Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-20853
ANSYS, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
04-3219960
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
2600 ANSYS Drive, Canonsburg, PA
 
15317
(Address of principal executive offices)
 
(Zip Code)
844-462-6797
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share
 
The Nasdaq Global Select Market
(Title of each class)
 
(Name of exchange on which registered)
Securities registered pursuant to section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically 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).    Yes  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
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.
Large accelerated filer  x
  
Accelerated filer  ¨
Non-accelerated filer  ¨
  
Smaller reporting company  ¨
Emerging growth company  ¨
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x
The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on June 29, 2018 as reported on the Nasdaq Global Select Market, was $11,318,000,000.
The number of shares of the registrant's Common Stock, par value $.01 per share, outstanding as of February 22, 2019 was 83,771,828 shares.
Documents Incorporated By Reference:
Portions of the Proxy Statement for the Registrant's 2019 Annual Meeting of Stockholders are incorporated by reference into Part III.




ANSYS, Inc.
ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR 2018
Table of Contents
 
 
 
PART I
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
PART II
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
PART III
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
PART IV
 
 
 
Item 15.
Item 16.
 
 


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Important Factors Regarding Future Results
Information provided by ANSYS, Inc. (hereafter the Company or ANSYS), in this Annual Report on Form 10-K, may contain forward-looking statements concerning such matters as projected financial performance, market and industry segment growth, product development and commercialization, acquisitions or other aspects of future operations. Such statements, made pursuant to the safe harbor established by the securities laws, are based on the assumptions and expectations of the Company's management at the time such statements are made. The Company cautions investors that its performance (and, therefore, any forward-looking statement) is subject to risks and uncertainties. Various important factors including, but not limited to, those discussed in Item 1A. Risk Factors, may cause the Company's future results to differ materially from those projected in any forward-looking statement. All information presented is as of December 31, 2018, unless otherwise indicated.
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 values of stock awards, bad debts, contract revenue, acquired deferred revenue, the valuation of goodwill and other intangible assets, deferred compensation, income taxes, uncertain tax positions, tax valuation reserves, useful lives for depreciation and amortization, and contingencies and litigation. The Company bases its 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.
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 intentions regarding its hybrid sales and distribution model.
The Company's intentions related to investments in research and development, particularly as it relates to expanding the ease of use and capabilities of its broad portfolio of simulation software products.
The Company's 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 the Company's acquisitions.
The Company's statements regarding the impact of global economic conditions.
The Company's expectations regarding the outcome of its service tax audit cases.
The Company's belief that, in most geographical locations, its facilities allow for sufficient space to support present and future foreseeable needs, including such expansion and growth as the business may require.
The Company's expectation that it can renew existing facility leases as they expire or find alternative facilities without difficulty, as needed.
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 belief that its overall performance is best measured by fiscal-year results rather than by quarterly results.
The Company's estimates regarding the expected impact on reported revenue related to the acquisition accounting treatment of deferred revenue.
The Company's expectation that it will continue to make targeted investments in its global sales and marketing organizations and its global business infrastructure to enhance and support its revenue-generating activities.

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The Company's intention to repatriate previously taxed earnings in excess of working capital needs and to reinvest all other earnings of its non-U.S. subsidiaries.
The Company's plans related to future capital spending.
The sufficiency of existing cash and cash equivalent balances to meet future working capital and capital expenditure requirements.
The Company's belief that the best uses of its excess cash are to invest in the business and repurchase stock in order to both offset dilution and return capital, in excess of its requirements, to stockholders with the goal of increasing stockholder value.
The Company's intentions related to investments in complementary companies, products, services and technologies.
The Company's expectation that changes in currency exchange rates will affect the Company's financial position, results of operations and cash flows.
The Company's expectations regarding future claims related to indemnification obligations.
The Company's estimates regarding total compensation expense associated with granted stock-based awards for future years.
The Company's expectations regarding the impacts of new accounting guidance.
The Company's assessment of its ability to realize deferred tax assets.
The Company's performance expectations related to its partnerships and strategic alliances.
The Company's expectations regarding acquisitions and integrating such acquired companies to realize the benefits of cost reductions and other synergies relating thereto.
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.

PART I
ITEM 1.
BUSINESS
ANSYS, a Delaware 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, materials and chemical processing, turbomachinery, consumer products, healthcare, and sports. Headquartered south of Pittsburgh, Pennsylvania, the Company and its subsidiaries employed approximately 3,400 people as of December 31, 2018. The Company focuses on the development of open and flexible solutions that enable users to analyze designs directly on the desktop, providing a common platform for fast, efficient and cost-conscious product development, from design concept to final-stage testing and validation. The Company distributes its ANSYS® suite of simulation technologies through a global network of independent resellers and distributors (collectively, 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 operates and reports as one segment.
The Company's product portfolio consists of the following:
Simulation Platform: ANSYS Workbench 
ANSYS Workbench is the framework upon which the Company's suite of advanced engineering simulation technologies is built. The innovative project schematic view ties together the entire simulation process, guiding the user through complex multiphysics analyses with drag-and-drop simplicity. With bi-directional computer-aided design (CAD) connectivity, powerful highly-automated meshing, a project-level update mechanism, pervasive parameter management and integrated optimization tools, the ANSYS Workbench platform enables Pervasive Engineering Simulation™.

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The Company's Workbench framework allows engineers and designers to incorporate the compounding effects of multiple physics into a virtual prototype of their design and simulate its operation under real-world conditions. As product architectures become smaller, lighter and more complex, companies must be able to accurately predict how products will behave in real-world environments where multiple types of physics interact in a coupled way. ANSYS multiphysics software enables engineers to simulate the interactions between structures, heat transfer, fluids and electronics all within a single, unified engineering simulation environment.
ANSYS Workbench enables companies to create a customized simulation environment to deploy specialized simulation best practices and automations unique to their product development process or industry. With ANSYS ACT™, end users or ANSYS partners can modify the user interface, process simulation data or embed third-party applications to create specialized tools based on ANSYS Workbench.
High-Performance Computing
The Company's high-performance computing (HPC) product suite enables enhanced insight into product performance and improves the productivity of the design process. The HPC product suite delivers cross-physics parallel processing capabilities for the full spectrum of the Company's simulation software by supporting structures, fluids, thermal and electronics simulations. This product suite decreases turnaround time for individual simulations, allowing users to consider multiple design ideas and make the right design decisions early in the design cycle.
Structures
The Company's structural analysis product suite offers simulation tools for product design and optimization that increase productivity, minimize physical prototyping and help to deliver better and more innovative products in less time. These tools tackle real-world analysis problems by making product development less costly and more reliable. In addition, these tools have capabilities that cover a broad range of analysis types, elements, contacts, materials, equation solvers and coupled physics capabilities, all targeted toward understanding and solving complex design problems. The Company also provides comprehensive topology optimization tools that engineers use to design structural components to meet loading requirements with minimal material and component weight. The Company offers a complete simulation workflow for additive manufacturing that allows reliable 3D printing by simulating the laser sintering process and delivering compensated CAD geometries that ensure reliable printed parts.
Fluids
The Company's fluids product suite enables modeling of fluid flow and other related physical phenomena. Fluid flow analysis capabilities provide all the tools needed to design and optimize new fluids equipment and to troubleshoot already existing installations. The suite contains general-purpose computational fluid dynamics software and specialized products to address specific industry applications.
Electromagnetics
The Company's electromagnetics product suite provides field simulation software for designing high-performance electronic and electromechanical products. The software streamlines the design process and predicts performance of mobile communication and internet-access devices, broadband networking components and systems, integrated circuits (ICs) and printed circuit boards (PCBs), as well as electromechanical systems such as automotive components and power electronics equipment, all prior to building a prototype.
Semiconductors
Advancements in semiconductor design and manufacturing enable smaller electronic architectures. Shrinking geometries, especially in the emerging 3D IC, FinFET and stacked-die architectures, reveal design challenges related to power and reliability. The Company's power analysis and optimization software suite manages the power budget, power delivery integrity and power-induced noise in an electronic design, from initial prototyping to system sign-off. These solutions deliver accuracy with correlation to silicon measurement; the capacity to handle an entire electronic system, including IC, package and PCB, efficiently for ease-of-debug and fast turnaround time; and comprehensiveness to facilitate cross-domain communications and electronic ecosystem enablement.

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Embedded Software
The Company's SCADE® product suite is a comprehensive solution for embedded software simulation, code production and automated certification. It has been developed specifically for use in critical systems with high dependability requirements, including aerospace, rail transportation, nuclear, industrial and automotive applications. SCADE software supports the entire development workflow, from requirements analysis and design, through verification, implementation and deployment. SCADE solutions easily integrate with each other and the rest of the ANSYS product suite, allowing for development optimization and increased communication among team members.
Systems
The Company delivers a unique and comprehensive system simulation capability that is ideal for the design of today's increasingly automated products. This collaborative environment leverages the Company's multiphysics, multibody dynamics, circuit and embedded software simulation capabilities, enabling users to simulate the complex interactions between components, circuits and control software within a single environment. These technologies provide a complete view into predicted product performance, which creates greater design confidence for engineers.
3D Design
The Company’s Discovery™ product family allows every engineer to benefit from the insight of simulation in their product design. The Discovery products range from early design exploration tools powered by interactive real-time simulation and intuitive geometry editing, to detailed product validation solutions utilizing proven flagship solver technology with easy-to-use guided workflows. These tools allow for design engineers of all levels of expertise to utilize simulation across the entire product design process and to work seamlessly with simulation experts using ANSYS flagship products for even more advanced analysis.
Academic
The Company's academic product suite provides a highly scalable portfolio of academic products based on several usage tiers, including associate, research and teaching. Each tier includes various non-commercial products that bundle a broad range of physics and advanced coupled field solver capabilities. The academic product suite provides entry-level tools intended for class demonstrations and hands-on instruction. It includes flexible terms of use and more complex analysis suitable for doctoral and post-doctoral research projects. The Company also provides a special product at no cost to students that is suitable for use away from the classroom and in non-commercial applications.
PRODUCT DEVELOPMENT
The Company makes significant investments in research and development and emphasizes frequent, integrated product releases. The Company's product development strategy centers on ongoing development and innovation of new technologies to increase productivity and to provide engineering simulation solutions that customers can integrate into enterprise-wide product lifecycle management (PLM) systems. The Company's product development efforts focus on extensions of the full product line with new functional modules, further integration with CAD, electronic CAD (ECAD) and PLM products, and the development of new products. The Company's products run on the most widely-used engineering computing platforms and operating systems, including Windows, Linux and most UNIX workstations.
The Company's total research and development expenses were $233.8 million, $202.7 million and $183.1 million in 2018, 2017 and 2016, respectively, or 18.1%, 18.5% and 18.5% of total revenue, respectively. As of December 31, 2018, the Company's product development staff consisted of approximately 1,200 employees, most of whom hold advanced degrees and have industry experience in engineering, mathematics, computer science or related disciplines. The Company has traditionally invested significant resources in research and development activities and intends to continue to make investments in expanding the ease of use and capabilities of its broad portfolio of simulation software products.

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The Company completed the following major product development activities and releases:
In February 2019, the Company released ANSYS 2019 R1. The new ANSYS Fluent® user experience improves the workflow process without compromising accuracy. Engineers benefit from the complete, single-window solution within ANSYS Fluent. ANSYS Motion™ was released with the most-powerful multibody dynamics solution. New offerings in the electronics and electromagnetics suite include an EMI Scanner, electromigration analysis and noise-vibration-harshness (NVH) capabilities. In structures, ANSYS Mechanical added thermal compliance to enable the generation of designs that maximize heat transfer using topology optimization. A new semi-implicit method allows efficient solution of problems that involve both large strain and large deformation. ANSYS Additive Suite™ includes ANSYS Additive Science™, an exploratory environment for engineers to determine how process parameters affect meltpool sizes and material porosity. Improvements to the SCADE suite for automotive make it simpler and faster to comply with industry standards like AUTOSAR and ISO 26262 for model-based systems and software in autonomous vehicles. ANSYS VRXPERIENCE™ integrates two new camera models, enabling users to test the perception algorithm in night driving conditions. New features in ANSYS medini® analyze allow users to more quickly and accurately perform functional safety analysis for DO-178C and other standards on aircraft systems. ANSYS SPEOS™ strengthens predictive design capabilities for creating, testing and validating a virtual design in a fast iteration loop, ensuring compliance with international standards and regulations. Topology optimization has been added to ANSYS Discovery Live, taking a leap forward in making digital exploration and generative design accessible for every engineer.
In September 2018, the Company released ANSYS 19.2 with faster problem-solving capabilities. In fluids, ANSYS 19.2 delivered new features to accelerate computational fluid dynamics simulations using a task-based workflow for watertight geometries and Mosaic meshing technology, empowering more engineers to get accurate results faster and with less training. ANSYS 19.2 introduced System Coupling 2.0 for multiphysics simulation with improved and consistent performance for any scenario, enabling HPC for multiphysics simulations. Engineers benefit from new functionality to improve workflow for semiconductors, specifically those used in the automotive and autonomous vehicle industries, with dedicated ISO 26262 support to meet safety regulations in ANSYS medini analyze. ANSYS introduced ANSYS VRXPERIENCE, providing virtual reality simulation and validation for autonomous vehicle simulation, complex systems such as intelligent headlamps, interior and exterior lighting, autonomous vehicles controls and HMI validation. A new product bundle, ANSYS SPEOS, provides a complete solution for designing and simulating illumination, interior and exterior lighting, cameras and lidars. New inverse analysis in the ANSYS structural suite, material designer and topology optimization developments give engineers more simulation options. Inverse Analysis predicts the shape of a component, helping achieve the desired shape during operation. Additive solutions provided improved robustness for both ANSYS Additive Print™ and ANSYS Workbench Additive, including physics-driven lattice optimization. In topology optimization, ANSYS 19.2 added loading options; manufacturing constraints that are ideal for additive manufacturing; and a unique lattice optimization capability. In the electromagnetics suite, new advancements in multi-channel radar system simulation include a lightweight geometry modeler that enables rapid meshing and an efficient actor movement in pulse-by-pulse road scene simulation resulting in 20 times faster processing.
In May 2018, the Company released ANSYS 19.1 with new simulation-based digital twin functionality. ANSYS Twin Builder™ is a first-of-its-kind product, enabling customers to build, validate and deploy simulation-based digital twins. A digital twin combines accurate physics-based virtual replicas of a product with data collected using industrial internet of things connectivity platforms, providing intelligence and predictive maintenance insights in real-world operating conditions. ANSYS 19.1 also provided updates across all physics and delivered new metal additive manufacturing solutions, empowering customers to quickly test their product designs virtually before printing a part. ANSYS Additive Suite enables designers to optimize weight reduction and lattice density; create, repair and clean up CAD geometry; simulate the additive process; and conduct structural and thermal analysis for data validation. In fluids, ANSYS 19.1 offered a new approach to cavitation modeling across diverse applications, from hydro pumps to rocket fuel systems. Users reliably predict cavitation using pre-existing material properties, without the need for empirical model parameters or extensive physical testing. ANSYS 19.1 introduced ANSYS EnVision™ Pro, a new version of ANSYS EnSight™ Viewer, which empowers engineers to interact with EnSight data and create new views and photorealistic images. In semiconductors, a new 3D IC graphical user interface wizard enabled automatic and seamless connections between multiple dies, interposer and package for chip-level power and thermal integrity analysis, significantly improving usability and easing 3D IC setup and analysis.

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New Product Offerings
Optical
On May 2, 2018, the Company acquired OPTIS, a premier provider of software for scientific simulation of light, human vision and physics-based visualization. Adding OPTIS' optical sensor and closed-loop, real-time simulation to the Company's leading multiphysics portfolio, the Company now offers the broadest toolset for validating the safety and reliability of autonomous vehicles.
The Company's capabilities now span the simulation of all sensors, including lidar, cameras and radar; the multiphysics simulation of physical and electronic components; the analysis of systems functional safety; as well as the automated development of safety-certified embedded software. This functionality can be integrated into a closed-loop simulation environment that interacts with weather and traffic simulators, enabling thousands of driving scenarios to be executed virtually.
Beyond the autonomous vehicle sector, the acquisition reinforces the Company as a world-class simulation provider across various industries and verticals.
PRODUCT QUALITY
The Company's employees generally perform product development tasks according to predefined quality plans, procedures and work instructions. Certain technical support tasks are also subject to a quality process. These plans define, for each project, the methods to be used, the responsibilities of project participants and the quality objectives to be met. The majority of software products are developed under a quality system that is certified to the ISO 9001:2015 standard. The Company establishes quality plans for its products and services, and subjects product designs to multiple levels of testing and verification in accordance with processes established under the Company's quality system.
SALES AND MARKETING
The Company distributes and supports its products through its own direct sales offices, as well as a global network of independent channel partners. This channel partner network provides the Company with a cost-effective, highly-specialized channel of distribution and technical support. It also enables the Company to draw on business and technical expertise from a global network, provides relative stability to the Company's operations to help mitigate geography-specific economic trends and provides the Company with an opportunity to take advantage of new geographic markets or enhance its sales coverage in existing markets. The Company derived 22.4%, 24.8% and 24.4% of its total revenue through the indirect sales channel for the years ended December 31, 2018, 2017 and 2016, respectively.
The channel partners sell ANSYS products to new customers, expand installations within the existing customer base, offer training and consulting services, and provide the first line of ANSYS technical support. The Company's channel partner certification process helps to ensure that each channel partner has the ongoing capability to adequately represent the Company's expanding product lines and to provide an acceptable level of training, consultation and customer support.
The Company also has a direct sales organization to develop an enterprise-wide, focused sales approach and to implement a worldwide major account strategy. The sales management organization also functions as a focal point for requests to ANSYS from the channel partners and provides additional support in strategic locations through the presence of direct sales offices.
During 2018, the Company continued to invest in its existing domestic and international strategic sales offices. In total, the Company's direct sales organization comprises 1,700 employees who are responsible for the sales, technical support, consulting services, marketing initiatives and administrative activities designed to support the Company's overall revenue growth and expansion strategies.
The Company's products are utilized by organizations ranging in size from small consulting firms to the world's largest industrial companies. No single customer accounted for more than 5% of the Company's revenue in 2018, 2017 or 2016.
Information with respect to foreign and domestic revenue may be found in Note 16 to the consolidated financial statements in Part IV, Item 15 of this Annual Report on Form 10-K and in the section entitled “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Annual Report on Form 10-K.
STRATEGIC ALLIANCES AND MARKETING RELATIONSHIPS
The Company has established and continues to pursue strategic alliances with advanced technology suppliers, hardware vendors, specialized application developers, and CAD, ECAD and PLM providers. The Company believes that these relationships facilitate accelerated incorporation of advanced technology into the Company's products, provide access to new

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customers, expand the Company's sales channels, develop specialized product applications and provide direct integration with leading CAD, electronic design automation (EDA), product data management and PLM systems.
The Company has technical and marketing relationships with leading CAD vendors, such as Autodesk, PTC and Siemens Product Lifecycle Management Software, to provide direct links between products. These links facilitate the transfer of electronic data models between the CAD systems and ANSYS products.
In 2018, the Company partnered with PTC to accelerate product innovation by providing customers a world-class simulation-driven design solution. Working together, ANSYS and PTC will deliver ANSYS Discovery Live real-time simulation within PTC’s Creo® 3D CAD software. The combined solution will be sold by PTC as part of the Creo product suite. This solution will offer customers a unified modeling and simulation environment, removing the boundaries between CAD and simulation and enabling design engineers to gain insight into each of the many design decisions they make throughout the product development process. This insight will enable design engineers to create higher quality products, while reducing product and development costs. The product is expected to be commercially available in the first half of 2019.
Similarly, the Company maintains marketing and software development relationships with leading EDA software companies, including Cadence Design Systems, Synopsys, Mentor Graphics, Zuken and National Instruments. These relationships support the transfer of data between electronics design and layout software and the ANSYS electronics simulation portfolio. In 2017, the Company entered into an integration and distribution agreement with Synopsys to cooperatively integrate ANSYS RedHawk technology into an in-design add-on to a Synopsys design tool for the primary purpose of providing customers with direct, in-design access to the RedHawk technology's capabilities.
The Company also has a relationship with Spatial Corp. to provide the 3D modeling kernel technology upon which the Company's in-house geometry modeling software solutions are built.
The main method that ANSYS employs to democratize HPC to a wider audience is through partnerships with a number of companies, such as cloud-hosting providers, HPC hardware manufacturers and supercomputing centers such as HLRS in Stuttgart, Germany. The cloud partners not only provide HPC services, but also the back-end infrastructure to those customers who lack the in-house HPC or IT staff, but still want the ability to increase computational resources quickly. In addition, ANSYS has established partnerships with HPC partners that provide appliances, or pre-configured racks of computational hardware optimized and configured to run ANSYS software.
The Company's open cloud strategy allows it to work with various public cloud providers and cloud hosting partners. This approach makes it easy for customers to use the same workflows on-premise and in the Cloud. In addition, the Company strengthened its other cloud-hosting service partnerships by further improving best practices for executing engineering simulation in the Cloud. Cloud-hosting partners such as Nimbix, Rescale and Gompute provide friction-free cloud access to ANSYS solutions for customers. Furthermore, the Company enjoys mutually-committed alliances with large cloud platform providers such as Microsoft and AWS. In 2018, the Company entered into an agreement with SAP to embed ANSYS' pervasive simulation solutions for digital twins into SAP's market-leading digital supply chain, manufacturing and asset management portfolio. The partnership's first solution, expected in 2019, will run on SAP Cloud Platform and empower industrial asset operators to optimize operations and maintenance through real-time engineering insights, to reduce product cycle times and increase profitability.
The Company's Partner Program actively encourages specialized developers of software solutions to use the Company's technology as a development platform for their applications and provides customers with enhanced functionality related to their use of the Company's software. With almost 200 active solution partnerships, spanning a wide range of technologies, including optimization, electronics, mechanical simulation, fluid simulation and CAD, this partner ecosystem extends the depth and breadth of the Company's technology offerings.
The Company has a software license agreement with Livermore Software Technology Corporation (LSTC) whereby LSTC has provided LS-DYNA® software for explicit dynamics solutions used in applications such as crash test simulations in automotive and other industries. Under this arrangement, LSTC assists in the integration of the LS-DYNA software with the Company's pre- and post-processing capabilities and provides updates and problem resolution in return for royalties from sales of the ANSYS LS-DYNA® combined product.
The Company has a license agreement with Dynardo GmbH involving the optiSLang software for robust design optimization. Under this arrangement, Dynardo provides its optiSLang software and assists with marketing, customer support, training, and integration into the Company's platform, in return for royalties from sales of the combined product. ANSYS optiSLang applies across many industries, extending and strengthening the Company's capabilities in sensitivity analysis and simulation process automation to enable faster and better-performing product designs.

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The Company has a software license agreement with HBM that provides the advanced fatigue capabilities of nCode DesignLife™, a leading durability software from HBM. ANSYS nCode DesignLife™ technology leverages the open architecture of the ANSYS platform and enables mechanical engineers to more easily address complex product life and durability issues before a prototype is built.
COMPETITION
The Company believes that the principal factors affecting sales of its software include ease of use, breadth and depth of functionality, flexibility, quality, ease of integration with other software systems, file compatibility across computer platforms, range of supported computer platforms, performance, price and total cost of ownership, customer service and support, company reputation and financial viability, and effectiveness of sales and marketing efforts.
The Company continues to experience competition across all markets for its products and services. The Company's competitors include large, global, publicly traded companies; small, geographically-focused firms; startup firms; and solutions produced in-house by the end users. Some of the Company's current and possible future competitors have greater financial, technical, marketing and other resources than the Company, and some have well-established relationships with current and potential customers of the Company. The Company's current and possible future competitors also include firms that have elected, or may in the future elect, to compete by means of open source licensing. These competitive pressures may result in decreased sales volumes, price reductions and/or increased operating costs, and could result in lower revenues, margins and net income.
PROPRIETARY RIGHTS AND LICENSES
The Company regards its software as proprietary and relies on a combination of trade secret, copyright, patent and trademark laws, license agreements, nondisclosure and other contractual provisions, and technical measures to protect its proprietary rights in its products. The Company distributes its software products under software license agreements that grant customers nonexclusive licenses, which are typically nontransferable, for the use of the Company's products. License agreements for the Company's products are directly between the Company and end users. Use of the licensed software product is restricted to specified sites unless the customer obtains a multi-site license for its use of the software product or the software product is by its nature a multi-site use product. Software security measures are also employed to prevent unauthorized use of the Company's software products and the licensed software is subject to terms and conditions prohibiting unauthorized reproduction. For most products, customers may purchase a perpetual license of the technology with the right to annually purchase ongoing maintenance, technical support and upgrades, or may lease the product on a fixed-term basis for a fee that includes the license, maintenance, technical support and upgrades. For its Discovery products, customers purchase an annual subscription for a certain number of named users that includes the license, maintenance, technical support and upgrades.
The Company licenses its software products utilizing a combination of web-based and hard-copy license terms and forms. For certain software products, the Company primarily relies on "click-wrapped" licenses (i.e. online agreements where the website provider posts terms and conditions, and the user clicks on the "accept" button). The enforceability of these types of agreements under the laws of some jurisdictions is uncertain.
The Company also seeks to protect the source code of its software as a trade secret and as unpublished copyrighted work. The Company has obtained federal trademark registration protection for ANSYS and other marks in the U.S. and foreign countries. Additionally, the Company was awarded numerous patents by the U.S. Patent and Trademark Office, and has a number of patent applications pending. To the extent the Company does not choose to seek patent protection for its intellectual property, the Company primarily relies on the protection of its source code as a trade secret.
Employees of the Company have signed agreements under which they have agreed not to disclose trade secrets or confidential information. These agreements, where legally permitted, restrict engagement in or connection with any business that is competitive with the Company anywhere in the world while employed by the Company (and, in some cases, for specified periods thereafter) and state that any products or technology created by employees during their term of employment are the property of the Company. In addition, the Company requires all channel partners to enter into agreements not to disclose the Company's trade secrets and other proprietary information.
Despite these precautions, there can be no assurance that misappropriation of the Company's technology and proprietary information (including source code) will be prevented. Further, there can be no assurance that copyright, trademark, patent and trade secret protection will be available for the Company's products in certain jurisdictions, or that restrictions on the ability of employees and channel partners to engage in activities competitive with the Company will be enforceable. Costly and time-consuming litigation could be necessary in the future to enforce the Company's rights to its trade secrets and proprietary information or to enforce its patent rights and copyrights, and it is possible that, in the future, the Company's competitors may be able to obtain the Company's trade secrets or to independently develop similar, unpatented technology.

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The software development industry is characterized by rapid technological change. Therefore, the Company believes that factors such as the technological and creative skills of its personnel, new product developments, frequent product enhancements, name recognition and reliable product maintenance are also important to establishing and maintaining technology leadership in addition to the various legal protections of its technology that may be available.
The Company does not believe that any of its products infringe upon the proprietary rights of third parties. There can be no assurance, however, that third parties will not claim such infringement by the Company or its licensors or licensees with respect to current or future products. The Company expects that software suppliers will increasingly be subject to the risk of such claims as the number of products and suppliers continues to expand and the functionality of products continues to increase. Any such claims, with or without merit, could be time consuming, result in costly litigation, cause product release delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company.
SEASONAL VARIATIONS
The Company's business has experienced seasonality, including quarterly reductions in software sales resulting from slowdowns of customer activities during the summer months, particularly in Europe, as well as from the seasonal purchasing and budgeting patterns of the Company's global customers. Lease and maintenance contract renewals are typically highest in the first and fourth quarters. The Company's revenue is typically highest in the fourth quarter.
DEFERRED REVENUE AND BACKLOG
Deferred revenue consists of billings made or payments received in advance of revenue recognition. The deferred revenue on the Company's consolidated balance sheets does not represent the total value of annual or multi-year, noncancellable agreements. The Company's backlog represents installment billings for periods beyond the current quarterly billing cycle and customer orders received but not processed. The Company's deferred revenue and backlog as of December 31, 2018 and 2017 consisted of the following:
ASC 606(1)
Balance at December 31, 2018
(in thousands)
Total
 
Current
 
Long-Term
Deferred revenue
$
343,174

 
$
328,584

 
$
14,590

Backlog
315,998

 
147,299

 
168,699

Total
$
659,172

 
$
475,883

 
$
183,289

ASC 605(1)
Balance at December 31, 2018
(in thousands)
Total
 
Current
 
Long-Term
Deferred revenue
$
555,539

 
$
526,168

 
$
29,371

Backlog
401,543

 
142,284

 
259,259

Total
$
957,082

 
$
668,452

 
$
288,630

ASC 605
Balance at December 31, 2017
(in thousands)
Total
 
Current
 
Long-Term
Deferred revenue
$
468,560

 
$
440,491

 
$
28,069

Backlog
301,150

 
97,283

 
203,867

Total
$
769,710

 
$
537,774

 
$
231,936

(1)Effective January 1, 2018, the Company adopted new guidance on revenue recognition, Accounting Standards Codification (ASC) 606. The Company recorded $244.1 million of deferred revenue to retained earnings upon the adoption of the new guidance. Deferred revenue and backlog is presented under the prior guidance, ASC 605, for comparability purposes. For further information, see Note 3 to the consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Revenue associated with deferred revenue and backlog that will be recognized in the subsequent twelve months is classified as current in the tables above.

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EMPLOYEES
As of December 31, 2018, the Company employed approximately 3,400 people. At that date, there were also contract personnel and co-op students providing ongoing development services and technical support. Certain employees of the Company are subject to collective bargaining agreements and have local work councils.
ACQUISITIONS
The Company makes targeted acquisitions in order to support its long-term strategic direction, accelerate innovation, provide increased capabilities to its existing products, supply new products and services, expand its customer base and enhance its distribution channels.
During the year ended December 31, 2018, the Company completed the acquisition of 100% of the shares of OPTIS, a premier provider of software for scientific simulation of light, human vision and physics-based visualization, for a purchase price of $291.0 million.
During the years ended December 31, 2017 and 2016, the Company completed various acquisitions to expand its customer base and accelerate the development of new and innovative products to the marketplace while lowering design and engineering costs for customers. The acquisitions were not individually significant. The combined purchase prices of the acquisitions purchased during the years ended December 31, 2017 and 2016 were approximately $67.0 million and $10.3 million, respectively.
The 2018 and 2017 technology acquisitions are further described in the table below:
Date of Closing
 
Company
 
Details
May 2, 2018
 
OPTIS
 
OPTIS, a premier provider of software for scientific simulation of light, human vision and physics-based visualization, extends the Company's portfolio into the area of optical simulation to provide comprehensive sensor solutions, covering visible and infrared light, electromagnetics and acoustics for camera, radar and lidar.
November 15, 2017
 
3DSIM
 
3DSIM, a developer of premier additive manufacturing technology, gives ANSYS a complete additive manufacturing simulation workflow solution. 3DSIM's software solutions empower manufacturers, designers, materials scientists and engineers to achieve their objectives through simulation-driven innovation rather than physical trial and error.
July 5, 2017
 
Computational Engineering International, Inc.
(CEI Inc.)
 
CEI Inc., the developer of EnSight, aids engineers and scientists in their ability to analyze, visualize and communicate large simulation data sets in clear, higher-resolution outputs.
March 10, 2017
 
CLK Design Automation (CLK-DA)
 
CLK-DA offers fast transistor simulation technology that complements the Company's semiconductor product portfolio.
For further information on the Company's business combinations, see Note 4 to the consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
AVAILABLE INFORMATION
The Company's website is www.ansys.com. The Company makes available on its website, free of charge, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, interactive data files, Current Reports on Form 8-K, reports filed pursuant to Section 16 and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such materials are electronically filed or furnished to the Securities and Exchange Commission (SEC). The Company's reports may also be obtained by accessing the EDGAR database of the SEC's website at www.sec.gov. In addition, the Company has posted the charters for its Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee, as well as the Company's Code of Business Conduct and Ethics, Standard Business Practices and Corporate Governance Guidelines on its website. Information posted on the Company's website or social media accounts is not incorporated by reference in this Annual Report on Form 10-K.

ITEM 1A.
RISK FACTORS
Information provided by the Company or its spokespersons, including information contained in this Annual Report on Form 10-K, may from time to time contain forward-looking statements concerning projected financial performance, market and industry sector growth, product development and commercialization or other aspects of future operations. Such statements will be based on the assumptions and expectations of the Company's management at the time such statements are made. The Company cautions investors that its performance (and, therefore, any forward-looking statement) is subject to risks and uncertainties. Various important factors, including, but not limited to, the following may cause the Company's future results to differ materially from those projected in any forward-looking statement.

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Global Economic Conditions. The Company's operations and performance depend significantly on foreign and domestic economic conditions. Uncertainty in the macroeconomic environment, as well as geopolitical conditions, can result in significant volatility in credit, equity and foreign exchange markets. This volatility and the related economic conditions may negatively impact the Company as customers defer spending in response to tighter credit; higher unemployment; geopolitical tensions and uncertainties; unpredictable government trade, tax or other policies; evolving immigration and other labor policies; financial market volatility; government austerity programs; negative financial news; declining valuations of investments; and other factors. In addition, certain of the Company's customers' budgets may be constrained and may be unable to purchase the Company's products at the same level as they have in prior periods. Customer spending levels may be impacted by trade or tax policies or decreased government spending in certain countries as concerns continue regarding economic conditions and government debt levels. These economic conditions can change abruptly. To the extent the global economy experiences volatility, the Company may be exposed to impairments of certain assets as their values deteriorate.
Tighter credit due to economic conditions may diminish the Company's future borrowing ability. The Company's customers' ability to pay for the Company's products and services may also be impaired, which may lead to an increase in the Company's allowance for doubtful accounts and write-offs of accounts receivable. Since the Company is exposed to the majority of major world markets, uncertainty in any significant market may negatively impact the Company's performance and results, particularly with respect to the Company's largest geographic customer bases. The Company is unable to predict the likely duration and magnitude of changing economic conditions or the likelihood of additional uncertainty arising in any of the Company's key markets.
Decline in Customers' Businesses. The Company's sales are based significantly on end-user demand for products in key industrial sectors. Many of these sectors periodically experience economic declines, which may be exacerbated by other economic factors. These factors may also adversely affect the Company's business by extending sales cycles and reducing revenue. These economic factors may cause the Company's customers to reduce the size of their workforce or cut back on operations and may lead to a reduction in renewals of licenses or maintenance contracts with the Company. The Company's customers may request discounts which may cause fluctuations in the Company's future operating results. The Company may not be able to adjust its operating expenses to offset such fluctuations because a substantial portion of the Company's operating expenses are related to personnel, facilities and marketing programs. The level of personnel and related expenses may not be able to be adjusted quickly and is based, in significant part, on the Company's expectation for future revenue.
Risks Associated with International Activities. A majority of the Company's business comes from outside the United States and the Company has customers that supply a wide spectrum of goods and services in virtually all of the world's major economic regions. If any of the foreign economies in which the Company does business deteriorate or suffer periods of uncertainty, the Company's business and performance may be negatively impacted through reduced customer spending, changes in purchasing cycles or timing, reduced access to credit for its customers, or other factors impacting the Company's international sales and collections. The Company's results may also be negatively impacted by geopolitical tensions, which may result in increased economic volatility.
As a result of its significant international presence, the Company has revenue, expenses, cash, accounts receivable and payment obligations denominated in foreign currencies. As a result, the Company is subject to currency exchange risk. The Company's revenues and operating results are adversely affected when the U.S. Dollar strengthens relative to other currencies and are positively affected when the U.S. Dollar weakens. As a result, changes in currency exchange rates will affect the Company's financial position, results of operations and cash flows. In the event that there are economic declines in countries in which the Company conducts transactions, the resulting changes in currency exchange rates may affect the Company's financial position, results of operations and cash flows. The Company seeks to reduce currency exchange transaction risks primarily through its normal operating and treasury activities, but there can be no assurance that it will be successful in reducing these risks.
Additional risks inherent in the Company's international business activities include imposition of government controls; export license requirements; restrictions on the export of critical technology, products and services; the violation of anti-corruption laws and regulations applicable to the Company, by third parties in countries where such conduct may be permissible or commonplace; political and economic instability; difficulties in staffing and managing international operations; changes in data privacy regulations; longer accounts receivable payment cycles; burdens of complying with a wide variety of foreign laws, taxes and regulations; protectionist economic policies; new foreign tariffs and trade sanctions; new U.S. export and/or import and doing-business regulations, including new trade sanctions impacting more foreign entities thereby restricting the sale of the Company's products and services to those entities (which may result in an advantage to certain of the Company's competitors who may not be subject to the same regulatory restrictions); and the fact that patent, copyright, trademark and trade secret protection may not be available in every foreign country in which the Company sells its products and services. The Company's business, financial position, results of operations and cash flows could be materially, adversely affected by any of these risks.

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The U.S. government has been requesting foreign governments to renegotiate existing trade agreements with the U.S. and to change currency conversion rates, increasing uncertainty levels in the international trade environment. While preliminary agreements were reached with Mexico and Canada, a high level of uncertainty remains in the future trade conditions, including with China, which may have an impact on the Company's business.
In 2017, the United Kingdom initiated a two-year process to leave the European Union commonly known as “Brexit”. The lack of success of the efforts of the government of the United Kingdom to conclude a withdrawal agreement with the representatives of the European Union creates a high level of uncertainty in the political, legal and economic environment in the United Kingdom, the European Union and the United States. The Company has significant operations in the United Kingdom and the European Union. Ongoing uncertainty or the conclusion of withdrawal terms that are disadvantageous for the Company could negatively impact the Company’s results.
In May 2018, the General Data Protection Regulation (GDPR) went into effect in the European Union. These rules outline a comprehensive set of requirements for businesses that use any personal data in-scope for the regulation, including the use of data solely for sales, marketing, or support purposes and with respect to employee data originating in or processed within the European Economic Area. The Company is subject to the requirements of the GDPR with respect to both customer and employee data, for which non-compliance can result in potentially significant monetary penalties and enhanced regulatory oversight of data practices, as well as the basis for a private right of action and class action claims. If the Company fails to comply with the GDPR or a number of other data protection regulations that apply to the Company’s business globally, its reputation may suffer and its financial position, results of operations and cash flows may be negatively impacted.
Sales Forecasts. The Company makes many operational and strategic decisions based upon short- and long-term sales forecasts. The Company's sales personnel continually monitor the status of all proposals, including the estimated closing date and the value of the sale, in order to forecast quarterly sales. These forecasts are subject to significant estimation and are impacted by many external factors, including global economic conditions and the performance of the Company's customers. A variation in actual sales activity from that forecasted could cause the Company to plan or budget incorrectly and, therefore, could adversely affect the Company's business, financial position, results of operations and cash flows. The Company's management team forecasts macroeconomic trends and developments, and integrates them through long-range planning into budgets, research and development strategies and a wide variety of general management duties. Global economic conditions, and the effect those conditions and other disruptions in global markets have on the Company's customers, may have a significant impact on the accuracy of the Company's sales forecasts. These conditions may increase the likelihood or the magnitude of variations between actual sales activity and the Company's sales forecasts and, as a result, the Company's performance may be hindered because of a failure to properly match corporate strategy with economic conditions. This, in turn, may adversely affect the Company's business, financial position, results of operations and cash flows.
Stock Market and Stock Price Volatility. Market prices for securities of software companies have generally been volatile. In particular, the market price of the Company's common stock has been, and may continue to be, subject to significant fluctuations as a result of factors affecting the Company, the software industry or the securities markets in general. Such factors include, but are not limited to, declines in trading price that may be triggered by the Company's failure to meet the expectations of securities analysts and investors. Moreover, the trading price could be subject to additional fluctuations in response to quarter-to-quarter variations in the Company's operating results, material announcements made by the Company or its competitors, conditions in the financial markets or the software industry generally, or other events and factors, many of which are beyond the Company's control.
Rapidly Changing Technology; New Products; Risk of Product Errors. The Company operates in an industry generally characterized by rapidly changing technology and frequent new product introductions, which can render existing products obsolete or unmarketable. A major factor in the Company's future success will be its ability to anticipate technological changes and to develop and introduce, in a timely manner, enhancements to its existing products, products acquired in acquisitions and new products to meet those changes. If the Company is unable to introduce new products and to respond quickly to industry changes, its business, financial position, results of operations and cash flows could be materially, adversely affected.
The introduction and marketing of new or enhanced products requires the Company to manage the transition from existing products in order to minimize disruption in customer purchasing patterns. There can be no assurance that the Company will be successful in developing and marketing, on a timely basis, new products or product enhancements, that the new products will adequately address the changing needs of the marketplace or that the Company will successfully manage the transition from existing products. Software products as complex as those offered by the Company may contain undetected errors when first introduced, or as new versions are released, and the likelihood of errors is increased as a result of the Company's commitment to the frequency of its product releases. There can be no assurance that errors will not be found in any new or enhanced products after the commencement of commercial shipments. Certain products require a higher level of sales and support expertise. Failure of the Company's sales channel, particularly the indirect channel, to obtain this expertise and to sell the new

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product offerings effectively could have an adverse impact on the Company's sales in future periods. Any of these problems may result in the loss of or delay in customer acceptance, diversion of development resources, damage to the Company's reputation, or increased service and warranty costs, any of which could have a material adverse effect on the Company's business, financial position, results of operations and cash flows.
Product Quality. The Company has separate quality systems and registrations under the ISO 9001:2015 standard, in addition to other governmental and industrial regulations. The Company's continued compliance with quality standards and favorable outcomes in periodic examinations is important to retain current customers and vital to procure new sales. If the Company was determined not to be compliant with various regulatory or ISO 9001 standards, its certificates of registration could be suspended, requiring remedial action and a time-consuming re-registration process. Product quality issues or failures could result in the Company's reputation becoming diminished, resulting in a material adverse impact on revenue, operating margins, net income, financial position and cash flows.
Competition. The Company continues to experience competition across all markets for its products and services. Some of the Company's current and possible future competitors have greater financial, technical, marketing and other resources than the Company, and some have well-established relationships with current and potential customers of the Company. The Company's current and possible future competitors also include firms that have competed or may in the future elect to compete by means of open source licensing. Parties among the Company's current or future strategic alliances may diminish or sever technical, software development and marketing relationships with the Company for competitive purposes. These competitive pressures may result in decreased sales volumes, price reductions and/or increased operating costs, and could result in lower revenues, margins and net income.
Research and Development. The Company devotes substantial resources to research and development. New competitors, technological advances in the software development industry by the Company or by competitors, acquisitions, entry into new markets, or other competitive factors may require the Company to invest significantly greater resources than it anticipates. If the Company is required to invest significantly greater resources than anticipated without a corresponding increase in revenue, its operating results could decline. In addition, the Company's periodic research and development expenses may be independent of its level of revenue, which could negatively impact its financial results. Finally, there can be no guarantee that the Company's research and development investments will result in products that create additional revenue.
Changes in the Company's Pricing Models. The intense competition the Company faces in the sales of its products and services, and general economic and business conditions, can put pressure on the Company to adjust its prices. If the Company's competitors offer deep discounts on certain products or services, or develop products that the marketplace considers more valuable, the Company may need to lower prices or offer discounts or other favorable terms in order to compete successfully. Any such changes may reduce operating margins and could adversely affect operating results. The Company's maintenance products, which include software license updates and product support fees, are generally priced as a percentage of its new software license fees. The Company's competitors may offer lower percentage pricing on product updates and support that could put pressure on the Company to further discount its new license or product support prices.
Any broad-based change to the Company's prices and pricing policies could cause new software license and service revenues to decline or be delayed as its sales force implements and its customers adjust to the new pricing policies. Some of the Company's competitors may bundle software products for promotional purposes or as a long-term pricing strategy or provide guarantees of prices, product implementations or wider geographical license usage provisions. These practices could, over time, significantly constrain the prices that the Company can charge for certain products. If the Company does not adapt its pricing models to reflect changes in customer use of its products or changes in customer demand, the Company's new software license revenues could decrease. Additionally, increased distribution of applications through application service providers, including software-as-a-service providers, may reduce the average price for the Company's products or adversely affect other sales of the Company's products, reducing new software license revenues unless the Company can offset price reductions with volume increases. The increase in open source software distribution may also cause the Company to adjust its pricing models.
Dependence on Senior Management and Key Technical Personnel. The Company's success depends upon the continued services of the Company's senior executives, key technical employees and other employees. Each of the Company's executive officers, key technical personnel and other employees could terminate his or her relationship with the Company at any time. The loss of any of the Company's senior executives might significantly delay or prevent the achievement of the Company's business objectives and could materially harm the Company's business and customer relationships.
In addition, because of the highly technical nature of the Company's products, the Company must attract and retain highly skilled engineering and development personnel, many of whom are recruited from outside of the United States. The market for this talent is highly competitive. The Company is limited in its ability to recruit internationally by restrictive domestic immigration laws. If the immigration laws become stricter or the processing of immigration requests becomes more

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cumbersome or less efficient, or if the Company has less success in recruiting and retaining key personnel, the Company's business, reputation and operating results could be materially and adversely affected.
Dependence on Proprietary Technology. The Company's success is highly dependent upon its proprietary technology. The Company generally relies on contracts and the laws of copyrights, patents, trademarks and trade secrets to protect its technology. The Company maintains a trade secrets program, enters into confidentiality agreements with its employees and channel partners, and limits access to and distribution of its software, documentation and other proprietary information. There can be no assurance that the steps taken by the Company to protect its proprietary technology will be adequate to prevent misappropriation of its technology by third parties, or that third parties will not be able to develop similar technology independently. Costly and time-consuming litigation could be necessary to enforce and determine the scope of trade secret rights and related confidentiality and nondisclosure provisions. Although the Company is not aware that any of its technology infringes upon the rights of third parties, there can be no assurance that other parties will not assert technology infringement claims against the Company or that, if asserted, such claims will not prevail. Any such litigation could be costly to the Company, damage its reputation, and distract the Company’s employees from their daily work. Any successful infringement claims asserted against the Company could require the Company to develop technology workarounds for the impacted products or product development, which could be costly, disrupt product development, and delay go-to-market activities. Such disruption and delay could negatively impact the Company’s results.
Risks Associated with Security of the Company's Products, Source Code and IT Systems. The Company makes significant efforts to maintain and improve the security and integrity of its products, source code, computer systems and data. Despite significant efforts to create security barriers to such programs, it is virtually impossible for the Company to entirely mitigate all risks. There appears to be an increasing number of computer “hackers” developing and deploying a variety of destructive software programs (such as viruses, worms, ransomware and the like) that could attack the Company's products and computer systems. Effective security requires increasingly broad governance that may require involvement of increased numbers of personnel or departments. As a result, the Company may incur costs to increase personnel and technology to prevent such attacks and implement such broader governance. Because the techniques used to obtain unauthorized access to networks or to sabotage systems change frequently and generally are not recognized until launched against a target, the Company may be unable to anticipate these techniques or to implement adequate preventive measures. Like all software products, the Company's communications system and software is vulnerable to such attacks. The impact of such an attack could disrupt the proper functioning of the Company's software products, cause errors in the output of its customers' work, allow unauthorized access to sensitive, proprietary or confidential information of the Company or its customers and employees and result in other destructive outcomes. If this were to occur, the Company's reputation may suffer, customers may stop buying products, the Company could face lawsuits and potential liability, and the Company's financial performance could be negatively impacted.
There is also a danger of industrial espionage, cyber-attacks, misuse, theft of information or assets (including source code), or damage to assets by people who have gained unauthorized access to the Company's facilities, systems or information. This includes phishing, which has become a very prevalent technique. Such cybersecurity breaches, misuse or other disruptions could lead to the disclosure of portions of the Company's product source code or other confidential information, improper usage and distribution of the Company's products without compensation, illegal usage of the Company's products which could jeopardize the security of information stored in and transmitted through its computer systems, and theft, manipulation and destruction of private and proprietary data, resulting in defective products and production downtimes. Although the Company actively employs measures to combat unlicensed copying, access and use of software and intellectual property through a variety of techniques, preventing unauthorized use or infringement of the Company's rights is inherently difficult. These events could adversely affect the Company's financial results or could result in significant claims for damages against it. Participating in lawsuits to protect against any such unauthorized access to, usage of or disclosure of any of the Company's products or any portion of the Company's product source code, or in prosecutions in connection with any such cybersecurity breach, could be costly and time-consuming, and may divert management's attention and adversely affect the market's perception of the Company and its products.
Policing the unauthorized distribution and use of the Company's products is difficult, and software piracy (including online piracy) is a persistent problem. The proliferation of technology designed to circumvent typical software protection measures used in the Company's products, and the possibility of methods that circumvent the techniques it employs in its products, may lead to an expansion in piracy or misuse of its products and intellectual property. As a result, and despite the Company's efforts to prevent such activities, the Company may nonetheless lose significant revenue due to illegal use of its software, and management's attention may be diverted to address specific instances of piracy or misuse, or to address piracy and misuse in general.
A number of the Company's core processes, such as software development, sales and marketing, customer service and financial transactions, rely on its IT infrastructure and applications. The Company also relies upon third-party products, which are exposed to various security vulnerabilities. Malicious software, sabotage and other cybersecurity breaches of the types

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discussed above could cause an outage of the Company's infrastructure, which could lead to a substantial denial of service and ultimately to production downtime, recovery costs and customer claims. This could have a significant negative impact on the Company's business, financial position, profit and cash flows.
The Company has implemented a number of measures designed to ensure the security of its information, IT resources and other assets. Nonetheless, unauthorized users could gain access to its systems through cyber-attacks and steal, use without authorization, and sabotage the Company's intellectual property and confidential data. Any breach of its IT security, misuse or theft could lead to loss of production, recovery costs or litigation brought by employees, customers or business partners, which could have a significant negative impact on the Company's business, financial position, profit, cash flows and reputation.
Implementation of IT Systems. The Company is currently implementing a new Customer Relationship Management (CRM) system. While this system is anticipated to simplify the sales and order processing efforts and to enhance customer service, there is a risk that the project will not achieve the anticipated benefits or that the benefits will not be achieved as quickly as anticipated. There is also a risk that the Company will have to write off previously capitalized expenditures if the project is not successful or if implementation decisions regarding the project are modified. The project implementation timeline and scope may change and become longer and broader as new facets of the design and implementation efforts are undertaken. This may take the attention of key operational management away from other aspects of the business, including the integration of acquisitions, and also result in increased consulting and software costs. These factors may have a significant negative impact on the Company's business, financial position, profit, cash flows and reputation.
Dependence on Channel Partners. The Company continues to distribute a meaningful portion of its products through its global network of independent, regional channel partners. The channel partners sell the Company's software products to new and existing customers, expand installations within the existing customer base, offer consulting services and provide the first line of technical support. Consequently, in certain geographies, the Company is highly dependent upon the efforts of the channel partners. Difficulties in ongoing relationships with channel partners, such as failure to meet performance criteria or to promote the Company's products as aggressively as the Company expects, and differences in the handling of customer relationships, could adversely affect the Company's performance. Additionally, the loss of any major channel partner for any reason, including a channel partner's decision to sell competing products rather than the Company's products, could have a material adverse effect on the Company. Moreover, the Company's future success will depend substantially on the ability and willingness of its channel partners to continue to dedicate the resources necessary to promote the Company's portfolio of products and to support a larger installed base of the Company's products. If the channel partners are unable or unwilling to do so, the Company may be unable to sustain revenue growth.
The Company has been increasing its number of channel partners, particularly in international locations. The business relationships with these channel partners are recently established and could result in additional compliance burdens for the Company. These partners also have a less-established payment history with the Company and revenue from these partners could come with a higher rate of bad debt expense.
During times of significant fluctuations in world currencies, certain channel partners may have solvency issues to the extent that effective hedge strategies are not employed or there is not sufficient working capital. In particular, if the U.S. Dollar strengthens relative to other currencies, certain channel partners who pay the Company in U.S. Dollars may have trouble paying the Company on time or may have trouble distributing the Company's products due to the impact of the currency exchange fluctuation on such channel partner's cash flows. This may impact the Company's ability to distribute its products into certain regions and markets, and may have an adverse effect on the Company's results of operations and cash flows.
Revenue Volatility. As described in Note 3 to the consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K, the Company adopted ASC 606 effective January 1, 2018, which significantly impacts the Company's timing, allocation and presentation of lease license, perpetual license and maintenance revenue. Under previous revenue guidance, the Company historically maintained stable recurring revenue from the sale of software lease licenses and software maintenance subscriptions. However, under ASC 606, the license component of lease revenue is recognized up front, whereas, it was recognized ratably over the contract under prior guidance. The post-contract support portion of lease license contracts continues to be recognized over the contract term, but it is now allocated to maintenance and service revenue.
The Company continues to sell perpetual licenses that involve the payment of a single, upfront fee. Historically, these licenses have been more typical in the computer software industry and remain as the preferred licensing approach in certain markets. The revenue associated with perpetual licenses continues to be recognized up front, consistent with prior revenue guidance.
The adoption of the new revenue recognition guidance, coupled with the Company's continued sales of perpetual licenses, creates the likelihood for software license revenue volatility to increase across periods, particularly as compared to the Company's results under the previous revenue recognition standard. The Company's revenue in any period will depend significantly on sales contracts completed during that period.

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Renewal Rates for Annual Lease and Maintenance Contracts. 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. If the rate of renewal for these contracts is adversely affected by economic or other factors, the Company's lease license and maintenance growth will be adversely affected. As a result, the Company's business, financial position, results of operations and cash flows may also be adversely impacted during those periods.
Risks Associated with Acquisitions. Historically, the Company has consummated acquisitions in order to support the Company's long-term strategic direction, accelerate innovation, provide increased capabilities to existing products, supply new products and services, expand its customer base and enhance its distribution channels. The Company has completed a number of acquisitions in recent years and expects to make additional acquisitions in the future, but may not be able to identify suitable acquisition candidates or, if suitable candidates are identified, the Company may not be able to complete the business combination on commercially acceptable terms. The process of exploring and pursuing acquisition opportunities may result in devotion of significant management and financial resources.
Even if the Company is able to consummate acquisitions that it believes will be successful, such transactions present many risks including, among others, difficulty in integrating the management teams, strategies, cultures and operations of the companies; failing to achieve anticipated synergies and revenue increases; difficulty incorporating and integrating the acquired technologies or products with the Company's existing product lines; difficulty in coordinating, establishing or expanding sales, distribution and marketing functions, as necessary; difficulty in training the global sales team to sell the acquired products; failure to develop new products and services that utilize the technologies and resources of the companies; disruption of the Company's ongoing business and diversion of management's attention to transition or integration issues; unanticipated and unknown liabilities; the loss of key employees, customers, partners and channel partners of the Company or of the acquired company, resulting in the loss of key information, expertise or know-how, and unanticipated additional recruitment and training costs; infringement of intellectual property rights; difficulties implementing and maintaining sufficient controls, policies and procedures over the systems, products and processes of the acquired company; and cybersecurity risks. If the Company does not achieve the anticipated benefits of its acquisitions as rapidly or to the extent anticipated by the Company's management and financial or industry analysts, there could be a material adverse effect on the Company's stock price, business, financial position, results of operations and cash flows.
In addition, for companies acquired, limited experience will exist for several quarters following the acquisition relating to how the acquired company's sales pipelines will convert into sales or revenues, and the conversion rate post-acquisition may be quite different than the historical conversion rate. Because a substantial portion of the Company's sales are completed in the latter part of a quarter, and its cost structure is largely fixed in the short-term, revenue shortfalls may have a negative impact on the Company's profitability. A delay in a small number of large, new software license transactions could cause the Company's quarterly software license revenues to fall significantly short of its predictions.
The Company may periodically be involved in business combinations with enterprises that are developmental in nature. While these entities have leading-edge technology, they may not have developed direct or indirect distribution channels and may not have software revenues which cover the ongoing expenses. Therefore, the Company may have a decrease in operating margin and profitability while these types of acquisitions are integrated and the distribution channel incorporates the new product offerings.
As the Company continues to expand through acquisition or strategic transactions, the acquisition of entities or entry into strategic partnerships with companies that will be viewed as competitors by other strategic partners may become more likely. Such acquisitions could have an adverse effect on partnerships or impact sales of the Company's products, which could negatively impact the Company’s results.
Disruption of Operations or Infrastructure Failures. A significant portion of the Company's software development personnel, source code and computer equipment is located at operating facilities in the United States, Canada, India, Japan and throughout Europe. The occurrence of a natural disaster or other unforeseen catastrophe at any of these facilities could cause interruptions in the Company's operations, services and product development activities. Additionally, if the Company experiences problems that impair its business infrastructure, such as a computer virus, telephone system failure or an intentional disruption of its information technology systems by a third party, these interruptions could have a material adverse effect on the Company's business, financial position, results of operations, cash flows and the ability to meet financial reporting deadlines. Further, because the Company's sales are not generally linear during any quarterly period, the potential adverse effects resulting from any of the events described above or any other disruption of the Company's business could be accentuated if it occurs close to the end of a fiscal quarter.

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Table of Contents

Risks Associated with Significant Sales to Existing Customers. A significant portion of the Company's sales includes follow-on sales to existing customers that invest in the Company's broad suite of engineering simulation software and services. If a significant number of current customers were to become dissatisfied with the Company's products and services, or choose to license or utilize competitive offerings, the Company's follow-on sales, and recurring lease and maintenance revenues, could be materially, adversely impacted, resulting in reduced revenue, operating margins, net income and cash flows.
Industry Consolidation. Consolidation in industries that utilize the Company’s software may result in combined workforces
where economies of scale and synergies are achieved, and fewer ANSYS software licenses are required. Consolidation may
also result in the newly combined/surviving entity wanting the most favorable pricing from the former contracts and expecting
larger volume discounts on future purchases. If a customer is acquired by an entity that does not utilize ANSYS in favor of a competing product, the Company may not have future orders from the enterprise. Further, consolidation of the Company's competitors may result in synergies that allow those competitors to benefit from broader sales channels and increased access to capital. Any of these impacts could adversely affect the Company's business, financial position, results of operations and cash flows.
Periodic Reorganization of Sales Force. The Company relies heavily on its direct sales force. From time to time, the Company reorganizes and makes adjustments to its sales leadership and/or its sales force in response to such factors as management changes, performance issues, market opportunities and other considerations. These changes may result in a temporary lack of sales production and may adversely impact revenue in future quarters. There can be no assurance that the Company will not restructure its sales force in future periods or that the transition issues associated with such a restructuring will not occur.
Governmental Revenue Sources. The Company's sales to the United States government must comply with Federal Acquisition Regulations. Failure to comply with these regulations could result in penalties being assessed against the Company or an order preventing the Company from making future sales to the United States government. Further, the Company's international activities must comply with the export control laws of the United States and other countries, the Foreign Corrupt Practices Act, the United Kingdom Bribery Act of 2010 and a variety of other laws and regulations of the United States and other countries in which the Company operates. Failure to comply with any of these laws and regulations could adversely affect the Company's business, financial position, results of operations and cash flows.
In certain circumstances, the United States government, state and local governments and their respective agencies, and certain foreign governments may have the right to terminate contractual arrangements at any time, without cause. The United States, European Union and certain other government contracts, as well as the Company's state and local level contracts, are subject to the approval of appropriations or funding authorizations. Certain of these contracts permit the imposition of various civil and criminal penalties and administrative sanctions, including, but not limited to, termination of contracts, refund of a portion of fees received, forfeiture of profits, suspension of payments, fines and suspensions or debarment from future government business, any of which could have an adverse effect on the Company's results of operations and cash flows.
Contingencies. The Company is 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 intellectual property rights and other matters. Use or distribution of the Company’s products could generate product liability, regulatory infraction, or similar claims by the customers or end users of the Company or its indirect sales partners, government entities, or other third parties. 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 materially affect the Company's results of operations, cash flows and financial position.
Income Tax Estimates. The Company makes significant estimates in determining its worldwide income tax provision. These estimates involve complex tax regulations in a number of jurisdictions across the Company's global operations and are subject to many transactions and calculations in which the ultimate tax outcome is uncertain. The final outcome of tax matters could be different than the estimates reflected in the historical income tax provision and related accruals. Such differences could have a material impact on income tax expense and net income in the periods in which such determinations are made.
The amount of income tax paid by the Company is subject to ongoing audits by federal, state and foreign tax authorities. These audits can result in additional assessments, including interest and penalties. The Company's estimate for liabilities associated with uncertain tax positions is highly judgmental and actual future outcomes may result in favorable or unfavorable adjustments to the Company's estimated tax liabilities, including estimates for uncertain tax positions, in the period the assessments are made or resolved, audits are closed or when statutes of limitation on potential assessments expire. As a result, the Company's effective tax rate may fluctuate significantly on a quarterly or annual basis.
The Company allocates a portion of its purchase price to goodwill and intangible assets. Impairment charges associated with goodwill are generally not tax-deductible and will result in an increased effective income tax rate in the period the impairment is recorded. The Company has recorded significant deferred tax liabilities related to acquired intangible assets that are not

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deductible for tax purposes. These deferred tax liabilities are based on future statutory tax rates in the locations in which the intangible assets are recorded. Any future changes in statutory tax rates would be recorded as an adjustment to the deferred tax liabilities in the period the change is announced, and could have a material impact on the Company's effective tax rate during that period.
Changes in Tax Law. The Company's operations are subject to income and transaction taxes in the United States and in multiple foreign jurisdictions. A change in the tax law in the jurisdictions in which the Company does business, including an increase in tax rates, an adverse change in the treatment of an item of income or expense, or a decrease in tax rates in a jurisdiction in which the Company has significant deferred tax assets, could result in a material increase in tax expense. Currently, a substantial portion of the Company's revenue is generated from customers located outside the United States, and a substantial portion of assets are located outside the United States. Changes in existing taxation rules or practices, new taxation rules, or varying interpretations of current taxation practices could have a material adverse effect on the Company's results of operations or the manner in which the Company conducts its business.
Interest Rates. Borrowings under the Company's revolving credit facility use the London Interbank Offering Rate (LIBOR) as a benchmark for establishing the interest rate. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. The consequences of these developments cannot be entirely predicted, but could include an increase in the cost of the Company's variable rate indebtedness.
Changes in Existing Financial Accounting Standards. Changes in existing accounting rules or practices, new accounting pronouncements, or varying interpretations of current accounting pronouncements could have a significant adverse effect on the Company's results of operations or the manner in which the Company conducts its business.
In addition, the Company could incur significant costs for changes to its business systems, processes and internal controls as a result of the transition. These costs could have a significant adverse impact on the Company's results of operations and cash flows. The transition could also cause management to divert time from the day-to-day operations of the Company, which could impact the Company's business. If the Company is unable to successfully transition its business systems, processes and internal controls before the guidance effective date, it could impact the ability to meet financial reporting deadlines. For further information on the impact of recently issued accounting guidance on the Company, see Note 2 to the consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.

ITEM 2.
PROPERTIES
The Company's executive offices and those related to certain domestic product development, marketing, production and administration are located in a LEED certified, 186,000 square foot office facility in Canonsburg, Pennsylvania. The lease for this facility was effective as of September 14, 2012 and expires on December 31, 2029, excluding any renewal or termination options.
The Company owns: a 70,000 square foot office facility in Lebanon, New Hampshire; a 62,000 square foot office building near its current Canonsburg headquarters; a 59,000 square foot facility in Pune, India; and a 5,000 square foot facility in Apex, North Carolina.
The Company and its subsidiaries also lease office space in various locations throughout the world. The Company owns substantially all equipment used in its facilities. Management believes that, in most geographic locations, its facilities allow for sufficient space to support present and future foreseeable needs, including such expansion and growth as the business may require. In other geographic locations, the Company expects that it will be required to expand capacity beyond that which it currently owns or leases.
The Company's properties and equipment are in good operating condition and are adequate for the Company's current needs. The Company does not anticipate difficulty in renewing existing leases as they expire or in finding alternative facilities.


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Table of Contents

ITEM 3.
LEGAL PROCEEDINGS
The Company is 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 intellectual property rights and other matters. In the opinion of the Company, the resolution of pending matters is not expected to have a material adverse effect on the Company's consolidated results of operations, cash flows or financial position. However, each of these matters is subject to various uncertainties and it is possible that an unfavorable resolution of one or more of these proceedings could materially affect the Company's results of operations, cash flows or financial position.

ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.

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Table of Contents

PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock trades on the Nasdaq Global Select Market tier of the Nasdaq Stock Market under the symbol: "ANSS".
On February 15, 2019, there were 132 stockholders of record.
The Company has not paid cash dividends on its common stock as it has retained earnings primarily for acquisitions, for future business opportunities and to repurchase stock when authorized by the Board of Directors and when such repurchase meets the Company's objectives. The Company reviews its policy with respect to the payment of dividends from time to time; however, there can be no assurance that any dividends will be paid in the future.


22

Table of Contents

Performance Graph
Set forth below is a line graph comparing the yearly percentage change in the cumulative total stockholder return on the Company's common stock, based on the market price per share of the Company's common stock, with the total return of companies included within the Nasdaq Composite Stock Market Index, the Russell 1000 Index, the S&P 500 Stock Index and an industry peer group of four companies (Autodesk, Inc., PTC Inc., Cadence Design Systems, Inc. and Synopsys, Inc.) selected by the Company pursuant to Item 201(e) of Regulation S-K, for the period commencing December 31, 2013 and ending December 31, 2018. The calculation of total cumulative returns assumes a $100 investment in the Company's common stock, the Nasdaq Composite Stock Market Index, the Russell 1000 Index, the S&P 500 Stock Index and the peer group on December 31, 2013, and the reinvestment of all dividends, and accounts for all stock splits. The historical information set forth below is not necessarily indicative of future performance.
ansysstockgraph2018.jpg
ASSUMES $100 INVESTED ON DECEMBER 31, 2013
ASSUMES DIVIDENDS REINVESTED
FIVE FISCAL YEARS ENDING DECEMBER 31, 2018

 
As of December 31,
 
2013
 
2014
 
2015
 
2016
 
2017
 
2018
ANSYS, Inc.
$
100

 
$
94

 
$
106

 
$
106

 
$
169

 
$
164

Nasdaq Composite
$
100

 
$
115

 
$
123

 
$
134

 
$
173

 
$
168

Russell 1000 Index
$
100

 
$
113

 
$
114

 
$
128

 
$
156

 
$
148

S&P 500 Stock Index
$
100

 
$
114

 
$
115

 
$
129

 
$
157

 
$
150

Peer Group
$
100

 
$
116

 
$
120

 
$
149

 
$
217

 
$
249



23

Table of Contents

Equity Compensation Plan Information as of December 31, 2018
 
 
(a)
 
(b)
 
(c)
Plan Category
 
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
 
Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights(1)
 
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(excluding securities
reflected in column
(a))
Equity Compensation Plans Approved by Security Holders
 
 
 
 
 
 
1996 Stock Option and Grant Plan
 
3,027,267(2)

 
$
65.46

 
6,246,619(3)

1996 Employee Stock Purchase Plan
 
(4)
 
(5)
 
242,643

Equity Compensation Plans Not Approved by Security Holders(6)
 
 
 
 
 
 
Ansoft Corporation 2006 Stock Incentive Plan
 
57,242

 
$
41.02

 

Apache Design Solutions, Inc. 2001 Stock/Option Issuance Plan
 
46,963

 
$
19.38

 

SpaceClaim Corporation 2005 Stock Incentive Plan
 
3,471

 
$
23.81

 

Gear Design Solutions, Inc. Stock Incentive Plan
 
4,502

 
$
12.26

 

Total
 
3,139,445

 
 
 
6,489,262

(1)
The weighted average exercise price does not take into account the shares for outstanding restricted stock units or deferred stock awards, which have no exercise price.
(2)
Includes 1,521,525 shares for outstanding restricted stock units for employees, 1,371,661 shares for outstanding stock options, 13,632 shares for outstanding restricted stock units for non-employee directors and 120,449 shares for deferred stock awards for non-employee directors. Restricted stock units with a performance or market condition are included based on assumed target performance, unless performance is otherwise known.
(3)
The number of securities remaining available for future issuance assumes maximum attainment for awards with a performance condition or a market condition.
(4)
The number of shares issuable with respect to the current offering period is not determinable until the end of the period.
(5)
The per share purchase price of shares issuable with respect to the current offering period is not determinable until the end of the period.
(6)
The Company no longer issues awards under equity compensation plans not approved by security holders.
Unregistered Sale of Equity Securities and Use of Proceeds
None.
Issuer Purchases of Equity Securities
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under Plans or Programs(1)
October 1 - October 31, 2018
 
500,000

 
$
154.03

 
500,000

 
3,825,505

November 1 - November 30, 2018
 

 
$

 

 
3,825,505

December 1 - December 31, 2018
 

 
$

 

 
3,825,505

Total
 
500,000

 
$
154.03

 
500,000

 
3,825,505

(1) The Company initially announced its stock repurchase program in February 2000, and subsequently announced various amendments to the program. The most recent amendment to the program, authorizing the repurchase of up to 5,000,000 shares, was approved by the Company's Board of Directors in February 2018. There is no expiration date to this amendment.


24

Table of Contents

ITEM 6.
SELECTED FINANCIAL DATA
The following table sets forth selected financial data as of and for the year ended December 31 for each of the last five years. This selected financial data should be read in conjunction with the consolidated financial statements and related notes included in Part IV, Item 15 of this Annual Report on Form 10-K.
 
 
Year Ended December 31,
(in thousands, except per share data)
 
2018(1)
 
2017
 
2016
 
2015
 
2014
Total revenue
 
$
1,293,636

 
$
1,095,250

 
$
988,465

 
$
942,753

 
$
936,021

Operating income
 
476,574

 
390,728

 
376,242

 
353,679

 
347,450

Net income
 
419,375

 
259,251

 
265,636

 
252,521

 
254,690

Earnings per share – basic
 
$
4.99

 
$
3.05

 
$
3.05

 
$
2.82

 
$
2.77

Weighted average shares – basic
 
83,973

 
84,988

 
87,227

 
89,561

 
92,067

Earnings per share – diluted
 
$
4.88

 
$
2.98

 
$
2.99

 
$
2.76

 
$
2.70

Weighted average shares – diluted
 
85,913

 
86,854

 
88,969

 
91,502

 
94,194

Total assets
 
$
3,265,964

 
$
2,941,623

 
$
2,800,526

 
$
2,729,904

 
$
2,752,879

Working capital
 
786,410

 
661,713

 
630,301

 
592,280

 
617,240

Long-term liabilities
 
91,650

 
87,239

 
53,021

 
51,331

 
70,303

Stockholders' equity
 
2,649,547

 
2,245,831

 
2,208,405

 
2,194,427

 
2,217,501

Cash provided by operating activities
 
486,437

 
430,438

 
365,980

 
375,699

 
399,838

(1)Effective January 1, 2018, the Company adopted new guidance on revenue recognition. The Company elected to adopt the change in accounting principle using the modified retrospective approach. Results for reporting periods beginning after January 1, 2018 are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance. For further information, see Note 3 to the consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
In the table above, the comparability of information among the years presented is impacted by the Company's acquisitions. The operating results of the Company's acquisitions have been included in the results of operations since their respective acquisition dates. For further information, see the “Acquisitions” section of Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and Note 4 to the consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.


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Table of Contents

ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Overall GAAP and Non-GAAP Results
The Company's growth rates of GAAP and non-GAAP results for the year ended December 31, 2018 as compared to the year ended December 31, 2017 were as follows:
 
GAAP
 
Non-GAAP
 
Under ASC 605
 
Impact of ASC 606 Adoption(1)
 
Total
 
Under ASC 605
 
Impact of ASC 606 Adoption(1)
 
Total
Revenue
11.1
%
 
7.0
%
 
18.1
%
 
12.2
%
 
6.5
%
 
18.7
%
Operating income
2.2
%
 
19.8
%
 
22.0
%
 
7.4
%
 
13.9
%
 
21.3
%
Diluted earnings per share
39.3
%
 
24.5
%
 
63.8
%
 
32.2
%
 
16.9
%
 
49.1
%
(1)The Company adopted Accounting Standards Codification 606 (ASC 606) on January 1, 2018 using the modified retrospective approach for all contracts not completed as of the date of adoption. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with ASC 605, Revenue Recognition (ASC 605). The adoption of ASC 606 significantly impacted the timing, allocation and presentation of lease license, perpetual license and maintenance revenue. For further information on the impact of this adoption on the Company's results, see Note 3 to the consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Under ASC 605, the Company experienced higher revenue during the year ended December 31, 2018 across all classes of revenue, including license revenue, maintenance and services. The Company also experienced increased operating expenses primarily due to increased personnel costs, higher stock-based compensation and OPTIS expenses for the period from the acquisition date (May 2, 2018) through December 31, 2018. These increases were partially offset by restructuring in 2017 that did not reoccur in 2018.
The non-GAAP results exclude the income statement effects of the acquisition accounting adjustment to deferred revenue, stock-based compensation, amortization of acquired intangible assets, restructuring charges, transaction costs related to business combinations, and the impact of the enactment of the Tax Cuts and Jobs Act. For further disclosure regarding non-GAAP results, see the section titled "Non-GAAP Results" immediately preceding the section titled "Liquidity and Capital Resources."
Impact of OPTIS
On May 2, 2018, the Company completed the acquisition of OPTIS. The table presented below reflects the impact of OPTIS from the date of acquisition to December 31, 2018. The operating (loss) income does not include integration costs borne directly by ANSYS, Inc. and its non-OPTIS subsidiaries as a result of the acquisition.
 
Year Ended December 31, 2018
 
ASC 606
 
ASC 605
(in thousands)
GAAP
 
Non-GAAP
 
GAAP
 
Non-GAAP
Revenue
$
18,532

 
$
27,261

 
$
12,276

 
$
26,703

Operating (loss) income
$
(5,462
)
 
$
4,992

 
$
(11,718
)
 
$
4,434



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Table of Contents

Impact of Foreign Currency
The Company's comparative financial results were impacted by fluctuations in the U.S. Dollar during the year ended December 31, 2018 as compared to the year ended December 31, 2017. The impacts on the Company's revenue and operating income due to currency fluctuations are reflected in the table below. Amounts in brackets indicate an adverse impact from currency fluctuations.
 
Year Ended December 31, 2018
 
ASC 606
 
ASC 605
(in thousands)
GAAP
 
Non-GAAP
 
GAAP
 
Non-GAAP
Revenue
$
14,622

 
$
14,647

 
$
14,847

 
$
14,884

Operating income
$
9,620

 
$
9,855

 
$
10,295

 
$
10,545

Using ASC 606 and ASC 605 results for the year ended December 31, 2018 and 2017, respectively, the Company's constant currency(1) growth rates(2) were as follows:
 
Year Ended December 31, 2018
 
GAAP
 
Non-GAAP
Revenue
16.8
%
 
17.3
%
Operating income
19.5
%
 
19.4
%
In constant currency, the Company's growth rates(2) under ASC 605 were as follows:
 
Year Ended December 31, 2018
 
GAAP
 
Non-GAAP
Revenue
9.7
 %
 
10.8
%
Operating income
(0.4
)%
 
5.3
%
(1) Constant currency amounts exclude the effect of foreign currency fluctuations on the reported results. To present this information, the 2018 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 2017, rather than the actual exchange rates in effect for 2018.
(2) The constant currency growth rates are calculated by adjusting the 2018 reported revenue and operating income amounts by the 2018 currency fluctuation impacts in the table above and comparing to the 2017 reported revenue and operating income amounts.
Other Financial Information
The Company’s financial position includes $777.4 million in cash and short-term investments, and working capital of $786.4 million as of December 31, 2018.
During the year ended December 31, 2018, the Company repurchased 1.7 million shares for $269.8 million at an average price of $161.12 per share under the Company's stock repurchase program.
Business
ANSYS, a Delaware 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, materials and chemical processing, turbomachinery, consumer products, healthcare, and sports. Headquartered south of Pittsburgh, Pennsylvania, the Company and its subsidiaries employed approximately 3,400 people as of December 31, 2018. The Company focuses on the development of open and flexible solutions that enable users to analyze designs directly on the desktop, providing a common platform for fast, efficient and cost-conscious product development, from design concept to final-stage testing and validation. The Company distributes its ANSYS suite of simulation technologies through a global network of independent resellers and distributors (collectively, 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 Item 1A. Risk

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Factors for a complete discussion of factors that 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 also 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 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
Compared to the ASC 605 revenue for the year ended December 31, 2017, the Company's geographic revenue growth during the year ended December 31, 2018 was as follows:
 
Year Ended December 31, 2018
 
ASC 606
 
ASC 605
 
Reporting Currency
 
Constant Currency
 
Reporting Currency
 
Constant Currency
Americas
19.4
%
 
19.4
%
 
13.7
%
 
13.7
%
Europe, Middle East and Africa (EMEA)
22.3
%
 
18.3
%
 
12.4
%
 
8.6
%
Asia-Pacific
12.2
%
 
11.7
%
 
6.1
%
 
5.4
%
Total
18.1
%
 
16.8
%
 
11.1
%
 
9.7
%
Due to the change in revenue recognition under ASC 606, the ASC 606 growth rates presented above, which compare the 2018 results under ASC 606 to the 2017 results under ASC 605, are less representative of the underlying operations of each region than those presented under ASC 605.
The Company continues to focus on a number of sales improvement activities across the geographic regions, including sales hiring, pipeline building, productivity initiatives and customer engagement activities.
Industry Commentary:
Due to the continued investments in autonomous vehicles and electrification, the automotive industry remained strong throughout 2018. Investments in smart, connected products and 5G by companies around the globe bolstered the high-tech industry during the year. Increased defense spending in both the United States and Europe supported strong performance in aerospace and defense. The industrial equipment sector saw growth due to the continued focus on efficiency and reliability.
Acquisitions
In February 2019, the Company acquired 100% of the shares of Granta Design Limited (Granta Design) and Helic, Inc. (Helic) for a combined purchase price of approximately $261.5 million. The acquisition of Granta Design, the premier provider of materials information technology, expands the Company's portfolio into this important area, giving customers access to material intelligence, including data that is critical to successful simulations. The acquisition of Helic, the industry-leading provider of electromagnetic crosstalk solutions for systems on chips, combined with the Company's flagship electromagnetic and semiconductor solvers, will provide a comprehensive solution for on-chip, 3D integrated circuit and chip-package-system electromagnetics and noise analysis.
During the year ended December 31, 2018, the Company completed the acquisition of 100% of the shares of OPTIS, a premier provider of software for scientific simulation of light, human vision and physics-based visualization, for a purchase price of $291.0 million, paid in cash. The acquisition extended the Company's portfolio into the area of optical simulation to provide comprehensive sensor solutions, covering visible and infrared light, electromagnetics and acoustics for camera, radar and lidar.

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Table of Contents

During the years ended December 31, 2017 and 2016, the Company completed various acquisitions to expand its customer base and accelerate the development of new and innovative products to the marketplace while lowering design and engineering costs for customers. The acquisitions were not individually significant. The combined purchase prices of the acquisitions purchased during the years ended December 31, 2017 and 2016 were approximately $67.0 million and $10.3 million, respectively.
For further information on the Company's business combinations during the years ended December 31, 2018, 2017 and 2016, see Note 4 to the consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.



29

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 2018, 2017 and 2016. The operating results of the Company's acquisitions have been included in the results of operations since their respective acquisition dates.
 
 
Year Ended December 31,
(in thousands)
 
2018
(ASC 606)
 
2018
(ASC 605)
 
2017
(ASC 605)
 
2016
(ASC 605)
Revenue:
 
 
 
 
 
 
 
 
Software licenses
 
$
576,717

 
$
676,846

 
$
624,964

 
$
568,174

Maintenance and service
 
716,919

 
539,623

 
470,286

 
420,291

Total revenue
 
1,293,636

 
1,216,469

 
1,095,250

 
988,465

Cost of sales:
 
 
 
 
 
 
 
 
Software licenses
 
18,619

 
36,852

 
34,421

 
28,860

Amortization
 
27,034

 
27,034

 
36,794

 
38,092

Maintenance and service
 
110,232

 
91,999

 
78,949

 
79,908

Total cost of sales
 
155,885

 
155,885

 
150,164

 
146,860

Gross profit
 
1,137,751

 
1,060,584

 
945,086

 
841,605

Operating expenses:
 
 
 
 
 
 
 
 
Selling, general and administrative
 
413,580

 
413,580

 
338,640

 
269,515

Research and development
 
233,802

 
233,802

 
202,746

 
183,093

Amortization
 
13,795

 
13,795

 
12,972

 
12,755

Total operating expenses
 
661,177

 
661,177

 
554,358

 
465,363

Operating income
 
476,574

 
399,407

 
390,728

 
376,242

Interest income
 
11,419

 
11,419

 
6,962

 
4,209

Other expense, net
 
(908
)
 
(908
)
 
(1,996
)
 
(136
)
Income before income tax provision
 
487,085

 
409,918

 
395,694

 
380,315

Income tax provision
 
67,710

 
53,067

 
136,443

 
114,679

Net income
 
$
419,375

 
$
356,851

 
$
259,251

 
$
265,636



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Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Revenue:
 
Year Ended December 31,
 
Change
(in thousands, except percentages)
2018
(ASC 606)
 
2017
(ASC 605)
 
Amount
 
%
 
Constant Currency %
Revenue:
 
 
 
 
 
 
 
 
 
Lease licenses
$
275,619

 
$
376,886

 
$
(101,267
)
 
(26.9
)
 
(27.4
)
Perpetual licenses
301,098

 
248,078

 
53,020

 
21.4

 
20.2

Software licenses
576,717

 
624,964

 
(48,247
)
 
(7.7
)
 
(8.5
)
Maintenance
676,883

 
440,428

 
236,455

 
53.7

 
51.6

Service
40,036

 
29,858

 
10,178

 
34.1

 
33.1

Maintenance and service
716,919

 
470,286

 
246,633

 
52.4

 
50.4

Total revenue
$
1,293,636

 
$
1,095,250

 
$
198,386

 
18.1

 
16.8

The adoption of ASC 606 significantly impacted the timing, allocation and presentation of lease license, perpetual license and maintenance revenue. For further information on the impact of this adoption on the Company's results, see Note 3 to the consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
For purposes of comparability, the changes in the following table and the related discussion that follows are presented in accordance with ASC 605.
 
Year Ended December 31,
 
Change
(in thousands, except percentages)
2018
(ASC 605)
 
2017
(ASC 605)
 
Amount
 
%
 
Constant Currency %
Revenue:
 
 
 
 
 
 
 
 
 
Lease licenses
$
421,268

 
$
376,886

 
$
44,382

 
11.8
 
10.7
Perpetual licenses
255,578

 
248,078

 
7,500

 
3.0
 
2.0
Software licenses
676,846

 
624,964

 
51,882

 
8.3
 
7.2
Maintenance
499,510

 
440,428

 
59,082

 
13.4
 
11.6
Service
40,113

 
29,858

 
10,255

 
34.3
 
33.4
Maintenance and service
539,623

 
470,286

 
69,337

 
14.7
 
13.0
Total revenue
$
1,216,469

 
$
1,095,250

 
$
121,219

 
11.1
 
9.7
The Company’s ASC 605 revenue in the year ended December 31, 2018 increased 11.1% as compared to the year ended December 31, 2017, while revenue grew 9.7% in constant currency. The growth rate was favorably impacted by the Company’s continued investment in its global sales, support and marketing organizations; continued progress with market segmentation and go-to-market adjustments; and the May 2018 acquisition of OPTIS. Lease license revenue increased 11.8%, or 10.7% in constant currency, as compared to the year ended December 31, 2017. Perpetual license revenue, which is derived primarily from new sales during the year, increased 3.0%, or 2.0% in constant currency, as compared to the year ended December 31, 2017. Annual maintenance contracts that were sold with new perpetual licenses, along with maintenance contracts for perpetual licenses sold in previous quarters, contributed to maintenance revenue growth of 13.4%, or 11.6% in constant currency. Service revenue, driven primarily by a focus on service offerings that provide on-site mentorship on simulation best practices, training and expanding simulation adoption, increased 34.3%, or 33.4% in constant currency, as compared to the year ended December 31, 2017.

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With respect to revenue, on average for the year ended December 31, 2018, the U.S. Dollar was approximately 2.3% weaker and 2.6% weaker, when measured against the Company’s primary foreign currencies, than for the year ended December 31, 2017 under ASC 606 and ASC 605, respectively. The table below presents the impacts of currency fluctuations on revenue for the year ended December 31, 2018. Amounts in brackets indicate a net adverse impact from currency fluctuations.
 
Year Ended December 31, 2018
(in thousands)
ASC 606
 
ASC 605
Euro
$
12,498

 
$
11,915

Japanese Yen
2,088

 
2,075

South Korean Won
918

 
1,182

British Pound
870

 
1,083

Indian Rupee
(1,623
)
 
(1,372
)
Other
(129
)
 
(36
)
Total
$
14,622

 
$
14,847

The net overall weaker U.S. Dollar also resulted in increased operating income of $9.6 million and $10.3 million for the year ended December 31, 2018 as compared to the year ended December 31, 2017 under ASC 606 and ASC 605, respectively.
A substantial portion of the Company's lease license and maintenance revenue is derived from annual lease and maintenance contracts. These contracts are generally renewed on an annual basis and 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 lease license and maintenance revenue growth rate in any period does not necessarily correlate to the growth rate of new licenses sold during that period under ASC 605. The same is true for maintenance revenue growth under ASC 606. However, under ASC 606, lease license revenue is entirely attributed to license sales completed during the period, resulting in a higher correlation of lease license revenue growth to the growth rate of new lease license sales than that under ASC 605. 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 lease license and maintenance growth in constant currency. Conversely, if the rate of renewal for these contracts is adversely affected by economic or other factors, the Company's lease license and maintenance growth will be adversely affected.
The Company has been experiencing an increased interest by some of its larger customers in enterprise agreements that often include longer-term, time-based licenses involving a larger number of the Company's software products. While these arrangements typically involve a higher overall transaction price, the revenue from these contracts is typically deferred and recognized over the period of the contract under ASC 605, resulting in increased deferred revenue and backlog. To the extent these types of contracts replace sales of perpetual licenses, there could be a near-term adverse impact on software license and maintenance revenue growth. Under ASC 606, the upfront recognition of license revenue related to these larger, multi-year transactions can result in significantly higher lease license revenue volatility. As software products, across a large variety of applications and industries, become increasingly distributed in software-as-a-service, cloud and other subscription environments in which the licensing approach is time-based rather than perpetual, the Company is also experiencing a shifting preference from perpetual licenses to time-based licenses across a broader spectrum of its customers, particularly in the more mature geographic markets, such as the U.S. and Japan.
As a percentage of revenue, the Company's international and domestic revenues, and the Company's direct and indirect revenues, are as follows:
 
Year Ended December 31,
 
2018
(ASC 606)
 
2018
(ASC 605)
 
2017
(ASC 605)
International
60.9
%
 
60.5
%
 
61.9
%
Domestic
39.1
%
 
39.5
%
 
38.1
%
 
 
 
 
 
 
Direct revenue
77.6
%
 
76.5
%
 
75.2
%
Indirect revenue
22.4
%
 
23.5
%
 
24.8
%
In valuing deferred revenue on the balance sheets of the Company's recent acquisitions as of their respective acquisition dates, the Company applied the fair value provisions applicable to the accounting for business combinations, resulting in a reduction

32

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of deferred revenue as compared to its historical carrying amount. As a result, the Company's post-acquisition revenue will be less than the sum of what would have otherwise been reported by ANSYS and each acquiree absent the acquisitions. Under ASC 606, the impacts on reported revenue were $9.4 million for the year ended December 31, 2018. The expected impacts on reported revenue, including an estimate for the Granta and Helic acquisitions, are $2.2 million and $6.5 million for the quarter ending March 31, 2019 and the year ending December 31, 2019, respectively. The Company has not yet performed a valuation of the Granta and Helic acquired deferred revenue. Until such valuation is completed, the expected impacts on revenue will remain preliminary estimates that are likely to change. Under ASC 605, the impacts on reported revenue were $15.6 million and $2.9 million for the years ended December 31, 2018 and 2017, respectively.
Cost of Sales and Operating Expenses:
The tables below reflect the Company's operating results as presented on the consolidated statements of income, which are inclusive of foreign currency translation impacts. The adoption of ASC 606 resulted in a reclassification of expenses within cost of sales from software licenses to maintenance and service. Amounts included in the discussion that follows are provided in constant currency and do not include the impact of the OPTIS acquisition. The impact of the OPTIS acquisition on each expense line is provided separately, where material. The impact, where material, of foreign exchange translation on each expense line is also provided separately and is inclusive of the OPTIS acquisition.
 
Year Ended December 31,
 
 
 
 
2018
 
2017
 
Change
(in thousands, except percentages)
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
Amount
 
%
Cost of sales:
 
 
 
 
 
 
 
 
 
 
 
Software licenses
$
18,619

 
1.4
 
$
34,421

 
3.1
 
$
(15,802
)
 
(45.9
)
Amortization
27,034

 
2.1
 
36,794

 
3.4
 
(9,760
)
 
(26.5
)
Maintenance and service
110,232

 
8.5
 
78,949

 
7.2
 
31,283

 
39.6

Total cost of sales
155,885

 
12.1
 
150,164

 
13.7
 
5,721

 
3.8

Gross profit
$
1,137,751

 
87.9
 
$
945,086

 
86.3
 
$
192,665

 
20.4

Software Licenses: The net decrease in the cost of software licenses was primarily due to the following:
Reclassification of $18.2 million of cost of sales, previously reflected within software licenses, to maintenance and service due to the adoption of ASC 606 in 2018.
OPTIS-related software license expenses of $1.6 million for the period from the acquisition date (May 2, 2018) through December 31, 2018.
Amortization: The decrease in amortization expense was primarily due to a net decrease in the amortization of trade names and acquired technology due to assets that became fully amortized.
Maintenance and Service: The increase in maintenance and service costs was primarily due to the following:
Reclassification of $18.2 million of cost of sales, previously reflected within software licenses, to maintenance and service due to the adoption of ASC 606 in 2018.
Increased third-party technical support of $5.5 million.
OPTIS-related maintenance and service expenses of $2.8 million for the period from the acquisition date (May 2, 2018) through December 31, 2018.
Increased salaries of $2.1 million.
The improvement in gross profit was a result of the increase in revenue, partially offset by the increase in the related cost of sales.

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Table of Contents

 
Year Ended December 31,
 
 
 
 
2018
 
2017
 
Change
(in thousands, except percentages)
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
Amount
 
%
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
$
413,580

 
32.0
 
$
338,640

 
30.9
 
$
74,940

 
22.1
Research and development
233,802

 
18.1
 
202,746

 
18.5
 
31,056

 
15.3
Amortization
13,795

 
1.1
 
12,972

 
1.2
 
823

 
6.3
Total operating expenses
$
661,177

 
51.1
 
$
554,358

 
50.6
 
$
106,819

 
19.3
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 $35.2 million.
Increased stock-based compensation of $15.3 million.
OPTIS-related selling, general and administrative expenses of $13.8 million for the period from the acquisition date (May 2, 2018) through December 31, 2018.
Increased business travel of $3.9 million.
Increased severance expenses of $3.7 million.
Decreased consulting costs of $7.1 million.
The Company anticipates that it will continue to make targeted investments in its global sales and marketing organizations and its global business infrastructure to enhance and support its revenue-generating activities.
Research and Development: The net increase in research and development costs was primarily due to the following:
Increased salaries, incentive compensation and other headcount-related costs of $15.2 million.
Increased stock-based compensation of $11.6 million.
OPTIS-related research and development expenses of $5.9 million for the period from the acquisition date (May 2, 2018) through December 31, 2018.
Increased IT maintenance and software hosting costs of $1.5 million.
Restructuring costs of $6.8 million related to 2017 workforce realignment activities that did not reoccur in 2018.
The Company has traditionally invested significant resources in research and development activities and intends to continue to make investments in expanding the ease of use and capabilities of its broad portfolio of simulation software products.
Interest Income: Interest income for the year ended December 31, 2018 was $11.4 million as compared to $7.0 million for the year ended December 31, 2017. Interest income increased as a result of an increase in the average rate of return on invested cash balances.
Other Expense, net: The Company's other expense, net consists of the following:
 
Year Ended December 31,
(in thousands)
2018
 
2017
Foreign currency losses, net
$
(3,058
)
 
$
(1,935
)
Investment gains, net
2,204

 
24

Other
(54
)
 
(85
)
Total other expense, net
$
(908
)
 
$
(1,996
)

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Income Tax Provision: The Company's income before income tax provision, income tax provision and effective tax rate were as follows:
 
Year Ended December 31,
(in thousands, except percentages)
2018
(ASC 606)
 
2018
(ASC 605)
 
2017
(ASC 605)
Income before income tax provision
$
487,085

 
$
409,918

 
$
395,694

Income tax provision
$
67,710

 
$
53,067

 
$
136,443

Effective tax rate
13.9
%
 
12.9
%
 
34.5
%
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (Tax Reform). Tax Reform makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time federal income tax on certain unrepatriated earnings of foreign subsidiaries (transition tax); (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) creating a new provision designed to tax global intangible low-taxed income (GILTI) which allows for the possibility of using foreign tax credits (FTCs) and a deduction of up to 50 percent to offset the income tax liability (subject to some limitations); (5) repealing the domestic production activity deduction; (6) creating the foreign-derived intangible income deduction; (7) creating the base erosion anti-abuse tax, a new minimum tax; (8) allowing for full expensing of qualified property through bonus depreciation; and (9) creating limitations on the deductibility of certain executive compensation.
The SEC staff issued Staff Accounting Bulletin (SAB) 118, which provides guidance on accounting for the tax effects of Tax Reform. SAB 118 provided a measurement period that was limited to one year from enactment for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, throughout the measurement period, a company must reflect the income tax effects of those aspects of Tax Reform for which the accounting under ASC 740 was complete in the financial statements. To the extent that a company’s accounting for certain income tax effects of Tax Reform was incomplete, but a reasonable estimate was able to be made, the company must record a provisional estimate in the financial statements. If a company could not determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the tax laws that were in effect immediately before the enactment of Tax Reform.
As further discussed below, the Company finalized its provisional Tax Reform calculations as of the end of the measurement period, based on guidance and information available as of the reporting date. The U.S. government has not yet issued final guidance related to the new rules enacted as part of Tax Reform. Subsequent adjustments, if any, will be recorded in the period in which guidance is finalized.
The Company’s accounting for the impact of the reduction in the U.S. federal corporate tax rate on the Company's deferred tax assets and liabilities is complete. Tax Reform reduced the corporate tax rate to 21 percent, effective January 1, 2018. Consequently, the Company recorded a net adjustment to deferred income tax expense of $1.9 million for the year ended December 31, 2017 to revalue the Company’s deferred tax assets and liabilities. No further adjustments were recorded for the year ended December 31, 2018.
The Company’s accounting for the transition tax is complete. Reasonable estimates of certain effects were calculated and a provisional adjustment of $16.0 million was recorded in the December 31, 2017 financial statements. To determine the amount of the transition tax, the Company determined, in addition to other factors, the amount of post-1986 earnings and profits (E&P) of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. Based on revised E&P calculations updated during the measurement period, the Company recognized an additional measurement-period adjustment of $0.9 million to the transition tax obligation and a corresponding adjustment to tax expense, resulting in a total transition tax obligation of $16.9 million. The Company has elected to pay this liability over eight years; however, in accordance with IRS issued guidance, tax overpayments from the year ended December 31, 2017 are required to be applied to the transition tax obligation. Based on this guidance, $15.6 million of the obligation has been paid, with the remaining $1.3 million recorded in other long-term liabilities at December 31, 2018.
The Company’s accounting for the indefinite reinvestment assertion is complete. In general, it is the practice and intention of the Company to repatriate previously taxed earnings in excess of working capital needs and to reinvest all other earnings of its non-U.S. subsidiaries. As part of Tax Reform, the Company incurred U.S. tax on substantially all of the earnings of its non-U.S. subsidiaries as part of the transition tax. This tax increased the Company’s previously taxed earnings and allows for the repatriation of the majority of its foreign earnings without any residual U.S. federal tax. The Company does not believe that there is an excess of the financial reporting basis over the tax basis of investments in foreign subsidiaries. Accordingly, any repatriation in excess of previously taxed earnings will be a non-taxable return of basis. During the year ended December 31, 2018, the Company repatriated $144.3 million of foreign cash. The Company has not made any measurement-period adjustments related to its indefinite reinvestment assertion during the year ended December 31, 2018.

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Table of Contents

The Company’s accounting policy choice for GILTI is complete. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the period cost method) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the deferred method). The Company selected the period cost method and recorded GILTI tax expense of $0.4 million in the financial statements for the year ended December 31, 2018.
The decrease in the effective tax rate from the prior year is primarily due to the reduction in the U.S. federal corporate tax rate from 35 percent to 21 percent enacted as part of Tax Reform, the additional $15.1 million of transition tax in 2017 when compared to 2018, and a net $6.7 million benefit related to global legal entity restructuring activities. The effective tax rate was also reduced by the foreign-derived intangible income deduction, increased research and development credits and increased stock-based compensation benefits, partially offset by the loss of the domestic manufacturing deduction, which was repealed as part of Tax Reform. When compared to the federal and state combined statutory rate, the effective tax rates for the years ended December 31, 2018 and 2017 were favorably impacted by tax benefits from stock-based compensation and research and development credits.
Net Income: The Company's net income, diluted earnings per share and weighted average shares used in computing diluted earnings per share were as follows:
 
Year Ended December 31,
(in thousands, except per share data)
2018
(ASC 606)
 
2018
(ASC 605)
 
2017
(ASC 605)
Net income
$
419,375

 
$
356,851

 
$
259,251

Diluted earnings per share
$
4.88

 
$
4.15

 
$
2.98

Weighted average shares outstanding - diluted
85,913

 
85,913

 
86,854




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Table of Contents

Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Revenue:
 
Year Ended December 31,
 
Change
(in thousands, except percentages)
2017
 
2016
 
Amount
 
%
 
Constant Currency %
Revenue:
 
 
 
 
 
 
 
 
 
Lease licenses
$
376,886

 
$
340,331

 
$
36,555

 
10.7
 
10.8
Perpetual licenses
248,078

 
227,843

 
20,235

 
8.9
 
7.6
Software licenses
624,964

 
568,174

 
56,790

 
10.0
 
9.5
Maintenance
440,428

 
394,745

 
45,683

 
11.6
 
11.0
Service
29,858

 
25,546

 
4,312

 
16.9
 
16.0
Maintenance and service
470,286

 
420,291

 
49,995

 
11.9
 
11.3
Total revenue
$
1,095,250

 
$
988,465

 
$
106,785

 
10.8
 
10.3
The Company's revenue increased 10.8%, or 10.3% in constant currency, during the year ended December 31, 2017 as compared to the year ended December 31, 2016. The growth rate was favorably impacted by the Company's continued investment in its global sales, support and marketing organizations. Lease license revenue increased 10.7%, or 10.8% in constant currency, as compared to the prior year. Perpetual license revenue, which is derived primarily from new sales, increased 8.9%, or 7.6% in constant currency, as compared to the prior year. 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 11.6%, or 11.0% in constant currency. Service revenue, primarily composed of consulting projects, increased 16.9%, or 16.0% in constant currency.
With respect to revenue, on average for the year ended December 31, 2017, the U.S. Dollar was 1.0% weaker, when measured against the Company's primary foreign currencies, than for the year ended December 31, 2016. The table below presents the impacts of currency fluctuations on revenue for the year ended December 31, 2017. Amounts in brackets indicate a net adverse impact from currency fluctuations.
(in thousands)
Year Ended December 31, 2017
Euro
$
6,634

South Korean Won
1,439

Taiwan Dollar
886

Indian Rupee
838

Japanese Yen
(3,416
)
British Pound
(1,316
)
Other
329

Total
$
5,394

The net overall weaker U.S. Dollar also resulted in increased operating income of $3.5 million for the year ended December 31, 2017 as compared to the year ended December 31, 2016.
As a percentage of revenue, the Company's international and domestic revenues, and the Company's direct and indirect revenues, are as follows:
 
Year Ended December 31,
 
2017
 
2016
International
61.9
%
 
62.8
%
Domestic
38.1
%
 
37.2
%
 
 
 
 
Direct revenue
75.2
%
 
75.6
%
Indirect revenue
24.8
%
 
24.4
%

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Table of Contents


In valuing deferred revenue on the balance sheets of the Company's recent acquisitions as of their respective acquisition dates, the Company applied the fair value provisions applicable to the accounting for business combinations, resulting in a reduction of deferred revenue as compared to its historical carrying amount. As a result, the Company's post-acquisition revenue will be less than the sum of what would have otherwise been reported by ANSYS and each acquiree absent the acquisitions. The impacts on reported revenue for the years ended December 31, 2017 and 2016 were $2.9 million and $0.1 million, respectively.
Cost of Sales and Operating Expenses:
The tables below reflect the Company's operating results as presented on the consolidated statements of income, which are inclusive of foreign currency translation impacts. Amounts included in the discussion that follows are provided in constant currency. The impact, where material, of foreign exchange translation on each expense line is provided separately.
 
Year Ended December 31,
 
 
 
 
2017
 
2016
 
Change
(in thousands, except percentages)
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
Amount
 
%
Cost of sales:
 
 
 
 
 
 
 
 
 
 
 
Software licenses
$
34,421

 
3.1
 
$
28,860

 
2.9
 
$
5,561

 
19.3

Amortization
36,794

 
3.4
 
38,092

 
3.9
 
(1,298
)
 
(3.4
)
Maintenance and service
78,949

 
7.2
 
79,908

 
8.1
 
(959
)
 
(1.2
)
Total cost of sales
150,164

 
13.7
 
146,860

 
14.9
 
3,304

 
2.2

Gross profit
$
945,086

 
86.3
 
$
841,605

 
85.1
 
$
103,481

 
12.3

Software Licenses: The increase in the cost of software licenses was primarily due to the following:
Increased third-party royalties of $2.9 million.
Increased salaries and other headcount-related costs of $1.6 million.
Increased restructuring costs of $0.6 million.
Amortization: The decrease in amortization expense was primarily due to a net decrease in the amortization of acquired technology, partially offset by an increase in the amortization of trade names.
Maintenance and Service: The net decrease in maintenance and service costs was primarily due to the following:
Decreased salaries and other headcount-related costs of $4.0 million, primarily due to a redeployment of technical personnel resources to pre-sales activities.
Decreased depreciation and facility costs, each of $0.6 million.
Increased third-party technical support of $2.1 million.
Increased restructuring costs of $1.7 million.
Increased stock-based compensation of $1.0 million.
The improvement in gross profit was a result of the increase in revenue, partially offset by the increase in the related cost of sales.

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Year Ended December 31,
 
 
 
 
2017
 
2016
 
Change
(in thousands, except percentages)
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
Amount
 
%
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
$
338,640

 
30.9
 
$
269,515

 
27.3
 
$
69,125

 
25.6
Research and development
202,746

 
18.5
 
183,093

 
18.5
 
19,653

 
10.7
Amortization
12,972

 
1.2
 
12,755

 
1.3
 
217

 
1.7
Total operating expenses
$
554,358

 
50.6
 
$
465,363

 
47.1
 
$
88,995

 
19.1
Selling, General and Administrative: The increase in selling, general and administrative costs was primarily due to the following:
Increased salaries, incentive compensation and other headcount-related costs of $42.1 million.
Increased stock-based compensation of $14.8 million.
Increased consulting costs of $7.3 million.
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 $9.6 million.
Increased restructuring costs of $6.5 million.
Increased stock-based compensation of $3.8 million.
Interest Income: Interest income for the year ended December 31, 2017 was $7.0 million as compared to $4.2 million for the year ended December 31, 2016. Interest income increased as a result of an increase in both the Company's average invested cash balances and the average rate of return on those balances.
Other Expense, net: The Company's other expense, net consists of the following:
 
Year Ended December 31,
(in thousands)
2017
 
2016
Foreign currency (losses) gains, net
$
(1,935
)
 
$
77

Other
(61
)
 
(213
)
Total other expense, net
$
(1,996
)
 
$
(136
)
Income Tax Provision: The Company's income before income tax provision, income tax provision and effective tax rate were as follows:
 
Year Ended December 31,
(in thousands, except percentages)
2017
 
2016
Income before income tax provision
$
395,694

 
$
380,315

Income tax provision
$
136,443

 
$
114,679

Effective tax rate
34.5
%
 
30.2
%
The increase in the effective tax rate from the prior year is primarily due to tax charges of $17.9 million related to Tax Reform, partially offset by increased tax benefits of $13.1 million related to stock-based compensation in 2017. In addition, the 2016 effective tax rate was reduced by entity structuring and related repatriation benefits of $10.8 million that did not reoccur in 2017. In the first quarter of 2017, the Company adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which requires excess tax benefits and deficiencies related to stock-based compensation to be reflected in the income statement as a component of the provision for income taxes. Previously, these tax effects were reflected in stockholders' equity.

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When compared to the federal and state combined statutory rate, the effective tax rates for the years ended December 31, 2017 and 2016 were favorably impacted by the domestic manufacturing deduction and research and development credits. The rates were also favorably impacted by the recurring item of lower statutory tax rates in many of the Company's foreign jurisdictions.
Net Income: The Company's net income, diluted earnings per share and weighted average shares used in computing diluted earnings per share were as follows:
 
Year Ended December 31,
(in thousands, except per share data)
2017
 
2016
Net income
$
259,251

 
$
265,636

Diluted earnings per share
$
2.98

 
$
2.99

Weighted average shares outstanding - diluted
86,854

 
88,969






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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 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.
 
ASC 606
 
Year Ended December 31, 2018
(in thousands, except percentages and per share data)
GAAP Results
 
Adjustments
 
Non-GAAP
Results
Total revenue
$
1,293,636

 
$
9,442

(1)
$
1,303,078

Operating income
476,574

 
141,442

(2)
618,016

Operating profit margin
36.8
%
 
 
 
47.4
%
Net income
$
419,375

 
$
94,510

(3)
$
513,885

Earnings per share – diluted:
 
 
 
 
 
Earnings per share
$
4.88

 
 
 
$
5.98

Weighted average shares
85,913

 
 
 
85,913

(1)
Amount represents the revenue not reported during the period as a result of the acquisition accounting adjustment associated with the accounting for deferred revenue in business combinations.
(2)
Amount represents $83.3 million of stock-based compensation expense, $4.3 million of excess payroll taxes related to stock-based awards, $40.8 million of amortization expense associated with intangible assets acquired in business combinations, $3.5 million of transaction expenses related to business combinations and the $9.4 million adjustment to revenue as reflected in (1) above.
(3)
Amount represents the impact of the adjustments to operating income referred to in (2) above, decreased for the related income tax impact of $47.9 million and increased for a measurement-period adjustment related to the Tax Cuts and Jobs Act of $0.9 million and rabbi trust expense of $0.1 million.
 
ASC 605
 
Year Ended December 31,
 
2018
 
2017
(in thousands, except percentages and per share data)
As
Reported
 
Adjustments
 
Non-GAAP
Results
 
As
Reported
 
Adjustments
 
Non-GAAP
Results
Total revenue
$
1,216,469

 
$
15,583

(1)
$
1,232,052

 
$
1,095,250

 
$
2,856

(4)
$
1,098,106

Operating income
399,407

 
147,583

(2)
546,990

 
390,728

 
118,567

(5)
509,295

Operating profit margin
32.8
%
 
 
 
44.4
%
 
35.7
%
 
 
 
46.4
%
Net income
$
356,851

 
$
98,832

(3)
$
455,683

 
$
259,251

 
$
88,663

(6)
$
347,914

Earnings per share – diluted:
 
 
 
 
 
 
 
 
 
 
 
Earnings per share
$
4.15

 
 
 
$
5.30

 
$
2.98

 
 
 
$
4.01

Weighted average shares
85,913

 
 
 
85,913

 
86,854

 
 
 
86,854

(1)
Amount represents the revenue not reported during the period as a result of the acquisition accounting adjustment associated with the accounting for deferred revenue in business combinations.
(2)
Amount represents $83.3 million of stock-based compensation expense, $4.3 million of excess payroll taxes related to stock-based awards, $40.8 million of amortization expense associated with intangible assets acquired in business combinations, $3.5 million of transaction expenses related to business combinations and the $15.6 million adjustment to revenue as reflected in (1) above.
(3)
Amount represents the impact of the adjustments to operating income referred to in (2) above, decreased for the related income tax impact of $49.7 million and increased for a measurement-period adjustment related to the Tax Cuts and Jobs Act of $0.9 million and rabbi trust expense of $0.1 million.

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(4)
Amount represents the revenue not reported during the period as a result of the acquisition accounting adjustment associated with the accounting for deferred revenue in business combinations.
(5)
Amount represents $53.2 million of stock-based compensation expense, $49.8 million of amortization expense associated with intangible assets acquired in business combinations, $11.7 million of restructuring charges, $1.1 million of transaction expenses related to business combinations and the $2.9 million adjustment to revenue as reflected in (4) above.
(6)
Amount represents the impact of the adjustments to operating income referred to in (5) above, decreased for the related income tax impact of $52.5 million, excluding the impact of the Tax Cuts and Jobs Act, and rabbi trust income of $0.1 million, and increased for total net impacts of the Tax Cuts and Jobs Act of $22.7 million.
 
ASC 605
 
Year Ended December 31,
 
2017
 
2016
(in thousands, except percentages and per share data)
As
Reported
 
Adjustments
 
Non-GAAP
Results
 
As
Reported
 
Adjustments
 
Non-GAAP
Results
Total revenue
$
1,095,250

 
$
2,856

(1)
$
1,098,106

 
$
988,465

 
$
103

(4)
$
988,568

Operating income
390,728

 
118,567

(2)
509,295

 
376,242

 
88,114

(5)
464,356

Operating profit margin
35.7
%
 
 
 
46.4
%
 
38.1
%
 
 
 
47.0
%
Net income
$
259,251

 
$
88,663

(3)
$
347,914

 
$
265,636

 
$
57,286

(6)
$
322,922

Earnings per share – diluted:
 
 
 
 
 
 
 
 
 
 
 
Earnings per share
$
2.98

 
 
 
$
4.01

 
$
2.99

 
 
 
$
3.63

Weighted average shares
86,854

 
 
 
86,854

 
88,969

 
 
 
88,969

(1)
Amount represents the revenue not reported during the period as a result of the acquisition accounting adjustment associated with the accounting for deferred revenue in business combinations.
(2)
Amount represents $53.2 million of stock-based compensation expense, $49.8 million of amortization expense associated with intangible assets acquired in business combinations, $11.7 million of restructuring charges, $1.1 million of transaction expenses related to business combinations and the $2.9 million adjustment to revenue as reflected in (1) above.
(3)
Amount represents the impact of the adjustments to operating income referred to in (2) above, decreased for the related income tax impact of $52.5 million, excluding the impact of the Tax Cuts and Jobs Act, and rabbi trust income of $0.1 million, and increased for total net impacts of the Tax Cuts and Jobs Act of $22.7 million.
(4)
Amount represents the revenue not reported during the period as a result of the acquisition accounting adjustment associated with the accounting for deferred revenue in business combinations.
(5)
Amount represents $50.8 million of amortization expense associated with intangible assets acquired in business combinations, $33.3 million of stock-based compensation expense, $3.4 million of restructuring charges, $0.4 million of transaction expenses related to business combinations and the $0.1 million adjustment to revenue as reflected in (4) above.
(6)
Amount represents the impact of the adjustments to operating income referred to in (5) above, adjusted for the related income tax impact of $30.8 million.
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.

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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 the Company's competitors and may not be directly comparable to similarly titled measures of the Company's competitors due to potential differences in the exact method of calculation. The Company compensates for these limitations by using these non-GAAP financial measures as supplements to GAAP financial measures and by reviewing the reconciliations of the non-GAAP financial measures to their most comparable GAAP financial measures.
The adjustments to these non-GAAP financial measures, and the basis for such adjustments, are outlined below:
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 acquisition 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 intangible assets from acquisitions and its related tax impact. The Company incurs amortization of intangible assets, included in its GAAP presentation of amortization expense, related to various acquisitions it has made. 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. This non-GAAP adjustment also includes excess payroll tax expense related to stock-based compensation. Stock-based compensation expense (benefit) incurred in connection with the Company's 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 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. Management similarly excludes income (expense) related to assets held in a rabbi trust in connection with the Company's deferred compensation plan. Specifically, the Company excludes stock-based compensation and income (expense) related to assets held in the deferred compensation plan rabbi trust 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 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. 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.

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Table of Contents

Restructuring charges and the related tax impact. The Company occasionally incurs expenses for restructuring its workforce 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. 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, as it generally does not incur these expenses as a part of its 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.
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, 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 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 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.
Tax Cuts and Jobs Act. The Company recorded charges in its income tax provision related to the enactment of the Tax Cuts and Jobs Act, specifically for the transition tax related to unrepatriated cash and the impacts of the tax rate change on net deferred tax assets. Management excludes these charges for the purpose of calculating non-GAAP net income and non-GAAP diluted earnings per share when it evaluates the continuing operational performance of the Company, as (i) the charges are not expected to recur as part of its normal operations and (ii) the charges resulted from the extremely infrequent event of major U.S. tax reform, the last such reform having occurred in 1986. 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.
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 Income
Diluted Earnings Per Share
Non-GAAP Diluted Earnings Per Share


44

Table of Contents

Liquidity and Capital Resources
 
 
As of December 31,
 
Change
(in thousands, except percentages)
 
2018
 
2017
 
Amount
 
%
Cash, cash equivalents and short-term investments
 
$
777,364

 
$
881,787

 
$
(104,423
)
 
(11.8
)
Working capital
 
$
786,410

 
$
661,713

 
$
124,697

 
18.8

Cash, cash equivalents and short-term investments decreased during the current fiscal year primarily due to cash utilized in the May 2, 2018 acquisition of OPTIS, partially offset by the excess of cash provided by operating activities over cash used in financing activities.
Cash, Cash Equivalents and Short-Term Investments
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 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, except percentages)
2018
 
% of Total
 
2017
 
% of Total
Domestic
$
616,249

 
79.3
 
$
561,417

 
63.7
Foreign
161,115

 
20.7
 
320,370

 
36.3
Total
$
777,364

 
 
 
$
881,787

 
 
In general, it is the practice and intention of the Company to repatriate previously taxed earnings in excess of working capital needs and to reinvest all other earnings of its non-U.S. subsidiaries. As part of Tax Reform, the Company incurred U.S. tax on substantially all of the earnings of its non-U.S. subsidiaries as part of the transition tax. This tax increased the Company’s previously taxed earnings and allows for the repatriation of the majority of its foreign earnings without any residual U.S. federal tax. The Company does not believe that there is an excess of the financial reporting basis over the tax basis of investments in foreign subsidiaries. Accordingly, any repatriation in excess of previously taxed earnings will be a non-taxable return of basis. During the year ended December 31, 2018, the Company repatriated $144.3 million of foreign cash, which increased the percentage of domestic cash, cash equivalents and short-term investments at December 31, 2018.
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 the Company's consolidated balance sheet.
Cash Flows from Operating Activities
 
 
Year Ended December 31,
 
Change
(in thousands)
 
2018
 
2017
 
2016
 
2018 vs. 2017
 
2017 vs. 2016
Net cash provided by operating activities
 
$
486,437

 
$
430,438

 
$
365,980

 
$
55,999

 
$
64,458

Fiscal year 2018 as compared to fiscal year 2017
Net cash provided by operating activities increased during the current fiscal year due to increased net income (net of non-cash operating adjustments) of $151.4 million, partially offset by decreased net cash flows from operating assets and liabilities of $95.4 million.
Fiscal year 2017 as compared to fiscal year 2016
Net cash provided by operating activities increased during the prior fiscal year due to increased net cash flows from operating assets and liabilities of $46.5 million and increased net income (net of non-cash operating adjustments) of $17.9 million.



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Table of Contents

Cash Flows from Investing Activities
 
 
Year Ended December 31,
 
Change
(in thousands)
 
2018
 
2017
 
2016
 
2018 vs. 2017
 
2017 vs. 2016
Net cash used in investing activities
 
$
(313,680
)
 
$
(97,443
)
 
$
(32,173
)
 
$
(216,237
)
 
$
(65,270
)
Fiscal year 2018 as compared to fiscal year 2017
Net cash used in investing activities increased during the current fiscal year due primarily to increased acquisition-related net cash outlays of $219.1 million, primarily related to OPTIS. The Company currently plans capital spending of $35 million to $40 million during fiscal year 2019 as compared to the $21.8 million that was spent in 2018. The level of spending will depend on various factors, including the growth of the business and general economic conditions.
Fiscal year 2017 as compared to fiscal year 2016
Net cash used in investing activities increased during the prior fiscal year due to increased acquisition-related net cash outlays of $56.0 million and increased capital expenditures of $6.7 million.
Cash Flows from Financing Activities
 
 
Year Ended December 31,
 
Change
(in thousands)
 
2018
 
2017
 
2016
 
2018 vs. 2017
 
2017 vs. 2016
Net cash used in financing activities
 
$
(262,675
)
 
$
(294,651
)
 
$
(288,630
)
 
$
31,976

 
$
(6,021
)
Fiscal year 2018 as compared to fiscal year 2017
Net cash used in financing activities decreased during the current fiscal year due primarily to decreased stock repurchases of $66.2 million, partially offset by increased restricted stock unit withholding taxes paid in lieu of issuing shares of $17.8 million and decreased proceeds from shares issued for stock-based compensation of $11.5 million.
Fiscal year 2017 as compared to fiscal year 2016
Net cash used in financing activities increased during the prior fiscal year due primarily to increased restricted stock unit withholding taxes paid in lieu of issuing shares of $6.1 million.
Other Cash Flow Information
The Company believes that existing cash and cash equivalent balances of $777.1 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 additional financings can be obtained on favorable terms, if at all.
Under the Company's stock repurchase program, the Company repurchased shares as follows:
 
Year Ended December 31,
(in thousands, except per share data)
2018
 
2017
 
2016
Number of shares repurchased
1,674

 
2,750

 
3,700

Average price paid per share
$
161.12

 
$
122.20

 
$
90.90

Total cost
$
269,801

 
$
336,042

 
$
336,335

The most recent amendment to the program, authorizing the repurchase of up to 5,000,000 shares, was approved by the Company's Board of Directors in February 2018. There is no expiration date to this amendment. As of December 31, 2018, 3.8 million shares remained available for repurchase under the program.

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Table of Contents

The Company continues to generate positive cash flows from operating activities and believes that the best uses of its excess cash are to invest in the business and 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 the issuance of additional securities. Additionally, the Company has in the past, and expects in the future, to repurchase stock in order to both offset dilution and return capital, in excess of its requirements, to stockholders with the goal of increasing stockholder value.
In February 2019, the Company acquired 100% of the shares of Granta Design and Helic for a combined purchase price of approximately $261.5 million. The acquisition of Granta Design, the premier provider of materials information technology, expands the Company's portfolio into this important area, giving customers access to material intelligence, including data that is critical to successful simulations. The acquisition of Helic, the industry-leading provider of electromagnetic crosstalk solutions for systems on chips, combined with the Company's flagship electromagnetic and semiconductor solvers, will provide a comprehensive solution for on-chip, 3D integrated circuit and chip-package-system electromagnetics and noise analysis.
Also in February 2019, the Company entered into a $500 million unsecured revolving credit facility. The revolving credit facility will be available for general corporate purposes, including, among others, to finance acquisitions, share repurchases and capital expenditures, and becomes payable in full in February 2024.

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

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Table of Contents

Contractual Obligations
The Company's significant contractual obligations as of December 31, 2018 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 lease(1)
 
$
31,946

 
$
4,294

 
$
8,928

 
$
8,928

 
$
9,796

Other operating leases(2)
 
37,776

 
12,687

 
14,210

 
6,408

 
4,471

Unconditional purchase obligations(3)
 
37,511

 
24,182

 
13,221

 
108

 

Obligations related to uncertain tax positions, including interest and penalties(4)
 

 

 

 

 

Other long-term obligations(5)
 
16,171

 
2,836

 
2,686

 
2,328

 
8,321

Total contractual obligations
 
$
123,404

 
$
43,999

 
$
39,045

 
$
17,772

 
$
22,588

(1)
The Company previously entered into a lease agreement for 186,000 square feet of rentable space located in an office facility in Canonsburg, Pennsylvania, which serves as the Company's headquarters. The term of the lease is 183 months, beginning on October 1, 2014 and expiring on December 31, 2029. The Company has a one-time right to terminate the lease effective upon the last day of the tenth full year following the date of possession (December 31, 2024) by providing the landlord with at least 18 months' prior written notice of such termination.
(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 royalties, software licenses and long-term purchase contracts for network, communication and office maintenance services, which are unrecorded as of December 31, 2018.
(4)
The Company has $29.3 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)
Other long-term obligations primarily include post-employment benefits, including pension obligations, of $9.7 million for certain foreign locations of the Company, office space restoration of $2.3 million, federal transition tax related to Tax Reform of $1.3 million and deferred compensation of $1.1 million. These amounts include the related current portions when applicable.

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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: The Company's revenue is derived principally from the licensing of computer software products and from related maintenance contracts. The Company adopted ASC 606 on January 1, 2018 using the modified retrospective approach for all contracts not completed as of the date of adoption. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with ASC 605, Revenue Recognition (ASC 605). The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company’s software licenses, maintenance and services.
Revenue Recognition Policy 2018 (ASC 606)
The Company enters into contracts that include combinations of products, maintenance and services, which are accounted for as separate performance obligations with differing revenue recognition patterns.
Revenue from perpetual licenses is classified as software license revenue. Software license revenue is recognized up front upon delivery of the licensed product and/or the utility that enables the customer to access authorization keys, provided that a signed contract has been received. Typically, the Company’s perpetual licenses are sold with post-contract support (PCS), which includes unspecified technical enhancements and customer support. The Company allocates value in bundled perpetual and PCS arrangements based on the standalone selling prices of the perpetual license and PCS. Revenue from PCS is classified as maintenance revenue and is recognized ratably over the term of the contract, as the Company satisfies the PCS performance obligation over time.
In addition to perpetual licenses, the Company sells time-based lease licenses. Lease licenses are sold only as a bundled arrangement that includes the rights to a term software license and PCS. Utilizing observable inputs, the Company determined that 50% of the estimated standalone selling price of the lease license is attributable to the term license and 50% is attributable to the PCS. Consistent with the perpetual sales, the license component is classified as software license revenue and recognized as revenue up front at the commencement of the lease. The PCS is classified as maintenance revenue and is recognized ratably over the term of the contract, as the Company provides the PCS benefit over time.
Revenue from training, support and other services is recognized as the services are performed. For contracts in which the service consists of a single performance obligation, such as providing a training class to a customer, the Company recognizes revenue upon completion of the performance obligation. For service contracts that are longer in duration and often include multiple performance obligations (for example, both training and consulting), the Company measures the progress toward completion of the obligations and recognizes revenue accordingly. In measuring progress towards the completion of performance obligations, 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 at a point in time or over time as appropriate when the channel partner submits a purchase commitment, collectability from the channel partner is probable, a license agreement signed by the end-user customer is received and the performance obligation was met. 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 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 perform substantially as specified in the Company's 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. The warranty is not sold, and cannot be purchased, separately. The warranty does not provide any type of additional service to the customer or performance obligation for the Company.
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

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generally limited in a variety of industry-standard respects, including the Company's right to replace an infringing product. As of December 31, 2018, 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.
Significant Judgments (ASC 606)
The Company’s contracts with customers typically include promises to transfer licenses and services to a customer. Judgment is required to determine if the promises are separate performance obligations, and if so, the allocation of the transaction price to each performance obligation. The Company uses the estimated standalone selling price method to allocate the transaction price for items that are not sold separately, particularly lease licenses sold with PCS. The estimated standalone selling price is determined using all information reasonably available to the Company, including market conditions and other observable inputs. The corresponding revenues are recognized as the related performance obligations are satisfied.
The Company applies a practical expedient to expense sales commissions as incurred when the amortization period would have been one year or less. Sales commissions associated with the initial year of multi-year contracts are expensed as incurred due to their immateriality. Sales commissions associated with multi-year contracts beyond the initial year are subject to an employee service requirement and are expensed as incurred as they are not considered incremental costs to obtain a contract.
The Company is required to adjust promised amounts of consideration for the effects of the time value of money if the timing of the payments provides the customer or the Company with a significant financing benefit. The Company considers various factors in assessing whether a financing component exists, including the duration of the contract, market interest rates and the timing of payments. The Company’s contracts do not include a significant financing component requiring adjustment to the transaction price.
Revenue Recognition Policy 2017 and 2016 (ASC 605)
Revenue from perpetual licenses was classified as license revenue and was recognized upon delivery of the licensed product and/or the utility that enabled the customer to access authorization keys, provided that acceptance had occurred and a signed contractual obligation was received, the price was fixed and determinable, and collectibility of the receivable was probable. The Company determined the fair value of PCS sold together with perpetual licenses based on the rate charged for PCS when sold separately. Revenue from PCS contracts was classified as maintenance and service revenue and was recognized ratably over the term of the contract.
Revenue for software lease licenses was classified as license revenue and was 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, could not be separated from lease revenue for accounting purposes. As a result, both the lease licenses and PCS were recognized ratably over the lease period. The Company included the revenue for the entire lease arrangement within software license revenue in the consolidated statements of income.
Many of the Company's semiconductor products were typically licensed via longer term leases of 24–36 months. The Company recognized revenue for these licenses over the term of the lease contract. Because the Company did not have vendor-specific objective evidence of the fair value of these leases, the Company also recognized revenue from perpetual licenses over the term of the lease contract during the infrequent occurrence of these licenses being sold with semiconductor leases in multiple-element arrangements.
Revenue from training, support and other services was recognized as the services were performed. The Company applied the specific performance method to contracts in which the service consisted of a single act, such as providing a training class to a customer, and the proportional performance method to other service contracts that were longer in duration and often included multiple acts (for example, both training and consulting). In applying the proportional performance method, the Company typically utilized output-based estimates for services with contractual billing arrangements that were not based on time and materials, and estimated output based on the total tasks completed as compared to the total tasks required for each work contract. Input-based estimates were utilized for services that involved general consultations with contractual billing arrangements based on time and materials, utilizing direct labor as the input measure.
The accounting treatment under ASC 605 associated with arrangements through independent channel partners, non-income related taxes, warranties and indemnification obligations is consistent with ASC 606 described above.
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

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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 tax assets for which a valuation allowance was used to reduce their carrying value, the adjustment to the valuation allowance will be recorded as a reduction to 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 income taxes 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 quantitative assessment of whether the fair value of each reporting unit or asset exceeds its carrying amount. The Company has one reporting unit. Goodwill is tested at this reporting unit level and indefinite-lived intangible assets are tested at the individual asset level. This requires the Company to assess and make judgments regarding a variety of factors which impact the fair value of the reporting unit or asset being tested, including business plans, anticipated future cash flows, economic projections and other market data. Because there are inherent uncertainties involved in these factors, significant differences between these estimates and actual results could result in future impairment charges and could materially impact the Company's future financial results. During the first quarter of 2018, the Company 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, 2018. No other events or circumstances changed during the year ended December 31, 2018 that would indicate that the fair values of the Company's reporting unit and indefinite-lived intangible asset are below their carrying values.
Contingencies: The Company is involved in 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 intellectual property rights 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 restricted stock units and other stock awards to employees and directors under the Company's equity incentive 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 2018, 2017 and 2016 was $83.3 million, $53.2 million and $33.3 million, respectively. As of December 31, 2018, total unrecognized estimated compensation expense related to unvested stock options and awards granted prior to that date was $141.1 million, which is expected to be recognized over a weighted average period of 1.6 years.
The value of each stock option 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

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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 the 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. The Company did not grant stock option awards during 2018 or 2017.
 
Year Ended December 31,
 
2016
Risk-free interest rate
1.19% to 1.93%
Expected dividend yield
—%
Expected volatility
24%
Expected term
5.7 years
Weighted average fair value per share
$23.96
The Company issues various restricted stock unit awards which contain a market condition, a performance condition, a service condition, or any combination of the three. Restricted stock unit awards are valued based on the grant-date fair value of the award. Stock-based compensation expense is recognized over the employee's requisite service period for awards with only a service condition. For awards with a performance condition, stock-based compensation expense is recorded from the service inception date through the conclusion of the measurement period based on management's estimates concerning the probability of vesting.
Vesting of restricted stock unit awards with a market condition is based on the Company's performance as measured by total shareholder return relative to the appreciation of a specified stock index over the measurement period, subject to each participant's continued employment with the Company through the conclusion of the measurement period. The fair value of the restricted stock unit awards with a market condition is estimated using a Monte Carlo simulation model. The determination of the fair value of the awards is affected by the grant date and a number of variables, each of which has been identified in the chart below for awards granted during each respective period. Share-based compensation expense based on the fair value of the award is being recorded from the grant date through the conclusion of the measurement period.
 
Year Ended December 31,
Assumptions used in Monte Carlo lattice pricing model
2018
 
2017
 
2016
Risk-free interest rate
2.4%
 
1.5%
 
1.0%
Expected dividend yield
—%
 
—%
 
—%
Expected volatility—ANSYS stock price
21%
 
19%
 
21%
Expected volatility—Nasdaq Composite Index
15%
 
15%
 
16%
Expected term
2.8 years
 
2.8 years
 
2.8 years
Correlation factor
0.65
 
0.70
 
0.65
Weighted average fair value per share
$191.76

$120.94

$78.71
The Company also grants restricted stock units to non-employee Directors, which vest upon the earlier of one year from the date of grant or the date of the next regular annual meeting of stockholders.
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, 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. The Company accounts for forfeitures of stock-based awards as they occur.
Estimates of stock-based compensation expense are significant to the Company's financial statements, but this expense is partially based on the aforementioned option valuation and Monte Carlo simulation models and will never result in the payment of cash by the Company other than through the payment of withholding taxes in lieu of additional share issuance. 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 stock-based compensation expense when evaluating the Company's underlying business performance.

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Recent Accounting Guidance
For information regarding recent accounting guidance and its impact 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.

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ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Income Rate Risk. Changes in the overall level of interest rates affect the interest income that is generated from the Company's cash, cash equivalents and short-term investments. For the year ended December 31, 2018, total interest income was $11.4 million. 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 of the Company with original maturities of three months to one year.
Foreign Currency Transaction Risk. As the Company operates in international regions, a portion of its revenue, expenses, cash, accounts receivable and payment obligations are denominated in foreign currencies. As a result, changes in currency exchange rates will affect the Company's financial position, results of operations and cash flows.
With respect to revenue, on average for the year ended December 31, 2018, the U.S. Dollar was approximately 2.3% weaker and 2.6% weaker, when measured against the Company’s primary foreign currencies, than for the year ended December 31, 2017 under ASC 606 and ASC 605, respectively. The table below presents the impacts of currency fluctuations on revenue for the year ended December 31, 2018. Amounts in brackets indicate a net adverse impact from currency fluctuations.
 
Year Ended December 31, 2018
(in thousands)
ASC 606
 
ASC 605
Euro
$
12,498

 
$
11,915

Japanese Yen
2,088

 
2,075

South Korean Won
918

 
1,182

British Pound
870

 
1,083

Indian Rupee
(1,623
)
 
(1,372
)
Other
(129
)
 
(36
)
Total
$
14,622

 
$
14,847

The net overall weaker U.S. Dollar also resulted in increased operating income of $9.6 million and $10.3 million for the year ended December 31, 2018 as compared to the year ended December 31, 2017 under ASC 606 and ASC 605, respectively.
The most significant currency impacts on revenue and operating income are typically attributable to U.S. Dollar exchange rate changes against the British Pound, Euro, Japanese Yen and South Korean Won as reflected in the charts below:
 
Period End Exchange Rates
As of
GBP/USD
 
EUR/USD
 
USD/JPY
 
USD/KRW
December 31, 2015
1.474

 
1.086

 
120.337

 
1,176.886

December 31, 2016
1.234

 
1.051

 
116.918

 
1,208.313

December 31, 2017
1.351

 
1.200

 
112.701

 
1,068.376

December 31, 2018
1.276

 
1.147

 
109.589

 
1,115.325

 
Average Exchange Rates
Year Ended
GBP/USD
 
EUR/USD
 
USD/JPY
 
USD/KRW
December 31, 2016
1.355

 
1.107

 
108.530

 
1,160.699

December 31, 2017
1.289

 
1.130

 
112.139

 
1,130.945

December 31, 2018
1.335

 
1.181

 
110.405

 
1,100.786


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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following tables set forth selected unaudited quarterly information. The Company believes that the amounts stated below present fairly the results of such periods when read in conjunction with the consolidated financial statements and related notes included in Part IV, Item 15 of this Annual Report on Form 10-K.
Other information required by this Item is included in Part IV, Item 15 of this Annual Report on Form 10-K.
 
 
Fiscal Quarter Ended
(in thousands, except per share data)
 
December 31,
2018
 
September 30,
2018
 
June 30,
2018
 
March 31,
2018
Revenue
 
$
415,432

 
$
289,418

 
$
305,913

 
$
282,873

Gross profit
 
375,343

 
253,110

 
265,463

 
243,835

Operating income
 
179,936

 
93,024

 
108,553

 
95,061

Net income
 
153,163

 
89,336

 
92,596

 
84,280

Earnings per share – basic
 
$
1.83

 
$
1.06

 
$
1.10

 
$
1.00

Earnings per share – diluted
 
$
1.79

 
$
1.04

 
$
1.08

 
$
0.98

 
 
 
Fiscal Quarter Ended
(in thousands, except per share data)
 
December 31,
2017
 
September 30,
2017
 
June 30,
2017
 
March 31,
2017
Revenue
 
$
302,336

 
$
275,585

 
$
263,924

 
$
253,405

Gross profit
 
261,524

 
239,602

 
227,586

 
216,374

Operating income
 
100,679

 
106,183

 
98,394

 
85,472

Net income
 
52,585

 
73,630

 
69,730

 
63,306

Earnings per share – basic
 
$
0.62

 
$
0.87

 
$
0.82

 
$
0.74

Earnings per share – diluted
 
$
0.61

 
$
0.85

 
$
0.80

 
$
0.73


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ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. As required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Company has evaluated, with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures are effective, as defined in Rule 13a-15(e) of the Exchange Act.
The Company believes, based on its knowledge, that the financial statements and other financial information included in this report fairly present, in all material respects, the financial condition, results of operations and cash flows of the Company as of and for the periods presented in this report. The Company is committed to both a sound internal control environment and to good corporate governance.
From time to time, the Company reviews the disclosure controls and procedures, and may periodically make changes to enhance their effectiveness and to ensure that the Company's systems evolve with its business.
Report on Internal Control over Financial Reporting. The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, the Company has conducted an evaluation of the effectiveness of its internal control over financial reporting based upon the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's internal control over financial reporting was effective at December 31, 2018.
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.
Additionally, Deloitte & Touche LLP, an independent registered public accounting firm, has issued an attestation report on the Company's internal control over financial reporting. This report is included in Item 15 of this Annual Report on Form 10-K.
Changes in Internal Controls. There were no changes in the Company’s internal control over financial reporting that occurred during the three months ended December 31, 2018 that materially affected, or were reasonably likely to materially affect, the Company's internal control over financial reporting. During fiscal year 2018, the Company implemented internal controls to ensure it has adequately evaluated contracts and arrangements that may contain leases and properly assessed the impact of the new lease accounting standard on the Company's consolidated financial statements. The Company does not expect significant changes to its internal controls over financial reporting due to the adoption of the new standard, effective January 1, 2019.

ITEM 9B.
OTHER INFORMATION
Item 1.01 Entry into a Material Definitive Agreement
On February 22, 2019, the Company entered into a $500 million unsecured revolving credit facility, which includes a $50 million sublimit for the issuance of standby letters of credit, with Bank of America, N.A. as Administrative Agent. The revolving credit facility will be available for general corporate purposes, including, among others, to finance acquisitions, share repurchases and capital expenditures and becomes payable in full on February 22, 2024.
Borrowings under the revolving credit facility will accrue interest at the London Interbank Offered Rate (LIBOR) plus an applicable margin or at the base rate. 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 one-month LIBOR plus 1.000%. The applicable margin for borrowings is a percentage per annum based on the lower of (1) a pricing level determined by the Company’s then-current

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consolidated leverage ratio and (2) a pricing level determined by the Company’s debt ratings (if such debt ratings exist). The revolving credit facility contains customary representations and warranties, affirmative and negative covenants and events of default.
The revolving credit agreement also contains a financial covenant requiring the Company and its subsidiaries to maintain a consolidated leverage ratio of 3.50 to 1.00 as of the end of any fiscal quarter (for the four-quarter period ending on such date) with an opportunity for a temporary increase in such consolidated leverage ratio to 4.00 to 1.00 upon the consummation of certain qualified acquisitions for which the aggregate consideration is at least $250 million.
Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant
The information required by this Item 2.03 is incorporated by reference to Item 1.01 above.
Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.

Pursuant to the terms of the transition agreement between James E. Cashman, III and the Company, on February 22, 2019, Mr. Cashman tendered his voluntary resignation from the Company’s Board of Directors and as an employee of the Company effective, in each case, on April 30, 2019.


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PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated by reference to the Company's 2019 Proxy Statement and is set forth under “Corporate Governance at ANSYS,” “Director Nominations,” “Continuing Directors Following the 2019 Annual Meeting,” “Corporate Governance at ANSYS,” “Audit Committee,” “Our Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Audit Committee” therein.
The Company adopted a Code of Business Conduct and Ethics that applies to its principal executive officer, principal financial officer, principal accounting officer, and all directors of the Company and its subsidiaries. The Company’s Code of Business Conduct and Ethics is posted under the Corporate Responsibility tab of the Investor Relations section of its website at www.ansys.com. The Company will post any amendments to, or waiver of, its Code of Business Conduct and Ethics on its website.

ITEM 11.
EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the Company's 2019 Proxy Statement and is set forth under “Compensation Discussion and Analysis,” “Compensation Policies and Practices Related to Risk Management,” “Summary Compensation Table (Fiscal Years 2018, 2017 and 2016),” “Grants of Plan-Based Awards in Fiscal Year 2018,” “Outstanding Equity Awards at End of Fiscal Year 2018,” “Option Exercises and Vested Stock in Fiscal Year 2018,” “Potential Payments Upon Termination or Change of Control Under Employment or Other Agreements,” “2018 CEO Pay Ratio," “Compensation Committee Report,” “Compensation Committee Interlocks and Insider Participation,” "Director Nominations" and “Non-Employee Director Compensation” therein.

ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERS
The information required by this Item relating to Regulation S-K, Item 201(d) is incorporated by reference herein from Part II, Item 5 of this Annual Report on Form 10-K.
All other information required by this Item is incorporated by reference to the Company's 2019 Proxy Statement and is set forth under “Ownership of Our Common Stock” therein.

ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated by reference to the Company's 2019 Proxy Statement and is set forth under "Director Independence" and “Related-Party Transactions” therein.

ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference to the Company's 2019 Proxy Statement and is set forth under “Independent Registered Accounting Firm Services and Fees” therein.

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PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
Documents Filed as Part of this Annual Report on Form 10-K:
1.
Financial Statements: The following consolidated financial statements and reports are filed as part of this report:
-
-
-
-
-
-
-
-
2.
Financial Statement Schedule: The following financial statement schedule is filed as part of this report and should be read in conjunction with the consolidated financial statements.
-
Schedules not listed above have been omitted because they are not applicable, are not required or the information required to be set forth therein is included in the consolidated financial statements or notes thereto.
3.
Exhibits: The exhibits listed in the accompanying Exhibit Index immediately following the financial statement schedule are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K.
(b)
Exhibits:
The Company hereby files as part of this Annual Report on Form 10-K the exhibits listed in the Exhibit Index immediately following the financial statement schedule of this Annual Report on Form 10-K.
(c)
Financial Statement Schedule:
The Company hereby files as part of this Annual Report on Form 10-K the financial statement schedule listed in Item 15(a)(2) as set forth above.



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MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting for the Company. In order to evaluate the effectiveness of internal control over financial reporting, management has conducted an assessment, including testing, using the financial reporting criteria in the Internal Control - Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company's system of internal control over financial reporting is designed to provide reasonable assurance to the Company's management and Board of Directors regarding the reliability of financial records used in preparation of the Company's published financial statements. As all internal control systems have inherent limitations, even systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Based on its assessment, management has concluded that the Company maintained an effective system of internal control over financial reporting as of December 31, 2018. Deloitte & Touche LLP, an independent registered public accounting firm, has audited the Company's internal control over financial reporting as of December 31, 2018, as stated in their report which appears in Part IV, Item 15 of this Annual Report on Form 10-K.
/s/    AJEI S. GOPAL        
  
/s/    MARIA T. SHIELDS        
Ajei S. Gopal
  
Maria T. Shields
President and Chief Executive Officer
  
Chief Financial Officer
February 28, 2019
  
February 28, 2019


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of ANSYS, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of ANSYS, Inc. and subsidiaries (the "Company") as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2018, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 3 to the consolidated financial statements, the Company has changed its method of accounting for revenue from contracts with customers in 2018 due to the adoption of the new revenue standard. The Company adopted the new revenue standard using a modified retrospective approach.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. 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 audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.


/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
February 28, 2019
We have served as the Company's auditor since 2002.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of ANSYS, Inc.

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of ANSYS, Inc. and subsidiaries (the “Company”) as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018, of the Company and our report dated February 28, 2019, expressed an unqualified opinion on those financial statements and included an explanatory paragraph related to the Company’s change in method of accounting for revenue from contracts with customers in 2018 due to the adoption of the new revenue standard.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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 the policies or procedures may deteriorate.

/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
February 28, 2019

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ANSYS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
December 31,
(in thousands, except share and per share data)
2018
 
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
777,139

 
$
881,501

Short-term investments
225

 
286

Accounts receivable, less allowance for doubtful accounts of $8,000 and $6,800, respectively
317,700

 
124,659

Other receivables and current assets
216,113

 
263,820

Total current assets
1,311,177

 
1,270,266

Property and equipment, net
61,655

 
57,096

Goodwill
1,572,455

 
1,378,553

Other intangible assets, net
211,272

 
157,625

Other long-term assets
82,775

 
35,972

Deferred income taxes
26,630

 
42,111

Total assets
$
3,265,964

 
$
2,941,623

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
7,953

 
$
6,042

Accrued bonuses and commissions
79,945

 
69,925

Accrued income taxes
8,726

 
5,760

Other accrued expenses and liabilities
99,559

 
86,335

Deferred revenue
328,584

 
440,491

Total current liabilities
524,767

 
608,553

Long-term liabilities:
 
 
 
Deferred income taxes
30,077

 
1,461

Other long-term liabilities
61,573

 
85,778

Total long-term liabilities
91,650

 
87,239

Commitments and contingencies


 


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

 

Common stock, $.01 par value; 300,000,000 shares authorized; 93,236,023 shares issued
932

 
932

Additional paid-in capital
867,462

 
873,357

Retained earnings
2,919,411

 
2,316,916

Treasury stock, at cost: 9,601,670 and 9,044,498 shares, respectively
(1,075,879
)
 
(907,530
)
Accumulated other comprehensive loss
(62,379
)
 
(37,844
)
Total stockholders' equity
2,649,547

 
2,245,831

Total liabilities and stockholders' equity
$
3,265,964

 
$
2,941,623

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

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ANSYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 
Year Ended December 31,
(in thousands, except per share data)
2018
 
2017
 
2016
Revenue:
 
 
 
 
 
Software licenses
$
576,717

 
$
624,964

 
$
568,174

Maintenance and service
716,919

 
470,286

 
420,291

Total revenue
1,293,636

 
1,095,250

 
988,465

Cost of sales:
 
 
 
 
 
Software licenses
18,619

 
34,421

 
28,860

Amortization
27,034

 
36,794

 
38,092

Maintenance and service
110,232

 
78,949

 
79,908

Total cost of sales
155,885

 
150,164

 
146,860

Gross profit
1,137,751

 
945,086

 
841,605

Operating expenses:
 
 
 
 
 
Selling, general and administrative
413,580

 
338,640

 
269,515

Research and development
233,802

 
202,746

 
183,093

Amortization
13,795

 
12,972

 
12,755

Total operating expenses
661,177

 
554,358

 
465,363

Operating income
476,574

 
390,728

 
376,242

Interest income
11,419

 
6,962

 
4,209

Other expense, net
(908
)
 
(1,996
)
 
(136
)
Income before income tax provision
487,085

 
395,694

 
380,315

Income tax provision
67,710

 
136,443

 
114,679

Net income
$
419,375

 
$
259,251

 
$
265,636

Earnings per share – basic:
 
 
 
 
 
Earnings per share
$
4.99

 
$
3.05

 
$
3.05

Weighted average shares
83,973


84,988

 
87,227

Earnings per share – diluted:
 
 
 
 
 
Earnings per share
$
4.88

 
$
2.98

 
$
2.99

Weighted average shares
85,913


86,854

 
88,969

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

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ANSYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Year Ended December 31,
(in thousands)
2018
 
2017
 
2016
Net income
$
419,375

 
$
259,251

 
$
265,636

Other comprehensive (loss) income:
 
 
 
 
 
Foreign currency translation adjustments
(24,535
)
 
19,808

 
(5,488
)
Comprehensive income
$
394,840

 
$
279,059

 
$
260,148

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

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ANSYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Year Ended December 31,
(in thousands)
2018
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
 
Net income
$
419,375

 
$
259,251

 
$
265,636

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
59,255

 
67,678

 
69,587

Deferred income tax benefit
(33,675
)
 
(2,693
)
 
(10,921
)
Provision for bad debts
1,577

 
1,474

 
2,009

Stock-based compensation expense
83,346

 
53,154

 
33,347

Other
410

 
21

 
1,290

Changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable
(74,455
)
 
(14,406
)
 
(17,388
)
Other receivables and current assets
(30,241
)
 
(18,498
)
 
(39,644
)
Other long-term assets
3,288

 
2,343

 
(7,167
)
Accounts payable, accrued expenses and current liabilities
19,920

 
27,045

 
16,919

Accrued income taxes
1,086

 
1,215

 
9,052

Deferred revenue
56,213

 
20,648

 
41,430

Other long-term liabilities
(19,662
)
 
33,206

 
1,830

Net cash provided by operating activities
486,437

 
430,438

 
365,980

Cash flows from investing activities:
 
 
 
 
 
Acquisitions, net of cash acquired
(283,026
)
 
(63,885
)
 
(7,891
)
Capital expenditures
(21,762
)
 
(19,149
)
 
(12,443
)
Other investing activities
(8,892
)
 
(14,409
)
 
(11,839
)
Net cash used in investing activities
(313,680
)
 
(97,443
)
 
(32,173
)
Cash flows from financing activities:
 
 
 
 
 
Purchase of treasury stock
(269,801
)
 
(336,042
)
 
(336,335
)
Restricted stock withholding taxes paid in lieu of issued shares
(28,879
)
 
(11,112
)
 
(5,057
)
Contingent consideration payments

 

 
(1,048
)
Proceeds from shares issued for stock-based compensation
41,019

 
52,503

 
53,811

Other financing activities
(5,014
)
 

 
(1
)
Net cash used in financing activities
(262,675
)
 
(294,651
)
 
(288,630
)
Effect of exchange rate fluctuations on cash and cash equivalents
(14,444
)
 
20,678

 
(6,866
)
Net (decrease) increase in cash and cash equivalents
(104,362
)
 
59,022

 
38,311

Cash and cash equivalents, beginning of period
881,501

 
822,479

 
784,168

Cash and cash equivalents, end of period
$
777,139

 
$
881,501

 
$
822,479

Supplemental disclosures of cash flow information:
 
 
 
 
 
Income taxes paid
$
87,244

 
$
116,389

 
$
118,455

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

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ANSYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury Stock
 
Accumulated
Other
Comprehensive (Loss)/Income
 
Total
Stockholders'
Equity
(in thousands)
Shares
 
Amount
 
Shares
 
Amount
 
Balance, January 1, 2016
93,236
 
$
932

 
$
894,469

 
$
1,792,029

 
5,097

 
$
(440,839
)
 
$
(52,164
)
 
$
2,194,427

Treasury shares acquired
 
 
 
 
 
 
 
 
3,700

 
(336,335
)
 
 
 
(336,335
)
Stock-based compensation activity, including tax benefit of $8,065

 


 
(11,459
)
 
 
 
(1,249
)
 
101,624

 
 
 
90,165

Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
(5,488
)
 
(5,488
)
Net income for the year
 
 
 
 
 
 
265,636

 
 
 
 
 
 
 
265,636

Balance, December 31, 2016
93,236
 
932

 
883,010

 
2,057,665

 
7,548

 
(675,550
)
 
(57,652
)
 
2,208,405

Treasury shares acquired
 
 
 
 
 
 
 
 
2,750

 
(336,042
)
 
 
 
(336,042
)
Stock-based compensation activity

 


 
(9,653
)
 
 
 
(1,254
)
 
104,062

 
 
 
94,409

Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
19,808

 
19,808

Net income for the year
 
 
 
 
 
 
259,251

 
 
 
 
 
 
 
259,251

Balance, December 31, 2017
93,236
 
932

 
873,357

 
2,316,916

 
9,044

 
(907,530
)
 
(37,844
)
 
2,245,831

Cumulative effect of the ASC 606 adoption
 
 
 
 
 
 
183,120

 
 
 
 
 
 
 
183,120

Treasury shares acquired
 
 
 
 
 
 
 
 
1,674

 
(269,801
)
 
 
 
(269,801
)
Stock-based compensation activity

 


 
(5,895
)
 
 
 
(1,116
)
 
101,452

 
 
 
95,557

Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
(24,535
)
 
(24,535
)
Net income for the year
 
 
 
 
 
 
419,375

 
 
 
 
 
 
 
419,375

Balance, December 31, 2018
93,236
 
$
932

 
$
867,462

 
$
2,919,411

 
9,602

 
$
(1,075,879
)
 
$
(62,379
)
 
$
2,649,547

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

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ANSYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
1.
Organization
ANSYS, Inc. (hereafter the Company or 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 and defense, automotive, electronics, semiconductors, energy, materials and chemical processing, turbomachinery, consumer products, healthcare, and sports.
As defined by the accounting guidance for segment reporting, the Company operates as one segment.
Given the integrated approach to the multi-discipline problem-solving needs of the Company's customers, a single sale of software may contain components from multiple product areas and include combined technologies. The Company also has 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 the Company to provide accurate historical or current reporting among its various product lines.

2.
Accounting Policies
Accounting Principles
The financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States. Certain items in the notes to the consolidated financial statements of prior years have been reclassified to conform to the current year's presentation. These reclassifications had no effect on reported net income, comprehensive income, cash flows, total assets or total liabilities and stockholders' equity.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Recently Adopted Accounting Guidance
Revenue from contracts with customers: In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09). The Company adopted ASU 2014-09 and its related amendments (collectively known as ASC 606) effective January 1, 2018 using the modified retrospective approach. See Note 3 for the required disclosures related to the impact of adopting this standard.
Income taxes: In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16). The Company adopted ASU 2016-16 effective January 1, 2018 using the modified retrospective approach. Previous guidance required the tax effects from intra-entity asset transfers to be deferred until the asset was sold to a third party or recovered through use. ASU 2016-16 eliminated this deferral for all intra-entity asset transfers other than inventory. The adoption of the standard did not have a material effect on the Company’s consolidated financial statements.
Business combinations: In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01). The Company prospectively adopted ASU 2017-01 effective January 1, 2018. This standard narrows the definition of a business. If substantially all the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the acquiree is not a business. The standard also requires a business to include an input and a substantive process that significantly contributes to the ability to create outputs. This definition is expected to reduce the number of acquisitions accounted for as business combinations, which will impact the accounting treatment of certain items, including the accounting treatment of contingent consideration and transaction expenses.
Accounting Guidance Issued and Not Yet Adopted
Leases: In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 requires virtually all leases, other than leases that meet the definition of a short-term lease or leases of intangible assets, to be recorded on the balance sheet with a right-of-use asset and a corresponding lease liability. Leases will be classified

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as either operating or finance leases based on certain criteria. This classification will determine the timing and presentation of expenses on the income statement, as well as the presentation of related cash flows. The standard is effective for the Company on January 1, 2019. A modified retrospective transition is required upon adoption.
The Company will elect the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows the Company to carry forward the historical lease classification. In addition, the Company will elect the accounting policy to combine the lease and nonlease components as a single component. The Company will make the accounting policy election to record short-term leases on the consolidated balance sheet.
The Company will primarily have operating leases. The Company expects adoption of the new standard will result in the recognition of a right-of-use asset, and a corresponding lease liability, of $80.0 million - $100.0 million on the Company's consolidated balance sheet. Where applicable, a corresponding deferred tax asset and liability will be recorded related to the right-of-use asset and lease liability. The new standard is not expected to materially impact the Company's consolidated statements of income or consolidated statements of cash flows.
Credit losses: In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). The current guidance requires the allowance for doubtful accounts to be estimated based on an incurred loss model, which considers past and current conditions. ASU 2016-13 requires companies to use an expected loss model that also considers reasonable and supportable forecasts of future conditions. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted for annual periods beginning after December 15, 2018, including interim periods within that reporting period. The standard requires a cumulative-effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective. The Company will not early adopt the standard. The Company is currently evaluating the effect that this update will have on its financial results upon adoption.
Implementation cost accounting for cloud computing arrangements: In August 2018, the FASB issued Accounting Standards Update No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15). The standard aligns the accounting for costs incurred to implement a cloud computing arrangement (CCA) that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Under ASU 2018-15, an entity would apply Subtopic 350-40 to determine which implementation costs related to a CCA that is a service contract should be capitalized. The standard does not change the accounting for the service component of a CCA. The associated cash flows will be reflected within operating activities. ASU 2018-15 is effective for annual periods beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted, including adoption in any interim period for which financial statements have not been issued. Entities can choose to adopt the new guidance (1) prospectively to eligible costs incurred on or after the date the guidance is first applied or (2) retrospectively. The Company is currently evaluating the effect that this update will have on its financial results upon adoption.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the amounts of revenue and expenses during the reported periods. Significant estimates included in these consolidated financial statements include:
Allowances for doubtful accounts receivable
Income tax accruals, including those related to the Tax Cuts and Jobs Act
Uncertain tax positions
Tax valuation reserves
Fair value of stock-based compensation and probabilities of performance award attainment
Contract revenue
Acquired deferred revenue
Useful lives for depreciation and amortization
Valuations of goodwill and other intangible assets
Deferred compensation
Loss contingencies

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Actual results could differ from these estimates. Changes in estimates are recorded in the results of operations in the period that the changes occur.
Revenue Recognition
The Company's revenue is derived principally from the licensing of computer software products and from related maintenance contracts. The Company adopted ASC 606 on January 1, 2018. ASC 606 requires an entity to evaluate revenue recognition by identifying a contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract, and recognizing revenue when (or as) the entity satisfies a performance obligation.
Revenue Recognition Policy 2018 (ASC 606)
The Company enters into contracts that include combinations of products, maintenance and services, which are accounted for as separate performance obligations with differing revenue recognition patterns.
Revenue from perpetual licenses is classified as software license revenue. Software license revenue is recognized up front upon delivery of the licensed product and/or the utility that enables the customer to access authorization keys, provided that a signed contract has been received. Typically, the Company’s perpetual licenses are sold with post-contract support (PCS), which includes unspecified technical enhancements and customer support. The Company allocates value in bundled perpetual and PCS arrangements based on the standalone selling prices of the perpetual license and PCS. Revenue from PCS is classified as maintenance revenue and is recognized ratably over the term of the contract, as the Company satisfies the PCS performance obligation over time.
In addition to perpetual licenses, the Company sells time-based lease licenses. Lease licenses are sold only as a bundled arrangement that includes the rights to a term software license and PCS. Utilizing observable inputs, the Company determined that 50% of the estimated standalone selling price of the lease license is attributable to the term license and 50% is attributable to the PCS. Consistent with the perpetual sales, the license component is classified as software license revenue and recognized as revenue up front at the commencement of the lease. The PCS is classified as maintenance revenue and is recognized ratably over the term of the contract, as the Company provides the PCS benefit over time.
Revenue from training, support and other services is recognized as the services are performed. For contracts in which the service consists of a single performance obligation, such as providing a training class to a customer, the Company recognizes revenue upon completion of the performance obligation. For service contracts that are longer in duration and often include multiple performance obligations (for example, both training and consulting), the Company measures the progress toward completion of the obligations and recognizes revenue accordingly. In measuring progress towards the completion of performance obligations, 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 at a point in time or over time as appropriate when the channel partner submits a purchase commitment, collectability from the channel partner is probable, a license agreement signed by the end-user customer is received and the performance obligation was met. 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 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 perform substantially as specified in the Company's 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. The warranty is not sold, and cannot be purchased, separately. The warranty does not provide any type of additional service to the customer or performance obligation for the Company.
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

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of December 31, 2018, 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.
Significant Judgments (ASC 606)
The Company’s contracts with customers typically include promises to transfer licenses and services to a customer. Judgment is required to determine if the promises are separate performance obligations, and if so, to allocate the transaction price to each performance obligation. The Company uses the estimated standalone selling price method to allocate the transaction price for items that are not sold separately, particularly lease licenses sold with PCS. The estimated standalone selling price is determined using all information reasonably available to the Company, including market conditions and other observable inputs. The corresponding revenues are recognized as the related performance obligations are satisfied.
The Company applies a practical expedient to expense sales commissions as incurred when the amortization period would have been one year or less. Sales commissions associated with the initial year of multi-year contracts are expensed as incurred due to their immateriality. Sales commissions associated with multi-year contracts beyond the initial year are subject to an employee service requirement and are expensed as incurred as they are not considered incremental costs to obtain a contract.
The Company is required to adjust promised amounts of consideration for the effects of the time value of money if the timing of the payments provides the customer or the Company with a significant financing benefit. The Company considers various factors in assessing whether a financing component exists, including the duration of the contract, market interest rates and the timing of payments. The Company’s contracts do not include a significant financing component requiring adjustment to the transaction price.
Revenue Recognition Policy 2017 and 2016 (ASC 605)
Revenue from perpetual licenses was classified as license revenue and was recognized upon delivery of the licensed product and/or the utility that enabled the customer to access authorization keys, provided that acceptance had occurred and a signed contractual obligation was received, the price was fixed and determinable, and collectibility of the receivable was probable. The Company determined the fair value of PCS sold together with perpetual licenses based on the rate charged for PCS when sold separately. Revenue from PCS contracts was classified as maintenance and service revenue and was recognized ratably over the term of the contract.
Revenue for software lease licenses was classified as license revenue and was 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, could not be separated from lease revenue for accounting purposes. As a result, both the lease licenses and PCS were recognized ratably over the lease period. The Company included the revenue for the entire lease arrangement within software license revenue in the consolidated statements of income.
Many of the Company's semiconductor products were typically licensed via longer term leases of 2436 months. The Company recognized revenue for these licenses over the term of the lease contract. Because the Company did not have vendor-specific objective evidence of the fair value of these leases, the Company also recognized revenue from perpetual licenses over the term of the lease contract during the infrequent occurrence of these licenses being sold with semiconductor leases in multiple-element arrangements.
Revenue from training, support and other services was recognized as the services were performed. The Company applied the specific performance method to contracts in which the service consisted of a single act, such as providing a training class to a customer, and the proportional performance method to other service contracts that were longer in duration and often included multiple acts (for example, both training and consulting). In applying the proportional performance method, the Company typically utilized output-based estimates for services with contractual billing arrangements that were not based on time and materials, and estimated output based on the total tasks completed as compared to the total tasks required for each work contract. Input-based estimates were utilized for services that involved general consultations with contractual billing arrangements based on time and materials, utilizing direct labor as the input measure.
The accounting treatment under ASC 605 associated with arrangements through independent channel partners, non-income related taxes, warranties and indemnification obligations is consistent with ASC 606 described above.

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Cash and Cash Equivalents
Cash and cash equivalents consist primarily of highly liquid investments such as deposits held at major banks and money market funds. Cash equivalents are carried at cost, which approximates fair value. The Company's cash and cash equivalents balances comprise the following:
 
December 31, 2018
 
December 31, 2017
(in thousands, except percentages)
Amount
 
% of Total
 
Amount
 
% of Total
Cash accounts
$
331,084

 
42.6
 
$
568,587

 
64.5
Money market funds
446,055

 
57.4
 
312,914

 
35.5
Total
$
777,139

 
 
 
$
881,501

 
 
The Company's money market fund balances are held in various funds of a single issuer.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the various classes of assets, which range from one to forty years. Repairs and maintenance are charged to expense as incurred. Gains or losses from the sale or retirement of property and equipment are included in operating income.
Research and Development
Research and development costs, other than certain capitalized software development costs, are expensed as incurred. Internally developed software costs required to be capitalized as defined by the accounting guidance are not material to the Company's consolidated financial statements.
Business Combinations
When the Company consummates an acquisition, the assets acquired and the liabilities assumed are recognized separately from goodwill at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of the fair value of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While best estimates and assumptions are used to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, the Company's estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill as the Company obtains 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. Upon the earlier of the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, any subsequent adjustments are recorded in the consolidated statements of income.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the consideration transferred over the fair value of net identifiable assets acquired. Other intangible assets consist of trade names, customer lists, contract backlog and acquired software and technology. Intangible assets that are not considered to have an indefinite useful life are amortized over their useful lives, which are generally two to fifteen years. Amortization expense for intangible assets was $40.8 million, $49.8 million and $50.8 million for the years ended December 31, 2018, 2017 and 2016, respectively.
The Company tests goodwill and indefinite-lived intangible assets for impairment at least annually by performing a quantitative assessment of whether the fair value of each reporting unit or asset exceeds its carrying amount. The Company has one reporting unit. Goodwill is tested at this reporting unit level and indefinite-lived intangible assets are tested at the individual asset level. This requires the Company to assess and make judgments regarding a variety of factors which impact the fair value of the reporting unit or asset being tested, including business plans, anticipated future cash flows, economic projections and other market data.
The Company performs its annual impairment tests for goodwill and indefinite-lived intangible assets as of January 1 of each year unless there is an indicator that would require a test during the year. The Company periodically reviews the carrying value of other intangible assets and will recognize impairments when events or circumstances indicate that such assets may be impaired.

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Concentrations of Credit Risk
The Company has a concentration of credit risk with respect to revenue and trade receivables due to the use of certain significant channel partners to market and sell the Company's products. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. The following table outlines concentrations of risk with respect to the Company's revenue:
 
 
Year Ended December 31,
(as a % of revenue)
 
2018
 
2017
 
2016
Revenue from channel partners
 
22
%
 
25
%
 
24
%
Largest channel partner
 
4
%
 
5
%
 
5
%
2nd largest channel partner
 
2
%
 
2
%
 
2
%
No single customer accounted for more than 5% of the Company's revenue in 2018, 2017 or 2016.
In addition to the concentration of credit risk with respect to trade receivables, the Company's cash and cash equivalents are also exposed to concentration of credit risk. The Company's cash and cash equivalent accounts are insured through various public and private bank deposit insurance programs, foreign and domestic; however, a significant portion of the Company's funds are not insured. The following table outlines concentrations of risk with respect to the Company's cash and cash equivalents:
 
As of December 31,
(in thousands)
2018
 
2017
Cash and cash equivalents held domestically
$
616,249

 
$
561,417

Cash and cash equivalents held by foreign subsidiaries
160,890

 
320,084

Cash and cash equivalents held in excess of deposit insurance, foreign and domestic
754,163

 
852,138

Largest balance of cash and cash equivalents held with one financial institution, foreign and domestic
452,166

 
328,902

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 estimated 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. The Company recorded provisions for bad debts of $1.6 million, $1.5 million and $2.0 million for the years ended December 31, 2018, 2017 and 2016, respectively.
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 tax assets for which a valuation allowance was used to reduce their carrying value, the adjustment to the valuation allowance will be recorded as a reduction to 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 its examination even though the statute of limitations remains open. The Company recognizes interest and penalties related to

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income taxes 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.
Foreign Currencies
Certain of the Company's sales and intercompany transactions are denominated in foreign currencies. These transactions are translated to the functional currency at the exchange rate on the transaction date. Assets and liabilities denominated in a currency other than the Company's or subsidiary's functional currency are translated at the effective exchange rate on the balance sheet date. Gains and losses resulting from foreign exchange transactions are included in other expense, net. The Company recorded net foreign exchange losses of $3.1 million and $1.9 million for the years ended December 31, 2018 and 2017, respectively, and net foreign exchange gains of $0.1 million for the year ended December 31, 2016.
The financial statements of the Company's foreign subsidiaries are translated from the functional (local) currency to U.S. Dollars. Assets and liabilities are translated at the exchange rates on the balance sheet date. Results of operations are translated at average exchange rates, which approximate rates in effect when the underlying transactions occurred.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss is composed entirely of foreign currency translation adjustments.
Earnings Per Share
Basic earnings per share (EPS) amounts are computed by dividing earnings by the weighted average number of common shares outstanding during the period. Diluted EPS amounts assume the issuance of common stock for all potentially dilutive equivalents outstanding. To the extent stock awards are anti-dilutive, they are excluded from the calculation of diluted EPS.
The details of basic and diluted EPS are as follows:
  
 
Year Ended December 31,
(in thousands, except per share data)
 
2018
 
2017
 
2016
Net income
 
$
419,375

 
$
259,251

 
$
265,636

Weighted average shares outstanding – basic
 
83,973

 
84,988

 
87,227

Dilutive effect of stock plans
 
1,940

 
1,866

 
1,742

Weighted average shares outstanding – diluted
 
85,913

 
86,854

 
88,969

Basic earnings per share
 
$
4.99

 
$
3.05

 
$
3.05

Diluted earnings per share
 
$
4.88

 
$
2.98

 
$
2.99

Anti-dilutive shares
 
7

 
84

 
260

Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with share-based payment accounting guidance. The guidance requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost is recognized over the period during which an employee is required to provide service in exchange for the award, typically the vesting period.
Fair Value of Financial Instruments
The Company accounts for certain assets and liabilities at fair value in accordance with the accounting guidance applicable to fair value measurements and disclosures. The carrying values of cash, cash equivalents, short-term investments, accounts receivable, accounts payable, accrued expenses, other accrued liabilities and short-term obligations are deemed to be reasonable estimates of their fair values because of their short-term nature.


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3.
Revenue from Contracts with Customers
Adoption of ASC 606, Revenue from Contracts with Customers
The Company adopted ASC 606 on January 1, 2018 using the modified retrospective approach for all contracts not completed as of the date of adoption. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with ASC 605, Revenue Recognition (ASC 605). The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company’s software licenses, maintenance and services.
The Company recorded an increase to retained earnings of $242.4 million, or $183.1 million net of tax, on January 1, 2018 due to the cumulative effect of the ASC 606 adoption, with the impact primarily derived from revenue related to time-based software lease licenses.
Impact of ASC 606 on Consolidated Financial Statement Line Items
The following table compares the impacted assets and liabilities on the consolidated balance sheet as of December 31, 2018 to the amounts had ASC 605 been in effect:
 
December 31, 2018
 
 
(in thousands)
As Reported (ASC 606)
 
ASC 605
 
Change
Accounts receivable, less allowance for doubtful accounts of $8,000
$
317,700

 
$
135,190

 
$
182,510

Other receivables and current assets
216,113

 
351,246

 
(135,133
)
Other long-term assets
82,775

 
43,429

 
39,346

Deferred income tax assets
26,630

 
65,973

 
(39,343
)
Accrued income taxes
8,726

 

 
8,726

Other accrued expenses and liabilities
99,559

 
101,949

 
(2,390
)
Deferred revenue - current
328,584

 
526,168

 
(197,584
)
Deferred income tax liabilities
30,077

 
23,056

 
7,021

Other long-term liabilities
61,573

 
76,354

 
(14,781
)
Stockholders' equity
$
2,649,547

 
$
2,403,159

 
$
246,388

The Company recorded $244.1 million of deferred revenue to retained earnings upon the adoption of ASC 606 on January 1, 2018. The pattern of software lease license revenue recognition has changed under ASC 606. Software lease license revenue was recognized ratably over the term of the contract under the previous guidance; however, approximately 50% of the contract is recognized up front at the commencement of the lease under ASC 606. This change in the pattern of revenue recognition, coupled with the recording of deferred revenue to retained earnings at the adoption date, resulted in the changes to the consolidated balance sheet line items as noted in the table above.

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The following table compares the impacted amounts on the consolidated statements of income for the year ended December 31, 2018 to the amounts had ASC 605 been in effect:
(in thousands, except per share data)
As Reported (ASC 606)
 
ASC 605
 
Change
Revenue:
 
 
 
 
 
Software licenses
$
576,717

 
$
676,846

 
$
(100,129
)
Maintenance and service
716,919

 
539,623

 
177,296

Cost of sales:
 
 
 
 


Software licenses
18,619

 
36,852

 
(18,233
)
Maintenance and service
110,232

 
91,999

 
18,233

Income tax provision
67,710

 
53,067

 
14,643

Earnings per share:
 
 
 
 
 
Basic
$
4.99

 
$
4.25

 
$
0.74

Diluted
$
4.88

 
$
4.15

 
$
0.73

The impacts to reported software licenses revenue, and maintenance and service revenue, were primarily due to the PCS portion of lease license contracts now being allocated to maintenance and service revenue under ASC 606. Under the previous guidance, this revenue was reported as software licenses revenue. This decrease to software licenses revenue was partially offset by the upfront recognition of the license component of lease revenue, which would have been recognized ratably over the contract under prior guidance. Consistent with the change in revenue, there was a corresponding reclassification within cost of sales. Costs incurred related to the PCS portion of lease license contracts are reflected in cost of maintenance and service. Under the previous guidance, such costs were reflected within cost of software licenses.
The adoption of ASC 606 had no impact on the Company’s cash flows from operations. However, with the adoption of ASC 606, there will be income tax payments associated with deferred revenue and backlog credited to retained earnings and never recognized as revenue in the financial statements. The 2018 tax payments related to the adoption of ASC 606 are approximately $14.0 million.
Disaggregation of Revenue
The following table summarizes revenue for the years ended December 31, 2018, 2017 and 2016:
 
Year Ended December 31,
(in thousands)
2018
(ASC 606)
 
2018
(ASC 605)
 
2017
(ASC 605)
 
2016
(ASC 605)
Revenue:
 
 
 
 
 
 
 
Lease licenses
$
275,619

 
$
421,268

 
$
376,886

 
$
340,331

Perpetual licenses
301,098

 
255,578

 
248,078

 
227,843

Software licenses
576,717

 
676,846

 
624,964

 
568,174

Maintenance
676,883

 
499,510

 
440,428

 
394,745

Service
40,036

 
40,113

 
29,858

 
25,546

Maintenance and service
716,919

 
539,623

 
470,286

 
420,291

Total revenue
$
1,293,636

 
$
1,216,469

 
$
1,095,250

 
$
988,465

The Company’s software licenses revenue is recognized up front, while maintenance and service revenue is generally recognized over the term of the contract. Under ASC 606, the Company derived 22.4% of its total revenue through the indirect sales channel for the year ended December 31, 2018. Under ASC 605, the Company derived 23.5%, 24.8%, and 24.4% of its total revenue through the indirect sales channel for the years ended December 31, 2018, 2017 and 2016, respectively.

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Deferred Revenue
Deferred revenue consists of billings made or payments received in advance of revenue recognition from software license and maintenance agreements. The timing of revenue recognition may differ from the timing of billings to customers. Payment terms vary by the type and location of customer and the products or services offered. The time between invoicing and when payment is due is not significant. The changes in deferred revenue during the year ended December 31, 2018, inclusive of both current and long-term, are as follows:
(in thousands)
 
Beginning balance – January 1
$
299,730

Acquired deferred revenue
2,470

Recognition of deferred revenue
(1,293,636
)
Deferral of revenue
1,339,964

Currency translation
(5,354
)
Ending balance – December 31
$
343,174

Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and backlog. The Company's backlog represents installment billings for periods beyond the current quarterly billing cycle and customer orders received but not processed. Revenue recognized during the year ended December 31, 2018 reflected above of $1,293.6 million included amounts in deferred revenue and backlog at the beginning of the period of $387.2 million. Total revenue allocated to remaining performance obligations was $659.2 million as of December 31, 2018 and will be recognized as revenue as follows:
(in thousands)
 
Next 12 months
$
475,883

Months 13-24
125,048

Months 25-36
43,470

Thereafter
14,771

Total revenue allocated to remaining performance obligations
$
659,172


4.
Acquisitions
OPTIS
On May 2, 2018, the Company completed the acquisition of 100% of the shares of OPTIS, a premier provider of software for scientific simulation of light, human vision and physics-based visualization, for a purchase price of $291.0 million, paid in cash. The acquisition extends the Company's portfolio into the area of optical simulation to provide comprehensive sensor solutions, covering visible and infrared light, electromagnetics and acoustics for camera, radar and lidar. The acquisition met the definition of a business under ASU 2017-01.
The operating results of OPTIS have been included in the Company's consolidated financial statements since May 2, 2018, the date of acquisition.

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The assets and liabilities of OPTIS have been recorded based upon management's estimates of their fair market values as of the acquisition date. The following tables summarize the fair value of consideration transferred and the fair values of identified assets acquired and liabilities assumed at the acquisition date:
Fair Value of Consideration Transferred:
(in thousands)
 
Cash
$
290,983

Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed:
(in thousands)
 
Cash
$
7,957

Accounts receivable and other tangible assets
15,979

Developed software and core technologies (9 – 10 year life)
47,597

Customer lists (12 year life)
41,303

Trade names (4 – 10 year life)
10,749

Accounts payable and other liabilities
(11,444
)
Deferred revenue
(2,470
)
Net deferred tax liabilities
(23,187
)
Total identifiable net assets
$
86,484

Goodwill
$
204,499

The goodwill, which is not tax-deductible, is attributed to intangible assets that do not qualify for separate recognition, including the assembled workforce of the acquired business and the synergies expected to arise as a result of the acquisition of OPTIS.
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 the acquisition date is obtained during the measurement period (up to one year from the acquisition date). During the period since the OPTIS acquisition date, the Company adjusted the fair values of the assets acquired and liabilities assumed, with the offset recorded as a $1.8 million increase to goodwill. These adjustments were based on refinements to assumptions used in the preliminary valuation of accounts receivable and other tangible assets, developed software and core technologies, accounts payable and other liabilities, and information about what was known and knowable as of the acquisition date in the calculation of the net deferred tax liabilities.
In valuing deferred revenue on the OPTIS balance sheet as of the acquisition date, the Company applied the fair value provisions applicable to the accounting for business combinations. Acquired deferred revenue with a historical carrying value of $14.2 million under ASC 606, and $22.3 million under ASC 605, was ascribed a fair value of $2.5 million on the opening balance sheet. As a result, the Company's post-acquisition revenue will be less than the sum of what would have otherwise been reported by ANSYS and OPTIS absent the acquisition. Under ASC 606 and ASC 605, the impacts on reported revenue for the year ended December 31, 2018 were $8.7 million and $14.4 million, respectively. The expected impact on reported revenue for the year ending December 31, 2019 is $1.6 million under ASC 606.
Full pro forma results of operations have not been presented as the effects of the OPTIS business combination were not material to the Company's consolidated results of operations. The table presented below reflects the impact of OPTIS from the date of acquisition to December 31, 2018. The operating loss does not include integration costs borne directly by ANSYS, Inc. and its non-OPTIS subsidiaries as a result of the acquisition.
 
Year Ended December 31, 2018
(in thousands)
ASC 606
 
ASC 605
Revenue
$
18,532

 
$
12,276

Operating loss
$
(5,462
)
 
$
(11,718
)


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Prior Year Acquisitions
During the years ended December 31, 2017 and 2016, the Company completed various acquisitions to expand its customer base and accelerate the development of new and innovative products to the marketplace while lowering design and engineering costs for customers. The acquisitions were not individually significant. The combined purchase prices of the acquisitions purchased during the years ended December 31, 2017 and 2016 were approximately $67.0 million and $10.3 million, respectively. The 2017 technology acquisitions are further described in the table below:
Date of Closing
 
Company
 
Details
November 15, 2017
 
3DSIM
 
3DSIM, a developer of premier additive manufacturing technology, gives ANSYS a complete additive manufacturing simulation workflow solution. 3DSIM's software solutions empower manufacturers, designers, materials scientists and engineers to achieve their objectives through simulation-driven innovation rather than physical trial and error.
July 5, 2017
 
Computational Engineering International, Inc.
(CEI Inc.)
 
CEI Inc., the developer of EnSight, aids engineers and scientists in their ability to analyze, visualize and communicate large simulation data sets in clear, higher-resolution outputs.
March 10, 2017
 
CLK Design Automation (CLK-DA)
 
CLK-DA offers fast transistor simulation technology that complements the Company's semiconductor product portfolio.
The operating results of each acquisition have been included in the Company's consolidated financial statements since each respective date of acquisition. The effects of the business combinations were not material to the Company's consolidated results of operations individually or in the aggregate.
In valuing deferred revenue on the balance sheets of the Company's acquisitions as of their respective acquisition dates, the Company applied the fair value provisions applicable to the accounting for business combinations. Under ASC 606, the impacts on reported revenue for the year ended December 31, 2018 were $0.7 million. The expected impact on reported revenue for the year ending December 31, 2019 is $0.1 million. Under ASC 605, the impacts on reported revenue for the years ended December 31, 2018, 2017 and 2016 were $1.2 million, $2.9 million and $0.1 million, respectively.

5.
Receivables and Other Current Assets
The Company's receivables and other current assets comprise the following balances:
 
December 31,
(in thousands)
2018
 
2017
Accounts receivable, less allowance for doubtful accounts of $8,000 and $6,800, respectively
$
317,700

 
$
124,659

 
 
 
 
Receivables related to unrecognized revenue
$
167,144

 
$
215,155

Income taxes receivable, including overpayments and refunds
13,709

 
21,663

Prepaid expenses and other current assets
35,260

 
27,002

Total other receivables and current assets
$
216,113

 
$
263,820

Receivables for unrecognized revenue represent the current portion of billings made for customer contracts that have not yet been recognized as revenue.
Upon the adoption of ASC 606 on January 1, 2018, the opening balances of accounts receivable and receivables related to unrecognized revenue were $278.8 million and $136.4 million, respectively.


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6.
Property and Equipment
Property and equipment consists of the following:
 
 
 
 
December 31,
(in thousands)
 
Estimated Useful Lives
 
2018

2017
Equipment
 
1-12 years
 
$
92,409

 
$
88,189

Computer software
 
1-5 years
 
35,053

 
34,994

Buildings and improvements
 
5-40 years
 
27,352

 
26,423

Leasehold improvements
 
1-17 years
 
15,782

 
13,316

Furniture
 
1-13 years
 
10,846

 
9,239

Land
 
 
 
1,759

 
1,759

Property and equipment, gross
 
 
 
183,201

 
173,920

Less: Accumulated depreciation
 
 
 
(121,546
)
 
(116,824
)
Property and equipment, net
 
 
 
$
61,655

 
$
57,096

Depreciation expense related to property and equipment was $18.4 million, $17.9 million and $18.7 million for the years ended December 31, 2018, 2017 and 2016, respectively.

7.
Goodwill and Intangible Assets
Goodwill represents the excess of the fair value of the consideration transferred over the value of net tangible and identifiable intangible assets of acquired businesses. Identifiable intangible assets acquired in business combinations are recorded based on their fair values on the date of acquisition.
During the first quarter of 2018, the Company 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, 2018. No other events or circumstances changed during the year ended December 31, 2018 that would indicate that the fair values of the Company's reporting unit and indefinite-lived intangible asset are below their carrying values.
The Company's intangible assets and estimated useful lives are classified as follows:
 
December 31, 2018
 
December 31, 2017
(in thousands)
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Finite-lived intangible assets:
 
 
 
 
 
 
 
Developed software and core technologies (3 – 11 years)
$
410,680

 
$
(314,730
)
 
$
365,317

 
$
(297,645
)
Customer lists and contract backlog (5 – 15 years)
209,031

 
(117,614
)
 
171,048

 
(104,522
)
Trade names (2 – 10 years)
137,225

 
(113,677
)
 
127,200

 
(104,130
)
Total
$
756,936

 
$
(546,021
)
 
$
663,565

 
$
(506,297
)
Indefinite-lived intangible assets:
 
 
 
 
 
 
 
Trade name
$
357

 
 
 
$
357

 
 
Amortization expense for the intangible assets reflected above was $40.8 million, $49.8 million and $50.8 million for the years ended December 31, 2018, 2017 and 2016, respectively.

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As of December 31, 2018, estimated future amortization expense for the intangible assets reflected above is as follows:
(in thousands)
 
2019
$
31,652

2020
32,723

2021
29,900

2022
26,182

2023
23,275

Thereafter
67,183

Total intangible assets subject to amortization, net
210,915

Indefinite-lived trade name
357

Other intangible assets, net
$
211,272

The changes in goodwill during the years ended December 31, 2018 and 2017 are as follows:
(in thousands)
2018
 
2017
Beginning balance - January 1
$
1,378,553

 
$
1,337,215

Acquisitions and adjustments(1)
204,381

 
36,443

Currency translation
(10,479
)
 
4,895

Ending balance - December 31
$
1,572,455

 
$
1,378,553

(1) In accordance with the accounting for business combinations, the Company 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 the Company 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.

8.
Fair Value Measurement
The valuation hierarchy for disclosure of assets and liabilities reported at fair value prioritizes the inputs for such valuations into three broad levels:
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2: quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; or
Level 3: unobservable inputs based on the Company's 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.
The following tables provide the assets carried at fair value and measured on a recurring basis:
 
 
 
Fair Value Measurements at Reporting Date Using:
(in thousands)
December 31, 2018
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Cash equivalents
$
446,055

 
$
446,055

 
$

 
$

Short-term investments
$
225

 
$

 
$
225

 
$

Deferred compensation plan investments
$
1,646

 
$
1,646

 
$

 
$


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Fair Value Measurements at Reporting Date Using:
(in thousands)
December 31, 2017
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Cash equivalents
$
312,914

 
$
312,914

 
$

 
$

Short-term investments
$
286

 
$

 
$
286

 
$

Deferred compensation plan investments
$
3,742

 
$
3,742

 
$

 
$

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 of the Company. 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 the 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 the Company's consolidated balance sheets.

9.
Income Taxes
Income before income taxes includes the following components:
 
 
Year Ended December 31,
(in thousands)
 
2018
 
2017
 
2016
Domestic
 
$
455,478

 
$
344,447

 
$
340,251

Foreign
 
31,607

 
51,247

 
40,064

Total
 
$
487,085

 
$
395,694

 
$
380,315

The provision for income taxes is composed of the following:
 
 
Year Ended December 31,
(in thousands)
 
2018
 
2017
 
2016
Current:
 
 
 
 
 
 
Federal
 
$
58,138

 
$
112,414

 
$
99,783

State
 
12,888

 
7,879

 
8,338

Foreign
 
30,359

 
18,843

 
17,479

Deferred:
 
 
 
 
 
 
Federal
 
(20,764
)
 
(7,387
)
 
(13,368
)
State
 
(2,901
)
 
(584
)
 
(1,036
)
Foreign
 
(10,010
)
 
5,278

 
3,483

Total
 
$
67,710

 
$
136,443

 
$
114,679


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The reconciliation of the U.S. federal statutory tax rate to the consolidated effective tax rate is as follows:
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Federal statutory tax rate
 
21.0
 %
 
35.0
 %
 
35.0
 %
State income taxes, net of federal benefit
 
1.5

 
1.1

 
1.6

Foreign rate differential
 
0.8

 
0.1

 
0.1

Uncertain tax positions
 
0.5

 
0.3

 
(0.2
)
U.S. tax reform enactment
 
0.2

 
4.5

 

Domestic production activity benefit
 

 
(2.6
)
 
(3.7
)
Benefit from entity structuring activities
 
(1.4
)
 

 
(2.2
)
Research and development credits
 
(2.3
)
 
(1.4
)
 
(1.0
)
Stock-based compensation
 
(3.3
)
 
(3.1
)
 
0.2

Foreign-derived intangible income deduction
 
(3.9
)
 

 

Other
 
0.8

 
0.6

 
0.4

 
 
13.9
 %
 
34.5
 %
 
30.2
 %
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (Tax Reform). Tax Reform makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time federal income tax on certain unrepatriated earnings of foreign subsidiaries (transition tax); (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) creating a new provision designed to tax global intangible low-taxed income (GILTI) which allows for the possibility of using foreign tax credits (FTCs) and a deduction of up to 50 percent to offset the income tax liability (subject to some limitations); (5) repealing the domestic production activity deduction; (6) creating the foreign-derived intangible income deduction; (7) creating the base erosion anti-abuse tax, a new minimum tax; (8) allowing for full expensing of qualified property through bonus depreciation; and (9) creating limitations on the deductibility of certain executive compensation.
The SEC staff issued Staff Accounting Bulletin (SAB) 118, which provides guidance on accounting for the tax effects of Tax Reform. SAB 118 provided a measurement period that was limited to one year from enactment for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, throughout the measurement period, a company must reflect the income tax effects of those aspects of Tax Reform for which the accounting under ASC 740 was complete in the financial statements. To the extent that a company’s accounting for certain income tax effects of Tax Reform was incomplete, but a reasonable estimate was able to be made, the company must record a provisional estimate in the financial statements. If a company could not determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the tax laws that were in effect immediately before the enactment of Tax Reform.
As further discussed below, the Company finalized its provisional Tax Reform calculations as of the end of the measurement period, based on guidance and information available as of the reporting date. The U.S. government has not yet issued final guidance related to the new rules enacted as part of Tax Reform. Subsequent adjustments, if any, will be recorded in the period in which guidance is finalized.
The Company’s accounting for the impact of the reduction in the U.S. federal corporate tax rate on the Company's deferred tax assets and liabilities is complete. Tax Reform reduced the corporate tax rate to 21 percent, effective January 1, 2018. Consequently, the Company recorded a net adjustment to deferred income tax expense of $1.9 million for the year ended December 31, 2017 to revalue the Company’s deferred tax assets and liabilities. No further adjustments were recorded for the year ended December 31, 2018.
The Company’s accounting for the transition tax is complete. Reasonable estimates of certain effects were calculated and a provisional adjustment of $16.0 million was recorded in the December 31, 2017 financial statements. To determine the amount of the transition tax, the Company determined, in addition to other factors, the amount of post-1986 earnings and profits (E&P) of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. Based on revised E&P calculations updated during the measurement period, the Company recognized an additional measurement-period adjustment of $0.9 million to the transition tax obligation and a corresponding adjustment to tax expense, resulting in a total transition tax obligation of $16.9 million. The Company has elected to pay this liability over eight years; however, in accordance with IRS issued guidance, tax overpayments from the year ended December 31, 2017 are required to be applied to the transition tax obligation. Based on this guidance, $15.6 million of the obligation has been paid, with the remaining $1.3 million recorded in other long-term liabilities at December 31, 2018.

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The Company’s accounting for the indefinite reinvestment assertion is complete. In general, it is the practice and intention of the Company to repatriate previously taxed earnings in excess of working capital needs and to reinvest all other earnings of its non-U.S. subsidiaries. As part of Tax Reform, the Company incurred U.S. tax on substantially all of the earnings of its non-U.S. subsidiaries as part of the transition tax. This tax increased the Company’s previously taxed earnings and allows for the repatriation of the majority of its foreign earnings without any residual U.S. federal tax. The Company does not believe that there is an excess of the financial reporting basis over the tax basis of investments in foreign subsidiaries. Accordingly, any repatriation in excess of previously taxed earnings will be a non-taxable return of basis. During the year ended December 31, 2018, the Company repatriated $144.3 million of foreign cash. The Company has not made any measurement-period adjustments related to its indefinite reinvestment assertion during the year ended December 31, 2018.
The Company’s accounting policy choice for GILTI is complete. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the period cost method) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the deferred method). The Company selected the period cost method and recorded GILTI tax expense of $0.4 million in the financial statements for the year ended December 31, 2018.
The components of deferred tax assets and liabilities are as follows:
 
 
December 31,
(in thousands)
 
2018
 
2017
Deferred tax assets:
 
 
 
 
Stock-based compensation
 
$
20,464

 
$
17,825

Net operating loss carryforwards
 
19,741

 
21,391

Uncertain tax positions
 
17,823

 
15,424

Employee benefits
 
15,048

 
8,603

Research and development credits
 
5,951

 
3,699

Allowance for doubtful accounts
 
1,616

 
1,462

Deferred revenue
 

 
5,134

Other
 
2,505

 
2,003

Valuation allowance
 
(2,127
)
 
(1,906
)
 
 
81,021

 
73,635

Deferred tax liabilities:
 
 
 
 
Other intangible assets
 
(38,787
)
 
(29,924
)
Accounting method change
 
(31,626
)
 

Deferred revenue
 
(12,021
)
 

Property and equipment
 
(2,034
)
 
(1,557
)
Unremitted foreign earnings
 

 
(1,504
)
 
 
(84,468
)
 
(32,985
)
Net deferred tax (liabilities) assets
 
$
(3,447
)
 
$
40,650

At December 31, 2018 and 2017, respectively, the Company excluded from the above table deferred tax assets associated with foreign net operating loss carryforwards of $19.5 million and $25.2 million and corresponding valuation allowances of $19.5 million and $25.2 million in a jurisdiction where the Company determined utilization is remote.
The net increase in the valuation allowance was primarily due to an increase in unrealizable tax assets. As of each reporting date, management considers new evidence, both positive and negative, that could affect the future realization of deferred tax assets. If management determines it is more likely than not that an asset, or a portion of an asset, will not be realized, a valuation allowance is recorded.
As of December 31, 2018, the Company had federal net operating loss carryforwards of $5.6 million. These losses expire between 2025 - 2036, and are subject to limitations on their utilization. Deferred tax assets of $0.4 million have been recorded for state operating loss carryforwards. These losses expire between 2029 - 2035, and are subject to limitations on their utilization. The Company had total foreign net operating loss carryforwards of $73.8 million, of which $46.0 million are not currently subject to expiration dates. The remainder, $27.8 million, expires between 2021 - 2035. The Company had tax credit carryforwards of $4.3 million, of which $2.2 million are subject to limitations on their utilization. Approximately $0.6 million of these tax credit carryforwards are not currently subject to expiration dates. The remainder, $3.7 million, expires in various years between 2019 - 2038.

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The following is a reconciliation of the total amounts of unrecognized tax benefits:
 
 
Year Ended December 31,
(in thousands)
 
2018
 
2017
 
2016
Unrecognized tax benefit as of January 1
 
$
19,657

 
$
15,209

 
$
16,067

Gross increases—tax positions in prior period
 
1,229

 
905

 
983

Gross decreases—tax positions in prior period
 
(376
)
 
(765
)
 
(2,502
)
Gross increases—tax positions in current period
 
4,014

 
3,757

 
2,725

Reductions due to a lapse of the applicable statute of limitations
 
(994
)
 
(847
)
 
(927
)
Changes due to currency fluctuation
 
(703
)
 
1,414

 
(348
)
Settlements
 

 
(16
)
 
(789
)
Unrecognized tax benefit as of December 31
 
$
22,827

 
$
19,657

 
$
15,209

The Company believes that it is reasonably possible that approximately $1.0 million of uncertain tax positions may be resolved within the next twelve months as a result of settlement with a taxing authority or a lapse of the statute of limitations. Of the total unrecognized tax benefit as of December 31, 2018$13.7 million would affect the effective tax rate, if recognized.
The Company recognizes interest and penalties related to income taxes as income tax expense. During the years ended December 31, 2018, 2017 and 2016, the Company recorded penalty expense of $0.8 million, $1.1 million and $0.8 million, respectively. The Company recorded interest income of $0.1 million for the year ended December 31, 2018 and interest expense of $0.4 million and $0.1 million during the years ended December 31, 2017 and 2016, respectively. As of December 31, 2018, the Company accrued a liability for penalties of $4.7 million and interest of $4.0 million. As of December 31, 2017, the Company accrued a liability for penalties of $3.9 million and interest of $3.6 million.
The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. In the U.S., the Company's only major tax jurisdiction, the 2015 - 2018 tax years are open to examination by the Internal Revenue Service.

10.
Pension and Profit-Sharing Plans
The Company has a 401(k)/profit-sharing plan for all qualifying domestic employees that permits participants to defer a portion of their pay pursuant to Section 401(k) of the Internal Revenue Code. The Company makes matching contributions on behalf of each eligible participant in an amount equal to 100% of the first 3% and an additional 25% of the next 5%, for a maximum total of 4.25% of the employee's compensation. The Company may make a discretionary contribution based on the participant's eligible compensation, provided the employee is employed at the end of the year and has worked at least 1,000 hours. The Company also maintains various defined contribution and defined benefit pension arrangements for its international employees. The Company meets the minimum statutory funding requirements for its foreign defined benefit and contribution plans. The total unfunded portion of the defined benefit obligations is $9.7 million.
Expenses related to the Company's retirement programs were $12.4 million in 2018, $10.1 million in 2017 and $9.1 million in 2016.

11.
Non-Compete and Employment Agreements
Employees of the Company have signed agreements under which they have agreed not to disclose trade secrets or confidential information that, where legally permitted, restrict engagement in or connection with any business that is competitive with the Company anywhere in the world while employed by the Company (and, in some cases, for specified periods thereafter in relevant geographic areas), and that any products or technology created by them during their term of employment are the property of the Company. In addition, the Company requires all channel partners to enter into agreements not to disclose the Company's trade secrets and other proprietary information.
The Company has an employment agreement with its Chief Executive Officer. This agreement provides for, among other things, in the case of termination for reasons other than death, disability or cause and subject to non-compete and non-solicit clauses, minimum severance payments equal to two times his base salary and target bonus paid out over two years from the date of termination and up to two years of payments for health care coverage from the date of termination. The Chief Executive Officer is subject to a two-year restriction on competition and solicitation following termination of employment under the circumstances described in the contract.

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The Company has a transition agreement with its Chairman of the Board. This agreement provides for, among other things, that the Chairman of the Board shall be employed by the Company until April 30, 2019 unless terminated earlier in accordance with the terms of the agreement. The Chairman of the Board shall receive salary paid in bi-monthly installments as specified in the transition agreement and restricted stock units vesting in part in March 2018 and the remainder at the end of the transition agreement, subject to the Chairman of the Board's continued employment, in accordance with the terms of the transition agreement. The Chairman of the Board will not be entitled to bonus payments during his employment pursuant to the transition agreement, but he will be eligible to participate in all of the Company’s benefit plans subject to the terms of such plans. The transition agreement provides for an additional payment (less salary received and equity calculations as set forth in the transition agreement) in the event that the Chairman of the Board's employment is terminated without cause prior to April 30, 2019.
The Company also has employment agreements with several other employees, primarily in foreign jurisdictions. The terms of these employment agreements generally include annual compensation, severance payment provisions and non-compete clauses.

12.
Stock-Based Compensation
The Company has an equity incentive plan—the Fifth Amended and Restated ANSYS, Inc. 1996 Stock Option and Grant Plan (Stock Plan). The Stock Plan, as amended, authorizes the grant of up to 39.8 million shares of the Company's common stock in the form of: (i) incentive stock options (ISOs), (ii) nonqualified stock options, (iii) common stock with or without vesting or other restrictions, (iv) common stock upon the attainment of specified performance goals, (v) restricted stock awards, (vi) the right to receive cash dividends with the holders of the common stock as if the recipient held a specified number of shares of the common stock, (vii) deferred stock awards, (viii) restricted stock unit awards, (ix) stock appreciation rights and (x) cash-based awards.
The Stock Plan provides that: (i) the exercise price of an ISO must be no less than the fair value of the stock at the date of grant and (ii) the exercise price of an ISO held by an optionee who possesses more than 10% of the total combined voting power of all classes of stock must be no less than 110% of the fair market value of the stock at the time of grant. The Compensation Committee of the Board of Directors has the authority to set expiration dates no later than ten years from the date of grant (or five years for an optionee who meets the 10% criterion), payment terms, and other provisions for each grant. The majority of options granted have a four-year vesting period. Shares associated with unexercised options or reacquired shares of common stock (except those shares withheld as a result of tax withholding or net issuance) become available for option grants and common stock issuances under the Stock Plan. The Compensation Committee of the Board of Directors may, at its sole discretion, accelerate or extend the date or dates on which all or any particular award or awards granted under the Stock Plan may vest or be exercised. Upon termination of service of a participant due to the participant’s death or disability, the vesting of restricted stock units held by the participant accelerates (in case of performance-based vesting, subject to the attainment of the performance requirement).
In the event of a "sale event," defined in the Stock Plan as a "Transaction," all outstanding awards will be assumed or continued by the successor entity, with appropriate adjustment in the awards to reflect the transaction. In such event, except as the Compensation Committee may otherwise specify with respect to particular awards in the award agreements, if the service relationship of the holder of an award is terminated without cause within 18 months after the sale event, then all awards held by such holder will become fully vested and exercisable at that time. If there is a sale event in which the successor entity refuses to assume or continue outstanding awards, then subject to the consummation of the sale event, all awards with time-based vesting conditions will become fully vested and exercisable at the effective time of the sale event and all awards with performance-based vesting conditions may become vested and exercisable in accordance with the award agreements at the discretion of the Compensation Committee. If awards are not assumed or continued after a sale event, then all such awards will terminate at the time of the sale event. In the event of the termination of stock options or stock appreciation rights in connection with a sale event, the Compensation Committee may either make or provide for a cash payment to the holders of such awards equal to the difference between the per share transaction consideration and the exercise price of such awards or permit each holder to have at least a 15-day period to exercise such awards prior to their termination.
The Company currently issues shares related to exercised stock options or vested awards from its existing pool of treasury shares and has no specific policy to repurchase treasury shares as stock options are exercised or as awards vest. If the treasury pool is depleted, the Company will issue new shares.

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Total stock-based compensation expense recognized for the years ended December 31, 2018, 2017 and 2016 is as follows:
 
 
Year Ended December 31,
(in thousands, except per share amounts)
 
2018
 
2017
 
2016
Cost of sales:
 
 
 
 
 
 
Software licenses
 
$

 
$
969

 
$
701

Maintenance and service
 
5,224

 
2,533

 
1,578

Operating expenses:
 
 
 
 
 
 
Selling, general and administrative
 
47,099

 
30,817

 
15,990

Research and development
 
31,023

 
18,835

 
15,078

Stock-based compensation expense before taxes
 
83,346

 
53,154

 
33,347

Related income tax benefits
 
(34,518
)
 
(20,503
)
 
(10,538
)
Stock-based compensation expense, net of taxes
 
$
48,828

 
$
32,651

 
$
22,809

Net impact on earnings per share:
 
 
 
 
 
 
Basic earnings per share
 
$
(0.58
)
 
$
(0.38
)
 
$
(0.26
)
Diluted earnings per share
 
$
(0.57
)
 
$
(0.38
)
 
$
(0.26
)
Stock Options
Information regarding stock option transactions is summarized below:
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
(options in thousands)
 
Options
 
Weighted-
Average
Exercise
Price
 
Options
 
Weighted-
Average
Exercise
Price
 
Options
 
Weighted-
Average
Exercise
Price
Outstanding, beginning of year
 
2,170

 
$
59.17

 
3,136

 
$
56.37

 
3,986

 
$
51.07

Granted
 

 
$

 

 
$

 
260

 
$
94.38

Exercised
 
(679
)
 
$
50.92

 
(956
)
 
$
49.78

 
(1,082
)
 
$
45.57

Forfeited
 
(7
)
 
$
86.28

 
(10
)
 
$
80.92

 
(28
)
 
$
72.07

Outstanding, end of year
 
1,484

 
$
62.80

 
2,170

 
$
59.17

 
3,136

 
$
56.37

Vested and Exercisable, end of year
 
1,347

 
$
59.69

 
1,930

 
$
55.11

 
2,762

 
$
51.80

Nonvested
 
137

 
$
93.44

 
240

 
$
91.71

 
374

 
$
90.12

 
 
 
2018
 
2017
 
2016
Weighted Average Remaining Contractual Term (in years)
 
 
 
 
 
 
Outstanding
 
3.55

 
4.10

 
4.62

Vested and Exercisable
 
3.14

 
3.57

 
4.04

Nonvested
 
7.60

 
8.30

 
8.93

Aggregate Intrinsic Value (in thousands)
 
 
 
 
 
 
Exercised
 
$
78,648

 
$
58,472

 
$
49,752

Outstanding
 
$
118,908

 
$
191,895

 
$
113,822

Vested and Exercisable
 
$
112,133

 
$
178,456

 
$
112,379

Nonvested
 
$
6,775

 
$
13,439

 
$
1,443

Compensation Expense - Stock Options (in thousands)
 
$
2,006

 
$
2,948

 
$
7,406

Historical and future expected forfeitures have not been significant and, as a result, the outstanding option amounts reflected in the tables above approximate the options expected to vest.
The fair value of each option grant is estimated on the date of grant, or date of acquisition for options issued in a business combination, using the Black-Scholes option pricing model, which was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The Company's options have characteristics significantly different from those of traded options, and changes in input assumptions can materially affect the fair value estimates. The interest rates used were determined by using the five-year Treasury Note yield at the date of grant or date of acquisition for

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options issued in a business combination. The volatility was determined based on the historic volatility of the Company's stock during the preceding six years.
The table below presents the weighted average input assumptions used and resulting fair values for options granted or issued in business combinations during the year ended December 31, 2016:
Risk-free interest rate
1.19% to 1.93%
Expected dividend yield
—%
Expected volatility
24%
Expected term
5.7 years
Weighted average fair value per share
$23.96
The Company did not grant stock option awards in 2018 and 2017. Forfeitures of awards are accounted for as they occur. The effect of pre-vesting forfeitures on the Company's recorded expense has historically been negligible due to the relatively low turnover of stock option holders.
The Company's determination of fair value of share-based payment awards on the date of grant using an option pricing model is affected by the Company's stock price as well as assumptions regarding a number of variables. As of December 31, 2018, total unrecognized estimated compensation cost related to unvested stock options granted prior to that date was $2.8 million, which is expected to be recognized over a weighted average period of 1.4 years.
Information regarding stock options outstanding as of December 31, 2018 is summarized below:
(options in thousands)
 
Options Outstanding
 
Options Exercisable
 
Options Unvested
Range of Exercise Prices
 
Options
 
Weighted-
Average
Remaining
Contractual
Life (years)
 
Weighted-
Average
Exercise
Price
 
Options
 
Weighted-
Average
Remaining
Contractual
Life (years)
 
Weighted-
Average
Exercise
Price
 
Options
 
Weighted-
Average
Remaining
Contractual
Life (years)
 
Weighted-
Average
Exercise
Price
$5.91 - $48.97
 
458

 
1.57
 
$
42.12

 
457

 
1.56
 
$
42.20

 
1

 
6.00
 
$
12.26

$58.67
 
359

 
2.84
 
$
58.67

 
359

 
2.84
 
$
58.67

 

 
0.00
 
$

$61.68 - $65.72
 
11

 
0.44
 
$
63.75

 
11

 
0.44
 
$
63.75

 

 
0.00
 
$

$67.44 - $95.09
 
656

 
5.38
 
$
79.50

 
520

 
4.79
 
$
75.68

 
136

 
7.61
 
$
94.16


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Restricted Stock Units
Under the terms of the ANSYS, Inc. Second Amended and Restated Long-Term Incentive Plan, the Company issues various restricted stock awards. The following table summarizes the types of awards and vesting conditions:
Award
Vesting Period
Vesting Condition
Restricted stock units with a market and service condition
Three years
Company performance measured by total shareholder return relative to the Nasdaq Composite Index for the measurement period and subject to continued employment through the vesting period.
Restricted stock units with an operating performance and service condition
Three years
Operating performance metrics as defined by the Company through the vesting period.
Restricted stock units with a service condition only
Three or four years
Continued employment with the Company through the yearly vesting period.
The fair values of restricted stock units (RSUs) with a market condition were estimated using a Monte Carlo simulation model and are recognized over the vesting period. The determination of the fair values of the awards was affected by the grant date and several variables, each of which has been identified in the chart below:
 
Year Ended December 31,
Assumptions used in Monte Carlo lattice pricing model
2018
 
2017
 
2016
Risk-free interest rate
2.4%
 
1.5%
 
1.0%
Expected dividend yield
—%
 
—%
 
—%
Expected volatility—ANSYS stock price
21%
 
19%
 
21%
Expected volatility—Nasdaq Composite Index
15%
 
15%
 
16%
Expected term
2.8 years
 
2.8 years
 
2.8 years
Correlation factor
0.65
 
0.70
 
0.65
Weighted average fair value per share
191.76
 
120.94
 
78.71
The fair value of RSUs with operating performance metrics is based on the fair market value of the Company's stock on the date of the grant and is recognized from the grant date through the conclusion of the measurement period associated with each operating performance metric based on management's estimates concerning the probability of vesting.
The fair value of RSUs with only a service condition is based on the fair market value of the Company's stock on the date of the grant and is recognized over the vesting period.
Total compensation expense for RSU awards recorded for the years ended December 31, 2018, 2017 and 2016 was $77.4 million, $46.3 million and $22.9 million, respectively.
Information regarding all employee RSU transactions is summarized below:
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
(RSUs in thousands)
 
RSUs
 
Weighted-
Average
Grant Date Fair Value
 
RSUs
 
Weighted-
Average
Grant Date Fair Value
 
RSUs
 
Weighted-
Average
Grant Date Fair Value
Nonvested, beginning of year
 
1,361

 
$
100.66

 
906

 
$
86.45

 
656

 
$
83.30

Granted(1)
 
681

 
$
163.67

 
866

 
$
109.67

 
588

 
$
87.50

Performance adjustment(2)
 
76

 
$
151.52

 
35

 
$
98.29

 
(90
)
 
$
77.68

Vested
 
(524
)
 
$
101.38

 
(341
)
 
$
88.58

 
(176
)
 
$
83.79

Forfeited
 
(72
)
 
$
125.29

 
(105
)
 
$
90.80

 
(72
)
 
$
83.82

Nonvested, end of year
 
1,522

 
$
129.96

 
1,361

 
$
100.66

 
906

 
$
86.45

(1) Includes all RSUs granted during the year. RSUs with operating performance conditions are issued annually and have three performance cycles. Performance conditions are assigned at the beginning of each performance cycle and are reflected as grants at target at that time.

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(2) RSUs with a market or performance condition are granted at target and vest based on achievement of the market or operating performance and service conditions. The actual number of RSUs issued may be more or less than the target RSUs depending on the achievement of the market or operating performance conditions.
Board of Directors
In 2015 and prior, the Company granted deferred stock awards to non-employee Directors, which are rights to receive shares of common stock upon termination of service as a Director. Associated with these awards, the Company established a non-qualified 409(a) deferred compensation plan with assets held under a rabbi trust to provide Directors an opportunity to diversify their vested awards. During open trading windows and at their elective option, the Directors may convert their Company shares into a variety of non-Company-stock investment options in order to diversify a portion of their holdings, subject to meeting ownership guidelines.
Information regarding deferred stock awards to non-employee Directors is summarized below:
 
Year Ended December 31, 2018
 
Diversified
 
Undiversified
 
Total
Deferred Awards Outstanding, beginning of year
29,500

 
159,599

 
189,099

Shares Diversified
6,105

 
(6,105
)
 

Shares Issued Upon Retirement
(23,355
)
 
(33,045
)
 
(56,400
)
Deferred Awards Outstanding, end of year
12,250

 
120,449

 
132,699

In 2018, 2017 and 2016, the Company granted 13,632, 18,018 and 38,400 RSUs, respectively, which will vest in full upon the earlier of one year from the date of grant or the date of the next regular meeting of stockholders. The weighted average grant date fair values per RSU were $165.71, $123.38 and $86.25 for the years ended December 31, 2018, 2017 and 2016, respectively. Total compensation expense associated with the awards recorded for the years ended December 31, 2018, 2017 and 2016 was $2.3 million, $2.6 million and $1.9 million, respectively.
Employee Stock Purchase Plan
The Company's 1996 Employee Stock Purchase Plan (the “Purchase Plan”) was adopted by the Board of Directors on April 19, 1996 and was subsequently approved by the Company's stockholders. The stockholders approved an amendment to the Purchase Plan in May 2016 to increase the number of shares available for offerings to 1.8 million shares. The Purchase Plan is administered by the Compensation Committee. Offerings under the Purchase Plan commence on each February 1 and August 1, and have a duration of six months. An employee who owns or is deemed to own shares of stock representing in excess of 5% of the combined voting power of all classes of stock of the Company may not participate in the Purchase Plan.
During each offering, an eligible employee may purchase shares under the Purchase Plan by authorizing payroll deductions of up to 10% of his or her cash compensation during the offering period. The maximum number of shares that may be purchased by any participating employee during any offering period is limited to 3,840 shares (as adjusted by the Compensation Committee from time to time). Unless the employee has previously withdrawn from the offering, his or her accumulated payroll deductions will be used to purchase common stock on the last business day of the period at a price equal to 90% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. Under applicable tax rules, an employee may not accrue the right to purchase more than $25,000 of common stock, based on the grant-date fair value, in any calendar year in which the option is outstanding at any time. As of December 31, 2018, 1.6 million shares of common stock had been issued under the Purchase Plan. The total compensation expense recorded under the Purchase Plan during the years ended December 31, 2018, 2017 and 2016 was $1.8 million, $1.2 million and $1.2 million, respectively.


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13.
Stock Repurchase Program
Under the Company's stock repurchase program, the Company repurchased shares as follows:
 
Year Ended December 31,
(in thousands, except per share data)
2018
 
2017
 
2016
Number of shares repurchased
1,674

 
2,750

 
3,700

Average price paid per share
$
161.12

 
$
122.20

 
$
90.90

Total cost
$
269,801

 
$
336,042

 
$
336,335

The most recent amendment to the program, authorizing the repurchase of up to 5.0 million shares, was approved by the Company's Board of Directors in February 2018. There is no expiration date to this amendment. As of December 31, 2018, 3.8 million shares remained available for repurchase under the program.

14.
Leases
Office Space
The Company's executive offices and those related to certain domestic product development, marketing, production and administration are located in a 186,000 square foot office facility in Canonsburg, Pennsylvania. The term of the lease is 183 months, beginning on October 1, 2014 and expiring on December 31, 2029. Absent the exercise of options in the lease for additional rentable space or early lease termination, the Company's base rent (inclusive of property taxes and certain operating expenses) will be $4.3 million per annum for the first five years of the lease term, $4.5 million per annum for years six through ten and $4.7 million per annum for years eleven through fifteen. The Company incurred $4.4 million in lease expense related to this facility during each of the years ended December 31, 2018, 2017 and 2016.
The Company has entered into various other noncancellable operating leases for office space.
Office space lease expense totaled $19.9 million, $17.1 million and $16.9 million for the years ended December 31, 2018, 2017 and 2016, respectively. Future minimum lease payments, including termination fees, under noncancellable operating leases for office space in effect at December 31, 2018 are as follows:
(in thousands)
 
2019
$
16,354

2020
12,469

2021
10,177

2022
8,523

2023
6,809

Thereafter
14,267

Total
$
68,599


15.
Royalty Agreements
The Company has entered into various renewable, nonexclusive license agreements under which the Company has been granted access to the licensor's technology and the right to sell the technology in the Company's product line. Royalties are payable to developers of the software at various rates and amounts, which generally are based upon unit sales, revenue or flat fees. Royalty fees are reported in cost of goods sold and were $16.9 million, $16.0 million and $13.1 million for the years ended December 31, 2018, 2017 and 2016, respectively.


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16.
Geographic Information
Revenue to external customers is attributed to individual countries based upon the location of the customer. Revenue by geographic area is as follows:
 
Year Ended December 31,
(in thousands)
2018
(ASC 606)
 
2018
(ASC 605)
 
2017
(ASC 605)
 
2016
(ASC 605)
United States
$
506,335

 
$
480,997

 
$
417,343

 
$
367,892

Japan
145,951

 
137,733

 
126,097

 
120,159

Germany
140,506

 
124,729

 
108,211

 
99,820

South Korea
72,724

 
62,215

 
63,011

 
56,793

France
67,657

 
62,146

 
53,672

 
49,293

China
57,567

 
56,060

 
54,415

 
43,088

Other EMEA
193,317

 
182,228

 
166,472

 
151,250

Other international
109,579

 
110,361

 
106,029

 
100,170

Total revenue
$
1,293,636

 
$
1,216,469

 
$
1,095,250

 
$
988,465

Property and equipment by geographic area is as follows:
 
December 31,
(in thousands)
2018
 
2017
United States
$
46,605

 
$
45,498

India
4,176

 
3,704

EMEA
7,120

 
5,114

Other international
3,754

 
2,780

Total property and equipment, net
$
61,655

 
$
57,096


17.
Unconditional Purchase Obligations
The Company has entered into various unconditional purchase obligations which primarily include royalties, software licenses and long-term purchase contracts for network, communication and office maintenance services. The Company expended $22.4 million, $14.1 million and $7.2 million related to unconditional purchase obligations that existed as of the beginning of each year for the years ended December 31, 2018, 2017 and 2016, respectively. Future expenditures under unconditional purchase obligations in effect as of December 31, 2018 are as follows:
(in thousands)
 
2019
$
24,182

2020
8,588

2021
4,633

2022
54

2023
54

Total
$
37,511



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18.
Restructuring
During the fourth quarter of 2016, the Company initiated workforce realignment activities to reallocate resources to align with the Company's future strategic plans. The Company completed the workforce realignment activities as of September 30, 2017. The Company incurred related restructuring charges as follows:
(in thousands)
Gross
 
Net of Tax
Q4 2016
$
3,419

 
$
2,355

Q1 2017
9,273

 
6,176

Q2 2017
2,000

 
1,435

Q3 2017
466

 
331

Total restructuring charges
$
15,158

 
$
10,297

The restructuring charges are included in the presentation of cost of software licenses; cost of maintenance and service; research and development expense; and selling, general and administrative expense. The gross charges were fully paid as of March 31, 2018.

19.
Contingencies and Commitments
The Company is 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 intellectual property rights and other matters. In the opinion of the Company, the resolution of pending matters is not expected to have a material adverse effect on the Company's consolidated results of operations, cash flows or financial position. However, each of these matters is subject to various uncertainties and it is possible that an unfavorable resolution of one or more of these proceedings could materially affect the Company's results of operations, cash flows or financial position.
An Indian subsidiary of the Company has several service tax audits pending that have resulted in formal inquiries being received on transactions through mid-2012. The Company could incur tax charges and related liabilities of approximately $7.1 million. The service tax issues raised in the Company’s 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) passed a favorable ruling to Microsoft. The Company can provide no assurances on whether the Microsoft case's favorable ruling will be challenged in higher courts or on the impact that the present Microsoft case’s decision will have on the Company’s cases. The Company is uncertain as to when these service tax matters will be concluded.
The Company sells software licenses and services to its customers under proprietary software license agreements. Each license agreement contains the relevant terms of the contractual arrangement with the customer, and generally includes certain provisions for indemnifying the customer against losses, expenses and liabilities from damages that are incurred by or awarded against the customer in the event the Company's software or services are found to infringe upon a patent, copyright or other proprietary right of a third party. To date, the Company has not had to reimburse any of its customers for any losses related to these indemnification provisions and no material claims asserted under these indemnification provisions are outstanding as of December 31, 2018. For several reasons, including the lack of prior material indemnification claims, the Company cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.


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20. Subsequent Events
Acquisitions
In February 2019, the Company acquired 100% of the shares of Granta Design Limited (Granta Design) and Helic, Inc. (Helic) for a combined purchase price of approximately $261.5 million. The acquisition of Granta Design, the premier provider of materials information technology, expands the Company's portfolio into this important area, giving customers access to material intelligence, including data that is critical to successful simulations. The acquisition of Helic, the industry-leading provider of electromagnetic crosstalk solutions for systems on chips, combined with the Company's flagship electromagnetic and semiconductor solvers, will provide a comprehensive solution for on-chip, 3D integrated circuit and chip-package-system electromagnetics and noise analysis.
Credit Facility
Also in February 2019, the Company entered into a $500 million unsecured revolving credit facility. The revolving credit facility will be available for general corporate purposes, including, among others, to finance acquisitions, share repurchases and capital expenditures, and becomes payable in full in February 2024.




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SCHEDULE II
ANSYS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts

(in thousands)
                                Description
 
Balance at
Beginning
of Year
 
Additions:
Charges to Costs
and Expenses
 
Deductions:
Returns and
Write-Offs
 
Balance at
End
of Year
Year ended December 31, 2018
Allowance for doubtful accounts
 
$
6,800

 
$
1,577

 
$
377

 
$
8,000

Year ended December 31, 2017
Allowance for doubtful accounts
 
$
5,700

 
$
1,474

 
$
374

 
$
6,800

Year ended December 31, 2016
Allowance for doubtful accounts
 
$
5,200

 
$
2,009

 
$
1,509

 
$
5,700



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Exhibit No.
 
Exhibit
3.1
  
 
 
3.2
  
 
 
3.3
  
 
 
 
3.4
 
 
 
3.5
  
 
 
3.6
  
 
 
3.7
  
 
 
 
3.8
 
 
 
 
3.9
 
 
 
3.10
 
 
 
 
10.1
  
 
 
 
10.2
  
The Company's Pension Plan and Trust, as amended (filed as Exhibit 10.20 to the Company's Registration Statement on Form S-1 (File No. 333-4278) and incorporated herein by reference).*(P)
 
 
10.3
  
Form of Director Indemnification Agreement (filed as Exhibit 10.21 to the Company's Registration Statement on Form S-1 (File No. 333-4278) and incorporated herein by reference).(P)
 
 
10.4
  
 
 
10.5
  
 
 
10.6
 
 
 
 
10.7
 
 
 
 
10.8
 
 
 
 
10.9
 
 
 
 
10.10
  
 
 

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Table of Contents

10.11
  
 
 
10.12
  
 
 
10.13
  
 
 
10.14
  
 
 
10.15
  
 
 
 
10.16
  
 
 
10.17
 
 
 
 
10.18
  
 
 
10.19
  
 
 
10.20
  
 
 
 
10.21
  
 
 
 
10.22
 
 
 
 
10.23
 
 
 
 
10.24
 
 
 
10.25
  
 
 
10.26
  
 
 
10.27
  
 
 
 
10.28
 
 
 
 
10.29
 
 
 
 

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Table of Contents

10.30
 
 
 
 
10.31
 
 
 
 
10.32
 
 
 
 
10.33
 
 
 
 
10.34
 
 
 
 
10.35
 
 
 
 
10.36
 
 
 
 
10.37
 
 
 
 
10.38
 
 
 
 
10.39
 
 
 
 
10.40
 
 
 
 
10.41
 
 
 
 
10.42
 
 
 
 
10.43
 
 
 
 
10.44
 

 
 
 
14.1
  
 
 
 
14.2
 
 
 
 
21.1
  
 
 
23.1
  
 
 
24.1
  
 
 
31.1
  
 
 

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Table of Contents

31.2
  
 
 
32.1
  
 
 
32.2
  
 
 
101.INS
  
XBRL Instance Document
 
 
101.SCH
  
XBRL Taxonomy Extension Schema
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase
 
 
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase
*
Indicates management contract or compensatory plan, contract or arrangement.
 
 
(P)
Indicates a paper filing.

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ITEM 16.
FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
ANSYS, Inc.
 
 
 
 
Date:
February 28, 2019
 
By:
 
/s/    AJEI S. GOPAL        
 
 
 
 
 
 
 
 
 
 
 
Ajei S. Gopal
 
 
 
 
 
President and Chief Executive Officer
 
 
 
 
Date:
February 28, 2019
 
By:
 
/s/    MARIA T. SHIELDS        
 
 
 
 
 
 
 
 
 
 
 
Maria T. Shields
 
 
 
 
 
Chief Financial Officer

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POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Ajei S. Gopal, his or her attorney-in-fact, with the power of substitution, for such person in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated below.
Signature
Title
Date
 
 
 
/s/    AJEI S. GOPAL        
President and Chief Executive Officer
(Principal Executive Officer)
February 28, 2019
Ajei S. Gopal
 
 
 
 
/s/    MARIA T. SHIELDS        
Chief Financial Officer
(Principal Financial Officer and Accounting Officer)
February 28, 2019
Maria T. Shields
 
 
 
 
/s/ NICOLE ANASENES 
Director
February 28, 2019
Nicole Anasenes
 
 
 
 
 
/s/    JAMES E. CASHMAN III        
Non-Executive Chairman of the Board of Directors
February 28, 2019
James E. Cashman III
 
 
 
 
 
/s/ GLENDA M. DORCHAK
Director
February 28, 2019
Glenda M. Dorchak
 
 
 
 
 
/s/ GUY E. DUBOIS
Director
February 28, 2019
Guy E. Dubois
 
 
 
 
 
/s/ DR. ALEC D. GALLIMORE
Director
February 28, 2019
Dr. Alec D. Gallimore
 
 
 
 
 
/s/ RONALD W. HOVSEPIAN
Lead Independent Director
February 28, 2019
Ronald W. Hovsepian
 
 
 
 
 
/s/ WILLIAM R. MCDERMOTT
Director
February 28, 2019
William R. McDermott
 
 
 
 
 
/s/ BARBARA V. SCHERER
Director
February 28, 2019
Barbara V. Scherer
 
 
 
 
 
/s/ MICHAEL C. THURK
Director
February 28, 2019
Michael C. Thurk
 
 


101