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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended: December 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
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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 offices) (zip code)
Registrant's telephone number, including area code:
(512) 338-9119
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of Class)
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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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an acceletated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No |_|
The aggregate market value of voting stock held by non-affiliates of the
registrant at the close of business on January 22, 2003, was $935,589,198 based
upon the last sales price reported for such date on the NASDAQ National Market.
For purposes of this disclosure, shares of Common Stock held by persons who hold
more than 5% of the outstanding shares of Common Stock and shares held by
officers and directors of the registrant as of December 31, 2002 have been
excluded in that such persons may be deemed to be affiliates. This determination
is not necessarily conclusive.
At the close of business on January 22, 2003, registrant had outstanding
51,101,102 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the definitive
proxy statement for the Annual Meeting of Stockholders to be held on May 13,
2003 (the "Proxy Statement").
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PART I
This Form 10-K contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These statements,
including statements regarding our strategy, products, product development
efforts and financial performance, are subject to risks and uncertainties. We
use words such as "anticipate," "believe," "plan," "expect," "future," "intend"
and similar expressions to identify forward-looking statements. Our actual
results could differ materially from the results anticipated in these
forward-looking statements as a result of certain factors including those set
forth under the heading "Factors affecting the Company's Business" beginning on
page 27, and elsewhere in this Form 10-K. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. You should not place undue reliance on these forward-looking
statements. We disclaim any obligation to update information contained in any
forward-looking statement.
ITEM 1. BUSINESS
National Instruments Corporation (the "Company" or "National Instruments")
is a leading supplier of measurement and automation products that engineers and
scientists use in a wide range of industries. These industries are spread across
a large and diverse market for test and measurement ("T&M") and industrial
automation ("IA") applications. The Company provides flexible application
software and modular, multifunction hardware that users combine with
industry-standard computers, networks and the Internet to create measurement and
automation systems, which the Company also refers to as "virtual instruments."
A virtual instrument is a user-defined measurement and automation system
that consists of an industry standard computer or workstation (which may be a
mainstream general-purpose computer or workstation or a version of an industry
standard computer or workstation that is specially designed and packaged for
harsh industrial or embedded environments), equipped with the Company's
user-friendly application software, cost-effective hardware and driver software.
Virtual instrumentation represents a fundamental shift from traditional
hardware-centered instrumentation systems to software-centered systems that
exploit the computational, display, productivity and connectivity capabilities
of computers, networks and the Internet. Because virtual instruments exploit
these computation, connectivity, and display capabilities, users can define and
change the functionality of their instruments, rather than being restricted by
fixed-functions imposed by traditional instrument vendors. The Company's
products empower users to monitor and control traditional instruments, create
innovative computer-based systems that can replace traditional instruments at a
lower cost, and develop systems that integrate measurement functionality with
industrial automation. The Company believes that giving users flexibility to
create their own user-defined virtual instruments for an increasing number of
applications in a wide variety of industries, and letting users leverage the
latest technologies from computers, networking and communications shortens
system development time and reduces both short- and long-term costs of
developing, owning and operating measurement and automation systems, and
improves efficiency and precision of applications spanning research, design,
production and service.
The Company is based in Austin, Texas and was incorporated under the laws
of the State of Texas in May 1976 and was reincorporated in Delaware in June
1994. On March 13, 1995, the Company completed an initial public offering of
shares of its Common Stock. The Company's Common Stock, $0.01 par value, is
quoted on the NASDAQ National Market System under the trading symbol NATI.
Industry Background
Engineers and scientists have long used instruments to observe, better
understand and manage the real-world phenomena, events and processes related to
their industries or areas of expertise. Instruments measure and control
electrical signals, such as voltage, current and power, and physical phenomena,
such as temperature, pressure, speed, flow, volume, torque and vibration. Common
instruments include voltmeters, signal generators, oscilloscopes, dataloggers,
spectrum analyzers, cameras, and temperature and pressure monitors and
controllers. Instruments generally perform three basic functions: data
acquisition and control; data analysis; and presentation of results. Instruments
are used pervasively in research, education, manufacturing and service
applications in numerous fields including electronics, automotive, aerospace,
telecommunications, medical research and pharmaceutical, semiconductor and
petrochemical.
Instruments and systems are used to facilitate research as well as product
design, production and service. In research and development settings, scientists
and engineers use instruments and systems to collect and analyze experimental
data and simulate manufacturing processes or techniques. In manufacturing
environments, engineers use instruments and systems to test and verify the
proper operation of the products being manufactured and to monitor and control
the manufacturing machines and processes. In service contexts, instruments and
systems are used to monitor, troubleshoot and repair products and processes.
Traditional Instrument Applications for Measurement and Automation
Instrument applications can be generally categorized as either T&M or IA.
T&M applications generally involve testing during the design, manufacture and
service of a wide variety of products. IA applications generally involve
automating the machinery and processes used in the production and distribution
of a wide variety of products and materials.
A typical T&M instrument is a stand-alone unit that has input, output and
analysis capabilities; knobs, switches and push buttons for user operation; and
gauges, meters or other displays for visual data presentation. Traditionally,
most T&M instruments were vendor-defined, fixed-function devices designed to
address specific applications. As a result, users had limited flexibility to
adapt their instruments to changing requirements. In the 1960's, vendors began
to incorporate integrated circuits, including programmable microcontrollers, to
increase instrument flexibility. In the mid-1970's, the General Purpose
Interface Bus ("GPIB" or "IEEE 488") was developed as a standard interface to
connect instruments to external computers. The first computer controllers for
GPIB instruments were based on proprietary hardware architectures. In the later
1970's, some minicomputers with general purpose but complex operating systems
were equipped for GPIB instrument control. In the early 1980's, personal
computers with limited processing power equipped with MS-DOS, a standard,
character-based operating system, began replacing minicomputers as the preferred
platforms for instrument control applications. In the 1990s, personal computers
with Windows operating systems and graphics-based application software grew in
popularity and became the dominant platforms for instrument control
applications. In the late 1990s, connectivity to the Internet and the ability
for personal computers to integrate and share data throughout the enterprise
further increased the popularity and use of PC-based instrumentation systems,
and new web-enabled tools enabled users to begin to easily leverage the Internet
for networked and distributed measurement applications. In the early 2000's, as
mainstream PCs continued their dramatic increase in processor performance,
memory, storage, and display capabilities at ever lower prices, improvements in
PC operating systems also increased reliability, stability, and network
connectivity. These improvements, combined with add-on products such as the
Company's LabVIEW Real-Time Software and associated hardware, enabled industry
standard PCs to be used in a wider range of T&M applications.
IA systems have long included mechanical devices, analog gauges and meters,
and since the 1960's, have also included electronic instruments such as data
loggers and strip chart recorders. In the 1970's, programmable logic controllers
("PLCs"), special-purpose, proprietary stand-alone industrial computers, were
introduced and were used primarily for "discrete" manufacturing applications
such as automobile assembly. PLCs have traditionally had primitive operator
interface panels incorporating buttons, lights and indicators. In parallel,
sophisticated instrumentation systems called distributed control systems
("DCSs") were also adopted to provide computer control of large-scale continuous
processes, such as those found in oil refineries. DCSs integrated a variety of
sensors and control elements using both analog and digital connections, all
controlled by a central computer running proprietary software. In the
mid-1980's, another approach became available when industrial PC-based IA
systems came into use. These early PC-based systems generally ran proprietary,
vendor-defined software and incorporated plug-in data acquisition boards or
interfaced to PLCs. In the 1990's, Ethernet networks grew in popularity as a
standard for connectivity between IA devices, instruments, and systems, and
personal computers with high-speed processors running Windows based operating
systems. In addition, graphics-based application software grew in popularity as
platforms for supervision and control of IA systems and applications. Finally,
just as in T&M applications, in the late 1990's connectivity to the Internet
enabled users to leverage networked applications via the internet. In the early
2000's, industry standard PC technologies began to migrate beyond traditional
desktop and laptop computer form factors into a wide variey of industrial and
embedded form factors. As a result, PC technologies designed for harsh
industrial environments began to replace traditional proprietary solutions in
industrial and embedded applications where the computer itself resides inside
industrial machines and processes to provide embedded real-time monitoring and
control.
Limitations of Traditional Approaches to Instrumentation
Instruments and systems for both T&M and IA applications have historically
shared common limitations, including: fixed, vendor-defined functionality;
proprietary, closed architectures that were generally difficult to program and
integrate with other systems; and inflexible operator interfaces that were
usually cumbersome to operate and change. These problems have been further
complicated in IA applications because specialized data transfer and
communications standards have not evolved rapidly or been widely adopted. For
example, PLCs, while greatly improving control of individual processes, created
multiple "islands of information" that were generally unable to communicate or
share data with other systems throughout the manufacturing enterprise.
Furthermore, proprietary instrumentation systems have traditionally been very
expensive, with IA system prices ranging as high as several million dollars and
T&M instrumentation system prices often ranging in the hundreds of thousands of
dollars. In addition, the limitations on programmability of traditional systems
means that adopting these systems to changing requirements is both expensive and
time consuming, and users are often required to purchase multiple single-purpose
instruments.
Although desktop computers in the 1980's typically were based on open
architectures, until the 1990's they lacked higher-level application software
development tools and intuitive graphical user interfaces ("GUIs").
Consequently, the process of creating intuitive operator interface and control
panels was difficult and expensive. These early desktop computers also lacked
the power to rapidly process and analyze the volume of data characteristic of
many high data rate T&M and IA applications. In addition, desktop computers were
difficult to network reliably until standard network operating systems evolved
late in the decade. For all of these reasons, users and vendors were relatively
slow to incorporate desktop computers in their instrumentation systems.
In the 1990's, desktop and portable computers improved significantly in
data and graphics processing power, storage, communication, and networking
capabilities, user-friendliness and reliability. Nevertheless, users accustomed
to the flexibility, efficiency, power and open architecture of these
later-generation computers, and the highly evolved application software
available for business computing needs, have been generally frustrated in their
efforts to integrate these computers into measurement and automation solutions.
Standard desktop computers were not equipped with the hardware connections
required to control many types of instruments and lacked
instrumentation-specific application development tools, including GUI
development environments. Neither standard programming languages such as C/ C++
and Visual Basic, nor operating systems such as Windows, Linux and UNIX, are
"measurement aware." Without the aid of instrumentation-specific software to
facilitate the integration of various instrumentation system capabilities and
components, engineers and scientists could not easily utilize the full potential
of computers, networks and the Internet to meet their measurement and automation
requirements.
The Company's Approach to Measurement and Automation
The Company pioneered a new computer-based approach to measurement and
automation called virtual instrumentation in 1986 when it introduced its LabVIEW
application software, which is a graphical programming environment that empowers
users to easily build their own computer-based instruments and systems to meet
their specific measurement and automation needs. While a traditional instrument
bundles the data acquisition, analysis and presentation functions in a single,
stand-alone unit, a "virtual instrument" system consists of industry standard
computers or workstations equipped with the Company's user-friendly application
software, cost-effective hardware and driver software that together perform the
functions of instruments. By unbundling the key instrumentation functions,
virtual instruments represent a fundamental shift from hardware-centered
instrumentation systems to software-centered systems that exploit the
computational, display, productivity and connectivity capabilities of computers,
networks and the Internet. The Company's application software products give
users the power and flexibility to define, implement, modify and control the
core data acquisition, analysis, and presentation functions of instruments with
their computer. Users can mix and match their choice of the Company's DAQ, GPIB,
VXI, PXI, image acquisition, motion control or industrial communications
products to create virtual instrumentation systems that meet their specific
instrumentation needs. The Company's products empower users to monitor and
control instruments, create innovative computer-based systems that can replace
instruments at a lower cost, and integrate measurement functionality with
industrial automation and standard network connectivity to improve efficiency
and precision of applications spanning research, design, production and service.
Because much of the instrumentation functionality resides in the software, in a
significant sense, the software is the instrument.
User Benefits
Compared with traditional solutions, the Company believes its products and
computer-based, virtual instrumentation approach provide the following
significant customer benefits:
Performance, Ease-of-Use and Efficiency
The Company's virtual instrument application software brings the power and
ease-of-use of computers, networks and the Internet to instrumentation. With
features such as graphical programming, automatic code generation capabilities,
graphical tools libraries, ready-to-use example programs, libraries of specific
instrumentation functions, and the ability to deploy their applications on
platforms ranging from standard desktop and laptop computers to computers
designed for harsh industrial settings and embedded "real-time" control, users
can quickly build a virtual instrument system that meets their individual
application needs. For example, a user may build the data acquisition and
analysis functions of an instrument by selecting and connecting icons
representing particular functions and may customize the display on the
computer's monitor to reflect the desired presentation. With faster time to
solution, users have more time to optimize system functionality and performance,
and can devote more time to their core work rather than to programming. In
addition, the continuous improvement in performance of PCs and the Internet,
which are the core platform for the Company's approach, result in direct
performance benefits for virtual instrument users in the form of faster
execution for software-based measurement and automation applications, resulting
in shorter test times and faster automation, and higher manufacturing
throughput.
Modularity, Reusability and Reconfigurability
The Company's products include reusable hardware and software modules that
offer considerable flexibility in configuring systems. This ability to reuse and
reconfigure instrument systems allows users to reduce development time and
maximize efficiency by eliminating duplicated programming efforts and to quickly
adapt their instruments to new and changing needs. In addition, these features
help protect both hardware and software investments against obsolescence.
Mix and Match Capabilities
The flexibility of the Company's virtual instrumentation approach permits
users to mix and match many combinations of GPIB, VXI, DAQ, PXI, image
acquisition, motion control and industrial communications products to build
customized measurement and automation solutions. The Company's open product
architecture provides a high level of integration between the Company's products
and other industry standard instrumentation products. This approach provides
users with the flexibility to mix and match the Company's and third-party
hardware components when developing custom virtual instrumentation systems.
Long-Term Compatibility Across Multiple Computer Platforms
The Company offers a variety of multi-platform software products so users
can choose the platform and programming methodology that best meets their needs
and skills. These software products also have portable, open architectures so
users can move their applications among multiple platforms and operating
systems. In addition, the Company strives to ensure long-term compatibility
between its products and the latest industry-standard computers, operating
systems, programming languages and tools, as well as backward compatibility with
its own product offerings.
Network and Integrate with Customers' Computing Environments
The Company's products facilitate connectivity of measurement and
automation systems with the enterprise by utilizing industry communication
standards such as the Web, Ethernet and TCP/IP. The Company's products provide
integrated Web support, data and file transfer between computers, distributed
access to databases and remote test and measurement and process monitoring
capabilities. In addition, the Company's products are also compatible with a
wide variety of familiar, easy-to-use software applications such as word
processors, spreadsheets, Web browsers, and databases. In many cases, a single
computer or workstation can serve both the instrumentation and general purpose
computing needs of scientists and engineers.
Large User Base
The Company supports and encourages the sharing of ideas, derived software
libraries and modules among its broad user base through its NI.com Web site,
user groups, newsletters, conferences and seminars. This large base of users
stimulates the expansion of the Company's network of approximately 600 third
party system integrators and consultants, who can save users time and money by
providing value-added expertise, software programs and integration of systems
for use with the Company's products.
Lower Total Solution Cost
The Company believes that its products and solutions offer
price/performance advantages over traditional instrumentation. Virtual
instrumentation provides users the ability to utilize industry standard
computers and workstations equipped with modular and reusable application
software, cost-effective hardware and driver software that together perform the
instrumentation functions that would otherwise be performed by costly,
proprietary instrumentation systems. In addition, virtual instrumentation gives
users the flexibility and portability to adapt to changing needs, whereas
traditional closed systems are both expensive and time consuming to adapt, if
adaptable at all.
Strategy
The Company's objective is to be a leading supplier of measurement and
automation products and solutions to engineers, scientists and others in both
T&M and IA applications. To achieve this objective, the Company is pursuing a
strategy that includes the following elements:
Expand Broad Customer Base
Serve A Large and Diverse Market. The Company's products and services are
designed to serve a broad customer base across many industries. The Company
defines product features and capabilities by working closely with technically
sophisticated customers and seeks to achieve high unit volumes by selling these
same products to a large base of customers with diverse measurement and
automation needs.
Support Many Computer and Instrument Options. The Company diversifies its
customer base by accommodating many popular computer platforms and a variety of
instrumentation options. In addition, the Company expects to continue to create
or adapt products for computer systems and instrumentation options that gain
market acceptance. Customers are provided a range of price/performance options
through the Company's extensive line of products.
Provide Worldwide Marketing and Distribution. The Company uses multiple
coordinated distribution channels in its major world markets. The Company
devotes significant resources to direct sales activities in the United States
and in key international markets. In addition to its direct sales channel, the
Company's other distribution channels include distributors, OEMs, VARs and
systems integrators and consultants. By using this broad range of channels, the
Company seeks to develop and maintain relations with its customers and prospects
and to provide the levels of support, training and education required by the
market. To address the range of sales opportunities, the Company expects to
continue to pursue value-added sales channels through formal relationships with
OEMs, VARs, consultants or other third parties when such relationships can add
significant value to its products or revenues. The Company intends to expand
each of these distribution networks to take advantage of market opportunities.
Acquire New Technologies. The Company has in the past acquired companies,
products, and technologies to augment its product offerings, and intends to
continue to seek opportunities to satisfy customer needs and build market
penetration through acquisitions in the future. In connection with these
acquisitions, the Company has leveraged its established sales channels in an
effort to accelerate the delivery of the acquired product to the market.
Target Academic Environments. The Company markets and sells its products to
colleges and universities, increasing the potential for future growth as
students gain experience using the Company's products before entering the work
force.
Maintain High Levels of Customer Satisfaction
Offer Innovative Modular and Integrated Solutions. The Company intends to
continue to deliver innovative, modular software and hardware tools with open,
portable architectures that can be easily integrated to create instrumentation
systems and solutions. The Company solicits regular feedback from its customers,
resulting in the addition of new product features and enhanced performance, to
help ensure that existing and new products meet or surpass customer
expectations.
Provide Global Customer Support and Education. The Company's sales and
marketing engineers have the technical expertise necessary to understand
customers' application needs and work with them to identify cost-effective
solutions using the virtual instrumentation approach. The Company also offers
comprehensive customer support, including technical support via the NI.com Web
site, electronic mail, bulletin boards, fax and telephone, newsletters, warranty
service and repair, upgrade programs, free and paid seminars and technical
classes. In 2002 the Company continued to invest to leverage the Web for
customer support. Through the Company's NI.com Web site, customers have access
to a growing range of support options to solve their own problems directly over
the Web, including software downloads, upgrades and bug fixes, automated product
configuration tools, knowledge databases of common questions and answers, online
seminars, live product demonstrations and discussion forums.
Deliver Long-Term Compatibility. The Company emphasizes consistency in the
implementation of its products across different platforms and strives to
maintain a high degree of backward compatibility between existing and new
products, engendering a high degree of customer loyalty.
Leverage External and Internal Technology
Leverage Generally Available Technology. The Company leverages the research
and development efforts of vendors of personal computers and workstations,
operating systems, programming languages and software development tools, and
their suppliers. By integrating Web, networking and communications capabilities
directly in its software and hardware products, the Company's products allow
users of its virtual instrument approach to easily distribute measurement and
automation capabilities throughout factories and around the world, easily
integrate measurement and automation data throughout their organization and
across the enterprise and achieve advanced solutions at a lower development
cost.
Support Open Architecture on Multiple Platforms. The Company approaches the
market with an open architecture so users have the flexibility to combine the
Company's products with those from instrument suppliers, computer vendors and
competitors.
Leverage Core Technologies. The Company designs proprietary ASICs to
optimize performance and reduce production costs. The Company utilizes these
ASICs and its other internally developed hardware and software components in
multiple products to achieve consistency and compatibility between products.
Develop and Support Industry Standards. The Company actively participates
in efforts to standardize key technologies by participating in industry
consortia and serving on standards committees, such as IEEE 488, VXI, Compact
PCI, PXI, PICmg, the Interchangeable Virtual Instrumentation Foundation, also
called IVI, Foundation Fieldbus, OPC, and ASAM. The Company's ongoing strategy
is to conform its products to established and emerging standards in both the
general computer and the instrumentation industries.
Products and Technology
The Company offers an extensive line of measurement and automation
products. Engineers, scientists and other users involved in T&M and IA
applications can use these products with computers, networks and the Internet to
develop customer-defined virtual instrument solutions. The Company's products
consist of application software, and hardware components together with related
driver software. In T&M applications, the Company's products can be used to
monitor and control traditional instruments or to create computer-based
instruments that can replace the traditional instruments. In IA applications,
the Company's products can be used in the same ways as in T&M and can also be
used to integrate measurement functionality with process automation
capabilities. The Company's products are designed to work either in an
integrated solution or separately. The Company believes that the flexibility,
functionality and ease of use of its application software promotes sales of the
Company's other software and hardware products.
Application Software
The Company believes that application software is playing an increasingly
important role in the development of computer-based instruments and systems in
measurement and automation applications. The Company's application software
products leverage the increasing capability of computers, networks and the
Internet for data analysis, connectivity and presentation power to bring
increasing efficiency and precision to measurement and automation applications.
The Company's application software products include LabVIEW, DIAdem, Measurement
Studio, LabWindows/CVI, TestStand, Switch Executive, Lookout, Measure, DASYLab,
and VI Logger. The Company's application software products are integrated with
the Company's hardware/driver software.
The Company offers a variety of software products for developing
measurement and automation applications to meet the different programming and
computer preferences of its customers. LabVIEW, LabWindows/CVI, and Measurement
Studio for Microsoft development software are programming environments with
which users can develop GUIs, control instruments and acquire, analyze and
present data. With these software products, users can design custom virtual
instruments by creating a GUI on the computer screen through which they operate
the actual program and control selected hardware. Users can customize front
panels with knobs, buttons, dials and graphs to emulate control panels of
instruments or add custom graphics to visually represent the control and
operation of processes. LabVIEW, LabWindows/CVI and Measurement Studio also have
ready-to-use libraries for controlling hundreds of programmable instruments,
including serial, GPIB and VXI, the Company's plug-in DAQ boards and PXI/PCI
computer-based instruments. Once created, virtual instruments can be modified or
used as components of another program by the original developer or another user.
The principal difference between LabVIEW, LabWindows/CVI, and Measurement
Studio is in the way users develop programs. With LabVIEW, users program
graphically, developing application programs by connecting icons to create
"block diagrams" which are natural design notations for scientists and
engineers. With LabWindows/CVI, users may program with the conventional,
text-based language of C. Measurement Studio consists of application-specific
ActiveX controls and C++ classes and libraries that add measurement productivity
to general purpose Microsoft Visual Basic, Visual C++ and Visual Studio.NET
development environments.
The latest revisions of LabVIEW and Measurement Studio software packages
feature enhanced capabilities to allow users to more easily integrate the Web
into their computer-based instrumentation applications. Measurement Studio 6.0,
a major upgrade, was introduced in 2001. LabVIEW 6.1, which was introduced in
2002, continued to build on the Internet capabilities of LabVIEW, allowing the
customer to easily communicate, share and control measurement and automation
systems and information with anyone on the Web. In addition, customers can use
the Internet and Intranets to build distributed, networked systems throughout
their enterprise. In 2002, the Company also expanded the capabilities of its
LabVIEW Real Time software product to run on the new industrial Compact
FieldPoint hardware platform specially designed and packaged for harsh
industrial or embedded environments. This adds to the portfolio of PXI and
FieldPoint real-time enabled hardware that allow users who have exceptional
response requirements to reliably execute an expanded range of system-level
applications even if the PC operating system crashes--solving a key objection
some potential users have had in the past to using PC technology for embedded
devices or for mission critical measurement and automation applications, and
extending the range of applications for computer-based measurement and
automation.
The Company also sells a range of optional add-on products for LabVIEW and
Measurement Studio, such as advanced analysis libraries, database tools and
Internet integration, including the LabVIEW Datalogging and Supervisory Control
Module, an add-on module for high channel count applications in research and
development and manufacturing. New toolkits introduced in 2002 integrate LabVIEW
software increasingly with design tools used by design engineers, including the
LabVIEW Simulation Interface Toolkit and the LabVIEW DSP Test Integration
Toolkit for use with Texas Instruments Code Composer Studio.
The Company also offers a software product called TestStand targeted for
T&M applications in a manufacturing environment. TestStand is a test management
environment for organizing, controlling, and running automated production test
systems on the factory floor. It also generates customized test reports and
integrates product and test data across the customers' enterprise and across the
Internet. TestStand manages tests that are written in LabVIEW, LabWindows/CVI,
Measurement Studio, C and C++, and VisualBasic, so test engineers can easily
share and re-use test code throughout their organization and from one product to
the next. TestStand is a key element of the Company's strategy to broaden the
reach of its application software products across the corporate enterprise. In
2001, the Company introduced TestStand 2.0, a significant upgrade of TestStand
for high volume manufacturing applications. This version allows testing of
multiple units in parallel on the same test system by simply adding additional
measurement and automation hardware. Users can therefore easily scale their test
systems to increase throughput or reduce test time without major software
changes, which lowers the cost to test each unit and increases their profit
margin. In 2002, the Company introduced Switch Executive application software to
simplify configuration and programming of switching in manufacturing test
systems. Also in 2002, the Company introduced TestStand 2.0.1 which includes
enhancements for tighter integration with Switch Executive.
The Company's instrumentation software products also include DASYLab and
DIAdem. DASYLab is a schematic environment by which users can quickly configure
simple DAQ applications using both the Company's and third-party DAQ boards. The
Company introduced DASYLab 7.0 in 2002 as well as DIAdem 8.1. DIAdem is an easy
to use, rapid development environment for data acquisition, monitoring,
visualization, open and closed loop control, analysis, automation and
documentation. DIAdem features extensive off-line analysis capabilities,
including analysis functions specific to automotive test. DIAdem 8.1 integrates
report generation capabilities further with LabVIEW.
The Company's Lookout software product is targeted specifically for IA
applications. Lookout is a non-programming solution. Lookout is a human machine
interface/supervisory control and data acquisition ("HMI/SCADA") software
product that requires no programming or script writing. Lookout provides a
scalable architecture for applications ranging from HMIs to large, sophisticated
SCADA applications.
In 2001, the Company introduced VI Logger, a software product targeted
specifically at Data Logging applications. VI Logger is built with LabVIEW
technology, and works with a wide variety of the Company's data acquisition and
signal conditioning hardware products.
Hardware Products and Related Driver Software
The Company's hardware and related driver software products include GPIB,
VXI, DAQ, PXI, image acquisition, motion control, and industrial communications.
The Company believes it can deliver significant cost/performance benefits to
users and distinguish its products from competitive products by designing
proprietary ASICs for use in its hardware products. Software drivers are
necessary to link hardware to the operating system and the Company's application
software. The high level of integration between the Company's products provides
users with the flexibility to mix and match hardware components when developing
custom virtual instrumentation systems.
GPIB Interfaces/Driver Software. GPIB, also known as the IEEE 488 standard,
has existed since 1975 and defines the protocol for transferring data between
certain instruments and computers over an industry-standard cable. The computer
must be equipped with a GPIB interface. Driver software controls the interface
and the transfer of data between the instrument and the computer. GPIB is
largely used in T&M applications.
The Company began selling GPIB products in 1977 and is a leading supplier
of GPIB interface boards and driver software to control traditional GPIB
instruments. These traditional instruments are manufactured by a variety of
third-party vendors and are used primarily in T&M applications. The Company's
diverse portfolio of hardware and software products for GPIB instrument control
is available for a wide range of computers, workstations and minicomputers. The
Company's GPIB product line also includes products for portable computers such
as a PCMCIA-GPIB interface card, and products for controlling GPIB instruments
using the computer's standard parallel USB, IEEE 1394 (Firewire), Ethernet, and
serial ports.
Portability of GPIB application programs is provided by the Company's
NI-488.2 driver software and NI-VISA driver software. The Company offers
networking capabilities through its GPIB products. With these products, users
can communicate with and control GPIB instruments from any point on an
Ethernet-based TCP/IP network. The Company also offers a variety of GPIB support
products, including converters, expanders, extenders, data buffers and GPIB
system analyzers as well as cables and other accessories.
VXI Modules/Driver Software. VXI is an industry standard instrumentation
platform developed in 1987 through an industry consortium to reduce the size and
increase the performance of instrumentation systems for automated test and
measurement applications. With VXI, the physical size of multiple instrument
systems can be decreased and communication between instruments and computers can
be improved relative to rack of box instruments. Like GPIB, VXI is supported by
a variety of traditional third-party instrument manufacturers and is largely
used in military and aerospace applications.
VXI instruments are modular in design and can be inserted into an
industry-standard chassis. Unlike GPIB instruments, VXI modules do not have a
front panel for manual operation or visual data presentation. Therefore,
software is necessary for users to create, define the functionality of and
operate VXI instrumentation systems. Today, VXI is being used primarily to
supplement or replace high-end GPIB products in military and aerospace
applications.
The Company is a leading supplier of VXI computer controller hardware and
the accompanying NI-VXI and NI-VISA driver software. The Company also offers
LabVIEW, LabWindows/CVI, Measurement Studio and TestStand software products for
VXI systems. In 2002, the Company introduced two new lines of VXI controllers,
the VXI 870B and VXI 770, that offer increased performance and industry standard
operating system support.
DAQ Hardware/Driver Software. DAQ hardware and driver software products are
"instruments on a board" that users can combine with sensors, signal
conditioning hardware and software to acquire analog data and convert it into a
digital format that can be accepted by a computer. The Company believes that
computer-based DAQ products are typically a lower-cost solution than traditional
instrumentation.
The Company believes that applications suitable for automation with
computer-based DAQ products are widespread throughout many industries, and that
many systems currently using traditional instrumentation (either manual or
computer-controlled) could be displaced by computer-based DAQ systems. The
Company offers a range of computer-based DAQ products, including models for
digital, analog and timing input-output, and for transferring data directly to a
computer's random-access memory.
The Company's DAQ products provide a range of price/performance options,
and include products for high-speed applications such as on-line monitoring and
control as well as products designed for long-term recording of slowly changing
data such as temperatures. The Company also offers products with features
comparable to stand-alone traditional instruments such as oscilloscopes, DMMs,
and function and arbitrary waveform generators. The Company offers DAQ
hardware/driver software products for numerous desktop and notebook computers.
The Company also offers SCXI (signal conditioning extensions for
instrumentation) hardware, which expands the types and quantity of sensors that
can be connected to the Company's data acquisition boards. In 2002, the Company
expanded its DAQ product line with new low-cost and high-resolution hardware,
portable data acqusition solutions for laptop computers, and high-speed
simultaneous sampling boards.
PXI Modular Instrumentation. The Company's PXI modular instrument platform,
which was introduced in 1997, is a desktop PC packaged in a small, rugged form
factor with expansion slots and instrumentation extensions. It combines
mainstream PC software and PCI hardware with advanced instrumentation
capabilities derived from the VXI architecture. In essence, PXI is an
instrumentation PC with plenty of expansion slots to enable the company to
pursue complete system-level opportunities and deliver a much higher percentage
of the overall system content using the company's own products. PXI delivers
many of the benefits of VXI in a much smaller package with higher performance
and at lower prices. The Company continues to expand its PXI product offerings
with new modules, which address a wide variety of measurement and automation
applications. Following the Company's 2001 introduction of a new family of
embedded PXI controllers that significantly improve the price and performance of
PXI, and upgrade its LabVIEW Real-Time software so that the PXI system platform
can be used for embedded and real-time applications, the Company introduced two
highly innovative PXI based products in the third quarter of 2002. Engineers can
reduce the time it takes to make accurate measurements with National Instruments
PXI-4070 FlexDMM -- a full-featured 6 1/2-digit digital multimeter (DMM) in a
single-slot 3U PXI module. The National Instruments FlexDMM delivers the
accuracy of a traditional 6 1/2-digit DMM along with the advanced features and
throughput of higher resolution DMMs that cost thousands of dollars more. These
advanced features include a 1.8 MS/s fully isolated digitizer mode,
self-calibration, and offset compensated ohms measurement. In addition, the
Company introduced the NI PXI-5660 2.7 GHz RF signal analyzer. Test engineers
can perform RF measurements up to 200 times faster than before with the National
Instruments PXI-5660 RF signal analyzer. Its software-defined measurement
capabilites and integration with the PXI platform make it competitive for unique
measurements in applications ranging from consumer electronics to avionics,
satellite and missile testing. Additionally, in the fourth quarter of 2002, the
Company introduced the LabVIEW FPGA Pioneer system, a kit that enables customers
to configure the hardware logic on a reconfigurable PXI module through
innovative graphical software. This kit provides an off-the-shelf solution for
many real-time and embedded applications that previously required custom
hardware. PXI also continues to gain acceptance, with endorsements from over 50
suppliers. The number of unique PXI modules for T&M applications grew from 600
to over 880 modules in 2002.
Machine Vision/Image Acquisition. In late 1996, the Company introduced its
first image acquisition hardware. With the advanced technologies in PC's and the
Company's vision products, it is cost-effective for end-users to integrate
vision into their measurement and automation applications. The Company's vision
software is designed to work with many different software environments,
including LabVIEW, LabWindows/CVI, Visual Basic, C, and Measurement Studio and
hardware buses including PCI and PXI. Vision is commonly used in applications
ranging from quality control of manufactured products to biomedical cell
counting to security. In 2002, the Company expanded its software offering with
new easy-to-use menu driven machine vision software that can run as a
stand-alone vision system. The new software can also generate LabVIEW code.
Users can easily modify the LabVIEW code to create custom applications.
Motion Control. During 1997, the Company introduced its first line of
motion control hardware, software and peripheral products. This intelligent
PC-based motion control hardware is programmable from industry standard
development environments including LabVIEW, LabWindows/CVI and Measurement
Studio. The Company's software tools for motion are easily integrated with the
Company's other product lines, allowing motion to be combined with image
acquisition, test, measurement, data acquisition and automation. The Company's
computer-based motion products allow users to leverage standard hardware and
software in measurement and automation applications to create robust, flexible
solutions. In 2002, the Company introduced new low cost motion controllers for
stepper motors, developed a program for third-party companies with
complimentarary products, and released new software for interactive motion
control which simplifies motion control application development.
Industrial Communications Interfaces. In mid-1995, the Company began
shipping its first interface boards for communicating with serial devices, such
as dataloggers and PLCs targeted for IA applications, and benchtop instruments,
such as oscilloscopes, targeted for T&M applications. Industrial applications
need the same high-quality, easy-to-use hardware and software tools for
communicating with industrial devices such as process instrumentation, PLCs,
single-loop controllers, and a variety of I/O and DAQ devices. National
Instruments offers four hardware and driver software product lines for
communication with industrial devices--Controller Area Network (CAN), DeviceNet,
Foundation Fieldbus, and RS-485 and RS-232. The Company's industrial
communication products are designed to work with standard serial software
drivers, and Windows versions of LabVIEW, LabWindows/CVI and Measurement Studio.
Distributed I/O and Embedded Control Hardware/Software. The Company
introduced its FieldPoint product for distributed I/O applications in mid-1997.
FieldPoint is an intelligent, distributed, and modular I/O system that gives
industrial system developers an economical solution for distributed data
acquisition, monitoring and control applications. Suitable for direct connection
to industrial signals, FieldPoint includes a wide array of rugged and isolated
analog and digital I/O modules, terminal base options, and network modules.
FieldPoint software provides seamless integration into the LabVIEW Real-Time and
LabVIEW Datalogging and Supervisory Control Modules, driver libraries for
support under LabVIEW, LabWindows/CVI, Measurement Studio and Lookout, and an
OPC server that provides wide compatibility of FieldPoint hardware with other
industrial automation software packages. The FieldPoint 2000 family of real-time
network control modules, which were introduced in 2001, enable LabVIEW Real-Time
users to download their LabVIEW code and easily create networked systems of
intelligent, real-time nodes for embedded measurement and control. In the fourth
quarter of 2002, the Company launched Compact FieldPoint, a new intelligent
distributed I/O product line with 23 new measurent and automation modules.
Compact FieldPoint extends NI's hardware and LabVIEW Real-time into new
industrial control, process monitoring, and embedded machine applications that
require intellignet I/O products with a small form factor, a wide operating
temperature, and resistance to shock and vibration.
Customer Training Courses
The Company offers fee-based training classes and self-paced course kits
for many of its software and hardware products. On-site courses are quoted per
customer requests. The Company also offers programs to certify programmers and
instructors for its products.
Markets and Applications
The Company's products are used across many industries in a variety of
applications from research and development to production testing and industrial
control. The following industries and applications are served worldwide by the
Company: advanced research, automotive, commercial aerospace, computers and
electronics, continuous process manufacturing, education, government/defense,
medical research/pharmaceutical, power/energy, semiconductors, automated test
equipment, telecommunications and others.
Customers
The Company has a broad customer base, with no customer accounting for more
than 3% of the Company's sales in 2002, 2001, or 2000.
Marketing
Through its worldwide marketing efforts, the Company strives to educate
engineers and scientists about the benefits of the Company's virtual
instrumentation philosophy, products and technology, and to highlight the
performance, ease of use and cost advantages of its products. The Company also
seeks to present its position as a technological leader among producers of
instrumentation software and hardware and to help promulgate industry standards
that will benefit users of computer-based instrumentation.
The Company reaches its intended audience through its Web site at NI.com as
well as the distribution of written and electronic materials including
demonstration versions of its software products, participation in tradeshows and
technical conferences and training and user seminars. An in-house staff develops
the NI.com Web site, advertising, publicity, and promotional materials that the
Company uses worldwide. The primary marketing/sales tool is the Company's Web
site at NI.com. Throughout 2000, 2001, and 2002, the Company invested
aggressively to enhance the content, performance, and features of NI.com as well
as to integrate E-commerce as a core component of the Company's business model.
Through NI.com, customers can view the Company's complete on-line catalog,
participate in on-line seminars and demonstrations, interactively configure
systems, obtain pricing in a number of currencies, place orders, track the
status of orders, register products and obtain software upgrades. The Company
believes its direct business model provides the opportunity to leverage the Web
heavily to reach customers and improve operations.
The primary printed marketing/sales tool is the Company's catalog,
published annually and distributed worldwide. The catalog is approximately 800
pages, with detailed tutorial information that educates readers about the
Company's integrated product architecture and virtual instrumentation concept.
Short-form versions of the catalog are typically also available in languages of
major international markets, including French, German, Spanish and Japanese.
The Company also uses quarterly newsletters to educate current and
prospective customers about its products and technologies. These newsletters
include new product information, feature articles that educate readers about new
instrumentation technology, user solution case studies of real-world
applications, product news from Alliance Program members and key customers, and
event and customer education schedules. These newsletters are available in print
form and via email subscription. There are also many books available on virtual
instrumentation products in English, German, French, Japanese and other
languages.
The Company actively markets its products in higher education environments,
and identifies many colleges, universities and trade and technical schools as
key accounts. The Company offers special academic pricing and products to enable
universities to utilize Company products in their classes and laboratories. The
Company believes its prominence in the higher education area can contribute to
its future success because students gain experience using the Company's products
before they enter the work force.
Sales and Distribution
The Company distributes its software and hardware products primarily
through a direct sales organization. The Company also uses independent
distributors, OEMs, VARs, system integrators and consultants to market its
products. The Company has sales offices in the United States and sales offices
and distributors in key international markets. Sales outside of North America
accounted for approximately 50%, 49%, and 47% of the Company's revenues in 2002,
2001, and 2000, respectively. The Company expects that a significant portion of
its total revenues will continue to be derived from international sales. See
Note 12 of Notes to Consolidated Financial Statements for details concerning the
geographic breakdown of the Company's net sales, operating income and
identifiable assets.
Through all of its sales channels, the Company seeks to approach potential
customers with a highly technical sales force. The Company believes that the
majority of sales are made directly to those persons within an organization who
actually use the Company's products to integrate their own systems. The Company
identifies and targets major end-user accounts as those having a large number of
actual or potential end users, and believes that it achieves a high level of
repeat customer sales. The Company targets major accounts with a variety of
targeted sales and marketing campaigns such as seminars, user groups,
newsletters and direct mail.
Throughout 2002, the Company continued to invest aggressively to integrate
the Web as a core component of its direct sales model. The Company provides
worldwide on-line pricing for products in a number of currencies, allows
customers to order the complete catalog of products via the Web, provides a
variety of Web-based seminars, demonstrations, and configuration tools to allow
customers to more easily select and order multiple compatible products for their
systems, and offers Prime Access business-to-business capabilities to allow key
customers to conduct business directly with the Company through secure, private
pages at NI.com.
Direct Sales
The Company directly markets and sells its products in the Americas, Europe
and Asia. The Company has sales offices located throughout the United States and
in key international markets. Many of the Company's international sales offices
employ application engineering technical support specialists as well as sales,
marketing and administrative personnel.
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 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 US dollars. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 11 of Notes to Consolidated Financial Statements.
Distributors
The Company utilizes distributors primarily to market its products in
geographic areas not served by the Company's direct sales organization.
Generally, the Company's indirect sales customers do not maintain significant
inventory levels.
OEMs
The Company utilizes OEMs customers such as traditional instrument
manufacturers and automatic test equipment (ATE) system suppliers who offer for
sale systems, fully integrated by the OEM customer, containing embedded
components of various companies, including National Instruments. The Company
approaches OEM accounts with its standard product lines and offers quantity
discounts based on volume commitments and technical support capabilities and
requirements. The Company also promotes its sales and marketing capabilities to
its OEM customers by providing specialized product training, documentation,
packaging and part numbers to simplify ordering, flexible shipping and warranty
repair options and joint promotion.
VARs, System Integrators and Consultants
The Company has relationships with third-party VARs, system integrators and
consultants who offer add-on products and system integration services. These
third-party developers expand the Company's market and sales opportunities by
adding value to the Company's standard products, making them suitable for
vertical market applications such as manufacturing automation or image
processing and analysis. The Company maintains a formal third-party
sales/marketing/training program, called the Alliance Program, which it uses to
work with many of the VARs, system integrators and consultants. Applicants must
be sponsored for membership by a Company sales engineer, pass qualification
criteria and pay a nominal annual membership fee. In late 1998, the Company
introduced an elite level of its Alliance Program called Select Integrators.
Select Integrators must qualify for the program based upon their level of
business with the Company and beginning in 2002, new Select Integrators must
pass the CSIA (Control System Integrators Association) Best Practices and
Benchmarks audit. As of December 31, 2002, the Company's Alliance Program had
approximately 562 members including 15 Select Integrators. The Company publishes
on-line directories on its NI.com Web site of third-party Alliance Program
member products and services for use by its sales force and its end users to
locate additional products and/or services compatible with the Company's
products. The Company makes available to qualified third parties the opportunity
to participate in joint marketing and sales programs, such as trade shows,
customer sales events and the Company's newsletters. In addition to its
relationships with third-party VAR, system integrators and consultants, the
Company has a direct presence in the German systems integration market.
Customer Support
The Company believes the ability to provide comprehensive service and
support to its customers is an important factor in its business. The Company
permits customers to return products within 30 days from receipt for a refund of
the purchase price less a restocking charge, and generally provides a two-year
warranty on GPIB hardware products, a one-year warranty on other hardware
products, and a 90-day warranty on cables and software (medium only). Customers
may also purchase a one-year extended warranty on hardware products.
Historically, warranty costs have not been material. Some of the key elements of
the Company's service and support strategy include:
Customer Technical Support
The Company maintains a large staff of application engineers, all of whom
are highly qualified technical professionals. These application engineers
provide customer support by telephone, fax, electronic mail and world-wide Web
forums, and electronic bulletin boards, and are trained in both instrumentation
and computer technology. In 2002, the Company continued to invest heavily to
leverage the Web for customer support. Through the Company's NI.com web site,
customers have access to a growing range of support options to solve their own
problems directly over the Web, including software downloads, upgrades and bug
fixes, automated product configuration tools, knowledge databases of common
questions and answers, live product demonstrations, and discussion forums. As a
result of the Company's commitment to the Web, in 2002, the Company's NI.com web
site was awarded one of the "Ten Best Web Support Sites" according to
Association of Support Professionals for the second consecutive year and
customers were able to request technical support in 12 different languages.
Upgrades
The Company typically offers programs in which existing customers can
upgrade to the latest Company products for an upgrade fee. Application software
customers have the option of purchasing a one-year renewable maintenance and
support program, which entitles them to unspecified software upgrades and
priority access to the Company's technical support hotline.
Customer Education
The Company offers a variety of fee-based training classes ranging in scope
from basic and introductory courses for new users to advanced courses for
experienced users.
Competition
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"). The Company believes
Agilent is the dominant supplier of GPIB and VXI-compatible instruments and
systems. Agilent is also a leading supplier of equipment used in data
acquisition and control applications. Agilent offers its own line of GPIB
instrument controllers, as well as hardware and software add-on products for
third-party desktop computers and workstations that directly compete with the
Company's products. Agilent is aggressively advertising and marketing its
products and system integration services. Because of Agilent's dominance in the
instrumentation business, changes in its marketing strategy or product offerings
could have a material adverse affect on the Company. The Company also faces
competition from a variety of other competitors.
Certain of the Company's competitors have substantial competitive
advantages in terms of breadth of technology, sales, marketing and support
capability and resources, including the number of sales and technical personnel
and their ability to cover a geographic area and/or particular account more
extensively and with more complete solutions than the Company can offer, and
more extensive warranty support, system integration and service capabilities
than those of the Company. In addition, large competitors can often enter into
strategic alliances with key customers or target accounts of the Company, which
can potentially have a negative impact on the Company's success with those
accounts.
The Company believes its ability to compete successfully depends on a
number of factors both within and outside its control, including: 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; success in leveraging the Web; strategic relationships with other
suppliers; timing of new product introductions by the Company or its
competitors; protection of the Company's products by effective use of
intellectual property laws; general market and economic conditions; and events
related to weather and government actions throughout the world. There can be no
assurance that the Company will be able to compete successfully in the future.
Research and Development
The Company believes that its long-term growth and success depends on
delivering high quality software and hardware products on a timely basis. The
Company intends to focus its research and development efforts on enhancing
existing products and developing new products that incorporate appropriate
features and functionality to be competitive with respect to technology and
price/performance.
The Company's research and development staff strives to build quality into
products at the design stage in an effort to reduce overall development and
manufacturing costs. The Company's research and development staff also designs
proprietary ASICs, many of which are designed for use in several products. The
goal of the ASIC design program is to further differentiate the Company's
products from competing products, to improve manufacturability and to reduce
costs. The Company seeks to reduce the time to market for new and enhanced
products by sharing its internally developed hardware and software components
across multiple products.
In the past, the Company has experienced significant delays in the
introduction of new products. The Company's strategy of developing products
which depend upon third parties' commercially available technologies is
substantially dependent on the third parties willingness to grant pre-release
access to, and the Company's ability to develop expertise in, current and future
product developments of such third parties. There can be no assurance that the
Company will continue to receive such pre-release access from any of these
companies, or, even with such access, that the Company will be able to develop
products on a timely basis that are compatible with future releases.
The Company has implemented certain programs, including pre-release bug
analysis measures and enhanced project-tracking efforts, in order to improve the
product development process and to permit more accurate product development
scheduling. Nonetheless, there can be no assurance that the Company's research
and development efforts will not encounter delays or other difficulties, that
development efforts will result in commercially successful products, or that the
Company's products will not be rendered obsolete by changing technology or new
product announcements by other companies.
As of December 31, 2002, the Company employed 791 people in product
research and development. The Company's research and development expenses were
$64.0 million, $60.7 million, and $56.0 million for 2002, 2001, and 2000,
respectively.
Intellectual Property
The Company relies on a combination of patent, trade secret, copyright and
trademark law, contracts and technical measures to establish and protect its
proprietary rights in its products. As of December 31, 2002, the Company held
178 United States patents (173 utility patents and 5 design patents) and 8
patents in foreign countries (5 patents registered in Europe in various
countries; 1 patent in Canada; and 2 patents in Japan), and had 230 patent
applications pending in the United States and foreign countries. Forty of such
issued United States patents are software patents related to LabVIEW, and cover
fundamental aspects of the graphical programming approach used in LabVIEW. The
Company's patents expire from 2007 to 2020. No assurance can be given that the
Company's pending patent applications will result in the issuance of patents.
The Company also owns certain registered trademarks in the United States and
abroad.
Although the Company relies to some extent on trade secret protection for
much of its technology, and regularly obtains confidentiality agreements with
key customers who wish to know more about the Company's product development
philosophy and/or future directions, there can be no assurance that third
parties will not either independently develop the same or similar technology,
obtain unauthorized access to the Company's proprietary technology or misuse the
technology to which the Company has granted access.
The laws of certain foreign countries treat the protection of proprietary
rights of the Company in its products differently from those in the United
States, and in many cases the protection afforded by such foreign laws is not as
strong as in the United States. The Company believes that its products and their
use do not infringe the proprietary rights of third parties. There can be no
assurance, however, that infringement claims will not successfully be made.
Manufacturing and Suppliers
The Company manufactures a substantial majority of its products at its
facilities in Austin, Texas and Debrecen, Hungary. Product manufacturing
operations at the Company can be divided into four areas: electronic circuit
card and module assembly; cable assembly; technical manuals and product support
documentation; and software duplication. The Company manufactures most of the
electronic circuit card assemblies and modules in-house, although subcontractors
are used from time to time. The Company manufactures some of its electronic
cable assemblies in-house, but many assemblies are produced by subcontractors.
The Company primarily subcontracts its software duplication. Reliance on
contract manufacturers entails risks of quality problems, less control of
product pricing, and potential unavailability of or delays in delivery of
products, any of which could have a material adverse effect on the Company's
results of operations. Although the Company attempts to maintain adequate safety
stock of critical inventory components, there can be no assurance that the
Company, together with its third-party manufacturers, will be able to produce
sufficient quantities of the Company's products in a timely manner.
The Company has implemented a customer focused quality system that involves
all organizations. The Company's products are designed and tested in a formal
development process and are controlled in manufacturing and distribution.
Additionally, the Company is committed to continuous improvement of the
Company's products, services and processes to assure long term customer
satisfaction.
During 2001, the Company completed a manufacturing facility in Hungary. The
Hungarian operation is the Company's second manufacturing facility and was
expanded in 2002 to add a second Surface Mount Line, a Mechanical Assembly Line
and a Through-Hole Production Line. The Company estimates that in 2003 products
manufactured at its Hungarian manufacturing facility will source a significant
portion of the Company's global sales. Any delay in bringing this facility to
maximum capacity could have a material adverse effect on the Company's results
of operations.
The marketplace dictates that many of the Company's products be shipped
very quickly after an order is received. Since purchased component and
manufacturing lead times are typically much longer than the short order
fulfillment time, the Company is required to keep adequate amounts of finished
goods inventory and must use an accurate system for forecasting demand for those
products in its production planning operations. Fluctuations in demand for the
Company's products typically result from month-to-month variations in the
quantity and mix of products and from normal, seasonal variations. A variety of
circumstances, including inaccurate forecasts of customer demand, poor
availability of purchased components, supplier quality problems, production
equipment problems, transport disruptions or damage to products in manufacturing
operations, could create a buildup of excess finished goods on the one hand or
an inability to timely deliver product on the other. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Engineering refinements to the Company's new hardware and software products
are fairly common. These changes can result in the disruption of the
manufacturing operation and concurrent delays in delivery dates. Finished goods
inventory at the Company's international warehouses and branches typically has a
short shelf life due to engineering changes and product upgrades initiated by
the Company's product development operation, and, if managed incorrectly, can
result in significant quantities of obsolete inventory. This relatively short
shelf life, and the resulting requirement to properly manage the quantity of
inventory to meet customer demand while minimizing inventory obsolescence, has
been and continues to be a challenge to the Company and its branch offices. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company obtains most of its electronic components from suppliers
located principally in the United States and Asia. Some of the components
purchased by the Company, including ASICs, are sole-sourced. Any disruption of
the Company's supply of sole or limited source components, whether resulting
from business demand, quality, production or delivery problems, could adversely
affect the Company's ability to manufacture its products, which could in turn
adversely affect the Company's business and results of operations. See
"Managements Discussion and Analysis of Financial Condition and Results of
Operations."
Backlog
The Company typically ships products shortly following the receipt of an
order. Accordingly, the Company's backlog typically represents less than 10 days
sales. Backlog should not be viewed as an indicator of future sales.
Employees
As of December 31, 2002, the Company had 3,008 employees, (excluding 138
part-time employees, interns and co-ops) including 791 in research and
development, 1,387 in sales and marketing and customer support, 483 in
manufacturing and 347 in administration and finance. None of the Company's
employees are represented by a labor union and the Company has never experienced
a work stoppage. The Company considers its employee relations to be good. For
four consecutive years, 1999, 2000, 2001, and 2002, the Company has been named
among the 100 Best Companies to Work for in America according to FORTUNE
magazine.
Available information
Our Internet website address is http://www.ni.com. Our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 are available through our Internet
website as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC. Our Internet website and the
information contained therein or connected thereto are not intended to be
incorporated into this Annual Report on Form 10-K.
ITEM 2. PROPERTIES
The Company's principal activities are conducted at three Company-owned
buildings in Austin, Texas. The Company owns approximately 69 acres of land in
north Austin, Texas, on which are a 232,000 square foot office facility, a
140,000 square foot manufacturing and office facility, and a newly constructed
380,000 square foot research and development facility. The Company also owns a
136,000 square foot office building in Austin, Texas which is partially leased
to three tenants. The Company also owns a 148,000 square foot manufacturing
facility in Debrecen, Hungary. The Company's German subsidiary, National
Instruments Engineering GmbH & Co. KG owns a 25,500 square foot office building
in Aachen, Germany in which a majority of its activities are conducted. National
Instruments Engineering also owns another 19,375 square foot office building,
which is partially leased to BMS Modern Games and Klocke Nanotech.
As of December 31, 2002, the Company also leased a number of sales and
support offices in the United States and overseas. The Company's facilities are
currently utilized below design maximum capacity to allow for headcount growth
and design/construction cycles. The Company believes existing facilities are
adequate to meet its current requirements.
ITEM 3. 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
infringed 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.
The Company has filed two complaints in the U.S. District Court, Eastern
District of Texas (Marshall Division) against The MathWorks, Inc. ("Defendant")
for patent infringement. In the first complaint, filed January 25, 2001, the
Company claims that the Defendant infringes certain of the Company's U.S.
patents. The Defendant challenges the validity and enforceability of these
patents and asserts that it does not infringe the claims of these patents. Trial
on the first case began January 13, 2003, and is currently pending. The Company
expects a jury verdict by the end of January 2003. In the second complaint,
filed October 21, 2002, the Company claims that the Defendant infringes certain
other of the Company's U.S. patents. In each case, the Company seeks monetary
damages and injunction of the sale of certain products of the Defendant. The
Company also seeks attorney's fees and costs in the second case. For both
complaints, the Company expects to incur legal expenses of approximately $2
million during the first quarter of 2003. Due to the inherent uncertainties of
litigation, there may be significant changes in the amount and timing of these
expected expenses.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock, $0.01 par value, began trading on the Nasdaq
National Market under the symbol NATI effective March 13, 1995. Prior to that
date, there was no public market for the Common Stock. The high and low closing
prices for the Common Stock, as reported by Nasdaq, are as indicated in the
following table.
High Low
2002
First Quarter 2002...................................... $42.62 $34.12
Second Quarter 2002..................................... 41.75 30.21
Third Quarter 2002...................................... 31.50 21.56
Fourth Quarter 2002..................................... 36.46 20.00
High Low
2001
First Quarter 2001...................................... $56.125 $31.563
Second Quarter 2001..................................... 38.14 26.688
Third Quarter 2001...................................... 38.80 26.00
Fourth Quarter 2001..................................... 39.70 25.37
At the close of business on January 16, 2003, there were approximately 637
holders of record of the Common Stock and approximately 12,679 shareholders of
beneficial interest.
The Company believes factors such as quarterly fluctuations in results of
operations, announcements by the Company or its competitors, technological
innovations, new product introductions, governmental regulations, litigation or
changes in earnings estimates by analysts may cause the market price of the
Common Stock to fluctuate, perhaps substantially. In addition, stock prices for
many technology companies fluctuate widely for reasons that may be unrelated to
their operating results. These broad market and industry fluctuations may
adversely affect the market price of the Company's Common Stock.
To date, the Company has not paid any cash dividends on its Common Stock.
While the Company currently does not anticipate paying any cash dividends in the
immediate future; the Company plans to review its dividend policy should
President Bush's proposal to completely eliminate double taxation of dividends
become law.
See Item 12 for information regarding securities authorized for issuance
under equity compensation plans.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements, including the Notes to
Consolidated Financial Statements. The information set forth below is not
necessarily indicative of results of future operations. The information should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Years Ended December 31,
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(in thousands, except per share data)
Statements of Income Data:
Net sales:
North America.................................. $195,770 $195,842 $215,960 $175,873 $153,435
Europe......................................... 122,800 128,523 133,799 108,801 86,961
Asia Pacific................................... 72,220 60,910 60,390 44,909 33,834
-------- -------- -------- -------- --------
Consolidated net sales......................... 390,790 385,275 410,149 329,583 274,230
Cost of sales.................................... 105,086 101,297 98,326 76,040 65,187
-------- -------- -------- -------- --------
Gross profit................................... 285,704 283,978 311,823 253,543 209,043
-------- -------- -------- -------- --------
Operating expenses:
Sales and marketing............................ 145,671 145,555 147,377 120,886 100,783
Research and development....................... 63,964 60,745 55,954 45,531 34,757
General and administrative..................... 35,714 29,234 32,077 24,258 20,455
-------- -------- -------- -------- --------
Total operating expenses...................... 245,349 235,534 235,408 190,675 155,995
Operating income.............................. 40,355 48,444 76,415 62,868 53,048
Other income (expense):
Interest income................................ 3,295 5,837 6,390 4,759 3,439
Interest expense............................... (128) (26) (533) (404) (463)
Net foreign exchange gain (loss) and other..... 96 (722) (1,159) 130 (224)
-------- -------- -------- -------- --------
Income before income taxes and cumulative effect
of accounting change............................. 43,618 53,533 81,113 67,353 55,800
Provision for income taxes....................... 12,213 17,131 25,956 21,553 18,414
-------- -------- -------- -------- --------
Income before cumulative effect of accounting
change........................................... 31,405 36,402 55,157 45,800 37,386
Cumulative effect of accounting change,
net of tax....................................... -- -- -- (552) --
-------- -------- -------- -------- --------
Net income................................... $ 31,405 $ 36,402 $ 55,157 $ 45,248 $ 37,386
======== ======== ======== ======== ========
Basic earnings per share:
Income before cumulative effect of accounting
change......................................... $ 0.61 $ 0.72 $ 1.10 $ 0.92 $ 0.76
Cumulative effect of accounting change, net
of tax......................................... -- -- -- (0.01) --
-------- -------- -------- -------- --------
Basic earnings per share....................... $ 0.61 $ 0.72 $ 1.10 $ 0.91 $ 0.76
======== ======== ======== ======== ========
Diluted earnings per share:
Income before cumulative effect of accounting
change......................................... $ 0.59 $ 0.68 $ 1.03 $ 0.88 $ 0.73
Cumulative effect of accounting change, net
of tax......................................... -- -- -- (0.01) --
-------- -------- -------- -------- --------
Diluted earnings per share..................... $ 0.59 $ 0.68 $ 1.03 $ 0.87 $ 0.73
======== ======== ======== ======== ========
Weighted average shares outstanding:
Basic.......................................... 51,219 50,910 50,332 49,776 49,248
Diluted........................................ 53,411 53,651 53,564 52,203 51,150
December 31,
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(in thousands)
Balance Sheet Data:
Cash and cash equivalents........................ $ 40,240 $ 49,089 $ 75,277 $ 45,309 $ 51,538
Short-term investments........................... 113,638 101,422 79,525 83,525 49,158
Working capital.................................. 211,453 209,836 220,208 173,761 133,510
Total assets..................................... 458,714 424,619 389,350 318,753 249,786
Long-term debt, net of current portion........... -- -- -- 4,301 4,379
Total stockholders' equity....................... 386,463 366,164 321,023 254,235 204,184
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following "Management's Discussion and Analysis of Financial Condition
and Results of Operations: contains certain forward-looking statements,
including statements regarding our financial performance. These statements are
subject to risks and uncertainties. We use words such as "anticipate,"
"believe," "plan," "expect," "future," "intend" and similar expressions to
identify forward-looking statements. Our actual results could differ materially
from the results anticipated in these forward-looking statements. As a result of
certain factors including those set forth under the heading "Factors affecting
the Company's Business" beginning on page 27, and elsewhere in this Form 10-K.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. You should not place undue reliance on
these forward-looking statements. We disclaim any obligation to update
information contained in any forward-looking statement.
Overview
National Instruments designs, develops, manufactures and markets
instrumentation and automation software and hardware for general commercial,
industrial and scientific applications. The Company offers hundreds of products
used to create virtual instrumentation systems for measurement and automation.
The Company has identified a large and diverse market for test and measurement
("T&M") and industrial automation ("IA") applications. The Company's products
are used in a variety of applications from research and development to
production testing, monitoring and industrial control. In test and measurement
applications, the Company's products can be used to monitor and control
traditional instruments or to create computer-based instruments that can replace
traditional instruments. In industrial automation applications, the Company's
products can be used in the same ways as in test and measurement and can also be
used to integrate measurement functionality with process automation
capabilities. The Company sells to a large number of customers in a wide variety
of industries. No single customer accounted for more than 3% of the Company's
sales in 2002, 2001 or 2000.
The Company has been profitable in every year since 1990. However, there
can be no assurance that the Company's net sales will grow or that the Company
will remain profitable in future periods. As a result, the Company believes
historical results of operations should not be relied upon as indications of
future performance.
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:
Years Ended December 31,
2002 2001 2000
-------- -------- --------
Net sales:
North America................................ 50.1% 50.8% 52.7%
Europe....................................... 31.4 33.4 32.6
Asia Pacific................................. 18.5 15.8 14.7
-------- -------- --------
Consolidated net sales....................... 100.0 100.0 100.0
Cost of sales.................................... 26.9 26.3 24.0
-------- -------- --------
Gross profit................................. 73.1 73.7 76.0
Operating expenses:
Sales and marketing.......................... 37.3 37.8 35.9
Research and development..................... 16.4 15.8 13.7
General and administrative................... 9.1 7.5 7.8
-------- -------- --------
Total operating expenses.................. 62.8 61.1 57.4
-------- -------- --------
Operating income.......................... 10.3 12.6 18.6
Other income (expense):
Interest income.............................. 0.8 1.5 1.5
Interest expense............................. -- -- (0.1)
Net foreign exchange loss and other.......... -- (0.2) (0.3)
-------- -------- --------
Income before income taxes....................... 11.1 13.9 19.7
Provision for income taxes....................... 3.1 4.5 6.3
-------- -------- --------
Net income....................................... 8.0% 9.4% 13.4%
======== ======== ========
Net Sales. In 2002, net sales for the Company's products were $390.8
million, a 1% increase from the level achieved in 2001, which followed a
decrease in net sales of 6% in 2001 from the level achieved in 2000. The Company
believes the increase in sales in 2002 is primarily attributable to the
introduction of new and upgraded products and an increased market acceptance of
the Company's products in Asia. The Company believes the decrease in sales in
2001 was primarily attributable to the approximate 25% 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.
North American revenue was $195.8 million in 2002, flat with 2001,
following a 9% decrease in 2001 from 2000. European revenue was $122.8 million
in 2002, a decrease of 4% from 2001, following a 6% decrease in 2001 from 2000.
Asia Pacific revenue grew 19% to $72.2 million in 2002, which followed a 5%
increase in 2001 over 2000 levels. The Company believes that approximately 80%
of the decrease in revenue in Europe in 2002 is attributable to the decrease in
sales of the Company's hardware products that are used to control traditional
instruments, the result of the downturn in the industrial economy, and that
approximately 20% of the decrease in revenue in Europe is due to the weakening
of the Company's Euro exchange rate. See the discussion below for more
information concerning the impact of foreign currency fluctuations on sales
growth. The Company believes that approximately 50% of the increase in sales and
in the revenue growth rate in Asia Pacific in 2002 is attributable to the
introduction of new and upgraded products, an expanded customer base, an
increased field sales force, and approximately 50% of the increase is
attributable to the Company's favorable hedge position with regard to the
Japanese yen.
International sales (sales to customers outside of North America) accounted
for 50%, 49% and 47% of the Company's consolidated net sales for 2002, 2001 and
2000, respectively. The Company intends to continue to expand its international
operations by increasing its presence in existing markets, adding a market
presence in some new geographical markets and continuing the use of distributors
to sell its products in some countries.
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 2002 and
2001, this weighted average value of the U.S. dollar decreased by 2.5%, 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
during 2002 had been the same as that in 2001, on a pro-forma basis, the
Company's sales for 2002 would have been flat with sales from 2001. Pro-forma
European sales for 2002 would have decreased by 4% from 2001 sales. Pro-forma
Asia Pacific sales for 2002 would have increased by 10% over 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 $4.5 million in 2002. The preceding pro-forma amounts and
percentages are not presented in accordance with generally accepted accounting
principles but are presented for comparative purposes.
Gross Profit. As a percentage of sales, gross profit represented 73%, 74%
and 76% in 2002, 2001 and 2000, respectively. The relatively high software
content of the Company's products is demonstrated in the gross margins achieved
by the Company. In 2002, the lower margin is attributable to the reduced sales
of certain hardware products that are used to control traditional instruments
and an increase in the Company's overall manufacturing costs due to the ramp up
of the Company's Hungarian production facility. There can be no assurance that
the Company will maintain its historical margins. The Company believes its
current manufacturing capacity is adequate to meet current needs.
Sales and Marketing. Sales and marketing expense in 2002 was flat with
2001, which followed a decrease of 1% in 2001 from 2000. Sales and marketing
personnel increased by 75 during 2002 from 1,312 at December 31, 2001 to 1,387
at December 31, 2002. Sales and marketing expense as a percentage of revenue was
37% in 2002, down from 38% in 2001 and up from 36% in 2000. 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 expense in 2002
increased 5% compared to 2001 following an increase of 9% in 2001 over 2000. The
increase in research and development costs in absolute amounts in each period
was primarily due to increases in personnel costs from hiring of additional
product development engineers. Research and development personnel increased from
720 at December 31, 2001 to 791 at December 31, 2002. The Company plans to
continue making a significant investment in research and development in order to
remain competitive and support revenue growth.
The Company capitalizes software development costs in accordance with
Statement of Financial Accounting Standards ("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 $3.8 million, $3.1
million and $2.6 million during 2002, 2001 and 2000, respectively. Software
development costs capitalized during such years were $5.8 million, $3.9 million
and $5.0 million, respectively. (See Note 5 of Notes to Consolidated Financial
Statements for a description of intangibles.)
General and Administrative. General and administrative expenses in 2002
increased 22% from 2001, which followed a decrease of 9% in 2001 from 2000. The
increase in general and administrative expenses in 2002 from 2001 is
attributable to increased litigation costs of $4.7 million associated with a
legal action brought by the Company against The MathWorks, Inc. in 2001 to
enforce the Company's intellectual property rights, compared to a gain of
approximately $1.2 million in 2001 recorded upon the settlement of a previous
case with Cognex Corporation. The Company expects to continue to incur
significant litigation expenses in 2003 related to patent litigation with The
MathWorks. A significant amount of the decrease in general and administrative
costs in 2001 was due to reduced intellectual property defense costs, the result
of the net recovery of $1.2 million of intellectual property defense costs
accrued in the prior year, and to operational efficiencies resulting from
continued systems improvement. Implementation of information systems to support
the Company's new research and development facility, upgrading its worldwide
business applications suite to Oracle's latest web-based release 11i and
continued investment in the Company's web presence were the main areas of focus
for investment in the information systems department in 2002. General and
administrative expenses as a percentage of revenue increased to 9.1% during 2002
from 7.6% during 2001. The Company expects that general and administrative costs
will increase in absolute amounts and will fluctuate as a percentage of revenue
as the Company continues to invest in maintaining its existing systems,
protecting its intellectual property, developing the infrastructure for the new
Hungarian manufacturing facility, and developing web-based commerce and
management information systems.
During the fourth quarter of 2002, the Company and Trilogy Software, Inc.
("Trilogy") settled a dispute regarding Trilogy's buy-out of the lease of the
Company's Millenium office building which resulted in a gain of approximately
$6.0 million from lease termination. As a result of additional facility lease
consolidation, the Company incurred lease termination costs of approximately
$2.4 million in the fourth quarter of 2002.
In the fourth quarter of 2002, the Company contributed approximately $3.6
milion to the National Instruments Foundation, a 501(c)(3) charitable foundation
established in 2002 for the purpose of continued promotion of scientific and
engineering research and education at higher education institutions worldwide.
Two of the four directors of the National Instruments Foundation are current
officers of National Instruments.
Interest Income and Expense. Interest income decreased 44% in 2002 from
2001, which followed a decrease of 9% in 2001 from 2000. The decrease in
interest income in 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 cash provided by operating activities in 2002 totaled $51.0
million.
Net Foreign Exchange Gain (Loss). The Company experienced net foreign
exchange losses of $724,000 in 2002, compared to losses of $1.4 million in 2001
and losses of $1.5 million in 2000. These results are attributable to movements
between the U.S. dollar and the local currencies in countries in which the
Company's 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, yen and pound sterling) and limits the duration of these
contracts to 40 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.
(See Note 10 of Notes to Consolidated Financial Statements for a description of
the Company's forward and purchased option contracts and hedged positions.) The
Company's hedging strategy increased the foreign exchange loss for December 31,
2002 by $1.4 million and reduced the net foreign exchange loss for December 31,
2001 by $6.5 million.
Provision for Income Taxes. The provision for income taxes reflects an
effective tax rate of 28% in 2002 and 32% in 2001 and 2000. The decrease in the
effective rate resulted from income tax benefits attributable to the
extraterritorial income exclusion and a change in the distrubion of income among
taxing jurisdictions, particularly the impact of the Company's new manufacturing
facility in Hungary. The 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 December 31, 2002, the Company had working
capital of approximately $211.5 million compared to $209.8 million at December
31, 2001.
Accounts receivable increased to $63.0 million at December 31, 2002 from
$53.6 million at December 31, 2001, as a result of higher sales levels in the
fourth quarter of 2002 compared to the fourth quarter of 2001. Receivable days
outstanding at December 31, 2002 increased to 54 days from 51 days at December
31, 2001. Consolidated inventory balances have increased to $39.2 million at
December 31, 2002 from $32.6 million at December 31, 2001. The increase in
inventory was due to the planned increase in finished goods and safety stock
inventory which enabled the Company to reduce delivery time of products to
customers thereby increasing customer satisfaction. Inventory turns of 2.8 per
year for 2002 represent a decrease from turns of 3.1 per year for 2001.
Cash used in 2002 includes $30.8 million for the purchase of property and
equipment, $19.6 million for the repurchase of approximately 813,000 shares of
common stock and $5.8 million for capitalization of software development costs.
During 2002, the Company completed construction of, and moved into a
382,000 sq. ft. office building ("Mopac C") located on its North Austin campus.
The total cost for the new building, including furniture, fixtures and equipment
was approximately $57.4 million. The Company consolidated its leaseholds upon
completion of its move into Mopac C during the fourth quarter of 2002. All the
Company's buildings are free from lien.
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. The Company estimates that its budgeted capital expenditures
over the next fiscal year will be approximately $18 million. As of December 31,
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.
The following summarizes the Company's contractual cash obligations as of
December 31, 2002 (in thousands):
Payments Due by Period
----------------------------------------------
Total 2003 2004 2005 2006 Beyond
------ ------ ------ ------ ------ ------
Long-term debt................. $ -- $ -- $ -- $ -- $ -- $ --
Capital lease obligations...... -- -- -- -- -- --
Operating leases............... 4,456 1,652 1,616 988 102 98
Other long-term obligations.... -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total contractual cash
obligations.................... $4,456 $1,652 $1,616 $ 988 $ 102 $ 98
====== ====== ====== ====== ====== ======
The following summarizes the Company's other commercial commitments as of
December 31, 2002 (in thousands):
Amount of Commitment Expiration by Period
----------------------------------------------
Total 2003 2004 2005 2006 Beyond
------ ------ ------ ------ ------ ------
Guarantees..................... $3,800 $3,800 $ -- $ -- $ -- $ --
Other commercial commitments... 4,300 4,300 -- -- -- --
------ ------ ------ ------ ------ ------
Total commercial commitments... $8,100 $8,100 $ -- $ -- $ -- $ --
====== ====== ====== ====== ====== ======
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. These dynamics
have adversely affected revenue growth in international markets in previous
years. The Company's foreign currency hedging program includes both foreign
currency forward and purchased option contracts to reduce the effect of exchange
rate fluctuations. However, the hedging program will not eliminate all of the
Company's foreign exchange risks. (See "Net Foreign Exchange Gain (Loss)" and
Note 10 of Notes to Consolidated Financial Statements.)
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 inventories 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 December 31, 2002,
the Company has non-cancelable operating lease obligations of approximately $4.5
million and contractual purchase commitments with various suppliers of general
components and customized inventory components of approximately $4.3 million. As
of December 31, 2002, the Company has outstanding guarantees for payment of
foreign operating leases, customs and foreign grants totaling approximately $3.8
million. (See Note 12 of Notes to Consolidated Financial Statements.) At
December 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 exchange rates on its results of operations and financial position.
Based on the foreign exchange instruments outstanding at December 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 $13.7 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. (See Note 9 of Notes to Consolidated
Financial Statements for a description of the Company's financial instruments at
December 31, 2002 and 2001.)
Short-term Investments. The fair value of the Company's investments in
marketable securities at December 31, 2002 was $113.6 million. Investments with
maturities beyond one year may be classified as short-term based on their highly
liquid nature and because such marketable securities represent the investment of
cash that is available for current operations. 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 December 31, 2002, a 100 basis point
increase or decrease in interest rates would result in a decrease or increase of
approximately $570,000, respectively, in the fair value of the investment
portfolio. 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 require pre-approval of all non-audit services
by its auditor, PricewaterhouseCoopers LLP including the following: 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. The
Company is currently monitoring the developments regarding new regulations as a
result of the recent adoption of the Sarbanes-Oxley Act of 2002, and will comply
with any new requirements.
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 No. 146 is not expected to have a material effect
on the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. This Statement amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. This Statement also amends the disclosure provision of
SFAS No. 123 and APB No. 28, Interim Financial Reporting, to require disclosure
in the summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
The adoption of SFAS No. 148 did not have a material effect on the Company's
financial position or results of operations.
Critical Accounting Policies
The Company's critical accounting policies are as follows:
o Revenue recognition
Revenue from the sale and licensing of products is generally
recognized on the date the product is shipped to the customer. Revenue
related to the sale of maintenance contracts is deferred and amortized
on a straight-line basis over the service period.
o Estimating allowances, specifically sales returns, the allowance for
doubtful accounts and the valuation allowance for excess and obsolete
inventories
The preparation of financial statements requires the Company to make
estimates and assumptions that affect the reported amount of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Specifically, the
Company must make estimates of potential future product returns
related to current period product revenue. Management analyzes
historical returns, current economic trends, and changes in customer
demand and acceptance of our products when evaluating the adequacy of
the sales returns and other allowances. Significant management
judgments and estimates must be made and used in connection with
establishing the sales returns and other allowances in any accounting
period. The allowance for sales returns was $1.2 million at December
31, 2002. Material differences may result in the amount and timing of
the Company's revenue for any period if management made different
judgments or utilized different estimates. Similarly, our management
must make estimates of the uncollectability of our accounts
receivables. Management specifically analyzes accounts receivable and
analyzes historical bad debts, customer concentrations, customer
credit-worthiness and current economic trends when evaluating the
adequacy of the allowance for doubtful accounts. The allowance for
doubtful accounts was $3.8 million at December 31, 2002. The Company
writes down its inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and
estimated market value based on assumptions on future demands and
market conditions. The valuation allowance for excess and obsolete
inventories was $3.5 million at December 31, 2002. If actual market
conditions are less favorable than those projected by management,
additional inventory write downs may be required.
o Accounting for costs of computer software
The Company capitalizes costs related to the development and
acquisition of certain software products. Capitalization of costs
begins when technological feasibility has been established and ends
when the product is available for general release to customers.
Amortization is computed on an individual product basis for those
products available for market and has been recognized based on the
product's estimated economic life, generally three years. At each
balance sheet date, the unamortized costs are reviewed by management
and reduced to net realized value when necessary. As of December 31,
2002, unamortized capitalized software development costs was $9.3
million.
o Valuation of long-lived and intangible assets
The Company assesses the impairement of identifiable intangibles,
long-lived assets and related goodwill whenever events or changes in
circumstances indicate that the carrying value may not be recoverable.
Factors considered important which could trigger an impairment review
include the following:
o Significant underperformance relative to expected historical or
projected future operating results;
o Significant changes in the manner of the Company's use of the acquired
assets or the strategy for the overall business;
o Significant negative industry or economic trends;
o The Company's market capitalization relative to net book value.
When it is determined that the carrying value of intangibles,
long-lived assets and related goodwill may not be recoverable based
upon the existence of one or more of the above indicators of
impairment, the measurement of any impairment is determined and the
carrying value is reduced as appropriate. As of December 31, 2002, the
Company had net goodwill of approximately $5.8 million.
Factors Affecting the Company's Business
U.S./Global Economic Slowdown. As occurred in 2001 and 2002, 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. The Company could also be subject
to or impacted by acts of terriorism and/or the effects that a war or U.S.
military action would have on the U.S. and/or global economies. The worsening of
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 2003. The
Company's spending for 2003 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 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 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 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. During 2002, the Company devoted
significant resources to implementing information systems to support its new
research and development facility on its Austin campus. The Company also devoted
significant resources to upgrading its Japanese office's business applications
suite to Oralcle's latest web-based release 11i, and to continued development of
web offerings. In 2003, the Company will be focusing on upgrading its U.S.
office's business applications suite to Oracle's latest web-based release 11i,
and will continue to devote significant resources to the development of the web.
Failure to successfully implement these initiatives could have a material
adverse effect on the Company's operating results.
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 import and export regulations. Failure
to ensure compliance with these regulations could result in fines and/or
termination of import and export privileges, 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 2002 and 2001,
the weighted average value of the U.S. dollar decreased by 2.5%, 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 2002 had been the same
as that in 2001, on a pro-forma basis, the Company's sales for 2002 would have
been flat with sales from 2001. If the weighted average value during 2002 had
been the same as that in 2001, on a pro-forma basis, the Company's consolidated
operating expenses would have been $240.8 million, representing a decrease of
$4.5 million. If the U.S. dollar strengthens in the future, it could have a
materially adverse effect on the Company's operating results.
As of December 31, 2002, the Company has $1.0 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 12 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. This facility
sources 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 operating results.
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. These benefits may not be available in the
future due to changes in Hungary's political condition and/or tax laws. 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 operating results.
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 the ETI has been ruled an illegal export subsidy by the World Trade
Organization. The repeal of the 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 operating results.
Products Dependent on Certain Industries. Sales of 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 the past, 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 the
Company's revenues and operating results.
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 as amended by SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, 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 effective January 1, 2002, for the options granted during 2002,
the Company estimates it would have recognized stock option expense of
approximately $614,000. 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 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 involved in litigation 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 and 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 operating results.
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 affect on operating results. The Company also believes its
future success will depend 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, 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 operationg results.
Risk of Product Liability Claims. The Company's products are designed 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 7(a). MARKET RISK
Response to this item is included in "Item 7--Management's Discussion and
Analysis of Financial Condition and Results of Operations--Market Risk" above.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to the
Consolidated Financial Statements set forth on pages F-1 through F-21 and S-1
hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant intends to file a definitive proxy statement pursuant to
Regulation 14A with the Securities and Exchange Commission (the "Proxy
Statement") relating to its annual meeting of stockholders not later than 120
days after the end of the fiscal year covered by this Report, and such
information is incorporated by reference herein.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
incorporated by reference to the Company's Proxy Statement under the heading
"Election of Directors."
The information concerning the Company's executive officers required by
this Item is incorporated by reference to the Company's Proxy Statement under
the heading "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Election of Directors."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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. Starting in the fourth quarter of 2000, Jeffrey L. Kodosky and
James J. Truchard have made periodic sales of the Company's stock pursuant to
such plans.
The information required by this Item pursuant to Item 403 of Regulation
S-K is incorporated by reference to the Company's Proxy Statement under the
heading "Election of Directors."
The information required by this Item pursuant to Item 201(d) of Regulation
S-K is incorporated by reference to the Company's Proxy Statement under the
heading "Equity Compensation Plans Information".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the fourth quarter of 2002, the Company contributed approximately $3.6
milion to the National Instruments Foundation, a 501(c)(3) charitable foundation
established in 2002 for the purpose of continued promotion of scientific and
engineering research and education at higher education institutions worldwide.
Two of the four directors of the National Instruments Foundation are current
officers of National Instruments.
During 2001, the Company acquired a 10% minority interest in another
company for $2.5 million. Because of the Company's ownership percentage and its
lack of control and inability to exert influence over this entity, this
investment is accounted for under the cost method. Sales to this company during
2002 and 2001 were $141,000 and $96,000, respectively.Trade receivables from
this company at December 31, 2002 and 2001 were approximately $28,000 and
$7,000, respectively. The Company has no other minority investments in any other
entities.
In addition, the information required by this item is incorporated by
reference to the Company's Proxy Statement under the heading "Certain
Relationships and Related Transactions."
ITEM 14. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer, after
evaluating the effectiveness of the Company's disclosure controls and procedures
(as defined in Rules 13a-14(c) and 15d-14(c) of the Securities and Exchange Act
of 1934, as amended) as of a date within 90 days of the filing of this annual
report (the "Evaluation Date"), have concluded that, as of the Evaluation Date,
the Company's disclosure controls and procedures were effective to ensure the
timely collection, evaluation and disclosure of information relating to the
Company that would potentially be subject to disclosure under the Securities
Exchange Act of 1934, as amended, and the rules and regulations promulgated
thereunder. There were no significant changes in the Company's internal controls
or in other factors that could significantly affect the internal controls
subsequent to the Evaluation Date.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed with Report
1. Financial Statements. See Index to Consolidated Financial
Statements at page F-1 of this Form 10-K and the Financial
Statements and Notes thereto which are included at pages F-2 to
F-21 of this Form 10-K.
2. Exhibits.
Exhibit
Number Description
------- -----------
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.**
10.4 Agreement Regarding Terms of Employment.
11.0 Computation of Earnings Per Share.
21.1 Subsidiaries of the Company.
23.0 Consent of Independent Accountants.
24.0 Power of Attorney (included on page 35).
99.1 Certification of Chief Executive Officer and Chief Financial
Officer
* Incorporated by reference to the Company's Registration Statement on Form S-1
(Reg. No. 33-88386) declared effective March 13, 1995.
** Management Contract or Compensatory, Plan or Arrangement.
(b) Reports on Form 8-K
Not Applicable.
(c) Exhibits
See Item 15(a)(2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Registrant
NATIONAL INSTRUMENTS CORPORATION
January 26, 2003 BY:/s/ Dr. James J. Truchard
Dr. James J. Truchard
Chairman of the Board and President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Dr. James J. Truchard and Alexander M.
Davern, jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and conforming all that each of said attorneys-in-fact, or his
substitute or substitutes, any do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
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Signature Capacity in Which Signed Date
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/s/ James J. Truchard Chairman of the Board and
Dr. James J. Truchard President (Principal Executive January 26, 2003
Officer)
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- --------------------------------------------------------------------------------
/s/ Alexander M. Davern Chief Financial Officer and
Alexander M. Davern Treasurer (Principal Financial January 27, 2003
and Accounting Officer)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
/s/ Jeffrey L. Kodosky
Jeffrey L. Kodosky Director January 24, 2003
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- --------------------------------------------------------------------------------
/s/ Dr. Donald M. Carlton
Dr. Donald M. Carlton Director January 24, 2003
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
/s/ Ben G. Streetman
Ben G. Streetman Director January 27, 2003
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
/s/ R. Gary Daniels
R. Gary Daniels Director January 26, 2003
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
/s/ Charles J. Roesslein
Charles J. Roesslein Director January 25, 2003
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
/s/ Duy-Loan T. Le
Duy-Loan T. Le Director January 27, 2003
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I, James Truchard, certify that:
1. I have reviewed this annual report on Form 10-K of National Instruments
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 26, 2003
/s/ James Truchard
James Truchard
Chief Executive Officer
I, Alexander Davern, certify that:
1. I have reviewed this annual report on Form 10-K of National Instruments
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 27, 2003
/s/ Alexander Davern
Alexander Davern
Chief Financial Officer
NATIONAL INSTRUMENTS CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
No.
Financial Statements: ----
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheets as of December 31, 2002 and 2001............... F-3
Consolidated Statements of Income for each of the Three Years Ended
December 31, 2002.......................................................... F-4
Consolidated Statements of Cash Flows for each of the Three Years Ended
December 31, 2002.......................................................... F-5
Consolidated Statements of Stockholders' Equity for each of the Three Years
Ended December 31, 2002.................................................... F-6
Notes to Consolidated Financial Statements................................. F-7
Financial Statement Schedules:
For each of the Three Years Ended December 31, 2002
Schedule II--Valuation and Qualifying Accounts......................... S-1
All other schedules are omitted because they are not applicable.
Report of Independent Accountants
To the Board of Directors and Stockholders of National Instruments Corporation
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of National Instruments Corporation and its subsidiaries at December
31, 2002 and 2001, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Austin, Texas
January 27, 2003
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
2002 2001
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents........................... $ 40,240 $ 49,089
Short-term investments.............................. 113,638 101,422
Accounts receivable, net............................ 62,981 53,624
Inventories, net.................................... 39,247 32,607
Prepaid expenses and other current assets........... 13,756 20,608
Deferred income taxes, net.......................... 8,104 6,408
---------- ----------
Total current assets............................. 277,966 263,758
Property and equipment, net......................... 152,133 137,360
Intangibles and other assets........................ 28,615 23,501
---------- ----------
Total assets..................................... $ 458,714 $ 424,619
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 25,578 $ 28,958
Accrued compensation................................ 9,555 8,944
Accrued expenses and other liabilities.............. 13,507 6,819
Income taxes payable................................ 6,153 1,298
Other taxes payable................................. 11,720 7,903
---------- ----------
Total current liabilities........................ 66,513 53,922
Deferred income taxes, net.............................. 5,738 4,533
---------- ----------
Total liabilities................................ 72,251 58,455
---------- ----------
Commitments and contingencies (Note 13)
Stockholders' equity:
Common stock: par value $0.01; 180,000,000 shares
authorized;51,074,607 and 51,162,469 shares issued
and outstanding, respectively....................... 511 512
Additional paid-in capital.......................... 72,063 78,261
Retained earnings................................... 321,813 290,408
Accumulated other comprehensive loss................ (7,924) (3,017)
---------- ----------
Total stockholders' equity....................... 386,463 366,164
---------- ----------
Total liabilities and stockholders' equity....... $ 458,714 $ 424,619
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
For the Years
Ended December 31,
2002 2001 2000
---------- ---------- ----------
Net sales.................................. $ 390,790 $ 385,275 $ 410,149
Cost of sales.............................. 105,086 101,297 98,326
---------- ---------- ----------
Gross profit........................... 285,704 283,978 311,823
---------- ---------- ----------
Operating expenses:
Sales and marketing.................... 145,671 145,555 147,377
Research and development............... 63,964 60,745 55,954
General and administrative............. 35,714 29,234 32,077
---------- ---------- ----------
Total operating expenses............ 245,349 235,534 235,408
---------- ---------- ----------
Operating income....................... 40,355 48,444 76,415
Other income (expense):
Interest income........................ 3,295 5,837 6,390
Interest expense....................... (128) (26) (533)
Net foreign exchange loss.............. (724) (1,424) (1,482)
Other income, net...................... 820 702 323
---------- ---------- ----------
Income before income taxes................. 43,618 53,533 81,113
Provision for income taxes................. 12,213 17,131 25,956
Net income.......................... $ 31,405 $ 36,402 $ 55,157
========== ========== ==========
Basic earnings per share................... $ 0.61 $ 0.72 $ 1.10
========== ========== ==========
Weighted average shares
outstanding - basic....................... 51,219 50,910 50,332
========== ========== ==========
Diluted earnings per share................. $ 0.59 $ 0.68 $ 1.03
========== ========== ==========
Weighted average shares
outstanding - diluted..................... 53,411 53,651 53,564
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended
December 31,
2002 2001 2000
---------- ---------- ----------
Cash flow from operating activities:
Net income........................................ $ 31,405 $ 36,402 $ 55,157
Adjustments to reconcile net income to cash
provided by operating activities:
Charges to income not requiring cash outlays:
Depreciation and amortization................. 20,748 16,802 16,345
Provision (benefit) for deferred income taxes. (207) 822 (832)
Tax benefit from stock option plans........... 1,835 1,665 1,363
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable.... (9,357) 21,080 (16,425)
Decrease (increase) in inventory.............. (6,640) 685 (7,131)
Decrease (increase) in prepaid expenses
and other assets............................. 1,823 (9,574) (1,655)
(Decrease) increase in accounts payable....... (3,380) (1,407) 7,047
(Decrease) increase in taxes and other
liabilities.................................. 12,906 (9,322) 1,127
---------- ---------- ----------
Net cash provided by operating activities.. 49,133 57,153 54,996
---------- ---------- ----------
Cash flow from investing activities:
Capital expenditures.............................. (30,817) (65,274) (27,631)
Additions to intangibles.......................... (8,750) (4,903) (6,930)
Purchases of short-term investments............... (134,434) (149,505) (97,685)
Sales of short-term investments................... 122,218 127,608 101,685
---------- ---------- ----------
Net cash used in investing activities...... (51,783) (92,074) (30,561)
---------- ---------- ----------
Cash flow from financing activities:
Repayments of long-term debt...................... -- -- (5,177)
Proceeds from issuance of common stock............ 13,424 12,242 10,710
Repurchase of common stock........................ (19,623) (3,509) --
---------- ---------- ----------
Net cash provided by (used in) financing
activities................................ (6,199) 8,733 5,533
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents...................................... (8,849) (26,188) 29,968
Cash and cash equivalents at beginning of period.. 49,089 75,277 45,309
---------- ---------- ----------
Cash and cash equivalents at end of period........ $ 40,240 $ 49,089 $ 75,277
========== ========== ==========
Cash paid for interest and income taxes
Interest...................................... $ 128 $ 26 $ 601
Income taxes.................................. $ 5,052 $ 15,814 $ 26,776
The accompanying notes are an integral part of these consolidated financial
statements.
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Accumulated
Common Common Additional Other Total
Stock Stock Paid-In Retained Comprehensive Stockholders'
(Shares) Amount Capital Earnings Gain/(Loss) Equity
---------- ------ ---------- -------- ------------- -------------
Balance at December 31, 1999...................... 50,047,182 $ 500 $ 58,830 $198,849 $ (3,944) $ 254,235
Net income........................................ 55,157 55,157
Foreign currency translation adjustment
(net of $1,126 tax benefit)..................... (2,090) (2,090)
Unrealized gain on securities available for sale..
(net of $75 tax expense)........................ 202 202
Unrealized gain on derivative instruments
(net of $1,512 tax expense)..................... 2,809 2,809
Issuance of common stock under employee plans..... 587,421 6 10,704 10,710
---------- ------ ---------- -------- ------------- -------------
Balance at December 31, 2000...................... 50,634,603 $ 506 $ 69,534 $254,006 $ (3,023) $ 321,023
Net income........................................ 36,402 36,402
Foreign currency translation adjustment
(net of $1,137 tax benefit)..................... (2,417) (2,417)
Unrealized loss on securities available for sale
(net of $0 tax benefit)......................... (167) (167)
Unrealized gain on derivative instruments
(net of $1,449 tax expense)..................... 2,590 2,590
Issuance of common stock under employee plans..... 649,666 6 12,236 12,242
Repurchase and retirement of common stock......... (121,800) (3,509) (3,509)
---------- ------ ---------- -------- ------------- -------------
Balance at December 31, 2001...................... 51,162,469 $ 512 $ 78,261 $290,408 $ (3,017) $ 366,164
Net income........................................ 31,405 31,405
Foreign currency translation adjustment
(net of $1,355 tax expense)..................... 3,483 3,483
Unrealized gain on securities available for sale
(net of $0 tax benefit)......................... 147 147
Unrealized loss on derivative instruments
(net of $3,320 tax benefit)..................... (8,537) (8,537)
Issuance of common stock under employee plans..... 725,488 7 13,417 13,424
Repurchase and retirement of common stock......... (813,350) (8) (19,615) (19,623)
---------- ------ ---------- -------- ------------- -------------
Balance at December 31, 2002...................... 51,074,607 $ 511 $ 72,063 $321,813 $ (7,924) $ 386,463
The accompanying notes are an integral part of these consolidated financial
statements.
NATIONAL INSTRUMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Operations and summary of significant accounting policies
National Instruments Corporation (the "Company") is a Delaware Corporation.
The Company engages in the design, development, manufacture and marketing of
instrumentation software and specialty computer plug-in cards and accessories
that users combine with industry standard computers, networks and the Internet
to create measurement and automation systems. The Company offers hundreds of
products used to create virtual instrumentation systems for general, commercial,
industrial and scientific applications. The Company's products may be used in
different environments, and consequently, specific application of the Company's
products is determined by the customer and often is not known to the Company.
The Company approaches all markets with essentially the same products, which are
used in a variety of applications from research and development to production
testing and industrial control. The following industries and applications are
served worldwide by the Company: advanced research, automotive, commercial
aerospace, computers and electronics, continuous process manufacturing,
education, government/defense, medical research/pharmaceutical, power/energy,
semiconductors, automated test equipment, telecommunications and others. The
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Certain prior year amounts have been reclassified to conform with the 2002
presentation.
Use of estimates
Judgments and estimates by management are required in the preparation of
financial statements to conform with U.S. generally accepted accounting
principles. The estimates and underlying assumptions affect the reported amounts
of assets and liabilities, the disclosure of contingencies at the balance sheet
date and the reported revenues and expenses for the period. Actual results could
differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents include cash and highly liquid investments with
original maturities of three months or less at the date of acquisition.
Short-term investments
Short-term investments consist of corporate, state and municipal securities
with readily determinable fair market values and original maturities in excess
of three months. Investments with maturities beyond one year may be classified
as short-term based on their highly liquid nature and because such marketable
securities represent the investment of cash that is available for current
operations. The Company's investments are classified as available-for-sale and
accordingly are reported at fair value, with unrealized gains and losses
reported as other comprehensive income. Unrealized losses are charged against
income when a decline in fair value is determined to be other than temporary.
The specific identification method is used to determine the cost of securities
sold.
Inventories
Inventories are stated at the lower-of-cost or market. Cost is determined
using standard costs, which approximate the first-in first-out (FIFO) method.
Cost includes the acquisition cost of purchased components, parts and
subassemblies, in-bound freight costs, labor and overhead. Market, is
replacement cost with respect to raw materials and, is net realizable value with
respect to work in process and finished goods.
Inventory is shown net of valuation allowance for excess and obsolete
inventories of $3.5 million and $2.9 million at December 31, 2002 and 2001,
respectively.
Property and equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, which
range from twenty to forty years for buildings, three to seven years for
purchased internal use software and three to five years for equipment. Leasehold
improvements are depreciated over the shorter of the life of the lease or the
asset.
Intangible assets
The Company has capitalized costs related to the development and
acquisition of certain software products. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86, Accounting for the Costs of
Computer Software to Be Sold, Leased or Otherwise Marketed, capitalization of
costs begins when technological feasibility has been established and ends when
the product is available for general release to customers. Technological
feasibility for Ntaional Instruments products is established when the product is
available for beta release. Amortization is computed on an individual product
basis for those products available for market and has been recognized based on
the product's estimated economic life, generally three years. Patents are
amortized using the straight-line method over their estimated period of benefit,
generally seventeen years. At each balance sheet date, the unamortized costs for
all intanbigle assets are reviewed by management and reduced to net realizable
value when necessary.
The excess purchase price over the fair value of assets acquired is
recorded as goodwill. Beginning in 2002 with the adoption of SFAS No. 142,
Goodwill and Other Intangible Assets, goodwill is no longer amortized, but
instead tested for impairment at least annually. Prior to 2002, goodwill was
amortized using the straight-line method over its estimated period of benefit,
ten years.
Concentrations of credit risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of foreign currency forward
and option contracts, cash and cash equivalents, short-term investments and
trade accounts receivable. In management's opinion, no significant concentration
of credit risk exists for the Company.
The Company's counterparties in its foreign currency forward and option
contracts are major financial institutions. The Company does not anticipate
nonperformance by these counterparties. The Company maintains cash and cash
equivalents with various financial institutions located in many countries
worldwide. The Company's short-term investments are diversified among and
limited to high-quality securities with high credit ratings. Concentration of
credit risk with respect to trade accounts receivable is limited due to the
large number of customers and their dispersion across many countries and
industries. The amount of sales to any individual customer did not exceed 3% of
revenue for the periods presented. The amount of trade accounts receivable from
any individual customer at December 31, 2002 was approximately $600,000.
Revenue recognition
Sales revenue is generally recognized on the date the product is shipped to
the customer. Provision is made for estimated sales returns based on actual
historical experience. Revenue related to the sale of maintenance contracts is
deferred and amortized on a straight-line basis over the service period.
Deferred revenue at December 31, 2002 and 2001 is $5.4 million and $4.2 million
respectively.
Accounts receivable are net of allowances for doubtful accounts of $3.8
million and $4.9 million at December 31, 2002 and 2001, respectively.
Warranty expense
The Company offers a one-year limited warranty on most hardware products
and a 90-day warranty on software products, which is included in the sales price
of many of its products. Provision is made for estimated future warranty costs
at the time of sale.
The warranty reserve at December 31, was as follows (in thousands):
Dollar Amount of
Liability
------------------
2002 2001
-------- --------
Balance at the beginning of the period.................... $ 865 $ 715
Accruals for warranties issued during the period.......... 988 1,484
Settlements made (in cash or in kind) during the period.. (1,138) (1,334)
-------- --------
Balance at the end of the period.......................... $ 715 $ 865
======== ========
Legal defense costs
The Company accrues for legal defense costs on an undiscounted basis, in
accordance with SFAS No. 5, Accounting for Loss Contingencies, when such costs
are considered probable of being incurred and are reasonably estimable. The
Company periodically evaluates available information, both internal and
external, relative to such contingencies and adjusts this accrual as necessary.
Advertising expense
The Company expenses its costs of advertising as incurred. Advertising
expense for the years ended December 31, 2002, 2001 and 2000 is $29.6 million,
$30.4 million and $35.4 million, respectively.
Foreign currency translation
The functional currency for the Company's international operations is the
applicable local currency. The assets and liabilities of these operations are
translated at the rate of exchange in effect on the balance sheet date; sales
and expenses are translated at average rates. The resultant gains or losses from
translation are included in a separate component of other comprehensive income.
Gains and losses resulting from remeasuring monetary asset and liability
accounts that are denominated in a currency other than a subsidiary's functional
currency are included in determining net income.
Foreign currency hedging instruments
All of the Company's derivative instruments are recognized on the balance
sheet at their fair value. The Company currently uses foreign currency forward
and purchased option contracts to hedge its exposure to material foreign
currency denominated receivables and forecasted foreign currency cash flows.
On the date the derivative contract is entered into, the Company designates
its derivative as either a hedge of the fair value of foreign currency
denominated receivables ("fair-value" hedge) or as a hedge of the variability of
foreign currency cash flows to be received ("cash flow" hedge). Changes in the
fair market value of a fair-value hedge are recorded, along with the loss or
gain on the re-measurement of foreign-currency-denominated receivables, in
current earnings. Changes in the fair value of derivatives that are highly
effective as--and that are designated and qualify as--cash flow hedges under
SFAS No. 133 are recorded in other comprehensive income. These amounts are
subsequently reclassified into earnings in the period during which the hedge
transaction is realized. The Company does not enter into derivative contracts
for speculative purposes.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as fair-value or cash flow hedges to
specific assets and liabilities on the balance sheet or to specific firm
commitments or forecasted transactions. The Company also formally assesses, both
at the hedge's inception and on an ongoing basis, whether the derivatives that
are used to hedge forecasted transactions are highly effective in offsetting
changes in cash flows of hedged items.
The Company prospectively discontinues hedge accounting if (1) it is
determined that the derivative is no longer highly effective in offsetting
changes in the fair value or cash flows of a hedged item (including firm
commitments or forecasted transactions); (2) the derivative expires or is sold,
terminated or exercised; (3) the derivative is de-designated as a hedge
instrument, because it is unlikely that a forecasted transaction will occur; (4)
the hedged firm commitment no longer meets the definition of a firm commitment;
or (5) management determines that designation of the derivative as a hedge
instrument is no longer appropriate.
When hedge accounting is discontinued because it is probable that a
forecasted transaction will not occur, the derivative will continue to be
carried on the balance sheet at its fair value, and gains and losses that were
accumulated in other comprehensive income will be recognized immediately in
earnings. In all other situations where hedge accounting is discontinued, the
derivative will be carried at its fair value on the balance sheet, with changes
in its fair value recognized in current-period earnings.
Income taxes
The Company accounts for income taxes under the asset and liability method
as set forth in SFAS No. 109, Accounting for Income Taxes. Deferred tax assets
and liabilities are recognized for the expected tax consequences of temporary
differences between the tax bases of assets and liabilities and their reported
amounts. Valuation allowances are established when necessary to reduce deferred
tax assets to amounts which are more likely than not to be realized.
Earnings per share
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted average number of common shares outstanding during each period. Diluted
EPS is computed by dividing net income by the weighted average number of common
shares and common share equivalents outstanding (if dilutive) during each
period. Common share equivalents include stock options. The number of common
share equivalents outstanding relating to stock options is computed using the
treasury stock method.
The reconciliation of the denominators used to calculate the basic EPS and
diluted EPS for the years ended December 31, 2002, 2001 and 2000, respectively,
are as follows (in thousands):
Years Ended December 31,
2002 2001 2000
-------- -------- --------
Weighted average shares outstanding-basic.... 51,219 50,910 50,332
Plus: Common share equivalents
Stock options............................... 2,192 2,741 3,232
-------- -------- --------
Weighted average shares outstanding-diluted.. 53,411 53,651 53,564
======== ======== ========
Stock options to acquire 1,649,000, 1,394,000 and 990,000 shares for the
years ended December 31, 2002, 2001 and 2000, respectively, were excluded from
the computations of diluted earnings per share because the effect of including
stock options would have been anti-dilutive.
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 follows the
disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based
Compensation. As allowed by SFAS No. 123, the Company continues to apply the
provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock
issued to Employees and related interpretations in accounting for its plans.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. No compensation cost
has been recognized in the Company's financial statements for the stock option
plan and the stock purchase plan. If compensation cost for the Company's two
active stock-based compensation plans were determined based on the fair value at
the grant date for awards under those plans consistent with the method
established by SFAS No. 123, the Company's net income and earnings per share
would approximate the pro-forma amounts below (in thousands, except per share
data):
Year Ended Deccember 31,
----------------------------------
2002 2001 2000
---------- ---------- ----------
Net income, as reported................... $ 31,405 $ 36,402 $ 55,157
Stock-based compensation included in
reported net income, net of related tax
effects.................................. -- -- --
Total stock-based compensation expense
determined under fair value method for
all awards, net of related tax effects... (14,019) (14,086) (10,850)
---------- ---------- ----------
Pro-forma net income...................... $ 17,386 $ 22,316 $ 44,307
---------- ---------- ----------
Earnings per share:
Basic - as reported....................... $ 0.61 $ 0.72 $ 1.10
Basic - pro-forma......................... $ 0.34 $ 0.44 $ 0.88
Diluted - as reported..................... $ 0.59 $ 0.68 $ 1.03
Diluted - pro-forma....................... $ 0.33 $ 0.42 $ 0.83
Comprehensive income
The Company follows SFAS No. 130, Reporting Comprehensive Income, which
established standards for reporting comprehensive income and its components
including, as applicable, foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. Total comprehensive income for 2002, 2001 and 2000 was $26.5
million, $36.4 million and $56.1 million, respectively.
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 Company
adopted SFAS No 145 effective July 1, 2002. 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 No. 146 is not expected to have a material effect
on the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. This Statement amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. This Statement also amends the disclosure provision of
SFAS No. 123 and APB No. 28, Interim Financial Reporting, to require disclosure
in the summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
The Company adopted SFAS No. 148 effective December 31, 2002. The adoption of
SFAS No. 148 did not have a material effect on the Company's financial position
or results of operations.
Note 2: Short-term investments
Short-term investments at December 31, 2002 and 2001, consisting of
corporate, state and municipal securities, were acquired at an aggregate cost of
$113.6 million and $101.0 million, respectively. The contractual maturities of
these securities, which are classified as available-for-sale and carried at fair
value, are as follows (in thousands):
December 31,
2002 2001
---------- ----------
Less than 90 days............................ $ 33,237 $ 14,004
90 days to one year.......................... 40,377 36,799
One year through two years................... 38,876 23,233
Two years through three years................ 1,148 27,386
---------- ----------
$ 113,638 $ 101,422
========== ==========
Note 3: Inventories
Inventories, net consist of the following (in thousands):
December 31,
2002 2001
---------- ----------
Raw materials................................ $ 21,127 $ 15,394
Work-in-process.............................. 1,324 824
Finished goods............................... 16,796 16,389
---------- ----------
$ 39,247 $ 32,607
========== ==========
Note 4: Property and equipment
Property and equipment consist of the following (in thousands):
December 31,
2002 2001
---------- ----------
Land......................................... $ 5,850 $ 5,665
Buildings.................................... 121,320 66,819
Furniture and equipment...................... 114,166 93,608
---------- ----------
241,336 166,092
Accumulated depreciation..................... (89,203) (73,159)
Construction-in-progress..................... -- 44,427
---------- ----------
$ 152,133 $ 137,360
========== ==========
Depreciation expense for the years ended December 31, 2002, 2001 and 2000,
was $16.0 million, $12.6 million and $12.8 million, respectively.
Note 5: Intangibles and other assets
Intangibles at December 31, 2002 and 2001 include capitalized software
development costs of $9.3 million and $7.5 million (net of accumulated
amortization of $15.6 million and $11.7 million), respectively, goodwill of $5.8
million and $4.9 million in 2002 and 2001 (net of accumulated amortization of
$1.9 million and $1.6 million), respectively, and patents of $5.6 million and
$4.4 million in 2002 and 2001 (net of accumulated amortization of $1.1 million
and $731,000), respectively. Total amortization costs were $4.7 million, $4.2
million and $3.5 million for the years ended December 31, 2002, 2001 and 2000,
respectively. Software development costs capitalized during 2002, 2001 and 2000
were $5.8 million, $3.9 million and $5.0 million, respectively, and related
amortization was $3.8 million, $3.1 million and $2.6 million, respectively.
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142, discontinues amortization of acquired goodwill and instead
requires annual impairment testing. The Company adopted SFAS No. 142 effective
January 1, 2002. Adoption of SFAS No. 142 did not have a material impact on the
Company's financial position or results of operations.
Note 6: Income taxes
The components of income before the provision for income taxes are as
follows (in thousands):
Years Ended December 31,
2002 2001 2000
-------- -------- --------
Domestic.................................... $38,517 $47,085 $68,982
Foreign..................................... 5,101 6,448 12,131
-------- -------- --------
$43,618 $53,533 $81,113
The provision for income taxes charged to operations is as follows (in
thousands):
Years Ended December 31,
2002 2001 2000
-------- -------- --------
Current tax expense:
U.S. federal............................. $ 8,798 $12,856 $22,902
State.................................... 654 1,575 2,043
Foreign.................................. 2,968 1,878 1,843
-------- -------- --------
Total current......................... 12,420 16,309 26,788
-------- -------- --------
Deferred tax expense (benefit):
U.S. federal............................. 580 1,078 (2,031)
State.................................... 56 123 (12)
Foreign.................................. (843) (379) 1,211
-------- -------- --------
Total deferred........................ (207) 822 (832)
-------- -------- --------
Total provision....................... $12,213 $17,131 $25,956
======== ======== ========
Deferred tax liabilities (assets) at December 31, 2002 and 2001 as follows
(in thousands):
December 31,
2002 2001
-------- --------
Capitalized software.................................. $ 3,246 $ 2,548
Unrealized gain on derivative instruments............. 967 2,588
Depreciation and amortization......................... 2,906 1,088
Unrealized exchange gain.............................. -- 381
Accrued legal expenses................................ 116 --
Undistributed earnings of foreign subsidiaries........ 183 114
-------- --------
Gross deferred tax liabilities....................... 7,418 6,719
-------- --------
Operating loss carryforwards.......................... (2,465) (1,180)
Vacation and other accruals........................... (1,852) (1,559)
Inventory valuation and warranty provisions........... (3,218) (3,611)
Doubtful accounts and sales provisions................ (1,184) (1,615)
Unrealized exchange loss.............................. (588) --
Intercompany profit................................... (1,911) (1,234)
Accrued rent expenses................................. (818) --
Accrued legal expenses................................ -- (319)
Other................................................. (473) (797)
-------- --------
Gross deferred tax assets............................ (12,509) (10,315)
-------- --------
Valuation allowance................................... 615 557
-------- --------
Net deferred tax asset............................... $(4,476) $(3,039)
======== ========
A reconciliation of income taxes at the U.S. federal statutory income tax rate
to the effective tax rate follows:
Years Ended
December 31,
2002 2001 2000
---- ---- ----
U.S. federal statutory tax rate............................ 35% 35% 35%
Foreign sales corporation/ETI benefit...................... (6) (2) (2)
Foreign taxes more (less) than federal statutory rate...... 2 (1) (1)
Research and development tax credit........................ (2) (1) --
Tax exempt interest........................................ (2) (2) (2)
State income taxes, net of federal tax benefit............. 1 3 2
---- ---- ----
Effective tax rate......................................... 28% 32% 32%
==== ==== ====
As of December 31, 2002, fifteen of the Company's subsidiaries have
available, for income tax purposes, foreign net operating loss carryforwards of
approximately $15.8 million, of which $1.3 million expire during the years 2005
- - 2010 and $14.5 million of which may be carried forward indefinitely. The
Company's tax valuation allowance relates to the realizability of these foreign
net operating loss carryforwards. The profit from the Company's Hungarian
operation is currently exempt from income tax. These benefits may not be
available in the future due to changes in Hungary's political condition and/or
tax laws.
The Company has not provided for U.S. federal income and foreign
withholding taxes on approximately $9.4 million of certain non-U.S.
subsidiaries' undistributed earnings as of December 31, 2002. These earnings
would become subject to taxes of approximately $2.3 million, if they were
actually or deemed to be remitted to the parent company as dividends or if the
Company should sell its stock in these subsidiaries. The Company currently
intends to reinvest indefinitely these undistributed earnings.
Note 7: Stockholders' equity
Stock repurchases and retirements
In 1998, the Company's Board of Directors approved the repurchase and
retirement of shares of common stock to reduce the dilutive effect of the
Company's stock plans. Pursuant to this repurchase program, the Company has
repurchased and retired a total of 935,150 shares for approximately $23.1
million.
Stock option plans
The stockholders of the Company approved the 1994 Incentive Stock Option
Plan on May 9, 1994. At the time of approval, 6,075,000 shares of the Company's
common stock were reserved for issuance under this plan. In 1997, an additional
4,725,000 shares of the Company's common stock were reserved for issuance under
this plan. The 1994 Plan, administered by the Compensation Committee of the
Board of Directors, provides for granting of incentive awards in the form of
stock options to directors, executive officers and employees of the Company and
its subsidiaries. Awards under the plan must be granted within ten years of the
effective date of the 1994 Plan. Options granted may be either incentive stock
options within the meaning of Section 422 of the Internal Revenue Code or
nonqualified options. The right to purchase shares vests over a five to ten-year
period, beginning on the date of grant. Stock options must be exercised within
ten years from date of grant. Stock options are issued at market price at the
grant date. Shares available for grant at December 31, 2002 were 1,848,955.
Transactions under all plans are summarized as follows:
Weighted
Number of average
shares under exercise
option price
------------ --------
Outstanding at December 31, 1999........................ 5,516,962 $ 14.95
Exercised........................................... (443,544) 11.56
Canceled............................................ (209,966) 24.98
Granted............................................. 1,451,062 47.92
------------ --------
Outstanding at December 31, 2000........................ 6,314,514 $ 22.40
Exercised........................................... (388,474) 11.52
Canceled............................................ (191,940) 33.00
Granted............................................. 1,520,527 32.13
------------ --------
Outstanding at December 31, 2001........................ 7,254,627 $ 24.74
Exercised........................................... (386,012) 11.42
Canceled............................................ (173,678) 36.07
Granted............................................. 322,463 36.25
------------ --------
Outstanding at December 31, 2002........................ 7,017,400 $ 25.69
Options exercisable at December 31:
2000................................................ 2,964,530 $ 14.20
2001................................................ 3,683,015 17.52
2002................................................ 4,189,185 20.44
Weighted
Number of average
shares under fair
option value
------------ --------
Weighted average, grant date fair value of options
granted during:
2000................................................ 1,451,062 $ 25.17
2001................................................ 1,520,527 16.71
2002................................................ 322,463 17.65
December 31, 2002
----------------------------------------------------------
Options Outstanding Options Exercisable
---------------------------------- ----------------------
Weighted
Weighted average Weighted
Number of average remaining Number of average
options exercise contractual options exercise
Exercise price outstanding price life (yrs) exercisable price
-------------- ----------- -------- ----------- ----------- --------
$ 6.44 - $ 8.89................ 1,129,910 $ 8.09 3 1,086,710 $ 8.06
9.11 - 14.44................ 1,136,567 14.22 4 975,566 14.21
14.83 - 22.96................ 1,671,508 20.98 6 1,208,812 21.11
23.33 - 30.50................ 1,383,469 30.90 8 336,040 30.74
31.56 - 51.56................ 1,695,946 45.52 8 582,057 46.61
----------- -------- ----------- ----------- --------
7,017,400 $25.69 6 4,189,185 $ 20.44
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
2002 2001 2000
-------- -------- --------
Dividend expense yield................... 0% 0% 0%
Expected life............................ 5 years 5 years 5 years
Expected volatility...................... 44.7% 43.1% 40.6%
Risk-free interest rate.................. 4.5% 4.7% 6.8%
Employee stock purchase plan
The Company's employee stock purchase plan permits substantially all
domestic employees and employees of designated subsidiaries to acquire the
Company's common stock at a purchase price of 85% of the lower of the market
price at the beginning or the end of the participation period. The semi-annual
periods begin on October 1 and April 1 of each year. Employees may designate up
to 15% of their compensation for the purchase of common stock. Common stock
reserved for future employee purchases aggregated 1,825,328 shares at December
31, 2002. Shares issued under this plan were 357,955 in 2002. The weighted
average fair value of the employees' purchase rights, as shown below was
estimated using the Black-Scholes model with the following assumptions:
2002 2001 2000
-------- -------- --------
Dividend expense yield................... 0% 0% 0%
Expected life............................ 6 months 6 months 6 months
Expected volatility...................... 43% 41% 58%
Risk-free interest rate.................. 2.3% 5.1% 5.6%
Weighted average, grant date fair value of purchase rights granted under
the Employee Stock Purchase Plan:
Weighted
Number average
of shares fair value
------------- -------------
2000..................................... 158,158 $ 14.54
2001..................................... 290,082 7.95
2002..................................... 323,265 7.76
Stockholders' rights plan
During 1995, the Board of Directors declared a dividend distribution of one
common share purchase right for each outstanding share of Common Stock. The
rights become exercisable under certain conditions involving acquisition of the
Company's Common Stock. Under certain other conditions where the Company is
consolidated or merged, each holder of a right shall have the right to receive,
upon exercise of the right, shares of Common Stock of the Company, or acquiring
company, having a value of twice the exercise price of the right. The rights
expire on March 13, 2005, and may be redeemed in whole by the Company for $0.01
per right. The rights are excluded from earnings per share computations because
they qualify as contingent shares and therefore are excluded as long as the
conditions that require issuance of the shares are not imminent.
Note 8: Employee retirement plan
The Company has a defined contribution retirement plan pursuant to Section
401(k) of the Internal Revenue Code. Substantially all domestic employees with
at least thirty days of continuous service are eligible to participate and may
contribute up to 15% of their compensation. The Board of Directors has elected
to make matching contributions equal to 50% of employee contributions, which may
be applied, to a maximum of 6% of each participant's compensation. Employees are
eligible for the Company's matching contributions after one year of continuous
service. Company contributions vest immediately. The Company's policy prohibits
participants from direct investment in shares of common stock of the Company.
Company contributions charged to expense were $1.8 million, $1.6 million and
$1.3 million in 2002, 2001 and 2000, respectively.
Note 9: Financial instruments
Fair value of financial instruments
The estimated fair value amounts disclosed below have been determined by
the Company using available market information and valuation methodologies
described below. However, considerable judgment is required in interpreting
market data to develop these estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the Company
could realize in a current market exchange. The use of different market
assumptions could have a significant effect on these estimates. For certain
financial instruments of the Company, including cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities, the carrying
amount approximates fair value due to the short-term maturity of these
instruments. The estimated fair values of the other assets (liabilities) of the
Company's remaining financial instruments at December 31, 2002 and 2001 are as
follows (in thousands):
December 31,
2002 2001
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Short-term investments.................. $113,638 $113,638 $101,422 $101,422
Other assets/liabilities:
Forward contracts................... (2,685) (2,685) 2,391 2,391
Purchased options................... 694 694 2,873 2,873
The fair values of short-term investments and foreign currency forward and
purchased option contracts were estimated based upon quotes from brokers as of
the applicable balance sheet date.
Note 10: Derivative instruments and hedging activities
The Company has operations in 40 countries. Approximately fifty percent of
the Company's revenues are generated outside North America. The Company's
activities expose it to a variety of market risks, including the effects of
changes in foreign-currency exchange rates and interest rates. These financial
risks are monitored and managed by the Company as an integral part of its
overall risk management program.
The Company maintains a foreign-currency risk management strategy that uses
derivative instruments (foreign currency forward and purchased options
contracts) to protect its interests from fluctuations in earnings and cash flows
caused by the volatility in currency exchange rates. Movements in
foreign-currency exchange rates pose a risk to the Company's operations and
competitive position, since exchange rate changes may affect the profitability,
cash flow, and business and/or pricing strategies of non-U.S. based competitors.
Foreign currency fair value and cash flow hedges
The Company's foreign sales are denominated in the customers' local
currency. The Company purchases foreign currency forward and purchased options
contracts as hedges of forecasted sales that are denominated in foreign
currencies and as hedges of foreign currency denominated receivables. These
contracts are entered into to protect against the risk that the eventual
dollar-net-cash inflows resulting from such sales or firm commitments will be
adversely affected by changes in exchange rates.
The Company held forward contracts with notional amounts totaling $24.1
million and $31.9 million at December 31, 2002 and 2001, respectively, that were
designated as foreign currency fair value hedges of the Company's foreign
denominated receivables. The fair value of these contracts, which are for 90-day
periods, is a liability of $1.3 million at December 31, 2002, and an asset of
$289,000 at December 31, 2001. The Company recorded a net loss of $4.9 million
and a net gain of $2.0 million for fair value hedges for the year ended December
31, 2002 and 2001, respectively, which was recorded in "Foreign Currency
Gain(Loss)." The Company hedges up to 90% of its outstanding foreign denominated
receivables.
The Company held forward contracts with a notional amount of $48.1 million
and $17.1 million and option contracts with notional amounts totaling $86.4
million and $54.1 million at December 31, 2002 and 2001, respectively, that were
designated as foreign currency cash flow hedges related to the Company's
anticipated sales transactions. The fair value of these contracts, which are for
terms up to thirty-six months, is a liability of $2.8 million at December 31,
2002, and an asset of $4.2 million at December 31, 2001 and a net unrealized
deferred loss of $2.8 million and net unrealized deferred gain of $4.2 million
at December 31, 2002 and 2001, respectively, recorded in "Accumulated Other
Comprehensive Income." The Company hedges up to 100% of anticipated foreign
currency denominated cash inflows for the following 1 to 36 months. The Company
recorded a net gain of $3.6 million and $4.4 million for cash flow hedges for
the year ended December 31, 2002 and 2001, respectively, which was included in
"Net Revenue."
As of December 31, 2002, $1.0 million of deferred gains on cash flow hedges
recorded in "Accumulated Other Comprehensive Income" are expected to be
reclassified to earnings during the next twelve months. The actual foreign sales
expected to occur over the next twelve months will necessitate the reclassifying
to earnings of these derivative gains.
Hedge ineffectiveness of a foreign currency option contract designated as a
cash flow hedge is measured by comparing the hedging instrument's cumulative
change in fair value from inception to maturity to the forecasted transaction's
terminal value. No amounts were excluded from the assessment of hedge
effectiveness for the year ended December 31, 2002. For the year ended December
31, 2001, the Company recognized a net loss of $89,000 (reported in the "Net
Foreign Exchange Gain (Loss)" line item in the Consolidated Statement of
Income), which represented the net ineffectiveness of all cash-flow hedges.
Note 11: Segment information
In accordance with SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, the Company determines segments using the
management approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. It
also requires disclosures about products and services, geographic areas and
major customers.
While the Company sells its products to many different industries, 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 of
intangibles is recorded in North America. Substantially all of the Company's
goodwill and related amortization is recorded in Europe. Net sales, operating
income and identifiable assets, classified by the major geographic areas in
which the Company operates, are as follows (in thousands):
Years Ended December 31,
2002 2001 2000
---------- ---------- ----------
Net sales:
North America:
Unaffiliated customer sales........ $ 195,770 $ 195,842 $ 215,960
Geographic transfers............... 58,330 58,041 55,524
---------- ---------- ----------
254,100 253,883 271,484
---------- ---------- ----------
Europe:
Unaffiliated customer sales........ 122,800 128,523 136,355
Geographic transfers............... 35,027 6,981 --
---------- ---------- ----------
157,827 135,504 136,355
Asia Pacific:
Unaffiliated customer sales........ 72,220 60,910 57,834
Eliminations.......................... (93,357) (65,022) (55,524)
---------- ---------- ----------
$ 390,790 $ 385,275 $ 410,149
========== ========== ==========
Years Ended December 31,
2002 2001 2000
---------- ---------- ----------
Operating income:
North America............................. $ 31,031 $ 40,624 $ 57,188
Europe.................................... 37,789 41,229 48,180
Asia Pacific.............................. 35,499 27,336 27,001
Unallocated:
Research and development expenses......... (63,964) (60,745) (55,954)
---------- ---------- ----------
$ 40,355 $ 48,444 $ 76,415
========== ========== ==========
December 31,
2002 2001
---------- ----------
Identifiable assets:
North America............................. $ 373,066 $ 349,209
Europe.................................... 63,600 65,201
Asia Pacific.............................. 22,048 10,209
---------- ----------
$ 458,714 $ 424,619
========== ==========
Total sales outside the United States for 2002, 2001 and 2000 were $212.7
million, $189.8 million and $217.3 million, respectively.
Note 12: Commitments, contingencies and leases
The Company has commitments under noncancelable operating leases primarily
for office facilities and equipment. Future minimum lease payments as of
December 31, 2002, for each of the next five years are as follows (in
thousands):
2003................................ $1,652
2004................................ 1,616
2005................................ 988
2006................................ 102
Thereafter.......................... 98
------
$4,456
======
During the fourth quarter of 2002, the Company and Trilogy Software
("Trilogy") settled a dispute regarding Trilogy's buy-out of the lease of the
Company's Millenium office building which resulted in a gain of approximately
$6.0 million from lease termination. As a result of additional facility lease
consolidation, the Company incurred lease termination costs of approximately
$2.4 million in the fourth quarter of 2002. These amounts were included in
general and administrative expenses.
Rent expense under operating leases was approximately $6.3 million, $5.4
million and $3.5 million for the years ended December 31, 2002, 2001 and 2000,
respectively.
As of December 31, 2002, the Company has non-cancelable purchase
commitments with various suppliers of customized inventory and inventory
components totaling approximately $4.3 million over the next twelve months.
As of December 31, 2002, the Company has outstanding guarantees for payment
of foreign operating leases, customs and foreign grants totaling approximately
$3.8 million.
Note 13: Litigation
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
infringed 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.
The Company has filed two complaints in the U.S. District Court, Eastern
District of Texas (Marshall Division) against The MathWorks, Inc. ("Defendant")
for patent infringement. In the first complaint, filed January 25, 2001, the
Company claims that the Defendant infringes certain of the Company's U.S.
patents. The Defendant challenges the validity and enforceability of these
patents and asserts that it does not infringe the claims of these patents. The
trial for this case began January 13, 2003 and is currently pending. The Company
expects a jury verdict by the end of January, 2003. In the second complaint,
filed October 21, 2002, the Company claims that the Defendant infringes certain
other of the Company's U.S. patents. In each case, the Company seeks monetary
damages and injunction of the sale of certain products of the Defendant. The
Company also seeks attorney's fees and costs in the second case. For both
complaints, the Company expects to incur legal expenses of approximately $2
million during the first quarter of 2003. Due to the inherent uncertainties of
litigation, there may be significant changes in the amount and timing of these
expenses.
Note 14: Related party transactions
In the fourth quarter of 2002, the Company contributed approximately $3.6
milion to the National Instruments Foundation, a 501(c)(3) charitable foundation
established in 2002 for the purpose of continued promotion of scientific and
engineering research and education at higher education institutions worldwide.
This contribution was recorded as general and administrative expense in 2002.
Two of the four directors of the National Instruments Foundation are current
officers of National Instruments.
During 2001, the Company acquired a 10% minority interest in another
company for $2.5 million. Because of the Company's ownership percentage and its
lack of control and inability to exert influence over this entity, this
investment is accounted for under the cost method. Sales to this company during
2002 and 2001 were $141,000 and $96,000, respectively. Trade receivables from
this company at December 31, 2002 and 2001 were approximately $28,000 and
$7,000, respectively. The Company has no other minority investments in any other
entities.
Note 15: Quarterly results (unaudited)
The following quarterly results have been derived from unaudited
consolidated financial statements that, in the opinion of management, reflect
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of such quarterly information. The operating results for any
quarter are not necessarily indicative of the results to be expected for any
future period. The unaudited quarterly financial data for each of the eight
quarters in the two years ended December 31, 2002 are as follows (in thousands,
except per share data):
Three Months Ended
Mar. 31, Jun. 30, Sep. 30, Dec. 31,
2002 2002 2002 2002
-------- -------- -------- --------
Net sales.......................... $ 94,739 $ 93,505 $ 96,020 $106,525
Gross profit....................... 69,381 66,902 70,824 78,597
Operating income................... 10,255 8,760 8,606 12,735
Net income......................... 7,367 7,388 6,685 9,965
Basic earnings per share........... $ 0.14 $ 0.14 $ 0.13 $ 0.20
Weighted average shares
outstanding-basic................ 51,205 51,449 51,195 51,013
Diluted earnings per share......... $ 0.14 $ 0.14 $ 0.13 $ 0.19
Weighted average shares
outstanding-diluted.............. 53,953 53,974 52,906 52,875
Three Months Ended
Mar. 31, Jun. 30, Sep. 30, Dec. 31,
2001 2001 2001 2001
-------- -------- -------- --------
Net sales.......................... $108,080 $ 97,707 $ 85,062 $ 94,426
Gross profit....................... 81,207 72,079 61,774 68,918
Operating income................... 19,890 12,085 6,509 9,960
Net income......................... 13,947 9,430 5,685 7,340
Basic earnings per share........... $ 0.28 $ 0.19 $ 0.11 $ 0.14
Weighted average shares
outstanding-basic................ 50,701 50,887 50,956 51,095
Diluted earnings per share......... $ 0.26 $ 0.18 $ 0.11 $ 0.14
Weighted average shares
outstanding-diluted.............. 53,873 53,450 53,288 53,524
SCHEDULE II
NATIONAL INSTRUMENTS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Allowance for doubtful accounts:
Balance at Provision for Write-Offs Balance at
Beginning Bad Debt Charged to End of
Year Description of Period Expense Allowances Period
- ---- ----------- ---------- ------------- ---------- ----------
2000... Allowance for doubtful accounts $ 4,143 $ 1,962 $ 1,589 $ 4,516
2001... Allowance for doubtful accounts 4,516 1,579 1,175 4,920
2002... Allowance for doubtful accounts 4,920 (840) 329 3,751
Valuation allowances for excess and obsolete inventories:
Balance at Provision Write-Offs Balance at
Beginning Charged to Charged to End of
Year Description of Period Cost of Sales Allowances Period
- ---- ----------- ---------- ------------- ---------- ----------
2000... Valuation allowances for excess
and obsolete inventories $ 2,354 $ 1,090 $ 978 $ 2,466
2001... Valuation allowances for excess
and obsolete inventories 2,466 1,082 682 2,866
2002... Valuation allowances for excess
and obsolete inventories 2,866 1,818 1,212 3,472