b60c604234f14c7

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:  June 30, 2013 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  

  

https://cdn.kscope.io/695a53031883366ebe831186c5d46b6f-nati-20120630x10qg1.jpg  

NATIONAL INSTRUMENTS CORPORATION  

(Exact name of registrant as specified in its charter)  

 

 

 

 

Delaware  

(State or other jurisdiction of incorporation or organization)

 

74-1871327  

(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 TAccelerated 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 July 29, 2013

Common Stock - $0.01 par value

124,798,807

 

1  


 

  

   

NATIONAL INSTRUMENTS CORPORATION  

  

INDEX  

 

 

 

 

 

 

 

 

 

 

PART I.  FINANCIAL INFORMATION 

Page No.

 

 

 

Item 1

Financial Statements:

 

 

 

 

 

Consolidated Balance Sheets

 

 

June 30, 2013 (unaudited) and December 31, 2012

3

 

 

 

 

Consolidated Statements of Income

 

 

(unaudited) for the three and six month periods ended June 30, 2013 and 2012

4

 

 

 

 

Statements of Consolidated Comprehensive Income

 

 

(unaudited) for the three and six month periods ended June 30, 2013 and 2012

5

 

 

 

 

Consolidated Statements of Cash Flows

 

 

(unaudited) for the three and six month periods ended June 30, 2013 and 2012

6

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

Item 2

Management's Discussion and Analysis of Financial Condition and Results of Operations

22

 

 

 

Item 3

Quantitative and Qualitative Disclosures about Market Risk

32

 

 

 

Item 4

Controls and Procedures

35

 

 

 

 

 

 

PART II.  OTHER INFORMATION 

 

 

 

 

 

 

 

Item 1

Legal Proceedings

36

 

 

 

Item 1A

Risk Factors

36

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

44

 

 

 

Item 5

Other Information

44

 

 

 

Item 6

Exhibits

45

 

 

 

 

Signatures and Certifications

46

 

  

   

2  


 

  

  

PART I - FINANCIAL INFORMATION  

  

ITEM 1.               Financial Statements  

  

NATIONAL INSTRUMENTS CORPORATION  

CONSOLIDATED BALANCE SHEETS  

(in thousands, except share data)  

  

  

  

  

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

2013

 

2012

Assets

 

(unaudited)

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

$

169,580 

$

161,996 

Short-term investments

 

153,970 

 

173,166 

Accounts receivable, net

 

172,880 

 

187,060 

Inventories, net

 

185,278 

 

169,990 

Prepaid expenses and other current assets

 

68,202 

 

48,009 

Deferred income taxes, net

 

30,197 

 

27,479 

Total current assets

 

780,107 

 

767,700 

Property and equipment, net

 

263,915 

 

249,721 

Goodwill

 

146,922 

 

147,258 

Intangible assets, net

 

87,972 

 

93,913 

Other long-term assets

 

25,303 

 

26,177 

Total assets

$

1,304,219 

$

1,284,769 

Liabilities and stockholders' equity

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable

$

54,606 

$

65,080 

Accrued compensation

 

28,467 

 

29,978 

Deferred revenue - current

 

95,137 

 

90,714 

Accrued expenses and other liabilities

 

33,412 

 

34,373 

Other taxes payable

 

22,315 

 

24,811 

Total current liabilities

 

233,937 

 

244,956 

Deferred income taxes

 

46,480 

 

47,630 

Liability for uncertain tax positions

 

22,277 

 

20,920 

Deferred revenue - long-term

 

21,120 

 

20,446 

Other long-term liabilities

 

8,646 

 

11,689 

Total liabilities

 

332,460 

 

345,641 

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; 360,000,000 shares authorized; 124,784,176 and 122,878,690 shares issued and outstanding, respectively

 

1,248 

 

1,229 

Additional paid-in capital

 

568,426 

 

532,845 

Retained earnings

 

402,597 

 

404,210 

Accumulated other comprehensive (loss) income

 

(512)

 

844 

Total stockholders’ equity

 

971,759 

 

939,128 

Total liabilities and stockholders’ equity

$

1,304,219 

$

1,284,769 

 

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

3  


 

  

NATIONAL INSTRUMENTS CORPORATION  

CONSOLIDATED STATEMENTS OF INCOME  

(in thousands, except per share data)  

(unaudited)  

  

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Net sales:

 

 

 

 

 

 

 

 

Product

$

275,663 

$

268,979 

$

541,081 

$

508,314 

Software maintenance

 

20,463 

 

21,931 

 

41,533 

 

43,729 

GSA accrual

 

 -

 

1,349 

 

 -

 

1,349 

Total net sales

 

296,126 

 

292,259 

 

582,614 

 

553,392 

 

 

 

 

 

 

 

 

 

Cost of sales:

 

 

 

 

 

 

 

 

Product

 

82,787 

 

69,787 

 

151,413 

 

129,578 

Software maintenance

 

1,028 

 

1,064 

 

2,642 

 

2,621 

Total cost of sales

 

83,815 

 

70,851 

 

154,055 

 

132,199 

 

 

 

 

 

 

 

 

 

Gross profit

 

212,311 

 

221,408 

 

428,559 

 

421,193 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Sales and marketing

 

112,561 

 

110,756 

 

226,631 

 

210,808 

Research and development

 

58,473 

 

54,286 

 

119,729 

 

108,301 

General and administrative

 

22,156 

 

21,502 

 

45,000 

 

42,876 

Acquisition related adjustment

 

 -

 

 -

 

(1,316)

 

 -

Total operating expenses

 

193,190 

 

186,544 

 

390,044 

 

361,985 

 

 

 

 

 

 

 

 

 

Operating income

 

19,121 

 

34,864 

 

38,515 

 

59,208 

 

 

 

 

 

 

 

 

 

Other income:

 

 

 

 

 

 

 

 

Interest income

 

177 

 

132 

 

362 

 

362 

Net foreign exchange loss

 

(1,051)

 

(1,016)

 

(2,513)

 

(1,904)

Other income, net

 

400 

 

151 

 

424 

 

255 

Income before income taxes

 

18,647 

 

34,131 

 

36,788 

 

57,921 

Provision for income taxes

 

4,226 

 

7,690 

 

3,767 

 

12,838 

 

 

 

 

 

 

 

 

 

Net income

$

14,421 

$

26,441 

$

33,021 

$

45,083 

 

 

 

 

 

 

 

 

 

Basic earnings per share

$

0.12 

$

0.22 

$

0.27 

$

0.37 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

124,377 

 

121,801 

 

123,845 

 

121,360 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

$

0.12 

$

0.22 

$

0.26 

$

0.37 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - diluted

 

125,270 

 

122,759 

 

124,824 

 

122,376 

 

 

 

 

 

 

 

 

 

Dividends declared per share

$

0.14 

$

0.14 

$

0.28 

$

0.28 

 

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

4  


 

  

  

NATIONAL INSTRUMENTS CORPORATION  

 STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME  

(in thousands)  

(unaudited)  

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Net income

$

14,421 

$

26,441 

$

33,021 

$

45,083 

Other comprehensive income, before tax and net of reclassification adjustments:

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(325)

 

(5,597)

 

(3,249)

 

(1,281)

Unrealized gain (loss) on securities available-for-sale

 

36 

 

(404)

 

(406)

 

889 

Unrealized gain on derivative instruments

 

1,574 

 

747 

 

3,652 

 

4,631 

Other comprehensive income (loss), before tax

 

1,285 

 

(5,254)

 

(3)

 

4,239 

Tax expense (benefit) related to items of other comprehensive income

 

191 

 

(1,005)

 

1,353 

 

1,020 

Other comprehensive income (loss), net of tax

 

1,094 

 

(4,249)

 

(1,356)

 

3,219 

Comprehensive income

$

15,515 

$

22,192 

$

31,665 

$

48,302 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

5  


 

  

NATIONAL INSTRUMENTS CORPORATION 

CONSOLIDATED STATEMENTS OF CASH FLOWS  

(in thousands)  

(unaudited)  

  

  

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30,

 

 

2013

 

2012

Cash flow from operating activities:

 

 

 

 

Net income

$

33,021 

$

45,083 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

Depreciation and amortization

 

33,555 

 

27,316 

Stock-based compensation

 

14,006 

 

13,285 

Tax (benefit) expense from deferred income taxes

 

(3,633)

 

6,695 

Tax benefit from stock option plans

 

(2,042)

 

(2,094)

Changes in operating assets and liabilities:

 

 

 

 

Accounts receivable

 

14,358 

 

(31,203)

Inventories

 

(14,732)

 

(16,994)

Prepaid expenses and other assets

 

(18,418)

 

(17,625)

Accounts payable

 

(10,612)

 

10,596 

Deferred revenue

 

5,097 

 

17,911 

Taxes, accrued expenses and other liabilities

 

(6,208)

 

(11,169)

Net cash provided by operating activities

 

44,392 

 

41,801 

 

 

 

 

 

Cash flow from investing activities:

 

 

 

 

Capital expenditures

 

(33,147)

 

(28,934)

Capitalization of internally developed software

 

(8,073)

 

(9,664)

Additions to other intangibles

 

(2,710)

 

(1,085)

Purchases of short-term investments

 

(16,039)

 

(38,879)

Sales and maturities of short-term investments

 

35,234 

 

183,058 

Net cash (used in) provided by investing activities

 

(24,735)

 

104,496 

 

 

 

 

 

Cash flow from financing activities:

 

 

 

 

Proceeds from issuance of common stock

 

20,612 

 

14,422 

Dividends paid

 

(34,727)

 

(34,019)

Tax benefit from stock option plans

 

2,042 

 

2,094 

Net cash used in financing activities

 

(12,073)

 

(17,503)

 

 

 

 

 

Net change in cash and cash equivalents

 

7,584 

 

128,794 

Cash and cash equivalents at beginning of period

 

161,996 

 

142,608 

Cash and cash equivalents at end of period

$

169,580 

$

271,402 

 

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

6  


 

  

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, 2012, 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 June 30, 2013 and December 31, 2012, the results of our operations and comprehensive income for the three and six month periods ended June 30, 2013 and June 30, 2012, and the cash flows for the six month periods ended June 30, 2013 and June 30, 2012. Operating results for the three and six month periods ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States.

 

Following approval by the Company’s Board of Directors and stockholders, on May 14, 2013, the Company’s certificate of incorporation was amended to increase the authorized shares of common stock by 180,000,000 shares to a total of 360,000,000 shares.  As a result of this amendment, the total number of shares which the Company is authorized to issue is 365,000,000 shares, consisting of (i) 5,000,000 shares of preferred stock, par value $.01 per share, and (ii) 360,000,000 shares of common stock, par value $.01 per share.  

 

 

  

   

Note 2 – Earnings per share  

  

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding during each period. Diluted EPS is computed by dividing net income by the weighted average number of common shares and common share equivalents outstanding (if dilutive) during each period. The number of common share equivalents, which include stock options and restricted stock units (“RSUs”), is computed using the treasury stock method.  

  

The reconciliation of the denominators used to calculate basic EPS and diluted EPS for the three and six month periods ended June 30, 2013 and 2012, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

(In thousands)

 

(In thousands)

 

(Unaudited)

 

(Unaudited)

 

2013

 

2012

 

2013

 

2012

Weighted average shares outstanding-basic

124,377 

 

121,801 

 

123,845 

 

121,360 

Plus: Common share equivalents

 

 

 

 

 

 

 

Stock options, RSUs

893 

 

958 

 

979 

 

1,016 

Weighted average shares outstanding-diluted

125,270 

 

122,759 

 

124,824 

 

122,376 

  

Stock awards to acquire 538,100 and 4,300 shares for the three months ended June 30, 2013 and 2012, respectively, and 183,500 and 74,900 shares for the six month period ended June 30, 2013 and 2012, respectively, were excluded in the computations of diluted EPS because the effect of including the stock awards would have been anti-dilutive.

  

 

Note 3 – Cash, cash equivalents and short-term investments  

  

The following tables summarize unrealized gains and losses related to our short-term investments designated as available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2013

(In thousands)

 

(Unaudited)

 

 

 

 

Gross

 

Gross

 

Cumulative

 

 

 

 

Adjusted Cost

 

Unrealized Gain

 

Unrealized Loss

 

Translation Adjustment

 

Fair Value

Cash

$

132,898 

$

 -

$

 -

$

 -

$

132,898 

Money Market Accounts

 

36,682 

 

 -

 

 -

 

 -

 

36,682 

Municipal bonds

 

1,434 

 

 

 -

 

 -

 

1,435 

Corporate bonds

 

17,891 

 

 -

 

(27)

 

(2,108)

 

15,756 

U.S. treasuries and agencies

 

117,625 

 

26 

 

 -

 

 -

 

117,651 

Foreign government bonds

 

18,391 

 

 -

 

(13)

 

(2,162)

 

16,216 

Time deposits

 

2,912 

 

 -

 

 -

 

 -

 

2,912 

Cash, cash equivalents, and short-term investments

$

327,833 

$

27 

$

(40)

$

(4,270)

$

323,550 

7  


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

December 31, 2012

 

 

 

 

Gross

 

Gross

 

Cumulative

 

 

 

 

Adjusted Cost

 

Unrealized Gain

 

Unrealized Loss

 

Translation Adjustment

 

Fair Value

Cash

$

141,340 

$

 -

$

 -

$

 -

$

141,340 

Money Market Accounts

 

20,656 

 

 -

 

 -

 

 -

 

20,656 

Municipal bonds

 

1,465 

 

 

 -

 

 -

 

1,466 

Corporate bonds

 

8,708 

 

 -

 

(20)

 

(910)

 

7,778 

U.S. treasuries and agencies

 

135,953 

 

 -

 

(28)

 

 -

 

135,925 

Foreign government bonds

 

27,947 

 

57 

 

 -

 

(2,919)

 

25,085 

Time deposits

 

2,912 

 

 -

 

 -

 

 -

 

2,912 

Cash, cash equivalents, and short-term investments

$

338,981 

$

58 

$

(48)

$

(3,829)

$

335,162 

  

The following tables summarize the contractual maturities of our short-term investments designated as available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2013

(In thousands)

 

(Unaudited)

 

 

Adjusted Cost

 

Fair Value

Due in less than 1 year

$

130,096 

$

128,990 

Due in 1 to 5 years

 

28,157 

 

24,980 

Total available-for-sale debt securities

$

158,253 

$

153,970 

 

 

 

 

 

Due in less than 1 year

 

Adjusted Cost

 

Fair Value

Corporate bonds

$

 -

$

 -

U.S. treasuries and agencies

 

117,625 

 

117,651 

Foreign government bonds

 

9,559 

 

8,427 

Time deposits

 

2,912 

 

2,912 

Total available-for-sale debt securities

$

130,096 

$

128,990 

 

 

 

 

 

Due in 1 to 5 years

 

Adjusted Cost

 

Fair Value

Municipal bonds

$

1,434 

$

1,435 

Corporate bonds

 

17,891 

 

15,756 

U.S. treasuries and agencies

 

 -

 

 -

Foreign government bonds

 

8,832 

 

7,789 

Total available-for-sale debt securities

$

28,157 

$

24,980 

  

 

  

   

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 advantageous market that market participants may 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. Fair value measurement 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   

 

 

 

 

 

8  


 

Assets and liabilities measured at fair value on a recurring basis are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

(In thousands)

 

(Unaudited)

Description

 

June 30, 2013

 

Quoted Prices in Active Markets for Identical Assets (Level 1)

 

Significant Other Observable Inputs (Level 2)

 

Significant Unobservable Inputs (Level 3)

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents available for sale:

 

 

 

 

 

 

 

 

Money Market Funds

$

36,682 

$

36,682 

$

 

$

 -

U.S. treasuries and agencies

 

 -

 

 

 

 -

 

 -

Short-term investments available for sale:

 

 

 

 

 

 

 

 

Municipal bonds

 

1,435 

 

 

 

1,435 

 

 -

Corporate bonds

 

15,756 

 

 

 

15,756 

 

 -

U.S. treasuries and agencies

 

117,651 

 

 

 

117,651 

 

 -

Foreign government bonds

 

16,216 

 

 

 

16,216 

 

 -

Time deposits

 

2,912 

 

2,912 

 

 

 

 -

Derivatives

 

8,007 

 

 

 

8,007 

 

 -

Total Assets 

$

198,659 

$

39,594 

$

159,065 

$

 -

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Derivatives

$

(1,538)

$

 -

$

(1,538)

$

 -

Total Liabilities 

$

(1,538)

$

 -

$

(1,538)

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Fair Value Measurements at Reporting Date Using

Description

 

December 31, 2012

 

Quoted Prices in Active Markets for Identical Assets (Level 1)

 

Significant Other Observable Inputs (Level 2)

 

Significant Unobservable Inputs (Level 3)

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents available for sale:

 

 

 

 

 

 

 

 

Money Market Funds

$

20,656 

$

20,656 

$

 -

$

 -

U.S. Treasuries and Agencies

 

 -

 

 -

 

 -

 

 -

Short-term investments available for sale:

 

 

 

 

 

 

 

 

Municipal bonds

 

1,466 

 

 -

 

1,466 

 

 -

Corporate bonds

 

7,778 

 

 -

 

7,778 

 

 -

U.S. treasuries and agencies

 

135,925 

 

 -

 

135,925 

 

 -

Foreign government bonds

 

25,085 

 

 -

 

25,085 

 

 -

Time deposits

 

2,912 

 

2,912 

 

 -

 

 -

Derivatives

 

4,246 

 

 -

 

4,246 

 

 -

Total Assets 

$

198,068 

$

23,568 

$

174,500 

$

 -

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Derivatives

$

(2,804)

$

 -

$

(2,804)

$

 -

Total Liabilities 

$

(2,804)

$

 -

$

(2,804)

$

 -

  

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. We believe all of these sources reflect the credit risk associated with each of our available-for-sale short-term investments. 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.  

  

 

 

9  


 

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. We consider counterparty credit risk in the valuation of our derivatives. However, counterparty credit risk did not impact the valuation of our derivatives during the six month period ended June 30, 2013. There were not any transfers in or out of Level 1 or Level 2 during the six month period ended June 30, 2013.  

  

Our foreign government bonds consist of German government sovereign debt denominated in Euro with maximum maturities of 24 months. Our short-term investments do not involve sovereign debt from any other country in Europe.  

  

We did not have any items that were measured at fair value on a nonrecurring basis at June 30, 2013 and December 31, 2012.  

  

The carrying value of net accounts receivable and accounts payable contained in the Consolidated Balance Sheets approximates fair value.

 

 

 Note 5 – Derivative instruments and hedging activities  

  

We recognize all of our derivative instruments as either assets or liabilities in our statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, 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 approximately 62% and 61% of our revenues during the three month periods ended June 30, 2013 and 2012, respectively, and 60% of our revenues during each of the six month periods ended June 30, 2013 and 2012, 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.  

  

10  


 

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 three 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, 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 the following notional amounts:

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

US Dollar Equivalent

 

 

As of June 30, 2013

 

As of December 31,

 

 

(Unaudited)

 

2012

Euro

$

60,559 

$

84,770 

Japanese yen

 

31,639 

 

42,209 

Hungarian forint

 

31,979 

 

36,005 

Total forward contracts notional amount

$

124,177 

$

162,984 

  

The contracts in the foregoing table had contractual maturities of 36 months or less at June 30, 2013 and December 31, 2012.  

  

At June 30, 2013, we expect to reclassify $3.6 million of gains on derivative instruments from accumulated OCI to net sales during the next twelve months when the hedged international sales occur, $204,000 of losses on derivative instruments from accumulated OCI to cost of sales when the cost of sales are incurred and $47,000 of losses 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 June 30, 2013. 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 three and six month periods ended June 30, 2013 and 2012.  

 

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 loss”. As of June 30, 2013 and December 31, 2012, we held foreign currency forward contracts with a notional amount of $53 million and  $69 million, respectively.   

 

 

 

 

 

 

11  


 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Derivatives

 

June 30, 2013

December 31, 2012

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

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

$

4,191 

Prepaid expenses and other current assets

$

2,956 

 

 

 

 

 

 

 

Foreign exchange contracts - LT forwards

Other long-term assets

 

2,567 

Other long-term assets

 

1,046 

Total derivatives designated as hedging instruments

 

$

6,758 

 

$

4,002 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - ST forwards

Prepaid expenses and other current assets

$

1,249 

Prepaid expenses and other current assets

$

244 

Total derivatives not designated as hedging instruments

 

$

1,249 

 

$

244 

 

 

 

 

 

 

 

Total derivatives

 

$

8,007 

 

$

4,246 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability Derivatives

 

June 30, 2013

December 31, 2012

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

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

$

(846)

Accrued expenses and other liabilities

$

(1,292)

 

 

 

 

 

 

 

Foreign exchange contracts - LT forwards

Other long-term liabilities

 

(259)

Other long-term liabilities

 

(798)

Total derivatives designated as hedging instruments

 

$

(1,105)

 

$

(2,090)

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - ST forwards

Accrued expenses and other liabilities

$

(433)

Accrued expenses and other liabilities

$

(714)

Total derivatives not designated as hedging instruments

 

$

(433)

 

$

(714)

 

 

 

 

 

 

 

Total derivatives

 

$

(1,538)

 

$

(2,804)

  

12  


 

 

 

 

 

 

 

 

 

 

 

 

 

The following tables present the effect of derivative instruments on our Consolidated Statements of Income for the three month periods ended June 30, 2013 and 2012, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2013

(In thousands)

(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

$

(268)

Net sales

$

804 

Net foreign exchange gain (loss)

$

 -

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

1,161 

Cost of sales

 

(34)

Net foreign exchange gain (loss)

 

 -

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

681 

Operating expenses

 

(9)

Net foreign exchange gain (loss)

 

 -

Total

$

1,574 

 

$

761 

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2012

(In thousands)

(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

$

1,281 

Net sales

$

728 

Net foreign exchange gain (loss)

$

 -

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

(377)

Cost of sales

 

103 

Net foreign exchange gain (loss)

 

 -

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

(157)

Operating expenses

 

Net foreign exchange gain (loss)

 

 -

Total

$

747 

 

$

839 

 

$

 -

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

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

 

 

 

June 30, 2013

 

June 30, 2012

 

 

 

(Unaudited)

 

(Unaudited)

Foreign exchange contracts - forwards

Net foreign exchange gain/(loss)

$

502 

$

794 

 

 

 

 

 

 

Total

 

$

502 

$

794 

13  


 

  

The following tables present the effect of derivative instruments on our Consolidated Statements of Income for the six month periods ended June 30, 2013 and 2012, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2013

(In thousands)

(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

$

3,995 

Net sales

$

1,962 

Net foreign exchange gain (loss)

$

 -

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

(266)

Cost of sales

 

74 

Net foreign exchange gain (loss)

 

 -

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

(77)

Operating expenses

 

(10)

Net foreign exchange gain (loss)

 

 -

Total

$

3,652 

 

$

2,026