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 , 2020
[☐ ] 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
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | ||||
| (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 | ||||||
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.
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
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 30, 2020, was $3,001,133,422 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 30, 2020, 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 12, 2021, the registrant had outstanding 131,607,055 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
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Form 10-K
For the Fiscal Year Ended December 31, 2020
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”) that are subject to risks and uncertainties. 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," “endeavor to,” "seek to," are committed to,” "remaining committed to,” "focus on,” "are encouraged by," "remain cautious," "remain optimistic," or “estimate,” statements of "goals," “commitments,” "strategy," or "visions"; or other variations thereof or comparable terminology or the negative thereof) should be considered forward-looking statements. All forward-looking statements are based on current expectations and projections of future events. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, forward-looking statements are not guarantees of performance and 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” below and elsewhere in this Form 10-K, which could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements. Actual results could differ materially from those stated or implied by our forward-looking statements, due to risks and uncertainties associated with our business or underlying assumptions or conditions. You should not place undue reliance on any of these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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
•Providing a differentiated software-defined platform for automated test and automated measurement systems
•Focusing on industry-specific applications that benefit from our platform's disruptive capabilities
•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 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.
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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 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.
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
•NI TestStand - application software targeted for automated test and automated measurement applications in a manufacturing environment.
•NI VeriStand - a ready-to-use software environment for configuring real-time testing applications, including hardware-in-the-loop test systems.
•Flexlogger - application software optimized for quick sensor configuration and data logging of mixed signals to verify electromechanical systems.
•NI InsightCM Enterprise - a software solution with tightly integrated hardware options for monitoring ancillary rotating equipment.
Systems and Data Management
•NI DIAdem - configuration-based technical data management, analysis, and report generation tools to interactively mine and analyze engineering and measurement data.
•NI SystemLink - systems management software that enables the mass coordination of connected devices, software deployments, and data communications throughout a distributed system.
Over the past few years, we have demonstrated our commitment to software excellence by modernizing our flagship software, LabVIEW, while also expanding our software capabilities in focus areas such as data analytics, through the development of new product offerings and inorganic acquisition activity. As further described below, we acquired OptimalPlus Ltd. ("OptimalPlus") in the third quarter of 2020, expanding our enterprise software capabilities to provide customers with business-critical insights through advanced product analytics across their product development flow and supply chain. OptimalPlus software helps enable customer enhancements in key manufacturing metrics such as yield and efficiency, helps customers improve product quality and reliability, and provides customers with full supply chain visibility.
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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, providing 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.
We are seeing a similar need for application specific systems in the Transportation industry. With the increase in both the volume and complexity of electrical components in vehicles, NI customers need to increase production test capacity while minimizing costs. The NI ECU Test System (ECUTS) reduces the cost of test by testing multiple engine control units (ECUs) in parallel in the same or similar footprint to traditional test systems. This system is defined by software and built on the NI modular hardware platform which increases flexibility for our customers and protects against rapid requirements changes in the future. In addition, electrification has become a major trend in the automotive industry and battery technology is a major contributor to electric vehicle capabilities such as range, performance, and charging time. Battery technology is also changing rapidly and requires long test cycle times during the development process. The NI Battery Test System (BTS) automates the process of testing battery performance during design validation by providing a system-level starting point for the most common battery cycle tests and is configurable for rapidly adjusting to unique testing requirements in order to accelerate the design process.
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 comprised of highly qualified engineers and experts who help our customers to meet their application needs. Our Integrated Engineering Services offering supports integration of our standard products with custom hardware and software solutions to meet the specific requirements of our customers. Our Methodology Consulting Services offering provides strategic guidance to our customers to assess, design and implement solutions to enhance their processes. With direct operations in approximately 40 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 Partners around the world we are able to deliver solutions tailored to customer needs. Our National Instruments 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.
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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.
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 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: We offer services to provide 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 real-time 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.
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•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. As vehicles move towards autonomous capability, there is growing need for hardware-in-the loop (HIL) test capability to validate and verify functionality of ADAS systems, which are anticipated to play a central role for autonomous driving. Our HIL offerings allow customers to accelerate test deployment earlier in the development cycle, while minimizing the costs compared to more traditional testing approaches and expanding test scenarios that are performed in lab and simulation. Our platform-based approach provides flexibility and scalability to address rapid changes in requirements and technology.
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•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.
•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 their products 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. Examples of 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.
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 continue to focus on scale and efficiency in serving our broad base of customers. Our focus to streamline the process of doing business with NI means both reducing our costs and improving the experience of the large number of smaller accounts we serve. This includes investment in ni.com for a better digital experience and significantly expanding the usage of our distributor channel in 2021 and beyond. We believe increasing sales through our indirect channels will allow us to maintain and expand our presence within certain markets while also creating more opportunities for our direct sales force to support proactive engagement with our larger accounts where we can deliver value through our application-specific system offerings that leverage our platform.
We have sales and support offices in approximately 40 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.
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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 in-depth 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, both in person and virtually.
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 $280 million, $272 million and $261 million in 2020, 2019, and 2018, 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, 2020, we held 861 U.S. patents (861 utility patents and 0 design patents) and 94 patents in foreign countries (79 patents registered in Europe, 12 patents in China, 2 patents in Japan, and 1 patent in Mexico), and had 89 patent applications pending in the U.S. and foreign countries. Two hundred thirty-six (236) 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 2021 to 2039. 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.
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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, technical manuals and product support documentation are delivered digitally wherever possible. In those cases where physical media is required, we use outside partners to produce these materials.
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 Item 1A, Risk Factors, 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.
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.
Human Capital
At NI, we believe our company, our people and our products make a positive impact on society and the planet. We consider our employees to be one of our greatest assets and critical to our continued success. As of December 31, 2020, we had approximately 7,000 employees worldwide, of which approximately 43% are in the Americas, 29% in the EMEA region, and 28% in the APAC region.
Our Culture and Values
Our Core Values drive our culture and values at NI – Be Bold, Be Kind, Be Connectors. These values provide us with moral guideposts needed when making decisions, especially the hard ones, and influence the way we engage with our customers, communities, and each other, and they are foundational in how we define and execute towards success. Each year we conduct an Employee Engagement Survey to enhance our understanding of our employees’ experiences at NI and identify the key drivers of their engagement. The survey results are used to calculate an overall engagement index and to measure several underlying elements that contribute to employee engagement such as strong business direction, manager engagement, employee empowerment, resource adequacy, and collaboration. We use the outputs of the survey to enable managers across the organization to drive improvements with clear, actionable insights. During 2020, over 90% of our employees participated in the survey and we saw a steady improvement in our overall engagement index.
Our Code of Ethics is instrumental in creating a workplace that values each of our employees and emphasizes an ethical approach to doing business and managing our people. We also abide by the employment laws of all the countries in which we operate.
Diversity and Inclusion
We are committed to creating a diverse, inclusive workforce, that fosters well-being, equity and opportunity at NI. NI strives to create a diverse and inclusive culture of belonging, where all employees feel welcomed, valued, respected, and heard, and who share their excitement for our culture. We have recently announced “Engineering Hope”, which is an ambitious 10-year impact strategy and vision of a more sustainable, equitable and inclusive world, where diversity is embraced and fosters innovation. This diversity and inclusion effort will focus on changing the faces of engineering and building an equitable and thriving society.
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Employee Safety
During COVID-19, our primary focus has been the safety and well-being of our employees and their families. Our global pandemic efforts leveraged the advice and recommendations of infectious disease experts at the U.S. Center for Disease Control and Prevention and other organizations to establish proper safety standards and secure appropriate levels of personal protective equipment. We created a global crisis team that developed a comprehensive return to site protocols, conducted employee outreach, and implemented various flexible working arrangements. In addition, in order to reinforce a deep connection and establish clear direction with our employees, we have significantly increased leadership updates and management outreach. As the pandemic continues, the health and safety of our employees remain the top priority while we ensure our employees remain productive and engaged while working from home.
Talent Management and Total Rewards
We invest in attracting, developing, and retaining the best talent at NI. We do this by communicating a clear purpose and strategy, transparent goal setting, driving accountability, continuously assessing, developing, advancing talent, and a leadership-driven talent strategy. We are committed to providing total rewards that are market competitive and performance based, driving innovation and operational excellence. Our compensation programs, practices, and policies reflect our commitment to reward short- and long-term performance that aligns with, and drives, stockholder value. Total direct compensation is generally positioned within a competitive range of the market median, with differentiation based on tenure, skills, proficiency, and performance to attract and retain key talent.
We conduct annual performance conversations to identify areas of success and improvement for our employees, which support future goal-setting and talent reviews.
Corporate Responsibility
We work to help engineers, enterprises, and innovators thrive. Our Corporate Impact Strategy outlines measurable goals and commitments for ensuring our company, people, and products work to make a positive impact on the planet. We are fostering a pipeline of diverse science, technology, engineering and math ("STEM") talent through academic partnerships, our employee mentor program, and investment in STEM education. We are committed to conserving natural resources, protecting biodiversity, and reducing greenhouse gas emissions. For example, we are working toward achieving Zero Waste by 2030, diverting at least 90% of our waste from landfill by reusing, recycling or composting it instead. We continue to support economic opportunity initiatives through donations of financial support, products, and volunteer work. We intend to continue our long-term partnerships with nonprofit organizations while also looking for innovative giving opportunities.
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, which are not the only risks that we face. Our business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those described in this Risk Factor section of this Form 10-K. Any one or more of these factors could, directly or indirectly, cause our actual financial condition and operating results to vary materially from our past, or from our anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect our business, financial condition, operating results and stock price.
RISKS RELATED TO OUR ABILITY TO GROW OUR BUSINESS
Uncertain Global Economic and Geopolitical Conditions, Including in China and other countries, Could Materially Adversely Affect Our Business and Results of Operations. Our operations and performance are sensitive to fluctuations in general economic and geopolitical 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 new or existing trade tensions with other countries, geopolitical instability, pandemics and other major public health issues including the COVID-19 pandemic, 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. For example, in recent years, there have been significant changes to U.S. trade policies, legislation, treaties and tariffs, in particular trade policies and tariffs affecting China. Some of these trade policies, including the U.S.’s trading relationship with China, have been renegotiated during this timeframe and are subject to further changes in the future. Changes to current policies by the U.S. (including any changes by the new U.S. presidential administration) or other governments could adversely affect our business, including potentially through increased import tariffs and other influences on U.S. trade relations with China and other countries. The imposition of additional tariffs or other trade barriers could increase our costs in certain markets, and may cause our customers to find alternative sourcing. Protectionist and retaliatory trade measures by any of the United States, China or another country could limit our customers’ ability to sell their products and services and could reduce demand for our customers’ products. 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. In addition, the application of various regulations depends on the classification of our products which can change over time as such regulations are modified or interpreted. 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:
•tariffs and other trade barriers impacting China or other countries in which we have significant sales;
•increases in taxes or changes in U.S. or foreign tax laws, including the possible increase in the U.S. corporate income tax rate and other changes in tax policy proposed by the new U.S. presidential administration,
•fluctuations in foreign currencies relative to the U.S. dollar;
•unexpected changes to currency policy or currency restrictions in foreign jurisdictions;
•major public health concerns, including the coronavirus:
•delays in collecting trade receivable balances from customers in developing economies;
•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;
•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.
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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 for some persons or companies to engage in business practices that are prohibited by U.S. and other laws and 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, distributors and agents, including those based in or from countries where practices which violate such laws and regulations may be customary, will not take actions in violation of the law or our policies. Any violation of foreign or U.S. laws or regulations by our employees, contractors, distributors 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.
For example, in the past, the U.S. government added certain of our customers based in China to its “Entity List”, which imposes additional restrictions on sales to such customers. Although the addition of these customers did not have a material adverse effect on our business, financial condition and results of operations, the U.S. government has the power to place additional customers on the Entity List or impose other restrictions on these or other customers or suppliers, and such actions could prohibit us from selling products or providing services to such customers, receiving payments from such customers or purchasing products from such entities. These restrictive governmental actions and any similar measures that may be imposed on U.S. companies by the Chinese or other governments will likely limit or prevent us from doing business with certain of our customers or suppliers and harm our ability to compete effectively or otherwise negatively affect our ability to sell our products. 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.
We Continue to Face Significant Risks Related to Adverse Public Health Matters, Including Epidemics and Pandemics such as the COVID-19 Pandemic.
Any outbreaks of contagious diseases and other adverse public health developments in countries where we operate could have a material and adverse effect on our business, financial condition, liquidity and results of operations. For example, the COVID-19 pandemic has adversely affected our operations throughout the world, as well as the facilities of our suppliers and customers. The COVID-19 pandemic caused widespread disruptions to our operations throughout 2020, particularly during the first half of the year. As of December 31, 2020, we continued to experience some disruptions, and at a minimum, we expect those disruptions to continue through the first half of 2021 and they could, potentially, extend for the full year and beyond. These disruptions have included and may continue to include, depending on the specific location, government regulations that require us to adjust or restrict our operations at certain of our facilities, incur additional costs, adapt to challenges presented by travel restrictions and “work-from-home” orders, experience logistical challenges and limitations, and reduce the demand from certain customers. The extent to which the COVID-19 pandemic will continue to impact our business and financial results going forward will be dependent on future developments such as the length and severity of the COVID-19 pandemic, future government regulations and actions in response to the COVID-19 pandemic, the timing, availability and effectiveness of vaccines, some of which have recently been approved and are being distributed for use, and the overall impact of the COVID-19 pandemic on the global economy and capital markets, among many other factors, all of which remain uncertain and unpredictable. In addition, the COVID-19 pandemic could directly impact the health of our management team and other employees. It is impossible to predict the overall future impact of the COVID-19 pandemic on our business, financial condition, liquidity and financial results, and there can be no assurance that the COVID-19 pandemic will not have a material and adverse effect on our financial results in the future during any quarter or period in which we are affected.
The COVID-19 pandemic also increases the likelihood and potential severity of other risks (including some discussed separately within this Item 1A. Risk Factors), including but not limited to, the following:
•In 2020, we transitioned a significant subset of our employee population to a remote work environment in an effort to mitigate the spread of COVID-19. This change may exacerbate certain risks to our business, including an increased risk of phishing and other cybersecurity attacks, an increased risk of challenges related to hiring, training, and retaining personnel, and an increased risk of delays or disruptions to our product development, sales, marketing, manufacturing and support operations that we cannot fully mitigate through remote or other alternative work arrangements.
•Protracted economic uncertainty could negatively affect the financial condition of our customers or suppliers, which may result in an increase in bankruptcies or insolvencies, a delay in payments and decreased sales.
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•A scarcity of resources or other hardships caused by the COVID-19 pandemic may result in increased geopolitical tensions which may cause governments and/or other entities to take actions that may have a significant negative impact on our ability or the ability of our suppliers and customers to conduct business.
Our Failure to Manage Our Partner and Distribution Channels Effectively could Result in a Loss of Revenue and Harm to Our Business. We are currently in the process of expanding our relationships with a number of distributors and other strategic partners, none of which are currently responsible for a material amount of our total net sales, in order to streamline and increase our worldwide sales to certain customers. Successfully managing our indirect distribution channel efforts to reach various customer segments for our products and services is a complex process across the broad range of geographies where we do business or plan to do business. While we have a focused strategy, plan, and team dedicated to making our sales through distributors a successful element of our business, our distributors and other strategic partners are independent businesses that we do not control. Notwithstanding the independence of these partners, we may face legal risk and potential reputational harm from the activities of these third parties including, but not limited to, export control violations, workplace conditions, corruption and anti-competitive behavior. If an agreement with one of our distributors or strategic partners were terminated, any prolonged delay in securing a replacement could have a material negative impact on our net sales and results of operations.
We cannot be certain that our distribution and strategic partner channel will market or sell our products and services effectively. If our efforts to expand our distributor and strategic partner channels are not successful, we may lose sales opportunities, customers and revenue opportunities. These distributors and strategic partners may also sell our competitors’ products and services, and if they favor our competitors’ products or services for any reason, they may fail to market our products or services effectively or to devote resources necessary to market and sell our products. If these partners are OEMs, they may decide not to bundle our applications on their devices. In addition, the financial health of our distributors and strategic partners and our continuing relationships with them are important to our success. Some of these distributors and strategic partners may be unable to withstand adverse changes in economic conditions, which could result in insolvency, the inability of such distributors and strategic partners to obtain financing or a delay in paying their obligations to us. Although we have mitigation plans in place for many possible issues, these factors, as well as others we may not contemplate could result in a material negative impact to our net sales and results of operations.
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. Any such shutdown of a significant system or network disruption could result from new system implementations, facility issues, energy blackouts, computer viruses, cyber-attacks, or security breaches including ransomware, 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 attack or pose threats to our customers and our information technology infrastructure. If we were to experience a complete or partial shutdown, disruption or attack, it would likely 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, existing or changing laws and regulations governing our responsibility to safeguard private data could result in a significant increase in our operating or capital expenditures which are needed to comply with these laws or regulations. If any of the foregoing events were to occur, our operating results in the impacted periods would be adversely impacted.
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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 known to us. For example, in December 2020, we were notified by Solarwinds Corporation, one of our suppliers, that a recent update to one of its network management software products contained data collection malware that had also been distributed to thousands of its other clients, including federal, state and local government agencies, educational institutions, private companies and governments around the world. Since becoming aware of this malware attack, we have taken steps to mitigate the known vulnerabilities, including ceasing to use the affected version of the software, and actively monitoring our organization’s corporate networks for related activity. If we experienced a similar type of malware attack on our own software products, it would likely disrupt our software and our customers, allow unauthorized users into our customers proprietary information, or cause other destructive outcomes. As a result, we could have a negative impact on our reputation, customer demand could decrease, we could face liabilities due to potential lawsuits, and our financial performance could be negatively impacted. See Risk Factor "Our Products are Complex and May Contain Bugs, Vulnerabilities, Errors, or Design Flaws" for more discussion.
We are continually working to maintain reliable information technology 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. In an effort to mitigate the spread of COVID-19, we have transitioned a significant number of our employee population to a remote work environment. This change may exacerbate certain risks to our business, including an increased demand for information technology resources, an increased risk of phishing and other cybersecurity attacks, and an increased risk of unauthorized dissemination of sensitive personal information or proprietary or confidential information. No assurance can be given that our efforts to continue to enhance our systems will be successful. Although we maintain insurance to cover certain information technology risks, 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.
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. A protracted economic slowdown or slower than expected recovery could continue to negatively affect the financial condition of our customers, which may result in additional delays in orders or payments and decreased sales, or an increase in bankruptcies or insolvencies. 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.
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 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.
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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.
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 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.
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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;
•major public health concerns, including the coronavirus;
•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;
•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 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 application-specific integrated circuits ("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. A protracted economic slowdown or continued economic uncertainty could negatively affect the financial condition of our suppliers, which may result in an increase in bankruptcies or insolvencies and decreased availability of raw materials. 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.
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. In particular, the COVID-19 pandemic disrupted global supply chains which could lead to increased difficulties in obtaining a consistent supply of materials at stable pricing levels. In addition, we may experience supply chain shortages as a result of a rapid economic recovery. 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.
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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.
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, our President and Chief Executive Officer, 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.
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.
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.
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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 also operate in conjunction with third-party products and components across a broad ecosystem, and, as has occurred in the past and as may be expected to occur in the future, these third-party products and components may contain bugs, vulnerabilities, errors or design flaws. Any of such bugs, vulnerabilities, errors or design flaws in our products, third-party components or operating systems on which our products are based, and third-party products and components in conjunction with which our products operate, or fixes to these issues, may have a negative impact on the performance of our products and may also be exploited by third parties, including state sponsored organizations, to conduct cyber-attacks. For example, if we experienced an attack on our software products similar to the attack that recently impacted our supplier Solarwinds, such attack could disrupt our software and our customers, allow unauthorized users into our customers proprietary information, or cause other destructive outcomes. The negative impact of any of the foregoing matters could adversely impact the performance of our products, result in additional costs or liability claims, lead to reduced revenue, cause harm to our reputation or competitive position, and result in a material adverse impact on our operating results. Although we maintain insurance to cover certain information technology risks, 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.
Our Recently Announced Restructuring Activities May not be Successful and May Adversely Impact Employee Hiring and Retention, Our Results of Operations and Financial Condition. In October 2020, we announced a workforce reduction plan intended to accelerate our growth strategy and further optimize our cost structure. Actions taken under the plan reduced our headcount by approximately 3% during the fourth quarter of 2020, and are expected to result in additional reductions to our headcount of approximately 6% over the next six to nine months. We have incurred substantial charges to implement this plan, and our restructuring activities may subject us to reputational risks and litigation risks and expenses. As has been the case with our past restructuring plans, we cannot provide any assurance that we will realize the anticipated cost savings and other benefits or that additional restructuring plans will not be required or implemented in the future. In addition, our restructuring plans may have other adverse consequences, such as attrition beyond our planned reduction in workforce, a negative effect on employee morale or on our ability to attract and retain highly skilled employees, which may result in weaknesses in our infrastructure and disruption to our operations, which could lead to a number of negative outcomes such as a negative impact on our ability to comply with legal or regulatory requirements, a loss of business opportunities to competitors, delays in or inability to complete our research and development roadmaps, reduced productivity among remaining employees, and other negative outcomes we cannot foresee at this time, all of which could result in a material, adverse impact on our ability to grow revenue and meet our profitability goals.
RISKS RELATED TO OUR FINANCIAL PERFORMANCE
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.
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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 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 current and 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. System orders may also introduce additional short-term variability in our quarterly results as additional time may be required to convert these opportunities into sales.
We Have Established a Budget and Variations from Our Budget Will Affect Our Financial Results. We have established an operating budget for fiscal 2021. 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 2021 is less than the demand we anticipated in setting our fiscal year budget, our operating results could be negatively impacted.
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 have incurred additional, unexpected costs as a result of the COVID-19 pandemic, including costs for acquisition of additional personal protective equipment (“PPE”), enhanced cleaning and environmental sanitation costs, above average freight costs, and increased labor expense. We expect such costs to continue; however, we are not able to reasonably predict the total amount of costs we will incur related to the pandemic, and such costs could increase.
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;
•major public health concerns such as pandemics or other factors;
•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 manufacturing facilities;
•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; or
•disruptions in transportation channels.
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We have Outstanding Debt and may Incur Other Debt in the Future, which could Adversely Affect Our Financial Condition, Liquidity and Results of Operations. We currently have outstanding debt as well as additional borrowing capacity available under our revolving credit facility. We may borrow additional amounts in the future (which would be subject to lender approval) and use the proceeds from any future borrowing for general corporate purposes, future acquisitions, expansion of our business or repurchases of our outstanding shares of common stock. Our incurrence of this debt, and increases in our aggregate levels of debt, may adversely affect our operating results and financial condition by, among other things:
•requiring a portion of our cash flow from operations to make interest payments on this debt;
•increasing our vulnerability to general adverse economic and industry conditions;
•reducing the cash flow available to fund capital expenditures and other corporate purposes and to grow our business; and
•limiting our flexibility in planning for, or reacting to, changes in our business and the industry.
Our current revolving credit facility and term loan facility, as amended, impose restrictions on us, including restrictions on our ability to create liens on our assets, the ability of our subsidiaries to incur indebtedness, the ability to make certain investments, consummate certain asset sales, or engage in certain transactions, and require us to maintain compliance with specified financial ratios. Our ability to comply with these ratios and other restrictions may be affected by events beyond our control. If we breach any of the covenants and do not obtain a waiver from the lenders, then, subject to applicable cure periods, our outstanding indebtedness could be declared immediately due and payable. Although we currently are in compliance with our debt agreements, if our operating and financial performance deteriorates, there would be an increased risk regarding future compliance with our debt covenants.
Additionally, the borrowings under our various debt facilities are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on certain of our variable rate indebtedness will increase even though the amount borrowed remains the same, and our net income and cash flows, including cash available for servicing our indebtedness, will decrease. In addition, in July 2017, the United Kingdom's Financial Conduct Authority, which regulates the London Interbank Offered Rate (“LIBOR”), announced that it will no longer persuade or compel banks to submit LIBOR rates after 2021. It is unclear whether or not, at that time, LIBOR will cease to exist and a satisfactory replacement rate developed or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of, among other entities, large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index, the Secured Overnight Financing Rate ("SOFR"), that measures the cost of borrowing cash overnight, backed by U.S. Treasury securities. SOFR is observed and backward-looking, which stands in contrast with LIBOR, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel members. Whether or not SOFR attains market traction as a LIBOR replacement rate remains in question. As such, the future of LIBOR at this time is uncertain. If LIBOR ceases to exist, the level of interest payments on the portion of our indebtedness that bears interest at variable rates would be affected, which may adversely impact the amount of our interest payments under our various debt facilities.
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.
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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, 2020. 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, 2020 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 costly and 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 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 2014 through 2020 remain open to examination by the major taxing jurisdictions to which we are subject.
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).
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. For example, in July 2020, we acquired OptimalPlus Ltd., an Israeli-based software company. The successful integration of this acquisition, as well as potential future acquisitions, depends on a variety of factors, including but not limited to:
•the achievement of anticipated cost savings, synergies, business opportunities and growth prospects from combining the acquired company;
•the scalability of production, manufacturing and marketing of products of a newly acquired company to broader adjacent markets;
•the complexities of the technologies being integrated;
•the ability to cohesively integrate operations, product definitions, price lists, delivery, and technical support for products and solutions of a newly acquired company into our existing operations;
•the compatibility of our infrastructure, operations, policies and organizations with those of the acquired company;
•the retention of key employees; and
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•the management of relationships with our strategic partners, suppliers, and customer base and the necessities of integrating and retaining key 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. We may experience increased challenges related to our integration of acquired businesses, as well our ability to execute on potential acquisitions, as a result of the COVID-19 pandemic due to various factors including travel restrictions, global demand uncertainty, and financial market volatility. The existing products or services previously sold or otherwise provided by entities we have acquired may be of a lesser quality than our products or could contain errors, vulnerabilities or malware that produce incorrect results on which users rely or cause failure or interruption of systems or processes, or be exploited to conduct cyber-attacks, 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.
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 additional debt, contingent liabilities or amortization expenses, or write-offs of goodwill and other intangible assets, any of which could harm our financial condition.
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.
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.
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RISKS RELATED TO OUR COMMON STOCK
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.
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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, 2020, we also leased a number of sales and support offices in the U.S. and various countries throughout the world. All of these facilities are well maintained and suitable for the operations conducted in them.
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.
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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 4, 2021, there were approximately 280 holders of record of our common stock and approximately 48,281 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 | |||||
| 2020 | |||||
| March 9, 2020 | $ | 0.26 | |||
| June 8, 2020 | $ | 0.26 | |||
| September 8, 2020 | $ | 0.26 | |||
| December 7, 2020 | $ | 0.26 | |||
| 2019 | |||||
| March 4, 2019 | $ | 0.25 | |||
| June 3, 2019 | $ | 0.25 | |||
| September 3, 2019 | $ | 0.25 | |||
| December 2, 2019 | $ | 0.25 | |||
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 20, 2021, our Board of Directors declared a quarterly cash dividend of $0.27 per common share, payable on March 1, 2021, to stockholders of record at the close of business on February 8, 2021.
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, 2020 to October 31, 2020 | — | — | — | 1,885,299 | ||||||||||||||||||||||
| November 1, 2020 to November 30, 2020 | 275,356 | 34.39 | 275,356 | 1,609,943 | ||||||||||||||||||||||
| December 1, 2020 to December 31, 2020 | — | — | — | 1,609,943 | ||||||||||||||||||||||
| Total | 275,356 | 34.39 | 275,356 | 1,609,943 | ||||||||||||||||||||||
(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 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, 2020, there were 1,609,943 shares available for repurchase under our repurchase program. This repurchase program does not have an expiration date.
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Performance Graph
The following graph compares the cumulative total return to holders of NI’s common stock from December 31, 2015 to December 31, 2020 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, 2015 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.
| 12/31/2015 | 12/31/2016 | 12/31/2017 | 12/31/2018 | 12/31/2019 | 12/31/2020 | |||||||||||||||||||||||||||||||||
| National Instruments | 100 | 111 | 153 | 170 | 162 | 173 | ||||||||||||||||||||||||||||||||
| Nasdaq | 100 | 109 | 141 | 137 | 188 | 273 | ||||||||||||||||||||||||||||||||
| Russell 2500 | 100 | 118 | 137 | 124 | 158 | 189 | ||||||||||||||||||||||||||||||||
| Russell 2000 | 100 | 121 | 139 | 124 | 155 | 186 | ||||||||||||||||||||||||||||||||
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.
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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) | ||||||||||||||||||||||||||||||||
| 2020 (1) | 2019 (1) | 2018 (1) | 2017 | 2016 | ||||||||||||||||||||||||||||
| Statements of Income Data: | ||||||||||||||||||||||||||||||||
| Net sales: | ||||||||||||||||||||||||||||||||
| Americas | $ | 508,448 | $ | 538,679 | $ | 538,379 | $ | 504,626 | $ | 482,039 | ||||||||||||||||||||||
| EMEA | 345,635 | 376,550 | 406,466 | 374,277 | 368,877 | |||||||||||||||||||||||||||
| APAC | 432,588 | 437,986 | 414,287 | 410,483 | 377,263 | |||||||||||||||||||||||||||
| Consolidated net sales | 1,286,671 | 1,353,215 | 1,359,132 | 1,289,386 | 1,228,179 | |||||||||||||||||||||||||||
| Cost of sales: | 371,121 | 336,891 | 333,727 | 328,324 | 313,121 | |||||||||||||||||||||||||||
| Gross profit | 915,550 | 1,016,324 | 1,025,405 | 961,062 | 915,058 | |||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||
| Sales and marketing | 465,509 | 473,392 | 482,576 | 477,921 | 461,236 | |||||||||||||||||||||||||||
| Research and development | 280,381 | 272,452 | 261,072 | 231,761 | 235,706 | |||||||||||||||||||||||||||
| General and administrative | 129,863 | 122,768 | 108,878 | 105,602 | 98,390 | |||||||||||||||||||||||||||
| Total operating expenses | 875,753 | 868,612 | 852,526 | 815,284 | 795,332 | |||||||||||||||||||||||||||
| Gain on sale of business/assets | 159,753 | 26,842 | — | — | — | |||||||||||||||||||||||||||
| Operating income | 199,550 | 174,554 | 172,879 | 145,778 | 119,726 | |||||||||||||||||||||||||||
| Other (expense) income | (788) | 5,990 | 3,574 | 1,602 | (5,091) | |||||||||||||||||||||||||||
| Income before income taxes | 198,762 | 180,544 | 176,453 | 147,380 | 114,635 | |||||||||||||||||||||||||||
| Provision for income taxes | 55,103 | 18,393 | 21,396 | 94,969 | 31,901 | |||||||||||||||||||||||||||
| Net income | $ | 143,659 | $ | 162,151 | $ | 155,057 | $ | 52,411 | $ | 82,734 | ||||||||||||||||||||||
| Basic earnings per share | $ | 1.10 | $ | 1.23 | $ | 1.17 | $ | 0.40 | $ | 0.64 | ||||||||||||||||||||||
| Weighted average shares outstanding - basic | 131,082 | 131,722 | 131,987 | 130,300 | 128,453 | |||||||||||||||||||||||||||
| Diluted earnings per share | $ | 1.09 | $ | 1.22 | $ | 1.16 | $ | 0.40 | $ | 0.64 | ||||||||||||||||||||||
| Weighted average shares outstanding - diluted | 131,799 | 132,734 | 133,274 | 131,387 | 129,008 | |||||||||||||||||||||||||||
| Cash dividends declared per common share | $ | 1.04 | $ | 1.00 | $ | 0.92 | $ | 0.84 | $ | 0.80 | ||||||||||||||||||||||
| (1) On January 1, 2018, we adopted the new revenue recognition standard using the modified retrospective method of adoption. Prior periods have not been adjusted. | ||||||||||||||||||||||||||||||||
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| December 31, | ||||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||
| Balance Sheet Data: | ||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 260,232 | $ | 194,616 | $ | 259,386 | $ | 290,164 | $ | 285,283 | ||||||||||||||||||||||
| Short-term investments | 59,923 | 237,983 | 271,396 | 121,888 | 73,117 | |||||||||||||||||||||||||||
| Working capital | 467,655 | 641,235 | 739,236 | 624,835 | 574,572 | |||||||||||||||||||||||||||
| Total assets | 1,884,488 | 1,651,889 | 1,671,235 | 1,566,434 | 1,496,564 | |||||||||||||||||||||||||||
| Long-term debt, net of current portion | 92,036 | — | — | — | 25,000 | |||||||||||||||||||||||||||
| Total stockholders' equity | 1,224,871 | 1,176,350 | 1,238,358 | 1,128,021 | 1,114,219 | |||||||||||||||||||||||||||
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
National Instruments Corporation and its subsidiaries (referred to as the “Company,” “we,” “us,” “our,” “National Instruments” or “NI”) has made 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”), that are subject to risks and uncertainties. Any statements contained herein regarding our future financial performance, operations or other matters (including, without limitation, statements to the effect that we “believe,” “expect,” “plan,” “intend to,” “may,” “will,” “project,” “anticipate,” “continue,” “strive to,” “endeavor to,” “seek to,” “are committed to,” "remaining committed to"; “are encouraged by,” "remain cautious," "remain optimistic," “estimate”, "focus on"; statements of “goals,”“commitments,” "strategy" or “visions”; or other variations thereof or comparable terminology or the negative thereof) should be considered forward-looking statements. All forward-looking statements are based on current expectations and projections of future events. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, forward-looking statements are not guarantees of performance and 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” above and elsewhere in this Form 10-K, which could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements. Actual results could differ materially from those stated or implied by our forward-looking statements, due to risks and uncertainties associated with our business or under different assumptions or conditions. You should not place undue reliance on any of these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview and Current Business Outlook
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 help support the success of our customers, employees, suppliers and stockholders. We have been profitable in every year since 1990. We sell to a large number of customers in a wide variety of industries. 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:
•Expanding 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 backward 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. Examples of these types of customers include semiconductor, transportation, and aerospace, defense and government ("ADG").
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•Leveraging a worldwide sales, distribution and manufacturing network
We distribute and sell our software and hardware products through a direct sales organization, as well as through independent distributors. We also use OEMs, value added resellers, system integrators and consultants to market and sell our products. We have sales offices in the U.S. and sales offices and distributors in key international markets. Sales outside of the Americas accounted for approximately 60% of our revenues in each of 2020, 2019 and 2018. 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).
We manufacture substantially all of our product volume at our facilities in Debrecen, Hungary and Penang, Malaysia.
•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 when necessary, and will likely engage in future litigation to protect our intellectual property rights.
Our operating results fluctuate from period to period due to changes in global economic conditions and a number of other factors such as the impact of the COVID-19 pandemic. 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 not decline, or that we will remain profitable in future periods.
Recent Developments - Impact of COVID-19 pandemic
As further discussed below and in the "Risk Factors" section of this Form 10-K, our operations and the operations of our customers and suppliers have been adversely impacted by the challenges resulting from the COVID-19 pandemic.
Current Business Outlook
While we remain cautious due to continuing uncertainty, we are optimistic about our position to capture long-term growth opportunities as we continue to enhance our offerings in key focus areas. We are seeing early signs of recovery in end markets where we experienced weaker demand over the past year, such as transportation. While we expect headwinds related to the COVID-19 pandemic to continue over the next few quarters, we expect demand to increase as our customers make investments in emerging technologies related to 5G/mmWave and vehicle electrification. We also expect recent additions and enhancements to our software offerings will fuel long-term revenue growth across our various end markets, particularly at our largest customers.
We also remain confident in the strength of our operating model. Over the past several years, we had taken steps to improve efficiencies and rebalance our resources on activities that we believe will generate a higher return. These steps involved, among other things, reduction in our overall employee headcount and optimization of our organizational structure. We believe these pre-pandemic efforts have enhanced our financial and structural position to navigate the current challenges of the COVID-19 pandemic. Additionally, we are currently focusing on proactively managing expenses intended to help us maintain strength in our balance sheet and improve our financial position. During the three months ended December 31, 2020, we began implementing additional measures that will reduce our headcount by approximately 9%, the remaining 6% of which we expect to occur over the next six to nine months.
We expect our recent restructuring plan will reduce our operating expenses by approximately $40 million per year, which we expect to be offset by increases in operating expenses related to other strategic initiatives. We believe these measures will allow us to accelerate our growth strategy and achieve our long-term financial goals. We remain committed to maintaining our critical investments and capacity to run our business while continuing to innovate. Furthermore, we continue to focus on scale and efficiency in serving our broad-based customers. Our focus to streamline the process of doing business with NI means both reducing our costs and improving the experience of the large number of smaller accounts we serve. This includes investment in ni.com for a better digital experience and significantly expanding the usage of our distributor channel in 2021 and beyond. We believe these actions will allow our direct sales force to support proactive engagements with accounts where we can deliver enterprise-level value.
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During the twelve months ended December 31, 2020, we saw continued volatility in the exchange rates between the U.S. dollar and many of the currency markets where we have exposure. As of February 12, 2021, the U.S. dollar index, as tracked by the St. Louis Federal Reserve is below its 10-year average, approximately 5% above its low value over that period. If the US dollar maintains its current trading ranges against the major currency markets where we do business, we could see a modest benefit to our US dollar equivalent sales during 2021. We cannot predict to what degree foreign currency markets will fluctuate in the future. See Results of Operations - Net Sales below for additional discussion on the impact of foreign exchange rates on our net sales and Note 5 - Derivative instruments and hedging activities of Notes to Consolidated Financial Statements for a further description of our derivative instruments and hedging activities.
Acquisitions and divestitures
On January 15, 2020, we completed the sale of AWR Corporation ("AWR") for approximately $161 million. We recognized a gain of approximately $160 million on the sale. The gain is included within "Gain on sale of business/assets" in the consolidated statements of income, which also included approximately $1 million of transaction costs. (See Note 1 - Basis of presentation of Notes to Consolidated Financial Statements for additional details concerning the divestiture of the AWR business.)
On July 2, 2020, we completed our acquisition of OptimalPlus. Total proceeds used to acquire the business and replace certain unvested share options consisted of approximately $365 million in cash, inclusive of $18 million in cash acquired. (See Note 1 - Basis of presentation and Note 18 - Acquisitions of Notes to Consolidated Financial Statements for additional details concerning this acquisition.)
Results of Operations
The following table sets forth, for the periods indicated, the percentage of net sales represented by geographic region and by certain items reflected in our Consolidated Statements of Income:
| Years ended December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Net sales: | ||||||||||||||||||||
| Americas | 39.5 | % | 39.8 | % | 39.6 | % | ||||||||||||||
| EMEA | 26.9 | 27.8 | 29.9 | |||||||||||||||||
| APAC | 33.6 | 32.4 | 30.5 | |||||||||||||||||
| Consolidated net sales | 100.0 | 100.0 | 100.0 | |||||||||||||||||
| Cost of sales | 28.8 | 24.9 | 24.6 | |||||||||||||||||
| Gross profit | 71.2 | 75.1 | 75.4 | |||||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Sales and marketing | 36.2 | 35.0 | 35.5 | |||||||||||||||||
| Research and development | 21.8 | 20.1 | 19.2 | |||||||||||||||||
| General and administrative | 10.1 | 9.1 | 8.0 | |||||||||||||||||
| Total operating expenses | 68.1 | 64.2 | 62.7 | |||||||||||||||||
| Gain on sale of business/assets | 12.4 | 2.0 | — | |||||||||||||||||
| Operating income | 15.5 | 12.9 | 12.7 | |||||||||||||||||
| Other (expense) income: | (0.1) | 0.4 | 0.3 | |||||||||||||||||
| Income before income taxes | 15.4 | 13.3 | 13.0 | |||||||||||||||||
| Provision for income taxes | 4.3 | 1.4 | 1.6 | |||||||||||||||||
| Net income | 11.2 | % | 12.0 | % | 11.4 | % | ||||||||||||||
Figures may not sum due to rounding.
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Results of Operations for the years ended December 31, 2020, 2019, and 2018
Net Sales. The following table sets forth our net sales for the years ended December 31, 2020, 2019, and 2018 along with the percent changes between the corresponding periods.
| Years ended December 31, | ||||||||||||||||||||||||||||||||
| ($ in millions) | 2020 | Change | 2019 | Change | 2018 | |||||||||||||||||||||||||||
| Product sales | $ | 1,137.6 | (6.4)% | $ | 1,215.0 | (0.4)% | $ | 1,220.0 | ||||||||||||||||||||||||
| Software maintenance sales | 149.1 | 7.9% | 138.2 | (0.6)% | 139.1 | |||||||||||||||||||||||||||
| Total net sales | $ | 1,286.7 | (4.9)% | $ | 1,353.2 | (0.4)% | $ | 1,359.1 | ||||||||||||||||||||||||
Figures may not sum due to rounding.
The divestiture of our AWR business in January 2020 reduced our net sales by approximately 2% during 2020 compared to 2019, partially offset by net sales attributable to our acquisition of OptimalPlus, which was acquired on July 2, 2020. The effect of changes in foreign currency exchange rates further reduced net sales by less than 1% during the same period. The remaining decreases were driven by weaker demand in certain industries, primarily attributable to the ongoing COVID-19 pandemic. On a global basis, we saw significant weakness in orders from our transportation customers and some of our broad-based portfolio offerings, which was partially offset by increased demand for system-level offerings from our ADG and semiconductor customers.
In 2020, product sales decreased compared to 2019 while software maintenance sales increased compared to 2019. The decrease in product sales during the period was primarily attributable to the divestiture of our AWR business, unfavorable changes in exchange rates and general weakness in the industrial economy throughout most of 2020 due to the COVID-19 pandemic. The increase in software maintenance sales for 2020 was primarily attributable to renewals of our enterprise-wide software agreements and sales from our recently acquired OptimalPlus business.
In 2019, product and software maintenance sales decreased 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 EMEA region, which was partially offset by strength in the APAC region.
Orders with a value greater than $20,000 increased by 3% year over year during 2020 compared to a year over year increase of 4% in 2019, driven by increased demand for the system-level offerings described above.
Orders with a value less than $20,000 decreased by 11% year over year during 2020 compared to a year over year decrease of 6% in 2019. Orders with a value greater than $20,000 were 64%, 60%, and 58% of our total orders for the years ended December 31, 2020, 2019, and 2018, respectively.
The following table sets forth our net sales by geographic region for the years ended December 31, 2020, 2019, and 2018 along with the changes between the corresponding periods and the region’s percentage of total net sales.
| Years ended December 31, | ||||||||||||||||||||||||||||||||
| ($ in millions) | 2020 | Change | 2019 | Change | 2018 | |||||||||||||||||||||||||||
| Americas | $ | 508.4 | (5.6)% | $ | 538.7 | 0.1% | $ | 538.4 | ||||||||||||||||||||||||
| Percentage of total net sales | 39 | % | 40 | % | 40 | % | ||||||||||||||||||||||||||
| EMEA | $ | 345.6 | (8.2)% | $ | 376.6 | (7.4)% | $ | 406.5 | ||||||||||||||||||||||||
| Percentage of total net sales | 27 | % | 28 | % | 30 | % | ||||||||||||||||||||||||||
| APAC | $ | 432.6 | (1.2)% | $ | 438.0 | 5.7% | $ | 414.3 | ||||||||||||||||||||||||
| Percentage of total net sales | 34 | % | 32 | % | 30 | % | ||||||||||||||||||||||||||
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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 expanding 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.), EMEA, 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, 2020 and 2019, 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, 2020 and 2019, respectively.
| Year Ended December 31, 2019 | Change in Constant Dollars | Impact of changes in foreign currency exchange rates on net sales | Year Ended December 31, 2020 | |||||||||||||||||||||||||||||||||||
| ($ in millions) | GAAP Net Sales | Dollars | Percentage | Dollars | Percentage | GAAP Net Sales | ||||||||||||||||||||||||||||||||
| Americas | $ | 538.7 | $ | (29.2) | (5.4)% | $ | (1.1) | (0.2)% | $ | 508.4 | ||||||||||||||||||||||||||||
| EMEA | 376.6 | (30.2) | (8.0)% | (0.8) | (0.2)% | 345.6 | ||||||||||||||||||||||||||||||||
| APAC | 438.0 | (1.0) | (0.2)% | (4.4) | (1.0)% | 432.6 | ||||||||||||||||||||||||||||||||
| Total net sales | $ | 1,353.2 | $ | (60.3) | (4.5)% | $ | (6.2) | (0.5)% | $ | 1,286.7 | ||||||||||||||||||||||||||||
Figures may not sum due to rounding.
| 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 | ||||||||||||||||||||||||||||
| EMEA | 406.5 | (20.2) | (5.0)% | (9.7) | (2.4)% | 376.6 | ||||||||||||||||||||||||||||||||
| APAC | 414.3 | 32.0 | 7.7% | (8.3) | (2.0)% | 438.0 | ||||||||||||||||||||||||||||||||
| Total net sales | $ | 1,359.1 | $ | 12.8 | 0.9% | $ | (18.7) | (1.4)% | $ | 1,353.2 | ||||||||||||||||||||||||||||
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 2020 and 2019).
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, 2020, 2019, and 2018 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) | 2020 | Change | 2019 | Change | 2018 | |||||||||||||||||||||||||||
| Gross Profit | $ | 915.6 | (9.9)% | $ | 1,016.3 | (0.9)% | $ | 1,025.4 | ||||||||||||||||||||||||
| Gross Profit as a percentage of net sales | 71.2 | % | 75.1 | % | 75.4 | % | ||||||||||||||||||||||||||
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The decreases in our gross profit and gross profit as a percentage of net sales were primarily related to the following:
| Twelve Months Ended | |||||
| December 31, 2019 | 75.1 | % | |||
| Impact of acquisition-related intangible amortization, fair value adjustments and sales mix related to the OptimalPlus acquisition | (0.8) | % | |||
| Changes in sales mix related to recently divested AWR business (included in comparative period) | (0.6) | % | |||
| Changes in sales mix related to service cost reallocation | (0.8) | % | |||
| Impact of restructuring related costs | (0.1) | % | |||
| Increase in outbound freight and other logistics costs due to COVID-19 pandemic | (0.4) | % | |||
| Changes in foreign currency exchange rates | (0.1) | % | |||
| Other changes in sales mix, product material variances and reserves | (1.1) | % | |||
| December 31, 2020 | 71.2 | % | |||
During the years ended December 31, 2020 and 2019, the change in exchange rates had the effect of decreasing our cost of sales by $2.1 million and $3.3 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, 2020 and 2019, these hedges had the effect of increasing our cost of sales by $2.2 million and $0.5 million, respectively. (See Note 5 - Derivative instruments and hedging activities of Notes to Consolidated Financial Statements for further discussion regarding our cash flow hedging program and its related impacted on our results of operations).
Operating Expenses. The following table sets forth our operating expenses for the years ended December 31, 2020, 2019, and 2018 along with the percentage changes between the corresponding periods and the line item as a percentage of total net sales.
| Years Ended December 31, | ||||||||||||||||||||||||||||||||
| ($ in thousands) | 2020 | Change | 2019 | Change | 2018 | |||||||||||||||||||||||||||
| Sales and marketing | $ | 465,509 | (2)% | $ | 473,392 | (2)% | $ | 482,576 | ||||||||||||||||||||||||
| Percentage of total net sales | 36 | % | 35 | % | 36 | % | ||||||||||||||||||||||||||
| Research and development | $ | 280,381 | 3% | $ | 272,452 | 4% | $ | 261,072 | ||||||||||||||||||||||||
| Percentage of total net sales | 22 | % | 20 | % | 19 | % | ||||||||||||||||||||||||||
| General and Administrative | $ | 129,863 | 6% | $ | 122,768 | 13% | $ | 108,878 | ||||||||||||||||||||||||
| Percentage of total net sales | 10 | % | 9 | % | 8 | % | ||||||||||||||||||||||||||
| Total operating expenses | $ | 875,753 | 1% | $ | 868,612 | 2% | $ | 852,526 | ||||||||||||||||||||||||
| Percentage of total net sales | 68 | % | 64 | % | 63 | % | ||||||||||||||||||||||||||
The $7 million increase in our total operating expenses, excluding the gain on sale of business/assets, during 2020 compared to 2019 was primarily related to the following:
•$24 million increase in severance and other restructuring-related charges.
•$15 million increase in non-acquisition personnel costs, primarily attributable to higher salaries and accrued payments under our variable pay programs, as well as additional stock-based compensation expense (due to comparatively higher stock prices on the grant date of unvested RSU awards and a shorter average service period for our awards), which was partially offset by reductions in benefit costs due to lower headcount;
•$13 million increase attributable to acquisition-related transaction and integration costs, compensation expense related to unvested options acquired and replaced with cash-settled awards that will be recognized as post-combination expense over the remaining service period, amortization of acquisition-related intangibles, and higher operating costs related to our recently acquired OptimalPlus business, which were partially offset by a reduction in operating costs related to the divestment of our AWR business;
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•$5 million increase related to lower software development costs eligible for capitalization;
•$(29) million related to decreases in travel and event related expenses related to the travel restrictions from COVID-19, partially offset by additional advertising-related costs associated with our 2020 rebranding initiative;
•$(11) million decrease attributable to the strategic reallocation of resources related to the delivery of certain services offerings. The cost related to these activities are now classified as “Cost of Sales” whereas historically they were presented as “Sales and Marketing” expenses, as further discussed above under “Gross Profit”;
•$(7) million decrease related to a charitable contribution made during 2019; and
•$(3) million decrease related to the effect of changes in foreign currency exchange rates.
The increase in research and development costs during 2020 was primarily related to a $5 million increase in software development costs expensed, that did not qualify for capitalization and an increase in stock-based compensation expense. In the second quarter of 2018, we began moving toward agile methodologies of software development, which are characterized by a more dynamic development process with more frequent and iterative revisions to a product's features and functions. The transition to an agile method of software development enables us to adapt quickly to the evolving needs of our customers and accelerate our commitment to modernizing and expanding the usage of our software platform. Consequently, 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, resulting in a larger portion of our software development expenditures being recognized as operating expenses. 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 two years.
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:
•$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;
•$13 million decrease related to the year over year impact of changes in foreign currency exchange rates;
•$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;
•$5 million increase related to a decrease in software development costs eligible for capitalization, as described in more detail below;
•$6 million increase due to restructuring costs during the year; and
•$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 increase in software development costs expensed, that did not qualify for capitalization and an increase in stock-based compensation expense.
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.
Gain on Sale of Business/Asset. On January 15, 2020, we completed the sale of our AWR subsidiary and recognized a gain on the sale of $160 million. On August 29, 2019, we sold an office building and property located in Austin, Texas and recognized a gain on the sale of $27 million. These amounts are presented as "Gain on sales of business/asset" in our 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).
Operating Income. For the years ended December 31, 2020, 2019, and 2018, operating income was $200 million, $175 million and $173 million, respectively, an increase of 14% in 2020, following an increase of 1% in 2019. As a percentage of net sales, operating income was 16%, 13% and 13%, respectively, over the three-year period. The changes in operating income in absolute dollars and as a percent of sales in 2019 and 2020 are attributable to the factors discussed in Net Sales, Gross Profit and Operating Expenses above.
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Other (Expense) Income.
•Interest Income. Interest income was $3.9 million, $8.1 million and $5.9 million for the years ended December 31, 2020, 2019, and 2018, respectively. In response to the negative economic impact of the COVID-19 pandemic, the Federal Reserve took action to cut the Federal Funds Rate to a target range of zero to 0.25%. We do not expect yields to improve in the near term.
•Interest Expense. Interest expense was approximately $2 million, $0 million, and $0 million due to borrowings outstanding under our Credit Agreement for the years ended December 31, 2020, 2019, and 2018, respectively. Refer to Note 15 - Debt and Note 20 - Subsequent events for additional information regarding the terms of our Credit Agreement and related borrowings.
•Net Foreign Exchange Loss. Net foreign exchange loss was $0.1 million, $1.8 million, and $3.4 million for the years ended December 31, 2020, 2019, and 2018, 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 2020, we saw continued volatility in the exchange rates between the U.S. dollar and many of the currency markets where we have exposure. As of February 12, 2021, the U.S. dollar index, as tracked by the St. Louis Federal Reserve is below its 10-year average, approximately 5% above its low value over that period. 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. In the past, we have noted that volatility in the foreign currency exchange 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. We cannot predict to what degree foreign currency markets will fluctuate in the future. In the past, these dynamics have also adversely affected our net sales 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. See “Results of Operations - Net Sales” above for additional discussion on the impact of foreign exchange rates on our net sales.
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 decreased our foreign exchange loss by $0.8 million, increased our foreign exchange loss by $0.3 million, and decreased our foreign exchange loss by $0.3 million in 2020, 2019, and 2018, 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).
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Provision for Income Taxes. For the years ended December 31, 2020, 2019, and 2018, our provision for income taxes reflected an effective tax rate of 28%, 10% and 12%, 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 2019 | 10 | % | |||
| Decreased profits in foreign jurisdictions with reduced income tax rates | 6 | ||||
| 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 | 1 | ||||
| Global intangible low-taxed income inclusion ("GILTI") | (1) | ||||
| Amortization of intangible asset | 1 | ||||
| Foreign-derived intangible income deduction | 1 | ||||
| Research and development tax credit | 1 | ||||
| Outside basis difference on asset held for sale | 8 | ||||
| Transition tax on deferred foreign income | (1) | ||||
| Effective tax rate for 2020 | 28 | % | |||
| Years ended December 31, | |||||
| Effective tax rate for 2018 | 12 | % | |||
| Decreased 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 | % | |||
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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-related intangibles and fair value adjustments, acquisition-related transaction costs, disposal gains on sales of business/assets 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) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||
| Cost of sales | $ | 979 | $ | 887 | $ | 3,766 | $ | 3,475 | ||||||||||||||||||
| Sales and marketing | 5,462 | 4,868 | 22,288 | 19,612 | ||||||||||||||||||||||
| Research and development | 5,129 | 4,236 | 17,769 | 16,265 | ||||||||||||||||||||||
| General and administrative | 4,251 | 3,393 | 14,552 | 12,086 | ||||||||||||||||||||||
| Provision for income taxes | (445) | (1,433) | (8,705) | (9,337) | ||||||||||||||||||||||
| Total | $ | 15,376 | $ | 11,951 | $ | 49,670 | $ | 42,101 | ||||||||||||||||||
| Three Months Ended December 31, | Years Ended December 31, | |||||||||||||||||||||||||
| (In thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||
| Amortization of acquisition intangibles | ||||||||||||||||||||||||||
| Net sales | $ | 1,961 | $ | — | $ | 3,260 | $ | — | ||||||||||||||||||
| Cost of sales | 4,313 | 823 | 9,892 | 3,348 | ||||||||||||||||||||||
| Sales and marketing | 1,965 | 485 | 5,264 | 1,970 | ||||||||||||||||||||||
| Research and development | 9 | 28 | 94 | 112 | ||||||||||||||||||||||
| General and administrative | 846 | — | 846 | — | ||||||||||||||||||||||
| Other (expense) income | 124 | 124 | 487 | 409 | ||||||||||||||||||||||
| Provision for income taxes | (606) | (127) | (2,554) | (703) | ||||||||||||||||||||||
| Total | $ | 8,612 | $ | 1,333 | $ | 17,289 | $ | 5,136 | ||||||||||||||||||
| Three Months Ended December 31, | Years Ended December 31, | |||||||||||||||||||||||||
| (In thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||
| Acquisition transaction costs, restructuring charges, and other | ||||||||||||||||||||||||||
| Cost of sales | $ | 1,620 | $ | — | $ | 1,626 | $ | — | ||||||||||||||||||
| Sales and marketing | 23,309 | 5,356 | 32,079 | 13,646 | ||||||||||||||||||||||
| Research and development | 1,184 | 3,266 | 6,374 | 4,166 | ||||||||||||||||||||||
General and administrative (1)(4) | 8,685 | 2,002 | 21,279 | 11,527 | ||||||||||||||||||||||
Gain on sale of business/assets (1)(2) | — | — | (159,753) | (26,842) | ||||||||||||||||||||||
| Other (expense) income | 191 | — | 589 | — | ||||||||||||||||||||||
Provision for income taxes (3) | (1,602) | (13,477) | 32,364 | (12,237) | ||||||||||||||||||||||
| Total | $ | 33,387 | $ | (2,853) | $ | (65,442) | $ | (9,740) | ||||||||||||||||||
| (1): During the third quarter of 2019, we recognized a gain of $27 million related to the sale of an office building, presented within "Gain on sale of business/assets". During the third quarter of 2019, we also recognized a charitable contribution expense of $7 million related to a donation using a portion of the proceeds from the sale of the property, presented within "General and Administrative". | ||||||||||||||||||||||||||
| (2): During the first quarter of 2020, we recognized a gain of $160 million related to the divestiture of AWR, presented within "Gain on sale of Business/assets". | ||||||||||||||||||||||||||
| (3): During the fourth quarter of 2019, we recognized an income tax benefit of $11 million related to the recognition of deferred taxes on the outside basis difference of our AWR business. | ||||||||||||||||||||||||||
| (4): During the third quarter of 2020, we recognized $5 million of compensation expense related to the replacement of unvested options acquired in connection with the OptimalPlus acquisition. These amounts were accounted for as post-combination expense and will be recognized over the required service period. | ||||||||||||||||||||||||||
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| Three Months Ended December 31, | Years Ended December 31, | |||||||||||||||||||||||||
| (In thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||
| (Capitalization) and amortization of internally developed software costs | ||||||||||||||||||||||||||
| Cost of sales | $ | 6,936 | $ | 7,012 | $ | 27,931 | $ | 27,085 | ||||||||||||||||||
| Research and development | (1,248) | (1,887) | (4,043) | (9,066) | ||||||||||||||||||||||
| Provision for income taxes | (1,195) | (1,076) | (5,017) | (3,784) | ||||||||||||||||||||||
| Total | $ | 4,493 | $ | 4,049 | $ | 18,871 | $ | 14,235 | ||||||||||||||||||
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Liquidity and Capital Resources
Overview
At December 31, 2020, we had $320 million in cash, cash equivalents and short-term investments. Our cash and cash equivalent balances are held in numerous financial institutions throughout the world, including substantial amounts held outside of the U.S., however, all of our short-term investments that are located outside of the U.S. are denominated in the U.S. dollar. Our short-term investments do not include any foreign sovereign debt. The following table presents the geographic distribution of our cash, cash equivalents, and short-term investments as of December 31, 2020 (in millions):
| Domestic | International | Total | |||||||||
| Cash and Cash Equivalents | $102.5 | $157.8 | $260.2 | ||||||||
| 39% | 61% | ||||||||||
| Short-term Investments | $48.3 | $11.6 | $59.9 | ||||||||
| 81% | 19% | ||||||||||
| Cash, Cash Equivalents and Short-term Investments | $150.8 | $169.4 | $320.2 | ||||||||
| 47% | 53% | ||||||||||
Figures may not sum due to rounding.
We utilize a variety of tax planning and financing strategies with the objective of having our worldwide cash available in the locations in which it is needed. The following table presents our working capital, cash and cash equivalents and short-term investments:
| (In thousands) | December 31, 2020 | December 31, 2019 | Increase/ (Decrease) | |||||||||||||||||
| Working capital | $ | 467,655 | $ | 641,235 | $ | (173,580) | ||||||||||||||
| Cash and cash equivalents (1) | 260,232 | 194,616 | 65,616 | |||||||||||||||||
| Short-term investments (1) | 59,923 | 237,983 | (178,060) | |||||||||||||||||
| Total cash, cash equivalents and short-term investments | $ | 320,155 | $ | 432,599 | $ | (112,444) | ||||||||||||||
(1) Included in working capital
Our principal sources of liquidity include cash, cash equivalents, and marketable securities, as well as the cash flows generated from our operations. The primary drivers of the net decrease in working capital between December 31, 2019 and December 31, 2020 were:
•Cash, cash equivalents, and short-term investments decreased by $112 million. Additional analysis of the changes in our cash flows for the year ended December 31, 2020 compared to the year ended December 31, 2019 are discussed below.
•"Accounts receivable, net" increased by $18 million which is primarily related to the timing of billings during the fourth quarter of 2020 compared to the same period in 2019. Days sales outstanding increased to 56 days at December 31, 2020, compared to 54 days at December 31, 2019.
•Inventory decreased by $6 million to $194 million at December 31, 2020, from $200 million at December 31, 2019. Inventory turns increased to 1.7 at December 31, 2020, compared to 1.5 at December 31, 2019. The decrease in inventory is primarily attributable to stronger demand for our products during the fourth quarter of 2020.
•Prepaid expenses and other current assets increased by $3 million, primarily related to the timing of prepaid insurance and maintenance contracts.
•Accounts payable and accrued expenses decreased by $1 million, primarily related to timing of invoice payments to vendors.
•Accrued compensation increased by $39 million primarily related to the restructuring initiative announced in the fourth quarter of 2020.
•The current portion of deferred revenue increased by $1 million.
•Other current liabilities increased by $22 million, primarily related to changes in the fair value of our foreign currency forward exchange contracts and the timing of certain tax payments.
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•Operating lease liabilities, current increased by $2 million.
•Other taxes payable increased by $8 million, primarily related to the timing of payments for VAT and other indirect taxes.
Analysis of Cash Flow
The following table summarizes the proceeds and (uses) of cash:
| (In thousands) | December 31, | |||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Cash provided by operating activities | $ | 180,767 | $ | 224,405 | $ | 274,580 | ||||||||||||||
| Cash used by investing activities | (61,301) | (17,948) | (209,996) | |||||||||||||||||
| Cash used by financing activities | (56,454) | (270,817) | (90,843) | |||||||||||||||||
| Effect of exchange rate changes on cash | 2,604 | (410) | (4,519) | |||||||||||||||||
| Net change in cash equivalents | 65,616 | (64,770) | (30,778) | |||||||||||||||||
| Cash and cash equivalents at beginning of year | 194,616 | 259,386 | 290,164 | |||||||||||||||||
| Cash and cash equivalents at end of year | $ | 260,232 | $ | 194,616 | $ | 259,386 | ||||||||||||||
Operating Activities Cash provided by operating activities for the year ended December 31, 2020 decreased by $44 million compared to the year ended December 31, 2019. This decrease was primarily due to a $110 million decrease in net income excluding the effect of non-cash items including stock-based compensation, depreciation and amortization, gain on sale of assets/business, and deferred tax benefits, and was partially offset by a $67 million increase in cash provided by operating assets and liabilities during the year
Investing Activities Cash used by investing activities for the year ended December 31, 2020 increased by $43 million compared to the same period in 2019. During 2020 we spent $335 million on the acquisition of OptimalPlus, net of cash received, and received $160 million in proceeds from the sale of our AWR business. During 2019 we received $32 million in proceeds from the sale of an office building. In 2020 we had a net sale of short-term investments of $178 million compared to a net sale of short-term investments of $34 million during the same period in 2019. The net sale of short-term investments was primarily driven by funding needs to support our acquisition of OptimalPlus and our common stock repurchase activities. Cash outflows related to capitalized software development also decreased by $5 million and there was a decrease in capital expenditures and investments in other intangible assets of $11 million compared to the same period in 2019. Additionally, during 2020, we decreased strategic investments in equity-method investments by $4 million when compared to 2019.
Financing Activities Cash used by financing activities decreased by $214 million for 2020 compared to 2019. This was primarily related to a $97 million increase in proceeds received under our term loan, net of issuance costs and repayments, and a $123 million decrease in cash used to repurchase our common stock, partially offset by an increase of $5 million related to our quarterly dividends.(See Note 12 – Authorized shares of common and preferred stock and stock-based compensation plans of Notes to Consolidated Financial Statements for additional discussion about our share repurchase program).
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Contractual Cash Obligations. The following summarizes our contractual cash obligations as of December 31, 2020:
| Payments due by period | |||||||||||||||||
| (In thousands) | Total | Less than one year | One to three years | Three to five years | More than five years | ||||||||||||
| Tax payable (1) | 68,870 | 7,247 | 20,843 | 40,780 | — | ||||||||||||
| Term loan | 98,750 | 5,000 | 10,000 | 83,750 | — | ||||||||||||
| Operating leases | 58,514 | 17,868 | 19,575 | 12,935 | 8,136 | ||||||||||||
| Total contractual obligations | 226,134 | 30,115 | 50,418 | 137,465 | 8,136 | ||||||||||||
| (1) Represents one-time transition tax payable related to known amounts of cash taxes payable in future years as a result of the Tax Cuts and Jobs Act. For further information, refer to Note 10 - Income taxes of Notes to Consolidated Financial Statements | |||||||||||||||||
We have commitments under non-cancelable operating leases primarily for office facilities throughout the world. Certain leases require us to pay property taxes, insurance and routine maintenance, and include escalation clauses. As of December 31, 2020, we had non-cancelable operating lease obligations of approximately $59 million compared to $66 million at December 31, 2019. Rent expense under operating leases was $22 million, $23 million and $21 million for the years ended December 31, 2020, 2019 and 2018, respectively.
The following summarizes our other commercial commitments as of December 31, 2020:
| (In thousands) | Total | 2021 | 2022 | 2023 | 2024 | 2025 | Beyond | |||||||||||||||||||||||||||||||||||||
| Purchase obligations | 5,015 | 5,015 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Total commercial commitments | $ | 5,015 | $ | 5,015 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||||
Purchase obligations primarily represent purchase commitments for customized inventory and inventory components. As of December 31, 2020, we had non-cancelable purchase commitments with various suppliers of customized inventory and inventory components totaling approximately $5.0 million over the next twelve months. At December 31, 2019, we had non-cancelable purchase commitments with various suppliers of customized inventory and inventory components totaling approximately $6.5 million.
At December 31, 2020, we did not have any material outstanding guarantees for payment of customs and foreign grants. At December 31, 2019, we had no outstanding guarantees for payment of customs and foreign grants.
Credit Agreement. Refer to Note 15 - Debt of Notes to Consolidated Financial Statements for additional details on our secured term loan and secured revolving loan facilities. As of December 30, 2020, we had $114 million in available borrowing capacity under the revolving loan facility. Proceeds of additional borrowings made under the Amended and Restated Credit Agreement (the "Credit Agreement") may be used for working capital and other general corporate purposes. We may prepay the loans under the Credit Agreement in whole or in part at any time without premium or penalty. Certain of our existing and future material domestic subsidiaries are required to guaranty our obligations under the Credit Agreement.
Off-Balance Sheet Arrangements. We do not have any off-balance sheet debt. At December 31, 2020, we did not have any relationships with any unconsolidated entities or financial partnerships, such as entities often referred to as structured finance entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we were engaged in such relationships.
Prospective Capital Needs. We believe that our existing cash, cash equivalents and short-term investments, together with cash generated from operations as well as from the purchase of common stock through our employee stock purchase plan will be sufficient to cover our working capital needs, capital expenditures, investment requirements, commitments, payment of dividends to our stockholders and repurchases of our common stock for at least the next 12 months. We may also seek to pursue additional financing or to raise additional funds by seeking an increase in our unsecured revolving line of credit under our Credit Agreement or selling equity or debt to the public or in private transactions from time to time. If we elect to raise additional funds, we may not be able to obtain such funds on a timely basis or on acceptable terms, if at all. If we raise additional funds by issuing additional equity or convertible debt securities, the ownership percentages of our existing stockholders would be reduced. In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to those of our common stock.
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Although we believe that we have sufficient capital to fund our operating activities for at least the next 12 months, our future capital requirements may vary materially from those now planned. We anticipate that the amount of capital we will need in the future will depend on many factors, including:
•payment of dividends to our stockholders;
•required levels of research and development and other operating costs;
•our business, product, capital expenditure and research and development plans, and product and technology roadmaps;
•acquisitions of other businesses, assets, products or technologies;
•repurchase of our common stock;
•the overall levels of sales of our products and gross profit margins;
•the levels of inventory and accounts receivable that we maintain;
•general economic and political uncertainty and specific conditions in the markets we address, including any volatility in the industrial economy in the various geographic regions in which we do business;
•the inability of certain of our customers who depend on credit to have access to their traditional sources of credit to finance the purchase of products from us, which may lead them to reduce their level of purchases or to seek credit or other accommodations from us;
•