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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
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Exchange Act of 1934
For the fiscal quarter ended: June 30, 2002 or
Transition report pursuant to Section 13 or 15(d) of the Securities
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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
- ---------------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11500 North MoPac Expressway
Austin, Texas 78759
- ---------------------------------------- -----------------------------------
(address of principal executive (zip code)
offices)
Registrant's telephone number, including area code: (512) 338-9119
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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 August 12, 2002
Common Stock - $0.01 par value 51,535,944
NATIONAL INSTRUMENTS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION Page No.
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Item 1 Financial Statements:
Consolidated Balance Sheets
June 30, 2002 (unaudited) and December 31, 2001 3
Consolidated Statements of Income (unaudited)
Three months and six months ended June 30, 2002 and 2001 4
Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, 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 18
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 20
Item 6 Exhibits and Reports on Form 8-K 21
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, December 31,
2002 2001
------------- ------------
Assets (unaudited)
Current assets:
Cash and cash equivalents....................... $ 60,580 $ 49,089
Short-term investments.......................... 99,034 101,422
Accounts receivable, net........................ 59,660 53,624
Inventories, net................................ 32,510 32,607
Prepaid expenses and other current assets....... 17,687 20,608
Deferred income tax, net........................ 8,126 6,408
------------- ------------
Total current assets......................... 277,597 263,758
Property and equipment, net........................ 145,145 137,360
Intangibles and other assets....................... 24,442 23,501
------------- ------------
Total assets................................. $ 447,184 $ 424,619
============= ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable................................ $ 24,385 $ 28,958
Accrued compensation............................ 8,940 8,944
Accrued expenses and other liabilities.......... 11,997 6,819
Income taxes payable............................ 4,896 1,298
Other taxes payable............................. 8,728 7,903
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Total current liabilities.................... 58,946 53,922
Deferred income taxes.............................. 3,643 4,533
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Total liabilities............................ 62,589 58,455
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Commitments and contingencies -- --
Stockholders' equity:
Common stock: par value $0.01; 180,000,000
shares authorized; 51,501,443 and 51,162,469
shares issued and outstanding, respectively..... 515 512
Additional paid-in capital...................... 84,353 78,261
Retained earnings............................... 305,164 290,408
Accumulated other comprehensive loss............ (5,437) (3,017)
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Total stockholders' equity................... 384,595 366,164
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Total liabilities and stockholders' equity... $ 447,184 $ 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 Six Months Ended
June 30, June 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net sales........................ $ 93,505 $ 97,707 $ 188,244 $ 205,787
Cost of sales.................... 26,603 25,628 51,961 52,501
---------- ---------- ---------- ----------
Gross profit.................. 66,902 72,079 136,283 153,286
---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing........... 33,566 36,389 68,974 74,892
Research and development...... 15,734 15,933 31,667 31,030
General and administrative.... 8,842 7,672 16,628 15,389
---------- ---------- ---------- ----------
Total operating expenses... 58,142 59,994 117,269 121,311
---------- ---------- ---------- ----------
Operating income........... 8,760 12,085 19,014 31,975
Other income (expense):
Interest income, net.......... 839 1,470 1,635 3,271
Net foreign exchange gain
(loss)....................... 217 116 (677) (1,262)
Other income.................. 445 197 522 395
========== ========== ========== ==========
Income before income taxes....... 10,261 13,868 20,494 34,379
Provision for income taxes....... 2,873 4,438 5,738 11,002
---------- ---------- ---------- ----------
Net income................. $ 7,388 $ 9,430 $ 14,756 $ 23,377
========== ========== ========== ==========
Basic earnings per share......... $ 0.14 $ 0.19 $ 0.29 $ 0.46
========== ========== ========== ==========
Weighted average shares
outstanding-basic.............. 51,449 50,887 51,331 50,794
========== ========== ========== ==========
Diluted earnings per share....... $ 0.14 $ 0.18 $ 0.27 $ 0.43
========== ========== ========== ==========
Weighted average shares
outstanding-diluted............ 53,974 53,450 53,966 53,786
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30,
----------------------
2002 2001
---------- ----------
Cash flow from operating activities:
Net income.......................................... $ 14,756 $ 23,377
Adjustments to reconcile net income to cash
provided by operating activities:
Charges to income not requiring cash outlays:
Depreciation and amortization.................. 9,922 8,713
Provision for (benefit from) deferred income
taxes.......................................... (2,609) 2,293
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable..... (6,036) 13,796
Decrease (increase) in inventory............... 97 (1,781)
Decrease (increase) in prepaid expense and
other assets................................... 336 (7,243)
Increase (decrease) in current liabilities..... 5,024 (9,882)
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Net cash provided by operating activities........ 21,490 29,273
---------- ----------
Cash flow from investing activities:
Capital expenditures................................ (15,607) (24,778)
Additions to intangibles............................ (2,875) (2,429)
Purchases of short-term investments................. (81,026) (73,417)
Sales of short-term investments..................... 83,414 62,864
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Net cash used in investing activities............ (16,094) (37,760)
---------- ----------
Cash flow from financing activities:
Proceeds from issuance of common stock, net of
repurchases......................................... 6,095 2,896
---------- ----------
Net cash provided by financing activities........ 6,095 2,896
---------- ----------
Net increase (decrease) in cash and cash equivalents... 11,491 (5,591)
Cash and cash equivalents at beginning of period....... 49,089 75,277
---------- ----------
Cash and cash equivalents at end of period............. $ 60,580 $ 69,686
========== ==========
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 June 30, 2002 and December 31, 2001, and the
results of operations for the three-month and six-month periods ended June 30,
2002 and 2001, and the cash flows for the six-month periods ended June 30, 2002
and 2001. Operating results for the three-month and six-month periods ended June
30, 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 and six-month periods ended June 30, 2002 and 2001,
respectively, are as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
(unaudited) (unaudited)
2002 2001 2002 2001
---------- ---------- ---------- ----------
Weighted average shares 51,449 50,887 51,331 50,794
outstanding-basic...............
Plus: Common share equivalents
Stock options................ 2,525 2,563 2,635 2,992
---------- ---------- ---------- ----------
Weighted average shares
outstanding-diluted............. 53,974 53,450 53,966 53,786
========== ========== ========== ==========
Stock options to acquire 1,533,053 and 1,408,531 shares for the quarters ended
June 30, 2002 and 2001, respectively, and 1,463,892 and 1,373,760 shares for the
six months ended June 30, 2002 and 2001, respectively were excluded in the
computations of diluted EPS because the effect of including the stock options
would have been anti-dilutive.
NOTE 3 - Inventories, net
Inventories consist of the following (in thousands):
June 30, December 31,
2002 2001
(unaudited)
----------- ------------
Raw materials $ 16,723 $ 15,394
Work-in-process 929 824
Finished goods 14,858 16,389
----------- ------------
$ 32,510 $ 32,607
=========== ============
NOTE 4 - Comprehensive Income
Total comprehensive income for the quarters ended June 30, 2002 and 2001 is $7.4
million and $9.3 million, respectively, and included other comprehensive loss of
$10,000 and $86,000, respectively. For the first six months of 2002 and 2001,
comprehensive income is $12.3 million and $25.1 million, respectively, and
included other comprehensive loss of $2.4 million and income of $1.7 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 Six Months Ended
June 30, June 30,
---------------------- ----------------------
(unaudited) (unaudited)
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net sales:
Americas:
Unaffiliated customer sales... $ 49,540 $ 50,734 $ 97,188 $ 107,058
Geographic transfers.......... 14,062 13,227 27,242 29,262
---------- ---------- ---------- ----------
63,602 63,961 124,430 136,320
---------- ---------- ---------- ----------
Europe:
Unaffiliated customer sales... 29,365 33,464 58,365 66,888
---------- ---------- ---------- ----------
Asia Pacific:
Unaffiliated customer sales... 14,600 13,509 32,691 31,841
---------- ---------- ---------- ----------
Eliminations.................... (14,062) (13,227) (27,242) (29,262)
---------- ---------- ---------- ----------
$ 93,505 $ 97,707 $ 188,244 $ 205,787
========== ========== ========== ==========
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
(unaudited) (unaudited)
2002 2001 2002 2001
---------- ---------- ---------- ----------
Operating income:
Americas........................ $ 9,529 $ 11,493 $ 18,153 $ 25,685
Europe.......................... 8,595 11,207 16,813 22,277
Asia Pacific.................... 6,370 5,318 15,715 15,043
Unallocated:
Research and development
expenses........................ (15,734) (15,933) (31,667) (31,030)
---------- ---------- ---------- ----------
$ 8,760 $ 12,085 $ 19,014 $ 31,975
========== ========== ========== ==========
June 30, December 31,
2002 2001
(unaudited)
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Identifiable assets:
Americas........................ $ 372,327 $ 349,209
Europe.......................... 62,903 65,201
Asia Pacific.................... 11,954 10,209
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$ 447,184 $ 424,619
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NOTE 6 - Recently Issued Accounting Pronouncements
In May 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections as of April 2002. The Statement rescinds SFAS No. 4 and requires
that only unusual or infrequent gains and losses from extinguishment of debt
should be classified as extraordinary items, consistent with APB Opinion 30.
This Statement amends SFAS No. 13 to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends certain existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The adoption
of SFAS No. 145 did not have a material effect on the Company's financial
position or results of operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). This Statement requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred as opposed to on the date of an
entity's commitment to an exit plan, which was the practice employed under EITF
Issue 94-3. The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. SFAS 146 is not expected to have a material effect on the Company's
financial position or results of operations.
NOTE 7 - Commitments and Contingencies
On January 25, 2001, the Company filed a complaint in U.S. District Court,
Eastern District of Texas (Marshall Division) against The MathWorks, Inc.
("Defendant") for patent infringement. The Company claims that the Defendant
infringes certain of the Company's U.S. patents. Defendant challenges the
validity and enforceability of these patents and asserts that it does not
infringe the claims of these patents. The Company seeks monetary damages,
injunction of the sale of certain products of the Defendant, and attorney's fees
and costs. The case was originally set for trial September 4, 2002. However, on
July 18, 2002, the court, due to other scheduling considerations, reset the
trial for January 6, 2003. As a result of the rescheduled trial, the Company
expects to incur legal expenses of approximately $700,000 in the third quarter
of 2002 and approximately $800,000 spread between the fourth quarter of 2002 and
the first quarter of 2003. Due to the inherent uncertainties of litigation,
there can be no assurance that there will not be significant changes in the
amount and timing of these expected expenses.
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
"believes," "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 Six Months Ended
June 30, June 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net sales:
Americas 53.0% 51.9% 51.6% 52.0%
Europe 31.4 34.3 31.0 32.5
Asia Pacific 15.6 13.8 17.4 15.5
---------- ---------- ---------- ----------
Consolidated net sales 100.0 100.0 100.0 100.0
Cost of sales 28.5 26.2 27.6 25.5
---------- ---------- ---------- ----------
Gross profit 71.5 73.8 72.4 74.5
---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing 35.9 37.2 36.7 36.4
Research and development 16.8 16.3 16.8 15.1
General and administrative 9.4 7.9 8.8 7.5
---------- ---------- ---------- ----------
Total operating expenses 62.1 61.4 62.3 59.0
---------- ---------- ---------- ----------
Operating income 9.4 12.4 10.1 15.5
Other income (expense):
Interest income, net 0.9 1.5 0.9 1.6
Net foreign exchange gain 0.2 0.1 (0.4) (0.6)
(loss)
Other income 0.5 0.2 0.3 0.2
---------- ---------- ---------- ----------
Income before income taxes 11.0 14.2 10.9 16.7
Provision for income taxes 3.1 4.5 3.1 5.3
---------- ---------- ---------- ----------
Net income 7.9% 9.7% 7.8% 11.4%
=========- ========== ========== ==========
Net Sales. Consolidated net sales decreased by $4.2 million or 4% for the
three months ended June 30, 2002 to $93.5 million from $97.7 million for the
three months ended June 30, 2001, and decreased $17.5 million or 9% to $188.2
million for the six months ended June 30, 2002 from $205.8 million for the
comparable period in the prior year. The decrease in sales for the three and six
months ended June 30, 2002 was primarily attributable to the 18% and 27%
declines, respectively, in the sales of certain hardware products that are used
to control traditional instruments, which resulted from the continued 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 June 30, 2002, the sales of hardware products that are used to
control traditional instruments represented 19% of revenue compared to 22% in
the quarter ended June 30, 2001. For the six months ended June 30, 2002, the
sales of hardware products that are used to control traditional instruments
represented 19% of revenue compared to 24% for the comparable prior year period.
Sales in the Americas in the second quarter of 2002 decreased by 2% from
the second quarter of 2001 and sales in the Americas for the six months ended
June 30, 2002 decreased 9% from the six months ended June 30, 2001.
Sales outside of North America, as a percentage of consolidated sales for
the quarter ended June 30, 2002, decreased to 47% from 48% over the comparable
2001 period as a result of weaker sales in Europe. International sales as a
percentage of consolidated sales for the six months ended June 30, 2002 remained
flat at 48% compared with the comparable 2001 period. Compared to the
corresponding periods in 2001, the Company's European sales decreased by 12% to
$29.4 million for the quarter ended June 30, 2002 and decreased by 13% to $58.4
million for the six months ended June 30, 2002. Sales in Asia Pacific increased
by 8% to $14.6 million in the quarter ended June 30, 2002 compared to the same
period in 2001 and increased 3% to $32.7 million for the six months ended June
30, 2002 compared to the same period in 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. Between the second
quarter of 2001 and the second quarter of 2002 the weighted value of the U.S.
dollar decreased by 2.2%, 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 second quarter of 2002 had been the same
as that in the second quarter of 2001, on a pro-forma basis the Company's sales
for the second quarter of 2002 would have decreased by 4%. Pro-forma European
sales for the second quarter of 2002 would have decreased by 10% over the second
quarter 2001. Pro-forma Asia Pacific sales for the second quarter of 2002 would
have increased by 5% over the second quarter 2001 sales. If the weighted average
value of the dollar in the six months ended June 30, 2002 had been the same as
that in the six months ended June 30, 2001, on a pro-forma basis the Company's
year-to-date sales would have decreased by 9% over 2001 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 increasing
operating expenses $1.6 million for the six months ended June 30, 2002 and
$200,000 for the quarter ended June 30, 2002.
Gross Profit. As a percentage of net sales, gross profit decreased to 71.5%
for the second quarter of 2002 from 73.8% for the second quarter of 2001 and
decreased to 72.4% for the first six months of 2002 from 74.5% for the
comparable period a year ago. Approximately 60% of the lower margin in the
second quarter of 2002 is attributable to the impact of fixed charges relative
to lower sales volume. The remaining fraction of the lower margin is
attributable to reduced sales of certain hardware products that are used to
control traditional instruments. 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 second quarter of
2002 decreased to $33.6 million, an 8% decrease, as compared to the second
quarter of 2001 and decreased 8% to $69.0 million for the first six months of
2002 from the comparable 2001 period. As a percentage of net sales, sales and
marketing expenses were 35.9% and 37.2% for the three months ended June 30, 2002
and 2001, respectively, and 36.7% and 36.4% for the six months ended June 30,
2002 and 2001, respectively. The decreases in these expenses is attributable to
decreases in advertising and literature costs, training costs 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 decreased to
$15.7 million for the quarter ended June 30, 2002, a 1% decrease as compared to
$15.9 million for the three months ended June 30, 2001, and increased 2% to
$31.7 million for the six months ended June 30, 2002 from the comparable 2001
period. As a percentage of net sales, research and development expenses
increased to 16.8% for the quarter ended June 30, 2002, from 16.3% for the
quarter ended June 30, 2001, and increased to 16.8% for the six months ended
June 30, 2002, from 15.1% for the comparable 2001 period. The increase in
research and development costs in the six month period ended June 30, 2002
versus the prior year period and as a percentage of sales in each period was
primarily due to increases in personnel costs from hiring of additional product
development engineers. Research and development personnel increased from 693 at
June 30, 2001 to 758 at June 30, 2002. The Company plans to continue making a
significant investment in research and development in order to remain
competitive and continue revenue growth.
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 $1.1 million and $756,000 for the quarters ended June 30, 2002 and 2001,
respectively, and $1.9 million and $1.5 million during the six months ended June
30, 2002 and 2001, respectively. Software development costs capitalized were
$1.2 million and $933,000 for the quarters ended June 30, 2002 and 2001,
respectively, and $1.6 million and $2.0 million for the first six months of 2002
and 2001, respectively.
General and Administrative. General and administrative expenses for the
second quarter ended June 30, 2002 increased 15% to $8.8 million from $7.7
million for the comparable prior year period. For the first six months of 2002,
general and administrative expenses increased 8% to $16.6 million from $15.4
million for the first six months of 2001. As a percentage of net sales, general
and administrative expenses increased to 9.4% for the quarter ended June 30,
2002 from 7.9% for the second quarter of 2001. During the first six months of
2002, general and administrative expenses increased as a percentage of sales to
8.8% from 7.5% for the comparable prior year period. The Company's general and
administrative expenses increased due to litigation costs of approximately $1.3
million associated with a legal action by the Company brought against MathWorks,
Inc. in 2001 to enforce our intellectual property. (See Note 7 - Commitments and
Contingencies.) 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 second quarter of 2002
decreased to $839,000 from $1.5 million in the second quarter of 2001, and
decreased to $1.6 million for the first six months of 2002 from $3.3 million for
the comparable 2001 period. 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 for the quarter and six months ended June 30, 2002 was due to lower
yields on the Company's investments. The primary source of interest income is
from the investment of the Company's cash and short-term investments.
Net Foreign Exchange Gain (Loss). The Company experienced net foreign
exchange gains of $217,000 in the second quarter of 2002 compared to gains of
$116,000 in the second quarter of 2001. Net foreign exchange losses of $677,000
were recognized for the first six months of 2002 compared to losses of $1.3
million for the first six months 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 increase in net foreign
exchange gains in the second quarter of 2002 and the decrease in net foreign
exchange losses recognized in the six months ended June 30, 2002 is mainly due
to the weakening of the U.S. dollar.
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 gains by $3.5 million during the quarter
ended June 30, 2002, and by $1.0 million for the six months ended June 30, 2002.
Provision for Income Taxes. The provision for income taxes reflects an
effective tax rate of 28% for the three and six months ended June 30, 2002 and
32% for the three and six months ended June 30, 2001. The decrease in the
effective rate resulted from income tax benefits attributable to the
extraterritorial income exclusion 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 June 30, 2002, the Company had working
capital of approximately $218.7 million compared to $209.8 million at December
31, 2001. Net cash provided by operating activities for the six months ended
June 30, 2002 totaled $21.5 million.
Accounts receivable increased to $59.7 million at June 30, 2002 from $53.6
million at December 31, 2001. Days sales outstanding increased to 58 at June 30,
2002 compared to 51 at December 31, 2001. Consolidated inventory balances
decreased to $32.5 million at June 30, 2002 from $32.6 million at December 31,
2001. Inventory turns remained flat at 3.3 for the quarter ended June 30, 2002
versus the quarter ended December 31, 2001. Cash used in the first six months of
2002 for the purchase of property and equipment totaled $15.6 million and $1.6
million was used for the capitalization of software development costs.
In October of 2000, the Company began construction of an office building
("Mopac C") located on the North Austin campus. Construction costs have been and
will continue to 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 be approximately $59 million. The Company has
incurred approximately $52.0 million in construction costs as of June 30, 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 had previously signed an agreement to lease the Millenium
building to a third party tenant, Trilogy Software, Inc. ("Trilogy") of Austin,
Texas. On July 18, 2002, Trilogy, citing economic hardship, tendered a letter to
the Company purporting to surrender all rights to the Millenium office building
lease, indicating its intention not to make any lease payments after July 2002,
and offering to buy-out its remaining obligations on the lease. At present,
Trilogy has failed to make timely payment of rent due for August 2002 and is
currently in default of the lease terms. The Company has not accepted Trilogy's
surrender of the premises and has indicated to Trilogy its intent to strictly
enforce the terms of the lease. Although the Company and Trilogy are currently
discussing terms of a possible buy-out, there can be no assurance as to the
timing or amount of payment the Company may receive from Trilogy, if any.
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 June 30, 2002, the Company had no debt outstanding.
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 June 30, 2002, the
Company has outstanding guarantees for payment of foreign operating leases,
customs and foreign grants totaling approximately $3.3 million. At June 30,
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 June 30, 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 $8.7 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 June 30, 2002 was $99.0 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 June
30, 2002, a 100 basis point increase or decrease in interest rates would result
in a decrease or increase of approximately $675,000, 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.
Non-Audit Services
Prior to adoption of the Sarbanes-Oxley Act of 2002, the Company's Audit
Committee modified its charter to pre-approve the following non-audit services
(not to exceed $150,000 in the aggregate per year): tax research and
consultations; international tax consulting; tax assistance and compliance in
international locations; assistance with transfer pricing; expatriate tax
services; consultations and assistance with other taxes including state and
local taxes, sales and use taxes, customs and duties; review of intercompany
agreements; and assistance with international manufacturing tax issues.
Recently Issued Accounting Pronouncements
In May 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections as of April 2002. The Statement rescinds SFAS No. 4 and requires
that only unusual or infrequent gains and losses from extinguishment of debt
should be classified as extraordinary items, consistent with APB Opinion 30.
This Statement amends SFAS No. 13 to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends certain existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The adoption
of SFAS No. 145 did not have a material effect on our financial position or
results of operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). This Statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred as opposed to on the date
of an entity's commitment to an exit plan, which was the practice employed under
EITF Issue 94-3. The provisions of this Statement are effective for exit or
disposal activities that are initiated after December 31, 2002, with early
application encouraged. SFAS 146 is not expected to have a material effect on
the Company's financial position or results of operations.
Factors Affecting the Company's Business and Prospects
U.S./Global Economic Slowdown. As recently experienced, 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 the remainder
of 2002. The Company's spending for the second half of the year could exceed
this budget due to a number of factors; including: additional marketing costs
for 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 used in our
products, 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.
If the U.S. dollar strengthens in the future, it could have a material adverse
effect on gross and net profit margins.
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 adverse 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. 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. Between the second quarter of 2002 and the second quarter
of 2001 this weighted average value of the U.S. dollar decreased by 2.2%,
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 second
quarter of 2002 had been the same as that in the second quarter of 2001, on a
pro-forma basis the Company's sales for the second quarter of 2002 would have
decreased by 4%. If the weighted average value during the second quarter of 2002
had been the same as that in the second quarter of 2001, on a pro-forma basis
the Company's consolidated operating expenses would have been $58.0 million. If
the U.S. dollar strengthens in the future, it could have a material adverse
effect on the operating results of the Company.
As of June 30, 2002, the Company has $3.0 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 18 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.
Income Tax Rate. The Company established a manufacturing facility in
Hungary in 2001. As a result of certain foreign investment incentives available
under Hungarian law, the profit from the Company's Hungarian operation is
currently exempt from income tax through 2011. These benefits may not be
available in the future due to changes in Hungary's political condition and/or
tax laws. Specifically, Hungary has applied for inclusion into the European
Union. In order for Hungary to gain acceptance into the European Union, the
Hungarian government may choose to change existing tax laws which could result
in the reduction or elimination of these foreign investment incentives. The
reduction or elimination of these foreign investment incentives would result in
the reduction or elimination of certain tax benefits thereby increasing the
Company's future effective income tax rate, which could have a material adverse
effect on the Company's results of operations.
The Company receives a substantial income tax benefit from the
extraterritorial income exemption ("ETI") under U.S. law. The ETI rules provide
that a percentage of the profits from products and intangibles exported from the
U.S. are exempt from U.S. tax. This benefit may not be available in the future
as ETI has been ruled an illegal export subsidy by the World Trade Organization.
Legislation has been introduced in Congress that would repeal ETI as of December
31, 2002. The repeal of ETI would result in the elimination of this tax benefit
thereby increasing the Company's future effective income tax rate, 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 results of operations.
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 the
Company's revenues and results of operations.
Stock-based Compensation Plans. The Company has two active stock-based
compensation plans and one inactive plan. The two active stock-based
compensation plans are the 1994 Incentive Stock Option Plan and the Employee
Stock Purchase Plan. The Company currently adheres to the disclosure only
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and as
such, no compensation cost has been recognized in the Company's financial
statements for the stock option plan and the stock purchase plan. The Company is
currently monitoring the recent discussions related to possible new regulations
regarding the accounting treatment for stock options. The Company will comply
with any changes in the accounting of stock options required by the FASB. If the
fair value based method of accounting for stock options established under SFAS
No. 123 were adopted, the Company estimates it would have recognized stock
option expense of approximately $73,000 and $340,000 for the quarter and six
month periods ended June 30, 2002. If the Company were to adopt the accounting
provision of SFAS No. 123, the adoption would be prospective. Accordingly, the
Company would expect stock option expense to increase in the future if
additional stock options are issued.
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, the Company's Chairman and Chief Executive
Officer, and other members of senior management and key technical personnel. The
Company has no agreements providing for the employment of any of its key
employees for any fixed term and the Company's key employees may voluntarily
terminate their employment with the Company at any time. The loss of the
services of one or more of the Company's key employees in the future could have
a material adverse effect on operating results. The Company also believes its
future success will depend in large part upon its ability to attract and retain
additional highly skilled management, technical, marketing, research and
development, and operational personnel with experience in managing large and
rapidly changing companies, including companies acquired through acquisition, as
well as training, motivating and supervising the employees. In addition, the
recruiting environment for software engineering, sales and other technical
professionals is very competitive. Competition for qualified software engineers
is particularly intense and is likely to result in increased personnel costs.
Failure to attract or retain qualified software engineers could have an adverse
effect on the Company's operating results. The Company also recruits and employs
foreign nationals to achieve its hiring goals primarily for 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
On January 25, 2001, the Company filed a complaint in U.S. District Court,
Eastern District of Texas (Marshall Division) against The MathWorks, Inc.
("Defendant") for patent infringement. The Company claims that the Defendant
infringes certain of the Company's U.S. patents. Defendant challenges the
validity and enforceability of these patents and asserts that it does not
infringe the claims of these patents. The Company seeks monetary damages,
injunction of the sale of certain products of the Defendant, and attorney's fees
and costs. The case was originally set for trial September 4, 2002. However, on
July 18, 2002, the court, due to other scheduling considerations, reset the
trial for January 6, 2003. As a result of the rescheduled trial, the Company
expects to incur legal expenses of approximately $700,000 in the third quarter
of 2002 and approximately $800,000 spread between the fourth quarter of 2002 and
the first quarter of 2003. Due to the inherent uncertainties of litigation,
there can be no assurance that there will not be significant changes in the
amount and timing of these expected expenses.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of stockholders was held on May 14, 2002.
(b) The following directors were elected at the meeting to serve a term of
three years:
Donald M. Carlton
Jeffrey L. Kodosky
The following directors are continuing to serve their terms:
James J. Truchard
Charles J. Roesslein
Ben G. Streetman
R. Gary Daniels
(c) The matters voted upon at the meeting and results of the voting with
respect to those matters were as follows:
Broker
For Against Abstain Non-Vote
(1) Election of directors:
Donald M. Carlton 45,960,187 447,542
Jeffrey L. Kodosky 45,923,056 484,673
Broker
For Against Abstain Non-Vote
(2) Ratification of 45,230,065 1,166,305 11,359
PricewaterhouseCoopers LLP
as the Company's independent
public accountants for the
fiscal year ending
December 31, 2002.
The foregoing matters are described in detail in the Company's definitive
proxy statement dated April 4, 2002, for the Annual Meeting of Stockholders held
on May 14, 2002.
ITEM 5. OTHER INFORMATION
Pursuant to the Company's Bylaws, stockholders of the Company may submit
proper proposals for inclusion in the Company's proxy statement and for
consideration at the next annual meeting of stockholders by submitting their
proposals in writing to the Secretary of the Company in a timely manner. In
order to be considered for inclusion in the Company's proxy materials for the
annual meeting of stockholders to be held in the year 2003, stockholder
proposals must be received by the Secretary of the Company no later than
December 5, 2002, and must otherwise comply with the requirements of Rule 14a-8
of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
In addition, the Company's bylaws establish an advance notice procedure
with regard to business brought before an annual meeting, including stockholder
proposals not included in the Company's proxy statement. For director
nominations or other business to be properly brought before the 2003 Annual
Meeting by a stockholder, such stockholder must deliver written notice to the
Secretary of the Company at the Company's principal executive office no later
than February 3, 2003 and no earlier than January 4, 2003. If the date of the
Company's 2003 Annual Meeting is advanced or delayed by more than 30 calendar
days from the first anniversary date of the 2002 Annual Meeting, your notice of
a proposal will be timely if it is received by the Company by the close of
business on the tenth day following the day the Company publicly announces the
date of the 2003 Annual Meeting.
The proxies solicited by the Company each year grant the proxy holders
discretionary authority to vote on any matter raised at the Company's annual
meeting. If a stockholder fails to comply with the foregoing notice provisions,
proxy holders will be allowed to use their discretionary voting authority should
the stockholder proposal come before the 2003 Annual Meeting.
A copy of the full text of the bylaw provisions governing the notice
requirements set forth above may be obtained by writing to the Secretary of the
Company. All notices of proposals and director nominations by stockholders
should be sent to National Instruments Corporation, 11500 N. Mopac Expressway,
Building B, Austin, Texas 78759, Attention: Corporate Secretary.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1* Certificate of Incorporation of the Company.
3.2* Bylaws of the Company.
4.1* Specimen of Common Stock certificate of the Company.
4.2* Rights Agreement dated as of May 19, 1994, between the Company and
The First National Bank of Boston.
10.1* Form of Indemnification Agreement.
10.2* 1994 Incentive Plan.
10.3* 1994 Employee Stock Purchase Plan.
11.1 Computation of Earnings Per Share
99.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (Reg. No. 33-88386) declared effective March 13, 1995.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter
ended June 30, 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: August 13, 2002
NATIONAL INSTRUMENTS CORPORATION
INDEX TO EXHIBITS
Exhibit No. Description Page
----------- ------------------------ ----
11.1 Statement Regarding Computation of 24
Earnings per Share
99.1 Certification of Chief Executive Officer 25
and Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act
of 2002