Document



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, 2018 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  
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12521953&doc=12    
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) 683-0100  
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 every Interactive Data File required to be submitted 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 such files). Yes☒ No☐  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth 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 October 26, 2018
Common Stock - $0.01 par value
132,432,594

1


NATIONAL INSTRUMENTS CORPORATION
  
INDEX  
Page No.

 
 
 

 
 

 

September 30, 2018 (unaudited) and December 31, 2017

 
 

 

(unaudited) for the three and nine months ended September 30, 2018 and 2017

 
 

 

(unaudited) for the three and nine months ended September 30, 2018 and 2017

 
 

 

(unaudited) for the three and nine months ended September 30, 2018 and 2017

 
 


 
 

 
 

 
 

 
 

 
 
 

 
 

 
 

 
 

 
 

 
 

 
 



2


PART I - FINANCIAL INFORMATION  

ITEM 1. Financial Statements
NATIONAL INSTRUMENTS CORPORATION  
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

September 30,
 
December 31,

2018
 
2017
Assets
(unaudited)
 
 

Current assets:
 

 
 

Cash and cash equivalents
$
311,381

 
$
290,164

Short-term investments
171,028

 
121,888

Accounts receivable, net
239,468

 
248,825

Inventories, net
192,412

 
184,592

Prepaid expenses and other current assets
62,447

 
48,621

Total current assets
976,736

 
894,090

Property and equipment, net
245,898

 
249,715

Goodwill
263,119

 
266,783

Intangible assets, net
116,061

 
123,293

Other long-term assets
28,106

 
32,553

Total assets
$
1,629,920

 
$
1,566,434

Liabilities and stockholders' equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued expenses
$
51,321

 
$
49,733

Accrued compensation
52,182

 
43,309

Deferred revenue - current
120,398

 
120,638

Other current liabilities
17,508

 
23,782

Other taxes payable
34,654

 
31,793

Total current liabilities
276,063

 
269,255

Deferred income taxes
36,638

 
33,609

Liability for uncertain tax positions
9,045

 
10,158

Income tax payable - long-term
74,015

 
81,515

Deferred revenue - long-term
31,762

 
33,742

Other long-term liabilities
5,488

 
10,134

Total liabilities
433,011

 
438,413

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; 132,432,594 shares and 130,978,947 shares issued and outstanding, respectively 
1,324

 
1,310

Additional paid-in capital
881,417

 
829,979

Retained earnings
329,342

 
313,241

Accumulated other comprehensive loss
(15,174
)
 
(16,509
)
Total stockholders’ equity
1,196,909

 
1,128,021

Total liabilities and stockholders’ equity
$
1,629,920

 
$
1,566,434


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,

 
2018
 
2017
 
2018
 
2017

 
 

 
 

 
 

 
 

Net sales:
 
 

 
 

 
 

 
 

Product
 
$
310,216

 
$
291,891

 
$
897,355

 
$
853,219

Software maintenance
 
35,911

 
29,030

 
101,678

 
86,416

Total net sales
 
346,127

 
320,921

 
999,033

 
939,635


 
 

 
 

 
 

 
 

Cost of sales:
 
 

 
 

 
 

 
 

Product
 
87,082

 
81,641

 
239,205

 
235,989

Software maintenance
 
1,933

 
2,110

 
6,493

 
6,744

Total cost of sales
 
89,015

 
83,751

 
245,698

 
242,733


 
 

 
 

 
 

 
 

Gross profit
 
257,112

 
237,170

 
753,335

 
696,902


 
 

 
 

 
 

 
 

Operating expenses:
 
 

 
 

 
 

 
 

Sales and marketing
 
118,220

 
116,661

 
365,474

 
358,335

Research and development
 
66,170

 
56,526

 
194,921

 
171,701

General and administrative
 
26,712

 
26,468

 
81,882

 
78,400

Total operating expenses
 
211,102

 
199,655

 
642,277

 
608,436


 
 

 
 

 
 

 
 

Operating income
 
46,010

 
37,515

 
111,058

 
88,466


 
 

 
 

 
 

 
 

Other income:
 
 

 
 

 
 

 
 

Interest income
 
1,539

 
657

 
3,845

 
1,509

Net foreign exchange (loss) gain
 
(956
)
 
1,096

 
(2,082
)
 
1,624

Other gain (loss), net
 
1,782

 
(1,153
)
 
169

 
(957
)
Income before income taxes
 
48,375

 
38,115

 
112,990

 
90,642

Provision for income taxes
 
5,181

 
4,726

 
14,474

 
13,949


 
 

 
 

 
 

 
 

Net income
 
$
43,194

 
$
33,389

 
$
98,516

 
$
76,693


 
 

 
 

 
 

 
 

Basic earnings per share
 
$
0.33

 
$
0.26

 
$
0.75

 
$
0.59


 
 

 
 

 
 

 
 

Weighted average shares outstanding - basic
 
132,357

 
130,660

 
131,792

 
130,103


 
 

 
 

 
 

 
 

Diluted earnings per share
 
$
0.32

 
$
0.25

 
$
0.74

 
$
0.59


 
 

 
 

 
 

 
 

Weighted average shares outstanding - diluted
 
133,197

 
131,617

 
133,067

 
131,050


 
 

 
 

 
 

 
 

Dividends declared per share
 
$
0.23

 
$
0.21

 
$
0.69

 
$
0.63


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,

 
2018
 
2017
 
2018
 
2017

 
 

 
 

 
 

 
 

Net income
 
$
43,194

 
$
33,389

 
$
98,516

 
$
76,693

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

 
 

 
 

 
 

Foreign currency translation adjustment
 
(1,359
)
 
6,226

 
(7,360
)
 
21,890

Unrealized gain (loss) on securities available-for-sale
 
154

 
162

 
(404
)
 
187

Unrealized gain (loss) on derivative instruments
 
3,316

 
(3,136
)
 
11,578

 
(9,470
)
Other comprehensive income, before tax
 
2,111

 
3,252

 
3,814

 
12,607

Tax expense (benefit) related to items of other comprehensive income
 
720

 
(1,186
)
 
2,479

 
(3,333
)
Other comprehensive income, net of tax
 
1,391

 
4,438

 
1,335

 
15,940

Comprehensive income
 
$
44,585

 
$
37,827

 
$
99,851

 
$
92,633


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,

 
2018
 
2017
Cash flow from operating activities:
 
 

 
 

Net income
 
$
98,516

 
$
76,693

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

 
 

Depreciation and amortization
 
53,735

 
54,794

Stock-based compensation
 
27,492

 
21,272

Deferred income taxes
 
732

 
(4,290
)
Changes in operating assets and liabilities
 
6,862

 
(1,013
)
Net cash provided by operating activities
 
187,337

 
147,456


 
 

 
 

Cash flow from investing activities:
 
 

 
 

Capital expenditures
 
(27,373
)
 
(24,084
)
Capitalization of internally developed software
 
(13,152
)
 
(34,406
)
Additions to other intangibles
 
(5,165
)
 
(1,379
)
Purchases of short-term investments
 
(172,462
)
 
(62,845
)
Sales and maturities of short-term investments
 
122,726

 
45,582

Net cash used in investing activities
 
(95,426
)
 
(77,132
)

 
 

 
 

Cash flow from financing activities:
 
 

 
 

Principal payments on revolving line of credit
 

 
(10,000
)
Proceeds from issuance of common stock
 
24,424

 
22,870

Dividends paid
 
(91,034
)
 
(82,051
)
Net cash used in financing activities
 
(66,610
)
 
(69,181
)

 
 

 
 

Effect of exchange rate changes on cash
 
(4,084
)
 
7,768


 
 

 
 

Net change in cash and cash equivalents
 
21,217

 
8,911

Cash and cash equivalents at beginning of period
 
290,164

 
285,283

Cash and cash equivalents at end of period
 
$
311,381

 
$
294,194

 
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, 2017, 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, 2018 and December 31, 2017, the results of our operations and comprehensive income for three and nine months ended September 30, 2018 and 2017, and the cash flows for the nine months ended September 30, 2018 and 2017. Our operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States.

Out of Period Adjustments

During the three months ended September 30, 2018, we recorded a non-cash out of period adjustment of $2.3 million related to the deferral of gross profit associated with intercompany purchases from our equity-method investee that should have been recognized when realized, through transactions with third-parties, beginning in January 2011. This adjustment was recorded as an increase to "Other long-term assets" on our consolidated balance sheet and an increase to "Other gain (loss), net" on our consolidated statements of income. We evaluated the adjustment from a qualitative and quantitative perspective and concluded that the amount of income was not material to any individual prior quarter or year and that the cumulative out of period adjustment was not expected to be material to our full year 2018 results.

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 includes 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 months ended September 30, 2018 and 2017, are as follows:


 
Three Months Ended September 30,
 
Nine Months Ended September 30,

 
(In thousands)
 
(In thousands)

 
(Unaudited)
 
(Unaudited)

 
2018
 
2017
 
2018
 
2017
Weighted average shares outstanding-basic
 
132,357

 
130,660

 
131,792

 
130,103

Plus: Common share equivalents
 
 

 
 

 
 

 
 

RSUs
 
840

 
957

 
1,275

 
947

Weighted average shares outstanding-diluted
 
133,197

 
131,617

 
133,067

 
131,050

  
Stock awards to acquire 36,600 shares and 40,700 shares for the three months ended September 30, 2018 and 2017, respectively, and 537,000 shares and 22,300 shares for the nine months ended September 30, 2018 and 2017, respectively, were excluded in the computations of diluted EPS because the effect of including the stock awards would have been anti-dilutive.

Summary of Significant Accounting Policies

We adopted ASU 2014-09, Revenue from Contracts with Customers and all the related amendments ("new revenue standard") as of January 1, 2018. The impact of this new guidance on our accounting policies and operating results is described below. There were no other significant changes in our accounting policies during the nine months ended September 30, 2018 compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2017.

7



Accounts Receivable, net

Accounts receivable are recorded net of allowances for doubtful accounts. Our allowance for doubtful accounts is based on historical experience. We analyze historical bad debts, customer concentrations, customer creditworthiness and current economic trends when evaluating the adequacy of our allowance for doubtful accounts. Unbilled receivables represent amounts for which revenue has been recognized but which have not yet been invoiced to the customer. The current portion of unbilled receivables is included in "accounts receivable, net" on the consolidated balance sheet and is not material.

Sales Tax

Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected from our customers, are excluded from revenue.

Shipping and Handling Costs

Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are in included in cost of sales.

Recently Adopted Accounting Pronouncements

Revenue from Contracts with Customers

On January 1, 2018, we adopted the new revenue standard using the modified retrospective transition method. Under this method, we evaluated all contracts that were in effect at the beginning of 2018 as if those contracts had been accounted for under the new revenue standard. We did not evaluate individual modifications for those periods prior to the adoption date, but the aggregate effect of all modifications as of the adoption date and such effects are provided below. Under the modified retrospective transition approach, periods prior to the adoption date were not adjusted and continue to be reported in accordance with historical GAAP. A cumulative catch-up adjustment was recorded to beginning retained earnings to reflect the impact of all existing arrangements under the new revenue standard.

We do not expect the impact of the adoption of the new revenue standard to be material to our annual net income on an ongoing basis. A majority of our sales revenue continues to be recognized when products are shipped from our manufacturing facilities. Historically, we have had to defer revenue for certain types of licenses arrangements and recognize revenue for such licenses ratably over the license term. Under the new revenue standard, we are no longer required to establish vendor-specific objective evidence ("VSOE") to recognize software license revenue separately from the other elements, and we are able to recognize all software license revenue once the customer obtains control of the license, which will generally occur at the start of each license term.

The cumulative effects of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of ASU 2014-09, Revenue - Revenue from Contracts with Customers were as follows (in thousands):

(in thousands)
Balance at December 31, 2017
Adjustments Due to ASU 2014-09
Balance at January 1, 2018
Balance Sheet
 
 
 
Assets
 
 
 
Accounts receivable, net
$
248,825

2,399

$
251,224

Other long-term assets
32,553

(106
)
32,447

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Deferred revenue - current
120,638

(9,067
)
111,571

Deferred revenue - long-term
33,742

(997
)
32,745

Other current liabilities
23,782

2,100

25,882

Deferred income taxes
33,609

1,638

35,247

Retained earnings
$
313,241

8,619

$
321,860


8



The following tables present the amounts by which financial statement line items were affected in the current period due to the adoption of ASU 2014-09. Our historical net cash flows are not impacted by this accounting change.

(In thousands, except per share data)
For the three month period ended September 30, 2018
 
For the nine month period ended September 30, 2018
 
Increase / (Decrease)
 
Increase / (Decrease)
Consolidated Statements of Income*
 
 
 
Net Sales
 
 
 
Products
$
(626
)
 
$
6,828

Software Maintenance

 

Total net sales
(626
)
 
6,828

 
 
 
 
Operating Expenses
8

 
(198
)
 
 
 
 
Operating Income
(634
)
 
7,026

 
 
 
 
Provision for income taxes
(109
)
 
1,173

 
 
 
 
Net income
$
(525
)
 
$
5,853

 
 
 
 
Basic earnings per share
 
0.04
Diluted earnings per share
 
0.04
*   Excludes line items that were not materially affected by our adoption of ASU 2014-09.
(in thousands)
September 30, 2018
 
Increase / (Decrease)
Consolidated Balance Sheet*
 
Assets
 
Accounts receivable, net
$
2,093

Other long-term assets
92

 
 
Liabilities and Stockholder's Equity
 
Deferred revenue - current
(14,521
)
Deferred revenue - long-term
(2,620
)
Other current liabilities
3,273

Deferred income taxes
1,638

Retained earnings
$
14,415

*   Excludes line items that were not materially affected by our adoption of ASU 2014-09. Balance sheet line item amounts include the cumulative-effect adjustment recorded on January 1, 2018.




9


Recently Issued Accounting Pronouncements

In August 2018, the SEC issued Release No. 33-10532 that amends and clarifies certain financial reporting requirements. The principal change to our financial reporting will be the inclusion of the annual disclosure requirement of changes in stockholders’ equity in Rule 3-04 of Regulation S-X to interim periods. We will adopt this new rule beginning with our financial reporting for the quarter ended March 31, 2019. Upon adoption, we will include our Consolidated Statements of Stockholders' Equity with each quarterly filing on Form 10-Q.

In January 2018, the FASB issued ASU 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which gives entities the option to reclassify to retained earnings tax effects resulting from the Tax Cuts and Jobs Act (the "Act") related to items that the FASB refers to as having been stranded in accumulated other comprehensive income ("OCI"). The new guidance may be applied retrospectively to each period in which the effect of the Act is recognized or in the period of adoption. We must adopt this guidance for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted for periods for which financial statements have not yet been issued or made available for issuance, including the period the Act was enacted. The guidance, when adopted, will require new disclosures regarding a company’s accounting policy for releasing the tax effects in accumulated OCI and permit the company the option to reclassify to retained earnings the tax effects resulting from the Act that are stranded in accumulated OCI. The adoption of ASU 2018-02 is not expected to have a material effect on our consolidated financial statements. We do not plan to adopt the new standard prior to the required effective date and we do not plan to elect the option to reclassify to retained earnings the tax effects resulting from the Act that are stranded in accumulated OCI.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The ASU simplifies certain aspects of hedge accounting and improves disclosures of hedging arrangements through the elimination of the requirement to separately measure and report hedge ineffectiveness. The ASU generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item in order to align financial reporting of hedge relationships with the associated economic results. Entities must apply the amendments to cash flow and net investment hedge relationships that exist on the date of adoption using a modified retrospective approach. The presentation and disclosure requirements must be applied prospectively. Our effective date for adoption of this guidance is our fiscal year beginning January 1, 2019. We are currently evaluating the effect that this guidance will have on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes ASC 840, 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 do not expect to adopt the new standard prior to the required effective date. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures. Based on our initial assessment, we expect that the adoption of this standard will have a material impact on our balance sheet but that it will not have a material impact on our consolidated statements of income, comprehensive income, or cash flows. We have completed a qualitative and quantitative assessment of our lease portfolio and are in the process of testing our new real estate lease accounting system, collecting data for leases entered into during 2018 and implementing new processes and controls to account for our leases in accordance with the new standard. As permitted by ASU 2018-11, Leases (Topic 842): Targeted Improvements, we do not expect to adjust comparative-period financial statements.

10




Note 2 - Revenue

Revenue Recognition

Revenue is recognized upon transfer of control of the promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of our products or services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.

Nature of Goods and Services

We derive revenues from two primary sources: products and software maintenance.

Product revenues are primarily generated from the sale of off-the-shelf modular test and measurement hardware components and related drivers, and application software licenses. Sales of most hardware components may also include optional extended hardware warranties, which typically provide additional service-type coverage for three years from the purchase date. Our software licenses typically provide for a perpetual right to use our software. We also offer some term-based software licenses that expire, which are referred to as subscription arrangements. We do not customize software for customers and installation services are not required. The software is delivered before related services are provided and is functional without professional services, updates and technical support. We sell our customer support contracts as a percentage of net software purchases the support is related. Revenues from offerings related to our hardware and software products such as extended hardware warranties, training, consulting and installation services are not significant and presented within product revenues, as further discussed below.

Software maintenance revenues consists of post contract customer support that provides the customer with unspecified upgrades and technical support. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices of software licenses are estimated based on our established pricing practices and maximize the use of observable inputs. Standalone selling prices of hardware products are typically estimated based on observable transactions when these services are sold on a standalone basis. Our typical performance obligations include the following:

Performance Obligation
When performance obligation is typically satisfied
When payment is typically due
How standalone selling price is typically estimated
Product revenue
Modular hardware
When customer obtains control of the product (point in time)
Within 30-90 days of shipment
Observable in transactions without multiple performance obligations
Software licenses
When software media is delivered to customer or made available for download electronically, and the applicable license period has begun (point-in-time)
Within 30-90 days of the beginning of license period
Established pricing practices for software licenses bundled with maintenance, which are separately observable in renewal transactions
Extended hardware warranty
Ratably over the course of the support contract (over time)
At the beginning of the contract period
Observable in renewal transactions
Other related support offerings
As work is performed (over time) or course is delivered (point in time)
Within 30-90 days of delivery
Observable in transactions without multiple performance obligations
Software maintenance revenue
Software maintenance
Ratably over the course of the support contract (over time)
At the beginning of the contract period
Observable in renewal transactions


11




Significant Judgments

Judgment is required to determine the standalone selling price ("SSP") for each distinct performance obligation. We use a single amount to estimate SSP for items that are not sold separately, including perpetual and term licenses sold with software maintenance. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount that needs to be allocated based on the relative SSP of the various products and services.

Due to the various benefits from and the nature of our enterprise agreement program, judgment is required to assess the pattern of delivery, including the exercise pattern of certain benefits across our portfolio of customers. Additionally, whether a renewal option represents a distinct performance obligation could significantly impact the timing of revenue recognized.

Our products are generally sold with a right of return which is accounted for as variable consideration when estimating the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period as additional information becomes available and only to the extent that it is probable that a significant reversal of any incremental revenue will not occur. During the first quarter of 2018, we began to reclassify our allowance for sales returns to
"other current liabilities" from "accounts receivable, net" due to the adoption of the new revenue standard.

Disaggregation of Revenues

We disaggregate revenue from contracts with customers based on the timing of transfer of goods or services to customers (point-in-time or over time) and geographic region based on the billing location of the customer. The geographic regions that are tracked are the Americas (United States, Canada and Latin America), EMEIA (Europe, Middle East, India and Africa) and APAC (Australia, New Zealand, Southeast Asia and China). Total net sales based on the disaggregation criteria described above are as follows:

 
 
Three Months Ended September 30,
 
(In thousands)
 
 
(Unaudited)
 

 
2018
 
2017 (1)
 
 
 
 
 
 
 
 
 
Net sales:
 
Point-in-Time
Over Time
Total
 
Point-in-Time
Over Time
Total
Americas
 
$
115,214

27,702

$
142,916

 
$
108,988

24,203

$
133,191

EMEIA
 
79,952

19,461

99,413

 
73,459

19,818

93,277

APAC
 
95,837

7,961

103,798

 
84,678

9,775

94,453

Total net sales (2)
 
$
291,003

55,124

$
346,127

 
$
267,125

53,796

$
320,921

(1) As discussed in "Note 1 - Basis of presentation", prior periods have not been adjusted for adoption of ASU 2014-09
(2) Net sales contains hedging gains and losses, which do not represent revenues recognized from customers. See "Note 5 - Derivative instruments and hedging activities" for more information on the impact of our hedging activities on our results of operations

 
 
Nine Months Ended September 30,
 
(In thousands)
 
 
(Unaudited)
 

 
2018
 
2017 (1)
 
 
 
 
 
 
 
 
 
Net sales:
 
Point-in-Time
Over Time
Total
 
Point-in-Time
Over Time
Total
Americas
 
$
317,426

75,003

$
392,429

 
$
300,043

73,234

$
373,277

EMEIA
 
257,346

57,520

314,866

 
232,270

56,295

288,565

APAC
 
267,773

23,965

291,738

 
251,626

26,167

277,793

Total net sales (2)
 
$
842,545

156,488

$
999,033

 
$
783,939

155,696

$
939,635

(1) As discussed in "Note 1 - Basis of presentation", prior periods have not been adjusted for adoption of ASU 2014-09
(2) Net sales contains hedging gains and losses, which do not represent revenues recognized from customers. See "Note 5 - Derivative instruments and hedging activities" for more information on the impact of our hedging activities on our results of operations


12




Information about Contract Balances

Amounts collected in advance of services being provided are accounted for as deferred revenue. Nearly all of our deferred revenue balance is related to extended hardware and software maintenance contracts. Payment terms and conditions vary by contract type, although payment is typically due within 30 to 90 days of contract inception. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers, such as invoicing at the beginning of a subscription term with a portion of the revenue recognized ratably over the contract period, or to provide customers with financing, such as multi-year on-premises licenses that are invoiced annually with revenue recognized upfront.

Changes in deferred revenue, current and long-term, during the nine months ended September 30, 2018 were as follows:


Amount

(In thousands)
Deferred Revenue at December 31, 2017
$
154,380

  Impact of adopting new revenue standard
(10,064
)
Deferred Revenue at January 1, 2018
$
144,316

   Deferral of revenue billed in current period, net of recognition
116,507

   Recognition of revenue deferred in prior periods
(105,291
)
   Foreign currency translation impact
(3,372
)
Balance as of September 30, 2018 (unaudited)
$
152,160


For the nine months ended September 30, 2018, revenue recognized from performance obligations related to prior periods (for example, due to changes in transaction price) was not material. Amounts recognized as revenue in excess of amounts billed are recorded as unbilled receivables. Unbilled receivables which are anticipated to be invoiced in the next twelve months are included in "accounts receivable, net" on the consolidated balance sheet. Based on the nature of our contracts with customers, we do not typically recognize unbilled receivables related to revenues recognized in excess of amounts billed. For the nine months ended September 30, 2018, amounts recognized related to unbilled receivables were not material.

Unsatisfied Performance Obligations

Revenue expected to be recognized in any future period related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less, and excluding contracts where revenue is recognized as invoiced, was approximately $54.9 million as of September 30, 2018. Since we typically invoice customers at contract inception, this amount is included in our current and non-current deferred revenue balances. As of September 30, 2018, we expect to recognize approximately 12% of the revenue related to these unsatisfied performance obligations during the remainder of 2018, 44% during 2019, and 44% thereafter.

Assets Recognized from the Costs to Obtain a Contract with a Customer

We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs meet the requirements to be capitalized. Capitalized incremental costs related to initial contracts and renewals are amortized over the same period because the commissions paid on both the initial contract and renewals are commensurate with one another. Total capitalized costs to obtain a contract were immaterial during the periods presented and are included in other long-term assets on our consolidated balance sheets.

13





Practical Expedients

As discussed in "Note 1 - Basis of presentation" and elsewhere in "Note 2 - Revenue," we have elected the following practical expedients in accordance with the new revenue standard:

We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses.
We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
We do not consider the time value of money for contracts with original durations of one year or less.



Note 3 – Short-term investments  
  
The following tables summarize unrealized gains and losses related to our short-term investments designated as available-for-sale:

 
As of September 30, 2018
(In thousands)
 
(Unaudited)

 
 
 
Gross
 
Gross
 
 

 
Adjusted Cost
 
Unrealized Gain
 
Unrealized Loss
 
Fair Value
Corporate bonds
 
$
147,158

 
$
211

 
$
(823
)
 
$
146,546

U.S. treasuries and agencies
 
24,468

 

 
(5
)
 
24,463

Time deposits
 
19

 

 

 
19

Total Short-term investments
 
$
171,645

 
$
211

 
$
(828
)
 
$
171,028

(In thousands)
 
As of December 31, 2017

 
 
 
Gross
 
Gross
 
 

 
Adjusted Cost
 
Unrealized Gain
 
Unrealized Loss
 
Fair Value
Corporate bonds
 
$
120,341

 
$
182

 
$
(395
)
 
$
120,128

Time deposits
 
1,760

 

 

 
1,760

Total Short-term investments
 
$
122,101

 
$
182

 
$
(395
)
 
$
121,888


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

 
As of September 30, 2018
(In thousands)
 
(Unaudited)

 
Adjusted Cost
 
Fair Value
Due in less than 1 year
 
$
67,609

 
$
67,511

Due in 1 to 5 years
 
104,036

 
103,517

Total available-for-sale debt securities
 
$
171,645

 
$
171,028


 
 
 
 
Due in less than 1 year
 
Adjusted Cost
 
Fair Value
Corporate bonds
 
$
43,122

 
$
43,029

U.S. treasuries and agencies
 
24,468

 
24,463

Time deposits
 
19

 
19

Total available-for-sale debt securities
 
$
67,609

 
$
67,511


 
 
 
 
Due in 1 to 5 years
 
Adjusted Cost
 
Fair Value
Corporate bonds
 
$
104,036

 
$
103,517

Total available-for-sale debt securities
 
$
104,036

 
$
103,517


14


        
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
 
September 30, 2018
 
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
 
$
120,395

 
$
120,395

 
$

 
$

Short-term investments available for sale:
 
 

 
 

 
 

 
 
Corporate bonds
 
146,546

 

 
146,546

 

U.S. treasuries and agencies
 
24,463

 

 
24,463

 

Time deposits
 
19

 
19

 

 

Derivatives
 
9,296

 

 
9,296

 

Total Assets 
 
$
300,719

 
$
120,414

 
$
180,305

 
$


 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Derivatives
 
$
(1,724
)
 
$

 
$
(1,724
)
 
$

Total Liabilities 
 
$
(1,724
)
 
$

 
$
(1,724
)
 
$



15


(In thousands)
 
Fair Value Measurements at Reporting Date Using
Description
 
December 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
 
$
61,423

 
$
61,423

 
$

 
$

U.S. treasuries and agencies
 
39,461

 

 
39,461

 

Short-term investments available for sale:
 
 

 
 

 
 

 
 

Corporate bonds
 
120,128

 

 
120,128

 

Time deposits
 
1,760

 
1,760

 

 

Derivatives
 
7,232

 

 
7,232

 

Total Assets 
 
$
230,004

 
$
63,183

 
$
166,821

 
$


 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 

 
 

Derivatives
 
$
(12,743
)
 
$

 
$
(12,743
)
 
$

Total Liabilities 
 
$
(12,743
)
 
$

 
$
(12,743
)
 
$


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 of our short-term investments available-for-sale have contractual maturities of less than 60 months.  
  
Derivatives include foreign currency forward 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. 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 months ended September 30, 2018. There were no transfers in or out of Level 1 or Level 2 during the nine months ended September 30, 2018.  
  
As of September 30, 2018, 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, 2018 and December 31, 2017. 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.


16


We have operations in approximately 50 countries. Sales outside of the Americas accounted for approximately 59% and 58% of our net sales during the three months ended September 30, 2018 and 2017, and approximately 61% and 60% of our net sales during the nine months ended September 30, 2018 and 2017, 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 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 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 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 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. We purchase foreign currency forward contracts for up to 100% of our forecasted exposures in selected currencies (primarily in Euro, Japanese yen, Hungarian forint, British pound, Malaysian ringgit, Korean won and Chinese yuan) and limit the duration of these contracts to 36 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 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 designated as cash flow hedges with the following notional amounts:

(In thousands)
 
US Dollar Equivalent

 
As of September 30, 2018
 
As of December 31,

 
(Unaudited)
 
2017
Chinese yuan
 
$
64,020

 
$
39,197

Euro
 
164,488

 
177,406

Japanese yen
 
10,754

 
22,857

Hungarian forint
 
28,284

 
41,296

British pound
 
16,197

 
9,931

Malaysian ringgit
 
26,325

 
28,287

Korean won
 
10,984

 

Total forward contracts notional amount
 
$
321,052

 
$
318,974


17


  
The contracts in the foregoing table had contractual maturities of 27 months or less and 24 months or less at September 30, 2018 and December 31, 2017, respectively.  

At September 30, 2018, we expect to reclassify $5.1 million of gains on derivative instruments from accumulated OCI to net sales during the next twelve months when the hedged international sales occur, $0.2 million of gains on derivative instruments from accumulated OCI to cost of sales during the next twelve months when the cost of sales are incurred and $0.3 million of gains 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, 2018. Actual results may vary materially as a result of changes in the corresponding exchange rates subsequent to this date.  
  
The gains and losses recognized in earnings due to hedge ineffectiveness were not material for each of the nine months ended September 30, 2018 and 2017 and are included as a component of net income under the line item “net foreign exchange gain (loss).”

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 90 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, 2018 and December 31, 2017, we held foreign currency forward contracts that were not designated as hedging instruments with a notional amount of $52 million and $63 million, respectively.   
The following tables present the fair value of derivative instruments on our Consolidated Balance Sheets at September 30, 2018 and December 31, 2017, respectively.   

 
Asset Derivatives

 
September 30, 2018
 
December 31, 2017
(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
 
$
6,717

 
Prepaid expenses and other current assets
 
$
4,707

 
 
 
 
 
 
 
 
 
Foreign exchange contracts - LT forwards
 
Other long-term assets
 
2,016

 
Other long-term assets
 
2,339

Total derivatives designated as hedging instruments
 
 
 
$
8,733

 
 
 
$
7,046

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 

 
 
 
 

 
 
 
 
 
 
 
 
 
Foreign exchange contracts - ST forwards
 
Prepaid expenses and other current assets
 
$
563

 
Prepaid expenses and other current assets
 
$
187

Total derivatives not designated as hedging instruments
 
 
 
$
563

 
 
 
$
187

 
 
 
 
 
 
 
 
 
Total derivatives
 
 
 
$
9,296

 
 
 
$
7,233


18


   

 
Liability Derivatives

 
September 30, 2018
 
December 31, 2017
(In thousands)
 
(Unaudited)
 

 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
Derivatives designated as hedging instruments
 
 
 
 

 
 
 
 

Foreign exchange contracts - ST forwards
 
Other current liabilities
 
$
(1,078
)
 
Other current liabilities
 
$
(7,487
)

 
 
 
 

 
 
 
 

Foreign exchange contracts - LT forwards
 
Other long-term liabilities
 
(493
)
 
Other long-term liabilities
 
(3,959
)
Total derivatives designated as hedging instruments
 
 
 
$
(1,571
)
 
 
 
$
(11,446
)

 
 
 
 

 
 
 
 

Derivatives not designated as hedging instruments
 
 
 
 

 
 
 
 


 
 
 
 

 
 
 
 

Foreign exchange contracts - ST forwards
 
Other current liabilities
 
$
(153
)
 
Other current liabilities
 
$
(1,297
)
Total derivatives not designated as hedging instruments
 
 
 
$
(153
)
 
 
 
$
(1,297
)

 
 
 
 

 
 
 
 

Total derivatives
 
 
 
$
(1,724
)
 
 
 
$
(12,743
)

19


The following tables present the effect of derivative instruments on our Consolidated Statements of Income for three months ended September 30, 2018 and 2017, respectively:
September 30, 2018
(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
 
$
3,569

 
Net sales
 
$
1,424

 
Net foreign exchange gain/(loss)
 
$


 
 

 
 
 
 

 
 
 
 

Foreign exchange contracts - forwards
 
(96
)
 
Cost of sales
 
74

 
Net foreign exchange gain/(loss)
 


 
 

 
 
 
 

 
 
 
 

Foreign exchange contracts - forwards
 
(157
)
 
Operating expenses
 
111

 
Net foreign exchange gain/(loss)
 

Total
 
$
3,316

 
 
 
$
1,609

 
 
 
$

September 30, 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
 
$
(5,804
)
 
Net sales
 
$
(1,401
)
 
Net foreign exchange gain/(loss)
 
$


 
 

 
 
 
 

 
 
 
 

Foreign exchange contracts - forwards
 
1,421

 
Cost of sales
 
(105
)
 
Net foreign exchange gain/(loss)
 


 
 

 
 
 
 

 
 
 
 

Foreign exchange contracts - forwards
 
1,247

 
Operating expenses
 
(148
)
 
Net foreign exchange gain/(loss)
 

Total
 
$
(3,136
)
 
 
 
$
(1,654
)
 
 
 
$

(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, 2018
 
September 30, 2017

 
 
 
(Unaudited)
 
(Unaudited)
Foreign exchange contracts - forwards
 
Net foreign exchange gain/(loss)
 
$
865

 
(887
)

 
 
 
 

 
 

Total
 
 
 
$
865

 
$
(887
)

20


The following tables present the effect of derivative instruments on our Consolidated Statements of Income for the nine months ended September 30, 2018 and 2017, respectively:
September 30, 2018
(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
 
$
16,128

 
Net sales
 
$
(2,491
)
 
Net foreign exchange gain/(loss)
 
$


 
 

 
 
 
 

 
 
 
 

Foreign exchange contracts - forwards
 
(2,422
)
 
Cost of sales
 
717

 
Net foreign exchange gain/(loss)
 


 
 

 
 
 
 

 
 
 
 

Foreign exchange contracts - forwards
 
(2,128
)
 
Operating expenses
 
888

 
Net foreign exchange gain/(loss)
 

Total
 
11,578

 
 
 
$
(886
)
 
 
 
$

September 30, 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
 
$
(20,601
)
 
Net sales
 
$
1,348

 
Net foreign exchange gain/(loss)
 
$


 
 

 
 
 
 

 
 
 
 

Foreign exchange contracts - forwards
 
5,901

 
Cost of sales
 
(1,083
)
 
Net foreign exchange gain/(loss)
 


 
 

 
 
 
 

 
 
 
 

Foreign exchange contracts - forwards
 
5,230

 
Operating expenses
 
(1,127
)
 
Net foreign exchange gain/(loss)
 

Total
 
$
(9,470
)
 
 
 
$
(862
)
 
 
 
$

(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, 2018
 
September 30, 2017

 
 
 
(Unaudited)
 
(Unaudited)
Foreign exchange contracts - forwards
 
Net foreign exchange gain/(loss)
 
$
678

 
(4,065
)
Total
 
 
 
$
678

 
$
(4,065
)
໿

21


Note 6 – Inventories, net 
  
Inventories, net consist of the following: 


 
September 30, 2018
 
December 31,
(In thousands)
 
(Unaudited)
 
2017

 
 

 
 

Raw materials  
 
$
100,603

 
$
91,513

Work-in-process
 
10,291

 
8,938

Finished goods
 
81,518

 
84,141

Total
 
$
192,412

 
$
184,592

໿

22


Note 7 – Intangible assets, net  
  
Intangible assets at September 30, 2018 and December 31, 2017 are as follows:


 
September 30, 2018
 
 
(In thousands)
 
(Unaudited)
 
December 31, 2017

 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Capitalized software development costs
 
$
118,424

 
$
(38,154
)
 
$
80,270

 
$
116,691

 
$
(30,345
)
 
$
86,346

Acquired technology
 
95,691

 
(89,507
)
 
6,184

 
96,198

 
(87,341
)
 
8,857

Patents
 
34,248

 
(21,264
)
 
12,984

 
33,163

 
(19,931
)
 
13,232

Other
 
51,049

 
(34,426
)
 
16,623

 
45,565

 
(30,707
)
 
14,858

Total
 
$
299,412

 
$
(183,351
)
 
$
116,061

 
$
291,617

 
$
(168,324
)
 
$
123,293

    
Software development costs capitalized for the three months ended September 30, 2018 and 2017 were $1.9 million and $10.1 million, respectively, and related amortization expense was $6.9 million and $5.7 million, respectively. For the nine months ended September 30, 2018 and 2017, capitalized software development costs were $13.8 million and $35.8 million, respectively, and related amortization expense was $19.9 million and $16.5 million, respectively. Capitalized software development costs for the three months ended September 30, 2018 and 2017 included costs related to stock based compensation of $0.1 million and $0.5 million, respectively. For the nine months ended September 30, 2018 and 2017, capitalized software development costs included costs related to stock based compensation of $0.6 million and $1.4 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 $9.0 million and $8.7 million for the three months ended September 30, 2018 and 2017, respectively, and $26.4 million and $25.7 million for the nine months ended September 30, 2018 and 2017, respectively.
 

23


Note 8 – Goodwill 
  
The carrying amount of goodwill as of September 30, 2018, was as follows:


Amount

(In thousands)
Balance as of December 31, 2017
$
266,783

Foreign currency translation impact
(3,664
)
Balance as of September 30, 2018 (unaudited)
$
263,119


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. Effective for the annual goodwill impairment test for 2018 and for future testing, we will perform the required annual testing as of November 30 of each year rather than on February 28. In anticipation of this change, we reperformed our annual goodwill impairment test as of November 30, 2017 and determined that it was more likely than not that the estimated fair value for the reporting unit exceeded the carrying amount and that no impairment existed as of the assessment date. We do not believe that the change in the date of the annual goodwill impairment test is a material change in the method of applying an accounting principle nor do we expect that it will result in any delay, acceleration or impact to the results of the impairment testing. We believe this date is preferable because it aligns with the timing of our annual planning process which largely occurs during the fourth quarter. Retrospective application to prior periods is impracticable as we are unable to objectively determine, without the use of hindsight, the assumptions that would be used in those earlier periods.

No impairment of goodwill was identified during the nine months ended September 30, 2018 or the twelve months ended December 31, 2017.
   
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 had a valuation allowance of $78 million at September 30, 2018 and December 31, 2017. A majority of the valuation allowance is related to the deferred tax assets of National Instruments Hungary Kft. (“NI Hungary”).

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 $9.0 million and $10.2 million of unrecognized tax benefits at September 30, 2018 and December 31, 2017, respectively, all of which would affect our effective income tax rate if recognized. We recorded a gross increase in unrecognized tax benefits of $1 million and $1.6 million for the three and nine months ended September 30, 2018, respectively, as a result of the tax positions taken during these and prior periods. We recorded a gross decrease in unrecognized tax benefits of $3.1 million for each of the three-and nine-month periods ended September 30, 2018 as a result of closing open tax years and the enactment-date effects of the Tax Cuts and Jobs Act. As of September 30, 2018, it is reasonably possible that we will recognize tax benefits in the amount of $3.4 million in the next twelve months due to the closing of open tax years. The nature of the uncertainty is related to deductions taken on returns that have not been examined by the applicable tax authority.  Our continuing policy is to recognize interest and penalties related to income tax matters in income tax expense. As of September 30, 2018, we had approximately $1.2 million accrued for interest related to uncertain tax positions. The tax years 2009 through 2018 remain open to examination by the major taxing jurisdictions to which we are subject.  
 

24


Our provision for income taxes reflected an effective tax rate of 11% and 12% for the three months ended September 30, 2018 and 2017, respectively, and 13% and 15% for the nine months ended September 30, 2018 and 2017, respectively. For the three and nine months ended September 30, 2018, our effective tax rate was lower than the U.S. federal statutory rate of 21% 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, a tax benefit from disqualifying dispositions of equity awards that do not ordinarily result in a tax benefit, excess tax benefits from share-based compensation, and the deduction for foreign-derived deduction eligible income, offset by the U.S. tax on global intangible low-taxed income. For the three and nine months ended September 30, 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, a tax benefit from disqualifying dispositions of equity awards that do not ordinarily result in a tax benefit, and excess tax benefits from share-based compensation.

Our earnings in Hungary are subject to a statutory tax rate of 9%. In addition, our research and development activities in Hungary 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 $2.6 million and $4.3 million for the three months ended September 30, 2018 and 2017, respectively, and $7.1 million and $11.6 million for the nine months ended September 30, 2018 and 2017, 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 income tax benefits of the tax holiday for the three and nine months ended September 30, 2018 were approximately $0.8 million and $1.9 million, respectively.  The impact of the tax holiday on a per share basis for each of the three and nine months ended September 30, 2018 was a benefit of $0.01 per share. The income tax benefits of the tax holiday for the three and nine months ended September 30, 2017 were approximately $0.8 million and $1.9 million, respectively.  The impact of the tax holiday on a per share basis for each of the three and nine months ended September 30, 2017 was a benefit of $0.01 per share.

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.

The Tax Cuts and Jobs Act was enacted on December 22, 2017. The Act reduced the federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign earnings.

We are applying the guidance in SAB 118 when accounting for the enactment-date effects of the Act. As of September 30, 2018, we had not completed our accounting for the tax effects of enactment of the Act. However, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. At December 31, 2017, we recognized a provisional amount of $69.9 million, which is included as a component of income tax expense from continuing operations. During the three month period ended September 30, 2018, we recognized a $(1.8) million adjustment to the provisional amounts recorded at December 31, 2017, primarily related to foreign withholding and distribution taxes. We expect to finalize our calculation during the fourth quarter of 2018.

The Act subjects a U.S. shareholder to tax on global intangible low-taxed income ("GILTI") earned by certain foreign subsidiaries. The FASB staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the years the tax is incurred as a period expense only. Given the complexity of the GILTI provisions, we are still evaluating the effects of the GILTI provisions and have not yet determined our accounting policy. At September 30, 2018, because we are still evaluating the GILTI provisions and our analysis of future taxable income that is subject to GILTI, we have included GILTI related to current-year operations only in our estimated annual effective tax rate and have not provided additional GILTI on deferred items.



25


Note 10 – Comprehensive income    

Our comprehensive income is comprised of net income, foreign currency translation, unrealized gains and losses on forward contracts and securities classified as available-for-sale. The accumulated OCI, net of tax, for the nine months ended September 30, 2018 and 2017, consisted of the following:  


 
September 30, 2018

 
(Unaudited)
(In thousands)
 
Currency translation adjustment
 
Investments
 
Derivative instruments
 
Accumulated other comprehensive income/(loss)
Balance as of December 31, 2017
 
$
(12,717
)
 
$
(782
)
 
(3,010
)
 
$
(16,509
)
Current-period other comprehensive (loss)
 income
 
(7,360
)
 
(404
)
 
10,692

 
2,928

Reclassified from accumulated OCI into income
 

 

 
886

 
886

Income tax expense
 

 
30

 
2,449

 
2,479

Balance as of September 30, 2018
 
$
(20,077
)
 
$
(1,216
)
 
$
6,119

 
$
(15,174
)


 
September 30, 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)
 
21,890

 
187

 
(10,332
)
 
11,745

Reclassified from accumulated OCI into income
 

 

 
862

 
862

Income tax expense (benefit)
 
13

 
14

 
(3,360
)
 
(3,333
)
Balance as of September 30, 2017
 
$
(15,297
)
 
$
(496
)
 
$
(2,888
)
 
$
(18,681
)
໿
  
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 $0.01 per share, and (ii) 360,000,000 shares of common stock, par value $0.01 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 our 1994 Incentive Plan which terminated in May 2005 (the “1994 Plan”), 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 threefive 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.  

26



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 threefive 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.