20140930 10Q Q3_Taxonomy2013

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:  September 30, 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/d8ba65abd02fa8ea1959a412c59a8341-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 October 28, 2014

Common Stock - $0.01 par value

127,586,103

 


 

  

   

NATIONAL INSTRUMENTS CORPORATION  

  

INDEX  

 

 

 

 

 

 

 

 

 

 

PART I.  FINANCIAL INFORMATION 

Page No.

 

 

 

Item 1

Financial Statements:

 

 

 

 

 

Consolidated Balance Sheets

 

 

September 30, 2014 (unaudited) and December 31, 2013

2

 

 

 

 

Consolidated Statements of Income

 

 

(unaudited) for the three and nine month periods ended September 30, 2014 and 2013

3

 

 

 

 

Consolidated Statements of Comprehensive Income

 

 

(unaudited) for the three and nine month periods ended September 30, 2014 and 2013

4

 

 

 

 

Consolidated Statements of Cash Flows

 

 

(unaudited) for the nine month periods ended September 30, 2014 and 2013

5

 

 

 

 

Notes to Consolidated Financial Statements

6

 

 

 

Item 2

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

21

 

 

 

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

 

  

   

1  


 

  

  

PART I - FINANCIAL INFORMATION  

  

ITEM 1.Financial Statements  

  

NATIONAL INSTRUMENTS CORPORATION  

CONSOLIDATED BALANCE SHEETS  

(in thousands, except share data)  

  

  

  

  

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2014

 

2013

Assets

 

(unaudited)

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

$

259,455 

$

230,263 

Short-term investments

 

188,299 

 

163,149 

Accounts receivable, net

 

187,726 

 

180,680 

Inventories, net

 

170,862 

 

172,109 

Prepaid expenses and other current assets

 

71,735 

 

49,001 

Deferred income taxes, net

 

28,425 

 

33,393 

Total current assets

 

906,502 

 

828,595 

Property and equipment, net

 

261,622 

 

260,568 

Goodwill

 

145,026 

 

146,520 

Intangible assets, net

 

83,151 

 

82,310 

Other long-term assets

 

24,592 

 

25,558 

Total assets

$

1,420,893 

$

1,343,551 

Liabilities and stockholders' equity

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable

$

61,893 

$

56,614 

Accrued compensation

 

37,638 

 

25,189 

Deferred revenue - current

 

101,407 

 

96,117 

Accrued expenses and other liabilities

 

13,728 

 

17,627 

Other taxes payable

 

34,822 

 

29,808 

Total current liabilities

 

249,488 

 

225,355 

Deferred income taxes

 

41,885 

 

44,620 

Liability for uncertain tax positions

 

10,412 

 

23,572 

Deferred revenue - long-term

 

24,808 

 

21,389 

Other long-term liabilities

 

7,012 

 

5,531 

Total liabilities

 

333,605 

 

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; 127,585,824 and 125,690,240 shares issued and outstanding, respectively

 

1,276 

 

1,257 

Additional paid-in capital

 

649,794 

 

604,330 

Retained earnings

 

440,785 

 

414,947 

Accumulated other comprehensive (loss) income

 

(4,567)

 

2,550 

Total stockholders’ equity

 

1,087,288 

 

1,023,084 

Total liabilities and stockholders’ equity

$

1,420,893 

$

1,343,551 

 

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

2  


 

  

NATIONAL INSTRUMENTS CORPORATION  

CONSOLIDATED STATEMENTS OF INCOME  

(in thousands, except per share data)  

(unaudited)  

  

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

Net sales:

 

 

 

 

 

 

 

 

Product

$

287,336 

$

269,582 

$

837,824 

$

810,663 

Software maintenance

 

26,365 

 

19,556 

 

73,262 

 

61,089 

Total net sales

 

313,701 

 

289,138 

 

911,086 

 

871,752 

 

 

 

 

 

 

 

 

 

Cost of sales:

 

 

 

 

 

 

 

 

Product

 

79,266 

 

73,541 

 

229,529 

 

224,954 

Software maintenance

 

1,683 

 

1,665 

 

4,443 

 

4,307 

Total cost of sales

 

80,949 

 

75,206 

 

233,972 

 

229,261 

 

 

 

 

 

 

 

 

 

Gross profit

 

232,752 

 

213,932 

 

677,114 

 

642,491 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Sales and marketing

 

116,736 

 

111,253 

 

348,026 

 

337,884 

Research and development

 

58,972 

 

60,791 

 

170,082 

 

180,520 

General and administrative

 

22,741 

 

21,363 

 

68,854 

 

66,363 

Acquisition related adjustment

 

 -

 

 -

 

 -

 

(1,316)

Total operating expenses

 

198,449 

 

193,407 

 

586,962 

 

583,451 

 

 

 

 

 

 

 

 

 

Operating income

 

34,303 

 

20,525 

 

90,152 

 

59,040 

 

 

 

 

 

 

 

 

 

Other income:

 

 

 

 

 

 

 

 

Interest income

 

362 

 

133 

 

793 

 

495 

Net foreign exchange (loss) gain

 

(452)

 

456 

 

(1,005)

 

(2,057)

Other (loss) income, net

 

(70)

 

304 

 

283 

 

728 

Income before income taxes

 

34,143 

 

21,418 

 

90,223 

 

58,206 

(Benefit from) provision for income taxes

 

(5,559)

 

5,654 

 

7,275 

 

9,421 

 

 

 

 

 

 

 

 

 

Net income

$

39,702 

$

15,764 

$

82,948 

$

48,785 

 

 

 

 

 

 

 

 

 

Basic earnings per share

$

0.31 

$

0.13 

$

0.65 

$

0.39 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

127,478 

 

125,032 

 

126,785 

 

124,244 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

$

0.31 

$

0.13 

$

0.65 

$

0.39 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - diluted

 

127,903 

 

125,608 

 

127,529 

 

125,221 

 

 

 

 

 

 

 

 

 

Dividends declared per share

$

0.15 

$

0.14 

$

0.45 

$

0.42 

 

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

3  


 

  

  

NATIONAL INSTRUMENTS CORPORATION  

 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME  

(in thousands)  

(unaudited)  

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

Net income

$

39,702 

$

15,764 

$

82,948 

$

48,785 

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

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(9,909)

 

6,307 

 

(10,467)

 

3,058 

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

 

(221)

 

(91)

 

(129)

 

(497)

Unrealized gain (loss) on derivative instruments

 

10,023 

 

(2,371)

 

8,063 

 

1,281 

Other comprehensive loss, before tax

 

(107)

 

3,845 

 

(2,533)

 

3,842 

Tax expense related to items of other comprehensive income

 

5,224 

 

611 

 

4,584 

 

1,964 

Other comprehensive (loss) income, net of tax

 

(5,331)

 

3,234 

 

(7,117)

 

1,878 

Comprehensive income

$

34,371 

$

18,998 

$

75,831 

$

50,663 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

4  


 

  

NATIONAL INSTRUMENTS CORPORATION 

CONSOLIDATED STATEMENTS OF CASH FLOWS  

(in thousands)  

(unaudited)  

  

  

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30,

 

 

2014

 

2013

Cash flow from operating activities:

 

 

 

 

Net income

$

82,948 

$

48,785 

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

 

 

 

 

Depreciation and amortization

 

51,011 

 

50,897 

Stock-based compensation

 

19,531 

 

21,996 

Tax benefit from deferred income taxes

 

2,222 

 

(1,272)

Tax benefit from stock option plans

 

(1,189)

 

(2,185)

Changes in operating assets and liabilities:

 

 

 

 

Accounts receivable

 

(7,046)

 

4,789 

Inventories

 

1,247 

 

(8,358)

Prepaid expenses and other assets

 

(24,887)

 

(18,320)

Accounts payable

 

5,279 

 

(10,636)

Deferred revenue

 

8,709 

 

6,192 

Taxes, accrued expenses and other liabilities

 

2,891 

 

2,834 

Net cash provided by operating activities

 

140,716 

 

94,722 

 

 

 

 

 

Cash flow from investing activities:

 

 

 

 

Capital expenditures

 

(30,645)

 

(40,795)

Capitalization of internally developed software

 

(22,055)

 

(10,566)

Additions to other intangibles

 

(2,238)

 

(4,146)

Purchases of short-term investments

 

(107,664)

 

(16,039)

Sales and maturities of short-term investments

 

82,514 

 

35,299 

Net cash used in investing activities

 

(80,088)

 

(36,247)

 

 

 

 

 

Cash flow from financing activities:

 

 

 

 

Proceeds from issuance of common stock

 

24,483 

 

28,809 

AWR earnout payment

 

 -

 

(9,016)

Dividends paid

 

(57,108)

 

(52,241)

Tax benefit from stock option plans

 

1,189 

 

2,185 

Net cash used in financing activities

 

(31,436)

 

(30,263)

 

 

 

 

 

Net change in cash and cash equivalents

 

29,192 

 

28,212 

Cash and cash equivalents at beginning of period

 

230,263 

 

161,996 

Cash and cash equivalents at end of period

$

259,455 

$

190,208 

 

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

5  


 

  

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 September 30, 2014 and December 31, 2013,  and the results of our operations and comprehensive income for the three and nine month periods ended September 30, 2014. Operating results for the three and nine month periods ended September 30, 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 and nine month periods ended September 30, 2014 and 2013, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

(In thousands)

 

(In thousands)

 

(Unaudited)

 

(Unaudited)

 

2014

 

2013

 

2014

 

2013

Weighted average shares outstanding-basic

127,478 

 

125,032 

 

126,785 

 

124,244 

Plus: Common share equivalents

 

 

 

 

 

 

 

Stock options, RSUs

425 

 

576 

 

744 

 

977 

Weighted average shares outstanding-diluted

127,903 

 

125,608 

 

127,529 

 

125,221 

  

Stock awards to acquire 420,000 shares and 682,300 shares for the three months ended September 30, 2014 and 2013, respectively, and 24,300 shares and 58,500 shares for the nine month periods ended September 30, 2014 and 2013, 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, 2014

(In thousands)

 

(Unaudited)

 

 

 

 

Gross

 

Gross

 

Cumulative

 

 

 

 

Adjusted Cost

 

Unrealized Gain

 

Unrealized Loss

 

Translation Adjustment

 

Fair Value

Cash

$

140,155 

$

 -

$

 -

$

 -

$

140,155 

Money Market Accounts

 

119,300 

 

 -

 

 -

 

 -

 

119,300 

Corporate bonds

 

107,766 

 

87 

 

(168)

 

(3,924)

 

103,761 

U.S. treasuries and agencies

 

74,079 

 

 

(38)

 

 -

 

74,044 

Foreign government bonds

 

8,863 

 

12 

 

 -

 

(1,293)

 

7,582 

Time deposits

 

2,912 

 

 -

 

 -

 

 -

 

2,912 

Cash, cash equivalents, and short-term investments

$

453,075 

$

102 

$

(206)

$

(5,217)

$

447,754 

 

6  


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 September 30, 2014

(In thousands)

 

(Unaudited)

 

 

Adjusted Cost

 

Fair Value

Due in less than 1 year

$

58,746 

$

54,971 

Due in 1 to 5 years

 

134,874 

 

133,328 

Total available-for-sale debt securities

$

193,620 

$

188,299 

 

 

 

 

 

Due in less than 1 year

 

Adjusted Cost

 

Fair Value

Corporate bonds

$

42,278 

$

39,781 

U.S. treasuries and agencies

 

4,693 

 

4,696 

Foreign government bonds

 

8,863 

 

7,582 

Time deposits

 

2,912 

 

2,912 

Total available-for-sale debt securities

$

58,746 

$

54,971 

 

 

 

 

 

Due in 1 to 5 years

 

Adjusted Cost

 

Fair Value

Corporate bonds

$

65,488 

$

63,980 

U.S. treasuries and agencies

 

69,386 

 

69,348 

Total available-for-sale debt securities

$

134,874 

$

133,328 

  

 

  

   

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   

7  


 

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, 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

$

119,300 

$

119,300 

$

 -

$

 -

Short-term investments available for sale:

 

 

 

 

 

 

 

 

Corporate bonds

 

103,761 

 

 -

 

103,761 

 

 -

U.S. treasuries and agencies

 

74,044 

 

 -

 

74,044 

 

 -

Foreign government bonds

 

7,582 

 

 -

 

7,582 

 

 -

Time deposits

 

2,912 

 

2,912 

 

 -

 

 -

Derivatives

 

14,180 

 

 -

 

14,180 

 

 -

Total Assets 

$

321,779 

$

122,212 

$

199,567 

$

 -

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Derivatives

$

(1,626)

$

 -

$

(1,626)

$

 -

Total Liabilities 

$

(1,626)

$

 -

$

(1,626)

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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.  

  

8  


 

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, 2014. There were not any transfers in or out of Level 1 or Level 2 during the nine month period ended September 30, 2014.  

  

Our foreign government bonds consist of German government sovereign debt denominated in Euro with maximum remaining maturities of 8 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, 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 58% and 56% of our revenues during the three month periods ended September 30, 2014 and 2013, respectively, and 60% and 59% during the nine month periods ended September 30, 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.  

9  


 

 

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 September 30, 2014

 

As of December 31,

 

 

(Unaudited)

 

2013

Euro

$

131,932 

$

75,886 

Japanese yen

 

11,371 

 

23,284 

Hungarian forint

 

36,206 

 

21,159 

British pound

 

30,813 

 

14,869 

Malaysian ringgit

 

1,778 

 

4,426 

Total forward contracts notional amount

$

212,100 

$

139,624 

  

The contracts in the foregoing table had contractual maturities of 36 months or less at September 30, 2014 and December 31, 2013.  

  

At September 30, 2014, we expect to reclassify $10 million of gains on derivative instruments from accumulated OCI to net sales during the next twelve months when the hedged international sales occur, $501,000 of losses on derivative instruments from accumulated OCI to cost of sales when the cost of sales are incurred and $294,000 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 September 30, 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 and nine month periods ended September 30, 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 September 30, 2014 and December 31, 2013, we held foreign currency forward contracts with a notional amount of $73 million and  $70 million, respectively.   

10  


 

The following tables present the fair value of derivative instruments on our Consolidated Balance Sheets at September 30, 2014 and December 31, 2013, respectively.   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Derivatives

 

September 30, 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

$

9,818 

Prepaid expenses and other current assets

$

4,825 

 

 

 

 

 

 

 

Foreign exchange contracts - LT forwards

Other long-term assets

 

2,763 

Other long-term assets

 

1,719 

Total derivatives designated as hedging instruments

 

$

12,581 

 

$

6,544 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - ST forwards

Prepaid expenses and other current assets

$

1,599 

Prepaid expenses and other current assets

$

364 

Total derivatives not designated as hedging instruments

 

$

1,599 

 

$

364 

 

 

 

 

 

 

 

Total derivatives

 

$

14,180 

 

$

6,908 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability Derivatives

 

September 30, 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

$

(840)

Accrued expenses and other liabilities

$

(3,350)

 

 

 

 

 

 

 

Foreign exchange contracts - LT forwards

Other long-term liabilities

 

(402)

Other long-term liabilities

 

 -

Total derivatives designated as hedging instruments

 

$

(1,242)

 

$

(3,350)

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - ST forwards

Accrued expenses and other liabilities

$

(384)

Accrued expenses and other liabilities

$

(1,392)

Total derivatives not designated as hedging instruments

 

$

(384)

 

$

(1,392)

 

 

 

 

 

 

 

Total derivatives

 

$

(1,626)

 

$

(4,742)

 

11  


 

The following tables present the effect of derivative instruments on our Consolidated Statements of Income for the three month periods ended September 30, 2014 and 2013, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 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

$

11,637 

Net sales

$

999 

Net foreign exchange gain (loss)

$

 -

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

(1,009)

Cost of sales

 

32 

Net foreign exchange gain (loss)

 

 -

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

(605)

Operating expenses

 

24 

Net foreign exchange gain (loss)

 

 -

Total

$

10,023 

 

$

1,055 

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 

 

$

 -

 

 

 

 

 

 

 

(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, 2014

 

September 30, 2013

 

 

 

(Unaudited)

 

(Unaudited)

Foreign exchange contracts - forwards

Net foreign exchange gain/(loss)

$

2,223 

$

(1,293)

 

 

 

 

 

 

Total

 

$

2,223 

$

(1,293)

  

12  


 

The following tables present the effect of derivative instruments on our Consolidated Statements of Income for the nine month periods ended September 30, 2014 and 2013, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 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

$

10,660 

Net sales

$

1,114 

Net foreign exchange gain (loss)

$

 -

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

(1,748)

Cost of sales

 

214 

Net foreign exchange gain (loss)

 

 -

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

(849)

Operating expenses

 

128 

Net foreign exchange gain (loss)

 

 -

Total

$

8,063 

 

$

1,456 

 

$

 -