20160630 10Q Q2

 

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:  June 30, 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/6923fb1e70c51379cef89db7cc9c838d-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 July 25, 2016

Common Stock - $0.01 par value

128,606,767

  

   



 

  


 

 



NATIONAL INSTRUMENTS CORPORATION  

  

INDEX  





 

 



 

 



 

 

PART I.  FINANCIAL INFORMATION 

Page No.



 

 

Item 1

Financial Statements:

 



 

 



Consolidated Balance Sheets

 



June 30, 2016 (unaudited) and December 31, 2015

2



 

 



Consolidated Statements of Income

 



(unaudited) for the three and six month periods ended June 30, 2016 and 2015

3



 

 



Consolidated Statements of Comprehensive Income

 



(unaudited) for the three and six month periods ended June 30, 2016 and 2015

4



 

 



Consolidated Statements of Cash Flows

 



(unaudited) for the six month periods ended June 30, 2016 and 2015

5



 

 



Notes to Consolidated Financial Statements

6



 

 

Item 2

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

23



 

 

Item 3

Quantitative and Qualitative Disclosures about Market Risk

34



 

 

Item 4

Controls and Procedures

36



 

 



 

 

PART II.  OTHER INFORMATION

 



 

 



 

 

Item 1

Legal Proceedings

37



 

 

Item 1A

Risk Factors

37



 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

47



 

 

Item 5

Other Information

47



 

 

Item 6

Exhibits

48



 

 



Signatures and Certifications

50



  

   

1


 

 

  

  

PART I - FINANCIAL INFORMATION  

  

ITEM 1.Financial Statements  

  

NATIONAL INSTRUMENTS CORPORATION  

CONSOLIDATED BALANCE SHEETS  

(in thousands, except per share data)  

  

  

  

  





 

 

 

 



 

June 30,

 

December 31,



 

2016

 

2015

Assets

 

(unaudited)

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

$

285,261 

$

251,129 

Short-term investments

 

55,063 

 

81,789 

Accounts receivable, net

 

222,243 

 

216,244 

Inventories, net

 

194,585 

 

185,197 

Prepaid expenses and other current assets

 

63,502 

 

65,381 

Total current assets

 

820,654 

 

799,740 

Property and equipment, net

 

257,868 

 

257,853 

Goodwill

 

260,224 

 

257,718 

Intangible assets, net

 

108,241 

 

108,196 

Other long-term assets

 

26,302 

 

30,349 

Total assets

$

1,473,289 

$

1,453,856 

Liabilities and stockholders' equity

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable

$

50,724 

$

50,970 

Accrued compensation

 

31,071 

 

27,956 

Deferred revenue - current

 

116,202 

 

112,283 

Accrued expenses and other liabilities

 

23,374 

 

11,756 

Other taxes payable

 

32,869 

 

37,250 

Total current liabilities

 

254,240 

 

240,215 

Long-term debt

 

40,000 

 

37,000 

Deferred income taxes

 

37,751 

 

44,673 

Liability for uncertain tax positions

 

12,823 

 

11,974 

Deferred revenue - long-term

 

28,066 

 

27,708 

Other long-term liabilities

 

9,218 

 

10,565 

Total liabilities

 

382,098 

 

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;  128,606,647 shares and 127,849,271 shares issued and outstanding, respectively 

 

1,286 

 

1,275 

Additional paid-in capital

 

744,800 

 

717,705 

Retained earnings

 

374,190 

 

400,831 

Accumulated other comprehensive loss

 

(29,085)

 

(38,090)

Total stockholders’ equity

 

1,091,191 

 

1,081,721 

Total liabilities and stockholders’ equity

$

1,473,289 

$

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

 

Six Months Ended



 

June 30,

 

June 30,



 

2016

 

2015

 

2016

 

2015



 

 

 

 

 

 

 

 

Net sales:

 

 

 

 

 

 

 

 

Product

$

278,530 

$

273,807 

$

537,963 

$

535,381 

Software maintenance

 

27,575 

 

27,984 

 

55,319 

 

55,923 

Total net sales

 

306,105 

 

301,791 

 

593,282 

 

591,304 



 

 

 

 

 

 

 

 

Cost of sales:

 

 

 

 

 

 

 

 

Product

 

75,194 

 

75,621 

 

149,404 

 

150,502 

Software maintenance

 

2,314 

 

1,054 

 

4,250 

 

2,509 

Total cost of sales

 

77,508 

 

76,675 

 

153,654 

 

153,011 



 

 

 

 

 

 

 

 

Gross profit

 

228,597 

 

225,116 

 

439,628 

 

438,293 



 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Sales and marketing

 

116,361 

 

111,855 

 

229,568 

 

221,408 

Research and development

 

59,839 

 

55,409 

 

119,179 

 

115,929 

General and administrative

 

25,130 

 

23,165 

 

49,770 

 

46,136 

Total operating expenses

 

201,330 

 

190,429 

 

398,517 

 

383,473 



 

 

 

 

 

 

 

 

Operating income

 

27,267 

 

34,687 

 

41,111 

 

54,820 



 

 

 

 

 

 

 

 

Other income:

 

 

 

 

 

 

 

 

Interest income

 

258 

 

341 

 

511 

 

694 

Net foreign exchange loss

 

(1,285)

 

(577)

 

(711)

 

(2,251)

Other income (loss), net

 

53 

 

25 

 

(2,353)

 

653 

Income before income taxes

 

26,293 

 

34,476 

 

38,558 

 

53,916 

Provision for (benefit from) income taxes

 

6,493 

 

9,534 

 

9,460 

 

13,970 



 

 

 

 

 

 

 

 

Net income

$

19,800 

$

24,942 

$

29,098 

$

39,946 



 

 

 

 

 

 

 

 

Basic earnings per share

$

0.15 

$

0.19 

$

0.23 

$

0.31 



 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

128,282 

 

128,682 

 

127,938 

 

128,363 



 

 

 

 

 

 

 

 

Diluted earnings per share

$

0.15 

$

0.19 

$

0.23 

$

0.31 



 

 

 

 

 

 

 

 

Weighted average shares outstanding - diluted

 

128,746 

 

129,337 

 

128,429 

 

129,013 



 

 

 

 

 

 

 

 

Dividends declared per share

$

0.20 

$

0.19 

$

0.40 

$

0.38 



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

 

Six Months Ended



 

June 30,

 

June 30,



 

2016

 

2015

 

2016

 

2015



 

 

 

 

 

 

 

 

Net income

$

19,800 

$

24,942 

$

29,098 

$

39,946 

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

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(6,191)

 

4,467 

 

8,166 

 

(10,484)

Unrealized gain on securities available-for-sale

 

211 

 

283 

 

549 

 

789 

Unrealized (loss) gain on derivative instruments

 

138 

 

(7,718)

 

3,565 

 

(6,736)

Other comprehensive (loss) gain, before tax

 

(5,842)

 

(2,968)

 

12,280 

 

(16,431)

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

 

(1,436)

 

(1,387)

 

3,275 

 

(4,302)

Other comprehensive (loss) gain, net of tax

 

(4,406)

 

(1,581)

 

9,005 

 

(12,129)

Comprehensive income

$

15,394 

$

23,361 

$

38,103 

$

27,817 



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

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



 

4


 

 

  

NATIONAL INSTRUMENTS CORPORATION 

CONSOLIDATED STATEMENTS OF CASH FLOWS  

(in thousands)  

(unaudited)  

  

  





 

 

 

 



 

 

 

 



 

Six Months Ended



 

June 30,



 

2016

 

2015

Cash flow from operating activities:

 

 

 

 

Net income

$

29,098 

$

39,946 

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

 

 

 

 

Depreciation and amortization

 

38,217 

 

36,502 

Stock-based compensation

 

13,497 

 

12,745 

Tax (benefit) expense from deferred income taxes

 

(2,927)

 

(1,561)

Tax benefit from stock option plans

 

(439)

 

(937)

Changes in operating assets and liabilities:

 

 

 

 

Accounts receivable

 

(5,999)

 

(2,748)

Inventories

 

(9,388)

 

(12,228)

Prepaid expenses and other assets

 

8,855 

 

(19,544)

Accounts payable

 

(246)

 

(2,082)

Deferred revenue

 

4,277 

 

3,692 

Taxes, accrued expenses and other liabilities

 

8,714 

 

(3,002)

Net cash provided by operating activities

 

83,659 

 

50,783 



 

 

 

 

Cash flow from investing activities:

 

 

 

 

Capital expenditures

 

(20,970)

 

(20,626)

Capitalization of internally developed software

 

(15,406)

 

(11,446)

Additions to other intangibles

 

(689)

 

(520)

Acquisitions, net of cash received

 

(549)

 

(24,523)

Purchases of short-term investments

 

(5,008)

 

(29,649)

Sales and maturities of short-term investments

 

31,734 

 

36,796 

Net cash used in investing activities

 

(10,888)

 

(49,968)



 

 

 

 

Cash flow from financing activities:

 

 

 

 

Proceeds from revolving line of credit

 

15,000 

 

 -

Principal payments on revolving line of credit

 

(12,000)

 

 -

Proceeds from issuance of common stock

 

14,830 

 

14,416 

Repurchase of common stock

 

(5,635)

 

(8,545)

Dividends paid

 

(51,273)

 

(48,869)

Tax benefit from stock option plans

 

439 

 

937 

Net cash used in financing activities

 

(38,639)

 

(42,061)



 

 

 

 

Net change in cash and cash equivalents

 

34,132 

 

(41,246)

Cash and cash equivalents at beginning of period

 

251,129 

 

274,030 

Cash and cash equivalents at end of period

$

285,261 

$

232,784 

 

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 June 30, 2016 and December 31, 2015, the results of our operations and comprehensive income for the three and six month periods ended June 30, 2016, and the cash flows for the six month period ended June 30, 2016. Our operating results for the three and six month periods ended June 30, 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 and six month periods ended June 30, 2016 and 2015, are as follows:



 

 

 

 

 

 

 



 

 

 

 

 

 

 



Three Months Ended June 30,

 

Six Months Ended June 30,



(In thousands)

 

(In thousands)



(Unaudited)

 

(Unaudited)



2016

 

2015

 

2016

 

2015

Weighted average shares outstanding-basic

128,282 

 

128,682 

 

127,938 

 

128,363 

Plus: Common share equivalents

 

 

 

 

 

 

 

Stock options and RSUs

464 

 

655 

 

491 

 

650 

Weighted average shares outstanding-diluted

128,746 

 

129,337 

 

128,429 

 

129,013 

  

Stock awards to acquire 51,000 shares and 556,000 shares for the three months ended June 30, 2016 and 2015, respectively, and 333,000 shares and 304,000 shares for the six month periods ended June 30, 2016 and 2015, 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 June 30, 2016

(In thousands)

 

(Unaudited)



 

 

 

Gross

 

Gross

 

Cumulative

 

 



 

Adjusted Cost

 

Unrealized Gain

 

Unrealized Loss

 

Translation Adjustment

 

Fair Value

Cash

$

238,514 

 

 -

 

 -

 

 -

 

238,514 

Money Market Accounts

 

46,747 

 

 -

 

 -

 

 -

 

46,747 

Corporate bonds

 

54,717 

 

159 

 

(24)

 

(2,649)

 

52,203 

Time deposits

 

2,860 

 

 -

 

 -

 

 -

 

2,860 

Cash, cash equivalents, and short-term investments

$

342,838 

$

159 

$

(24)

$

(2,649)

$

340,324 



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 

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 June 30, 2016

(In thousands)

 

(Unaudited)



 

Adjusted Cost

 

Fair Value

Due in less than 1 year

$

34,863 

$

34,874 

Due in 1 to 5 years

 

22,714 

 

20,189 

Total available-for-sale debt securities

$

57,577 

$

55,063 



 

 

 

 

Due in less than 1 year

 

Adjusted Cost

 

Fair Value

Corporate bonds

$

32,003 

$

32,014 

Time deposits

 

2,860 

 

2,860 

Total available-for-sale debt securities

$

34,863 

$

34,874 



 

 

 

 

Due in 1 to 5 years

 

Adjusted Cost

 

Fair Value

Corporate bonds

$

22,714 

$

20,189 

Total available-for-sale debt securities

$

22,714 

$

20,189 

  

 

  

   

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

 

June 30, 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

$

46,747 

 

46,747 

 

 -

 

 -

Short-term investments available for sale:

 

 

 

 

 

 

 

 

Corporate bonds

 

52,203 

 

 -

 

52,203 

 

 -

Time deposits

 

2,860 

 

2,860 

 

 -

 

 -

Derivatives

 

5,263 

 

 -

 

5,263 

 

 -

Total Assets 

$

107,073 

$

49,607 

$

57,466 

$

 -



 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Derivatives

$

(7,833)

 

 -

 

(7,833)

 

 -

Total Liabilities 

$

(7,833)

$

 -

$

(7,833)

$

 -



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

(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 

 

 -

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 54 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 six month period ended June 30, 2016. There were no transfers in or out of Level 1 or Level 2 during the six month period ended June 30, 2016.  

  

As of June 30, 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 June 30, 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 63% and 58% of our net sales during the three month periods ended June 30, 2016 and 2015, respectively, and 62% and 59% of our net sales during the six month periods ended June 30, 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 June 30, 2016

 

As of December 31,



 

(Unaudited)

 

2015

Euro

$

76,554 

$

30,867 

Japanese yen

 

23,087 

 

4,119 

Hungarian forint

 

36,696 

 

38,836 

British pound

 

7,569 

 

4,342 

Malaysian ringgit

 

43,077 

 

40,249 

Chinese yuan

 

40,926 

 

26,548 

Total forward contracts notional amount

$

227,909 

$

144,961 

  

The contracts in the foregoing table had contractual maturities of 40 months or less at June 30, 2016 and December 31, 2015.  

  

At June 30, 2016, we expect to reclassify $304,000 of gains on derivative instruments from accumulated OCI to net sales during the next twelve months when the hedged international sales occur, $1.5 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 $1.4 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 June 30, 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 and six month periods ended June 30, 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 June 30, 2016 and December 31, 2015, we held foreign currency forward contracts with a notional amount of $106 million and $97 million, respectively.   

10


 

 

The following tables present the fair value of derivative instruments on our Consolidated Balance Sheets at June 30, 2016 and December 31, 2015, respectively.   



 

 

 

 

 

 



 

 

 

 

 

 



Asset Derivatives



June 30, 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

$

1,908 

 

$

391 

 

 

 

 

 

 

 

Foreign exchange contracts - LT forwards

Other long-term assets

 

579 

 

 

 -

Total derivatives designated as hedging instruments

 

$

2,487 

 

$

391 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - ST forwards

Prepaid expenses and other current assets

$

2,776 

 

$

840 

Total derivatives not designated as hedging instruments

 

$

2,776 

 

$

840 

 

 

 

 

 

 

 

Total derivatives

 

$

5,263 

 

$

1,231 



   



 

 

 

 

 

 



 

 

 

 

 

 



 

 

 

 

 

 



Liability Derivatives



June 30, 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

$

(4,547)

 

$

(4,653)



 

 

 

 

 

 

Foreign exchange contracts - LT forwards

Other long-term liabilities

 

(2,395)

 

 

(3,613)

Total derivatives designated as hedging instruments

 

$

(6,942)

 

$

(8,266)



 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 



 

 

 

 

 

 

Foreign exchange contracts - ST forwards

Accrued expenses and other liabilities

$

(891)

 

$

(480)

Total derivatives not designated as hedging instruments

 

$

(891)

 

$

(480)



 

 

 

 

 

 

Total derivatives

 

$

(7,833)

 

$

(8,746)



11


 

 

The following tables present the effect of derivative instruments on our Consolidated Statements of Income for three month periods ended June 30, 2016 and 2015, respectively:







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

June 30, 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

$

2,764 

Net sales

$

(904)

Net foreign exchange gain/(loss)

$

-  



 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

(1,442)

Cost of sales

 

(382)

Net foreign exchange gain/(loss)

 

-  



 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

(1,184)

Operating expenses

 

(360)

Net foreign exchange gain/(loss)

 

-  

Total

$

138 

 

$

(1,646)

 

$

-  







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

June 30, 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

$

(8,096)

Net sales

$

5,201 

Net foreign exchange gain/(loss)

$

 -



 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

258 

Cost of sales

 

(509)

Net foreign exchange gain/(loss)

 

 -



 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

120 

Operating expenses

 

(378)

Net foreign exchange gain/(loss)

 

 -

Total

$

(7,718)

 

$

4,314 

 

$

 -







 

 

 

 

 

(In thousands)

 

 

 

 

 

Derivatives not Designated as Hedging Instruments

Location of Gain (Loss) Recognized in Income

 

Amount of Gain (Loss) Recognized in Income

 

Amount of Gain (Loss) Recognized in Income



 

 

June 30, 2016

 

June 30, 2015



 

 

(Unaudited)

 

(Unaudited)

Foreign exchange contracts - forwards

 

$

2,063 

$

(1,306)



 

 

 

 

 

Total

 

$

2,063 

$

(1,306)

12


 

 

The following tables present the effect of derivative instruments on our Consolidated Statements of Income for the six month periods ended June 30, 2016 and 2015, respectively:





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

June 30, 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

$

(276)

Net sales

$

$(1,141)

Net foreign exchange gain/(loss)

$

 -



 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

1,597 

Cost of sales

 

$(953)

Net foreign exchange gain/(loss)

 

 -



 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

2,244 

Operating expenses

 

$(889)

Net foreign exchange gain/(loss)

 

 -

Total

$

3,565 

 

$

(2,983)

 

$

 -







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

June 30, 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

$

(2,893)

Net sales

$

10,282 

Net foreign exchange gain/(loss)

$

 -



 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

(1,959)

Cost of sales

 

(842)

Net foreign exchange gain/(loss)

 

 -



 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

(1,884)

Operating expenses

 

(742)

Net foreign exchange gain/(loss)

 

 -

Total

$

(6,736)

 

$

8,698 

 

$

 -









 

 

 

 

 

(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