20160930 10Q Q3

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, 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/747910f2cc2ff449e92890fee7c8f396-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  24, 2016

Common Stock - $0.01 par value

128,919,410

1


 





NATIONAL INSTRUMENTS CORPORATION  

  

INDEX  





 

 



 

 



 

 

PART I.  FINANCIAL INFORMATION 

Page No.



 

 

Item 1

Financial Statements:

 



 

 



Consolidated Balance Sheets

 



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

3



 

 



Consolidated Statements of Income

 



(unaudited) for the three and nine month periods ended September 30, 2016 and 2015

4



 

 



Consolidated Statements of Comprehensive Income

 



(unaudited) for the three and nine month periods ended September 30, 2016 and 2015

5



 

 



Consolidated Statements of Cash Flows

 



(unaudited) for the nine month periods ended September 30, 2016 and 2015

6



 

 



Notes to Consolidated Financial Statements

7



 

 

Item 2

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

24



 

 

Item 3

Quantitative and Qualitative Disclosures about Market Risk

35



 

 

Item 4

Controls and Procedures

37



 

 



 

 

PART II.  OTHER INFORMATION

 



 

 



 

 

Item 1

Legal Proceedings

38



 

 

Item 1A

Risk Factors

38



 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

48



 

 

Item 5

Other Information

48



 

 

Item 6

Exhibits

49



 

 



Signatures and Certifications

51



  

   

2


 

  

  

PART I - FINANCIAL INFORMATION  

  

ITEM 1.Financial Statements  

  

NATIONAL INSTRUMENTS CORPORATION  

CONSOLIDATED BALANCE SHEETS  

(in thousands, except per share data)  

        



 

 

 

 



 

September 30,

 

December 31,



 

2016

 

2015

Assets

 

(unaudited)

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

$

300,652 

$

251,129 

Short-term investments

 

52,277 

 

81,789 

Accounts receivable, net

 

206,171 

 

216,244 

Inventories, net

 

196,391 

 

185,197 

Prepaid expenses and other current assets

 

55,281 

 

65,381 

Total current assets

 

810,772 

 

799,740 

Property and equipment, net

 

261,859 

 

257,853 

Goodwill

 

261,372 

 

257,718 

Intangible assets, net

 

110,161 

 

108,196 

Other long-term assets

 

28,729 

 

30,349 

Total assets

$

1,472,893 

$

1,453,856 

Liabilities and stockholders' equity

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable

$

53,192 

$

50,970 

Accrued compensation

 

31,615 

 

27,956 

Deferred revenue - current

 

113,645 

 

112,283 

Accrued expenses and other liabilities

 

23,940 

 

11,756 

Other taxes payable

 

33,461 

 

37,250 

Total current liabilities

 

255,853 

 

240,215 

Long-term debt

 

25,000 

 

37,000 

Deferred income taxes

 

37,787 

 

44,673 

Liability for uncertain tax positions

 

10,037 

 

11,974 

Deferred revenue - long-term

 

28,148 

 

27,708 

Other long-term liabilities

 

8,657 

 

10,565 

Total liabilities

 

365,482 

 

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; 128,920,278 shares and 127,471,604 shares issued and outstanding, respectively

 

1,289 

 

1,275 

Additional paid-in capital

 

758,411 

 

717,705 

Retained earnings

 

372,893 

 

400,831 

Accumulated other comprehensive loss

 

(25,182)

 

(38,090)

Total stockholders’ equity

 

1,107,411 

 

1,081,721 

Total liabilities and stockholders’ equity

$

1,472,893 

$

1,453,856 

 

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

3


 

  

NATIONAL INSTRUMENTS CORPORATION  

CONSOLIDATED STATEMENTS OF INCOME  

(in thousands, except per share data)  

(unaudited)  

  

  





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2016

 

2015

 

2016

 

2015



 

 

 

 

 

 

 

 

Net sales:

 

 

 

 

 

 

 

 

Product

$

278,521 

$

271,683 

$

816,486 

$

807,064 

Software maintenance

 

27,843 

 

28,129 

 

83,161 

 

84,053 

Total net sales

 

306,364 

 

299,812 

 

899,647 

 

891,117 



 

 

 

 

 

 

 

 

Cost of sales:

 

 

 

 

 

 

 

 

Product

 

74,734 

 

75,144 

 

225,261 

 

225,646 

Software maintenance

 

1,998 

 

2,022 

 

5,126 

 

4,531 

Total cost of sales

 

76,732 

 

77,166 

 

230,387 

 

230,177 



 

 

 

 

 

 

 

 

Gross profit

 

229,632 

 

222,646 

 

669,260 

 

660,940 



 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Sales and marketing

 

116,662 

 

114,507 

 

346,230 

 

335,916 

Research and development

 

59,066 

 

52,533 

 

178,244 

 

168,462 

General and administrative

 

24,537 

 

23,255 

 

74,308 

 

69,391 

Total operating expenses

 

200,265 

 

190,295 

 

598,782 

 

573,769 



 

 

 

 

 

 

 

 

Operating income

 

29,367 

 

32,351 

 

70,478 

 

87,171 



 

 

 

 

 

 

 

 

Other income:

 

 

 

 

 

 

 

 

Interest income

 

276 

 

396 

 

787 

 

1,089 

Net foreign exchange gain/(loss)

 

(760)

 

286 

 

(1,471)

 

(1,965)

Other income (loss), net

 

301 

 

133 

 

(2,052)

 

787 

Income before income taxes

 

29,184 

 

33,166 

 

67,742 

 

87,082 

Provision for income taxes

 

4,695 

 

9,988 

 

14,155 

 

23,958 



 

 

 

 

 

 

 

 

Net income

$

24,489 

$

23,178 

$

53,587 

$

63,124 



 

 

 

 

 

 

 

 

Basic earnings per share

$

0.19 

$

0.18 

$

0.42 

$

0.49 



 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

128,815 

 

127,935 

 

128,233 

 

128,219 



 

 

 

 

 

 

 

 

Diluted earnings per share

$

0.19 

$

0.18 

$

0.42 

$

0.49 



 

 

 

 

 

 

 

 

Weighted average shares outstanding - diluted

 

129,047 

 

128,229 

 

128,738 

 

128,856 



 

 

 

 

 

 

 

 

Dividends declared per share

$

0.20 

$

0.19 

$

0.60 

$

0.57 



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

4


 

  

  

NATIONAL INSTRUMENTS CORPORATION  

 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME  

(in thousands)  

(unaudited)  

  





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2016

 

2015

 

2016

 

2015



 

 

 

 

 

 

 

 

Net income

$

24,489 

$

23,178 

$

53,587 

$

63,124 

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

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

3,964 

 

(3,789)

 

12,130 

 

(14,273)

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

 

(70)

 

(348)

 

479 

 

441 

Unrealized (loss) gain on derivative instruments

 

976 

 

(7,642)

 

4,541 

 

(14,378)

Other comprehensive (loss) gain, before tax

 

4,870 

 

(11,779)

 

17,150 

 

(28,210)

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

 

967 

 

(3,935)

 

4,242 

 

(8,238)

Other comprehensive (loss) gain, net of tax

 

3,903 

 

(7,844)

 

12,908 

 

(19,972)

Comprehensive income

$

28,392 

$

15,334 

$

66,495 

$

43,152 



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

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



 

5


 

  

NATIONAL INSTRUMENTS CORPORATION 

CONSOLIDATED STATEMENTS OF CASH FLOWS  

(in thousands)  

(unaudited)  

  

  





 

 

 

 



 

 

 

 



 

Nine Months Ended



 

September 30,



 

2016

 

2015

Cash flow from operating activities:

 

 

 

 

Net income

$

53,587 

$

63,124 

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

 

 

 

 

Depreciation and amortization

 

55,164 

 

55,157 

Stock-based compensation

 

19,635 

 

19,151 

Tax expense from deferred income taxes

 

(7,321)

 

(7,404)

Tax benefit from stock option plans

 

(439)

 

(944)

Changes in operating assets and liabilities:

 

 

 

 

Accounts receivable

 

10,073 

 

17,162 

Inventories

 

(11,194)

 

(14,809)

Prepaid expenses and other assets

 

19,696 

 

(3,370)

Accounts payable

 

2,222 

 

(5,609)

Deferred revenue

 

1,802 

 

(1,591)

Taxes, accrued expenses and other liabilities

 

9,855 

 

(386)

Net cash provided by operating activities

 

153,080 

 

120,481 



 

 

 

 

Cash flow from investing activities:

 

 

 

 

Capital expenditures

 

(34,408)

 

(28,102)

Capitalization of internally developed software

 

(24,048)

 

(22,639)

Additions to other intangibles

 

(1,969)

 

(2,240)

Acquisitions, net of cash received

 

(549)

 

(28,629)

Purchases of short-term investments

 

(9,054)

 

(29,649)

Sales and maturities of short-term investments

 

38,566 

 

44,752 

Net cash used in investing activities

 

(31,462)

 

(66,507)



 

 

 

 

Cash flow from financing activities:

 

 

 

 

Proceeds from revolving line of credit

 

15,000 

 

42,000 

Principal payments on revolving line of credit

 

(27,000)

 

(17,000)

Proceeds from issuance of common stock

 

22,157 

 

21,252 

Repurchase of common stock

 

(5,635)

 

(72,559)

Dividends paid

 

(77,056)

 

(73,406)

Tax benefit from stock option plans

 

439 

 

944 

Net cash used in financing activities

 

(72,095)

 

(98,769)



 

 

 

 

Net change in cash and cash equivalents

 

49,523 

 

(44,795)

Cash and cash equivalents at beginning of period

 

251,129 

 

274,030 

Cash and cash equivalents at end of period

$

300,652 

$

229,235 

 

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

6


 

  

NATIONAL INSTRUMENTS CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  

  

Note 1 – Basis of presentation  

  

The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 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 September 30, 2016 and December 31, 2015, the results of our operations and comprehensive income for the three and nine month periods ended September 30, 2016 and 2015, and the cash flows for the nine month periods ended September 30, 2016 and 2015. Our operating results for the three and nine month periods ended September 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 nine month periods ended September 30, 2016 and 2015, are as follows:



 

 

 

 

 

 

 



 

 

 

 

 

 

 



Three Months Ended September 30,

 

Nine Months Ended September 30,



(In thousands)

 

(In thousands)



(Unaudited)

 

(Unaudited)



2016

 

2015

 

2016

 

2015

Weighted average shares outstanding-basic

128,815 

 

127,935 

 

128,233 

 

128,219 

Plus: Common share equivalents

 

 

 

 

 

 

 

Stock options and RSUs

232 

 

294 

 

505 

 

637 

Weighted average shares outstanding-diluted

129,047 

 

128,229 

 

128,738 

 

128,856 

  

Stock awards to acquire 1,068,800 shares and 1,331,000 shares for the three months ended September 30, 2016 and 2015, respectively, and 58,000 shares 433,400 shares, for the nine months ended September 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 September 30, 2016

(In thousands)

 

(Unaudited)



 

 

 

Gross

 

Gross

 

Cumulative

 

 



 

Adjusted Cost

 

Unrealized Gain

 

Unrealized Loss

 

Translation Adjustment

 

Fair Value

Cash

$

254,227 

 

 -

 

 -

 

(1,173)

 

253,054 

Money Market Accounts

 

47,598 

 

 -

 

 -

 

 -

 

47,598 

Corporate bonds

 

51,979 

 

110 

 

(36)

 

(1,536)

 

50,517 

Time deposits

 

1,760 

 

 -

 

 -

 

 -

 

1,760 

Cash, cash equivalents, and short-term investments

$

355,564 

$

110 

$

(36)

$

(2,709)

$

352,929 



 

 

 

 

 

 

 

 

 

 

 

7


 



 

 

 

 

 

 

 

 

 

 

(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 September 30, 2016

(In thousands)

 

(Unaudited)



 

Adjusted Cost

 

Fair Value

Due in less than 1 year

$

37,442 

$

37,439 

Due in 1 to 5 years

 

16,297 

 

14,838 

Total available-for-sale debt securities

$

53,739 

$

52,277 



 

 

 

 

Due in less than 1 year

 

Adjusted Cost

 

Fair Value

Corporate bonds

$

35,682 

$

35,679 

Time deposits

 

1,760 

 

1,760 

Total available-for-sale debt securities

$

37,442 

$

37,439 



 

 

 

 

Due in 1 to 5 years

 

Adjusted Cost

 

Fair Value

Corporate bonds

$

16,297 

$

14,838 

Total available-for-sale debt securities

$

16,297 

$

14,838 

  

 

     

Note 4 – Fair value measurements 

  

We define fair value to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market that market participants may use when pricing the asset or liability.   

We follow a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value measurement is determined based on the lowest level input that is significant to the fair value measurement. The three values of the fair value hierarchy are the following:   

Level 1 – Quoted prices in active markets for identical assets or liabilities   

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly   

Level 3 – Inputs that are not based on observable market data   

8


 

Assets and liabilities measured at fair value on a recurring basis are summarized below:





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Fair Value Measurements at Reporting Date Using

(In thousands)

 

(Unaudited)

Description

 

September 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

$

47,598 

 

47,598 

 

 -

 

 -

Short-term investments available for sale:

 

 

 

 

 

 

 

 

Corporate bonds

 

50,517 

 

 -

 

50,517 

 

 -

Time deposits

 

1,760 

 

1,760 

 

 -

 

 -

Derivatives

 

2,698 

 

 -

 

2,698 

 

 -

Total Assets 

$

102,573 

$

49,358 

$

53,215 

$

 -



 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Derivatives

$

(6,188)

 

 

 

(6,188)

 

 

Total Liabilities 

$

(6,188)

$

 -

$

(6,188)

$

 -



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

(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 60 months.  

  

9


 

Derivatives include foreign currency forward and option contracts. Our foreign currency forward contracts are valued using an income approach (Level 2) based on the spot rate less the contract rate multiplied by the notional amount. Our foreign currency option contracts are valued using a market approach based on the quoted market prices which are derived from observable inputs including current and future spot rates, interest rate spreads as well as quoted market prices of similar instruments. We consider counterparty credit risk in the valuation of our derivatives. However, counterparty credit risk did not impact the valuation of our derivatives during the nine month period ended September 30, 2016. There were no transfers in or out of Level 1 or Level 2 during the nine month period ended September 30, 2016.  

  

As of September 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 September 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 58% of our net sales during each of the three month periods ended September 30, 2016 and 2015, and approximately 61% and 58% of our net sales during the nine month periods ended September 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, Malaysian ringgit and Chinese yuan) and limit the duration of these contracts to 40 months or less.  

10


 

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (“OCI”) and reclassified into earnings in the same line item (net sales, operating expenses, or cost of sales) associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings or expenses during the current period and are classified as a component of “net foreign exchange gain (loss).” Hedge effectiveness of foreign currency forwards and purchased option contracts designated as cash flow hedges are measured by comparing the hedging instrument’s cumulative change in fair value from inception to maturity to the forecasted transaction’s terminal value.   



We held forward contracts with the following notional amounts:



 

 

 

 



 

 

 

 

(In thousands)

 

US Dollar Equivalent



 

As of September 30, 2016

 

As of December 31,



 

(Unaudited)

 

2015

Euro

$

87,972 

$

30,867 

Japanese yen

 

38,217 

 

4,119 

Hungarian forint

 

63,587 

 

38,836 

British pound

 

2,826 

 

4,342 

Malaysian ringgit

 

46,692 

 

40,249 

Chinese yuan

 

34,390 

 

26,548 

Total forward contracts notional amount

$

273,684 

$

144,961 

  

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

  

At September 30, 2016, we expect to reclassify $1.0 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 $1.3 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 September 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 nine month periods ended September 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 gain (loss).” As of September 30, 2016 and December 31, 2015, we held foreign currency forward contracts with a notional amount of $66 million and $97 million, respectively.   

11


 

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



 

 

 

 

 

 



 

 

 

 

 

 



Asset Derivatives



September 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

$

1,030 

 

$

391 

 

 

 

 

 

 

 

Foreign exchange contracts - LT forwards

Other long-term assets

 

950 

 

 

 -

Total derivatives designated as hedging instruments

 

$

1,980 

 

$

391 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - ST forwards

Prepaid expenses and other current assets

$

718 

 

$

840 

Total derivatives not designated as hedging instruments

 

$

718 

 

$

840 

 

 

 

 

 

 

 

Total derivatives

 

$

2,698 

 

$

1,231 



   



 

 

 

 

 

 



 

 

 

 

 

 



 

 

 

 

 

 



Liability Derivatives



September 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

$

(4,116)

 

$

(4,653)



 

 

 

 

 

 

Foreign exchange contracts - LT forwards

Other long-term liabilities

 

(1,349)

 

 

(3,613)

Total derivatives designated as hedging instruments

 

$

(5,465)

 

$

(8,266)



 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 



 

 

 

 

 

 

Foreign exchange contracts - ST forwards

Accrued expenses and other liabilities

$

(723)

 

$

(480)

Total derivatives not designated as hedging instruments

 

$

(723)

 

$

(480)



 

 

 

 

 

 

Total derivatives

 

$

(6,188)

 

$

(8,746)



12


 

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







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

September 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

$

(1,156)

Net sales

$

(160)

Net foreign exchange gain/(loss)

$

-  



 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

1,412 

Cost of sales

 

(414)

Net foreign exchange gain/(loss)

 

-  



 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

720 

Operating expenses

 

(389)

Net foreign exchange gain/(loss)

 

-  

Total

$

976 

 

$

(963)

 

$

-  







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 September 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

$

(4,706)

Net sales

$

5,405 

Net foreign exchange gain/(loss)

$

 -



 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

(649)

Cost of sales

 

(698)

Net foreign exchange gain/(loss)

 

 -



 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

(2,287)

Operating expenses

 

(573)

Net foreign exchange gain/(loss)

 

 -

Total

$

(7,642)

 

$

4,134 

 

$

 -







 

 

 

 

 

(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, 2016

 

 September 30, 2015



 

 

(Unaudited)

 

(Unaudited)

Foreign exchange contracts - forwards

 

$

(814)

$

2,967 



 

 

 

 

 

Total

 

$

(814)

$

2,967 

13


 

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





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

September 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

$

$(1,432)

Net sales

$

$(1,301)

Net foreign exchange gain/(loss)

$

 -



 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

$3,009 

Cost of sales

 

$(1,367)

Net foreign exchange gain/(loss)

 

 -



 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

$2,964 

Operating expenses

 

$(1,278)

Net foreign exchange gain/(loss)

 

 -

Total

$

4,541 

 

$

(3,946)

 

$

 -







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 September 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

$

(7,599)

Net sales

$

15,687 

Net foreign exchange gain/(loss)

$

 -



 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

(2,608)

Cost of sales

 

(1,540)

Net foreign exchange gain/(loss)

 

 -



 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

(4,171)

Operating expenses

 

(1,315)

Net foreign exchange gain/(loss)

 

 -

Total

$

(14,378)

 

$

12,832 

 

$

 -









 

 

 

 

 

(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, 2016

 

 September 30, 2015



 

 

(Unaudited)

 

(Unaudited)

Foreign exchange contracts - forwards

Net foreign exchange gain/(loss)

$

(1,005)

$

3,606 

 

 

 

 

 

 

Total

 

$

(1,005)

$

3,606 









14


 

Note 6 – Inventories, net 

  

Inventories, net consist of the following: 



 

 

 

 



 

September 30, 2016

 

December 31,

(In thousands)

 

(Unaudited)

 

2015