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

FORM 10-Q  
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934    
For the quarterly period ended:  March 31, 2020 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/e51cc3b95d137918947faddf3bdee38c-nati-20170630x10qg001a12.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 exchange on which registered
Common Stock, $0.01 par value
NATI
Nasdaq Stock Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No ☐  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No☐  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):    
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No  
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.  
Class
Outstanding at April 27, 2020
Common Stock - $0.01 par value
130,595,074

    


NATIONAL INSTRUMENTS CORPORATION
  
INDEX  
Page No.

 
 
 

 
 

 

March 31, 2020 (unaudited) and December 31, 2019

 
 

 

(unaudited) for the three months ended March 31, 2020 and 2019

 
 

 

(unaudited) for the three months ended March 31, 2020 and 2019

 
 

 

(unaudited) for the three months ended March 31, 2020 and 2019
 
 
 
 
 
(unaudited) for the three months ended March 31, 2020 and 2019
 

 
 


 
 

 
 

 
 

 
 

 
 
 

 
 

 
 

 
 

 
 

 
 

 
 



    


PART I - FINANCIAL INFORMATION  

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


March 31,
 
December 31,

2020
 
2019
Assets
(unaudited)
 
 

Current assets:
 

 
 

Cash and cash equivalents
$
254,441

 
$
194,616

Short-term investments
329,573

 
237,983

Accounts receivable, net
213,015

 
248,872

Inventories, net
208,493

 
200,410

Prepaid expenses and other current assets
64,972

 
65,477

Total current assets
1,070,494

 
947,358

Property and equipment, net
245,166

 
243,717

Goodwill
253,191

 
262,242

Intangible assets, net
76,308

 
84,083

Operating lease right-of-use assets
66,245

 
70,407

Other long-term assets
51,461

 
44,082

Total assets
$
1,762,865

 
$
1,651,889

Liabilities and stockholders' equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
50,259

 
$
52,192

Accrued compensation
38,808

 
47,732

Deferred revenue - current
117,598

 
131,445

Operating lease liabilities - current
13,942

 
13,431

Other taxes payable
33,064

 
40,607

Other current liabilities
60,065

 
20,716

Total current liabilities
313,736

 
306,123

Deferred income taxes
12,475

 
14,065

Liability for uncertain income tax positions
6,756

 
6,652

Income taxes payable - non-current
69,151

 
69,151

Deferred revenue - non-current
32,853

 
33,480

Operating lease liabilities - non-current
36,429

 
40,650

Other long-term liabilities
11,348

 
5,418

Total liabilities
482,748

 
475,539

Commitments and contingencies


 


Stockholders' equity:
 

 
 

Preferred stock:  par value $0.01;  5,000,000 shares authorized; none issued and outstanding 

 

Common stock:  par value $0.01;  360,000,000 shares authorized; 130,595,203 shares and 130,504,535 shares issued and outstanding, respectively 
1,306

 
1,305

Additional paid-in capital
973,354

 
953,578

Retained earnings
335,876

 
242,537

Accumulated other comprehensive loss
(30,419
)
 
(21,070
)
Total stockholders’ equity
1,280,117

 
1,176,350

Total liabilities and stockholders’ equity
$
1,762,865

 
$
1,651,889


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


    


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

 
Three Months Ended

 
March 31,

 
2020
 
2019

 
 

 
 

Net sales:
 
 

 
 

Product
 
$
273,978

 
$
277,702

Software maintenance
 
35,403

 
33,372

Total net sales
 
309,381

 
311,074


 
 

 
 

Cost of sales:
 
 

 
 

Product
 
82,071

 
74,188

Software maintenance
 
1,690

 
1,887

Total cost of sales
 
83,761

 
76,075


 
 

 
 

Gross profit
 
225,620

 
234,999


 
 

 
 

Operating expenses:
 
 

 
 

Sales and marketing
 
115,746

 
117,551

Research and development
 
71,621

 
66,166

General and administrative
 
26,180

 
27,883

Total operating expenses
 
213,547

 
211,600

Gain on sale of business
 
159,753

 

Operating income
 
171,826

 
23,399


 
 

 
 

Other income:
 
 

 
 

Interest income
 
2,299

 
2,234

Net foreign exchange (loss) gain
 
(505
)
 
366

Other loss, net
 
(1,234
)
 
(24
)
Income before income taxes
 
172,386

 
25,975

Provision for income taxes
 
39,731

 
2,755


 
 

 
 

Net income
 
$
132,655

 
$
23,220


 
 

 
 

Basic earnings per share
 
$
1.02

 
0.18


 
 

 
 

Weighted average shares outstanding - basic
 
130,613

 
132,252


 
 

 
 

Diluted earnings per share
 
$
1.01

 
$
0.17


 
 

 
 

Weighted average shares outstanding - diluted
 
131,357

 
133,367


 
 

 
 

Dividends declared per share
 
$
0.26

 
$
0.25

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

    


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


 
Three Months Ended

 
March 31,

 
2020
 
2019

 
 

 
 

Net income
 
$
132,655

 
$
23,220

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

 
 

Foreign currency translation adjustment
 
(5,913
)
 
(3,067
)
Unrealized (loss) gain on securities available-for-sale
 
(2,788
)
 
1,175

Unrealized (loss) gain on derivative instruments
 
(575
)
 
1,212

Other comprehensive loss, before tax
 
(9,276
)
 
(680
)
Tax expense related to items of other comprehensive income
 
73

 
210

Other comprehensive loss, net of tax
 
(9,349
)
 
(890
)
Comprehensive income
 
$
123,306

 
$
22,330


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


    


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


 
Three Months Ended

 
March 31,

 
2020
 
2019
Cash flow from operating activities:
 
 

 
 

Net income
 
$
132,655

 
$
23,220

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

 
 

Disposal gain on sale of business
 
(159,753
)
 

Depreciation and amortization
 
19,265

 
18,012

Stock-based compensation
 
12,104

 
11,034

Tax benefit from deferred income taxes
 
(1,599
)
 
(1,650
)
Changes in operating assets and liabilities, net of divestitures
 
40,948

 
(8,469
)
Net cash provided by operating activities
 
43,620

 
42,147


 
 

 
 

Cash flow from investing activities:
 
 

 
 

Capital expenditures
 
(12,816
)
 
(10,936
)
Proceeds from sale of business, net of cash divested
 
158,973

 

Capitalization of internally developed software
 
(1,915
)
 
(2,279
)
Additions to other intangibles
 
(112
)
 
(106
)
Payments to acquire equity-method investments
 

 
(9,784
)
Purchases of short-term investments
 
(206,331
)
 
(60,094
)
Sales and maturities of short-term investments
 
111,827

 
81,151

Net cash provided by (used in) investing activities
 
49,626

 
(2,048
)

 
 

 
 

Cash flow from financing activities:
 
 

 
 

Proceeds from issuance of common stock
 
8,991

 
9,213

Repurchase of common stock
 
(6,526
)
 
(46,404
)
Dividends paid
 
(33,997
)
 
(33,110
)
Net cash used in financing activities
 
(31,532
)
 
(70,301
)

 
 

 
 

Effect of exchange rate changes on cash
 
(1,889
)
 
(418
)

 
 

 
 

Net change in cash and cash equivalents
 
59,825

 
(30,620
)
Cash and cash equivalents at beginning of period
 
194,616

 
259,386

Cash and cash equivalents at end of period
 
$
254,441

 
$
228,766

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


    




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

 
 
March 31, 2020
 
 
Common Stock Shares
 
Common Stock Amount
 
Additional-Paid in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income/(Loss)
 
Total Stockholders' Equity
Balance at December 31, 2019
 
130,504,535

 
$
1,305

 
$
953,578

 
$
242,537

 
$
(21,070
)
 
$
1,176,350

Net income
 

 

 

 
132,655

 

 
132,655

Other comprehensive loss, net of tax
 

 

 

 

 
(9,349
)
 
(9,349
)
Issuance of common stock under employee plans, including tax benefits
 
255,541

 
3

 
8,988

 

 

 
8,991

Stock-based compensation
 

 

 
11,993

 

 

 
11,993

Repurchase of common stock
 
(164,873
)
 
(2
)
 
(1,205
)
 
(5,319
)
 

 
(6,526
)
Dividends paid (1)
 

 

 

 
(33,997
)
 

 
(33,997
)
Balance at March 31, 2020
 
130,595,203

 
$
1,306

 
$
973,354

 
$
335,876

 
$
(30,419
)
 
$
1,280,117


 
 
March 31, 2019

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

 
$
1,327

 
$
897,544

 
$
356,418

 
$
(16,931
)
 
$
1,238,358

Net income
 

 

 

 
23,220

 

 
23,220

Other comprehensive loss, net of tax
 

 

 

 

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

 
2

 
9,211

 

 

 
9,213

Stock-based compensation
 

 

 
10,866

 

 

 
10,866

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

 
(46,404
)
Dividends paid (1)
 

 

 

 
(33,110
)
 

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

 
1,319

 
910,602

 
307,153

 
(17,821
)
 
1,201,253


(1) Cash dividends declared per share of common stock were $0.26 and $0.25 for the three months ended March 31, 2020 and 2019, respectively.

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


    





NATIONAL INSTRUMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  
  

Note 1 – Basis of presentation
  
The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2019, included in our annual report on Form 10-K, filed with the Securities and Exchange Commission (the "SEC"). In our opinion, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring items) considered necessary to present fairly our financial position at March 31, 2020 and December 31, 2019, the results of our operations and comprehensive income for the three months ended March 31, 2020 and 2019, the cash flows for the three months ended March 31, 2020 and 2019, and the statement of stockholders' equity for the three months ended March 31, 2020 and 2019. Our operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States.

Recently Adopted Accounting Pronouncements

Current Expected Credit Losses ("CECL")

In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU replaces the incurred-loss impairment methodology and requires immediate recognition of estimated credit losses expected to occur for most financial assets, including trade receivables. Credit losses on available-for-sale debt securities with unrealized losses will be recognized as allowances for credit losses limited to the amount by which fair value is below amortized cost. We adopted the new standard on January 1, 2020 and the impact of the adoption was not material to our consolidated financial statements as credit losses are not expected to be significant based on historical collection trends, the financial condition of payment partners, and external market factors. We will continue to actively monitor the impact of the recent coronavirus (COVID-19) pandemic on expected credit losses.

Implementation Costs Incurred in a Cloud Computing Arrangement

In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which clarifies the accounting for implementation costs in cloud computing arrangements. The new standard aligns the treatment of implementation costs incurred by customers in cloud computing arrangements that are service contracts with the treatment of similar costs incurred to develop or obtain internal-use software. Under the new standard, implementation costs are deferred and presented in the same financial statement caption on the condensed consolidated balance sheet as a prepayment of related arrangement fees. The deferred costs are recognized over the term of the arrangement in the same financial statement caption in the condensed consolidated income statement as the related fees of the arrangement. We adopted the new standard on January 1, 2020. The new standard did not have a material impact on our consolidated financial statements and related disclosures.

Fair Value Measurements

In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement,” which modifies the disclosure requirements on fair value measurements. We adopted the new standard on January 1, 2020. The new standard did not have a material impact on our consolidated financial statements and related disclosures.

Income Taxes

In December 2019, the FASB issued ASU 2019-12, “Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740),” which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments in this ASU also improve consistency and simplify other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ASU will be applied using different approaches depending on what the specific amendment relates to and, for public entities, are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. An entity is permitted to early adopt the guidance, and we early adopted ASU 2019-12 as of January 1, 2020. The adoption did not have a material impact on our consolidated financial statements and related disclosures.



    


Summary of Significant Accounting Policies

As discussed above, we adopted the new expected credit loss standard as of January 1, 2020. There were no other significant changes in our accounting policies during the three months ended March 31, 2020 compared to the significant accounting policies described in our 2019 Form 10-K.
 
Divestitures

AWR

On January 15, 2020, we completed the sale of our AWR Corporation subsidiary ("AWR") for approximately $161 million, subject to final working capital adjustments. We recognized a gain of approximately $160 million on the sale. The gain is included within "Gain on sale of business" in the consolidated statements of income, which also included approximately $1 million of transaction costs.

The divestiture of AWR resulted in the derecognition of the following assets and liabilities (in thousands):

Cash
1,027

Accounts receivable, net
7,233

Prepaid and other current assets
283

Goodwill
7,221

Other non-current assets
556

Total assets
16,320

 
 
Deferred revenue
15,296

Other current liabilities
940

Cumulative translation adjustment
(660
)
Total liabilities and stockholders' equity
15,576

 
 
Total assets divested, net (including cash)
744



Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding during each period. Diluted EPS is computed by dividing net income by the weighted average number of common shares and common share equivalents outstanding (if dilutive) during each period. The number of common share equivalents, which includes restricted stock units ("RSUs"), is computed using the treasury stock method.    

The reconciliation of the denominators used to calculate basic EPS and diluted EPS for the three months ended March 31, 2020 and 2019, are as follows:

 
Three Months Ended March 31,

 
(In thousands)

 
(Unaudited)

 
2020
 
2019
Weighted average shares outstanding-basic
 
130,613

 
132,252

Plus: Common share equivalents
 
 

 
 

RSUs
 
744

 
1,115

Weighted average shares outstanding-diluted
 
131,357

 
133,367


  
RSU awards to acquire 182,000 shares and 67,100 shares for the three months ended March 31, 2020 and 2019, respectively, were excluded in the computations of diluted EPS because the effect of including the stock awards would have been anti-dilutive.

    


Note 2 - Revenue

Revenue Recognition

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

Disaggregation of Revenues

We disaggregate revenue from contracts with customers based on the timing of transfer of goods or services to customers (point-in-time or over time) and geographic region based on the billing location of the customer. The geographic regions that are tracked are the Americas (United States, Canada, and Latin America), EMEIA (Europe, Middle East, India, and Africa) and APAC (Australia, New Zealand, Southeast Asia, China, South Korea and Japan). We operate as one operating segment.

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

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

 
2020
 
2019
 
 
 
 
 
 
 
 
 
Net sales:
 
Point-in-Time(1)
Over Time
Total
 
Point-in-Time(1)
Over Time
Total
Americas
 
$
105,299

19,718

$
125,017

 
$
99,681

22,974

$
122,655

EMEIA
 
71,103

19,590

90,693

 
79,122

19,685

98,807

APAC
 
83,908

9,763

93,671

 
81,450

8,162

89,612

Total net sales(1)
 
$
260,310

49,071

$
309,381

 
$
260,253

50,821

$
311,074

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


Information about Contract Balances

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

Changes in deferred revenue, current and non-current, during the three months ended March 31, 2020 were as follows:
 
Amount

(In thousands)
Deferred Revenue at December 31, 2019
$
164,925

   Deferral of revenue billed in current period, net of recognition
47,978

   Recognition of revenue deferred in prior periods
(44,870
)
Divestiture of AWR subsidiary
(15,296
)
   Foreign currency translation impact
(2,286
)
Balance as of March 31, 2020 (unaudited)
$
150,451




    


For the three months ended March 31, 2020, revenue recognized from performance obligations satisfied in prior periods (for example, due to changes in transaction price) was not material. Amounts recognized as revenue in excess of amounts billed are recorded as unbilled receivables. Unbilled receivables which are anticipated to be invoiced in the next twelve months are included in "accounts receivable, net" on the consolidated balance sheet. Based on the nature of our contracts with customers, we do not typically recognize unbilled receivables related to revenues recognized in excess of amounts billed. For the three months ended March 31, 2020, amounts recognized related to unbilled receivables were not material.

Unsatisfied Performance Obligations

Revenue expected to be recognized in any future period related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less, and contracts where revenue is recognized as invoiced, was approximately $60.3 million as of March 31, 2020. Because we typically invoice customers at contract inception, this amount is included in our current and non-current deferred revenue balances. As of March 31, 2020, we expect to recognize approximately 38% of the revenue related to these unsatisfied performance obligations during the remainder of 2020, 35% during 2021, and 27% thereafter.

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

We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs meet the requirements to be capitalized. Capitalized incremental costs related to initial contracts and renewals are amortized over the same period because the commissions paid on both the initial contract and renewals are commensurate with one another. Total capitalized costs to obtain a contract were not material during the periods presented and are included in other long-term assets on our consolidated balance sheets.

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


 
As of March 31, 2020
(In thousands)
 
(Unaudited)

 
 
 
Gross
 
Gross
 
 

 
Adjusted Cost
 
Unrealized Gain
 
Unrealized Loss
 
Fair Value
Corporate bonds
 
$
331,801

 
$
143

 
$
(2,371
)
 
$
329,573

Total Short-term investments
 
$
331,801

 
$
143

 
$
(2,371
)
 
$
329,573


(In thousands)
 
As of December 31, 2019

 
 
 
Gross
 
Gross
 
 

 
Adjusted Cost
 
Unrealized Gain
 
Unrealized Loss
 
Fair Value
Corporate bonds
 
$
237,423

 
$
628

 
$
(68
)
 
$
237,983

Total Short-term investments
 
$
237,423

 
$
628

 
$
(68
)
 
$
237,983




    


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


 
As of March 31, 2020
(In thousands)
 
(Unaudited)

 
Adjusted Cost
 
Fair Value
Due in less than 1 year
 
$
246,602

 
$
245,943

Due in 1 to 5 years
 
85,199

 
83,630

Total available-for-sale debt securities
 
$
331,801

 
$
329,573


 
 
 
 
Due in less than 1 year
 
Adjusted Cost
 
Fair Value
Corporate bonds
 
$
246,602

 
$
245,943

Total available-for-sale debt securities
 
$
246,602

 
$
245,943


 
 
 
 
Due in 1 to 5 years
 
Adjusted Cost
 
Fair Value
Corporate bonds
 
$
85,199

 
$
83,630

Total available-for-sale debt securities
 
$
85,199

 
$
83,630



Equity-Method Investments

The carrying value of our equity method investments was $16 million as of March 31, 2020. Our proportionate share of the income from equity-method investments was not material for the periods presented.


        
Note 4 – Fair value measurements 
  
We define fair value to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market that market participants may use when pricing the asset or liability.   
We follow a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value measurement is determined based on the lowest level input that is significant to the fair value measurement. The three values of the fair value hierarchy are the following:   
Level 1 – Quoted prices in active markets for identical assets or liabilities   
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly   
Level 3 – Inputs that are not based on observable market data   

    



Assets and liabilities measured at fair value on a recurring basis are summarized below:

 
Fair Value Measurements at Reporting Date Using
(In thousands)
 
(Unaudited)
Description
 
March 31, 2020
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents available for sale:
 
 
 
 
 
 
 
 
Money Market Funds
 
$
114,082

 
$
114,082

 
$

 
$

Corporate bonds
 
$
29,970

 
$

 
$
29,970

 
$

Short-term investments available for sale:
 
 

 
 

 
 

 
 
Corporate bonds
 
329,573

 

 
329,573

 

Derivatives
 
18,553

 

 
18,553

 


Total Assets 
 
$
492,178

 
$
114,082

 
$
378,096

 
$


 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Derivatives
 
$
(13,130
)
 
$

 
$
(13,130
)
 
$

Total Liabilities 
 
$
(13,130
)
 
$

 
$
(13,130
)
 
$


(In thousands)
 
Fair Value Measurements at Reporting Date Using
Description
 
December 31, 2019
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents available for sale:
 
 
 
 
 
 
 
 
Money Market Funds
 
$
87,397

 
$
87,397

 
$

 
$

Corporate notes and bonds
 
9,962

 

 
9,962

 

Short-term investments available for sale:
 
 
 
 
 
 
 
 
Corporate bonds
 
237,983

 

 
237,983

 

Derivatives
 
8,209

 

 
8,209

 

Total Assets 
 
$
343,551

 
$
87,397

 
$
256,154

 
$


 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Derivatives
 
$
(2,872
)
 
$

 
$
(2,872
)
 
$

Total Liabilities 
 
$
(2,872
)
 
$

 
$
(2,872
)
 
$



We value our available-for-sale short-term investments based on pricing from third party pricing vendors, who may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. We classify all of our fixed income available-for-sale securities as having Level 2 inputs. The valuation techniques used to measure the fair value of our financial instruments having Level 2 inputs were derived from non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models, such as discounted cash flow techniques. We believe all of these sources reflect the credit risk associated with each of our available-for-sale short-term investments. Short-term investments available-for-sale consists of debt securities issued by states of the U.S. and political subdivisions of the U.S., corporate debt securities and debt securities issued by U.S. government organizations and agencies. All of our short-term investments available-for-sale have contractual maturities of less than 60 months.  

    


  
Our derivatives consist of foreign currency forward contracts. Our foreign currency forward contracts are valued using an income approach (Level 2) based on the spot rate less the contract rate multiplied by the notional amount. We consider counterparty credit risk in the valuation of our derivatives. However, counterparty credit risk did not impact the valuation of our derivatives during the three months ended March 31, 2020. There were no transfers in or out of Level 1 or Level 2 during the three months ended March 31, 2020.  
  
As of March 31, 2020, our short-term investments did not include any foreign sovereign debt. The majority of our short-term investments that are located outside of the U.S. are denominated in the U.S. dollar with the exception of $4 million U.S. dollar equivalent of corporate bonds that are denominated in Euro.
  
We did not have any items that were measured at fair value on a nonrecurring basis at March 31, 2020 and December 31, 2019. The carrying value of net accounts receivable, accounts payable, and long-term debt contained in the consolidated balance sheets approximates fair value.
 
Note 5 – Derivative instruments and hedging activities 
  
We recognize all of our derivative instruments as either assets or liabilities in our statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.

We have operations in approximately 45 countries. Sales outside of the Americas accounted for approximately 60% and 61% of our net sales during the three months ended March 31, 2020 and 2019, respectively. Our activities expose us to a variety of market risks, including the effects of changes in foreign currency exchange rates. These financial risks are monitored and managed by us as an integral part of our overall risk management program.   
  
We maintain a foreign currency risk management strategy that uses derivative instruments (foreign currency forward contracts) to help protect our earnings and cash flows from fluctuations caused by the volatility in currency exchange rates. Movements in foreign currency exchange rates pose a risk to our operations and competitive position, in that exchange rate changes may affect our profitability and cash flow, and the business or pricing strategies of our non-U.S. based competitors.
 
The vast majority of our foreign sales are denominated in the customers’ local currency. We purchase foreign currency forward contracts as hedges of forecasted sales that are denominated in foreign currencies and as hedges of foreign currency denominated financial assets or liabilities. These contracts are entered into to help protect against the risk that the eventual dollar-net-cash inflows resulting from such sales or firm commitments will be adversely affected by changes in exchange rates. We also purchase foreign currency forward contracts as hedges of forecasted expenses that are denominated in foreign currencies. These contracts are entered into to help protect against the risk that the eventual dollar-net-cash outflows resulting from foreign currency operating and cost of sales expenses will be adversely affected by changes in exchange rates.
 
We designate foreign currency forward contracts as cash flow hedges of forecasted net sales or forecasted expenses. In addition, we hedge our foreign currency denominated balance sheet exposures using foreign currency forward contracts that are not designated as hedging instruments. None of our derivative instruments contain a credit-risk-related contingent feature.
 
 Cash flow hedges  

To help protect against the reduction in value caused by a fluctuation in foreign currency exchange rates of forecasted foreign currency cash flows resulting from international sales over the next one to three years, we have instituted a foreign currency cash flow hedging program. We hedge portions of our forecasted net sales and forecasted expenses denominated in foreign currencies with forward contracts. For forward contracts, when the dollar strengthens significantly against the foreign currencies, the change in the present value of future foreign currency cash flows may be offset by the change in the fair value of the forward contracts designated as hedges. We purchase foreign currency forward contracts for up to 100% of our forecasted exposures in selected currencies (primarily in Euro, Japanese yen, Hungarian forint, British pound, Malaysian ringgit, Chinese yuan, and Korean won) and limit the duration of these contracts to 40 months or less.  


    


For derivative instruments that are designated and qualify as a cash flow hedge, the gain or loss on the derivative is reported as a component of accumulated other comprehensive income ("OCI") and reclassified into earnings in the same line item (net sales, operating expenses, or cost of sales) associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. Hedge effectiveness of foreign currency forwards designated as cash flow hedges are measured by comparing the hedging instrument’s cumulative change in fair value from inception to maturity to the forecasted transaction’s terminal value.  


We held forward contracts designated as cash flow hedges with the following notional amounts:

(In thousands)
 
US Dollar Equivalent

 
As of March 31, 2020
 
As of December 31,

 
(Unaudited)
 
2019
Chinese yuan
 
50,402

 
$
32,970

Euro
 
220,749

 
130,122

Japanese yen
 
82,611

 
53,527

Hungarian forint
 
107,395

 
95,228

British pound
 
14,616

 
13,988

Malaysian ringgit
 
33,552

 
32,725

Korean won
 
23,746

 
24,728

Total forward contracts notional amount
 
$
533,071

 
$
383,288


  
The contracts in the foregoing table had contractual maturities of 39 months or less and 36 months or less at March 31, 2020 and December 31, 2019, respectively.

At March 31, 2020, we expect to reclassify $9.9 million of gains on derivative instruments from accumulated OCI to net sales during the next twelve months when the hedged international sales occur, $(2.4) million of losses on derivative instruments from accumulated OCI to cost of sales during the next twelve months when the cost of sales are incurred and $(3.4) million of losses on derivative instruments from accumulated OCI to operating expenses during the next twelve months when the hedged operating expenses occur. Expected amounts are based on derivative valuations at March 31, 2020. Actual results may vary materially as a result of changes in the corresponding exchange rates subsequent to this date.  

The gains and losses recognized in earnings due to hedge ineffectiveness were not material for the three months ended March 31, 2020, and 2019 and are included as a component of net income under the line item "net foreign exchange loss."

Other Derivatives  
Other derivatives not designated as hedging instruments consist primarily of foreign currency forward contracts that we use to hedge our foreign denominated net receivable or net payable positions to help protect against the change in value caused by a fluctuation in foreign currency exchange rates. We typically attempt to hedge up to 90% of our outstanding foreign denominated net receivables or net payables and typically limit the duration of these foreign currency forward contracts to approximately 90 days or less. The gain or loss on the derivatives as well as the offsetting gain or loss on the hedge item attributable to the hedged risk is recognized in current earnings under the line item “net foreign exchange gain (loss).” As of March 31, 2020 and December 31, 2019, we held foreign currency forward contracts that were not designated as hedging instruments with a notional amount of $59 million and $41 million, respectively.   
The following tables present the fair value of derivative instruments on our Consolidated Balance Sheets at March 31, 2020 and December 31, 2019, respectively.   

    



 
Asset Derivatives

 
March 31, 2020
 
December 31, 2019
(In thousands)
 
(Unaudited)
 
 
 
 

 
 
 
 
 
 
 
 

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

 
 
 
 

Foreign exchange contracts - ST forwards
 
Prepaid expenses and other current assets
 
$
10,027

 
Prepaid expenses and other current assets
 
$
7,039

 
 
 
 
 
 
 
 
 
Foreign exchange contracts - LT forwards
 
Other long-term assets
 
7,520

 
Other long-term assets
 
970

Total derivatives designated as hedging instruments
 
 
 
$
17,547

 
 
 
$
8,009

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 

 
 
 
 

 
 
 
 
 
 
 
 
 
Foreign exchange contracts - ST forwards
 
Prepaid expenses and other current assets
 
$
1,006

 
Prepaid expenses and other current assets
 
$
200

Total derivatives not designated as hedging instruments
 
 
 
$
1,006

 
 
 
$
200

 
 
 
 
 
 
 
 
 
Total derivatives
 
 
 
$
18,553

 
 
 
$
8,209

   

 
Liability Derivatives

 
March 31, 2020
 
December 31, 2019
(In thousands)
 
(Unaudited)
 

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

 
 
 
 

Foreign exchange contracts - ST forwards
 
Other current liabilities
 
$
(5,922
)
 
Other current liabilities
 
$
(2,089
)

 
 
 
 

 
 
 
 

Foreign exchange contracts - LT forwards
 
Other long-term liabilities
 
(6,541
)
 
Other long-term liabilities
 
(351
)
Total derivatives designated as hedging instruments
 
 
 
$
(12,463
)
 
 
 
$
(2,440
)

 
 
 
 

 
 
 
 

Derivatives not designated as hedging instruments
 
 
 
 

 
 
 
 


 
 
 
 

 
 
 
 

Foreign exchange contracts - ST forwards
 
Other current liabilities
 
$
(667
)
 
Other current liabilities
 
$
(432
)
Total derivatives not designated as hedging instruments
 
 
 
$
(667
)
 
 
 
$
(432
)

 
 
 
 

 
 
 
 

Total derivatives
 
 
 
$
(13,130
)
 
 
 
$
(2,872
)


    


The following tables present the effect of derivative instruments on our Consolidated Statements of Income for the three-months ended March 31, 2020 and 2019, respectively:
March 31, 2020
(In thousands)
(Unaudited)
Derivatives in Cash Flow Hedging Relationship
 
Gain or (Loss) Recognized in OCI on Derivative
 
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income
 
Gain or (Loss) Reclassified from Accumulated OCI into Income
Foreign exchange contracts - forwards
 
$
10,856

 
Net sales
 
$
2,534


 
 

 
 
 
 

Foreign exchange contracts - forwards
 
(6,760
)
 
Cost of sales
 
(519
)

 
 

 
 
 
 

Foreign exchange contracts - forwards
 
(4,671
)
 
Operating expenses
 
(445
)
Total
 
$
(575
)
 
 
 
$
1,570

March 31, 2019
(In thousands)
(Unaudited)
Derivatives in Cash Flow Hedging Relationship
 
Gain or (Loss) Recognized in OCI on Derivative
 
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income
 
Gain or (Loss) Reclassified from Accumulated OCI into Income
Foreign exchange contracts - forwards
 
$
1,800

 
Net sales
 
$
1,745


 
 

 
 
 
 

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


 
 

 
 
 
 

Foreign exchange contracts - forwards
 
(318
)
 
Operating expenses
 
29

Total
 
$
1,212

 
 
 
$
1,794

(In thousands)
 
 
 
 
 
 
Derivatives not Designated as Hedging Instruments
 
Location of Gain (Loss) Recognized in Income
 
Amount of Gain (Loss) Recognized in Income
 
Amount of Gain (Loss) Recognized in Income

 
 
 
March 31, 2020
 
March 31, 2019