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, 1998 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 (zip code)
offices)
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 November 11, 1998
Common Stock - $0.01 par value 32,927,757
Page 1
NATIONAL INSTRUMENTS CORPORATION
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets
September 30, 1998 (unaudited) and December 31, 1997 3
Consolidated Statements of Income (unaudited)
Three months and nine months ended September 30, 1998
and 1997 4
Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
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 19
Page 2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, December 31,
1998 1997
--------------- --------------
Assets (unaudited)
Current assets:
Cash and cash equivalents.................... $ 41,104 $ 31,943
Short-term investments....................... 47,585 51,067
Accounts receivable, net..................... 42,264 37,411
Inventories.................................. 16,403 15,505
Prepaid expenses and other current assets.... 8,843 5,387
Deferred income tax, net..................... 7,893 7,900
--------------- --------------
Total current assets...................... 164,092 149,213
Property and equipment, net..................... 66,619 46,805
Intangibles and other assets.................... 6,817 8,472
=============== ==============
Total assets.............................. $ 237,528 $ 204,490
=============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt............ $ 851 $ 851
Accounts payable............................. 15,574 16,946
Accrued compensation......................... 10,050 8,219
Accrued expenses and other liabilities....... 4,591 2,455
Income taxes payable......................... 6,706 4,871
Other taxes payable.......................... 3,586 3,729
--------------- --------------
Total current liabilities................. 41,358 37,071
Long-term debt, net of current portion.......... 4,597 5,151
Deferred income taxes........................... 514 514
--------------- --------------
Total liabilities......................... 46,469 42,736
--------------- --------------
Commitments and contingencies -- --
Stockholders' equity:
Common Stock: par value $.01; 180,000,000
shares authorized; 32,852,058 and 32,656,473
shares issued and outstanding, respectively.. 328 326
Additional paid-in capital...................... 49,498 47,160
Retained earnings............................... 142,771 116,215
Accumulated other comprehensive loss............ (1,538) (1,947)
--------------- --------------
Total stockholders' equity................ 191,059 161,754
=============== ==============
Total liabilities and stockholders' equity $ 237,528 $ 204,490
=============== ==============
The accompanying notes are an integral part of these financial statements.
Page 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,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net sales........................... $ 67,874 $ 60,595 $200,997 $175,259
Cost of sales....................... 16,286 14,214 47,944 40,517
---------- ---------- ---------- ----------
Gross profit..................... 51,588 46,381 153,053 134,742
---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing.............. 24,971 21,817 73,995 63,260
Research and development......... 9,603 9,172 26,306 23,307
General and administrative....... 5,020 4,675 14,941 13,488
---------- ---------- ---------- ----------
Total operating expenses...... 39,594 35,664 115,242 100,055
---------- ---------- ---------- ----------
Operating income.............. 11,994 10,717 37,811 34,687
Other income (expense):
Interest income, net............. 651 759 2,083 2,162
Net foreign exchange gain (loss). 82 (134) (259) (1,404)
---------- ---------- ---------- ----------
Income before income taxes.... 12,727 11,342 39,635 35,445
Provision for income taxes.......... 4,200 3,743 13,079 11,697
---------- ---------- ---------- ----------
Net income.................... $ 8,527 $ 7,599 $ 26,556 $ 23,748
========== ========== ========== ==========
Basic earnings per share............ $ 0.26 $ 0.23 $ 0.81 $ 0.73
========== ========== ========== ==========
Weighted average shares
outstanding-basic................... 32,850 32,573 32,800 32,534
========== ========== ========== ==========
Diluted earnings per share.......... $ 0.25 $ 0.23 $ 0.78 $ 0.71
========== ========== ========== ==========
Weighted average shares
outstanding-diluted................. 33,950 33,750 34,100 33,533
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
Page 4
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
------------------------
1998 1997
---------- ----------
Cash flow from operating activities:
Net income....................................... $ 26,556 $ 23,748
Adjustments to reconcile net income to cash
provided by operating activities
Charges to income not requiring cash outlays:
Depreciation and amortization............... 7,824 6,214
Charge for in-process research & development -- 1,400
Changes in operating assets and liabilities:
Increase in accounts receivable............. (5,052) (4,145)
Increase in inventory....................... (920) (2,244)
Decrease (increase) in prepaid expense and
other assets................................ 858 (2,070)
Increase in current liabilities............. 3,182 2,329
---------- ----------
Net cash provided by operating activities..... 32,448 25,232
---------- ----------
Cash flow from investing activities:
Payments for acquisitions, net of cash received.. (1,519) (2,000)
Capital expenditures............................. (25,101) (12,195)
Additions to intangibles ........................ (1,688) (978)
Purchases of short-term investments.............. (34,511) (39,610)
Sales of short-term investments.................. 37,993 36,907
---------- ----------
Net cash used in investing activities......... (24,826) (17,876)
---------- ----------
Cash flow from financing activities:
Repayments of debt............................... (606) (4,416)
Net proceeds from issuance of common stock....... 2,198 1,472
---------- ----------
Net cash provided by (used in) financing
activities.................................... 1,592 (2,944)
---------- ----------
Effect of translation rate changes on cash.......... (53) (415)
---------- ----------
Net increase in cash and cash equivalents........... 9,161 3,997
Cash and cash equivalents at beginning of period.... 31,943 30,211
---------- ----------
Cash and cash equivalents at end of period.......... $ 41,104 $ 34,208
========== ==========
The accompanying notes are an integral part of these financial statements.
Page 5
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, 1997, 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, 1998 and December 31, 1997, and the
results of operations for the three-month and nine-month periods ended September
30, 1998 and 1997, and the cash flows for the nine-month periods ended September
30, 1998 and 1997. Operating results for the three-month and nine-month periods
ended September 30, 1998 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1998.
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 the basic EPS and
diluted EPS for the three-month and nine-month periods ended September 30, 1998
and 1997, respectively, are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
(unaudited) (unaudited)
1998 1997 1998 1997
---------- ---------- ---------- ----------
Weighted average shares
outstanding-basic................ 32,850 32,573 32,800 32,534
Plus: Common share equivalents
Stock options................. 1,100 1,177 1,300 999
========== ========== ========== ==========
Weighted average shares 33,950 33,750 34,100 33,533
outstanding-diluted.............. ========== ========== ========== ==========
Stock options to acquire 972,402 and 2,658 shares for the quarters ended
September 30, 1998 and 1997, respectively, and 677,967 and 4,280 shares for the
nine months ended September 30, 1998 and 1997, respectively, were not included
in the computations of diluted earnings per share because the effect of
including the stock options would have been anti-dilutive.
NOTE 3 - Inventories
Inventories consist of the following (in thousands):
September 30, December 31,
1998 1997
(unaudited)
-------------- -------------
Raw materials $ 7,556 $ 6,985
Work-in-process 1,294 1,315
Finished goods 7,553 7,205
-------------- -------------
$ 16,403 $ 15,505
============== =============
Page 6
NOTE 4 - Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." The new standard, which is effective for financial statements issued
for periods ending after December 15, 1997, established standards for reporting,
in addition to net income, comprehensive income and its components including, as
applicable, foreign currency items, minimum pension liability adjustments and
unrealized gains and losses on certain investments in debt and equity
securities. Upon adoption the Company is also required to reclassify financial
statements for earlier periods provided for comparative purposes. The Company
adopted this standard in the first quarter of 1998. Total comprehensive income
for the quarters ended September 30, 1998 and 1997 is $9.3 million and $7.3
million, respectively. For the first nine months of 1998 and 1997, comprehensive
income is $27.0 million and $22.8 million, respectively.
Reconciliation of accumulated other comprehensive loss (in thousands):
Cumulative Unrealized Accumulated
Foreign Currency Gain (Loss) Other
Translation on Comprehensive
Adjustment Securities Loss
---------------- ----------- -------------
Balance at December 31, 1997 $ (2,052) $ 105 $ (1,947)
Current-period change 430 (21) 409
================ =========== =============
Balance at September 30, 1998 $ (1,622) $ 84 $ (1,538)
================ =========== =============
NOTE 5 - Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which the Company adopted in the first
quarter of 1998. The statement establishes standards for reporting information
about operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Under SFAS No. 131,
operating segments are to be determined consistent with the way that management
organizes and evaluates financial information internally for making operating
decisions and assessing performance. The adoption of this new accounting
standard is not expected to have a material impact on the consolidated balance
sheet or statement of income.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which standardizes the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, by requiring that an entity recognize those items as assets or
liabilities in the statement of financial position and measure them at fair
value. This statement is effective for all quarters of fiscal years beginning
after June 15, 1999. Management has not yet completed its evaluation of the
effects of this change on its operations.
NOTE 6 - Acquisition
On August 17, 1998, the Company acquired all of the issued and outstanding
shares of common stock of DATALOG GmbH/DASYtec GmbH (Datalog) and related
subsidiaries for an aggregate purchase price of approximately $2.2 million. The
Company amortized $750,000 of the purchased software during the third quarter of
1998. This amortization period was utilized due to the nature of this technology
and timing of the revenue streams associated with it. If this charge had not
been taken, net income for the quarter ended September 30, 1998 would have been
$9.0 million or $0.27 per share-diluted and net income for the nine months ended
September 30, 1998 would have been $27.1 million or $0.79 per share-diluted.
Page 7
On September 30, 1997, the Company acquired the products, technology and net
assets of nuLogic, Inc. for a purchase price of approximately $2.0 million in
cash. The acquisition was accounted for as a purchase. The Company recorded a
$1.4 million pre-tax charge against earnings for the write-off of in-process
nuLogic research and development technology that had not reached the working
model stage and had no alternative future use. If this charge had not been
taken, net income for the quarter ended September 30, 1997 would have been $8.6
million or $0.25 per share-diluted and net income for the nine months ended
September 30, 1997 would have been $24.7 million or $0.74 per share-diluted.
The consolidated financial statements include the operating results of each
business from the date of acquisition. Proforma results of operations have not
been presented because the effects of those operations were not material.
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
"expects," "plans," "may," "will," "projects," "continues," or "estimates" or
other variations thereof or comparable terminology or the negative thereof)
should be considered forward-looking statements. Actual results could differ
materially from those projected in the forward-looking statements as a result of
a number of important factors. For a discussion of important factors that could
affect the Company's results, please refer to the Issues and Outlook section and
financial statement line item discussions below. Readers are also encouraged to
refer to the Company's Annual Report on Form 10-K for further discussion of the
Company's business and the risks and opportunities attendant thereto.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of net sales represented by certain items reflected in the Company's
consolidated statements of income:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net sales:
North America 57.6% 61.7% 57.8% 59.6%
Europe 29.7 24.6 29.8 26.5
Asia Pacific 12.7 13.7 12.4 13.9
---------- ---------- ---------- ----------
Consolidated net sales 100.0 100.0 100.0 100.0
Cost of sales 24.0 23.5 23.9 23.1
---------- ---------- ---------- ----------
Gross profit 76.0 76.5 76.1 76.9
---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing 36.8 36.0 36.8 36.1
Research and development 14.1 15.1 13.1 13.3
General and administrative 7.4 7.7 7.4 7.7
---------- ---------- ---------- ----------
Total operating expenses 58.3 58.8 57.3 57.1
---------- ---------- ---------- ----------
Operating income 17.7 17.7 18.8 19.8
Other income (expense):
Interest income, net 1.0 1.3 1.0 1.2
Net foreign exchange gain 0.1 (0.2) (0.1) (0.8)
(loss)
---------- ---------- ---------- ----------
Income before income taxes 18.8 18.8 19.7 20.2
Provision for income taxes 6.2 6.2 6.5 6.7
---------- ---------- ---------- ----------
Net income 12.6% 12.6% 13.2% 13.5%
========== ========== ========== ==========
Page 8
Net Sales. Consolidated net sales increased by $7.3 million or 12.0% for
the three months ended September 30, 1998 to $67.9 million from $60.6 million
for the three months ended September 30, 1997, and increased $25.7 million or
14.7% to $201.0 million for the nine months ended September 30, 1998 from $175.3
million for the comparable period in the prior year. The increase in sales is
primarily attributable to the introduction of new and upgraded products and
increased marketing efforts. North American sales in the third quarter of 1998
increased by 4.5% over the third quarter of 1997 and North American sales for
the nine months ended September 30, 1998 increased 11.2% from the nine months
ended September 30, 1997. The Company believes its softening growth rate over
the last two quarters for North American sales is attributable to the continuing
effect of economic difficulties in Asia Pacific on the Company's North American
customers, particularly in the automated test equipment and semiconductor
sectors, and the fact that the number of sales engineers in the field actually
decreased during the first half of the year. Historically the Company has found
a high correlation between revenue and the number of sales engineers in the
field. The Company added seven sales engineers to the field during the third
quarter of 1998 to bring the total up to 52 engineers in the field. There can be
no assurance that the additional engineers will result in additional revenue for
the Company.
International sales as a percentage of consolidated sales for the quarter
and nine months ended September 30, 1998 increased to 42.4% from 38.3% and to
42.2% from 40.4% over the comparable 1997 periods as a result of strong European
sales. Compared to 1997, the Company's European sales increased by 35.4% to
$20.2 million for the quarter ended September 30, 1998 and by 29.1% to $59.9
million for the nine months ended September 30, 1998. Sales in Asia Pacific
increased by 3.7% to $8.6 million for the quarter ended September 30, 1998
compared to 1997 and increased 2.1% to $24.9 million from $24.4 million for the
nine months ended September 30, 1998 compared to the same period in 1997. The
low sales growth rate in Asia Pacific was impacted by the economic difficulties
occurring in the region and by the devaluation of Asian currencies against the
US dollar. 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; changing exchange rates, 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
third quarter of 1997 and the third quarter of 1998 the weighted average value
of the US dollar increased by 6.7%, 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 third quarter of 1998 had been the same as that in the third
quarter of 1997, the Company's sales for the third quarter of 1998 would have
been $69.1 million, a 14% increase. This effect is 1.8% of consolidated net
sales in the aggregate. European sales for the third quarter of 1998 would have
been $20.0 million, a 34% increase in third quarter 1998 sales over third
quarter 1997 sales. The Company attributes the European sales growth to a sound
European economy and the success of new local language versions of LabVIEW 5.0
in French and German. Also, the automated test equipment and semiconductor
industries, which have shown a significant decrease in sales in the US represent
a smaller part of the Company's European business. Asia Pacific sales for the
third quarter of 1998 would have been $10.1 million, a 21% increase in third
quarter 1998 sales over third quarter 1997 sales. If the weighted average value
of the dollar in the nine months ended September 30, 1998 had been the same as
that in the nine months ended September 30, 1997, the Company's consolidated
year-to-date sales would have been $206.2 million, an 18% increase in
year-to-date sales over year-to-date 1997 sales. 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 consolidated
operating expenses by $1.3 million for the nine months ended September 30, 1998
and $209,000 for the third quarter of 1998.
Page 9
Gross Profit. As a percentage of net sales, gross profit decreased to 76.0%
for the third quarter of 1998 from 76.5% for the third quarter of 1997 and
decreased to 76.1% for the first nine months of 1998 from 76.9% for the
comparable period a year ago. The lower margin for the third quarter and nine
months ending September 30, 1998 compared to prior year periods is attributable
to the increase in the value of the US dollar, increased spending for the third
manufacturing production line, installed March 1998, and lower sales growth in
the Asia region which has historically provided higher than average margins. The
Company's various product lines generate varying gross margins. Therefore, any
material changes in sales mix could result in a significant change in
consolidated gross margins.
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 third quarter of
1998 increased to $25.0 million, a 14.5% increase, as compared to the third
quarter of 1997, and increased 17.0% to $74.0 million for the first nine months
of 1998 from the comparable 1997 period. As a percentage of net sales, sales and
marketing expenses were 36.8% and 36.0% for the quarters ended September 30,
1998 and 1997, respectively, and 36.8% and 36.1% for the nine months ended
September 30, 1998 and 1997, respectively. The increase in these expenses in
absolute dollar amounts is primarily attributable to increased advertising,
personnel, sales and marketing seminars, tradeshows, and other marketing
activities. Sales and marketing personnel increased from 612 at September 30,
1997 to 783 at September 30, 1998. 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 new recruiting, initial and on-going marketing
and advertising campaign costs associated with major new product releases, the
opening of new sales offices and the timing and extent of domestic and
international conferences and trade shows.
Research and Development. Research and development expenses increased to
$9.6 million for the quarter ended September 30, 1998, a 4.7% increase, as
compared to $9.2 million for the three months ended September 30, 1997, and
increased 12.9% to $26.3 million for the nine months ended September 30, 1998
from the comparable 1997 period. As a percentage of net sales, research and
development expenses represented 14.1% and 15.1% for the third quarters ended
September 30, 1998 and 1997, respectively, and 13.1% and 13.3% for the nine
months ended September 30, 1998 and 1997, respectively. The above comparisons
include charges of $750,000 and $1.4 million related to acquisitions for the
third quarter of 1998 and 1997, respectively. Excluding the effects of these
charges, the increase in research and development costs is mainly due to
increases in personnel costs from increased hiring, including increases in
intern personnel expenses to support the Company's increased recruiting efforts.
Research and development personnel increased from 373 at September 30, 1997 to
449 at September 30, 1998. The Company believes that a significant, on-going
investment in research and development is required to remain competitive.
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. Amortization expense totaled
$544,000 and $368,000 for the quarters ended September 30, 1998 and 1997,
respectively, and $1.5 million and 1.1 million during the nine months ended
September 30, 1998 and 1997, respectively. Excluding amounts capitalized related
to new acquisitions, software development costs capitalized were $84,000 and
$265,000 for the quarters ended September 30, 1998 and 1997, respectively, and
$1.2 million and $671,000 for the first nine months of 1998 and 1997,
respectively. Amounts capitalized relating to acquisitions during the third
quarters of 1998 and 1997 were $367,000 for Datalog and $612,000 for nuLogic,
respectively. The amounts capitalized in the third quarter and first nine months
of 1998 include amounts related to LabVIEW 5.0, LabWindows/CVI 5.0 and NI DAQ
6.1.
Page 10
General and Administrative. General and administrative expenses for the
third quarter ended September 30, 1998 increased 7.4% to $5.0 million from $4.7
million for the comparable prior year period. For the first nine months of 1998,
general and administrative expenses increased 10.8% to $14.9 million from $13.5
million for the first nine months of 1997. As a percentage of net sales, general
and administrative expenses decreased to 7.4% for the quarter ended September
30, 1998 from 7.7% for the third quarter of 1997. During the first nine months
of 1998, general and administrative expenses decreased as a percentage of sales
to 7.4% from 7.7% 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. Net interest income in the third quarter of 1998
decreased to $651,000 from $759,000 in the third quarter of 1997 and decreased
to $2.1 million from $2.2 million for the first nine months of 1998 and 1997.
Net interest income has represented approximately one percent or less of net
sales and has fluctuated as a result of investment balances, bank borrowings and
interest terms thereon.
Net Foreign Exchange Gain (Loss). Net foreign exchange gains recognized in
the third quarter of 1998 were $82,000 compared to net foreign exchange losses
of $134,000 recognized in the third quarter of 1997. Net foreign exchange losses
of $259,000 were recognized for the first nine months of 1998 compared to $1.4
million for the first nine months of 1997. Foreign exchange gains and losses are
attributable to movements between the US dollar and the local currencies in
countries in which the Company's sales subsidiaries are located. The decrease in
net foreign exchange losses recognized in the first nine months of 1998 is
mainly due to the strengthening of the European currencies against the US dollar
while in 1997 the US dollar strengthened against these currencies. The Company
recognizes the local currency as the functional currency of its international
subsidiaries.
The Company utilizes foreign currency forward exchange contracts against 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 forward contracts to 90 days and does not invest in
contracts for speculative purposes. The Company's hedging strategy has reduced
the foreign exchange losses recorded by $668,000 during the nine-month period
ended September 30, 1998.
In December 1997, the Company expanded its foreign currency hedging program
to also include foreign currency option contracts in order to reduce its
exposure related to forecasted net foreign currency cash flows. The Company's
policy allows for the purchase of 5% "out-of-the-money" foreign currency put
option contracts with a duration of up to 12 months for up to 80% of the
specific country's forecasted net foreign currency risk. In June 1998, the
Company expanded its policy to allow for the purchase of similar foreign
currency put option contracts extending from 12 months to 24 months. The third
quarter 1998 Japanese Yen option contract was exercised at expiration. The gain
from the sale of this contract had a net effect on operating income of $228,000.
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. If the US dollar strengthens, 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 does not invest in
contracts for speculative purposes.
Provision for Income Taxes. The provision for income taxes reflects an
effective tax rate of 33% for both the three months and nine months ended
September 30, 1998 and 1997. As of September 30, 1998, ten of the Company's
subsidiaries had available in the aggregate, for income tax purposes, foreign
net operating loss carryforwards of approximately $3.0 million, of which $2.3
million expire between 2000 and 2008. The remaining $697,000 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 requirements
through cash flow from operations. Historically, the Company also financed its
capital expenditures, such as the manufacturing facility constructed in 1995,
through borrowings from financial institutions. At September 30, 1998, the
Company had working capital of approximately $122.7 million compared to $112.1
million at December 31, 1997.
Page 11
Accounts receivable increased to $42.3 million at September 30, 1998 from
$37.4 million at December 31, 1997, as a result of higher sales levels. Days
sales outstanding decreased to 56 at September 30, 1998 compared to 57 at
December 31, 1997. Inventory levels increased to $16.4 million from $15.5
million at September 30, 1998 and December 31, 1997, respectively. Inventory
turns increased to 4.0 at September 30, 1998 compared to turns of 3.9 at
December 31, 1997.
Cash used in the first nine months of 1998 for the purchase of property and
equipment totaled $25.1 million and for the capitalization of software
development costs totaled $1.6 million. The Company completed construction of an
office building next to its manufacturing facility in June 1998 which serves as
the Company's new headquarters. The Company has paid approximately $30 million
in construction costs as of September 30, 1998 and approximately $2 million will
be paid during the fourth quarter of 1998 resulting in a total cost of $32
million for the new building including furniture, fixtures and equipment. These
costs have been paid out of the Company's existing working capital. The addition
of this new facility has added approximately $800,000 to $1 million in quarterly
operating costs.
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 $28.5 million credit agreement with NationsBank
of Texas, N.A. which consists of (i) a $20.0 million revolving line of credit
negotiated June 30, 1998, and (ii) an $8.5 million manufacturing facility loan.
As of September 30, 1998, the Company had no outstanding balance on the
revolving line of credit and a balance of $5.4 million on the manufacturing
facility loan. The revolving line of credit expires December 31, 1999. The
Company's credit agreements contain certain financial covenants and restrictions
as to various matters. As of July 8, 1998, the Company's campus, which includes
the land and buildings of the manufacturing and corporate headquarter site, was
released from the lien held by NationsBank of Texas, N.A. due to terms of the
negotiated line of credit.
In October 1998, the Company authorized a stock repurchase program where up
to one million shares of its common stock may, from time to time, be purchased
on the open market. Any repurchases may constitute a significant use of future
cash resources.
The Company believes that its cash flow from operations, if any, existing
cash balances, 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 like the recent devaluation in
certain Asian currencies; 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 US dollar,
and if the local sales prices cannot be raised, the Company will experience a
deterioration of its gross and net profit margins. In addition, the recent
economic turmoil in Asia could continue to have an adverse effect on the
Company's operating results. The Company believes the moderate sales growth rate
in North America for the third quarter is partially caused by the effect of
economic difficulties in Asia on North American customers. This effect could
result in an increased adverse reaction in North America in future quarters and
could potentially impact Europe as well. In addition, decisions made by OEMs to
adjust their purchases or inventory levels could adversely effect the Company's
revenues. Any possible freight carrier interruptions of business could
potentially have an adverse effect on product shipments.
Page 12
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 serves a number of industries such as
automated test equipment, 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, growing in the fourth quarter and being relatively
flat or declining from the fourth quarter of the year to the first quarter of
the following year. The Company believes the seasonality of its revenue results
from the international mix of its revenue and the variability of the budgeting
and purchasing cycles of its customers throughout each international region.
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 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. 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.
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 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. It is possible that one
or more of the Company's three regional information systems could experience a
complete or partial shutdown. If this 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 due to the shipments which would not occur until the
following period.
Page 13
Impact of Year 2000. Many computer systems experience problems handling
dates beyond the year 1999. Therefore, some computer hardware and software will
need to be modified prior to the Year 2000 in order to remain functional.
The Company is updating its recent assessment of Year 2000 compliance in
its current product versions. No assurances can be made that problems will not
arise, such as customer problems with software programs, operating systems or
hardware that disrupt their use of the Company's products. There can be no
assurances that such disruption would not negatively impact costs and revenues
in future years.
In previous quarters the Company reported that it had been assured by
Oracle Corporation that all of the Company's Oracle-based management information
systems, which include the manufacturing, distribution, finance, and order entry
systems, were Year 2000 compliant with the exception of the management
information system in Japan. The Company upgraded the Japanese system during
October 1998. The Company is in the process of internal Year 2000 testing of the
major management information systems as well as assessing additional Year 2000
issues in its worldwide systems. The Company is aware that its current customer
marketing database and customer support software are not Year 2000 compliant.
However, the Company is working to upgrade both systems prior to Year 2000 as
part of on-going system upgrades.
The Company recently initiated formal communications with all of its
significant suppliers and vendors to determine the extent to which the Company
is vulnerable to a third party failure to correct Year 2000 issues. In
management's assessment, the most likely worst case scenario for Year 2000
non-compliance for inventory management would result if significant suppliers
and vendors were unable to ship inventory to meet market demands. In addition,
inventory management does limited electronic data interchange ("EDI") with
suppliers. EDI suppliers could be processed manually if EDI failed from either
side. Management's assessment for inventory information services most likely
worst case scenario would result if either the listing companies were unable to
update their data or clients were unable to access the Company's database due to
their own systems being non-Year 2000 compliant. The Company does rely on
third-party providers for key services such as telecommunications, utilities and
transportation. Interruption of these services could, in management's view, have
a material impact on the operations of the Company. Efforts have begun to
evaluate the readiness of these critical suppliers. The Company is in the early
phase of developing contingency plans and determining the extent of such plans.
The failure to identify and correct a Year 2000 issue could result in the
interruption of the Company's normal operations. Such failure could have a
material adverse effect on the Company's results of operations and financial
condition. Although management presently believes the Company is taking
appropriate steps to assess and correct its Year 2000 issues, due to the general
uncertainty inherent in the Year 2000 issue, due in part from the uncertainty of
Year 2000 readiness of third parties, the Company is unable to determine at this
time whether Year 2000 issues will have a material adverse effect on the
Company's results of operations or financial condition.
The Company presently believes that with modifications to existing software
and conversions to new software, the Year 2000 issue can be mitigated. It is not
anticipated that there will be a significant increase in costs as much of the
Year 2000 activities will be a continuation of the on-going process to improve
all of the Company's systems. The Company plans to complete the Year 2000
project by the end of 1999. However, if such modifications and conversions are
not made, or are not completed timely, the Year 2000 issue could have a material
impact on the operations of the Company. Specific factors that might cause a
material impact include, but are not limited to, availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, failure by third parties to timely convert their systems, and
similar uncertainties.
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 revenues
and results of operations.
Page 14
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. There can be no assurance that patent
litigation will not 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, sales, 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. In addition, the recruiting environment for
engineering and other technical professionals is very competitive. Competition
for qualified software engineers is particularly intense. The Company also
recruits and employs foreign nationals to achieve its hiring goals primarily for
entry-level engineering and software positions. There can be no guarantee that
the Company will continue to be able to recruit foreign nationals to the degree
necessary if government requirements for temporary and permanent residence
become more restrictive. 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 results of operations.
Page 15
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, 1998.
Page 16
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: November 13, 1998
Page 17
NATIONAL INSTRUMENTS CORPORATION
INDEX TO EXHIBITS
Exhibit No. Description Page
11.1 Statement Regarding Computation 22
of Earnings per Share
Page 18