SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the fiscal quarter ended: March 31, 2000 or
Transition report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the transition period from ________________ to ________________
Commission file number: 0-25426
---------
NATIONAL INSTRUMENTS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-1871327
- ---------------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11500 North MoPac Expressway
Austin, Texas 78759
- ---------------------------------------- -----------------------------------
(address of principal executive (zip code)
offices)
Registrant's telephone number, including area code: (512) 338-9119
--------------------------
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 10, 2000
Common Stock - $0.01 par value 50,266,028
Page 1
NATIONAL INSTRUMENTS CORPORATION
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets
March 31, 2000 (unaudited) and December 31, 1999............3
Consolidated Statements of Income (unaudited)
three months ended March 31, 2000 and 1999..................4
Consolidated Statements of Cash Flows (unaudited)
three months ended March 31, 2000 and 1999..................5
Notes to Consolidated Financial Statements..................6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations............................9
Item 3 Quantitative and Qualitative Disclosures about Market Risk ...15
PART II. OTHER INFORMATION
Item 1 Legal Proceedings.............................................16
Item 6 Exhibits and Reports on Form 8-K..............................16
Page 2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, December 31,
2000 1999
------------ ------------
Assets (unaudited)
Current assets:
Cash and cash equivalents..................... $ 47,788 $ 45,309
Short-term investments........................ 80,350 83,525
Accounts receivable, net...................... 62,574 58,279
Inventories, net.............................. 25,467 26,161
Prepaid expenses and other current assets..... 15,674 11,216
Deferred income tax, net...................... 5,787 6,539
------------ ------------
Total current assets 237,640 231,029
Property and equipment, net..................... 73,164 69,771
Intangibles and other assets.................... 18,335 17,953
------------ ------------
Total assets................................ $ 329,139 $ 318,753
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt............. $ 875 $ 876
Accounts payable.............................. 20,071 23,318
Accrued compensation.......................... 9,921 11,021
Accrued expenses and other liabilities........ 10,195 10,326
Income taxes payable.......................... 8,211 4,739
Other taxes payable........................... 4,694 6,988
------------ ------------
Total current liabilities................... 53,967 57,268
Long-term debt, net of current portion.......... 3,626 4,301
Deferred income taxes........................... 2,949 2,949
------------ ------------
Total liabilities........................... 60,542 64,518
------------ ------------
Commitments and contingencies -- --
Stockholders' equity:
Common stock: par value $.01; 180,000,000
shares authorized; 50,164,290 and 50,047,182
shares issued and outstanding, respectively... 502 500
Additional paid-in capital...................... 59,887 58,830
Retained earnings............................... 211,513 198,849
Accumulated other comprehensive loss............ (3,305) (3,944)
------------ ------------
Total stockholders' equity.................. 268,597 254,235
------------ ------------
Total liabilities and stockholders' equity.. $ 329,139 $ 318,753
============ ============
The accompanying notes are an integral part of these financial statements.
Page 3
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
-----------------------
2000 1999
---------- ----------
Net sales.............................................. $ 94,105 $ 73,686
Cost of sales.......................................... 22,240 16,940
---------- ----------
Gross profit........................................ 71,865 56,746
---------- ----------
Operating expenses:
Sales and marketing................................. 34,762 27,023
Research and development............................ 12,346 9,250
General and administrative.......................... 6,704 5,307
---------- ----------
Total operating expenses.......................... 53,812 41,580
---------- ----------
Operating income.................................. 18,053 15,166
Other income (expense):
Interest income, net................................ 1,274 942
Net foreign exchange loss........................... (704) (579)
---------- ----------
Income before income taxes and cumulative effect of
accounting change................................... 18,623 15,529
Provision for income taxes............................ 5,959 4,969
---------- ----------
Income before cumulative effect of accounting change.. 12,664 10,560
Cumulative effect of accounting change................ -- (552)
---------- ----------
Net income........................................ $ 12,664 $ 10,008
========== ==========
Basic earnings per share:
Income before cumulative effect of accounting change $ 0.25 $ 0.21
Cumulative effect of accounting change, net of tax.. -- (0.01)
---------- ----------
Basic earnings per share............................ $ 0.25 $ 0.20
========== ==========
Diluted earnings per share:
Income before cumulative effect of accounting change $ 0.24 $ 0.20
Cumulative effect of accounting change, net of tax.. -- (0.01)
---------- ----------
Diluted earnings per share ......................... $ 0.24 $ 0.19
========== ==========
Weighted average shares outstanding:
Basic .............................................. 50,112 49,484
Diluted ............................................ 53,415 51,339
The accompanying notes are an integral part of these financial statements.
Page 4
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31,
----------------------
2000 1999
---------- ----------
Cash flow from operating activities:
Net income.......................................... $ 12,664 $ 10,008
Adjustments to reconcile net income to cash provided
by operating activities:
Charges to income not requiring cash outlays:
Depreciation and amortization................... 4,012 2,522
Provision for deferred income taxes............. 744 1,049
Changes in operating assets and liabilities:
Increase in accounts receivable................. (4,295) (1,574)
Decrease in inventory........................... 694 150
Increase in prepaid expenses and other assets... (4,278) (1,498)
(Decrease) increase in current liabilities...... (3,301) 3,611
---------- ----------
Net cash provided by operating activities......... 6,240 14,268
---------- ----------
Cash flow from investing activities:
Capital expenditures................................ (6,270) (1,048)
Additions to intangibles ........................... (1,050) (511)
Purchases of short-term investments................. (11,500) (41,176)
Sales of short-term investments..................... 14,675 37,842
---------- ----------
Net cash used in investing activities............. (4,145) (4,893)
---------- ----------
Cash flow from financing activities:
Repayments of long-term debt........................ (675) (205)
Net proceeds from issuance of common stock under
employee plans...................................... 1,059 536
---------- ----------
Net cash provided by financing activities......... 384 331
---------- ----------
Net increase in cash and cash equivalents............. 2,479 9,706
Cash and cash equivalents at beginning of period...... 45,309 51,538
---------- ----------
Cash and cash equivalents at end of period............ $ 47,788 $ 61,244
========== ==========
The accompanying notes are an integral part of these financial statements.
Page 5
NATIONAL INSTRUMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Basis of Presentation
The accompanying unaudited financial statements should be read in conjunction
with the consolidated financial statements and notes thereto for the year ended
December 31, 1999, included in the Company's annual report on Form 10-K, filed
with the Securities and Exchange Commission. In the opinion of management, the
accompanying consolidated financial statements reflect all adjustments
(consisting only of normal recurring items) considered necessary to present
fairly the financial position of National Instruments Corporation and its
consolidated subsidiaries at March 31, 2000 and December 31, 1999, and the
results of operations and cash flows for the three-month periods ended March 31,
2000 and 1999. Operating results for the three-month period ended March 31, 2000
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000.
NOTE 2 - 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. Common share equivalents include stock options. The number of common
share equivalents outstanding relating to stock options is computed using the
treasury stock method.
The reconciliation of the denominators used to calculate basic EPS and diluted
EPS for the three-month periods ended March 31, 2000 and 1999, respectively, are
as follows (in thousands):
(unaudited)
March 31,
2000 1999
---------- ----------
Weighted average shares outstanding-basic 50,112 49,484
Plus: Common share equivalents
Stock options 3,303 1,855
---------- ----------
Weighted average shares outstanding-diluted 53,415 51,339
========== ==========
At March 31, 1999, options to acquire 1,363,500 shares of common stock were
excluded in the computations of diluted EPS because the effect of including the
options would have been anti-dilutive. At March 31, 2000, there were no
anti-dilutive options outstanding.
NOTE 3 - Inventories
Inventories consist of the following (in thousands):
March 31, December 31,
2000 1999
(unaudited)
----------- ------------
Raw materials $ 9,810 $ 11,115
Work-in-process 1,125 2,402
Finished goods 14,532 12,644
----------- ------------
$ 25,467 $ 26,161
=========== ============
NOTE 4 - Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income". The Company's comprehensive income is
comprised of net income, foreign currency translation adjustments and unrealized
gains and losses on certain investments in debt and equity securities.
Comprehensive income for the quarters ended March 31, 2000 and 1999 is $13.3
million and $10.4 million, respectively, and included other comprehensive income
of $639,000 and $393,000 for the quarters ended March 31, 2000 and 1999,
respectively.
Page 6
NOTE 5 - Accounting for Derivatives and Hedging Activities
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," on January 1, 1999. In accordance with the transition
provisions of SFAS 133, the Company recorded a net-of-tax cumulative-effect type
adjustment of $552,000 in current earnings to recognize the fair value of its
derivatives designated as cash-flow hedging instruments at the date of adoption.
All of the Company's derivative instruments are recognized on the balance sheet
at their fair value. The Company currently uses foreign currency forward and
purchased option contracts to hedge its exposure to material foreign currency
denominated receivables and planned net foreign currency cash flows.
On the date the derivative contract is entered into, the Company designates its
derivative as either a hedge of the fair value of a recognized asset or
liability ("fair value" hedge), as a hedge of the variability of cash flows to
be received ("cash flow" hedge), or as a foreign-currency cash flow hedge
("foreign currency" hedge). Changes in the fair value of a derivative that is
highly effective as - and that is designated and qualifies as - a fair-value
hedge, along with the loss or gain on the hedged asset or liability that is
attributable to the hedged risk (including losses or gains on firm commitments),
are recorded in current-period earnings. Changes in the fair value of a
derivative that is highly effective as - and that is designated and qualifies as
- - a cash-flow hedge are recorded in other comprehensive income, until earnings
are affected by the variability of cash flows. Changes in the fair value of
derivatives that are highly effective as - and that are designated and qualify
as - foreign-currency hedges are recorded in either current-period earnings or
other comprehensive income, depending on whether the hedge transaction is a
fair-value hedge (e.g., a hedge of a firm commitment that is to be settled in a
foreign currency) or a cash-flow hedge (e.g., a foreign-currency-denominated
forecasted transaction). All of the Company's derivative instruments at March
31, 2000 were designated as either foreign-currency fair value hedges or
foreign-currency cash flow hedges.
The Company formally documents all relationships between hedging instruments and
hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives that are designated as fair-value, cash-flow, or foreign-currency
hedges to specific assets and liabilities on the balance sheet or to specific
firm commitments or forecasted transactions. The Company also formally assesses,
both at the hedge's inception and on an ongoing basis, whether the derivatives
that are used in hedging transactions are highly effective in offsetting changes
in fair values or cash flows of hedged items. When it is determined that a
derivative is not highly effective as a hedge or that it has ceased to be a
highly effective hedge, the Company discontinues hedge accounting prospectively,
as discussed below.
The Company discontinues hedge accounting prospectively when (1) it is
determined that the derivative is no longer effective in offsetting changes in
the fair value or cash flows of a hedged item (including firm commitments or
forecasted transactions); (2) the derivative expires or is sold, terminated, or
exercised; (3) the derivative is dedesignated as a hedge instrument, because it
is unlikely that a forecasted transaction will occur; (4) the hedged firm
commitment no longer meets the definition of a firm commitment; or (5)
management determines that designation of the derivative as a hedge instrument
is no longer appropriate.
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair-value hedge, the derivative
will continue to be carried on the balance sheet at its fair value, and the
hedged asset or liability will no longer be adjusted for changes in fair value.
When hedge accounting is discontinued because the hedged item no longer meets
the definition of a firm commitment, the derivative will continue to be carried
on the balance sheet at its fair value, and any asset or liability that was
recorded pursuant to recognition of the firm commitment will be removed from the
balance sheet and recognized as a gain or loss in current-period earnings. When
hedge accounting is discontinued because it is probable that a forecasted
transaction will not occur, the derivative will continue to be carried on the
balance sheet at its fair value, and gains and losses that were accumulated in
other comprehensive income will be recognized immediately in earnings. In all
other situations in which hedge accounting is discontinued, the derivative will
be carried at its fair value on the balance sheet, with changes in its fair
value recognized in current-period earnings.
Page 7
NOTE 6 - Litigation
On May 2, 2000, the Company was served by Cognex Corporation, asserting patent
infringement of two Cognex patents, copyright infringement, trademark
infringement and unfair competition. Cognex seeks preliminary and permanent
injunctive relief, actual monetary damages in an unspecified amount, and
attorney's fees and costs. The Company intends to defend this lawsuit
vigorously. The Company is unable to predict the outcome of the litigation at
this time. Based on the facts we have reviewed to date, management does not
expect the resolution of this matter to have a material adverse effect on the
Company's business, results of operations or financial condition.
Page 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Any statements contained herein regarding the
future financial performance or operations of the Company (including, without
limitation, statements to the effect that the Company "expects," "plans," "may,"
"will," "projects," "continues," or "estimates" or other variations thereof or
comparable terminology or the negative thereof) should be considered
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements as a result of a number of important
factors. For a discussion of important factors that could affect the Company's
results, please refer to the Issues and Outlook section and financial statement
line item discussions below. Readers are also encouraged to refer to the
Company's Annual Report on Form 10-K for further discussion of the Company's
business and the risks and opportunities attendant thereto.
Results of Operations
The following table sets forth, for the periods indicated, the percentage of
net sales represented by certain items reflected in the Company's consolidated
statements of income:
Three Months Ended
March 31,
-------------------------
2000 1999
---------- ----------
Net sales:
North America 51.5% 52.1%
Europe 32.9 32.1
Asia Pacific 15.6 15.8
---------- ----------
Consolidated net sales 100.0 100.0
Cost of sales 23.6 23.0
---------- ----------
Gross profit 76.4 77.0
Operating expenses:
Sales and marketing 37.0 36.6
Research and development 13.1 12.6
General and administrative 7.1 7.2
---------- ----------
Total operating expenses 57.2 56.4
---------- ----------
Operating income 19.2 20.6
Other income (expense):
Interest income, net 1.3 1.2
Net foreign exchange loss (0.7) (0.8)
---------- ----------
Income before income taxes and cumulative effect
of account change 19.8 21.0
Provision for income taxes 6.3 6.7
---------- ----------
Income before cumulative effect of accounting
change 13.5 14.3
Cumulative effect of accounting change, net of tax -- (0.7)
---------- ----------
Net income 13.5% 13.6%
========== ==========
Net Sales. Consolidated net sales for the first quarter of 2000 increased by
$20.4 million or 28% over the comparable prior year quarter. The increase in
sales is primarily attributable to the introduction of new and upgraded
products, increased market acceptance of the Company's products in each of the
geographical areas in which the Company operates, and an expanded customer base.
North American sales in the first quarter of 2000 increased by 26% over the
first quarter of 1999.
Sales outside of North America, as a percentage of consolidated sales for the
quarter ended March 31, 2000, increased to 48.5% from 47.9% in the comparable
1999 period as a result of strong sales in both Europe and Asia Pacific.
Compared to 1999, the Company's European sales increased by 31% to $31.0 million
for the quarter ended March 31, 2000. Sales in Asia Pacific increased by 26% to
$14.7 million in the quarter ended March 31, 2000 compared to 1999. The Company
expects sales outside of North America to continue to represent a significant
portion of its revenue.
Page 9
The Company's international sales are subject to inherent risks, including
fluctuations in local economies; difficulties in staffing and managing foreign
operations; greater difficulty in accounts receivable collection; costs and
risks of localizing products for foreign countries; unexpected changes in
regulatory requirements, tariffs and other trade barriers; difficulties in the
repatriation of earnings and burdens of complying with a wide variety of foreign
laws. The Company's sales outside of North America are denominated in local
currencies, and accordingly, the Company is subject to the risks associated with
fluctuations in currency rates. In particular, increases in the value of the
dollar against foreign currencies decrease the U.S. dollar value of foreign
sales requiring the Company either to increase its price in the local currency,
which could render the Company's product prices noncompetitive, or to suffer
reduced revenues and gross margins as measured in U.S. dollars. These dynamics
have adversely affected revenue growth in international markets in previous
years. The Company's foreign currency hedging program includes both foreign
currency forward and purchased option contracts to reduce the effect of exchange
rate fluctuations. However, the hedging program will not eliminate all of the
Company's foreign exchange risks. (See "Net Foreign Exchange Gain/Loss" below).
Sales made by the Company's direct sales offices in Europe and Asia Pacific
are denominated in local currencies, and accordingly, the US dollar equivalent
of these sales is affected by changes in the weighted average value of the US
dollar. This weighted average is calculated as the percentage change in the
value of the currency relative to the US dollar, multiplied by the proportion of
international sales recorded in the particular currency. Between the first
quarter of 1999 and the first quarter of 2000 the weighted average value of the
US dollar increased by 2.6%, causing an equivalent decrease in the US dollar
value of the Company's foreign currency sales and expenses. If the weighted
average value of the US dollar in the first quarter of 2000 had been the same as
that in the first quarter of 1999, the Company's sales for the first quarter of
2000 would have been $95.3 million, a 29% increase over the first quarter of
1999. This effect is 1.2% of consolidated net sales in the aggregate. European
sales for the first quarter of 2000 would have been $32.9 million, a 39%
increase in first quarter 2000 sales over first quarter 1999. Asia Pacific sales
for the first quarter of 2000 would have been $13.9 million, a 20% increase in
first quarter 2000 sales over first quarter 1999 sales. Since most of the
Company's international operating expenses are also incurred in local
currencies, the change in exchange rates had the effect of decreasing operating
expenses by $431,000 for the quarter ended March 31, 2000.
Gross Profit. As a percentage of net sales, gross profit decreased to 76.4%
for the first quarter of 2000 from 77.0% for the first quarter of 1999. The
marketplace for the Company's products dictates that many of the Company's
products be shipped very quickly after an order is received. As a result, the
Company is required to maintain significant inventories. Therefore, inventory
obsolescence is a risk for the Company due to frequent engineering changes,
shifting customer demand, the emergence of new industry standards and rapid
technological advances including the introduction by the Company or its
competitors of products embodying new technology. While the Company maintains
valuation allowances for excess and obsolete inventory and management continues
to monitor the adequacy of such valuation allowances, there can be no assurance
that such valuation allowances will be sufficient.
The Company believes that with the addition of its fourth production line put
in place in the first quarter of 2000 its manufacturing capacity will be
adequate to meet anticipated needs for 2000.
Sales and Marketing. Sales and marketing expenses for the first quarter of
2000 increased to $34.8 million, a 29% increase, as compared to the first
quarter of 1999. As a percentage of net sales, sales and marketing expenses were
37.0% and 36.6% for the three months ended March 31, 2000 and 1999,
respectively. The increase in these expenses in absolute dollar amounts and as a
percentage of revenue is primarily attributable to programs to increase the
Company's international presence in both the European and Asia Pacific markets,
increase in sales and marketing personnel both internationally and in North
America, increased marketing for new products and an increase in Web marketing
and sales activities. The Company expects sales and marketing expenses in future
periods to increase in absolute dollars, and to fluctuate as a percentage of
sales based on initial marketing and advertising campaign costs associated with
major new product releases and entry into new market areas, investment in the
Web sales and marketing efforts, increasing product demonstration costs and the
timing of domestic and international conferences and trade shows.
Page 10
Research and Development. Research and development expenses increased to
$12.3 million for the quarter ended March 31, 2000, a 33% increase, as compared
to $9.3 million for the three months ended March 31, 1999. As a percentage of
net sales, research and development expenses increased to 13.1% for the quarter
ended March 31, 2000, from 12.6% for the quarter ended March 31, 1999. The
increase in research and development costs in absolute amounts and as a
percentage of sales in each period was primarily due to increases in personnel
costs from hiring of additional product development engineers. The Company
believes that a significant, on-going investment in research and development is
required to remain competitive.
The Company capitalizes software development costs in accordance with the
SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased,
or Otherwise Marketed." The Company amortizes such costs over the related
product's estimated economic life, generally three years, beginning when a
product becomes available for general release. Software amortization expense
totaled $602,000 and $589,000 for the quarters ended March 31, 2000 and 1999,
respectively. Software development costs capitalized were $990,000 and $386,000
for the quarters ended March 31, 2000 and 1999, respectively. The amounts
capitalized in the first quarter of 2000 related to the development of LabVIEW
6.0 and NI DAQ 6.7. During the quarter ended March 31, 2000, the Company
amortized $161,000 of goodwill related to the acquisition of GfS Systemtechnik
GmbH on August 31, 1999.
General and Administrative. General and administrative expenses for the
first quarter ended March 31, 2000 increased 26% to $6.7 million from $5.3
million for the comparable prior year period. As a percentage of net sales,
general and administrative expenses declined to 7.1% for the first quarter of
2000 as compared to 7.2% for the first quarter of 1999. The Company's general
and administrative expenses increased in absolute dollars mainly due to
additional personnel. The Company expects that general and administrative
expenses in future periods will increase in absolute amounts and will fluctuate
as a percentage of net sales.
Interest Income, Net. Net interest income in the first quarter of 2000
increased to $1.3 million from $942,000 in the first quarter of 1999. Net
interest income has represented approximately one percent of net sales and has
fluctuated as a result of investment balances, bank borrowings and interest
terms thereon.
Net Foreign Exchange Gain (Loss). The Company experienced net foreign
exchange losses in the first quarter of 2000 of $704,000 compared to losses of
$579,000 in the first quarter of 1999. These results are attributable to
movements between the US dollar and the local currencies in countries in which
the Company's sales subsidiaries are located. The increase in net foreign
exchange losses recognized in the first quarter of 2000 is mainly due to the
weakening of the euro and yen, which resulted in higher losses in 2000 than it
did in the first quarter of 1999. The Company recognizes the local currency as
the functional currency of its international subsidiaries. To minimize this
foreign currency risk the Company engages in hedging activities by utilizing
foreign currency forward exchange and option contracts.
The Company utilizes foreign currency forward exchange contracts to
economically hedge a majority of its foreign currency-denominated receivables in
order to reduce its exposure to significant foreign currency fluctuations. The
Company typically limits the duration of its foreign currency forward exchange
contracts to 90 days.
The Company utilizes foreign currency forward exchange contracts and foreign
currency purchased option contracts in order to reduce its exposure to
fluctuations in future net foreign currency cash flows. The Company's policy
allows for the purchase of these contracts for up to 90% of its risk and limits
the duration of these contracts to 24 months. It also requires that the foreign
currency purchased option contracts be purchased 5% "out-of-the-money." As a
result, the Company's hedging activities only partially address its risks in
foreign currency transactions, and there can be no assurance that this strategy
will be successful. The Company does not invest in contracts for speculative
purposes. The Company's hedging strategy has reduced the foreign exchange losses
by $2.1 million for the three-month period ended March 31, 2000.
Effective January 1, 1999, the Company elected to adopt SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." (See Note 5 of
Notes to Consolidated Financial Statements.)
Page 11
Provision for Income Taxes. The provision for income taxes reflects an
effective tax rate of 32% for the three months ended March 31, 2000 and 1999. As
of March 31, 2000, seven of the Company's subsidiaries had available, for income
tax purposes, foreign net operating loss carryforwards of approximately $3.6
million, of which $2.5 million expires between 2002 and 2008. The remaining $1.1
million of loss carryforwards may be carried forward indefinitely to offset
future taxable income in the related tax jurisdictions.
Liquidity and Capital Resources
The Company is currently financing its operations and capital expenditures
through cash flow from operations. At March 31, 2000, the Company had working
capital of approximately $183.7 million compared to $173.8 million at December
31, 1999.
Accounts receivable increased to $62.6 million at March 31, 2000 from $58.3
million at December 31, 1999. Days sales outstanding increased to 61 at March
31, 2000 compared to 57 at December 31, 1999. Consolidated inventory balances
decreased to $25.5 million at March 31, 2000 from $26.2 million at December 31,
1999. Inventory turns of 3.5 represent a slight decrease from turns of 3.6 at
December 31, 1999. Cash used in the first three months of 2000 for the purchase
of the property and equipment totaled $6.3 million and for the capitalization of
software development costs totaled $990,000.
The Company is currently planning to break ground for an office building
("Mopac C") to be located on the North Austin campus. It is currently
anticipated that a significant portion of the construction costs will be paid
out of the Company's existing working capital with any remaining costs being
funded through credit from the Company's current financial institutions. The
Company estimates the total cost for the new building, including furniture,
fixtures and equipment, will range from $58 million to $62 million with
approximately $15.5 million expected to be incurred during 2000 and the
remainder in 2001. In October of 2000, the Company plans to enter into firm
commitments of approximately $60 million for the new building. The actual level
of spending may vary depending on a variety of factors, including unforeseen
difficulties in construction. Upon completion of the Mopac C building, the
Company intends to vacate its existing 136,000 sq. ft. Millenium office
building. The Company intends to lease the Millenium building to a third party.
The Company currently expects to fund expenditures for capital requirements
as well as liquidity needs created by changes in working capital from a
combination of available cash and short-term investment balances, internally
generated funds, and financing arrangements with its current financial
institutions. The Company has a $28.5 million credit agreement with Bank of
America N.A. which consists of (i) a $20.0 million revolving line of credit, and
(ii) an $8.5 million manufacturing facility loan. As of March 31, 2000, the
Company had no outstanding balance on the revolving line of credit and had a
balance of $4.1 million on the manufacturing facility loan. The revolving line
of credit expires on December 29, 2000. The Company's credit agreements contain
certain financial covenants and restrictions as to various matters, including
the bank's prior approval of significant mergers and acquisitions. Borrowings
under the line of credit are collateralized by substantially all of the
Company's assets.
The Company believes that the cash flow from operations, if any, existing
cash balances, short-term investments and credit available under the Company's
existing credit facilities, will be sufficient to meet its cash requirements for
at least the next twelve months. Cash requirements for periods beyond the next
twelve months depend on the Company's profitability, its ability to manage
working capital requirements and its rate of growth.
Market Risk
The Company is exposed to a variety of risks, including foreign currency
fluctuations and changes in the market value of its investments. In the normal
course of business, the Company employs established policies and procedures to
manage its exposure to fluctuations in foreign currency values and changes in
the market value of its investments.
Page 12
Foreign Exchange Risk Management. The Company's objective in managing its
exposure to foreign currency exchange rate fluctuations is to reduce the impact
of adverse fluctuations in such exchange rates on the Company's earnings and
cash flow. Accordingly, the Company utilizes purchased foreign currency option
contracts and forward contracts to hedge its exposure on anticipated
transactions and firm commitments. The principal currencies hedged are the euro,
British pound and Japanese yen. The Company monitors its foreign exchange
exposures regularly to ensure the overall effectiveness of its foreign currency
hedge positions. However, there can be no assurance the Company's foreign
currency hedging activities will substantially offset the impact of fluctuations
in currency exchanges rates on its results of operations and financial position.
Based on the foreign exchange instruments outstanding at March 31, 2000, an
adverse change (defined as 20% in the Asian currencies, primarily the yen, and
10% in all other currencies) in exchange rates would result in a decline in
income before taxes of less than $18 million. Additionally, as the Company
utilizes foreign currency instruments for hedging anticipated and firmly
committed transactions, management believes that a loss in fair value for those
instruments will be substantially offset by increases in the value of the
underlying exposure.
Short-term Investments. The fair value of the Company's investments in
marketable securities at March 31, 2000 was $80.4 million. The Company's
investment policy is to manage its investment portfolio to preserve principal
and liquidity while maximizing the return on the investment portfolio through
the full investment of available funds. The Company diversifies the marketable
securities portfolio by investing in multiple types of investment-grade
securities. The Company's investment portfolio is primarily invested in
short-term securities with at least an investment grade rating to minimize
interest rate and credit risk as well as to provide for an immediate source of
funds. Based on the Company's investment portfolio and interest rates at March
31, 2000, a 100 basis point increase or decrease in interest rates would result
in a decrease or increase of approximately $400,000, respectively, in the fair
value of the investment portfolio, which is not significantly different from
December 31, 1999. Although changes in interest rates may affect the fair value
of the investment portfolio and cause unrealized gains or losses, such gains or
losses would not be realized unless the investments are sold.
Issues and Outlook
Fluctuations in Quarterly Results. The Company's quarterly operating results
have fluctuated in the past and may fluctuate significantly in the future due to
a number of factors, including: changes in the mix of products sold; the
availability and pricing of components from third parties (especially sole
sources); the timing of orders; level of pricing of international sales;
fluctuations in foreign currency exchange rates; the difficulty in maintaining
margins, including the higher margins traditionally achieved in international
sales; and changes in pricing policies by the Company, its competitors or
suppliers. Specifically, if the local currencies in which the Company sells
weaken against the US dollar, and if the local sales prices cannot be raised,
the Company will experience a deterioration of its gross and net profit margins.
The Company expects the increased costs of the fourth manufacturing line and an
adverse change in the European foreign currency exchange rates to have a
negative effect on gross and net profit margins in future quarters.
As has occurred in the past and as may be expected to occur in the future,
new software products of the Company or new operating systems of third parties
on which the Company's products are based, often contain bugs or errors that can
result in reduced sales and/or cause the Company's support costs to increase,
either of which could have a material adverse impact on the Company's operating
results. Furthermore, the Company has significant revenues from customers in
industries such as semiconductors, automated test equipment, telecommunications,
aerospace, defense and automotive which are cyclical in nature. Downturns in
these industries could have a material adverse effect on the Company's operating
results.
In recent years, the Company's revenues have been characterized by
seasonality, with revenues typically being relatively constant in the first,
second and third quarters, growing in the fourth quarter and being relatively
flat or declining from the fourth quarter of the year to the first quarter of
the following year. The Company's results of operations in the third quarter of
2000 may be adversely affected by lower sales levels in Europe, which typically
occur during the summer months. The Company believes the seasonality of its
revenue results from the international mix of its revenue and the variability of
the budgeting and purchasing cycles of its customers throughout each
international region. In addition, total operating expenses have in the past
tended to be higher in the second and third quarters of each year, due to
college recruiting and significantly increased intern personnel expenses.
Page 13
New Product Introductions and Market Acceptance. The market for the Company's
products is characterized by rapid technological change, evolving industry
standards, changes in customer needs and frequent new product introductions, and
is therefore highly dependent upon timely product innovation. The Company's
success is dependent in part on its ability to successfully develop and
introduce new and enhanced products on a timely basis to replace declining
revenues from older products, and on increasing penetration in international
markets. In the past, the Company has experienced significant delays between the
announcement and the commercial availability of new products. Any significant
delay in releasing new products could have a material adverse effect on the
ultimate success of a product and other related products and could impede
continued sales of predecessor products, any of which could have a material
adverse effect on the Company's operating results. There can be no assurance
that the Company will be able to introduce new products in accordance with
announced release dates, that new products will achieve market acceptance or
that any such acceptance will be sustained for any significant period. Failure
of new products to achieve or sustain market acceptance could have a material
adverse effect on the Company's operating results. Moreover, there can be no
assurance that the Company's international sales will continue at existing
levels or grow in accordance with the Company's efforts to increase foreign
market penetration.
Risks associated with Increased Development of Web site. The Company has
devoted significant resources in developing its Web site as a key marketing and
sales tool and expects to continue to do so in the future. There can be no
assurance that the Company will be successful in its attempt to leverage the Web
to increase sales. The Company hosts its own Web site internally. Failure to
successfully maintain the Web site and to protect it from hackers could have a
significant impact on the Company's results.
Operation in Intensely Competitive Markets. The markets in which the Company
operates are characterized by intense competition from numerous competitors,
some of which are divisions of large corporations having far greater resources
than the Company, and the Company expects to face further competition from new
market entrants in the future. A key competitor is Agilent Technologies Inc.
("Agilent"). Agilent offers its own line of instrument controllers and also
offers hardware and software add-on products for third-party desktop computers
and workstations that provide solutions that directly compete with the Company's
virtual instrumentation products. Agilent is aggressively advertising and
marketing products that are competitive with the Company's products. Because of
Agilent's strong position in the instrumentation business, changes in its
marketing strategy or product offerings could have a material adverse effect on
the Company operating results.
The Company believes its ability to compete successfully depends on a number
of factors both within and outside its control, including: new product
introductions by competitors; product pricing; quality and performance; success
in developing new products; adequate manufacturing capacity and supply of
components and materials; efficiency of manufacturing operations; effectiveness
of sales and marketing resources and strategies; strategic relationships with
other suppliers; timing of new product introductions by the Company; protection
of the Company's products by effective use of intellectual property laws;
general market and economic conditions; and government actions throughout the
world. There can be no assurance that the Company will be able to compete
successfully in the future.
Management Information Systems. The Company relies on three primary regional
centers for its management information systems. As with any information system,
unforeseen issues may arise that could affect management's ability to receive
adequate, accurate and timely financial information which in turn could inhibit
effective and timely decisions. Furthermore, it is possible that one or more of
the Company's three regional information systems could experience a complete or
partial shutdown. If this shutdown occurred near the end of a quarter it could
impact the Company's product shipments and revenues, as product distribution is
heavily dependent on the integrated management information systems in each
region. Accordingly, operating results in that quarter would be adversely
impacted due to the shipments, which would not occur until the following period.
The Company is working to achieve reliable regional management information
systems to control costs and improve the ability to deliver its products in
substantially all of its direct markets worldwide. No assurance can be given
that the Company's efforts will be successful. The failure to receive adequate,
accurate and timely financial information could inhibit management's ability to
make effective and timely decisions.
Page 14
Dependence on Key Suppliers. The Company's manufacturing processes use large
volumes of high-quality components and subassemblies supplied by outside
sources. Several of these components are available through sole or limited
sources. Sole-source components purchased by the Company include custom
application-specific integrated circuits ("ASICs") and other components. The
Company has in the past experienced delays and quality problems in connection
with sole-source components, and there can be no assurance that these problems
will not recur in the future. Accordingly, the failure to receive sole-source
components from suppliers could result in a material adverse effect on revenues
and results of operations.
Proprietary Rights and Intellectual Property Litigation. The Company's
success depends in part on its ability to obtain and maintain patents and other
proprietary rights relative to the technologies used in its principal products.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may have in the past infringed or violated certain of the Company's
intellectual property rights. The Company is currently litigating a complaint in
federal court alleging patent infringement by the products of the defendant. As
is typical in the industry, the Company from time to time may be notified that
it is infringing certain patent or intellectual property rights of others. On
May 2, 2000, the Company was served by Cognex Corporation, asserting patent
infringement of two Cognex patents, copyright infringement, trademark
infringement and unfair competition. Cognex seeks preliminary and permanent
injunctive relief, actual monetary damages in an unspecified amount, and
attorney's fees and costs. The Cognex litigation, invalidity claims in response
to the previously mentioned patent infringement complaint initiated by the
Company, and any other intellectual property litigation initiated in the future
may cause significant litigation expense, liability and a diversion of
management's attention which may have a material adverse effect on results of
operations.
Dependence on Key Management and Technical Personnel. The Company's success
depends to a significant degree upon the continued contributions of its key
management, sales, marketing, research and development and operational
personnel, including Dr. Truchard, Mr. Kodosky and other members of senior
management and key technical personnel. The Company has no agreements providing
for the employment of any of its key employees for any fixed term and the
Company's key employees may voluntarily terminate their employment with the
Company at any time. The loss of the services of one or more of the Company's
key employees in the future could have a material adverse effect on operating
results. The Company also believes its future success will depend in large part
upon its ability to attract and retain additional highly skilled management,
technical, marketing, research and development, and operational personnel with
experience in managing large and rapidly changing companies, including companies
acquired through acquisition, as well as training, motivating and supervising
the employees. In addition, the recruiting environment for software engineering,
sales and other technical professionals is very competitive. Competition for
qualified software engineers is particularly intense and is likely to result in
increased personnel costs. Failure to attract or retain qualified software
engineers could have an adverse effect on the Company's operating results. The
Company also recruits and employs foreign nationals to achieve its hiring goals
primarily for entry-level engineering and software positions. There can be no
guarantee that the Company will continue to be able to recruit foreign nationals
to the current degree if government requirements for temporary and permanent
residence become increasingly restrictive. These factors further intensify
competition for key personnel, and there can be no assurance that the Company
will be successful in retaining its existing key personnel or attracting and
retaining additional key personnel. Failure to attract and retain a sufficient
number of technical personnel could have a material adverse effect on the
results of operations.
The Year 2000. During fiscal years 1999 and 1998, the Company had a Year 2000
project in place to address the potential exposures related to the impact on our
computer systems and products for the Year 2000 and beyond. As of December 31,
1999, all scheduled Y2K work was completed. As of the date hereof, the Company
encountered no material Y2K system problems and no impact on operations or
expenses has occurred. However, the success to date of its Year 2000 efforts
cannot guarantee that a Year 2000 problem affecting third parties upon which it
relies will not become apparent in the future.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Response to this item is included in "Item 2 - Management's Discussion and
Analysis of Financial Conditions and Results of Operations - Market Risk" above.
Page 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 2, 2000, the Company was served by Cognex Corporation in the United
States District Court for the District of Delaware. Cognex asserted the
following claims: patent infringement of two Cognex patents, copyright
infringement, trademark infringement, federal unfair competition, Delaware
unfair competition, and Massachusetts statutory unfair competition. Cognex seeks
preliminary and permanent injunctive relief, actual monetary damages in an
unspecified amount, and attorney's fees and costs. A trial has not yet been
scheduled in this action. The Company intends to defend this lawsuit vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
11.1 Computation of Earnings Per Share
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 2000.
Page 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL INSTRUMENTS CORPORATION
Registrant
BY: /s/ Alex Davern
------------------------------
Alex Davern
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
Dated: May 15, 2000
Page 17
NATIONAL INSTRUMENTS CORPORATION
INDEX TO EXHIBITS
Exhibit No. Description Page
----------- ----------- ----
11.1 Statement Regarding Computation 19
of Earnings per Share
Page 18