SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the fiscal quarter ended: March 31, 1999 or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to ________________
Commission file number: 0-25426
NATIONAL INSTRUMENTS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-1871327
- ------------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11500 North MoPac Expressway
Austin, Texas 78759
- ------------------------------------ ---------------------
(address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (512) 338-9119
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date
Class Outstanding at May 12, 1999
Common Stock - $0.01 par value 33,111,553
NATIONAL INSTRUMENTS CORPORATION
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets
March 31, 1999 (unaudited) and December 31, 1998...........4
Consolidated Statements of Income (unaudited)
three months ended March 31, 1999 and 1998.................5
Consolidated Statements of Cash Flows (unaudited)
three months ended March 31, 1999 and 1998................ 6
Notes to Consolidated Financial Statements.................7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................9
Item 3 Quantitative and Qualitative Disclosures about
Market Risk................................................... 15
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K...............................16
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, December 31,
1999 1998
---------- ------------
(unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents...................................... $61,244 $51,538
Short-term investments......................................... 52,492 49,158
Accounts receivable, net....................................... 47,156 45,622
Inventories.................................................... 16,304 16,454
Prepaid expenses and other current assets...................... 9,009 6,687
Deferred income tax, net....................................... 3,888 4,937
---------- ----------
Total current assets....................................... 190,093 174,396
Property and equipment, net........................................ 65,260 66,131
Intangibles and other assets....................................... 8,775 9,259
---------- ----------
Total assets............................................... $ 264,128 $ 249,786
========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Current portion of long-term debt.............................. $ 881 $ 849
Accounts payable............................................... 18,160 17,242
Accrued compensation........................................... 9,059 7,895
Accrued expenses and other liabilities......................... 3,765 5,011
Income taxes payable........................................... 9,101 5,893
Other taxes payable............................................ 3,559 3,996
---------- ----------
Total current liabilities.................................. 44,525 40,886
Long-term debt, net of current portion............................. 4,145 4,379
Deferred income taxes.............................................. 337 337
---------- ----------
Total liabilities.......................................... 49,007 45,602
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock: par value $.01; 180,000,000 shares authorized;
33,000,591 and 32,942,740 shares issued and
outstanding, respectively..................................... 333 329
Additional paid-in capital......................................... 52,194 51,662
Retained earnings.................................................. 163,609 153,601
Accumulated other comprehensive loss............................... (1,015) (1,408)
---------- ----------
Total stockholders' equity................................. 215,121 204,184
---------- ----------
Total liabilities and stockholders' equity................. $ 264,128 $ 249,786
========== ==========
The accompanying notes are an integral part of these financial statements.
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
-------------------------
1999 1998
---------- ----------
Net sales................................................. $ 73,686 $ 65,353
Cost of sales............................................. 16,940 15,569
---------- ----------
Gross profit.......................................... 56,746 49,784
---------- ----------
Operating expenses:
Sales and marketing................................... 27,023 24,530
Research and development.............................. 9,250 7,750
General and administrative............................ 5,307 4,720
---------- ----------
Total operating expenses.......................... 41,580 37,000
---------- ----------
Operating income.................................. 15,166 12,784
Other income (expense):
Interest income, net.................................. 942 670
Net foreign exchange loss............................. (579) (274)
---------- ----------
Income before income taxes and cumulative
effect of accounting change......................... 15,529 13,180
Provision for income taxes................................ 4,969 4,349
---------- ----------
Income before cumulative effect of accounting change...... 10,560 8,831
Cumulative effect of accounting change.................... (552) -
========== ==========
Net income....................................... $ 10,008 $ 8,831
========== ==========
Basic earnings per share:
Income before cumulative effect of accounting change $ 0.32 $ 0.27
Cumulative effect of accounting change, net of tax .. (0.02) -
---------- ----------
Basic earnings per share............................. $ 0.30 $ 0.27
========== ==========
Diluted earnings per share:
Income before cumulative effect of accounting change $ 0.31 $ 0.26
Cumulative effect of accounting change, net of tax .. (0.02) -
---------- ----------
Diluted earnings per share .......................... $ 0.29 $ 0.26
========== ==========
Weighted average shares outstanding:
Basic ............................................... 32,989 32,668
========== ==========
Diluted ............................................. 34,226 34,100
========== ==========
The accompanying notes are an integral part of these financial statements.
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31,
------------------------
1999 1998
--------- ---------
Cash flow from operating activities:
Net income................................................................... $10,008 $ 8,831
Adjustments to reconcile net income to cash provided by operating activities:
Charges to income not requiring cash outlays:
Depreciation and amortization........................................ 2,522 2,278
Changes in operating assets and liabilities:
Increase in accounts receivable...................................... (1,574) (2,434)
(Increase) decrease in inventory..................................... 150 (15)
(Increase) decrease in prepaid expenses and other assets............. (489) 658
Increase in current liabilities...................................... 3,611 3,650
--------- ---------
Net cash provided by operating activities................................ 14,228 12,968
--------- ---------
Cash flow from investing activities:
Capital expenditures......................................................... (1,048) (9,558)
Additions to intangibles .................................................... (511) (1,066)
Purchases of short-term investments.......................................... (41,176) (7,013)
Sales of short-term investments.............................................. 37,842 7,089
--------- ---------
Net cash used in investing activities.................................... (4,893) (10,548)
--------- ---------
Cash flow from financing activities:
Repayments of long-term debt................................................. (205) (208)
Net proceeds from issuance of common stock under employee plans.............. 536 308
--------- ---------
Net cash provided by financing activities................................ 331 100
--------- ---------
Effects of translation rate changes on cash...................................... 40 (105)
--------- ---------
Net increase in cash and cash equivalents........................................ 9,706 2,415
Cash and cash equivalents at beginning of period................................. 51,538 31,943
--------- ---------
Cash and cash equivalents at end of period....................................... $61,244 $34,358
========= =========
The accompanying notes are an integral part of these financial statements.
NATIONAL INSTRUMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Basis of Presentation
The accompanying unaudited financial statements should be read in conjunction
with the consolidated financial statements and notes thereto for the year ended
December 31, 1998, included in the Company's annual report on Form 10-K, filed
with the Securities and Exchange Commission. In the opinion of management, the
accompanying consolidated financial statements reflect all adjustments
(consisting only of normal recurring items) considered necessary to present
fairly the financial position of National Instruments Corporation and its
consolidated subsidiaries at March 31, 1999 and December 31, 1998, and the
results of operations and cash flows for the three-month periods ended March 31,
1999 and 1998. Operating results for the three-month period ended March 31, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999.
NOTE 2 - Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted average number of common shares outstanding during each period. Diluted
EPS is computed by dividing net income by the weighted average number of common
shares and common share equivalents outstanding (if dilutive) during each
period. Common share equivalents include stock options. The number of common
share equivalents outstanding relating to stock options is computed using the
treasury stock method.
The reconciliation of the denominators used to calculate basic EPS and diluted
EPS for the three-month periods ended March 31, 1999 and 1998, respectively, are
as follows (in thousands):
(unaudited)
March 31,
1999 1998
-------- --------
Weighted average shares outstanding-basic 32,989 32,668
Plus: Common share equivalents
Stock options 1,237 1,432
-------- --------
Weighted average shares outstanding-diluted 34,226 34,100
======== ========
At March 31, 1999 and March 31, 1998, options to acquire 909,000 and 129,000
shares, respectively, of common stock were not included in the computations of
diluted EPS because the effect of including the options would have been
anti-dilutive.
NOTE 3 - Inventories
Inventories consist of the following (in thousands):
March 31, December 31,
1999 1998
(unaudited)
----------- -----------
Raw materials $ 6,264 $ 7,194
Work-in-process 1,203 943
Finished goods 8,837 8,317
----------- -----------
$ 16,304 $ 16,454
=========== ===========
NOTE 4 - Comprehensive Income
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income" during the first quarter of 1998. The
Company's comprehensive income is comprised of net income, foreign currency
translation adjustments and unrealized gains and losses on certain investments
in debt and equity securities. Total comprehensive income for the quarters ended
March 31, 1999 and 1998 is $10.4 million and $8.7 million, respectively.
Reconciliation of accumulated other comprehensive loss (in thousands):
Balance at December 31, 1998 $ (1,408)
Current-period change 393
-----------------
Balance at March 31, 1999 $ (1,015)
=================
NOTE 5 - Adoption of SFAS 133
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," on January 1, 1999. In accordance with the transition
provisions of SFAS 133, the Company recorded a net-of-tax cumulative-effect type
adjustment of $552,000 in current earnings to recognize the fair value of its
derivatives designated as cash-flow hedging instruments.
Accounting for Derivatives and Hedging Activities
All of the Company's derivative instruments are recognized on the balance sheet
at their fair value. The Company currently uses foreign currency forward
contracts (to hedge its exposure to material foreign currency receivables and
planned net foreign currency cash flows) and foreign currency put options (to
hedge exposure to planned net foreign currency cash flows). On the date the
derivative contract is entered into, the Company designates its derivative as
either a hedge of the fair value of a recognized asset or liability ("fair
value" hedge), as a hedge of the variability of cash flows to be received ("cash
flow" hedge), or as a foreign-currency cash flow hedge ("foreign currency"
hedge). Changes in the fair value of a derivative that is highly effective as
and that is designated and qualifies as - a fair-value hedge, along with the
loss or gain on the hedged asset or liability that is attributable to the hedged
risk (including losses or gains on firm commitments), are recorded in
current-period earnings. Changes in the fair value of a derivative that is
highly effective as - and that is designated and qualifies as - a cash-flow
hedge are recorded in other comprehensive income, until earnings are affected by
the variability of cash flows. Changes in the fair value of derivatives that are
highly effective as - and that are designated and qualify as - foreign-currency
hedges are recorded in either current-period earnings or other comprehensive
income, depending on whether the hedge transaction is a fair-value hedge (e.g.,
a hedge of a firm commitment that is to be settled in a foreign currency) or a
cash-flow hedge (e.g., a foreign-currency-denominated forecasted transaction).
The Company formally documents all relationships between hedging instruments and
hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives that are designated as fair-value, cash-flow, or foreign-currency
hedges to specific assets and liabilities on the balance sheet or to specific
firm commitments or forecasted transactions. The Company also formally assesses,
both at the hedge's inception and on an ongoing basis, whether the derivatives
that are used in hedging transactions are highly effective in offsetting changes
in fair values or cash flows of hedged items. When it is determined that a
derivative is not highly effective as a hedge or that it has ceased to be a
highly effective hedge, the Company discontinues hedge accounting prospectively,
as discussed below.
The Company discontinues hedge accounting prospectively when (1) it is
determined that the derivative is no longer effective in offsetting changes in
the fair value or cash flows of a hedged item (including firm commitments or
forecasted transactions); (2) the derivative expires or is sold, terminated, or
exercised; (3) the derivative is dedesignated as a hedge instrument, because it
is unlikely that a forecasted transaction will occur; (4) because a hedged firm
commitment no longer meets the definition of a firm commitment; or (5)
management determines that designation of the derivative as a hedge instrument
is no longer appropriate.
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair-value hedge, the derivative
will continue to be carried on the balance sheet at its fair value, and the
hedged asset or liability will no longer be adjusted for changes in fair value.
When hedge accounting is discontinued because the hedged item no longer meets
the definition of a firm commitment, the derivative will continue to be carried
on the balance sheet at its fair value, and any asset or liability that was
recorded pursuant to recognition of the firm commitment will be removed from the
balance sheet and recognized as a gain or loss in current-period earnings. When
hedge accounting is discontinued because it is probable that a forecasted
transaction will not occur, the derivative will continue to be carried on the
balance sheet at its fair value, and gains and losses that were accumulated in
other comprehensive income will be recognized immediately in earnings. In all
other situations in which hedge accounting is discontinued, the derivative will
be carried at its fair value on the balance sheet, with changes in its fair
value recognized in current-period earnings.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Any statements contained herein
regarding the future financial performance or operations of the Company
(including, without limitation, statements to the effect that the Company
"expects," "plans," "may," "will," "projects," "continues," or "estimates" or
other variations thereof or comparable terminology or the negative thereof)
should be considered forward-looking statements. Actual results could differ
materially from those projected in the forward-looking statements as a result of
a number of important factors. For a discussion of important factors that could
affect the Company's results, please refer to the Issues and Outlook section and
financial statement line item discussions below. Readers are also encouraged to
refer to the Company's Annual Report on Form 10-K for further discussion of the
Company's business and the risks and opportunities attendant thereto.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of net sales represented by certain items reflected in the Company's
consolidated statements of income:
Three Months Ended
March 31,
--------------------
1999 1998
---- ----
Net sales:
North America 52.1% 57.0%
Europe 32.1 29.1
Asia Pacific 15.8 13.9
------ ------
Consolidated net sales 100.0 100.0
Cost of sales 23.0 23.8
------ ------
Gross profit 77.0 76.2
Operating expenses:
Sales and marketing 36.6 37.5
Research and development 12.6 11.9
General and administrative 7.2 7.2
------ ------
Total operating expenses 56.4 56.6
------ ------
Operating income 20.6 19.6
Other income (expense):
Interest income, net 1.2 1.0
Net foreign exchange loss (.8) (.4)
------ ------
Income before income taxes and cumulative
effect of account change 21.0 20.2
Provision for income taxes 6.7 6.7
------ ------
Income before cumulative effect of accounting change 14.3 13.5
Cumulative effect of accounting change, net of tax (.7) -
------ ------
Net income 13.6% 13.5%
====== ======
Net Sales. Consolidated net sales for the first quarter of 1999 increased
by $8.3 million or 13% over the comparable prior year quarter. The increase in
sales is primarily attributable to the introduction of new and upgraded products
and increased sales and marketing efforts. North American sales in the first
quarter of 1999 increased by 5% over the first quarter of 1998. The Company
believes its soft growth rate for North American sales is primarily attributable
to the continued effect of economic difficulties over the last year in Asia
Pacific on the Company's North American customers, particularly in the
electronics, automated test equipment and semiconductor sectors. OEM sales to
our top ATE accounts like GenRad, Hewlett-Parkard, Tektronix and Teradyne were
down significantly compared to the very strong first quarter last year. In the
semiconductor industry, sales to our top US customers were flat compared to the
year ago first quarter. Domestic sales growth was primarily due to increased
sales to automotive, telecom and system integration customers.
International sales as a percentage of consolidated sales for the quarter
ended March 31, 1999 increased to 47.9% from 43.0% in the comparable 1998 period
as a result of strong sales in Europe and improved sales in Asia Pacific.
Compared to 1998, the Company's European sales increased by 24% to $23.7 million
for the quarter ended March 31, 1999. Sales in Asia Pacific increased by 29% to
$11.6 million in the quarter ended March 31, 1999 compared to 1998. The Company
expects sales outside of North America to continue to represent a significant
portion of its revenue.
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. Sales made by the Company's direct sales offices in Europe and Asia
Pacific are denominated in local currencies, and accordingly, the US dollar
equivalent of these sales is affected by changes in the weighted average value
of the US dollar. This weighted average is calculated as the percentage change
in the value of the currency relative to the US dollar, multiplied by the
proportion of international sales recorded in the particular currency. Between
the first quarter of 1998 and the first quarter of 1999 the weighted value of
the US dollar decreased by 4.2%, causing an equivalent increase in the US dollar
value of the Company's foreign currency sales and expenses. If the weighted
average value of the US dollar in the first quarter of 1999 had been the same as
that in the first quarter of 1998, the Company's sales for the first quarter of
1999 would have been $71.8 million, a 10% increase over the first quarter of
1998. This effect is 2.5% of consolidated net sales in the aggregate. European
sales for the first quarter of 1999 would have been $23.0 million, a 21%
increase in first quarter 1999 sales over first quarter 1998. Asia Pacific sales
for the first quarter of 1999 would have been $10.5 million, a 16% increase in
first quarter 1999 sales over first quarter 1998 sales. Since most of the
Company's international operating expenses are also incurred in local
currencies, the change in exchange rates had the effect of increasing operating
expenses by $593,000 for the quarter ended March 31, 1999.
Gross Profit. As a percentage of net sales, gross profit increased to 77.0%
for the first quarter of 1999 from 76.2% for the first quarter of 1998. The
increase in margin for the first quarter ending March 31, 1999 compared to the
prior year period is attributable to favorable foreign exchange rates, increased
leveraging of our fixed manufacturing expenses, and improved hardware product
mix.
The marketplace for the Company's products dictates that many of the
Company's products be shipped very quickly after an order is received. As a
result, the Company is required to maintain significant inventories. Therefore,
inventory obsolescence is a risk for the Company due to frequent engineering
changes, shifting customer demand, the emergence of new industry standards and
rapid technological advances including the introduction by the Company or its
competitors of products embodying new technology. While the Company maintains
valuation allowances for excess and obsolete inventory and management continues
to monitor the adequacy of such valuation allowances, there can be no assurance
that such valuation allowances will be sufficient.
Sales and Marketing. Sales and marketing expenses for the first quarter of
1999 increased to $27.0 million, a 10% increase, as compared to the first
quarter of 1998. As a percentage of net sales, sales and marketing expenses were
36.6% and 37.5% for the three months ended March 31, 1999 and 1998,
respectively. The decrease as a percentage of revenue is partially attributable
to the worldwide promotion and release of LabVIEW 5.0 in the first quarter of
1998, which increased sales and marketing expenses by $500,000. The increase in
these expenses in absolute dollar amounts is primarily attributable to increased
personnel, sales and marketing seminars, tradeshows, and other marketing
activities. The Company expects sales and marketing expenses in future periods
to increase in absolute dollars, and to fluctuate as a percentage of sales based
on new recruiting, initial 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 expenses increased to
$9.3 million for the quarter ended March 31, 1999, a 19% increase, as compared
to $7.7 million for the three months ended March 31, 1998. As a percentage of
net sales, research and development expenses increased to 12.6% for the quarter
ended March 31, 1999, from 11.9% for the quarter ended March 31, 1998. The
increase in research and development costs in absolute amounts and as a
percentage of sales in each period was primarily due to increases in personnel
costs from hiring of additional product development engineers. The Company
believes that a significant, on-going investment in research and development is
required to remain competitive.
The Company capitalizes software development costs in accordance with the
SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased,
or Otherwise Marketed." The Company amortizes such costs over the related
product's estimated economic life, generally three years, beginning when a
product becomes available for general release. Amortization expense totaled
$589,000 and $414,000 for the quarters ended March 31, 1999 and 1998,
respectively. Software development costs capitalized were $386,000 and $787,000
for the quarters ended March 31, 1999 and 1998, respectively. The amounts
capitalized in the first quarter of 1999 related to the development of LabVIEW
5.1 and Lookout 4.0.
General and Administrative. General and administrative expenses for the
first quarter ended March 31, 1999 increased 12% to $5.3 million from $4.7
million for the comparable prior year period. As a percentage of net sales,
general and administrative expenses remained at 7.2% for the quarters ended
March 31, 1999 and 1998, respectively. The Company's general and administrative
expense increased in absolute dollars mainly due to additional personnel. The
Company expects that general and administrative expense in future periods will
increase in absolute amounts and will fluctuate as a percentage of net sales.
Interest Income, Net. Net interest income in the first quarter of 1999
increased to $942,000 from $670,000 in the first quarter of 1998. Net interest
income has represented approximately one percent of net sales and has fluctuated
as a result of investment balances, bank borrowings and interest terms thereon.
Net Foreign Exchange Gain (Loss). Net foreign exchange losses recognized in
the first quarter of 1999 were $579,000 compared to $274,000 recognized in the
first quarter of 1998. Foreign exchange gains and losses are attributable to
movements between the US dollar and the local currencies in countries in which
the Company's sales subsidiaries are located. The increase in net foreign
exchange losses recognized in the first quarter of 1999 is mainly due to the
weakening of the euro which resulted in higher losses in 1999 than it did in the
first quarter of 1998. The Company recognizes the local currency as the
functional currency of its international subsidiaries. To minimize this foreign
currency risk the Company engages in hedging activities by utilizing foreign
exchange forward and option contracts.
The Company utilizes 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 forward contracts to 90 days.
The Company utilizes foreign currency forward exchange contracts and
foreign currency purchased option contracts in order to reduce its exposure to
fluctuations in future net foreign currency cash flows. The Company's policy
allows for the purchase of these contracts for up to 80% of its risk and limits
the duration of these contracts to 24 months. It also requires that the foreign
currency purchased option contracts be purchased 5% "out-of-the-money." As a
result, the Company's hedging activities only partially address its risks in
foreign currency transactions, and there can be no assurance that this strategy
will be successful. The Company does not currently invest in contracts for
speculative purposes. The Company's hedging strategy has reduced the foreign
exchange losses recorded by $2.1 million during the three-month period ended
March 31, 1999.
Effective January 1, 1999, the Company elected to adopt SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." (See Note 5 of
Notes to Consolidated Financial Statements.)
Provision for Income Taxes. The provision for income taxes reflects an
effective tax rate of 32% and 33% for the three months ended March 31, 1999 and
1998, respectively. The decrease in the effective rate resulted from income tax
benefits attributable to the Company's foreign sales corporation and a change in
the mix of income among taxing jurisdictions. As of March 31, 1999, eleven of
the Company's subsidiaries had available, for income tax purposes, foreign net
operating loss carryforwards of approximately $3.6 million, of which $2.9
million expires between 2000 and 2009. The remaining $.7 million of loss
carryforwards may be carried forward indefinitely to offset future taxable
income in the related tax jurisdictions.
Liquidity and Capital Resources
The Company is currently financing its operations and capital expenditures
through cash flow from operations. At March 31, 1999, the Company had working
capital of approximately $145.6 million compared to $133.5 million at December
31, 1998.
Accounts receivable increased to $47.2 million at March 31, 1999 from
$45.6 million at December 31, 1998. Days sales outstanding increased to 58 at
March 31, 1999 compared to 57 at December 31, 1998. Consolidated inventory
balances decreased to $16.3 million at March 31, 1999 from $16.5 million at
December 31, 1998. Inventory turns of 4.1 represent a slight decrease from turns
of 4.2 at December 31, 1998. Cash used in the first three months of 1999 for the
purchase of the property and equipment totaled $1.0 million and for the
capitalization of software development costs totaled $511,000.
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 a $20.0 million revolving line of credit and an
$8.5 million manufacturing facility loan. As of March 31, 1999, the Company had
no outstanding balance on the revolving line of credit and had a balance of $5.0
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.
The Company believes that the cash flow from operations, if any, existing
cash balances, 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.
Market Risk
The Company is exposed to a variety of risks, including foreign currency
fluctuations and changes in the market value of its investments. In the normal
course of business, the Company employs established policies and procedures to
manage its exposure to fluctuations in foreign currency values and changes in
the market value of its investments.
Foreign Currency Hedging Activities. The Company's objective in managing
its exposure to foreign currency exchange rate fluctuations is to reduce the
impact of adverse fluctuations in such exchange rates on the Company's earnings
and cash flow. Accordingly, the Company utilizes purchased foreign currency
option contracts and forward contracts to hedge its exposure of anticipated
transactions and firm commitments. The principal currencies hedged are the
British pound, Japanese yen, German deutsche mark, French franc and Italian
lire. The Company monitors its foreign exchange exposures regularly to ensure
the overall effectiveness of its foreign currency hedge positions. However,
there can be no assurance the Company's foreign currency hedging activities will
substantially offset the impact of fluctuations in currency exchanges rates on
its results of operations and financial position. Based on the foreign exchange
instruments outstanding at March 31, 1999, 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 $16.0 million.
Additionally, as the Company utilizes foreign currency instruments for hedging
anticipated and firmly committed transactions, management believes that a loss
in fair value for those instruments will be offset by increases in the value of
the underlying exposure.
Short-term Investments. The fair value of the Company's investments in
marketable securities at March 31, 1999 was $52.5 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 March
31, 1999, a 100 basis point increase or decrease in interest rates would result
in a decrease or increase of less than $300,000, respectively, in the fair value
of the investment portfolio, which is not significantly different from December
31, 1998. 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.
Issues and Outlook
Fluctuations in Quarterly Results. The Company's quarterly operating
results have fluctuated in the past and may fluctuate significantly in the
future due to a number of factors; including: changes in the mix of products
sold; the availability and pricing of components from third parties (especially
sole sources); the timing of orders; level of pricing of international sales;
fluctuations in foreign currency exchange rates; the difficulty in maintaining
margins; including the higher margins traditionally achieved in international
sales; and changes in pricing policies by the Company; its competitors or
suppliers. Specifically, if the local currencies in which the Company sells
weaken against the US dollar, and if the local sales prices cannot be raised,
the Company will experience a deterioration of its gross and net profit margins.
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 like those experienced in 1998 could again have a material
adverse effect on the Company's operating results.
In recent years, the Company's revenues have been characterized by
seasonality, with revenues typically being relatively constant in the first,
second and third quarters, growing in the fourth quarter and being relatively
flat or declining from the fourth quarter of the year to the first quarter of
the following year. The Company'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.
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. HP recently announced
that it will split off its measurement business as a separate company in late
1999. Because of HP's strong position in the instrumentation business, the
reorganization of its measurement business, changes in its marketing strategy or
product offerings could have a material adverse effect on the Company operating
results.
The Company believes its ability to compete successfully depends on a
number of factors both within and outside its control, including: new product
introductions by competitors; product pricing; quality and performance; success
in developing new products; adequate manufacturing capacity and supply of
components and materials; efficiency of manufacturing operations; effectiveness
of sales and marketing resources and strategies; strategic relationships with
other suppliers; timing of new product introductions by the Company; protection
of the Company's products by effective use of intellectual property laws;
general market and economic conditions; and government actions throughout the
world. There can be no assurance that the Company will be able to compete
successfully in the future.
Management Information Systems. The Company relies on three primary
regional centers for its management information systems. It is possible that one
or more of the Company's three regional information systems could experience a
complete or partial shutdown. If this shutdown occurred near the end of a
quarter it could impact the Company's product shipments and revenues as product
distribution is heavily dependent on the integrated management information
systems in each region. Accordingly, operating results in that quarter would be
adversely impacted due to the shipments which would not occur until the
following period.
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 PCs, embedded processors and related software to control activity
scheduling, inventory tracking and manufacturing. As of March 1999, 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 92% 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.
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, currently estimated at $1.5
million.
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 US, 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 redeployment of resources, will not
exceed $3.7 million. Approximately $2.9 million has been spent on the programs
to date. 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.
Dependence on Key Suppliers. The Company's manufacturing processes use
large volumes of high-quality components and subassemblies supplied by outside
sources. Several of these components are available through sole or limited
sources. Sole-source components purchased by the Company include custom
application-specific integrated circuits ("ASICs") and other components. The
Company has in the past experienced delays and quality problems in connection
with sole-source components, and there can be no assurance that these problems
will not recur in the future. Accordingly, the failure to receive sole-source
components from suppliers could result in a material adverse effect on revenues
and results of operations.
Proprietary Rights and Intellectual Property Litigation. The Company's
success depends in part on its ability to obtain and maintain patents and other
proprietary rights relative to the technologies used in its principal products.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may have in the past infringed or violated certain of the Company's
intellectual property rights. The Company recently filed two complaints in
federal court alleging infringement by the products of two separate defendants.
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 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, sales, 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 become 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.
Failure to attract and retain a sufficient number of technical personnel could
have a material adverse effect on the results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Response to this item is included in "Item 2 - Management's Discussion and
Analysis of Financial Conditions and Results of Operations - Market Risk" above.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
11.1 Computation of Earnings Per Share
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the
quarter ended March 31, 1999.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL INSTRUMENTS CORPORATION
Registrant
BY: /s/ Alex Davern
______________________
Alex Davern
Chief Financial Officer and Treasurer (principal
financial and accounting officer)
Dated: May 13, 1999
NATIONAL INSTRUMENTS CORPORATION
INDEX TO EXHIBITS
Exhibit No. Description Page
- ----------- ----------- ----
11.1 Statement Regarding Computation of Earnings 19
per Share