UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal quarter ended: June 30, 2003 or
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to ________________
Commission file number: 0-25426
-------------------
NATIONAL INSTRUMENTS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-1871327
- ---------------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11500 North MoPac Expressway
Austin, Texas 78759
- ---------------------------------------- -----------------------------------
(address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (512) 338-9119
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 126-2 of the Exchange Act). Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 23, 2003
Common Stock - $0.01 par value 51,627,233
NATIONAL INSTRUMENTS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1 Financial Statements:
Consolidated Balance Sheets
June 30, 2003 (unaudited) and December 31, 2002................3
Consolidated Statements of Income (unaudited)
Three months and six months ended June 30, 2003 and 2002.......4
Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, 2003 and 2002........................5
Notes to Consolidated Financial Statements.....................6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................10
Item 3 Quantitative and Qualitative Disclosures about Market Risk.......18
Item 4 Controls and Procedures..........................................18
PART II. OTHER INFORMATION
Item 1 Legal Proceedings................................................19
Item 4 Submission of Matters to a Vote of Security Holders..............19
Item 6 Exhibits and Reports on Form 8-K.................................20
Signatures.......................................................21
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, December 31,
2003 2002
------------ ------------
Assets (unaudited)
Current assets:
Cash and cash equivalents....................... $ 28,062 $ 40,240
Short-term investments.......................... 140,029 113,638
Accounts receivable, net........................ 61,760 62,981
Inventories, net................................ 35,896 39,247
Prepaid expenses and other current assets....... 11,632 13,756
Deferred income tax, net........................ 7,155 8,104
------------ ------------
Total current assets......................... 284,534 277,966
Property and equipment, net........................ 150,395 152,133
Intangibles, net and other assets.................. 38,835 28,615
------------ ------------
Total assets................................. $ 473,764 $ 458,714
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable................................ $ 25,436 $ 25,578
Accrued compensation............................ 11,078 9,555
Accrued expenses and other liabilities.......... 15,231 13,507
Income taxes payable............................ 206 6,153
Other taxes payable............................. 7,584 11,720
------------ ------------
Total current liabilities.................... 59,535 66,513
Deferred income taxes.............................. 5,140 5,738
------------ ------------
Total liabilities............................ 64,675 72,251
------------ ------------
Commitments and contingencies...................... -- --
Stockholders' equity:
Common stock: par value $0.01; 180,000,000
shares authorized; 51,570,767 and 51,074,607
shares issued and outstanding, respectively..... 516 511
Additional paid-in capital...................... 79,773 72,063
Retained earnings............................... 335,980 321,813
Accumulated other comprehensive loss............ (7,180) (7,924)
------------ ------------
Total stockholders' equity................... 409,089 386,463
------------ ------------
Total liabilities and stockholders' equity... $ 473,764 $ 458,714
============ ============
The accompanying notes are an integral part of these financial statements.
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net sales....................... $ 100,165 $ 93,505 $ 199,338 $ 188,244
Cost of sales................... 27,150 26,603 53,163 51,961
---------- ---------- ---------- ----------
Gross profit................. 73,015 66,902 146,175 136,283
---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing.......... 38,124 33,566 76,669 68,974
Research and development..... 16,876 15,734 32,127 31,667
General and administrative... 9,201 8,842 20,240 16,628
---------- ---------- ---------- ----------
Total operating expenses.. 64,201 58,142 129,036 117,269
---------- ---------- ---------- ----------
Operating income.......... 8,814 8,760 17,139 19,014
Other income (expense):
Interest income, net......... 620 839 1,306 1,635
Net foreign exchange gain
(loss)....................... 340 217 325 (677)
Other income, net............ 98 445 119 522
---------- ---------- ---------- ----------
Income before income taxes...... 9,872 10,261 18,889 20,494
Provision for income taxes...... 2,468 2,873 4,722 5,738
---------- ---------- ---------- ----------
Net income................ $ 7,404 $ 7,388 $ 14,167 $ 14,756
========== ========== ========== ==========
Basic earnings per share........ $ 0.14 $ 0.14 $ 0.28 $ 0.29
========== ========== ========== ==========
Weighted average shares
outstanding-basic............... 51,490 51,449 51,324 51,331
========== ========== ========== ==========
Diluted earnings per share...... $ 0.14 $ 0.14 $ 0.27 $ 0.27
========== ========== ========== ==========
Weighted average shares
outstanding-diluted............. 53,633 53,974 53,453 53,966
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30,
----------------------
2003 2002
---------- ----------
Cash flow from operating activities:
Net income......................................... $ 14,167 $ 14,756
Adjustments to reconcile net income to cash
provided by operating activities:
Charges to income not requiring cash outlays:
Depreciation and amortization................. 12,390 9,922
Benefit from deferred income taxes............ (965) (3,620)
Tax benefit from stock option plans........... 1,315 1,011
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable.... 1,221 (6,036)
Decrease in inventory......................... 3,351 97
Decrease in prepaid expense and other assets.. 2,511 336
Increase (decrease) in current liabilities.... (6,978) 5,024
---------- ----------
Net cash provided by operating activities....... 27,012 21,490
---------- ----------
Cash flow from investing activities:
Capital expenditures............................... (7,759) (15,607)
Capitalization of internally developed software.... (8,432) (1,386)
Additions to other intangibles..................... (4,323) (1,489)
Purchases of short-term investments................ (77,042) (81,026)
Sales of short-term investments.................... 50,651 83,414
---------- ----------
Net cash used in investing activities........... (46,905) (16,094)
---------- ----------
Cash flow from financing activities:
Proceeds from issuance of common stock, net of
repurchases........................................ 7,715 6,095
---------- ----------
Net cash provided by financing activities....... 7,715 6,095
---------- ----------
Net increase (decrease) in cash and cash equivalents.. (12,178) 11,491
Cash and cash equivalents at beginning of period...... 40,240 49,089
---------- ----------
Cash and cash equivalents at end of period............ $ 28,062 $ 60,580
========== ==========
The accompanying notes are an integral part of these financial statements.
NATIONAL INSTRUMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto for the
year ended December 31, 2002, included in the Company's annual report on Form
10-K, filed with the Securities and Exchange Commission. In the opinion of
management, the accompanying consolidated financial statements reflect all
adjustments (consisting only of normal recurring items) considered necessary to
present fairly the financial position of National Instruments Corporation and
its consolidated subsidiaries at June 30, 2003 and December 31, 2002, and the
results of operations for the three-month and six-month periods ended June 30,
2003 and 2002, and the cash flows for the six-month periods ended June 30, 2003
and 2002. Operating results for the three-month and six-month periods ended June
30, 2003 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2003.
Certain prior year amounts have been reclassified to conform with the 2003
presentation.
NOTE 2 - Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted average number of common shares outstanding during each period. Diluted
EPS is computed by dividing net income by the weighted average number of common
shares and common share equivalents outstanding (if dilutive) during each
period. Common share equivalents include stock options. The number of common
share equivalents outstanding relating to stock options is computed using the
treasury stock method.
The reconciliation of the denominators used to calculate basic EPS and diluted
EPS for the three-month and six-month periods ended June 30, 2003 and 2002,
respectively, are as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
(unaudited) (unaudited)
2003 2002 2003 2002
--------- --------- --------- ---------
Weighted average shares
outstanding-basic................. 51,490 51,449 51,324 51,331
Plus: Common share equivalents
Stock options.................. 2,143 2,525 2,129 2,635
--------- --------- --------- ---------
Weighted average shares
outstanding-diluted............... 53,633 53,974 53,453 53,966
========= ========= ========= =========
Stock options to acquire 1,564,000 and 1,533,000 shares for the quarters ended
June 30, 2003 and 2002, respectively, and 1,551,000 and 1,464,000 shares for the
six months ended June 30, 2003 and 2002, respectively, were excluded in the
computations of diluted EPS because the effect of including the stock options
would have been anti-dilutive.
NOTE 3 - Inventories, net
Inventories consist of the following (in thousands):
June 30, December 31,
2003 2002
(unaudited)
------------ ------------
Raw materials................... $ 17,555 $ 21,127
Work-in-process................. 1,115 1,324
Finished goods.................. 17,226 16,796
------------ ------------
$ 35,896 $ 39,247
============ ============
NOTE 4 - Comprehensive Income
Total comprehensive income for the quarters ended June 30, 2003 and 2002 is $8.3
million and $7.4 million, respectively, and included other comprehensive income
of $880,000 in 2003 and other comprehensive loss of $10,000 in 2002. For the
first six months of 2003 and 2002, comprehensive income is $14.9 million and
$12.3 million, respectively, and included other comprehensive income of $740,000
in 2003 and other comprehensive loss of $2.4 million in 2002.
NOTE 5 - 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 amended by SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. 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):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
(unaudited) (unaudited)
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income, as reported............. $ 7,404 $ 7,388 $ 14,167 $ 14,756
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................. (2,082) (2,194) (4,239) (4,451)
---------- ---------- ---------- ----------
Pro-forma net income................ $ 5,322 $ 5,194 $ 9,928 $ 10,305
---------- ---------- ---------- ----------
Earnings per share:
Basic - as reported................. $ 0.14 $ 0.14 $ 0.28 $ 0.29
Basic - pro-forma................... $ 0.10 $ 0.10 $ 0.19 $ 0.20
Diluted - as reported............... $ 0.14 $ 0.14 $ 0.27 $ 0.27
Diluted - pro-forma................. $ 0.10 $ 0.10 $ 0.19 $ 0.19
NOTE 6 - Warranty Reserve
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 was as follows (in thousands):
Six Months Ended Year Ended
June 30, 2003 December 31,
(unaudited) 2002
---------------- ------------
Balance at the beginning of the period....... $ 715 $ 865
Accruals for warranties issued during the
period....................................... 518 988
Settlements made (in cash or in kind) during
the period................................... (518) (1,138)
---------------- ------------
Balance at the end of the period............. $ 715 $ 715
================ ============
NOTE 7 - Segment Information
While the Company sells its products to many different markets, its management
has chosen to organize the Company by geographic areas, and as a result has
determined that it has one reportable segment. Substantially all of the interest
income, interest expense, depreciation and amortization is recorded in North
America. Substantially all of the Company's goodwill 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):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
(unaudited) (unaudited)
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net sales:
Americas:
Unaffiliated customer sales.... $ 49,562 $ 49,540 $ 96,220 $ 97,188
Geographic transfers........... 13,239 14,062 27,130 27,242
---------- ---------- ---------- ----------
62,801 63,602 123,350 124,430
---------- ---------- ---------- ----------
Europe:
Unaffiliated customer sales.... 31,175 29,231 62,453 58,151
Geographic transfers........... 11,814 14,556 23,017 22,069
---------- ---------- ---------- ----------
42,989 43,787 85,470 80,220
---------- ---------- ---------- ----------
Asia Pacific:
Unaffiliated customer sales.... 19,428 14,734 40,665 32,905
---------- ---------- ---------- ----------
Eliminations..................... (25,053) (28,618) (50,147) (49,311)
---------- ---------- ---------- ----------
$ 100,165 $ 93,505 $ 199,338 $ 188,244
========== ========== ========== ==========
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
(unaudited) (unaudited)
2003 2002 2003 2002
---------- ---------- ---------- ----------
Operating income:
Americas......................... $ 9,337 $ 9,529 $ 15,236 $ 18,153
Europe........................... 9,399 8,595 17,609 16,813
Asia Pacific..................... 6,954 6,370 16,421 15,715
Unallocated:
Research and development
expenses......................... (16,876) (15,734) (32,127) (31,667)
---------- ---------- ---------- ----------
$ 8,814 $ 8,760 $ 17,139 $ 19,014
========== ========== ========== ==========
June 30, December 31,
2003 2002
(unaudited)
------------ ------------
Identifiable assets:
Americas......................... $ 400,684 $ 373,066
Europe........................... 48,181 63,600
Asia Pacific..................... 24,899 22,048
------------ ------------
$ 473,764 $ 458,714
============ ============
Total sales outside the United States for the quarter and six months ended June
30, 2003 were $55.3 million and $112.1 million, respectively, and for the
quarter and six months ended June 30, 2002 were $48.6 million and $99.8 million,
respectively.
NOTE 8 - Recently Issued Accounting Pronouncement
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 149, Amendment of
Statement No. 133 on Derivative Instruments and Hedging Activities. SFAS No. 149
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. The amendments set forth in SFAS No. 149 improve financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. SFAS No. 149 is generally effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The guidance is to be applied prospectively.
SFAS No. 149 is not expected to have a material effect on the Company's
financial position or results of operations.
NOTE 9 - Litigation
The Company is currently involved in two legal proceedings against The
MathWorks, Inc. ("Defendant") for patent infringement. The Company filed the
first action on January 25, 2001 in the U.S. District Court, Eastern District of
Texas (Marshall Division) claiming that the Defendant infringes certain of the
Company's U.S. patents. The Defendant challenged the validity of these patents
and asserted that it does not infringe the claims of these patents.
The trial of the first case concluded and on January 30, 2003, the jury found
infringement by the Defendant of three of the patents involved and awarded the
Company specified damages. On June 23, 2003, the Court entered final judgement
in favor of the Company in an amount of approximately $4 million and entered an
injunction against Defendant's sale of its Simulink and related products. The
Court stayed the injunction pending appeal of the case and required the
Defendant to pay a specified royalty on its U.S. sales of Simulink and related
products during the pendency of appeal. On July 22, 2003, Defendant filed its
Notice of Appeal and the case is currently pending on appeal before the U.S.
Court of Appeals for the Federal Circuit. The final judgment has not been
recorded in the financial statements of the Company pending the disposition of
the appeal.
In the second complaint, filed October 21, 2002 also in the U.S. District Court,
Eastern District of Texas (Marshall Division), the Company claims that the
Defendant infringes certain other 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. In this case, the Company seeks
monetary damages and injunction of the sale of certain products of the Defendant
as well as attorney's fees and costs.
NOTE 10 - Subsequent Event
The Company's Board of Directors approved on July 23, 2003, a quarterly cash
dividend of $0.05 per common share, payable August 29, 2003 to shareholders of
record August 4, 2003.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Any statements contained herein
regarding the future financial performance or operations of the Company
(including, without limitation, statements to the effect that the Company
"believes," "expects," "plans," "may," "will," "projects," "continues," or
"estimates" or other variations thereof or comparable terminology or the
negative thereof) should be considered forward-looking statements. Actual
results could differ materially from those projected in the forward-looking
statements as a result of a number of important factors. For a discussion of
important factors that could affect the Company's results, please refer to the
Factors Affecting the Company's Business and Prospects section and financial
statement line item discussions below. Readers are also encouraged to refer to
the Company's Annual Report on Form 10-K for further discussion of the Company's
business and the risks attendant thereto.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of net sales represented by certain items reflected in the Company's
consolidated statements of income:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net sales:
Americas 49.5% 53.0% 48.3% 51.6%
Europe 31.1 31.4 31.3 31.0
Asia Pacific 19.4 15.6 20.4 17.4
---------- ---------- ---------- ----------
Consolidated net sales 100.0 100.0 100.0 100.0
Cost of sales 27.1 28.5 26.7 27.6
---------- ---------- ---------- ----------
Gross profit 72.9 71.5 73.3 72.4
---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing 38.1 35.9 38.5 36.7
Research and development 16.8 16.8 16.1 16.8
General and administrative 9.2 9.4 10.1 8.8
---------- ---------- ---------- ----------
Total operating expenses 64.1 62.1 64.7 62.3
---------- ---------- ---------- ----------
Operating income 8.8 9.4 8.6 10.1
Other income (expense):
Interest income, net 0.6 0.9 0.7 0.9
Net foreign exchange gain
(loss) 0.3 0.2 0.2 (0.4)
Other income, net 0.1 0.5 -- 0.3
---------- ---------- ---------- ----------
Income before income taxes 9.8 11.0 9.5 10.9
Provision for income taxes 2.4 3.1 2.4 3.1
---------- ---------- ---------- ----------
Net income 7.4% 7.9% 7.1% 7.8%
========== ========== ========== ==========
Net Sales. Consolidated net sales increased by $6.7 million or 7% for the
three months ended June 30, 2003 to $100.2 million from $93.5 million for the
three months ended June 30, 2002, and increased $11.1 million or 6% to $199.3
million for the six months ended June 30, 2003 from $188.2 million for the
comparable period in the prior year. The increase in sales for the three and six
months ended June 30, 2003 was primarily attributable to the introduction of new
and upgraded products and an increased market acceptance of the Company's
products in Asia. Sales in the Americas in the second quarter of 2003 were flat
with sales from the second quarter of 2002 and sales in the Americas for the six
months ended June 30, 2003 decreased 1% from the six months ended June 30, 2002.
Sales outside of North America, as a percentage of consolidated sales for
the quarter ended June 30, 2003, increased to 50.5% from 47.0% over the
comparable 2002 period as a result of stronger sales in Asia. International
sales as a percentage of consolidated sales for the six months ended June 30,
2003 increased to 51.7% from 48.4% over the comparable 2002 period due to
stronger sales in Asia. Compared to the corresponding periods in 2002, the
Company's European sales increased by 6% to $31.2 million for the quarter ended
June 30, 2003 and increased 7% to $62.5 million for the six months ended June
30, 2003. Sales in Asia Pacific increased by 33% to $19.4 million in the quarter
ended June 30, 2003 compared to the same period in 2002 and increased 24% to
$40.7 million for the six months ended June 30, 2003 compared to the same period
in 2002. The Company expects sales outside of North America to continue to
represent a significant portion of its revenue.
Sales made by the Company's direct sales offices in Europe and Asia Pacific
are denominated in local currencies, and accordingly, the U.S. dollar equivalent
of these sales is affected by changes in foreign currency exchange rates.
Between the second quarter of 2002 and the second quarter of 2003, net of
hedging results, the change in exchange rates had the effect of increasing the
Company's consolidated sales by 4%; increasing European sales by 14% and
decreasing sales in Asia Pacific by 9%. For 2003, year-to-date sales, net of
hedging results, the change in exchange rates had the effect of increasing the
Company's consolidated sales by 2%. Since most of the Company's international
operating expenses are also incurred in local currencies, the change in exchange
rates had the effect of increasing operating expenses $1.8 million for the six
months ended June 30, 2003 and $1.4 million for the quarter ended June 30, 2003.
Gross Profit. As a percentage of sales, gross profit increased to 73% for
the second quarter of 2003 from 72% for the second quarter of 2002 and increased
to 73% for the first six months of 2003 from 72% for the comparable period a
year ago. Approximately 80% of the higher margin in the second quarter of 2003
is attributable to favorable foreign exchange rates. The remaining fraction of
the higher margin is attributable to the impact of fixed charges relative to
higher sales volume. 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 expenses for the second quarter of
2003 increased to $38.1 million, a 14% increase, as compared to the second
quarter of 2002 and increased 11% to $76.7 million for the first six months of
2003 from the comparable 2002 period. As a percentage of net sales, sales and
marketing expenses were 38.1% and 35.9% for the three months ended June 30, 2003
and 2002, respectively, and 38.5% and 36.7% for the six months ended June 30,
2003 and 2002, respectively. The increase in these expenses is primarily
attributable to the increase in personnel costs and the increases in advertising
and literature costs and special event activity. The Company expects sales and
marketing expenses in future periods to increase in absolute dollars, and to
fluctuate as a percentage of sales based on recruiting, initial marketing and
advertising campaign costs associated with major new product releases and entry
into new market areas, investment in web sales and marketing efforts, increasing
product demonstration costs and the timing of domestic and international
conferences and trade shows.
Research and Development. Research and development expenses increased to
$16.9 million for the quarter ended June 30, 2003, a 7% increase as compared to
$15.7 million for the three months ended June 30, 2002, and increased 1% to
$32.1 million for the six months ended June 30, 2003 from the comparable 2002
period. As a percentage of net sales, research and development expenses remained
flat at 16.8% for the quarter ended June 30, 2003, compared with the quarter
ended June 30, 2002, and decreased to 16.1% for the six months ended June 30,
2003, from 16.8% for the comparable 2002 period. The decrease in research and
development costs as a percentage of sales in the six-month period ended June
30, 2003 versus the prior year period was primarily due to increases in
capitalized software development costs and was mitigated by the increases in
personnel costs from the hiring of additional product development engineers.
Research and development personnel increased from 765 at June 30, 2002 to 860 at
June 30, 2003. The Company plans to continue making a significant investment in
research and development in order to remain competitive and support revenue
growth. The Company expects that research and development expenses will increase
in the quarter ending September 30, 2003 to approximately $18.5 million.
The Company capitalizes software development costs in accordance with the
SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased,
or Otherwise Marketed. The Company amortizes such costs over the related
product's estimated economic useful life, generally three years, beginning when
a product becomes available for general release. Software amortization expense
totaled $1.2 million and $1.1 million for the quarters ended June 30, 2003 and
2002, respectively, and $2.2 million and $1.9 million during the six months
ended June 30, 2003 and 2002, respectively. Software development costs
capitalized were $3.9 million and $1.2 million for the quarters ended June 30,
2003 and 2002, respectively, and $8.4 million and $1.6 million for the first six
months of 2003 and 2002, respectively. The Company expects that capitalization
of software development costs will significantly decrease in the remaining six
months of 2003. The amounts capitalized in the six months ended June 30, 2003
are mainly related to the development of new and upgraded products which were
completed and released in the second quarter of 2003.
General and Administrative. General and administrative expenses for the
second quarter ended June 30, 2003 increased 4% to $9.2 million from $8.8
million for the comparable prior year period. For the first six months of 2003,
general and administrative expenses increased 22% to $20.2 million from $16.6
million for the first six months of 2002. As a percentage of net sales, general
and administrative expenses decreased to 9.2% for the quarter ended June 30,
2003 from 9.4% for the second quarter of 2002. During the first six months of
2003, general and administrative expenses increased as a percentage of sales to
10.1% from 8.8% for the comparable prior year period. The increase in general
and administrative expenses in absolute terms and as a percentage of sales for
the six months ended June 30, 2003 from the comparable prior year period was
primarily attributable to increased litigation costs of approximately $1.6
million associated with a legal action by the Company brought against The
MathWorks, Inc. to enforce the Company's intellectual property. (See Note 9 -
Litigation.) The Company expects that general and administrative expenses in
future periods will increase in absolute amounts and will fluctuate as a
percentage of revenue.
Interest Income, Net. Net interest income in the second quarter of 2003
decreased to $620,000 from $839,000 in the second quarter of 2002, and decreased
to $1.3 million for the first six months of 2003 from $1.6 million for the
comparable 2002 period. The decreases in interest income for the quarter and six
months ended June 30, 2003 were due to lower yields on the Company's
investments. The primary source of interest income is from the investment of the
Company's cash.
Net Foreign Exchange Gain (Loss). The Company experienced net foreign
exchange gains of $340,000 in the second quarter of 2003 compared to gains of
$217,000 in the second quarter of 2002. Net foreign exchange gains of $325,000
were recognized for the first six months of 2003 compared to losses of
($677,000) for the first six months of 2002. These results are attributable to
movements between the U.S. dollar and the local currencies in countries in which
the Company's sales subsidiaries are located. The Company recognizes the local
currency as the functional currency of its international subsidiaries.
The Company utilizes foreign currency forward contracts to hedge a majority
of its foreign currency-denominated receivables in order to reduce its exposure
to significant foreign currency fluctuations. The Company typically limits the
duration of its "receivables" foreign currency forward contracts to 90 days.
The Company also utilizes foreign currency forward contracts and foreign
currency purchased option contracts in order to reduce its exposure to
fluctuations in future foreign currency cash flows. The Company purchases these
contracts for up to 100% of its forecasted cash flows in selected currencies
(primarily the euro, 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.
The Company's hedging strategy reduced the foreign exchange gains by $3.6
million during the quarter ended June 30, 2003, and by $5.3 million for the six
months ended June 30, 2003.
Provision for Income Taxes. The provision for income taxes reflects an
effective tax rate of 25% for the three and six months ended June 30, 2003 and
28% for the three and six months ended June 30, 2002. The decrease in the
effective rate resulted from income tax benefits attributable to the
extraterritorial income exclusion and a change in the distribution of income
among taxing jurisdictions, particularly the impact of the Company's new
manufacturing facility in Hungary. The Company's effective tax rate is lower
than the U.S. federal statutory rate of 35% primarily as a result of the
extraterritorial income exclusion, tax-exempt interest and reduced tax rates in
certain foreign jurisdictions.
Liquidity and Capital Resources
The Company is currently financing its operations and capital expenditures
through cash flow from operations. At June 30, 2003, the Company had working
capital of approximately $225.0 million compared to $211.5 million at December
31, 2002. Net cash provided by operating activities for the six months ended
June 30, 2003 totaled $27.0 million.
Accounts receivable decreased to $61.8 million at June 30, 2003 from $63.0
million at December 31, 2002. Days sales outstanding decreased to 56 at June 30,
2003 compared to 58 at June 30, 2002. Consolidated inventory balances decreased
to $35.9 million at June 30, 2003 from $39.2 million at December 31, 2002.
Inventory turns decreased to 3.0 for the quarter ended June 30, 2003 from turns
of 3.3 for the quarter ended December 31, 2002. Cash used in the first six
months of 2003 for the purchase of property and equipment totaled $7.8 million,
for the capitalization of internally developed software costs totaled $8.4
million, and additions to other intangibles totaled $4.3 million.
The Company currently expects to fund expenditures for capital requirements
as well as liquidity needs created by changes in working capital from a
combination of available cash and short-term investment balances and internally
generated funds. As of June 30, 2003, the Company had no debt outstanding. The
Company believes that the cash flow from operations, if any, existing cash
balances and short-term investments will be sufficient to meet its cash
requirements for at least the next twelve months. Cash requirements for periods
beyond the next twelve months will depend on the Company's profitability, its
ability to manage working capital requirements and its rate of growth.
Financial Risk Management
The Company's international sales are subject to inherent risks, including
fluctuations in local economies; difficulties in staffing and managing foreign
operations; greater difficulty in accounts receivable collection; costs and
risks of localizing products for foreign countries; unexpected changes in
regulatory requirements, tariffs and other trade barriers; difficulties in the
repatriation of earnings and burdens of complying with a wide variety of foreign
laws. The Company's sales outside of North America are denominated in local
currencies, and accordingly, the Company is subject to the risks associated with
fluctuations in currency rates. In particular, increases in the value of the
dollar against foreign currencies decrease the U.S. dollar value of foreign
sales requiring the Company either to increase its price in the local currency,
which could render the Company's product prices noncompetitive, or to suffer
reduced revenues and gross margins as measured in U.S. dollars. 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)").
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. At June 30, 2003, the
Company did not have any relationships with any unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance
entities, which would have been established for the purpose of facilitating
off-balance sheet arrangements. As such, the Company is not exposed to any
financing, liquidity, market or credit risk that could arise if the Company were
engaged in such relationships.
Market Risk
The Company is exposed to a variety of risks, including foreign currency
fluctuations and changes in the market value of its investments. In the normal
course of business, the Company employs established policies and procedures to
manage its exposure to fluctuations in foreign currency values and changes in
the market value of its investments.
Foreign Currency Hedging Activities. The Company's objective in managing
its exposure to foreign currency exchange rate fluctuations is to reduce the
impact of adverse fluctuations in such exchange rates on the Company's earnings
and cash flow. Accordingly, the Company utilizes purchased foreign currency
option contracts and forward contracts to hedge its exposure on anticipated
transactions and firm commitments. The principal currencies hedged are the euro,
British pound and Japanese yen. The Company monitors its foreign exchange
exposures regularly to ensure the overall effectiveness of its foreign currency
hedge positions. However, there can be no assurance the Company's foreign
currency hedging activities will substantially offset the impact of fluctuations
in currency exchanges rates on its results of operations and financial position.
Based on the foreign exchange instruments outstanding at June 30, 2003, 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 $14.7 million.
However, as the Company utilizes foreign currency instruments for hedging
anticipated and firmly committed transactions, management believes that a loss
in fair value for those instruments will be substantially offset by increases in
the value of the underlying exposure.
Short-term Investments. The fair value of the Company's investments in
marketable securities at June 30, 2003 was $140.0 million. Investments with
maturities beyond one year are 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 June 30, 2003, a 100 basis point
increase or decrease in interest rates would result in a decrease or increase of
approximately $700,000, 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.
Recently Issued Accounting Pronouncement
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 149, Amendment of
Statement No. 133 on Derivative Instruments and Hedging Activities. SFAS No. 149
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. The amendments set forth in SFAS No. 149 improve financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. SFAS No. 149 is generally effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The guidance is to be applied prospectively.
SFAS No. 149 is not expected to have a material effect on the Company's
financial position or results of operations.
Factors Affecting the Company's Business and Prospects
U.S./Global Economic Slowdown. As 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. Additionally, the Company could
be impacted by the effects of the SARS virus, either through increased
difficulty or costs of the export of products into affected regions, the import
of components used in our products from affected regions, and/or the effects the
virus or costs to contain the virus have on the economy in regions in which the
Company does business, particularly Asia, which has been the highest growth
region of the Company over the past two years. 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 the remainder of the year could exceed this budget due to
a number of factors; including: additional marketing costs for conferences and
tradeshows; increased costs from the over-hiring of product development
engineers or other personnel; increased manufacturing costs resulting from
component supply shortages and/or component price fluctuations and/or additional
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 reduce expenditures 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's results of operations in
the third quarter of 2003 may be adversely affected by lower sales levels in
Europe, which typically occur during the summer months. The Company believes the
seasonality of its revenue results from the international mix of its revenue and
the variability of the budgeting and purchasing cycles of its customers
throughout each international region. In addition, total operating expenses have
in the past tended to be higher in the second and third quarters of each year,
due to recruiting and significantly increased intern personnel expenses.
New Product Introductions and Market Acceptance. The market for the
Company's products is characterized by rapid technological change, evolving
industry standards, changes in customer needs and frequent new product
introductions, and is therefore highly dependent upon timely product innovation.
The Company's success is dependent in part on its ability to successfully
develop and introduce new and enhanced products on a timely basis to replace
declining revenues from older products, and on increasing penetration in
domestic and international markets. In the past, the Company has experienced
significant delays between the announcement and the commercial availability of
new products. Any significant delay in releasing new products could have a
material adverse effect on the ultimate success of a product and other related
products and could impede continued sales of predecessor products, any of which
could have a material adverse effect on the Company's operating results. There
can be no assurance that the Company will be able to introduce new products in
accordance with announced release dates, that new products will achieve market
acceptance or that any such acceptance will be sustained for any significant
period. Failure of new products to achieve or sustain market acceptance could
have a material adverse effect on the Company's operating results. Moreover,
there can be no assurance that the Company's international sales will continue
at existing levels or grow in accordance with the Company's efforts to increase
foreign market penetration.
Risks Associated with Increased Development of Web Site. The Company has
devoted significant resources in developing its Web site as a key marketing and
sales tool and expects to continue to do so in the future. There can be no
assurance that the Company will be successful in its attempt to leverage the Web
to increase sales. The Company hosts its Web site internally. Failure to
successfully maintain the Web site and to protect it from hackers could have a
significant adverse impact on the Company's operating results.
Operation in Intensely Competitive Markets. The markets in which the
Company operates are characterized by intense competition from numerous
competitors, some of which are divisions of large corporations having far
greater resources than the Company, and the Company expects to face further
competition from new market entrants in the future. A key competitor is Agilent
Technologies Inc. ("Agilent"). Agilent offers its own line of instrument
controllers and also offers hardware and software add-on products for
third-party desktop computers and workstations that provide solutions that
directly compete with the Company's virtual instrumentation products. Agilent is
aggressively advertising and marketing products that are competitive with the
Company's products. Because of Agilent's strong position in the instrumentation
business, changes in its marketing strategy or product offerings could have a
material adverse effect on the Company's operating results.
The Company believes its ability to compete successfully depends on a
number of factors both within and outside its control, including: new product
introductions by competitors; product pricing; quality and performance; success
in developing new products; adequate manufacturing capacity and supply of
components and materials; efficiency of manufacturing operations; effectiveness
of sales and marketing resources and strategies; strategic relationships with
other suppliers; timing of new product introductions by the Company; protection
of the Company's products by effective use of intellectual property laws;
general market and economic conditions; and government actions throughout the
world. There can be no assurance that the Company will be able to compete
successfully in the future.
Management Information Systems. The Company relies on three primary
regional centers for its management information systems. As with any information
system, unforeseen issues may arise that could affect management's ability to
receive adequate, accurate and timely financial information, which in turn could
inhibit effective and timely decisions. Furthermore, it is possible that one or
more of the Company's three regional information systems could experience a
complete or partial shutdown. If such a shutdown occurred near the end of a
quarter it could impact the Company's product shipments and revenues, as product
distribution is heavily dependent on the integrated management information
systems in each region. Accordingly, operating results in that quarter would be
adversely impacted. The Company is working to achieve reliable regional
management information systems to control costs and improve the ability to
deliver its products in substantially all of its direct markets worldwide. No
assurance can be given that the Company's efforts will be successful. The
failure to receive adequate, accurate and timely financial information could
inhibit management's ability to make effective and timely decisions.
During the quarter ended September 30, 2003, the Company will be upgrading
its Americas business applications suite to Oracle's latest web-based release,
11i. There can be no assurance that the Company will not experience difficulties
implementing the new system. Difficulties or delays in the implementation may
interrupt normal Company operations, including the ability to: provide quotes,
process orders, ship products, provide services and support to our customers,
bill and track our customers, fulfill contractual obligations and otherwise run
our business. Any disruptions occurring in the implementation of the system may
have a material adverse effect on the Company's operating results.
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 foreign currency exchange rates.
Between the second quarter of 2003 and the second quarter of 2002, net of
hedging results, the change in exchange rates had the effect of increasing the
Company's consolidated sales by 4% as compared to the second quarter of 2002.
Since most of the Company's international operating expenses are also incurred
in local currencies, the change in exchanges rates had the effect of increasing
operating expenses by $1.4 million for the quarter ended June 30, 2003 as
compared to the comparable prior year period. If the U.S. dollar strengthens in
the future, it 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 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, 2003, the Company estimates it would have
recognized stock option expense for the options granted during 2003 of
approximately $190,000 and $201,000 for the quarter and six month periods ended
June 30, 2003. If the Company were to adopt the accounting provision of SFAS No.
123, the adoption would be prospective. Accordingly, the Company would expect
stock option expense to increase in the future if additional stock options are
issued.
Proprietary Rights and Intellectual Property Litigation. The Company's
success depends in part on its ability to obtain and maintain patents and other
proprietary rights relative to the technologies used in its principal products.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may have in the past infringed or violated certain of the Company's
intellectual property rights. The Company may from time to time, engage in
litigation to protect its intellectual property rights. In monitoring and
policing its intellectual property rights, the Company may be required to spend
significant resources. Over the next six months, the Company expects to incur
litigation expenses of approximately $2.6 million related to current patent
litigation. Due to the inherent uncertainties of litigation there may be
significant changes in the amount and timing of these expected expenses.
Additionally, as is typical in the industry, the Company from time to time may
be notified that it is infringing certain patent or intellectual property rights
of others. There can be no assurance that this litigation or any other
intellectual property litigation initiated in the future will not cause
significant litigation expense, liability and a diversion of management's
attention which may have a material adverse effect on the Company's 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 effect 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 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 at the current rate. 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 operating 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 3. Quantitative and Qualitative Disclosures About Market Risk
Response to this item is included in "Item 2 - Management's Discussion and
Analysis of Financial Conditions and Results of Operations - Market Risk" above.
Item 4. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer, based on
the evaluation of the Company's disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as
amended) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, as of June 30,
2003, have concluded that 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. During the three months ended June 30,
2003, there were no changes in the Company's internal control over financial
reporting identified in connection with the evaluation required by paragraph (d)
of the Rule 13a-15 or Rule 15d-15 that has materially affected, or is reasonably
likely to materially affect, the internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently involved in two legal proceedings against The
MathWorks, Inc. ("Defendant") for patent infringement. The Company filed the
first action on January 25, 2001 in the U.S. District Court, Eastern District of
Texas (Marshall Division) claiming that the Defendant infringes certain of the
Company's U.S. patents. The Defendant challenged the validity of these patents
and asserted that it does not infringe the claims of these patents.
The trial of the first case concluded and on January 30, 2003, the jury
found infringement by the Defendant of three of the patents involved and awarded
the Company specified damages. On June 23, 2003, the Court entered final
judgement in favor of the Company in an amount of approximately $4 million and
entered an injunction against Defendant's sale of its Simulink and related
products. The Court stayed the injunction pending appeal of the case and
required the Defendant to pay a specified royalty on its U.S. sales of Simulink
and related products during the pendency of appeal. On July 22, 2003, Defendant
filed its Notice of Appeal and the case is currently pending on appeal before
the U.S. Court of Appeals for the Federal Circuit. The final judgment has not
been recorded in the financial statements of the Company pending the disposition
of the appeal.
In the second complaint, filed October 21, 2002 also in the U.S. District
Court, Eastern District of Texas (Marshall Division), the Company claims that
the Defendant infringes certain other 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. In this case, the
Company seeks monetary damages and injunction of the sale of certain products of
the Defendant as well as attorney's fees and costs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of stockholders was held on May 13, 2003.
(b) The following directors were elected at the meeting to serve a term of three
years:
Ben G. Streetman
R. Gary Daniels
Duy-Loan T. Le
The following directors are continuing to serve their terms:
Donald M. Carlton
Jeffrey L. Kodosky
James J. Truchard
Charles J. Roesslein
(c) The matters voted upon at the meeting and results of the voting with respect
to those matters were as follows:
For Abstain
(1) Election of directors:
Ben G. Streetman 48,245,742 410,345
R. Gary Daniels 48,247,977 408,110
Duy-Loan T. Le 48,511,105 144,982
The foregoing matters are described in detail in the Company's definitive
proxy statement dated April 4, 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits.
3.1* Certificate of Incorporation of the Company.
3.2* Bylaws of the Company.
4.1* Specimen of Common Stock certificate of the Company.
4.2* Rights Agreement dated as of May 19, 1994, between the Company and
The First National Bank of Boston.
10.1* Form of Indemnification Agreement.
10.2* 1994 Incentive Plan.
10.3* 1994 Employee Stock Purchase Plan.
10.4* Agreement regarding Terms of Employment incorporated by reference
from Exhibit 10.4 of the Company's 10-K filed January 28, 2003.**
11.1 Computation of Earnings Per Share.
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
99.3 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
* Incorporated by reference to the Company's Registration Statement on
Form S-1 (Reg. No. 33-88386) declared effective March 13, 1995.
** Management Contract or Compensatory Plan or Arrangement.
b) Reports on Form 8-K.
On April 1, 2003, the Company filed Form 8-K reporting on the same date
under Item 7 "Financial Statements and Exhibits" and Item 9 "Regulation FD
Disclosure" the Company's press release.
On April 17, 2003, the Company filed Form 8-K reporting on the same date
under Item 7 "Financial Statements and Exhibits" and Item 9 "Regulation FD
Disclosure" the Company's press release.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL INSTRUMENTS CORPORATION
Registrant
BY:/s/ Alex Davern
Alex Davern
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
Dated: July 25, 2003
NATIONAL INSTRUMENTS CORPORATION
INDEX TO EXHIBITS
Exhibit No. Description Page
----------- ----------- ----
11.1 Statement Regarding Computation 23
of Earnings per Share
99.1 Certification of Chief Executive 24
Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant
to Section 302 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial 25
Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant
to Section 302 of the
Sarbanes-Oxley Act of 2002
99.3 Certification of Chief Executive 26
Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002