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, 2002 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 offices) (zip code)
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 1, 2002
Common Stock - $0.01 par value 51,445,290
NATIONAL INSTRUMENTS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1 Financial Statements:
Consolidated Balance Sheets
March 31, 2002 (unaudited) and December 31, 2001......... 3
Consolidated Statements of Income (unaudited)
three months ended March 31, 2002 and 2001............... 4
Consolidated Statements of Cash Flows (unaudited)
three months ended March 31, 2002 and 2001............... 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.. 16
PART II. OTHER INFORMATION
Item 1 Legal Proceedings........................................... 17
Item 5 Other Information........................................... 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)
March 31, December 31,
2002 2001
------------ ------------
Assets (unaudited)
Current assets:
Cash and cash equivalents....................... $ 40,500 $ 49,089
Short-term investments.......................... 108,224 101,422
Accounts receivable, net........................ 60,174 53,624
Inventories, net................................ 30,807 32,607
Prepaid expenses and other current assets....... 21,889 20,608
Deferred income tax, net........................ 7,587 6,408
------------ ------------
Total current assets.......................... 269,181 263,758
Property and equipment, net......................... 141,042 137,360
Intangibles and other assets........................ 22,895 23,501
------------ ------------
Total assets.................................. $ 433,118 $ 424,619
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable................................ $ 24,597 $ 28,958
Accrued compensation............................ 10,089 8,944
Accrued expenses and other liabilities.......... 8,474 6,819
Income taxes payable............................ 4,285 1,298
Other taxes payable............................. 8,330 7,903
------------ ------------
Total current liabilities..................... 55,775 53,922
Deferred income taxes, net.......................... 4,723 4,533
------------ ------------
Total liabilities............................. 60,498 58,455
------------ ------------
Commitments and contingencies....................... -- --
Stockholders' equity:
Common stock: par value $.01; 180,000,000
shares authorized; 51,321,233 and 51,162,469
shares issued and outstanding, respectively..... 513 512
Additional paid-in capital.......................... 79,503 78,261
Retained earnings................................... 297,775 290,408
Accumulated other comprehensive loss................ (5,171) (3,017)
------------ ------------
Total stockholders' equity.................... 372,620 366,164
------------ ------------
Total liabilities and stockholders' equity.... $ 433,118 $ 424,619
============ ============
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
March 31,
------------------------
2002 2001
---------- ----------
Net sales........................................... $ 94,739 $ 108,080
Cost of sales....................................... 25,358 26,873
---------- ----------
Gross profit.................................... 69,381 81,207
---------- ----------
Operating expenses:
Sales and marketing............................. 35,407 38,503
Research and development........................ 15,933 15,097
General and administrative...................... 7,786 7,717
---------- ----------
Total operating expenses..................... 59,126 61,317
---------- ----------
Operating income............................. 10,255 19,890
Other income (expense):
Interest income, net............................ 797 1,801
Net foreign exchange loss....................... (894) (1,378)
Other income.................................... 74 198
---------- ----------
Income before income taxes.......................... 10,232 20,511
Provision for income taxes.......................... 2,865 6,564
---------- ----------
Net income.......................................... $ 7,367 $ 13,947
========== ==========
Basic earnings per share............................ $ 0.14 $ 0.28
========== ==========
Weighted average shares outstanding - basic......... 51,205 50,701
========== ==========
Diluted earnings per share ......................... $ 0.14 $ 0.26
========== ==========
Weighted average shares outstanding - diluted....... 53,953 53,873
========== ==========
The accompanying notes are an integral part of these financial statements.
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31,
----------------------
2002 2001
---------- ----------
Cash flow from operating activities:
Net income......................................... $ 7,367 $ 13,947
Adjustments to reconcile net income to cash
provided by operating activities:
Charges to income not requiring cash outlays:
Depreciation and amortization................ 4,350 4,407
Provision for (benefit from) deferred
income taxes................................. (997) 2,296
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable... (6,550) 8,571
Decrease (increase) in inventory............. 1,800 (1,503)
Increase in prepaid expenses and other
assets....................................... (3,376) (7,706)
Increase (decrease) in current liabilities... 1,853 (3,983)
---------- ----------
Net cash provided by operating activities....... 4,447 16,029
---------- ----------
Cash flow from investing activities:
Capital expenditures............................... (6,871) (12,307)
Additions to intangibles .......................... (605) (1,163)
Purchases of short-term investments................ (49,084) (42,386)
Sales of short-term investments.................... 42,282 39,733
---------- ----------
Net cash used in investing activities........... (14,278) (16,123)
---------- ----------
Cash flow from financing activities:
Net proceeds from issuance of common stock
under employee plans............................... 1,242 1,378
---------- ----------
Net cash provided by financing activities....... 1,242 1,378
---------- ----------
Net (decrease) increase in cash and cash equivalents... (8,589) 1,284
Cash and cash equivalents at beginning of period....... 49,089 75,277
---------- ----------
Cash and cash equivalents at end of period............. $ 40,500 $ 76,561
========== ==========
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, 2001, 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, 2002 and December 31, 2001, and the
results of operations and cash flows for the three-month periods ended March 31,
2002 and 2001. Operating results for the three-month period ended March 31, 2002
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2002.
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, 2002 and 2001, respectively, are
as follows (in thousands):
March 31,
-----------------------
(unaudited)
2002 2001
---------- ----------
Weighted average shares outstanding-basic..... 51,205 50,701
Plus: Common share equivalents
Stock options............................. 2,748 3,172
---------- ----------
Weighted average shares outstanding-diluted... 53,953 53,873
========== ==========
Stock options to acquire 1,356,000 and 1,191,000 shares for the quarters ended
March 31, 2002 and 2001, respectively were excluded in the computations of
diluted EPS because the effect of including the options would have been
anti-dilutive.
NOTE 3 - Inventories
Inventories consist of the following (in thousands):
March 31, December 31,
2002 2001
(unaudited)
------------ ------------
Raw materials.................... $ 13,863 $ 15,394
Work-in-process.................. 739 824
Finished goods................... 16,205 16,389
------------ ------------
$ 30,807 $ 32,607
============ ============
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 March 31, 2002 and 2001 is $4.9 million and $15.8 million,
respectively, and included other comprehensive losses of $2.4 million for the
quarter ended March 31, 2002 and other comprehensive income of $1.8 million for
the quarter ended March 31, 2001
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
March 31,
---------------------------
(unaudited)
2002 2001
------------ ------------
Net sales:
Americas:
Unaffiliated customer sales........ $ 47,648 $ 56,324
Geographic transfers............... 13,180 16,035
------------ ------------
60,828 72,359
------------ ------------
Europe:
Unaffiliated customer sales........ 29,000 33,424
------------ ------------
Asia Pacific:
Unaffiliated customer sales........ 18,091 18,332
------------ ------------
Eliminations......................... (13,180) (16,035)
------------ ------------
$ 94,739 $ 108,080
============ ============
Three Months Ended
March 31,
---------------------------
(unaudited)
2002 2001
------------ ------------
Operating income:
Americas............................. $ 8,856 $ 14,192
Europe............................... 7,914 11,070
Asia Pacific......................... 9,418 9,725
Unallocated:
Research and development expenses.... (15,933) (15,097)
------------ ------------
$ 10,255 $ 19,890
============ ============
March 31, December 31,
2002 2001
(unaudited)
------------ ------------
Identifiable assets:
Americas.............................. $ 363,462 $ 349,209
Europe................................ 58,516 65,201
Asia Pacific.......................... 11,140 10,209
------------ ------------
$ 433,118 $ 424,619
============ ============
Total sales outside the United States for the quarters ended March 31, 2002 and
2001 were $51.2 million and $57.1 million, respectively.
NOTE 6 - Commitments and Contingencies
During 2001, the Company filed a complaint in U.S. District Court, Western
District of Texas (Midland Division) for declaratory judgment arising from a
controversy between the Company and General Patent Corporation, General Patent
Corporation International, and Acticon Technologies, LLC ("Defendants")
concerning the enforceability, validity, and infringement of certain patents in
which Defendants claim an interest. Defendants claimed that the Company
infringes these patents. The Company challenged the validity and enforceability
of these patents and asserted that it does not infringe the claims of these
patents. The Company sought a declaratory judgment of invalidity and
non-infringement. Defendants sought damages in an unspecified amount, injunction
of the sale of certain products of the Company and attorney's fees and costs. On
April 16, 2002, the case was dismissed by stipulation of the parties. As a
result, the Company reduced the intellectual property defense cost accrual by
approximately $500,000.
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," "believes," "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 Market Risk section, the Issues and Outlook section
and financial statement line item discussions below. Readers are also encouraged
to refer to the documents regularly filed by the Company with the Securities and
Exchange Commission, including the Company's Annual Report on Form 10-K for
further discussion of the Company's business and the risks 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,
----------------------------
2002 2001
---------- ----------
Net sales:
North America 50.3% 52.2%
Europe 30.6 30.9
Asia Pacific 19.1 16.9
---------- ----------
Consolidated net sales 100.0 100.0
Cost of sales 26.8 24.9
---------- ----------
Gross profit 73.2 75.1
Operating expenses:
Sales and marketing 37.4 35.6
Research and development 16.8 14.0
General and administrative 8.2 7.1
---------- ----------
Total operating expenses 62.4 56.7
---------- ----------
Operating income 10.8 18.4
Other income (expense):
Interest income, net 0.8 1.7
Net foreign exchange loss (0.9) (1.3)
Other income 0.1 0.2
---------- ----------
Income before income taxes 10.8 19.0
Provision for income taxes 3.0 6.1
---------- ----------
Net income 7.8% 12.9%
========== ==========
Net Sales. Consolidated net sales for the first quarter of 2002 decreased
by $13.3 million or 12% from the comparable prior year quarter. The Company
believes the decrease in sales is primarily attributable to the approximate 35%
decline in the sales of certain hardware products that are used to control
traditional instruments, which resulted from the worsening of the industrial
economy and the severe deterioration of sales of traditional instruments by
other vendors used in test and measurement applications. In the quarter ended
March 31, 2002, the sales of hardware products that are used to control
traditional instruments represented 19% of revenue compared to 25% in the
quarter ended March 31, 2001. North American sales in the first quarter of 2002
decreased by 15% from the first quarter of 2001.
Sales outside of North America, as a percentage of consolidated sales for
the quarter ended March 31, 2002, increased to 49.7% from 47.8% in the
comparable 2001 period. Compared to 2001, the Company's European sales decreased
by 13% to $29.0 million for the quarter ended March 31, 2002. Sales in Asia
Pacific decreased by 1% to $18.1 million in the quarter ended March 31, 2002
compared to 2001. The Company expects sales outside of North America to continue
to represent a significant portion of its revenue.
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. During the quarter
ended March 31, 2002, the Company recognized a pretax gain of $2.6 million on
its foreign currency cash flow hedging contracts, primarily on the Japanese yen.
As a result of these gains, between the first quarter of 2001 and the first
quarter of 2002 the weighted average value of the U.S. dollar decreased by 4.2%,
causing an equivalent increase 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 first quarter of 2002 had been the same as that in the first quarter of
2001, on a pro-forma basis the Company's sales for the first quarter of 2002
would have decreased by 14%. Pro-forma European sales for the first quarter of
2002 would have decreased by 12% from first quarter of 2001 sales. Pro-forma
Asia Pacific sales for the first quarter of 2002 would have decreased by 11%
from first quarter 2001 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 increasing operating expenses by $1.0 million for the
quarter ended March 31, 2002.
Gross Profit. As a percentage of sales, gross profit decreased to 73% for
the first quarter of 2002 from 75% for the first quarter of 2001. The relatively
high software content of the Company's products is demonstrated in the gross
margins achieved by the Company. Approximately 70% of the lower margin in the
first quarter of 2002 is attributable to reduced sales of certain hardware
products that are used to control traditional instruments. The remaining
fraction of the lower margin is attributable to increased charges resulting from
lower sales volume. There can be no assurance that the Company will maintain its
historical margins.
The Company established a new manufacturing facility in Hungary in 2001.
The Company believes its current manufacturing capacity is adequate to meet
current needs.
Sales and Marketing. Sales and marketing expenses for the first quarter of
2002 decreased to $35.4 million, an 8% decrease, as compared to the first
quarter of 2001. As a percentage of net sales, sales and marketing expenses were
37.4% and 35.6% for the three months ended March 31, 2002 and 2001,
respectively. The decrease in these expenses is attributable to decreases in
travel, advertising and literature costs, the variable components of
compensation and special event activity. 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
$15.9 million for the quarter ended March 31, 2002, a 6% increase, as compared
to $15.1 million for the three months ended March 31, 2001. As a percentage of
net sales, research and development expenses increased to 16.8% for the quarter
ended March 31, 2002, from 14.0% for the quarter ended March 31, 2001. The
increase in research and development costs in absolute amounts and as a
percentage of sales was due to increases in personnel costs from hiring of
additional product development engineers. 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 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
$865,000 and $774,000 for the quarters ended March 31, 2002 and 2001,
respectively. Software development costs capitalized were $400,000 and $1.1
million for the quarters ended March 31, 2002 and 2001, respectively. The
amounts capitalized in the first quarter of 2002 related to the development of
NI-488.2, NI-PAL 1.6.0 and MStudio 6.0.1.
General and Administrative. General and administrative expenses for the
first quarter ended March 31, 2002 increased 1% to $7.8 million from $7.7
million for the comparable prior year period. As a percentage of net sales,
general and administrative expenses increased to 8.2% for the quarter ended
March 31, 2002, from 7.1% for the first quarter of 2001. The Company expects
that general and administrative expenses in future periods will increase in
absolute amounts and will fluctuate as a percentage of revenue.
Interest Income, Net. Net interest income in the first quarter of 2002
decreased to $800,000 from $1.8 million in the first quarter of 2001. Net
interest income has historically represented less than two percent of revenue
and has fluctuated as a result of investment balances, bank borrowings and
interest terms thereon. The decrease in interest income in the first quarter of
2002 was primarily due to lower yields on the Company's investments. The primary
source of interest income is from the investment of the Company's cash.
Net Foreign Exchange Gain (Loss). The Company experienced net foreign
exchange losses in the first quarter of 2002 of $900,000 compared to losses of
$1.4 million in the first quarter of 2001. These results 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 Company recognizes the local
currency as the functional currency of its international subsidiaries.
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 and the yen) 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 losses by $2.5 million and $2.3 million
for the quarters ended March 31, 2002 and 2001, respectively.
Provision for Income Taxes. The provision for income taxes reflects an
effective tax rate of 28% for the three months ended March 31, 2002 and 32% for
the three months ended March 31, 2001. The decrease in the effective rate
resulted from income tax benefits attributable to the extraterritorial income
inclusion and a change in the distribution of income among taxing jurisdictions.
The Company's effective tax rate is lower than the U.S. federal statutory rate
of 35% primarily as a result of the extraterritorial income exclusion,
tax-exempt interest and reduced tax rates in certain foreign jurisdictions.
Liquidity and Capital Resources
The Company is currently financing its operations and capital expenditures
through cash flow from operations. At March 31, 2002, the Company had working
capital of approximately $213.4 million compared to $209.8 million at December
31, 2001. Net cash provided by operating activities in the first quarter of 2002
totaled $4.4 million.
Accounts receivable increased to $60.2 million at March 31, 2002 from $53.6
million at December 31, 2001. Receivable days outstanding increased to 58 at
March 31, 2002 compared to 51 at December 31, 2001. Consolidated inventory
balances decreased to $30.8 million at March 31, 2002 from $32.6 million at
December 31, 2001. Inventory turns remained flat at 3.3 for the quarter ended
March 31, 2002 versus the quarter ended December 31, 2001. Cash used in the
first three months of 2002 for the purchase of the property and equipment
totaled $6.9 million and for the capitalization of software development costs
totaled $400,000.
In October of 2000, the Company began construction of an office building
("Mopac C") located on its 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 $48.1 million in construction costs as of March 31, 2002,
with the remainder becoming payable over the next six 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.
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 March 31, 2002, the Company had no debt outstanding to
financial institutions.
The Company believes that the 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 will depend on the Company's profitability, its
ability to manage working capital requirements and its rate of growth.
Financial Risk Management
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. As has occurred
in the past, most recently in the quarter ended March 31, 2002, these dynamics
have adversely affected revenue growth 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)").
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 has no debt or off-balance sheet debt. As of March 31, 2002,
the Company has outstanding guarantees for payment of foreign operating leases,
customs and foreign grants totaling approximately $3.2 million. At March 31,
2002, the Company did not have any relationships with any unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes. As such, the Company is not
exposed to any financing, liquidity, market or credit risk that could arise if
the Company were engaged in such relationships.
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 exchanges rates on its results of operations and financial position.
Based on the foreign exchange instruments outstanding at March 31, 2002, 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 $13.8 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 March 31, 2002 was $108.2 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, 2002, a 100 basis point increase or decrease in interest rates would result
in a decrease or increase of approximately $550,000, respectively, in the fair
value of the investment portfolio, which is not significantly different from
December 31, 2001. 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 experienced in 2001, when the worsening
of the industrial economy resulted in a deterioration of the test and
measurement market, the markets in which the Company does business could again
experience the negative effects of a slowdown in the U.S. and/or Global
economies. Downturns in the U.S. or Global economies could result in reduced
purchasing and capital spending in any of the markets served by the Company
which could have a material adverse effect on the Company's operating results.
Budgets. The Company has established an operating budget for 2002. The
Company's spending for 2002 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 Mopac C office
building; failure of a third party tenant to pay rent for leased office space
and/or additional litigation expenses related to intellectual property
litigation. Any future decreased demand for our products could result in
decreased revenue and could require the Company to revise its budget and reduce
expenditures. Exceeding the established operating budget or failing to revise
its budget in response to any decrease in our revenue could have a material
adverse effect on the Company's operating results.
Risk of Component Shortages. As has occurred in the past 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.
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 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.
In recent years, with the exception of 2001, 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 2002 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 recruiting and significantly increased intern personnel expenses.
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 operating 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 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.
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 Company must also comply with various export regulations. Failure to comply
with these regulations could result in fines and/or termination of export
licenses, which could have a material adverse effect on the Company's operating
results. Additionally, 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. During the quarter ended March 31, 2002, the Company
recognized a pretax gain of $2.6 million on its foreign currency cash flow
hedging contracts, primarily on the Japanese yen. As a result of these gains,
between the first quarter of 2002 and the first quarter of 2001, the weighted
average value of the U.S. dollar decreased by 4.2%, causing an equivalent
increase in the U.S. dollar value of the Company's foreign currency sales and
expenses. If the weighted average value during the first quarter of 2002 had
been the same as that in the first quarter of 2001, on a pro-forma basis the
Company's sales for the first quarter of 2002 would have decreased by 14%. If
the weighted average value during the first quarter of 2002 had been the same as
that in the first quarter of 2001, the Company's consolidated operating expenses
would have been $58.1 million, representing a decrease of $1.0 million. If the
U.S. dollar strengthens again in the future, it could have a materially adverse
effect on the operating results of the Company.
As of March 31, 2002, the Company has $6.2 million of deferred gains on yen
foreign currency cash flow hedge contracts recorded in accumulated other
comprehensive income that are expected to be reclassified into earnings over the
next 21 months. If the yen fails to strengthen before the expiration of these
contracts, and if the Company is unable to increase prices in Japan and/or
globally, the Company will experience a deterioration of revenue and gross and
net profit margins, which could have a material adverse effect on the Company's
operating results.
Expansion of Manufacturing Capacity. During 2001, the Company completed
construction of a second manufacturing facility. This facility is located in
Hungary and became operational in the fourth quarter of 2001. The Company
estimates that by 2003, this facility will source a significant portion of the
Company's sales. Currently the Company is continuing to recruit and train the
local work force and is continuing to develop and implement information systems
to support its operation. This facility and its operation are also subject to
risks associated with a new manufacturing facility and with doing business
internationally, including difficulty in managing manufacturing operations in a
foreign country, difficulty in achieving or maintaining product quality,
interruption to transportation flows for delivery of components to us and
finished goods to our customers, and changes in the country's political or
economic conditions. No assurance can be given that the Company's efforts will
be successful. Accordingly, failure to deal with these factors could result in
interruption in the facility's operation or delays in expanding its capacity,
either of which could have a material adverse effect on the Company's results of
operations.
Products Dependent on Certain Industries. The Company's products are
dependent on customers in certain industries, particularly the
telecommunications, semiconductor, automotive, automated test equipment, defense
and aerospace industries. As experienced in 2001, and as may be expected to
occur in the future, downturns characterized by diminished product demand in any
one or more of these industries could result in decreased sales, which could
have a material adverse effect on the Company's operating results.
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 a 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. There
can be no assurance that this litigation or any other 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 the Company's 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 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 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 Company's 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
During 2001, the Company filed a complaint in U.S. District Court, Western
District of Texas (Midland Division) for declaratory judgment arising from a
controversy between the Company and General Patent Corporation, General Patent
Corporation International, and Acticon Technologies, LLC ("Defendants")
concerning the enforceability, validity, and infringement of certain patents in
which Defendants claim an interest. Defendants claimed that the Company
infringes these patents. The Company challenged the validity and enforceability
of these patents and asserted that it does not infringe the claims of these
patents. The Company sought a declaratory judgment of invalidity and
non-infringement. Defendants sought damages in an unspecified amount, injunction
of the sale of certain products of the Company and attorney's fees and costs. On
April 16, 2002, the case was dismissed by stipulation of the parties. As a
result, the Company reduced the intellectual property defense cost accrual by
approximately $500,000.
ITEM 5. OTHER INFORMATION
From time to time the Company's directors, executive officers and other
insiders may adopt stock trading plans pursuant to Rule 10b5-1(c) promulgated by
the Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended. Jeffrey L. Kodosky and James J. Truchard have made periodic
sales of the Company's stock pursuant to such plans.
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, 2002.
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 2, 2002
NATIONAL INSTRUMENTS CORPORATION
INDEX TO EXHIBITS
Exhibit No. Description Page
- ----------- ----------- ----
11.1 Statement Regarding Computation of 20
Earnings per Share