64d4628b7f7b44d

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, 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  

  

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 October 29, 2013

Common Stock - $0.01 par value

125,157,757

 

1  


 

  

   

NATIONAL INSTRUMENTS CORPORATION  

  

INDEX  

 

 

 

 

 

 

 

 

 

 

PART I.  FINANCIAL INFORMATION 

Page No.

 

 

 

Item 1

Financial Statements:

 

 

 

 

 

Consolidated Balance Sheets

 

 

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

3

 

 

 

 

Consolidated Statements of Income

 

 

(unaudited) for the three and nine month periods ended September 30, 2013 and 2012

4

 

 

 

 

Consolidated Statements of Comprehensive Income

 

 

(unaudited) for the three and nine month periods ended September 30, 2013 and 2012

5

 

 

 

 

Consolidated Statements of Cash Flows

 

 

(unaudited) for the nine month periods ended September 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

45

 

 

 

Item 5

Other Information

45

 

 

 

Item 6

Exhibits

46

 

 

 

 

Signatures and Certifications

47

 

  

   

2  


 

  

  

PART I - FINANCIAL INFORMATION  

  

ITEM 1.Financial Statements  

  

NATIONAL INSTRUMENTS CORPORATION  

CONSOLIDATED BALANCE SHEETS  

(in thousands, except share data)  

  

  

  

  

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2013

 

2012

Assets

 

(unaudited)

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

$

190,208 

$

161,996 

Short-term investments

 

153,906 

 

173,166 

Accounts receivable, net

 

182,723 

 

187,060 

Inventories, net

 

178,904 

 

169,990 

Prepaid expenses and other current assets

 

66,412 

 

48,009 

Deferred income taxes, net

 

26,464 

 

27,479 

Total current assets

 

798,617 

 

767,700 

Property and equipment, net

 

262,966 

 

249,721 

Goodwill

 

147,319 

 

147,258 

Intangible assets, net

 

84,424 

 

93,913 

Other long-term assets

 

28,269 

 

26,177 

Total assets

$

1,321,595 

$

1,284,769 

Liabilities and stockholders' equity

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable

$

54,582 

$

65,080 

Accrued compensation

 

29,559 

 

29,978 

Deferred revenue - current

 

96,043 

 

90,714 

Accrued expenses and other liabilities

 

20,003 

 

34,373 

Other taxes payable

 

31,021 

 

24,811 

Total current liabilities

 

231,208 

 

244,956 

Deferred income taxes

 

45,046 

 

47,630 

Liability for uncertain tax positions

 

23,399 

 

20,920 

Deferred revenue - long-term

 

21,309 

 

20,446 

Other long-term liabilities

 

9,455 

 

11,689 

Total liabilities

 

330,417 

 

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 and 180,000,000 shares authorized, respectively; 125,157,034 and 122,878,690 shares issued and outstanding, respectively

 

1,252 

 

1,229 

Additional paid-in capital

 

586,406 

 

532,845 

Retained earnings

 

400,798 

 

404,210 

Accumulated other comprehensive income

 

2,722 

 

844 

Total stockholders’ equity

 

991,178 

 

939,128 

Total liabilities and stockholders’ equity

$

1,321,595 

$

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

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Net sales:

 

 

 

 

 

 

 

 

Product

$

269,582 

$

267,894 

$

810,663 

$

776,208 

Software maintenance

 

19,556 

 

22,080 

 

61,089 

 

65,809 

GSA accrual

 

 -

 

 -

 

 -

 

1,349 

Total net sales

 

289,138 

 

289,974 

 

871,752 

 

843,366 

 

 

 

 

 

 

 

 

 

Cost of sales:

 

 

 

 

 

 

 

 

Product

 

73,541 

 

71,796 

 

224,954 

 

201,374 

Software maintenance

 

1,665 

 

1,698 

 

4,307 

 

4,319 

Total cost of sales

 

75,206 

 

73,494 

 

229,261 

 

205,693 

 

 

 

 

 

 

 

 

 

Gross profit

 

213,932 

 

216,480 

 

642,491 

 

637,673 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Sales and marketing

 

111,253 

 

109,213 

 

337,884 

 

320,021 

Research and development

 

60,791 

 

56,627 

 

180,520 

 

164,928 

General and administrative

 

21,363 

 

20,714 

 

66,363 

 

63,590 

Acquisition related adjustment

 

 -

 

 -

 

(1,316)

 

 -

Total operating expenses

 

193,407 

 

186,554 

 

583,451 

 

548,539 

 

 

 

 

 

 

 

 

 

Operating income

 

20,525 

 

29,926 

 

59,040 

 

89,134 

 

 

 

 

 

 

 

 

 

Other income:

 

 

 

 

 

 

 

 

Interest income

 

133 

 

133 

 

495 

 

495 

Net foreign exchange gain (loss)

 

456 

 

(235)

 

(2,057)

 

(2,139)

Other income (loss), net

 

304 

 

(899)

 

728 

 

(644)

Income before income taxes

 

21,418 

 

28,925 

 

58,206 

 

86,846 

Provision for income taxes

 

5,654 

 

4,585 

 

9,421 

 

17,423 

 

 

 

 

 

 

 

 

 

Net income

$

15,764 

$

24,340 

$

48,785 

$

69,423 

 

 

 

 

 

 

 

 

 

Basic earnings per share

$

0.13 

$

0.20 

$

0.39 

$

0.57 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

125,032 

 

122,402 

 

124,244 

 

121,710 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

$

0.13 

$

0.20 

$

0.39 

$

0.57 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - diluted

 

125,608 

 

123,074 

 

125,221 

 

122,726 

 

 

 

 

 

 

 

 

 

Dividends declared per share

$

0.14 

$

0.14 

$

0.42 

$

0.42 

 

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

4  


 

  

  

NATIONAL INSTRUMENTS CORPORATION  

 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME  

(in thousands)  

(unaudited)  

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Net income

$

15,764 

$

24,340 

$

48,785 

$

69,423 

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

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

6,307 

 

2,708 

 

3,058 

 

1,427 

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

 

(91)

 

(724)

 

(497)

 

165 

Unrealized (loss) gain on derivative instruments

 

(2,371)

 

(1,646)

 

1,281 

 

2,985 

Other comprehensive income, before tax

 

3,845 

 

338 

 

3,842 

 

4,577 

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

 

611 

 

(337)

 

1,964 

 

683 

Other comprehensive income, net of tax

 

3,234 

 

675 

 

1,878 

 

3,894 

Comprehensive income

$

18,998 

$

25,015 

$

50,663 

$

73,317 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

5  


 

  

NATIONAL INSTRUMENTS CORPORATION 

CONSOLIDATED STATEMENTS OF CASH FLOWS  

(in thousands)  

(unaudited)  

  

  

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30,

 

 

2013

 

2012

Cash flow from operating activities:

 

 

 

 

Net income

$

48,785 

$

69,423 

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

 

 

 

 

Depreciation and amortization

 

50,897 

 

41,029 

Stock-based compensation

 

21,996 

 

20,506 

Tax (benefit) expense from deferred income taxes

 

(1,272)

 

3,626 

Tax benefit from stock option plans

 

(2,185)

 

(2,353)

Changes in operating assets and liabilities:

 

 

 

 

Accounts receivable

 

4,789 

 

(25,549)

Inventories

 

(8,358)

 

(23,278)

Prepaid expenses and other assets

 

(18,320)

 

(10,296)

Accounts payable

 

(10,636)

 

11,100 

Deferred revenue

 

6,192 

 

(2,271)

Taxes, accrued expenses and other liabilities

 

2,834 

 

8,325 

Net cash provided by operating activities

 

94,722 

 

90,262 

 

 

 

 

 

Cash flow from investing activities:

 

 

 

 

Capital expenditures

 

(40,795)

 

(52,483)

Capitalization of internally developed software

 

(10,566)

 

(11,284)

Additions to other intangibles

 

(4,146)

 

(1,426)

Purchases of short-term investments

 

(16,039)

 

(48,718)

Sales and maturities of short-term investments

 

35,299 

 

220,094 

Net cash (used in) provided by investing activities

 

(36,247)

 

106,183 

 

 

 

 

 

Cash flow from financing activities:

 

 

 

 

Proceeds from issuance of common stock

 

28,809 

 

21,297 

AWR earnout payment

 

(9,016)

 

Dividends paid

 

(52,241)

 

(51,167)

Tax benefit from stock option plans

 

2,185 

 

2,353 

Net cash used in financing activities

 

(30,263)

 

(27,517)

 

 

 

 

 

Net change in cash and cash equivalents

 

28,212 

 

168,928 

Cash and cash equivalents at beginning of period

 

161,996 

 

142,608 

Cash and cash equivalents at end of period

$

190,208 

$

311,536 

 

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 September 30, 2013 and December 31, 2012, the results of our operations and comprehensive income for the three and nine month periods ended September 30, 2013 and 2012, and our cash flows for the nine month periods ended September 30, 2013 and September 30, 2012. Operating results for the three and nine month periods ended September 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 nine month periods ended September 30, 2013 and 2012, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

(In thousands)

 

(In thousands)

 

(Unaudited)

 

(Unaudited)

 

2013

 

2012

 

2013

 

2012

Weighted average shares outstanding-basic

125,032 

 

122,402 

 

124,244 

 

121,710 

Plus: Common share equivalents

 

 

 

 

 

 

 

Stock options, RSUs

576 

 

672 

 

977 

 

1,016 

Weighted average shares outstanding-diluted

125,608 

 

123,074 

 

125,221 

 

122,726 

  

Stock awards to acquire 682,300 shares and 1,201,000 shares for the three month periods ended September 30, 2013 and 2012, respectively, and 58,500 shares and 5,030 shares for the nine month periods ended September 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 cash, cash equivalents, and short-term investments designated as available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2013

(In thousands)

 

(Unaudited)

 

 

 

 

Gross

 

Gross

 

Cumulative

 

 

 

 

Adjusted Cost

 

Unrealized Gain

 

Unrealized Loss

 

Translation Adjustment

 

Fair Value

Cash

$

123,585 

$

 -

$

 -

$

 -

$

123,585 

Money Market Accounts

 

66,623 

 

 -

 

 -

 

 -

 

66,623 

Municipal bonds

 

 -

 

 -

 

 -

 

 -

 

 -

Corporate bonds

 

17,913 

 

 

(9)

 

(1,500)

 

16,409 

U.S. treasuries and agencies

 

117,678 

 

56 

 

 -

 

 -

 

117,734 

Foreign government bonds

 

18,395 

 

 -

 

(4)

 

(1,540)

 

16,851 

Time deposits

 

2,912 

 

 -

 

 -

 

 -

 

2,912 

Cash, cash equivalents, and short-term investments

$

347,106 

$

61 

$

(13)

$

(3,040)

$

344,114 

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 September 30, 2013

(In thousands)

 

(Unaudited)

 

 

Adjusted Cost

 

Fair Value

Due in less than 1 year

$

130,148 

$

129,401 

Due in 1 to 5 years

 

26,750 

 

24,505 

Total available-for-sale debt securities

$

156,898 

$

153,906 

 

 

 

 

 

Due in less than 1 year

 

Adjusted Cost

 

Fair Value

U.S. treasuries and agencies

 

117,678 

 

117,734 

Foreign government bonds

 

9,558 

 

8,755 

Time deposits

 

2,912 

 

2,912 

Total available-for-sale debt securities

$

130,148 

$

129,401 

 

 

 

 

 

Due in 1 to 5 years

 

Adjusted Cost

 

Fair Value

Corporate bonds

 

17,913 

 

16,409 

Foreign government bonds

 

8,837 

 

8,096 

Total available-for-sale debt securities

$

26,750 

$

24,505 

  

 

  

   

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   

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

 

September 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

$

66,623 

$

66,623 

$

 

$

 -

U.S. treasuries and agencies

 

 -

 

 

 

 -

 

 -

Short-term investments available for sale:

 

 

 

 

 

 

 

 

Municipal bonds

 

 -

 

 -

 

 -

 

 -

Corporate bonds

 

16,409 

 

 -

 

16,409 

 

 -

U.S. treasuries and agencies

 

117,734 

 

 -

 

117,734 

 

 -

Foreign government bonds

 

16,851 

 

 -

 

16,851 

 

 -

Time deposits

 

2,912 

 

2,912 

 

 -

 

 -

Derivatives

 

5,908 

 

 -

 

5,908 

 

 -

Total Assets 

$

226,437 

$

69,535 

$

156,902 

$

 -

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Derivatives

$

(3,538)

$

 -

$

(3,538)

$

 -

Total Liabilities 

$

(3,538)

$

 -

$

(3,538)

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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)

$

 -

8  


 

 

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 organizations 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. 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 nine month period ended September 30, 2013. There were not any transfers in or out of Level 1 or Level 2 during the nine month period ended September 30, 2013.  

9  


 

  

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 September 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 50 countries. Sales outside of the Americas accounted for approximately 56% and 59% of our revenues during each of the three month periods ended September 30, 2013 and 2012, respectively, and 59% and 60% of our revenues during the nine month periods ended September 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.  

  

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.  

  

10  


 

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 September 30, 2013

 

As of December 31,

 

 

(Unaudited)

 

2012

Euro

$

66,788 

$

84,770 

Japanese yen

 

27,645 

 

42,209 

Hungarian forint

 

22,461 

 

36,005 

British pound

 

9,780 

 

 -

Malaysian ringgit

 

4,426 

 

 -

Total forward contracts notional amount

$

131,100 

$

162,984 

  

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

  

At September 30, 2013, we expect to reclassify $1.2 million of gains on derivative instruments from accumulated OCI to net sales during the next twelve months when the hedged international sales occur, $334,000 of gains on derivative instruments from accumulated OCI to cost of sales when the cost of sales are incurred and $283,000 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, 2013. Actual results may vary as a result of changes in the corresponding exchange rates subsequent to this date.  

  

We did not record any ineffectiveness from our hedges during the three and nine month periods ended September 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 gain (loss)”. As of September 30, 2013 and December 31, 2012, we held foreign currency forward contracts with a notional amount of $52 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

 

September 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

$

3,692 

Prepaid expenses and other current assets

$

2,956 

 

 

 

 

 

 

 

Foreign exchange contracts - LT forwards

Other long-term assets

 

2,017 

Other long-term assets

 

1,046 

Total derivatives designated as hedging instruments

 

$

5,709 

 

$

4,002 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - ST forwards

Prepaid expenses and other current assets

$

199 

Prepaid expenses and other current assets

$

244 

Total derivatives not designated as hedging instruments

 

$

199 

 

$

244 

 

 

 

 

 

 

 

Total derivatives

 

$

5,908 

 

$

4,246 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability Derivatives

 

September 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

$

(1,887)

Accrued expenses and other liabilities

$

(1,292)

 

 

 

 

 

 

 

Foreign exchange contracts - LT forwards

Other long-term liabilities

 

(540)

Other long-term liabilities

 

(798)

Total derivatives designated as hedging instruments

 

$

(2,427)

 

$

(2,090)

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - ST forwards

Accrued expenses and other liabilities

$

(1,111)

Accrued expenses and other liabilities

$

(714)

Total derivatives not designated as hedging instruments

 

$

(1,111)

 

$

(714)

 

 

 

 

 

 

 

Total derivatives

 

$

(3,538)

 

$

(2,804)

  

12  


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 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

$

(3,536)

Net sales

$

751 

Net foreign exchange gain (loss)

$

 -

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

698 

Cost of sales

 

(20)

Net foreign exchange gain (loss)

 

 -

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

467 

Operating expenses

 

15 

Net foreign exchange gain (loss)

 

 -

Total

$

(2,371)

 

$

746 

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 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

$

(2,119)

Net sales

$

857 

Net foreign exchange gain (loss)

$

 -

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

309 

Cost of sales

 

92 

Net foreign exchange gain (loss)

 

 -

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

164 

Operating expenses

 

62 

Net foreign exchange gain (loss)

 

 -

Total

$

(1,646)

 

$

1,011 

 

$

 -

 

 

 

 

 

 

 

(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

 

 

 

September 30, 2013

 

September 30, 2012

 

 

 

(Unaudited)

 

(Unaudited)

Foreign exchange contracts - forwards

Net foreign exchange gain/(loss)

$

(1,293)

$

(1,164)

 

 

 

 

 

 

Total

 

$

(1,293)

$

(1,164)

  

13  


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 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

$

459 

Net sales

$

2,713 

Net foreign exchange gain (loss)

$

 -

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

432 

Cost of sales

 

54 

Net foreign exchange gain (loss)

 

 -

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

390 

Operating expenses

 

Net foreign exchange gain (loss)

 

 -

Total

$

1,281 

 

$

2,772 

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2012

(In thousands)

(Unaudited)

Derivatives in Cash Flow Hedging Relationship