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:  March 31, 2019 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=12871763&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 April 25, 2019
Common Stock - $0.01 par value
131,866,173

    


NATIONAL INSTRUMENTS CORPORATION
  
INDEX  
Page No.

 
 
 

 
 

 

March 31, 2019 (unaudited) and December 31, 2018

 
 

 

(unaudited) for the three month periods ended March 31, 2019 and 2018

 
 

 

(unaudited) for the three month periods ended March 31, 2019 and 2018

 
 

 

(unaudited) for the three month periods ended March 31, 2019 and 2018

 
 


 
 

 
 

 
 

 
 

 
 
 

 
 

 
 

 
 

 
 

 
 

 
 



    


PART I - FINANCIAL INFORMATION  

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


March 31,
 
December 31,

2019
 
2018
Assets
(unaudited)
 
 

Current assets:
 

 
 

Cash and cash equivalents
$
228,766

 
$
259,386

Short-term investments
251,297

 
271,396

Accounts receivable, net
215,012

 
242,955

Inventories, net
204,710

 
194,146

Prepaid expenses and other current assets
66,434

 
54,337

Total current assets
966,219

 
1,022,220

Property and equipment, net
228,164

 
245,201

Goodwill
262,384

 
264,530

Intangible assets, net
104,066

 
110,783

Operating lease right-of-use assets
70,861

 

Other long-term assets
39,644

 
28,501

Total assets
$
1,671,338

 
$
1,671,235

Liabilities and stockholders' equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
50,576

 
$
48,388

Accrued compensation
35,148

 
45,821

Deferred revenue - current
130,336

 
127,288

Operating lease liabilities - current
16,088

 

Other current liabilities
27,807

 
25,913

Other taxes payable
28,001

 
35,574

Total current liabilities
287,956

 
282,984

Deferred income taxes
24,268

 
25,457

Liability for uncertain income tax positions
8,025

 
9,775

Income taxes payable - non-current
74,546

 
74,546

Deferred revenue - non-current
32,393

 
32,636

Operating lease liabilities - non-current
38,154

 

Other long-term liabilities
4,743

 
7,479

Total liabilities
470,085

 
432,877

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; 131,866,173 shares and 132,655,941 shares issued and outstanding, respectively 
1,319

 
1,327

Additional paid-in capital
910,602

 
897,544

Retained earnings
307,153

 
356,418

Accumulated other comprehensive loss
(17,821
)
 
(16,931
)
Total stockholders’ equity
1,201,253

 
1,238,358

Total liabilities and stockholders’ equity
$
1,671,338

 
$
1,671,235


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


    


NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)  
  

 
Three Months Ended

 
March 31,

 
2019
 
2018

 
 

 
 

Net sales:
 
 

 
 

Product
 
$
277,702

 
$
280,359

Software maintenance
 
33,372

 
31,538

Total net sales
 
311,074

 
311,897


 
 

 
 

Cost of sales:
 
 

 
 

Product
 
74,188

 
72,317

Software maintenance
 
1,887

 
2,206

Total cost of sales
 
76,075

 
74,523


 
 

 
 

Gross profit
 
234,999

 
237,374


 
 

 
 

Operating expenses:
 
 

 
 

Sales and marketing
 
117,551

 
120,117

Research and development
 
66,166

 
61,843

General and administrative
 
27,883

 
27,277

Total operating expenses
 
211,600

 
209,237


 
 

 
 

Operating income
 
23,399

 
28,137


 
 

 
 

Other income:
 
 

 
 

Interest income
 
2,234

 
1,015

Net foreign exchange gain
 
366

 
979

Other loss, net
 
(24
)
 
(519
)
Income before income taxes
 
25,975

 
29,612

Provision for income taxes
 
2,755

 
5,344


 
 

 
 

Net income
 
$
23,220

 
$
24,268


 
 

 
 

Basic earnings per share
 
$
0.18

 
0.19


 
 

 
 

Weighted average shares outstanding - basic
 
132,252

 
131,127


 
 

 
 

Diluted earnings per share
 
$
0.17

 
$
0.18


 
 

 
 

Weighted average shares outstanding - diluted
 
133,367

 
132,624


 
 

 
 

Dividends declared per share
 
$
0.25

 
$
0.23


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

    


NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)  


 
Three Months Ended

 
March 31,

 
2019
 
2018

 
 

 
 

Net income
 
$
23,220

 
$
24,268

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

 
 

Foreign currency translation adjustment
 
(3,067
)
 
5,804

Unrealized gain (loss) on securities available-for-sale
 
1,175

 
(696
)
Unrealized gain (loss) on derivative instruments
 
1,212

 
(3,771
)
Other comprehensive (loss) gain, before tax
 
(680
)
 
1,337

Tax benefit (expense) related to items of other comprehensive income
 
210

 
(872
)
Other comprehensive (loss) gain, net of tax
 
(890
)
 
2,209

Comprehensive income
 
$
22,330

 
$
26,477


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


    


NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)  


 
Three Months Ended

 
March 31,

 
2019
 
2018
Cash flow from operating activities:
 
 

 
 

Net income
 
$
23,220

 
$
24,268

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

 
 

Depreciation and amortization
 
18,012

 
17,436

Stock-based compensation
 
11,034

 
8,204

Tax expense from deferred income taxes
 
(1,650
)
 
(2,046
)
Changes in operating assets and liabilities
 
(8,469
)
 
(7,879
)
Net cash provided by operating activities
 
42,147

 
39,983


 
 

 
 

Cash flow from investing activities:
 
 

 
 

Capital expenditures
 
(10,936
)
 
(8,115
)
Capitalization of internally developed software
 
(2,279
)
 
(7,668
)
Additions to other intangibles
 
(106
)
 
(2,855
)
Payments to acquire equity-method investment
 
(9,784
)
 

Purchases of short-term investments
 
(60,094
)
 
(52,355
)
Sales and maturities of short-term investments
 
81,151

 
10,211

Net cash used in investing activities
 
(2,048
)
 
(60,782
)

 
 

 
 

Cash flow from financing activities:
 
 

 
 

Proceeds from issuance of common stock
 
9,213

 
8,600

Repurchase of common stock
 
(46,404
)
 

Dividends paid
 
(33,110
)
 
(30,177
)
Net cash used in financing activities
 
(70,301
)
 
(21,577
)

 
 

 
 

Effect of exchange rate changes on cash
 
(418
)
 
2,577


 
 

 
 

Net change in cash and cash equivalents
 
(30,620
)
 
(39,799
)
Cash and cash equivalents at beginning of period
 
259,386

 
290,164

Cash and cash equivalents at end of period
 
$
228,766

 
$
250,365

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


    




NATIONAL INSTRUMENTS CORPORATION  
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(unaudited)

 
 
March 31, 2019
 
 
Common Stock Shares
 
Common Stock Amount
 
Additional-Paid in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income/(Loss)
 
Total Stockholders' Equity
Balance at December 31, 2018
 
132,655,941

 
$
1,327

 
$
897,544

 
$
356,418

 
$
(16,931
)
 
$
1,238,358

Net income
 

 

 

 
23,220

 

 
23,220

Other comprehensive loss, net of tax
 

 

 

 

 
(890
)
 
(890
)
Issuance of common stock under employee plans, including tax benefits
 
245,330

 
2

 
9,211

 

 

 
9,213

Stock-based compensation
 

 

 
10,866

 

 

 
10,866

Repurchase of common stock
 
(1,035,098
)
 
(10
)
 
(7,019
)
 
(39,375
)
 

 
(46,404
)
Dividends paid (1)
 

 

 

 
(33,110
)
 

 
(33,110
)
Balance at March 31, 2019
 
131,866,173

 
$
1,319

 
$
910,602

 
$
307,153

 
$
(17,821
)
 
$
1,201,253


 
 
March 31, 2018

 
Common Stock Shares
 
Common Stock Amount
 
Additional-Paid in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income/(Loss)
 
Total Stockholders' Equity
Balance at December 31, 2017
 
$
130,978,947

 
$
1,310

 
$
829,979

 
$
313,241

 
$
(16,509
)
 
$
1,128,021

Net income
 

 

 

 
24,268

 

 
24,268

Other comprehensive income, net of tax
 

 

 

 

 
2,209

 
2,209

Issuance of common stock under employee plans, including tax benefits
 
225,848

 
2

 
8,598

 

 

 
8,600

Stock-based compensation
 

 

 
8,166

 

 

 
8,166

Adoption of ASU 2014-09
 

 

 

 
8,619

 

 
8,619

Dividends paid (1)
 

 

 

 
(30,177
)
 

 
(30,177
)
Balance at March 31, 2018
 
131,204,795

 
1,312

 
846,743

 
315,951

 
(14,300
)
 
1,149,706


(1) Cash dividends declared per share of common stock were $0.25 and $0.23 for the three month periods ended March 31, 2019 and 2018, respectively.

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


    





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, 2018, 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, 2019 and December 31, 2018, the results of our operations and comprehensive income for the three months ended March 31, 2019 and 2018, and the cash flows for the three months ended March 31, 2019 and 2018. Our operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States.

Recently Adopted Accounting Pronouncements

Leases

In February 2016, the Financial Accounting Standards Board ("FASB") established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which supersedes ASC 840, Leases, and requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. Topic 842, as amended, (the "new lease standard") establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

We adopted the new lease standard on January 1, 2019 and used the effective date as our date of initial adoption. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for earlier periods.

We have completed a qualitative and quantitative assessment of our lease portfolio, in which the standard had a material impact on our consolidated balance sheet but did not have an impact on our consolidated income statement. Upon adoption, we recognized lease liabilities of approximately $52 million, with corresponding ROU assets of the same amount, based on the present value of the remaining minimum rental payments under current leasing standards for our existing operating leases. Additionally, we also reclassified approximately $19 million from "Property, plant and equipment, net" to "Operating lease right-of-use assets" related to prepaid leasehold land.

The new standard provides a number of optional practical expedients in transition. We elected the 'package of practical expedients', which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us. The new standard also provides practical expedients for an entity's ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also elected the practical expedient to not separate lease and non-lease components for our office leases.


    


The cumulative effects of the changes made to our consolidated January 1, 2019 balance sheet for the adoption of the new lease standard were as follows (in thousands):

 
Balance at December 31, 2018
Adjustments Due to ASU 2016-02
Balance at January 1, 2019
 
 
 
 
Assets
 
 
 
Property, plant and equipment, net
$
245,201

$
(18,606
)
$
226,595

Operating lease right-of-use assets

68,938

68,938

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Operating lease liabilities, current

18,597

18,597

Operating lease liabilities, non-current

$
33,853

$
33,853

Other current liabilities
$
25,913

$
(2,118
)
$
23,795


Other Recently Adopted Accounting Pronouncements

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The ASU expands strategies that qualify for hedge accounting, changes how many hedging relationships are presented in the financial statements, and simplifies the application of hedge accounting in certain situations. On January 1, 2019, we adopted the guidance in ASU 2017-12. Adoption did not have a material impact on our financial statements. We continue to assess opportunities enabled by the new standard to expand our risk management strategies.

In August 2018, the Securities and Exchange Commission ("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 adopted this new rule beginning with our financial reporting for the quarter ended March 31, 2019.

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"). We adopted ASU 2018-02 effective January 1, 2019, and we did not elect the option to reclassify to retained earnings the tax effects resulting from the Act that are stranded in accumulated OCI. The adoption of the new guidance did not have a material effect on our consolidated financial statements.

Recent Accounting Guidance Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU will replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We will be required to use a forward-looking expected credit loss model for accounts receivables and other financial instruments.  This ASU requires instruments measured at amortized cost to be presented at the net amount expected to be collected. Entities are also required to record allowances for available-for-sale debt securities rather than reduce the carrying amount. We do not plan to adopt the ASU earlier than our required effective date of January 1, 2020. We expect that the adoption of the ASU will not have a material impact on our financial statements.

Summary of Significant Accounting Policies

As discussed above, we adopted the new lease standard as of January 1, 2019. The impact of this new guidance on our accounting policies and financial statements is described below. Additionally, in the first quarter of 2019, we granted performance-based restricted stock units to certain executives under our 2015 Equity Incentive Plan ("PRSUs"). The PRSU awards granted during the three months ended March 31, 2019 include a market condition as defined by ASC 718. The impact of the new equity awards on our accounting policies is described below. There were no other significant changes in our accounting policies during the three months ended March 31, 2019 compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2018.

    



Stock-Based Compensation

Stock-based compensation costs are based on the fair value on the date of grant for all restricted stock units ("RSUs") and on the date of enrollment for the employee stock purchase plan. We recognize compensation expense ratably over the requisite service period of the awards. PRSUs are restricted stock unit awards that vest based on a market condition, currently our stockholder return relative to the total stockholder return of the constituents of the Russell 2000 Index at the end of a three-year performance period. Up to 200% of the full target number of shares subject to each PRSU award are eligible to be earned after the completion of the three-year performance period based on our total stockholder return relative to the total stockholder return of the Russell 2000 Index at the end of the performance period.

The fair values of RSUs are estimated using their market price on the date of grant. The fair values of employee stock purchase plans are estimated using the Black-Scholes option-pricing model. The fair values of PRSUs are estimated using a Monte Carlo simulation. The determination of fair value of the PRSUs is affected by our stock price and a number of assumptions including the expected volatility, expected dividend yield and the risk-free interest rate. Our expected volatility at the date of grant was based on the historical volatilities of our stock and the constituents of the Russell 2000 Index over the performance period.

Refer to Note 11 – Authorized shares of common and preferred stock and stock-based compensation plans for additional information on our equity-based compensation programs.

Leases

We determine whether an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use ("ROU") assets and operating lease liabilities (current and non-current) on our consolidated balance sheet. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our consolidated balance sheet.

Operating lease ROU assets and operating lease liabilities are recognized based on their present value of the future minimum lease payments over the lease term at commencement date. As none of our leases provide an implicit rate we use our incremental borrowing rate based on the information available as of the commencement date. The operating lease ROU assets also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

We have lease agreements with lease and non-lease components. For office leases we account for the lease and non-lease components as a single lease component. For certain leases, such as equipment and vehicles, we account for the lease and non-lease components separately. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities. Refer to Note 8 - Leases for additional information on our leasing activities.
 
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 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, 2019 and 2018, are as follows:

 
Three Months Ended March 31,

 
(In thousands)

 
(Unaudited)

 
2019
 
2018
Weighted average shares outstanding-basic
 
132,252

 
131,127

Plus: Common share equivalents
 
 

 
 

RSUs
 
1,115

 
1,497

Weighted average shares outstanding-diluted
 
133,367

 
132,624


    


  
Stock awards to acquire 67,100 shares and 0 shares for the three months ended March 31, 2019 and 2018, respectively, were excluded in the computations of diluted EPS because the effect of including the stock awards would have been anti-dilutive.



    


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.

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, China, South Korea and Japan). We operate as one operating segment.

Total net sales based on the disaggregation criteria described above are as follows:

 
 
Three Months Ended March 31,
 
(In thousands)
 
 
(Unaudited)
 

 
2019
 
2018
 
 
 
 
 
 
 
 
 
Net sales:
 
Point-in-Time(1)
Over Time
Total
 
Point-in-Time(1)
Over Time
Total
Americas
 
$
99,681

22,974

$
122,655

 
$
100,053

19,669

$
119,722

EMEIA
 
79,122

19,685

98,807

 
86,907

18,505

105,412

APAC
 
81,450

8,162

89,612

 
78,685

8,078

86,763

Total net sales(1)
 
$
260,253

50,821

$
311,074

 
$
265,645

46,252

$
311,897

(1): Net sales contains hedging gains and losses, which do not represent revenues recognized from customers.
See Note - 5 Derivatives instruments and hedging activities for more information on the impact of our hedging activities on our results of operations

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 non-current, during the three months ended March 31, 2019 were as follows:
 
Amount

(In thousands)
Deferred Revenue at December 31, 2018
$
159,924

   Deferral of revenue billed in current period, net of recognition
51,562

   Recognition of revenue deferred in prior periods
(47,995
)
   Foreign currency translation impact
(762
)
Balance as of March 31, 2019 (unaudited)
$
162,729


For the three months ended March 31, 2019, 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 three months ended March 31, 2019, 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 contracts where revenue is recognized as invoiced, was approximately $57 million as of March 31, 2019. Since we typically invoice customers at contract inception, this amount is included in our current and non-current deferred revenue balances. As of March 31, 2019, we expect to recognize approximately 37% of the revenue related to these unsatisfied performance obligations during the remainder of 2019, 35% during 2020, and 28% 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.

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


 
As of March 31, 2019
(In thousands)
 
(Unaudited)

 
 
 
Gross
 
Gross
 
 

 
Adjusted Cost
 
Unrealized Gain
 
Unrealized Loss
 
Fair Value
Corporate bonds
 
$
203,851

 
$
915

 
$
(347
)
 
$
204,419

U.S. treasuries and agencies
 
46,852

 
27

 
(1
)
 
46,878

Total Short-term investments
 
$
250,703

 
$
942

 
$
(348
)
 
$
251,297


(In thousands)
 
As of December 31, 2018

 
 
 
Gross
 
Gross
 
 

 
Adjusted Cost
 
Unrealized Gain
 
Unrealized Loss
 
Fair Value
Corporate bonds
 
$
235,045

 
$
726

 
$
(1,298
)
 
$
234,473

U.S. treasuries and agencies
 
36,932

 
2

 
(11
)
 
36,923

Total Short-term investments
 
$
271,977

 
$
728

 
$
(1,309
)
 
$
271,396



    


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


 
As of March 31, 2019
(In thousands)
 
(Unaudited)

 
Adjusted Cost
 
Fair Value
Due in less than 1 year
 
$
132,980

 
$
133,008

Due in 1 to 5 years
 
117,723

 
118,289

Total available-for-sale debt securities
 
$
250,703

 
$
251,297


 
 
 
 
Due in less than 1 year
 
Adjusted Cost
 
Fair Value
Corporate bonds
 
$
86,128

 
$
86,130

U.S. treasuries and agencies
 
46,852

 
46,878

Total available-for-sale debt securities
 
$
132,980

 
$
133,008


 
 
 
 
Due in 1 to 5 years
 
Adjusted Cost
 
Fair Value
Corporate bonds
 
$
117,723

 
$
118,289

Total available-for-sale debt securities
 
$
117,723

 
$
118,289


Equity-Method Investments

The carrying value of our equity method investments was $13 million as of March 31, 2019. Our proportionate share of the income from equity-method investments was not material for the periods presented.


        
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, 2019
 
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
 
$
57,584

 
$
57,584

 
$

 
$

Short-term investments available for sale:
 
 

 
 

 
 

 
 
Corporate bonds
 
204,419

 

 
204,419

 

U.S. treasuries and agencies
 
46,878

 

 
46,878

 

Derivatives
 
10,753

 

 
10,753

 


Total Assets 
 
$
319,634

 
$
57,584

 
$
262,050

 
$


 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Derivatives
 
$
(1,461
)
 
$

 
$
(1,461
)
 
$

Total Liabilities 
 
$
(1,461
)
 
$

 
$
(1,461
)
 
$


(In thousands)
 
Fair Value Measurements at Reporting Date Using
Description
 
December 31, 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
 
$
62,094

 
$
62,094

 
$

 
$

Corporate notes and bonds
 
9,979

 

 
9,979

 

Short-term investments available for sale:
 
 
 
 
 
 
 
 
Corporate bonds
 
234,473

 

 
234,473

 

Time deposits
 
36,923

 

 
36,923

 

Derivatives
 
9,369

 

 
9,369

 

Total Assets 
 
$
352,838

 
$
62,094

 
$
290,744

 
$


 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Derivatives
 
$
(1,483
)
 
$

 
$
(1,483
)
 
$

Total Liabilities 
 
$
(1,483
)
 
$

 
$
(1,483
)
 
$



    


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.  
  
Our derivatives consist of 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 three months ended March 31, 2019. There were no transfers in or out of Level 1 or Level 2 during the three months ended March 31, 2019.  
  
As of March 31, 2019, 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, 2019 and December 31, 2018. The carrying value of net accounts receivable, accounts payable, and long-term debt contained in the consolidated balance sheets approximates fair value.
 
Note 5 – Derivative instruments and hedging activities 
  
We recognize all of our derivative instruments as either assets or liabilities in our statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.

We have operations in over 50 countries. Sales outside of the Americas accounted for approximately 61% and 62% of our net sales during the three months ended March 31, 2019 and 2018, 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, Chinese yuan, and Korean won) 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 gain or loss on the derivative is reported as a component of accumulated 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. 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 March 31, 2019
 
As of December 31,

 
(Unaudited)
 
2018
Chinese yuan
 
79,931

 
$
45,520

Euro
 
141,484

 
134,654

Japanese yen
 
22,543

 
15,141

Hungarian forint
 
32,192

 
35,384

British pound
 
8,892

 
9,948

Malaysian ringgit
 
25,245

 
27,778

Korean won
 
13,608

 
8,331

Total forward contracts notional amount
 
$
323,895

 
$
276,756

  
The contracts in the foregoing table had contractual maturities of 21 months or less and 24 months or less at March 31, 2019 and December 31, 2018, respectively.

At March 31, 2019, we expect to reclassify $7.3 million of gains on derivative instruments from accumulated OCI to net sales during the next twelve months when the hedged international sales occur, $(0.1) million of losses on derivative instruments from accumulated OCI to cost of sales during the next twelve months when the cost of sales are incurred and $(0.1) 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, 2019. Actual results may vary materially as a result of changes in the corresponding exchange rates subsequent to this date.  

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 March 31, 2019 and December 31, 2018, we held foreign currency forward contracts that were not designated as hedging instruments with a notional amount of $42 million and $71 million, respectively.   
The following tables present the fair value of derivative instruments on our Consolidated Balance Sheets at March 31, 2019 and December 31, 2018, respectively.   

    



 
Asset Derivatives

 
March 31, 2019
 
December 31, 2018
(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
 
$
7,811

 
Prepaid expenses and other current assets
 
$
7,594

 
 
 
 
 
 
 
 
 
Foreign exchange contracts - LT forwards
 
Other long-term assets
 
2,487

 
Other long-term assets
 
1,380

Total derivatives designated as hedging instruments
 
 
 
$
10,298

 
 
 
$
8,974

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 

 
 
 
 

 
 
 
 
 
 
 
 
 
Foreign exchange contracts - ST forwards
 
Prepaid expenses and other current assets
 
$
455

 
Prepaid expenses and other current assets
 
$
395

Total derivatives not designated as hedging instruments
 
 
 
$
455

 
 
 
$
395

 
 
 
 
 
 
 
 
 
Total derivatives
 
 
 
$
10,753

 
 
 
$
9,369

   

 
Liability Derivatives

 
March 31, 2019
 
December 31, 2018
(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
 
$
(763
)
 
Other current liabilities
 
$
(662
)

 
 
 
 

 
 
 
 

Foreign exchange contracts - LT forwards
 
Other long-term liabilities
 
(225
)
 
Other long-term liabilities
 
(191
)
Total derivatives designated as hedging instruments
 
 
 
$
(988
)
 
 
 
$
(853
)

 
 
 
 

 
 
 
 

Derivatives not designated as hedging instruments
 
 
 
 

 
 
 
 


 
 
 
 

 
 
 
 

Foreign exchange contracts - ST forwards
 
Other current liabilities
 
$
(473
)
 
Other current liabilities
 
$
(630
)
Total derivatives not designated as hedging instruments
 
 
 
$
(473
)
 
 
 
$
(630
)

 
 
 
 

 
 
 
 

Total derivatives
 
 
 
$
(1,461
)
 
 
 
$
(1,483
)

    


The following tables present the effect of derivative instruments on our Consolidated Statements of Income for three month periods ended March 31, 2019 and 2018, respectively:
March 31, 2019
(In thousands)
(Unaudited)
Derivatives in Cash Flow Hedging Relationship
 
Gain or (Loss) Recognized in OCI on Derivative
 
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income
 
Gain or (Loss) Reclassified from Accumulated OCI into Income
Foreign exchange contracts - forwards
 
$
1,800

 
Net sales
 
$
1,745


 
 

 
 
 
 

Foreign exchange contracts - forwards
 
(270
)
 
Cost of sales
 
20


 
 

 
 
 
 

Foreign exchange contracts - forwards
 
(318
)
 
Operating expenses
 
29

Total
 
$
1,212

 
 
 
$
1,794

March 31, 2018
(In thousands)
(Unaudited)
Derivatives in Cash Flow Hedging Relationship
 
Gain or (Loss) Recognized in OCI on Derivative
 
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income
 
Gain or (Loss) Reclassified from Accumulated OCI into Income
Foreign exchange contracts - forwards
 
$
(5,073
)
 
Net sales
 
$
(2,620
)

 
 

 
 
 
 

Foreign exchange contracts - forwards
 
726

 
Cost of sales
 
341


 
 

 
 
 
 

Foreign exchange contracts - forwards
 
576

 
Operating expenses
 
456

Total
 
$
(3,771
)
 
 
 
$
(1,823
)
(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, 2019
 
March 31, 2018

 
 
 
(Unaudited)
 
(Unaudited)
Foreign exchange contracts - forwards
 
Net foreign exchange gain/(loss)
 
$
(228
)
 
(1,761
)

 
 
 
 

 
 

Total
 
 
 
$
(228
)
 
$
(1,761
)

໿

    


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


 
March 31, 2019
 
December 31,
(In thousands)
 
(Unaudited)
 
2018

 
 

 
 

Raw materials  
 
$
102,186

 
$
98,346

Work-in-process
 
9,708

 
9,306

Finished goods
 
92,816

 
86,494


 
$
204,710

 
$
194,146

໿

    


Note 7 – Intangible assets and goodwill  
  
Intangible assets at March 31, 2019 and December 31, 2018 are as follows:


 
March 31, 2019
 
 
(In thousands)
 
(Unaudited)
 
December 31, 2018

 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Capitalized software development costs
 
$
125,857

 
$
(55,785
)
 
$
70,072

 
$
123,842

 
$
(49,299
)
 
$
74,543

Acquired technology
 
91,901

 
(85,502
)
 
6,399

 
92,236

 
(84,962
)
 
7,274

Patents
 
34,542

 
(22,213
)
 
12,329

 
34,427

 
(21,725
)
 
12,702

Other
 
46,214

 
(30,948
)
 
15,266

 
46,437

 
(30,173
)
 
16,264


 
$
298,514

 
$
(194,448
)
 
$
104,066

 
$
296,942

 
$
(186,159
)
 
$
110,783

    
Software development costs capitalized for the three month periods ended March 31, 2019 and 2018 were $2.4 million and $8.0 million, respectively, and related amortization expense was $6.9 million and $6.2 million, respectively. Capitalized software development costs for the three month periods ended March 31, 2019 and 2018 included costs related to stock based compensation of $0.1 million and $0.3 million, respectively.

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 $8.4 million for the three month periods ended March 31, 2019 and 2018, respectively.

Goodwill

The carrying amount of goodwill as of March 31, 2019, was as follows:


Amount

(In thousands)
Balance as of December 31, 2018
$
264,530

Foreign currency translation impact
(2,146
)
Balance as of March 31, 2019 (unaudited)
$
262,384


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 is performed in the fourth quarter of each year.

 No impairment of goodwill was identified during the three months ended March 31, 2019 or the twelve months ended December 31, 2018.  
 

    




Note 8 – Leases

We have operating leases for corporate offices, automobiles, and certain equipment. Our leases have remaining terms of 1 year to 95 years, some of which may include options to extend the leases for up to 9 years, and some of which may include options to terminate the leases within 1 year. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.

Amounts related to finance lease activities and income from leasing activities were not material for the periods presented.

The components of operating lease expense were as follows (unaudited):
(In thousands)
March 31, 2019

Operating Lease Cost (a)
$
5,725

(a) includes variable and short-term lease costs

 

Supplemental cash flow information related to operating leases were as follows (unaudited):
(In thousands)
March 31, 2019

Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
4,791

 
 
Supplemental non-cash information:
 
Operating lease right-of-use assets obtained in exchange for new operating lease obligations
6,334


Maturities of lease liabilities as of March 31, 2019 were as follows (unaudited):
(In thousands)
 
Years ending December 31,
Operating Leases
2019 (Excluding the three months ended March 31, 2019)
$
15,280

2020
15,295

2021
10,512

2022
7,573

2023
6,669

Thereafter
14,936

    Total future minimum lease payments
70,265

Less imputed interest
(16,023
)
    Total
$
54,242

 
 
Weighted Average Remaining Lease Term (years)
 
Operating Leases
5.22

 
 
Weighted Average Discount Rate
 
Operating Leases
6.0
%

As of March 31, 2019, we have additional operating leases, that have not commenced during the period, which were not material.








    


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 $80 million at March 31, 2019 and December 31, 2018. 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 $8.0 million and $9.8 million of unrecognized tax benefits at March 31, 2019 and December 31, 2018, respectively, all of which would affect our effective income tax rate if recognized. We recorded a gross increase in unrecognized tax benefits of $0.2 million for the three month period ended March 31, 2019, as a result of the tax positions taken during this period. We recorded a gross decrease in unrecognized tax benefits of $2.0 million for the three month period ended March 31, 2019 as a result of closing of open tax years. As of March 31, 2019, it is reasonably possible that we will recognize tax benefits in the amount of $1.5 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, 2019, we had approximately $0.7 million accrued for interest related to uncertain tax positions. The tax years 2012 through 2019 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 11% and 18% for the three month period ended March 31, 2019 and 2018, respectively. For the three month period ended March 31, 2019, 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 deduction for foreign-derived deduction eligible income, a decrease in unrecognized tax benefits resulting from the closing of open tax years, 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, offset by the U.S. tax on global intangible low-taxed income and nondeductible officer compensation. For the three month period ended March 31, 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 deduction for foreign-derived deduction eligible income, 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, offset by the U.S. tax on global intangible low-taxed income.

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 $1.0 million and $1.7 million for the three month periods ended March 31, 2019 and 2018, 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 months ended March 31, 2019 and March 31, 2018 were approximately $0.5 million and $0.6 million, respectively.  The impact of the tax holiday on a per share basis for each of the three months ended March 31, 2019 and March 31, 2018 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.



    


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 three months ended March 31, 2019 and 2018, consisted of the following:  


 
March 31, 2019
 
 
(Unaudited)
(In thousands)
 
Currency translation adjustment
 
Investments
 
Derivative instruments
 
Accumulated other comprehensive income/(loss)
Balance as of December 31, 2018
 
$
(22,485
)
 
$
(1,308
)
 
6,862

 
$
(16,931
)
Current-period other comprehensive income (loss)
 
(3,067
)
 
1,175

 
3,006

 
1,114

Reclassified from accumulated OCI into income
 

 

 
(1,794
)
 
(1,794
)
Income tax benefit (expense)
 

 
(6
)
 
216

 
210

Balance as of March 31, 2019
 
$
(25,552
)
 
$
(127
)
 
$
7,858

 
$
(17,821
)


 
March 31, 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 income (loss)
 
5,804

 
(696
)
 
(5,594
)
 
(486
)
Reclassified from accumulated OCI into income
 

 

 
1,823

 
1,823

Income tax benefit (expense)
 

 
(65
)
 
(807
)
 
(872
)
Balance as of March 31, 2018
 
$
(6,913
)
 
$
(1,413
)
 
$
(5,974
)
 
$
(14,300
)
໿
  
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.  

    



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.

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 and such awards may be subject to performance-based vesting conditions. 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 2,705,610 shares available for grant under the 2015 Plan at March 31, 2019.   
    
During the three month period ended March 31, 2019, we granted PRSUs to certain executives under our 2015 Plan. Refer to the "Summary of Significant Accounting Policies" in Note 1 - Basis of presentation for additional discussion regarding the impact of these new grants on our accounting policies and related estimates.

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 9, 2017, our stockholders approved an additional 3,000,000 shares for issuance under our employee stock purchase plan. At March 31, 2019, we had 1,749,934 shares of common stock reserved for future issuance under this plan. We issued 245,110 shares under this plan in the three months ended March 31, 2019 and the weighted average purchase price of the shares issued was $37.59 per share. During the three months ended March 31, 2019, 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, 2019.

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 repurchased 1,035,098 shares of our common stock at a weighted average price per share of $44.83 during the three months ended March 31, 2019. We did not make any repurchases during the three months ended March 31, 2018. At March 31, 2019, there were 2,964,902 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 products 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. (See Note 2 –Revenue of Notes to consolidated financial statements for total net sales by the major geographic areas in which we operate).

Based on the billing location of the customer, total sales outside the U.S. for the three months ended March 31, 2019 and 2018 were $198 million and $200 million, respectively. Total property and equipment, net, outside the U.S. was $115 million and $132 million as of March 31, 2019 and December 31, 2018. See Note 1 - Basis of presentation for additional information regarding the impact of the new lease accounting standard on our consolidated balance sheet.



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 million to $125 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 million in the aggregate, subject to consent of the Lender and terms and conditions to be mutually agreed between us and the Lender. On April 27, 2018, we entered into a Second Amendment to Loan Agreement (the "Second Amendment") which amended the Loan Agreement, as amended by the Amendment to, among other things, (i) reduce the revolving line of credit from $125.0 million to $5.0 million, (ii) reduce the letter of credit sublimit under the line of credit from $10.0 million to $5.0 million and (iii) require us and our subsidiaries to comply with certain of the affirmative and negative covenants under the Loan Agreement only if loans are outstanding under the Loan Agreement or if we have not reimbursed any drawing under a letter of credit issued under the Loan Agreement within five business days following the request of 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 0.50%, or a LIBOR rate plus a spread of 1.13% to 2.00%, 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 0.18% to 0.30%, 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, 2019, we were in compliance with all applicable 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, 2019, we had no outstanding borrowings under this line of credit. During the three month periods ended March 31, 2019 and 2018, we incurred no interest expense under this line of credit. As of March 31, 2019 and March 31, 2018, the weighted-average interest rate on the revolving line of credit was 3.7% and 3.0%, respectively.

Note 14 – Commitments and contingencies  
  
We offer a one-year limited warranty on most hardware products which is included in the terms of sale of such products. We also offer optional extended warranties on our hardware products for which the related revenue is recognized ratably over the warranty period. Provision is made for estimated future warranty costs at the time of the sale for the estimated costs that may be incurred under the standard warranty. Our estimate is based on historical experience and product sales during the period.  The warranty reserve for the three month periods ended March 31, 2019 and 2018 was as follows:

 
Three Months Ended March 31,
(In thousands)
 
(Unaudited)

 
2019
 
2018
Balance at the beginning of the period
 
$
3,173

 
$
2,846

Accruals for warranties issued during the period
 
626

 
729

Accruals related to pre-existing warranties
 
(133
)
 
230

Settlements made (in cash or in kind) during the period
 
(515
)
 
(784
)
Balance at the end of the period
 
$
3,151

 
$
3,021

 

As of March 31, 2019, we had non-cancelable purchase commitments with various suppliers of customized inventory and inventory components totaling approximately $7.1 million over the next twelve months.  As of March 31, 2019, we had no outstanding guarantees for payment of customs and foreign grants, which are generally payable over the next twelve months.

Note 15 – Restructuring

Since the first quarter of 2017, we have been taking steps to reduce our overall employee headcount in an effort to minimize job duplication or evaluate where we should shift and centralize activities, improve efficiencies, and rebalance our resources on higher return activities. The timing and scope of our headcount reductions will vary.

A summary of the charges in the consolidated statement of operations resulting from our restructuring activities is shown below:


 
Three Months Ended March 31,
(In thousands)
 
(Unaudited)

 
2019
 
2018
Cost of sales
 
$

 
28

Research and development
 
345

 
146

Sales and marketing
 
1,981

 
1,645

General and Administration
 
990

 
612

Total restructuring and other related costs
 
$
3,316

 
2,431



    


A summary of balance sheet activity related to the restructuring activity is shown below:


Restructuring Liability

(in thousands)
Balance as of December 31, 2018
$
3,506

Income statement expense
3,316

Cash payments
(3,178
)
Balance as of March 31, 2019
$
3,644


The restructuring  liability of  $3.6 million  at  March 31, 2019  relating  to  this restructuring activity  is  recorded  in the “accrued compensation” line item of the consolidated balance sheet.

໿



Note 16 – Litigation  
  
We are not currently a party to any material litigation. However, in the ordinary course of our business, we have in the past, are currently and will likely become involved in various legal proceedings, claims, and regulatory, tax or government inquiries and investigations, and could incur uninsured liability in any one or more of them. We also periodically receive notifications from various third parties related to alleged infringement of patents or intellectual property rights, commercial disputes or other matters. No assurances can be given with respect to the extent or outcome of any investigation, litigation or dispute. 
 
Note 17 – Subsequent events  
  
On April 24, 2019, our Board of Directors declared a quarterly cash dividend of $0.25 per common share, payable on June 3, 2019, to stockholders of record on May 13, 2019.



    


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any statements contained herein regarding our future financial performance, operations or other matters (including, without limitation, statements to the effect that we “believe,” "expect," "plan," "intend to," "may," "will,” "project," “anticipate,” "continue," “are encouraged by,” or "estimate"; statements of "goals" or "visions"; or other variations thereof or comparable terminology or the negative thereof) should be considered forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of important factors, including those set forth under the heading “Risk Factors” beginning on page 42, and in the discussion below. Readers are also encouraged to refer to the documents regularly filed by us with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2018, for further discussion of our business and the risks attendant thereto.  
  
Overview  
  
For more than 40 years, National Instruments Corporation (the "Company", "we", "us" or "our") has enabled engineers and scientists around the world to accelerate productivity, innovation and discovery. Our software-centric platform provides an advanced approach through integration of software and modular hardware to create automated test and automated measurement systems. We believe our long-term track record of innovation and our differentiated platform help support the success of our customers, employees, suppliers and stockholders. We have been profitable in every year since 1990. We sell to a large number of customers in a wide variety of industries. 

The key strategies that we focus on in running our business are the following:  
  
Expanding our broad customer base  
  
We strive to increase our already broad customer base and to grow our large order business by serving a large market on many computer platforms, through a global marketing and distribution network. We also seek to acquire new technologies and expertise from time to time to open new opportunities for our existing product portfolio.  

Maintaining a high level of customer satisfaction  
  
To maintain a high level of customer satisfaction we strive to offer innovative, modular and integrated products through a global sales and support network. We strive to maintain a high degree of backwards compatibility across different platforms to preserve the customer’s investment in our products. In this time of intense global competition, we believe that it is crucial that we continue to offer products with high quality and reliability, and that our products provide cost-effective solutions for our customers.   

Leveraging external and internal technology  
  
Our product strategy is to provide superior products by leveraging generally available technology, supporting open architectures on multiple platforms and leveraging our core technologies across multiple products.

We sell into test and measurement and industrial/embedded applications in a broad range of industries and are subject to the economic and industry forces that drive those markets. It has been our experience that the performance of these industries and our performance are impacted by general trends in industrial production for the global economy and by the specific performance of certain vertical markets that are intensive consumers of measurement technologies. Examples of these markets are advanced research, automotive, automated test equipment, consumer electronics, commercial aerospace, computers and electronics, continuous process manufacturing, education, government/defense, medical research/pharmaceutical, power/energy, semiconductors, and telecommunications.











    


Leveraging a worldwide sales, distribution and manufacturing network  

We distribute and sell our software and hardware products primarily through a direct sales organization. We also use independent distributors, original equipment manufacturers, value-added resellers, system integrators, and consultants to market and sell our products. We have sales offices in the U.S. and sales offices and distributors in key international markets. Sales outside of the Americas accounted for approximately 61% and 62% of our net sales during the three month periods ended March 31, 2019 and 2018, respectively. The vast majority of our foreign sales are denominated in the customers’ local currency, which exposes us to the effects of changes in foreign currency exchange rates. We expect that a significant portion of our total net sales will continue to be derived from international sales. (See Note 2 – Revenue of Notes to consolidated financial statements for details concerning the geographic breakdown of our net sales).
  
We manufacture substantially all of our product volume at our facilities in Debrecen, Hungary and Penang, Malaysia. Our product manufacturing operations can be divided into four areas: electronic circuit card and module assembly; chassis and cable assembly; technical manuals and product support documentation; and software duplication. Most of our electronic circuit card assemblies, modules and chassis are manufactured in house, although contractors are used from time to time. The majority of our electronic cable assemblies are produced by contractors; however, we do manufacture some on an exception basis. Our software duplication, technical manuals and product support documentation are primarily produced by contractors. 

Delivering high quality, reliable products

We believe that our long-term growth and success depend on delivering high quality software and hardware products on a timely basis. Accordingly, we focus significant efforts on research and development. We focus our research and development efforts on enhancing existing products and developing new products that incorporate appropriate features and functionality to be competitive with respect to technology, price and performance. Our success also depends on our ability to obtain and maintain patents and other proprietary rights related to technologies used in our products. We have engaged in litigation and where necessary, will likely engage in future litigation to protect our intellectual property rights. In monitoring and policing our intellectual property rights, we have been and may be required to spend significant resources.

Our operating results fluctuate from period to period due to changes in global economic conditions and a number of other factors. As a result, we believe our historical results of operations should not be relied upon as indications of future performance. There can be no assurance that our net sales will grow or that we will remain profitable in future periods.  

Current business outlook  
  
Many of the industries we serve have historically been cyclical and have experienced periodic downturns. In assessing our business, we consider the trends in the Global Purchasing Managers’ Index (“PMI”), global industrial production as well as industry reports on the specific vertical industries that we target. Historically, our business cycles have generally followed the expansion and contraction cycles in the global industrial economy as measured by the Global PMI. In the three month period ended March 31, 2019, the average of the Global PMI was 50.7 which is indicative of expansion in the industrial sector, and the average of the new order element of the Global PMI was 50.0 which is a neutral reading. We are unable to predict whether the industrial economy, as measured by the PMI, will remain at or above the neutral reading of 50, strengthen or contract during the remainder of 2019.


We remain cautious about economic uncertainty indicated by the weakening PMI during early 2019. However, we are encouraged by our continuing commitment to disciplined execution of our long-term goals, reflected by recent improvements in our operational profitability. Additionally, we remain optimistic about our strategic objectives for the company and our long-term position in the industry through the sustained differentiation we deliver to our customers through our platform-based approach. Despite the weakening PMI, we continue to see growth in our orders above $20,000 which we believe reflects our focus on developing highly differentiated products, particularly for complex test and measurement systems. In the first quarter of 2019, we saw a 6% year over year decrease from orders under $20,000, which was offset by a 6% year over year increase from orders over $20,000.

Since the first quarter of 2017 we have been taking steps to reduce our overall employee headcount in an effort to shift and centralize activities, improve efficiencies, and rebalance our resources on higher return activities. We incurred $2 million in severance and other restructuring-related charges, net of tax during the three months ended March 31, 2019. The timing and scope of any future headcount reductions will vary.



    


During early 2019, we saw a slightly appreciated U.S dollar index with a mix of appreciation and devaluation in the currency markets where we do business. In the markets where we have our largest exposure to foreign currency, the Eurozone and China, the U.S. dollar appreciated against the Euro by approximately 2% and devalued against the Chinese yuan by approximately 2%. See “Results of Operations” below for additional discussion on the impact of foreign exchange rates on our business for the three month period ended March 31, 2019. See “Our Revenues are Subject to Seasonal Variations” under “Risk Factors” for additional discussion of potential fluctuations in our net sales. 

We have hedging programs in place to help mitigate the risks associated with foreign currency risks. However, there can be no assurance such hedges will offset more than a portion of the financial impact resulting from movements in the foreign currency markets in which we do business. (See Note 5 – Derivative instruments and hedging activities of Notes to consolidated financial statements for additional details concerning hedging programs.)

Results of Operations  
  
The following table sets forth, for the periods indicated, the percentage of net sales represented by certain items reflected in our Consolidated Statements of Income:  


 
Three Months Ended March 31,

 
(Unaudited)

 
2019
 
2018
Net sales:
 
 
 
 

Americas
 
39.4
 %
 
38.4
 %
EMEIA
 
31.8

 
33.8

APAC
 
28.8

 
27.8

Total net sales
 
100.0

 
100.0

Cost of sales
 
24.5

 
23.9

Gross profit
 
75.5

 
76.1

Operating expenses:
 
 

 
 

Sales and marketing
 
37.8

 
38.5

Research and development
 
21.3

 
19.8

General and administrative
 
9.0

 
8.7

Total operating expenses
 
68.0

 
67.1

Operating income
 
7.5

 
9.0

Other income (expense):
 
 

 
 

Interest income
 
0.7

 
0.3

Net foreign exchange loss
 
0.1

 
0.3

Other income, net
 

 
(0.2
)
Income before income taxes
 
8.4

 
9.4

Provision for income taxes
 
0.9

 
1.7

Net income
 
7.5
 %
 
7.8
 %

  Figures may not sum due to rounding.


    


Results of Operations for the three month periods ended March 31, 2019 and 2018  

Net Sales.  The following table sets forth our net sales for the three month periods ending March 31, 2019 and 2018 along with the changes between the corresponding periods.


 
Three Months Ended March 31,

 
(Unaudited)

 
 
 
 
 
Change
(In millions)
 
2019
 
2018
 
Dollars
 
Percentage

 
 
 
 
 
 
 
 
Product sales
 
$
277.7

 
$
280.4

 
(2.7)
 
(1)%
Software maintenance sales
 
33.4

 
31.5

 
1.8
 
6%
Total net sales
 
$
311.1

 
$
311.9

 
(0.8)
 
Figures may not sum due to rounding.

Orders with a value greater than $20,000, increased by 6% year over year during the three months ended March 31, 2019, compared to the year over year increase of 7% in the three month period ended March 31, 2018. A significant factor in the continued expansion of our large orders in the three months ended March 31, 2019 was strong demand for our system-level offerings, particularly in applications related to semiconductor validation and production test. The increase in software maintenance sales was primarily related to recent growth in our software offerings, and consequently, billings for annual renewals of software maintenance programs during the trailing 12 months.

During the three month periods ended March 31, 2019 and 2018, large orders were 59% and 56% of our total orders, respectively. Orders with a value greater than $20,000, particularly those orders with a value greater than $100,000, are more volatile, are subject to greater discount variability, and may contract at a faster pace during an economic downturn compared to our other orders.

The following table sets forth our net sales by geographic region for the three month periods ended March 31, 2019 and 2018 along with the changes between the corresponding periods and the region’s percentage of total net sales.


 
Three Months Ended March 31,

 
(Unaudited)