681e236c4dbc49b

UNITED STATES  

SECURITIES AND EXCHANGE COMMISSION  

Washington, D.C. 20549  

  

FORM 10-Q  

  

 Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  

  

For the quarterly period ended:  March 31, 2014 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/e5d95afe6da07f3e90f6c115a0fd7ad0-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  No   

  

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

  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):  

  

Large accelerated filer 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   

  

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 April 28, 2014

Common Stock - $0.01 par value

126,132,512

 

1  


 

  

   

NATIONAL INSTRUMENTS CORPORATION  

  

INDEX  

 

 

 

 

 

 

 

 

 

 

PART I.  FINANCIAL INFORMATION 

Page No.

 

 

 

Item 1

Financial Statements:

 

 

 

 

 

Consolidated Balance Sheets

 

 

March 31, 2014 (unaudited) and December 31, 2013

3

 

 

 

 

Consolidated Statements of Income

 

 

(unaudited) for the three month periods ended March 31, 2014 and 2013

4

 

 

 

 

Consolidated Statements of Comprehensive Income

 

 

(unaudited) for the three month periods ended March 31, 2014 and 2013

5

 

 

 

 

Consolidated Statements of Cash Flows

 

 

(unaudited) for the three month periods ended March 31, 2014 and 2013

6

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

Item 2

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

21

 

 

 

Item 3

Quantitative and Qualitative Disclosures about Market Risk

30

 

 

 

Item 4

Controls and Procedures

32

 

 

 

 

 

 

PART II.  OTHER INFORMATION 

 

 

 

 

 

 

 

Item 1

Legal Proceedings

33

 

 

 

Item 1A

Risk Factors

33

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

41

 

 

 

Item 5

Other Information

41

 

 

 

Item 6

Exhibits

42

 

 

 

 

Signatures and Certifications

43

 

  

   

2  


 

  

  

PART I - FINANCIAL INFORMATION  

  

ITEM 1.Financial Statements  

  

NATIONAL INSTRUMENTS CORPORATION  

CONSOLIDATED BALANCE SHEETS  

(in thousands, except share data)  

  

  

  

  

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

2014

 

2013

Assets

 

(unaudited)

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

$

240,701 

$

230,263 

Short-term investments

 

169,409 

 

163,149 

Accounts receivable, net

 

181,545 

 

180,680 

Inventories, net

 

170,257 

 

172,109 

Prepaid expenses and other current assets

 

51,723 

 

49,001 

Deferred income taxes, net

 

35,324 

 

33,393 

Total current assets

 

848,959 

 

828,595 

Property and equipment, net

 

262,518 

 

260,568 

Goodwill

 

146,544 

 

146,520 

Intangible assets, net

 

83,484 

 

82,310 

Other long-term assets

 

24,173 

 

25,558 

Total assets

$

1,365,678 

$

1,343,551 

Liabilities and stockholders' equity

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable

$

62,827 

$

56,614 

Accrued compensation

 

21,817 

 

25,189 

Deferred revenue - current

 

102,155 

 

96,117 

Accrued expenses and other liabilities

 

16,567 

 

17,627 

Other taxes payable

 

29,752 

 

29,808 

Total current liabilities

 

233,118 

 

225,355 

Deferred income taxes

 

43,294 

 

44,620 

Liability for uncertain tax positions

 

24,145 

 

23,572 

Deferred revenue - long-term

 

21,261 

 

21,389 

Other long-term liabilities

 

6,119 

 

5,531 

Total liabilities

 

327,937 

 

320,467 

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; 126,132,383 and 125,690,240 shares issued and outstanding, respectively

 

1,261 

 

1,257 

Additional paid-in capital

 

621,211 

 

604,330 

Retained earnings

 

414,765 

 

414,947 

Accumulated other comprehensive income

 

504 

 

2,550 

Total stockholders’ equity

 

1,037,741 

 

1,023,084 

Total liabilities and stockholders’ equity

$

1,365,678 

$

1,343,551 

 

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

 

 

March 31,

 

 

2014

 

2013

 

 

 

 

 

Net sales:

 

 

 

 

Product

$

262,264 

$

265,418 

Software maintenance

 

22,410 

 

21,070 

Total net sales

 

284,674 

 

286,488 

 

 

 

 

 

Cost of sales:

 

 

 

 

Product

 

69,621 

 

68,626 

Software maintenance

 

1,581 

 

1,614 

Total cost of sales

 

71,202 

 

70,240 

 

 

 

 

 

Gross profit

 

213,472 

 

216,248 

 

 

 

 

 

Operating expenses:

 

 

 

 

Sales and marketing

 

111,916 

 

114,070 

Research and development

 

55,259 

 

61,256 

General and administrative

 

22,473 

 

22,844 

Acquisition related adjustment

 

 -

 

(1,316)

Total operating expenses

 

189,648 

 

196,854 

 

 

 

 

 

Operating income

 

23,824 

 

19,394 

 

 

 

 

 

Other income:

 

 

 

 

Interest income

 

197 

 

185 

Net foreign exchange gain (loss)

 

50 

 

(1,462)

Other income (loss), net

 

88 

 

24 

Income before income taxes

 

24,159 

 

18,141 

Provision for income taxes

 

5,436 

 

(459)

 

 

 

 

 

Net income

$

18,723 

$

18,600 

 

 

 

 

 

Basic earnings per share

$

0.15 

$

0.15 

 

 

 

 

 

Weighted average shares outstanding - basic

 

125,973 

 

123,306 

 

 

 

 

 

Diluted earnings per share

$

0.15 

$

0.15 

 

 

 

 

 

Weighted average shares outstanding - diluted

 

126,725 

 

124,365 

 

 

 

 

 

Dividends declared per share

$

0.15 

$

0.14 

 

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

 

 

March 31,

 

 

2014

 

2013

 

 

 

 

 

Net income

$

18,723 

$

18,600 

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

 

 

 

 

Foreign currency translation adjustment

 

(1,139)

 

(2,924)

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

 

192 

 

(442)

Unrealized (loss) gain on derivative instruments

 

(1,873)

 

2,078 

Other comprehensive loss, before tax

 

(2,820)

 

(1,288)

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

 

(774)

 

1,162 

Other comprehensive loss, net of tax

 

(2,046)

 

(2,450)

Comprehensive income

$

16,677 

$

16,150 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

5  


 

  

NATIONAL INSTRUMENTS CORPORATION 

CONSOLIDATED STATEMENTS OF CASH FLOWS  

(in thousands)  

(unaudited)  

  

  

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

 

2014

 

2013

Cash flow from operating activities:

 

 

 

 

Net income

$

18,723 

$

18,600 

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

 

 

 

 

Depreciation and amortization

 

16,994 

 

16,829 

Stock-based compensation

 

6,553 

 

7,134 

Tax benefit from deferred income taxes

 

(3,198)

 

(1,902)

Tax benefit from stock option plans

 

(70)

 

(459)

Changes in operating assets and liabilities:

 

 

 

 

Accounts receivable

 

(865)

 

15,115 

Inventories

 

1,852 

 

(18,045)

Prepaid expenses and other assets

 

(2,790)

 

(12,969)

Accounts payable

 

6,213 

 

1,603 

Deferred revenue

 

5,910 

 

3,776 

Taxes, accrued expenses and other liabilities

 

(3,180)

 

(9,200)

Net cash provided by operating activities

 

46,142 

 

20,482 

 

 

 

 

 

Cash flow from investing activities:

 

 

 

 

Capital expenditures

 

(11,959)

 

(19,094)

Capitalization of internally developed software

 

(7,602)

 

(2,803)

Additions to other intangibles

 

(1,049)

 

(1,418)

Purchases of short-term investments

 

(9,649)

 

(8,177)

Sales and maturities of short-term investments

 

3,389 

 

26,092 

Net cash used in investing activities

 

(26,870)

 

(5,400)

 

 

 

 

 

Cash flow from financing activities:

 

 

 

 

Proceeds from issuance of common stock

 

10,000 

 

11,798 

Dividends paid

 

(18,904)

 

(17,281)

Tax benefit from stock option plans

 

70 

 

459 

Net cash used in financing activities

 

(8,834)

 

(5,024)

 

 

 

 

 

Net change in cash and cash equivalents

 

10,438 

 

10,058 

Cash and cash equivalents at beginning of period

 

230,263 

 

161,996 

Cash and cash equivalents at end of period

$

240,701 

$

172,054 

 

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, 2013, included in our annual report on Form 10-K, filed with the Securities and Exchange Commission. In our opinion, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring items) considered necessary to present fairly our financial position at March 31, 2014 and December 31, 2013,  and the results of our operations, comprehensive income, and cash flows for the three month periods ended March 31, 2014 and March 31, 2013. Operating results for the three month period ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States.

 

 

  

   

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 months ended March 31, 2014 and 2013, are as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

(In thousands)

 

(Unaudited)

 

2014

 

2013

Weighted average shares outstanding-basic

125,973 

 

123,306 

Plus: Common share equivalents

 

 

 

Stock options, RSUs

752 

 

1,059 

Weighted average shares outstanding-diluted

126,725 

 

124,365 

  

Stock awards to acquire 61,500 shares and 86,800 shares for the three months ended March 31, 2014 and 2013 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 March 31, 2014

(In thousands)

 

(Unaudited)

 

 

 

 

Gross

 

Gross

 

Cumulative

 

 

 

 

Adjusted Cost

 

Unrealized Gain

 

Unrealized Loss

 

Translation Adjustment

 

Fair Value

Cash

$

120,982 

$

 -

$

 -

$

 -

$

120,982 

Money Market Accounts

 

119,719 

 

 -

 

 -

 

 -

 

119,719 

Corporate bonds

 

71,359 

 

44 

 

(20)

 

(1,183)

 

70,200 

U.S. treasuries and agencies

 

79,146 

 

 

(23)

 

 -

 

79,129 

Foreign government bonds

 

18,428 

 

 -

 

(2)

 

(1,258)

 

17,168 

Time deposits

 

2,912 

 

 -

 

 -

 

 -

 

2,912 

Cash, cash equivalents, and short-term investments

$

412,546 

$

50 

$

(45)

$

(2,441)

$

410,110 

 

7  


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

December 31, 2013

 

 

 

 

Gross

 

Gross

 

Cumulative

 

 

 

 

Adjusted Cost

 

Unrealized Gain

 

Unrealized Loss

 

Translation Adjustment

 

Fair Value

Cash

$

142,058 

$

 -

$

 -

$

 -

$

142,058 

Money Market Accounts

 

88,205 

 

 -

 

 -

 

 -

 

88,205 

Corporate bonds

 

71,964 

 

16 

 

(146)

 

(1,218)

 

70,616 

U.S. treasuries and agencies

 

72,459 

 

26 

 

 -

 

 -

 

72,485 

Foreign government bonds

 

18,409 

 

 -

 

(7)

 

(1,266)

 

17,136 

Time deposits

 

2,912 

 

 -

 

 -

 

 -

 

2,912 

Cash, cash equivalents, and short-term investments

$

396,007 

$

42 

$

(153)

$

(2,484)

$

393,412 

  

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2014

(In thousands)

 

(Unaudited)

 

 

Adjusted Cost

 

Fair Value

Due in less than 1 year

$

104,365 

$

102,543 

Due in 1 to 5 years

 

67,480 

 

66,866 

Total available-for-sale debt securities

$

171,845 

$

169,409 

 

 

 

 

 

Due in less than 1 year

 

Adjusted Cost

 

Fair Value

Corporate bonds

$

22,389 

$

21,217 

U.S. treasuries and agencies

 

69,492 

 

69,498 

Foreign government bonds

 

9,572 

 

8,916 

Time deposits

 

2,912 

 

2,912 

Total available-for-sale debt securities

$

104,365 

$

102,543 

 

 

 

 

 

Due in 1 to 5 years

 

Adjusted Cost

 

Fair Value

Corporate bonds

$

48,970 

$

48,983 

U.S. treasuries and agencies

 

9,654 

 

9,631 

Foreign government bonds

 

8,856 

 

8,252 

Total available-for-sale debt securities

$

67,480 

$

66,866 

  

 

  

   

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

 

March 31, 2014

 

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

$

119,719 

$

119,719 

$

 -

$

 -

Short-term investments available for sale:

 

 

 

 

 

 

 

 

Corporate bonds

 

70,200 

 

 -

 

70,200 

 

 -

U.S. treasuries and agencies

 

79,129 

 

 -

 

79,129 

 

 -

Foreign government bonds

 

17,168 

 

 -

 

17,168 

 

 -

Time deposits

 

2,912 

 

2,912 

 

 -

 

 -

Derivatives

 

4,588 

 

 -

 

4,588 

 

 -

Total Assets 

$

293,716 

$

122,631 

$

171,085 

$

 -

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Derivatives

$

(3,545)

$

 -

$

(3,545)

$

 -

Total Liabilities 

$

(3,545)

$

 -

$

(3,545)

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Fair Value Measurements at Reporting Date Using

Description

 

December 31, 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

$

88,205 

$

88,205 

$

 -

$

 -

Short-term investments available for sale:

 

 

 

 

 

 

 

 

Corporate bonds

 

70,616 

 

 -

 

70,616 

 

 -

U.S. treasuries and agencies

 

72,485 

 

 -

 

72,485 

 

 -

Foreign government bonds

 

17,136 

 

 -

 

17,136 

 

 -

Time deposits

 

2,912 

 

2,912 

 

 -

 

 -

Derivatives

 

6,908 

 

 -

 

6,908 

 

 -

Total Assets 

$

258,262 

$

91,117 

$

167,145 

$

 -

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Derivatives

$

(4,742)

$

 -

$

(4,742)

$

 -

Total Liabilities 

$

(4,742)

$

 -

$

(4,742)

$

 -

 

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 40 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 three month period ended March 31, 2014. There were not any transfers in or out of Level 1 or Level 2 during the three month period ended March 31, 2014.  

  

Our foreign government bonds consist of German government sovereign debt denominated in Euro with maximum remaining maturities of 15 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 March 31, 2014 and December 31, 2013.  

  

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 60% and 58% of our revenues during the three month periods ended March 31, 2014 and 2013, 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, Hungarian forint, British pound, and Malaysian ringgit) 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 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 March 31, 2014

 

As of December 31,

 

 

(Unaudited)

 

2013

Euro

$

86,571 

$

75,886 

Japanese yen

 

17,641 

 

23,284 

Hungarian forint

 

15,855 

 

21,159 

British pound

 

23,668 

 

14,869 

Malaysian ringgit

 

5,591 

 

4,426 

Total forward contracts notional amount

$

149,326 

$

139,624 

  

The contracts in the foregoing table had contractual maturities of 36 months or less at March 31, 2014 and December 31, 2013.  

  

At March 31, 2014, we expect to reclassify $68,000 of losses on derivative instruments from accumulated OCI to net sales during the next twelve months when the hedged international sales occur, $321,000 of gains on derivative instruments from accumulated OCI to cost of sales when the cost of sales are incurred and $168,000 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 March 31, 2014. 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 month periods ended March 31, 2014 and 2013.  

 

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 March 31, 2014 and December 31, 2013, we held foreign currency forward contracts with a notional amount of $61 million and  $70 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

 

March 31, 2014

December 31, 2013

(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

$

3,139 

Prepaid expenses and other current assets

$

4,825 

 

 

 

 

 

 

 

Foreign exchange contracts - LT forwards

Other long-term assets

 

1,024 

Other long-term assets

 

1,719 

Total derivatives designated as hedging instruments

 

$

4,163 

 

$

6,544 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - ST forwards

Prepaid expenses and other current assets

$

425 

Prepaid expenses and other current assets

$

364 

Total derivatives not designated as hedging instruments

 

$

425 

 

$

364 

 

 

 

 

 

 

 

Total derivatives

 

$

4,588 

 

$

6,908 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability Derivatives

 

March 31, 2014

December 31, 2013

(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

$

(2,833)

Accrued expenses and other liabilities

$

(3,350)

 

 

 

 

 

 

 

Foreign exchange contracts - LT forwards

Other long-term liabilities

 

 -

Other long-term liabilities

 

 -

Total derivatives designated as hedging instruments

 

$

(2,833)

 

$

(3,350)

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - ST forwards

Accrued expenses and other liabilities

$

(712)

Accrued expenses and other liabilities

$

(1,392)

Total derivatives not designated as hedging instruments

 

$

(712)

 

$

(1,392)

 

 

 

 

 

 

 

Total derivatives

 

$

(3,545)

 

$

(4,742)

  

12  


 

The following tables present the effect of derivative instruments on our Consolidated Statements of Income for three month periods ended March 31, 2014 and 2013, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2014

(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

$

(1,035)

Net sales

$

346 

Net foreign exchange gain (loss)

$

 -

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

(597)

Cost of sales

 

81 

Net foreign exchange gain (loss)

 

 -

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

(241)

Operating expenses

 

18 

Net foreign exchange gain (loss)

 

 -

Total

$

(1,873)

 

$

445 

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 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

$

4,263 

Net sales

$

1,158 

Net foreign exchange gain (loss)

$

 -

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

(1,427)

Cost of sales

 

108 

Net foreign exchange gain (loss)

 

 -

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

(758)

Operating expenses

 

(1)

Net foreign exchange gain (loss)

 

 -

Total

$

2,078 

 

$

1,265 

 

$

 -

 

 

 

 

 

 

 

(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

 

 

 

March 31, 2014

 

March 31, 2013

 

 

 

(Unaudited)

 

(Unaudited)

Foreign exchange contracts - forwards

Net foreign exchange gain/(loss)

$

(68)

$

1,324 

 

 

 

 

 

 

Total

 

$

(68)

$

1,324 

  

  

   

 

13  


 

Note 6 – Inventories  

  

Inventories, net consist of the following: 

 

 

 

 

 

 

 

 

March 31, 2014

 

December 31,

(In thousands)

 

(Unaudited)

 

2013

 

 

 

 

 

Raw materials  

$

79,092 

$

81,574 

Work-in-process

 

4,217 

 

4,958 

Finished goods

 

86,948 

 

85,577 

 

$

170,257 

$

172,109 

 

  

Note 7 – Intangible asset 

  

Intangible assets at March 31, 2014 and December 31, 2013 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2014

 

 

(In thousands)

 

(Unaudited)

 

December 31, 2013

 

 

Gross Carrying Amount

 

Accumulated Amortization

 

Net Carrying Amount

 

Gross Carrying Amount

 

Accumulated Amortization

 

Net Carrying Amount

Capitalized software development costs

$

55,995 

$

(27,827)

$

28,168 

$

48,947 

$

(25,706)

$

23,241 

Acquired technology

 

89,318 

 

(57,281)

 

32,037 

 

89,446 

 

(54,253)

 

35,193 

Patents

 

26,547 

 

(11,476)

 

15,071 

 

26,070 

 

(11,045)

 

15,025 

Other

 

28,732 

 

(20,524)

 

8,208 

 

28,517 

 

(19,666)

 

8,851 

 

$

200,592 

$

(117,108)

$

83,484 

$

192,980 

$

(110,670)

$

82,310 

  

  

Software development costs capitalized for the three month periods ended March 31, 2014 and 2013 were $8.0 million and $2.9 million, respectively, and related amortization expense was $3.1 million and $3.7 million, respectively. Capitalized software development costs for the three month periods ended March 31, 2014 and 2013 included costs related to stock based compensation of $378,000 and $140,000, respectively. The related amounts in the table above are net of fully amortized assets.

 

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 technology and other intangible assets 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 10 to 17 years. Total intangible assets amortization expenses were $7.6 million and $8.4 million for the three months ended March 31, 2014 and 2013, respectively. 

 

 Note 8 – Goodwill 

  

The carrying amount of goodwill as of March 31, 2014, was as follows:

 

 

 

 

 

 

 

 

 

Amount

 

 

(In thousands)

Balance as of December 31, 2013

$

146,520 

Purchase price adjustments

 

 -

Foreign currency translation impact

 

24 

Balance as of March 31, 2014 (unaudited)

$

146,544 

 

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, 2014. No impairment of goodwill was identified during 2014 and 2013. Goodwill is deductible for tax purposes in certain jurisdictions.

   

 

14  


 

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 $24.1 million and $23.6 million of unrecognized tax benefits at March 31, 2014 and December 31, 2013, respectively, all of which would affect our effective income tax rate if recognized. We recorded a gross increase in unrecognized tax benefits of $515,000 for the three months ended March 31, 2014 as a result of tax positions taken during the period. Our continuing policy is to recognize interest and penalties related to income tax matters in income tax expense. As of March 31, 2014, we had approximately $1.5 million accrued for interest related to uncertain tax positions. The tax years 2007 through 2013 remain open to examination by the major taxing jurisdictions to which we are subject.  The Internal Revenue Service (“IRS”) commenced an examination of our U.S. income tax returns for 2010 and 2011 in the second quarter of 2013 and such examination is still ongoing.  

  

Our provision for income taxes reflected an effective tax rate of 23% and (3)% for the three month periods ended March 31, 2014 and 2013. For the three months ended March 31, 2014, 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, and a tax benefit from disqualifying dispositions of equity awards that do not ordinarily result in a tax benefit. For the three month period ended March 31, 2013, 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 research and development tax credit, and a tax benefit from disqualifying dispositions of equity awards that do not ordinarily result in a tax benefit.

 

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 $1.6 million and $1.7 million for the three month periods ended March 31, 2014 and 2013, 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 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 $2.5 million and $2.4 million for the three month periods ended March 31, 2014 and 2013, respectively.

 

Earnings from our operations in Malaysia are free of tax under a tax holiday effective January 1, 2013. This tax holiday expires in 2027. If we fail to satisfy the conditions of the tax holiday, this tax benefit may be terminated early. The tax holiday resulted in an income tax benefit of $306,000 for the three months ended March 31, 2014.

     

 

Note 10 – Comprehensive income    

 

Our comprehensive income is comprised of net income, foreign currency translation, unrealized gains and losses on forward and option contracts and securities classified as available-for-sale. The accumulated other comprehensive income, net of tax, for the three month periods ended March 31, 2014 and 2013, consisted of the following:   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2014

 

 

(Unaudited)

(In thousands)

 

Currency translation adjustment

 

Investments

 

Derivative instruments

 

Accumulated other comprehensive income/(loss)

Balance as of December 31, 2013

$

1,311 

$

(1,066)

$

2,305 

$

2,550 

Current-period other comprehensive (loss) income

 

(1,139)

 

192 

 

(1,428)

 

(2,375)

Reclassified from accumulated OCI into income

 

 -

 

 -

 

(445)

 

(445)

Income tax (benefit) expense

 

(255)

 

62 

 

(581)

 

(774)

Balance as of March 31, 2014

$

427 

$

(936)

$

1,013 

$

504 

15  


 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013

 

 

(Unaudited)

(In thousands)

 

Currency translation adjustment

 

Investments

 

Derivative instruments

 

Accumulated other comprehensive income/(loss)

Balance as of December 31, 2012

$

208 

$

(620)

$

1,256