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UNITED STATES  
SECURITIES AND EXCHANGE COMMISSION  
Washington, D.C. 20549  

FORM 10-Q  
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  
  
For the quarterly period ended: June 30, 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=13038715&doc=11    
NATIONAL INSTRUMENTS CORPORATION  
(Exact name of registrant as specified in its charter)  
Delaware
 
74-1871327
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)

 
 
11500 North MoPac Expressway 
 
 
Austin,
 
78759
Texas
 
 
(address of principal executive offices)
 
(zip code)
 
Registrant's telephone number, including area code:  (512) 683-0100  
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of exchange on which registered
Common Stock
NATI
Nasdaq Stock Market
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.    
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 July 29, 2019
Common Stock - $0.01 par value
131,884,775

1


NATIONAL INSTRUMENTS CORPORATION
  
INDEX  
Page No.

 
 
 

 
 

 

June 30, 2019 (unaudited) and December 31, 2018

 
 

 

(unaudited) for the three and six months ended June 30, 2019 and 2018

 
 

 

(unaudited) for the three and six months ended June 30, 2019 and 2018

 
 

 

(unaudited) for the six months ended June 30, 2019 and 2018
 
 
 
 
 
 
(unaudited) for the three and six months ended June 30, 2019 and 2018

 
 


 
 

 
 

 
 

 
 

 
 
 

 
 

 
 

 
 

 
 

 
 

 
 



2


PART I - FINANCIAL INFORMATION  

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

June 30,
 
December 31,

2019
 
2018
Assets
(unaudited)
 
 

Current assets:
 

 
 

Cash and cash equivalents
$
191,761

 
$
259,386

Short-term investments
247,892

 
271,396

Accounts receivable, net
222,565

 
242,955

Inventories, net
206,851

 
194,146

Prepaid expenses and other current assets
66,021

 
54,337

Total current assets
935,090

 
1,022,220

Property and equipment, net
233,900

 
245,201

Goodwill
263,984

 
264,530

Intangible assets, net
97,612

 
110,783

Operating lease right-of-use assets
70,799

 

Other long-term assets
38,088

 
28,501

Total assets
$
1,639,473

 
$
1,671,235

Liabilities and stockholders' equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued expenses
$
54,966

 
$
48,388

Accrued compensation
39,613

 
45,821

Deferred revenue - current
128,787

 
127,288

Other lease liabilities - current
15,735

 

Other current liabilities
12,665

 
25,913

Other taxes payable
33,517

 
35,574

Total current liabilities
285,283

 
282,984

Deferred income taxes
27,903

 
25,457

Liability for uncertain tax positions
8,329

 
9,775

Income tax payable - long-term
67,046

 
74,546

Deferred revenue - long-term
32,937

 
32,636

Operating lease liabilities - non-current
38,495

 

Other long-term liabilities
4,906

 
7,479

Total liabilities
464,899

 
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; 131,884,775 shares and 132,655,941 shares issued and outstanding, respectively 
1,319

 
1,327

Additional paid-in capital
924,801

 
897,544

Retained earnings
264,484

 
356,418

Accumulated other comprehensive loss
(16,030
)
 
(16,931
)
Total stockholders’ equity
1,174,574

 
1,238,358

Total liabilities and stockholders’ equity
$
1,639,473

 
$
1,671,235


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
 
Six Months Ended

 
June 30,
 
June 30,

 
2019
 
2018
 
2019
 
2018

 
 

 
 

 
 

 
 

Net sales:
 
 

 
 

 
 

 
 

Product
 
$
299,798

 
$
306,780

 
$
577,500

 
$
587,139

Software maintenance
 
34,433

 
34,229

 
67,805

 
65,767

Total net sales
 
334,231

 
341,009

 
645,305

 
652,906


 
 

 
 

 
 

 
 

Cost of sales:
 
 

 
 

 
 

 
 

Product
 
81,741

 
79,806

 
155,929

 
152,122

Software maintenance
 
2,025

 
2,353

 
3,912

 
4,560

Total cost of sales
 
83,766

 
82,159

 
159,841

 
156,682


 
 

 
 

 
 

 
 

Gross profit
 
250,465

 
258,850

 
485,464

 
496,224


 
 

 
 

 
 

 
 

Operating expenses:
 
 

 
 

 
 

 
 

Sales and marketing
 
120,868

 
127,138

 
238,419

 
247,255

Research and development
 
68,257

 
66,908

 
134,423

 
128,751

General and administrative
 
29,044

 
27,892

 
56,927

 
55,170

Total operating expenses
 
218,169

 
221,938

 
429,769

 
431,176


 
 

 
 

 
 

 
 

Operating income
 
32,296

 
36,912

 
55,695

 
65,048


 
 

 
 

 
 

 
 

Other income:
 
 

 
 

 
 

 
 

Interest income
 
2,023

 
1,290

 
4,257

 
2,305

Net foreign exchange loss
 
(1,611
)
 
(2,105
)
 
(1,245
)
 
(1,126
)
Other gain (loss), net
 
143

 
(1,095
)
 
119

 
(1,613
)
Income before income taxes
 
32,851

 
35,002

 
58,826

 
64,614

Provision for income taxes
 
4,159

 
3,948

 
6,914

 
9,292


 
 

 
 

 
 

 
 

Net income
 
$
28,692

 
$
31,054

 
$
51,912

 
$
55,322


 
 

 
 

 
 

 
 

Basic earnings per share
 
$
0.22

 
$
0.24

 
$
0.39

 
$
0.42


 
 

 
 

 
 

 
 

Weighted average shares outstanding - basic
 
132,062

 
131,877

 
132,156

 
131,504


 
 

 
 

 
 

 
 

Diluted earnings per share
 
$
0.22

 
$
0.23

 
$
0.39

 
$
0.42


 
 

 
 

 
 

 
 

Weighted average shares outstanding - diluted
 
132,973

 
133,054

 
133,172

 
132,838


 
 

 
 

 
 

 
 

Dividends declared per share
 
$
0.25

 
$
0.23

 
$
0.50

 
$
0.46


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
 
Six Months Ended

 
June 30,
 
June 30,

 
2019
 
2018
 
2019
 
2018

 
 

 
 

 
 

 
 

Net income
 
$
28,692

 
$
31,054

 
$
51,912

 
$
55,322

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

 
 

 
 

 
 

Foreign currency translation adjustment
 
2,265

 
(11,804
)
 
(802
)
 
(6,001
)
Unrealized gain (loss) on securities available-for-sale
 
738

 
128

 
1,913

 
(557
)
Unrealized gain (loss) on derivative instruments
 
(1,480
)
 
12,032

 
(268
)
 
8,262

Other comprehensive income, before tax
 
1,523

 
356

 
843

 
1,704

Tax expense (benefit) related to items of other comprehensive income
 
(268
)
 
2,621

 
(58
)
 
1,760

Other comprehensive income (loss), net of tax
 
1,791

 
(2,265
)
 
901

 
(56
)
Comprehensive income
 
$
30,483

 
$
28,789

 
$
52,813

 
$
55,266


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


5


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


 
Six Months Ended

 
June 30,

 
2019
 
2018
Cash flow from operating activities:
 
 

 
 

Net income
 
$
51,912

 
$
55,322

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

 
 

Depreciation and amortization
 
35,984

 
35,098

Stock-based compensation
 
24,662

 
17,936

Deferred income taxes
 
2,268

 
1,766

Changes in operating assets and liabilities
 
(26,189
)
 
(11,270
)
Net cash provided by operating activities
 
88,637

 
98,852


 
 

 
 

Cash flow from investing activities:
 
 

 
 

Capital expenditures
 
(26,048
)
 
(19,764
)
Capitalization of internally developed software
 
(4,497
)
 
(11,344
)
Additions to other intangibles
 
(487
)
 
(3,936
)
Acquisitions, net of cash received
 
(9,784
)
 

Purchases of short-term investments
 
(91,777
)
 
(137,275
)
Sales and maturities of short-term investments
 
117,108

 
47,634

Net cash used in investing activities
 
(15,485
)
 
(124,685
)

 
 

 
 

Cash flow from financing activities:
 
 

 
 

Proceeds from issuance of common stock
 
17,645

 
16,622

Repurchase of common stock
 
(92,375
)
 

Dividends paid
 
(66,067
)
 
(60,575
)
Net cash used in financing activities
 
(140,797
)
 
(43,953
)

 
 

 
 

Effect of exchange rate changes on cash
 
20

 
(2,759
)

 
 

 
 

Net change in cash and cash equivalents
 
(67,625
)
 
(72,545
)
Cash and cash equivalents at beginning of period
 
259,386

 
290,164

Cash and cash equivalents at end of period
 
$
191,761

 
$
217,619

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


6




NATIONAL INSTRUMENTS CORPORATION  
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(unaudited)
 
 
Common Stock Shares
 
Common Stock Amount
 
Additional-Paid in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income/(Loss)
 
Total Stockholders' Equity
Balance at March 31, 2019
 
131,866,173

 
$
1,319

 
$
910,602

 
$
307,153

 
$
(17,821
)
 
$
1,201,253

Net income
 

 

 

 
28,692

 

 
28,692

Other comprehensive income, net of tax
 

 

 

 

 
1,791

 
1,791

Issuance of common stock under employee plans, including tax benefits
 
1,133,102

 
11

 
8,420

 

 

 
8,431

Stock-based compensation
 

 

 
13,335

 

 

 
13,335

Repurchase of common stock
 
(1,114,500
)
 
(11
)
 
(7,556
)
 
(38,404
)
 

 
(45,971
)
Dividends paid (1)
 

 

 

 
(32,957
)
 

 
(32,957
)
Balance at June 30, 2019
 
131,884,775

 
1,319

 
924,801

 
264,484

 
(16,030
)
 
1,174,574

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
 
132,655,941

 
1,327

 
897,544

 
356,418

 
(16,931
)
 
1,238,358

Net income
 

 

 

 
51,912

 

 
51,912

Other comprehensive income, net of tax
 

 

 

 

 
901

 
901

Issuance of common stock under employee plans, including tax benefits
 
1,378,432

 
14

 
17,631

 

 

 
17,645

Stock-based compensation
 

 

 
24,200

 

 

 
24,200

Repurchase of common stock
 
(2,149,598
)
 
(22
)
 
(14,574
)
 
(77,779
)
 

 
(92,375
)
Dividends paid (1)
 

 

 

 
(66,067
)
 

 
(66,067
)
Balance at June 30, 2019
 
131,884,775

 
$
1,319

 
$
924,801

 
$
264,484

 
$
(16,030
)
 
$
1,174,574



7





 
Common Stock Shares
 
Common Stock Amount
 
Additional-Paid in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income/(Loss)
 
Total Stockholders' Equity
Balance at March 31, 2018
 
131,204,795

 
$
1,312

 
$
846,743

 
$
315,951

 
$
(14,300
)
 
$
1,149,706

Net income
 

 

 

 
31,054

 

 
31,054

Other comprehensive loss, net of tax
 

 

 

 

 
(2,265
)
 
(2,265
)
Issuance of common stock under employee plans, including tax benefits
 
1,003,310

 
10

 
8,012

 

 

 
8,022

Stock-based compensation
 

 

 
9,559

 

 

 
9,559

Dividends paid (1)
 

 

 

 
(30,398
)
 

 
(30,398
)
Balance at June 30, 2018
 
132,208,105

 
1,322

 
864,314

 
316,607

 
(16,565
)
 
1,165,678

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
 
130,978,947

 
1,310

 
829,979

 
313,241

 
(16,509
)
 
1,128,021

Net income
 

 

 

 
55,322

 

 
55,322

Other comprehensive loss, net of tax
 

 

 

 

 
(56
)
 
(56
)
Issuance of common stock under employee plans, including tax benefits
 
1,229,158

 
12

 
16,610

 

 

 
16,622

Stock-based compensation
 

 

 
17,725

 

 

 
17,725

Adoption of ASU 2014-09
 

 

 

 
8,619

 

 
8,619

Dividends paid (1)
 

 

 

 
(60,575
)
 

 
(60,575
)
Balance at June 30, 2018
 
132,208,105

 
$
1,322

 
$
864,314

 
$
316,607

 
$
(16,565
)
 
$
1,165,678

(1) Cash dividends declared per share of common stock were $0.25 and $0.23 for the three months ended June 30, 2019 and 2018, respectively, and $0.50 and $0.46 for the six months ended June 30, 2019 and 2018, respectively.

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

8






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 June 30, 2019 and December 31, 2018, the results of our operations and comprehensive income for three and six months ended June 30, 2019 and 2018, the cash flows for the six months ended June 30, 2019 and 2018 and the statement of stockholder's equity for the three and six months ended June 30, 2019. Our operating results for the three and six months ended June 30, 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. 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.


9


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 six months ended June 30, 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 six months ended June 30, 2019 compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2018.

10



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 RSU awards that vest based on a market condition, currently our stockholder return relative to the total stockholder return of the companies included in 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, with service-based vesting conditions, are estimated using their market price on the date of grant. The fair values of rights under 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 companies included in 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.


11


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 and six months ended June 30, 2019 and 2018, are as follows:

 
Three Months Ended June 30,
 
Six Months Ended June 30,

 
(In thousands)
 
(In thousands)

 
(Unaudited)
 
(Unaudited)

 
2019
 
2018
 
2019
 
2018
Weighted average shares outstanding-basic
 
132,062

 
131,877

 
132,156

 
131,504

Plus: Common share equivalents
 
 

 
 

 
 

 
 

RSUs
 
911

 
1,177

 
1,016

 
1,334

Weighted average shares outstanding-diluted
 
132,973

 
133,054

 
133,172

 
132,838


  
Stock awards to acquire 861,000 shares and 697,800 shares for the three months ended June 30, 2019 and 2018, respectively, and 395,800 shares and 350,800 shares for the six months ended June 30, 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.

12




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.

The transaction price is allocated to the separate performance obligations on a relative standalone selling price 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
Perpetual/Subscription licenses: Value relationships based on (i) the directly observable pricing of the license bundled with software maintenance and (ii) the directly observable pricing of software maintenance renewals, when they are sold on a standalone basis.

Enterprise-wide term licenses: Residual method
Extended hardware warranty
Ratably over the course of the support contract (over time)
Within 30-90 days of 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)
Within 30-90 days of the beginning of the contract period
Observable in renewal transactions

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:

13





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

 
2019
 
2018
 
 
 
 
 
 
 
 
 
Net sales:
 
Point-in-Time
Over Time
Total
 
Point-in-Time
Over Time
Total
Americas
 
$
105,773

23,141

$
128,914

 
$
109,180

20,611

$
129,791

EMEIA
 
79,844

19,189

99,033

 
90,487

19,554

110,041

APAC
 
98,131

8,153

106,284

 
93,251

7,926

101,177

Total net sales(1)
 
$
283,748

50,483

$
334,231

 
$
292,918

48,091

$
341,009

(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


 
 
Six Months Ended June 30,
 
(In thousands)
 
 
(Unaudited)
 

 
2019
 
2018
 
 
 
 
 
 
 
 
 
Net sales:
 
Point-in-Time
Over Time
Total
 
Point-in-Time
Over Time
Total
Americas
 
$
205,454

46,115

$
251,569

 
$
209,232

40,280

$
249,512

EMEIA
 
158,966

38,874

197,840

 
177,394

38,059

215,453

APAC
 
179,581

16,315

195,896

 
171,937

16,004

187,941

Total net sales(1)
 
$
544,001

101,304

$
645,305

 
$
558,563

94,343

$
652,906

(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 long-term, during the six months ended June 30, 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
100,737

   Recognition of revenue deferred in prior periods
(98,745
)
   Foreign currency translation impact
(192
)
Balance as of June 30, 2019 (unaudited)
$
161,724




14




For the six months ended June 30, 2019, revenue recognized from performance obligations satisfied in 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 six months ended June 30, 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 excluding contracts where revenue is recognized as invoiced, was approximately $58 million as of June 30, 2019. Since we typically invoice customers at contract inception, this amount is included in our current and non-current deferred revenue balances. As of June 30, 2019, we expect to recognize approximately 25% of the revenue related to these unsatisfied performance obligations during the remainder of 2019, 40% during 2020, and 35% 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.

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 June 30, 2019
(In thousands)
 
(Unaudited)

 
 
 
Gross
 
Gross
 
 

 
Adjusted Cost
 
Unrealized Gain
 
Unrealized Loss
 
Fair Value
Corporate bonds
 
$
199,632

 
$
1,358

 
$
(165
)
 
$
200,825

U.S. treasuries and agencies
 
47,014

 
53

 

 
47,067

Total Short-term investments
 
$
246,646

 
$
1,411

 
$
(165
)
 
$
247,892


15


(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:

 
As of June 30, 2019
(In thousands)
 
(Unaudited)

 
Adjusted Cost
 
Fair Value
Due in less than 1 year
 
$
134,464

 
$
135,265

Due in 1 to 5 years
 
112,182

 
112,627

Total available-for-sale debt securities
 
$
246,646

 
$
247,892


 
 
 
 
Due in less than 1 year
 
Adjusted Cost
 
Fair Value
Corporate bonds
 
$
87,450

 
$
88,198

U.S. treasuries and agencies
 
47,014

 
47,067

Total available-for-sale debt securities
 
$
134,464

 
$
135,265