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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: September 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=13172894&doc=10    
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, $0.01 par value
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 October 29, 2019
Common Stock, $0.01 par value
131,059,097

1


NATIONAL INSTRUMENTS CORPORATION
INDEX  
Page No.

 
 
 

 
 

 

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

 
 

 

(unaudited) for the three and nine months ended September 30, 2019 and 2018

 
 

 

(unaudited) for the three and nine months ended September 30, 2019 and 2018

 
 

 

(unaudited) for the nine months ended September 30, 2019 and 2018
 
 
 
 
 
 
(unaudited) for the three and nine months ended September 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)

September 30,
 
December 31,

2019
 
2018
Assets
(unaudited)
 
 

Current assets:
 

 
 

Cash and cash equivalents
$
222,773

 
$
259,386

Short-term investments
209,416

 
271,396

Accounts receivable, net
224,305

 
242,955

Inventories, net
206,727

 
194,146

Prepaid expenses and other current assets
66,313

 
54,337

Total current assets
929,534

 
1,022,220

Property and equipment, net
239,140

 
245,201

Goodwill
259,430

 
264,530

Intangible assets, net
91,162

 
110,783

Operating lease right-of-use assets
63,766

 

Other long-term assets
45,289

 
28,501

Total assets
$
1,628,321

 
$
1,671,235

Liabilities and stockholders' equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued expenses
$
56,839

 
$
48,388

Accrued compensation
43,109

 
45,821

Deferred revenue - current
124,386

 
127,288

Other lease liabilities - current
14,038

 

Other current liabilities
22,761

 
25,913

Other taxes payable
31,958

 
35,574

Total current liabilities
293,091

 
282,984

Deferred income taxes
25,949

 
25,457

Liability for uncertain tax positions
7,631

 
9,775

Income tax payable - non-current
67,046

 
74,546

Deferred revenue - non-current
31,920

 
32,636

Operating lease liabilities - non-current
33,112

 

Other long-term liabilities
7,411

 
7,479

Total liabilities
466,160

 
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; 131,059,097 shares and 132,655,941 shares issued and outstanding, respectively 
1,311

 
1,327

Additional paid-in capital
939,121

 
897,544

Retained earnings
245,465

 
356,418

Accumulated other comprehensive loss
(23,736
)
 
(16,931
)
Total stockholders’ equity
1,162,161

 
1,238,358

Total liabilities and stockholders’ equity
$
1,628,321

 
$
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
 
Nine Months Ended

 
September 30,
 
September 30,

 
2019
 
2018
 
2019
 
2018

 
 

 
 

 
 

 
 

Net sales:
 
 

 
 

 
 

 
 

Product
 
$
305,247

 
$
310,216

 
$
882,747

 
$
897,355

Software maintenance
 
35,195

 
35,911

 
103,000

 
101,678

Total net sales
 
340,442

 
346,127

 
985,747

 
999,033


 
 

 
 

 
 

 
 

Cost of sales:
 
 

 
 

 
 

 
 

Product
 
84,127

 
87,082

 
240,056

 
239,205

Software maintenance
 
1,788

 
1,933

 
5,700

 
6,493

Total cost of sales
 
85,915

 
89,015

 
245,756

 
245,698


 
 

 
 

 
 

 
 

Gross profit
 
254,527

 
257,112

 
739,991

 
753,335


 
 

 
 

 
 

 
 

Operating expenses:
 
 

 
 

 
 

 
 

Sales and marketing
 
113,922

 
118,220

 
352,340

 
365,474

Research and development
 
66,558

 
66,170

 
200,981

 
194,921

General and administrative
 
35,711

 
26,712

 
92,639

 
81,882

Gain on sale of assets
 
(26,842
)
 

 
(26,842
)
 

Total operating expenses
 
189,349

 
211,102

 
619,118

 
642,277


 
 

 
 

 
 

 
 

Operating income
 
65,178

 
46,010

 
120,873

 
111,058


 
 

 
 

 
 

 
 

Other income:
 
 

 
 

 
 

 
 

Interest income
 
1,930

 
1,539

 
6,187

 
3,845

Net foreign exchange loss
 
(378
)
 
(956
)
 
(1,623
)
 
(2,082
)
Other gain, net
 
697

 
1,782

 
815

 
169

Income before income taxes
 
67,427

 
48,375

 
126,252

 
112,990

Provision for income taxes
 
15,783

 
5,181

 
22,697

 
14,474


 
 

 
 

 
 

 
 

Net income
 
$
51,644

 
$
43,194

 
$
103,555

 
$
98,516


 
 

 
 

 
 

 
 

Basic earnings per share
 
$
0.39

 
$
0.33

 
$
0.79

 
$
0.75


 
 

 
 

 
 

 
 

Weighted average shares outstanding - basic
 
131,385

 
132,357

 
131,896

 
131,792


 
 

 
 

 
 

 
 

Diluted earnings per share
 
$
0.39

 
$
0.32

 
$
0.78

 
$
0.74


 
 

 
 

 
 

 
 

Weighted average shares outstanding - diluted
 
131,889

 
133,197

 
132,890

 
133,067


 
 

 
 

 
 

 
 

Dividends declared per share
 
$
0.25

 
$
0.23

 
$
0.75

 
$
0.69

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

4


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


 
Three Months Ended
 
Nine Months Ended

 
September 30,
 
September 30,

 
2019
 
2018
 
2019
 
2018

 
 

 
 

 
 

 
 

Net income
 
$
51,644

 
$
43,194

 
$
103,555

 
$
98,516

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

 
 

 
 

 
 

Foreign currency translation adjustment
 
(8,500
)
 
(1,359
)
 
(9,303
)
 
(7,360
)
Unrealized (loss) gain on securities available-for-sale
 
(419
)
 
154

 
1,494

 
(404
)
Unrealized gain on derivative instruments
 
1,627

 
3,316

 
1,359

 
11,578

Other comprehensive (loss) income, before tax
 
(7,292
)
 
2,111

 
(6,450
)
 
3,814

Tax expense related to items of other comprehensive income
 
414

 
720

 
355

 
2,479

Other comprehensive (loss) income, net of tax
 
(7,706
)
 
1,391

 
(6,805
)
 
1,335

Comprehensive income
 
$
43,938

 
$
44,585

 
$
96,750

 
$
99,851


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


5


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


 
Nine Months Ended

 
September 30,

 
2019
 
2018
Cash flow from operating activities:
 
 

 
 

Net income
 
$
103,555

 
$
98,516

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

 
 

Depreciation and amortization
 
54,546

 
53,735

Stock-based compensation
 
38,054

 
27,492

Disposal gain on sale of assets
 
(26,842
)
 

Deferred income taxes
 
(1,461
)
 
732

Changes in operating assets and liabilities
 
(18,507
)
 
6,862

Net cash provided by operating activities
 
149,345

 
187,337


 
 

 
 

Cash flow from investing activities:
 
 

 
 

Capital expenditures
 
(47,183
)
 
(27,373
)
Proceeds from sale of assets
 
32,492

 

Capitalization of internally developed software
 
(7,179
)
 
(13,152
)
Additions to other intangibles
 
(1,132
)
 
(5,165
)
Acquisitions of equity-method investments
 
(13,670
)
 

Purchases of short-term investments
 
(141,074
)
 
(172,462
)
Sales and maturities of short-term investments
 
204,046

 
122,726

Net cash provided by (used in) investing activities
 
26,300

 
(95,426
)

 
 

 
 

Cash flow from financing activities:
 
 

 
 

Proceeds from issuance of common stock
 
25,823

 
24,424

Repurchase of common stock
 
(137,171
)
 

Dividends paid
 
(99,083
)
 
(91,034
)
Net cash used in financing activities
 
(210,431
)
 
(66,610
)

 
 

 
 

Effect of exchange rate changes on cash
 
(1,827
)
 
(4,084
)

 
 

 
 

Net change in cash and cash equivalents
 
(36,613
)
 
21,217

Cash and cash equivalents at beginning of period
 
259,386

 
290,164

Cash and cash equivalents at end of period
 
$
222,773

 
$
311,381

 
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 June 30, 2019
 
131,884,775

 
$
1,319

 
$
924,801

 
$
264,484

 
$
(16,030
)
 
$
1,174,574

Net income
 

 

 

 
51,644

 

 
51,644

Other comprehensive loss, net of tax
 

 

 

 

 
(7,706
)
 
(7,706
)
Issuance of common stock under employee plans
 
230,400

 
3

 
8,175

 

 

 
8,178

Stock-based compensation
 

 

 
13,284

 

 

 
13,284

Repurchase of common stock
 
(1,056,078
)
 
(11
)
 
(7,139
)
 
(37,647
)
 

 
(44,797
)
Dividends paid (1)
 

 

 

 
(33,016
)
 

 
(33,016
)
Balance at September 30, 2019
 
131,059,097

 
1,311

 
939,121

 
245,465

 
(23,736
)
 
1,162,161

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 

 

 

 
103,555

 

 
103,555

Other comprehensive loss, net of tax
 

 

 

 

 
(6,805
)
 
(6,805
)
Issuance of common stock under employee plans
 
1,608,832

 
16

 
25,807

 

 

 
25,823

Stock-based compensation
 

 

 
37,484

 

 

 
37,484

Repurchase of common stock
 
(3,205,676
)
 
(32
)
 
(21,714
)
 
(115,425
)
 

 
(137,171
)
Dividends paid (1)
 

 

 

 
(99,083
)
 

 
(99,083
)
Balance at September 30, 2019
 
131,059,097

 
$
1,311

 
$
939,121

 
$
245,465

 
$
(23,736
)
 
$
1,162,161

(1) Cash dividends declared per share of common stock were $0.25 for the three months ended September 30, 2019, and $0.75 for the nine months ended September 30, 2019.
 
The accompanying notes are an integral part of these financial statements. 

7





 
Common Stock Shares
 
Common Stock Amount
 
Additional-Paid in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income/(Loss)
 
Total Stockholders' Equity
Balance at June 30, 2018
 
132,208,105

 
$
1,322

 
$
864,314

 
$
316,607

 
$
(16,565
)
 
$
1,165,678

Net income
 

 

 

 
43,194

 

 
43,194

Other comprehensive income, net of tax
 

 

 

 

 
1,391

 
1,391

Issuance of common stock under employee plans
 
224,489

 
2

 
7,800

 

 

 
7,802

Stock-based compensation
 

 

 
9,303

 

 

 
9,303

Dividends paid (1)
 

 

 

 
(30,459
)
 

 
(30,459
)
Balance at September 30, 2018
 
132,432,594

 
1,324

 
881,417

 
329,342

 
(15,174
)
 
1,196,909

 
 
 
 
 
 
 
 
 
 
 
 
 

 
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
 

 

 

 
98,516

 

 
98,516

Other comprehensive income, net of tax
 

 

 

 

 
1,335

 
1,335

Issuance of common stock under employee plans
 
1,453,647

 
14

 
24,409

 

 

 
24,423

Stock-based compensation
 

 

 
27,029

 

 

 
27,029

Adoption of ASU 2014-09
 

 

 

 
8,619

 

 
8,619

Dividends paid (1)
 

 

 

 
(91,034
)
 

 
(91,034
)
Balance at September 30, 2018
 
132,432,594

 
$
1,324

 
$
881,417

 
$
329,342

 
$
(15,174
)
 
$
1,196,909

(1) Cash dividends declared per share of common stock were $0.23 for the three months ended September 30, 2018, $0.69 for the nine months ended September 30, 2018.

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 ("SEC"). In our opinion, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring items) considered necessary to present fairly our financial position at September 30, 2019 and December 31, 2018, the results of our operations and comprehensive income for three and nine months ended September 30, 2019 and 2018, the cash flows for the nine months ended September 30, 2019 and 2018 and the statement of stockholder's equity for the three and nine months ended September 30, 2019. Our operating results for the three and nine months ended September 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.

Gain on Sale of Assets

During the three months ended September 30, 2019, we recognized a gain of $26.8 million from the sale of our 136,000 square foot office building and property located at 6504 Bridgepoint Parkway, Austin, Texas (the "Millennium Property"). At the time of sale, we did not occupy the building and had been leasing the building to third parties for several years. The disposal gain is presented as "Gain on sale of assets" in the Consolidated Statements of Income.

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 ("ROU") model 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 lease standard will not be provided for earlier periods.

We have completed a qualitative and quantitative assessment of our lease portfolio, in which the new lease 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 lease 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 lease standard our prior conclusions about lease identification, lease classification and initial direct costs. The new lease 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 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 nine months ended September 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 nine months ended September 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. The market condition currently used is our stockholder return relative to the total stockholder return of the companies included in the Russell 2000 Index at the end of the 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.

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 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 and nine months ended September 30, 2019 and 2018, are as follows:

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

 
(In thousands)
 
(In thousands)

 
(Unaudited)
 
(Unaudited)

 
2019
 
2018
 
2019
 
2018
Weighted average shares outstanding-basic
 
131,385

 
132,357

 
131,896

 
131,792

Plus: Common share equivalents
 
 

 
 

 
 

 
 

RSUs
 
504

 
840

 
994

 
1,275

Weighted average shares outstanding-diluted
 
131,889

 
133,197

 
132,890

 
133,067


Stock awards to acquire 1,611,000 shares and 36,600 shares for the three months ended September 30, 2019 and 2018, respectively, and 568,000 shares and 537,000 shares for the nine months ended September 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.

11




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 training 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, China, South Korea and Japan). Total net sales based on the disaggregation criteria described above are as follows:

12





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

 
2019
 
2018
 
 
 
 
 
 
 
 
 
Net sales:
 
Point-in-Time
Over Time
Total
 
Point-in-Time
Over Time
Total
Americas
 
$
119,895

$
23,222

$
143,117

 
$
118,725

$
24,191

$
142,916

EMEIA
 
75,443

20,247

95,690

 
79,952

19,461

99,413

APAC
 
92,794

8,841

101,635

 
95,837

7,961

103,798

Total net sales(1)
 
$
288,132

$
52,310

$
340,442

 
$
294,514

$
51,613

$
346,127

(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


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

 
2019
 
2018
 
 
 
 
 
 
 
 
 
Net sales:
 
Point-in-Time
Over Time
Total
 
Point-in-Time
Over Time
Total
Americas
 
$
325,349

$
69,337

$
394,686

 
$
327,958

$
64,471

$
392,429

EMEIA
 
234,409

59,121

293,530

 
257,346

57,520

314,866

APAC
 
272,375

25,156

297,531

 
267,773

23,965

291,738

Total net sales(1)
 
$
832,133

$
153,614

$
985,747

 
$
853,077

$
145,956

$
999,033

(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 nine months ended September 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
149,961

   Recognition of revenue deferred in prior periods
(150,762
)
   Foreign currency translation impact
(2,817
)
Balance as of September 30, 2019 (unaudited)
$
156,306




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For the nine months ended September 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 nine months ended September 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 $57 million as of September 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 September 30, 2019, we expect to recognize approximately 13% of the revenue related to these unsatisfied performance obligations during the remainder of 2019, 45% during 2020, and 42% 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 September 30, 2019
(In thousands)
 
(Unaudited)

 
 
 
Gross
 
Gross
 
 

 
Adjusted Cost
 
Unrealized Gain
 
Unrealized Loss
 
Fair Value
Corporate bonds
 
$
208,480

 
$
1,072

 
$
(159
)
 
$
209,393

Time deposits
 
23

 

 

 
23

Total Short-term investments
 
$
208,503

 
$
1,072

 
$
(159
)
 
$
209,416


14


(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 September 30, 2019
(In thousands)