| 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. Reclassifications Certain prior period amounts have been reclassified to conform to the current period presentation. We have reclassified certain amounts previously presented in "Accounts payable and accrued expense" to "Accrued expenses and other current liabilities" as of December 31, 2021 to conform to current period presentation as follows: As of December 31, (in thousands) 2021 Accounts payable: As reported $ 83,218 Reclassifications (24,155) Adjusted $ 59,063 Accrued expenses and other current liabilities: As reported $ 40,671 Reclassifications 24,155 Adjusted $ 64,826 Gain on Sale of Business/Assets Sale of Office Buildings and land During the three months ended September 30, 2022, we recognized a gain of $33.6 million from the sale of approximately 75-acres of land in Williamson County, Texas and two office buildings in Aachen, Germany. The buildings in Germany were previously used for certain research and development activities that have been relocated to other research and development locations. The disposal gain is presented as “Gain on sale of business/assets” in the Consolidated Statements of Income. Divestiture of AWR On January 15, 2020, we completed the sale of our AWR Corporation subsidiary ("AWR") for approximately $161 million. We recognized a gain of approximately $160 million on the sale. The gain is included within "Gain on sale of business/asset" in the consolidated statements of income, which also included approximately $1 million of transaction costs. 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. 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. A majority of our hardware products are now bundled with service-type warranties of one year or three years, in addition to optional extended hardware warranties, which typically provide additional service-type coverage for one 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 Service-type hardware warranty Ratably over the course of the support contract (over time), typically one or three years 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 utilization 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. 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. 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 allowance for credit losses of $7.7 million and $7.0 million at December 31, 2022 and 2021, respectively. The allowance for credit losses reflects the best estimate of future losses over the contractual life of outstanding accounts receivable and is determined on the basis of historical bad debts, customer concentrations, customer creditworthiness and current economic trends. 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 years ended December 31, 2022 and December 31, 2021. 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 $5.5 million and $3.2 million at December 31, 2022 and 2021, respectively, and is presented within "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. 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. 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. We periodically assess our available-for-sale debt securities for impairment and credit losses based on the specific identification method. We record an allowance for credit loss when a decline in fair value is due to credit-related factors. We consider various factors in determining whether an investment is impaired, including the severity of the impairment, changes in underlying credit ratings, forecasted recovery, our intent to sell or the likelihood that it would be required to sell the investment before its anticipated recovery in market value and the probability that the scheduled cash payments will continue to be made. When we conclude that a credit-related impairment has occurred, we assess whether we intend to sell the security or if it is more likely than not that we will be required to sell the security before recovery. If either of these two conditions is met, we recognize a charge in earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If we do not intend to sell a security and it is not more likely than not that we will be required to sell the security before recovery, the unrealized loss is separated into an amount representing the credit loss, which is recognized in “Other expense” in our Consolidated Statements of Income, and the amount related to all other factors, which is recorded in accumulated other comprehensive income (loss) . 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. We record our proportionate share of the net income or loss of our equity method investees, along with adjustments for unrealized profits or losses on intra-entity transactions and amortization of basis differences, within "Other expense i" in the Consolidated Statement of Income. Profits or losses related to intra-entity sales with our equity method investees are eliminated until realized by the investor or investee. Basis differences represent differences between the cost of the investment and the underlying equity in net assets of the investment and are generally amortized over the lives of the related assets that gave rise to them. Equity method goodwill is not amortized or tested for impairment; instead the equity method investment is tested for impairment. We record our interest in the net earnings of our equity method investments based on the most recently available financial statements of the investees. At December 31, 2022, the difference between the carrying amount of our equity-method investments and our share of the underlying equity in net assets of our investments was approximately $21 million. The basis difference is primarily attributable to intangible assets and equity-method goodwill. The carrying amount of the investment in equity interests is adjusted to reflect our interest in net earnings, dividends received and other-than-temporary impairments. We review the carrying amount for impairment whenever factors indicate that the carrying amount of the investment might not be recoverable. In such a case, the decrease in value is recognized in the period the impairment occurs 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. The carrying amounts of non-marketable equity investments that do not have a readily determinable fair value were not material for the periods presented. We did not record any other-than-temporary impairments on our investment securities during 2022, 2021, and 2020. 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 $19.4 million, $18.9 million and $17.0 million at December 31, 2022, 2021 and 2020, respectively. (In thousands) Year Description Balance at Beginning of Period Provisions Write-Offs Balance at End of Period 2020 Adjustment for excess and obsolete inventories $ 15,489 $ 8,163 6,616 $ 17,036 2021 Adjustment for excess and obsolete inventories $ 17,036 $ 9,986 8,090 $ 18,932 2022 Adjustment for excess and obsolete inventories $ 18,932 $ 11,089 10,604 $ 19,417 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 three 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 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 remaining legal life of the patent, generally ten Leasehold improvements are amortized over the shorter of the life of the lease or the asset. Intangible assets with finite useful lives, including developed technology, customer-related intangible assets, patents, trademarks, and backlog are subject to amortization over the expected period of economic benefit to us. We evaluate whether events or circumstances have occurred that warrant a revision to the remaining useful lives of intangible assets. In cases where a revision is deemed appropriate, the remaining carrying amounts of the intangible assets are amortized over the revised remaining useful life. Intangible assets related to in-process research and development (“IPR&D”) projects are considered to be indefinite-lived until the completion or abandonment of the associated R&D efforts. If and when development is complete, the associated assets would be deemed long-lived and would then be amortized over their respective estimated useful lives at that point in time. Indefinite-lived intangible assets are tested for impairment at least annually during the fourth quarter of our fiscal year. In testing indefinite-lived intangible assets for impairment, we may first perform a qualitative assessment of whether it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount, and, if so, we then quantitatively compare the fair value of the indefinite-lived intangible asset to its carrying amount. We determine the fair value of our indefinite-lived intangible assets using a discounted cash flow method. Goodwill We account for business combinations using the acquisition method of accounting and, accordingly, allocate the fair value of acquisition consideration to the assets acquired and liabilities assumed based on their fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair value of the assets acquired and liabilities assumed is recorded as goodwill. The results of operations of the businesses acquired are included in our consolidated statement of income beginning on the date of the acquisition. The excess purchase price over the fair value of assets acquired is recorded as goodwill. As businesses are acquired, we assign assets acquired (including goodwill) and liabilities assumed to either our existing reporting unit or a newly identified reporting unit as of the date of the acquisition. In the event a disposal group meets the definition of a business, goodwill is allocated to the disposal group based on the relative fair value of the disposal group to the related reporting unit. Goodwill is deductible for tax purposes in certain jurisdictions. Impairment Testing Goodwill and indefinite-lived intangible assets We review indefinite-lived intangible assets, including goodwill, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. The authoritative accounting guidance allows a qualitative approach for testing indefinite-lived intangible assets for impairment. We have one operating segment and one reporting unit for impairment testing of goodwill and indefinite-lived intangible assets. Goodwill and indefinite-lived intangible assets are tested for impairment on an annual basis, 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. Our annual impairment test was performed as of November 30, 2022. No impairment of goodwill and indefinite-lived intangible assets was identified during 2022, 2021, and 2020. Long lived assets with definite lives The carrying values of long-lived assets, including identifiable intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, a recoverability test is performed utilizing undiscounted cash flows expected to be generated by that asset or asset group compared to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models or, when available, quoted market values and third-party appraisals. It is not possible for us to predict the likelihood of any possible future impairments or, if such an impairment were to occur, the magnitude of any impairment. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities on our consolidated balance sheet includes the following amounts (in thousands): As of December 31 As of December 31, (in thousands) 2022 2021 Income taxes payable - current $ 87,186 $ 14,457 Hedge payable - current 18,117 7,091 Deferred social security taxes (under CARES act) - current — 5,785 Accrued liabilities 26,851 24,155 Other 21,003 13,338 Total $ 153,157 $ 64,826 Concentrations of credit risk At December 31, 2022, we had $140 million in cash and cash equivalents. Our cash and cash equivalent balances are held in numerous financial institutions throughout the world, including substantial amounts held outside of the U.S. The most significant of our operating accounts was our Wells Fargo operating account owned by our entity in the United States which held approximately $38 million or 27% of our total cash and cash equivalents at a bank that carried Aaa1/A+/AA ratings at December 31, 2022. The following table presents the geographic distribution of our cash, cash equivalents, and short-term investments as of December 31, 2022 (in millions): Domestic International Total Cash and Cash Equivalents $40.7 $99.1 $139.8 29% 71% Figures may not sum due to rounding. 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 – 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 4% of our sales for the years ended December 31, 2022, 2021, and 2020, respectively. The largest trade account receivable from any individual customer at December 31, 2022 was approximately $11.3 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 has recently and may continue to 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 standard warranty on most hardware products which is included in the terms of sale of such products. During 2022, we enhanced the service entitlements included with our standard warranty to include technical support and dependable repair and replacement coverage. Standard warranties sold with these additional entitlements are now accounted for as service-type warranties and the revenue allocated to these performance obligations is now recognized over the service duration of one For hardware previously sold with only an assurance-type warranty, a provision is made for estimated future warranty costs at the time of the sale for the estimated costs that may be incurred. Our estimate is based on historical experience and product sales during the period. The warranty reserve for the years ended December 31, 2022, 2021, and 2020 was $1.5 million, $3.2 million and $2.9 million at December 31, 2022, 2021 and 2020, respectively. Loss contingencies We accrue for probable losses from contingencies 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. Government Grants We have received government assistance in the form of non-reimbursable grants for certain operating and capital expenditures in several countries where we operate. We record proceeds from government grants when there is reasonable assurance that we will comply with the relevant conditions of the grant agreement and the grant funds are received. Grants in recognition of specific expenses are recognized in the same period as an offset to those related expenses. Grants related to depreciable assets are recognized over the periods and in the proportions in which depreciation expense on those assets is recognized. Cash receipts related to government grants are presented within operating or investing cash flows, depending on the nature of the grant. Unrecognized benefits from grants previously received are recorded in "Other current liabilities" and "Other long-term liabilities". The amounts recorded in "Other current liabilities" and "Other long-term liabilities" as of December 31, 2022 were $2.4 million and $6.8 million respectively, primarily related to prior period grants for depreciable assets. Amounts received from new or existing grant arrangements during fiscal year 2022 were not material. The effect of government grants on our results of operations during 2022 were not material. Other Expense Other expense consisted of the following amounts: Years ended December 31, (in thousands) 2022 2021 2020 Interest income $ 454 $ 375 $ 3,899 Interest expense (16,591) (3,780) (1,883) Loss from equity-method investments (163) (5,719) (2,942) Net foreign exchange loss (10,170) (4,973) (141) Other gain (loss) 6,277 (493) 279 Other expense $ (20,193) $ (14,590) $ (788) The year over year increase within "Other gain(loss)" was primarily related to a $3.4 million insurance recovery related to a pre-acquisition claim liability from one of our prior acquisitions, a $1.3 million tax settlement with an acquisition after the measurement period closed and a $0.8 million liquidation payment. Advertising expense We expense costs of advertising as incurred. Advertising expense for the years ended December 31, 2022, 2021, and 2020 was $8 million, $20 million, and $15 million, respectively. Foreign currency translation The functional currency for a substantial majority of 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. 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. We also use interest rate swaps to hedge interest rate exposure under our Credit Facility resulting from vari |
