| Operations and summary of significant accounting policies | Operations and summary of significant accounting policies National Instruments Corporation (the "Company," "NI," "we," "us" or "our") is a Delaware corporation. We provide flexible application software and modular, multifunction hardware that users combine with industry-standard computers, networks and third-party devices to create automated test and automated measurement systems. Our software-centric approach helps our customers quickly and cost-effectively design, prototype and deploy custom-defined solutions for their design, control and test application needs. We offer hundreds of products used to create virtual instrumentation systems for general, commercial, industrial and scientific applications. Our products may be used in different environments, and consequently, specific application of our products is determined by the customer and often is not known to us. These financial statements have been prepared in accordance with U.S. generally accepted accounting principles. Principles of consolidation The Consolidated Financial Statements include the accounts of National Instruments Corporation and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Use of estimates The preparation of our financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Although these estimates are based on management's best knowledge of current events and actions that may impact the company in the future, actual results may be materially different from the estimates. Gain on Sale of Assets During the twelve months ended December 31, 2019, we recognized a gain of $26.8 million from the sale of our 136,000 square foot office building and property located at 6504 Bridgepoint Parkway, Austin, Texas. At the time of sale, we did not occupy the building and had been leasing the building to third parties for several years. The disposal gain is presented as "Gain on sale of assets" in the Consolidated Statements of Income, in accordance with ASC 360 - Property, Plant and Equipment . Assets held-for-sale On December 2, 2019, we entered into a stock purchase agreement with Cadence Design Systems, Inc. ("Cadence") for Cadence to acquire AWR Corporation, our wholly owned subsidiary (the "Transaction"). The transaction closed on January 15, 2020. The purchase price for the Transaction was approximately $160 million in cash and we expect to recognize a gain on the divestment of approximately $123 million , net of taxes, during the first quarter of 2020. Approximately 110 AWR employees joined Cadence, effective as of the date of closing. AWR provides software products used by microwave and RF engineers to design wireless products for complex, high-frequency RF applications. The technology helps customers accelerate the design and product development cycle of systems used in communications, aerospace and defense, semiconductor, computer, and consumer electronics, by helping reduce the time it takes to go from concept to manufacturing. Assets held-for-sale as of December 31, 2019 were included within the following line items on our Consolidated Balance Sheets: Year Ended December 31, (In thousands) 2019 Assets Cash $ 6,015 Accounts receivable, net 9,544 Prepaids and other current assets 291 Property, plant and equipment, net 268 Goodwill 7,593 Intangibles, net 141 Operating lease right-of-use assets 461 Other long-term assets 119 Total Assets $ 24,432 Liabilities Accounts payable and accrued liabilities $ 1,030 Accrued compensation 1,474 Deferred revenue 17,851 Other current liabilities 503 Operating lease liabilities - non-current 290 Total Liabilities 21,148 Net Assets Classified as Held for Sale $ 3,284 Revenue Recognition Revenue is recognized upon transfer of control of the promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of our products or services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities. Impact of adopting Topic 606 On January 1, 2018, we adopted the new revenue standard using the modified retrospective transition method. Under the modified retrospective transition approach, periods prior to the adoption date were not adjusted and continue to be reported in accordance with historical GAAP. A cumulative catch-up adjustment was recorded to beginning retained earnings to reflect the impact of all existing arrangements under the new revenue standard. The impact of adopting the new revenue standard for the year ended December 31, 2018 is further discussed under "Recently Adopted Accounting Pronouncements". Nature of Goods and Services We derive revenues from two primary sources: products and software maintenance. Product revenues are primarily generated from the sale of off-the-shelf modular test and measurement hardware components and related drivers, and application software licenses. Sales of most hardware components may also include optional extended hardware warranties, which typically provide additional service-type coverage for three years from the purchase date. Our software licenses typically provide for a perpetual right to use our software. We also offer some term-based software licenses that expire, which are referred to as subscription arrangements. We do not customize software for customers and installation services are not required. The software is delivered before related services are provided and is functional without professional services, updates and technical support. We sell our customer support contracts as a percentage of net software purchases to which the support is related. Revenues from offerings related to our hardware and software products such as extended hardware warranties, training, consulting and installation services are not significant and are presented within product revenues, as further discussed below. Software maintenance revenues consists of post-contract customer support that provides the customer with unspecified upgrades and technical support. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices of software licenses are estimated based on our established pricing practices and maximize the use of observable inputs. Standalone selling prices of hardware products are typically estimated based on observable transactions when these services are sold on a standalone basis. Our typical performance obligations include the following: Performance Obligation When performance obligation is typically satisfied When payment is typically due How standalone selling price is typically estimated Product revenue Modular hardware When customer obtains control of the product (point-in-time) Within 30-90 days of shipment Observable in transactions without multiple performance obligations Software licenses When software media is delivered to customer or made available for download electronically, and the applicable license period has begun (point-in-time) Within 30-90 days of the beginning of license period Perpetual/Subscription licenses: Value relationships based on (i) the directly observable pricing of the license bundled with software maintenance and (ii) the directly observable pricing of software maintenance renewals, when they are sold on a standalone basis. Enterprise-wide term licenses: Residual method Extended hardware warranty Ratably over the course of the support contract (over time) Within 30-90 days of the beginning of the contract period Observable in renewal transactions Other related support offerings As work is performed (over time) or course is delivered (point-in-time) Within 30-90 days of delivery Observable in transactions without multiple performance obligations Software maintenance revenue Software maintenance Ratably over the course of the support contract (over time) Within 30-90 days of the beginning of the contract period Observable in renewal transactions Significant Judgments Judgment is required to determine the standalone selling price ("SSP") for each distinct performance obligation. We use a single amount to estimate SSP for items that are not sold separately, including perpetual and term licenses sold with software maintenance. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount that needs to be allocated based on the relative SSP of the various products and services. Due to the various benefits from and the nature of our enterprise agreement program, judgment is required to assess the pattern of delivery, including the exercise pattern of certain benefits across our portfolio of customers. Additionally, whether a renewal option represents a distinct performance obligation could significantly impact the timing of revenue recognized. Our products are generally sold with a right of return which is accounted for as variable consideration when estimating the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period as additional information becomes available and only to the extent that it is probable that a significant reversal of any incremental revenue will not occur. During the first quarter of 2018, we began to reclassify our allowance for sales returns to "other current liabilities" from "accounts receivable, net" due to the adoption of ASU 2014-09. Changes to our estimated variable consideration were not material for the periods presented. Contract Balances Timing of revenue recognition may differ from the timing of payment from customers. We record a receivable when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized subsequent to invoicing. Based on the nature of our contracts with customers, we do not typically recognize unbilled receivables related to revenues recognized in excess of amounts billed. For the year ended December 31, 2019, amounts recognized related to unbilled receivables were not material. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with efficient and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing. Examples include invoicing at the beginning of a maintenance service term with revenue recognized ratably over the contract period. Accounts Receivable Accounts receivable are recorded net of allowances for doubtful accounts of $3.5 million at each of December 31, 2019 and 2018 . Our allowance for doubtful accounts is based on historical experience. We analyze historical bad debts, customer concentrations, customer creditworthiness and current economic trends when evaluating the adequacy of our allowance for doubtful accounts. (In thousands) Year Description Balance at Beginning of Period Provisions Write-Offs Balance at End of Period 2017 Allowance for doubtful accounts $ 1,867 $ 1,383 358 $ 2,892 2018 Allowance for doubtful accounts $ 2,892 $ 1,135 537 $ 3,490 2019 Allowance for doubtful accounts $ 3,490 $ 396 343 $ 3,543 Contract Liabilities We recognize contract liabilities, presented in our Consolidated Balance Sheet as "Deferred revenue" when we have an obligation to transfer goods or services to a customer for which we have received consideration (or an amount of consideration is due) from the customer. Refer to Note 2 - Revenue of Notes to Consolidated Financial Statements for additional information, including changes in our contract liability during the year ended December 31, 2019. Refund Liability A refund liability for estimated sales returns is made by reducing recorded revenue based on historical experience. We analyze historical returns, current economic trends and changes in customer demand of our products when evaluating the adequacy of our sales returns refund liability. Our sales return refund liability was $2.6 million and $2.3 million at December 31, 2019 and 2018 , respectively. As further discussed in Note 2 - Revenue, we adopted the new revenue standard on January 1, 2018 using the modified retrospective method. Under the modified retrospective method of adoption, we did not adjust our comparative periods to reflect the adoption of the new revenue standard. In accordance with the new revenue standard, our sales return refund liability as of December 31, 2019 and 2018 was presented in "Other Current Liabilities" on our balance sheet. Assets Recognized from the Costs to Obtain a Contract with a Customer We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs meet the requirements to be capitalized. Capitalized incremental costs related to initial contracts and renewals are amortized over the same period because the commissions paid on both the initial contract and renewals are commensurate with one another. Total capitalized costs to obtain a contract were not material during the periods presented and are included in other long-term assets on our consolidated balance sheets. The net effect of capitalization and amortization of these costs was not material to our results of operating during the periods presented. Shipping and handling costs Our shipping and handling costs charged to customers are included in net sales, and the associated expense is recorded in cost of sales. Cash and cash equivalents Cash and cash equivalents include cash and highly liquid investments with maturities of three months or less at the date of acquisition. Investments We value our available-for-sale debt instruments based on pricing from third-party pricing vendors, who may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. We classify all of our fixed income available-for-sale securities as having Level 2 inputs. The valuation techniques used to measure the fair value of our financial instruments having Level 2 inputs were derived from non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models, such as discounted cash flow techniques. We believe all of these sources reflect the credit risk associated with each of our available-for-sale debt investments. Short-term investments consist of available-for-sale debt securities issued by states of the U.S. and political subdivisions of the U.S., corporate debt securities and debt securities issued by U.S. government organizations and agencies. All short-term investments have contractual maturities of less than 60 months. Our investments in debt securities are classified as available-for-sale and accordingly are reported at fair value, with unrealized gains and losses reported as other comprehensive income, a component of stockholders’ equity. Unrealized losses are charged against income when a decline in fair value is determined to be other than temporary. Investments with maturities beyond one year are classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. The fair value of our short-term investments in debt securities at December 31, 2019 and December 31, 2018 was $238 million and $271 million , respectively. The decrease was due to the net sale of $34 million of short-term investments. We had $5 million U.S. dollar equivalent of corporate bonds that were denominated in Euro at December 31, 2019 . We follow the guidance provided by FASB ASC 320 to assess whether our investments with unrealized loss positions are other than temporarily impaired. Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in other income (expense), net, in our Consolidated Statements of Income. In addition, we from time to time make equity investments in non-publicly traded companies. Equity investments in which we do not have control but have the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method. Our proportionate share of income or loss is recorded in "Other income (expense), net "in the Consolidated Statement of Income. All other non-marketable equity investments do not have readily determinable fair values and are recorded at cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes. We periodically review our non-marketable equity investments for other-than-temporary declines in fair value and write-down specific investments to their fair values when we determine that an other-than-temporary decline has occurred. Our non-marketable equity investments were not material at December 31, 2019 and 2018. We did not identify or record any other-than-temporary impairments on our investment securities during 2019 , 2018 , and 2017 . Inventories, net Inventories are stated at the lower-of-cost or net realizable value. Cost is determined using standard costs, which approximate the first-in first-out (“FIFO”) method. Cost includes the acquisition cost of purchased components, parts and subassemblies, in-bound freight costs, labor and overhead. Inventory is shown net of adjustment for excess and obsolete inventories of $15.5 million , $15.4 million and $16.4 million at December 31, 2019 , 2018 and 2017 , respectively. (In thousands) Year Description Balance at Beginning of Period Provisions Write-Offs Balance at End of Period 2017 Adjustment for excess and obsolete inventories $ 12,639 $ 7,130 3,322 $ 16,447 2018 Adjustment for excess and obsolete inventories $ 16,447 $ 7,870 8,932 $ 15,385 2019 Adjustment for excess and obsolete inventories $ 15,385 $ 6,046 5,942 $ 15,489 Property and equipment, net Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from twenty to forty years for buildings, and three to seven years for purchased internal use software and for equipment which are each included in furniture and equipment. Intangible assets, net We capitalize costs related to the development and acquisition of certain software products. Capitalization of costs begins when technological feasibility has been established and ends when the product is available for general release to customers. Technological feasibility for our products is established when the product is available for beta release. Amortization is computed on an individual product basis for those products available for market and is recognized based on the product’s estimated economic life, generally three to six years . We use the services of outside counsel to search for, document, and apply for patents. Those costs, along with any filing or application fees, are capitalized. Costs related to patents which are abandoned are written off. Once a patent is granted, the patent costs are amortized ratably over the legal life of the patent, generally ten to seventeen years . Leasehold improvements are amortized over the shorter of the life of the lease or the asset. At each balance sheet date, the unamortized costs for all intangible assets are reviewed by management and reduced to net realizable value when necessary. Goodwill The excess purchase price over the fair value of net assets acquired is recorded as goodwill. We have one operating segment and one reporting unit. Goodwill is tested for impairment on an annual basis, in the fourth quarter of each year, and between annual tests if indicators of potential impairment exist, using a fair-value-based approach based on the market capitalization of the reporting unit. No impairment of goodwill was identified during our annual testing of goodwill performed as of November 30, 2019 and 2018 . Goodwill is deductible for tax purposes in certain jurisdictions. Concentrations of credit risk At December 31, 2019 , we had $ 433 million in cash, cash equivalents and short-term investments. Our cash and cash equivalent balances are held in numerous financial institutions throughout the world, including substantial amounts held outside of the U.S., however, the majority of our short-term investments that are located outside of the U.S. are denominated in the U.S. dollar with the exception of $5 million U.S. dollar equivalent of corporate bonds that are denominated in Euro. The most significant of our operating accounts was our Malaysian Citibank operating account which held approximately $13 million or 7% of our total cash and cash equivalents at a bank that carried Baa1/BBB+/A ratings at December 31, 2019 . The following table presents the geographic distribution of our cash, cash equivalents, and short-term investments as of December 31, 2019 (in millions): Domestic International Total Cash and Cash Equivalents $55.9 $138.7 $194.6 29% 71% Short-term Investments $164.3 $73.7 $238.0 69% 31% Cash, Cash Equivalents and Short-term Investments $220.2 $212.4 $432.6 51% 49% The goal of our investment policy is to manage our investment portfolio to preserve principal and liquidity while maximizing the return on our investment portfolio through the full investment of available funds. We place our cash investments in instruments that meet credit quality standards, as specified in our corporate investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issue, issuer or type of instrument. Our cash equivalents and short-term investments carried ratings from the major credit rating agencies that were in accordance with our corporate investment policy. Our investment policy allows investments in the following: government and federal agency obligations, repurchase agreements (“Repos”), certificates of deposit and time deposits, corporate obligations, medium term notes and deposit notes, commercial paper including asset-backed commercial paper (“ABCP”), puttable bonds, general obligation and revenue bonds, money market funds, taxable commercial paper, corporate notes/bonds, municipal notes, municipal obligations and tax exempt commercial paper. All such instruments must carry minimum ratings of A1/P1/F1, MIG1/VMIG1/SP1 and A2/A/A, as applicable, all of which are considered “investment grade”. Our investment policy for marketable securities requires that all securities mature in five years or less, with a weighted average maturity of no longer than 24 months with at least 10% maturing in 90 days or less. (See Note 3 – Short-term investments of Notes to Consolidated Financial Statements for further discussion and analysis of our investments). Concentration of credit risk with respect to trade accounts receivable is limited due to our large number of customers and their dispersion across many countries and industries. No single customer accounted for more than 3% of our sales for the years ended December 31, 2019 , 2018 , and 2017 , respectively. The largest trade account receivable from any individual customer at December 31, 2019 was approximately $4.6 million . Key supplier risk Our manufacturing processes use large volumes of high-quality components and subassemblies supplied by outside sources. Several of these items are available through sole or limited sources. Supply shortages or quality problems in connection with these key items could require us to procure items from replacement suppliers, which would cause significant delays in fulfillment of orders and likely result in additional costs. In order to manage this risk, we maintain safety stock of some of these single sourced components and subassemblies and perform regular assessments of a suppliers' performance, grading key suppliers in critical areas such as quality and “on-time” delivery. Warranty reserve We offer a one -year limited warranty on most hardware products which is included in the terms of sale of such products. We also offer optional extended warranties on our hardware products for which the related revenue is recognized ratably over the warranty period. Provision is made for estimated future warranty costs at the time of the sale for the estimated costs that may be incurred under the limited warranty. Our estimate is based on historical experience and product sales during the period. The warranty reserve for the years ended December 31, 2019 , 2018 , and 2017 was as follows: (In thousands) 2019 2018 2017 Balance at the beginning of the year $ 3,173 $ 2,846 $ 2,686 Accruals for warranties issued during the year 2,356 3,026 2,644 Accruals related to pre-existing warranties (376 ) 389 274 Settlements made (in cash or in kind) during the year (2,592 ) (3,088 ) (2,758 ) Balance at the end of the year $ 2,561 $ 3,173 $ 2,846 Loss contingencies We accrue for probable losses from contingencies including legal defense costs, on an undiscounted basis , when such costs are considered probable of being incurred and are reasonably estimable. We periodically evaluate available information, both internal and external, relative to such contingencies and adjust this accrual as necessary. Advertising expense We expense costs of advertising as incurred. Advertising expense for the years ended December 31, 2019 , 2018 , and 2017 was $7 million , $8 million , and $11 million , respectively. Foreign currency translation The functional currency for our international sales operations is the applicable local currency. The assets and liabilities of these operations are translated at the rate of exchange in effect on the balance sheet date and sales and expenses are translated at average rates. The resulting gains or losses from translation are included in a separate component of other comprehensive income. Gains and losses resulting from re-measuring monetary asset and liability accounts that are denominated in a currency other than a subsidiary’s functional currency are included in net foreign exchange gain (loss) and are included in net income. Foreign currency hedging instruments All of our derivative instruments are recognized on the balance sheet at their fair value. We currently use foreign currency forward contracts to hedge our exposure to material foreign currency denominated receivables and forecasted foreign currency cash flows. On the date the derivative contract is entered into, we designate the derivative as a hedge of the variability of foreign currency cash flows to be received or paid (“cash flow” hedge) or as a hedge of our foreign denominated net receivable positions (“other derivatives”). Changes in the fair value of derivatives that are designated and qualify as cash flow hedges and that are deemed to be highly effective are recorded in other comprehensive income. These amounts are subsequently reclassified into earnings in the period during which the hedged transaction is realized. The gain or loss on the other derivatives as well as the offsetting gain or loss on the hedged item attributable to the hedged risk is recognized in current earnings under the line item “Net foreign exchange gain (loss)”. We do not enter into derivative contracts for speculative purposes. We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking various hedge transactions at the inception of the hedge. This process includes linking all derivatives that are designated as cash flow hedges to specific forecasted transactions. We also formally assess, both at the hedge’s inception and on an ongoing basis, whether the hedging instruments are highly effective in offsetting changes in cash flows of hedged items. We prospectively discontinue hedge accounting if (1) it is determined that the derivative is no longer highly effective in offsetting changes in the fair value of a hedged item (forecasted transactions); or (2) the derivative is de-designated as a hedge instrument, because it is unlikely that a forecasted transaction will occur. When hedge accounting is discontinued, the derivative is sold, and the resulting gains and losses are recognized immediately in earnings. Income taxes We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts. We account for GILTI in deferred taxes. Valuation allowances are established when necessary to reduce deferred tax assets to amounts which are more likely than not to be realized. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our financial position or our results of operations. In estimating future tax consequences, all expected future events are considered other than enactments of changes in tax laws or rates. We account for uncertainty in income taxes recognized in our financial statements using prescribed recognition thresholds and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on our tax returns. Our policy is to recognize interest and penalties related to income tax matters in income tax expense. Earnings per share Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding during each period. Diluted EPS is computed by dividing net income by the weighted average number of common shares and common share equivalents outstanding (if dilutive) during each period. The number of common share equivalents, which include stock options and restricted stock units (“RSUs”), is computed using the treasury stock method. The reconciliation of the denominators used to calculate basic EPS and diluted EPS for years ended December 31, 2019 , 2018 , and 2017 are as follows: Years ended December 31, (In thousands) 2019 2018 2017 Weighted average shares outstanding-basic 131,722 131,987 130,300 Plus: Common share equivalents RSUs 1,012 1,287 1,087 Weighted average shares outstanding-diluted 132,734 133,274 131,387 Stock awards to acquire 94,206 shares, 11,352 shares, and 32,400 shares for the years ended December 31, 2019 , 2018 , and 2017 , respectively, were excluded in the computations of diluted EPS because the effect of including the stock awards would have been anti-dilutive. Stock-based compensation Stock-based compensation costs are based on the fair value on the date of grant for all restricted stock units ("RSUs") and on the date of enrollment for the employee stock purchase plan. We recognize compensation expense ratably over the requisite service period of the awards. PRSUs are RSU awards that vest based on a market condition. The market condition currently used is our stockholder return relative to the total stockholder return of the companies included in the Russell 2000 Index at the end of the three-year performance period. The fair values of RSUs, with service-based vesting conditions, are estimated using their market price on the date of grant. The fair values of rights under employee stock purchase plans are estimated using the Black-Scholes option-pricing model. The fair values of PRSUs are estimated using |
