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(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
iCommon
Stock, $0.01 par value per share
iANSS
iNasdaq Stock Market LLC
(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.
iYes☒No ☐
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).
iYes☒ No ☐
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.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
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 i☐ No ☒
The
number of shares of the Registrant's Common Stock, $0.01 par value per share, outstanding as of July 31, 2021 was i87,252,523 shares.
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 aerospace and defense, automotive, electronics, semiconductors, energy, turbomachinery, consumer products, and healthcare.
As defined by the accounting guidance for segment reporting, we operate as ione segment.
Given the integrated approach to the multi-discipline
problem-solving needs of our customers, a single sale of software 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.
The COVID-19 pandemic has had, and may continue to have, an impact on our business and employees, particularly as new variants emerge.
2.iAccounting
Policies
i
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, 2020 (2020 Form 10-K). The condensed consolidated December 31, 2020 balance sheet presented is derived from the audited December 31, 2020 balance sheet included in the 2020 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 and six months ended June 30, 2021 are not necessarily indicative of the results that
may be expected for any future period.
i
Recently Adopted Accounting Guidance
Income taxes: In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), as part of its initiative to reduce complexity in the accounting standards. The amendments in ASU 2019-12 eliminated
certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarified and simplified other aspects of the accounting for income taxes. We adopted ASU 2019-12 on January 1, 2021 with no material impact to our condensed consolidated financial statements.
i
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. iOur cash and cash equivalents balances comprise the following:
Indirect
revenue, as a percentage of total revenue
i24.6
%
i21.9
%
i26.2
%
i23.8
%
/
Our
software licenses revenue is recognized up front, while maintenance and service revenue is generally recognized over the term of the contract.
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.
i
The
changes in deferred revenue, inclusive of both current and long-term deferred revenue, during the six months ended June 30, 2021 and 2020 were as follows:
(in thousands)
2021
2020
Beginning balance – January 1
$
i388,810
$
i365,274
Acquired
deferred revenue
i746
i1,405
Deferral
of revenue
i777,714
i661,790
Recognition
of revenue
(i809,880)
(i690,646)
Currency
translation
(i5,792)
(i1,635)
Ending
balance – June 30
$
i351,598
$
i336,188
/
i
Total
revenue allocated to remaining performance obligations as of June 30, 2021 will be recognized as revenue as follows:
(in thousands)
Next 12 months
$
i597,173
Months
13-24
i177,100
Months 25-36
i83,608
Thereafter
i69,218
Total
revenue allocated to remaining performance obligations
$
i927,099
/
Revenue allocated to remaining performance obligations represents contracted revenue that has
not yet been recognized, which includes both deferred revenue and backlog. Our backlog represents installment billings for periods beyond the current
quarterly billing cycle. Revenue recognized during the six months ended June 30, 2021 and 2020 included amounts in deferred revenue and backlog at the beginning of the period of $i373.7
million and $i343.9 million, respectively.
4.iAcquisitions
During
the six months ended June 30, 2021 we completed several acquisitions to expand our solution offerings and enhance our customers' experience. The effects of the acquisitions were not material to our condensed consolidated results of operations individually or in the aggregate. The combined purchase price of the acquisitions during the six months ended June 30, 2021 was approximately $i110.8 million, which was paid in cash.
The
assets and liabilities of the acquisitions have been recorded based upon management's estimates of their fair market values as of each respective date of acquisition. The following tables summarize the fair value of consideration transferred and the fair values of identified assets acquired and liabilities assumed for the combined acquisitions at each respective date of acquisition:
i
Fair Value of Consideration Transferred:
(in
thousands)
Cash
$
i110,790
/i
Recognized
Amounts of Identifiable Assets Acquired and Liabilities Assumed:
(in thousands)
Cash
$
i4,320
Accounts
receivable and other tangible assets
i2,854
Developed software and core technologies (i12
year weighted-average life)
i32,200
Customer lists (i9
year weighted-average life)
i2,300
Trade names (i10
year weighted-average life)
i1,000
Accounts payable and other liabilities
(i2,834)
Deferred
revenue
(i746)
Net deferred tax liabilities
(i7,311)
Total
identifiable net assets
$
i31,783
Goodwill
$
i79,007
/
The
goodwill, which is not tax-deductible, is attributed to intangible assets that do not qualify for separate recognition, including the assembled workforces of the acquired businesses and the synergies expected to arise as a result of the acquisitions.
The fair values 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 each respective acquisition date is obtained during the measurement period (up to one year from the acquisition date).
On December 1, 2020, we acquired i100%
of the shares of Analytical Graphics, Inc. (AGI), a premier provider of mission-simulation, modeling, testing and analysis software for aerospace, defense and intelligence applications. The acquisition expands the scope of our offerings, empowering users to solve challenges by simulating from the chip level all the way to a customer's entire mission. The purchase price was approximately $i720.6 million, inclusive of net working capital adjustments.
On April 1, 2020,
we acquired i100% of the shares of Lumerical Inc. (Lumerical), a leading developer of photonic design and simulation tools, for a purchase price of approximately $i107.5 million,
which was paid in cash. The acquisition adds best-in-class photonic products to our multiphysics portfolio, providing customers with a full set of solutions to solve their next-generation product challenges.
The operating results of each acquisition have been included in our condensed consolidated financial statements since each respective date of acquisition.
Income
taxes receivable, including overpayments and refunds
i45,879
i31,628
Prepaid
expenses and other current assets
i55,259
i44,740
Total
other receivables and current assets
$
i214,492
$
i268,522
Accrued
vacation
i41,656
i34,132
Consumption,
VAT and sales tax liabilities
i25,321
i45,156
Accrued
expenses and other current liabilities
i119,568
i120,178
Total
other accrued expenses and liabilities
$
i186,545
$
i199,466
/
Receivables
related to unrecognized revenue represent the current portion of billings made for customer contracts that have not yet been recognized as revenue.
6.iEarnings 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.
i
The details of basic and diluted EPS are as follows:
Finite-lived
intangible assets are amortized over their estimated useful lives of itwo years to iseventeen years. Amortization expense for the intangible assets reflected above was $i19.5
million and $i13.9 million for the three months ended June 30, 2021 and 2020, respectively. Amortization expense for the intangible assets reflected above was $i38.8
million and $i27.6 million for the six months ended June 30, 2021 and 2020, respectively
i
As
of June 30, 2021, estimated future amortization expense for the intangible assets reflected above was as follows:
(in thousands)
Remainder of 2021
$
i36,684
2022
i78,527
2023
i80,665
2024
i80,069
2025
i77,767
2026
i75,567
Thereafter
i259,762
Total
intangible assets subject to amortization
i689,041
Indefinite-lived trade name
i357
Other
intangible assets, net
$
i689,398
/
i
The
changes in goodwill during the six months ended June 30, 2021 and 2020 were as follows:
(in thousands)
2021
2020
Beginning balance – January 1
$
i3,038,306
$
i2,413,280
Acquisitions
and adjustments(1)
i78,610
i69,330
Currency
translation
(i6,180)
(i8,311)
Ending
balance – June 30
$
i3,110,736
$
i2,474,299
(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 2021, 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, 2021. No other events or circumstances changed during the six months
ended June 30, 2021 that would indicate that the fair values of our reporting unit and indefinite-lived intangible asset are below their carrying amounts.
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 long-term 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 long-term debt approximates the estimated fair value. See Note 10, "Debt", for additional information on our borrowings.
i
The
following tables provide the assets carried at fair value and measured on a recurring basis:
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.
Our
right-of-use (ROU) 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 i186,000 square foot office facility in Canonsburg, Pennsylvania. The term of the lease is i183
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 $i4.5
million per annum through 2024 and $i4.7 million per annum for 2025 - 2029.
i
The components of our global lease cost reflected in the condensed consolidated statements of income are
as follows:
Weighted-average remaining lease term of operating leases
i6.9 years
i7.7
years
Weighted-average discount rate of operating leases
i3.0
%
i3.3
%
/
i
The
maturity schedule of the operating lease liabilities as of June 30, 2021 is as follows:
(in thousands)
Remainder of 2021
$
i14,238
2022
i25,593
2023
i20,018
2024
i18,734
2025
i17,708
Thereafter
i50,813
Total
future lease payments
i147,104
Less: Present value adjustment
(i14,934)
Present
value of future lease payments(1)
$
i132,170
(1) Includes the current portion of operating lease liabilities of $i24.0
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 June 30, 2021.
In
February 2019, we entered into a credit agreement for a $i500.0 million unsecured revolving credit facility, which includes a $i50.0
million sublimit for the issuance of letters of credit (Revolving Credit Facility), with Bank of America, N.A. as the Administrative Agent. The Revolving Credit Facility becomes payable in full on February 22, 2024 and is available for general corporate purposes, including, among others, to finance acquisitions and capital expenditures. The Revolving Credit Facility had not been utilized as of June 30, 2021.
We amended our credit agreement (Amended Credit Agreement) on October 16, 2019. The amendment provided for a new $i500.0
million unsecured term loan facility to finance our acquisition of Livermore Software Technology (LST) in the fourth quarter of 2019. The term loan was funded on November 1, 2019 and matures on November 1, 2024. Principal on the term loan will be payable on the last business day of each fiscal quarter commencing with the ninth full fiscal quarter after the funding date at a rate of i1.25% per quarter, increasing to i2.50%
per quarter after the next four fiscal quarters. We repaid $i75.0 million of the unsecured term loan balance in January 2020 prior to the scheduled maturity dates in 2022 ($i25.0 million) and
2023 ($i50.0 million). In June 2021, we repaid $i26.0 million of the unsecured term loan balance prior to the scheduled maturity date in 2024.
In
connection with the acquisition of AGI, we entered into a credit agreement (AGI Credit Agreement) on November 9, 2020, with Bank of America, N.A. as the Administrative Agent. The AGI Credit Agreement provided for a new $i375.0 million unsecured term loan facility to finance a portion of the cash consideration for the acquisition. The term loan was funded on December 1, 2020 and matures on November 1, 2024. Principal on the term loan will be payable on the last
business day of each fiscal quarter commencing with the fifth full fiscal quarter after the funding date at a rate of i1.25% per quarter, increasing to i2.50% per quarter after the next four fiscal quarters. We repaid $i19.0 million
of the unsecured term loan balance in June 2021 prior to the scheduled maturity dates in 2022 ($i18.8 million) and 2023 ($i0.2 million).
Borrowings
under the Amended Credit Agreement and the AGI Credit Agreement (collectively, the Credit Agreements) accrue interest at the Eurodollar rate plus an applicable margin or at the base rate, at our election. For the quarter ended June 30, 2021, we elected to apply the Eurodollar rate. The base rate is the applicable margin plus the highest of (i) the federal funds rate plus i0.500%, (ii) the Bank of America prime rate and (iii) the Eurodollar rate plus i1.000%.
The applicable margin for these borrowings is a percentage per annum based on the lower of (1) a pricing level determined by our then-current consolidated leverage ratio and (2) a pricing level determined by our debt ratings (if such debt ratings exist). This results in a margin ranging from i1.125% to i1.750%
and i0.125% to i0.750% for the Eurodollar rate and base rate, respectively.
The weighted average
interest rate in effect during each of the three and six months ended June 30, 2021 was ii1.45/%.
As of June 30, 2021, the rate in effect for the Credit Agreements was i1.40%.
The Credit Agreements contain language in the event the Eurodollar rate is not available due to LIBOR changes. If this occurs, the base rate will be used for borrowings. However, we may work with the Administrative Agent to amend the Credit Agreements to replace the Eurodollar rate with (i) one or more rates based on the Secured Overnight Financing Rate (SOFR); or (ii) another alternative benchmark rate, subject
to the lenders' approval.
The Credit Agreements contain customary representations and warranties, affirmative and negative covenants and events of default. The Credit Agreements also each contain a financial covenant requiring us to maintain a consolidated leverage ratio of indebtedness to earnings before interest, taxes, depreciation and amortization not exceeding i3.50 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
leverage ratio to i4.00 to 1.00 upon the consummation of certain qualified acquisitions for which the aggregate consideration is at least $i250.0
million.
As of June 30, 2021 and December 31, 2020, the carrying values of the term loans were $i753.3 million, which is net of $i1.7 million
of unamortized debt issuance costs, and $i798.1 million, which is net of $i1.9 million of unamortized debt issuance
costs, respectively. We were in compliance with all covenants as of June 30, 2021 and December 31, 2020.
Tax
expense for the first half of 2021 and 2020 benefited due to increased stock compensation benefits, many of which were recognized discretely in the first quarter of each year. These benefits were partially offset by an increase in non-deductible compensation in 2021.
12.iStock Repurchase Program
i
Under
our stock repurchase program, we repurchased shares as follows:
As
of June 30, 2021, i2.8 million shares remained available for repurchase under the program.
13.iStock-Based
Compensation
On May 14, 2021, our stockholders approved the ANSYS, Inc. 2021 Equity and Incentive Compensation Plan (the 2021 Plan). The 2021 Plan is a long-term incentive plan pursuant to which awards may be granted to directors, officers, other employees and certain consultants of Ansys and its subsidiaries. These awards include stock option rights, stock appreciation rights, restricted stock, restricted stock units, cash incentives, performance shares, performance units and other awards. The 2021 Plan authorizes i4.4 million
shares of common stock for issuance, plus i1.6 million shares that remained available for issuance under the Fifth Amended and Restated ANSYS, Inc. 1996 Stock Option and Grant Plan (the Predecessor Plan) as of the effective date of the 2021 Plan plus any shares relating to the outstanding awards under the Predecessor Plan or the 2021 Plan that are subsequently forfeited. As of the effective date of the 2021 Plan, grants are no longer made under the
Predecessor Plan.
Revenue to external customers is attributed to individual countries based upon the location of the customer. iRevenue by geographic area is as follows:
We are subject to various investigations, claims and legal proceedings that arise in the ordinary course of business, including commercial disputes, labor and employment matters, tax audits, alleged infringement of third party's 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 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 approximately $i7.3 million.
As such charges are not probable at this time, a reserve has not been recorded on the condensed consolidated balance sheet as of June 30, 2021. 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 $i7.3 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 of intellectual property infringement or non-compliance to contractual terms and conditions by third parties 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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of ANSYS, Inc.
Results of Review of Interim Financial Information
We have reviewed the accompanying condensed consolidated balance sheet of ANSYS, Inc. and subsidiaries (the "Company") as of June 30, 2021, the related condensed consolidated statements of income, comprehensive income, and stockholders’ equity for the three-month and six-month periods ended June 30, 2021 and 2020, and of cash
flows for the six-month periods ended June 30, 2021 and 2020, and the related notes (collectively referred to as the "interim financial information"). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2020, and the related consolidated statements of income, comprehensive income,
stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 24, 2021, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2020, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This interim financial information is the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect
to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the accompanying
unaudited condensed consolidated financial statements and notes thereto for the six months ended June 30, 2021, and with our audited consolidated financial statements and notes thereto for the year ended December 31, 2020 included in the 2020 Form 10-K filed with the Securities and Exchange Commission. 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 aerospace
and defense, automotive, electronics, semiconductors, energy, turbomachinery, consumer products, and healthcare. Headquartered south of Pittsburgh, Pennsylvania, we employed approximately 4,900 people as of June 30, 2021. We focus on the development of open and flexible solutions that enable users to analyze designs directly on the desktop, which can be delivered both on-premises and in the cloud. We provide a common platform for fast, efficient and cost-conscious product development, from design concept to final-stage testing and validation. 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.
Our strategy of Pervasive Engineering Simulation
seeks to deepen the use of simulation in our core, to amplify usage of simulation throughout the product lifecycle and to embed simulation into our partners' ecosystems. The engineering software simulation market is strong and growing. The market growth is driven by customers' needs for rapid, quality innovation in a cost-efficient manner, enabling faster time to market of new products and lower warranty costs. While the transition away from physical prototyping toward simulation is prevalent across all industries, simulation demand is heightened by investments in high-growth solutions, including 5G, electrification, autonomous and the Industrial Internet of Things. Our strategy of Pervasive Engineering Simulation is aligned with this market growth.
We license our technology to businesses, educational institutions and governmental agencies. Growth in our revenue is affected by the strength of global economies, general business
conditions, currency exchange rate fluctuations, customer budgetary constraints and the competitive position of our products. We believe that the features, functionality and integrated multiphysics capabilities of our 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. 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, including the impact of the current COVID-19 pandemic. As a result, we believe that our overall performance is best measured by fiscal year results rather than by quarterly results.
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 our software products as compared to our competitors; investing in research and development to develop new and innovative products and increase the capabilities of our existing products; supplying new products and services; focusing on customer needs, training, consulting and support; and enhancing our distribution channels. We also consider acquisitions to supplement our global engineering talent, product offerings and distribution channels.
Overview:
Update on the Impact of the COVID-19 Pandemic
During the first half of 2021, we have continued to work to mitigate the effects of the COVID-19 pandemic on our business by adapting our local guidelines based on the severity
of the virus in the countries in which we operate. The health and safety of our employees and their families, our partners and our broad Ansys community around the world remain a high priority. Remote access remains the primary means of work for much of our workforce. During the second quarter, we announced our plans for post-pandemic work arrangements. These plans include options for our employees to work from home, in the office or on a flexible basis where they can alternate between the office and home. These arrangements will start to be adopted in the fourth quarter and will be subject to evolving local guidelines on precautions to be taken to mitigate COVID-19 risk to our employees and customers. Remote work arrangements have not adversely affected our ability to maintain effective financial operations, including our financial reporting systems, internal controls over financial reporting and disclosure controls and procedures. We expect to maintain these effective
controls as we continue to work remotely during and after the COVID-19 pandemic. The spread of the virus and its variants and economic deterioration caused by them could have an impact on our business, as well as on our ability to achieve our financial guidance.
Our direct and indirect sales and support teams continue to use collaborative technology to access both Ansys’ data centers and the public cloud, and to meet virtually with customers to mitigate disruptions to our sales pipeline. Additionally, in-person meetings are starting to resume as well as planning for live attendance at trade events. Our research and development teams have also continued
to be productive and we continue to meet our product release targets, as evidenced by the recent release of Ansys 2021 R2 in July.
Our spending reflects our expectations for the pace at which economic recovery will occur, and we continue to invest in long-term opportunities. We have also maintained and intend to maintain our commitment to invest in our acquisitions, research and development, and certain digital transformation projects, in particular our Customer Relationship Management (CRM) system and human resources information system (HRIS) projects, as those projects are critical to our ability to operate efficiently and scale the business for future growth.
Please see "Risk Factors,""Quantitative and Qualitative Disclosures about Market Risk," and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of our Forms
10-K and 10-Q for discussion on additional business risks, including those associated with the COVID-19 pandemic.
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.
Our GAAP and non-GAAP results for the three and six months ended June 30, 2021 as compared to the three and six months ended June 30, 2020 reflected the following variances:
Our
results reflect an increase in revenue during the three and six months ended June 30, 2021 due to growth in perpetual and lease licenses, maintenance and service driven by strong execution, acquisitions and by the improving global economic environment in 2021 as compared to 2020. We also experienced increased operating expenses during the three and six months ended June 30, 2021, primarily due to increased personnel costs, additional operating expenses related to acquisitions, increased costs related to foreign exchange translation due to a weaker U.S. Dollar and higher stock-based compensation. The COVID-19 pandemic did not have a material impact on our operating expenses during the three and six months ended June 30, 2021.
The non-GAAP results exclude the income statement effects
of the acquisition accounting adjustments to deferred revenue, stock-based compensation, amortization of acquired intangible assets, and transaction expenses related to business combinations.
Impact of Foreign Currency
Our comparative financial results were impacted by fluctuations in the U.S. Dollar during the three and six months ended June 30, 2021 as compared to the three and six months ended June 30, 2020. The net favorable impacts on our GAAP and non-GAAP revenue and operating income as a result of the weakened U.S. Dollar when measured against our primary foreign currencies are reflected in the table below.
Constant currency amounts exclude the effects of foreign
currency fluctuations on the reported results. To present this information, the 2021 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 2020 comparable period, rather than the actual exchange rates in effect for 2021. Constant currency growth rates are calculated by adjusting the 2021 reported revenue and operating income amounts by the 2021 currency fluctuation impacts and comparing the adjusted amounts to the 2020 comparable period reported revenue and operating income amounts.
Other Key Business Metric
Annual Contract Value (ACV) is one of our key performance metrics and is useful to investors in assessing the strength and trajectory of our business. Given that revenue is more volatile
due to the upfront revenue recognition of perpetual licenses and multi-year lease license sales, we provide ACV as a supplemental metric to help evaluate the annual performance of the business. Summed over the long term, ACV and revenue are equal. However, there will be years in which ACV growth lags revenue growth and other years in which ACV growth leads revenue growth. It is used by management in financial and operational decision-making and in setting sales targets used for compensation. ACV should be viewed independently of 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 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.
Our ACV was as follows:
Three
Months Ended June 30,
Change
(in thousands, except percentages)
2021
2020
Amount
%
Constant Currency %
ACV
$
430,539
$
344,406
$
86,133
25.0
22.7
Recurring
ACV as a percentage of ACV
82.1
%
83.2
%
Six
Months Ended June 30,
Change
(in thousands, except percentages)
2021
2020
Amount
%
Constant Currency %
ACV
$
749,921
$
645,456
$
104,465
16.2
13.5
Recurring
ACV as a percentage of ACV
80.2
%
82.7
%
Recurring ACV includes both lease licenses and maintenance contracts. The reduction as a percentage of total ACV in 2021 as compared to 2020 was driven by an increase in perpetual licensing coming off a weak comparable in 2020.
Industry Commentary:
High-tech,
aerospace and defense, and automotive continue to drive our growth as customers continued to invest in innovation with a focus on simulation to replace physical testing. The high-tech industry growth was strengthened by the megatrend of 5G and the increasingly pervasive use of more complex electronics systems. While the commercial aviation sector continues its recovery from the impact of the global pandemic, the defense segment has remained strong and buoyed our overall performance in the aerospace and defense industry. As electrification, advanced driver-assistance systems and autonomous technologies shape the future of transportation and mobility, the automotive industry continues to invest in simulation to simultaneously accelerate the development of these new innovations and improve the productivity of existing technologies and processes.
Other Financial Information
Our financial
position includes $958.2 million in cash and short-term investments, and working capital of $1,027.0 million as of June 30, 2021.
There were no share repurchases during the first half of 2021 as compared to the 0.7 million shares repurchased during the first half of 2020 for $161.0 million. As of June 30, 2021, we had 2.8 million shares remaining available for repurchase under our authorized share repurchase program.
The following table presents our
geographic constant currency GAAP revenue growth during the three and six months ended June 30, 2021 as compared to the three and six months ended June 30, 2020:
The
mix of perpetual license sales as well as the value and duration of multi-year lease contracts executed during the period significantly impact revenue recognition. As a result, regional revenues may fluctuate significantly on a quarterly basis and are not necessarily indicative of customer usage changes or our cash flows for such regions during the periods presented.
To drive growth, we continue to focus on a number of sales improvement activities across the geographic regions, including sales hiring, pipeline building, productivity initiatives and customer engagement activities.
Continued trade tensions between the U.S. and China have had an impact on, and in the future may further restrict, our ability to sell and distribute our products to certain customers. As a result, this has had, and
in the future could continue to have, an adverse effect on our business, results of operations or financial condition. Refer to additional details in Part I, "Item 1A. Risk Factors" in our 2020 Form 10-K.
Use of Estimates:
The preparation of our financial statements requires us 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, we evaluate our estimates, including those related to fair values of stock awards, bad debts, contract revenue, acquired deferred revenue, the standalone selling prices of our products and services, the valuation of goodwill and other intangible assets, deferred compensation, income taxes, uncertain
tax positions, tax valuation reserves, operating lease assets and liabilities, useful lives for depreciation and amortization, and contingencies and litigation. We base our estimates on historical experience, market experience, estimated future cash flows and various other assumptions that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
Note About Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act), 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:
•Our expectations regarding the impacts of the COVID-19 pandemic and variants of the virus as well as trade tensions between the U.S. and China.
•Our expectations regarding integrating acquired companies to realize the benefits of incremental ACV and revenue synergies as well as cost reductions.
•Our assessment of the ultimate liabilities arising from various
investigations, claims and legal proceedings.
•Our expectations regarding the outcome of our service tax audit cases.
•Our expectations regarding future claims related to indemnification obligations.
•Our intentions regarding our hybrid sales and distribution model.
•Our statements regarding the strength of the features, functionality and integrated multiphysics capabilities of our software products.
•Our belief that our overall performance is best measured by fiscal year results rather than by quarterly results.
•Our expectations regarding the accelerated development of new and innovative products to the marketplace while lowering design and engineering costs for customers as a result of our acquisitions.
•Our intentions related to investments in research and development, particularly as it relates to expanding the ease of use and capabilities of our broad portfolio of simulation software products.
•Our expectations regarding increased license volatility due to an increased customer preference for time-based licenses rather than perpetual licenses.
•Our statements regarding the impact of global economic conditions.
•Our
estimates regarding the expected impact on reported revenue related to the acquisition accounting treatment of deferred revenue.
•Our expectation that we will continue to make targeted investments in our global sales and marketing organizations and our global business infrastructure to enhance and support our revenue-generating activities.
•Our intention to repatriate previously taxed earnings in excess of working capital needs and to reinvest all other earnings of our non-U.S. subsidiaries.
•Our plans related to future capital spending.
•The sufficiency of existing cash and cash equivalent balances to meet future
working capital and capital expenditure requirements.
•Our belief that the best uses of our excess cash are to invest in the business, acquire or make investments in complementary companies, products, services and technologies, make payments on outstanding debt balances and repurchase stock in order to both offset dilution and return capital, in excess of our requirements, to stockholders with the goal of increasing stockholder value.
•Our expectation that changes in currency exchange rates will affect our financial position, results of operations and cash flows.
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 our control. We describe such risks, uncertainties, and factors in
the "Risk Factors,""Quantitative and Qualitative Disclosures about Market Risk," and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of our Forms 10-K and 10-Q. Many of these risks, uncertainties, and factors are currently amplified by, and may continue to be amplified by, the COVID-19 pandemic. Forward-looking statements speak only as of the date they are made and we undertake no obligation to update them. Our actual results could differ materially from those set forth in forward-looking statements.
Revenue
for the quarter ended June 30, 2021 increased 15.8% compared to the quarter ended June 30, 2020, or 13.4% in constant currency. The growth rate was favorably impacted by our continued investment in our global sales, support and marketing organizations, strong perpetual license sales, the timing and duration of our multi-year lease contracts, momentum sales to our small- and medium-sized businesses, and our recent acquisitions. Lease license revenue increased 14.6%, or 13.9% in constant currency, as compared to the prior-year quarter. Perpetual license revenue, which is derived from new sales during the quarter, increased 51.5%, or 48.1% in constant currency, as compared to the prior-year quarter. Annual maintenance contracts
that were sold with new perpetual licenses, maintenance contracts for new perpetual licenses sold in previous quarters, maintenance renewals and the maintenance portion of lease license contracts collectively contributed to maintenance revenue growth of 7.4%, or 4.5% in constant currency.
We continue to experience interest by some of our larger customers in enterprise agreements that often include longer-term, time-based licenses involving a larger number of our software products. While these arrangements typically involve a higher overall transaction price, the upfront recognition of license revenue related to these larger, multi-year transactions can result in significant lease license revenue volatility. Software products, across a large variety
of applications and industries, are increasingly distributed in software-as-a-service, cloud and other subscription environments in which the licensing approach is time-based rather than perpetual. As this preference increases, it will continue to result in a shift from perpetual licenses to time-based licenses.
In relation to the COVID-19 pandemic and our revenue, we continue to expect a recovery in the business environment during the second half of the year as vaccine distribution becomes more widespread and a larger percentage of the population is inoculated. Globally, businesses have not resumed full operations. Additional waves or mutated variants of COVID-19 could result in renewed shutdowns that stop or regress economic recovery.
With respect to revenue, on average for the quarter ended June 30, 2021, the U.S. Dollar was approximately
5.4% weaker, when measured against our primary foreign currencies, than for the quarter ended June 30, 2020. The table below presents the net impacts of currency fluctuations on revenue for the quarter ended June 30, 2021. The overall impact was favorable.
The impacts from currency fluctuations resulted in increased operating income of $1.4 million for the quarter ended June 30, 2021 as compared
to the quarter ended June 30, 2020.
In
valuing deferred revenue on the balance sheets of our recent acquisitions as of their respective acquisition dates, we applied the fair value provisions applicable to the accounting for business combinations, resulting in a reduction of deferred revenue as compared to the historical carrying amount. As a result, our post-acquisition revenue will be less than the sum of what would have otherwise been reported by us and each acquiree absent the acquisitions. The impacts on reported revenue were $5.9 million and $4.0 million for the quarters ended June 30, 2021 and 2020, respectively. The expected impacts on reported revenue are $4.2 million and $21.1 million for the quarter ending September 30, 2021 and the year ending December 31, 2021, respectively.
Deferred
Revenue and Backlog:
Deferred revenue consists of billings made or payments received in advance of revenue recognition from customer agreements. The deferred revenue on our condensed consolidated balance sheets does not represent the total value of annual or multi-year, noncancellable agreements. Our backlog represents installment billings for periods beyond the current quarterly billing cycle. Our deferred revenue and backlog as of June 30, 2021 and December 31, 2020 consisted of the following:
Revenue
associated with deferred revenue and backlog that will be recognized in the subsequent twelve months is classified as current in the tables above.
The tables below reflect our operating results as presented on the condensed consolidated statements of income, which are inclusive of foreign currency translation impacts. Amounts included in the discussions that follow each table are provided in constant currency and are inclusive of costs related to our acquisitions. The impact of foreign exchange translation is discussed separately, where material.
Selling, General and Administrative: The net increase in selling, general and administrative costs was primarily due to the following:
•Increased salaries and incentive compensation of $15.4 million.
•Increased stock-based compensation of $7.2 million.
•Increased costs related to foreign exchange translation of $3.7 million due to a weaker U.S. Dollar.
•Increased consulting and professional fees of $2.2 million.
•Increased IT maintenance and software hosting costs of $1.5 million.
•Increased
marketing expenses of $1.2 million.
•Decreased bad debt expense of $1.9 million.
We anticipate that we will continue to make targeted investments in our global sales and marketing organizations and our global business infrastructure to enhance and support our revenue-generating activities.
Research and Development: The increase in research and development costs was primarily due to the following:
•Increased salaries and incentive compensation of $8.7 million.
•Increased costs related to foreign exchange translation of $2.3 million due to a weaker U.S. Dollar.
•Increased stock-based compensation
of $1.5 million.
•Increased IT maintenance and software hosting costs of $1.4 million.
We have traditionally invested significant resources in research and development activities and intend to continue to make investments in expanding the ease of use and capabilities of our broad portfolio of simulation software products.
Interest Income: Interest income for the quarter ended June 30, 2021 was $0.5 million as compared to $0.9 million for the quarter ended June 30, 2020. Interest income decreased as a result of a lower interest rate environment and the related decrease in the average rate of return on invested cash balances.
Interest Expense:
Interest expense for the quarter ended June 30, 2021 was $3.3 million as compared to $3.0 million for the quarter ended June 30, 2020. Interest expense increased as a result of interest incurred on debt financing obtained in connection with the acquisition of AGI in the fourth quarter of 2020, partially offset by a lower interest rate environment.
Other Income, net: Other income for the quarter ended June 30, 2021 was $14.9 million as compared to $1.9 million for the quarter ended June 30, 2020. Other income consisted primarily of net investment gains.
Income Tax Provision: Our income before income tax provision, income
tax provision and effective tax rates were as follows:
Three Months Ended June 30,
(in thousands, except percentages)
2021
2020
Income before income tax provision
$
128,860
$
112,585
Income
tax provision
$
35,144
$
16,021
Effective tax rate
27.3
%
14.2
%
The increase in the effective tax rate from the second quarter of 2020 was primarily due to an increase in non-deductible compensation in 2021 and a tax structuring benefit recognized in the second quarter of 2020 that did not recur in 2021. These tax increases
were partially offset by a 2021 benefit related to tax planning in a foreign jurisdiction.
When compared to the federal and state combined statutory rate for each respective period, the effective tax rates for the quarters ended June 30, 2021 and 2020 were favorably impacted by the foreign-derived intangible income (FDII) deduction and research and development credits. Additionally, tax expense/benefits related to stock-based compensation impacted the rate in each period.
Revenue
for the six months ended June 30, 2021 increased 17.3% compared to the six months ended June 30, 2020, or 14.5% in constant currency. The growth rate was favorably impacted by our continued investment in our global sales, support and marketing organizations, strong perpetual license sales, the timing and duration of our multi-year lease contracts, momentum sales to our small- and medium-sized businesses, and our recent acquisitions. Lease license revenue increased 23.3%, or 22.0% in constant currency, as compared to the six months ended June 30, 2020. Perpetual license revenue, which is derived from new sales during the six months ended June 30, 2021, increased 54.0% or 50.1% in constant
currency, as compared to the six months ended June 30, 2020. Annual maintenance contracts that were sold with new perpetual licenses, maintenance renewals and the maintenance portion of lease license contracts collectively contributed to maintenance revenue growth of 7.0% or 3.9% in constant currency. Service revenue increased 2.3% or decreased 0.6% in constant currency, as compared to the six months ended June 30, 2020.
With respect to revenue, on average for the six months ended June 30, 2021, the U.S. Dollar was approximately 5.9% weaker, when measured against our primary foreign currencies,
than for the six months ended June 30, 2020. The table below presents the net impacts of currency fluctuations on revenue for the six months ended June 30, 2021. The overall impact was favorable.
The impacts from currency fluctuations resulted in increased operating income of $3.5 million for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020.
In
valuing deferred revenue on the balance sheets of our recent acquisitions as of their respective acquisition dates, we applied the fair value provisions applicable to the accounting for business combinations, resulting in a reduction of deferred revenue as compared to the historical carrying amount. As a result, our post-acquisition revenue will be less than the sum of what would have otherwise been reported by us and each acquiree absent the acquisitions. The impacts on reported revenue were $14.8 million and $8.0 million for the six months ended June 30, 2021 and 2020, respectively.
Cost of Sales and Operating Expenses:
The tables below reflect our operating results as presented on the condensed consolidated statements of income, which are inclusive of foreign currency translation
impacts. Amounts included in the discussions that follow each table are provided in constant currency and are inclusive of costs related to our acquisitions. The impact of foreign exchange translation is discussed separately, where material.
Selling, General and Administrative: The net increase
in selling, general and administrative costs was primarily due to the following:
•Increased salaries, incentive compensation and other headcount-related costs of $30.3 million.
•Increased stock-based compensation of $9.3 million.
•Increased costs related to foreign exchange translation of $7.5 million due to a weaker U.S. Dollar.
•Increased IT maintenance and software hosting costs of $2.9 million.
•Increased professional fees of $2.3 million.
•Decreased bad debt expense of $5.0 million.
•Decreased business
travel of $3.9 million due to the COVID-19 pandemic.
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 $17.9 million.
•Increased costs related to foreign exchange translation of $4.7 million due to a weaker U.S. Dollar.
•Increased stock-based compensation of $2.9 million.
•Increased IT maintenance and software hosting costs of $2.4 million.
Interest Income: Interest income for the six months ended June 30,
2021 was $1.0 million as compared to $3.7 million for the six months ended June 30, 2020. Interest income decreased as a result of a lower interest rate environment and the related decrease in the average rate of return on invested cash balances.
Interest Expense: Interest expense was $6.7 million for the six months ended June 30, 2021 and 2020. The lower interest rate environment in 2021 was offset by the interest incurred on debt financing obtained in connection with the acquisition of AGI in the fourth quarter of 2020.
Other Income, net: Other income for the six months ended June 30, 2021 was $15.3 million as compared to $2.0 million
for the quarter ended June 30, 2020. Other income consisted primarily of net investment gains.
Income Tax Provision: Our income before income tax provision, income tax provision and effective tax rates were as follows:
Six Months Ended June 30,
(in thousands, except percentages)
2021
2020
Income
before income tax provision
$
176,483
$
145,909
Income tax provision
$
10,369
$
3,281
Effective tax rate
5.9
%
2.2
%
The
increase in the effective tax rate from the prior year was primarily due to an increase in non-deductible compensation as well as a tax structuring benefit recognized in the second quarter of 2020 that did not recur in 2021. These tax increases were partially offset by a 2021 benefit related to tax planning in a foreign jurisdiction as well as increased benefits from stock-based compensation.
When compared to the federal and state combined statutory rate for each respective period, the effective tax rates for the six months ended June 30, 2021 and 2020 were
favorably impacted by tax benefits from stock-based compensation, the FDII deduction, and research and development credits, partially offset by the impact of non-deductible compensation.
Net Income: Our net income, diluted earnings per share and weighted average shares used in computing diluted earnings per share were as follows:
We provide non-GAAP revenue, non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP operating income, non-GAAP operating profit margin, non-GAAP net income and non-GAAP diluted earnings per share as supplemental measures to GAAP regarding our 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 included below.
(in thousands, except percentages and per share data)
Revenue
Gross Profit
%
Operating Income
%
Net Income
EPS - Diluted1
Total
GAAP
$
690,646
$
586,670
84.9
%
$
146,880
21.3
%
$
142,628
$
1.64
Acquisition
accounting for deferred revenue
7,952
7,952
0.2
%
7,952
0.9
%
7,952
0.09
Stock-based compensation expense
—
6,330
1.0
%
65,071
9.4
%
65,071
0.75
Excess
payroll taxes related to stock-based awards
—
689
0.1
%
8,859
1.2
%
8,859
0.10
Amortization of intangible assets from acquisitions
—
19,316
2.7
%
27,641
4.0
%
27,641
0.32
Transaction
expenses related to business combinations
—
—
—
%
1,259
0.1
%
1,259
0.01
Rabbi trust (income) / expense
—
—
—
%
—
—
%
(5)
—
Adjustment
for income tax effect
—
—
—
%
—
—
%
(46,773)
(0.54)
Total non-GAAP
$
698,598
$
620,957
88.9
%
$
257,662
36.9
%
$
206,632
$
2.37
1
Diluted weighted average shares were 87,152.
We use non-GAAP financial measures (a) to evaluate our historical and prospective financial performance as well as our performance relative to our 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 employees. In addition, many financial analysts that follow us focus on and publish both historical results and future projections based on non-GAAP financial measures. We believe that it is in the best interest of our investors to provide this information to analysts so that they accurately report the non-GAAP financial information. Moreover, investors have historically requested, and we have
historically reported, these non-GAAP financial measures as a means of providing consistent and comparable information with past reports of financial results.
While we believe 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 our competitors and may not be directly comparable to similarly titled measures of our competitors due to potential differences in the exact method of calculation. We compensate for these limitations by using these non-GAAP financial measures as supplements to GAAP financial measures and by reviewing the reconciliations of the non-GAAP financial measures to their most comparable GAAP financial measures.
The
adjustments to these non-GAAP financial measures, and the basis for such adjustments, are outlined below:
Acquisition accounting for deferred revenue. Historically, we have consummated acquisitions in order to support our strategic and other business objectives. In accordance with the fair value provisions applicable to the accounting for business combinations, acquired deferred revenue is often recorded on the opening balance sheet at an amount that is lower than the historical carrying value. Although this acquisition accounting requirement has no impact on our business or cash flow, it adversely impacts our 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, we provide non-GAAP financial measures which exclude the impact of the acquisition accounting adjustment.
We believe 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 us in our financial and operational decision-making, and (b) compare our past and future reports of financial results as the revenue reduction related to acquired deferred revenue will not recur when related lease licenses and software maintenance contracts are renewed in future periods.
Amortization of intangible assets from acquisitions. We incur amortization of intangible assets, included in our GAAP presentation of amortization expense, related to various acquisitions we have made. We exclude these expenses for the purpose of calculating non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP operating income, non-GAAP operating
profit margin, non-GAAP net income and non-GAAP diluted earnings per share when we evaluate our continuing operational performance 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 us after the acquisition. Accordingly, we do not consider these expenses for purposes of evaluating our performance during the applicable time period after the acquisition, and we exclude such expenses when making decisions to allocate resources. We believe 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 us in our financial and operational decision-making, and (b) compare our past reports of financial results as we have historically reported these non-GAAP financial measures.
Stock-based compensation
expense. We incur expense related to stock-based compensation included in our GAAP presentation of cost of maintenance and service; research and development expense; and selling, general and administrative expense. This non-GAAP adjustment also includes excess payroll tax expense related to stock-based compensation. Stock-based compensation expense (benefit) incurred in connection with our deferred compensation plan held in a rabbi trust includes an offsetting benefit (charge) recorded in other income (expense). Although stock-based compensation is an expense and viewed as a form of compensation, we exclude these expenses for the purpose of calculating non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP operating income, non-GAAP operating profit margin, non-GAAP net income and non-GAAP diluted earnings per share when we evaluate our continuing operational performance. We similarly exclude income (expense) related to assets held in a
rabbi trust in connection with our deferred compensation plan. Specifically, we exclude stock-based compensation and income (expense) related to assets held in the deferred compensation plan rabbi trust during our annual budgeting process and our quarterly and annual assessments of our performance. The annual budgeting process is the primary mechanism whereby we allocate resources to various initiatives and operational requirements. Additionally, the annual review by our board of directors during which it compares our 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 our senior management and department managers, charges related to stock-based compensation are excluded from expenditure and profitability results. In fact, we record stock-based compensation expense into a stand-alone cost center for which no single operational
manager is responsible or accountable. In this way, we can 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. We believe that these non-GAAP financial measures are useful to investors because they allow investors to (a) evaluate our operating results and the effectiveness of the methodology used by us to review our operating results, and (b) review historical comparability in our financial reporting as well as comparability with competitors' operating results.
Transaction expenses related to business combinations. We incur expenses for professional services rendered in connection with business combinations, which are included in our GAAP presentation of selling, general and administrative expense.
These expenses are generally not tax-deductible. We exclude these acquisition-related transaction expenses, derived from announced acquisitions, 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 we evaluate our continuing operational performance, as we generally would not have otherwise incurred these expenses in the periods presented as a part of our operations. We believe that these non-GAAP financial measures are useful to investors because they allow investors to (a) evaluate our operating results and the effectiveness of the methodology used by us to review our operating results, and (b) review historical comparability in our financial reporting as well as comparability with competitors' operating results.
Non-GAAP tax provision. We
utilize a normalized non-GAAP annual effective tax rate (AETR) to calculate non-GAAP measures. This methodology provides better consistency across interim reporting periods by eliminating the effects of non-recurring items and aligning the non-GAAP tax rate with our expected geographic earnings mix. To project this rate, we analyzed our historic and projected non-GAAP earnings mix by geography along with other factors such as our current tax structure, recurring tax credits and incentives, and expected tax positions. On an annual basis we will re-evaluate this rate for significant items that may materially affect our projections.
Non-GAAP financial measures are not in accordance with, or an alternative for, GAAP. Our 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 our consolidated financial statements
prepared in accordance with GAAP.
We have provided a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures as listed below:
Cash and cash equivalents consist primarily of highly liquid investments such as money market funds and deposits held at major banks. Short-term investments consist primarily of deposits held by certain of our foreign subsidiaries with original maturities of three months to one year. The following table presents our foreign and domestic holdings of cash, cash equivalents and short-term investments as of June 30, 2021 and December 31, 2020:
In
general, it is our intention to permanently reinvest all earnings in excess of previously taxed amounts. Substantially all of the pre-2018 earnings of our non-U.S. subsidiaries were taxed through the transition tax imposed as part of the Tax Cuts and Jobs Act of 2017 and post-2018 current earnings are taxed as part of global intangible low-taxed income tax expense. These taxes increase our previously taxed earnings and allow for the repatriation of the majority of our foreign earnings without any residual U.S. federal tax. While we believe that the financial reporting bases may be greater than the tax bases of investments in foreign subsidiaries for any earnings in excess of previously taxed amounts, such amounts are considered permanently reinvested. The cumulative temporary difference
related to such permanently reinvested earnings is approximately $115.6 million, and we would anticipate the tax effect on those earnings to be immaterial.
The amount of cash, cash equivalents and short-term investments held by foreign subsidiaries is subject to translation adjustments caused by changes in foreign currency exchange rates as of the end of each respective reporting period, the offset to which is recorded in accumulated other comprehensive loss on our condensed consolidated balance sheet.
Cash Flows from Operating Activities
Six
Months Ended June 30,
(in thousands)
2021
2020
Change
Net cash provided by operating activities
$
289,984
$
279,004
$
10,980
Net
cash provided by operating activities increased during the six months ended June 30, 2021 compared to the six months ended June 30, 2020 due to increased net income (net of non-cash operating adjustments) of $35.6 million, partially offset by decreased net cash flows from operating assets and liabilities of $24.6 million. The growth in net cash provided by operating activities was impacted by a meaningful increase in customer receipts driven primarily by ACV growth and stronger collections in 2021, partially offset by increased outflows related to operational payments and income taxes.
Cash Flows from Investing Activities
Six
Months Ended June 30,
(in thousands)
2021
2020
Change
Net cash used in investing activities
$
(116,324)
$
(119,566)
$
3,242
Net
cash used in investing activities decreased during the six months ended June 30, 2021 compared to the six months ended June 30, 2020 due to decreased capital expenditures of $6.1 million, partially offset by increased acquisition-related net cash outlays of $5.0 million. We currently plan capital spending of $30.0 million to $40.0 million during fiscal year 2021 as compared to the $35.4 million that was spent in fiscal year 2020. The level of spending will depend on various factors, including the growth of the business and general economic conditions.
Net cash used in financing activities decreased during the six months ended June 30, 2021 compared to the six months ended June 30, 2020 due to decreased stock repurchases of $161.0 million and decreased principal payments on long-term debt of $30.0 million, partially offset by increased restricted stock withholding taxes paid in lieu of issued shares of $25.3
million.
Other Cash Flow Information
As of June 30, 2021, the carrying value of our term loans was $753.3 million, with no principal payments due in the next twelve months. Borrowings under the term loans accrue interest at the Eurodollar rate plus an applicable margin or at the base rate, at our election. The base rate is the applicable margin plus the highest of (i) the federal funds rate plus 0.500%, (ii) the Bank of America prime rate and (iii) the Eurodollar rate plus 1.000%. The applicable margin for these borrowings is a percentage per annum based on the lower of (1) a pricing level determined by our then-current consolidated leverage ratio and (2) a pricing level determined by our debt ratings (if such debt ratings exist).
We previously entered into noncancellable operating lease
commitments, primarily for our domestic and international offices. The commitments related to these operating leases is $147.1 million, of which $27.4 million is due in the next twelve months.
We believe that existing cash and cash equivalent balances of $957.7 million, together with cash generated from operations and access to the $500.0 million Revolving Credit Facility, will be sufficient to meet our working capital and capital expenditure requirements through the next twelve months. Our cash requirements in the future may also be financed through additional equity or debt financings. However, future disruptions in the capital markets could make financing more challenging, and there can be no assurance that such financing can be obtained on commercially reasonable terms, or at all.
Under our stock repurchase program, we repurchased shares as follows:
As of June 30, 2021, 2.8 million shares remained available for repurchase under the program.
The authorized repurchase program does not have an expiration date, and the pace of the repurchase activity will depend on factors such as working capital needs, cash requirements for acquisitions, our stock price, and economic and market conditions. Our stock repurchases may be effected from time to time through open market purchases or pursuant to a Rule 10b5-1 plan.
We
continue to generate positive cash flows from operating activities and believe that the best uses of our excess cash are to invest in the business; acquire or make investments in complementary companies, products, services and technologies; and make payments on our outstanding debt balances. Any future acquisitions may be funded by available cash and investments, cash generated from operations, debt financing, or the issuance of additional securities. Additionally, we have in the past, and expect in the future, to repurchase stock in order to both offset dilution and return capital, in excess of our requirements, to stockholders with the goal of increasing stockholder value.
Off-Balance-Sheet Arrangements
We do not have any special-purpose entities or off-balance-sheet arrangements.
Contractual Obligations
There
were no material changes to our significant contractual obligations during the six months ended June 30, 2021 as compared to those previously reported within "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2020 Form 10-K.
During the first quarter of 2021, 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, 2021. No other events or circumstances changed during the six months ended June 30, 2021 that would indicate that the fair values of our reporting unit and indefinite-lived intangible asset are below their carrying amounts.
No significant changes have occurred to our critical accounting policies and estimates as previously reported within "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2020 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. Changes in the overall level of interest rates affect the interest income that is generated from our cash, cash equivalents and short-term investments and the interest expense that is generated from our outstanding borrowings. For the three and six months ended June 30, 2021, interest income was $0.5 million and $1.0 million, respectively, and interest expense was $3.3 million and $6.7 million, respectively. Cash and cash equivalents consist primarily of highly liquid investments such as money market funds and deposits held at major banks. Short-term investments consist primarily of deposits held by certain foreign subsidiaries
with original maturities of three months to one year.
Foreign Currency Transaction Risk. As we operate in international regions, a portion of our revenue, expenses, cash, accounts receivable and payment obligations are denominated in foreign currencies. As a result, changes in currency exchange rates will affect our financial position, results of operations and cash flows.
With respect to revenue, on average for the quarter ended June 30, 2021, the U.S. Dollar was approximately 5.4% weaker, when measured against our primary foreign currencies, than for the quarter ended June 30, 2020. With respect to revenue, on average for the six months ended June 30, 2021, the U.S. Dollar was approximately 5.9% weaker, when
measured against our primary foreign currencies, than for the six months ended June 30, 2020. The table below presents the net impacts of currency fluctuations on revenue for the three and six months ended June 30, 2021. The overall impacts were favorable for the three and six months ended June 30, 2021.
The
impacts from currency fluctuations resulted in increased operating income of $1.4 million and $3.5 million for the three and six months ended June 30, 2021 as compared to the three and six months ended June 30, 2020.
The most significant currency impacts on revenue and operating income are typically attributable to U.S. Dollar exchange rate changes against the Euro and Japanese Yen. Historical exchange rates for these currency pairs are reflected in the charts below:
Evaluation of Disclosure Controls and Procedures. As required by Rules 13a-15 and 15d-15 of the Exchange Act, we have evaluated, with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, the effectiveness of the design
and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures are effective, as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act.
We believe, based on our knowledge, that the financial statements and other financial information included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows as of and for the periods presented in this report. We are committed to both a sound internal control environment and to good corporate governance.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
From time to time, we review the disclosure controls and procedures, and may periodically make changes to enhance their effectiveness and to ensure that our systems evolve with our business.
Changes in Internal Control. There were no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2021 that materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting. Although the majority of our employee base worked remotely, the remote work arrangements did not adversely affect our ability to maintain financial operations,
including our financial reporting systems, internal controls over financial reporting and disclosure controls and procedures.
We are subject to various
investigations, claims and legal proceedings that arise in the ordinary course of business, including commercial disputes, labor and employment matters, tax audits and litigations, alleged infringement of third party's intellectual property rights and other matters. Use or distribution of our products could generate product liability, regulatory infraction, or similar claims by our customers, end users, channel partners, government entities or other third parties. Sales and marketing activities that impact processing of personal data, as well as measures taken to ensure license compliance against pirated or unauthorized usage of our commercial product, may also result in claims by customers and individual employees of customers. Each of these matters is subject to various uncertainties, and it is possible that an unfavorable resolution of one or more of these matters could have a significant adverse effect on our condensed consolidated financial statements as well as
cause reputational damage.
Item 1A. Risk Factors
We face a number of risks that could materially and adversely affect our business, financial position, results of operations and cash flows. A discussion of our risk factors can be found in Part I, Item 1A "Risk Factors" in our 2020 Form 10-K. No material changes have occurred to such risk factors after the filing of our 2020 Form 10-K.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
On June
20, 2021, in connection with our previously completed acquisition of AGI, we issued 987 shares of common stock with an aggregate value of $0.3 million to the former stockholders of AGI as part of the consideration for the acquisition. The shares were initially withheld by us and delivered to the former stockholders of AGI following satisfaction of certain indemnification and other obligations of AGI and the stockholders under the merger agreement. The shares were issued in reliance upon an exemption from the registration requirements of the Securities Act of 1933, as amended (the Securities Act), provided by Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder for an issuance not involving a public offering.
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
