c093011.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:  September 30, 2011 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 T  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 October 24, 2011
Common Stock - $0.01 par value
120,397,206


 
 

 

NATIONAL INSTRUMENTS CORPORATION

INDEX


     
PART I.  FINANCIAL INFORMATION
Page No.
     
Item 1
Financial Statements:
 
     
   
 
September 30, 2011 (unaudited) and December 31, 2010
3
     
   
 
(unaudited) for the three and nine month periods ended September 30, 2011 and 2010
4
     
   
 
(unaudited) for the nine month periods ended September 30, 2011 and 2010
5
     
 
6
     
Item 2
 
 
24
     
Item 3
34
     
Item 4
37
     
     
PART II.  OTHER INFORMATION
 
     
     
Item 1
39
     
Item 1A
39
     
Item 2
47
     
Item 4
Reserved
47
     
Item 5
47
     
Item 6
48
     
 
50


 
 

 

PART I - FINANCIAL INFORMATION

ITEM 1.
Financial Statements

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

 
   
September 30,
2011
   
December 31,
2010
 
Assets
 
(unaudited)
       
Current assets:
           
Cash and cash equivalents                                                                                                
  $ 196,511     $ 219,447  
Short-term investments                                                                                                
    139,372       131,215  
Accounts receivable, net                                                                                                
    158,608       127,214  
Inventories, net                                                                                                
    132,554       117,765  
Prepaid expenses and other current assets                                                                                                
    46,068       36,239  
Deferred income taxes, net                                                                                                
    16,122       18,838  
Total current assets                                                                                            
    689,235       650,718  
Property and equipment, net                                                                                                     
    182,300       160,410  
Goodwill                                                                                                     
    131,353       70,278  
Intangible assets, net                                                                                                     
    90,142       52,816  
Other long-term assets                                                                                                     
    22,649       25,460  
Total assets                                                                                            
  $ 1,115,679     $ 959,682  
Liabilities and stockholders' equity
               
Current liabilities:
               
Accounts payable                                                                                                
  $ 39,650     $ 33,544  
Accrued compensation                                                                                                
    38,444       27,734  
Deferred revenue                                                                                                
    83,336       71,650  
Accrued expenses and other liabilities                                                                                                
    35,290       16,538  
Other taxes payable                                                                                                
    22,117       16,846  
Total current liabilities
    218,837       166,312  
Deferred income taxes                                                                                                     
    36,413       29,477  
Liability for uncertain tax positions                                                                                                     
    15,376       14,953  
Other long-term liabilities                                                                                                     
    18,255       4,395  
Total liabilities
    288,881       215,137  
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; 120,398,881 and 117,904,976 shares issued and outstanding, respectively
    1,204       1,179  
Additional paid-in capital                                                                                                
    459,486       407,713  
Retained earnings                                                                                                
    370,211       336,363  
Accumulated other comprehensive (loss)                                                                                                
    (4,103 )     (710 )
Total stockholders’ equity
    826,798       744,545  
Total liabilities and stockholders’ equity
  $ 1,115,679     $ 959,682  


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
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net sales:
                       
Product                                                                
  $ 247,256     $ 203,188     $ 699,007     $ 573,413  
Software maintenance                                                                
    20,839       17,261       60,222       49,844  
GSA Accrual                                                                
    (13,107 )     -       (13,107 )     -  
Total net sales                                                          
    254,988       220,449       746,122       623,257  
                                 
Cost of sales:
                               
Product                                                                
  $ 63,579     $ 50,380     $ 169,340     $ 139,818  
Software maintenance                                                                
    1,636       1,523       4,237       3,966  
Total cost of sales                                                          
    65,215       51,903       173,577       143,784  
                                 
Gross profit                                                                
    189,773       168,546       572,545       479,473  
                                 
Operating expenses:
                               
Sales and marketing                                                                
  $ 103,195     $ 79,494     $ 286,547     $ 233,166  
Research and development                                                                
    54,674       39,971       144,569       114,912  
General and administrative                                                                
    21,148       17,392       61,219       49,701  
Total operating expenses                                                          
    179,017       136,857       492,335       397,779  
                                 
Operating income                                                                
    10,756       31,689       80,210       81,694  
                                 
Other income (expense):
                               
Interest income                                                                
  $ 354     $ 380     $ 1,039     $ 1,051  
Net foreign exchange gain (loss)                                                                
    (708 )     426       (1,417 )     (2,475 )
Other income (expense), net                                                                
    (95 )     160       (220 )     970  
Income before income taxes
    10,307       32,655       79,612       81,240  
Provision for (benefit from) income taxes                                                                  
    (2,429 )     4,522       9,867       10,152  
                                 
Net income                                                          
  $ 12,736     $ 28,133     $ 69,745     $ 71,088  
                                 
Basic earnings per share
  $ 0.11     $ 0.24     $ 0.58     $ 0.61  
                                 
Weighted average shares outstanding - basic
    120,308       117,264       119,585       116,748  
                                 
Diluted earnings per share
  $ 0.11     $ 0.24     $ 0.58     $ 0.60  
                                 
Weighted average shares outstanding - diluted
    121,102       118,293       121,027       118,272  
                                 
Dividends declared per share                                                                  
  $ 0.10     $ 0.09     $ 0.30     $ 0.26  


The accompanying notes are an integral part of these financial statements.

 
 

 

NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

 
   
Nine Months Ended
 
   
September 30,
 
   
2011
   
2010
 
Cash flow from operating activities:
           
Net income                                                                                                  
  $ 69,745     $ 71,088  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization                                                                                             
    35,745       28,220  
Stock-based compensation                                                                                             
    16,650       14,194  
Tax (benefit) expense from deferred income taxes                                                                                             
    (491 )     1,174  
Tax (benefit) expense from stock option plans                                                                                             
    (5,047 )     599  
Changes in operating assets and liabilities:
               
Accounts receivable                                                                                          
    (23,509 )     (17,298 )
Inventories                                                                                          
    (12,376 )     (14,712 )
Prepaid expenses and other assets                                                                                          
    (9,000 )     (15,328 )
Accounts payable                                                                                          
    4,112       9,171  
Deferred revenue                                                                                          
    10,215       6,698  
Taxes and other liabilities                                                                                          
    30,456       33,938  
Net cash provided by operating activities                                                                                       
    116,500       117,744  
                 
Cash flow from investing activities:
               
Capital expenditures                                                                                                  
    (40,329 )     (14,404 )
Capitalization of internally developed software                                                                                                  
    (11,412 )     (14,300 )
Additions to other intangibles                                                                                                  
    (3,226 )     (2,253 )
Acquisitions, net of cash received                                                                                                  
    (73,558 )     (2,191 )
Purchases of short-term investments                                                                                                  
    (93,299 )     (88,226 )
Sales and maturities of short-term investments                                                                                                  
    86,086       63,519  
Net cash (used by) investing activities                                                                                       
    (135,738 )     (57,855 )
                 
Cash flow from financing activities:
               
Proceeds from issuance of common stock                                                                                                  
    27,152       38,368  
Repurchase of common stock                                                                                                  
    -       (41,862 )
Dividends paid                                                                                                  
    (35,897 )     (30,417 )
Tax benefit (expense) from stock option plans                                                                                                  
    5,047       (599 )
Net cash (used by) financing activities                                                                                       
    (3,698 )     (34,510 )
                 
Net change in cash and cash equivalents                                                                                                  
    (22,936 )     25,379  
Cash and cash equivalents at beginning of period                                                                                                  
    219,447       201,465  
Cash and cash equivalents at end of period                                                                                                  
  $ 196,511     $ 226,844  



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, 2010, 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 September 30, 2011 and December 31, 2010, and the results of our operations for the three month and nine month periods ended September 30, 2011 and September 30, 2010 and the cash flows for the nine month periods ended September 30, 2011 and September 30, 2010. Operating results for the three month and nine month periods ended September 30, 2011, are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

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 and nine month periods ended September 30, 2011 and 2010, respectively, are as follows (in thousands):

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
(unaudited)
   
(unaudited)
 
   
2011
   
2010
   
2011
   
2010
 
Weighted average shares outstanding-basic
    120,308       117,264       119,585       116,748  
Plus: Common share equivalents
                               
Stock options, restricted stock units                                                              
    794       1,029       1,442       1,524  
Weighted average shares outstanding-diluted
    121,102       118,293       121,027       118,272  

Stock options to acquire 1,400,000 shares and 717,000 shares for the three month periods ended September 30, 2011 and 2010, respectively, and 640,000 shares and 852,000 shares for the nine month periods ended September 30, 2011 and 2010, respectively, were excluded in the computations of diluted EPS because the effect of including the stock options would have been anti-dilutive.

On January 21, 2011, our Board of Directors declared a 3 for 2 stock split which was effected as a stock dividend, and paid on February 21, 2011, to stockholders of record on February 4, 2011. All per share data and numbers of common shares, where appropriate, have been retroactively adjusted to reflect the stock split.
 
Note 3 – Cash, cash equivalents and short-term investments

The following table summarizes unrealized gains and losses related to our cash, cash equivalents and short-term investments designated as available-for-sale (in thousands):

   
As of September 30, 2011
(unaudited)
 
   
Adjusted Cost
   
Gross
Unrealized Gain
   
Gross
Unrealized Loss
   
Cumulative Translation Adjustment
   
Fair Value
 
Cash                                        
  $ 96,845     $ -     $ -     $ -     $ 96,845  
Money market accounts                                        
    99,666       -       -       -       99,666  
Municipal bonds                                        
    15,421       20       -       -       15,441  
Corporate bonds                                        
    77,456       1       (276 )     -       77,181  
U.S. treasuries and agencies
    11,026       -       (7 )     -       11,019  
Foreign government bonds
    36,135       193       -       (3,348 )     32,980  
Time deposits                                        
    2,751       -       -       -       2,751  
Cash, Cash equivalents and short-term investments
  $ 339,300     $ 214     $ (283 )   $ (3,348 )   $ 335,883  
 
   
As of December 31, 2010
 
   
Adjusted Cost
   
Gross
Unrealized Gain
   
Gross
Unrealized Loss
   
Cumulative Translation Adjustment
   
Fair Value
 
Cash                                        
  $ 86,344     $ -     $ -     $ -     $ 86,344  
Money market accounts                                        
    133,103       -       -       -       133,103  
Municipal bonds                                        
    16,843       18       -       -       16,861  
Corporate bonds                                        
    56,141       38       (69 )     -       56,110  
U.S. treasuries and agencies
    23,142       13       (20 )     -       23,135  
Foreign government bonds
    36,010       89       (32 )     (3,410 )     32,657  
Time deposits                                        
    2,452       -       -       -       2,452  
Cash, Cash equivalents and short-term investments
  $ 354,035     $ 158     $ (121 )   $ (3,410 )   $ 350,662  
 
The following table summarizes the contractual maturities of our investments designated as available-for-sale (in thousands):

   
As of September 30, 2011
(Unaudited)
 
   
Adjusted Cost
   
Fair Value
 
Due in less than 1 year                                                                      
  $ 81,716     $ 79,909  
Due in 1 to 5 years                                                                      
    61,073       59,463  
Total short-term investments                                                                      
  $ 142,789     $ 139,372  
   
Due in less than 1 year
 
Adjusted Cost
   
Fair Value
 
Municipal bonds                                                                   
  $ 15,421     $ 15,441  
Corporate bonds                                                                   
    42,084       41,940  
U.S. treasuries and agencies                                                                   
    3,011       3,011  
Foreign government bonds                                                                   
    18,449       16,766  
Time deposits                                                                   
    2,751       2,751  
Total short-term investments                                                                      
  $ 81,716     $ 79,909  
   
Due in 1 to 5 years
 
Adjusted Cost
   
Fair Value
 
Corporate bonds                                                                   
  $ 35,372     $ 35,241  
U.S. treasuries and agencies                                                                   
    8,015       8,008  
Foreign government bonds                                                                   
    17,686       16,214  
Total short-term investments                                                                      
  $ 61,073     $ 59,463  

Note 4 – Fair value measurements

We define fair value to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most liquid market and assumptions that market participants would use when pricing the asset or liability.

We follow a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The three values of the fair value hierarchy are the following:

Level 1 – Quoted prices in active markets for identical assets or liabilities

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly

Level 3 – Inputs that are not based on observable market data

Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
 
   
Fair Value Measurements at Reporting Date Using
(Unaudited)
 
Description
 
September 30, 2011
   
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                                       
  $ 99,666     $ 99,666     $ -     $ -  
Short-term investments available for sale:
                               
Municipal bonds                                    
    15,441       -       15,441       -  
Corporate bonds                                    
    77,181       -       77,181       -  
U.S. treasuries and agencies
    11,019       -       11,019       -  
Foreign government bonds
    32,980       -       32,980       -  
Time deposits                                    
    2,751       -       2,751       -  
Derivatives                                       
    3,254       -       3,254       -  
Total Assets                                       
  $ 242,292     $ 99,666     $ 142,626     $ -  
                                 
Liabilities
                               
Derivatives                                       
  $ (3,115 )   $ -     $ (3,115 )   $ -  
Total Liabilities                                       
  $ (3,115 )   $ -     $ (3,115 )   $ -  

   
Fair Value Measurements at Reporting Date Using
 
Description
 
December 31, 2010
   
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                                       
  $ 133,103     $ 133,103     $ -     $ -  
Short-term investments available for sale:
                               
Municipal bonds                                    
    16,861       -       16,861       -  
Corporate bonds                                    
    56,110       -       56,110       -  
U.S. treasuries and agencies
    23,135       -       23,135       -  
Foreign government bonds
    32,657       -       32,657       -  
Time deposits                                    
    2,452       -       2,452       -  
Derivatives                                       
    2,325       -       2,325       -  
Total Assets                                       
  $ 266,643     $ 133,103     $ 133,540     $ -  
                                 
Liabilities
                               
Derivatives                                       
  $ (3,733 )   $ -     $ (3,733 )   $ -  
Total Liabilities                                       
  $ (3,733 )   $ -     $ (3,733 )   $ -  

We value our available-for-sale short term investments based on pricing from third party pricing vendors, who may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. We classify all of our fixed income available-for-sale securities as having Level 2 inputs. The valuation techniques used to measure the fair value of our financial instruments having Level 2 inputs were derived from non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models, such as discounted cash flow techniques. Short-term investments available-for-sale consists of debt securities issued by states of the U.S. and political subdivisions of the U.S., corporate debt securities and debt securities issued by U.S. government corporations and agencies as well as debt securities issued by foreign governments. All short-term investments available-for-sale have contractual maturities of less than 24 months.

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 similar instruments. There were not any transfers in or out of Level 1 or Level 2 during the three and nine month periods ended September 30, 2011.

Certain investments have been reclassified to conform to current year presentation.

We did not have any items that were measured at fair value on a nonrecurring basis at September 30, 2011 and December 31, 2010.

Note 5 – Derivative instruments and hedging activities

We recognize all of our derivative instruments as either assets or liabilities in our statements 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, we 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. Sales outside of the Americas accounted for 61% and 56% of our revenues during the three month periods ended September 30, 2011 and 2010, respectively, and 60% and 57% of our revenues during the nine month periods ended September 30, 2011 and 2010, respectively.  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 option contracts) to help 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 option 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 help 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 help 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.

We designate foreign currency forward and purchased 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 that are not designated as hedging instruments. None of our derivative instruments contain a credit-risk-related contingent feature.

Cash flow hedges

To help 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 purchased 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, 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 purchased 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 $65.0 million dollar equivalent of Euro, $1.6 million dollar equivalent of British pound sterling, $48.2 million dollar equivalent of Japanese yen, $5.3 million dollar equivalent of Korean won and $33.3 million dollar equivalent of Hungarian forint at September 30, 2011. These contracts are for terms of up to 24 months. At December 31, 2010, we held forward contracts with a notional amount of $28.3 million dollar equivalent of Euro, $6.0 million dollar equivalent of British pound sterling, $18.4 million dollar equivalent of Japanese yen, and $33.4 million dollar equivalent of Hungarian forint.

We did not have any purchased option contracts at September 30, 2011. At September 30, 2010, we held purchased option contracts with a notional amount of $8.7 million dollar equivalent of Euro.

At September 30, 2011, we expect to reclassify $1.2 million of losses on derivative instruments from accumulated other comprehensive income to net sales during the next twelve months when the hedged international sales occur, $107,000 of gains on derivative instruments from accumulated OCI to cost of sales when the cost of sales are incurred and $49,000 of gains on derivative instruments from accumulated OCI to operating expenses during the next twelve months when the hedged operating expenses occur. Expected amounts are based on derivative valuations at September 30, 2011. Actual results may vary as a result of changes in the corresponding exchange rate subsequent to this date.

We did not record any ineffectiveness from our hedges during the nine months ended September 30, 2011.

Other Derivatives

Other derivatives not designated as hedging instruments 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 attempt to 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 120 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 September 30, 2011 and December 31, 2010, we held foreign currency forward contracts with a notional amount of $39.8 million and $41.3 million, respectively.

The following tables present 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):
 
 
Asset Derivatives
 
 
September 30, 2011
(Unaudited)
 
December 31, 2010
 
 
 
Balance Sheet Location
 
Fair Value
 
 
Balance Sheet Location
 
Fair Value
 
Derivatives designated as hedging instruments
               
Foreign exchange contracts - ST forwards
Prepaid expenses and other current assets
  $ 717  
Prepaid expenses and other current assets
  $ 1,104  
                     
Foreign exchange contracts - LT forwards
Other long-term assets
    169  
Other long-term assets
    490  
Total derivatives designated as hedging instruments
    $ 886       $ 1,594  
                     
Derivatives not designated as hedging instruments
                   
                     
Foreign exchange contracts - ST forwards
Prepaid expenses and other current assets
  $ 2,368  
Prepaid expenses and other current assets
  $ 731  
Total derivatives not designated as hedging instruments
    $ 2,368       $ 731  
                     
Total derivatives
    $ 3,254       $ 2,325  

 
Liability Derivatives
 
 
September 30, 2011
(Unaudited)
 
December 31, 2010
 
 
 
Balance Sheet Location
 
Fair Value
 
 
Balance Sheet Location
 
Fair Value
 
Derivatives designated as hedging instruments
               
Foreign exchange contracts - ST forwards
Accrued expenses and other liabilities
  $ (1,808 )
Accrued expenses and other liabilities
  $ (2,677 )
                     
Foreign exchange contracts - LT forwards
Other long-term liabilities
    (1,115 )
Other long-term liabilities
    -  
Total derivatives designated as hedging instruments
    $ (2,923 )     $ (2,677 )
                     
Derivatives not designated as hedging instruments
                   
                     
Foreign exchange contracts - ST forwards
Accrued expenses and other liabilities
  $ (191 )
Accrued expenses and other liabilities
  $ (1,056 )
Total derivatives not designated as hedging instruments
    $ (191 )     $ (1,056 )
                     
Total derivatives
    $ (3,114 )     $ (3,733 )
 
Effect of derivative instruments on our Consolidated Statements of Income for the three month periods ended September 30, 2011 and 2010, respectively (in thousands):
 
September 30, 2011
(Unaudited)
 
Derivatives in Cash Flow Hedging Relationship
 
Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
 
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
 
Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
 
Foreign exchange contracts - forwards and options
  $ 1,097  
Net sales
  $ (1,124 )
Net foreign exchange gain (loss)
  $ -  
                             
Foreign exchange contracts - forwards and options
    (3,608 )
Cost of sales
    507  
Net foreign exchange gain (loss)
    -  
                             
Foreign exchange contracts - forwards and options
    (1,684 )
Operating expenses
    190  
Net foreign exchange gain (loss)
    -  
Total
  $ (4,195 )     $ (427 )     $ -  

September 30, 2010
(Unaudited)
 
Derivatives in Cash Flow Hedging Relationship
 
Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
 
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
 
Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
 
Foreign exchange contracts - forwards and options
  $ (6,201
Net sales
  $ 1,358  
Net foreign exchange gain (loss)
  $ -  
                             
Foreign exchange contracts - forwards and options
    2,558  
Cost of sales
    374  
Net foreign exchange gain (loss)
    -  
                             
Foreign exchange contracts - forwards and options
    1,299  
Operating expenses
    266  
Net foreign exchange gain (loss)
    -  
Total
  $ (2,344 )     $ 1,998       $ -  

Derivatives not Designated as Hedging Instruments
Location of Gain (Loss) Recognized in Income
 
Amount of Gain (Loss) Recognized in Income
   
Amount of Gain (Loss) Recognized in Income
 
     
September 30, 2011
(Unaudited)
   
September 30, 2010
(Unaudited)
 
Foreign exchange contracts - forwards
Net foreign exchange gain/(loss)
  $ 2,744     $ (2,233 )
Total
    $ 2,744     $ (2,233 )

Effect of derivative instruments on our Consolidated Statements of Income for the nine month periods ended September 30, 2011 and 2010, respectively (in thousands):
 
September 30, 2011
(Unaudited)
 
Derivatives in Cash Flow Hedging Relationship
 
Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
 
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
 
Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
 
Foreign exchange contracts - forwards and options
  $  630  
Net sales
  $ (2,864
Net foreign exchange gain (loss)
  $  -  
                             
Foreign exchange contracts - forwards and options
    (1,128 )
Cost of sales
      1,257  
Net foreign exchange gain (loss)
      -  
                             
Foreign exchange contracts - forwards and options
    (541 )
Operating expenses
      612  
Net foreign exchange gain (loss)
      -  
Total
  $ (1,039 )     $ (995 )     $ -  

September 30, 2010
(Unaudited)
 
Derivatives in Cash Flow Hedging Relationship
 
Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
 
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
 
Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
 
Foreign exchange contracts - forwards and options
  $ (4,457
Net sales
  $  4,407  
Net foreign exchange gain (loss)
  $  -  
                             
Foreign exchange contracts - forwards and options
    (2,152 )
Cost of sales
      1,785  
Net foreign exchange gain (loss)
    -  
                             
Foreign exchange contracts - forwards and options
    (1,095 )
Operating expenses
      853  
Net foreign exchange gain (loss)
      -  
Total
  $ (7,704 )     $ 7,045       $ -  

Derivatives not Designated as Hedging Instruments
Location of Gain (Loss) Recognized in Income
 
Amount of Gain (Loss) Recognized in Income
   
Amount of Gain (Loss) Recognized in Income
 
     
September 30, 2011
(Unaudited)
   
September 30, 2010
(Unaudited)
 
Foreign exchange contracts - forwards
Net foreign exchange gain/(loss)
  $ 641     $ (857 )
Total
    $ 641     $ (857 )
 
Note 6 – Inventories

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

   
September 30,
   
December 31,
 
   
2011
(Unaudited)
   
2010
 
             
Raw materials
  $ 58,666     $ 55,218  
Work-in-process
    5,425       6,359  
Finished goods
    68,463       56,188  
    $ 132,554     $ 117,765  
 
Note 7 – Intangibles

Intangibles at September 30, 2011 and December 31, 2010 were as follows (in thousands):

   
September 30, 2011
(Unaudited)
   
December 31, 2010
 
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net Carrying Amount
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net Carrying Amount
 
Capitalized software development costs
  $ 52,400     $ (26,153 )   $ 26,247     $ 40,481     $ (16,217 )   $ 24,264  
Acquired technology
    67,308       (29,904 )     37,404       35,634       (25,017 )     10,617  
Patents
    22,180       (7,025 )     15,155       20,790       (6,312 )     14,478  
Other
    23,860       (12,524 )     11,336       14,059       (10,602 )     3,457  
    $ 165,748     $ (75,606 )   $ 90,142     $ 110,964     $ (58,148 )   $ 52,816  

Capitalized software development costs for the three month periods ended September 30, 2011 and 2010, were $2.1   million and $3.4 million, respectively, and related amortization expense was $3.3 million and $2.8 million, respectively. For the nine month periods ended September 30, 2011 and 2010, capitalized software development costs were $11.9 million and $15.0 million, respectively, and related amortization expense was $9.9 million and $7.9 million, respectively. For the three month periods ended September 30, 2011 and 2010, capitalized software development costs included costs related to stock based compensation of $96,000 and $144,000, respectively. For the nine month periods ended September 30, 2011 and 2010, capitalized software development costs included costs related to stock based compensation of $508,000 and $655,000, 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. Acquired intangible assets which include acquired technology and other are amortized over their useful lives, which range from three to eight 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 $6.8 million and $5.2 million for the three month periods ended September 30, 2011 and 2010, respectively, and $17.5 million and $13.4 million for the nine month periods ended September 30, 2011 and 2010, respectively.

The overall increase in our acquired technology and other intangible assets can be attributed to our acquisitions of AWR Corporation and Phase Matrix Inc. See Note 16 – Acquisitions of Notes to Consolidated Financial Statements for additional discussion related to these acquisitions.

Note 8 – Goodwill

The carrying amount of goodwill as of September 30, 2011, was as follows (in thousands):
 
   
Amount
 
Balance as of December 31, 2010                                                                                                                   
  $ 70,278  
Acquisitions                                                                                                                   
    61,069  
Divestitures                                                                                                                   
    -  
Foreign currency translation impact                                                                                                                   
    6  
Balance as of September 30, 2011                                                                                                                   
  $ 131,353  

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. 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, 2011. No impairment of goodwill has been identified during the period presented. Goodwill is deductible for tax purposes in certain jurisdictions.

See Note 16 – Acquisitions of Notes to Consolidated Financial Statements for additional discussion related to current period acquisitions.

Note 9 – Income taxes

We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Valuation allowances are established when necessary to reduce deferred tax assets to amounts which are more likely than not to be realized.

We account for uncertainty in income taxes recognized in our financial statements using prescribed recognition thresholds and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on our tax returns. We had $15.4 million and $15.0 million of unrecognized tax benefits at September 30, 2011 and December 31, 2010, respectively, all of which would affect our effective income tax rate if recognized. We recorded a gross increase in unrecognized tax benefits of $853,000 and $3.6 million for the three and nine month periods ended September 30, 2011. We recorded a gross decrease in unrecognized tax benefits of $3.7 million for the three and nine month periods ended September 30, 2011, as a result of the closing of open years. As of September 30, 2011, it is deemed reasonable that we will recognize tax benefits in the amount of $2.2 million in the next twelve months due to the closing of open tax years. Our continuing policy is to recognize interest and penalties related to income tax matters in income tax expense. As of September 30, 2011, we have approximately $618,000 accrued for interest related to uncertain tax positions. The nature of the uncertainty is related to deductions taken on returns that have not been examined by the applicable tax authority. The tax years 2004 through 2010 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 (24)% and 14% for the three month periods ended September 30, 2011 and 2010, respectively, and 12% for the nine month periods ended September 30, 2011 and 2010, respectively. For the three and nine month periods ended September 30, 2011, our effective tax rate was lower than the U.S. federal statutory rate of 35% as a result of an enhanced deduction for certain research and development expenses, profits in foreign jurisdictions with reduced income tax rates, the U.S. federal research and development credit, a decrease in unrecognized tax benefits for uncertain tax positions and the tax benefit from our GSA accrual. For the three and nine month periods ended September 30, 2010, our effective tax rate was lower than the U.S. federal statutory rate of 35% as a result of the partial release of a deferred tax asset valuation allowance, an enhanced deduction for certain research and development expenses and profits in foreign jurisdictions with reduced income tax rates. For the nine months ended September 30, 2010, our effective tax rate was lower than the U.S. federal statutory rate of 35% as a result of the partial release of a deferred tax asset valuation allowance, an enhanced deduction for certain research and development expenses, profits in foreign jurisdictions with reduced income tax rates and a decrease in unrecognized tax benefits for uncertain tax positions.

Our earnings in Hungary are subject to a statutory tax rate of 19%. The difference between this rate and the statutory U.S. rate of 35% resulted in income tax benefits of $1.4 million and $4.0 million for the three month periods ended September 30, 2011 and 2010, respectively, and $8.8 million and $9.9 million for the nine month periods ended September 30, 2011 and 2010, respectively. No countries other than Hungary had a significant impact on our effective tax rate. We have not entered into any advanced pricing or other agreements with the Internal Revenue Service with regard to any foreign jurisdictions.

The tax position of our Hungarian operation continues to benefit from assets created by the restructuring of our operations in Hungary in 2003. In addition, our research and development activities in Hungary continue to benefit from a tax law in Hungary that provides for an enhanced deduction for qualified research and development expenses. Partial release of the valuation allowance on assets from the restructuring and the enhanced tax deduction for research expenses resulted in income tax benefits of $2.2 million and $4.5 million for the three month periods ended September 30, 2011 and 2010, respectively, and $12.2 million and $12.3 million for the nine month periods ended September 30, 2011 and 2010, respectively.

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 unrealized gains and losses on our investments designated as available for sale. Comprehensive income for the three and nine month periods ended September 30, 2011 and 2010, was as follows (in thousands):

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
(unaudited)
   
(unaudited)
 
   
2011
   
2010
   
2011
   
2010
 
Comprehensive income:
                       
Net income                                                                  
  $ 12,736     $ 28,133     $ 69,745     $ 71,088  
Foreign currency translation gains (losses), net of taxes
    (8,589 )     8,792       (1,165 )     (2,577 )
Unrealized (losses) on derivative instruments, net of taxes
    (3,573 )     (908 )     (942 )     (8,000 )
Unrealized gains (losses) on investments designated as available for sale, net of taxes
    (282 )     (536 )     (1,286 )     235  
Total comprehensive income
  $ 292     $ 35,481     $ 66,352     $ 60,746  

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, 13,668,750 shares of our common stock were reserved for issuance under this plan. In 1997, an additional 10,631,250 shares of our common stock were reserved for issuance under this plan, and an additional 1,125,000 shares were reserved for issuance under this plan 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 under the options 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 revenue 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 with an exercise price which was equal to the market price of our common stock at the grant date. We 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. During the nine month period ended September 30, 2011, we did not make any changes in accounting principles or methods of estimates related to the 1994 Plan.

Restricted stock plans

Our stockholders approved our 2005 Incentive Plan (the “2005 Plan”) on May 10, 2005. At the time of approval, 4,050,000 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, provided 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. The 2005 Plan terminated on May 11, 2010, except with respect to outstanding awards previously granted thereunder.  There were 3,362,304 shares of common stock that were reserved but not issued under the 1994 Plan and the 2005 Plan as of May 11, 2010.

Our stockholders approved our 2010 Incentive Plan (the “2010 Plan”) on May 11, 2010. At the time of approval, 3,000,000 shares of our common stock were reserved for issuance under this plan, as well as the 3,362,304 shares of common stock that were reserved but not issued under the 1994 Plan and the 2005 Plan as of May 11, 2010, and any shares that are returned to the 1994 Plan and the 2005 Plan as a result of the forfeiture or termination of options or RSUs or repurchases of shares issued under these plans. The 2010 Plan, administered by the Compensation Committee of the Board of Directors, provides for granting of incentive awards in the form of restricted stock and RSUs to employees, directors and consultants of the Company and employees and consultants of any parent or subsidiary of the Company. 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. At September 30, 2011, there were 5,094,572 shares available for grant under the 2010 Plan.

We 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. During the nine month period ended September 30, 2011, we did not make any changes in accounting principles or methods of estimates related to the 2010 Plan.

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 generally beginning on February 1, May 1, August 1 and November 1 of each year. Employees may designate up to 15% of their compensation for the purchase of common stock under this plan.  On May 10, 2011, our stockholders approved an additional 3,000,000 shares for issuance under our employee stock purchase plan, and at September 30, 2011, we had 3,921,240 shares of common stock reserved for future issuance under this plan. During the nine month period ended September 30, 2011, we issued 699,602 shares under this plan. The weighted average fair value of the employees’ purchase rights for these shares was $21.78 per share and was estimated using the Black-Scholes model. During the nine month period ended September 30, 2011, we did not make any changes in accounting principles or methods of estimates related to the employee stock purchase plan.

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.

There were not any shares of preferred stock issued and outstanding at September 30, 2011.

Note 12 – Segment 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
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
(unaudited)
   
(unaudited)
 
   
2011
   
2010
   
2011
   
2010
 
Net sales:
                       
Americas:
  $ 98,537     $ 97,031     $ 299,614     $ 266,300  
Europe:
    75,127       59,882       222,566       177,681  
Asia Pacific:
    81,324       63,536       223,942       179,276  
    $ 254,988     $ 220,449     $ 746,122     $ 623,257  

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
(unaudited)
   
(unaudited)
 
   
2011
   
2010
   
2011
   
2010
 
Operating income:
                       
Americas                                               
  $ 1,401     $ 21,395     $ 40,186     $ 52,689  
Europe                                               
    31,867       31,347       100,562       87,409  
Asia Pacific                                               
    32,162       18,918       84,031       56,508  
Unallocated:
                               
Research and development expenses
    (54,674 )     (39,971 )     (144,569 )     (114,912 )
    $ 10,756     $ 31,689     $ 80,210     $ 81,694  

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
(unaudited)
   
(unaudited)
 
   
2011
   
2010
   
2011
   
2010
 
Interest income:
                       
Americas                                               
  $ 82     $ 177     $ 352     $ 433  
Europe                                               
    238       182       591       546  
Asia Pacific                                               
    34       21       96       72  
    $ 354     $ 380     $ 1,039     $ 1,051  

 
 
September 30,
2011
   
December 31,
2010
 
   
(unaudited)
       
Long-lived assets:
           
Americas                                                                             
  $ 109,912     $ 103,033  
Europe                                                                             
    44,480       40,083  
Asia Pacific                                                                             
    27,908       17,294  
    $ 182,300     $ 160,410  
 
Total sales outside the U. S. for the three month periods ended September 30, 2011 and 2010, were $163.7 million and $131.3 million, respectively, and $470.2 million and $378.9 million for the nine month periods ended September 30, 2011 and 2010, respectively.
 
Note 13 – Commitments and contingencies

We offer a one-year limited warranty on most hardware products, with a two or three-year warranty on a subset of our 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 the sale 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 nine month periods ended September 30, 2011 and 2010, respectively, was as follows (in thousands):

   
Nine Months Ended
 
   
September 30,
 
   
(unaudited)
 
   
2011
   
2010
 
Balance at the beginning of the period                                                                                                   
  $ 921     $ 921  
Accruals for warranties issued during the period                                                                                                   
    2,175       1,485  
Settlements made (in cash or in kind) during the period                                                                                                   
    (2,175 )     (1,483 )
Balance at the end of the period                                                                                                   
  $ 921     $ 923  

As of September 30, 2011, we have non-cancelable purchase commitments with various suppliers of customized inventory and inventory components totaling approximately $11.9 million over the next twelve months.

As of September 30, 2011, we have outstanding guarantees for payment of customs and foreign grants totaling approximately $4.2 million, which are generally payable over the next twelve months.

From November 1999 to May 2011, we sold products to the U.S. government under a contract with the General Services Administration ("GSA"). During such time, our sales under the contract were approximately 2% of our total sales. Our contract with GSA contained a price reduction or "most favored customer" pricing provision. For the past several months, we have been in discussions with GSA regarding our compliance with this pricing provision and have provided GSA with information regarding our pricing practices. GSA conducted an on-site review of our GSA pricing practices and orally informed us that GSA did not agree with our previous determination of the potential non-compliance amount.  GSA subsequently requested that we conduct a further analysis of the non-compliance amount based upon a methodology that GSA proposed.   This analysis resulted in calculated overpayments (including added interest) by GSA to us of approximately $13.1 million. GSA is reviewing the analysis and has not yet officially responded, and has not made any formal demand for pricing adjustments related to our GSA contract. However, GSA may make such a demand in the future, and there can be no assurance that the amount of any such demand, if we were required to pay it, would not have a material adverse impact on our results of operations. If GSA believes that our pricing practices did not comply with the contract, GSA could conduct a formal investigation of such matter or could refer such matter to the U.S. Department of Justice for investigation, including an investigation regarding potential violations of the False Claims Act, which could result in litigation and the possible imposition of a damage remedy that includes treble damages plus civil penalties, and could also result in us being suspended or debarred from future government contracting.  As a result of the foregoing, during the quarter ended September 30, 2011, we established an accrual of $13.1 million which represents the amount of the loss contingency that is reasonably estimable at this time.  There can be no assurance that our actual losses will not exceed such reserve amount. Due to the complexities of conducting business with GSA, the relatively small amount of revenue we realized from our GSA contract, and our belief that we can continue to sell our products to U.S. government agencies through other contracting methods, we cancelled our contract with GSA in April 2011, effective May 2011. To date, we have not experienced any material adverse impact on our results of operations as a result of the cancellation of our GSA contract.

Note 14 – Recently issued accounting pronouncements

In October 2009, the FASB updated FASB ASC 605, Revenue Recognition (FASB ASC 605) that amended the criteria for separating consideration in multiple-deliverable arrangements. The amendments establish a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third–party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. The amendments will change the application of the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverable’s selling price. This update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. On January 1, 2011, we adopted the accounting update as required on a prospective basis. The adoption of the amended revenue recognition rules did not change the units of accounting for our revenue transactions. It also did not significantly change how we allocated the arrangement consideration to the various units of accounting or the timing of revenue. The impact of our adoption was not material to our consolidated financial statements for the three and nine month periods ended September 30, 2011. We cannot reasonably estimate the effect of adopting these standards on future financial periods as the impact will vary depending on the nature and volume of new or materially modified sales arrangements in any given period.  In addition, as our, or our competitors’, pricing practices and strategies evolve, we may modify our pricing practices in the future. This may result in a different allocation of revenue to the deliverables in the multiple element arrangements from the current fiscal quarter, which may change the pattern and timing of revenue recognition for these elements, but will not change the total revenue recognized for the arrangement.

In January 2010, the FASB updated FASB ASC 820, Fair Value Measurements and Disclosures (FASB ASC 820) that requires additional disclosures and clarifies existing disclosures regarding fair value measurements. The additional disclosures include (i) transfers in and out of Levels 1 and 2 and (ii) activity in Level 3 fair value measurements. The update provides amendments that clarify existing disclosures on level of disaggregation and disclosures about inputs and valuation techniques. This update is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. These disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We adopted the update on January 1, 2010 as required and subsequently adopted on January 1, 2011, the update surrounding disclosures on Level 3 fair value measurements and concluded it did not have a material impact on our consolidated financial position or results of operations.  In May 2011, the FASB updated FASB ASC 820 that resulted in common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (IFRSs).  Some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.  The amendments are to be applied prospectively and are effective during interim and annual periods beginning after December 15, 2011.  We are currently evaluating the requirements of this update and have not yet determined the impact on our consolidated financial statements.

In June 2011, the FASB updated FASB ASC 220, Comprehensive Income (FASB ASC 220) that gives an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.  The update does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The update does not change the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense or benefit related to the total of other comprehensive income items.  The update does not affect how earnings per share is calculated or presented.  The update should be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  We are currently evaluating the requirements of this update and have not yet determined the impact on our consolidated financial statements.

In September 2011, the FASB updated FASB ASC 350, Goodwill and Other (FASB ASC 350) that gives an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.  The amendments are effective for annual and interim goodwill impairment test performed for fiscal years beginning after December 15, 2011.  We are currently evaluating the requirements of this update and have not yet determined the impact on our consolidated financial statements.

Note 15 – Litigation

We are not currently a party to any material litigation. However, in the ordinary course of our business, we are involved in legal actions, both as plaintiff and defendant, and could incur uninsured liability in any one or more of them. We also periodically receive notifications from various third parties related to alleged infringement of patents or intellectual property rights, commercial disputes or other matters. See Note 13 – Commitments and Contingencies in the Notes to our Consolidated Financial Statements, for discussion of the accrual we have recorded in connection with our GSA contract. No assurances can be given with respect to the extent or outcome of any future litigation or dispute.

Note 16 – Acquisitions

AWR Corporation

On June 30, 2011, we acquired all of the outstanding shares of AWR Corporation (AWR), a privately held company that is a leading supplier of electronic design automation software for designing radio frequency and high-frequency components and systems for the semiconductor, aerospace and defense, communications and test equipment industries.   The acquisition is expected to improve customer productivity through increased interoperability between upfront design and validation and production test functions.  The purchase price of the acquisition was $66 million consisting of $54 million in cash and a three-year earn-out arrangement.  We funded the purchase price from existing cash balances.  The range of potential undiscounted payments that we could be required to make under the earn-out arrangement is between $0 and $29 million and are payable if AWR achieves certain revenue and operating income targets.  The fair value of the earn-out arrangement was estimated at $12 million using the income approach, the key assumptions which included probability-weighted revenue and operating expense growth projections.

The allocation of the purchase price was determined using the preliminary fair value of assets and liabilities acquired as of June 30, 2011.  The preliminary allocation of the purchase price was based upon a preliminary valuation which is subject to change within the measurement period up to one year from the acquisition date. The primary areas which are not finalized are the fair value of contingent consideration, deferred revenue, intangible assets and related deferred taxes. 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 allocation of the purchase price of AWR (in thousands):

   
Amount
 
Net tangible assets acquired                                                                                                                   
  $ 10,718  
Amortizable intangible assets                                                                                                                   
    31,685  
Deferred tax liability                                                                                                                   
    (10,351 )
Goodwill                                                                                                                   
    34,343  
Total                                                                                                                   
  $ 66,395  

Goodwill is not deductible for tax purposes. Amortizable intangible assets have useful lives of 5 years from the date of acquisition.

Phase Matrix Inc.

On May 20, 2011, we acquired all of the outstanding shares of Phase Matrix, Inc. (PMI), a privately held company that designs and manufactures radio frequency and microwave test and measurement instruments, subsystems and components.  The acquisition is expected to speed our deployment of high-performance RF and wireless technologies to our production test and R&D customers.  The purchase price of the acquisition was $40.7 million consisting of $38.9 million in cash and $1.8 million in shares of our common stock.  We funded the cash portion of the purchase price from existing cash balances.

The allocation of the purchase price was determined using the fair value of assets and liabilities acquired as of May 20, 2011.  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 allocation of the purchase price of Phase Matrix, Inc. (in thousands):

   
Amount
 
Net tangible assets acquired                                                                                                                   
  $ 5,624  
Amortizable intangible assets                                                                                                                   
    8,331  
Goodwill                                                                                                                   
    26,725  
Total                                                                                                                   
  $ 40,680  

Goodwill is deductible for tax purposes. Amortizable intangible assets have useful lives which range from 9 months to 8 years from the date of acquisition. These assets are also deductible for tax purposes.

Other acquisitions

On December 31, 2010, we acquired all of the outstanding shares of a privately-held company for $2.3 million in net cash with an additional $500,000 in net cash to be paid out over the next three years. The purchase price for this acquisition included net working capital of $187,000, amortizable intangible assets of $1.5 million, and goodwill of $1.1 million. Our consolidated financial statements include the operating results of the acquired company from the date of acquisition.

On February 1, 2010, we acquired all of the outstanding shares of a privately-held company for $2.2 million in net cash, $3.0 million in shares of our common stock with the remainder to be paid in cash over the next four years. The purchase price allocation for this acquisition included net working capital of $1.1 million, amortizable intangible assets of $5.0 million, and goodwill of $5.0 million. Our consolidated financial statements include the operating results of the acquired company from the date of acquisition.

For these acquisitions, 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, from the date of acquisition. These assets are not deductible for tax purposes.

Pro forma results of operations have not been presented because the effect of these acquisitions is not material either individually or in the aggregate to our consolidated results of operations.

Note 17 – Subsequent events

We have evaluated subsequent events through the date the financial statements were issued.

On October 18, 2011, our Board of Directors declared a quarterly cash dividend of $0.10 per common share, payable November 28, 2011, to shareholders of record on November 7, 2011.



 
 

 

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 39, 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”, “us” 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. We have been profitable in every year since 1990.

The key strategies that we focus 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 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 high quality and reliability, and that our 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. Over the last 24 months, the PMI has reflected an expanding industrial economy by having an average value of 54 over that time period. However, the most recent reading for September 2011, showed the PMI had declined to 49.9, the first reading in the last 24 months that indicated a contraction in the global industrial economy. Historically, our business cycles have followed the expansion and contraction cycles in the PMI. During the nine month period ended September 30, 2011, the PMI had an average value of 54. A value above 50 is indicative of expansion in the global industrial economy. We are unable to predict whether the most recent reading indicating contraction, as measured by the PMI, will continue through the remainder of 2011 or into 2012. If this contraction continues or accelerates, it could have an adverse effect on the spending patterns of businesses including our current and potential customers which could adversely affect our revenues and therefore harm our business and results of operations.

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 U.S. and sales offices and distributors in key international markets. Sales outside of the Americas accounted for 61% and 56% of our revenues during the three month periods ended September 30, 2011 and 2010, respectively and 60% and 57% of our revenues during the nine month periods ended September 30, 2011 and 2010, respectively. 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 12 - Segment information of Notes to Consolidated Financial Statements for details concerning the geographic breakdown of our net sales, operating income, interest income and long-lived 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 currently use a subcontractor in Asia to manufacture a significant portion of our chassis but we are steadily moving an increasing percentage of this production in-house. 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 depend 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, price and 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 where necessary, will likely engage in future litigation to protect our intellectual property rights. In monitoring and policing our intellectual property rights, we have spent and may be required to spend significant resources.

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 our historical results of operations should not be relied upon as indications of future performance. There can be no assurance that our net sales will grow or that we will remain profitable in future periods.

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 increased order patterns during the nine month period ended September 30, 2011 compared to the same period in 2010. These positive order trends are consistent with the expansion we have seen in the global industrial economy as measured by the global PMI which has had an average reading of 54 during this period. We have seen these positive trends across all geographic regions and across all the vertical markets that we serve although the strength of the trend varies by region and by market. However, the most recent PMI reading for September 2011, showed the PMI had declined to 49.9, the first reading in that nine month period that indicated contraction in the global industrial economy. We are unable to predict whether the most recent reading indicating contraction, as measured by the PMI, will continue through the remainder of 2011 or into 2012. If this contraction continues or accelerates, it could have an adverse effect on the spending patterns of businesses including our current and potential customers which could adversely affect our revenues and therefore harm our business and results of operations. Our key strategies are to maintain a stable gross margin and to optimize our operating cost structure while maintaining strong employee productivity.

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
September 30,
   
Nine Months Ended
September 30,
 
   
(unaudited)
 
   
2011
   
2010
   
2011
   
2010
 
Net sales:
                       
Americas
    38.6 %     44.0 %     40.2 %     42.7 %
Europe
    29.5       27.2       29.8       28.5  
Asia Pacific
    31.9       28.8       30.0       28.8  
Consolidated net sales
    100.0       100.0       100.0       100.0  
Cost of sales
    25.6       23.5       23.3       23.1  
Gross profit
    74.4       76.5       76.7       76.9  
Operating expenses:
                               
Sales and marketing
    40.5       36.1       38.4       37.4  
Research and development
    21.4       18.1       19.4       18.4  
General and administrative
    8.3       7.9       8.2       8.0  
Total operating expenses
    70.2       62.1       66.0       63.8  
Operating income
    4.2       14.4       10.7       13.1  
Other income (expense):
                               
Interest income
    0.1       0.1       0.2       0.2  
Net foreign exchange gain (loss)
    (0.3 )     0.2       (0.2 )     (0.4 )
Other income (expense), net
    -       0.1       -       0.1  
Income before income taxes
    4.0       14.8       10.7       13.0  
Provision for income taxes
    (1.0 )     2.0       1.4       1.6  
Net income
    5.0 %     12.8 %     9.3 %     11.4 %
 

Results of Operations for the Three and Nine Month Periods Ended September 30, 2011 and 2010

We reported continued strong revenue growth and all time record revenue in the three months ended September 30, 2011. We believe our strategic investments in innovation and customer adoption are key to our future growth, and we continue to be optimistic about our position in the industry.

Net Sales.  Our consolidated net sales were $255 million and $220 million for the three month periods ended September 30, 2011 and 2010, respectively, an increase of 16%. Our consolidated net sales for the three month period ended September, 30, 2011, were negatively impacted by the $13 million accrual related to our GSA contract. This matter is discussed in greater detail in Note 13 – Commitments and Contingencies in the Notes to our Consolidated Financial Statements. For the same periods, product sales were $247 million and $203 million, respectively, an increase of 22% and software maintenance sales were $21 million and $17 million, respectively, an increase of 21 %. Products in the areas of virtual instrumentation and graphical system design, which comprised approximately 94% of our revenue in the three month period ended September 30, 2011, saw a year-over-year revenue increase of 24%. Instrument control products, which comprised approximately 6% of our revenues in the three month period ended September 30, 2011, saw a year-over-year revenue increase of 1%. In the three month period ended September 30, 2010, products in the areas of virtual instrumentation and graphical system design comprised approximately 93% of our revenue while instrument control products comprised approximately 7% of our revenues.

For the nine month periods ended September 30, 2011 and 2010, our consolidated net sales were $746 million and $623 million, respectively, an increase of 20%. Our consolidated net sales for the nine month period ended September 30, 2011, were negatively impacted by the $13 million accrual related to our GSA contract. For the same periods, product sales were $699 million and $573 million, respectively, an increase of 22% and software maintenance sales were $60 million and $50 million, respectively, an increase of 21%. Products in the areas of virtual instrumentation and graphical system design, which comprised approximately 94% of our revenue in the nine month period ended September 30, 2011, saw a year-over-year revenue increase of 23%. Instrument control products, which comprised approximately 6% of our revenues in the nine month period ended September 30, 2011, saw a year-over-year revenue increase of 8%. In the nine month period ended September 30, 2010, products in the areas of virtual instrumentation and graphical system design comprised approximately 93% of our revenue while instrument control products comprised approximately 7% of our revenues.
 
Revenues from our instrument control products are the most sensitive to the cycles of the global industrial economy. Our overall revenue increases in the three and nine month periods ended September 30, 2011 compared to the same periods in 2010, are attributed to increases in sales volume across all geographic regions of our business. We did not take any significant action with regard to pricing during the three and nine month periods ended September 30, 2011 and 2010.

Large orders, defined as orders with a value greater than $20,000, grew by 31%, year over year during the three month period ended September 30, 2011 and grew by 33%, year over year during the nine month period ended September 30, 2011. During the three and nine month periods ended September 30, 2011, these large orders were 48% and 45%, respectively, of our total sales. During the three and nine month periods ended September 30, 2010, these large orders were 43% and 41%, respectively, of our total sales. Larger orders may be more sensitive to changes in the global industrial economy, may be subject to greater discount variability and may contract at a faster pace during an economic downturn.

For the three month periods ended September 30, 2011 and 2010, net sales in the Americas were $98 million and $97 million, respectively, an increase of 2%. For these same periods, sales in the Americas, as a percentage of consolidated sales were 39% and 44%, respectively. In Europe, net sales were $75 million and $60 million for these same periods, an increase of 25%. For these same periods, sales in Europe, as a percentage of consolidated sales were 30% and 27%, respectively. In Asia, net sales were $81 million and $64 million for these same periods, an increase of 28%. For these same periods, sales in Asia, as a percentage of consolidated sales were 32% and 29%, respectively.

For the nine month periods ended September 30, 2011 and 2010, net sales in the Americas were $300 million and $266 million, respectively, an increase of 13%. For these same periods, sales in the Americas, as a percentage of consolidated sales were 40% and 43%, respectively. In Europe, net sales were $223 million and $178 million for these same periods, an increase of 25%. For these same periods, sales in Europe, as a percentage of consolidated sales were 30% and 29%, respectively. In Asia, net sales were $224 million and $179 million for these same periods, an increase of 25%. For these same periods, sales in Asia, as a percentage of consolidated sales were 30% and 29%, respectively.

For the three and nine month periods ended September 30, 2011, net sales in the Americas were negatively impacted by the $13 million accrual related to our GSA contract. 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. We anticipate that sales growth in Asia may continue to be strong relative to the Americas and Europe and continue to grow as a percentage of our total net sales.
 
Almost all of the sales made by our direct sales offices in the Americas, outside of the U.S., 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 month period ended September 30, 2011, in local currency terms, our consolidated net sales increased by $18 million or 9%, Americas sales increased by $626,000 or 1%, European sales increased by $5 million or 14%, and sales in Asia Pacific increased by $12 million or 19%, compared to the three month period ended September 30, 2010. During this same period, the change in exchange rates had the effect of increasing our consolidated sales by $18 million or 9%, increasing Americas sales by $879,000 or 1%, increasing European sales by $11 million or 30%, and increasing sales in Asia Pacific by $6 million or 10%.

For the nine month period ended September 30, 2011, in local currency terms, our consolidated net sales increased by $99 million or 17%, Americas sales increased by $32 million or 12%, European sales increased by $33 million or 23%, and sales in Asia Pacific increased by $35 million or 20%, compared to the nine month period ended September 30, 2010. During this same period, the change in exchange rates had the effect of increasing our consolidated sales by $26 million or 4%, increasing Americas sales by $1.7 million or 1%, increasing European sales by $14 million or 9%, and increasing sales in Asia Pacific by $11 million or 6%.
 
To help protect against a reduction in value caused by a fluctuation in foreign currency exchange rates of forecasted foreign currency cash flows resulting from international sales, we have a foreign currency cash flow hedging program. We hedge portions of our forecasted revenue denominated in foreign currencies with forward contracts. During the three month periods ended September 30, 2011 and 2010, these hedges had the effect of decreasing our consolidated sales by $1.1 million and increasing our consolidated sales by $1.4 million, respectively. During the nine month periods ended September 30, 2011 and 2010, these hedges had the effect of decreasing our consolidated sales by $2.9 million and increasing our consolidated sales by $4.4 million, respectively. (See Note 5 - Derivative instruments and hedging activities of Notes to Consolidated Financial Statements for further discussion regarding our cash flow hedging program and its related impacted on our consolidated sales for 2011 and 2010).
 
Gross Profit. For the three month periods ended September 30, 2011 and 2010, gross profit wa