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 30,1997 or
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
- - -
Act of 1934
For the transition period from ________________ to ________________
Commission file number: 0-25426
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NATIONAL INSTRUMENTS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-1871327
- ------------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6504 Bridge Point Parkway
Austin, Texas 78730
- ------------------------------------ -------------------------------------
(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 August 5, 1997
----- -----------------------------
Common Stock - $0.01 par value 21,712,226
================================================================================
2
NATIONAL INSTRUMENTS CORPORATION
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets
June 30, 1997 (unaudited) and December 31, 1996 3
Consolidated Statements of Income (unaudited)
Three months and six months ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, 1997 and 1996 5
Consolidated Statements of Stockholders' Equity (unaudited)
Six months ended June 30, 1997 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 16
Item 2 Change in Securities 16
Item 3 Defaults Upon Senior Securities 16
Item 4 Submission of Matters to a Vote of Security Holders 16
Item 5 Other Information . 17
Item 6 Exhibits and Reports on Form 8-K 17
3
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30,December 31,
1997 1996
----------- -----------
Assets (unaudited)
Current assets:
Cash and cash equivalents ........................ $ 32,710 $ 30,211
Short-term investments ........................... 51,497 48,956
Accounts receivable, net ......................... 37,490 33,442
Inventories, net ................................. 13,740 11,778
Prepaid expenses and other current assets ........ 7,727 7,198
-------- --------
Total current assets ......................... 143,164 131,585
Property and equipment, net .......................... 33,316 32,184
Intangibles and other assets ......................... 5,432 5,456
-------- --------
Total assets ................................. $181,912 $169,225
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt .............. $ 851 $ 1,517
Accounts payable ............................... 14,319 11,430
Accrued expenses and other liabilities ......... 10,887 9,360
Taxes payable .................................. 5,647 9,984
------- -------
Total current liabilities .................. 31,704 32,291
Long-term debt, net of current portion ............. 5,650 9,175
Deferred income taxes .............................. 808 806
------- -------
Total liabilities ...................... 38,162 42,272
------- ------
Commitments and contingencies .................. -- --
Stockholders' equity:
Common Stock: par value $.01; 60,000,000 shares
authorized; 21,703,352 and 21,642,241 shares issued
and outstanding, respectively ...................... 217 216
Additional paid-in capital ........................... 45,657 44,396
Retained earnings .................................... 98,739 82,590
Other ................................................ (863) (249)
--------- ---------
Total stockholders' equity ................... 143,750 126,953
--------- ---------
Total liabilities and stockholders' equity ... $ 181,912 $ 169,225
========= =========
The accompanying notes are an integral part of these financial statements.
4
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
------------------- -------------------
June 30, June 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- --------- --------
Net sales ......................... $ 60,092 $ 50,241 $ 114,663 $ 96,649
Cost of sales ..................... 14,009 12,762 26,302 24,028
-------- -------- --------- --------
Gross profit .................. 46,083 37,479 88,361 72,621
-------- -------- --------- --------
Operating expenses:
Sales and marketing ........... 21,481 18,077 41,443 35,642
Research and development ...... 7,658 6,852 14,135 11,827
General and administrative .... 4,543 4,388 8,813 8,562
-------- -------- --------- --------
Total operating expenses .. 33,682 29,317 64,391 56,031
-------- -------- --------- --------
Operating income .......... 12,401 8,162 23,970 16,590
Other income (expense):
Interest income, net .......... 705 314 1,403 571
Foreign exchange loss, net .... (306) (287) (1,270) (665)
-------- -------- --------- --------
Income before income taxes 12,800 8,189 24,103 16,496
Provision for income taxes ........ 4,219 2,784 7,954 5,608
-------- -------- --------- --------
Net income ................ $ 8,581 $ 5,405 $ 16,149 $ 10,888
======== ======== ========= ========
Earnings per share ................ $ 0.38 $ 0.25 $ 0.72 $ 0.50
======== ======== ========= ========
Weighted average shares outstanding 22,290 21,938 22,290 21,780
======== ======== ========= ========
The accompanying notes are an integral part of these financial statements.
5
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30,
--------------------
1997 1996
-------- --------
Cash flow from operating activities:
Net income ........................................... $ 16,149 $ 10,888
Adjustments to reconcile net income to cash provided
by operating activities
Charges to income not requiring cash outlays:
Depreciation and amortization ................ 4,102 4,248
Charge for in-process research & development . -- 1,000
Changes in operating assets and liabilities:
Increase in accounts receivable .............. (4,749) (3,684)
(Increase) decrease in inventory ............. (1,859) 1,772
Decrease in prepaid expense and other assets . 187 369
Increase in current liabilities .............. 582 3,888
-------- --------
Net cash provided by operating activities ........ 14,412 18,481
-------- --------
Cash flow from investing activities:
Payments for acquisition of Georgetown Systems,
net of cash received ............................ -- (700)
Capital expenditures ................................. (5,562) (3,228)
Additions to intangibles ............................. (582) (972)
Purchases of short-term investments .................. (26,719) (21,688)
Sales of short-term investments ...................... 24,117 20,873
-------- --------
Net cash used in investing activities ............ (8,746) (5,715)
-------- --------
Cash flow from financing activities:
Repayments of debt .................................. (4,187) (2,002)
Net proceeds from issuance of common stock ........... 1,261 926
-------- --------
Net cash used in financing activities ........... (2,926) (1,076)
-------- --------
Effect of translation rate changes on cash ............... (241) (131)
-------- --------
Net increase in cash and cash equivalents ................ 2,499 11,559
Cash and cash equivalents at beginning of period ......... 30,211 12,016
-------- --------
Cash and cash equivalents at end of period ............... $ 32,710 $ 23,575
======== ========
The accompanying notes are an integral part of these financial statements.
6
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Common Common Additional
Stock Stock Paid-In Retained
(Shares) Capital Earnings Other Total
----------- ----- ------ ------- ------ ---------
Balance at
December 31, 1996 .... 21,642,241 $216 $44,396 $82,590 $(249) $ 126,953
Net income ............. -- -- -- 16,149 -- 16,149
Issuance under
employee plans ....... 61,111 1 1,261 -- -- 1,262
Unrealized loss on
short-term investments . -- -- -- -- (61) (61)
Foreign currency
translation adjustment.. -- -- -- -- (553) (553)
========== ==== ======= ======= ===== =========
Balance at
June 30, 1997 ........ 21,703,352 $217 $45,657 $98,739 $(863) $ 143,750
========== ==== ======= ======= ===== =========
The accompanying notes are an integral part of these financial statements.
7
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, 1996, 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, 1997 and December 31, 1996, the results of
operations for the three-month and six-month periods ended June 30, 1997 and
1996, and the cash flows for the six-month periods ended June 30, 1997 and 1996.
Operating results for the three-month and six-month periods ended June 30, 1997
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1997.
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.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share." The new standard,
which is effective for financial statements issued for periods ending after
December 15, 1997, establishes standards for computing and presenting earnings
per share (EPS) and upon adoption requires restatement of all prior-period EPS
data presented. The Company will implement this standard in the fourth quarter
of 1997. The implementation of the standard will result in the presentation of a
basic EPS calculation in the consolidated financial statements as well as a
diluted EPS calculation. If the Company had adopted the new standard for the
second quarter of 1997, basic EPS would have been $0.40 per share and diluted
EPS would have approximated the EPS of $0.38 presented in the accompanying
consolidated statement of income.
NOTE 3 - Inventories
Inventories consist of the following (in thousands):
June 30, December 31,
1997 1996
(unaudited)
-------------------- --------------------
Raw materials $ 6,258 $ 5,324
Work-in-process 921 864
Finished goods 6,561 5,590
-------------------- --------------------
$ 13,740 $ 11,778
==================== ====================
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 Six Months Ended
June 30, June 30,
------------------ -----------------
1997 1996 1997 1996
Net sales:
North America .................. 60.4% 57.2% 58.5% 56.9%
Europe ......................... 27.5 28.9 27.5 28.6
Asia Pacific ................... 12.1 13.9 14.0 14.5
----- ----- ----- -----
Consolidated net sales ......... 100.0 100.0 100.0 100.0
Cost of sales ...................... 23.3 25.4 23.0 24.9
----- ----- ----- -----
Gross profit ................... 76.7 74.6 77.0 75.1
----- ----- ----- -----
Operating expenses:
Sales and marketing ............ 35.8 36.0 36.1 36.9
Research and development ....... 12.7 13.6 12.3 12.2
General and administrative ..... 7.6 8.7 7.7 8.8
----- ----- ----- -----
Total operating expenses ..... 56.1 58.3 56.1 57.9
----- ----- ----- -----
Operating income ........... 20.6 16.3 20.9 17.2
Other income (expense):
Interest income, net ........... 1.2 0.6 1.2 0.6
Foreign exchange loss, net ..... (0.5) (0.6) (1.1) (0.7)
----- ----- ----- -----
Income before income taxes .. 21.3 16.3 21.0 17.1
Provision for income taxes ......... 7.0 5.5 6.9 5.8
----- ----- ----- -----
Net income ..................... 14.3% 10.8% 14.1% 11.3%
===== ===== ===== =====
9
NET SALES. Consolidated net sales increased by $9.9 million or 20% for
the three months ended June 30, 1997 to $60.1 million from $50.2 million for the
three months ended June 30, 1996, and increased $18 million or 19% to $114.7
million for the six months ended June 30, 1997 from $96.6 million for the
comparable 1996 period. The increase in sales is primarily attributable to the
introduction of new and upgraded products, increased market acceptance of the
Company's products, and an expanding customer base. North American sales in the
second quarter of 1997 increased 26% over the second quarter of 1996, compared
with an increase of 23% in the second quarter of 1996 from the second quarter of
1995. North American sales for the six months ended June 30, 1997 increased 22%
from the six months ended June 30, 1996, compared with an increase of 23% in
1996 compared to the same period in 1995.
International sales as a percentage of consolidated sales for the
quarter and six months ended June 30, 1997 decreased from 42.8% to 39.6% and
from 43.1% to 41.5%, respectively, over the comparable 1996 periods. Compared to
1996, the Company's European net sales increased by 14% to $16.5 million for the
quarter ended June 30, 1997 and by 14% to $31.5 million for the six months ended
June 30, 1997. Net sales in Asia Pacific increased by 5% to $7.3 million in the
quarter ended June 30, 1997 compared to 1996 and by 14% to $16.0 million for the
six months ended June 30, 1997. The decline in the sales growth percentages in
the Asia Pacific region is directly attributable to lower sales growth rates in
Japan. The Company believes that sales growth rates in Japan have been
negatively impacted by the increase in the consumption tax rate in Japan, from
3% to 5% effective April 1, 1997, which has affected the timing of customers'
purchasing decisions. In addition, the Company faces a continuing challenge in
finding qualified bilingual sales and marketing personnel to staff operations in
Japan. The Company expects sales outside of North America to continue to
represent a significant portion of its revenue.
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.
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
second quarter of 1997 and the second quarter of 1996 the weighted average value
of the US dollar increased by 8.8%, 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 US dollar, multiplied by the proportion of international sales
recorded in the particular currency. If the weighted average value of the US
dollar in the second quarter of 1997 had been the same as that in the second
quarter of 1996, the Company's sales for the second quarter of 1997 would have
been $62.2 million This effect is 3.5% of consolidated net sales in the
aggregate. European sales for the second quarter of 1997 would have been $18
million, representing an increase of $3.4 million and would have reflected an
increase in the second quarter 1997 sales over the second quarter 1996 sales by
24% instead of 14%. Asia Pacific sales for the second quarter of 1997 would have
been $7.8 million, representing an increase of $977,000 and would have reflected
an increase in second quarter 1997 sales over second quarter 1996 sales by 14%
instead of 5%. If the weighted average value of the dollar in the six months
ended June 30, 1997 had been the same as that in the six months ended June 30,
1996, the Company's year-to-date sales would have been $119 million. Since most
of the Company's international operating expenses are also incurred in local
currencies the change in exchange rates has the corresponding effect of reducing
operating expenses by $800,000. If the current trend in the value of the dollar
continues throughout 1997, it will continue to have the effect of lowering the
US dollar equivalent of international sales and operating expenses.
10
GROSS PROFIT. As a percentage of net sales, gross profit increased to 76.7%
for the second quarter of 1997 from 74.6% for the second quarter of 1996 and
increased to 77.0% for the first six months of 1997 from 75.1% for the
comparable period a year ago. The higher margin for the second quarter of 1997
compared to the second quarter of 1996 is attributable to manufacturing labor
and overhead spending efficiencies and lower material costs.
The marketplace for the Company's products dictates that many of the
Company's products be shipped 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 for the second quarter of
1997 increased to $21.5 million, a 19% increase, as compared to the second
quarter of 1996, and increased 16% to $41.4 million for the first six months of
1997 from the comparable 1996 period. As a percentage of net sales, sales and
marketing expenses decreased to 35.8% for the second quarter of 1997 from 36.0%
for the second quarter of 1996 and decreased to 36.1% for the first six months
of 1997 from 36.9% for the first six months of 1996. The increase in these
expenses in absolute dollar amounts is primarily attributable to increases in
sales and marketing personnel and increased sales and marketing activities.
Overall sales and marketing personnel increased from 515 at June 30, 1996 to 614
at June 30, 1997. 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 increased to
$7.7 million for the quarter ended June 30, 1997, a 12% increase, as compared to
$6.9 million for the three months ended June 30, 1996, and increased 20% to
$14.1 million for the six months ended June 30, 1997 from the comparable 1996
period. As a percentage of net sales, research and development expenses
represented 12.7% and 13.6% for the second quarters ended June 30, 1997 and
1996, respectively, and 12.3% and 12.2% for the six months ended June 30, 1997
and 1996, respectively. The above comparisons include research and development
expenses of $1.0 million in the second quarter of 1996 for the write-off of
in-process research and development technology related to the purchase of
Georgetown Systems, Inc. ("GSI"). Excluding the effects of the GSI charge, the
increase in research and development expenses in the three months ended June 30,
1997 compared to the three months ended June 30, 1996 is mainly due to increases
in personnel costs from increased hiring, outside tooling and prototype
materials. The Company believes that a significant, on-going investment in
research and development is required to remain competitive. As a result of
increased recruiting efforts, the Company expects its intern personnel expenses
to increase in the third quarter of 1997.
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 $361,000 and $428,000 for the quarter ended June
30, 1997 and 1996, respectively, and $737,000 and $713,000 during the six months
ended June 30, 1997 and 1996, respectively. Software development costs
capitalized were $88,000 and $1.2 million for the quarter ended June 30, 1997
and 1996, respectively, and $406,000 and $1.9 million for the first six months
of 1997 and 1996, respectively. The amounts capitalized in the second quarter
and first six months of 1996 include $1.0 million of software development costs
related to the GSI acquisition.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
second quarter ended June 30, 1997 increased 4% to $4.5 million from $4.4
million for the comparable prior year period. For the first six months of 1997,
general and administrative expenses increased 3% to $8.8 million from $8.6
million for the first six months of 1996. As a percentage of net sales, general
and administrative expenses decreased to 7.6% for the quarter ended June 30,
1997 from 8.7% for the second quarter of 1996. During the first six months of
1997, general and administrative expenses decreased as a percentage of sales to
7.7% from 8.8% for the comparable prior year period. The decrease in general and
administrative expenses as a percent of sales is due to operational efficiencies
achieved as a result of increased systems integration during the past two years.
The Company's general and administrative expense increased in absolute dollars
mainly due to additional personnel. The Company expects that general and
administrative expense in future periods will increase in absolute amounts and
will fluctuate as a percentage of net sales.
INTEREST INCOME, NET. Interest income, net in the second quarter of 1997
increased to $705,000 from $314,000 in the second quarter of 1996 and increased
to $1.4 million for the first six months of 1997 from $571,000 for the first six
months of 1996. This increase is primarily due to an increase in the Company's
cash and investment balances. Interest expense in the second quarter of 1997
decreased to $125,000 from $242,000 in the second quarter of 1996 and decreased
to $258,000 for the first six months of 1997 from $472,000 for the first six
months of 1996. This decrease is attributed to repayments of debt in January
1997.
FOREIGN EXCHANGE LOSS, NET. Net foreign exchange losses recognized in the
second quarter of 1997 were $306,000 compared to $287,000 recognized in the
second quarter of 1996. Net foreign exchange losses of ($1.3) million were
recognized for the first six months of 1997 compared to $665,000 for the first
six months of 1996. 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 net losses in the
first six months of 1997 are a result of the strengthening of the US dollar
against local currencies, primarily the Japanese yen and the French franc which
weakened in the first half of 1997.
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 $770,000 during the six-month period ended June 30, 1997. If the
strengthening of the US dollar that occurred throughout 1996 and the first half
of 1997 is experienced during the remainder of 1997, 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 contract 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% and 34% for both the three months and the six months
ended June 30, 1997 and 1996, 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. As
of June 30, 1997, six of the Company's subsidiaries had available, for income
tax purposes, foreign net operating loss carryforwards of approximately $1.01
million of which $654,000 expire between 2000 and 2007. The remaining $406,000
of loss carryforwards may be carried forward indefinitely to offset future
taxable income in the related tax jurisdictions.
Liquidity and Capital Resources
The Company is currently financing its operations and capital resources
through cash flow from operations. Historically, the Company also financed its
capital expenditures, such as the new manufacturing facility constructed in
1995, through borrowings from financial institutions. At June 30, 1997, the
Company had working capital of approximately $111 million compared to $99
million at December 31, 1996. The increase in working capital is attributable to
an increase in cash and short term investments of $5.0 million and an increase
of net accounts receivable of $4.0 million from December 31, 1996 to June 30,
1997.
Accounts receivable increased to $37 million at June 30, 1997 from $33
million at Dec. 31, 1996, as a result of higher sales levels. Receivable days
outstanding decreased to 56 at June 30, 1997 compared to 57 at December 31,
1996. Inventory levels increased with consolidated inventory balances of $14
million and $12 million at June 30, 1997 and December 31, 1996, respectively.
Inventory increases were the result of planned efforts to increase inventory in
order to support the forecasted sales levels. Inventory turns of 4.1 represent
an improvement over turns of 3.7 at December 31, 1996.
Cash used in the first six months of 1997 for the purchase of the property
and equipment totaled $5.4 million and for the capitalization of software
development costs totaled $406,000. The Company has begun construction of an
office building to be located next to its manufacturing facility which opened in
July 1995. It is currently anticipated that a significant portion of the
construction costs will be paid out of the Company's existing working capital
and future cash flows. The Company estimates the total cost for the new
building, including furniture, fixtures and equipment, will range from $30
million to $35 million with approximately $21 million expected to be incurred
during 1997 and the remainder in the first half of 1998. In May of 1997, the
Company entered into firm commitments of approximately $23.5 million for the new
building. The actual level of spending may exceed this amount depending on a
variety of factors, including unforeseen difficulties in construction.
13
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 $24.0 million credit agreement with NationsBank
of Texas, N.A. which consists of (i) an $8.0 million revolving line of credit,
and (ii) a $7.5 million equipment line of credit, and (iii) an $8.5 million
manufacturing facility loan. As of June 30, 1997, the Company had no outstanding
balances under any of the lines of credit and had repaid all of the loans except
the $8.5 million manufacturing facility loan, which had a balance of $6.4
million. The revolving line of credit expires on June 30, 1998. 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.
Furthermore, the Company serves a number of industries such as semiconductors,
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, 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. If this historical
pattern continues, revenues for the third quarter of 1997 may be below revenues
for the second quarter of 1997. 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
increased sales and marketing activities. If this historical pattern continues,
net income for the third quarter of 1997 will be less than that in the first and
second quarter of 1997. The Company's results of operations may be adversely
affected by lower sales levels in Europe which typically occur during the summer
months.
14
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 system. The Company
plans to complete transition of the sales and receivable functions of the
European operations by the third quarter of 1997. The Company implemented the
new system for its Japanese operation in May of 1997. The rest of the Company's
Asia Pacific operations continue using independent management information
systems. The Company is working to eventually achieve a world-wide management
information system that will allow for the consolidation of common functions,
reduced costs, and improvements in the ability to deliver product world-wide. 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.
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. 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 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. A key competitor is Hewlett-Packard Company ("HP"),
which has been the leading supplier of traditional instrumentation solutions for
decades. Although HP offers its own line of proprietary instrument controllers,
HP 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. HP is aggressively advertising and
marketing products that are competitive with the Company's products. Because of
HP's dominance in the instrumentation business, changes in its marketing
strategy or product offerings could have a material adverse effect on the
Company operating results.
15
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 complete
successfully in the future.
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.
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. 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. While no actions are currently pending
by or against the Company, there can be no assurance that litigation will not be
initiated in the future which may cause significant litigation expense,
liability and a diversion of management's attention which may have a material
adverse affect on results of operations.
DEPENDENCE ON KEY MANAGEMENT AND TECHNICAL PERSONNEL. The Company's success
depends to a significant degree upon the continued contributions of its key
management, marketing, research and development and operational personnel. The
Company has no agreements providing for the employment of any of its key
employees for any fixed term and the Company's key employees may voluntarily
terminate their employment with the Company at any time. The loss of the
services of one or more of the Company's key employees in the future could have
a material adverse affect on operating results. The Company also believes its
future success will depend in large part upon its ability to attract and retain
additional highly skilled management, technical, marketing, research and
development, product development and operational personnel with experience in
managing large and rapidly changing companies as well as training, motivating
and supervising the employees. 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 1. LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings at this
time.
ITEM 2. CHANGE IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of stockholders was held on May 13, 1997.
(b) The following three directors were elected at the meeting to
serve a term of three years:
Dr. James J. Truchard
Jeffrey L. Kodosky
Dr. Ben G. Streetman
The following directors are continuing to serve their terms:
William C. Nowlin, Jr.
L. Wayne Ashby
Dr. Donald M. Carlton
Gerald T. Olson
(c) The matters voted upon at the meeting and results of the
voting with respect to those matters were as follows:
For Instructed Withheld
--- ---------- --------
(1) Election of directors: 19,022,297 10,859 61,809
Dr. James Truchard.
Jeffrey L. Kodosky
Dr. Ben G. Streetman
17
Broker
For Against Abstain Non-Vote
--- ------- ------- --------
(2) Proposal to approve the 15,224,778 2,129,656 10,427 1,730,104
amendment to the 1994
Incentive Plan to increase
the number of shares
reserved for issuance
thereunder 2,100,000
shares to 4,800,000
shares.
Broker
For Against Abstain Non-Vote
--- ------- ------- --------
(3) Ratification of Price 19,013,049 840 30,303 50,773
Waterhouse LLP as the
Company's independent
public accountants for
the fiscal year ending
December 31, 1997.
The foregoing matters are described in detail in the Company's
definitive proxy statement dated April 4, 1997, for the Annual Meeting
of Stockholders held on May 13, 1997.
ITEM 5. OTHER INFORMATION
Director Dr. Peter T. Flawn left the Board of Directors of the Company
to serve as interim President at the University of Texas at Austin
effective May 13, 1997. Dr. Flawn served on the Compensation and Audit
Committees of the Company's Board of Directors. Dr. Ben G. Streetman
has been elected to replace Dr. Flawn on these committees.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Construction Contract for Phase 2 Building between
National Instruments Corporation and White Construction
Company
11.1 Computation of Earnings Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the
quarter ended June 30, 1997.
18
================================================================================
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/ Alex Davern
---------------
BY: Alex Davern
Acting Chief Financial Officer
(principal financial and accounting
officer)
Dated: August 8, 1997
19
NATIONAL INSTRUMENTS CORPORATION
INDEX TO EXHIBITS
Exhibit No. Description Page
- ----------- ----------- ----
10.1 Construction Contract for Phase 2 20
Building between National Instruments
Corporation and White Construction
Company.
11.1 Statement Regarding Computation of Earnings per 116
Share
27.1 Financial Data Schedule 117