Edgar Filing: NATIONAL INSTRUMENTS CORP /DE/

a033110.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

T Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal quarter ended: March 31, 2010 or

£ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ________________ to ________________

Commission file number: 0-25426

NATIONAL INSTRUMENTS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		74-1871327
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

11500 North MoPac Expressway Austin, Texas		78759
(address of principal executive offices)		(zip code)

Registrant's telephone number, including area code: (512) 338-9119

__________________________

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 T No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes £ No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No T

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class	Outstanding at May 3, 2010
Common Stock - $0.01 par value	77,522,406

NATIONAL INSTRUMENTS CORPORATION

INDEX


PART I. FINANCIAL INFORMATION		Page No.

Item 1	Financial Statements:

	Consolidated Balance Sheets
	March 31, 2010 (unaudited) and December 31, 2009	3

	Consolidated Statements of Income
	(unaudited) for the three months ended March 31, 2010 and 2009	4

	Consolidated Statements of Cash Flows
	(unaudited) for the three months ended March 31, 2010 and 2009	5

	Notes to Consolidated Financial Statements	6

Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3	Quantitative and Qualitative Disclosures about Market Risk	29

Item 4	Controls and Procedures	32


PART II. OTHER INFORMATION


Item 1	Legal Proceedings	34

Item 1A	Risk Factors	34

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	41

Item 5	Other Information	41

Item 6	Exhibits	42

	Signatures and Certifications	43

PART I - FINANCIAL INFORMATION

ITEM 1.

Financial Statements

NATIONAL INSTRUMENTS CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

	March 31, 2010		December 31, 2009
	(unaudited)
Assets

Current assets:
Cash and cash equivalents	$	184,618	$	201,465
Short-term investments		110,952		87,196
Accounts receivable, net		104,818		103,957
Inventories, net		89,826		86,515
Prepaid expenses and other current assets		34,937		36,523
Deferred income taxes, net		15,222		16,522
Total current assets		540,373		532,178
Property and equipment, net		152,567		153,265
Goodwill, net		69,296		64,779
Intangible assets, net		48,369		43,390
Other long-term assets		19,647		19,417
Total assets	$	830,252	$	813,029

Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable	$	27,450	$	23,502
Accrued compensation		19,465		14,934
Deferred revenue		60,972		57,242
Accrued expenses and other liabilities		12,619		8,560
Other taxes payable		12,306		14,181
Total current liabilities		132,812		118,419
Deferred income taxes		25,088		25,012
Liability for uncertain tax positions		10,926		11,062
Other long-term liabilities		4,259		4,116
Total liabilities		173,085		158,609
Commitments and contingencies
Stockholders’ equity:
Preferred stock: par value $0.01; 5,000,000 shares authorized; none issued and outstanding		—		—
Common stock: par value $0.01; 180,000,000 shares authorized; 77,325,552 and 77,367,874 shares issued and outstanding, respectively		773		774
Additional paid-in capital		362,857		336,446
Retained earnings		285,422		303,655
Accumulated other comprehensive income		8,115		13,545
Total stockholders’ equity		657,167		654,420
Total liabilities and stockholders’ equity	$	830,252	$	813,029

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

NATIONAL INSTRUMENTS CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

(unaudited)

	Three Months Ended
	March 31,
	2010			2009

Net sales:
Product	$	175,395		$	143,450
Software maintenance		15,696			14,349
Total net sales		191,091			157,799

Cost of sales:
Product		42,262			39,556
Software maintenance		980			1,327
Total cost of sales		43,242			40,883

Gross profit		147,849			116,916

Operating expenses:
Sales and marketing		74,441			68,826
Research and development		38,546			34,789
General and administrative		15,340			15,780
Total operating expenses		128,327			119,395

Operating income (loss)		19,522			(2,479	)

Other income (expense):
Interest income		300			589
Net foreign exchange gain (loss)		(698	)		(702	)
Other income (expense), net		348			163
Income before income taxes		19,472			(2,429	)
Provision for (benefit from) income taxes		1,119			(2,787	)

Net income	$	18,353		$	358

Basic earnings per share	$	0.24		$	0.00

Weighted average shares outstanding – basic		77,380			77,277

Diluted earnings per share	$	0.23		$	0.00

Weighted average shares outstanding – diluted		78,435			77,436

Dividends declared per share	$	0.13		$	0.12

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

NATIONAL INSTRUMENTS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Three Months Ended
	March 31,
	2010			2009
Cash flow from operating activities:
Net income	$	18,353		$	358
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		9,442			8,385
Stock-based compensation		4,916			5,082
Tax expense/(benefit) from deferred income taxes		1,709			(1,486	)
Tax expense from stock option plans		1,587			242
Changes in operating assets and liabilities:
Accounts receivable		(613	)		30,631
Inventories		(3,006	)		4,740
Prepaid expenses and other assets		(297	)		(5,766	)
Accounts payable		3,618			(5,747	)
Deferred revenue		3,730			(549	)
Taxes and other liabilities		2,162			(11,084	)
Net cash provided by operating activities		41,601			24,806

Cash flow from investing activities:
Capital expenditures		(5,271	)		(3,004	)
Capitalization of internally developed software		(3,404	)		(3,114	)
Additions to other intangibles		(543	)		(1,340	)
Acquisition, net of cash received		(2,191	)		—
Purchases of short-term and long-term investments		(35,823	)		(11,850	)
Sales and maturities of short-term and long-term investments		9,037			4,026
Net cash (used by) investing activities		(38,195	)		(15,282	)

Cash flow from financing activities:
Proceeds from issuance of common stock		22,341			7,237
Repurchase of common stock		(30,935	)		(9,186	)
Dividends paid		(10,072	)		(9,285	)
Tax (benefit) from stock option plans		(1,587	)		(242	)
Net cash (used by) financing activities		(20,253	)		(11,476	)

Net change in cash and cash equivalents		(16,847	)		(1,952	)
Cash and cash equivalents at beginning of period		201,465			229,400
Cash and cash equivalents at end of period	$	184,618		$	227,448

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

NATIONAL INSTRUMENTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Basis of presentation

The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2009, included in our annual report on Form 10-K, filed with the Securities and Exchange Commission. In our opinion, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring items) considered necessary to present fairly our financial position at March 31, 2010 and December 31, 2009, and the results of our operations and cash flows for the three month periods ended March 31, 2010 and March 31, 2009. Operating results for the three month period ended March 31, 2010, are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

Note 2 – Earnings per share

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

The reconciliation of the denominators used to calculate basic EPS and diluted EPS for the three month periods ended March 31, 2010 and 2009, respectively, are as follows (in thousands):

	March 31,
	(unaudited)
	2010		2009
Weighted average shares outstanding-basic		77,380		77,277
Plus: Common share equivalents
Stock options, restricted stock units		1,055		159
Weighted average shares outstanding-diluted		78,435		77,436

Stock options to acquire 1,297,000 shares and 5,495,000 shares for the three month periods ended March 31, 2010 and 2009, respectively, were excluded in the computations of diluted EPS because the effect of including the stock options would have been anti-dilutive.

Note 3 – Cash, cash equivalents, short-term and long-term investments

Cash, cash equivalents, short-term and long-term investments consist of the following (in thousands):

	As of March 31, 2010		As of December 31, 2009
	(unaudited)
Cash and cash equivalents:
Cash	$	73,787	$	85,612
Cash equivalents:
Money market accounts		110,831		115,853
Total cash and cash equivalents		184,618		201,465
Short-term investments:
Municipal bonds		16,564		12,549
Corporate bonds		21,971		7,587
U.S. treasuries and agencies		28,234		21,033
Foreign government bonds		32,830		34,674
Time deposits		2,753		2,753
Auction rate securities		8,198		8,177
Auction rate securities put option		402		423
Total short-term investments		110,952		87,196
Total cash, cash equivalents and investments	$	295,570	$	288,661

The following table summarizes unrealized gains and losses related to our investments designated as available-for-sale (in thousands):

	As of March 31, 2010 (unaudited)
	Adjusted Cost		Gross Unrealized Gain		Gross Unrealized Loss			Cumulative Translation Adjustment			Fair Value
Municipal bonds	$	16,502	$	62	$	—		$	—		$	16,564
Corporate bonds		21,937		84		(50	)		—			21,971
U.S. treasuries and agencies		28,271		1		(37	)		—			28,235
Foreign government bonds		35,700		159		—			(3,030	)		32,829
Time deposits		2,753		—		—			—			2,753
Auction rate securities		8,600		—		(402	)		—			8,198
Auction rate securities put option		—		402		—			—			402
Total investments	$	113,763	$	708	$	(489	)	$	(3,030	)	$	110,952

	As of December 31, 2009
	Adjusted Cost		Gross Unrealized Gain		Gross Unrealized Loss			Cumulative Translation Adjustment			Fair Value
Municipal bonds	$	12,491	$	58	$	—		$	—		$	12,549
Corporate bonds		7,478		110		(1	)		—			7,587
U.S. treasuries and agencies		21,080		—		(47	)		—			21,033
Foreign government bonds		36,105		76		—			(1,507	)		34,674
Time deposits		2,753		—		—			—			2,753
Auction rate securities		8,600		—		(423	)		—			8,177
Auction rate securities put option		—		423		—			—			423
Total investments	$	88,507	$	667	$	(471	)	$	(1,507	)	$	87,196

The following table summarizes the contractual maturities of our investments designated as available-for-sale (in thousands):

	As of March 31, 2010 (unaudited)				As of December 31, 2009
	Adjusted Cost		Fair Value		Adjusted Cost		Fair Value
Due in less than 1 year	$	57,581	$	56,227	$	44,029	$	43,267
Due in 1 to 5 years		56,182		54,725		44,478		43,929
Total investments	$	113,763	$	110,952	$	88,507	$	87,196

Due in less than 1 year	Adjusted Cost		Fair Value		Adjusted Cost		Fair Value
Municipal bonds	$	12,902	$	12,949	$	4,103	$	4,110
Corporate bonds		6,413		6,480		5,384		5,473
U.S. treasuries and agencies		9,149		9,138		5,065		5,057
Foreign government bonds		17,764		16,307		18,124		17,274
Time deposits		2,753		2,753		2,753		2,753
Auction rate securities		8,600		8,198		8,600		8,177
Auction rate securities put option		—		402		—		423
Total investments	$	57,581	$	56,227	$	44,029	$	43,267

Due in 1 to 5 years	Adjusted Cost		Fair Value		Adjusted Cost		Fair Value
Municipal bonds	$	3,600	$	3,615	$	8,388	$	8,439
Corporate bonds		15,524		15,491		2,094		2,114
U.S. treasuries and agencies		19,122		19,096		16,015		15,976
Foreign government bonds		17,936		16,523		17,981		17,400
Total investments	$	56,182	$	54,725	$	44,478	$	43,929

Note 4 – Fair value measurements

FASB ASC 820, Fair Value Measurements and Disclosures (FASB ASC 820) clarifies the definition of fair value, prescribes methods for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value and expands disclosures about the use of fair value measurements. Effective January 1, 2010, we adopted the update to FASB ASC 820 that required additional disclosures and clarified existing disclosures regarding fair value measurements. The additional disclosures include transfers in and out of Level 1 and 2 as well as activity within Level 3 fair value measurements. The update also provides amendments that clarify existing disclosures on level of disaggregation and disclosures about inputs and valuation techniques. The adoption of the update to FASB ASC 820 did not have a material impact on our consolidated financial position or results of operations.

The following tables present our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value (in thousands). We did not have any items that were measured at fair value on a nonrecurring basis at March 31, 2010 and December 31, 2009.

				Fair Value Measurements at Reporting Date Using (unaudited)
Description	March 31, 2010			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Assets
Money Market Funds	$	110,831		$	110,831	$	—		$	—
Short-term investments available for sale:
Municipal bonds		16,564			16,564		—			—
Corporate bonds		21,971			21,971		—			—
U.S. treasuries and agencies		28,234			28,234		—			—
Foreign government bonds		32,830			32,830		—			—
Time deposits		2,753			2,753		—			—
Auction rate securities		8,198			—		—			8,198
Auction rate securities put option		402			—		—			402
Derivatives		10,436			—		10,436			—
Total Assets	$	232,219		$	213,183	$	10,436		$	8,600

Liabilities
Derivatives	$	(578	)	$	—	$	(578	)	$	—
Total Liabilities	$	(578	)	$	—	$	(578	)	$	—

				Fair Value Measurements at Reporting Date Using
Description	December 31, 2009			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Assets
Money Market Funds	$	115,853		$	115,853	$	—		$	—
Short-term investments available for sale
Municipal bonds		12,549			12,549		—			—
Corporate bonds		7,587			7,587		—			—
U.S. treasuries and agencies		21,033			21,033		—			—
Foreign government bonds		34,674			34,674		—			—
Time deposits		2,753			2,753		—			—
Auction rate securities		8,177			—		—			8,177
Auction rate securities put option		423			—		—			423
Derivatives		11,016			—		11,016			—
Total Assets	$	214,065		$	194,449	$	11,016		$	8,600

Liabilities
Derivatives	$	(318	)	$	—	$	(318	)	$	—
Total Liabilities	$	(318	)	$	—	$	(318	)	$	—

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Short-term investments available for sale
	(unaudited)

Beginning Balance at December 31, 2009	$	8,600
Total gains or (losses) (realized/unrealized)
Included in earnings		402
Included in other comprehensive income		—
Total losses (realized/unrealized)
Included in earnings		(402	)
Included in other comprehensive income		—
Purchases, issuances and settlements		—
Transfer in and/or out of Level 3		—
Ending Balance at March 31, 2010	$	8,600

The amount of total gains or (losses) for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at the reporting date		—
	$	—

Short-term investments available-for-sale are valued using a market approach (Level 1) based on the quoted market prices of identical instruments when available or other observable inputs such as trading prices of identical instruments in active markets. Short-term investments available-for-sale consists of debt securities issued by states of the U.S. and political subdivisions of the states, corporate debt securities and debt securities issued by U.S. government corporations and agencies. All short-term investments available-for-sale have contractual maturities of less than 24 months.

Derivatives include foreign currency forward and option contracts. Our foreign currency forward contracts are valued using an income approach (Level 2) based on the spot rate less the contract rate multiplied by the notional amount. Our foreign currency option contracts are valued using a market approach based on the quoted market prices which are derived from observable inputs including current and future spot rates, interest rate spreads as well as quoted market prices of identical instruments.

Short-term investments available-for-sale included in Level 3 are reported at their fair market value and consist of auction rate securities backed by education loan revenue bonds. One of our auction rate securities is from the Vermont Student Assistance Corporation and has a par value of $2.2 million. The other of our auction rate securities is from the New Hampshire Health and Education Facilities Authority and has a par value of $6.4 million. The ratings for these securities at March 31, 2010, were Baa3/A/AAA and Aaa/NR/AAA, respectively. Historically, we reported the fair market value of these securities at par as differences between par value and the purchase price or settlement value were historically comprised of accrued interest. Auction rate securities are variable rate debt instruments whose interest rates are typically reset approximately every 7 to 35 days. On March 26, 2010, and in prior auction periods beginning in February 2008, the auction process for these securities failed. At March 31, 2010, we reported these as short-term investments at their estimated fair market value of $8.2 million.

In November 2008, we accepted the UBS Auction Rate Securities Rights (the “Rights”) agreement offered by UBS as a liquidity alternative to the failed auction process. This Rights agreement is related to the auction rates securities discussed above. The Rights agreement is a nontransferable right to sell our auction rate securities, at par value, back to UBS at any time during the period June 30, 2010, through July 2, 2012. At March 31, 2010, we reported the Rights agreement at its estimated fair market value of $402,000 as a component of short-term debt securities available for sale.

The estimated fair market value of both the auction rate securities and the Rights agreement was determined using significant unobservable inputs (Level 3) as prescribed by FASB ASC 820. We considered many factors in determining the fair market value of the auction rate securities as well as our corresponding Rights agreement at March 31, 2010, including the fact that the debt instruments underlying the auction rate securities have redemption features which call for redemption at 100% of par value, current credit curves for like securities and discount factors to account for the illiquidity of the market for these securities. During the three month period ended March 31, 2010, we did not make any changes to our valuation techniques or related inputs.

Note 5 – Derivative instruments and hedging activities

FASB ASC 815, Derivatives and Hedging, (FASB ASC 815) requires companies to recognize all of their derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.

We have operations in over 40 countries. Sales outside of the Americas as a percentage of consolidated sales were 59% and 57% for the three month periods ended March 31, 2010 and 2009, respectively. Our activities expose us to a variety of market risks, including the effects of changes in foreign currency exchange rates. These financial risks are monitored and managed by us as an integral part of our overall risk management program.

We maintain a foreign currency risk management strategy that uses derivative instruments (foreign currency forward and purchased option contracts) to help protect our earnings and cash flows from fluctuations caused by the volatility in currency exchange rates. Movements in foreign currency exchange rates pose a risk to our operations and competitive position, since exchange rate changes may affect our profitability and cash flow, and the business or pricing strategies of our non-U.S. based competitors.

The vast majority of our foreign sales are denominated in the customers’ local currency. We purchase foreign currency forward and option contracts as hedges of forecasted sales that are denominated in foreign currencies and as hedges of foreign currency denominated receivables. These contracts are entered into to help protect against the risk that the eventual dollar-net-cash inflows resulting from such sales or firm commitments will be adversely affected by changes in exchange rates. We also purchase foreign currency forward contracts as hedges of forecasted expenses that are denominated in foreign currencies. These contracts are entered into to help protect against the risk that the eventual dollar-net-cash outflows resulting from foreign currency operating and cost of revenue expenses will be adversely affected by changes in exchange rates.

We designate foreign currency forward and purchased option contracts as cash flow hedges of forecasted revenues or forecasted expenses. In addition, we hedge our foreign currency denominated balance sheet exposures using foreign currency forward contracts. These derivatives are not designated as hedging instruments under FASB ASC 815. None of our derivative instruments contain a credit-risk-related contingent feature.

Cash flow hedges

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

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (“OCI”) and reclassified into earnings in the same line item (net sales, operating expenses, or cost of sales) associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings or expenses during the current period and are classified as a component of “net foreign exchange gain (loss)”. Hedge effectiveness of foreign currency forwards and purchased option contracts designated as cash flow hedges are measured by comparing the hedging instrument’s cumulative change in fair value from inception to maturity to the forecasted transaction’s terminal value.

We held forward contracts with a notional amount of $21.6 million dollar equivalent of Euro, $3.1 million dollar equivalent of British pound sterling, $19 million dollar equivalent of Japanese yen, and $23.3 million dollar equivalent of Hungarian forint at March 31, 2010. These contracts are for terms of up to 24 months. At December 31, 2009, we held forward contracts with a notional amount of $28.6 million dollar equivalent of Euro, $4.0 million dollar equivalent of British pound sterling, $24.4 million dollar equivalent of Japanese yen, and $17.8 million dollar equivalent of Hungarian forint.

We held purchased option contracts with a notional amount of $21.5 million dollar equivalent of Euro at March 31, 2010. These contracts are for terms of up to 12 months. At December 31, 2009, we held purchased option contracts with a notional amount of $28.4 million dollar equivalent of Euro.

At March 31, 2010, we expect to reclassify $4.3 million of gains on derivative instruments from accumulated other comprehensive income to net sales during the next twelve months when the hedged international sales occur, $2.4 million of gains on derivative instruments from accumulated OCI to cost of sales and $1.1 million of gains on derivative instruments from accumulated OCI to operating expenses during the next twelve months when the hedged international expenses occur. Expected amounts are based on derivative valuations at March 31, 2010. Actual results may vary as a result of changes in the corresponding exchange rate subsequent to this date.

We did not record any ineffectiveness during the three months ended March 31, 2010. During the three months ended March 31, 2009, hedges with a notional amount of $14.4 million were determined to be ineffective. As a result, we recorded a net gain of $417,000 related to these hedges as a component of “net foreign exchange gain (loss)”.

Other derivatives

Other derivatives not designated as hedging instruments under FASB ASC 815 consist primarily of foreign currency forward contracts that we use to hedge our foreign denominated net receivable or net payable positions to help protect against the change in value caused by a fluctuation in foreign currency exchange rates. We typically hedge up to 90% of our outstanding foreign denominated net receivables or net payables and typically limit the duration of these foreign currency forward contracts to approximately 90 days. The gain or loss on the derivatives as well as the offsetting gain or loss on the hedge item attributable to the hedged risk is recognized in current earnings under the line item “net foreign exchange gain (loss)”. As of March 31, 2010 and December 31, 2009, we held foreign currency forward contracts with a notional amount of $37.6 million and $45.2 million, respectively.

The following table presents the fair value of derivative instruments on our Consolidated Balance Sheets and the effect of derivative instruments on our Consolidated Statements of Income.

Fair Values of Derivative Instruments (in thousands):

	Asset Derivatives
	March 31, 2010 (unaudited)			December 31, 2009
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Foreign exchange contracts – ST forwards	Prepaid expenses and other current assets	$	6,476	Prepaid expenses and other current assets	$	7,947

Foreign exchange contracts – LT forwards	Other long-term assets		327	Other long-term assets		274

Foreign exchange contracts – ST options	Prepaid expenses and other current assets		2,331	Prepaid expenses and other current assets		1,821

Total derivatives designated as hedging instruments		$	9,134		$	10,042

Derivatives not designated as hedging instruments

Foreign exchange contracts – ST forwards	Prepaid expenses and other current assets	$	1,302	Prepaid expenses and other current assets	$	974

Total derivatives not designated as hedging instruments		$	1,302		$	974

Total derivatives		$	10,436		$	11,016

	Liability Derivatives
	March 31, 2010 (unaudited)				December 31, 2009
	Balance Sheet Location	Fair Value			Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Foreign exchange contracts – ST forwards	Accrued expenses and other liabilities	$	(33	)	Accrued expenses and other liabilities	$	—

Foreign exchange contracts – LT forwards	Other long-term liabilities		(110	)	Other long-term liabilities		—

Total derivatives designated as hedging instruments		$	(143	)		$	—

Derivatives not designated as hedging instruments

Foreign exchange contracts – ST forwards	Accrued expenses and other liabilities	$	(435	)	Accrued expenses and other liabilities	$	(318	)

Total derivatives not designated as hedging instruments		$	(435	)		$	(318	)

Total derivatives		$	(578	)		$	(318	)

The following tables show the effect of derivative instruments on our Consolidated Statements of Income for the three month periods ended March 31, 2010 and 2009, respectively (in thousands):

March 31, 2010 (unaudited)
Derivatives in Cash Flow Hedging Relationship	Amount of Gain/(Loss) Recognized in OCI (Effective Portion)			Location of Gain/(Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income (Effective Portion)		Location of Gain/(Loss) Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain/(Loss) Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Foreign exchange contracts – forwards and options	$	1,515		Net sales	$	1,037	Net foreign exchange gain (loss)	$	—

Foreign exchange contracts – forwards and options		(1,391	)	Cost of sales		769	Net foreign exchange gain (loss)		—

Foreign exchange contracts – forwards and options		(885	)	Operating expenses		368	Net foreign exchange gain (loss)		—

Total	$	(761	)		$	2,174		$	—

March 31, 2009 (unaudited)
Derivatives in Cash Flow Hedging Relationship	Amount of Gain/(Loss) Recognized in OCI (Effective Portion)			Location of Gain/(Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income (Effective Portion)			Location of Gain/(Loss) Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain/(Loss) Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Foreign exchange contracts – forwards and options	$	3,796		Net sales	$	2,633		Net foreign exchange gain (loss)	$	940

Foreign exchange contracts – forwards and options		(2,746	)	Cost of sales		(255	)	Net foreign exchange gain (loss)		(523	)

Foreign exchange contracts – forwards and options		(888	)	Operating expenses		(266	)	Net foreign exchange gain (loss)		—

Total	$	162			$	2,112			$	417

Derivatives not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income	Amount of Gain (Loss) Recognized in Income		Amount of Gain (Loss) Recognized in Income
		March 31, 2010 (unaudited)		March 31, 2009 (unaudited)
Foreign exchange contracts – forwards	Net foreign exchange gain/(loss)	$	439	$	3,089

Total		$	439	$	3,089

Note 6 – Inventories

Inventories, net consist of the following (in thousands):

	March 31,		December 31,
	2010		2009
	(unaudited)

Raw materials	$	43,524	$	42,121
Work-in-process		2,603		2,042
Finished goods		43,699		42,352
	$	89,826	$	86,515

Note 7 – Intangibles

Intangibles at March 31, 2010 and December 31, 2009 are as follows (in thousands):

	March 31, 2010							December 31, 2009
	(unaudited)
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Capitalized software development costs	$	42,494	$	(23,053	)	$	19,441	$	38,928	$	(20,455	)	$	18,473
Acquired technology		32,830		(21,775	)		11,055		28,022		(20,967	)		7,055
Patents		19,482		(5,611	)		13,871		19,033		(5,377	)		13,656
Leasehold equipment and other		12,978		(8,976	)		4,002		12,577		(8,371	)		4,206
	$	107,784	$	(59,415	)	$	48,369	$	98,560	$	(55,170	)	$	43,390

Software development costs capitalized for the three month periods ended March 31, 2010 and 2009 were $3.6 million and $3.1 million, respectively, and related amortization expense was $2.6 million and $2.1 million, respectively. Capitalized software development costs for the three month periods ended March 31, 2010 and 2009, included costs related to stock based compensation of $163,000 and $156,000, respectively. Amortization of capitalized software development costs is computed on an individual product basis for those products available for market and is recognized based on the product’s estimated economic life, generally three years. Patents are amortized using the straight-line method over their estimated period of benefit, generally ten to seventeen years. Total intangible assets amortization expenses were $4.2 million and $3.6 million for the three months ended March 31, 2010 and March 31, 2009, respectively.

Acquired core technology and intangible assets are amortized over their useful lives, which range from three to eight years. Amortization expense for acquisition related intangibles was approximately $844,000 and $1.0 million for the three months ended March 31, 2010 and March 31, 2009, respectively, of which approximately $722,000 and $887,000 was recorded in cost of sales, respectively, and approximately $122,000 and $126,000 was recorded in operating expenses for the three months ended March 31, 2010 and March 31, 2009, respectively.

Note 8 – Goodwill

The carrying amount of goodwill as of March 31, 2010, is as follows (in thousands):

	Amount
Balance as of December 31, 2009	$	64,779
Acquisitions		5,000
Divestitures		—
Foreign currency translation impact		(483	)
Balance as of March 31, 2009	$	69,296

The excess purchase price over the fair value of assets acquired is recorded as goodwill. As we have one operating segment, we allocate goodwill to one reporting unit for goodwill impairment testing. Goodwill is tested for impairment on an annual basis, and between annual tests if indicators of potential impairment exist, using a fair-value-based approach based on the market capitalization of the reporting unit. Our annual impairment test was performed as of February 28, 2010. No impairment of goodwill has been identified during the period presented. Goodwill is deductible for tax purposes in certain jurisdictions.

On February 1, 2010, we acquired all of the outstanding shares of a privately-held company for $2.2 million in net cash, $3.0 million in shares of our common stock with the remainder to be paid in cash over the next four years. The purchase price allocation for this acquisition included net working capital of $1.1 million, amortizable intangible assets of $5.0 million, and goodwill of $5.0 million. Our consolidated financial statements include the operating results from the date of acquisition.

Note 9 – Income taxes

We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Valuation allowances are established when necessary to reduce deferred tax assets to amounts which are more likely than not to be realized.

FASB ASC 740, Income Taxes (FASB ASC 740) addresses the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. We had $10.9 million and $11.1 million of unrecognized tax benefits at March 31, 2010 and December 31, 2009, respectively, all of which would affect our effective income tax rate if recognized. We recorded a gross decrease in unrecognized tax benefits of $1.1 million for the three month period ended March 31, 2010, as a result of a settlement with a taxing authority. As of March 31, 2010, it is deemed reasonable that we will recognize tax benefits in the amount of $2.4 million in the next twelve months due to the closing of open tax years. The nature of the uncertainty is related to deductions taken on returns that have not been examined by the applicable tax authority. Our continuing policy is to recognize interest and penalties related to income tax matters in income tax expense. As of March 31, 2010, we have approximately $744,000 accrued for interest related to uncertain tax positions. The tax years 2003 through 2009 remain open to examination by the major taxing jurisdictions to which we are subject.

Our provision for income taxes reflected an effective tax rate of 6% and 115% for the three month periods ended March 31, 2010 and 2009, respectively. For the three month period ended March 31, 2010, our effective tax rate was lower than the U.S. federal statutory rate of 35% as a result of a tax benefit from equity awards that do not ordinarily result in a tax benefit, the partial release of a deferred tax asset valuation allowance, an enhanced deduction for certain research and development expenses, increased profits in foreign jurisdictions with reduced income tax rates and a decrease in unrecognized tax benefits for uncertain tax positions. For the three months ended March 31, 2009, our effective tax rate was higher than the U.S. federal statutory rate of 35% as a result of non-deductible stock-based compensation expense, a change in a valuation allowance related to deferred tax assets for which tax benefits were previously recognized and the partial release of a deferred tax asset valuation allowance. The partial release of the valuation allowance had the effect of increasing our effective tax rate in the three months ended March 31, 2009, because we reported a net loss before taxes in that period.

The tax position of our Hungarian operation continues to benefit from assets created by the restructuring of our operations in Hungary. In addition, effective January 1, 2010, a new tax law in Hungary provides for an enhanced deduction for the qualified research and development expenses of NI Hungary Software and Hardware Manufacturing Kft. (“NI Hungary”). During the three months ended December 31, 2009, we obtained confirmation of the application of this new tax law for the qualified research and development expenses of NI Hungary. Partial release of the valuation allowance on assets from the restructuring and the enhanced tax deduction for research expenses resulted in income tax benefits of $3.2 and $1.1 million for the three month periods ended March 31, 2010 and 2009, respectively.

Note 10 – Comprehensive income

Our comprehensive income is comprised of net income, foreign currency translation, unrealized gains and losses on forward and option contracts and securities available for sale. Comprehensive income for the three month periods ended March 31, 2010 and March 31, 2009, was as follows (in thousands):

	Three Months Ended
	March 31,
	(unaudited)
	2010			2009
Comprehensive income:
Net income	$	18,353		$	358
Foreign currency translation (losses), net of taxes		(3,962	)		(2,775	)
Unrealized (losses) on derivative instruments, net of taxes		(3,345	)		(78	)
Unrealized gains/(losses) on available for sale securities, net of taxes		1,877			(180	)
Total comprehensive income	$	12,923		$	(2,675	)

Note 11 – Stock-based compensation plans

Stock option plans

Our stockholders approved the 1994 Incentive Stock Option Plan (the “1994 Plan”) on May 9, 1994. At the time of approval, 9,112,500 shares of our common stock were reserved for issuance under this plan. In 1997, an additional 7,087,500 shares of our common stock were reserved for issuance under this plan, and an additional 750,000 shares were reserved for issuance under this plan, as amended, in 2004. The 1994 Plan terminated in May 2005, except with respect to outstanding awards previously granted thereunder. Awards under the plan were either incentive stock options within the meaning of Section 422 of the Internal Revenue Code or nonqualified options. The right to purchase shares vests over a five to ten-year period, beginning on the date of grant. Vesting of ten year awards may accelerate based on the Company’s previous year’s earnings and revenue growth but shares cannot accelerate to vest over a period of less than five years. Stock options must be exercised within ten years from date of grant. Stock options were issued at the market price at the grant date. We estimate potential forfeitures of stock grants and adjust compensation cost recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods. During the three months ended March 31, 2010, we did not make any changes in accounting principles or methods of estimates.

Restricted stock plan

Our stockholders approved our 2005 Incentive Plan on May 10, 2005. At the time of approval, 2,700,000 shares of our common stock were reserved for issuance under this plan, as well as the number of shares which had been reserved but not issued under the 1994 Plan (our incentive stock option plan which terminated in May 2005), and any shares that returned to the 1994 Plan as a result of termination of options or repurchase of shares issued under such plan. The 2005 Plan, administered by the Compensation Committee of the Board of Directors, provides for granting of incentive awards in the form of restricted stock and restricted stock units (“RSUs”) to directors, executive officers and employees of the Company and its subsidiaries. Awards vest over a three, five or ten-year period, beginning on the date of grant. Vesting of ten year awards may accelerate based on the Company’s previous year’s earnings and growth but ten year awards cannot accelerate to vest over a period of less than five years. Shares available for grant at March 31, 2010 were 2,256,408. We estimate potential forfeitures of RSUs and adjust compensation cost recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods. During the three months ended March 31, 2010, we did not make any changes in accounting principles or methods of estimates.

Employee stock purchase plan

Our employee stock purchase plan permits substantially all domestic employees and employees of designated subsidiaries to acquire our common stock at a purchase price of 85% of the lower of the market price at the beginning or the end of the purchase period. The plan has quarterly purchase periods beginning on February 1, May 1, August 1 and November 1 of each year. Employees may designate up to 15% of their compensation for the purchase of common stock under this plan. We had 1,573,211 shares of common stock reserved for future employee purchases under this plan at March 31, 2010. We issued 181,860 shares under this plan in the three month period ended March 31, 2010. The weighted average fair value of the employees’ purchase rights was $22.70 per share and was estimated using the Black-Scholes model. During the three months ended March 31, 2010, we did not make any changes in accounting principles or methods of estimates.

For the three months ended March 31, 2010 and March 31, 2009, stock-based compensation recorded as a component of cost of sales, sales and marketing, research and development, and general and administrative was as follows (in thousands):

	Three Months Ended
	March 31,
	(unaudited)
	2010			2009
Stock-based compensation
Cost of sales	$	362		$	310
Sales and marketing		2,104			2,185
Research and development		1,765			1,737
General and administrative		685			799
		4,916			5,031
Provision for income taxes		(1,545	)		(3,014	)
Total	$	3,371		$	2,017

Authorized Preferred Stock and Preferred Stock Purchase Rights Plan

We have 5,000,000 authorized shares of preferred stock. On January 21, 2004, our Board of Directors designated 750,000 of these shares as Series A Participating Preferred Stock in conjunction with its adoption of a Preferred Stock Rights Agreement (the “Rights Agreement”) and declaration of a dividend of one preferred share purchase right (a “Right”) for each share of common stock outstanding held as of May 10, 2004 or issued thereafter. Each Right will entitle its holder to purchase one one-thousandth of a share of National Instruments’ Series A Participating Preferred Stock at an exercise price of $200, subject to adjustment, under certain circumstances. The Rights Agreement was not adopted in response to any effort to acquire control of National Instruments.

The Rights only become exercisable in certain limited circumstances following the tenth day after a person or group announces acquisitions of or tender offers for 20% or more of our common stock. In addition, if an acquirer (subject to certain exclusions for certain current stockholders of National Instruments, an “Acquiring Person”) obtains 20% or more of our common stock, then each Right (other than the Rights owned by an Acquiring Person or its affiliates) will entitle the holder to purchase, for the exercise price, shares of our common stock having a value equal to two times the exercise price. Under certain circumstances, our Board of Directors may redeem the Rights, in whole, but not in part, at a purchase price of $0.01 per Right. The Rights have no voting privileges and are attached to and automatically traded with our common stock until the occurrence of specified trigger events. The Rights will expire on the earlier of May 10, 2014 or the exchange or redemption of the Rights.

Note 12 – Segment information

We determine operating segments using the management approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of our operating segments. It also requires disclosures about products and services, geographic areas and major customers.

We have defined our operating segment based on geographic regions. We sell our products in three geographic regions. Our sales to these regions share similar economic characteristics, similar product mix, similar customers, and similar distribution methods. Accordingly, we have elected to aggregate these three geographic regions into a single operating segment. Revenue from the sale of our products which are similar in nature and software maintenance are reflected as total net sales in our Consolidated Statements of Income.

Total net sales, operating income, interest income and long-lived assets, classified by the major geographic areas in which we operate, are as follows (in thousands):

	Three Months Ended March 31,
	(unaudited)
	2010		2009
Net sales:
Americas:	$	79,197	$	68,439

Europe:		57,923		49,480

Asia Pacific:		53,971		39,880
	$	191,091	$	157,799

	Three Months Ended March 31,
	(unaudited)
	2010			2009
Operating income (loss):
Americas	$	13,379		$	5,307
Europe		27,039			16,780
Asia Pacific		17,650			10,223
Unallocated:
Research and development expenses		(38,546	)		(34,789	)
	$	19,522		$	(2,479	)

	Three Months Ended March 31,
	(unaudited)
	2010		2009
Interest income:
Americas	$	111	$	294
Europe		159		274
Asia Pacific		30		21
	$	300	$	589

	March 31, 2010		December 31, 2009
	(unaudited)
Long-lived assets:
Americas	$	100,555	$	100,489
Europe		35,407		36,555
Asia Pacific		16,605		16,221
	$	152,567	$	153,265

Total sales outside the United States for the three month periods ended March 31, 2010 and 2009 were $119.4 million and $96.2 million, respectively.

Note 13 – Commitments and Contingencies

We offer a one-year limited warranty on most hardware products, with a two or three-year warranty on a subset of our hardware products, which is included in the sales price of many of our products. Provision is made for estimated future warranty costs at the time of the sale, for the estimated costs that may be incurred under the basic limited warranty. Our estimate is based on historical experience and product sales during this period.

The warranty reserve for the three month periods ended March 31, 2010 and 2009, respectively, was as follows (in thousands):

	Three Months Ended
	March 31,
	(unaudited)
	2010			2009
Balance at the beginning of the period	$	921		$	952
Accruals for warranties issued during the period		485			496
Settlements made (in cash or in kind) during the period		(484	)		(602	)
Balance at the end of the period	$	922		$	846

As of March 31, 2010, we have outstanding guarantees for payment of foreign operating leases, customs and foreign grants totaling approximately $5.1 million.

As of March 31, 2010, we have non-cancelable purchase commitments with various suppliers of customized inventory and inventory components totaling approximately $7.5 million over the next twelve months.

Note 14 – Recently issued accounting pronouncements

In October 2009, the FASB updated FASB ASC 605, Revenue Recognition (FASB ASC 605) that amended the criteria for separating consideration in multiple-deliverable arrangements. The amendments establish a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third–party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. The amendments will change the application of the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverable’s selling price. This update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. We are currently evaluating the requirements of this update and have not yet determined the impact on our consolidated financial statements.

In October 2009, the FASB updated FASB ASC 985, Software (FASB ASC 985) that changes the accounting model for revenue arrangements that include both tangible products and software elements. Tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality are no longer within the scope of the software revenue guidance in Subtopic 985-605. In addition, the amendments require that hardware components of a tangible product containing software components always be excluded from the software revenue guidance. This update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. We are currently evaluating the requirements of this update and have not yet determined the impact on our consolidated financial statements.

In January 2010, the FASB updated FASB ASC 820, Fair Value Measurements and Disclosures (FASB ASC 820) that requires additional disclosures and clarifies existing disclosures regarding fair value measurements. The additional disclosures include 1) transfers in and out of Levels 1 and 2 and 2) activity in Level 3 fair value measurements. The update provides amendments that clarify existing disclosures on 1) level of disaggregation and 2) disclosures about inputs and valuation techniques. This update will be effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. These disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We adopted the update on January 1, 2010 as required and concluded it did not have a material impact on our consolidated financial position or results of operations.

In February 2010, the FASB updated FASB ASC 855, Subsequent Events (FASB ASC 855) that requires an entity that is an SEC filer to evaluate subsequent events through the date that the financial statements are issued. For an SEC filer, this guidance also eliminates the required disclosure of the date through which subsequent events are evaluated. This update is effective upon issuance. We adopted the update on January 1, 2010 as required and concluded it did not have a material impact on our consolidated financial position or results of operations.

Note 15 – Litigation

We filed a patent infringement action on January 25, 2001, in the U.S. District Court, Eastern District of Texas (Marshall Division) claiming that The MathWorks, Inc. (“MathWorks”) infringed certain of our U.S. patents. On January 30, 2003, a jury found infringement by MathWorks of three of the patents involved and awarded us specified damages. On September 23, 2003, the District Court entered final judgment in favor of us and entered an injunction against MathWorks’ sale of its Simulink and related products and stayed the injunction pending appeal. Upon appeal, the judgment and the injunction were affirmed by the U.S. Court of Appeals for the Federal Circuit (September 3, 2004). Subsequently the stay of injunction was lifted by the District Court. In November 2004, the final judgment amount of $7.4 million which had been held in escrow pending appeal was released to us.

An action was filed by MathWorks against us on September 22, 2004, in the U.S. District Court, Eastern District of Texas (Marshall Division), claiming that on that day MathWorks had released modified versions of its Simulink and related products, and seeking a declaratory judgment that the modified products do not infringe the three patents adjudged infringed in the District Court's decision of September 23, 2003 (and affirmed by the Court of Appeals on September 3, 2004). On November 2, 2004, MathWorks served the complaint on us. We filed an answer to MathWorks’ declaratory judgment complaint, denying MathWorks’ claims of non-infringement and alleging our own affirmative defenses. On January 5, 2005, the Court denied a contempt motion by us to enjoin the modified Simulink products under the injunction in effect from the first case. On January 7, 2005, we amended our answer to include counterclaims that MathWorks’ modified products are infringing three of our patents, and requested unspecified damages and an injunction. MathWorks filed its reply to our counterclaims on February 7, 2005, denying the counterclaims and alleging affirmative defenses. On March 2, 2005, we filed a notice of appeal regarding the Court's denial of the contempt motion. On March 15, 2005, the Court stayed MathWorks’ declaratory judgment action, pending a decision on the appeal by the Court of Appeals for the Federal Circuit. On February 9, 2006, the Court of Appeals for the Federal Circuit affirmed the District Court’s January 2005 order. On November 22, 2006, the District Court lifted the stay. The case schedule has yet to be set in this action. During the fourth quarter of 2004, we accrued $4 million related to our probable loss from this contingency, which consists entirely of anticipated patent defense costs that are probable of being incurred. In the fourth quarter of 2006, we accrued an additional $600,000 related to this contingency. During the third quarter of 2009, we reduced the accrual by $2 million and during the first quarter of 2010, we reduced the accrual by an additional $1,037,000 to reflect a decrease in the estimated costs that are probable of being incurred in this action. To date, we have charged a cumulative total of $623,000 against this accrual. At March 31, the remaining accrual was $936,000.

Note 16 – Subsequent events

We have evaluated subsequent events through the date the financial statements were issued.

On April 21, 2010, our Board of Directors declared a quarterly cash dividend of $0.13 per common share, payable June 1, 2010, to shareholders of record on May 10, 2010.

On April 21, 2010, our Board of Directors approved a new share repurchase plan that increased the aggregate number of shares of common stock that we are authorized to repurchase from 674,098 to 3.0 million.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Any statements contained herein regarding our future financial performance or operations (including, without limitation, statements to the effect that we “believe,” "expect," "plan," "may," "will," "project," "continue," or "estimate" or other variations thereof or comparable terminology or the negative thereof) should be considered forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of important factors, including those set forth under the heading “Risk Factors” beginning on page 34, and the discussion below. Readers are also encouraged to refer to the documents regularly filed by us with the Securities and Exchange Commission, including our Annual Report on Form 10-K for further discussion of our business and the risks attendant thereto.

Overview

National Instruments Corporation (“we”, “us” or “our”) is a leading supplier of measurement and automation products that engineers and scientists use in a wide range of industries. These industries comprise a large and diverse market for design, control and test applications. We provide flexible application software and modular, multifunctional hardware that users combine with industry-standard computers, networks and third party devices to create measurement, automation and embedded systems, which we also refer to as “virtual instruments”. Our approach gives customers the ability to quickly and cost-effectively design, prototype and deploy unique custom-defined solutions for their design, control and test application needs. We sell to a large number of customers in a wide variety of industries. No single customer accounted for more than 3% of our sales in the three months ended March 31, 2010 or in the years 2009, 2008 or 2007.

The key strategies that management focuses on in running our business are the following:

Expanding our broad customer base

We strive to increase our already broad customer base by serving a large market on many computer platforms, through a global marketing and distribution network. We also seek to acquire new technologies and expertise from time to time in order to open new opportunities for our existing product portfolio.

Maintaining a high level of customer satisfaction

To maintain a high level of customer satisfaction we strive to offer innovative, modular and integrated products through a global sales and support network. We strive to maintain a high degree of backwards compatibility across different platforms in order 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 quality and reliability, and that these 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 such as custom application specific integrated circuits (“ASICs”) across multiple products.

We sell into test and measurement (“T&M”) and industrial/embedded applications in a broad range of industries and as such are subject to the economic and industry forces which drive those markets. It has been our experience that the performance of these industries and our performance is impacted by general trends in industrial production for the global economy and by the specific performance of certain vertical markets that are intensive consumers of measurement technologies. Examples of these markets are semiconductor capital equipment, telecom, defense, aerospace, automotive and others. In assessing our business, we consider the trends in the Global Purchasing Managers Index (“PMI”) published by JP Morgan, global industrial production as well as industry reports on the specific vertical industries that we target. Starting in August 2009, the PMI has had readings above 50 which are indicative of expansion in the industrial global economy. We are unable to predict whether the current expansion cycle, as measured by the PMI, will be sustained throughout 2010.

We distribute our software and hardware products primarily through a direct sales organization. We also use independent distributors, OEMs, VARs, system integrators and consultants to market 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 59% and 57% or our revenues for the three month periods ended March 31, 2010 and 2009, respectively. 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 12 – Segment information of Notes to Consolidated Financial Statements for details concerning the geographic breakdown of our net sales, operating income, interest income and long-lived assets).

We manufacture a substantial majority of our products at our facilities in Debrecen, Hungary. Additional production primarily of low volume or newly introduced products is done in Austin, Texas. 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. We manufacture most of the electronic circuit card assemblies, and modules in-house, although subcontractors are used from time to time. We currently use subcontractors in Asia to manufacture a significant portion of our chassis but we review these arrangements periodically. We manufacture some of our electronic cable assemblies in-house, but many assemblies are produced by subcontractors. We primarily subcontract our software duplication, our technical manuals and product support documentation.

We believe that our long-term growth and success depends 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 is dependent on our ability to obtain and maintain patents and other proprietary rights related to technologies used in our products. We have engaged in litigation and where necessary, will likely engage in future litigation to protect our intellectual property rights. In monitoring and policing our intellectual property rights, we have been and may be required to spend significant resources.

We have been profitable in every year since 1990. However, there can be no assurance that our net sales will grow or that we will remain profitable in future periods. Our operating results fluctuate from period to period due to changes in global economic conditions and a number of other factors. As a result, we believe historical results of operations should not be relied upon as indications of future performance.

Current business outlook

Many of the industries we serve have historically been cyclical and have experienced periodic downturns. Our customers across all industries and geographic regions demonstrated reduced order patterns throughout most of 2009. During the fourth quarter of 2009, we began to see positive trends in the order patterns of our customers and have seen those trends continue during our first quarter of 2010. These positive order trends are consistent with the expansion we have seen in the global industrial economy as measured by the global PMI which has risen from 50 in July 2009 to 57 in March 2010. We have seen these positive trends across all geographic regions and across all the vertical markets that we serve although the strength of the trend varies by region and by market. We are unable to predict whether the current expansion cycle, as measured by the PMI, will be sustained throughout 2010. If this expansion cannot be sustained, it could have an adverse effect on the spending patterns of businesses including our current and potential customers which could adversely affect our revenues and therefore harm our business and result of operations. Our key strategies are to maintain a stable gross margin and to optimize our operating cost structure while maintaining strong employee productivity.

Results of Operations

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

	Three Months Ended
	March 31,
	2010			2009
Net sales:
Americas		41.4	%		43.4	%
Europe		30.3			31.3
Asia Pacific		28.3			25.3
Consolidated net sales		100.0			100.0
Cost of sales		22.6			25.9
Gross profit		77.4			74.1
Operating expenses:
Sales and marketing		39.0			43.6
Research and development		20.2			22.1
General and administrative		8.0			10.0
Total operating expenses		67.2			75.7
Operating income (loss)		10.2			(1.6	)
Other income (expense):
Interest income		0.2			0.4
Net foreign exchange gain (loss)		(0.4	)		(0.4	)
Other income (expense), net		0.2			0.1
Income (loss) before income taxes		10.2			(1.5	)
Provision for (benefit from) income taxes		0.6			(1.7	)
Net income		9.6	%		0.2	%

Net Sales. Consolidated net sales were $191 million and $158 million for the three month periods ended March 31, 2010 and 2009, respectively, an increase of 21%. This increase can be attributed to increases in sales volume across all areas of our business. Products in the areas of virtual instrumentation and graphical system design, which comprised approximately 92% of our revenue in the three months ended March 31, 2010, saw a year-over-year revenue increase of 19%. Instrument control products, which comprised approximately 8% of our revenues in the three months ended March 31, 2010, saw a year-over-year revenue increase of 48%. For the three months ended March 31, 2009, instrument control products comprised 6% of our revenues, while virtual instrumentation and graphical system design comprised 94% of our revenues. Our instrument control products are the most economically sensitive portion of our revenue. We did not take any significant action with regard to product pricing during the three months ended March 31, 2010, and thus, the increase in revenues is attributable to an increase in customer orders.

Sales in the Americas were $79 million and $68 million for the three month periods ended March 31, 2010 and 2009, respectively, an increase of 16%. Sales outside of the Americas, as a percentage of consolidated sales, increased to 59% for the three months ended March 31, 2010 compared to 57% for the comparable period in 2009. Sales in Europe were $58 million and $49 million for the three month periods ended March 31, 2010 and 2009, respectively, an increase of 17%. Sales in Asia were $54 million and $40 million for the three month periods ended March 31, 2010, and 2009, respectively, an increase of 35%. We expect sales outside of the Americas to continue to represent a significant portion of our revenue. We intend to continue to expand our international operations by increasing our presence in existing markets, adding a presence in some new geographical markets and continuing the use of distributors to sell our products in some countries.

Almost all sales made by our direct sales offices in the non U.S. Americas, in Europe and in Asia Pacific are denominated in local currencies, and accordingly, the U.S. dollar equivalent of these sales is affected by changes in foreign currency exchange rates. For the three months ended March 31, 2010, net of hedging results, the change in exchange rates had the effect of increasing our consolidated sales by $12 million or 7%, increasing Americas sales by $1.5 million or 2%, increasing European sales by $7 million or 14%, and increasing sales in Asia Pacific by $3.1 million or 8% compared to the three months ended March 31, 2009.

Gross Profit. As a percentage of sales, gross margin was 77% and 74% for the three month periods ended March 31, 2010, and 2009, respectively. Gross margin increased in the three months ended March 31, 2010, primarily as a result of increased sales volumes compared to the same period in 2009. For the three months ended March 31, 2010, charges related to acquisition related intangibles and stock based compensation decreased to $1.1 million from $1.2 million during the comparable period in 2009. For the three months ended March 31, 2010, the net impact of foreign currency exchange rates had the effect of increasing our cost of goods sold by $759,000 million or 2%.

Sales and Marketing. Sales and marketing expenses were $74 million and $69 million for the three month periods ended March 31, 2010, and 2009, respectively, an increase of 8%. As a percentage of net sales, sales and marketing expenses were 39% and 44% over the same periods. The decrease in sales and marketing expense as a percentage of revenue was due to the 21% increase in revenue during the three months ended March 31, 2010, compared to the three months ended March 31, 2009. The increase in sales and marketing expenses in absolute dollars was due to an increase in personnel related expenses of $2.3 million which includes commissions and variable compensation, as well as an increase caused by the net impact of changes in foreign currency exchange rates of $3.5 million. We plan to continue to make investments in our field sales force during the remainder of 2010. However, our field sales expansion during the remainder of 2010 will likely be targeted to strategic areas of need, whether technical or regional. We expect sales and marketing expenses in future periods to continue to fluctuate as a percentage of sales based on recruiting, marketing and advertising campaign costs associated with major new product releases and entry into new market areas, investment in web sales and marketing efforts, increasing product demonstration costs and the timing of domestic and international conferences and trade shows.

Research and Development. Research and development expenses were $39 million and $35 million for the three month periods ended March 31, 2010, and 2009, respectively, an increase of 11%. As a percentage of net sales, research and development expenses were 20% and 22% over the same periods. The decrease in research and development expenses as a percentage of revenue was due to the 21% increase in revenue during the three months ended March 31, 2010, compared to the three months ended March 31, 2009. The increase in research and development expenses in absolute dollars was due to an increase in personnel related expenses of $3.1 million which primarily consist of benefits and variable compensation as well as an increase caused by the net impact of changes in foreign currency exchange rates of $740,000. The suspension of temporary cost cutting measures implemented during 2009, which included a company-wide wage reduction as well as a reduction in the number of accrued vacation hours that employees were allowed to carry beyond the end of a fiscal year, resulted in an additional cost increase of $955,000 compared to the first quarter of 2009. We plan to continue to make additional investments in our research and development group during the remainder of 2010. However, our research and development expansion during the remainder of 2010 will likely be targeted to strategic areas of need.

We capitalize software development costs in accordance with FASB ASC 985. We amortize such costs over the related product’s estimated economic life, generally three years, beginning when a product becomes available for general release. Software amortization expense included in cost of goods sold totaled $2.6 million and $2.1 million during the three month periods ended March 31, 2010 and 2009, respectively. Internally developed software costs capitalized during the three month periods ended March 31, 2010 and 2009, were $3.6 million and $3.1 million, respectively. Capitalization of internally developed software costs varies depending on the timing of when each project reaches technological feasibility and the length and scope of the development cycle of each individual project. (See Note 7 - Intangibles of Notes to Consolidated Financial Statements for a description of intangibles).

General and Administrative. General and administrative expenses were $15 million and $16 million for the three month periods ended March 31, 2010 and 2009, respectively, a decrease of 3%. As a percentage of net sales, general and administrative expenses were 8% and 10% over the same periods. The decrease in general and administrative expenses as a percentage of revenue was driven by the 21% increase in revenue during the three months ended March 31, 2010, compared to the three months ended March 31, 2009. During the three months ended March 31, 2010, we recorded a reduction of our patent litigation accrual which resulted in a non-cash decrease to our general and administrative expenses of $1.1 million. This decrease was offset to some extent by personnel related expenses consisting of variable compensation had the effect of increasing general and administrative expenses by $400,000 and the net impact of changes in foreign currency exchange rates had the effect of increasing our general and administrative expenses by $541,000. We expect that general and administrative expenses in future periods will fluctuate in absolute dollars and as a percentage of revenue.

Interest Income. Interest income was $300,000 and $589,000 for the three month periods ended March 31, 2010 and 2009, respectively, a decrease of 49%. The decrease is attributable to a continued decrease in investment yields. The source of interest income is from the investment of our cash and short-term and long-term investments.

Net Foreign Exchange Gain (Loss). Net foreign exchange (loss) was ($698,000) and ($702,000) for the three month periods ended March 31, 2010 and 2009, 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. We recognize the local currency as the functional currency in virtually all of our international subsidiaries.

We utilize foreign currency forward contracts to hedge our foreign denominated net foreign currency balance sheet positions to help protect against the change in value caused by a fluctuation in foreign currency exchange rates. We typically hedge up to 90% of our outstanding foreign denominated net receivable or payable positions and typically limit the duration of these foreign currency forward contracts to approximately 90 days. The gain or loss on these derivatives as well as the offsetting gain or loss on the hedge item attributable to the hedged risk is recognized in current earnings under the line item “Net foreign exchange gain (loss)”. Our hedging strategy reduced our foreign exchange losses by $439,000 and $3.1 million during the three month periods ended March 31, 2010 and 2009, respectively.

To protect against the change in the value caused by a fluctuation in foreign currency exchange rates of forecasted foreign currency cash flows resulting from international sales and expenses over the next one to two years, we have a foreign currency cash flow hedging program. We hedge portions of our forecasted revenue and forecasted expenses denominated in foreign currencies with forward and option contracts. For forward contracts, when the dollar strengthens significantly against the foreign currencies, the change in the present value of future foreign currency cash flows may be offset by the change in the fair value of the forward contracts designated as hedges. For purchased option contracts, when the dollar strengthens significantly against the foreign currencies, the change in the present value of future foreign currency cash flows may be offset by the change in the fair value of the option contracts designated as hedges, net of the premium paid. Our foreign currency purchased option contracts are purchased “at-the-money” or “out-of-the-money.” We purchase foreign currency forward and option contracts for up to 100% of our forecasted exposures in selected currencies (primarily in Euro, Japanese yen, British pound sterling and Hungarian forint) and limit the duration of these contracts to 40 months or less. As a result, our hedging activities only partially address our risks from foreign currency transactions, and there can be no assurance that this strategy will be successful. We do not invest in contracts for speculative purposes. (See Note 5 - Derivative instruments and hedging activities of Notes to Consolidated Financial Statements for a description of our forward and purchased option contracts and hedged positions).

Provision for Income Taxes. Our provision for income taxes reflected an effective tax rate of 6% and 115% for the three month periods ended March 31, 2010 and 2009, respectively. The decrease in our effective tax rate for the three months ended March 31, 2010, compared to March 31, 2009, was due to the following;

Effective tax rate for the three months ended March 31, 2009			115%
Decrease in unrecognized tax benefits for uncertain tax positions			(47%)
Change in valuation allowance related to deferred tax assets for which tax benefits were previously recognized, recorded during the three months ended March 31, 2009			(18%)
Increased profits in foreign jurisdictions with reduced income tax rates			(17%)
Decrease in non-deductible stock-based compensation expense as a percentage of net income			(14%)
Enhanced deduction for certain research and development expenses in 2010			(12%)
Increase in the tax benefit from equity awards that do not ordinarily result in a tax benefit			(6%)
Increase in the partial release of a deferred tax asset valuation allowance			(3%)
Other			(2%)
Expiration of the research and development tax credit as of December 31, 2009			10%
Effective tax rate for the three months ended March 31, 2010			6%

(See Note 9 – Income taxes of Notes to Consolidated Financial Statements for further discussion regarding our effective tax rate and a discussion of income taxes at the U.S. federal statutory income tax rate of 35% and our effective tax rate).

Liquidity and Capital Resources