SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/ X / Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal quarter ended: September 30,1996 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6504 Bridge Point Parkway
Austin, Texas 78730
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(address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (512) 338-9119
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes / X / No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 1996
----- -------------------------------
Common Stock - $0.01 par value 21,641,434
NATIONAL INSTRUMENTS CORPORATION
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets
September 30, 1996 (unaudited) and December 31, 1995...............3
Consolidated Statements of Income (unaudited)
Three months and nine months ended September 30, 1996 and 1995.....4
Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, 1996 and 1995..................... 5
Consolidated Statements of Stockholders' Equity (unaudited)
Nine months ended September 30, 1996.............................. 6
Notes to Consolidated Financial Statements.........................7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations................................9
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K...................................17
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, December 31,
1996 1995
------------- ------------
Assets (unaudited)
Current assets:
Cash and cash equivalents...................... $ 28,795 $ 12,016
Short-term investments......................... 42,923 37,765
Accounts receivable, net....................... 31,636 28,789
Inventories, net............................... 11,406 15,295
Prepaid expenses and other current assets...... 5,996 6,788
----------- -----------
Total current assets....................... 120,756 100,653
Property and equipment, net........................ 32,290 32,596
Intangibles and other assets....................... 4,949 3,853
----------- -----------
Total assets............................... $ 157,995 $ 137,102
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt.............. $ 2,008 $ 2,137
Accounts payable............................... 10,317 9,783
Accrued expenses and other liabilities......... 10,729 7,313
Taxes payable.................................. 7,208 6,874
----------- -----------
Total current liabilities.................. 30,262 26,107
Long-term debt, net of current portion............. 9,194 11,603
Deferred income taxes.............................. 656 656
----------- -----------
Total liabilities.......................... 40,112 38,366
----------- -----------
Commitments and contingencies -- --
Stockholders' equity:
Common Stock: par value $.01; 60,000,000
shares authorized; 21,592,573 and 21,471,896
shares issued and outstanding, respectively.... 216 215
Additional paid-in capital......................... 43,512 41,277
Retained earnings.................................. 74,350 57,104
Other.............................................. (195) 140
----------- -----------
Total stockholders' equity................. 117,883 98,736
----------- -----------
Total liabilities and stockholders' equity. $ 157,995 $ 137,102
=========== ===========
The accompanying notes are an integral part of these financial statements.
-3-
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -------------------
1996 1995 1996 1995
------- ------- -------- --------
Net sales.......................... $49,679 $40,122 $146,328 $120,443
Cost of sales...................... 12,623 8,920 36,651 28,574
------- ------- -------- --------
Gross profit................... 37,056 31,202 109,677 91,869
------- ------- -------- --------
Operating expenses:
Sales and marketing............ 17,466 15,718 53,108 47,663
Research and development....... 6,412 5,161 18,239 15,100
General and administrative..... 4,401 4,053 12,963 10,958
------- ------- -------- --------
Total operating expenses... 28,279 24,932 84,310 73,721
------- ------- -------- --------
Operating income........... 8,777 6,270 25,367 18,148
Other income (expense):
Interest income, net........... 499 146 1,070 498
Foreign exchange
(loss) gain, net.............. (31) (637) (696) 363
------- ------- -------- --------
Income before income taxes. 9,245 5,779 25,741 19,009
Provision for income taxes......... 2,887 1,940 8,495 7,034
------- ------- -------- --------
Net income................. $ 6,358 $ 3,839 $ 17,246 $ 11,975
======= ======= ======== ========
Earnings per share................. $ 0.29 $ 0.18 $ 0.79 $ 0.58
======= ======= ======== ========
Weighted average
shares outstanding................ 22,061 21,593 21,872 20,707
======= ======= ======== ========
The accompanying notes are an integral part of these financial statements.
-4-
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
--------------------
1996 1995
-------- --------
Cash flow from operating activities:
Net income .......................................... $ 17,246 $ 11,975
Adjustments to reconcile net income to cash
provided by operating activities
Charges to income not requiring cash outlays:
Depreciation and amortization ............... 7,042 4,596
Charge for in-process research & development. 1,000 --
Changes in operating assets and liabilities:
Increase in accounts receivable ............. (2,975) (4,802)
Decrease (increase) in inventory ............ 3,711 (7,872)
Decrease (increase) in prepaid expenses and
other assets ............................... 707 (1,468)
Increase in current liabilities ............. 4,240 5,891
-------- --------
Net cash provided by operating activities ....... 30,971 8,320
-------- --------
Cash flow from investing activities:
Payments for acquisitions, net of cash received .... (900) --
Capital expenditures ............................... (5,111) (14,138)
Additions to intangibles ........................... (1,368) (531)
Purchases of short-term investments ................ (61,126) (62,133)
Sales of short-term investments .................... 55,900 22,758
-------- --------
Net cash used in investing activities .......... (12,605) (54,044)
-------- --------
Cash flow from financing activities:
(Repayments of) borrowings from debt ................ (2,509) 4,209
Net proceeds from issuance of common stock .......... 1,007 39,644
-------- --------
Net cash (used in) provided by
financing activities............................ (1,502) 43,853
-------- --------
Effect of translation rate changes on cash ........... (85) 167
-------- --------
Net increase (decrease) in cash and cash equivalents.. 16,779 (1,704)
Cash and cash equivalents at beginning of period ..... 12,016 7,526
-------- --------
Cash and cash equivalents at end of period ........... $ 28,795 $ 5,822
======== ========
The accompanying notes are an integral part of these financial statements.
-5-
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Common Additional
Stock Common Paid-In Retained
(Shares) Stock Capital Earnings Other Total
---------- ------- ---------- ---------- ------- --------
Balance at
December 31, 1995. 21,471,896 $ 215 $ 41,277 $ 57,104 $ 140 $ 98,736
Net income.......... -- -- -- 17,246 -- 17,246
Issuance in
connection with
acquisition....... 60,916 1 1,228 -- -- 1,229
Issuance under
employee plans.... 59,761 -- 1,007 -- -- 1,007
Unrealized loss on
short-term
investments....... -- -- -- -- (68) (68)
Foreign currency
translation
adjustment........ -- -- -- -- (267) (267)
---------- ------- ---------- ---------- ------- --------
Balance at
September 30, 1996 21,592,573 $ 216 $ 43,512 $ 74,350 $ (195) $117,883
========== ======= ========== ========== ======= ========
The accompanying notes are an integral part of these financial statements.
-6-
NATIONAL INSTRUMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Basis of Presentation
The accompanying unaudited financial statements should be read in conjunction
with the consolidated financial statements and notes thereto for the year ended
December 31, 1995, included in the Company's annual report on Form 10-K, filed
with the Securities and Exchange Commission. In the opinion of management, the
accompanying consolidated financial statements reflect all adjustments
(consisting only of normal recurring items) considered necessary to present
fairly the financial position of National Instruments Corporation and its
consolidated subsidiaries at September 30, 1996 and December 31, 1995, the
results of operations for the three-month and nine-month periods ended September
30, 1996 and 1995, and the cash flows for the nine-month periods ended September
30, 1996 and 1995. Operating results for the three-month and nine-month periods
ended September 30, 1996 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1996.
NOTE 2 - Earnings Per Share
Earnings per share are 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.
NOTE 3 - Inventories
Inventories consist of the following (in thousands):
September 30, December 31,
1996 1995
-------------------- --------------------
Raw materials $ 5,721 $ 8,101
Work-in-process 480 719
Finished goods 5,205 6,475
-------------------- --------------------
$ 11,406 $ 15,295
==================== ====================
NOTE 4 - Acquisitions
During the third quarter of 1996, the Company purchased imaging acquisition
software technology from Graftek (Miramande, France). The purchased software was
amortized over the third quarter, resulting in a charge to earnings of $500,000.
This amortization period was utilized due to the nature of this rapidly
developing technology and the revisions to be made to the software in the near
future. Excluding the effect of this charge, net income for the third quarter of
1996 would have been $6.7 million or $0.30 per share.
-7-
On April 1, 1996, the Company acquired all of the issued and outstanding shares
of common stock of Georgetown Systems, Inc. ("GSI") for an aggregate purchase
price of approximately $2.0 million, paid with 60,916 unregistered shares of the
Company's common stock and $764,000 in cash. The acquisition was accounted for
as a purchase. The results of GSI's operations have been combined with those of
the Company since the date of acquisition. The Company recorded a $1.0 million
charge against earnings during the second quarter of 1996 for the write-off of
in-process GSI research and development technology that had not reached the
working model stage. The Company also recorded $920,000 of capitalized software
development costs related to the acquisition, which are included in intangibles
and other assets and are being amortized on a straight line basis over 3 years.
Excluding the effect of the charge for the GSI acquisition and the amortization
of intangible assets related to the Graftek purchase, net income for the
nine-months ended September 30, 1996 would have been $18.2 million or $0.83 per
share.
-8-
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. Actual results could differ materially
from those projected in the forward-looking statements as a result of a number
of important factors. For a discussion of important factors that could affect
the Company's results, please refer to the Issues and Outlook section and
financial statement line item discussions below. Readers are also encouraged to
refer to the Company's Annual Report on Form 10-K for further discussion of the
Company's business and the risks and opportunities attendant thereto.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of net sales represented by certain items reflected in the Company's
consolidated statements of income:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- ----------------------------------
1996 1995 1996 1995
---------------- --------------- --------------- ---------------
Net sales:
North America................... 59.4% 58.6% 57.8% 56.8%
Europe.......................... 27.3 28.4 28.1 30.7
Asia Pacific.................... 13.3 13.0 14.1 12.5
---------------- --------------- --------------- ---------------
Consolidated net sales.......... 100.0 100.0 100.0 100.0
Cost of sales....................... 25.4 22.2 25.0 23.7
---------------- --------------- --------------- ---------------
Gross profit.................... 74.6 77.8 75.0 76.3
---------------- --------------- --------------- ---------------
Operating expenses:
Sales and marketing............. 35.1 39.2 36.3 39.6
Research and development........ 12.9 12.9 12.5 12.5
General and administrative...... 8.9 10.1 8.9 9.1
---------------- --------------- --------------- ---------------
Total operating expenses...... 56.9 62.2 57.7 61.2
---------------- --------------- --------------- ---------------
Operating income............ 17.7 15.6 17.3 15.1
Other income (expense):
Interest income, net............ 1.0 0.4 0.8 0.4
Foreign exchange (loss)gain, net (0.1) (1.6) (0.5) 0.3
---------------- --------------- --------------- ---------------
Income before income taxes... 18.6 14.4 17.6 15.8
Provision for income taxes.......... 5.8 4.8 5.8 5.8
---------------- --------------- --------------- ---------------
Net income...................... 12.8% 9.6% 11.8% 10.0%
================ =============== =============== ===============
NET SALES. Consolidated net sales represent gross sales less discounts,
returns and adjustments. Consolidated net sales of $49.7 million for the three
months ended September 30, 1996 increased by $9.6 million or 24% from $40.1
million for the three months ended September 30, 1995, and increased $25.9
million or 21% to $146.3 million for the nine months ended September 30, 1996
from $120.4 million for the comparable 1995 period. The increase in sales is
primarily attributable to the expansion of sales and marketing efforts,
particularly in the Asia Pacific market; the introduction of new and upgraded
products; increased market acceptance of the Company's products; and an
expanding customer base.
-9-
North American sales of $29.5 million for the quarter ended September 30,
1996 increased 25% and for the nine months ended September 30, 1996 increased
23% to $84.5 million over the comparable 1995 periods. Compared to 1995, the
Company's European sales increased by 19% to $13.6 million for the quarter ended
September 30, 1996 and by 11% to $41.2 million for the nine months ended
September 30, 1996. Net sales in Asia Pacific increased by 27% to $6.6 million
for the quarter ended September 30, 1996 compared to 1995 and by 37% to $20.7
million for the nine months ended September 30, 1996. The growth in the
Company's North American sales continues a historical trend of increased North
American sales as a percentage of consolidated net sales during the third
quarter when international sales levels tend to be weaker due to the typical
slowdown in the summer months in international markets, particularly Europe.
Despite weak economic conditions in several European countries, third quarter
sales growth of 19% over the prior year quarter was achieved. European sales
growth for the year-to-date remains low due to the decline in European sales in
the first quarter of fiscal 1996. This decline was the result of late product
releases and product delivery disruptions caused by the centralization of
European inventory during the first quarter. The sales increase in the Asia
Pacific region is attributable to increased customer acceptance of localized
products and support, particularly in Japan, and to the Company's new sales
offices in Hong Kong, Singapore, South Korea and Taiwan which opened in late
1994 and early 1995. The Company expects sales outside of North America to
continue to represent a significant, and possibly increasing, 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 US dollar equivalent
of these sales is affected by changes in the value of the US dollar. Between the
third quarter of 1995 and the third quarter of 1996 the weighted average value
of the US Dollar increased by 4.9%, causing an equivalent decrease in the US
dollar value of the Company's foreign currency sales and expenses. 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. If the weighted average value of the dollar
in the third quarter of 1996 had been the same as that in the third quarter of
1995, the Company's international sales for the third quarter of 1996 would have
been $7.4 million in the Asia Pacific region and $13.8 million in Europe
resulting in consolidated net sales of $50.7 million. Percentage sales growth
over the prior year third quarter would have been 42% in Asia, 21% in Europe and
26% consolidated growth. If the weighted average value of the dollar in the nine
months ended September 30, 1996 had been the same as that in the nine months
ended September 30, 1995, the Company's international year-to-date sales would
have been $23.3 million in Asia and $41.7 million in Europe resulting in
consolidated net sales of $149.5 million. Percentage sales growth over the
comparable prior year nine-month period would have been 55% in Asia, 13% in
Europe and 24% consolidated growth. Since most of the Company's international
operating expenses are also incurred in local currencies the change in exchange
rates has a corresponding effect on operating expenses. If the current trend in
the value of the dollar continues throughout 1996, it will continue to have the
effect of lowering the US dollar equivalent of international sales and operating
expenses.
GROSS PROFIT. Cost of goods sold consists primarily of the costs of
components and subassemblies, amortization of software development costs,
freight, labor and manufacturing overhead. As a percentage of net sales, gross
profit decreased to 74.6% for the third quarter of 1996 from 77.8% for the third
quarter of 1995 and decreased to 75.0% for the first nine months of 1996 from
76.3% for the comparable period a year ago. The lower margin for the third
quarter of 1996 compared to the third quarter of 1995 is attributable to the
foreign exchange effect on sales during the third quarter of 1996 as discussed
above and increased costs from the outsourcing of software duplication to a
third-party vendor. These same factors are responsible for the lower margin for
the nine months ended September 30, 1996 when compared to the nine months ended
September 30, 1995.
-10-
The marketplace for the Company's products dictates that many of the
Company's products be shipped very quickly after an order is received. As a
result, the Company is required to maintain significant inventories. Therefore,
inventory obsolescence is a risk for the Company due to frequent engineering
changes, shifting customer demand, the emergence of new industry standards and
rapid technological advances including the introduction by the Company, or its
competitors, of products embodying new technology. While the Company maintains
valuation allowances for excess and obsolete inventory and management continues
to monitor the adequacy of such valuation allowances, there can be no assurance
that such valuation allowances will be sufficient.
SALES AND MARKETING. Sales and marketing expenses consist of salaries and
commissions, customer support, advertising and promotional expenses. Sales and
marketing expenses increased 11% for the third quarter of 1996 and the first
nine months of 1996 from the comparable 1995 periods. As a percentage of net
sales, sales and marketing expenses decreased to 35.1% for the third quarter of
1996 from 39.2% for the third quarter of 1995 and decreased to 36.3% for the
first nine months of 1996 from 39.6% for the first nine months of 1995. The
increase in these expenses in absolute dollar amounts is primarily attributable
to programs designed to increase the Company's presence in both the European and
the Asia Pacific markets, including increases in international sales and
marketing personnel and increased sales and marketing activities in these
markets, as well as increases in United States sales and marketing personnel.
Overall sales and marketing personnel increased from 471 at September 30, 1995
to 517 at September 30, 1996, with increases primarily in the European and US
sales forces. The decline in sales and marketing expenses as a percentage of
sales is due to lower advertising costs related to the increased usage of
electronic media which is more cost effective than traditional printing methods.
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 initial
marketing and advertising campaign costs associated with major new product
releases, the opening of new sales offices and the timing of domestic and
international conferences and trade shows.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
principally of personnel costs and overhead costs relating to occupancy and
equipment depreciation. Research and development expenses increased to $6.4
million for the quarter ended September 30, 1996, a 24% increase, as compared to
$5.1 million for the three months ended September 30, 1995, and increased 21% to
$18.2 million for the nine months ended September 30, 1996 from the comparable
1995 period. As a percentage of net sales, research and development expenses
represented 12.9% of sales for the third quarter ended September 30, 1996 and
1995, respectively, and 12.5% for the nine months ended September 30, 1996 and
1995, respectively. The increase in absolute dollar amounts of research and
development expenses during the third quarter of 1996 is due to the amortization
of purchased software resulting from the purchase of Graftek imaging acquisition
software. Research and development expenses also increased as a result of the
hiring of additional product development engineers, including the increase in
personnel from the Georgetown Systems, Inc. ("GSI") acquisition in the second
quarter of 1996. For the nine months ended September 30, 1996, the increase in
the absolute dollar amounts of research and development expenses is primarily
attributable to a $1.0 million charge for the write-off of in-process research
and development technology of GSI. Excluding the effects of the Graftek charge
in the third quarter, research and development expenses have declined as a
percentage of revenue from the third quarter of 1995 primarily due to increased
software development costs capitalized for Bridgeview and HiQ 3.0 for Windows
during the third quarter of 1996. Excluding the effects of GSI, research and
development expenses have declined as a percentage of revenue during the
nine-month period ended September 30, 1996 as compared to 1995 which is due to
the capitalization of LabVIEW 4.0 development costs during the first quarter of
1996 and the software development costs capitalized in the third quarter of
1996. The Company believes that a significant, on-going investment in research
and development is required to remain competitive.
-11-
The Company capitalizes software development costs in accordance with the
Statement of Financial Accounting Standards No. 86. 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.
Amortization expense totaled $943,000 and $298,000 for the quarter ended
September 30, 1996 and 1995, respectively, and $1.7 million and $902,000 during
the nine months ended September 30, 1996 and 1995, respectively. The increase in
amortization expense is due primarily to amortization of development costs
capitalized as a result of the GSI and Graftek software acquisitions. Software
development costs capitalized were $821,000 and $76,000 for the quarters ended
September 30, 1996 and 1995, respectively, and $2.7 million and $276,000 for the
first nine months of 1996 and 1995, respectively. The amounts capitalized in the
third quarter and first nine months of 1996 include Bridgeview, HiQ 3.0 for
Windows and $500,000 of software development costs related to the Graftek
software acquisition. In the nine-month period ended September 30, 1996, amounts
capitalized also include development costs of LabVIEW 4.0 and $920,000 of
software development costs related to the GSI acquisition.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
personnel costs for administration, finance, information systems, human
resources and general management. General and administrative expenses for the
third quarter ended September 30, 1996 increased 9% to $4.4 million from $4.1
million for the comparable prior year period. For the first nine months of 1996,
general and administrative expenses increased 18% to $13.0 million from $11.0
million for the first nine months of 1995. As a percentage of net sales, general
and administrative expenses decreased to 8.9% for the quarter ended September
30, 1996 from 10.1% for the third quarter of 1995. During the first nine months
of 1996, general and administrative expenses decreased as a percentage of sales
to 8.9% from 9.1% for the comparable prior year period. The Company's general
and administrative expenses have increased in absolute dollars primarily due to
the increased sales volume including the related supporting activities and also
due to the costs of support for its worldwide management information system in
the US and Europe which will continue to affect general and administrative
expense. Implementation of the management information system for European
operations began in October 1995, in conjunction with the centralization of
European warehousing and administrative operations. This project is expected to
be completed in early 1997. The Company expects to eventually achieve a
worldwide management information system that will allow for the consolidation of
common functions, reduced costs, and improvements in the ability to deliver
product worldwide. No assurance can be given that the Company's efforts will be
successful. As a result of these and other factors, the Company expects that
general and administrative expense in future periods will increase in absolute
amounts as sales volume increases and as the worldwide implementation continues
and will fluctuate as a percentage of net sales.
INTEREST INCOME, NET. Interest income, net in the third quarter of 1996
increased to $499,000 from $146,000 in the third quarter of 1995 and increased
to $1,070,000 for the first nine months of 1996 from $498,000 for the first nine
months of 1995. Interest income for the nine months ended September 30, 1996 has
increased as a result of the investment of the proceeds from the Company's
initial public offering and due to the additional investment of cash generated
from operations during 1996.
FOREIGN EXCHANGE (LOSS) GAIN, NET. Net foreign exchange losses recognized
in the third quarter of 1996 were ($31,000) compared to net foreign exchange
losses of ($637,000) recognized in the third quarter of 1995. Net foreign
exchange losses of ($696,000) were recognized for the first nine months of 1996
compared with net foreign exchange gains of $363,000 for the first nine months
of 1995. These results are attributable to movements between the US 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 significant net losses in the third quarter
of 1995 are a result of the strengthening of the US dollar against the unhedged
portion of the Company's exposure in local currencies, primarily the Japanese
Yen, whereas in the third quarter of 1996 foreign currency exchange rates were
not as volatile.
-12-
The Company enters into foreign currency forward exchange contracts against
a majority of its intercompany foreign currency-denominated receivables in order
to reduce its exposure to significant foreign currency fluctuations. This
hedging strategy only partially addresses the Company's risks in foreign
currency transactions as the Company does not currently hedge anticipated
transactions. There can be no assurance that this strategy will be successful.
The Company's hedging strategy has reduced the foreign exchange losses recorded
by $529,000 during the nine-month period ended September 30, 1996. If the
strengthening of the US dollar continues throughout 1996, the Company could
experience significant foreign exchange losses due to the foreign exchange risks
that are not addressed by the Company's hedging strategy. The Company typically
limits the duration of its foreign exchange contracts to 90 days and does not
invest in contracts for speculative purposes.
PROVISION FOR INCOME TAXES. The provision for income taxes reflects an
effective tax rate of 33.0% and 37.0% for the nine months ended September 30,
1996 and 1995, respectively, and an effective tax rate of 31.2% and 33.6% for
the quarters ended September 30, 1996 and 1995, respectively. The decrease in
the effective rate resulted from a change in the mix of income among taxing
jurisdictions and utilization of tax credits for taxes paid in higher tax rate
jurisdictions. At September 30, 1996, seven of the Company's subsidiaries had
available, for income tax purposes, foreign net operating loss carryforwards of
approximately $1.4 million, of which $1.0 million expire between 1996 and 2006.
The remaining $400,000 of loss carryforwards may be carried forward indefinitely
to offset future taxable income in the related tax jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and capital resources through cash
flow from operations and, to a lesser degree, through borrowings from financial
institutions. At September 30, 1996, the Company had working capital of
approximately $90.5 million compared to $74.5 million at December 31, 1995. The
increase in working capital is reflected by the increase in cash and cash
equivalents of $16.8 million from December 31, 1995 to September 30, 1996,
because of positive cash flow from operating activities.
Accounts receivable increased to $31.6 million at September 30, 1996 from
$28.8 million at December 31, 1995, as a result of higher sales levels.
Receivable days outstanding of 59 days at September 30, 1996 were consistent
with days outstanding at December 31, 1995. Consolidated inventory balances have
decreased to $11.4 million at September 30, 1996 from $15.3 million at December
31, 1995. Inventory turns of 4.1 represent an improvement over turns of 2.7 at
December 31, 1995 and indicate the Company's improvements in inventory
management occurring at the manufacturing facility in Austin, Texas as well as
the centralized European warehouse in Amsterdam.
Cash used for investing activities in the first nine months of 1996
includes $5.1 million for the purchase of property and equipment, capitalization
of software development costs of $1.4 million, net short-term investment
purchases of $5.2 million and acquisition costs of $900,000 for the purchases of
GSI and Graftek software technology. The Company is currently in the process of
designing and developing an office building to be located next to its new
manufacturing facility in Austin, Texas. It is currently anticipated that a
portion of the construction costs will be paid out of the Company's existing
working capital with the remaining costs being funded through credit from the
Company's current financial institutions. The Company estimates the total cost
for the new building will range from $30 million to $35 million. The Company
intends to spend less than 10% of such building expenses during 1996 with the
remainder to be spent throughout 1997 and 1998. The Company has entered into
firm commitments of approximately $2.0 million for building design and site
development costs. The Company is not committed to spend the remaining amounts
and the actual level of spending may vary depending on a variety of factors
including decisions on a final design plan.
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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, internally
generated funds, and financing arrangements with its current financial
institutions. The Company has a $31.7 million credit agreement with NationsBank
of Texas, N.A. which consists of (i) an $8.0 million revolving line of credit,
(ii) a $7.5 million line of credit for new equipment purchases, (iii) a $3.9
million loan to finance equipment purchased prior to 1993, (iv) a $3.8 million
loan to finance the Company's existing real estate and (v) an $8.5 million loan
for the purchase of real estate and for the construction costs of the new
manufacturing facility. As of September 30, 1996, the Company had no outstanding
balances under the revolving and new equipment lines of credit, $731,000, $3.4
million and $7.1 million, under such other credit facilities, respectively. The
revolving line of credit expires on June 30, 1998 and the new equipment line of
credit is available for draws until June 30, 1997. The Company's credit
agreements contain certain financial covenants and restrictions as to various
matters, including the bank's prior approval of significant mergers and
acquisitions. Borrowings under the line of credit are collateralized by
substantially all of the Company's assets.
The Company believes that its cash flow from operations, if any, existing
cash balances and short-term investments and available credit under the
Company's existing credit facilities, will be sufficient to meet its cash
requirements for at least the next twelve months.
ISSUES AND OUTLOOK
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. 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, having a material adverse impact on the Company's operating results.
In addition, the Company serves a number of industries such as semiconductors,
telecommunications, aerospace, defense and automotive which are cyclical in
nature. Downturns in these industries, including the current decline in the
semiconductor industry, could have a material adverse effect on the Company's
operating results.
In recent years, the Company's revenues have been characterized by
seasonality, with revenues typically being relatively constant in the first,
second and third quarters and growing in the fourth quarter. The Company
believes the seasonality of its revenue results from the budgeting and
purchasing cycles of its customers.
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MANAGEMENT INFORMATION SYSTEMS. The Company does not currently have an
integrated world-wide management information system. While the Company is in the
process of implementing a new world-wide system, the deficiencies in its
existing information resources have at times inhibited management's ability to
manage certain aspects of the Company's operations in a timely manner. The
Company has implemented all of the US components of the new world-wide system.
Implementation began for European operations during October 1995 and will
continue throughout early 1997 in conjunction with the Company's plan to
centralize European warehouse and administrative operations. As of August 1996,
the Company has transitioned its European subsidiaries to a centralized,
third-party warehouse in Amsterdam. The Company is in the initial stages of
implementation for its Japanese operation. All of the Company's Asia Pacific
operations are currently using independent management information systems. Until
the new world-wide system can be implemented in this region, the growth of the
Company's Japanese operations may be inhibited by the deficiencies of its
current system. In addition, no assurance can be given that the Company's
world-wide implementation 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 European economies, particularly the French economy, are experiencing weak
economic conditions. In addition, recent economic indicators suggest a
struggling Japanese economy. There can be no assurances that these economic
conditions will improve or stabilize in the fourth quarter and accordingly these
factors may affect the Company's direct sales offices located in these countries
and negatively impact consolidated sales and operating results.
NEW PRODUCT INTRODUCTIONS AND MARKET ACCEPTANCE. The market for the
Company's products is characterized by rapid technological change, evolving
industry standards, changes in customer needs and frequent new product
introductions, and is therefore highly dependent upon timely product innovation.
The Company's success is dependent in part on its ability to successfully
develop and introduce new and enhanced products on a timely basis to replace
declining revenues from older products, and on increasing penetration in
international markets. There can be no assurance that the Company will be able
to introduce new products on a timely basis, that new products will achieve
market acceptance or that any such acceptance will be sustained for any
significant period. Moreover, there can be no assurance that the Company's
efforts to increase international market penetration will be successful.
OPERATION IN INTENSELY COMPETITIVE MARKETS. The markets in which the
Company operates are characterized by intense competition from numerous
competitors, and the Company expects to face further competition from new market
entrants in the future. 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; strategic relationships with other suppliers; timing
of new product introductions by the Company and its competitors; 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.
-15-
VOLATILE STOCK MARKET. The market price of the Company's common stock could
be subject to significant fluctuations due to the inherent volatility of the
stocks of technology companies. In addition, the stock market has recently
experienced significant price fluctuations, which often have been unrelated to
the operating performance of the specific companies whose stocks are traded.
Broad market fluctuations, as well as economic conditions generally and in the
technology industry specifically, may adversely affect the market price of the
Company's common stock.
DEPENDENCE ON KEY MANAGEMENT AND TECHNICAL PERSONNEL. The Company's success
depends to a significant degree upon the continued contributions of its key
management, marketing, research and development and operational personnel
including Dr. Truchard, Mr. Kodosky 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 Company's Manufacturing Manager, Michael Ross, recently notified the
Company of his plans to leave his position on November 30, 1996. At the present
time, the Company does not anticipate a material adverse affect on operating
results due to his departure and an active recruiting search is in progress to
find a replacement. However, 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. Competition for key personnel is intense 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.
-16-
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
11.1 Computation of Earnings Per Share
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the
quarter ended September 30, 1996.
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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
/s/ Joel B. Rollins
------------------------------------------------
BY: Joel B. Rollins
Vice President, Finance, Chief Financial
Officer and Treasurer (principal financial and
accounting officer)
Dated: October 31, 1996
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NATIONAL INSTRUMENTS CORPORATION
INDEX TO EXHIBITS
Exhibit No. Description Page
- ----------- ----------- ----
11.1 Statement Regarding Computation of Earnings per 20
Share
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