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: September 30, 2001 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
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NATIONAL INSTRUMENTS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-1871327
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11500 North MoPac Expressway
Austin, Texas 78759
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(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 October 23, 2001
Common Stock - $0.01 par value 51,118,603
NATIONAL INSTRUMENTS CORPORATION
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets
September 30, 2001 (unaudited) and December 31, 2000 3
Consolidated Statements of Income (unaudited)
Three months and nine months ended September 30, 2001
and 2000 4
Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 17
Item 6 Exhibits and Reports on Form 8-K 17
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, December 31,
2001 2000
------------- ------------
Assets (unaudited)
Current assets:
Cash and cash equivalents.................... $ 74,787 $ 75,277
Short-term investments....................... 88,460 79,525
Accounts receivable, net..................... 53,348 74,704
Inventories, net............................. 34,994 33,292
Prepaid expenses and other current assets.... 20,830 13,499
Deferred income tax, net..................... 7,118 8,262
------------- ------------
Total current assets...................... 279,537 284,559
Property and equipment, net..................... 120,358 84,694
Intangibles and other assets.................... 23,443 20,097
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Total assets.............................. $ 423,338 $ 389,350
============= ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable............................. $ 33,992 $ 30,365
Accrued compensation......................... 14,208 12,720
Accrued expenses and other liabilities....... 7,608 9,923
Income taxes payable......................... 4,174 3,366
Other taxes payable.......................... 5,876 7,977
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Total current liabilities................. 65,858 64,351
Deferred income taxes........................... 3,899 3,976
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Total liabilities......................... 69,757 68,327
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Commitments and contingencies -- --
Stockholders' equity:
Common Stock: par value $0.01; 180,000,000
shares authorized; 50,902,565 and 50,634,603
shares issued and outstanding, respectively.. 509 506
Additional paid-in capital...................... 72,331 69,534
Retained earnings............................... 283,068 254,006
Accumulated other comprehensive loss............ (2,327) (3,023)
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Total stockholders' equity................ 353,581 321,023
------------- ------------
Total liabilities and stockholders' equity $ 423,338 $ 389,350
============= ============
The accompanying notes are an integral part of these financial statements.
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net sales........................... $ 85,062 $102,247 $290,849 $295,902
Cost of sales....................... 23,288 24,417 75,789 70,687
--------- --------- --------- ---------
Gross profit...................... 61,774 77,830 215,060 225,215
--------- --------- --------- ---------
Operating expenses:
Sales and marketing.............. 34,275 37,302 109,167 106,506
Research and development......... 14,920 14,690 45,950 40,788
General and administrative....... 6,070 7,434 21,459 21,289
--------- --------- --------- ---------
Total operating expenses...... 55,265 59,426 176,576 168,583
--------- --------- --------- ---------
Operating income.............. 6,509 18,404 38,484 56,632
Other income (expense):
Interest income, net............. 1,303 1,543 4,574 4,068
Net foreign exchange gain (loss). 341 (630) (921) (1,756)
Other income..................... 206 90 601 310
--------- --------- --------- ---------
Income before income taxes.......... 8,359 19,407 42,738 59,254
Provision for income taxes.......... 2,674 6,210 13,676 18,961
--------- --------- --------- ---------
Net income.................... $ 5,685 $ 13,197 $ 29,062 $ 40,293
========= ========= ========= =========
Basic earnings per share............ $ 0.11 $ 0.26 $ 0.57 $ 0.80
========= ========= ========= =========
Weighted average shares
outstanding-basic.................. 50,956 50,364 50,848 50,247
========= ========= ========= =========
Diluted earnings per share.......... $ 0.11 $ 0.25 $ 0.54 $ 0.75
========= ========= ========= =========
Weighted average shares
outstanding-diluted................ 53,288 53,612 53,682 53,531
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
--------------------------
2001 2000
------------ ------------
Cash flow from operating activities:
Net income...................................... $ 29,062 $ 40,293
Adjustments to reconcile net income to cash
provided by operating activities:
Charges to income not requiring cash outlays:
Depreciation and amortization.............. 12,393 12,064
Provision for deferred income taxes........ 1,067 1,999
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable. 21,356 (6,837)
Increase in inventory...................... (1,702) (5,460)
Increase in prepaid expense and other assets (8,971) (8,186)
Increase in current liabilities............ 1,507 5,474
------------ ------------
Net cash provided by operating activities.... 54,712 39,347
------------ ------------
Cash flow from investing activities:
Capital expenditures............................ (45,149) (16,643)
Additions to intangibles ....................... (3,918) (5,073)
Purchases of short-term investments............. (110,790) (68,679)
Sales of short-term investments................. 101,855 63,747
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Net cash used in investing activities........ (58,002) (26,648)
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Cash flow from financing activities:
Repayments of long-term debt.................... -- (783)
Proceeds from issuance of common stock, net of
repurchases..................................... 2,800 5,208
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Net cash provided by financing activities.... 2,800 4,425
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Net (decrease) increase in cash and cash equivalents (490) 17,124
Cash and cash equivalents at beginning of period... 75,277 45,309
------------ ------------
Cash and cash equivalents at end of period......... $ 74,787 $ 62,433
============ ============
The accompanying notes are an integral part of these financial statements.
NATIONAL INSTRUMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto for the
year ended December 31, 2000, 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 September 30, 2001 and December 31, 2000, and
the results of operations for the three-month and nine-month periods ended
September 30, 2001 and 2000, and the cash flows for the nine-month periods ended
September 30, 2001 and 2000. Operating results for the three-month and
nine-month periods ended September 30, 2001 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2001.
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 the basic EPS and
diluted EPS for the three-month and nine-month periods ended September 30, 2001
and 2000, respectively, are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
(unaudited) (unaudited)
2001 2000 2001 2000
---------- ---------- ---------- ----------
Weighted average shares
outstanding-basic............ 50,956 50,364 50,848 50,247
Plus: Common share equivalents
Stock options.............. 2,332 3,248 2,834 3,284
---------- ---------- ---------- ----------
Weighted average shares
outstanding-diluted.......... 53,288 53,612 53,682 53,531
========== ========== ========== ==========
Stock options to acquire 1,541,000 and 1,292,000 shares for the quarters ended
September 30, 2001 and 2000, respectively, and 1,382,000 and 871,000 shares for
the nine months ended September 30, 2001 and 2000, respectively, were not
included in the computations of diluted earnings per share because the effect of
including the stock options would have been anti-dilutive.
NOTE 3 - Inventories
Inventories, net consist of the following (in thousands):
September 30, December 31,
2001 2000
(unaudited)
-------------- --------------
Raw materials $ 17,755 $ 17,298
Work-in-process 716 978
Finished goods 16,523 15,016
-------------- --------------
$ 34,994 $ 33,292
============== ==============
NOTE 4 - Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income" which established standards for reporting,
in addition to net income, comprehensive income and its components including, as
applicable, foreign currency items and unrealized gains and losses on certain
investments in debt and equity securities. Total comprehensive income for the
quarters ended September 30, 2001 and 2000 is $4.7 million and $13.1 million,
respectively, and includes other comprehensive loss of $1.0 million and
$108,000, respectively. For the first nine months of 2001 and 2000,
comprehensive income is $29.8 million and $41.6 million, respectively, and
includes other comprehensive income of $697,000 and $1.3 million, respectively.
NOTE 5 - Segment Information
While the Company sells its products to many different markets, its management
has chosen to organize the Company by geographic areas, and as a result has
determined that it has one reportable segment. Substantially, all of the
interest income, interest expense, depreciation and amortization is recorded in
North America. Net sales, operating income and identifiable assets, classified
by the major geographic areas in which the Company operates, are as follows (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
(unaudited) (unaudited)
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net sales:
Americas:
Unaffiliated customer sales.. $ 44,671 $ 56,838 $ 151,729 $ 159,006
Geographic transfers......... 12,329 13,374 41,591 39,302
---------- ---------- ---------- ----------
57,000 70,212 193,320 198,308
---------- ---------- ---------- ----------
Europe:
Unaffiliated customer sales.. 26,991 30,854 93,879 94,274
---------- ---------- ---------- ----------
Asia Pacific:
Unaffiliated customer sales.. 13,400 14,555 45,241 42,622
---------- ---------- ---------- ----------
Eliminations................... (12,329) (13,374) (41,591) (39,302)
---------- ---------- ---------- ----------
$ 85,062 $ 102,247 $ 290,849 $ 295,902
========== ========== ========== ==========
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
(unaudited) (unaudited)
2001 2000 2001 2000
---------- ---------- ---------- ----------
Operating income:
Americas................... $ 8,583 $ 15,953 $ 34,268 $ 46,243
Europe..................... 7,524 10,456 29,801 32,925
Asia Pacific............... 5,322 6,685 20,365 18,252
Unallocated:
Research and development
expenses.................. (14,920) (14,690) (45,950) (40,788)
---------- ---------- ---------- ----------
$ 6,509 $ 18,404 $ 38,484 $ 56,632
========== ========== ========== ==========
September 30, December 31,
2001 2000
(unaudited)
--------------- ---------------
Identifiable assets:
Americas............... $ 347,175 $ 324,881
Europe................. 60,341 52,056
Asia Pacific........... 11,516 12,413
--------------- ---------------
$ 419,032 $ 389,350
=============== ===============
NOTE 6 - Commitments and Contingencies
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 sought permanent injunctive relief,
actual monetary damages in an unspecified amount, attorney's fees and costs. On
June 21, 2000, the Company filed a response to their lawsuit denying all claims.
In the fourth quarter of 2000, the Company accrued $2.5 million of anticipated
intellectual property defense costs that were probable of being incurred. During
the current quarter ended September 30, 2001, the Company and Cognex settled the
dispute and Cognex dismissed the case with prejudice on August 13, 2001. As a
result, the Company reduced the intellectual property defense cost accrual by
approximately $1.2 million.
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 Nine Months Ended
September 30, September 30,
------------------ ------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net sales:
Americas 52.5% 55.6% 52.2% 53.7%
Europe 31.7 29.5 32.3 31.9
Asia Pacific 15.8 14.9 15.5 14.4
-------- -------- -------- --------
Consolidated net sales 100.0 100.0 100.0 100.0
Cost of sales 27.4 23.9 26.1 23.9
-------- -------- -------- --------
Gross profit 72.6 76.1 73.9 76.1
-------- -------- -------- --------
Operating expenses:
Sales and marketing 40.3 36.5 37.5 36.0
Research and development 17.5 14.4 15.8 13.8
General and administrative 7.1 7.2 7.4 7.2
-------- -------- -------- --------
Total operating expenses 64.9 58.1 60.7 57.0
-------- -------- -------- --------
Operating income 7.7 18.0 13.2 19.1
Other income (expense):
Interest income, net 1.5 1.5 1.6 1.4
Net foreign exchange gain (loss) 0.4 (0.6) (0.3) (0.6)
Other income 0.2 0.1 0.2 0.1
-------- -------- -------- --------
Income before income taxes 9.8 19.0 14.7 20.0
Provision for income taxes 3.1 6.1 4.7 6.4
-------- -------- -------- --------
Net income 6.7% 12.9% 10.0% 13.6%
======== ======== ======== ========
Net Sales. Consolidated net sales decreased by $17.2 million or 16.8% for
the three months ended September 30, 2001 to $85.1 million from $102.2 million
for the three months ended September 30, 2000, and decreased $5.1 million or
1.7% to $290.8 million for the nine months ended September 30, 2001 from $295.9
million for the comparable period in the prior year. The majority of the
decrease in sales is attributable to the approximate 40% decline in the sales of
hardware products that are used to control traditional instruments, which
resulted from the continued worsening of the industrial economy and the severe
deterioration of the test and measurement market.
Sales in the Americas in the third quarter of 2001 decreased by 21% from
the third quarter of 2000 and sales in the Americas for the nine months ended
September 30, 2001 decreased by 5% from the nine months ended September 30,
2000. Sales outside of North America, as a percentage of consolidated sales for
the quarter and nine months ended September 30, 2001 increased to 47.5% from
44.4% and to 47.8% from 46.3% over the comparable 2000 periods as a result of
lower relative sales in the Americas. Compared to 2000, the Company's European
sales decreased by 10.7% to $27.0 million for the quarter ended September 30,
2001 and decreased by 0.4% to $93.9 million for the nine months ended September
30, 2001. Sales in Asia Pacific decreased by 11.8% to $13.4 million for the
quarter ended September 30, 2001 compared to 2000 and increased 6.1% to $45.2
million for the nine months ended September 30, 2001 compared to the same period
in 2000. The Company expects sales outside of North America to continue to
represent a significant portion of its revenue.
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 risk
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. As has occurred
in the past, most recently in the current quarter ended September 30, 2001,
these dynamics have adversely affected revenue growth and profitability in
international markets. 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 U.S. dollar equivalent
of these sales is affected by changes in the weighted average value of the U.S.
dollar. This weighted average is calculated as the percentage change in the
value of the currency relative to the U.S. dollar, multiplied by the proportion
of international sales recorded in the particular currency. Between the third
quarter of 2000 and the third quarter of 2001 the weighted value of the U.S.
dollar increased by 11.2%, causing an equivalent decrease in the U.S. dollar
value of the Company's foreign currency sales and expenses. If the weighted
average value of the U.S. dollar in the third quarter of 2001 had been the same
as that in the third quarter of 2000, the Company's sales for the third quarter
of 2001 would have decreased by 12.7%. European sales for the third quarter of
2001 would have increased by 1% over third quarter 2000. Asia Pacific sales for
the third quarter of 2001 would have decreased by 5% from third quarter 2000
sales. If the weighted average value of the dollar in the nine months ended
September 30, 2001 had been the same as that in the nine months ended September
30, 2000, the Company's year-to-date sales would have increased by 3% over 2000
year-to-date 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 $2.6 million for the nine months ended
September 30, 2001 and by $567,000 for the quarter ended September 30, 2001.
Gross Profit. As a percentage of net sales, gross profit decreased to 72.6%
for the third quarter of 2001 from 76.1% for the third quarter of 2000 and
decreased to 73.9% for the first nine months of 2001 from 76.1% for the
comparable period a year ago. Approximately 60% of the lower margin in the third
quarter of 2001 is attributable to unfavorable foreign exchange rates, and
approximately 40% is attributable to charges resulting from lower sales volume.
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 is currently working to establish a new manufacturing facility
in Hungary in the fourth quarter of 2001. Any delay in making this manufacturing
capacity available could have a material adverse effect on the results of
operations.
Sales and Marketing. Sales and marketing expenses for the third quarter of
2001 decreased to $34.3 million, an 8.1% decrease, as compared to the third
quarter of 2000, and increased 2.5% to $109.2 million for the first nine months
of 2001 from the comparable 2000 period. As a percentage of net sales, sales and
marketing expenses were 40.3% and 36.5% for the quarters ended September 30,
2001 and 2000, respectively, and 37.5% and 36.0% for the nine months ended
September 30, 2001 and 2000, respectively. The increase in these expenses in
absolute dollar amounts for the nine months ended September 30, 2001, is
attributable to increases in sales and marketing personnel both internationally
and in North America. The decrease in sales and marketing expenses in absolute
dollar amounts for the quarter ended September 30, 2001, is attributable to
decreases in marketing literature, advertising and special event 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 recruiting,
initial marketing and advertising campaign costs associated with major new
product releases and entry into new market areas, investment in web sales and
marketing efforts, increasing product demonstration costs and the
timing of domestic and international conferences and trade shows.
Research and Development. Research and development expenses increased to
$14.9 million for the quarter ended September 30, 2001, a 1.6% increase, as
compared to $14.7 million for the three months ended September 30, 2000, and
increased 12.7% to $46.0 million for the nine months ended September 30, 2001
from $40.8 million in the comparable 2000 period. As a percentage of net sales,
research and development expenses represented 17.5% and 14.4% for the third
quarters ended September 30, 2001 and 2000, respectively, and 15.8% and 13.8%
for the nine months ended September 30, 2001 and 2000, respectively. The
increase in research and development costs in absolute amounts and as a
percentage of sales in each period is due to increases in personnel costs from
hiring of additional product development engineers. Research and development
personnel increased from 661 at September 30, 2000 to 728 at September 30, 2001.
The Company plans to continue making a significant investment in research and
development in order 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 useful life, generally three years, beginning when
a product becomes available for general release. Software amortization expense
totaled $802,000 and $680,000 for the quarters ended September 30, 2001 and
2000, respectively, and $2.3 million and $1.9 million during the nine months
ended September 30, 2001 and 2000, respectively. Software development costs
capitalized were $1.2 million and $1.3 million for the quarters ended September
30, 2001 and 2000, respectively, and $3.2 million and $3.7 million for the first
nine months of 2001 and 2000, respectively. The amounts capitalized in the third
quarter and first nine months of 2001 include amounts related to LabVIEW 6.1,
Measurement Studio 6.0 and TestStand 2.0.
General and Administrative. General and administrative expenses for the
third quarter ended September 30, 2001 decreased 18.3% to $6.1 million from $7.4
million for the comparable prior year period. For the first nine months of 2001,
general and administrative expenses increased 0.8% to $21.5 million from $21.3
million for the first nine months of 2000. As a percentage of net sales, general
and administrative expenses decreased to 7.1% for the quarter ended September
30, 2001 from 7.2% for the third quarter of 2000. During the first nine months
of 2001, general and administrative expenses as a percentage of sales increased
to 7.4% from 7.2% in the comparable prior year period. The decrease in general
and administrative expenses for the quarter ended September 30, 2001, from the
comparable prior year period is attributable to reduced intellectual property
defense costs of approximately $1.2 million and to the operational efficiencies
resulting from continued systems improvement. The Company's general and
administrative expense increased in absolute dollars and as a percentage of
sales in the first nine months of 2001 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 third quarter of 2001
decreased to $1.3 million from $1.5 million in the third quarter of 2000 and
increased to $4.6 million from $4.1 million for the first nine months of 2001
and 2000. Net interest income has represented less than two percent of net sales
and has fluctuated as a result of investment balances and interest terms
thereon.
Net Foreign Exchange Gain (Loss). Net foreign exchange gains recognized in
the third quarter of 2001 were $341,000 compared to net foreign exchange losses
of $630,000 recognized in the third quarter of 2000. Net foreign exchange losses
of $921,000 were recognized for the first nine months of 2001 compared to losses
of $1.8 million for the first nine months of 2000. Foreign exchange gains and
losses are attributable to movements between the U.S. dollar and the local
currencies in countries in which the Company's sales subsidiaries are located.
The net foreign exchange gains in the third quarter of 2001 and the decrease in
net foreign exchange losses recognized in the first nine months of 2001 is
mainly due to the strengthening of the U.S. dollar as compared to the comparable
periods in 2000.
The Company utilizes foreign currency forward contracts to 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 "receivables" foreign currency forward contracts to 90 days.
The Company also utilizes foreign currency forward contracts and foreign
currency purchased option contracts in order to reduce its exposure to
fluctuations in future foreign currency cash flows. The Company purchases these
contracts for up to 100% of its forecasted cash flows in selected currencies
(primarily the euro, yen and pound sterling) and limits the duration of these
contracts to 30 months. The foreign currency purchased option contracts are
purchased "at-the-money" or "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 reduced the foreign exchange gains by $587,000
during the quarter ended September 30, 2001, and reduced the foreign exchange
losses by $4.3 million for the nine months ended September 30, 2001.
Provision for Income Taxes. The provision for income taxes reflects an
effective tax rate of 32% for the three and nine months ended September 30, 2001
and 2000, respectively. The effective tax rate is lower than the federal
statutory rate primarily as a result of tax-exempt interest and the foreign
sales corporation benefit. As of September 30, 2001, fourteen of the Company's
subsidiaries had available, for income tax purposes, foreign net operating loss
carryforwards of approximately $6.2 million, of which $1.2 million expires
between 2002 and 2010. The remaining $5.0 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 September 30, 2001, the Company had
working capital of approximately $213.7 million compared to $220.2 million at
December 31, 2000. In the first nine months of 2001, the Company generated $54.7
million of cash provided by operating activities, primarily from net income of
$29.1 million and from the $21.4 million decrease in accounts receivables.
Accounts receivable decreased to $53.3 million at September 30, 2001 from
$74.7 million at December 31, 2000. Days sales outstanding decreased to 57 at
September 30, 2001 compared to 60 at December 31, 2000. Consolidated inventory
balances increased to $35.0 million at September 30, 2001 from $33.3 million at
December 31, 2000. Inventory turns of 2.7 represent a decrease from turns of 3.5
at December 31, 2000. Cash used in the first nine months of 2001 for the
purchase of the property and equipment totaled $45.1 million and for the
capitalization of software development costs totaled $3.2 million.
In October of 2000, the Company began construction of an office building
("Mopac C") 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. The Company estimates the total cost for the
new building, including furniture, fixtures and equipment, will range from $58
million to $62 million. In October of 2000, the Company entered into firm
commitments of approximately $60 million for the new building. The Company has
incurred approximately $34.9 million in construction costs as of September 30,
2001, with the remainder becoming payable over the next 10 months. 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 has signed an agreement to lease the Millenium
building to a third party and currently estimates that the net rental income
from this lease will offset approximately 30% of the projected operating costs
from the Mopac C building.
In May of 2001, the Company began construction of a second manufacturing
facility located in Hungary. The Company estimates that this European
manufacturing facility will be operational by Q4 of 2001, and that by 2003 will
source a significant portion of the Company's international sales. The location
of the facility has a cost base and tax rate significantly lower than in the
U.S., which should have the effect of reducing the cost of manufacturing and
lowering the consolidated tax rate. However, there can be no assurance that the
actual manufacturing costs will be lower. It is currently anticipated that the
construction costs will be paid out of the Company's existing working capital.
The Company estimates the total cost for the new facility, including furniture,
fixtures and equipment, will be approximately $17.0 million. The Company has
incurred approximately $8.3 million in construction costs as of September 30,
2001, with the remainder payable over the next 6 months. The actual level of
spending may vary depending on a variety of factors, including unforeseen
difficulties in construction.
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 and internally
generated funds. As of September 30, 2001, the Company had no debt outstanding
to financial institutions.
The Company believes that its cash flow from operations, if any, existing
cash balances and short-term investments 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.
Foreign Currency Hedging Activities. 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 exchange rates on its results of operations and financial position.
Based on the foreign exchange instruments outstanding at September 30, 2001, an
adverse change (defined as 20% in the Asian currencies and 10% in all other
currencies) in exchange rates would result in a decline in the aggregate fair
market value of all instruments outstanding of approximately $16.9 million.
However, 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 September 30, 2001 was $88.5 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
September 30, 2001, a 100 basis point increase or decrease in interest rates
would result in a decrease or increase of approximately $450,000, respectively,
in the fair value of the investment portfolio, which is not significantly
different from December 31, 2000. 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
U.S./Global Economic Slowdown. As occurred in the current quarter ended
September 30, 2001 and as has occurred in the past, a slowing U.S. economy may
result in decreased demand for automated test equipment, semiconductors and
other products. The markets in which the Company does business may experience
the negative effects of a slowdown in the U.S., and/or Global economies.
Downturns in the U.S. or Global economies could have a material adverse effect
on the Company's operating results.
Budgets. The Company has established an operating budget for the remainder
of 2001. The Company's spending for the remainder of the year could exceed this
budget due to a number of factors; including: additional marketing costs for any
unplanned conferences and tradeshows; increased costs from the over-hiring of
product development engineers or other personnel; increased manufacturing costs
resulting from component supply shortages and/or component price fluctuations;
additional construction costs and/or delays in the construction of the European
manufacturing facility in Hungary; additional litigation expenses related to
intellectual property litigation. Exceeding the established operating budget
could have a material adverse effect on the Company's operating results.
Risk of Component Shortages. As has occurred in the past, most recently in
the quarter ended March 31, 2001, and as may be expected to occur in the future,
supply shortages of components, including sole source components can result in
significant additional costs and inefficiencies in manufacturing. If the Company
is unsuccessful in resolving any such component shortages, it will experience a
significant impact on the timing of revenue and/or an increase in manufacturing
costs, either of which would have a material adverse impact on the Company's
operating results.
Expansion of Manufacturing Capacity. The Company is working to establish a
new manufacturing facility which is to be located in Hungary. It is anticipated
that this facility will be in operation by Q4, 2001. Any delay in bringing this
facility into production could have a material adverse effect on the Company's
results of operations. Factors which could result in a delay in bringing this
new facility into production include possible delays in construction,
difficulties in recruiting and training the local work force and possible
difficulties in establishing the required information systems.
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 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 U.S. 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 strength of the U.S. dollar 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.
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
domestic and 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 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's 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 such a 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 assurances 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.
Risks Associated with International Operations and Foreign Economies.
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 the burdens of complying with a wide variety of foreign laws.
The regulatory environment in some countries is very restrictive as their
governments try to protect their local economy and value of their local currency
against the U.S. dollar. Sales made by the Company's international direct sales
offices are denominated in local currencies, and accordingly, the U.S. dollar
equivalent of these sales is affected by changes in the weighted average value
of the U.S. dollar. This weighted average is calculated as the percentage change
in the value of the currency relative to the dollar, multiplied by the
proportion of international sales recorded in the particular currency. Between
the third quarter of 2000 and the third quarter of 2001, the weighted average
value of the U.S. dollar increased by 11.2%, causing an equivalent decrease in
the U.S. dollar value of the Company's foreign currency sales and expenses. If
the weighted average value during 2001 had been the same as that in 2000, the
Company's sales for the third quarter of 2001 would have decreased by 12.7%. If
the weighted average value of the dollar in the nine months ended September 30,
2001 had been the same as in the comparable prior year period, the Company's
year-to-date sales would have increased by 3% over 2000 year-to-date sales. If
the weighted average value during 2001 had been the same as that in 2000, the
Company's consolidated operating expenses would have been $38.7 million,
representing an increase of $567,000. If the U.S. dollar strengthens again in
the future, it could have a materially adverse effect on the operating results
of the Company.
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. 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. The Company is currently litigating a
complaint in federal court alleging patent infringement by the products of a
defendant, and is party to a declaratory judgement action alleging invalidity
and non-infringement on the patents of another defendant. There can be no
assurance that this litigation or intellectual property litigation initiated in
the future will not 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 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 affect 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 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. 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.
Risk of Product Liability Claims. The Company's products are designed in
part to provide information upon which the users may rely. The Company attempts
to assure the quality and accuracy of the processes contained in its products,
and to limit its product liability exposure through contractual limitations on
liability, including disclaimers in its "shrink wrap" license agreements with
end-users. If future products contain errors that produce incorrect results on
which users rely, customer acceptance of the Company's products could be
adversely affected. Further, the Company could be subject to liability claims
that could have a material adverse effect on the Company's operating results or
financial position. Although the Company maintains liability insurance, there
can be no assurance that such insurance or the contractual provisions used by
the Company to limit its liability will be sufficient.
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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 sought permanent injunctive relief,
actual monetary damages in an unspecified amount, attorney's fees and costs. On
June 21, 2000, the Company filed a response to their lawsuit denying all claims.
In the fourth quarter of 2000, the Company accrued $2.5 million of anticipated
intellectual property defense costs that were probable of being incurred. During
the current quarter ended September 30, 2001, the Company and Cognex settled the
dispute and Cognex dismissed the case with prejudice on August 13, 2001. As a
result, the Company reduced the intellectual property defense cost accrual by
approximately $1.2 million.
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 September 30, 2001.
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: October 25, 2001
NATIONAL INSTRUMENTS CORPORATION
INDEX TO EXHIBITS
Exhibit No. Description Page
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11.1 Statement Regarding Computation 20
of Earnings per Share