UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended: December 31, 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)
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Delaware 74-1871327
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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11500 North MoPac Expressway
Austin, Texas 78759
(address of principal executive (zip code)
offices)
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Registrant's telephone number, including area code: (512) 338-9119
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01
par value (Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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.
The aggregate market value of voting stock held by non-affiliates of the
registrant at the close of business on February 25, 1999, was $451,953,598 based
upon the last sales price reported for such date on the NASDAQ National Market
System. For purposes of this disclosure, shares of Common Stock held by persons
who hold more than 5% of the outstanding shares of Common Stock and shares held
by officers and directors of the registrant as of December 31, 1998 have been
excluded in that such persons may be deemed to be affiliates. This determination
is not necessarily conclusive.
At the close of business on February 25, 1999, registrant had outstanding
32,987,119 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part I and Part III incorporate certain information by reference from the
definitive proxy statement for the Annual Meeting of Stockholders to be held on
May 11, 1999 (the "Proxy Statement").
PART I
Certain information required by Part III is omitted from this Report in
that the Registrant intends to file a definitive proxy statement pursuant to
Regulation 14A with the Securities and Exchange Commission (the "Proxy
Statement") relating to its annual meeting of stockholders not later than 120
days after the end of the fiscal year covered by this Report, and such
information is incorporated by reference herein.
ITEM 1. BUSINESS
National Instruments Corporation (the "Company" or "National Instruments")
is a leading supplier of computer-based instrumentation hardware and software
products that engineers and scientists use in a wide range of industries. These
industries are spread across two large markets: test and measurement ("T&M") and
industrial automation ("IA"). The Company provides flexible application software
and modular, multifunction hardware that users combine with industry-standard
desktop computers, portable computers and workstations to create "virtual
instruments."
A virtual instrument consists of an industry standard desktop computer,
portable computer or workstation equipped with the Company's user-friendly
application software, cost-effective hardware and driver software that together
perform the functions of traditional instruments. Virtual instrumentation
represents a fundamental shift from traditional hardware-centered
instrumentation systems to software-centered systems that exploit the
computational, display, productivity and connectivity capabilities of popular
desktop computers, portable computers and workstations. Because virtual
instruments exploit these computation and display capabilities, users can define
and change the functionality of their instruments, rather than being restricted
by fixed-functions imposed by traditional instrument vendors. The Company's
products empower users to monitor and control traditional instruments, create
innovative computer-based systems that can replace traditional instruments at a
lower cost, and develop systems that integrate measurement functionality with
industrial automation. The Company believes that giving users flexibility to
create their own virtual instruments for an increasing number of applications in
a wide variety of industries, and making such instruments portable between
popular computers and operating systems, shortens system development time and
reduces both short- and long-term costs of developing, owning and operating
measurement and automation systems, and improves efficiency and precision of
applications spanning research, design, production and service.
The Company is based in Austin, Texas and was incorporated under the laws
of the State of Texas in May 1976 and was reincorporated in Delaware in June
1994. On March 13, 1995, the Company completed an initial public offering of
shares of its Common Stock. The Company's Common Stock, $0.01 par value, is
quoted on the NASDAQ National Market System under the trading symbol NATI.
Industry Background
Engineers and scientists have long used instruments to observe, better
understand and manage the real-world phenomena, events and processes related to
their industries or areas of expertise. Instruments measure and control
electrical signals, such as voltage, current and power, and physical phenomena,
such as temperature, pressure, speed, flow, volume, torque and vibration. Common
instruments include voltmeters, signal generators, oscilloscopes, dataloggers,
spectrum analyzers and temperature and pressure monitors and controllers.
Instruments generally perform three basic functions: data acquisition and
control; data analysis; and presentation of results. Instruments are used
pervasively in research, education, manufacturing and service applications in
numerous fields including electronics, automotive, aerospace,
telecommunications, medical research and pharmaceutical, semiconductor and
petrochemical.
Instrument applications can be generally categorized as either T&M or IA.
In research and development settings, scientists and engineers use T&M
instruments to collect and analyze experimental data, and IA instruments and
systems to simulate manufacturing processes or techniques. In manufacturing
environments, engineers use T&M instruments to test and verify the proper
operation of the products being manufactured while IA instruments and systems
monitor and control the manufacturing machines and processes.
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Test and Measurement
A typical T&M instrument is a stand-alone unit that has signal input,
output and analysis capabilities; knobs, switches and push buttons for user
operation; and gauges, meters or other displays for visual data presentation.
Traditionally, most T&M instruments were vendor-defined, fixed-function devices
designed to address specific applications. As a result, users had limited
flexibility to adapt their instruments to changing requirements. In the 1960's,
vendors began to incorporate integrated circuits, including programmable
microcontrollers, to increase instrument flexibility. In the mid-1970's, the
General Purpose Interface Bus ("GPIB" or "IEEE 488") was developed as a standard
interface to connect instruments to external computers. The first computer
controllers for GPIB instruments were based on proprietary hardware
architectures. In the later 1970's, some minicomputers with general purpose but
complex operating systems were equipped for GPIB instrument control. In the
early 1980's, personal computers with limited processing power equipped with
MS-DOS, a standard, character-based operating system, began replacing
minicomputers as the preferred platforms for instrument control applications.
Industrial Automation
IA systems have long included mechanical devices, analog gauges and meters,
and since the 1960's, have also included electronic instruments such as data
loggers and strip chart recorders. In the 1970's, programmable logic controllers
("PLCs"), special-purpose, proprietary stand-alone industrial computers, were
introduced and were used primarily for "discrete" manufacturing applications
such as automobile assembly. PLCs have traditionally had primitive operator
interface panels incorporating buttons, lights and indicators. In parallel,
sophisticated instrumentation systems called distributed control systems
("DCSs") were also adopted to provide computer control of large-scale continuous
processes, such as those found in oil refineries. DCSs integrated a variety of
sensors and control elements using both analog and digital connections, all
controlled by a central computer running proprietary software. In the
mid-1980's, when industrial PC-based IA systems came into use, another approach
became available. These early PC-based systems generally ran proprietary,
vendor-defined software and incorporated plug-in data acquisition boards or
interfaced to PLCs.
Limitations of Traditional Approaches to Instrumentation
Instruments and systems for both the T&M and IA markets have historically
shared common limitations, including: fixed, vendor-defined functionality;
proprietary, closed architectures that were generally difficult to program and
integrate with other systems; and inflexible operator interfaces that were
usually cumbersome to operate and change. These problems have been further
complicated in the IA market because specialized data transfer and
communications standards have not evolved rapidly or been widely adopted. For
example, PLCs, while greatly improving control of individual processes, created
multiple "islands of information" that were generally unable to communicate or
share data with other systems throughout the manufacturing enterprise.
Furthermore, proprietary instrumentation systems have traditionally been very
expensive, with IA system prices ranging as high as several million dollars and
T&M instrumentation system prices often ranging in the hundreds of thousands of
dollars. In addition, the limitations on programmability of traditional systems
means that adopting these systems to changing requirements is both expensive and
time consuming, and users are often required to purchase multiple single-purpose
instruments.
Although desktop computers in the 1980's typically were based on open
architectures, until recently they have lacked higher-level application software
development tools and intuitive graphical user interfaces ("GUIs").
Consequently, the process of creating intuitive operator interface and control
panels was difficult and expensive. These early desktop computers also lacked
the power to rapidly process and analyze the volume of data characteristic of
many high data rate T&M and IA applications. In addition, desktop computers were
difficult to network reliably until standard network operating systems evolved
late in the decade. For all of these reasons, users and vendors were relatively
slow to incorporate desktop computers in their instrumentation systems.
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In the 1990's, desktop and portable computers improved significantly in
data and graphics processing power, storage and communication capabilities,
user-friendliness and reliability. Nevertheless, users accustomed to the
flexibility, efficiency, power and open architecture of these later-generation
computers, and the highly evolved application software available for business
computing needs, have been generally frustrated in their efforts to integrate
these computers into instrumentation solutions. Standard desktop computers were
not equipped with the hardware connections required to control many types of
instruments and lacked instrumentation-specific application development tools,
including GUI development environments. Neither standard programming languages
such as C/C++ and Visual Basic, nor operating systems such as Windows, Linux and
UNIX, are "instrument aware." Without the aid of instrumentation-specific
software to facilitate the integration of various instrumentation system
capabilities and components, engineers and scientists could not easily utilize
the full potential of their modern desktop and portable computers to meet their
instrument requirements.
The Company's Virtual Instrument Approach to Measurement and Automation
The Company pioneered a new instrumentation approach to measurement and
automation called virtual instrumentation in 1986 when it introduced its LabVIEW
application software, which is a graphical programming environment. While a
traditional instrument bundles the data acquisition, analysis and presentation
functions in a single, stand-alone unit, a "virtual instrument" consists of an
industry standard computer or workstation equipped with the Company's
user-friendly application software, cost-effective hardware and driver software
that together perform the functions of traditional instruments. By unbundling
the key instrumentation functions, virtual instruments represent a fundamental
shift from traditional hardware-centered instrumentation systems to
software-centered systems that exploit the computational, display, productivity
and connectivity capabilities of popular desktop and portable computers and
workstations. The Company's virtual instrumentation application software
products give users the power and flexibility to define, implement, modify and
control each of the three core instrumentation functions. Users can mix and
match their choice of the Company's DAQ, GPIB, VXI, PXI, image acquisition,
motion control or industrial communications products to create virtual
instrumentation systems that meet their specific instrumentation needs. The
Company's products empower users to monitor and control traditional instruments,
create innovative computer-based systems that can replace traditional
instruments at a lower cost, and integrate measurement functionality with
industrial automation to improve efficiency and precision of applications
spanning research, design, production and service. Because much of the
instrumentation functionality resides in the software, in a significant sense,
the software is the instrument.
User Benefits
Compared with traditional solutions, the Company believes its products and
virtual instrumentation approach provide the following significant customer
benefits:
Performance, Ease-of-Use and Efficiency
The Company's virtual instrument application software brings the power and
ease-of-use of desktop and portable computers to the instrumentation market.
With features such as graphical programming, automatic code generation
capabilities, graphical tools libraries, ready-to-use example programs and
libraries of specific instrumentation functions, users can quickly build a
virtual instrument system that meets their individual application needs. For
example, a user may build the data acquisition and analysis functions of an
instrument by selecting and connecting icons representing particular
instrumentation functions and may customize the display on the computer's
monitor to reflect the desired presentation. With faster time to solution, users
have more time to optimize system functionality and performance, and can devote
more time to their core work rather than to programming instruments.
Modularity, Reusability and Reconfigurability
The Company's products include reusable hardware and software modules that
offer considerable flexibility in configuring systems. This ability to reuse and
reconfigure instruments systems allows users to reduce development time and
maximize efficiency by eliminating duplicated programming efforts and to quickly
adapt their instruments to new and changing needs. In addition, these features
help protect both hardware and software investments against obsolescence.
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Mix and Match Capabilities
The flexibility of the Company's virtual instrumentation approach permits
users to mix and match many combinations of GPIB, VXI, DAQ, PXI, image
acquisition, motion control and industrial communications products to build
customized instrument solutions. The Company's open product architecture
provides a high level of integration between the Company's products and other
industry standard instrumentation products. This approach provides users with
the flexibility to mix and match the Company's and third-party hardware
components when developing custom virtual instrumentation systems.
Long-Term Compatibility Across Multiple Computer Platforms
The Company offers a variety of multi-platform software products so users
can choose the platform and programming methodology that best meets their needs
and skills. These software products also have portable, open architectures so
users can move their applications among multiple platforms and operating
systems. In addition, the Company strives to ensure long-term compatibility
between its products and the latest industry-standard computers, operating
systems, programming languages and tools, as well as backward compatibility with
its own product offerings.
Network and Integrate with Customers' Computing Environments
The Company's products facilitate connectivity of measurement and
automation systems with the enterprise by utilizing industry communication
standards such as Ethernet and TCP/IP. The Company's products provide data and
file transfer between computers, distributed access to databases and remote test
and measurement and process monitoring capabilities. In addition, the Company's
products are also compatible with a wide variety of familiar, easy-to-use
software applications such as word processors, spreadsheets, web browsers, and
databases. In many cases, a single computer or workstation can serve both the
instrumentation and general purpose computing needs of scientists and engineers.
Large User Base
The Company supports and encourages the sharing of ideas, derived software
libraries and modules among its broad user base through user groups,
newsletters, conferences and seminars. This large base of users stimulates the
expansion of the Company's network of over 500 third party system integrators
and consultants, who can save users time and money by providing value-added
expertise, software programs and integration of systems for use with the
Company's products.
Lower Total Solution Cost
The Company believes that its virtual instrumentation products and
solutions offer price/performance advantages over traditional instrumentation.
Virtual instrumentation provides users the ability to utilize industry standard
computers and workstations equipped with modular and reusable application
software, cost-effective hardware and driver software that together perform the
instrumentation functions that would otherwise be performed by costly,
proprietary instrumentation systems. In addition, virtual instrumentation gives
users the flexibility and portability to adapt to changing needs, whereas
traditional closed systems are both expensive and time consuming to adapt, if
adaptable at all.
Strategy
The Company's objective is to be a leading supplier of virtual
instrumentation products and solutions to engineers, scientists and others in
both the T&M and IA markets. To achieve this objective, the Company is pursuing
a strategy that includes the following elements:
Expand Broad Customer Base
Serve Two Large Markets. The Company's products and services are designed
to serve the broad customer bases found in both the T&M and IA markets. The
Company defines product features and capabilities by working closely with
technically sophisticated customers in each of these markets and seeks to
achieve high unit volumes by selling these same products to a large base of
customers.
Support Many Computer and Instrument Options. The Company diversifies its
customer base by accommodating many popular computer platforms and a variety of
instrumentation options. In addition, the Company expects to continue to create
or adapt products for computer systems and instrumentation options that gain
market acceptance. Customers are provided a range of price/performance options
through the Company's extensive line of products.
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Provide Worldwide Marketing and Distribution. The Company uses multiple
coordinated distribution channels in its major world markets. The Company's
distribution channels include direct sales, distributors, OEMs, VARs and systems
integrators and consultants. By using this broad range of channels, the Company
seeks to develop and maintain relations with its customers and prospects and to
provide the levels of support, training and education required by the market.
The Company devotes significant resources to direct sales activities in the
United States and in key international markets. To address the range of sales
opportunities, the Company expects to continue to pursue value-added sales
channels through formal relationships with OEMs, VARs, consultants or other
third parties when such relationships can add significant value to its products
or revenues. The Company intends to expand each of these distribution networks
to take advantage of market opportunities.
Acquire New Technologies. The Company has in the past acquired companies,
products, and technologies to augment its product offerings, and intends to
continue to seek opportunities to satisfy customer needs and build market
penetration through acquisitions of new products and technologies in the future.
In connection with these acquisitions, the Company has leveraged its established
sales channels in an effort to accelerate the delivery of the acquired product
to the market and build market share.
Target Academic Environments. The Company markets and sells its products to
colleges and universities, increasing the potential for future growth as
students gain experience using the Company's products before entering the work
force.
Maintain High Levels of Customer Satisfaction
Offer Innovative Modular and Integrated Solutions. The Company intends to
continue to deliver innovative, modular software and hardware tools with open,
portable architectures that can be easily integrated to create instrumentation
systems and solutions. The Company solicits regular feedback from its customers,
resulting in the addition of new product features and enhanced performance, to
help ensure that existing and new products meet or surpass customer
expectations.
Provide Comprehensive Customer Support and Education. The Company's sales
and marketing engineers have the technical expertise necessary to understand
customers' instrumentation application needs and work with them to identify
cost-effective solutions using the virtual instrumentation approach. The Company
also offers comprehensive customer support, including technical support via fax
and telephone, electronic mail and world-wide web forums, bulletin boards,
newsletters, warranty service and repair, upgrade programs, free and paid
seminars and technical classes.
Deliver Long-Term Compatibility. The Company emphasizes consistency in the
implementation of its products across different platforms and strives to
maintain a high degree of backward compatibility between existing and new
products, engendering a high degree of customer loyalty.
Leverage External and Internal Technology
Leverage Generally Available Technology. The Company leverages the research
and development efforts of vendors of desktop and portable computers and
workstations, operating systems, programming languages and software development
tools, and their suppliers. These technologies are combined with the Company's
products to achieve advanced solutions at a lower development cost.
Support Open Architecture on Multiple Platforms. The Company approaches the
market with an open architecture so users have the flexibility to combine the
Company's products with those from traditional instrument suppliers, computer
vendors and competitors.
Leverage Core Technologies. The Company designs proprietary ASICs to
optimize performance and reduce production costs. The Company utilizes these
ASICs and its other internally developed hardware and software components in
multiple products to achieve consistency and compatibility between products.
Develop and Support Industry Standards. The Company actively participates
in efforts to standardize key technologies by participating in industry
consortia and serving on standards committees, such as IEEE 488, VXI, PXI and
the Interchangeable Virtual Instrumentation Foundation, also called IVI, for the
T&M market and Fieldbus and OPC for the IA market. The Company's ongoing
strategy is to conform its products to established and emerging standards in
both the general computer and the instrumentation industries.
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Products and Technology
The Company offers an extensive line of hundreds of computer-based
products. Engineers, scientists and other users in both the T&M and IA markets
can use these products with desktop and portable computers and workstations to
develop customer-defined virtual instruments. The Company's products consist of
application software, and hardware components together with related driver
software. In T&M applications, the Company's products can be used to monitor and
control traditional instruments or to create computer-based instruments that can
replace the traditional instruments. In IA applications, the Company's products
can be used in the same ways as in T&M and can also be used to integrate
measurement functionality with process automation capabilities. The Company's
products are designed to work either in an integrated solution or separately.
The Company believes that the flexibility, functionality and ease of use of its
application software promotes sales of the Company's other software and hardware
products. There are now several books available on the Company's technology,
both in English and other languages.
Application Software
The Company's application software products include both instrumentation
and automation software. The Company believes that application software is
playing an increasingly important role in the development of computer-based
instruments and systems in measurement and automation applications. The
Company's application software products leverage the increasing capability of
desktop and portable computers and workstations for data analysis, connectivity
and presentation power to bring increasing efficiency and precision to
measurement and automation applications. The Company's instrumentation software
products include LabVIEW, LabWindows/CVI, ComponentWorks, Measure, Virtual
Bench, TestStand and DASYLab. The Company's automation software products include
BridgeVIEW and Lookout. All of the Company's application software products are
highly integrated with the Company's hardware/driver software.
Instrumentation Software
The Company offers a variety of software products for developing
instrumentation applications to meet the different programming and computer
preferences of its customers. LabVIEW, LabWindows/CVI and ComponentWorks are
programming environments with which users can develop GUIs, control instruments
and acquire, analyze and present data. With these software products, users can
design custom virtual instruments by creating a GUI on the computer screen
through which they operate the actual program and control selected hardware.
Users can customize front panels with knobs, buttons, dials and graphs to
emulate control panels of traditional instruments or add custom graphics to
visually represent the control and operation of processes. LabVIEW and
LabWindows/CVI also have ready-to-use libraries for controlling hundreds of
programmable instruments, including serial, GPIB and VXI, the Company's plug-in
DAQ boards and PXI/PCI computer-based instruments. ComponentWorks has libraries
for controlling GPIB instruments and the Company's plug-in DAQ boards. Once
created, virtual instruments can be modified or used as components of another
program by the original developer or another user.
The principal difference between these products is in the way users develop
programs. With LabVIEW, users program graphically, developing application
programs by connecting icons to create "block diagrams" which are natural design
notations for scientists and engineers. LabVIEW is based on dataflow programming
techniques invented and patented by the Company. LabWindows/CVI is designed for
instrumentation users who are more comfortable programming with the
conventional, text-based language of C, and automatically generates and debugs
code for instrumentation programs. ComponentWorks adds application-specific OLE
or ActiveX controls and libraries to the Microsoft Visual Basic, Visual C++ and
Borland Delphi development environments.
The Company also sells a range of optional add-on products for LabVIEW,
LabWindows/CVI and ComponentWorks, such as advanced analysis libraries, database
tools and Internet integration.
The Company also offers a class of software products, VirtualBench and
Measure, which do not require any programming. VirtualBench is a collection of
"turnkey" virtual instruments that mimic the operation of traditional benchtop
instruments, through the use of a PC and a plug-in DAQ board. Measure is an
instrumentation add-on for Microsoft Excel that lets engineers and scientists
collect instrumentation data directly into a spreadsheet.
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In 1998, the Company added DASYLab to its line of instrumentation software
products. DASYLab is a schematic environment by which users can quickly
configure simple DAQ applications using both the Company's and third-party DAQ
boards.
Also in 1998, the Company introduced a new software product called
TestStand targeted for the T&M market. TestStand is a test management
environment for organizing, controlling, and running automated production test
systems on the factory floor. It also generates customized test reports and
integrates product and test data across the customers' enterprise and across the
Internet. TestStand manages tests that are written in LabVIEW, LabWindows/CVI, C
and C++, and VisualBasic, so test engineers can easily share and re-use test
code throughout their organization and from one product to the next. TestStand
is a key element of the Company's strategy to broaden the reach of its
application software products across the corporate enterprise.
Automation Software
The Company's Lookout and BridgeVIEW automation software products are
targeted for the IA market. Lookout is a non-programming solution. Lookout is a
human machine interface/supervisory control and data acquisition ("HMI/SCADA")
software product that requires no programming or script writing. Lookout
provides a scalable architecture for applications ranging from HMIs to large,
sophisticated SCADA applications. BridgeVIEW industrial automation software
offers a new approach to automation. The graphical programming technology
pioneered by the Company's LabVIEW data acquisition and instrumentation software
is core to BridgeVIEW. In the automation world, LabVIEW has been used for
applications ranging from manufacturing execution systems (MES) in a frame plant
to supervisory control of paper machines. BridgeVIEW builds on LabVIEW with
tools tailored to IA systems.
Hardware Products and Related Driver Software
The Company's hardware and related driver software products include GPIB,
VXI, DAQ, PXI, image acquisition, motion control, and industrial communications.
The Company believes it can deliver significant cost/performance benefits to
users and clearly distinguish its products from competitive products by
designing proprietary ASICs for use in its hardware products. Software drivers
are necessary to link hardware to the operating system and the Company's
application software. The high level of integration between the Company's
products provides users with the flexibility to mix and match hardware
components when developing custom virtual instrumentation systems.
GPIB Interfaces/Driver Software. GPIB, also known as the IEEE 488 standard,
has existed since 1975 and defines the protocol for transferring data between
certain instruments and computers over an industry-standard cable. The computer
must be equipped with a GPIB interface. Driver software controls the interface
and the transfer of data between the instrument and the computer. GPIB is
largely used in the T&M market.
The Company began selling GPIB products in 1977 and is a leading supplier
of GPIB interface boards and driver software to control traditional GPIB
instruments. These traditional instruments are manufactured by a variety of
third-party vendors and are used primarily in the T&M market. The Company's
diverse portfolio of hardware and software products for GPIB instrument control
is available for a wide range of desktop computers, workstations and
minicomputers. The Company's GPIB product line also includes products for
portable computers such as a PCMCIA-GPIB interface card, and products for
controlling GPIB instruments using the computer's standard parallel USB, IEEE
1394 (Firewire) and Ethernet ports.
Portability of GPIB application programs is provided by the Company's
NI-488.2 driver software, considered a de facto industry standard, and NI-VISA
driver software. The Company offers networking capabilities through its GPIB
products. With these products, users can communicate with and control GPIB
instruments from any point on an Ethernet-based TCP/IP network. The Company also
offers a variety of GPIB support products, including converters, expanders,
extenders, data buffers and GPIB system analyzers as well as cables and other
accessories.
VXI Controllers/Driver Software. VXI is an industry standard high-end
instrumentation platform developed in 1987 through an industry consortium to
take advantage of the computation and display capabilities of desktop computers
and workstations. With VXI, the physical size of multiple instrument systems can
be decreased and communication between instruments and computers can be
dramatically improved. Like GPIB, VXI is supported by a variety of traditional
third-party instrument manufacturers and is largely used in the T&M market.
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VXI instruments are modular in design and can be inserted into an
industry-standard chassis. Unlike GPIB instruments, VXI modules do not have a
front panel for manual operation or visual data presentation. Therefore,
software is necessary for users to create, define the functionality of and
operate VXI instrumentation systems. Today, VXI is being used primarily to
supplement or replace high-end GPIB products in T&M applications.
The Company is a leading supplier of VXI computer controller hardware and
the accompanying NI-VXI and NI-VISA driver software.
DAQ Hardware/Driver Software. DAQ hardware and driver software products are
"instruments on a board" that users can combine with sensors, signal
conditioning hardware and software to acquire analog data and convert it into a
digital format that can be accepted by a computer. The Company believes that DAQ
products are typically a lower-cost solution than traditional instrumentation.
The Company believes that applications suitable for automation with DAQ
products are widespread throughout many industries for both T&M and IA
applications, and that many systems currently using traditional instrumentation
(either manual or computer-controlled) could be displaced by DAQ-based systems.
The Company offers a range of DAQ products, including models for digital, analog
and timing input-output, and for transferring data directly to a computer's
random-access memory.
In 1997, the Company introduced a family of computer-based instruments that
deliver stand-alone instrument quality and measurement capabilities with the
flexibility and scalability inherent to PC-based virtual instrumentation
solutions. Computer-based instruments deliver features comparable to stand-alone
traditional instruments such as oscilloscopes, DMMs, and function and arbitrary
waveform generators.
The Company's DAQ products provide a range of price/performance options,
and include products for high speed applications such as on-line monitoring and
control as well as products designed for long-term recording of slowly changing
data such as temperatures. The Company offers DAQ hardware/driver software
products for numerous desktop and notebook computers. The Company also offers
SCXI (signal conditioning extensions for instrumentation) hardware, which
expands the types and quantity of sensors that can be connected to the Company's
data acquisition boards.
PXI Modular Instrumentation. The Company's PXI modular instrument platform,
which was introduced in 1997, is a desktop PC packaged in a small, rugged form
factor with expansion slots and instrumentation extensions. It combines
mainstream PC software and PCI hardware with advanced instrumentation
capabilities designed in the VXI architecture. In essence, PXI is an
instrumentation PC - delivering many of the benefits of VXI in a much smaller
package and at much lower prices. In 1998, the Company expanded its PXI product
offerings to include modules which address a wide variety T&M and IA
applications. Also, during 1998, PXI was formally established as an open
industry standard and received endorsements from over 40 suppliers. The Company
has targeted its PXI products for both the T&M and IA markets.
Image Acquisition. In late 1996, the Company introduced its first image
acquisition hardware and software for the machine vision market. In the past,
building PC-based machine vision systems was reserved for integrators, OEMs, and
vision experts. Today, with the advanced technologies in personal computers and
the Company's vision products, it is cost-effective for end-users to integrate
vision into their T&M and IA applications. The Company's vision software is
designed to work with many different environments, including LabVIEW,
LabWindows/CVI, ComponentWorks and BridgeVIEW. Image acquisition is commonly
used in applications for quality control of manufactured products.
Motion Control. During 1997, the Company acquired technologies and assets
that resulted in the addition of a line of motion control hardware, software and
peripheral products. This intelligent PC-based motion control hardware is
programmable from industry standard development environments including LabVIEW,
LabWindows/CVI, and BridgeVIEW. Virtual instrument software tools for motion are
easily integrated with the Company's product line, allowing motion to be
combined with image acquisition, test, measurement, data acquisition and
automation. As in many areas, motion control is moving to PC-based systems and
the motion products allow users to leverage standard hardware and software in
measurement and automation applications to create robust, flexible solutions.
-9-
Industrial Communications Interfaces. In mid-1995, the Company began
shipping its first interface boards for communicating with serial devices, such
as dataloggers and PLCs targeted for IA applications, and benchtop instruments,
such as oscilloscopes, targeted for T&M applications. Industrial applications
need the same high-quality, easy-to-use hardware and software tools for
communicating with industrial devices such as process instrumentation, PLCs,
single-loop controllers, and a variety of I/O and DAQ devices. National
Instruments offers three hardware and driver software product lines for
communication with industrial devices - Controller Area Network (CAN),
Foundation Fieldbus, and RS-485 and RS-232. The Company's industrial
communication products are designed to work with standard serial software
drivers, and Windows versions of LabVIEW, LabWindows/CVI, Lookout and
BridgeVIEW.
Distributed Input/Output Hardware/Software. The Company introduced its
FieldPoint product for distributed I/O applications in mid-1997. FieldPoint is
an intelligent, distributed, and modular I/O system that gives industrial system
developers an economical solution for monitoring and control applications. The
FieldPoint system includes isolated analog and digital I/O modules, terminal
base options, and network modules. FieldPoint software includes a server that
provides seamless integration into BridgeVIEW, driver libraries for support
under LabVIEW, LabWindows/CVI and Lookout, and an OPC server that provides wide
compatibility of FieldPoint hardware with other industrial automation software
packages.
Customer Training Courses
The Company offers fee-based training classes and self-paced course kits
for its LabVIEW, LabWindows/CVI, Lookout, BridgeVIEW, ComponentWorks, GPIB, VXI,
DAQ, image acquisition, and signal processing products. On-site courses are
quoted per customer requests. The Company also offers programs to certify
programmers and instructors for its products.
Markets and Applications
The Company's products are used across many industries in a variety of
applications from research and development to production testing and industrial
control.
Customers
The Company has a broad customer base, with no customer accounting for more
than 3% of the Company's sales in 1998, 1997 or 1996.
Marketing
Through its worldwide marketing efforts, the Company strives to educate
engineers and scientists about the benefits of the Company's virtual
instrumentation philosophy, products and technology, and to highlight the
performance, ease of use and cost advantages of its products. The Company also
seeks to present its position as a technological leader among producers of
instrumentation software and hardware and to help promulgate industry standards
that will benefit users of computer-controlled instrumentation.
The Company reaches its intended audience through distribution of written
and electronic materials and demonstration disks, participation in tradeshows
and technical conferences and training and user seminars. An in-house staff
develops the advertising, publicity, and promotional materials that the Company
uses worldwide. The primary marketing/sales tool is the Company's catalog,
published annually and distributed worldwide. The catalog is over 800 pages,
with detailed tutorial information that educates readers about the Company's
integrated product architecture and virtual instrumentation concept. Short-form
versions of the catalog are typically also available in languages of major
international markets, including French, German, Spanish and Japanese. Product
and technical information is also provided through the Company's World Wide Web
site on the Internet and through interactive CD-ROM. In 1997, the Company began
selling some of its products over the Internet. During 1998, the Company
introduced several new web initiatives including features that allow customers
to view the Company's on-line catalog, interactively configure a system, place
orders, track the status of orders, register products and obtain software
upgrades. On January 1, 1999, the Company introduced a new feature to enable
customers to obtain pricing in U.S. dollars, euros and yen. The Company expects
to increase efforts in this area in the future.
The Company also uses two quarterly newsletters to educate current and
prospective customers about its products and technologies: Instrumentation
Newsletter and AutomationVIEW. The Instrumentation Newsletter includes new
product information, feature articles that educate readers about new
instrumentation technology, user solution case studies of real-world
applications, product news from Alliance Program members and key customers, and
event and customer education schedules. The Company's AutomationVIEW newsletter
is targeted at IA prospects and customers.
-10-
The Company actively markets its products in higher education environments,
and identifies many colleges, universities and trade and technical schools as
key accounts. The Company offers special academic pricing and products to enable
universities to utilize Company products in their classes and laboratories. The
Company believes its prominence in the higher education area can contribute to
its future success because students gain experience using the Company's products
before they enter the work force.
Sales and Distribution
The Company distributes its software and hardware products through a direct
sales organization, independent distributors, OEMs, VARs, system integrators and
consultants. The Company has sales offices in the United States and sales
offices and distributors in key international markets. International sales
accounted for approximately 44%, 41% and 43% of the Company's revenues in 1998,
1997 and 1996, respectively. The Company expects that a significant portion of
its total revenues will continue to be derived from international sales. See
Note 12 of Notes to Consolidated Financial Statements for details concerning the
geographic breakdown of the Company's net sales, operating income and
identifiable assets.
Through all of its sales channels, the Company seeks to approach potential
customers with a highly technical sales force. The Company believes that the
majority of sales are made directly to those persons within an organization who
actually use the Company's products to integrate their own systems. The Company
identifies and targets major end-user accounts as those having a large number of
actual or potential end users, and believes that it achieves a high level of
repeat customer sales. The Company targets major accounts with a variety of
targeted sales and marketing campaigns such as seminars, user groups,
newsletters and direct mail.
Direct Sales
The Company directly markets and sells its products in the United States,
Canada and many European and Asia/Pacific countries. The Company has sales
offices located throughout the United States (including the District of
Columbia) and in key international markets. Many of the Company's international
sales offices employ application engineering technical support specialists as
well as sales, marketing and administrative personnel.
The Company's international sales are subject to inherent risks, including
fluctuations in local economies; difficulties in staffing and managing foreign
operations; greater difficulty in accounts receivable collection; costs and
risks of localizing products for foreign countries; unexpected changes in
regulatory requirements, tariffs and other trade barriers, difficulties in the
repatriation of earnings and burdens of complying with a wide variety of foreign
laws. The Company's sales outside of North America are denominated in local
currencies, and accordingly, the Company is subject to the risks associated with
fluctuations in currency rates. In particular, increases in the value of the
dollar against foreign currencies decrease the dollar value of foreign sales
requiring the Company either to increase its price in the local currency, which
could render the Company's product prices noncompetitive, or to suffer reduced
revenues and gross margins as measured in US dollars. These dynamics have
adversely affected revenue growth in international markets in recent years. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 11 of Notes to Consolidated Financial Statements.
Distributors
The Company utilizes distributors primarily to market its products in
geographic areas not served by the Company's direct sales organization.
OEMs
The Company utilizes OEMs such as traditional instrument manufacturers who
offer integrated systems and/or services to their customer bases. The Company
approaches OEM accounts with its standard product lines and offers quantity
discounts based on volume commitments and technical support capabilities and
requirements. The Company also promotes its sales and marketing capabilities to
its OEMs by providing specialized product training, documentation, packaging and
part numbers to simplify ordering, flexible shipping and warranty repair options
and joint promotion.
-11-
VARs, System Integrators and Consultants
The Company has relationships with third-party VARs, system integrators and
consultants who offer add-on products and system integration services. These
third-party developers expand the Company's market and sales opportunities by
adding value to the Company's standard products, making them suitable for
vertical market applications such as manufacturing automation or image
processing and analysis. The Company maintains a formal third-party
sales/marketing/training program, called the Alliance Program, which it uses to
work with many of the VARs, system integrators and consultants. Applicants must
be sponsored for membership by a Company sales engineer, pass qualification
criteria and pay a nominal annual membership fee. In late 1998, the Company
introduced an elite level of its Alliance Program called Select Integrators.
Select Integrators must qualify for the program based upon their level of
business with the Company. As of December 31, 1998, the Company's Alliance
Program had over 500 members including several Select Integrators. The Company
publishes on-line directories on its website of third-party Alliance Program
member products and services for use by its sales force and its end users to
locate additional products and/or services compatible with the Company's
products. The Company makes available to qualified third-parties the opportunity
to participate in joint marketing and sales programs, such as trade shows,
customer sales events and the Instrumentation Newsletter. In addition to its
relationships with third party VAR, system integrators and consultants, the
Company has a direct presence in the German DAQ systems integration market
through its DATALOG subsidiary.
Customer Support
The Company believes the ability to provide comprehensive service and
support to its customers is an important factor in its business. The Company
permits customers to return products within 30 days from receipt for a refund of
the purchase price less a restocking charge, and generally provides a two-year
warranty on GPIB hardware products, a one-year warranty on other hardware
products, and a 90-day warranty on cables and software (medium only).
Historically, warranty costs have not been material. Some of the key elements of
the Company's service and support strategy include:
Customer Technical Support
The Company maintains a large staff of application engineers at its
corporate facility, all of whom are highly qualified technical professionals.
Application engineers are also assigned to the Company's major international
offices. These application engineers provide customer support by telephone, fax,
electronic mail and world-wide web forums, and electronic bulletin boards, and
are trained in both instrumentation and computer technology.
Upgrades
The Company typically offers programs in which existing customers can
upgrade to the latest Company products at a reduced cost. Application software
customers have the option of purchasing a one-year renewable maintenance and
support program, which entitles them to new software releases for no additional
charge and priority access to the Company's technical support hotline.
Customer Education
The Company offers a variety of fee-based training classes ranging in scope
from basic and introductory courses for new users to advanced courses for
experienced users.
Competition
The markets in which the Company operates are characterized by intense
competition from numerous competitors, 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. The Company believes HP is
the dominant supplier of GPIB and VXI-compatible instruments and systems in the
T&M market. HP is also a leading supplier of equipment used in data acquisition
and control applications. Although HP offers its own line of instrument
controllers, HP also offers hardware and software add-on products for
third-party desktop computers and workstations that directly compete with the
Company's virtual instrumentation products. HP is aggressively advertising and
marketing its products and system integration services. Because of HP's
dominance in the instrumentation business, changes in its marketing strategy or
product offerings could have a material adverse affect on the Company. The
Company also faces competition from a variety of other competitors.
-12-
Certain of the Company's competitors have substantial competitive
advantages in terms of breadth of technology, sales, marketing and support
capability and resources, including the number of sales and technical personnel
and their ability to cover a geographic area and/or particular account more
extensively and with more complete solutions than the Company can offer, and
more extensive warranty support, system integration and service capabilities
than those of the Company. In addition, large competitors can often enter into
strategic alliances with key customers or target accounts of the Company, which
can potentially have a negative impact on the Company's success with those
accounts.
The Company believes its ability to compete successfully depends on a
number of factors both within and outside its control, including: product
pricing, quality and performance; success in developing new products; adequate
manufacturing capacity and supply of components and materials; efficiency of
manufacturing operations; effectiveness of sales and marketing resources and
strategies; strategic relationships with other suppliers; timing of new product
introductions by the Company and its competitors; protection of the Company's
products by effective use of intellectual property laws; general market and
economic conditions; and events related to weather and government actions
throughout the world. There can be no assurance that the Company will be able to
compete successfully in the future.
The Company is continually designing new and improved products to maintain
its competitive position. Because of the rapidly changing computer technology
for which many of the Company's products are designed, the Company believes that
its future success will depend in part on its ability to continue to improve its
products and technologies. In the past, certain competitors have cloned some of
the Company's hardware products at much lower prices, and promoted these
hardware products as being capable of running the Company's software. The
Company has responded to this tactic in the past by releasing new and improved
versions of its products designed around proprietary ASICs that have improved
performance and functionality in an effort to surpass the competition.
Research and Development
The Company believes that its long-term growth and success depends, in
part, on delivering high quality software and hardware products on a timely
basis. The Company intends to focus its research and development efforts on
enhancing existing products and developing new products that incorporate
appropriate features and functionality to be competitive with respect to
technology and price/performance.
The Company's research and development staff strives to build quality into
products at the design stage in an effort to reduce overall development and
manufacturing costs. The Company's research and development staff also designs
proprietary ASICs, many of which are designed for use in several products. The
goal of the ASIC design program is to further differentiate the Company's
products from competing products, to improve manufacturability and to reduce
costs. The Company seeks to reduce the time to market for new and enhanced
products by sharing its internally developed hardware and software components
across multiple products.
In the past, the Company has experienced significant delays in the
introduction of new products. The Company's strategy of developing products
based primarily on third parties' operating environments is substantially
dependent on the Company's ability to gain pre-release access to, and to develop
expertise in, current and future product developments of such companies. There
can be no assurance that the Company will continue to receive such pre-release
access from any of these companies, or, even with such access, that the Company
will be able to develop products on a timely basis that are compatible with
future releases.
The Company has implemented certain programs, including pre-release bug
analysis measures and enhanced project-tracking efforts, in order to improve the
product development process and to permit more accurate product development
scheduling. Nonetheless, there can be no assurance that the Company's research
and development efforts will not encounter delays or other difficulties, that
development efforts will result in commercially successful products, or that the
Company's products will not be rendered obsolete by changing technology or new
product announcements by other companies.
As of December 31, 1998, the Company employed 424 people in product
research and development. The Company's research and development expenses were
$34.8 million, $30.3 million, and $24.4 million for 1998, 1997, and 1996,
respectively.
-13-
Intellectual Property
The Company relies on a combination of patent, trade secret, copyright and
trademark law, contracts and technical measures to establish and protect its
proprietary rights in its products. The Company believes that legal protection
through means such as the patent and copyright laws will be less influential on
the Company's ability to compete than such factors as the creativity of its
development staff, its ability to expand its market share, develop new markets
and serve its customers.
As of December 31, 1998, the Company held 65 United States patents and 4
patents in foreign countries (one patent registered in Europe and 8 countries;
one patent in Canada, one patent in Europe and 3 countries, and one patent in
Japan), and had 89 patent applications pending in the United States and foreign
countries. Twenty-three of such United States patents are software patents
related to LabVIEW, and cover fundamental aspects of the graphical programming
approach used in LabVIEW. The Company's patents expire from 2007 to 2017. No
assurance can be given that the Company's pending patent applications will
result in the issuance of patents. The Company also owns certain registered
trademarks in the United States and abroad.
Although the Company relies to some extent on trade secret protection for
much of its technology, and regularly obtains confidentiality agreements with
key customers who wish to know more about the Company's product development
philosophy and/or future directions, there can be no assurance that third
parties will not either independently develop the same or similar technology,
obtain unauthorized access to the Company's proprietary technology or misuse the
technology to which the Company has granted access.
The laws of certain foreign countries treat the protection of proprietary
rights of the Company in its products differently from those in the United
States, and in many cases the protection afforded by such foreign laws is not as
strong as in the United States. The Company believes that its products and their
use do not infringe the proprietary rights of third parties. There can be no
assurance, however, that infringement claims will not successfully be made.
Manufacturing and Suppliers
The Company manufactures its products at its facilities in Austin, Texas.
Product manufacturing operations at the Company can be divided into four areas:
electronic circuit card and module assembly; cable assembly; technical manuals
and product support documentation; and software duplication. The Company
manufactures most of the electronic circuit card assemblies and modules
in-house, although subcontractors are used from time to time. The Company
manufactures some of its electronic cable assemblies in-house, but many
assemblies are produced by subcontractors. The Company primarily subcontracts
its software duplication and packaging functions. Reliance on contract
manufacturers entails risks of quality problems, less control of product
pricing, and potential unavailability of or delays in delivery of products, any
of which could have a material adverse effect on the Company's results of
operations. There can be no assurance that the Company, together with its
third-party manufacturers, will be able to produce sufficient quantities of the
Company's products in a timely manner.
The marketplace dictates that many of the Company's products be shipped
very quickly after an order is received. Since purchased component and
manufacturing lead times are typically much longer than the short order
fulfillment time, the Company is required to keep adequate amounts of finished
goods inventory and must use an accurate system for forecasting demand for those
products in its production planning operations. Fluctuations in demand for the
Company's products typically result from month-to-month variations in the
quantity and mix of products and from normal, seasonal variations. A variety of
circumstances, including inaccurate forecasts of customer demand, poor
availability of purchased components, supplier quality problems, production
equipment problems, carrier strikes or damage to products in manufacturing
operations, could create a buildup of excess finished goods on the one hand or
an inability to timely deliver product on the other. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Engineering refinements to the Company's new hardware and software products
are fairly common. These changes can result in the disruption of the
manufacturing operation and concurrent delays in delivery dates. Finished goods
inventory at the Company's international branches typically has a short shelf
life due to engineering changes and product upgrades initiated by the Company's
product development operation, and, if managed incorrectly, can result in
significant quantities of obsolete inventory. This relatively short shelf life,
and the resulting requirement to properly manage the quantity of inventory to
meet customer demand while minimizing inventory obsolescence, has been and
continues to be a challenge to the Company and its branch offices. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
-14-
The Company obtains most of its electronic components from suppliers
located principally in the United States and Asia. Some of the components
purchased by the Company, including ASICs, are sole-sourced. Any disruption of
the Company's supply of sole or limited source components, whether resulting
from quality, production or delivery problems, could adversely affect the
Company's ability to manufacture its products, which could in turn adversely
affect the Company's business and results of operations.
Backlog
The Company typically ships products shortly following the receipt of an
order. Accordingly, the Company does not view backlog data as an indicator of
future sales.
Employees
As of December 31, 1998, the Company had 1,658 employees, including 424 in
research and development, 803 in sales and marketing and customer support, 220
in manufacturing and 211 in administration and finance. None of the Company's
employees is represented by a labor union and the Company has never experienced
a work stoppage. The Company considers its employee relations to be good.
ITEM 2. PROPERTIES
The Company's principal administrative, sales, marketing, manufacturing,
research and development activities are conducted at three Company-owned
buildings in Austin, Texas. The Company owns approximately 69 acres of land in
north Austin, Texas. In 1998, the Company completed construction of a 232,000
square foot office facility, which is located next to an existing 140,000 square
foot manufacturing facility. The Company also owns a 136,000 square foot office
building in Austin, Texas in which it houses certain of its sales operations. A
portion of the 136,000 square foot office building is currently leased to
International Business Machines Corporation.
As of December 31, 1998, the Company also maintained a number of sales and
support offices in the United States and overseas. The Company believes existing
field sales and support facilities are adequate to meet its current
requirements.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
-15-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock, $0.01 par value, began trading on the Nasdaq
National Market System under the symbol NATI effective March 13, 1995. Prior to
that date, there was no public market for the Common Stock. The high and low
closing prices for the Common Stock in the following table, as reported by
Nasdaq, have been retroactively restated to reflect the three-for-two stock
split declared by the Company's Board of Directors on October 15, 1997 for
holders of record as of the close of business on October 28, 1997.
1998 High Low
First Quarter 1998 34 7/8 25 1/4
Second Quarter 1998 36 3/8 26 5/8
Third Quarter 1998 34 1/4 21 7/8
Fourth Quarter 1998 34 4/7 19
1997 High Low
First Quarter 1997 25 5/6 20 2/3
Second Quarter 1997 23 1/2 18 1/2
Third Quarter 1997 31 21 5/6
Fourth Quarter 1997 33 1/3 25
At the close of business on February 25, 1999, there were approximately 896
holders of record of the Common Stock and approximately 5,000 shareholders of
beneficial interest.
The Company believes factors such as quarterly fluctuations in results of
operations, announcements by the Company or its competitors, technological
innovations, new product introductions, governmental regulations, litigation or
changes in earnings estimates by analysts may cause the market price of the
Common Stock to fluctuate, perhaps substantially. In addition, stock prices for
many technology companies fluctuate widely for reasons that may be unrelated to
their operating results. These broad market and industry fluctuations were most
recently noted during the third quarter of 1998 when many technology stocks
declined in price. There can be no assurances that these market concerns will
not continue in the immediate future and may adversely affect the market price
of the Company's Common Stock.
To date, the Company has not paid any cash dividends on its Common Stock.
The Company currently anticipates that it will retain any available funds to
finance the growth and operation of its business and does not anticipate paying
any cash dividends in the immediate future.
-16-
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements, including the Notes
to Consolidated Financial Statements. The information set forth below is
not necessarily indicative of results of future operations. The information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Years Ended December 31,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands, except per share data)
Statements of Income Data:
Net sales:..............
North America......... $153,435 $141,784 $114,382 $ 93,001 $ 77,333
Europe................ 86,961 66,318 58,108 51,145 38,505
Asia Pacific.......... 33,834 32,777 28,225 20,673 11,165
-------- -------- -------- -------- --------
Consolidated net sales 274,230 240,879 200,715 164,819 127,003
Cost of sales........... 65,187 55,096 49,755 39,525 30,627
-------- -------- -------- -------- --------
Gross profit.......... 209,043 185,783 150,960 125,294 96,376
-------- -------- -------- -------- --------
Operating expenses:
Sales and marketing... 100,783 87,096 72,067 63,733 49,957
Research and development 34,757 30,296 24,387 19,991 15,163
General and administrative 20,455 18,508 17,129 15,071 11,414
------- -------- -------- -------- --------
Total operating expenses 155,995 135,900 113,583 98,795 76,534
-------- -------- -------- -------- --------
Operating income...... 53,048 49,883 37,377 26,499 19,842
Other income (expense):
Interest income....... 3,439 3,455 2,405 1,635 240
Interest expense...... (463) (502) (844) (875) (542)
Net foreign exchange
(loss) gain.......... (224) (2,649) (899) 150 1,556
-------- -------- -------- -------- --------
Income before income taxes 55,800 50,187 38,039 27,409 21,096
Provision for income taxes 18,414 16,562 12,553 9,986 8,129
-------- -------- -------- -------- --------
Net income............ $ 37,386 $ 33,625 $ 25,486 $ 17,423 $ 12,967
======== ======== ======== ======== ========
Basic earnings per share $ 1.14 $ 1.03 $ 0.79 $ 0.56 $ 0.48
======== ======== ======== ======== ========
Weighted average shares
outstanding-basic....... 32,832 32,563 32,359 31,158 27,164
======== ======== ======== ======== ========
Diluted earnings per share $ 1.10 $ 1.00 $ 0.77 $ 0.55 $ 0.47
======== ======== ======== ======== ========
Weighted average shares
outstanding-diluted..... 34,100 33,656 32,943 31,424 27,483
======== ======== ======== ======== ========
December 31,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands)
Balance Sheet Data:
Cash and cash equivalents $ 51,538 $ 31,943 $ 30,211 $ 12,016 $ 7,526
Short-term investments.. 49,158 51,067 48,956 37,765 ---
Working capital......... 133,510 112,142 99,294 74,546 26,869
Total assets............ 249,786 204,490 169,225 137,102 70,751
Long-term debt, net of
current portion 4,379 5,151 9,175 11,603 9,083
Total stockholders' equity 204,184 161,754 126,953 98,736 40,474
-17-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion in this document contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Actual results could differ materially
from those projected in the forward-looking statements throughout this
document 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 risk factors set forth below in Factors Affecting the Company's
Business, in the financial line item discussions below and elsewhere in
this document.
Overview
National Instruments Corporation designs, develops, manufactures and
markets instrumentation and automation software and specialty interface
cards for general commercial, industrial and scientific applications. The
Company offers hundreds of products used to create virtual instrumentation
systems for measurement and automation. The Company has identified two
major markets for its products: test and measurement and industrial
automation. Many of the Company's products may be used in either
environment, and consequently, specific application of the Company's
products is determined by the end-customer and often is not known to the
Company at the time of sale. The Company's products are used in a variety
of applications from research and development to production testing and
industrial control. In test and measurement applications, the Company's
products can be used to monitor and control traditional instruments or to
create computer-based instruments that can replace traditional instruments.
In industrial automation applications, the Company's products can be used
in the same ways as in test and measurement and can also be used to
integrate measurement functionality with process automation capabilities.
The Company sells to a large number of customers in a wide variety of
industries. No single customer accounted for more than 3% of the Company's
sales in 1998, 1997 or 1996.
The Company's revenues have grown every year since 1977 and the
Company has been profitable in every year since 1990. There can be no
assurance that the Company's net sales will continue to grow or that the
Company will remain profitable in future periods. As a result, the Company
believes historical results of operations should not be relied upon as
indications of future performance.
Results of Operations
The following table sets forth, for the periods indicated, the
percentage of net sales represented by certain items reflected in the
Company's consolidated statements of income:
Years Ended December 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
Net sales
North America............. 56.0% 58.9% 57.0%
Europe.................... 31.7 27.5 29.0
Asia Pacific.............. 12.3 13.6 14.0
----------- ----------- -----------
Consolidated net sales.... 100.0 100.0 100.0
Cost of sales............... 23.8 22.9 24.8
----------- ----------- -----------
Gross profit.............. 76.2 77.1 75.2
Operating expenses:
Sales and marketing....... 36.7 36.1 35.9
Research and development.. 12.7 12.6 12.2
General and administrative 7.5 7.7 8.5
----------- ----------- -----------
Total operating expenses 56.9 56.4 56.6
----------- ----------- -----------
Operating income........ 19.3 20.7 18.6
Other income (expense):
Interest income .......... 1.3 1.4 1.2
Interest expense.......... (0.2) (0.2) (0.4)
Net foreign exchange loss. (0.1) (1.1) (0.4)
----------- ----------- -----------
Income before income taxes.. 20.3 20.8 19.0
Provision for income taxes.. 6.7 6.9 6.3
----------- ----------- -----------
Net income.................. 13.6% 13.9% 12.7%
=========== =========== ===========
-18-
Net Sales. In 1998, net sales for the Company's products reached $274.2
million, a 14% increase from the level achieved in 1997, which followed an
increase in net sales of 20% in 1997 over the level achieved in 1996. This year
marks the twenty-second year of double-digit annual sales growth. The increase
in sales in these periods is primarily attributable to the introduction of new
and upgraded products in each period, increased market acceptance of the
Company's products in each of the major geographical areas in which the Company
operates, and an expanded customer base. The decrease in the 1998 U.S. dollar
annual growth rate, 14% as compared to 20% in 1997, is attributed to a slowdown
in sales growth in North America and Asia Pacific.
North American revenue was $153.4 million in 1998, an increase of 8.2% from
1997, following a 24% increase in 1997 over 1996. The increase in sales in North
America in 1998 is primarily attributable to increased demand for the Company's
products in the telecom and automotive industries and the industrial automation
market. The decrease in the North American revenue growth rate is attributed to
a decrease in sales of the Company's products as a result of an overall downturn
in the test and measurement market. This downturn was most pronounced in sales
to customers in the automated test equipment, semiconductor, defense and
aerospace industries. The slowdown in the automated test equipment and
semiconductor markets is partially attributable to the effect on the U.S.
economy of the Asian economic situation. In addition, the Company was not
successful in increasing its U.S. field sales force until the fourth quarter of
1998.
European revenue was $87.0 million in 1998, an increase of 31% over 1997,
following a 14% increase in 1997 from 1996. The increase in revenue growth in
Europe is primarily attributable to market acceptance of the Company's products,
the strong local economies and the Company's expansion in its European sales
force.
Asia Pacific revenue grew 3% to $33.8 million in 1998, which followed a 16%
increase in 1997 over 1996 levels. The decrease in the Asia Pacific revenue
growth rate during 1998 is primarily attributed to the weakening of the Japanese
yen, Korean won and other Asian currencies and the weak state of these
economies. See the discussion below for more information concerning the impact
of foreign currency fluctuations on sales growth.
International sales (sales to customers outside of North America) accounted
for 44%, 41% and 43% of the Company's consolidated net sales for 1998, 1997 and
1996, respectively. The Company intends to continue to expand its international
operations by increasing market presence in existing markets, and continuing to
use distributors to sell its products in countries in which the sales volume
does not justify direct sales activities.
The Company's international sales are subject to inherent risks, including
fluctuations in local economies; difficulties in staffing and managing foreign
operations; greater difficulty in accounts receivable collection; costs and
risks of localizing products for foreign countries; unexpected changes in
regulatory requirements, tariffs and other trade barriers; difficulties in the
repatriation of earnings and burdens of complying with a wide variety of foreign
laws. The Company's sales outside of North America are denominated in local
currencies, and accordingly, the Company is subject to the risks associated with
fluctuations in currency rates. In particular, increases in the value of the
dollar against foreign currencies decrease the U.S. dollar value of foreign
sales requiring the Company either to increase its price in the local currency,
which could render the Company's product prices noncompetitive, or to suffer
reduced revenues and gross margins as measured in U.S. dollars. These dynamics
have adversely affected revenue growth in international markets in 1998 and
1997. The Company's foreign currency hedging program includes both foreign
currency forward and purchased option contracts to reduce the effect of exchange
rate fluctuations. However, the hedging program will not eliminate all of the
Company's foreign exchange risks. (See "Foreign Exchange Gain/Loss" below and
Note 11 of Notes to Consolidated Financial Statements.)
-19-
Sales made by the Company's direct sales offices in Europe and Asia Pacific
are denominated in local currencies, and accordingly, the U.S. dollar equivalent
of these sales is affected by changes in the weighted average value of the U.S.
dollar. This weighted average is calculated as the percentage change in the
value of the currency relative to the dollar, multiplied by the proportion of
international sales recorded in the particular currency. Between 1997 and 1998
this weighted average value of the U.S. dollar increased by 4%, causing an
equivalent decrease in the U.S. dollar value of the Company's foreign currency
sales and expenses. If the weighted average value during 1998 had been the same
as that in 1997, the Company's consolidated net sales for 1998 would have been
$278.9 million representing an increase of $4.7 million, which represents 16%
consolidated sales growth. If the weighted average value during 1998 had been
the same as that in 1997, the Company's consolidated operating expenses would
have been $157.0 million, representing an increase of $1.0 million. The
preceding proforma amounts and percentages are presented for comparison
purposes.
Gross Profit. As a percentage of sales, gross profit represented 76%, 77%
and 75% in 1998, 1997, and 1996, respectively. The relatively high software
content of the Company's products is demonstrated in the gross margins achieved
by the Company. In 1998, the effect of foreign currency exchange rate
fluctuations and the weak Asia Pacific economies negatively impacted revenue
growth and gross margin. A lesser factor affecting gross margin includes
increased manufacturing expenses attributable to the addition of a third
production line in April 1998. The higher margin in 1997 is the result of
reduced direct material costs used in production and the favorable leveraging of
our production overhead expenses against the increase in sales. There can be no
assurance that the Company will maintain its historical margin.
The marketplace for the Company's products dictates that many of the
Company's products be shipped very quickly after an order is received. As a
result, the Company is required to maintain significant inventories. Therefore,
inventory obsolescence is a risk for the Company due to frequent engineering
changes, shifting customer demand, the emergence of new industry standards and
rapid technological advances including the introduction by the Company or its
competitors of products embodying new technology. While the Company maintains
valuation allowances for excess and obsolete inventory and management continues
to monitor the adequacy of such valuation allowances, there can be no assurance
that such valuation allowances will be sufficient.
The Company believes its current manufacturing capacity is more than
adequate to meet current needs.
Sales and Marketing. Sales and marketing expense in 1998 increased 16% from
1997, which followed an increase of 21% in 1997 from 1996. The increase in the
expense in absolute amounts during 1998 and 1997 is primarily attributable to
programs to increase the Company's international presence in both the European
and Asia Pacific markets, increases in sales and marketing personnel both
internationally and in North America, increased marketing for new products and a
worldwide seminar series. Sales and marketing personnel increased by 132 during
1998 from 671 at December 31, 1997 to 803 at December 31, 1998. Sales and
marketing expense as a percentage of revenue increased to 37% in 1998 from 36%
in 1997 and 1996.
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 and entry into new market areas, increasing product
demonstration costs and the timing of domestic and international conferences and
trade shows.
Research and Development. Research and development expense in 1998
increased 15% compared to 1997 following an increase of 24% in 1997 over 1996.
Excluding the effect of acquisition of products, technology and assets, research
and development expense grew 12%, 26% and 17% during 1998, 1997 and 1996,
respectively. (See Note 8 of Notes to Consolidated Financial Statements for a
description of the Company's acquisitions.) The increase in research and
development expenditures (excluding the acquisition related charges in 1998 and
1997) in absolute amounts and as a percentage of sales in each period was
primarily due to the hiring of additional product development engineers.
Research and development personnel increased from 373 at December 31, 1997 to
424 at December 31, 1998. The Company believes that a significant investment in
research and development is required to remain competitive and continue revenue
growth.
-20-
The Company capitalizes software development costs in accordance with
Statement of Financial Accounting Standards 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 life,
generally three years, beginning when a product becomes available for general
release. Amortization expense totaled $2.8 million, $1.5 million and $2.1
million during 1998, 1997 and 1996, respectively. The increase in amortization
expense is due primarily to amortization of $750,000 of purchased software
capitalized in the 1998 Datalog acquisition. Software development costs
capitalized during such years were $3.3 million, $2.1 million and $3.0 million,
respectively. The levels of capitalization for 1998 were primarily a result of
LabVIEW 5.0 and 5.1, NI-DAQ 6.5 and purchased software development costs related
to the Datalog acquisition. The significant items capitalized in 1997 include
NI-DAQ, LabVIEW 5.0, LabWindows/CVI and purchased software development costs
related to the nuLogic acquisition. (See Note 5 of Notes to Consolidated
Financial Statements for a description of intangibles.)
General and Administrative. General and administrative expenses in 1998
increased 10.5% from 1997, considerably lower than the increase in revenue of
14%. The continued leveraging of expenses is primarily due to the implementation
of new management information systems in the U.S., Europe and Japan. In absolute
dollars, the majority of the increase was comprised of cost attributable to
staffing increases in the information system department. Support of the new
management information systems and web based applications was the main focus
areas for incremental investment in 1998. The 1998 increase followed an 8%
increase in 1997 which also was driven by training and implementation costs of
the new management information systems. General and administrative expenses as a
percentage of revenue declined to 7.5% during 1998. This marks the third
consecutive year of reduced general and administrative expenses as a percent of
revenue. This decline is attributable to the efficiencies brought on by the
improvements made in recent years to the worldwide management information
system. The Company expects that general and administrative costs will continue
to increase in absolute amounts as the Company continues to invest in developing
web based commerce and management information systems.
Interest Income and Expense. Interest income in 1998 was flat from 1997,
which followed an increase of 44% in 1997 from 1996. The primary source of
interest income is from the investment of proceeds from the Company's issuance
of common stock under an initial public offering in March 1995 and cash flow
generated from operations. Net cash provided by operating activities in 1998
totaled $46.0 million. During the first half of 1998, $16.5 million was used to
pay construction costs of the Company's new office building. During 1997,
interest income increased due to the investment of cash generated from
operations. Interest expense decreased 8% from 1997, which followed a decrease
of 41% in 1997 from 1996. Interest expense represents less than 1% of net sales
and fluctuates as a result of bank borrowings and interest terms thereon. The 8%
decrease in interest expense in 1998 from 1997 is attributed to scheduled
repayments on the manufacturing facility loan. The large decrease in interest
expense from 1996 to 1997 is attributed to repayments of equipment and facility
loans during January 1997. (See Note 6 of Notes to Consolidated Financial
Statements for a description of the Company's debt.)
Foreign Exchange Gain/Loss. The Company experienced net foreign exchange
losses of $224,000 in 1998, compared to losses of $2.6 million and $899,000 in
1997 and 1996, respectively. These results are attributable to movements between
the U.S. dollar and the local currencies in countries in which the Company's
sales subsidiaries are located. The Company recognizes the local currency as the
functional currency of its international subsidiaries.
During 1998, the Company utilized foreign currency forward exchange
contracts to economically hedge a majority of its foreign currency-denominated
receivables in order to reduce its exposure to significant foreign currency
fluctuations. The Company typically limits the duration of its foreign exchange
forward contracts to 90 days.
In December 1997, the Company expanded its foreign currency hedging program
to also include foreign currency purchased option contracts in order to reduce
its exposures to fluctuations in future net foreign currency cash flows. The
Company's policy allows for the purchase of 5% "out-of-the-money" foreign
currency purchased option contracts for up to 80% of its risk and limits the
duration of these contracts to 12 months. As a result, the Company's hedging
activities only partially address its risks in foreign currency transactions,
and there can be no assurance that this strategy will be successful.
Effective January 1, 1999, the Company elected to adopt SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." (See Note 15 of
Notes to Consolidated Financial Statements.)
-21-
The Company does not currently invest in contracts for speculative purposes
nor does it intend to do so in the foreseeable future. (See Note 11 of Notes to
Consolidated Financial Statements for a description of the Company's forward and
purchased option contracts and hedged positions.)
Provision for Income Taxes. The provision for income taxes reflects an
effective tax rate of 33% in 1998, 1997 and 1996.
At December 31, 1998, seven of the Company's subsidiaries had available,
for income tax purposes, foreign net operating loss carryforwards of
approximately $4.2 million, of which $3.5 million expire between 2000 and 2008.
The remaining $654,000 of loss carryforwards may be carried forward indefinitely
to offset future taxable income in the related tax jurisdictions. (See Note 7 of
Notes to Consolidated Financial Statements for further discussion of the
Company's income tax provision.)
Liquidity and Capital Resources
The Company is currently financing its operations and capital expenditures
through cash flow from operations. At December 31, 1998, the Company had working
capital of approximately $133.5 million compared to $112.1 million at December
31, 1997.
Accounts receivable increased to $45.6 million at December 31, 1998 from
$37.4 million at December 31, 1997, as a result of higher sales levels.
Receivable days outstanding at December 31, 1998 was 57 days compared to 54 days
outstanding at December 31, 1997. Consolidated inventory balances have increased
to $16.5 million at December 31, 1998 from $15.5 million at December 31, 1997.
Inventory turns of 4.2 per year represent an improvement over turns of 4.1 per
year at December 31, 1997 and reflect improvements in inventory management
occurring at the Company's manufacturing facility in Austin, Texas as well as at
the centralized European warehouse in Amsterdam.
Cash used for investing activities in 1998 includes $28.0 million for the
purchase of property and equipment, capitalization of software development costs
of $2.8 million and purchase price of $2.2 million for the purchase of Datalog.
The Company completed an office building located next to its manufacturing
facility in Austin, Texas in the summer of 1998. The total cost for the new
building, including furniture, fixtures and equipment was $31.0 million of which
$16.5 million was paid in 1998 out of cash generated from operations.
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,
and (ii) an $8.5 million manufacturing facility loan. As of December 31, 1998,
the Company had no outstanding balance on the line of credit and had a balance
of $5.2 million on the manufacturing facility loan. The revolving line of credit
expires on December 31, 1999. 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.
(See Note 6 of Notes to Consolidated Financial Statements for additional
information regarding the Company's debt.)
The Company believes that the cash flow from operations, if any, existing
cash balances and short-term investments and credit available under the
Company's existing credit facilities, will be sufficient to meet its cash
requirements for at least the next twelve months. Cash requirements for periods
beyond the next twelve months depend on the Company's profitability, its ability
to manage working capital requirements and its rate of growth.
Market Risk
The Company is exposed to a variety of risks, including foreign currency
fluctuations and changes in the market value of its investments. In the normal
course of business, the Company employs established policies and procedures to
manage its exposure to fluctuations in foreign currency values and changes in
the market value of its investments.
-22-
Foreign Currency Hedging Activities. The Company's objective in managing
its exposure to foreign currency exchange rate fluctuations is to reduce the
impact of adverse fluctuations in such exchange rates on the Company's earnings
and cash flow. Accordingly, the Company utilizes purchased foreign currency
option contracts and forward contracts to hedge its exposure on anticipated
transactions and firm commitments. The principal currencies hedged are the
British pound, Japanese yen, German deutsche mark, French franc, Italian lire
and Swedish krona. The Company monitors its foreign exchange exposures regularly
to ensure the overall effectiveness of its foreign currency hedge positions.
However, there can be no assurance the Company's foreign currency hedging
activities will substantially offset the impact of fluctuations in currency
exchange rates on its results of operations and financial position. Based on the
foreign exchange instruments outstanding at December 31, 1998, an adverse change
(defined as 20% in certain Asian currencies and 10% in all other currencies) in
exchange rates would result in a decline in income before taxes of less than
$4.0 million. Additionally, as the Company utilizes foreign currency instruments
for hedging anticipated and firmly committed transactions, a loss in fair value
for those instruments is generally offset by increases in the value of the
underlying exposure. (See Note 11 of Notes to Consolidated Financial Statements
for a description of the Company's financial instruments at December 31, 1998
and 1997.)
Short-term Investments. The fair value of the Company's investments in
marketable securities at December 31, 1998 was $49.2 million. The Company's
investment policy is to manage its investment portfolio to preserve principal
and liquidity while maximizing the return on the investment portfolio through
the full investment of available funds. The Company diversifies the marketable
securities portfolio by investing in multiple types of investment-grade
securities. The Company's investment portfolio is primarily invested in
short-term securities with at least an investment grade rating to minimize
interest rate and credit risk as well as to provide for an immediate source of
funds. Based on the Company's investment portfolio and interest rates at
December 31, 1998, a 100 basis point increase or decrease in interest rates
would result in a decrease or increase of less than $400,000, respectively, in
the fair value of the investment portfolio. Although changes in interest rates
may affect the fair value of the investment portfolio and cause unrealized gains
or losses, such gains or losses would not be realized unless the investments are
sold.
Factors Affecting the Company's Business
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 past 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 Asian currencies again weaken against the U.S. dollar, and if the local
sales prices cannot be raised, the Company could experience additional
deterioration of its Asian profit margin. As has occurred in the past and as may
be expected to occur in the future, new software products of the Company or new
operating systems of third parties on which the Company's products are based,
often contain bugs or errors that can result in reduced sales and/or cause the
Company's support costs to increase, either of which could have a material
adverse impact on the Company's operating results. Furthermore, the Company has
significant revenues from customers in industries such as semiconductors,
automated test equipment, telecommunications, aerospace, defense and automotive
which are cyclical in nature. Downturns in these industries have adversely
affected revenue growth in 1998 and they could continue to do so.
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. If this historical pattern continues, revenues for the first
quarter of 1999 may not exceed revenues from the fourth quarter of 1998. The
Company's results of operations in the third quarter of 1999 may be adversely
affected by lower sales levels in Europe which typically occur during the summer
months. The Company believes the seasonality of its revenue results from the
international mix of its revenue and the variability of the budgeting and
purchasing cycles of its customers throughout each international region.
-23-
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.
Failure of new products to achieve or sustain market acceptance could have a
material adverse effect on the Company's operating results. Moreover, there can
be no assurance that the Company's international sales will continue at existing
levels or grow in accordance with the Company's efforts to increase foreign
market penetration.
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 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.
During 1998, the Company implemented a contact management and technical
support incident tracking system in 10 European branches, as well as a data
warehouse to aid in real-time worldwide sales information analysis. In 1999, the
Company will complete implementation of the contact management and technical
support incident tracking system in the three remaining European branches, the
U.S. and Japan. The Company will also devote significant effort on the
development of our web commerce offerings.
Implementation of the new order entry, distribution and finance management
information systems in Europe and Japan was completed in 1997. As with any
information system, unforeseen issues may arise that could affect management's
ability to receive adequate, accurate and timely financial information which in
turn could inhibit effective and timely decisions. Furthermore, it is possible
that one or more of the Company's three regional information systems could
experience a complete or partial shutdown. If 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. The Company is working to achieve reliable regional
management information systems to control costs and improve the ability to
deliver its products in substantially all of its direct markets worldwide. No
assurance can be given that the Company's efforts will be successful. The
failure to receive adequate, accurate and timely financial information could
inhibit management's ability to make effective and timely decisions. For further
information related to the management information system see the discussion of
the Impact of Year 2000 included in this document.
-24-
Risks Associated with International Operations and Foreign Economies.
International sales are subject to inherent risks, including fluctuations in
local economies, difficulties in staffing and managing foreign operations,
greater difficulty in accounts receivable collection, costs and risks of
localizing products for foreign countries, unexpected changes in regulatory
requirements, tariffs and other trade barriers, difficulties in the repatriation
of earnings and the burdens of complying with a wide variety of foreign laws.
The regulatory environment in some emerging countries is very restrictive as
their governments try to protect their local economy and value of their local
currency against the U.S. dollar. Sales made by the Company's direct sales
offices in Europe and Asia Pacific are denominated in local currencies, and
accordingly, the U.S. dollar equivalent of these sales is affected by changes in
the weighted average value of the U.S. dollar. This weighted average is
calculated as the percentage change in the value of the currency relative to the
dollar, multiplied by the proportion of international sales recorded in the
particular currency. Between 1997 and 1998 this weighted average value of the
U.S. dollar increased by 4%, causing an equivalent decrease in the U.S. dollar
value of the Company's foreign currency sales and expenses. If the weighted
average value during 1998 had been the same as that in 1997, the Company's
consolidated net sales for 1998 would have been $278.9 million representing an
increase of $4.7 million, which represents 16% consolidated sales growth. If the
weighted average value during 1998 had been the same as that in 1997, the
Company's consolidated operating expenses would have been $157.0 million,
representing an increase of $1.0 million, or 15% from 1997. If the U.S. dollar
strengthens again in the future, it could have a materially adverse effect on
the operating results of the Company.
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
application-specific integration 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.
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 effect 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
including Dr. Truchard, Mr. Kodosky and other members of senior management and
key technical personnel. The Company has no agreements providing for the
employment of any of its key employees for any fixed term and the Company's key
employees may voluntarily terminate their employment with the Company at any
time. The loss of the services of one or more of the Company's key employees in
the future could have a material adverse effect on operating results. The
Company also believes its future success will depend in large part upon its
ability to attract and retain additional highly skilled management, technical,
marketing, research and development, and operational personnel with experience
in managing large and rapidly changing companies as well as training, motivating
and supervising the employees. In addition, the recruiting environment for
software engineering, sales and other technical professionals is very
competitive. Competition for qualified software engineers is particularly
intense and is likely to result in increased personnel costs. Failure to attract
or retain qualified software engineers could have an adverse effect on the
Company's operating results. The Company also recruits and employs foreign
nationals to achieve its hiring goals primarily for 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 current degree if government
requirements for temporary and permanent residence becomes increasingly
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.
-25-
Risk of Product Liability Claims. The Company's products are designed in
part to provide information upon which the users may rely. The Company attempts
to assure the quality and accuracy of the processes contained in its products,
and to limit its product liability exposure through contractual limitations on
liability, including disclaimers in its "shrink wrap" license agreements with
end-users. If future products contain errors that produce incorrect results on
which users rely, customer acceptance of the Company's products could be
adversely affected. Further, the Company could be subject to liability claims
that could have a material adverse effect on the Company's operating results or
financial position. Although the Company maintains liability insurance, there
can be no assurance that such insurance or the contractual provisions used by
the Company to limit its liability will be sufficient.
Impact of Year 2000. Like many other companies, the Year 2000 computer
issue creates risks for the Company. If internal systems do not correctly
recognize and process date information beyond the year 1999, there could be an
adverse impact on the Company's operations. There are two other related issues
which could also lead to incorrect calculations or failures: i) some programs
assign special meaning to certain dates, such as 9/9/99, and ii) the fact that
the Year 2000 is a leap year. To address these Year 2000 issues with its
internal systems, the Company has initiated a comprehensive program which is
designed to deal with the most critical systems first. These activities are
intended to encompass all major categories of systems in use by the Company,
including network and communications infrastructure, manufacturing, research and
development, facilities management, sales, finance and human resources. The
Company's manufacturing equipment and systems are highly automated,
incorporating PC's, embedded processors and related software to control activity
scheduling, inventory tracking and manufacturing. As of December 1998, the
majority of the Company's critical and priority manufacturing systems and
non-manufacturing systems were determined to be already Year 2000 capable, or
replacements, changes, upgrades or workarounds have been determined and tested.
These replacements, changes and upgrades may not yet have been deployed.
The Company is continuing to test, gather and produce information about its
products. Certain older products will not be tested. The Company is classifying
its tested products into the following categories of compliance: compliant,
compliant with minor issues, and not compliant. Most of the products tested are
either compliant or compliant with minor issues. If a product is stated to be
non-compliant, the Company plans to make information available as to how an
organization could avoid possible Year 2000 issues regarding that product. The
Company is also providing additional information and references to help other
organizations test their products and applications so that end-users' systems
are Year 2000 compliant.
A Year 2000 Readiness Disclosure Statement is available at the National
Instruments web site. Information on the Company's web site is provided to
customers for the sole purpose of assisting in planning for the transition to
the Year 2000. No assurances can be made that problems will not arise such as
customer problems with other 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.
The Company is also actively working with suppliers of products and
services to determine the extent to which the suppliers' operations and the
products and services they provide are Year 2000 capable and to monitor their
progress toward Year 2000 capability. Highest priority is being placed on
working with suppliers that are critical to the business. The Company has made
inquiry of its major suppliers and to date has received written responses to its
initial inquiries from 72% of critical suppliers. Follow-up activities seek to
determine whether the supplier is taking all appropriate steps to fix Year 2000
problems and to be prepared to continue functioning effectively as a supplier in
accordance with National Instruments' standards and requirements. Contingency
plans are being developed to address issues related to suppliers that are not
considered to be making sufficient progress in becoming Year 2000 capable in a
timely manner. The Company is also developing contingency plans to address
possible changes in customer order patterns due to Year 2000 issues. As with
suppliers, the readiness of customers to deal with Year 2000 issues may affect
their operations and their ability to order and pay for products.
The Company believes that its most likely worst case Year 2000 scenarios
would relate to problems with the systems of third parties rather than with the
Company's internal systems or its products. It is clear that the Company has the
least ability to assess and remediate the Year 2000 problems of third parties
and the Company believes the risks are greatest with infrastructure (e.g.
electricity supply, water and sewer service), telecommunications, transportation
supply chains and critical suppliers of materials.
-26-
A worst case scenario involving a critical supplier of materials would be
the partial or complete shutdown of the supplier and its resulting inability to
provide critical supplies to the Company on a timely basis. The Company does not
maintain the capability to replace most third party supplies with internal
production. Where efforts to work with critical suppliers to ensure Year 2000
capability have not been successful, contingency planning generally emphasizes
the identification of substitute and second-source suppliers, and includes a
planned increase in the level of inventory carried.
The Company is not in a position to identify or to avoid all possible
scenarios; however, the Company is currently assessing scenarios and taking
steps to mitigate the impacts of various scenarios if they were to occur. This
contingency planning will continue through 1999 as the Company learns more about
the preparations and vulnerabilities of third parties regarding Year 2000
issues. Due to the large number of variables involved, the Company cannot
provide an estimate of the damage it might suffer if any of these scenarios were
to occur.
In 1994, the Company commenced the replacement of its legacy information
systems with a new generation of integrated applications. Since that time, the
Company has progressively replaced its manufacturing distribution, order entry
and financial systems in the U.S., Europe and Japan. These changes were made to
improve management's control of the organization and increase operational
efficiency. This early replacement of many of the Company's legacy systems has
reduced the extent of the Company's internal Year 2000 exposure.
The Company's Year 2000 efforts have been undertaken almost entirely with
its existing personnel. In some instances, consultants have been engaged to
provide specific guidance or services. Activities with suppliers and customers
have also involved their staffs and consultants.
The Company currently expects that the total cost of these programs,
including both incremental spending and redeployed resources, will not exceed
$3.7 million. Approximately $2.4 million has been spent on the programs to date.
Expected Year 2000 costs for manufacturing and non-manufacturing internal
systems in 1998 represent 37% of the total information technology budget for
1998. No significant internal systems projects are being deferred due to the
Year 2000 program efforts. The estimated costs do not include any potential
costs related to customer or other claims, or potential amounts related to
executing contingency plans, such as costs incurred on account of an
infrastructure or supplier failure. The Company has adequate general corporate
funds with which to pay for the programs' expected costs. All expected costs are
based on the current assessment of the programs and are subject to change as the
programs progress.
As we get closer to December 31, 1999, certain of the Company's customers
may decide to delay purchases of the Company's products as part of a general
restriction on new system implementations. Should a significant number of the
Company's customers adopt this strategy, this could have a material impact on
the Company's operating results.
Based on currently available information, management does not believe that
the Year 2000 matters discussed above related to internal systems or products
sold to customers will have a material adverse impact on the Company's financial
condition or overall trends in results of operations; however, it is uncertain
to what extent the Company may be affected by such matters. In addition, there
can be no assurance that the failure to ensure Year 2000 capability by a
supplier, customer or another third party would not have a material adverse
effect on the Company's financial condition or overall trends in results of
operations.
Euro Conversion. Effective January 1, 1999, eleven of the 15 member
countries of the European Union adopted a single European currency, the euro, as
their common legal currency. Like many companies that operate in Europe, various
aspects of the Company's business and financial accounting will be affected by
the conversion to the euro. The Company has adopted the euro currency as its
main operating currency for its European operations. The transition from many
different pricing arrangements to one standard price list, in euros, for all of
Europe allows for European pricing. In addition, the Company does not believe
that the conversion to the euro will result in the cancellation of any
significant contracts, or cause it to incur significant adverse tax
consequences, or significantly affect its foreign currency risk management
operations. The Company will continue to evaluate the impact of the euro
conversion going forward. The Company believes that its internal accounting,
order management and finance and banking systems will accommodate the conversion
with minimal modification. There can be no assurances that the conversion will
not adversely impact the Company's pricing, tax, currency hedging strategies or
other systems and processes in the future.
-27-
ITEM 7(a). MARKET RISK
Response to this item is included in "Item 7 - Management's Discussion of
Analysis of Financial Condition and Results of Operations - Market Risk" above.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to the
Consolidated Financial Statements set forth on pages F-1 through F-20 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-28-
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant intends to file a definitive proxy statement pursuant to
Regulation 14A with the Securities and Exchange Commission (the "Proxy
Statement") relating to its annual meeting of stockholders not later than 120
days after the end of the fiscal year covered by this Report, and such
information is incorporated by reference herein.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
incorporated by reference to the Company's Proxy Statement under the heading
"Election of Directors."
The information concerning the Company's executive officers required by
this Item is incorporated by reference to the Company's Proxy Statement under
the heading "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Election of Directors."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Election of Directors."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
-29-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed with Report
1. Financial Statements. See Index to Consolidated Financial
Statements at page F-1 of this Form 10-K and the Financial
Statements and Notes thereto which are included at pages F-2 to
F-20 of this Form 10-K.
2. Exhibits
Exhibit
Number Description
3.1* Certificate of Incorporation of the Company.
3.2* Bylaws of the Company.
4.1* Specimen of Common Stock certificate of the Company.
4.2* Rights Agreement dated as of May 19, 1994, between the
Company and The First National Bank of Boston.
10.1* Form of Indemnification Agreement.
10.2* 1994 Incentive Plan.
10.3* 1994 Employee Stock Purchase Plan.
10.5** Loan Agreements dated as of June 30, 1998, between the
Company and NationsBank of Texas, N.A., as amended and
supplemented.
11.1 Computation of Earnings Per Common Share.
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Accountants.
24.0 Power of Attorney (see page 32).
27.0 Financial Data Schedule (see Part II, Item 6).
* Incorporated by reference to the Company's Registration
Statement on Form S-1 (Reg. No. 33-88386) declared
effective March 13, 1995.
** Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
(b) Reports on Form 8-K.
Not Applicable.
(c) Exhibits
See Item 14(a)(2) above.
-30-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Registrant
NATIONAL INSTRUMENTS CORPORATION
March 11, 1999 BY: /s/ James J. Truchard
Dr. James J. Truchard
Chairman of the Board and President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Dr. James J. Truchard and Alexander M.
Davern, jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and conforming all that each of said attorneys-in-fact, or his
substitute or substitutes, any do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
- --------------------------------------------------------------------------------
Signature Capacity in Which Signed Date
- --------------------------------------------------------------------------------
/s/ James J. Truchard Chairman of the Board and
Dr. James J. Truchard President (Principal Executive March 11, 1999
Officer)
- --------------------------------------------------------------------------------
/s/ Alexander M. Davern Chief Financial Officer
Alexander M. Davern and Treasurer (Principal Financial March 12, 1999
and Accounting Officer)
- --------------------------------------------------------------------------------
/s/ Jeffrey L. Kodosky Director March 11, 1999
Jeffrey L. Kodosky
- --------------------------------------------------------------------------------
/s/ William C. Nowlin Director March 11, 1999
William C. Nowlin, Jr.
- --------------------------------------------------------------------------------
/s/ L. Wayne Ashby Director March 11, 1999
L. Wayne Ashby
- --------------------------------------------------------------------------------
/s/ Donald M. Carlton Director March 12, 1999
Dr. Donald M. Carlton
- --------------------------------------------------------------------------------
/s/ Ben G. Streetman Director March 12, 1999
Ben G. Streetman
- --------------------------------------------------------------------------------
-31-
NATIONAL INSTRUMENTS CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page No.
Financial Statements:
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Income for the Three Years Ended
December 31, 1998 F-4
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 1998 F-5
Consolidated Statements of Stockholders' Equity for the Three
Years Ended December 31, 1998 F-6
Notes to Consolidated Financial Statements F-7
Financial Statement Schedules:
For the Three Years Ended December 31, 1998
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
-F1-
Report of Independent Accountants
To the Board of Directors and Stockholders of National Instruments Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income and stockholders' equity and of cash
flows, present fairly, in all material respects, the financial position of
National Instruments Corporation and its subsidiaries at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Austin, Texas
January 22, 1999
-F2-
Consolidated Balance Sheets
(In thousands, except share data)
Assets
December 31,
---------------------
1998 1997
--------- ---------
Current assets:...........................
Cash and cash equivalents................ $ 51,538 $ 31,943
Short-term investments................... 49,158 51,067
Accounts receivable, net................. 45,622 37,411
Inventories.............................. 16,454 15,505
Prepaid expenses and other current assets 6,687 5,387
Deferred income tax, net................. 4,937 7,900
--------- ---------
Total current assets.................. 174,396 149,213
Property and equipment, net............... 66,131 46,805
Intangibles............................... 9,259 8,472
========= =========
Total assets.......................... $ 249,786 $ 204,490
========= =========
Liabilities and Stockholders' Equity
Current liabilities:......................
Current portion of long-term debt........ $ 849 $ 851
Accounts payable......................... 17,242 16,946
Accrued compensation..................... 7,895 8,219
Accrued expenses and other liabilities... 5,011 2,455
Income taxes payable..................... 5,893 4,871
Other taxes payable...................... 3,996 3,729
--------- ----------
Total current liabilities............. 40,886 37,071
Long-term debt, net of current portion.... 4,379 5,151
Deferred income taxes..................... 337 514
--------- ----------
Total liabilities..................... 45,602 42,736
--------- ----------
Commitments and contingencies............. --- ---
Stockholders' equity:
Common stock: par value $.01; 60,000,000
shares authorized; 32,942,740 and
32,656,473 shares issued and outstanding,
respectively.......................... 329 326
Additional paid-in capital................ 51,662 47,160
Retained earnings......................... 153,601 116,215
Accumulated other comprehensive loss...... (1,408) (1,947)
--------- ----------
Total stockholders' equity............ 204,184 161,754
--------- ----------
Total liabilities and stockholders' equity $ 249,786 $ 204,490
========= ==========
The accompanying notes are an integral part of these financial statements.
-F3-
Consolidated Statements of Income
(In thousands, except per share data)
For the Years
Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
Net sales....................... $ 274,230 $ 240,879 $ 200,715
Cost of sales................... 65,187 55,096 49,755
---------- ---------- ----------
Gross profit................... 209,043 185,783 150,960
---------- ---------- ----------
Operating expense:
Sales and marketing.......... 100,783 87,096 72,067
Research and development..... 34,757 30,296 24,387
General and administrative... 20,455 18,508 17,129
---------- ---------- ----------
Total operating expenses..... 155,995 135,900 113,583
---------- ---------- ----------
Operating income............. 53,048 49,883 37,377
Other income (expense):
Interest income.............. 3,439 3,455 2,405
Interest expense............. (463) (502) (844)
Net foreign exchange loss ... (224) (2,649) (899)
---------- ---------- ----------
Income before income taxes... 55,800 50,187 38,039
Provision for income taxes...... 18,414 16,562 12,553
========== ========== ==========
Net income................... $ 37,386 $ 33,625 $ 25,486
========== ========== ==========
Basic earnings per share........ $ 1.14 $ 1.03 $ 0.79
========== ========== ==========
Weighted average shares
outstanding-basic............... 32,832 32,563 32,359
========== ========== ==========
Diluted earnings per share...... $ 1.10 $ 1.00 $ 0.77
========== ========== ==========
Weighted average shares
outstanding-diluted............. 34,100 33,656 32,943
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
-F4-
Consolidated Statements of Cash Flows
(In thousands)
For the Years Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
Cash flow from operating activities:
Net income............................... $ 37,386 $ 33,625 $ 25,486
Adjustments to reconcile net income to
cash provided by operating activities:
Charges to income not requiring cash
outlays:
Depreciation and amortization........ 11,638 8,715 9,210
Provision for (benefit from) deferred
income taxes......................... 1,529 (3,072) (779)
Purchase of in-process research &
development.......................... --- 1,400 1,000
Changes in operating assets and
liabilities:
Increase in accounts receivable...... (5,678) (4,059) (4,715)
(Increase) decrease in inventory..... (605) (4,335) 3,275
Increase in prepaid expenses and
other assets......................... (1,162) (5,753) (402)
Increase in accounts payable......... 1,128 4,741 2,582
Increase in accrued expenses and
other liabilities.................... 1,730 1,199 4,620
---------- ---------- ----------
Net cash provided by operating activities 45,966 32,461 40,277
---------- ---------- ----------
Cash flow from investing activities:
Payments for acquisitions, net of cash
received................................ (1,519) (2,000) (1,200)
Capital expenditures..................... (27,985) (21,998) (6,811)
Additions to intangibles................. (2,667) (2,102) (1,568)
Purchases of short-term investments...... (52,188) (48,408) (68,790)
Sales of short-term investments.......... 54,097 46,298 57,619
---------- ---------- ----------
Net cash used in investing activities..... (30,262) (28,210) (20,750)
---------- ---------- ----------
Cash flow from financing activities:
Repayments of long-term debt............. (824) (4,640) (3,017)
Net proceeds from issuance of common
stock under employee plans.............. 4,505 2,874 1,891
---------- ---------- ----------
Net cash provided by (used in) financing
activities............................... 3,681 (1,766) (1,126)
---------- ---------- ----------
Effects of translation rate changes on cash 210 (753) (206)
---------- ---------- ----------
Net increase in cash and cash equivalents. 19,595 1,732 18,195
Cash and cash equivalents at beginning of
period................................... 31,943 30,211 12,016
========== ========== ==========
Cash and cash equivalents at end of period $ 51,538 $ 31,943 $ 30,211
========== ========== ==========
Cash paid for interest and income taxes
Interest................................. $ 499 $ 451 $ 904
========== ========== ==========
Income taxes............................. $ 16,008 $ 21,490 $ 11,135
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
-F5-
Consolidated Statements of Stockholders' Equity
(In thousands, except share data)
Accumulated
Other Total
Common Common Additional Compre- Stock- Compre-
Stock Stock Paid-In Retained hensive holders' hensive
(Shares) Amount Capital Earnings Loss Equity Income
---------- -------- ---------- -------- ----------- --------- --------
Balance at December
31, 1995.............. 32,207,844 $ 322 $ 41,170 $ 57,104 $ 140 $ 98,736
Comprehensive income
Net income.......... --- --- --- 25,486 --- 25,486 $25,486
Foreign currency
translation
adjustment and
other.............. --- --- --- --- (389) (389) (389)
========
Comprehensive income 25,097
========
Issuance of common
stock in connection
with acquisition...... 91,374 1 1,228 --- --- 1,229
Issuance of common
stock under employee
plans................. 164,143 2 1,889 --- --- 1,891
- ---------------------------------------------------------------------------------------------------
Balance at December
31, 1996.............. 32,463,361 325 44,287 82,590 (249) 126,953
Comprehensive income
Net income.......... --- --- --- 33,625 --- 33,625 33,625
Foreign currency
translation
adjustment and
other.............. --- --- --- --- (1,698) (1,698) (1,698)
========
Comprehensive income 31,927
========
Issuance of common
stock under employee
plans................. 193,112 1 2,873 --- --- 2,874
- ---------------------------------------------------------------------------------------------------
Balance at December
31, 1997.............. 32,656,473 326 47,160 116,215 (1,947) 161,754
Comprehensive income
Net income.......... --- --- --- 37,386 --- 37,386 37,386
Foreign currency
translation
adjustment and
other.............. --- --- --- --- 539 539 539
========
Comprehensive income $37,925
========
Issuance of common
stock under employee
plans................. 286,267 3 4,502 --- --- 4,505
- ---------------------------------------------------------------------------------------------------
Balance at December
31, 1998.............. 32,942,740 $ 329 $ 51,662 $153,601 $ (1,408) $204,184
========== ======== ========== ======== =========== =========
The accompanying notes are an integral part of these financial statements.
-F6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Operations and summary of significant accounting policies
National Instruments Corporation (the "Company") was incorporated on May
14, 1976 under the laws of the State of Texas. On June 10, 1994, the Company was
reincorporated in Delaware. On March 13, 1995, the Company completed an initial
public offering of shares of its common stock. The offering and the exercise of
the over-allotment option by the underwriters generated net cash proceeds of
$39.6 million.
The Company engages in the design, development, manufacture and marketing
of instrumentation software and specialty interface cards for general
commercial, industrial and scientific applications. The Company offers hundreds
of products used to create virtual instrumentation systems. The Company has
identified two major markets for its products: test and measurement and
industrial automation. The Company's products may be used in either environment,
and consequently, specific application of the Company's products is determined
by the customer and often is not known to the Company at the time of sale. The
Company approaches both markets with essentially the same products which are
used in a variety of applications from research and development to production
testing and industrial control. The following industries and applications are
served worldwide by the Company: advanced research, automotive, commercial
aerospace, computers and electronics, continuous process manufacturing,
education, government/defense, medical research/pharmaceutical, power/energy,
semiconductors, automated test equipment, telecommunications and others.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Use of estimates
Judgments and estimates by management are required in the preparation of
financial statements to conform with generally accepted accounting principles.
The estimates and underlying assumptions affect the reported amounts of assets
and liabilities, the disclosure of contingencies at the balance sheet date and
the reported revenues and expenses for the period. Actual results could differ
from those estimates.
Cash and cash equivalents
Cash and cash equivalents include cash and highly liquid investments with
maturities of three months or less at the date of acquisition.
Short-term investments
Short-term investments consist of state and municipal securities with
readily determinable fair market values and original maturities in excess of
three months. The Company's investments are classified as available-for-sale and
accordingly are reported at fair value, with unrealized gains and losses
reported as other comprehensive income. Unrealized losses are charged against
income when a decline in fair value is determined to be other than temporary.
The specific identification method is used to determine the cost of securities
sold.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using standard costs which approximate the first in, first out (FIFO) method.
Cost includes the acquisition cost of purchased components, parts and
subassemblies, in-bound freight costs, labor and overhead. Market, with respect
to raw materials, is replacement cost and, with respect to work-in-process and
finished goods, is net realizable value.
Property and equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, which
range from twenty to forty years for buildings and three to five years for
equipment. Leasehold improvements are depreciated over the shorter of the life
of the lease or the asset.
-F7-
Intangible assets
The Company has capitalized costs related to the development and
acquisition of certain software products. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86 "Accounting for the Costs of
Computer Software to Be Sold, Leased or Otherwise Marketed," capitalization of
costs begins when technological feasibility has been established and ends when
the product is available for general release to customers. Amortization is
computed on an individual product basis for those products available for market
and has been recognized based on the product's estimated economic life,
generally three years. Intangible assets are periodically assessed for
impairment of value and any loss is recognized upon impairment.
Concentrations of credit risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of foreign currency forward
and option contracts, cash and cash equivalents, short-term investments and
trade accounts receivable. In management's opinion, no significant concentration
of credit risk exists for the Company.
The Company's counterparties in its foreign currency forward and option
contracts are major financial institutions. The Company does not anticipate
nonperformance by these counterparties. The Company maintains cash and cash
equivalents with various financial institutions located in many countries
worldwide. Company policy is to limit exposure in foreign countries by
transferring cash to the U.S. The Company's short-term investments are
diversified among and limited to high-quality securities with high credit
ratings. Concentration of credit risk with respect to trade accounts receivable
is limited due to the large number of customers and their dispersion across many
countries and industries. The amount of sales and trade accounts receivable to
any individual customer was not significant for the periods presented.
Revenue recognition
Sales revenue is recognized on the date the product is shipped to the
customer. Provision is made for estimated sales returns. Revenue related to the
sale of extended service contracts is deferred and amortized on a straight-line
basis over the service period. The Company adopted the AICPA Statement of
Position 97-2 "Software Revenue Recognition" which did not have a material
impact on the consolidated balance sheet or statement of income.
Accounts receivable are net of allowances for doubtful accounts of $3.7
million and $4.0 million at December 31, 1998 and 1997, respectively.
Warranty expense
The Company offers a one-year limited warranty on most hardware products
and a 90-day warranty on software products which is included in the sales price
of many of its products. Provision is made for estimated future warranty costs
at the time of sale.
Advertising expense
The Company expenses its costs of advertising as incurred. Advertising
expense for the years ended December 31, 1998, 1997 and 1996 is $31.3 million,
$27.1 million and $22.2 million, respectively.
Foreign currency translation
The functional currency for the Company's international operations is the
applicable local currency. The assets and liabilities of these operations are
translated at the rate of exchange in effect on the balance sheet date; sales
and expenses are translated at average rates. The resultant gains or losses from
translation are included in a separate component of other comprehensive income.
Gains and losses resulting from remeasuring monetary asset and liability
accounts that are denominated in a currency other than a subsidiary's functional
currency are included in determining net income.
Foreign currency hedging instruments
The Company enters into foreign currency forward contracts to hedge its
exposure on material foreign currency receivables. The Company does not hold or
issue financial instruments for trading purposes. These financial instruments
are carried at market value, which is measured on the basis of spot rates on the
balance sheet date. Realized and unrealized gains and losses on the forward
contracts are netted against the related foreign currency loss or gain and
included in other income for the period.
-F8-
The Company uses foreign currency purchased option contracts to hedge
anticipated transactions for periods not exceeding twelve months. Realized and
unrealized gains and premiums of foreign currency purchased option contracts
that are designated and effective as hedges of anticipated transactions are
deferred and recognized in income in the same period as the hedged transaction.
The risk of loss associated with purchased options is limited to premium amounts
paid for the contracts, which could be significant.
Income taxes
The provision for income taxes is based on pretax financial accounting
income. Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts. Valuation allowances are established
when necessary to reduce deferred tax assets to amounts which are more likely
than not to be realized.
Earnings per share
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted average number of common shares outstanding during each period. Diluted
EPS is computed by dividing net income by the weighted average number of common
shares and common share equivalents outstanding (if dilutive) during each
period. Common share equivalents include stock options. The number of common
share equivalents outstanding relating to stock options is computed using the
treasury stock method.
The reconciliation of the denominators used to calculate the basic EPS and
diluted EPS for the years ended December 31, 1998, 1997 and 1996, respectively
is as follows (in thousands):
Years Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
Weighted average shares
outstanding-basic................ 32,832 32,563 32,359
Plus: Common share equivalents
Stock options.................. 1,268 1,093 584
---------- ---------- ----------
Weighted average shares
outstanding-diluted.............. 34,100 33,656 32,943
========== ========== ==========
Stock options to acquire 763,124, 14,285 and 3,762 shares for the years
ended December 31, 1998, 1997 and 1996, respectively were not included in the
computations of diluted earnings per share because the effect of including stock
options would have been anti-dilutive.
Stock-based compensation plans
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." As allowed by SFAS No. 123, the
Company continues to apply the provisions of Accounting Principles Board Opinion
No. 25 "Accounting for Stock issued to Employees" and related interpretations in
accounting for its plans. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock.
Comprehensive income
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." The standard, which was 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. The Company adopted this standard in
the first quarter of 1998 and has reclassified prior year financial statements
to reflect the provisions of this statement.
-F9-
Note 2: Short-term investments
Short-term investments at December 31, 1998 and 1997, consisting of state
and municipal securities, were acquired at an aggregate cost of $49.1 million
and $51.1 million, respectively. The contractual maturities of these securities,
which are classified as available-for-sale and carried at fair value, are as
follows (in thousands):
December 31,
-------------------
1998 1997
-------- --------
90 days to one year........... $ 26,639 $ 38,724
One year through two years.... 22,519 12,343
-------- --------
$ 49,158 $ 51,067
======== ========
Note 3: Inventories
Inventories consist of the following (in thousands):
December 31,
-------------------
1998 1997
-------- --------
Raw materials................. $ 7,194 $ 6,985
Work-in-process............... 943 1,315
Finished goods................ 8,317 7,205
-------- --------
$ 16,454 $ 15,505
======== ========
Note 4: Property and equipment
Property and equipment consist of the following (in thousands):
December 31,
-------------------
1998 1997
-------- --------
Land.......................... $ 4,006 $ 4,006
Buildings..................... 43,894 16,873
Furniture and equipment....... 56,956 40,839
-------- --------
104,856 61,718
Accumulated depreciation...... (38,725) (30,922)
Construction in process....... -- 16,009
-------- --------
$ 66,131 $ 46,805
======== ========
Depreciation expense for the years ended December 31, 1998, 1997 and 1996,
is $8.9 million, $7.1 million and $7.1 million, respectively.
Note 5: Intangibles
Intangibles at December 31, 1998 and 1997 include capitalized software
development costs of $3.9 million and $3.4 million, respectively, which are net
of accumulated amortization of $3.8 million and $7.1 million, respectively.
Total amortization costs were $2.8 million, $1.6 million and $2.1 million for
the years ended December 31, 1998, 1997 and 1996, respectively. Substantially
all of these amounts were amortization of software development costs.
-F10-
Note 6: Debt
Debt consists of the following (in thousands): December 31,
----------------
1998 1997
------- -------
Short-term debt: Revolving line, LIBOR (5.63% at
December 31, 1998), $20,000,000 commitment,
matures December 31, 1999.......................... $ --- $ ---
======= =======
Long-term debt: Manufacturing facility loan, LIBOR
(5.63% at December 31, 1998), $8,480,000 commitment,
half the principal is payable, together with
interest, in equal quarterly installments over a
five-year term, beginning September 1995,
remainder due at maturity at February 28, 2001..... $ 5,151 $ 6,002
Other............................................. 77 ---
------- -------
Total debt........................................ 5,228 6,002
Less current portion........................... 849 851
------- -------
Long-term portion................................. $ 4,379 $ 5,151
======= =======
The terms of the Company's debt agreements include various covenants which
require, among other things, a minimum tangible net worth of $154.0 million.
First security interests are in land and building of the manufacturing and
corporate headquarter site.
Long-term debt maturing in years 1999 and 2000 is $849,000 per year and
$3.5 million in 2001.
Note 7: Income taxes
The components of income before the provision for income taxes are as
follows (in thousands):
Years Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
Domestic.......... $ 46,817 $ 42,400 $ 35,108
Foreign........... 8,983 7,787 2,931
---------- ---------- ----------
$ 55,800 $ 50,187 $ 38,039
========== ========== ==========
The provision for income taxes charged to operations is as follows (in
thousands):
Years Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
Current tax expense
U.S. federal... $ 11,945 $ 15,140 $ 10,234
State.......... 1,109 1,468 985
Foreign........ 3,831 3,026 2,113
---------- ---------- ----------
Total current..... 16,885 19,634 13,332
---------- ---------- ----------
Deferred tax expense
(benefit)
U.S. federal... 2,352 (2,719) (201)
State.......... 329 (227) (180)
Foreign........ (1,152) (126) (398)
---------- ---------- ----------
Total deferred.... 1,529 (3,072) (779)
---------- ---------- ----------
Total provision... $ 18,414 $ 16,562 $ 12,553
========== ========== ==========
-F11-
Deferred tax liabilities (assets) at December 31, 1998 and 1997 are as
follows (in thousands):
December 31,
----------------------
1998 1997
---------- ----------
Capitalized software.......... $ 1,068 $ 735
Unrealized exchange gain...... 192 ---
---------- ----------
Gross deferred tax liabilities 1,260 735
---------- ----------
Depreciation and amortization. (311) (842)
Operating loss carryforwards.. (1,774) (272)
Vacation and other accruals... (1,358) (1,385)
Inventory valuation and warranty (1,246) (2,225)
provisions....................
Doubtful accounts and sales (1,311) (1,362)
provisions....................
Unrealized exchange loss...... --- (649)
Intercompany profit........... (599) (762)
Undistributed earnings of foreign (525) (364)
subsidiaries..................
Other......................... (615) (615)
---------- ----------
Gross deferred tax assets.. (7,739) (8,476)
---------- ----------
Valuation allowance........... 303 269
---------- ----------
Net deferred tax asset........ $ (6,176) $ (7,472)
========== ==========
The increase in the deferred tax assets valuation allowance in 1998 of
$34,000 is attributable to the operating losses in foreign jurisdictions the
benefits of which are not assured of realization at December 31, 1998.
A reconciliation of income taxes at the U.S. federal statutory income tax
rate to the effective tax rate follows:
Years Ended December 31,
------------------------
1998 1997 1996
------ ------ ------
U.S. federal statutory tax rate.............. 35% 35% 35%
Foreign sales corporation benefit............ (2) (1) (2)
Loss from unconsolidated foreign subsidiaries --- --- 1
Foreign tax credits utilized................. --- (1) (2)
Tax exempt interest.......................... (2) (2) (2)
State income taxes, net of federal tax benefit 2 2 2
Other........................................ --- --- 1
------ ------ ------
Effective tax rate........................ 33% 33% 33%
====== ====== ======
As of December 31, 1998, seven of the Company's subsidiaries have
available, for income tax purposes, foreign net operating loss carryforwards of
approximately $4.2 million, of which $3.5 million expire during the years 2000 -
2008 and $654,000 of which may be carried forward indefinitely.
A deferred income tax benefit of $161,000 was provided in 1998 for the
estimated foreign tax credits that will be utilized upon the anticipated future
repatriation of approximately $3.6 million of foreign undistributed earnings in
the form of dividends. The Company has not provided for U.S. federal income and
foreign withholding taxes on approximately $1.2 million of non-U.S.
subsidiaries' undistributed earnings as of December 31, 1998, because such
earnings are intended to be reinvested indefinitely. These earnings would become
subject to U.S. tax and foreign withholding tax, if they are actually or deemed
to be remitted to the parent company as dividends or if the Company should sell
its stock in these subsidiaries. If these earnings were distributed, foreign tax
credits should become available under current law to reduce or eliminate the
resulting U.S. income tax and foreign withholding tax liabilities.
-F12-
Note 8: Acquisitions
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
acquisition was accounted for as a purchase. The results of Datalog's operations
have been combined with those of the Company since the date of the acquisition.
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 expense
had not been taken, net income for the year ended December 31, 1998 would have
been $37.9 million or $1.11 per share-diluted.
In 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 results of nuLogic's operations
have been combined with those of the Company since the date of acquisition.
In 1996, the Company acquired all of the issued and outstanding shares of
common stock of Georgetown Systems, Inc. ("GSI") for an aggregate purchase price
of approximately $2.0 million, paid with 91,374 unregistered shares of the
Company's common stock and $764,000 in cash. The acquisition was accounted for
as a purchase. The results of GSI's operations have been combined with those of
the Company since the date of acquisition. Also in 1996, the Company purchased
imaging acquisition software technology for $500,000.
Note 9: Stockholders' equity
Common stock
The Company's reincorporation into Delaware on June 10, 1994 resulted in a
change in par value from no par to $.01 par value per share. All outstanding
stock was exchanged on a one-for-one basis as of the date of reincorporation.
The reincorporation increased the Company's authorized stock to 60,000,000
shares of Common Stock and 5,000,000 shares of Preferred Stock. Additionally,
the Company effected a six-for-one stock split on January 11, 1995, the date of
filing the Company's initial registration statement with the Securities and
Exchange Commission.
On October 15, 1997, the Company declared a stock split effected in the
form of a dividend of one share of common stock for each two shares outstanding.
The dividend was paid on November 12, 1997 to holders of record as of the close
of business on October 28, 1997.
All share information included in the accompanying consolidated financial
statements and notes has been retroactively adjusted to reflect the exchange and
stock splits.
Stock-based compensation plans
At December 31, 1998, the Company has two active stock-based compensation
plans and one inactive plan. The two active stock-based compensation plans are
the 1994 Incentive Stock Option Plan and the Employee Stock Purchase Plan. No
compensation cost has been recognized in the Company's financial statements for
the fixed stock option plan and the stock purchase plan. If compensation cost
for the Company's two active stock-based compensation plans were determined
based on the fair value at the grant date for awards under those plans
consistent with the method established by SFAS No. 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below (in thousands, except per share data).
Years Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
Net income As reported $ 37,386 $ 33,625 $ 25,486
Pro-forma 31,281 29,829 23,458
Basic earnings per share As reported $ 1.14 $ 1.03 $ 0.79
Pro-forma 0.95 0.92 0.72
Diluted earnings per share As reported $ 1.10 $ 1.00 $ 0.77
Pro-forma 0.92 0.89 0.71
-F13-
Stock option plans
The Company had a 1983 Incentive Stock Option Plan under which options were
granted to certain key employees pursuant to award agreements executed in 1983
(exercisable at $0.05 per share), 1985 (exercisable at $0.11 per share) and 1989
(exercisable at $1.55 per share). This plan terminated on November 30, 1993.
Under the plan, options were granted at a price not less than fair market value
on the date of grant. All options must be exercised within ten years of the date
of grant.
The stockholders of the Company approved the 1994 Incentive Stock Option
Plan on May 9, 1994. At the time of approval, 4,050,000 shares of the Company's
common stock were reserved for issuance under this plan. In 1997, an additional
3,150,000 shares of the Company's common stock were reserved for issuance under
this plan. The 1994 Plan, administered by the Compensation Committee of the
Board of Directors, provides for granting of incentive awards in the form of
stock options to directors, executive officers and employees of the Company and
its subsidiaries. Awards under the plan must be granted within ten years of the
effective date of the 1994 Plan. Options granted may be either incentive stock
options within the meaning of Section 422 of the Internal Revenue Code or
nonqualified options. The right to purchase shares vests over a five to ten year
period, beginning on the date of grant. Stock options must be exercised within
ten years from date of grant. Stock options are issued at market price at the
grant date. Shares available for grant at December 31, 1998 were 3,327,089.
Transactions under all plans are summarized as follows:
Number of Weighted
shares average
under exercise
option price
---------------- ----------------
Outstanding at December 31, 1995. 1,028,445 $ 9.07
Exercised..................... (13,763) 10.14
Canceled...................... (88,976) 11.57
Granted....................... 1,081,725 13.58
---------------- ----------------
Outstanding at December 31, 1996. 2,007,431 11.39
Exercised..................... (62,754) 11.52
Canceled...................... (151,898) 15.47
Granted....................... 1,245,402 22.10
---------------- ----------------
Outstanding at December 31, 1997. 3,038,181 15.57
Exercised..................... (163,127) 7.67
Canceled...................... (134,875) 21.86
Granted....................... 987,910 33.80
---------------- ----------------
Outstanding at December 31, 1998. 3,728,089 $ 20.54
================ ================
Options exercisable at December 31:
1996.......................... 410,841 $ 9.98
1997.......................... 801,970 12.07
1998.......................... 1,237,201 15.43
Weighted average, grant date fair Weighted average
value of options granted during: fair value
----------------
1996.......................... 1,081,725 $ 6.25
1997.......................... 1,245,402 10.15
1998.......................... 987,910 15.50
December 31, 1998
- --------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- ---------------------------------------------------- -------------------------
Weighted
Weighted average Weighted
Number of average remaining Number of average
Exercise options exercise contractual options exercise
price outstanding price life (yrs) exercisable price
- -------------- ----------- --------- ----------- ----------- ---------
$ 1.55 - 1.55 18,000 $ 1.55 1 --- $ 1.55
9.67 - 13.17 731,315 9.83 6 455,872 9.82
13.33 - 21.08 929,185 13.74 7 420,615 13.67
21.67 - 21.67 982,356 21.67 8 262,692 21.67
22.25 - 35.00 1,067,233 33.09 9 98,022 32.39
----------- -----------
1.55 - 35.00 3,728,089 20.54 8 1,237,201 15.43
-F14-
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
1998 1997 1996
---------- ---------- ----------
Dividend expense yield 0% 0% 0%
Expected life......... 5 years 7.2 years 7.2 years
Expected volatility... 33.3% 30.6% 30.6%
Risk-free interest rate 5.6% 6.3% 6.3%
Employee stock purchase plan
The Company's stock purchase plan became effective March 13, 1995 upon the
first date of registration of the Company's Common Stock. The plan permits
substantially all domestic employees and employees of designated subsidiaries to
acquire the Company's Common Stock at a purchase price of 85% of the lower of
the market price at the beginning or the end of the participation period. The
semi-annual periods begin on October 1 and April 1 of each year. Employees may
designate up to 15% of their compensation for the purchase of Common Stock.
Common Stock reserved for future employee purchases aggregated 1,876,875 shares
at December 31, 1998. Shares issued under this plan were 124,258 in 1998. The
fair value of the employees' purchase rights was estimated using the
Black-Scholes model with the following assumptions:
1998 1997 1996
---------- ---------- ----------
Dividend expense yield 0% 0% 0%
Expected life......... 6 months 6 months 6 months
Expected volatility... 40% 50% 60%
Risk-free interest rate 5.31% 5.22% 5.22%
Weighted average, grant date
fair value of purchase
rights granted under the Number of Weighted average
Employee Stock Purchase Plan: shares fair value
---------------- ----------------
1996..................... 140,403 $ 4.77
1997..................... 117,373 7.68
1998..................... 130,119 7.74
Stockholders' rights plan
The Board of Directors and stockholders approved and adopted the Rights
Agreement prior to the Company's initial public offering (the "offering"). On
March 13, 1995, the effective date of the offering, the Board of Directors
declared a dividend distribution of one common share purchase right for each
outstanding share of Common Stock. The rights become exercisable under certain
conditions involving acquisition of the Company's Common Stock. Under certain
other conditions where the Company is consolidated or merged, each holder of a
right shall have the right to receive, upon exercise of the right, shares of
Common Stock of the Company, or acquiring company, having a value of twice the
exercise price of the right. The rights expire on March 13, 2005, and may be
redeemed in whole by the Company for $.01 per right. The rights are excluded
from earnings per share computations because they qualify as contingent shares
and therefore are excluded as long as the conditions that require issuance of
the shares are not imminent.
Note 10: Employee retirement plan
The Company has a defined contribution retirement plan pursuant to Section
401(k) of the Internal Revenue Code. Substantially all domestic employees with
at least one year of continuous service are eligible to participate and may
contribute up to 15% of their compensation. The Board of Directors has elected
to make matching contributions equal to 50% of employee contributions, which may
be applied to a maximum of 6% of each participant's compensation. Company
contributions vest immediately. Company contributions charged to expense were
$933,000, $799,000 and $686,000 in 1998, 1997 and 1996, respectively.
-F15-
Note 11: Financial instruments
Fair value of financial instruments
The estimated fair value amounts disclosed below have been determined by
the Company using available market information and valuation methodologies
described below. However, considerable judgment is required in interpreting
market data to develop these estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the Company
could realize in a current market exchange. The use of different market
assumptions could have a significant effect on the estimates. For certain
financial instruments of the Company, including cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities, the carrying
amount approximates fair value due to the short-term maturity of these
instruments. The estimated fair values of the other assets (liabilities) of the
Company's remaining financial instruments at December 31, 1998 and 1997 are as
follows (in thousands):
December 31,
------------------------------------------------
1998 1997
---------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- ----------- --------- -----------
Short-term investments $ 49,158 $ 49,158 $ 51,067 $ 51,067
Other assets/liabilities:
Forward contracts (1,151) (1,151) 662 662
Purchased options 1,194 467 740 816
Long-term debt...... (4,379) (3,899) (5,151) (4,379)
The fair values of short-term investments and foreign exchange purchased
option contracts were estimated based upon quotes from brokers as of the
applicable balance sheet date. Foreign currency forward contracts' fair values
are estimates using quoted exchange rates at the applicable balance sheet date.
The fair value of long-term debt was estimated by discounting the future cash
flows using rates currently available for debt of similar terms and maturity.
Foreign currency hedging
The Company uses foreign currency forward contracts to hedge its exposure
on material foreign currency receivables. The risk of loss associated with
forward contracts is equal to the exchange rate differential from the time the
contract is entered into until the time it is settled. These foreign currency
forward contracts are for 90 day periods. At December 31, 1998, the Company held
forward contracts with a notional amount of $22.3 million, a carrying amount of
($1.2) million and a net realized loss of $1.2 million.
In addition to utilizing forward contracts to hedge the Company's foreign
currency receivables, the Company has entered into foreign currency purchased
option contracts to hedge a percentage of planned net foreign currency cash
flows. The maturities on these instruments are 12 months or less. At December
31, 1998, the Company held purchased option contracts with a notional amount of
$50.5 million, a carrying amount of $1.2 million and a net unrealized deferred
loss of $727,000. The carrying amount represents premiums deferred and was
recorded in prepaid expenses and other current assets.
Foreign currency forward and purchased option contracts reduced the
Company's net foreign exchange gain for December 31, 1998 by $1.9 million, and
reduced the net foreign exchange loss for December 31, 1997 and 1996 by $2.0
million and $674,000, respectively.
Note 12: Segment information
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 supersedes SFAS No. 14 "Financial Reporting for
Segments of a Business Enterprise", replacing the "industry segment" approach
with the "management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. It
also requires disclosures about products and services, geographic areas and
major customers.
-F16-
While the Company sells its products to many different markets, its
management has chosen to organize the Company by geographic areas, and as a
result has determined that it has one reportable segment. Substantially all of
the interest income, interest expense, depreciation and amortization is recorded
in North America. Net sales, operating income and identifiable assets,
classified by the major geographic areas in which the Company operates, are as
follows (in thousands):
Years Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
Net sales:
North America:
Unaffiliated customer sales.......... $ 153,435 $ 141,180 $ 114,382
Geographic transfers................. 32,451 29,128 26,388
---------- ---------- ----------
185,886 170,308 140,770
---------- ---------- ----------
Europe:
Unaffiliated customer sales.......... 86,961 66,318 58,108
---------- ---------- ----------
Asia Pacific:
Unaffiliated customer sales.......... 33,834 33,381 28,225
---------- ---------- ----------
Eliminations........................... (32,451) (29,128) (26,388)
---------- ---------- ----------
$ 274,230 $ 240,879 $ 200,715
========== ========== ==========
Year Ended
December
31,
----------
1998
----------
Operating income:
North America.......................... $ 44,669
Europe................................. 29,964
Asia Pacific........................... 13,172
Unallocated:
Research and development expenses...... (34,757)
----------
$ 53,048
==========
The Company's segment operating income disclosure for 1998 has been
conformed to the presentation required by SFAS No. 131. Management believes that
the cost to develop comparative segment operating income information for prior
years would be excessive and accordingly, will not be presented.
December 31,
----------------------
1998 1997
---------- ----------
Identifiable assets:
North America.......................... $ 204,215 $ 169,895
Europe................................. 29,978 22,472
Asia Pacific........................... 15,593 12,123
---------- ----------
$ 249,786 $ 204,490
========== ==========
Note 13: Commitments and contingencies
The Company has commitments under noncancelable operating leases primarily
for office facilities and equipment. Future minimum lease payments as of
December 31, 1998, for each of the next five years are as follows (in
thousands):
1999........................ $ 724
2000........................ 557
2001........................ 337
2002........................ 119
2003........................ 5
Thereafter.................. ---
--------
$ 1,742
========
-F17-
Rent expense under operating leases was approximately $2.6 million, $5.0
million and $4.2 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
Note 14: Quarterly results (unaudited)
The following quarterly results have been derived from unaudited
consolidated financial statements that, in the opinion of management, reflect
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of such quarterly information. The operating results for any
quarter are not necessarily indicative of the results to be expected for any
future period. The unaudited quarterly financial data for each of the eight
quarters in the two years ended December 31, 1998 are as follows (in thousands,
except per share data):
Three Months Ended
----------------------------------------------
March June Sept. Dec.
31, 30, 30, 31,
1998 1998 1998 1998
---------- ---------- ---------- ----------
Net sales..................... $ 65,353 $ 67,770 $ 67,874 $ 73,233
Gross profit.................. 49,784 51,681 51,588 55,990
Operating income.............. 12,784 13,033 11,994 15,237
Net income.................... 8,831 9,198 8,527 10,830
Basic earnings per share...... $ 0.27 $ 0.28 $ 0.26 $ 0.33
Weighted average shares
outstanding-basic............. 32,668 32,800 32,850 32,934
Diluted earnings per share.... $ 0.26 $ 0.27 $ 0.25 $ 0.32
Weighted average shares
outstanding-diluted........... 34,100 34,200 33,950 34,100
Three Months Ended
----------------------------------------------
March June Sept. Dec.
31, 30, 30, 31,
1997 1997 1997 1997
---------- ---------- ---------- ----------
Net sales..................... $ 54,571 $ 60,092 $ 60,595 $ 65,621
Gross profit.................. 42,278 46,083 46,381 51,041
Operating income.............. 11,569 12,401 10,717 15,196
Net income.................... 7,568 8,581 7,599 9,877
Basic earnings per share...... $ 0.23 $ 0.26 $ 0.23 $ 0.30
Weighted average shares 32,475 32,552 32,572 32,651
outstanding-basic.............
Diluted earnings per share.... $ 0.23 $ 0.26 $ 0.23 $ 0.29
Weighted average shares 33,450 33,435 33,750 34,003
outstanding-diluted
Note 15: Subsequent event
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999; the Company has
elected to adopt SFAS No. 133 early on January 1, 1999. SFAS No. 133 requires
that all derivative instruments be recorded on the balance sheet at fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, depending on the type
of hedge transaction. For fair-value hedge transactions in which the Company is
hedging changes in an asset's, liability's, or firm commitment's fair value,
changes in the fair value of the derivative instrument will generally be offset
in the income statement by changes in the hedged item's fair value. For
cash-flow hedge transactions in which the Company is hedging the variability of
cash flows related to a variable-rate asset, liability, or a forecasted
transaction, changes in the fair value of the derivative instrument will be
reported in other comprehensive income. The gains and losses on the derivative
instrument that are reported in other comprehensive income will be reclassified
as earnings in the periods in which earnings are impacted by the variability of
the cash flows of the hedged item. The ineffective portion of all hedges will be
recognized in current-period earnings.
The Company will record an adjustment to reflect all derivative instruments
at fair value as of January 1, 1999. This adjustment will be recorded through a
net-of-tax cumulative effect type adjustment of approximately $530,000.
-F18-
SCHEDULE II
NATIONAL INSTRUMENTS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS(1)
(In thousands)
Allowance for doubtful accounts
Balance Provision Balance
at for Write-Offs at
Year Description Beginning Bad Debt Charged to End of
of Period Expense Allowances Period
- ---- ---------------------- --------- ---------- ---------- --------
1996 Allowance for doubtful
accounts $ 1,601 $ 1,490 $ 671 $ 2,420
1997 Allowance for doubtful
accounts 2,420 1,914 334 4,000
1998 Allowance for doubtful
accounts 4,000 183 513 3,670
Valuation allowances for excess and obsolete inventory
Balance Provision Balance
at Charged to Write-Offs at
Year Description Beginning Cost of Charged to End of
of Period Sales Allowances Period
- ---- ------------------------ --------- ---------- ---------- --------
1996 Valuation allowances for
excess and
obsolete inventory $ 1,801 $ 1,138 $ 1,093 $ 1,846
1997 Valuation allowances for
excess and
obsolete inventory 1,846 1,829 515 3,160
1998 Valuation allowances for
excess and
obsolete inventory 3,160 --- 1,356 1,804
(1) Deferred tax assets valuation is omitted as required information. This
information is shown in Note 7 to the consolidated financial statements.
EXHIBIT 11.1
NATIONAL INSTRUMENTS CORPORATION AND SUBSIDIARIES
STATEMENTS RE: COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share data)
Years Ended December 31,
1998 1997 1996
---------- ---------- ----------
Net income $ 37,386 $ 33,625 $ 25,486
========== ========== ==========
Basic earnings per share $ 1.14 $ 1.03 $ 0.79
========== ========== ==========
Weighted average shares outstanding-basic 32,832 32,563 32,359
========== ========== ==========
Diluted earnings per share $ 1.10 $ 1.00 $ 0.77
========== ========== ==========
Weighted average shares outstanding-
diluted 34,100 33,656 32,943
========== ========== ==========
Calculation of weighted average shares:
Weighted average common stock 32,832 32,563 32,359
outstanding-basic
Weighted average common stock options,
utilizing the treasury stock method 1,268 1,093 584
---------- ---------- ----------
Weighted average shares outstanding-
diluted 34,100 33,656 32,943
========== ========== ==========
EXHIBIT 21.1
Subsidiaries of the Company
(Unless noted as a Texas corporation, all subsidiaries are formed under local
law.)
NI/GSI, Inc., a Texas corporation
N.I. Export (Barbados) Ltd., Barbados
National Instruments (Ireland) Limited, Ireland
National Instruments (Korea) Corporation, Korea
National Instruments Australia Corporation, a Texas corporation
National Instruments Belgium N.V., Belgium
National Instruments Brazil, Brazil
National Instruments Canada Corporation, a Texas corporation
National Instruments Corporation (UK) Limited, United Kingdom
National Instruments de Mexico, S.A. de C.V., Mexico
National Instruments Europe Corporation, a Texas corporation
National Instruments Finland Oy, Finland
National Instruments France Corporation, a Texas corporation
National Instruments Germany GmbH, Germany
National Instruments Gesellschaft m.b.H., Salzburg, Austria
National Instruments Hong Kong Limited, Hong Kong
National Instruments India Corporation, a Texas corporation
National Instruments International Distribution B.V., Netherlands
National Instruments Israel Ltd., Israel
National Instruments Italy s.r.l., Italy
National Instruments Japan Kabushiki Kaisha, Japan
National Instruments Netherlands B.V., Netherlands
National Instruments Netherlands Investments B.V., Netherlands
National Instruments Scandinavia Corporation, a Texas corporation
National Instruments Singapore (PTE) Ltd., Singapore
National Instruments Spain, S.L., Spain
National Instruments Sweden A.B., Sweden
National Instruments Switzerland Corporation, a Texas corporation
National Instruments Taiwan Corporation, a Texas corporation
NI Cayman Islands, Cayman Islands
Shanghai NI Instruments LTD (China)
Travis Investments C.V. (a limited partnership), Amsterdam
Visual Speed Sdn Bhd, Malaysia (subsidiary of NI Singapore)
DATALOG Systeme zur Messwerterfassung GmbH & Co. KG, Germany (subsidiary of NI
Germany)
DASYTEC USA, Incorporated (a New Hampshire corporation and subsidiary of DATALOG
Systeme zur Messwerterfassung GmbH & Co. KG)
EXHIBIT 23.1
Consent of Independent Accounts
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 of National Instruments Corporation of our report dated
January 22, 1999, appearing on page F-2 of the Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Austin, Texas
March 18, 1999