20170331 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, 2017 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/5eff44c2cfa979fa359ec609b5d3e2a0-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, emerging growth company, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, “emerging growth company” 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 Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

  

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 24, 2017

Common Stock - $0.01 par value

129,593,771

1


 





NATIONAL INSTRUMENTS CORPORATION  

  

INDEX  





 

 



 

 



 

 

PART I.  FINANCIAL INFORMATION 

Page No.



 

 

Item 1

Financial Statements:

 



 

 



Consolidated Balance Sheets

 



March 31, 2017 (unaudited) and December 31, 2016

3



 

 



Consolidated Statements of Income

 



(unaudited) for the three month periods ended March 31, 2017 and 2016

4



 

 



Consolidated Statements of Comprehensive Income

 



(unaudited) for the three month periods ended March 31, 2017 and 2016

5



 

 



Consolidated Statements of Cash Flows

 



(unaudited) for the three month periods ended March 31, 2017 and 2016

6



 

 



Notes to Consolidated Financial Statements

7



 

 

Item 2

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

22



 

 

Item 3

Quantitative and Qualitative Disclosures about Market Risk

33



 

 

Item 4

Controls and Procedures

33



 

 



 

 

PART II.  OTHER INFORMATION

 



 

 



 

 

Item 1

Legal Proceedings

33



 

 

Item 1A

Risk Factors

33



 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

43



 

 

Item 5

Other Information

43



 

 

Item 6

Exhibits

44



 

 



Signatures and Certifications

46



  

   

2


 

  

   

PART I - FINANCIAL INFORMATION  

  

ITEM 1.Financial Statements  

  

NATIONAL INSTRUMENTS CORPORATION  

CONSOLIDATED BALANCE SHEETS  

(in thousands, except per share data)  

        



 

 

 

 



 

March 31,

 

December 31,



 

2017

 

2016

Assets

 

(unaudited)

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

$

279,008 

$

285,283 

Short-term investments

 

86,410 

 

73,117 

Accounts receivable, net

 

224,267 

 

228,686 

Inventories, net

 

194,878 

 

193,608 

Prepaid expenses and other current assets

 

45,970 

 

53,953 

Total current assets

 

830,533 

 

834,647 

Property and equipment, net

 

260,208 

 

260,456 

Goodwill

 

254,523 

 

253,197 

Intangible assets, net

 

113,188 

 

108,663 

Other long-term assets

 

33,471 

 

39,601 

Total assets

$

1,491,923 

$

1,496,564 

Liabilities and stockholders' equity

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable

$

55,850 

$

48,800 

Accrued compensation

 

29,001 

 

27,743 

Deferred revenue - current

 

121,597 

 

115,577 

Accrued expenses and other liabilities

 

37,342 

 

32,997 

Other taxes payable

 

19,739 

 

34,958 

Total current liabilities

 

263,529 

 

260,075 

Long-term debt

 

25,000 

 

25,000 

Deferred income taxes

 

37,736 

 

45,386 

Liability for uncertain tax positions

 

12,071 

 

11,719 

Deferred revenue - long-term

 

30,024 

 

29,752 

Other long-term liabilities

 

7,793 

 

10,413 

Total liabilities

 

376,153 

 

382,345 

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; 129,594,639 shares and 129,202,979 shares issued and outstanding, respectively

 

1,296 

 

1,292 

Additional paid-in capital

 

785,666 

 

771,346 

Retained earnings

 

361,327 

 

376,202 

Accumulated other comprehensive loss

 

(32,519)

 

(34,621)

Total stockholders’ equity

 

1,115,770 

 

1,114,219 

Total liabilities and stockholders’ equity

$

1,491,923 

$

1,496,564 

 

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

3


 

  

NATIONAL INSTRUMENTS CORPORATION  

CONSOLIDATED STATEMENTS OF INCOME  

(in thousands, except per share data)  

(unaudited)  

  

  





 

 

 

 



 

 

 

 



 

Three Months Ended



 

March 31,



 

2017

 

2016



 

 

 

 

Net sales:

 

 

 

 

Product

$

271,512 

$

259,434 

Software maintenance

 

28,594 

 

27,743 

Total net sales

 

300,106 

 

287,177 



 

 

 

 

Cost of sales:

 

 

 

 

Product

 

75,196 

 

74,209 

Software maintenance

 

1,328 

 

1,937 

Total cost of sales

 

76,524 

 

76,146 



 

 

 

 

Gross profit

 

223,582 

 

211,031 



 

 

 

 

Operating expenses:

 

 

 

 

Sales and marketing

 

117,258 

 

113,207 

Research and development

 

58,263 

 

59,340 

General and administrative

 

25,743 

 

24,640 

Total operating expenses

 

201,264 

 

197,187 



 

 

 

 

Operating income

 

22,318 

 

13,844 



 

 

 

 

Other income:

 

 

 

 

Interest income

 

343 

 

253 

Net foreign exchange gain

 

82 

 

574 

Other gain (loss), net

 

431 

 

(2,406)

Income before income taxes

 

23,174 

 

12,265 

Provision for income taxes

 

5,026 

 

2,967 



 

 

 

 

Net income

$

18,148 

$

9,298 



 

 

 

 

Basic earnings per share

$

0.14 

$

0.07 



 

 

 

 

Weighted average shares outstanding - basic

 

129,438 

 

127,595 



 

 

 

 

Diluted earnings per share

$

0.14 

$

0.07 



 

 

 

 

Weighted average shares outstanding - diluted

 

130,108 

 

128,103 



 

 

 

 

Dividends declared per share

$

0.21 

$

0.20 



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

4


 

  

  

NATIONAL INSTRUMENTS CORPORATION  

 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME  

(in thousands)  

(unaudited)  

  





 

 

 

 



 

 

 

 



 

Three Months Ended



 

March 31,



 

2017

 

2016



 

 

 

 

Net income

$

18,148 

$

9,298 

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

 

 

 

 

Foreign currency translation adjustment

 

3,961 

 

14,357 

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

 

(4)

 

338 

Unrealized (loss) gain on derivative instruments

 

(2,812)

 

3,427 

Other comprehensive gain, before tax

 

1,145 

 

18,122 

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

 

(957)

 

4,713 

Other comprehensive gain, net of tax

 

2,102 

 

13,409 

Comprehensive income

$

20,250 

$

22,707 



 

 

 

 



 

 

 

 



 

 

 

 

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



 

5


 

  

NATIONAL INSTRUMENTS CORPORATION 

CONSOLIDATED STATEMENTS OF CASH FLOWS  

(in thousands)  

(unaudited)  

  

  





 

 

 

 



 

 

 

 



 

Three Months Ended



 

March 31,



 

2017

 

2016

Cash flow from operating activities:

 

 

 

 

Net income

$

18,148 

$

9,298 

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

 

 

 

 

Depreciation and amortization

 

18,669 

 

19,432 

Stock-based compensation

 

6,402 

 

6,748 

Tax expense from deferred income taxes

 

(2,984)

 

(6,915)

Changes in operating assets and liabilities

 

6,441 

 

15,801 

Net cash provided by operating activities

 

46,676 

 

44,364 



 

 

 

 

Cash flow from investing activities:

 

 

 

 

Capital expenditures

 

(10,811)

 

(9,267)

Capitalization of internally developed software

 

(11,624)

 

(8,003)

Additions to other intangibles

 

(525)

 

(363)

Acquisitions, net of cash received

 

 -

 

(549)

Purchases of short-term investments

 

(25,253)

 

(5,008)

Sales and maturities of short-term investments

 

11,931 

 

23,589 

Net cash (used in)/provided by investing activities

 

(36,282)

 

399 



 

 

 

 

Cash flow from financing activities:

 

 

 

 

Principal payments on revolving line of credit

 

 -

 

(12,000)

Proceeds from issuance of common stock

 

7,817 

 

7,445 

Repurchase of common stock

 

 -

 

(4,642)

Dividends paid

 

(27,201)

 

(25,556)

Net cash used in financing activities

 

(19,384)

 

(34,753)



 

 

 

 

Effect of exchange rate changes on cash

 

2,715 

 

4,261 



 

 

 

 

Net change in cash and cash equivalents

 

(6,275)

 

14,271 

Cash and cash equivalents at beginning of period

 

285,283 

 

251,129 

Cash and cash equivalents at end of period

$

279,008 

$

265,400 

 

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 and recent accounting pronouncements

  

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, 2016, 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, 2017 and December 31, 2016, the results of our operations and comprehensive income for the three month periods ended March 31, 2017 and 2016, and the cash flows for the three month periods ended March 31, 2017 and 2016. Our operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States.



Starting January 1, 2017, we began separately presenting the effect of exchange rate changes on cash and cash equivalents in our condensed consolidated statements of cash flows due to growing operations in foreign currency environments. Amounts in the comparable prior period have been reclassified to conform to the current period presentation.  The reclassifications resulted in the disaggregation of the amount attributable to the “Effect of exchange rate changes on cash” of $4.3 million, with a corresponding decrease to “Net cash provided by operating activities” for the three month period ended March 31, 2016. We believe the reclassification is immaterial to the consolidated financial statements.



Recently Adopted Accounting Pronouncements



In October 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-16, Income Taxes – Intra-Entity Transfers of Assets Other Than Inventory. The standard is intended to address diversity in practice and complexity in financial reporting, particularly for intra-entity transfers of intellectual property. We early adopted ASU 2016-16 effective January 1, 2017. Using the modified retrospective method, the impact of the adoption of the standard was to increase deferred tax assets by $0.4 million, decrease other assets, net by $6.2 million and decrease retained earnings by $5.8 million. The adoption of the amendments had the effect of increasing our diluted earnings per share by $0.01 for the three months ended March 31, 2017.



In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid in capital pools. The guidance also allows for the employer to repurchase a greater number of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. We adopted ASU 2016-09 effective January 1, 2017 as follows:



·

Our adoption of the amendments related to accounting for excess tax benefits resulted in the recognition of $0.5 million of excess tax benefits within income taxes rather than additional paid in capital for the three months ended March 31, 2017. We expect the impact on income tax expense could increase during fiscal year 2017 due to the vesting of restricted stock units in the second quarter.

·

We elected to retrospectively apply the changes in presentation to the statements of cash flows and no longer classify excess tax benefits as a financing activity, which increased net cash provided by operating activities and reduced net cash provided by financing activities by an immaterial amount for the three months ended March 31, 2017.

·

We elected to account for forfeitures as they occur using a modified retrospective transition method. The adoption of this one-time accounting policy election did not have a material impact on our financial statements.



In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (Topic 330). The amendments require that reporting entities measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments apply to inventory that is measured using the first-in, first-out or average cost basis. We adopted ASU 2015-11 as of January 1, 2017 and the guidance was applied prospectively. We determined there were no changes to disclosure, financial statement presentation, or valuation of inventory as a result of adoption.















7


 



Recently Issued Accounting Pronouncements



In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted, including adoption in an interim period, but any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. The new standard must be adopted retrospectively. We are currently evaluating the impact of this standard on our consolidated statements of cash flows.



In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes ASC840, Leases. The guidance requires lessees to recognize most lease liabilities on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. The update states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The update is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. We are currently evaluating the effect that the updated standard will have on our Consolidated Financial Statements and related disclosures.



In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The update is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. As currently issued and amended, ASU 2014-09 is effective for annual reporting periods, and interim periods within that period, beginning after December 15, 2017 and early adoption is permitted for annual reporting periods, and interim periods within that period, beginning after December 31, 2016. We intend to adopt this standard as of January 1, 2018 by applying the modified retrospective transition method. Consequently, the cumulative effect of applying the new standard to existing contracts as of January 1, 2018 will be recognized as an adjustment to the opening balance of equity in the first quarter of 2018.



We anticipate ASU 2014-09, as amended, could have a material impact on our consolidated financial statements and disclosures. We have reached initial conclusions on our key accounting matters related to the new standard. We will continue to monitor and assess the impact of changes to the standard and interpretations as they become available. The most significant impact of the standard relates to our accounting for software revenue from term licenses. Specifically, under the new standard we expect to recognize all software license revenue at the time of contract execution rather than over the contractual term for most of our enterprise agreements that include software term licenses, software maintenance, training, and support. Due to the complexity of certain of our enterprise agreement contracts, the actual revenue recognition treatment required under the standard will be dependent on contract-specific terms, and may vary in some instances from recognition at the time of billing. We do not expect the new standard will have an adverse effect on the timing of revenue recognition from our arrangements with customers.



Other Updates



The FASB also issued the following ASUs which are not expected to have a material impact on our financial condition, results of operations or cash flows upon adoption:



·

ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.

·

ASU 2017-04, Simplifying the Accounting for Goodwill Impairment, which removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment.



  

8


 

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, 2017 and 2016, are as follows:



 

 

 



 

 

 



Three Months Ended March 31,



(In thousands)



(Unaudited)



2017

 

2016

Weighted average shares outstanding-basic

129,438 

 

127,595 

Plus: Common share equivalents

 

 

 

Stock options and RSUs

670 

 

508 

Weighted average shares outstanding-diluted

130,108 

 

128,103 

  

Stock awards to acquire 21,500 shares and 393,800 shares for the three months ended March 31, 2017 and 2016 were excluded in the computations of diluted EPS because the effect of including the stock awards would have been antidilutive.

 

  

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, 2017

(In thousands)

 

(Unaudited)



 

 

 

Gross

 

Gross

 

Cumulative

 

 



 

Adjusted Cost

 

Unrealized Gain

 

Unrealized Loss

 

Translation Adjustment

 

Fair Value

Cash

$

219,389 

$

 -

$

 -

$

(383)

$

219,006 

Money Market Accounts

 

60,002 

 

 -

 

 -

 

 -

 

60,002 

Corporate bonds

 

86,274 

 

82 

 

(180)

 

(1,526)

 

84,650 

Time deposits

 

1,760 

 

 -

 

 -

 

 -

 

1,760 

Cash, cash equivalents, and short-term investments

$

367,425 

$

82 

$

(180)

$

(1,909)

$

365,418 





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

(In thousands)

 

As of December 31, 2016



 

 

 

Gross

 

Gross

 

Cumulative

 

 



 

Adjusted Cost

 

Unrealized Gain

 

Unrealized Loss

 

Translation Adjustment

 

Fair Value

Cash

$

217,112 

$

 -

$

 -

$

(406)

$

216,706 

Money Market Accounts

 

68,577 

 

 -

 

 -

 

 -

 

68,577 

Corporate bonds

 

72,986 

 

89 

 

(182)

 

(1,536)

 

71,357 

Time deposits

 

1,760 

 

 -

 

 -

 

 -

 

1,760 

Cash, cash equivalents, and short-term investments

$

360,435 

$

89 

$

(182)

$

(1,942)

$

358,400 



9


 

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





 

 

 

 



 

 

 

 



 

As of March 31, 2017

(In thousands)

 

(Unaudited)



 

Adjusted Cost

 

Fair Value

Due in less than 1 year

$

22,762 

$

22,755 

Due in 1 to 5 years

 

65,272 

 

63,655 

Total available-for-sale debt securities

$

88,034 

$

86,410 



 

 

 

 

Due in less than 1 year

 

Adjusted Cost

 

Fair Value

Corporate bonds

$

21,002 

$

20,995 

Time deposits

 

1,760 

 

1,760 

Total available-for-sale debt securities

$

22,762 

$

22,755 



 

 

 

 

Due in 1 to 5 years

 

Adjusted Cost

 

Fair Value

Corporate bonds

$

65,272 

$

63,655 

Total available-for-sale debt securities

$

65,272 

$

63,655 

   

     

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   

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, 2017

 

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

$

60,002 

$

60,002 

$

 -

$

 -

Short-term investments available for sale:

 

 

 

 

 

 

 

 

Corporate bonds

 

84,650 

 

 -

 

84,650 

 

 -

Time deposits

 

1,760 

 

1,760 

 

 -

 

 -

Derivatives

 

8,413 

 

 -

 

8,413 

 

 -

Total Assets 

$

154,825 

$

61,762 

$

93,063 

$

 -



 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Derivatives

$

(7,448)

 

 -

 

(7,448)

 

 -

Total Liabilities 

$

(7,448)

$

 -

$

(7,448)

$

 -

10


 



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

(In thousands)

 

Fair Value Measurements at Reporting Date Using

Description

 

December 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

$

68,577 

$

68,577 

$

 -

$

 -

Short-term investments available for sale:

 

 

 

 

 

 

 

 

Corporate bonds

 

71,357 

 

 -

 

71,357 

 

 -

Time deposits

 

1,760 

 

1,760 

 

 -

 

 -

Derivatives

 

15,113 

 

 -

 

15,113 

 

 -

Total Assets 

$

156,807 

$

70,337 

$

86,470 

$

 -



 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Derivatives

$

(8,199)

$

 -

$

(8,199)

$

 -

Total Liabilities 

$

(8,199)

$

 -

$

(8,199)

$

 -



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.  

  

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, 2017. There were no transfers in or out of Level 1 or Level 2 during the three month period ended March 31, 2017.  

  

As of March  31, 2017, 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, 2017 and December 31, 2016. The carrying value of net accounts receivable, accounts payable, and long-term debt contained in the Consolidated Balance Sheets approximates fair value.

 

11


 

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% of our net sales during each of the three month periods ended March 31, 2017 and 2016. 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.  



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.   

12


 



We held forward contracts with the following notional amounts:



 

 

 

 



 

 

 

 

(In thousands)

 

US Dollar Equivalent



 

As of March 31, 2017

 

As of December 31,



 

(Unaudited)

 

2016

Chinese yuan

$

20,703 

$

27,414 

Euro

 

135,252 

 

123,522 

Japanese yen

 

35,812 

 

44,982 

Hungarian forint

 

62,523 

 

57,077 

British pound

 

 -

 

 -

Malaysian ringgit

 

40,768 

 

42,510 

Total forward contracts notional amount

$

295,058 

$

295,505 

  

The contracts in the foregoing table had contractual maturities of 36 months or less at March 31, 2017 and December 31, 2016.  

  

At March 31, 2017, we expect to reclassify $5.5 million of gains on derivative instruments from accumulated OCI to net sales during the next twelve months when the hedged international sales occur, $1.7 million of losses on derivative instruments from accumulated OCI to cost of sales during the next twelve months when the hedged cost of sales are incurred and $1.7 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, 2017. Actual results may vary materially as a result of changes in the corresponding exchange rates subsequent to that date.  

  

The gains and losses recognized in earnings due to hedge ineffectiveness were not material for each of the three month periods ended March 31, 2017 and 2016 and are included as a component of net income.



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 March 31, 2017 and December 31, 2016, we held foreign currency forward contracts with a notional amount of $85 million and $60 million, respectively.   

The following tables present the fair value of derivative instruments on our Consolidated Balance Sheets at March 31, 2017 and December 31, 2016, respectively.   



 

 

 

 

 

 



 

 

 

 

 

 



Asset Derivatives



March 31, 2017

December 31, 2016

(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

$

5,717 

Prepaid expenses and other current assets

$

9,378 

 

 

 

 

 

 

 

Foreign exchange contracts - LT forwards

Other long-term assets

 

2,463 

Other long-term assets

 

3,866 

Total derivatives designated as hedging instruments

 

$

8,180 

 

$

13,244 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts - ST forwards

Prepaid expenses and other current assets

$

233 

Prepaid expenses and other current assets

$

1,869 

Total derivatives not designated as hedging instruments

 

$

233 

 

$

1,869 

 

 

 

 

 

 

 

Total derivatives

 

$

8,413 

 

$

15,113 

13


 







 

 

 

 

 

 



 

 

 

 

 

 



 

 

 

 

 

 



Liability Derivatives



March 31, 2017

December 31, 2016

(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

$

(3,631)

Accrued expenses and other liabilities

$

(4,672)



 

 

 

 

 

 

Foreign exchange contracts - LT forwards

Other long-term liabilities

 

(2,194)

Other long-term liabilities

 

(3,352)

Total derivatives designated as hedging instruments

 

$

(5,825)

 

$

(8,024)



 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 



 

 

 

 

 

 

Foreign exchange contracts - ST forwards

Accrued expenses and other liabilities

$

(1,623)

Accrued expenses and other liabilities

$

(175)

Total derivatives not designated as hedging instruments

 

$

(1,623)

 

$

(175)



 

 

 

 

 

 

Total derivatives

 

$

(7,448)

 

$

(8,199)





The following tables present the effect of derivative instruments on our Consolidated Statements of Income for the three month periods ended March 31, 2017 and 2016, respectively:





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

March 31, 2017

(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

$

(5,309)

Net sales

$

2,080 

Net foreign exchange gain/(loss)

$

-  



 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

1,309 

Cost of sales

 

(550)

Net foreign exchange gain/(loss)

 

-  



 

 

 

 

 

 

 

 

Foreign exchange contracts - forwards and options

 

1,188 

Operating expenses

 

(563)

Net foreign exchange gain/(loss)

 

-  

Total

$

(2,812)

 

$

967 

 

$

-  

14


 



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

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)

 

$

 -









 

 

 

 

 

(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, 2017

 

March 31, 2016



 

 

(Unaudited)

 

(Unaudited)

Foreign exchange contracts - forwards

Net foreign exchange gain/(loss)

$

(2,546)

 

(2,254)



 

 

 

 

 

Total

 

$

(2,546)

$

(2,254)









Note 6 – Inventories, net 

  

Inventories, net consist of the following: 



 

 

 

 



 

March 31, 2017

 

December 31,

(In thousands)

 

(Unaudited)

 

2016



 

 

 

 

Raw materials  

$

95,189 

$

92,906 

Work-in-process

 

8,601 

 

9,125 

Finished goods

 

91,088 

 

91,577 



$

194,878 

$

193,608 



  



15


 

Note 7 – Intangible assets, net  

  

Intangible assets at March 31, 2017 and December 31, 2016 are as follows:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2017

 

 

(In thousands)

 

(Unaudited)

 

December 31, 2016



 

Gross Carrying Amount

 

Accumulated Amortization

 

Net Carrying Amount

 

Gross Carrying Amount

 

Accumulated Amortization

 

Net Carrying Amount

Capitalized software development costs

$

110,133 

$

(38,678)

$

71,455 

$

103,887 

$

(39,180)

$

64,707 

Acquired technology

 

94,462 

 

(81,426)

 

13,036 

 

94,124 

 

(79,485)

 

14,639 

Patents

 

32,030 

 

(18,233)

 

13,797 

 

31,513 

 

(17,573)

 

13,940 

Other

 

43,117 

 

(28,217)

 

14,900 

 

42,848 

 

(27,471)

 

15,377 



$

279,742 

$

(166,554)

$

113,188 

$

272,372 

$

(163,709)

$

108,663 

    

Software development costs capitalized for the three month periods ended March 31, 2017 and 2016 were $12.0 million and $8.3 million, respectively, and related amortization expense was $5.3 million and $4.4 million, respectively. Capitalized software development costs for the three month periods ended March 31, 2017 and 2016 included costs related to stock based compensation of $0.4 million and $0.3 million, 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 to six 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 $8.4 million and $9.4 million for the three months ended March 31, 2017 and 2016, respectively.

 

 Note 8 – Goodwill 

  

The carrying amount of goodwill as of March 31, 2017, was as follows:



 

 



 

 



 

Amount



 

(In thousands)

Balance as of December 31, 2016

$

253,197 

Acquisitions

 

 -

Foreign currency translation impact

 

1,326 

Balance as of March 31, 2017 (unaudited)

$

254,523 



The excess purchase price over the fair value of assets acquired is recorded as goodwill. As we have one operating segment comprised of components with similar economic characteristics, 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, 2017.  No impairment of goodwill was identified during 2016 or 2017. (See “Note 17 – Acquisitions” of Notes to Consolidated Financial Statements for additional discussion related to our recent acquisitions).

   



16


 

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 $12.1 million and $11.7 million unrecognized tax benefits at March 31, 2017 and December 31, 2016, respectively, all of which would affect our effective income tax rate if recognized. We recorded a gross increase in unrecognized tax benefits of $260,000 for the three month period ended March 31, 2017, as a result of tax positions related to the current year. As of March 31, 2017, it is reasonably possible that we will recognize tax benefits in the amount of $3.7 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, 2017, we had approximately $1.2 million accrued for interest related to uncertain tax positions. The tax years 2008 through 2017 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 22% and 24% for the three month periods ended March 31, 2017 and 2016, respectively. For the three months ended March 31, 2017, our effective tax rate was lower than the U.S. federal statutory rate of 35% as a result of an enhanced deduction for certain research and development expenses, profits in foreign jurisdictions with reduced income tax rates, the research and development tax credit, and a tax benefit from disqualifying dispositions of equity awards that do not ordinarily result in a tax benefit. 



Our earnings in Hungary are subject to a statutory tax rate of 9%. 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. The tax position of our Hungarian operations resulted in income tax benefits of $2.9 million and $1.9 million for the three month periods ended March 31, 2017 and 2016, 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 $0.6 million and $0.3 million for the three month periods ended March 31, 2017 and 2016, 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.

     

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 OCI, net of tax, for the three month periods ended March 31, 2017 and 2016, consisted of the following:  





 

 

 

 

 

 

 

 



 

March 31, 2017



 

(Unaudited)

(In thousands)

 

Currency translation adjustment

 

Investments

 

Derivative instruments

 

Accumulated other comprehensive income/(loss)

Balance as of December 31, 2016

$

(37,174)

$

(669)

 

3,222 

$

(34,621)

Current-period other comprehensive income (loss)

 

3,961 

 

(4)

 

(1,845)

 

2,112 

Reclassified from accumulated OCI into income

 

-

 

-

 

(967)

 

(967)

Income tax (benefit) expense

 

65 

 

(20)

 

(1,002)

 

(957)

Balance as of  March 31, 2017

$

(33,278)

$

(653)

$

1,412 

$

(32,519)















17


 



 

 

 

 

 

 

 

 



 

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 (loss) 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)





  

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.



Restricted stock plan  

  

Our stockholders approved our 2005 Incentive Plan (the “2005 Plan”) in May 2005. At the time of approval, 4,050,000 shares of our common stock were reserved for issuance under this plan, as well as the number of shares which had been reserved but not issued under the 1994 Incentive Stock Option Plan (the “1994 Plan”) (our plan which terminated in May 2005), and any shares that returned to the 1994 Plan as a result of termination of options or repurchase of shares issued under such plan. The 2005 Plan, administered by the Compensation Committee of the Board of Directors, provided for granting of incentive awards in the form of restricted stock and RSUs to directors, executive officers and employees of the Company and its subsidiaries. Awards vest over a three, five or ten-year period, beginning on the date of grant. Vesting of ten year awards may accelerate based on the Company’s previous year’s earnings and growth but ten year awards cannot accelerate to vest over a period of less than five years. The 2005 Plan terminated on May 11, 2010, except with respect to outstanding awards previously granted thereunder. There were 3,362,304 shares of common stock that were reserved but not issued under the 2005 Plan as of May 11, 2010.  

  

Our stockholders approved our 2010 Incentive Plan (the “2010 Plan”) on May 11, 2010. At the time of approval, 3,000,000 shares of our common stock were reserved for issuance under this plan, as well as the 3,362,304 shares of common stock that were reserved but not issued under the 1994 Plan and the 2005 Plan as of May 11, 2010, and any shares that are returned to the 1994 Plan and the 2005 Plan as a result of the forfeiture or termination of options or RSUs or repurchase of shares issued under these plans. The 2010 Plan, administered by the Compensation Committee of the Board of Directors, provides for granting of incentive awards in the form of restricted stock and RSUs to employees, directors and consultants of the Company and employees and consultants of any parent or subsidiary of the Company. Awards vest over a three, five or ten-year period, beginning on the date of grant. Vesting of ten year awards may accelerate based on the Company’s previous year’s earnings and growth but ten year awards cannot accelerate to vest over a period of less than five years. The 2010 Plan terminated on May 12, 2015, except with respect to the outstanding awards previously granted thereunder. There were 2,518,416 shares of common stock that were reserved but not issued under the 2010 Plan as of May 12, 2015.



Our stockholders approved our 2015 Equity Incentive Plan (the “2015 Plan”) on May 12, 2015. At the time of approval, 3,000,000 shares of our common stock were reserved for issuance under this plan, as well as the 2,518,416 shares of common stock that were reserved but not issued under the 2010 Plan as of May 12, 2015, and any shares that were returned to the 1994, 2005, and the 2010 Plans as a result of the forfeiture or termination of options or RSUs or repurchase of shares issued under these plans. The 2015 Plan, administered by the Compensation Committee of the Board of Directors, provides for the granting of incentive awards in the form of restricted stock and RSUs to employees, directors and consultants of the Company and employees and consultants of any parent or subsidiary of the Company. Awards vest over a three, four, five or ten-year period, beginning on the date of grant. Vesting of ten year awards may accelerate based on the Company’s previous year’s earnings and growth but ten year awards cannot accelerate to vest over a period of less than five years. There were 4,730,268 shares available for grant under the 2015 Plan at March 31, 2017.   

18


 

    

During the three month period ended March 31, 2017, we did not make any material changes in accounting principles or methods of estimates related to the 2005 Plan, the 2010 and the 2015 Plans. See “Note 1 – Basis of Presentation” of Notes to Consolidated Financial Statements for our discussion of the adoption of recent ASUs related to our accounting for stock-based compensation.



Employee stock purchase plan  



Our employee stock purchase plan permits substantially all domestic employees and employees of designated subsidiaries to acquire our common stock at a purchase price of 85% of the lower of the market price at the beginning or the end of the purchase period. The plan has quarterly purchase periods generally beginning on February 1, May 1, August 1 and November 1 of each year. Employees may designate up to 15% of their compensation for the purchase of common stock under this plan. On May 13, 2014, our stockholders approved an additional 3,000,000 shares for issuance under our employee stock purchase plan. At March 31, 2017, we had 605,695 shares of common stock reserved for future issuance under this plan. We issued 327,356 shares under this plan in the three month period ended March 31, 2017. The weighted average purchase price of the employees’ purchase rights was $23.88 per share during the three month period ended March 31, 2017. During the three month period ended March 31, 2017, we did not make any changes in accounting principles or methods of estimates with respect to such plan.  



 Authorized Preferred Stock and Preferred Stock Purchase Rights Plan  

  

We have 5,000,000 authorized shares of preferred stock. On January 21, 2004, our Board of Directors designated 750,000 of these shares as Series A Participating Preferred Stock in conjunction with the adoption of a Preferred Stock Rights Agreement which expired on May 10, 2014. There were no shares of preferred stock issued and outstanding at March 31, 2017.



Stock repurchases and retirements

   

From time to time, our Board of Directors has authorized various programs for our repurchase of shares of our common stock depending on market conditions and other factors. Under the current program, we did not make any share repurchases during the three month period ended March 31, 2017. We repurchased a total of 170,790 shares of our common stock at a weighted average price per share of $27.18 during the three month period ended March 31, 2016. At March 31, 2017, there were 1,134,247 shares remaining available for repurchase under this program. This repurchase program does not have an expiration date. 

     

Note 12 – Segment and geographic information 

  

We operate as one operating segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker, who is our chief executive officer, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker evaluates our financial information and resources and assesses the performance of these resources on a consolidated basis. Since we operate in one operating segment, all required financial segment information can be found in the condensed consolidated financial statements and the notes thereto.

  

We sell our product in three geographic regions which consist of Americas; Europe, Middle East, India, and Africa (EMEIA); and Asia-Pacific (APAC). Our sales to these regions share similar economic characteristics, similar product mix, similar customers, and similar distribution methods. Revenue from the sale of our products, which are similar in nature, and software maintenance is reflected as total net sales in our Consolidated Statements of Income.    



  Total net sales by the major geographic areas in which we operate, are as follows:





 

 

 

 



 

Three Months Ended March 31,

(In thousands)

 

(Unaudited)



 

2017

 

2016

Net sales:

 

 

 

 

Americas

$

118,441 

$

110,851 

EMEIA

 

94,738 

 

91,852 

APAC

 

86,927 

 

84,474 



$

300,106 

$

287,177 



 

 

 

 



 

 

 

 

Based on the billing location of the customer, total sales outside the U.S. for the three month periods ended March 31, 2017 and 2016 were $189 million and $183 million, respectively. Total property and equipment, net, outside the U.S. was $133 million as of March 31, 2017 and December 31, 2016.

19


 



Note 13 - Debt



On May 9, 2013, we entered into a Loan Agreement (the “Loan Agreement”) with Wells Fargo Bank (the “Lender”). The Loan Agreement provided for a $50 million unsecured revolving line of credit with a scheduled maturity date of May 9, 2018 (the “Maturity Date”). On October 29, 2015, we entered into a First Amendment to Loan Agreement (the “Amendment”) with the Lender, which amended our Loan Agreement to among other things, (i) increase the unsecured revolving line of credit from $50.0 million to $125.0 million, (ii) extend the Maturity Date of the line of credit from May 9, 2018 to October 29, 2020, and (iii) provide us with an option to request increases to the line of credit of up to an additional $25.0 million in the aggregate, subject to consent of the Lender and terms and conditions to be mutually agreed between us and the Lender.



The loans bear interest, at our option, at a base rate determined in accordance with the Loan Agreement, plus a spread of 0.0% to 0.5%, or a LIBOR rate plus a spread of 1.125% to 2.0%, in each case with such spread determined based on a ratio of consolidated indebtedness to EBITDA, determined in accordance with the Loan Agreement. Principal, together with all accrued and unpaid interest, is due and payable on the Maturity Date. We are also obligated to pay a quarterly commitment fee, payable in arrears, based on the available commitments at a rate of 0.175% to 0.300%, with such rate determined based on the ratio described above. The Loan Agreement contains customary affirmative and negative covenants. The affirmative covenants include, among other things, delivery of financial statements, compliance certificates and notices; payment of taxes and other obligations; maintenance of existence; maintenance of properties and insurance; and compliance with applicable laws and regulations. The negative covenants include, among other things, limitations on indebtedness, liens, mergers, consolidations, acquisitions and sales of assets, investments, changes in the nature of the business, affiliate transactions and certain restricted payments. The Loan Agreement also requires us to maintain a ratio of consolidated indebtedness to EBITDA equal to or less than 3.25 to 1.00, and a ratio of consolidated EBITDA to interest expense greater than or equal to 3.00 to 1.00, in each case determined in accordance with the Loan Agreement. As of March 31, 2017, we were in compliance with all covenants in the Loan Agreement.



The Loan Agreement contains customary events of default including, among other things, payment defaults, breaches of covenants or representations and warranties, cross-defaults with certain other indebtedness, bankruptcy and insolvency events, judgment defaults and change in control events, subject to grace periods in certain instances. Upon an event of default, the lender may declare all or a portion of the outstanding obligations payable by us to be immediately due and payable and exercise other rights and remedies provided for under the Loan Agreement. Under certain circumstances, a default interest rate will apply on all obligations during the existence of an event of default under the Loan Agreement at a per annum rate of interest equal to 2.00% above the otherwise applicable interest rate.



Proceeds of loans made under the Loan Agreement may be used for working capital and other general corporate purposes. We may prepay the loans under the Loan Agreement in whole or in part at any time without premium or penalty. Certain of our existing and future material domestic subsidiaries are required to guaranty our obligations under the Loan Agreement.



As of March 31, 2017, we had outstanding $25 million in borrowings under this line of credit. During the three month periods ended March 31, 2017 and March 31, 2016, we incurred interest expense related to our outstanding borrowings of $178,000 and $135,000, respectively. As of March 31, 2017 and March 31, 2016, the weighted-average interest rate on the revolving line of credit was 2.0% and 1.6%, respectively. These charges are included in “Other income (loss), net” in our Consolidated Statements of Income.

 

Note 14 – Commitments and contingencies