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ANSYS: A Thorough Reading of the 10-K Shows the Drop in Cash Flow Is Benign
Posted by: Ben Strubel (IP Logged)
Date: January 11, 2012 01:52PM
ANSYS (ANSS) is a developer of engineering simulation software. The company markets its software around the globe to engineers, designers, researchers and students in the academia, aerospace, automotive, manufacturing, electronics, biomedical, energy and defense sectors. The company is headquartered in Canonsburg, Penn., employs over 1,600 people, and has a market cap of approximately $5 billion. The company appears on the Buffett-Munger Screener due in no small part to its 10 and 5-year EBITDA growth rates of 24.6% and 25.3% respectively.
The graph below shows ANSYS’s steady growth in net income and revenue (the screener uses EBITDA but I chose the more traditional net income for the graph).
However, looking at cash flow from operations and free cash flow over the last three years shows a different story. Cash flow from operations was $196.7 million in 2008, $173.7 million in 2009, and $169.9 million in 2010.
This discrepancy shows the importance of thoroughly reading a company’s financial statements. The reason for the difference could be innocuous like changes in taxes, restructuring charges (watch out for “one-time” restructuring charges that seem to appear every year), or other one-time items. Conversely, the difference could be a sign of more serious underlying problems in the business.
Let’s see what ANSYS has to say about the drop in cash flow from operations. The company explained:
"The $23.0 million decrease in the Company’s cash flow from operations in 2009 as compared to 2008 was primarily the result of an $18.4 million decrease in working capital fluctuations, a $9.4 million decrease in other non-cash operating adjustments, and a $4.7 million increase in net income."
Working capital is usually a source of fluctuation in cash flows and one of the reasons analysts and investors prefer the smoother measures such as net income, EBIT, or EBITDA.
For the drop from 2009 to 2010 the company says:
"A $48.9 million decrease in cash flows from operating assets and liabilities, whereby these fluctuations produced a net cash outflow of $29.5 million during the year ended December 31, 2010 and a net cash inflow of $19.4 million during the year ended December 31, 2009. Significantly contributing to the $29.5 million net cash outflow in 2010 were increased tax payments of approximately $55.1 million related to the merger of the Company’s Japan subsidiaries. These increased tax payments resulted from the net impact of $77.3 million in Japan tax payments and a reduction in U.S. tax payments of $22.2 million associated with related foreign tax credits. Please see below for a complete discussion of the expected future cash flow benefits associated with the merger of the Company’s Japan subsidiaries. Also see the sub-section entitled “Results of Operations” under Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations above for a complete discussion of the expected reduction in future income tax expense as a result of the merger of the Company’s Japan subsidiaries."
"An increase in net income of $36.7 million from $116.4 million for the year ended December 31, 2009 to $153.1 million for the year ended December 31, 2010."
"An increase in other non-cash operating adjustments of $5.3 million from $37.9 million for the year ended Dec. 31, 2009 to $43.2 million for the year ended Dec. 31, 2010. This increase was primarily the result of an increase in stock-based compensation expense of $5.8 million, decreased deferred income tax benefits of $1.4 million and decreased excess tax benefits from stock options of $1.4 million, partially offset by a decrease of $3.4 million in depreciation and amortization."
The biggest item is related to the company merging its Japanese business operations and having to pay $77.3 million in taxes in 2010. In a later section of ANSYS’s 2010 10-K, management states that they believe this merger will result in a savings of $45-$50 million in taxes in 2011 and approximately $15 from 2012 to 2015. Provided the company’s tax advisers are correct it looks like the reason for significant drop in cash flows this year is innocuous.
Reversing the $55.1 tax cost for 2010 would give the company $225 million in cash flow from operations. This would be what we would expect from the top-line revenue growth and GAAP accounting measures that were reported.
While relying on a screener is helpful it is always important to read through the company’s financials, something we do in the monthly Buffett-Munger screener.
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Disclosure: No positions
Stocks Discussed: ANSS,