a033109.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

 
 
T  Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended:  March 31, 2009 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 logo

 
NATIONAL INSTRUMENTS CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
 
74-1871327
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer 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 T  No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes £  No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):                                                                                                    
 
 Large accelerated filer   T   Accelerated filer   £       Non-accelerated filer   £     Smaller reporting company   £
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £  No T

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 6, 2009
Common Stock - $0.01 par value
77,725,916






NATIONAL INSTRUMENTS CORPORATION

INDEX

 
 PART I  FINANCIAL INFORMATION  
      Page No.
 Item 1   Financial Statements:  
     
   Consolidated Balance Sheets 
 March 31, 2009 (unaudited) and December 31, 2008
3
     
 
 (unaudited) for the three months ended March 31, 2009 and 2008
4
     
 
 (unaudited) for the three months ended March 31, 2009 and 2008
 5
     
   Notes to Consolidated Financial Statements   6
     
 Item 2  21
     
 Item 3  Quantitative and Qualitative Disclosures About Market Risk  29
     
 Item 4  Controls and Procedures   32
     
 PART II  OTHER INFORMATION  
     
 Item 1  Legal Proceedings   33
     
 Item 1A  Risk Factors   33
     
 Item 2  Unregistered Sales of Equity Securities and Use of Proceeds  40
     
 Item 5  Other Information   40
     
 Item 6   Exhibits  41
     
   Signatures and Certifications   42
 
 
 

 

PART I - FINANCIAL INFORMATION

ITEM 1.

NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)


   
March 31,
2009
   
December 31,
2008
 
Assets
 
(unaudited)
       
Current assets:
           
Cash and cash equivalents                                                                                     
  $ 227,448     $ 229,400  
Short-term investments                                                                                     
    14,044       6,220  
Accounts receivable, net                                                                                     
    90,917       121,548  
Inventories, net                                                                                     
    102,618       107,358  
Prepaid expenses and other current assets                                                                                     
    45,827       43,062  
Deferred income taxes, net                                                                                     
    22,430       21,435  
Total current assets                                                                                 
    503,284       529,023  
Long-term investments                                                                                          
    10,500       10,500  
Property and equipment, net                                                                                          
    150,793       154,477  
Goodwill, net                                                                                          
    64,168       64,561  
Intangible assets, net                                                                                          
    42,688       41,915  
Other long-term assets                                                                                          
    35,215       32,115  
Total assets                                                                                 
  $ 806,648     $ 832,591  
Liabilities and Stockholders' Equity
               
Current liabilities:
               
Accounts payable                                                                                     
  $ 25,129     $ 30,876  
Accrued compensation                                                                                     
    19,408       22,012  
Deferred revenue                                                                                     
    44,965       45,514  
Accrued expenses and other liabilities                                                                                     
    13,298       18,848  
Other taxes payable                                                                                     
    10,269       13,481  
Total current liabilities
    113,069       130,731  
Deferred income taxes                                                                                          
    25,422       25,157  
Other long-term liabilities                                                                                          
    12,380       12,265  
Total liabilities
    150,871       168,153  
Commitments and contingencies
               
Stockholders' equity:
               
Preferred stock:  par value $0.01; 5,000,000 shares authorized; none issued and outstanding
           
Common stock:  par value $0.01; 180,000,000 shares authorized; 77,173,376 and 77,193,063 shares issued and outstanding,
respectively
      772         772  
Additional paid-in capital                                                                                     
    42,972       39,673  
Retained earnings                                                                                     
    604,583       613,510  
Accumulated other comprehensive income                                                                                     
    7,450       10,483  
Total stockholders’ equity
    655,777       664,438  
Total liabilities and stockholders’ equity
  $ 806,648     $ 832,591  


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,
 
   
2009
   
2008
 
             
Net sales:
           
Product                                                                                                   
  $ 143,450     $ 181,790  
Software maintenance                                                                                                   
    14,349       11,128  
Total net sales                                                                                            
    157,799       192,918  
                 
Cost of sales:
               
Product                                                                                                   
  $ 39,556     $ 47,667  
Software maintenance                                                                                                   
    1,327       1,402  
Total cost of sales                                                                                            
    40,883       49,069  
                 
Gross profit                                                                                                   
    116,916       143,849  
                 
Operating expenses:
               
Sales and marketing                                                                                                   
    68,826       73,517  
Research and development                                                                                                   
    34,789       35,604  
General and administrative                                                                                                   
    15,780       16,663  
Total operating expenses                                                                                            
    119,395       125,784  
                 
Operating income (loss)                                                                                                   
    (2,479 )     18,065  
                 
Other income (expense):
               
Interest income                                                                                                   
    589       2,137  
Net foreign exchange gain (loss)                                                                                                   
    (702 )     1,548  
Other income (expense), net                                                                                                   
    163       61  
Income before income taxes
    (2,429 )     21,811  
Provision for (benefit from) income taxes                                                                                                     
    (2,787 )     4,195  
                 
Net income                                                                                            
  $ 358     $ 17,616  
                 
Basic earnings per share
  $ 0.00     $ 0.22  
                 
Weighted average shares outstanding – basic                                                                                                     
    77,277       78,840  
                 
Diluted earnings per share
  $ 0.00     $ 0.22  
                 
Weighted average shares outstanding – diluted                                                                                                     
    77,436       79,825  
                 
Dividends declared per share                                                                                                     
  $ 0.12     $ 0.11  

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,
 
   
2009
   
2008
 
Cash flow from operating activities:
           
Net income                                                                                             
  $ 358     $ 17,616  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization                                                                                    
    8,385       10,675  
Stock-based compensation                                                                                    
    5,082       4,739  
Benefit from deferred income taxes                                                                                    
    (1,486 )     (2,711 )
Tax expense (benefit from) stock option plans                                                                                    
    242       (161 )
Changes in operating assets and liabilities:
               
Accounts receivable                                                                                    
    30,631       5,112  
Inventories                                                                                    
    4,740       (7,099 )
Prepaid expenses and other assets                                                                                    
    (5,766 )     (5,677 )
Accounts payable                                                                                    
    (5,747 )     5,241  
Deferred revenue                                                                                    
    (549 )     3,574  
Taxes and other liabilities                                                                                    
    (11,084 )     (867 )
Net cash provided by operating activities                                                                                         
    24,806       30,442  
                 
Cash flow from investing activities:
               
Capital expenditures                                                                                             
    (3,004 )     (5,051 )
Capitalization of internally developed software                                                                                             
    (3,114 )     (1,528 )
Additions to other intangibles                                                                                             
    (1,340 )     (431 )
Acquisition, net of cash received                                                                                             
          (17,055 )
Purchases of short-term and long-term investments                                                                                             
    (11,850 )     (12,638 )
Sales and maturities of short-term and long-term investments
    4,026       66,208  
Purchases of foreign currency option contracts                                                                                         
          (1,481 )
Net cash (used by) provided by investing activities                                                                                         
    (15,282 )     28,024  
                 
Cash flow from financing activities:
               
Proceeds from issuance of common stock                                                                                             
    7,237       10,197  
Repurchase of common stock                                                                                             
    (9,186 )     (49,081 )
Dividends paid                                                                                             
    (9,285 )     (8,717 )
Tax expense (benefit from) stock option plans                                                                                             
    (242 )     161  
Net cash (used by) financing activities                                                                                         
    (11,476 )     (47,440 )
                 
Net change in cash and cash equivalents                                                                                                  
    (1,952 )     11,026  
Cash and cash equivalents at beginning of period                                                                                                  
    229,400       194,839  
Cash and cash equivalents at end of period                                                                                                  
  $ 227,448     $ 205,865  



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 consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2008, included in our annual report on Form 10-K, filed with the Securities and Exchange Commission. In our opinion, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring items) considered necessary to present fairly our financial position at March 31, 2009 and December 31, 2008, and the results of our operations and cash flows for the three month periods ended March 31, 2009 and March 31, 2008. Operating results for the three month period ended March 31, 2009, are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

Certain prior year amounts have been reclassified to conform to the 2009 presentation as shown in the following tables:

   
Three Months Ended
March 31, 2008
 
   
(unaudited)
 
       
Cost of sales as previously reported                                                                                                             
  $ 48,247  
Technical support costs previously reported as sales and marketing (a)
    822  
Cost of sales adjusted for reclassification                                                                                                             
  $ 49,069  
         
Sales and marketing as previously reported                                                                                                             
  $ 74,339  
Technical support costs as previously reported as sales and marketing (a)
    (822 )
Sales and marketing adjusted for reclassification                                                                                                             
  $ 73,517  
 
(a)  
We are separately reporting software maintenance revenue and cost of software maintenance revenue in our Consolidated Statements of Income. We have added this disclosure due to the increasing percentage of our revenue coming from software maintenance. As part of this expanded disclosure, some technical support costs previously reported as a component of sales and marketing expense are now reported as cost of software maintenance. This change has had no impact on our operating income, net income or earnings per share.

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. The number of common share equivalents, which include stock options and restricted stock units, 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, 2009 and 2008, respectively, are as follows (in thousands):

   
March 31,
 
   
(unaudited)
 
   
2009
   
2008
 
Weighted average shares outstanding-basic                                                                                            
    77,277       78,840  
Plus: Common share equivalents
               
Stock options, restricted stock units                                                                                        
    159       985  
Weighted average shares outstanding-diluted                                                                                            
    77,436       79,825  

Stock options to acquire 5,495,000 shares and 2,877,000 shares for the three month periods ended March 31, 2009 and 2008, respectively, were excluded in the computations of diluted EPS because the effect of including the stock options would have been anti-dilutive.
 
NOTE 3 – Cash, Cash Equivalents, Short-Term and Long-Term Investments

Cash, cash equivalents, short-term and long-term investments consist of the following (in thousands):

   
As of
March 31, 2009
   
As of
December 31, 2008
 
   
(unaudited)
       
Cash and cash equivalents:
           
Cash                                                                                 
  $ 71,188     $ 100,967  
Cash equivalents:
               
Debt securities                                                                               
           
Time deposits                                                                               
          73,400  
Money market accounts                                                                               
    156,260       55,033  
Total cash and cash equivalents                                                                            
  $ 227,448     $ 229,400  
Short-term investments:
               
Debt securities                                                                                 
  $ 14,044     $ 6,220  
Auction rate securities                                                                                 
           
Long-term investments:
               
Auction rate securities                                                                                 
    8,343       6,964  
Auction rate securities put option                                                                                 
    257       1,636  
Other long-term investments                                                                                 
    1,900       1,900  
Total investments                                                                               
  $ 24,544     $ 16,720  
Total cash, cash equivalents and investments                                                                            
  $ 251,992     $ 246,120  

The following table summarizes unrealized gains and losses related to our investments designated as available-for-sale (in thousands):
 
   
As of March 31, 2009
 
   
(unaudited)
 
                         
   
 
Adjusted Cost
   
Gross Unrealized Gain
   
Gross Unrealized Loss
   
 
Fair Value
 
Debt securities                                                                 
  $ 14,083     $ 40     $ (79 )   $ 14,044  
Auction rate securities                                                                 
    8,600             (257 )     8,343  
Auction rate securities put option                                                                 
          257             257  
Other long-term investments                                                                 
    1,900                   1,900  
Total investments                                                            
  $ 24,583     $ 297     $ (336 )   $ 24,544  
 
   
As of December 31, 2008
 
   
 
Adjusted Cost
   
Gross Unrealized Gain
   
Gross Unrealized Loss
   
 
Fair Value
 
Municipal securities                                                                 
  $ 6,199     $ 28     $ (7 )   $ 6,220  
Auction rate securities                                                                 
    8,600             (1,636 )     6,964  
Auction rate securities put option                                                                 
          1,636             1,636  
Other long-term investments                                                                 
    1,900                   1,900  
Total investments                                                            
  $ 16,699     $ 1,664     $ (1,643 )   $ 16,720  
 
NOTE 4 – Fair Value Measurements

Effective January 1, 2008, we adopted Statement of Financial Accounting Standards (“SFAS”) 157, Fair Value Measurements (SFAS 157). SFAS 157 clarifies the definition of fair value, prescribes methods for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value and expands disclosures about the use of fair value measurements. Effective January 1, 2009, in accordance with Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) FAS 157-2, Effective Date of FASB Statement 157, we adopted SFAS 157 for our nonfinancial assets and nonfinancial liabilities, except those items recognized or disclosed at fair value on an annual or more frequently recurring basis. The adoption of SFAS 157-2 did not have a material impact on our fair value measurements.
 
The following tables present our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value (in thousands).

         
Fair Value Measurements at Reporting Date Using (unaudited)
 
 
 
 
Description
 
 
March 31, 2009
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Assets
                       
Money Market Funds                                                 
  $ 156,260     $ 156,260     $        
Short-term investments available for sale
    14,044       14,044              
Long-term investments available for sale
    8,600                   8,600  
Derivatives                                                 
    20,094             20,094        
Total Assets                                                    
  $ 198,998     $ 170,304     $ 20,094     $ 8,600  
                                 
Liabilities
                               
Derivatives                                                 
    (3,229 )           (3,229 )      
Total Liabilities                                                    
  $ (3,229 )   $     $ (3,229 )   $  

   
Fair Value Measurements Using Significant Unobservable Inputs
(Level 3)
 
   
Long-term investments available for sale
 
   
(unaudited)
 
       
Beginning Balance                                                                         
  $ 8,600  
Total gains or (losses) (realized/unrealized)
       
Included in earnings                                                                    
    257  
Included in other comprehensive income                                                                    
     
Total losses (realized/unrealized)                                                                       
       
Included in earnings                                                                    
    (257 )
Included in other comprehensive income                                                                    
     
Purchases, issuances and settlements                                                                       
     
Transfer in and/or out of Level 3                                                                       
     
Ending Balance                                                                         
  $ 8,600  
         
The amount of total gains or (losses) for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at the reporting date
       
    $  

Short-term investments available-for-sale are valued using a market approach (Level 1) based on the quoted market prices of identical instruments when available or other observable inputs such as trading prices of identical instruments in inactive markets.

Derivatives include foreign currency forward and option contracts. Our foreign currency forward contracts are valued using an income approach (Level 2) based on the spot rate less the contract rate multiplied by the notional amount. Our foreign currency option contracts are valued using a market approach based on the quoted market prices which are derived from observable inputs including current and future spot rates, interest rate spreads as well as quoted market prices of identical instruments.

Long-term investments included in Level 3 are reported at their fair market value and consist of auction rate securities backed by education loan revenue bonds. One of our auction rate securities is from the Vermont Student Assistance Corporation and has a par value of $2.2 million. The other of our auction rate securities is from the New Hampshire Health and Education Facilities Authority and has a par value of $6.4 million. The ratings for these securities at March 31, 2009, were Baa1/A/AAA and Aaa/NR/AAA, respectively. We note that the bonds from the Vermont Student Assistance Corporation carried ratings of Aa3/A/AAA at December 31, 2008. Historically, we reported the fair market value of these securities at par as differences between par value and the purchase price or settlement value were historically comprised of accrued interest. Auction rate securities are variable rate debt instruments whose interest rates are typically reset approximately every 7 to 35 days. On April 13, 2009, and in prior auction periods beginning in February 2008, the auction process for these securities failed. Prior to the failure of the auction process, we had classified these investments as short-term but are now reporting them as long-term due to the fact that the underlying securities generally have longer dated contractual maturities which are in excess of the guidelines provided for in our corporate investment policy. The auction rate securities are classified as available-for-sale.

At March 31, 2009, we reported these long-term investments at their estimated fair market value of $8.3 million. In November 2008, we accepted the UBS Auction Rate Securities Rights (“the Rights”) agreement offered by UBS as a liquidity alternative to the failed auction process. This Rights agreement is related to the auction rates securities discussed above. The Rights agreement is a nontransferable right to sell our auction rate securities, at par value, back to UBS at any time during the period June 30, 2010, through July 2, 2012. At March 31, 2009, we reported the Rights agreement at its estimated fair market value of $0.3 million. We continue to have the ability to hold the debt instruments to their ultimate maturity and have not made a determination as to whether we will exercise our right under the Rights agreement described above. As such, we have recorded the unrealized loss related to the auction rate securities and the unrealized gain related to the Rights agreement as a component of other income (expense), in our Consolidated Statements of Income. The estimated fair market value of the Rights agreement is also included as a component of our long-term investments.

The estimated fair market value of both the auction rate securities and the Rights agreement was determined using significant unobservable inputs (Level 3) as prescribed by SFAS 157, Fair Value Measurements. We considered many factors in determining the fair market value of the auction rate securities as well as our corresponding Rights agreement at March 31, 2009, including the fact that the debt instruments underlying the auction rate securities have redemption features which call for redemption at 100% of par value, current credit curves for like securities and discount factors to account for the illiquidity of the market for these securities.

NOTE 5 – Derivative Instruments and Hedging Activities

SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as amended (SFAS 133(R),) requires companies to recognize all of their derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.

We have operations in over 40 countries. Approximately 57% of our revenues are generated outside the Americas. Our activities expose us to a variety of market risks, including the effects of changes in foreign-currency exchange rates. These financial risks are monitored and managed by us as an integral part of our overall risk management program.

We maintain a foreign-currency risk management strategy that uses derivative instruments (foreign currency forward and purchased options contracts) to protect our earnings and cash flows from fluctuations caused by the volatility in currency exchange rates. Movements in foreign-currency exchange rates pose a risk to our operations and competitive position, since exchange rate changes may affect our profitability and cash flow, and the business or pricing strategies of our non-U.S. based competitors.

The vast majority of our foreign sales are denominated in the customers’ local currency. We purchase foreign currency forward and purchased options contracts as hedges of forecasted sales that are denominated in foreign currencies and as hedges of foreign currency denominated receivables. These contracts are entered into to protect against the risk that the eventual dollar-net-cash inflows resulting from such sales or firm commitments will be adversely affected by changes in exchange rates. We also purchase foreign currency forward contracts as hedges of forecasted expenses that are denominated in foreign currencies. These contracts are entered into to protect against the risk that the eventual dollar-net-cash outflows resulting from foreign currency operating and cost of revenue expenses will be adversely affected by changes in exchange rates.

In accordance with SFAS 133(R), we designate foreign currency forward and option contracts as cash flow hedges of forecasted revenues or forecasted expenses. In addition, we hedge our foreign currency denominated balance sheet exposures using foreign currency forward contracts. These derivatives are not designated as hedging instruments under SFAS 133(R). None of our derivative instruments contain a credit-risk-related contingent feature.

Cash flow hedges

To protect against the reduction in value caused by a fluctuation in foreign currency exchange rates of forecasted foreign currency cash flows resulting from international sales over the next one to two years, we have instituted a foreign currency cash flow hedging program. We hedge portions of our forecasted revenue and forecasted expenses denominated in foreign currencies with forward and option contracts. For forward contracts, when the dollar strengthens significantly against the foreign currencies, the change in the present value of future foreign currency cash flows may be offset by the change in the fair value of the forward contracts designated as hedges. For option contracts, when the dollar strengthens significantly against the foreign currencies, the change in the present value of future foreign currency cash flows may be offset by the change in the fair value of the option contracts net of the premium paid designated as hedges. Our foreign currency purchased option contracts are purchased “at-the-money” or “out-of-the-money”. We purchase foreign currency forward and option contracts for up to 100% of our forecasted exposures in selected currencies (primarily in Euro, Japanese yen, British pound sterling, South Korean won and Hungarian forint) and limit the duration of these contracts to 40 months or less.

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (“OCI”) and reclassified into earnings in the same line item (net sales, operating expenses, or cost of sales) associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings or expenses during the current period and are classified as a component of “net foreign exchange gain (loss)”. Hedge effectiveness of foreign currency forwards and option contracts designated as cash flow hedges are measured by comparing the hedging instrument’s cumulative change in fair value from inception to maturity to the forecasted transaction’s terminal value.

We held forward contracts with a notional amount of $28.6 million dollar equivalent of Euro, $10.6 million dollar equivalent of British pound sterling, $32.1 million dollar equivalent of Japanese yen, $2.6 million dollar equivalent of South Korean won and $36.6 million dollar equivalent of Hungarian forint at March 31, 2009. We held forward contracts with a notional amount of $54.9 million dollar equivalent of Euro, $6.2 million dollar equivalent of British pound sterling, $18.9 million dollar equivalent of Japanese yen, $4.7 million dollar equivalent of South Korean won and $21.7 million dollar equivalent of Hungarian forint at December 31, 2008. These contracts are for terms up to 24 months.

We held option contracts with a notional amount of $95.5 million dollar equivalent of Euro at March 31, 2009. We held option contracts with a notional amount of $111.3 million dollar equivalent of Euro at December 31, 2008. These contracts are for terms up to 24 months.

At March 31, 2009, we expect to reclassify $7.8 million of gains and $264,000 of losses on derivative instruments from accumulated other comprehensive income to net sales during the next twelve months when the hedged international sales occur. At March 31, 2009, we expect to reclassify $114,000 of gains and $1.2 million of losses on derivative instruments from accumulated OCI to cost of sales and $83,000 of gains and $694,000 of losses on derivative instruments from accumulated OCI to operating expenses during the next twelve months when the hedged international expenses occur. Expected amounts are based on derivative valuations at March 31, 2009. Actual results may vary as a result of changes in the corresponding exchange rate subsequent to this date.

During the three months ended March 31, 2009, hedges with a notional amount of $14.4 million were determined to be ineffective. As a result, we recorded a net gain of $417,000 related to these hedges as a component of “net foreign exchange gain (loss)”. We did not record any ineffectiveness during the three months ended March 31, 2008.

Other Derivatives

Other derivatives not designated as hedging instruments under SFAS 133(R) consist primarily of foreign currency forward contracts that we use to hedge our foreign denominated net receivable or net payable positions to protect against the change in value caused by a fluctuation in foreign currency exchange rates. We typically hedge up to 90% of our outstanding foreign denominated net receivables or net payables and typically limit the duration of these foreign currency forward contracts to approximately 90 days. The gain or loss on the derivatives as well as the offsetting gain or loss on the hedge item attributable to the hedged risk is recognized in current earnings under the line item “net foreign exchange gain (loss)”. As of March 31, 2009 and December 31, 2008, we held forward contracts with a notional amount of $62.5 million and $67.1 million, respectively.

The following table presents the fair value of derivative instruments on our consolidated balance sheets and the effect of derivative instruments on our Consolidated Statements of Income.

Fair Values of Derivative Instruments (in thousands):
 
In thousands
Asset Derivatives
 
 
March 31, 2009
 
December 31, 2008
 
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
     
(unaudited)
         
Derivatives designated as hedging
instruments under Statement 133(R)
               
                 
Foreign exchange contracts – ST forwards
Prepaid expenses and other current assets
  $ 4,508  
Prepaid expenses and other current assets
  $ 5,260  
                     
Foreign exchange contracts – LT forwards
Other long-term assets
    4,362  
Other long-term assets
    2,654  
                     
Foreign exchange contracts – ST options
Prepaid expenses and other current assets
    6,801  
Prepaid expenses and other current assets
    5,705  
                     
Foreign exchange contracts – LT options
Other long-term assets
    3,172  
Other long-term assets
    3,838  
                     
Total derivatives designated as
hedging instruments under Statement 133(R)
    $ 18,843       $ 17,457  
                     
Derivatives not designated as
hedging instruments under Statement 133(R)
                   
                     
Foreign exchange contracts – ST forwards
Prepaid expenses and other current assets
  $ 2,190  
Prepaid expenses and other current assets
  $ 2,745  
                     
Total derivatives not designated as
hedging instruments under Statement 133(R)
    $ 2,190       $ 2,745  
                     
Total derivatives
    $ 21,033       $ 20,202  

 
 
Liability Derivatives
 
 
March 31, 2009
 
December 31, 2008
 
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
     
(unaudited)
         
Derivatives designated as hedging
instruments under Statement 133(R)
               
                 
Foreign exchange contracts – ST forwards
Accrued expenses and other liabilities
  $ (2,549 )
Accrued expenses and other liabilities
  $ (1,803 )
                     
Foreign exchange contracts – LT forwards
Other long-term liabilities
     
Other long-term liabilities
     
                     
Foreign exchange contracts – ST options
Accrued expenses and other liabilities
     
Accrued expenses and other liabilities
     
                     
Foreign exchange contracts – LT options
Other long-term liabilities
     
Other long-term liabilities
     
                     
Total derivatives designated as
hedging instruments under Statement 133(R)
    $ (2,549 )     $ (1,803 )
                     
Derivatives not designated as
hedging instruments under Statement 133(R)
                   
                     
Foreign exchange contracts – ST forwards
Accrued expenses and other liabilities
  $ (1,087 )
Accrued expenses and other liabilities
  $ (3,280 )
                     
Total derivatives not designated as
hedging instruments under Statement 133(R)
    $ (1,087 )     $ (3,280 )
                     
Total derivatives
    $ (3,636 )     $ (5,083 )
 
The following unaudited table shows the effect of derivative instruments on the Consolidated Statements of Income for the three-months ended March 31, 2009 and 2008 (in thousands):
 
 
 
 
 
 
 
 
Derivatives in Statement 133(R) Cash Flow Hedging Relationship
 
 
 
Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) (in thousands)
 
 
 
 
 
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) (in thousands)
 
 
 
 
 
 
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
   
2009
     
2009
     
2009
 
Foreign exchange contracts – forwards and options
  $  3,796  
 
Net sales
  $  2,633  
 
Net foreign exchange gain (loss)
  $  940  
                             
Foreign exchange contracts – forwards and options
    (2,746 )
 
Cost of sales
    (255 )
 
Net foreign exchange gain (loss)
    (523 )
                             
Foreign exchange contracts – forwards and options
    (888 )
 
Operating expenses
    (266 )
 
Net foreign exchange gain (loss)
       
                             
Total
  $ 162       $ 2,112       $ 417  
 

 
 
Derivatives not Designated as Hedging Instruments under Statement 133(R)
 
 
Location of Gain (Loss) Recognized in Income on Derivative
 
Amount of Gain (Loss) Recognized in Income on Derivative
 
       
2009
 
Foreign exchange contracts – forwards
 
Net foreign exchange gain/(loss)
  $ 3,089  
             
Total
      $ 3,089  

NOTE 6 – Inventories

Inventories, net consist of the following (in thousands):

   
March 31,
   
December 31,
 
   
2009
   
2008
 
   
(unaudited)
       
             
Raw materials                                                         
  $ 45,120     $ 48,004  
Work-in-process                                                         
    2,109       4,150  
Finished goods                                                         
    55,389       55,204  
    $ 102,618     $ 107,358  

NOTE 7 – Intangibles

Intangibles at March 31, 2009 and December 31, 2008 are as follows:
 
   
March 31, 2009
   
December 31, 2008
 
   
(unaudited)
                   
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net Carrying Amount
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net Carrying Amount
 
Capitalized software development costs
  $ 28,724     $ (13,453 )   $ 15,271     $ 25,610     $ (11,344 )   $ 14,266  
Acquired technology                                                
    27,418       (17,690 )     9,728       27,503       (16,804 )     10,699  
Patents                                                
    17,371       (4,691 )     12,680       16,068       (4,506 )     11,562  
Leasehold equipment and other
    11,439       (6,430 )     5,009       11,401       (6,013 )     5,388  
    $ 84,952     $ (42,264 )   $ 42,688     $ 80,582     $ (38,667 )   $ 41,915  
 
Software development costs capitalized for the three months ended March 31, 2009 and March 31, 2008 were $3.1 million and $1.5 million, respectively. Capitalized software amortization expense was $2.1 million and $2.5 million for the three months ended March 31, 2009 and March 31, 2008, respectively. Amortization of capitalized software development costs is computed on an individual product basis for those products available for market and is recognized based on the product’s estimated economic life, generally three years. Patents are amortized using the straight-line method over their estimated period of benefit, generally ten to seventeen years. Total intangible assets amortization expenses were $3.6 million and $3.9 million for the three months ended March 31, 2009 and March 31, 2008, respectively.

Acquired core technology and intangible assets are amortized over their useful lives, which range from three to eight years. Amortization expense for intangible assets acquired was approximately $1.0 million and $1.0 million for the three months ended March 31, 2009 and March 31, 2008, respectively, of which approximately $887,000 and $850,000 was recorded in cost of sales for the three months ended March 31, 2009 and March 31, 2008, respectively, and approximately $126,000 and $150,000 was recorded in operating expenses for the three months ended March 31, 2009 and March 31, 2008, respectively. The estimated amortization expense of intangible assets acquired for the current fiscal year and in future years will be recorded in the consolidated statements of income as follows (in thousands):

 
 
Fiscal Year
 
Cost of Sales
   
Acquisition related costs and amortization, net
   
 
Total
 
                   
2009
    3,300       502       3,802  
2010
    2,765       341       3,106  
2011
    2,121       214       2,335  
2012
    1,212       282       1,494  
Thereafter
                       
Total
    9,398       1,339       10,737  

NOTE 8 – Goodwill

The carrying amount of goodwill for 2009 is as follows:

   
Amount
(in thousands)
 
Balance as of December 31, 2008                                                                                                     
  $ 64,561  
Acquisitions                                                                                                     
     
Divestitures                                                                                                     
     
Foreign currency translation impact                                                                                                     
    (393 )
Balance as of March 31, 2009                                                                                                     
  $ 64,168  

The excess purchase price over the fair value of assets acquired is recorded as goodwill. As we have one operating segment, we allocate goodwill to one reporting unit for goodwill impairment testing. In accordance with SFAS 142, Goodwill and Other Intangible Assets, goodwill is tested for impairment on an annual basis, and between annual tests if indicators of potential impairment exist, using a fair-value-based approach based on the market capitalization of the reporting unit. Our annual impairment test was performed as of February 28, 2009. No impairment of goodwill has been identified during the period presented. Goodwill is deductible for tax purposes in certain jurisdictions.

NOTE 9 – Income Taxes

In July 2006, the FASB issued FASB Interpretation (“FIN”) 48, Accounting for Uncertainty in Income Taxes – an interpretation of Statement of Financial Accounting Standards 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. We had $9.5 million and $8.7 million of unrecognized tax benefits at March 31, 2009 and March 31, 2008, respectively, all of which would affect our effective income tax rate if recognized. As of March 31, 2009, it is deemed reasonable that we will recognize tax benefits in the amount of $1.6 million in the next twelve months due to the closing of open tax years. The nature of the uncertainty is related to deductions taken on returns that have not been examined by the applicable tax authority. Our continuing policy is to recognize interest and penalties related to income tax matters in income tax expense. As of March 31, 2009, we have approximately $646,000 accrued for interest related to uncertain tax positions. We recognized no material adjustment to the liability for unrecognized income tax benefits. The tax years 2002 through 2008 remain open to examination by the major taxing jurisdictions to which we are subject.

Our provision for income taxes reflected an effective tax rate of 115% for the three months ended March 31, 2009, and 19% for the three months ended March 31, 2008. For the three months ended March 31, 2009, our effective tax rate was higher than the U.S. federal statutory rate of 35% as a result of certain stock-based compensation expenses that do not result in a tax deduction and are a greater percentage of net income in the three months ended March 31, 2009, than they were during the same period in 2008. Non-deductible stock-based compensation expense accounted for 16 percentage points of the difference between the statutory rate and the effective rate. In addition, during the three months ended March 31, 2009, 18 percentage points of the difference was due to a valuation allowance related to the deferred tax assets for which tax benefits were previously recognized and 43 percentage points was due to the partial release of a deferred tax asset valuation allowance. The partial release of the valuation allowance had the effect of increasing our effective tax rate in the three months ended March 31, 2009, because we reported a net loss before taxes in that period. The increase in our effective tax rate for the three months ended March 31, 2009, compared to March 31, 2008, was primarily the result of the following; 13 percentage points due to an increase in non-deductible stock-based compensation expense as a percentage of net income, 20 percentage points due to a change in the valuation allowance related to deferred tax assets for which tax benefits were previously recognized and 53 percentage points due to the partial release of a deferred tax asset valuation allowance. For the three months ended March 31, 2008, our effective tax rate was lower than the U.S. federal statutory rate of 35% primarily as a result of tax exempt interest, reduced tax rates in certain foreign jurisdictions, and the partial release of a deferred tax asset valuation allowance.

NOTE 10 – Comprehensive Income

Our comprehensive income is comprised of net income, foreign currency translation, unrealized gains and losses on forward and option contracts and securities available for sale. Comprehensive income for the three month periods ended March 31, 2009 and March 31, 2008, was as follows (in thousands):

   
Three Months Ended
 
   
March 31,
 
   
(unaudited)
 
   
2009
   
2008
 
Comprehensive income:
           
Net income                                                                                           
  $ 358     $ 17,616  
Foreign currency translation gains (losses), net of taxes                                                                                           
    (2,775 )     5,703  
Unrealized losses on derivative instruments, net of taxes                                                                                           
    (78 )     (2,107 )
Unrealized (losses) on available for sale securities, net of taxes
    (180 )     (355 )
Total comprehensive income
  $ (2,675 )   $ 20,857  

NOTE 11 – Stock-Based Compensation Plans

Stock option plans

Our stockholders approved the 1994 Incentive Stock Option Plan (the “1994 Plan”) on May 9, 1994. At the time of approval, 9,112,500 shares of our common stock were reserved for issuance under this plan. In 1997, an additional 7,087,500 shares of our common stock were reserved for issuance under this plan, and an additional 750,000 shares were reserved for issuance under this plan, as amended, in 2004. The 1994 Plan terminated in May 2005, except with respect to outstanding awards previously granted thereunder. Awards under the plan were 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. Vesting of ten year awards may accelerate based on the Company’s previous year’s earnings and growth but shares cannot accelerate to vest over a period of less than five years. Stock options must be exercised within ten years from date of grant. Stock options were issued at the market price at the grant date. As part of the requirements of SFAS 123R, Share-Based Payment, we are required to estimate potential forfeitures of stock grants and adjust compensation cost recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods.

Transactions under all stock option plans are summarized as follows:

   
Number of shares under option
   
Weighted average
Exercise price
 
Outstanding at December 31, 2008                                                                             
    4,272,567     $ 25.97  
Exercised                                                                      
    (249,969 )     12.72  
Canceled                                                                      
    (66,567 )     29.12  
Granted                                                                      
           
Outstanding at March 31, 2009                                                                             
    3,956,031     $ 26.76  

The aggregate intrinsic value of stock options at exercise, represented in the table above, was $1.5 million for the three months ended March 31, 2009. Total unrecognized stock-based compensation expense related to non-vested stock options was approximately $5.0 million as of March 31, 2009, related to approximately 348,000 shares with a per share weighted average fair value of $16.75. We anticipate this expense to be recognized over a weighted average period of approximately 4.3 years.

     
Outstanding and Exercisable by Price Range as of March 31, 2009
 
               
     
Options Outstanding
   
Options Exercisable
 
                                 
Range of Exercise prices
   
Number outstanding as of 3/31/2009
   
Weighted average remaining contractual life
   
Weighted average exercise price
   
Number exercisable as of 3/31/2009
   
Weighted average exercise price
 
$ 12.36 – $ 21.04       1,333,833       2.43     $ 20.63       1,224,727     $ 20.64  
$ 21.25 – $ 29.85       1,353,962       4.58     $ 27.89       1,125,849     $ 27.82  
$ 30.51 – $ 34.38       1,268,236       1.23     $ 31.99       1,257,424     $ 31.99  
$ 12.36 – $ 34.38       3,956,031       2.78     $ 26.76       3,608,000     $ 26.84  

The weighted average remaining contractual life of options exercisable as of March 31, 2009 was 2.6 years. The aggregate intrinsic value of options outstanding as of March 31, 2009 was $(32.1) million. The aggregate intrinsic value of options currently exercisable as of March 31, 2009 was $(29.5) million. No options were granted in the three months ended March 31, 2009 as our 1994 Plan terminated in May 2005.

Restricted stock plan

Our stockholders approved the 2005 Incentive Plan on May 10, 2005. At the time of approval, 2,700,000 shares of our common stock were reserved for issuance under this plan, as well as the number of shares which had been reserved but not issued under the 1994 Plan (our incentive stock option plan which terminated in May 2005), and any shares that returned to the 1994 Plan as a result of termination of options or repurchase of shares issued under such plan. The 2005 Plan, administered by the Compensation Committee of the Board of Directors, provides for granting of incentive awards in the form of restricted stock and restricted stock units (“RSUs”) to directors, executive officers and employees of the Company and its subsidiaries. Awards vest over a three, five or ten-year period, beginning on the date of grant. Vesting of ten year awards may accelerate based on the Company’s previous year’s earnings and growth but ten year awards cannot accelerate to vest over a period of less than five years. Shares available for grant at March 31, 2009 were 2,620,700. As part of the requirements of SFAS 123R, we are required to estimate potential forfeitures of RSUs and adjust compensation cost recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods.

Transactions under the 2005 Incentive Plan are summarized as follows:

   
RSUs
 
   
Number of RSUs
   
Weighted Average Grant Price
 
Balance at December 31, 2008                                                                        
    2,165,228     $ 26.99  
Granted                                                                   
    24,725       19.77  
Earned                                                                   
           
Canceled                                                                   
    (9,761 )     27.23  
Balance at March 31, 2009                                                                        
    2,180,192     $ 26.90  

Total unrecognized stock-based compensation expense related to non-vested RSUs was approximately $54.5 million as of March 31, 2009, related to 2,180,192 shares with a per share weighted average fair value of $26.90. We anticipate this expense to be recognized over a weighted average period of approximately 7.0 years.

Employee stock purchase plan

Our employee stock purchase plan permits substantially all domestic employees and employees of designated subsidiaries to acquire our common stock at a purchase price of 85% of the lower of the market price at the beginning or the end of the purchase period. The plan has quarterly purchase periods on February 1, May 1, and November 1 of each year. During our annual shareholders meeting held on May 7, 2007, shareholders approved an additional 3.0 million shares of common stock to be reserved for issuance under this plan. Employees may designate up to 15% of their compensation for the purchase of common stock. Common stock reserved for future employee purchases aggregated 2,364,886 shares at March 31, 2009. Shares issued under this plan were 228,721 in the three month period ended March 31, 2009. The weighted average fair value of the employees’ purchase rights was $18.25 and was estimated using the Black-Scholes model with the following assumptions:

   
2009
 
Dividend expense yield
    0.3%  
Expected life
 
3 months
 
Expected volatility
    45%  
Risk-free interest rate
    1.7%  

For the three months ended March 31, 2009 and March 31, 2008, stock-based compensation recorded as a component of cost of sales, sales and marketing, research and development, and general and administrative was as follows:

   
Three Months Ended
 
   
March 31,
 
   
(unaudited)
 
   
2009
   
2008
 
Stock-based compensation
           
Cost of sales
  $ 310     $ 244  
Sales and marketing
    2,185       2,007  
Research and development
    1,737       1,727  
General and administrative
    799       754  
                 
Provision for income taxes
    (3,014 )     (1,083 )
Total
  $ 2,017     $ 3,649  

Authorized Preferred Stock and Preferred Stock Purchase Rights Plan

We have 5,000,000 authorized shares of preferred stock. On January 21, 2004, our Board of Directors designated 750,000 of these shares as Series A Participating Preferred Stock in conjunction with its adoption of a Preferred Stock Rights Agreement (the “Rights Agreement”) and declaration of a dividend of one preferred share purchase right (a “Right”) for each share of common stock outstanding held as of May 10, 2004 or issued thereafter. Each Right will entitle its holder to purchase one one-thousandth of a share of National Instruments’ Series A Participating Preferred Stock at an exercise price of $200, subject to adjustment, under certain circumstances. The Rights Agreement was not adopted in response to any effort to acquire control of National Instruments.

The Rights only become exercisable in certain limited circumstances following the tenth day after a person or group announces acquisitions of or tender offers for 20% or more of our common stock. In addition, if an acquirer (subject to certain exclusions for certain current stockholders of National Instruments, an “Acquiring Person”) obtains 20% or more of our common stock, then each Right (other than the Rights owned by an Acquiring Person or its affiliates) will entitle the holder to purchase, for the exercise price, shares of our common stock having a value equal to two times the exercise price. Under certain circumstances, our Board of Directors may redeem the Rights, in whole, but not in part, at a purchase price of $0.01 per Right. The Rights have no voting privileges and are attached to and automatically traded with our common stock until the occurrence of specified trigger events. The Rights will expire on the earlier of May 10, 2014 or the exchange or redemption of the Rights.


NOTE 12 – Commitments and Contingencies

We offer a one-year limited warranty on most hardware products, which is included in the sales price of many of our products. Provision is made for estimated future warranty costs at the time of sale pursuant to SFAS 5, Accounting for Contingencies, for the estimated costs that may be incurred under the basic limited warranty. Our estimate is based on historical experience and product sales during this period.

The warranty reserve for the three month periods ended March 31, 2009 and 2008, respectively, was as follows (in thousands):

   
Three Months Ended
 
   
March 31,
 
   
(unaudited)
 
   
2009
   
2008
 
Balance at the beginning of the period                                                                                
  $ 952     $ 750  
Accruals for warranties issued during the period                                                                                
    496       436  
Settlements made (in cash or in kind) during the period                                                                                
    (602 )     (414 )
Balance at the end of the period                                                                                
  $ 846     $ 772  

As of March 31, 2009, we have outstanding guarantees for payment of foreign operating leases, customs and foreign grants totaling approximately $2.0 million.

As of March 31, 2009, we have non-cancelable purchase commitments with various suppliers of customized inventory and inventory components totaling approximately $7.7 million over the next twelve months.

NOTE 13 – Segment Information

In accordance with SFAS 131, Disclosures about Segments of an Enterprise and Related Information, we determine operating segments using 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 our operating segments. It also requires disclosures about products and services, geographic areas and major customers.

We have defined our operating segment based on geographic regions. We sell our products in three geographic regions. Our sales to these regions share similar economic characteristics, similar product mix, similar customers, and similar distribution methods. Accordingly, we have elected to aggregate these three geographic regions into a single operating segment. Revenue from the sale of our products which are similar in nature and software maintenance are reflected as total net sales in our Consolidated Statements of Income.

Total net sales, operating income, interest income and long-lived assets, classified by the major geographic areas in which we operate, are as follows (in thousands):

   
Three Months Ended
March 31,
 
   
(unaudited)
 
   
2009
   
2008
 
Net sales:
           
Americas:
           
Unaffiliated customer sales                                                  
  $ 68,439     $ 83,585  
Geographic transfers                                                  
    21,361       30,983  
      89,800       114,568  
                 
Europe:
               
Unaffiliated customer sales                                                  
    49,480       59,144  
Geographic transfers                                                  
    50,153       50,584  
      99,633       109,728  
                 
Asia Pacific:
               
Unaffiliated customer sales                                                  
    39,880       50,190  
Eliminations                                                    
    (71,514 )     (81,567 )
                 
    $ 157,799     $ 192,919  

   
Three Months Ended
March 31,
 
   
(unaudited)
 
   
2009
   
2008
 
Operating income (loss):
           
Americas                                                    
  $ 5,307     $ 15,253  
Europe                                                    
    16,780       21,038  
Asia Pacific                                                    
    10,223       17,378  
Unallocated:
               
Research and development expenses                                                    
    (34,789 )     (35,604 )
    $ (2,479 )   $ 18,065  

   
Three Months Ended
March 31,
 
   
(unaudited)
 
   
2009
   
2008
 
Interest income:
           
Americas                                                    
  $ 294     $ 1,056  
Europe                                                    
    274       1,050  
Asia Pacific                                                    
    21       31  
    $ 589     $ 2,137  

   
March 31,
2009
   
December 31,
2008
 
   
(unaudited)
       
Long-lived assets:
           
Americas                                                     
  $ 106,226     $ 107,701  
Europe                                                     
    37,518       39,280  
Asia Pacific                                                     
    7,049       7,496  
    $ 150,793     $ 154,477  

Total sales outside the United States for the three month periods ended March 31, 2009 and 2008 were $96.2 million and $116.7 million, respectively.

NOTE 14 – Acquisitions

On February 1, 2008, we acquired all of the outstanding shares of microLEX Systems A/S, a premier provider of virtual instrumentation-based video, audio and mixed-signal test solutions. This acquisition was accounted for as a business combination. The total purchase price of the acquisition, which included legal and accounting fees, was $17.8 million in cash. The allocation of the purchase price was determined using the fair value of assets and liabilities acquired as of February 1, 2008. We funded the purchase price from existing cash balances. Our consolidated financial statements include the operating results from the date of acquisition. Pro-forma results of operations have not been presented because the effects of those operations were not material. The following table summarizes the initial allocation of the purchase price of microLEX (in thousands):

Goodwill                                                        
  $ 10,818  
Acquired core technology                                                        
    5,201  
Non-competition agreements                                                        
    159  
Trademarks                                                        
    119  
Customer relationships                                                        
    354  
Current assets acquired                                                        
    3,057  
Long-term assets acquired                                                        
    20  
Current liabilities assumed                                                        
    (486 )
Deferred tax liabilities                                                        
    (1,458 )
Total equity acquired                                                        
  $ 17,784  

Goodwill is not deductible for tax purposes. Existing technology, non-competition agreements, trademarks and customer relationships have useful lives of 5 years, 3 years, 3 years, and 5 years, respectively, and will be amortized over these periods from the date of acquisition. These assets are not deductible for tax purposes.

NOTE 15 – Recently Issued Accounting Pronouncements

In February 2008, the FASB issued Financial Statement Position (“FSP”) 157-2, Effective Date of FASB Statement 157, which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). This FSP partially defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP. We adopted FSP 157-2 on January 1, 2009 as required and concluded it did not have a material impact on our consolidated financial position or results of operations.

In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with FASB Statement 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. This FSP shall be effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. Earlier adoption for periods ending before March 15, 2009, is not permitted. We are currently evaluating the requirements of FSP FAS 157-4 and have not yet determined the impact on our consolidated financial statements.

In December 2007, the FASB issued SFAS 141R, Business Combinations—a replacement of FASB Statement 141, which significantly changes the principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This statement is effective prospectively, except for certain retrospective adjustments to deferred tax balances, for fiscal years beginning after December 15, 2008. We adopted SFAS 161 on January 1, 2009, as required and concluded it did not have a significant impact on our consolidated financial position or results of operations.

In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging Activities. This statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133(R) and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This statement is effective for fiscal years and interim periods beginning after November 15, 2008. Early application is encouraged. We adopted SFAS 161 on January 1, 2009, as required and concluded it did not have a significant impact on our consolidated financial position or results of operations.

In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets. FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, Goodwill and Other Intangible Assets. The intent of the position is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R, Business Combinations, and other U.S. generally accepted accounting principles. The provisions of FSP FAS 142-3 are effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. We adopted FSP FAS 142-3 on January 1, 2009, as required and concluded it did not have a significant impact on our consolidated financial position or results of operations.

In April 2009, the FASB issued FSP FAS 115-2, Recognition and Presentation of Other-Than-Temporary Impairments. FSP FAS 115-2 amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The FSP shall be effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Earlier adoption for periods ending before March 15, 2009, is not permitted. We are currently evaluating the requirements of FSP FAS 115-2 and have not yet determined the impact on our consolidated financial statements.

NOTE 16 – Litigation

We filed a patent infringement action on January 25, 2001, in the U.S. District Court, Eastern District of Texas (Marshall Division) claiming that The MathWorks, Inc. ("MathWorks") infringed certain of our U.S. patents. On January 30, 2003, a jury found infringement by MathWorks of three of the patents involved and awarded us specified damages. On June 23, 2003, the District Court entered final judgment in favor of us and entered an injunction against MathWorks' sale of its Simulink and related products and stayed the injunction pending appeal. Upon appeal, the judgment and the injunction were affirmed by the U.S. Court of Appeals for the Federal Circuit (September 3, 2004). Subsequently the stay of injunction was lifted by the District Court. In November 2004, the final judgment amount of $7.4 million which had been held in escrow pending appeal was released to us.

An action was filed by MathWorks against us on September 22, 2004, in the U.S. District Court, Eastern District of Texas (Marshall Division), claiming that on that day MathWorks had released modified versions of its Simulink and related products, and seeking a declaratory judgment that the modified products do not infringe the three patents adjudged infringed in the District Court's decision of June 23, 2003 (and affirmed by the Court of Appeals on September 3, 2004). On November 2, 2004, MathWorks served the complaint on us. We filed an answer to MathWorks' declaratory judgment complaint, denying MathWorks' claims of non-infringement and alleging our own affirmative defenses. On January 5, 2005, the Court denied a contempt motion by us to enjoin the modified Simulink products under the injunction in effect from the first case. On January 7, 2005, we amended our answer to include counterclaims that MathWorks' modified products are infringing three of our patents, and requested unspecified damages and an injunction. MathWorks filed its reply to our counterclaims on February 7, 2005, denying the counterclaims and alleging affirmative defenses. On March 2, 2005, we filed a notice of appeal regarding the Court's denial of the contempt motion. On March 15, 2005, the Court stayed MathWorks’ declaratory judgment action, pending a decision on the appeal by the Court of Appeals for the Federal Circuit. On February 9, 2006, the Court of Appeals for the Federal Circuit affirmed the District Court’s January 2005 order. On November 22, 2006, the District Court lifted the stay. The case schedule has yet to be set in this action. During the fourth quarter of 2004, we accrued $4 million related to our probable loss from this contingency, which consists entirely of anticipated patent defense costs that are probable of being incurred. In the fourth quarter of 2006, we accrued an additional $600,000 related to this contingency. We charged approximately $1,500 against this accrual during the three months ended March 31, 2009.  To date, we have charged a cumulative total of $620,000 against this accrual.

NOTE 17 – Subsequent Event

On April 22, 2009, our Board of Directors declared a quarterly cash dividend of $0.12 per common share, payable June 1, 2009, to shareholders of record on May 11, 2009.


 
 

 

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 our future financial performance or operations (including, without limitation, statements to the effect that we “believe,” "expect," "plan," "may," "will," "project," "continue," or "estimate" 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, including those set forth under the heading “Risk Factors” beginning on page 33, and the discussion below. Readers are also encouraged to refer to the documents regularly filed by us with the Securities and Exchange Commission, including our Annual Report on Form 10-K for further discussion of our business and the risks attendant thereto.


Overview

National Instruments Corporation (“we” or “our”) is a leading supplier of measurement and automation products that engineers and scientists use in a wide range of industries. These industries comprise a large and diverse market for design, control and test applications. We provide flexible application software and modular, multifunctional hardware that users combine with industry-standard computers, networks and third party devices to create measurement, automation and embedded systems, which we also refer to as “virtual instruments”. Our approach gives customers the ability to quickly and cost-effectively design, prototype and deploy unique custom-defined solutions for their design, control and test application needs. We sell to a large number of customers in a wide variety of industries. No single customer accounted for more than 3% of our sales in the three months ended March 31, 2009 or in the years 2008, 2007 or 2006.

The key strategies that management focuses on in running our business are the following:

Expanding our broad customer base

We strive to increase our already broad customer base by serving a large market on many computer platforms, through a global marketing and distribution network. We also seek to acquire new technologies and expertise from time to time in order to open new opportunities for our existing product portfolio.

Maintaining a high level of customer satisfaction

To maintain a high level of customer satisfaction we strive to offer innovative, modular and integrated products through a global sales and support network. We strive to maintain a high degree of backwards compatibility across different platforms in order to preserve the customer’s investment in our products. In this time of intense global competition, we believe it is crucial that we continue to offer products with quality and reliability, and that these products provide cost-effective solutions for our customers.

Leveraging external and internal technology

Our product strategy is to provide superior products by leveraging generally available technology, supporting open architectures on multiple platforms and by leveraging our core technologies such as custom application specific integrated circuits (“ASICs”) across multiple products.

We sell into test and measurement (“T&M”) and industrial/embedded applications in a broad range of industries and as such are subject to the economic and industry forces which drive those markets. It has been our experience that the performance of these industries and our performance is impacted by general trends in industrial production for the global economy and by the specific performance of certain vertical markets that are intensive consumers of measurement technologies. Examples of these markets are semiconductor capital equipment, telecom, defense, aerospace, automotive and others. In assessing our business, we consider the trends in the Global Purchasing Managers Index (“PMI”) published by JP Morgan, global industrial production as well as industry reports on the specific vertical industries that we target. The global industrial economy is currently in a recession. Many economists and other experts are predicting that this recession in the U.S. and global economies will likely continue through the remainder of 2009 and possibly beyond. We are unable to predict how long this recession will last. We expect our business to continue to be adversely impacted by this downturn in the U.S. and global economies.

We distribute our software and hardware products primarily through a direct sales organization. We also use independent distributors, OEMs, VARs, system integrators and consultants to market our products. We have sales offices in the United States and sales offices and distributors in key international markets. Sales outside of the Americas accounted for approximately 57% of our revenues in each of the three months ended March 31, 2009 and 2008. The vast majority of our foreign sales are denominated in the customers’ local currency, which exposes us to the effects of changes in foreign currency exchange rates. We expect that a significant portion of our total revenues will continue to be derived from international sales. (See Note 13 of Notes to Consolidated Financial Statements for details concerning the geographic breakdown of our net sales, operating income, interest income and identifiable assets).

We manufacture a substantial majority of our products at our facilities in Debrecen, Hungary. Additional production primarily of low volume or newly introduced products is done in Austin, Texas. Our product manufacturing operations can be divided into four areas: electronic circuit card and module assembly; chassis and cable assembly; technical manuals and product support documentation; and software duplication. We manufacture most of the electronic circuit card assemblies, and modules in-house, although subcontractors are used from time to time. We use subcontractors in Asia to manufacture a significant portion of our chassis. We manufacture some of our electronic cable assemblies in-house, but many assemblies are produced by subcontractors. We primarily subcontract our software duplication, our technical manuals and product support documentation.

We believe that our long-term growth and success depends on delivering high quality software and hardware products on a timely basis. Accordingly, we focus significant efforts on research and development. We focus our 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. Our success also is dependent on our ability to obtain and maintain patents and other proprietary rights related to technologies used in our products. We have engaged in litigation and will likely engage in future litigation to protect our intellectual property rights. In monitoring and policing our intellectual property rights, we have been and may be required to spend significant resources.

Current business outlook

Many of the industries we serve have historically been cyclical and have experienced periodic downturns. Our customers across all industries and geographic regions demonstrated reduced order patterns beginning in the fourth quarter of 2008. We saw those reduced order patterns continue during the quarter ended March 31, 2009 as almost all of the world’s major industrial economies reported record or near record declines in industrial production, signaling severe contraction in the industrial economy. The difficult economic conditions were reflected in our order trends and revenue for the March 2009 quarter.

With the quarterly average of the global Purchasing Managers Index (PMI) reaching a record low of 36 for the first quarter of 2009, we saw the effect of the global recession worldwide. Although the average PMI reading of 36 for the first quarter of 2009 was a record low, we did see some stabilization of the PMI as the level for January 2009 was 35, 35.8 for February 2009 and 37.3 for March 2009. However, these PMI levels continue to indicate that the industrial economy was still declining rapidly through the end of March 2009 and that conditions will likely remain weak throughout 2009. Although the rapid decline in the PMI seems to have ended and we have seen the effect of this PMI stabilization on our daily order rate which has stabilized in absolute dollars, we cannot predict when these overall adverse business conditions will improve or when the economic downturn will end. Our primary financial goals are to maintain our financial strength and to take advantage of the opportunities this downturn may create. Our key strategies to achieving these goals are to maintain a stable gross margin and to optimize our operating expense cost structure while maintaining strong employee productivity.

During the three months ended March 31, 2009, we took additional steps to reduce our operating cost structure. For the remainder of 2009, we will continue to be prudent in managing our expenses by reducing discretionary expenses while sustaining our strategic investment in research and development and field sales. As a result, our spending plans for the full year 2009 have been reduced by approximately $25 million from our expected levels earlier this year and we are currently budgeting for a decrease in total operating expenses of approximately 10% for 2009 compared to 2008. Although this strategy was successful during the three months ended March 31, 2009, we cannot be certain that we will achieve the same level of success in future periods. Historically, our operating results fluctuate from period to period due to changes in global economic conditions and a number of other factors. As a result, we believe historical results of operations should not be relied upon as indications of future performance. We have been profitable in every year since 1990. However, there can be no assurance that we will remain profitable in future periods.
Results of Operations

The following table sets forth, for the periods indicated, the percentage of net sales represented by certain items reflected in our consolidated statements of income:

   
Three Months Ended
 
   
March 31,
 
   
2009
   
2008
 
Net sales:
           
Americas
    43.4 %     43.3 %
Europe
    31.3       30.7  
Asia Pacific
    25.3       26.0  
Consolidated net sales
    100.0       100.0  
Cost of sales
    25.9       25.4  
Gross profit
    74.1       74.6  
Operating expenses:
               
Sales and marketing
    43.6       38.1  
Research and development
    22.1       18.5  
General and administrative
    10.0       8.6  
Total operating expenses
    75.7       65.2  
Operating income (loss)
    (1.6 )     9.4  
Other income (expense):
               
Interest income
    0.4       1.1  
Net foreign exchange gain (loss)
    (0.4 )     0.8  
Other income (expense), net
    0.1        
Income (loss) before income taxes
    (1.5 )     11.3  
Provision for (benefit from) income taxes
    (1.7 )     2.2  
Net income
    0.2 %     9.1 %

Net Sales.  Consolidated net sales were $157.8 million and $192.9 million for the three month periods ended March 31, 2009 and 2008, respectively, a decrease of 18%.  This decrease can be attributed to declines in sales volume across all areas of our business. Instrument control products which comprise approximately 6% of our revenues, saw a year-over-year decline of 42%. Products in the areas of virtual instrumentation and graphical system design which comprise approximately 94% of our revenues saw a year-over-year decline of 16%. For the three months ended March 31, 2008, instrument control products comprised 9% of our revenues, while virtual instrumentation and graphical system design comprised 91% of our revenues. Our instrument control products are the most economically sensitive portion of our revenue, and we expect the year-over-year revenue trend in instrument control to continue to be very weak in the second quarter and third quarters of 2009. We did not take any significant action with regard to pricing during the three months ended March 31, 2009, and thus, the decrease in revenues is attributable to a decrease in customer orders.

Sales in the Americas were $68.4 million and $83.6 million for the three month periods ended March 31, 2009 and 2008, respectively, a decrease of 18%. Sales outside of the Americas, as a percentage of consolidated sales, remained constant at 57% in each of the three month periods ended March 31, 2009, and 2008. Sales in Europe were $49.5 million and $59.1 million for the three month periods ended March 31, 2009 and 2008, respectively, a decrease of 16%. Sales in Asia were $39.9 million and $50.2 million for the three month periods ended March 31, 2009, and 2008, respectively, a decrease of 21%. We expect sales outside of the Americas to continue to represent a significant portion of our revenue. We intend to continue to expand our international operations by increasing our presence in existing markets, adding a presence in some new geographical markets and continuing the use of distributors to sell our products in some countries.

Almost all sales made by our direct sales offices in the Americas, outside of the United States, in Europe and in Asia Pacific are denominated in local currencies, and accordingly, the U.S. dollar equivalent of these sales is affected by changes in foreign currency exchange rates. For the three months ended March 31, 2009, net of hedging results, the change in exchange rates had the effect of decreasing our consolidated sales by $7.4 million or 4%, decreasing Americas sales by $2.2 million or 3%, decreasing European sales by $2.0 million or 3%, and decreasing sales in Asia Pacific by $3.2 million or 6% compared to the three months ended March 31, 2008.

Gross Profit.  As a percentage of sales, gross margin was 74% and 75% for the three month periods ended March 31, 2009, and 2008, respectively. Gross margin decreased in the three months ended March 31, 2009, primarily as a result of reduced sales volumes compared to the same period in 2008. For the three months ended March 31, 2009, charges related to acquisition related intangibles and stock based compensation increased to $1.2 million from $1.1 million during the comparable period in 2008. For the three months ended March 31, 2009, the net impact of foreign currency exchange rates had the effect of decreasing our cost of goods sold by $1.6 million or 3%. For the three months ended March 31, 2008, the net impact of foreign currency exchange rates had the effect of increasing our cost of goods sold by $992,000 or 2%.

Sales and Marketing.  Sales and marketing expenses were $68.8 million and $73.5 million for the three month periods ended March 31, 2009, and 2008, respectively, a decrease of 6%. As a percentage of net sales, sales and marketing expenses were 44% and 38% over the same periods. The decrease in sales and marketing expense for the three months ended March 31, 2009, was partly due to decreases in discretionary spending of approximately $2.8 million compared to the comparable prior year period. These decreases were in the areas of travel and advertising. Also, during the three months ended March 31, 2009, the net impact of foreign currency exchange rates had the effect of decreasing our sales and marketing expense by $3.3 million or 4% compared to the same period in 2008. The increase in sales and marketing expense as a percentage of revenue was due to the 18% decrease in revenue during the three months ended March 31, 2009, compared to the three months ended March 31, 2008. We plan to continue to make investments in our field sales force during the remainder of 2009. However, due to the continued downturn in the industrial economy in 2009 and due to the fact that we cannot anticipate when this downturn might ease, our field sales expansion during the remainder of 2009 will likely be less than it was in 2008. We expect sales and marketing expenses in future periods to continue to fluctuate as a percentage of sales based on recruiting, marketing and advertising campaign costs associated with major new product releases and entry into new market areas, investment in web sales and marketing efforts, increasing product demonstration costs and the timing of domestic and international conferences and trade shows.

Research and Development.  Research and development expenses were $34.8 million and $35.6 million for the three month periods ended March 31, 2009, and 2008, respectively, a decrease of 2%. As a percentage of net sales, research and development expenses were 22% and 19% over the same periods. The increase in research and development expenses as a percentage of revenue was due to the 18% decrease in revenue during the three months ended March 31, 2009, compared to the three months ended March 31, 2008. Overall expenses in research and development remained relatively constant due to spending controls on discretionary items such as travel. To an extent, these cost controls were offset by an increase in personnel expenses due to a net increase of 82 people in our worldwide R&D group during the three months ended March 31, 2009, compared to the same period in 2008. In addition, during the three months ended March 31, 2009, the net impact of foreign currency exchange rates had the effect of decreasing our research and development expense by $203,000 or 1% compared to the same period in 2008. We plan to continue to make additional investments in our research and development group during the remainder of 2009. However, due to the continued downturn in the industrial economy and due to the fact that we cannot anticipate when this downturn might ease, our research and development expansion during 2009 will likely be less than it was in 2008.

We capitalize software development costs in accordance with SFAS 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. We amortize such costs over the related product’s estimated economic life, generally three years, beginning when a product becomes available for general release. Software amortization expense included in cost of goods sold totaled $2.1 million and $2.5 million during the three month periods ended March 31, 2009 and 2008, respectively. Internally developed software costs capitalized during the three month periods ended March 31, 2009 and 2008, were $3.1 million and $1.5 million, respectively. Capitalization of internally developed software costs varies depending on the timing of when each project reaches technological feasibility and the length and scope of the development cycle of each individual project. (See Note 7 of Notes to Consolidated Financial Statements for a description of intangibles).

General and Administrative.  General and administrative expenses were $15.8 million and $16.7 million for the three month periods ended March 31, 2009 and 2008, respectively, a decrease of 5%. As a percentage of net sales, general and administrative expenses were 10% and 9% over the same periods. The increase in general and administrative expenses as a percentage of revenue was driven by the 18% decrease in revenue during the three months ended March 31, 2009, compared to the three months ended March 31, 2008. During the three months ended March 31, 2009, the net impact of foreign currency exchange rates had the effect of decreasing our general and administrative expense by $602,000 or 4% compared to the same period in 2008. We expect that general and administrative expenses in future periods will fluctuate in absolute dollars and as a percentage of revenue.

Interest Income.  Interest income was $589,000 and $2.1 million for the three month periods ended March 31, 2009 and 2008, respectively, a decrease of 72%. The decrease is attributable to a decrease in invested funds as well as a significant decrease in investment yields. The source of interest income is from the investment of our cash and short-term and long-term investments.

Net Foreign Exchange Gain (Loss).  Net foreign exchange gain (loss) was ($702,000) and $1.5 million for the three month periods ended March 31, 2009 and 2008, respectively. These results are attributable to movements in the foreign currency exchange rates between the U.S. dollar and foreign currencies in countries where our functional currency is not the U.S. dollar. We recognize the local currency as the functional currency in virtually all of our international subsidiaries.

We utilize foreign currency forward contracts to hedge our foreign denominated net receivable positions to protect against the reduction in value caused by a fluctuation in foreign currency exchange rates. We typically hedge up to 90% of our outstanding foreign denominated net receivables and typically limit the duration of these foreign currency forward contracts to approximately 90 days. The gain or loss on these derivatives as well as the offsetting gain or loss on the hedge item attributable to the hedged risk is recognized in current earnings under the line item net foreign exchange gain (loss).

To protect against the change in the value caused by a fluctuation in foreign currency exchange rates of forecasted foreign currency cash flows resulting from international sales and expenses over the next one to two years, we have instituted a foreign currency cash flow hedging program. We hedge portions of our forecasted revenue and forecasted expenses denominated in foreign currencies with forward and option contracts. For forward contracts, when the dollar strengthens significantly against the foreign currencies, the change in the present value of future foreign currency cash flows may be offset by the change in the fair value of the forward contracts designated as hedges. For option contracts, when the dollar strengthens significantly against the foreign currencies, the change in the present value of future foreign currency cash flows may be offset by the change in the fair value of the option contracts net of the premium paid designated as hedges. Our foreign currency purchased option contracts are purchased “at-the-money” or “out-of-the-money.” We purchase foreign currency forward and option contracts for up to 100% of our forecasted exposures in selected currencies (primarily in Euro, Japanese yen, British pound sterling and Hungarian forint) and limit the duration of these contracts to 40 months or less. As a result, our hedging activities only partially address our risks from foreign currency transactions, and there can be no assurance that this strategy will be successful. We do not invest in contracts for speculative purposes. (See Note 5 of Notes to Consolidated Financial Statements for a description of our forward and purchased option contracts and hedged positions). Our hedging strategy reduced our foreign exchange losses by $3.5 million during the three months ended March 31, 2009, and reduced our foreign exchange gain by $2.2 million during the three months ended March 31, 2008.

Provision for Income Taxes.  Our provision for income taxes reflected an effective tax rate of 115% for the three months ended March 31, 2009, and 19% for the three months ended March 31, 2008. For the three months ended March 31, 2009, our effective tax rate was higher than the U.S. federal statutory rate of 35% as a result of certain stock-based compensation expenses that do not result in a tax deduction and are a greater percentage of net income in the three months ended March 31, 2009, than they were during the same period in 2008. Non-deductible stock-based compensation expense accounted for 16 percentage points of the difference between the statutory rate and the effective rate. In addition, during the three months ended March 31, 2009, 18 percentage points of the difference was due to a valuation allowance related to the deferred tax assets for which tax benefits were previously recognized and 43 percentage points was due to the partial release of a deferred tax asset valuation allowance. The partial release of the valuation allowance had the effect of increasing our effective tax rate in the three months ended March 31, 2009, because we reported a net loss before taxes in that period. The increase in our effective tax rate for the three months ended March 31, 2009, compared to March 31, 2008, was primarily the result of the following; 13 percentage points due to an increase in non-deductible stock-based compensation expense as a percentage of net income, 20 percentage points due to a change in the valuation allowance related to deferred tax assets for which tax benefits were previously recognized and 53 percentage points due to the partial release of a deferred tax asset valuation allowance. For the three months ended March 31, 2008, our effective tax rate was lower than the U.S. federal statutory rate of 35% primarily as a result of tax exempt interest, reduced tax rates in certain foreign jurisdictions, and the partial release of a deferred tax asset valuation allowance.

Liquidity and Capital Resources

Working Capital, Cash and Cash Equivalents, Short-term Investments and Long-term Investments.  The following table presents our working capital, cash and cash equivalents and marketable securities (in thousands):
   
March 31, 2009
   
December 31, 2008
   
Increase/
(Decrease)
 
   
(unaudited)
             
Working capital                                                                                 
  $ 390,215     $ 398,292     $ (8,077 )
Cash and cash equivalents (1)                                                                                 
    227,448       229,400       (1,952 )
Short-term investments (1)                                                                                 
    14,044       6,220       7,824  
Long-term investments                                                                                 
    10,500       10,500        
Total cash, cash equivalents, short and long-term investments
  $ 251,992     $ 246,120     $ 5,872  
 
(1)         Included in working capital

Our working capital and short-term investments decreased by $8.1 million during the three months ended March 31, 2009, compared to December 31, 2008, due to repurchases of shares of our common stock, dividend payments, capital expenditures and the net purchase of short-term and long-term investments, offset by cash provided by operations.

Our cash and cash equivalent balances are held in numerous financial institutions throughout the world, including substantial amounts held outside of the U.S., however, the majority of our cash and investments that are located outside of the U.S. are denominated in the U.S. dollar. Most of the amounts held outside of the U.S. could be repatriated to the U.S., but under current law, would be subject to U.S. federal income taxes, less applicable foreign tax credits. In some countries repatriation of certain foreign balances is restricted by local laws. We have provided for the U.S. federal tax liability on these amounts for financial statement purposes, except for foreign earnings that are considered indefinitely reinvested outside of the U.S. Repatriation