20160331 10Q Q1

 

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, 2016 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/3d764d238fd86ed7af75caf122901cf2-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  25, 2016

Common Stock - $0.01 par value

127,651,281

  

   



 

  


 

 



NATIONAL INSTRUMENTS CORPORATION  

  

INDEX  





 

 



 

 



 

 

PART I.  FINANCIAL INFORMATION 

Page No.



 

 

Item 1

Financial Statements:

 



 

 



Consolidated Balance Sheets

 



March 31, 2016 (unaudited) and December 31, 2015

2 



 

 



Consolidated Statements of Income

 



(unaudited) for the three month periods ended March 31, 2016 and 2015

3



 

 



Consolidated Statements of Comprehensive Income

 



(unaudited) for the three month periods ended March 31, 2016 and 2015

4



 

 



Consolidated Statements of Cash Flows

 



(unaudited) for the three month periods ended March 31, 2016 and 2015

5



 

 



Notes to Consolidated Financial Statements

6



 

 

Item 2

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

22



 

 

Item 3

Quantitative and Qualitative Disclosures about Market Risk

31



 

 

Item 4

Controls and Procedures

33



 

 



 

 

PART II.  OTHER INFORMATION

 



 

 



 

 

Item 1

Legal Proceedings

34



 

 

Item 1A

Risk Factors

34



 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

43



 

 

Item 5

Other Information

43



 

 

Item 6

Exhibits

44



 

 



Signatures and Certifications

46



  

   

1


 

 

  

  

PART I - FINANCIAL INFORMATION  

  

ITEM 1.Financial Statements  

  

NATIONAL INSTRUMENTS CORPORATION  

CONSOLIDATED BALANCE SHEETS  

(in thousands, except per share data)  

  

  

  

  





 

 

 

 



 

March 31,

 

December 31,



 

2016

 

2015

Assets

 

(unaudited)

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

$

265,400 

$

251,129 

Short-term investments

 

63,208 

 

81,789 

Accounts receivable, net

 

207,308 

 

216,244 

Inventories, net

 

192,054 

 

185,197 

Prepaid expenses and other current assets

 

65,523 

 

65,381 

Total current assets

 

793,493 

 

799,740 

Property and equipment, net

 

256,961 

 

257,853 

Goodwill

 

262,900 

 

257,718 

Intangible assets, net

 

110,100 

 

108,196 

Other long-term assets

 

32,826 

 

30,349 

Total assets

$

1,456,280 

$

1,453,856 

Liabilities and stockholders' equity

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable

$

54,347 

$

50,970 

Accrued compensation

 

26,546 

 

27,956 

Deferred revenue - current

 

116,656 

 

112,283 

Accrued expenses and other liabilities

 

26,272 

 

11,756 

Other taxes payable

 

31,264 

 

37,250 

Total current liabilities

 

255,085 

 

240,215 

Long-term debt

 

25,000 

 

37,000 

Deferred income taxes

 

39,353 

 

44,673 

Liability for uncertain tax positions

 

12,283 

 

11,974 

Deferred revenue - long-term

 

27,359 

 

27,708 

Other long-term liabilities

 

8,738 

 

10,565 

Total liabilities

 

367,818 

 

372,135 

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; 127,652,149 shares and 127,471,604 shares issued and outstanding, respectively

 

1,277 

 

1,275 

Additional paid-in capital

 

730,970 

 

717,705 

Retained earnings

 

380,896 

 

400,831 

Accumulated other comprehensive loss

 

(24,681)

 

(38,090)

Total stockholders’ equity

 

1,088,462 

 

1,081,721 

Total liabilities and stockholders’ equity

$

1,456,280 

$

1,453,856 

 

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



 

March 31,



 

2016

 

2015



 

 

 

 

Net sales:

 

 

 

 

Product

$

259,434 

$

261,574 

Software maintenance

 

27,743 

 

27,939 

Total net sales

 

287,177 

 

289,513 



 

 

 

 

Cost of sales:

 

 

 

 

Product

 

74,209 

 

74,881 

Software maintenance

 

1,937 

 

1,455 

Total cost of sales

 

76,146 

 

76,336 



 

 

 

 

Gross profit

 

211,031 

 

213,177 



 

 

 

 

Operating expenses:

 

 

 

 

Sales and marketing

 

113,207 

 

109,553 

Research and development

 

59,340 

 

60,520 

General and administrative

 

24,640 

 

22,971 

Total operating expenses

 

197,187 

 

193,044 



 

 

 

 

Operating income

 

13,844 

 

20,133 



 

 

 

 

Other income:

 

 

 

 

Interest income

 

253 

 

353 

Net foreign exchange gain/(loss)

 

574 

 

(1,674)

Other income (loss), net

 

(2,406)

 

628 

Income before income taxes

 

12,265 

 

19,440 

Provision for income taxes

 

2,967 

 

4,436 



 

 

 

 

Net income

$

9,298 

$

15,004 



 

 

 

 

Basic earnings per share

$

0.07 

$

0.12 



 

 

 

 

Weighted average shares outstanding - basic

 

127,595 

 

128,040 



 

 

 

 

Diluted earnings per share

$

0.07 

$

0.12 



 

 

 

 

Weighted average shares outstanding - diluted

 

128,103 

 

128,676 



 

 

 

 

Dividends declared per share

$

0.20 

$

0.19 



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



 

March 31,



 

2016

 

2015



 

 

 

 

Net income

$

9,298 

$

15,004 

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

 

 

 

 

Foreign currency translation adjustment

 

14,357 

 

(14,951)

Unrealized gain on securities available-for-sale

 

338 

 

506 

Unrealized gain on derivative instruments

 

3,427 

 

982 

Other comprehensive (loss) gain, before tax

 

18,122 

 

(13,463)

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

 

4,713 

 

(2,915)

Other comprehensive (loss) gain, net of tax

 

13,409 

 

(10,548)

Comprehensive income

$

22,707 

$

4,456 



 

 

 

 



 

 

 

 



 

 

 

 

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



 

4


 

 

  

NATIONAL INSTRUMENTS CORPORATION 

CONSOLIDATED STATEMENTS OF CASH FLOWS  

(in thousands)  

(unaudited)  

  

  





 

 

 

 



 

 

 

 



 

Three Months Ended



 

March 31,



 

2016

 

2015

Cash flow from operating activities:

 

 

 

 

Net income

$

9,298 

$

15,004 

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

 

 

 

 

Depreciation and amortization

 

19,432 

 

17,924 

Stock-based compensation

 

6,748 

 

6,391 

Tax benefit from deferred income taxes

 

(6,915)

 

(2,238)

Tax benefit from stock option plans

 

(7)

 

(16)

Changes in operating assets and liabilities:

 

 

 

 

Accounts receivable

 

8,936 

 

11,828 

Inventories

 

(6,856)

 

(2,797)

Prepaid expenses and other assets

 

5,579 

 

(8,254)

Accounts payable

 

3,377 

 

(1,700)

Deferred revenue

 

4,024 

 

2,909 

Taxes, accrued expenses and other liabilities

 

5,002 

 

(12,640)

Net cash provided by operating activities

 

48,618 

 

26,411 



 

 

 

 

Cash flow from investing activities:

 

 

 

 

Capital expenditures

 

(9,267)

 

(10,263)

Capitalization of internally developed software

 

(8,003)

 

(2,222)

Additions to other intangibles

 

(363)

 

(399)

Acquisitions, net of cash received

 

(549)

 

(24,523)

Purchases of short-term investments

 

(5,008)

 

(22,332)

Sales and maturities of short-term investments

 

23,589 

 

15,774 

Net cash used in investing activities

 

399 

 

(43,965)



 

 

 

 

Cash flow from financing activities:

 

 

 

 

Proceeds from revolving line of credit

 

 -

 

 -

Principal payments on revolving line of credit

 

(12,000)

 

 -

Proceeds from issuance of common stock

 

7,445 

 

7,402 

Repurchase of common stock

 

(4,642)

 

 -

Dividends paid

 

(25,556)

 

(24,346)

Tax benefit from stock option plans

 

 

16 

Net cash used in financing activities

 

(34,746)

 

(16,928)



 

 

 

 

Net change in cash and cash equivalents

 

14,271 

 

(34,482)

Cash and cash equivalents at beginning of period

 

251,129 

 

274,030 

Cash and cash equivalents at end of period

$

265,400 

$

239,548 

 

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, 2015, 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, 2016 and December 31, 2015, and the results of our operations, comprehensive income, and cash flows for the three month periods ended March 31, 2016 and March 31, 2015. Our operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. 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, 2016 and 2015, are as follows:



 

 

 



 

 

 



Three Months Ended March 31,



(In thousands)



(Unaudited)



2016

 

2015

Weighted average shares outstanding-basic

127,595 

 

128,040 

Plus: Common share equivalents

 

 

 

Stock options and RSUs

508 

 

636 

Weighted average shares outstanding-diluted

128,103 

 

128,676 

  

Stock awards to acquire 393,847 shares and 46,400 shares for the three months ended March 31, 2016 and 2015 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, 2016

(In thousands)

 

(Unaudited)



 

 

 

Gross

 

Gross

 

Cumulative

 

 



 

Adjusted Cost

 

Unrealized Gain

 

Unrealized Loss

 

Translation Adjustment

 

Fair Value

Cash

$

189,674 

 

 -

 

 -

 

 -

 

189,674 

Money Market Accounts

 

75,726 

 

 -

 

 -

 

 -

 

75,726 

Corporate bonds

 

58,533 

 

57 

 

(83)

 

(2,581)

 

55,926 

U.S. treasuries and agencies

 

4,422 

 

 

 -

 

 -

 

4,423 

Time deposits

 

2,859 

 

 -

 

 -

 

 -

 

2,859 

Cash, cash equivalents, and short-term investments

$

331,214 

$

58 

$

(83)

$

(2,581)

$

328,608 



6


 

 



 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

(In thousands)

 

December 31, 2015



 

 

 

Gross

 

Gross

 

Cumulative

 

 



 

Adjusted Cost

 

Unrealized Gain

 

Unrealized Loss

 

Translation Adjustment

 

Fair Value

Cash

$

165,251 

$

 -

$

 -

$

(1,551)

$

163,700 

Money Market Accounts

 

87,429 

 

 -

 

 -

 

 -

 

87,429 

Corporate bonds

 

69,442 

 

 

(281)

 

(1,119)

 

68,044 

U.S. treasuries and agencies

 

4,419 

 

 -

 

(2)

 

 -

 

4,417 

Foreign government bonds

 

 -

 

 -

 

 -

 

 -

 

 -

Time deposits

 

9,326 

 

 

 -

 

 -

 

9,328 

Cash, cash equivalents, and short-term investments

$

335,867 

$

$

(283)

$

(2,670)

$

332,918 

  

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





 

 

 

 



 

 

 

 



 

As of March 31, 2016

(In thousands)

 

(Unaudited)



 

Adjusted Cost

 

Fair Value

Due in less than 1 year

$

33,761 

$

33,749 

Due in 1 to 5 years

 

32,053 

 

29,459 

Total available-for-sale debt securities

$

65,814 

$

63,208 



 

 

 

 

Due in less than 1 year

 

Adjusted Cost

 

Fair Value

Corporate bonds

$

26,480 

$

26,467 

U.S. treasuries and agencies

 

4,422 

 

4,423 

Time deposits

 

2,859 

 

2,859 

Total available-for-sale debt securities

$

33,761 

$

33,749 



 

 

 

 

Due in 1 to 5 years

 

Adjusted Cost

 

Fair Value

Corporate bonds

$

32,053 

$

29,459 

U.S. treasuries and agencies

 

-

 

-

Total available-for-sale debt securities

$

32,053 

$

29,459 

  

 

  

   

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

 

March 31, 2016

 

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

$

75,726 

$

75,726 

 

 -

$

 -

Short-term investments available for sale:

 

 

 

 

 

 

 

 

Corporate bonds

 

55,926 

 

 -

 

55,926 

 

 -

U.S. treasuries and agencies

 

4,423 

 

 -

 

4,423 

 

 -

Time deposits

 

2,859 

 

2,859 

 

 -

 

 -

Derivatives

 

1,609 

 

 -

 

1,609 

 

 -

Total Assets 

$

140,543 

$

78,585 

$

61,958 

$

 -



 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Derivatives

$

(7,951)

 

 -

 

(7,951)

$

 -

Total Liabilities 

$

(7,951)

$

 -

$

(7,951)

$

 -



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

(In thousands)

 

Fair Value Measurements at Reporting Date Using

Description

 

December 31, 2015

 

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

$

87,429 

$

87,429 

$

 -

$

 -

Short-term investments available for sale:

 

 

 

 

 

 

 

 

Corporate bonds

 

68,044 

 

 -

 

68,044 

 

 -

U.S. treasuries and agencies

 

4,417 

 

 -

 

4,417 

 

 -

Foreign government bonds

 

 -

 

 -

 

 -

 

 -

Time deposits

 

9,328 

 

9,328 

 

 -

 

 -

Derivatives

 

1,231 

 

 -

 

1,231 

 

 -

Total Assets 

$

170,449 

$

96,757 

$

73,692 

$

 -



 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Derivatives

$

(8,746)

$

 -

$

(8,746)

$

 -

Total Liabilities 

$

(8,746)

$

 -

$

(8,746)

$

 -



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. All short-term investments available-for-sale have contractual maturities of less than 56 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 three month period ended March 31, 2016. There were no transfers in or out of Level 1 or Level 2 during the three month period ended March 31, 2016.  

  

As of March 31, 2016, our short-term investments did not include sovereign debt from any country other than the United States. 

  

We did not have any items that were measured at fair value on a nonrecurring basis at March 31, 2016 and December 31, 2015.  

  

The carrying value of net accounts receivable, accounts payable, and long-term debt 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 61% and 59% of our net sales during the three month periods ended March 31, 2016 and 2015, 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, in that 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 financial assets or liabilities. 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 sales 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 net sales 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 net sales 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, Chinese yuan 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 March 31, 2016

 

As of December 31,



 

(Unaudited)

 

2015

Euro

$

51,190 

$

30,867 

Japanese yen

 

11,052 

 

4,119 

Hungarian forint

 

54,191 

 

38,836 

British pound

 

 -

 

4,342 

Malaysian ringgit

 

50,074 

 

40,249 

Chinese yuan

 

36,287 

 

26,548 

Total forward contracts notional amount

$

202,794 

$

144,961 





The contracts in the foregoing table had contractual maturities of 40 months or less at March 31, 2016 and December 31, 2015.  

  

At March 31, 2016, we expect to reclassify $2.1 million of losses on derivative instruments from accumulated OCI to net sales during the next twelve months when the hedged international sales occur, $1.1 million of losses on derivative instruments from accumulated OCI to cost of sales during the next twelve months when the cost of sales are incurred and $1.0 million 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 March 31, 2016. Actual results may vary materially 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, 2016 and 2015.  



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 help 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 or less. The gain or loss on the derivatives as well as the offsetting gain or loss on the hedge item attributable to the hedged risk is recognized in current earnings under the line item “net foreign exchange loss.” As of March 31, 2016 and December 31, 2015, we held foreign currency forward contracts with a notional amount of $83 million and  $97 million, respectively.   

10


 

 

The following tables present the fair value of derivative instruments on our Consolidated Balance Sheets at March 31, 2016 and December 31, 2015, respectively. 

  





 

 

 

 

 

 



 

 

 

 

 

 



Asset Derivatives



March 31, 2016

December 31, 2015

(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

$

209 

Prepaid expenses and other current assets

$

391 

 

 

 

 

 

 

 

Foreign exchange contracts - LT forwards

Other long-term assets

 

1,347 

Other long-term assets

 

 -

Total derivatives designated as hedging instruments

 

$

1,556 

 

$

391 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - ST forwards

Prepaid expenses and other current assets

$

53 

Prepaid expenses and other current assets

$

840 

Total derivatives not designated as hedging instruments

 

$

53 

 

$

840 

 

 

 

 

 

 

 

Total derivatives

 

$

1,609 

 

$

1,231 



   





 

 

 

 

 

 



 

 

 

 

 

 



 

 

 

 

 

 



Liability Derivatives



March 31, 2016

December 31, 2015

(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

$

(4,391)

Accrued expenses and other liabilities

$

(4,653)



 

 

 

 

 

 

Foreign exchange contracts - LT forwards

Other long-term liabilities

 

(1,732)

Other long-term liabilities

 

(3,613)

Total derivatives designated as hedging instruments

 

$

(6,123)

 

$

(8,266)



 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 



 

 

 

 

 

 

Foreign exchange contracts - ST forwards

Accrued expenses and other liabilities

$

(1,828)

Accrued expenses and other liabilities

$

(480)

Total derivatives not designated as hedging instruments

 

$

(1,828)

 

$

(480)



 

 

 

 

 

 

Total derivatives

 

$

(7,951)

 

$

(8,746)



11


 

 

The following tables present the effect of derivative instruments on our Consolidated Statements of Income for three month periods ended March 31, 2016 and 2015, respectively:







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

March 31, 2016

(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

$

(3,040)

Net sales

$

(237)

Net foreign exchange gain/(loss)

$

 -



 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

3,039 

Cost of sales

 

(571)

Net foreign exchange gain/(loss)

 

 -



 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

3,428 

Operating expenses

 

(529)

Net foreign exchange gain/(loss)

 

 -

Total

$

3,427 

 

$

(1,337)

 

$

 -









 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

March 31, 2015

(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

$

5,203 

Net sales

$

5,081 

Net foreign exchange gain/(loss)

$

 -



 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

(2,217)

Cost of sales

 

(333)

Net foreign exchange gain/(loss)

 

 -



 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

(2,004)

Operating expenses

 

(364)

Net foreign exchange gain/(loss)

 

 -

Total

$

982 

 

$

4,384 

 

$

 -







 

 

 

 

 

(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, 2016

 

March 31, 2015



 

 

(Unaudited)

 

(Unaudited)

Foreign exchange contracts - forwards

 

$

(2,254)

$

1,945 



 

 

 

 

 

Total

 

$

(2,254)

$

1,945 











12


 

 

Note 6 – Inventories, net 

  

Inventories, net consist of the following: 



 

 

 

 



 

March 31, 2016

 

December 31,

(In thousands)

 

(Unaudited)

 

2015



 

 

 

 

Raw materials  

$

96,770 

$

94,816 

Work-in-process

 

10,205 

 

10,819 

Finished goods

 

85,079 

 

79,562 



$

192,054 

$

185,197 







  

Note 7 – Intangible assets, net  

  

Intangible assets at March 31, 2016 and December 31, 2015 are as follows:



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2016

 

 

(In thousands)

 

(Unaudited)

 

December 31, 2015



 

Gross Carrying Amount

 

Accumulated Amortization

 

Net Carrying Amount

 

Gross Carrying Amount

 

Accumulated Amortization

 

Net Carrying Amount

Capitalized software development costs

$

88,427 

$

(34,219)

$

54,208 

$

80,682 

$

(30,434)

$

50,248 

Acquired technology

 

95,366 

 

(73,316)

 

22,050 

 

93,976 

 

(69,908)

 

24,068 

Patents

 

30,592 

 

(15,603)

 

14,989 

 

30,221 

 

(14,941)

 

15,280 

Other

 

44,780 

 

(25,927)

 

18,853 

 

43,201 

 

(24,601)

 

18,600 



$

259,165 

$

(149,065)

$

110,100 

$

248,080 

$

(139,884)

$

108,196 

  

  

Software development costs capitalized for the three month periods ended March 31, 2016 and 2015 were $8.3 million and $2.3 million, respectively, and related amortization expense was $4.4 million and $4.6 million, respectively. Capitalized software development costs for the three month periods ended March 31, 2016 and 2015 included costs related to stock based compensation of $324,000 and $95,000, 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 $9.4 million and $8.8 million for the three months ended March 31, 2016 and 2015, respectively. 

 



 Note 8 – Goodwill 

  

The carrying amount of goodwill as of March 31, 2016 was as follows:



 

 



 

 



 

Amount



 

(In thousands)

Balance as of December 31, 2015

$

257,718 

Acquisitions

 

419 

Foreign currency translation impact

 

4,763 

Balance as of March 31, 2016 (unaudited)

$

262,900 



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, 2016.  No impairment of goodwill was identified during 2016 or 2015.  

   

13


 

 

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 $12.8 million and $12.5 million of unrecognized tax benefits at March 31, 2016 and December 31, 2015, respectively, all of which would affect our effective income tax rate if recognized. We recorded a $218,000 change in unrecognized tax benefits for the three month period ended March 31, 2016. As of March 31, 2016, it is reasonably possible that we will recognize tax benefits in the amount of $3.4 million in the next twelve months due to the closing of open tax years. The nature of the uncertainty is related to deductions taken on returns that have not been examined by the applicable tax authority.  Our continuing policy is to recognize interest and penalties related to income tax matters in income tax expense. As of March 31, 2016, we had approximately $1.2 million accrued for interest related to uncertain tax positions. The tax years 2008 through 2016 remain open to examination by the major taxing jurisdictions to which we are subject.  

 

Our provision for income taxes reflected an effective tax rate of 24% and 23% for the three month periods ended March 31, 2016 and 2015, respectively. For the three months ended March 31, 2016, 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.   For the three months ended March 31, 2015, 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.



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 $589,000 and $901,000 for the three month periods ended March 31, 2016 and 2015, respectively.

  

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 $1.3 million and $1.8 million for the three month periods ended March 31, 2016 and 2015, 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 income tax benefits of $342,000 and $447,000 for the three month periods ended March 31, 2016 and 2015, respectively.



No other taxing jurisdictions had a significant impact on our effective tax rate. We have not entered into any advanced pricing or other agreements with the IRS with regard to any foreign jurisdictions.

14


 

 





     



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, 2016 and 2015, consisted of the following:  





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

March 31, 2016



 

(Unaudited)

(In thousands)

 

Currency translation adjustment

 

Investments

 

Derivative instruments

 

Accumulated other comprehensive income/(loss)

Balance as of December 31, 2015

$

(31,871)

$

(857)

 

(5,362)

$

(38,090)

Current-period other comprehensive income

 

14,357 

 

338 

 

2,090 

 

16,785 

Reclassified from accumulated OCI into income

 

 -

 

 -

 

1,337 

 

1,337 

Income tax expense

 

3,473 

 

83 

 

1,157 

 

4,713 

Balance as of  March 31, 2016

$

(20,987)

$

(602)

$

(3,092)

$

(24,681)









 

 

 

 

 

 

 

 



 

March 31, 2015



 

(Unaudited)

(In thousands)

 

Currency translation adjustment

 

Investments

 

Derivative instruments

 

Accumulated other comprehensive income/(loss)

Balance as of December 31, 2014

$

(17,304)

$

(1,399)

$

7,039 

$

(11,664)

Current-period other comprehensive (loss) income

 

(14,951)

 

506 

 

5,366 

 

(9,079)

Reclassified from accumulated OCI into income

 

 -

 

 -

 

(4,384)

 

(4,384)

Income tax (benefit) expense

 

(3,412)

 

115 

 

382 

 

(2,915)

Balance as of  March 31, 2015

$

(28,843)

$

(1,008)

$

7,639 

$

(22,212)



 

   

Note 11 – Authorized shares of common and preferred stock and stock-based compensation plans

  

Authorized shares of common and preferred stock



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.



Stock option plans  

  

Our stockholders approved the 1994 Incentive Stock Option Plan (the “1994 Plan”) in May 1994. At the time of approval, 13,668,750 shares of our common stock were reserved for issuance under this plan. In 1997, an additional 10,631,250 shares of our common stock were reserved for issuance under this plan, and an additional 1,125,000 shares were reserved for issuance under this plan in 2004. The 1994 Plan terminated in May 2005, except with respect to outstanding awards previously granted thereunder.