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UNITED STATES  
SECURITIES AND EXCHANGE COMMISSION  
Washington, D.C. 20549  
FORM 10-K  
[☒]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934  
For the fiscal year ended: December 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  

https://cdn.kscope.io/61a4fee5b18529ccaa1dd5c5a1eeed0c-nati-20171231x10kg001a12.jpg  
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  
78759
Austin,
 
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 each exchange on which registered
Common Stock, $0.01 par value
NATI
The NASDAQ Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock Purchase Rights
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes [x] No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ☐ No [x]
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 [x] 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 [x] 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 [x] 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 Act).  Yes [☐] No [x]
The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant at the close of business on June 28, 2019, was $3,059,614,367 based upon the last sales price reported for such date on the NASDAQ Stock Market. For purposes of this disclosure, shares of Common Stock held by persons who hold more than 5% of the outstanding shares of Common Stock and shares held by officers and directors of the registrant as of June 28, 2019, have been excluded in that such persons may be deemed to be affiliates. This determination is not necessarily conclusive.
At the close of business on February 5, 2020, the registrant had outstanding 130,760,076 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the definitive proxy statement to be filed by the registrant for its Annual Meeting of Stockholders to be held on May 5, 2020 (the “Proxy Statement”).

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Form 10-K
For the Fiscal Year Ended December 31, 2019

TABLE OF CONTENTS
 

 
 
 
 

 
 
 
 

 
 
 
 
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PART I

This Form 10-K 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,” “may,” “will,” “intend to,” “project,” “anticipate,” “continue,” "strive to," "seek to," "are encouraged by," "remain cautious," "remain optimistic," 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 Item 1 under the heading “Risk Factors” beginning on page 10, and elsewhere in this Form 10-K. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements. We disclaim any obligation to update information contained in any forward-looking statement.

ITEM 1.    BUSINESS
Overview
National Instruments Corporation (the "Company," "NI," "we," "us" or "our") started over 40 years ago on an idea of connecting engineers through software. Our founders created technology to connect instruments to computers in order to accelerate the testing and measurement of innovative technology, and this was the seed of a philosophy of accelerating innovation that continues to be a driving force of our culture, our business, and our operations today. We strive to enable customers around the world to do their most ambitious work while meeting fast-moving market demands. We provide the integration of modular hardware and open, flexible software systems, to consistently support organizations’ evolving test and measurement needs. Our hope is that in 100 years’ time, future generations will continue to benefit from the results of the innovation we make possible today.

Our overarching goal, which we call our core strategic vision is to be the leader in software-defined automated test and automated measurement systems. This vision provides a framework to help us achieve our financial goals of profitability and revenue growth by:
•
Delivering value that gives our customers a competitive advantage
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Providing a differentiated software-defined platform for automated test and automated measurement systems
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Focusing on industry-specific applications that benefit from our platform's disruptive capabilities
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Enhancing our system-level offerings to more fully meet customers' enterprise wide challenges
In pursuing our vision, we have empowered our team to be deliberate about the market opportunities we pursue to fuel growth by targeting the applications where we believe our systems can provide significant value to our customers. We believe our long-term track record for innovation and our differentiation in the market helps support the success of our customers, employees, community, and stockholders.

People first approach to engineering

Our philosophy of putting the needs of our customers first and elevating the impact of their creativity and innovation is at the heart of how we do business. We utilize our expertise to partner with talented engineers and enterprises around the world to push the limits of innovation. We believe it is a combination of our people, technology and data that make a difference in helping our customers reach speed, scale and efficiency across all phases of the product development cycle.

NI is headquartered in Austin, Texas. We were incorporated under the laws of the State of Texas in May 1976 and were reincorporated in Delaware in June 1994. In March 1995, we completed an initial public offering of our common stock. Our common stock, $0.01 par value, is quoted on the NASDAQ Stock Market under the trading symbol NATI.

Products, Technology, and Services

Our commitment to innovation and continuous improvement has been a core value for us for over 40 years. Below is an overview of our products, technology and services.

Software
    
NI software is the key differentiator of our platform. We have empowered hundreds of thousands of loyal users of LabVIEW, a unique graphical software platform optimized for engineers, and numerous other application software tools. We have

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consistently invested to maintain and strengthen our software platform to provide a simplified user interface, faster time-to-test, modern web- and cloud-enabled capabilities, and the ability to quickly create application-specific software tools.

The NI software platform spans the full range of customer needs, from high-performance driver software for NI hardware to general-purpose development tools that allow customers to create their own IP to higher-level software products that directly meet targeted customer applications. A hallmark of the NI software platform is the integration of NI and third-party software and hardware. We recently demonstrated our commitment and discipline to software excellence by a major investment to modernize our software platform, which resulted in a refresh of our flagship software, LabVIEW, as well as a series of new software products that address higher-level customer needs.

The power of our open platform

Across the world, software connections are driving our innovation. We have made significant investments in software interfaces so customers can use development tools such as Python, Linux, C++, Mathworks, MATLAB & Simulink, Microsoft Visual Studio, .NET and more to develop test and measurement applications with our platform.
    
NI provides a wide variety of software tools for programming automated test and automated measurement applications. This software offering includes:

Programming Environments
•
NI LabVIEW - a graphical programming approach that helps visualize every aspect of the application, including hardware configuration, measurement data, and debugging. This visualization makes it simple to integrate measurement hardware from various vendors, represent complex logic on the diagram, develop data analysis algorithms, and design custom engineering user interfaces.
•
NI LabWindows/CVI - an ANSI C integrated development environment and engineering toolbox with built-in libraries for measurement, analysis, and engineering UI design.
•
NI Measurement Studio - a suite of .NET tools designed for building engineering applications in Microsoft Visual Studio to acquire, analyze, and display measurement data.

Application Software
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NI TestStand - application software targeted for automated test and automated measurement applications in a manufacturing environment.
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NI VeriStand - a ready-to-use software environment for configuring real-time testing applications, including hardware-in-the-loop test systems.
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Flexlogger - application software optimized for quick sensor configuration and data logging of mixed signals to verify electromechanical systems.
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NI InsightCM Enterprise - a software solution with tightly integrated hardware options for monitoring ancillary rotating equipment.

Systems and Data Management
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NI DIAdem - configuration-based technical data management, analysis, and report generation tools to interactively mine and analyze engineering and measurement data.
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NI SystemLink - systems management software that enables the mass coordination of connected devices, software deployments, and data communications throughout a distributed system.


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Modular Hardware

We provide modular instrumentation that offers our customers the ability to create their own unique programmable, flexible and low-cost solutions. We believe our modular instrument approach enables us to grow our sales in the automated validation and automated production test market by delivering more test coverage and a lower-cost alternative for our customers. We offer two primary hardware form factors, PXI and NI C-series, both with a modular input/output ("I/O") approach in addition to industry standard PCI form factors. The NI PXI modular instrument platform, introduced in 1997, is a standard PC architecture in a rugged form factor with expansion slots and instrumentation extensions for timing, triggering and signal sharing. PXI combines mainstream PC software and PCI hardware with advanced instrumentation capabilities. The NI C-series platform, used in our CompactRIO and CompactDAQ products, is a rugged, high-performance I/O and processing platform used in a wide variety of data acquisition applications. We believe our C-series data acquisition and control products provide unique value where diverse I/O is needed, and we believe that we can expand our user base through new distributed and rugged products. The NI PXI and C-series platforms include field programmable gate array ("FPGA") technology, giving customers programmable hardware capability that provides high performance and is user-customizable with NI LabVIEW software.

Increasingly, our customers’ applications demand more system capabilities that more closely match their application needs. We have continually evolved our offering to include highly innovative products and application-specific systems. One example in the semiconductor industry is our NI Semiconductor Test System ("STS") which combines NI modular instrumentation with NI software for RF and mixed-signal production testing. The STS features fully production-ready test systems that use NI technology in a form factor suitable for a semiconductor production test environment. The STS combines the NI PXI hardware, TestStand test management software, and LabVIEW graphical programming software inside a fully enclosed test head. The compact STS design houses all the key components of a production tester while using a fraction of the floor space, power, and maintenance typically required by traditional automated test equipment. With the open, modular design, engineers can take advantage of the latest industry-standard PXI modules for more instrumentation and computing power.

Services and Support

We provide global services and support as part of our commitment to our customers’ success. Our services and support have always played a key role in helping our customers to design, deploy and create. Our services and support team is made up of highly qualified engineers and experts who help our customers to meet their application needs. With direct operations in approximately 45 countries, NI has local market expertise, on-site services, and technical support to enable customer success.

Through our ecosystem with an active community of software developers and over 1,000 National Instruments Alliance Partners around the world we are able to deliver solutions tailored to customer needs. Our Alliance Partners have deep knowledge of NI systems and the rich domain expertise to connect the right technologies, strategies, and support based on customers’ business needs.

We also offer software maintenance services, hardware services and maintenance and training certification.

Software Maintenance Services

Software Services for End Users: Our Standard Service Program provides our end users with support services through a software maintenance contract. The Standard Service Program is designed to help ensure that our end users are successful with our products by providing the end user with regular product upgrades and service packs, professional technical support from local engineers, 24-hour-a-day access to self-paced online product training, and access to older versions of their licensed NI software.

Volume Licensing for Account-Level Services: Our NI Volume License Program (“VLP”) and Enterprise Agreements (“EAs”) are designed to meet the needs of the business in addition to the needs of each end user. In addition to access to the Standard Service Program for each end user, businesses that take advantage of the VLP and EAs receive account-level benefits designed to help effectively manage their software assets and lower their total cost of ownership.
  

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Hardware Services and Maintenance

Warranty and Repair. We offer standard and extended warranties to help meet project life-cycle requirements and provide repair services for our products, express repair, and advance replacement services.
    
Calibration. To help our customers’ calibration needs, NI provides calibration solutions, including recalibration services, manual calibration procedures, and automated calibration software. In 2011, the American Association for Laboratory Accreditation accredited NI Calibration Services Austin to one of the highest international calibration standards in the industry, ISO/IEC 17025:2005 (“17025”). We now offer 17025 calibration services for original equipment manufacturers ("OEMs") and other organizations seeking to maintain their compliance with governmental, medical, transportation and electronics regulations. The 17025-calibration service offering is designed for companies standardizing their automated test and measurement systems on PXI modular instrumentation, which provides some of the most advanced technology for addressing the latest engineering challenges.
    
System Configuration and Deployment: Our NI System Assurance Program provides a fast, easy way to get our customers' new NI systems up and running. Our trained technicians install software and hardware and configure our customers’ PXI, and NI CompactRIO system to their specifications.    

Training and Certification

NI Training Program. NI training helps the customer build the skills to more efficiently develop robust, maintainable applications. We offer fee-based training classes and self-paced online training for many of our software and hardware products. On-site courses are quoted per customer requests and we include on-line course offerings with live teachers.

NI Certification Program. We offer programs to certify programmers and instructors for our products. Our certification program demonstrates our customers have the skills needed to create high-quality applications with NI software.

Markets and Applications

NI invests to enhance our offerings in software connected systems in the semiconductor, transportation and aerospace, defense, and government ADG industries. We are able to leverage the investments in these areas to serve a broad base of diverse customers in the other industries we serve.

•
Semiconductor

Within the semiconductor industry, customers are facing a rapid increase in complexity and intense time to market pressures. We are investing to increase our ability to deliver flexible, automated test, and measurement solutions that scale from chip verification to characterization, validation and into the production floor. This will help to meet the business needs of integrated circuit ("IC") manufacturers. IC makers are pressured to deliver more integrated solutions, ensure high levels of quality and reliability, remain cost competitive, and to shorten time to market to meet tight market windows. We continue to innovate with solutions that span our customers' product development lifecycle, focused on helping IC manufacturers address the cost, scalability, design, and device challenges they face in targeting the development of the next generation of smart devices.

•
Transportation

The automotive industry is evolving to include electrification and advanced driver-assistance systems (ADAS). New test challenges and requirements are coming faster than ever before and we believe customers see benefits in NI’s adaptable technologies. Our open and easily upgradable automated test and measurement systems give customers the flexibility to meet their needs when faced with rapidly changing requirements and tight budgets.

•
Aerospace, Defense and Government

Over the years we have built a deep understanding of how to help our ADG customers optimize test strategies to meet increasingly demanding technical and business requirements. We help our customers control their proprietary IP through our software offering while meeting their demands for highly customized and long life-cycle systems. Our adaptive, open technologies are designed to reduce the cost of maintenance and support by proactively managing technology insertion and life-cycle management strategies. Our combination of flexible hardware and open software also allows for rapid prototyping and validation of new technologies, helping reduce the time to innovate.


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•
Portfolio

For over 40 years, we have enabled engineers to develop and deliver increasingly complex products in every industry we serve. With our adaptive automated measurement technology, we help our customers perform research, validate design quality and thoroughly test them in production. Our platform’s modular characteristics allow our customers to quickly integrate solutions and also allows us to efficiently define and deliver ready-to-run offerings that meet their application needs even faster. The main industries of focus within the portfolio grouping, include Electrical Equipment, Electronics, Energy, Life Sciences and Academic.


Our Customers

We continue to have a broad, diverse sets of customers with over 35,000 customer accounts worldwide, with no customer representing more than 3% of our revenues in each of the past three years.

Culture and Employees

We consider our employees to be one of our greatest assets and central to our continued success. As of December 31, 2019, we had more than 7,300 employees worldwide. We consider our employee relations to be good.

Sales and Distribution

We distribute and sell our products primarily through a direct sales organization. We also use independent distributors, OEMs, value-added resellers ("VARs"), system integrators and consultants, each of whom we refer to as partners, to market and sell our products.

We have sales and support offices in approximately 45 countries. Sales outside of the U.S. accounted for approximately 63% of our revenues in each of the last three years. We believe the ability to provide comprehensive service and support to our customers is an important factor in our business. We generally permit customers to return products within 30 days from receipt for a refund of the purchase price less a restocking charge. Our hardware products are generally warranted against defects in materials and workmanship for one year from the date we ship the products to our customers. Historically, warranty costs and returns have not been material.

Our foreign operations are subject to certain risks set forth under Item 1A, Risk Factors, We are Subject to Various Risks Associated with International Operations and Foreign Economies. See also discussion regarding fluctuations in our quarterly results and seasonality in Item 1A, Risk Factors, Our Revenues are Subject to Seasonal Variations.

We have one operating segment and one reporting unit. Our chief operating decision maker evaluates our financial information and resources and assesses the performance of these resources on a consolidated basis. For information regarding revenue, results of operations, and total assets for each of our last three fiscal years, please refer to our financial statements included in this Form 10-K and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of this Form 10-K.

Marketing

We bring our inside knowledge of leading-edge technology trends to the professional engineering community throughout the year, achieving significant customer reach at our premier global events, NIWeek, NIDays Europe and NIDays Asia. We engage a broad audience and partner with our direct sales force to help strengthen customer relationships at all levels of the account. We expand our reach through thought leadership and content on our website at ni.com, gaining exposure through online webcasts, blogs and social media. We also participate actively in conversations in the technology community through industry tradeshows, technical conferences, trainings and user seminars.


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Competition

We operate in a highly competitive market, with competition offering products and solutions specific to industries and applications. Different competitors offer hardware, software or solutions that directly compete with different aspects of our business. Key competitors include Advantest, Anritsu, Fortive, Keysight, Rohde & Schwarz, and Teradyne.

See further discussion regarding risks associated with our competitive environment in Item 1A, Risk Factors, We Operate in Intensely Competitive Markets.

Research and Development

Our business and our customers’ businesses are rapidly evolving. We invest significant resources in research and development because we believe our long-term growth and success depends on helping our customers stay ahead of the curve in the fast-moving world of technology. We listen to our customers’ needs as a guide to our research and development efforts. We focus on enhancing existing products and developing new products that have features and functionality intended to address expected technology advances and we seek to offer competitive capabilities and performance at excellent value. Our research and development team strives to build quality into our products from the start, in the design phase. We believe this “quality first” mindset helps to reduce overall development and manufacturing costs and provide reliability in our end products.
Our research and development expenses were $272 million, $261 million and $232 million in 2019, 2018, and 2017, respectively.
Intellectual Property

We rely on a combination of patent, trade secret, copyright and trademark law, contracts and technical measures to establish and protect our proprietary rights in our products. As of December 31, 2019, we held 870 U.S. patents (868 utility patents and 2 design patents) and 91 patents in foreign countries (78 patents registered in Europe, 7 patents in China, 5 patents in Japan, and 1 patent in Mexico), and had 62 patent applications pending in the U.S. and foreign countries. 258 of our issued U.S. patents are software patents related to LabVIEW and cover fundamental aspects of the graphical programming approach used in LabVIEW. Our patents expire from 2020 to 2038. The expiration of any particular patent in the short term is not expected to have any significant negative impact on our business. No assurance can be given that our pending patent applications will result in the issuance of patents. We also own certain registered trademarks in the United States and abroad. See further discussion regarding risks associated with our patents in Item 1A, Risk Factors, Our Business Depends on Our Proprietary Rights and We Have Been Subject to Intellectual Property Litigation.

Manufacturing and Suppliers

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.

Our manufacturing processes use large volumes of high-quality components and subassemblies supplied by outside sources. Several of these components are only available through limited sources. Limited source items purchased include custom application specific integrated circuits, chassis and other items. We have in the past experienced delays and quality problems in connection with limited source items, and there can be no assurance that these problems will not recur in the future. Accordingly, our failure to receive items from limited source item suppliers could result in a material adverse effect on our net sales and operating results. See Our Business is Dependent on Key Suppliers for additional discussion of the risks associated with limited source suppliers. We must comply with many different governmental regulations related to the use, storage, discharge, and disposal of toxic, volatile or otherwise hazardous chemicals used in our operations in the U.S., Hungary, and Malaysia. See Item 1A, Risk Factors, Our Operations are Subject to a Variety of Environmental Regulations and Costs for further discussion of environmental matters as they may affect our business.


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Backlog

Backlog is a measure of orders that are received but that are not shipped to customers at the end of a quarter. We typically ship products shortly following the receipt of an order. Accordingly, our backlog typically represents less than 5 days sales. Backlog should not be viewed as an indicator of our future sales.

Corporate Responsibility

At NI, we want to help engineers, enterprises, and innovators thrive today, tomorrow, and for the next hundred years. From inspiring future science, technology, engineering, and math ("STEM") leaders to protecting our planet, our goal of making a positive impact on the world is ingrained in our culture, and business practices. As a company, we are fostering a pipeline of diverse STEM talent through academic partnerships, our employee mentor program, and investment in STEM education. We also are exploring ways that we can better conserve natural resources, reduce our environmental footprint, and put our technology to use in helping solve our planet's most pressing environmental problems.

At NI, we proudly support our employees and our communities as we collectively take on the most significant challenges of our time.

Available Information

Our website is www.ni.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act and every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T are available through our Internet website as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the Securities and Exchange Commission ("SEC"), or upon written request without charge. Our website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K. The SEC maintains a website, www.sec.gov, which contains these reports and other information regarding issuers that file electronically


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ITEM 1A.    RISK FACTORS 
In addition to the other information set forth in this Form 10-K, you should carefully consider the risk factors discussed below. The risks described below are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or operating results.
Uncertain Global Economic Conditions Could Materially Adversely Affect Our Business and Results of Operations.  Our operations and performance are sensitive to fluctuations in general economic conditions, both in the U.S. and globally. Uncertainty about global and regional economic conditions poses a risk to us as businesses may decrease or postpone spending in response to events such as continued trade tensions between the U.S. and China or other countries, geopolitical instability, pandemics and other major public health issues including the coronavirus, financial market volatility, tariffs or other trade restrictions, government regulatory actions, negative financial news or other factors. Negative trends or sentiments in worldwide and regional economic conditions have in the past and could again have a material adverse effect on demand for our products and services. Even if resolved, these trends could have a broad negative impact on the global industrial economy, which could have a material adverse impact on our business and our results of operations. These factors as well as others we may not contemplate could have a material adverse effect on the spending patterns of businesses including our current and potential customers which could have a material adverse effect on our net sales and our results of operations. See “Current business outlook” in this Form 10-K for information regarding recent business conditions.
We are Subject to Various Risks Associated with International Operations and Foreign Economies. Our international sales and operations are subject to inherent risks, including, but not limited to:

•
fluctuations in foreign currencies relative to the U.S. dollar;
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unexpected changes to currency policy or currency restrictions in foreign jurisdictions;
•
delays in collecting trade receivable balances from customers in developing economies;
•
tariffs and other trade barriers; 
•
unexpected changes in regulatory requirements;
•
fluctuations in local economies;  
•
disparate and changing employment laws in foreign jurisdictions;
•
difficulties in staffing and managing foreign operations;  
•
costs and risks of localizing products for foreign countries;
•
major public health concerns, including the coronavirus:
•
enhanced exposure to potential unauthorized use, duplication, misappropriation, theft or other infringement or violation of our intellectual property rights;  
•
government actions throughout the world; and 
•
the burdens of complying with a wide variety of foreign laws.  

Moreover, there can be no assurance that our international sales will continue at existing levels or grow in accordance with our efforts to increase foreign market penetration.

In many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by U.S. regulations applicable to us such as the Foreign Corrupt Practices Act. Although we have policies and procedures designed to ensure compliance with these laws, there can be no assurance that all of our employees, contractors and agents, including those based in or from countries where practices which violate such U.S. laws may be customary, will not take actions in violation of our policies. Any violation of foreign or U.S. laws by our employees, contractors or agents, even if such violation is prohibited by our policies, could have a material adverse effect on our business. We must also comply with various import and export regulations. The application of these various regulations depends on the classification of our products which can change over time as such regulations are modified or interpreted. As a result, even if we are currently in compliance with applicable regulations, there can be no assurance that we will not have to incur additional costs or take additional compliance actions in the future. Failure to comply with these regulations could result in fines or termination of import and export privileges, which could have a material adverse effect on our operating results. Additionally, the regulatory environment in some countries is very restrictive as their governments try to protect their local economy and value of their local currency against the U.S. dollar.


10

We Make Significant Investments in New Products that May Not Be Successful or Achieve Expected Returns. We plan to continue to make significant investments in research, development, and marketing for new and existing products and technologies. We have made and expect to make significant investments in software and other technology development related to the new and enhanced features of our products. These investments involve a number of risks as the commercial success of such efforts depend on many factors, including our ability to anticipate and respond to innovation, achieve the desired technological fit, and be effective with our marketing and distribution efforts.  If our existing or potential customers do not perceive our latest product offerings as providing significant new functionality or value, or if we are late to market with a new product or technology, we may not achieve our expected return on our investments or be able recover the costs expended to develop new product offerings, which could have a material adverse effect on our operating results.  Even if our new products are profitable, our operating margins for new products may not be as high as the margins we have experienced historically.

Our Product Revenues are Dependent on Certain Industries and Contractions in these Industries Could Have a Material Adverse Effect on Our Results of Operations.  Sales of our products are dependent on customers in certain industries, particularly telecommunications, semiconductor, consumer electronics, automotive, energy, automated test equipment, and aerospace, defense and government. As we have experienced in the past, and as we may continue to experience in the future, downturns characterized by diminished product demand in any one or more of these industries may result in decreased sales and a material adverse effect on our operating results. We cannot predict when and to what degree contractions in these industries may occur; however, any sharp or prolonged contraction in one or more of these industries could have a material adverse effect on our business and results of operations.

Our Success Depends on New Product Introductions and Market Acceptance of Our Products. The market for our products is characterized by rapid technological change, evolving industry standards, changes in customer needs and frequent new product introductions, and is therefore highly dependent upon timely product innovation. Our success is dependent on our ability to successfully develop and introduce new and enhanced products on a timely basis to replace declining revenues from older products, and on increasing penetration in domestic and international markets. As has occurred in the past and as may be expected to occur in the future, we have experienced significant delays between the announcement and the commercial availability of new products. Any significant delay in releasing new products could have a material adverse effect on the ultimate success of a product and other related products and could impede continued sales of predecessor products, any of which could have a material adverse effect on our operating results. There can be no assurance that we will be able to introduce new products in accordance with announced release dates, that our new products will achieve market acceptance or that any such acceptance will be sustained for any significant period. Failure of our new products to achieve or sustain market acceptance could have a material adverse effect on our operating results.

Our Reported Financial Results May be Adversely Affected by Changes in Accounting Principles Generally Accepted in the U.S. We prepare our financial statements in conformity with accounting principles generally accepted in the U.S. These accounting principles are subject to interpretation by the Financial Accounting Standards Board ("FASB") and the Securities and Exchange Commission. Generally accepted accounting principles and accompanying accounting pronouncements, implementation guidelines and interpretations for many aspects of our business, such as revenue recognition, software capitalization, and income tax uncertainties, are complex and involve subjective judgments by management. A change in these policies or interpretations could have a significant effect on our reported financial results and our internal controls over financial reporting, may retroactively affect previously reported results, could cause unexpected financial reporting fluctuations, and may require us to make costly changes to our operational processes and accounting systems. For example, in February 2016, the FASB issued ASU 2016-02, Leases, which, as amended, supersedes nearly all existing U.S. generally accepted accounting principles ("GAAP") lease guidance and which became effective for us for our fiscal year beginning January 1, 2019. (See Note 1 - Operations and summary of significant accounting policies and Note 9 - Leases of Notes to Consolidated Financial Statements for additional discussion of the accounting changes).


11

Our Manufacturing Capacity, and a Substantial Majority of our Warehousing and Distribution Capacity is Located Outside of the U.S. We manufacture substantially all of our product volume at our facilities in Debrecen, Hungary and Penang, Malaysia. In order to enable timely shipment of products to our customers we maintain the substantial majority of our inventory at our international locations. In addition to being subject to the risks of maintaining such a concentration of manufacturing capacity and global inventory, these facilities and their operations are also subject to risks associated with doing business internationally, including, but not limited to:

•
the volatility of the Hungarian forint and the Malaysian ringgit relative to the U.S. dollar; 
•
changing and potentially unstable political environments; 
•
significant and frequent changes in corporate tax laws; 
•
difficulty in managing manufacturing operations in foreign countries; 
•
challenges in expanding capacity to meet increased demand; 
•
difficulty in achieving or maintaining product quality; 
•
interruption to transportation flows for delivery of components to us and finished goods to our customers;
•
major public health concerns, including the coronavirus; 
•
restrictive labor codes; and 
•
increasing labor costs. 

No assurance can be given that our efforts to mitigate these risks will be successful. Any failure to effectively deal with the risks above could result in an interruption in the operations of our facilities in Hungary or Malaysia which could have a material adverse effect on our operating results.

Our centralization of inventory and distribution from a limited number of shipping points is subject to inherent risks, including:

•
burdens of complying with additional or more complex VAT and customs regulations; and 
•
concentration of inventory increasing the risks associated with fire, natural disasters and logistics disruptions to customer order fulfillment. 

Any failure or delay in distribution from our facilities in Hungary and Malaysia could have a material adverse effect on our operating results.

Our Financial Performance is Subject to Risks Associated with Changes in the Value of the U.S. Dollar versus Local Currencies. The vast majority of our sales outside of the U.S. are denominated in local currencies, and accordingly, the U.S. dollar equivalent of these sales is affected by changes in the foreign currency exchange rates. If the local currencies in which we sell our products strengthen against the U.S. dollar, we have in the past, and in the future may need to, lower our prices in the local currency to remain competitive in our international markets. This could have a material adverse effect on our gross and net profit margins. If the local currencies in which we sell our products weaken against the U.S. dollar and if the local sales prices cannot be raised due to competitive pressures, we will experience a deterioration of our gross and net profit margins. In the past, we have noted that significant volatility in foreign currency exchange rates in the markets in which we do business has had a significant impact on the revaluation of our foreign currency denominated firm commitments, on our ability to forecast our U.S. dollar equivalent net sales and expenses and on the effectiveness of our hedging programs. In the past, these dynamics have also adversely affected our net sales growth in international markets and may pose similar challenges in the future. See “Results of Operations” in this Form 10-K for further discussion on the effect that changes in the foreign currency exchange rates have had on our operating results. See “Current business outlook” in this Form 10-K for information regarding recent business conditions.


12

Orders with a Value of Greater than One Million Dollars Expose Us to Significant Additional Business and Legal Risks that Could Have a Material Adverse Impact on our Business, Results of Operations and Financial Condition. We continue to make a concentrated effort to increase our net sales through the pursuit of orders with a value greater than $1.0 million. These types of orders expose us to significant additional business and legal risks compared to smaller orders. Our very large customers frequently require contract terms that vary substantially from our standard terms of sale. At times these orders include terms that impose critical delivery commitments and severe contractual liabilities if we fail to provide the required quantity of products at the required delivery times, impose product acceptance requirements and product performance evaluation requirements which create uncertainty with respect to the timing of our ability to recognize revenue from such orders, allow the customers to cancel or delay orders without liability, require us to develop specific product mitigation plans for product delivery constraints caused by unexpected or catastrophic situations to help assure quick production recovery, and that require most favored customer pricing, significant discounts, extended payment terms and volume rebates. At times these customers require broad indemnity obligations and large direct and consequential damage provisions in the event we breach our contracts with them. At times these contracts have supply constraint requirements which mandate that we allocate large product inventories for a specific contract. These inventory requirements expose us to higher risks of inventory obsolescence and can adversely impact our ability to provide adequate product supply to other customers.

While we attempt to limit the number of contracts that contain the non-standard terms of sale described above and attempt to contractually limit our potential liability under such contracts, we have been, and expect to be, required to agree to some or all of such provisions to secure orders from very large customers and to continue to grow our business. These arrangements expose us to significant additional legal and operational risks which could result in a material adverse impact on our business, results of operations and financial condition. In addition, these larger orders are more volatile, are subject to greater discount variability and may contract at a faster pace during an economic downturn. We attempt to manage these risks but there can be no assurance that we will be successful in our efforts.

Revenue Derived from Systems Orders Could Adversely Affect our Gross Margin and Could Lead to Greater Variability in our Quarterly Results.  We consider orders with a value greater than $20,000 as being indicative of our systems business. These orders have been and may continue to be more sensitive to changes in the global industrial economy, subject to greater discount variability and such orders may be pushed-out or reduced at a faster pace during an economic downturn compared to orders valued at less than $20,000.  To the extent that the amount of our net sales derived from systems orders increases in future periods, either in absolute dollars or as a percentage of our overall business, our gross margins could decline, and we could experience greater volatility in our financial results and business, and see a greater negative financial impact from future downturns in the global industrial economy. System orders may also have an impact on the historical seasonal pattern of our net sales and our results of operations. System orders make managing inventory levels more difficult as we have in the past and may have to in the future build large quantities of inventory in anticipation of future demand that may not materialize.

Our Realignment Activities May be Disruptive to Our Operations and Negatively Impact Our Results of Operations.
Over the past three years, we have been implementing changes within our organization designed to enhance our ability to pursue market opportunities, accelerate our technology development initiatives, and improve operational efficiencies. Specifically, we have aligned certain aspects of our operations with our strategic focus on industry-specific applications where we believe our product platform can add the most value to our customers. In the short-term, these actions may lead to business disruptions, decreased productivity and unanticipated employee turnover which may have an adverse impact on our business and results of operations.

Concentrations of Credit Risk and Uncertain Conditions in the Global Financial Markets May Adversely Affect Our Business and Results of Operations.  By virtue of our holdings of cash, investment securities and foreign currency derivatives, we have exposure to many different counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks and investment banks. Many of these transactions expose us to credit risk in the event of a default of our counterparties. We continue to monitor the stability of the financial markets, particularly those in the emerging markets. We can give no assurance that we will not be negatively impacted by any adverse outcomes in those markets. There can be no assurance that any losses or impairments to the carrying value of our financial assets as a result of defaults by our counterparties would not materially and adversely affect our business, financial position and results of operations.

We Have Established a Budget and Variations from Our Budget Will Affect Our Financial Results.    We have established an operating budget for fiscal 2020. Our budget was established based on the estimated revenue from sales of our products which are based on anticipated economic conditions in the markets in which we do business as well as the timing and volume of our new products and the expected penetration of both new and existing products in the marketplace. If demand for our products during the remainder of 2020 is less than the demand we anticipated in setting our fiscal year budget, our operating results could be negatively impacted.


13

If we exceed our budgeted level of expenses or if we cannot reduce expenditures in response to a decrease in net sales, our operating results could be adversely affected. Our spending could exceed our budget due to a number of factors, including, but not limited to:

•
continued foreign currency fluctuations;
•
increased manufacturing costs resulting from component supply shortages or component price fluctuations; 
•
additional marketing costs for new product introductions or for conferences and tradeshows; 
•
the timing, cost or outcome of any future intellectual property litigation or commercial disputes;
•
unanticipated costs related to acquisitions we may make; or
•
increased component costs resulting from vendors increasing their sales prices.  

We Operate in Intensely Competitive Markets.  The markets in which we operate are characterized by intense competition from numerous competitors, some of which have larger market capitalization and resources than we do, and we may face further competition from new market entrants in the future. Key competitors are Advantest, Anritsu, Fortive, Keysight, Rohde & Schwarz, Teradyne, and others. These competitors offer hardware and software products that provide solutions that directly compete with our software defined automated test and automated measurement systems. Because these companies have strong positions in the instrumentation business, new product introductions by them, changes in their marketing strategy or product offerings or aggressive pricing strategies by them to gain market share could have a material adverse effect on our operating results.

We believe our ability to compete successfully depends on a number of factors both within and outside our control, including, but not limited to:
•
general market and economic conditions;
•
our ability to maintain and grow our business with our very large customers;
•
our ability to meet the volume and service requirements of our large customers;
•
success in developing and selling new products;
•
product pricing, including the impact of currency exchange rates;
•
industry consolidation, including acquisitions by us or our competitors;
•
capacity utilization and the efficiency of manufacturing operations;  
•
timing of our new product introductions; 
•
new product introductions by competitors; 
•
the ability of competitors to more fully leverage low cost geographies for manufacturing or distribution; 
•
effectiveness of sales and marketing resources and strategies; 
•
adequate manufacturing capacity and supply of components and materials; 
•
strategic relationships with our suppliers and other third parties; 
•
product quality and performance; 
•
protection of our products by effective use of intellectual property laws; 
•
the financial strength of our competitors; 
•
the outcome of any future litigation or commercial dispute; 
•
barriers to entry imposed by competitors with significant market power in new markets; and 
•
government actions throughout the world. 

There can be no assurance that we will be able to compete successfully in the future.


14

Our Quarterly Results are Subject to Fluctuations Due to Various Factors that May Adversely Affect Our Business and Results of Operations.  Our quarterly operating results have fluctuated in the past and may fluctuate significantly in the future due to a number of factors, including, but not limited to:

•
changes in the amount of revenue derived from very large orders (including orders from our very large customers) and the pricing, margins, and other terms of such orders; 
•
tariffs and trade restrictions imposed by the U.S. or other countries;
•
fluctuations in foreign currency exchange rates; 
•
changes in global economic conditions; 
•
changes in the capacity utilization including at our facility in Malaysia;
•
changes in the mix of products sold; 
•
the availability and pricing of components from third parties (especially limited sources); 
•
the difficulty in maintaining margins, including the higher margins traditionally achieved in international sales; 
•
changes in pricing policies by us, our competitors or suppliers; 
•
the timing, cost or outcome of any future intellectual property litigation or commercial disputes; 
•
delays in product shipments caused by human error or other factors;
•
disruptions in transportation channels; or
•
major public health concerns such as pandemics or other factors.  

Our Revenues are Subject to Seasonal Variations.  In previous years, our revenues have been characterized by seasonality, with revenues typically growing from the first quarter to the second quarter, being relatively constant from the second quarter to the third quarter, growing in the fourth quarter compared to the third quarter and declining in the first quarter of the following year from the fourth quarter of the preceding year. This historical trend has been affected and may continue to be affected in the future by broad fluctuations in the global industrial economy as well as the timing of new product introductions or any acquisitions. In addition, revenue derived from very large orders, including those from our very large customers, have had a significant impact on our historical seasonal trends as these orders may be more sensitive to changes in the global industrial economy, may be subject to greater volatility in timing and amount, greater discount variability, lower gross margins, and may contract at a faster pace during economic downturns.

Our Tax Returns and Other Tax Matters are Subject to Examination by the U.S. Internal Revenue Service and Other Tax Authorities and Governmental Bodies and the Results of These Examinations Could Have a Material Adverse Effect on Our Financial Condition. 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. These uncertain tax positions are subject to examination by the U.S. Internal Revenue Service and other tax authorities. There can be no assurance as to the outcome of any future examinations. If the ultimate determination of our taxes owed is for an amount in excess of amounts previously accrued, our operating results, cash flows, and financial condition could be materially adversely affected. Our tax years 2013 through 2019 remain open to examination by the major taxing jurisdictions to which we are subject.

Acquisitions, Joint Ventures, Alliances, or Similar Strategic Relationships, or Dispositions of Any of Our Businesses, and the Related Integration or Separation Risks May Disrupt or Otherwise Have a Material Adverse Effect on Our Business and Financial Results. As part of our business strategy, we pursue selective acquisitions, as well as joint ventures, partnerships, alliances, or similar strategic transactions and relationships with third parties, to support our business. We may also undertake dispositions of certain of our businesses or products.  Achieving the anticipated benefits of an acquisition or other strategic transaction depends upon whether the integration of the acquired business, products or technology is accomplished efficiently and effectively. In addition, successful transactions generally require, among other things, integration of product offerings, manufacturing operations and coordination of sales and marketing and research and development efforts. These difficulties can become more challenging due to the need to coordinate geographically separated organizations, the complexities of the technologies being integrated, and the necessities of integrating personnel with disparate business backgrounds and combining different corporate cultures. The time invested in completing any strategic transaction as well as the integration of operations following a strategic transaction also requires the dedication of management resources, which may distract attention from our day-to-day business and may disrupt key research and development, marketing or sales efforts. Our inability to successfully integrate any of our acquisitions could harm our business. The existing products previously sold by entities we have acquired may be of a lesser quality than our products or could contain errors that produce incorrect results on which users rely or cause failure or interruption of systems or processes that could subject us to liability claims that could have a material adverse effect on our operating results or financial position. Furthermore, products acquired, developed, or marketed in connection with acquisitions or other strategic transactions may not gain acceptance in our markets, and we may not achieve the anticipated or desired benefits of such transactions.


15

Similarly, any divestitures have inherent risks, including the inability to find potential buyers with favorable terms, the expense of selling the entity, business, or product line, the possibility that any anticipated sale will be delayed or will not occur, the potential impact on our cash flows and results of operations which may dilute our earnings per share, the potential delay or failure to realize the perceived strategic or financial merits of the divestment, difficulties in the separation of operations, services, information technology, products and personnel, potential loss of customers or employees, exposure to unanticipated liabilities, unexpected costs associated with such separation, diversion of management’s attention from other business concerns and potential post-closing claims for alleged breaches of related agreements, indemnification or other disputes.

Future acquisitions or dispositions could also result in the incurrence of debt, contingent liabilities or amortization expenses, or write-offs of goodwill and other intangible assets, any of which could harm our financial condition.

Tax Law Changes in Hungary Could Have a Negative Impact on our Effective Tax Rate, Earnings and Results of Operations. The profit from our Hungarian operations benefits from the fact that it is subject to an effective income tax rate that is lower than the U.S. federal statutory tax rate. Our earnings in Hungary are subject to a statutory tax rate of 9%. In addition, effective January 1, 2010, certain qualified research and development expenses in Hungary became eligible for an enhanced tax deduction. These tax benefits may not be available in future years due to changes in political conditions in Hungary or changes in tax laws in Hungary or in the U.S. The reduction or elimination of these benefits in Hungary could result in an increase in our future effective income tax rate which could have a material adverse effect on our operating results. (See Note 10 - Income taxes of Notes to Consolidated Financial Statements for additional discussion regarding the impact of these matters on our income taxes).

 Our Income Tax Rate Could be Adversely Affected by the Expiration of a Tax Holiday in Malaysia. Profits from our manufacturing facility in Penang, Malaysia are free of tax under a 15-year tax holiday effective January 1, 2013. The tax holiday has been extended for a period of ten years starting from the year 2028. If we fail to satisfy the conditions of the tax holiday, this tax benefit may be terminated early. The expiration of the tax holiday in Malaysia could have a material adverse effect on our operating results. (See Note 10 - Income taxes of Notes to Consolidated Financial Statements for additional discussion regarding the impact of this tax holiday on our income taxes).

Our Business is Dependent on Key Suppliers and Distributors and Disruptions in these Businesses Could Adversely Affect Our Business and Results of Operations. Our manufacturing processes use large volumes of high-quality components and subassemblies supplied by outside sources. Several of these items are only available through limited sources. Limited source items purchased include custom ASICs, chassis and other components. We have in the past experienced delays and quality problems in connection with limited source items, and there can be no assurance that these problems will not recur in the future. Accordingly, our failure to receive items from limited source item suppliers could result in a material adverse effect on our net sales and operating results. In the event that any of our limited source suppliers experience significant financial or operational difficulties due to adverse global economic conditions or otherwise, our business and operating results would likely be adversely impacted until we are able to secure another source for the required materials.

In some countries, we use distributors to support our sales channels. In the event that any of our distributors experience significant financial or operational difficulties due to adverse global economic conditions or if we experience disruptions in the use of these distributors, our business and operating results would likely be adversely impacted until we are able to secure another distributor or establish direct sales capabilities in the affected market.

We May Experience Component Shortages that May Adversely Affect Our Business and Result of Operations. As has occurred in the past and as may be expected to occur in the future, supply shortages of components used in our products, including limited source components, can result in significant additional costs and inefficiencies in manufacturing. If we are unsuccessful in resolving any such component shortages in a timely manner, we will experience a significant impact on the timing of revenue, a possible loss of revenue, or an increase in manufacturing costs, any of which would have a material adverse impact on our operating results.


16

We Rely on Management Information Systems and Interruptions in our Information Technology Systems or Cyber-Attacks on our Systems Could Adversely Affect Our Business. We rely on the efficient and uninterrupted operation of complex information technology systems and networks, including cloud-based and other outsourced services, to operate our business. We rely on a primary global center for our management information systems and on multiple systems in branches not covered by our global center. As with any information system, unforeseen issues may arise that could affect our ability to receive adequate, accurate and timely financial information, which in turn could inhibit effective and timely decisions. Furthermore, it is possible that our global center for information systems or our branch operations could experience a complete or partial shutdown. A significant system or network disruption could be the result of new system implementations, facility issues, energy blackouts, and computer viruses, cyber-attacks, or security breaches, some of which may remain undetected for an extended period.  Threats to our information technology security can take a variety of forms and individuals or groups of hackers or sophisticated organizations including state-sponsored organizations, may take steps that pose threats to our customers and our infrastructure. If we were to experience a shutdown, disruption or attack, it would adversely impact our product shipments and net sales, as order processing and product distribution are heavily dependent on our management information systems. Such an interruption could also result in a loss of our intellectual property or the release of sensitive competitive information or partner, customer or employee confidential information or personal data. Any loss of such information could harm our competitive position, result in a loss of customer confidence, and cause us to incur liability and significant costs to remedy the damages caused by the disruptions or security breaches. In addition, changing laws and regulations governing our responsibility to safeguard private data could result in a significant increase in operating or capital expenditures needed to comply with these new laws or regulations. Accordingly, our operating results in such periods would be adversely impacted. From time to time, we have experienced attempts to breach our security and attempts to introduce malicious software into our information technology systems; however, such attacks have not previously resulted in any material damage to us.

We are continually working to maintain reliable systems to control costs and improve our ability to deliver our products in our markets worldwide. Our efforts include, but are not limited to the following: firewalls, antivirus protection, patches, log monitors, routine backups with offsite retention of storage media, system audits, data partitioning and routine password modifications. Our internal information technology systems environment continues to evolve, and our business policies and internal security controls may not keep pace as new threats emerge.  No assurance can be given that our efforts to continue to enhance our systems will be successful. Although we maintain insurance, there can be no assurance that such insurance or the contractual limitations used by us to limit our liability will be sufficient to cover or limit any claims which may occur.

We are Subject to Risks Associated with Our Website.  We devote significant resources to maintaining our website, ni.com, as a key marketing, sales and support tool and expect to continue to do so in the future. Failure to properly maintain our website may interrupt our normal operations, including our ability to provide quotes, process orders, ship products, provide services and support to our customers, bill and track our customers, fulfill contractual obligations and otherwise run our business, which would have a material adverse effect on our results of operations. We host our website internally. Any failure to successfully maintain our website or any significant downtime or outages affecting our website could have a material adverse impact on our operating results.

Our Products are Complex and May Contain Bugs, Vulnerabilities, Errors, or Design Flaws.   As has occurred in the past and as may be expected to occur in the future, our hardware products, software products and third-party components or operating systems on which our products are based may contain bugs, vulnerabilities, errors or design flaws. Our products operate in conjunction with third-party products and components across a broad ecosystem. As has occurred in the past and as may be expected to occur in the future, our products, or products or components in conjunction with which they operate, may contain design flaws. These bugs, vulnerabilities, errors or design flaws, or fixes to these issues, may have a negative impact on the performance of our products, which could result in additional costs, liability claims, reduced revenue, or harm to our reputation or competitive position, any of which could have a material adverse impact on our operating results. Although we maintain insurance, there can be no assurance that such insurance or the contractual limitations used by us to limit our liability will be sufficient to cover or limit any claims which may occur.


17

We Are Subject to the Risk of Product Liability Claims.  Our products are designed to provide information upon which users may rely. Our products are also used in “real time” applications requiring extremely rapid and continuous processing and constant feedback. Such applications give rise to the risk that a failure or interruption of the system or application could result in economic damage, bodily harm or property damage. We attempt to assure the quality and accuracy of the processes contained in our products, and to limit our product liability exposure through contractual limitations on liability, limited warranties, express disclaimers and warnings as well as disclaimers contained in our “shrink wrap” and electronically displayed license agreements with end-users. If our products contain errors that produce incorrect results on which users rely or cause failure or interruption of systems or processes, customer acceptance of our products could be adversely affected. Further, we or our customers could be subject to product recall obligations, and we could be subject to liability claims that could have a material adverse effect on our operating results or financial position. Although we maintain insurance, there can be no assurance that such insurance or the contractual limitations used by us to limit our liability will be sufficient to cover or limit any claims which may occur.

Compliance with Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 is Costly and Challenging. 
As required by Section 302 of the Sarbanes-Oxley Act of 2002, this Form 10-K contains our management’s certification of adequate disclosure controls and procedures as of December 31, 2019. This annual report on Form 10-K also contains a report by our management on our internal control over financial reporting including an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2019 and an attestation and report by our external auditors with respect to the effectiveness of our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002. While these assessments and reports did not reveal any material weaknesses in our internal control over financial reporting, compliance with Sections 302 and 404 is required for each future fiscal year end. We expect that the ongoing compliance with Sections 302 and 404 will continue to be both very costly and very challenging and there can be no assurance that material weaknesses will not be identified in future periods. Any adverse results from such ongoing compliance efforts could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.


Our Business Depends on Our Proprietary Rights and We Have Been Subject to Intellectual Property Litigation. Our success depends on our ability to obtain and maintain patents and other proprietary rights relative to the technologies used in our principal products. Despite our efforts to protect our proprietary rights, unauthorized parties may have in the past infringed or violated certain of our intellectual property rights. We from time to time engage in 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. However, the steps we have taken to protect our intellectual property rights, may not be adequate to prevent unauthorized use, copying, misappropriation, or theft of our intellectual property or other infringement on or violation of our intellectual property rights. Intellectual property laws differ in various jurisdictions in which we operate and are subject to change at any time, which could further restrict our ability to protect our intellectual property and proprietary rights. In particular, a portion of our revenues is derived from jurisdictions where adequately protecting intellectual property rights may prove more challenging or impossible. We may also not be able to detect unauthorized uses or take timely and effective steps to remedy unauthorized conduct. To prevent or respond to unauthorized uses of our intellectual property, we may be required to engage in costly and time-consuming litigation or other proceedings and we may not ultimately prevail. We from time to time may be notified that we are infringing certain patent or intellectual property rights of others. There can be no assurance that any future intellectual property dispute or litigation will not result in significant expense, liability, injunction against the sale of some of our products, and a diversion of management’s attention, any of which may have a material adverse effect on our operating results.

Our Business Depends on the Continued Service of Our Key Management and Technical Personnel.  Our success depends upon the continued contributions of our key management, sales, marketing, research and development and operational personnel, including Eric Starkloff, who became our President and Chief Executive Officer effective February 1, 2020, and other members of our senior management and key technical personnel. The loss of the services of one or more of our key employees in the future could have a material adverse effect on our operating results. We also believe our future success will depend upon our ability to attract and retain additional highly skilled management, technical, marketing, research and development, and operational personnel with experience in managing large and rapidly changing companies, as well as training, motivating and supervising employees. The market for hiring and retaining certain technical personnel, including software engineers, has become more competitive and intense in recent years. Failure to attract and retain a sufficient number of qualified technical personnel, including software engineers, or retain our key personnel could have a material adverse effect on our operating results.


18

Our Operations are Subject to a Variety of Environmental Regulations and Costs that May Have a Material Adverse Effect on Our Business and Results of Operations.  We must comply with many different governmental regulations related to the use, storage, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in our operations in the U.S., Hungary, and Malaysia. Although we believe that our activities conform to presently applicable environmental regulations, our failure to comply with present or future regulations could result in the imposition of fines, suspension of production or a cessation of operations. Any such environmental regulations could require us to acquire costly equipment or to incur other significant expenses to comply with such regulations. Any failure by us to control the use of or adequately restrict the discharge of hazardous substances could subject us to future liabilities.

Provisions in Our Charter Documents and Delaware Law May Delay or Prevent an Acquisition of Us. Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us without the consent of our Board of Directors. These provisions include a classified Board of Directors, prohibition of stockholder action by written consent, prohibition of stockholders to call special meetings and the requirement that the holders of at least 80% of our shares approve any business combination not otherwise approved by two-thirds of our Board of Directors. Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. In addition, our Board of Directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer.


19

ITEM 1B.    UNRESOLVED STAFF COMMENTS
None.
ITEM 2.    PROPERTIES
We own approximately 141 acres of land in the Austin, Texas area. Our principal corporate and research and development activities are conducted in three buildings we own in Austin, Texas; 232,000 square foot and 140,000 square foot office facilities, and a 380,000 square foot research and development facility.
Our principal manufacturing activities are conducted in Debrecen, Hungary and Penang, Malaysia. We own a 374,000 square foot manufacturing, distribution and general and administrative facility in Debrecen, Hungary and a 314,000 square foot manufacturing, research and development, and general and administrative facility in Penang, Malaysia. In total, we hold a 99-year lease on approximately 23 acres of land comprised of two tracts in an industrial park in Penang, Malaysia.
Our German subsidiary, National Instruments Engineering GmbH & Co. KG, owns a 25,500 square foot office building in Aachen, Germany in which a majority of its activities are conducted. National Instruments Engineering owns another 19,375 square foot office building in Aachen, Germany, which is partially leased to third-parties. National Instruments Corporation (UK) Limited, United Kingdom, owns a 29,270 square foot office building in Newbury, UK, in which a majority of its activities are conducted.
As of December 31, 2019, we also leased a number of sales and support offices in the U.S. and various countries throughout the world. We believe our existing facilities are adequate to meet our current requirements.
ITEM 3.    LEGAL PROCEEDINGS
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.
ITEM 4.    MINE SAFETY DISCLOSURES
Not applicable.

20

PART II
ITEM 5.    MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock began trading on The NASDAQ Stock Market under the symbol NATI effective March 13, 1995.
At the close of business on February 7, 2020, there were approximately 293 holders of record of our common stock and approximately 44,584 beneficial holders of our common stock.
We believe factors such as quarterly fluctuations in our results of operations, announcements by us or our competitors, changes in earnings estimates by analysts or changes in our financial guidance, technological innovations, new product introductions, governmental regulations, actions, or litigation, may cause the market price of our common stock to fluctuate, perhaps substantially. In addition, stock prices for many technology companies fluctuate widely for reasons that may be unrelated to their operating results. These broad market and industry fluctuations may adversely affect the market price of our common stock.
Our cash dividend payments for the two most recent fiscal years, on a per share basis, are indicated in the following table. The dividends were paid on the dates set forth below:

Dividend Amount
2019
 
March 4, 2019
$
0.25

June 3, 2019
$
0.25

September 3, 2019
$
0.25

December 2, 2019
$
0.25


 
2018
 
March 5, 2018
$
0.23

June 4, 2018
$
0.23

September 4, 2018
$
0.23

December 3, 2018
$
0.23

Our policy as to whether any future dividends will be paid, and if so, the amount, will be based on, among other considerations, our balance of available cash, our ability to obtain external financing through our line of credit, or by selling equity or debt securities to the public or to selected investors, our views on changes in tax rates applied to dividend income, potential future capital requirements related to research and development, expansion into new market areas, strategic investments and business acquisitions, share dilution management, legal risks, and challenges to our business model. Future dividends are subject to approval and declaration by our Board of Directors.
On January 29, 2020, our Board of Directors declared a quarterly cash dividend of $0.26 per common share, payable on March 9, 2020, to stockholders of record on February 18, 2020.
Issuer Purchase of Equity Securities
Period
 
Total number of shares purchased
 
Average price paid per share
 
Total number of shares purchased as part of publicly announced plans or programs
 
Maximum number of shares that may yet be purchased under the plans or programs (1)
October 1, 2019 to October 31, 2019
 
—

 
—

 
—

 
3,794,324

November 1, 2019 to November 30, 2019
 
794,324

 
42.98

 
794,324

 
3,000,000

December 1, 2019 to December 31, 2019
 
—

 
—

 
—

 
3,000,000

Total
 
794,324

 
42.98

 
794,324

 
3,000,000

(1) On April 21, 2010, our Board of Directors authorized a program to repurchase shares of our common stock from time to time, depending on market conditions and other factors. On January 23, 2019, our Board of Directors amended our stock repurchase program to increase the number of shares that may be repurchased to 4,000,000 shares. On October 23, 2019, our Board of Directors amended our stock repurchase program to increase the number of shares that may be repurchased by 3,000,000 shares. At December 31, 2019, there were 3,000,000 shares remaining available for repurchase under our stock repurchase program. This repurchase program does not have an expiration date.

21

Performance Graph
The following graph compares the cumulative total return to holders of NI’s common stock from December 31, 2014 to December 31, 2019 to the cumulative return over such period of the (i) Nasdaq Composite Index, (ii) Russell 2000 Index and (iii) Russell 2500 Index.
The graph assumes that $100 was invested on December 31, 2014 in NI’s common stock and in each of the three indices and the reinvestment of all dividends, if any. Stockholders are cautioned against drawing any conclusions from the data contained therein, as past results are not necessarily indicative of future performance.
.https://cdn.kscope.io/61a4fee5b18529ccaa1dd5c5a1eeed0c-tschart19a01.gif
 
 
12/31/2014
 
12/31/2015
 
12/31/2016
 
12/31/2017
 
12/31/2018
 
12/31/2019
National Instruments
 
100
 
94.7
 
104.7
 
144.6
 
160.8
 
153.6
Nasdaq
 
100
 
107.1
 
116.7
 
151.4
 
147.2
 
201.2
Russell 2500
 
100
 
97.1
 
114.2
 
133.3
 
120.0
 
153.2
Russell 2000
 
100
 
95.6
 
115.9
 
132.9
 
118.2
 
148.4
The information contained in the Performance Graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act, or the Exchange Act, except to the extent that NI specifically incorporates it by reference into any such filing. The graph is presented in accordance with SEC requirements.

Unregistered Sales of Equity Securities
None.

22


ITEM 6.    SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with our consolidated financial statements, including the Notes to Consolidated Financial Statements contained in this Form 10-K. The information set forth below is not necessarily indicative of the results of our future operations. The information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
໿
໿

 
For the years ended December 31,

 
(in thousands, except per share data)

 
2019 (1)
 
2018 (1)
 
2017
 
2016
 
2015
Statements of Income Data:
 
 

 
 

 
 

 
 
 
 

Net sales:
 
 

 
 

 
 

 


 
 

Americas
 
$
538,679

 
$
538,388

 
$
504,626

 
$
482,039

 
$
496,746

EMEIA
 
403,424

 
432,977

 
408,625

 
389,843

 
409,119

APAC
 
411,112

 
387,767

 
376,135

 
356,297

 
319,591

Consolidated net sales
 
1,353,215

 
1,359,132

 
1,289,386

 
1,228,179

 
1,225,456

Cost of sales:
 
336,891

 
333,727

 
328,324

 
313,121

 
316,956

Gross profit
 
1,016,324

 
1,025,405

 
961,062

 
915,058

 
908,500

Operating expenses:
 
 
 
 

 
 

 
 

 
 

Sales and marketing
 
473,392

 
482,576

 
477,921

 
461,236

 
452,262

Research and development
 
272,452

 
261,072

 
231,761

 
235,706

 
225,131

General and administrative
 
122,768

 
108,878

 
105,602

 
98,390

 
93,935

Gain on sale of assets
 
(26,842
)
 
—

 
—

 
—

 
—

Total operating expenses
 
841,770

 
852,526

 
815,284

 
795,332

 
771,328

Operating income
 
174,554

 
172,879

 
145,778

 
119,726

 
137,172

Other income (expense):
 
 
 
 

 
 

 
 

 
 

Interest income
 
8,129

 
5,896

 
2,276

 
1,122

 
1,403

Net foreign exchange (loss) gain
 
(1,846
)
 
(3,423
)
 
892

 
(4,632
)
 
(7,075
)
Other (expense) income, net
 
(293
)
 
1,101

 
(1,566
)
 
(1,581
)
 
(221
)
Income before income taxes
 
180,544

 
176,453

 
147,380

 
114,635

 
131,279

Provision for income taxes
 
18,393

 
21,396

 
94,969

 
31,901

 
36,017

Net income
 
$
162,151

 
$
155,057

 
$
52,411

 
$
82,734

 
$
95,262


 
 

 
 

 
 

 
 

 
 

Basic earnings per share
 
$
1.23

 
$
1.17

 
$
0.40

 
$
0.64

 
$
0.74


 
 

 
 

 
 

 
 

 
 

Weighted average shares outstanding - basic
 
131,722

 
131,987

 
130,300

 
128,453

 
127,997


 
 

 
 

 
 

 
 

 
 

Diluted earnings per share
 
$
1.22

 
$
1.16

 
$
0.40

 
$
0.64

 
$
0.74


 
 

 
 

 
 

 
 

 
 

Weighted average shares outstanding - diluted
 
132,734

 
133,274

 
131,387

 
129,008

 
128,668


 
 

 
 

 
 

 
 

 
 

Cash dividends declared per common share
 
$
1.00

 
$
0.92

 
$
0.84

 
$
0.80

 
$
0.76

(1) On January 1, 2018, we adopted the new revenue standard using the modified retrospective method of adoption. Prior periods have not been adjusted. See Note 1 - Operations and Summary of Significant Accounting Policies to the Consolidated Financial Statements for additional information.


23


 
December 31,

 
(in thousands)

 
2019
 
2018
 
2017
 
2016
 
2015
Balance Sheet Data:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
194,616

 
$
259,386

 
$
290,164

 
$
285,283

 
$
251,129

Short-term investments
 
237,983

 
271,396

 
121,888

 
73,117

 
81,789

Working capital
 
641,235

 
739,236

 
624,835

 
574,572

 
559,525

Total assets
 
1,651,889

 
1,671,235

 
1,566,434

 
1,496,564

 
1,453,856

Long-term debt, net of current portion
 
—

 
—

 
—

 
25,000

 
37,000

Total stockholders' equity
 
1,176,350

 
1,238,358

 
1,128,021

 
1,114,219

 
1,081,721




24

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  
The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Any statements contained herein regarding our future financial performance,  operations, or other activities (including, without limitation, statements to the effect that we “believe,” “expect,” “plan,” ''intend to,” “may,” “will,” “project,” “anticipate”, “continue,” "strive to," "seek to," "are encouraged by," "remain cautious," "remain optimistic," 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”, and elsewhere in this Form 10-K. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements. We disclaim any obligation to update information contained in any forward-looking statement.
Overview  
For more than 40 years, we have 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 helps support the success of our customers, employees, suppliers and shareholders. We have been profitable in every year since 1990. We sell to a large number of customers in a wide variety of industries. No single customer represented more than 3% of our sales in each of the last three years.
The key strategies that we focus on in running our business are the following:
Expand our available market opportunity  
We strive to increase our available market by identifying new opportunities in existing customers, attracting and serving new customers, and expanding our business to market adjacencies. Our large network of existing customers provides a broad base from which to expand.
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 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 by 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 semiconductor, transportation, and aerospace, defense and government.
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, OEMs, VARs, 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 60% of our revenues in each of 2019 and 2018 and 61% of our revenues during 2017. 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 revenues will continue to be derived from international sales. (See Note 2 – Revenue and Note 14 - Segment information of Notes to Consolidated Financial Statements for details concerning the geographic breakdown of our net sales and long-lived assets, respectively).
    

25

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. During most of 2019, the PMI continued to steadily decline, indicating ongoing weakness in the industrial economy. The PMI was below 50.0 for six months of the year (May to October), the longest period of contraction in the past seven years. Despite softening demand in the industrial economy for most of the year, we were able to finish the year strong with record quarterly revenue in the fourth quarter. During the fourth quarter of 2019, the PMI reading showed initial signs of recovery, as the average of the PMI was 50.1 and the average of the new order element of the PMI was 50.3. For January 2020, the most recent PMI reading was 50.4, a nine-month high. For January 2020, the new order element of the PMI was 50.9. We are unable to predict whether the industrial economy, as measured by the PMI, will remain above the neutral reading of 50, strengthen or contract during 2020.
We have taken steps to improve efficiencies and rebalance our resources on higher return activities. The timing and scope of any future headcount reduction will vary.
We are encouraged by signs of stabilization in the industrial economy along with the improvements we have made to our operating profitability over the past three years. We remain optimistic about our long-term position in the industry through the sustained differentiation we deliver to our customers through our platform-based approach. However, we remain cautious about a variety of factors, including public health concerns such as those in China, that could have an adverse impact on our results of operations heading into 2020.

26

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

 
Years ended December 31,

 
2019
 
2018
 
2017
Net sales:
 
 
 
 

 
 

Americas
 
39.8
 %
 
39.6
 %
 
39.1
 %
EMEIA
 
29.8

 
31.9

 
31.7

APAC
 
30.4

 
28.5

 
29.2

Consolidated net sales
 
100.0

 
100.0

 
100.0

Cost of sales
 
24.9

 
24.6

 
25.5

Gross profit
 
75.1


75.4


74.5

Operating expenses:
 
 
 
 

 
 

Sales and marketing
 
35.0

 
35.5

 
37.1

Research and development
 
20.1

 
19.2

 
18.0

General and administrative
 
9.1

 
8.0

 
8.2

Gain on sale of assets
 
(2.0
)
 
—

 
—

Total operating expenses
 
62.2

 
62.7

 
63.3

Operating income
 
12.9

 
12.7

 
11.3

Other income (expense):
 
 
 
 

 
 
Interest income
 
0.6

 
0.4

 
0.2

Net foreign exchange gain (loss)
 
(0.1
)
 
(0.3
)
 
0.1

Other expense, net
 
—

 
0.1

 
(0.1
)
Income before income taxes
 
13.3

 
13.0

 
11.4

Provision for income taxes
 
1.4

 
1.6

 
7.4

Net income
 
12.0
 %

11.4
 %

4.1
 %
  Figures may not sum due to rounding.
Results of Operations for the years ended December 31, 2019, 2018, and 2017
Net Sales.  The following table sets forth our net sales for the years ended December 31, 2019, 2018, and 2017 along with the percent changes between the corresponding periods.

 
Years ended December 31,

 
 
 
 
 
 
 
 
 
 
($ in millions)
 
2019
 
Change
 
2018
 
Change
 
2017

 
 
 
 
 
 
 
 
 
 
Product sales
 
$
1,215.0

 
(0.4)%
 
$
1,220.0

 
4.0%
 
$
1,173.5

Software maintenance sales
 
138.2

 
(0.6)%
 
139.1

 
20.0%
 
115.9

Total net sales
 
$
1,353.2

 
(0.4)%
 
$
1,359.1

 
5.4%
 
$
1,289.4

In 2019, product and software maintenance sales decreased slightly compared to 2018. The decrease in product and software maintenance sales during the period was primarily attributable to unfavorable changes in exchange rates and general weakness in the industrial economy throughout most of 2019, particularly in the EMEIA region, which was partially offset by strength in the APAC region.
In 2018, product and software maintenance sales increased compared to 2017. The increases in product sales during 2018 is attributable to increased sales volume, particularly for orders greater than $20,000, across all geographic regions. The increase in software maintenance sales during 2018 can primarily be attributed to increased adoption of our software platform and increased recurring revenues related to software maintenance renewals.

27

Orders with a value greater than $20,000 increased by 4% year over year during 2019 compared to a year over year increase of 13% in 2018. Orders with a value greater than $20,000 were 60%, 58%, and 56% of our total orders for the years ended December 31, 2019, 2018, and 2017, respectively. A significant factor in the continued expansion of these orders in the year ended December 31, 2019, compared to 2018 and 2017, was strong demand for our system-level offerings, particularly within the semiconductor and ADG end markets. 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.
We do not typically maintain a large amount of order backlog as orders typically translate to sales quickly. As such, any weakness in orders typically has a pronounced impact on our net sales in the short term.
The following table sets forth our net sales by geographic region for the years ended December 31, 2019, 2018, and 2017 along with the changes between the corresponding periods and the region’s percentage of total net sales.
໿

 
Years ended December 31,

 
 
 
 
 
 
 
 
 
 
($ in millions)
 
2019
 
Change
 
2018
 
Change
 
2017

 
 
 
 
 
 
 
 
 
 
Americas
 
$
538.7

 
0.1%
 
$
538.4

 
6.7%
 
$
504.6

Percentage of total net sales
 
40
%
 
 
 
40
%
 
 
 
39
%

 
 
 
 
 
 
 
 
 
 
EMEIA
 
$
403.4

 
(6.8)%
 
$
433.0

 
6.0%
 
$
408.6

Percentage of total net sales
 
30
%
 
 
 
32
%
 
 
 
32
%

 
 
 
 
 
 
 
 
 
 
APAC
 
$
411.1

 
6.0%
 
$
387.8

 
3.1%
 
$
376.1

Percentage of total net sales
 
30
%
 
 
 
28
%
 
 
 
29
%
We expect sales outside of the Americas to continue to represent a significant portion of our revenue. We intend to continue to expand our international operations by increasing our presence in existing markets, adding a presence in some new geographical markets and continuing the use of distributors to sell our products in some countries.  
Almost all of the sales made by our direct sales offices in the Americas (excluding the U.S.), EMEIA, and APAC are denominated in local currencies, and accordingly, the U.S. dollar equivalent of these sales is affected by changes in foreign currency exchange rates. In order to provide a framework for assessing how our underlying business performed excluding the effects of foreign currency fluctuations between periods, we compare the percentage change in our results from period to period using constant currency calculations. To calculate the change in constant currency, current and comparative prior period results for entities reporting in currencies other than U.S. Dollars are converted into U.S. Dollars at constant exchange rates (i.e. the average rates in effect during the years ended December 31, 2019 and 2018, respectively). The following tables present this information, along with the impact of changes in foreign currency exchange rates on sales denominated in local currencies, for the years ended December 31, 2019 and 2018, respectively.
໿

 
Year Ended December 31, 2018
 
Change
in Constant Dollars
 
Impact of changes in foreign currency exchange rates on net sales
 
Year Ended December 31, 2019
($ in millions)
 
GAAP 
Net Sales
 
Dollars
 
Percentage
 
Dollars
 
Percentage
 
GAAP 
Net Sales

 
 
 
 
 
 
 
 
 
 
 
 
Americas
 
$
538.4

 
$
1.0

 
0.2%
 
$
(0.7
)
 
(0.1)%
 
$
538.7

EMEIA
 
433.0

 
(19.2
)
 
(4.4)%
 
(10.4
)
 
(2.4)%
 
403.4

APAC
 
387.8

 
31.1

 
8.0%
 
(7.7
)
 
(2.0)%
 
411.1

Total net sales
 
$
1,359.1

 
$
12.9

 
1.0%
 
$
(18.9
)
 
(1.4)%
 
$
1,353.2

  Figures may not sum due to rounding.


28


 
Year Ended December 31, 2017
 
Change
in Constant Dollars
 
Impact of changes in foreign currency exchange rates on net sales
 
Year Ended December 31, 2018
($ in millions)
 
GAAP 
Net Sales
 
Dollars
 
Percentage
 
Dollars
 
Percentage
 
GAAP 
Net Sales

 
 
 
 
 
 
 
 
 
 
 
 
Americas
 
$
504.6

 
$
33.0

 
6.5%
 
$
0.8

 
0.2%
 
$
538.4

EMEIA
 
408.6

 
10.5

 
2.6%
 
13.9

 
3.4%
 
433.0

APAC
 
376.1

 
4.3

 
1.1%
 
7.4

 
2.0%
 
387.8

Total net sales
 
$
1,289.4

 
$
47.7

 
3.7%
 
$
22.1

 
1.7%
 
$
1,359.1

Figures may not sum due to rounding.
To help protect against changes in the U.S. dollar equivalent value caused by fluctuations in foreign currency exchange rates of forecasted foreign currency cash flows resulting from international sales, we hedge portions of our forecasted revenue denominated in foreign currencies with average rate forward contracts. (See Note 5 - Derivative instruments and hedging activities of Notes to Consolidated Financial Statements for further discussion regarding our cash flow hedging program and its related impact on our consolidated sales for 2019 and 2018). 
Gross Profit. The following table sets forth our gross profit and gross profit as a percentage of net sales for the years ended December 31, 2019, 2018, and 2017 along with the percentage changes in gross profit for the corresponding periods. We continue to focus on cost control and cost reduction measures throughout our manufacturing cycle. 

 
Years Ended December 31,
($ in millions)
 
2019
 
Change
 
2018
 
Change
 
2017

 
 
 
 
 
 
 
 
 
 
Gross Profit
 
$
1,016.3

 
(0.9)%
 
$
1,025.4

 
6.7%
 
$
961.1

Gross Profit as a percentage of net sales
 
75.1
%
 

 
75.4
%
 
 
 
74.5
%
  
The slight decreases in our gross profit and gross profit as a percentage of sales during the year ended December 31, 2019 can be attributed to changes in product mix and foreign currency exchange rates. During the years ended December 31, 2019 and 2018, the change in exchange rates had the effect of decreasing our cost of sales by $3.3 million and increasing our cost of sales $3.2 million, respectively. To help protect against changes in our cost of sales caused by a fluctuation in foreign currency exchange rates of forecasted foreign currency cash flows, we hedge portions of our forecasted costs of sales denominated in foreign currencies with average rate forward contracts. During the years ended December 31, 2019 and 2018, these hedges had the effect of increasing our cost of sales by $0.5 million and decreasing our cost of sales by $0.7 million, respectively. (See Note 5 - Derivative instruments and hedging activities of Notes to Consolidated Financial Statements for further discussion regarding our cash flow hedging program and its related impacted on our results of operations).
    

29

Operating Expenses. The following table sets forth our operating expenses for the years ended December 31, 2019, 2018, and 2017 along with the percentage changes between the corresponding periods and the line item as a percentage of total net sales.  
໿

 
Years Ended December 31,
($ in thousands)
 
2019
 
Change
 
2018
 
Change
 
2017

 
 
 
 
 
 
 
 
 
 
Sales and marketing
 
$
473,392

 
(2)%
 
$
482,576

 
1%
 
$
477,921

Percentage of total net sales
 
35
 %
 
 
 
36
%
 
 
 
37
%

 
 
 
 
 

 
 
 
 
Research and development
 
$
272,452

 
4%
 
$
261,072

 
13%
 
$
231,761

Percentage of total net sales
 
20
 %
 
 
 
19
%
 
 
 
18
%

 
 
 
 
 
 
 
 
 
 
General and Administrative
 
$
122,768

 
13%
 
$
108,878

 
3%
 
$
105,602

Percentage of total net sales
 
9
 %
 
 
 
8
%
 
 
 
8
%
 
 
 
 
 
 
 
 
 
 
 
Gain on sale of assets
 
$
(26,842
)
 
100%
 
$
—

 
—%
 
$
—

Percentage of total net sales
 
(2
)%
 
 
 
—
%
 
 
 
—
%

 
 
 
 
 

 
 
 
 
Total operating expenses
 
$
841,770

 
(1)%
 
$
852,526

 
5%
 
$
815,284

Percentage of total net sales
 
62
 %
 
 
 
63
%
 
 
 
63
%
On August 29, 2019, we sold an office building and recognized a gain on the sale of $26.8 million, which is presented as "Gain on sale of assets" on the Consolidated Statements of Income, in accordance with ASC 360 - Property, Plant and Equipment (See note 1 - Operations and summary of significant accounting policies of Notes to Consolidated Financial Statements for further discussion on our Gain on Sales of Assets). The $16 million increase in our operating expenses, excluding the gain on sale of assets, during 2019 compared to 2018 was primarily related to the following:
•
a $14 million increase due to additional stock-based compensation expense, primarily attributable to comparatively     higher stock prices on the grant date of unvested RSU awards and a shorter average service period for our awards;
•
a $13 million decrease related to the year over year impact of changes in foreign currency exchange rates;
•
a $7 million increase due to a charitable contribution to a donor-advised fund using a portion of the proceeds from the sale of an office building;
•
a $5 million increase related to a decrease in software development costs eligible for capitalization, as described in more detail below;
•
a $6 million increase due to restructuring costs during the year; and
•
a $3 million decrease in personnel costs, primarily driven by a $12 million decrease in variable pay related to not attaining the performance targets under our company performance bonus for 2019, partially offset by increases in salaries and other variable pay plans intended to remain competitive with market levels;
The increase in research and development costs during 2019 was primarily related to a $5 million decrease in software development costs eligible for capitalization and an increase in stock-based compensation expense. In the second quarter of 2018, we began moving toward more frequent releases for many of our software products. Specifically, for many of our software development projects we started applying agile development methodologies which are characterized by a more dynamic development process with more frequent and iterative revisions to a product's features and functions as the software is being developed. Due to the shorter development cycle and focus on rapid production associated with agile development, we expect that for a significant majority of our software development projects the costs incurred subsequent to the achievement of technological feasibility will be immaterial in future periods and we expect to record significantly less capitalized software development costs than under our historical software development approaches. Consequently, a larger portion of our software development expenditures are being recognized as operating expenses in the future. We also expect amortization of previously capitalized software development costs to steadily decline as previously capitalized software development costs become fully amortized over the next four years.
    

30

The increase in our operating expenses in 2018 was primarily related to the following:
•
a $29 million increase in research and development expenses, primarily attributable to a decrease in software development costs eligible for capitalization, as described in more detail above.
•
a $10 million increase in personnel costs, primarily attributable to an $8 million increase related to our equity compensation costs due to higher stock prices. Additionally, increases in variable compensation costs to be more competitive with market levels were partially offset by lower salary and benefits costs, primarily related to headcount reductions.
•
a $8 million increase related to the year over year impact of changes in foreign currency exchange rates.
•
a $7 million decrease related to reductions in travel, outside services, and building and equipment costs. The decrease in cash expenditures related to travel and outside services is consistent with our continued focus on disciplined expense management and cost optimization.
We believe that our long-term growth and success depends on developing high quality software and hardware products on a timely basis. We are focused on leveraging recent investments in research and development and in our field sales force and taking actions to help ensure that those resources are focused in areas and initiatives that will contribute to future growth in our business.
Operating Income.  For the years ended December 31, 2019, 2018, and 2017, operating income was $175 million, $173 million and $146 million, respectively, an increase of 1% in 2019, following an increase of 19% in 2018. As a percentage of net sales, operating income was 13%, 13% and 11%, respectively, over the three-year period.  The changes in operating income in absolute dollars and as a percent of sales in 2018 and 2019 are attributable to the factors discussed in Net Sales, Gross Profit and Operating Expenses above.
Interest Income.    Interest income was $8.1 million, $5.9 million and $2.3 million for the years ended December 31, 2019, 2018, and 2017, respectively, an increase of 38% in 2019, following an increase of 159% in 2018. On average, yields in 2019 were less favorable than in 2018, however, we benefited from higher yields on investments that were made in 2018 for the full year in 2019.
Net Foreign Exchange (Loss)/Gain.    Net foreign exchange (loss)/gain was $(1.8) million, $(3.4) million, and $0.9 million for the years ended December 31, 2019, 2018, and 2017, respectively. These results are attributable to movements in the foreign currency exchange rates between the U.S. dollar and foreign currencies in subsidiaries for which our functional currency is not the U.S. dollar. During most of 2019, we saw continued volatility in the exchange rates between the U.S. dollar and many of the currency markets where we have exposure, primarily in South Korea and Europe along with a moderately stronger U.S. dollar when compared to 2018. As of February 20, 2020, the U.S. dollar index, as tracked by the St. Louis Federal Reserve, remains near its ten-year high. During 2018, we saw volatility in the exchange rates between the U.S. dollar and many of the currency markets where we have exposure, primarily in China and some emerging markets along with a stronger U.S. dollar when compared to 2017. In the past, we have noted that significant volatility in foreign currency exchange rates in the markets in which we do business has had a significant impact on the revaluation of our foreign currency denominated firm commitments, on our ability to forecast our U.S. dollar equivalent revenues and expenses and on the effectiveness of our hedging programs. In the past, these dynamics have also adversely affected our revenue growth in international markets and may pose similar challenges in the future. We recognize the local currency as the functional currency in virtually all of our international subsidiaries.
We utilize foreign currency forward contracts to hedge our foreign denominated net foreign currency balance sheet positions to help protect against the change in value caused by a fluctuation in foreign currency exchange rates. We typically hedge up to 90% of our outstanding foreign denominated net receivable or payable positions and typically limit the duration of these foreign currency forward contracts to approximately 90 days. The gain or loss on these derivatives as well as the offsetting gain or loss on the hedged item attributable to the hedged risk is recognized in current earnings under the line item “Net foreign exchange Gain/loss”. Our hedging strategy increased our foreign exchange losses by $0.3 million, decreased our foreign exchange losses by $0.3 million, and decreased our foreign exchange gains by $5.9 million in 2019, 2018, and 2017, respectively. (See Note 5 - Derivative instruments and hedging activities of Notes to Consolidated Financial Statements for a further description of our derivative instruments and hedging activities).
    

31

Provision for Income Taxes.  For the years ended December 31, 2019, 2018, and 2017, our provision for income taxes reflected an effective tax rate of 10%, 12% and 64%, respectively. The factors that caused our effective tax rates to change year-over-year are detailed in the table below:

Years ended
 December 31,
Effective tax rate for 2018
12
 %
Increased profits in foreign jurisdictions with reduced income tax rates
4

Change in enhanced deduction for certain research and development expenses
1

Change in intercompany prepaid tax asset
1

Change in state income taxes, net of federal benefit
(2
)
Global intangible low-taxed income inclusion ("GILTI")
(1
)
Foreign-derived intangible income deduction
(2
)
Global intangible low-taxed income deferred
2

Research and development tax credit
(1
)
Nondeductible officer compensation
1

Outside basis difference on asset held for sale
(6
)
Foreign tax on undistributed earnings
1

Effective tax rate for 2019
10
 %


Years ended
 December 31,
Effective tax rate for 2017
64
 %
Change in U.S. federal tax rate
(14
)
Increased profits in foreign jurisdictions with reduced income tax rates
8

Change in enhanced deduction for certain research and development expenses
(1
)
Change in intercompany prepaid tax asset
2

Change in state income taxes, net of federal benefit
2

Remeasurement of U.S. deferred tax balance
10

Transition tax on deferred foreign income
(55
)
Global intangible low-taxed income deferred ("GILTI")
(2
)
Foreign tax on undistributed earnings
(3
)
Foreign-derived intangible income deduction
(1
)
Global intangible low-taxed income inclusion
2

Effective tax rate for 2018
12
 %


32

Quarterly results of operations
The following quarterly results have been derived from our unaudited consolidated financial statements that, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such quarterly information. The operating results for any quarter are not necessarily indicative of the results to be expected for any future period. The following tables presenting our quarterly results of operations should be read in conjunction with the consolidated financial statements and related notes contained elsewhere in this Annual Report on Form 10-K. The unaudited quarterly financial data for each of the eight quarters in the two years ended December 31, 2019 and December 31, 2018 are as follows:

 
Three months ended

 
(in thousands, except per share data)

 
March 31, 2019
 
June 30, 2019
 
September 30, 2019
 
December 31, 2019
Net sales
 
$
311,074

 
$
334,231

 
$
340,442

 
$
367,468

Gross profit
 
234,999

 
250,465

 
254,527

 
276,333

Operating income
 
23,399

 
32,296

 
65,178

 
53,681

Net income
 
23,220

 
28,692

 
51,644

 
58,596

Basic earnings per share
 
$
0.18

 
$
0.22

 
$
0.39

 
$
0.45

Diluted earnings per share
 
$
0.17

 
$
0.22

 
$
0.39

 
$
0.45

Dividends declared per share
 
$
0.25

 
$
0.25

 
$
0.25

 
$
0.25

໿
໿

 
Three months ended

 
(in thousands, except per share data)

 
March 31, 2018
 
June 30, 2018
 
September 30, 2018
 
December 31, 2018
Net sales
 
$
311,897

 
$
341,009

 
$
346,127

 
$
360,099

Gross profit
 
237,374

 
258,850

 
257,112

 
272,070

Operating income
 
28,137

 
36,912

 
46,010

 
61,821

Net income
 
24,268

 
31,054

 
43,194

 
56,541

Basic earnings per share
 
$
0.19

 
$
0.24

 
$
0.33

 
$
0.43

Diluted earnings per share
 
$
0.18

 
$
0.23

 
$
0.32

 
$
0.42

Dividends declared per share
 
$
0.23

 
$
0.23

 
$
0.23

 
$
0.23


33

Other operational information  
We believe that the following additional unaudited operational metrics assist investors in assessing our operational performance relative to others in our industry and to our historical results.   The following tables provide details with respect to the amount of GAAP charges related to stock-based compensation, amortization of acquisition intangibles, acquisition-related transaction costs, disposal gains on buildings and related charitable contributions, tax effects on businesses held-for-sale, capitalization and amortization of internally developed software costs, and restructuring charges that were recorded in the line items indicated below (in thousands).

 
Three Months Ended December 31,
 
Years Ended December 31,
(In thousands)
 
2019
 
2018
 
2019