2011, respectively.

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

Year Ended December 31, 2013 2012 (in thousands, except percentages and per As Non-GAAP As Non-GAAP share data) Reported Adjustments Results Reported Adjustments Results Total revenue $ 861,260 $ 4,632 (1) $ 865,892 $ 798,018 $ 9,636 (4) $ 807,654 Operating income 321,863 101,232 (2) 423,095 294,253 110,290 (5) 404,543 Operating profit margin 37.4 % 48.9 % 36.9 % 50.1 % Net income $ 245,327 $ 66,197 (3) $ 311,524 $ 203,483 $ 73,304 (6) $ 276,787 Earnings per share - diluted: Diluted earnings per share $ 2.58 $ 3.27 $ 2.14 $ 2.91 Weighted average shares - diluted 95,139 95,139 94,954 94,954 (1) Amount represents the revenue not reported during the period as a result of the acquisition accounting adjustment associated with accounting for deferred revenue in business combinations.

(2) Amount represents $60.7 million of amortization expense associated with intangible assets acquired in business combinations, $35.3 million of stock-based compensation expense, the $4.6 million adjustment to revenue as reflected in (1) above and $0.6 million of transaction expenses related to business combinations.

(3) Amount represents the impact of the adjustments to operating income referred to in (2) above, adjusted for the related income tax impact of $35.0 million.

(4) Amount represents the revenue not reported during the period as a result of the acquisition accounting adjustment associated with accounting for deferred revenue in business combinations.

(5) Amount represents $67.3 million of amortization expense associated with intangible assets acquired in business combinations, $32.4 million of stock-based compensation expense, the $9.6 million adjustment to revenue as reflected in (4) above and $0.9 million of transaction expenses related to the Esterel acquisition.

(6) Amount represents the impact of the adjustments to operating income referred to in (5) above, adjusted for the related income tax impact of $37.0 million.

Note: The 2013 GAAP and non-GAAP net income and earnings per share data reflected above include $11.0 million of incremental tax benefit, or $0.12 per diluted share, related to the notification received from the IRS that the Joint Committee on Taxation took no exception to the Company's tax returns that were filed for 2009 and 2010, thus effectively settling the uncertainty regarding refund claims filed in connection with these returns.

34-------------------------------------------------------------------------------- Table of Contents Year Ended December 31, 2012 2011 (in thousands, except percentages and per As Non-GAAP As Non-GAAP share data) Reported Adjustments Results Reported Adjustments Results Total revenue $ 798,018 $ 9,636 (1) $ 807,654 $ 691,449 $ 9,621 (4) $ 701,070 Operating income 294,253 110,290 (2) 404,543 265,559 86,550 (5) 352,109 Operating profit margin 36.9 % 50.1 % 38.4 % 50.2 % Net income $ 203,483 $ 73,304 (3) $ 276,787 $ 180,675 $ 58,301 (6) $ 238,976 Earnings per share - diluted: Diluted earnings per share $ 2.14 $ 2.91 $ 1.91 $ 2.53 Weighted average shares - diluted 94,954 94,954 94,381 94,381 (1) Amount represents the revenue not reported during the period as a result of the acquisition accounting adjustment associated with accounting for deferred revenue in business combinations.

(2) Amount represents $67.3 million of amortization expense associated with intangible assets acquired in business combinations, $32.4 million of stock-based compensation expense, the $9.6 million adjustment to revenue as reflected in (1) above and $0.9 million of transaction expenses related to the Esterel acquisition.

(3) Amount represents the impact of the adjustments to operating income referred to in (2) above, adjusted for the related income tax impact of $37.0 million.

(4) Amount represents the revenue not reported during the period as a result of the acquisition accounting adjustment associated with accounting for deferred revenue in business combinations.

(5) Amount represents $51.7 million of amortization expense associated with intangible assets acquired in business combinations, $23.1 million of stock-based compensation expense, the $9.6 million adjustment to revenue as reflected in (4) above and $2.1 million of transaction expenses related to the Apache acquisition.

(6) Amount represents the impact of the adjustments to operating income referred to in (5) above, adjusted for the related income tax impact of $28.2 million.

Note: The 2011 GAAP and non-GAAP net income and earnings per share data reflected above include $4.8 million, or $0.05 per diluted share, related to income tax expense associated with reductions to the Japanese corporate tax rate, beginning with the 2013 tax year. This legislation, enacted on November 30, 2011, resulted in an additional $4.8 million in deferred tax expense due to the reduction in the value of certain net deferred tax assets of the Company's Japanese subsidiaries.

Non-GAAP Measures Management uses non-GAAP financial measures (a) to evaluate the Company's historical and prospective financial performance as well as its performance relative to its competitors, (b) to set internal sales targets and spending budgets, (c) to allocate resources, (d) to measure operational profitability and the accuracy of forecasting, (e) to assess financial discipline over operational expenditures and (f) as an important factor in determining variable compensation for management and its employees. In addition, many financial analysts that follow the Company focus on and publish both historical results and future projections based on non-GAAP financial measures. The Company believes that it is in the best interest of its investors to provide this information to analysts so that they accurately report the non-GAAP financial information. Moreover, investors have historically requested and the Company has historically reported these non-GAAP financial measures as a means of providing consistent and comparable information with past reports of financial results.

While management believes that these non-GAAP financial measures provide useful supplemental information to investors, there are limitations associated with the use of these non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with GAAP, are not reported by all of the Company's competitors and may not be directly comparable to similarly titled measures of the Company's competitors due to potential differences in the exact method of calculation. The Company compensates for these limitations by using these non-GAAP financial measures as supplements to GAAP financial measures and by reviewing the reconciliations of the non-GAAP financial measures to their most comparable GAAP financial measures.

35-------------------------------------------------------------------------------- Table of Contents The adjustments to these non-GAAP financial measures, and the basis for such adjustments, are outlined below: Acquisition accounting for deferred revenue and its related tax impact. Historically, the Company has consummated acquisitions in order to support its strategic and other business objectives. In accordance with the fair value provisions applicable to the accounting for business combinations, acquired deferred revenue is often recorded on the opening balance sheet at an amount that is lower than the historical carrying value. Although this purchase accounting requirement has no impact on the Company's business or cash flow, it adversely impacts the Company's reported GAAP revenue in the reporting periods following an acquisition. In order to provide investors with financial information that facilitates comparison of both historical and future results, the Company provides non-GAAP financial measures which exclude the impact of the acquisition accounting adjustment. The Company believes that this non-GAAP financial adjustment is useful to investors because it allows investors to (a) evaluate the effectiveness of the methodology and information used by management in its financial and operational decision-making, and (b) compare past and future reports of financial results of the Company as the revenue reduction related to acquired deferred revenue will not recur when related annual lease licenses and software maintenance contracts are renewed in future periods.

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

Stock-based compensation expense and its related tax impact. The Company incurs expense related to stock-based compensation included in its GAAP presentation of cost of software licenses; cost of maintenance and service; research and development expense and selling, general and administrative expense. Although stock-based compensation is an expense of the Company and viewed as a form of compensation, management excludes these expenses for the purpose of calculating non-GAAP operating income, non-GAAP operating profit margin, non-GAAP net income and non-GAAP diluted earnings per share when it evaluates the continuing operational performance of the Company. Specifically, the Company excludes stock-based compensation during its annual budgeting process and its quarterly and annual assessments of the Company's and management's performance. The annual budgeting process is the primary mechanism whereby the Company allocates resources to various initiatives and operational requirements. Additionally, the annual review by the board of directors during which it compares the Company's historical business model and profitability to the planned business model and profitability for the forthcoming year excludes the impact of stock-based compensation. In evaluating the performance of senior management and department managers, charges related to stock-based compensation are excluded from expenditure and profitability results. In fact, the Company records stock-based compensation expense into a stand-alone cost center for which no single operational manager is responsible or accountable. In this way, management is able to review, on a period-to-period basis, each manager's performance and assess financial discipline over operational expenditures without the effect of stock-based compensation. The Company believes that these non-GAAP financial measures are useful to investors because they allow investors to (a) evaluate the Company's operating results and the effectiveness of the methodology used by management to review the Company's operating results, and (b) review historical comparability in the Company's financial reporting as well as comparability with competitors' operating results.

Transaction costs related to business combinations. The Company incurs expenses for professional services rendered in connection with business combinations, which are included in its GAAP presentation of selling, general and administrative expense. These expenses are generally not tax deductible.

Management excludes these acquisition-related transaction expenses for the purpose of calculating non-GAAP operating income, non-GAAP operating profit margin, non-GAAP net income and non-GAAP diluted earnings per share when it evaluates the continuing operational performance of the Company, as it generally would not have otherwise incurred these expenses in the periods presented as a part of its continuing operations. The Company believes that these non-GAAP financial measures are useful to investors because they allow investors to (a) evaluate the Company's operating results and the effectiveness of the methodology used by management to review the Company's operating results, and (b) review historical comparability in the Company's financial reporting as well as comparability with competitors' operating results.

36-------------------------------------------------------------------------------- Table of Contents Non-GAAP financial measures are not in accordance with, or an alternative for, GAAP. The Company's non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP financial measures, and should be read only in conjunction with the Company's consolidated financial statements prepared in accordance with GAAP.

The Company has provided a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures as listed below: GAAP Reporting Measure Non-GAAP Reporting Measure Revenue Non-GAAP Revenue Operating Income Non-GAAP Operating Income Operating Profit Margin Non-GAAP Operating Profit Margin Net Income Non-GAAP Net IncomeDiluted Earnings Per Share Non-GAAP Diluted Earnings Per Share 37-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources As of December 31, Change (in thousands) 2013 2012 2013 vs. 2012 Cash, cash equivalents and short-term investments $ 742,986 $ 577,155 $ 165,831 Working capital $ 627,165 $ 435,972 $ 191,193 Cash, cash equivalents and short-term investments Cash and cash equivalents consist primarily of highly liquid investments such as money market mutual funds and deposits held at major banks. Short-term investments consist primarily of deposits held by certain foreign subsidiaries of the Company with original maturities of three months to one year. The following table presents the Company's foreign and domestic holdings of cash, cash equivalents and short-term investments: As of December 31, (in thousands) 2013 % of Total 2012 % of Total Cash, cash equivalents and short-term investments held domestically $ 530,680 71.4 % $ 399,295 69.2 % Cash, cash equivalents and short-term investments held by foreign subsidiaries 212,306 28.6 % 177,860 30.8 % Total $ 742,986 $ 577,155 If the foreign balances were repatriated to the U.S., they would be subject to domestic tax, resulting in a tax obligation in the period of repatriation. In general, it is the practice and intention of the Company to repatriate previously taxed earnings and to reinvest all other earnings of its non-U.S.

subsidiaries. The amount of cash, cash equivalents and short-term investments held by foreign subsidiaries is subject to translation adjustments caused by changes in foreign currency exchange rates as of the end of each respective reporting period, the offset to which is recorded in accumulated other comprehensive income on the Company's consolidated balance sheet.

Working capital The increase in working capital is due primarily to the increase in cash, cash equivalents and short-term investments realized through cash flows from operations.

Cash Flows from Operating Activities Year Ended December 31, Change (in thousands) 2013 2012 2011 2013 vs. 2012 2012 vs. 2011 Net cash provided by operating activities $ 332,983 $ 298,415 $ 307,661 $ 34,568 $ (9,246 ) Fiscal year 2013 as compared to fiscal year 2012 Cash flows from operations increased during the current fiscal year due to increased net income (net of non-cash operating adjustments) of $39.3 million and decreased net cash flows from operating assets and liabilities of $4.8 million.

Fiscal year 2012 as compared to fiscal year 2011 Cash flows from operations decreased during the prior fiscal year due to decreased net cash flows from operating assets and liabilities of $41.6 million and increased net income (net of non-cash operating adjustments) of $32.3 million.

38-------------------------------------------------------------------------------- Table of Contents Cash Flows from Investing Activities Year Ended December 31, Change (in thousands) 2013 2012 2011 2013 vs. 2012 2012 vs. 2011 Net cash used in investing activities $ (33,177 ) $ (68,956 ) $ (291,643 ) $ 35,779 $ 222,687 Fiscal year 2013 as compared to fiscal year 2012 Cash used in investing activities decreased during the current fiscal year due primarily to decreased acquisition-related cash outlays of $40.9 million and increased capital spending of $4.9 million. The Company currently plans capital spending of $35 million to $45 million during fiscal year 2014 as compared to $28.8 million in the current fiscal year. The planned increase is attributable to costs associated with the Company's new Canonsburg, Pennsylvania headquarters facility expected to be completed in late 2014. The Company has occupied its current headquarters facility since 1997. The level of spending will be dependent upon various factors, including growth of the business and general economic conditions.

Fiscal year 2012 as compared to fiscal year 2011 Cash used in investing activities decreased during the prior fiscal year due primarily to decreased acquisition-related cash outlays of $224.4 million.

Cash Flows from Financing Activities: Year Ended December 31, Change (in thousands) 2013 2012 2011 2013 vs. 2012 2012 vs. 2011 Net cash used in financing activities $ (129,759 ) $ (124,846 ) $ (9,676 ) $ (4,913 ) $ (115,170 ) Fiscal year 2013 as compared to fiscal year 2012 Cash used in financing activities increased during the current fiscal year due primarily to increased treasury stock repurchases of $20.7 million, decreased excess tax benefits from stock option exercises of $3.9 million, restricted stock withholding taxes paid in lieu of issued shares of $4.3 million, partially offset by decreased principal payments on long-term debt of $21.3 million.

Under the Company's stock repurchase program, the Company repurchased 1.5 million shares during the year ended December 31, 2013 at an average price per share of $77.73, for a total cost of $116.1 million. As of December 31, 2013, 1.5 million shares remain authorized for repurchase under the Company's stock repurchase program. The Company paid the outstanding balance of its term loan at maturity on July 31, 2013.

Fiscal year 2012 as compared to fiscal year 2011 Cash used in financing activities decreased during the prior fiscal year due primarily to increased treasury stock repurchases of $82.8 million, an increase in principal payments on long-term debt of $42.5 million and increased proceeds from the exercise of stock options of $9.2 million.

During the year ended December 31, 2012, the Company repurchased 1.5 million shares at an average price per share of $63.65, for a total cost of $95.5 million.

On January 3, 2014, the Company completed the acquisition of Reaction Design, a leading developer of chemistry simulation software, for a purchase price of approximately $19 million. The operating results of Reaction Design will be included in the Company's consolidated financial statements from the date of acquisition and, accordingly, Reaction Design's operating results are not included in the financial results presented in this annual report on Form 10-K.

The Company believes that existing cash and cash equivalent balances of $742.5 million, together with cash generated from operations, will be sufficient to meet the Company's working capital and capital expenditure requirements through the next twelve months. The Company's cash requirements in the future may also be financed through additional equity or debt financings. There can be no assurance that such financings can be obtained on favorable terms, if at all.

39-------------------------------------------------------------------------------- Table of Contents The Company continues to generate positive cash flows from operating activities and believes that the best use of its excess cash is to invest in the business and, to repurchase stock in order to offset dilution and to return capital to stockholders in excess of our requirements with the goal of increasing stockholder value. Additionally, the Company has in the past, and expects in the future, to acquire or make investments in complementary companies, products, services and technologies. Any future acquisitions may be funded by available cash and investments, cash generated from operations, credit facilities, or from the issuance of additional securities.

Off-Balance Sheet Arrangements The Company does not have any special purpose entities or off-balance sheet financing.

40-------------------------------------------------------------------------------- Table of Contents Contractual Obligations The Company's significant contractual obligations as of December 31, 2013 are summarized below: Payments Due by Period (in thousands) Total Within 1 year 2 - 3 years 4 - 5 years After 5 years Global headquarters operating leases(1) $ 68,389 $ 1,429 $ 8,556 $ 8,556 $ 49,848 Other operating leases(2) 35,890 11,401 12,045 5,249 7,195 Unconditional purchase obligations(3) 3,860 2,872 988 - - Obligations related to uncertain tax positions, including interest and penalties(4) 933 933 - - - Other long-term obligations(5) 35,463 11,140 17,457 3,780 3,086 Total contractual obligations $ 144,535 $ 27,775 $ 39,046 $ 17,585 $ 60,129 (1) On September 14, 2012, the Company entered into a lease agreement for a to-be-built office facility in Canonsburg, Pennsylvania, which will serve as the Company's new headquarters. The lease was effective as of September 14, 2012, but because the premises are under construction, the Company will not be obligated to pay rent until January 1, 2015. The term of the lease is 183 months, beginning on the date the Company takes possession of the facility. The Company shall have a one-time right to terminate the lease effective upon the last day of the tenth full year following the date of possession (anticipated to be December 31, 2025), by providing the landlord with at least 18 months' prior written notice of such termination. The Company's lease for its existing headquarters expires on December 31, 2014.

(2) Other operating leases primarily include noncancellable lease commitments for the Company's other domestic and international offices as well as certain operating equipment.

(3) Unconditional purchase obligations primarily include software licenses and long-term purchase contracts for network, communication and office maintenance services, which are unrecorded as of December 31, 2013.

(4) The Company has $17.9 million of unrecognized tax benefits, including estimated interest and penalties, that have been recorded as liabilities in accordance with income tax accounting guidance for which the Company is uncertain as to if or when such amounts may be settled. As a result, such amounts are excluded from the table above.

(5) Primarily includes deferred compensation of $20.0 million (including estimated imputed interest of $250,000 within 1 year, $580,000 within 2-3 years and $90,000 within 4-5 years), contingent consideration of $8.0 million (including estimated imputed interest of $360,000 within 1 year and $740,000 within 2-3 years) and pension obligations of $5.4 million for certain foreign locations of the Company.

41-------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Estimates The Company believes that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of its consolidated financial statements.

Revenue Recognition: Revenue is derived principally from the licensing of computer software products and from related maintenance contracts. Revenue from perpetual licenses is classified as license revenue and is recognized upon delivery of the licensed product and the utility that enables the customer to access authorization keys, provided that acceptance has occurred and a signed contractual obligation has been received, the price is fixed and determinable, and collectibility of the receivable is probable. The Company determines the fair value of post-contract customer support ("PCS") sold together with perpetual licenses based on the rate charged for PCS when sold separately.

Revenue from PCS contracts is classified as maintenance and service revenue and is recognized ratably over the term of the contract.

Revenue for software lease licenses is classified as license revenue and is recognized over the period of the lease contract. Typically, the Company's software leases include PCS which, due to the short term (principally one year or less) of the Company's software lease licenses, cannot be separated from lease revenue for accounting purposes. As a result, both the lease license and PCS are recognized ratably over the lease period. Due to the short-term nature of the software lease licenses and the frequency with which the Company provides major product upgrades (typically every 12-18 months), the Company does not believe that a significant portion of the fee paid under the arrangement is attributable to the PCS component of the arrangement and, as a result, includes the revenue for the entire arrangement within software license revenue in the consolidated statements of income.

The Company's Apache products are typically licensed via longer term leases of 24-36 months. The Company recognizes revenue for these licenses over the term of the lease contract. Because the Company does not have vendor-specific objective evidence of the fair value of these leases, the Company also recognizes revenue from perpetual licenses over the term of the lease contract during the infrequent occurrence of these licenses being sold with Apache leases in multiple-element arrangements.

Revenue from training, support and other services is recognized as the services are performed. The Company applies the specific performance method to contracts in which the service consists of a single act, such as providing a training class to a customer, and the proportional performance method to other service contracts that are longer in duration and often include multiple acts (for example, both training and consulting). In applying the proportional performance method, the Company typically utilizes output-based estimates for services with contractual billing arrangements that are not based on time and materials, and estimates output based on the total tasks completed as compared to the total tasks required for each work contract. Input-based estimates are utilized for services that involve general consultations with contractual billing arrangements based on time and materials, utilizing direct labor as the input measure.

The Company also executes arrangements through independent channel partners in which the channel partners are authorized to market and distribute the Company's software products to end-users of the Company's products and services in specified territories. In sales facilitated by channel partners, the channel partner bears the risk of collection from the end-user customer. The Company recognizes revenue from transactions with channel partners when the channel partner submits a written purchase commitment, collectibility from the channel partner is probable, a signed license agreement is received from the end-user customer and delivery has occurred, provided that all other revenue recognition criteria are satisfied. Revenue from channel partner transactions is the amount remitted to the Company by the channel partners. This amount includes a fee for PCS that is compensation for providing technical enhancements and the second level of technical support to the end-user, which is based on the rate charged for PCS when sold separately, and is recognized over the period that PCS is to be provided. The Company does not offer right of return, product rotation or price protection to any of its channel partners.

Non-income related taxes collected from customers and remitted to governmental authorities are recorded on the consolidated balance sheet as accounts receivable and accrued expenses. The collection and payment of these amounts are reported on a net basis in the consolidated statements of income and do not impact reported revenues or expenses.

The Company warrants to its customers that its software will substantially perform as specified in the Company's most current user manuals. The Company has not experienced significant claims related to software warranties beyond the scope of maintenance support, which the Company is already obligated to provide, and consequently, the Company has not established reserves for warranty obligations.

42-------------------------------------------------------------------------------- Table of Contents The Company's agreements with its customers generally require it to indemnify the customer against claims that the Company's software infringes third-party patent, copyright, trademark or other proprietary rights. Such indemnification obligations are generally limited in a variety of industry-standard respects, including the Company's right to replace an infringing product. As of December 31, 2013, the Company had not experienced any losses related to these indemnification obligations and no claims with respect thereto were outstanding.

The Company does not expect significant claims related to these indemnification obligations, and consequently, the Company has not established any related reserves.

Allowance for Doubtful Accounts: The Company makes judgments as to its ability to collect outstanding receivables and provides allowances for a portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices from both value and delinquency perspectives. For those invoices not specifically reviewed, provisions are provided at differing rates based upon the age of the receivable and the geographic area of origin. In determining these percentages, the Company considers its historical collection experience and current economic trends in the customer's industry and geographic region. If the historical data used to calculate the allowance for doubtful accounts does not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and future results of operations could be materially affected.

Income Taxes: The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period of the enactment date.

The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In the event the Company determines that it will be able to realize deferred income tax assets in the future in excess of their net recorded amount, an adjustment to the valuation allowance would be recorded that would reduce the provision for income taxes.

Tax benefits related to uncertain tax positions taken or expected to be taken on a tax return are recorded when such benefits meet a more likely than not threshold. Otherwise, these tax benefits are recorded when a tax position has been effectively settled, which means that the statute of limitations has expired or the appropriate taxing authority has completed their examination even though the statute of limitations remains open. The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the consolidated statements of income. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheets.

Goodwill and Indefinite-lived Intangible Assets: The Company tests goodwill and indefinite-lived intangible assets for impairment at least annually by performing a qualitative assessment of whether there is sufficient evidence that it is more likely than not that the fair value of each reporting unit or asset exceeds its carrying amount. Goodwill is tested at the reporting unit level and indefinite-lived intangible assets are tested at the individual asset level. The application of a qualitative assessment requires the Company to assess and make judgments regarding a variety of factors which potentially impact the fair value of the reporting unit or asset being tested, including general economic conditions, industry and market-specific conditions, customer behavior, cost factors, the Company's financial performance and trends, the Company's strategies and business plans, capital requirements, management and personnel issues, and the Company's stock price, among others. The Company then considers the totality of these and other factors, placing more weight on the events and circumstances that are judged to most affect the reporting unit's or asset's fair value and carrying amount, to reach a qualitative conclusion regarding whether it is more likely than not that the fair value of a reporting unit or asset is less than its carrying amount.

If it is determined that it is more likely than not that the fair value of a reporting unit or asset exceeds its carrying value, no further analysis is necessary. If it is determined that it is more likely than not the reporting unit's or asset's carrying value exceeds its fair value, a quantitative two-step analysis is performed where the fair value of the reporting unit or asset is estimated and the impairment loss, if any, is recorded. Because there are inherent uncertainties involved in these factors, the Company's estimates of fair value are imprecise and the resulting carrying value of goodwill and intangible assets may be misstated.

During the first quarter of 2013, the Company completed the annual impairment test for goodwill and indefinite-lived intangible assets and determined that these assets had not been impaired as of the test date, January 1, 2013. The Company performed qualitative assessments to test goodwill and indefinite-lived intangible assets for impairment, and as of the test date, there was sufficient evidence that it was not more likely than not that the fair values of its reporting units and indefinite-lived intangible assets were less than their carrying amounts.

43-------------------------------------------------------------------------------- Table of Contents Contingencies: The Company is involved in various investigations, claims and legal proceedings that arise in the ordinary course of business including alleged infringement of intellectual property rights, commercial disputes, labor and employment matters, tax audits and other matters. The Company reviews the status of these matters, assesses its financial exposure and records a related accrual if the potential loss from an investigation, claim or legal proceeding is probable and the amount is reasonably estimable. Significant judgment is involved in the determination of probability and in the determination of whether an exposure is reasonably estimable. As a result of the uncertainties involved in making these estimates, the Company may have to revise its estimates as facts and circumstances change. The revision of these estimates could have a material impact on the Company's financial position and results of operations.

Stock-based Compensation: The Company grants options and other stock awards to employees and directors under the Company's stock option and grant plan.

Eligible employees can also purchase shares of the Company's common stock at a discount under the Company's employee stock purchase plan. The benefits provided under these plans are share-based payments subject to the provisions of share-based payment accounting guidance. The Company uses the fair value method to apply the provisions of share-based payment accounting guidance. Stock-based compensation expense for 2013, 2012 and 2011 was $35.3 million, $32.4 million and $23.1 million, respectively. As of December 31, 2013, total unrecognized estimated compensation expense related to unvested stock options granted prior to that date was $39.9 million, which is expected to be recognized over a weighted average period of 1.7 years.

The value of each stock-based award was estimated on the date of grant or date of acquisition for options issued in a business combination using the Black-Scholes option pricing model ("Black-Scholes model"). The determination of the fair value of share-based payment awards using an option pricing model is affected by the Company's stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the Company's expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rates and expected dividends. The table below presents the weighted average input assumptions used and resulting fair values for options granted or issued in business combinations during each respective year. The stock-based compensation expense for options is recorded ratably over their requisite service period. The interest rate assumptions were determined by using the five-year U.S. Treasury Note yield on the date of grant or date of acquisition.

Year Ended December 31, 2013 2012 2011 Risk-free interest rate 0.68% to 1.48% 0.59% to 1.04% 0.91% to 2.11% Expected dividend yield -% -% -% Expected volatility 37% 38% 39% Expected term 5.8 years 6.0 years 5.8 years Weighted average fair value per share $29.85 $24.82 $25.84 Prior to 2012, the Company issued both non-qualified and incentive stock options; however, the Company no longer issues incentive stock options. The tax benefits associated with the outstanding incentive stock options are unpredictable, as they are predicated upon an award recipient triggering an event that disqualifies the award and that then results in a tax deduction to the Company. Share-based payment accounting guidance requires that these tax benefits be recorded at the time of the triggering event. The triggering events for each option holder are not easily projected. In order to estimate the tax benefits related to incentive stock options, the Company makes many assumptions and estimates, including the number of incentive stock options that will be exercised during the period by U.S. employees, the number of incentive stock options that will be disqualified during the period and the fair market value of the Company's stock price on the exercise dates. Each of these items is subject to significant uncertainty. Additionally, a significant portion of the tax benefits related to disqualified incentive stock options is accounted for as an increase to equity (additional paid-in capital) rather than as a reduction in income tax expense. Although all such benefits continue to be realized through the Company's tax filings, there is no corresponding benefit to income tax expense. For example, the Company realized a tax benefit of $6.1 million during the year ended December 31, 2013 related to disqualified dispositions of incentive stock options; however, only $1.8 million of such amount was recorded as a reduction in income tax expense.

44-------------------------------------------------------------------------------- Table of Contents Under the terms of the ANSYS, Inc. Long-Term Incentive Plan, in the first quarter of 2013, 2012 and 2011, the Company granted 94,300, 100,000 and 92,500 performance-based restricted stock units, respectively. Vesting of the full award or a portion thereof is based on the Company's performance as measured by total shareholder return relative to the median percentage appreciation of the NASDAQ Composite Index over a specified measurement period, subject to each participant's continued employment with the Company through the conclusion of the measurement period. The measurement period for the restricted stock units granted pursuant to the Long-Term Incentive Plan is a three-year period beginning January 1 of the year of the grant. Each restricted stock unit relates to one share of the Company's common stock. The weighted average fair value of each restricted stock unit granted in 2013, 2012 and 2011 was estimated on the grant date to be $50.05, $33.16 and $32.05, respectively. The fair value of the restricted stock units was estimated using a Monte Carlo simulation model. The determination of the fair value of the awards was affected by the grant date and a number of variables, each of which has been identified in the chart below.

Stock-based compensation expense based on the fair value of the award is being recorded from the grant date through the conclusion of the three-year measurement period. On December 31, 2013, employees earned 92,500 restricted stock units, which will be issued in the first quarter of 2014. Total compensation expense associated with the awards recorded for the years ended December 31, 2013, 2012 and 2011 was $3.6 million, $2.6 million and $1.6 million, respectively. Total compensation expense associated with granted awards for the years ending December 31, 2014 and 2015 is expected to be $2.8 million and $1.7 million, respectively.

Year Ended December 31, Assumption used in Monte Carlo lattice pricing model 2013 2012 2011 Risk-free interest rate 0.35% 0.16% 1.35% Expected dividend yield -% -% -% Expected volatility-ANSYS Stock Price 25% 28% 40% Expected volatility-NASDAQ Composite Index 20% 20% 25% Expected term 2.8 years 2.8 years 2.9 years Correlation factor 0.70 0.75 0.70 In addition, the Company grants deferred stock units to non-affiliate Independent Directors, which are rights to receive shares of common stock upon termination of service as a Director. The deferred stock units are issued in arrears and vest immediately. As of December 31, 2013, 115,842 deferred stock units have been earned with the underlying shares remaining unissued until the service termination of the respective Director owners. Of this amount, 26,215 units were earned during the year ended December 31, 2013.

In accordance with the Apache merger agreement, the Company granted performance-based restricted stock units to key members of Apache management and employees, with a maximum of $13.0 million to be earned over a three-fiscal-year period beginning January 1, 2012. Vesting of the full award or a portion thereof is determined discretely for each of the three fiscal years based on the achievement of certain revenue and operating income targets by the Apache subsidiary, and the recipient's continued employment through the measurement period. The value of each restricted stock unit on the August 1, 2011 grant date was $50.30, the closing price of ANSYS stock as of that date. Total compensation expense associated with the awards recorded for the years ended December 31, 2013 and 2012, was $3.8 million and $3.9 million, respectively. For the year ended December 31, 2013, employees earned 75,477 units, which will be issued in the first quarter of 2014.

To the extent the Company changes the terms of its stock-based compensation programs, experiences market volatility in the pricing of its common stock that increases the implied volatility assumption used in the Black-Scholes model, refines different assumptions in future periods such as forfeiture rates that differ from current estimates, or assumes stock awards from acquired companies that are different in nature than the Company's stock award arrangements, among other potential impacts, the stock-based compensation expense recorded in future periods and the related tax benefits may differ significantly from what was recorded in previous reporting periods.

Estimates of stock-based compensation expense are significant to the Company's financial statements, but this expense is based on the aforementioned option valuation models and will never result in the payment of cash by the Company.

For this reason, and because the Company does not view stock-based compensation as related to its operational performance, the Board of Directors and management exclude estimated stock-based compensation expense when evaluating the Company's underlying business performance.

Recent Accounting Guidance For information regarding recent accounting guidance and the impact of this guidance on the Company's consolidated financial statements, see Note 2 to the consolidated financial statements in Part IV, Item 15 of this Annual Report on Form 10-K.

45-------------------------------------------------------------------------------- Table of Contents

[ Back To Technology News's Homepage ]

OTHER NEWS PROVIDERS







Technology Marketing Corporation

800 Connecticut Ave, 1st Floor East, Norwalk, CT 06854 USA
Ph: 800-243-6002, 203-852-6800
Fx: 203-866-3326

General comments: tmc@tmcnet.com.
Comments about this site: webmaster@tmcnet.com.

STAY CURRENT YOUR WAY

© 2014 Technology Marketing Corporation. All rights reserved | Privacy Policy