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 quarterly period ended: September 30, 2013 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)
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Delaware (State or other jurisdiction of incorporation or organization) |
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74-1871327 (I.R.S. Employer Identification Number) |
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11500 North MoPac Expressway Austin, Texas |
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78759 |
(address of principal executive offices) |
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(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 T 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 TAccelerated 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 October 29, 2013 |
Common Stock - $0.01 par value |
125,157,757 |
1
NATIONAL INSTRUMENTS CORPORATION
INDEX
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Page No. |
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Item 1 |
Financial Statements: |
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September 30, 2013 (unaudited) and December 31, 2012 |
3 |
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(unaudited) for the three and nine month periods ended September 30, 2013 and 2012 |
4 |
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(unaudited) for the three and nine month periods ended September 30, 2013 and 2012 |
5 |
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(unaudited) for the nine month periods ended September 30, 2013 and 2012 |
6 |
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Notes to Consolidated Financial Statements |
7 |
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Item 2 |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
22 |
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Item 3 |
32 |
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Item 4 |
35 |
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Item 1 |
36 |
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Item 1A |
36 |
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Item 2 |
45 |
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Item 5 |
45 |
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Item 6 |
46 |
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47 |
2
PART I - FINANCIAL INFORMATION
ITEM 1.Financial Statements
NATIONAL INSTRUMENTS CORPORATION
(in thousands, except share data)
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September 30, |
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December 31, |
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2013 |
|
2012 |
Assets |
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(unaudited) |
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|
Current assets: |
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|
|
|
Cash and cash equivalents |
$ |
190,208 |
$ |
161,996 |
Short-term investments |
|
153,906 |
|
173,166 |
Accounts receivable, net |
|
182,723 |
|
187,060 |
Inventories, net |
|
178,904 |
|
169,990 |
Prepaid expenses and other current assets |
|
66,412 |
|
48,009 |
Deferred income taxes, net |
|
26,464 |
|
27,479 |
Total current assets |
|
798,617 |
|
767,700 |
Property and equipment, net |
|
262,966 |
|
249,721 |
Goodwill |
|
147,319 |
|
147,258 |
Intangible assets, net |
|
84,424 |
|
93,913 |
Other long-term assets |
|
28,269 |
|
26,177 |
Total assets |
$ |
1,321,595 |
$ |
1,284,769 |
Liabilities and stockholders' equity |
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Current liabilities: |
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Accounts payable |
$ |
54,582 |
$ |
65,080 |
Accrued compensation |
|
29,559 |
|
29,978 |
Deferred revenue - current |
|
96,043 |
|
90,714 |
Accrued expenses and other liabilities |
|
20,003 |
|
34,373 |
Other taxes payable |
|
31,021 |
|
24,811 |
Total current liabilities |
|
231,208 |
|
244,956 |
Deferred income taxes |
|
45,046 |
|
47,630 |
Liability for uncertain tax positions |
|
23,399 |
|
20,920 |
Deferred revenue - long-term |
|
21,309 |
|
20,446 |
Other long-term liabilities |
|
9,455 |
|
11,689 |
Total liabilities |
|
330,417 |
|
345,641 |
Commitments and contingencies |
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Stockholders' equity: |
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Preferred stock: par value $0.01; 5,000,000 shares authorized; none issued and outstanding |
|
- |
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- |
Common stock: par value $0.01; 360,000,000 and 180,000,000 shares authorized, respectively; 125,157,034 and 122,878,690 shares issued and outstanding, respectively |
|
1,252 |
|
1,229 |
Additional paid-in capital |
|
586,406 |
|
532,845 |
Retained earnings |
|
400,798 |
|
404,210 |
Accumulated other comprehensive income |
|
2,722 |
|
844 |
Total stockholders’ equity |
|
991,178 |
|
939,128 |
Total liabilities and stockholders’ equity |
$ |
1,321,595 |
$ |
1,284,769 |
The accompanying notes are an integral part of the financial statements.
3
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2013 |
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2012 |
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2013 |
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2012 |
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Net sales: |
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Product |
$ |
269,582 |
$ |
267,894 |
$ |
810,663 |
$ |
776,208 |
Software maintenance |
|
19,556 |
|
22,080 |
|
61,089 |
|
65,809 |
GSA accrual |
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- |
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- |
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- |
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1,349 |
Total net sales |
|
289,138 |
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289,974 |
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871,752 |
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843,366 |
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Cost of sales: |
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Product |
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73,541 |
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71,796 |
|
224,954 |
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201,374 |
Software maintenance |
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1,665 |
|
1,698 |
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4,307 |
|
4,319 |
Total cost of sales |
|
75,206 |
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73,494 |
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229,261 |
|
205,693 |
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Gross profit |
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213,932 |
|
216,480 |
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642,491 |
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637,673 |
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Operating expenses: |
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Sales and marketing |
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111,253 |
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109,213 |
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337,884 |
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320,021 |
Research and development |
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60,791 |
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56,627 |
|
180,520 |
|
164,928 |
General and administrative |
|
21,363 |
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20,714 |
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66,363 |
|
63,590 |
Acquisition related adjustment |
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- |
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- |
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(1,316) |
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- |
Total operating expenses |
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193,407 |
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186,554 |
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583,451 |
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548,539 |
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Operating income |
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20,525 |
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29,926 |
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59,040 |
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89,134 |
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Other income: |
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Interest income |
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133 |
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133 |
|
495 |
|
495 |
Net foreign exchange gain (loss) |
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456 |
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(235) |
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(2,057) |
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(2,139) |
Other income (loss), net |
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304 |
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(899) |
|
728 |
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(644) |
Income before income taxes |
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21,418 |
|
28,925 |
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58,206 |
|
86,846 |
Provision for income taxes |
|
5,654 |
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4,585 |
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9,421 |
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17,423 |
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Net income |
$ |
15,764 |
$ |
24,340 |
$ |
48,785 |
$ |
69,423 |
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Basic earnings per share |
$ |
0.13 |
$ |
0.20 |
$ |
0.39 |
$ |
0.57 |
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Weighted average shares outstanding - basic |
|
125,032 |
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122,402 |
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124,244 |
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121,710 |
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Diluted earnings per share |
$ |
0.13 |
$ |
0.20 |
$ |
0.39 |
$ |
0.57 |
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Weighted average shares outstanding - diluted |
|
125,608 |
|
123,074 |
|
125,221 |
|
122,726 |
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Dividends declared per share |
$ |
0.14 |
$ |
0.14 |
$ |
0.42 |
$ |
0.42 |
The accompanying notes are an integral part of these financial statements.
4
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2013 |
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2012 |
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2013 |
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2012 |
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Net income |
$ |
15,764 |
$ |
24,340 |
$ |
48,785 |
$ |
69,423 |
Other comprehensive income, before tax and net of reclassification adjustments: |
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Foreign currency translation adjustment |
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6,307 |
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2,708 |
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3,058 |
|
1,427 |
Unrealized (loss) gain on securities available-for-sale |
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(91) |
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(724) |
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(497) |
|
165 |
Unrealized (loss) gain on derivative instruments |
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(2,371) |
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(1,646) |
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1,281 |
|
2,985 |
Other comprehensive income, before tax |
|
3,845 |
|
338 |
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3,842 |
|
4,577 |
Tax expense (benefit) related to items of other comprehensive income |
|
611 |
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(337) |
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1,964 |
|
683 |
Other comprehensive income, net of tax |
|
3,234 |
|
675 |
|
1,878 |
|
3,894 |
Comprehensive income |
$ |
18,998 |
$ |
25,015 |
$ |
50,663 |
$ |
73,317 |
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The accompanying notes are an integral part of these financial statements. |
5
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Nine Months Ended |
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September 30, |
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2013 |
|
2012 |
Cash flow from operating activities: |
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Net income |
$ |
48,785 |
$ |
69,423 |
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
|
50,897 |
|
41,029 |
Stock-based compensation |
|
21,996 |
|
20,506 |
Tax (benefit) expense from deferred income taxes |
|
(1,272) |
|
3,626 |
Tax benefit from stock option plans |
|
(2,185) |
|
(2,353) |
Changes in operating assets and liabilities: |
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|
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Accounts receivable |
|
4,789 |
|
(25,549) |
Inventories |
|
(8,358) |
|
(23,278) |
Prepaid expenses and other assets |
|
(18,320) |
|
(10,296) |
Accounts payable |
|
(10,636) |
|
11,100 |
Deferred revenue |
|
6,192 |
|
(2,271) |
Taxes, accrued expenses and other liabilities |
|
2,834 |
|
8,325 |
Net cash provided by operating activities |
|
94,722 |
|
90,262 |
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|
|
Cash flow from investing activities: |
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|
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|
Capital expenditures |
|
(40,795) |
|
(52,483) |
Capitalization of internally developed software |
|
(10,566) |
|
(11,284) |
Additions to other intangibles |
|
(4,146) |
|
(1,426) |
Purchases of short-term investments |
|
(16,039) |
|
(48,718) |
Sales and maturities of short-term investments |
|
35,299 |
|
220,094 |
Net cash (used in) provided by investing activities |
|
(36,247) |
|
106,183 |
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|
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|
|
Cash flow from financing activities: |
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|
|
|
Proceeds from issuance of common stock |
|
28,809 |
|
21,297 |
AWR earnout payment |
|
(9,016) |
|
- |
Dividends paid |
|
(52,241) |
|
(51,167) |
Tax benefit from stock option plans |
|
2,185 |
|
2,353 |
Net cash used in financing activities |
|
(30,263) |
|
(27,517) |
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|
|
Net change in cash and cash equivalents |
|
28,212 |
|
168,928 |
Cash and cash equivalents at beginning of period |
|
161,996 |
|
142,608 |
Cash and cash equivalents at end of period |
$ |
190,208 |
$ |
311,536 |
The accompanying notes are an integral part of these financial statements.
6
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, 2012, 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 September 30, 2013 and December 31, 2012, the results of our operations and comprehensive income for the three and nine month periods ended September 30, 2013 and 2012, and our cash flows for the nine month periods ended September 30, 2013 and September 30, 2012. Operating results for the three and nine month periods ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States.
Following approval by the Company’s Board of Directors and stockholders, on May 14, 2013, the Company’s certificate of incorporation was amended to increase the authorized shares of common stock by 180,000,000 shares to a total of 360,000,000 shares. As a result of this amendment, the total number of shares which the Company is authorized to issue is 365,000,000 shares, consisting of (i) 5,000,000 shares of preferred stock, par value $.01 per share, and (ii) 360,000,000 shares of common stock, par value $.01 per share.
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 (“RSUs”), is computed using the treasury stock method.
The reconciliation of the denominators used to calculate basic EPS and diluted EPS for the three and nine month periods ended September 30, 2013 and 2012, are as follows:
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
||||
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(In thousands) |
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(In thousands) |
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(Unaudited) |
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(Unaudited) |
||||
|
2013 |
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2012 |
|
2013 |
|
2012 |
Weighted average shares outstanding-basic |
125,032 |
|
122,402 |
|
124,244 |
|
121,710 |
Plus: Common share equivalents |
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Stock options, RSUs |
576 |
|
672 |
|
977 |
|
1,016 |
Weighted average shares outstanding-diluted |
125,608 |
|
123,074 |
|
125,221 |
|
122,726 |
Stock awards to acquire 682,300 shares and 1,201,000 shares for the three month periods ended September 30, 2013 and 2012, respectively, and 58,500 shares and 5,030 shares for the nine month periods ended September 30, 2013 and 2012, respectively, were excluded in the computations of diluted EPS because the effect of including the stock awards would have been anti-dilutive.
Note 3 – Cash, cash equivalents and short-term investments
The following tables summarize unrealized gains and losses related to our cash, cash equivalents, and short-term investments designated as available-for-sale:
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As of September 30, 2013 |
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(In thousands) |
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(Unaudited) |
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Gross |
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Gross |
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Cumulative |
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Adjusted Cost |
|
Unrealized Gain |
|
Unrealized Loss |
|
Translation Adjustment |
|
Fair Value |
Cash |
$ |
123,585 |
$ |
- |
$ |
- |
$ |
- |
$ |
123,585 |
Money Market Accounts |
|
66,623 |
|
- |
|
- |
|
- |
|
66,623 |
Municipal bonds |
|
- |
|
- |
|
- |
|
- |
|
- |
Corporate bonds |
|
17,913 |
|
5 |
|
(9) |
|
(1,500) |
|
16,409 |
U.S. treasuries and agencies |
|
117,678 |
|
56 |
|
- |
|
- |
|
117,734 |
Foreign government bonds |
|
18,395 |
|
- |
|
(4) |
|
(1,540) |
|
16,851 |
Time deposits |
|
2,912 |
|
- |
|
- |
|
- |
|
2,912 |
Cash, cash equivalents, and short-term investments |
$ |
347,106 |
$ |
61 |
$ |
(13) |
$ |
(3,040) |
$ |
344,114 |
7
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|
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|
|
|
|
|
|
(In thousands) |
|
December 31, 2012 |
||||||||
|
|
|
|
Gross |
|
Gross |
|
Cumulative |
|
|
|
|
Adjusted Cost |
|
Unrealized Gain |
|
Unrealized Loss |
|
Translation Adjustment |
|
Fair Value |
Cash |
$ |
141,340 |
$ |
- |
$ |
- |
$ |
- |
$ |
141,340 |
Money Market Accounts |
|
20,656 |
|
- |
|
- |
|
- |
|
20,656 |
Municipal bonds |
|
1,465 |
|
1 |
|
- |
|
- |
|
1,466 |
Corporate bonds |
|
8,708 |
|
- |
|
(20) |
|
(910) |
|
7,778 |
U.S. treasuries and agencies |
|
135,953 |
|
- |
|
(28) |
|
- |
|
135,925 |
Foreign government bonds |
|
27,947 |
|
57 |
|
- |
|
(2,919) |
|
25,085 |
Time deposits |
|
2,912 |
|
- |
|
- |
|
- |
|
2,912 |
Cash, cash equivalents, and short-term investments |
$ |
338,981 |
$ |
58 |
$ |
(48) |
$ |
(3,829) |
$ |
335,162 |
The following tables summarize the contractual maturities of our short-term investments designated as available-for-sale:
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|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2013 |
||
(In thousands) |
|
(Unaudited) |
||
|
|
Adjusted Cost |
|
Fair Value |
Due in less than 1 year |
$ |
130,148 |
$ |
129,401 |
Due in 1 to 5 years |
|
26,750 |
|
24,505 |
Total available-for-sale debt securities |
$ |
156,898 |
$ |
153,906 |
|
|
|
|
|
Due in less than 1 year |
|
Adjusted Cost |
|
Fair Value |
U.S. treasuries and agencies |
|
117,678 |
|
117,734 |
Foreign government bonds |
|
9,558 |
|
8,755 |
Time deposits |
|
2,912 |
|
2,912 |
Total available-for-sale debt securities |
$ |
130,148 |
$ |
129,401 |
|
|
|
|
|
Due in 1 to 5 years |
|
Adjusted Cost |
|
Fair Value |
Corporate bonds |
|
17,913 |
|
16,409 |
Foreign government bonds |
|
8,837 |
|
8,096 |
Total available-for-sale debt securities |
$ |
26,750 |
$ |
24,505 |
Note 4 – Fair value measurements
We define fair value to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market that market participants may use when pricing the asset or liability.
We follow a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value measurement is determined based on the lowest level input that is significant to the fair value measurement. The three values of the fair value hierarchy are the following:
Level 1 – Quoted prices in active markets for identical assets or liabilities
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly
Level 3 – Inputs that are not based on observable market data
Assets and liabilities measured at fair value on a recurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using |
||||||
(In thousands) |
|
(Unaudited) |
||||||
Description |
|
September 30, 2013 |
|
Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
Significant Other Observable Inputs (Level 2) |
|
Significant Unobservable Inputs (Level 3) |
Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents available for sale: |
|
|
|
|
|
|
|
|
Money Market Funds |
$ |
66,623 |
$ |
66,623 |
$ |
|
$ |
- |
U.S. treasuries and agencies |
|
- |
|
|
|
- |
|
- |
Short-term investments available for sale: |
|
|
|
|
|
|
|
|
Municipal bonds |
|
- |
|
- |
|
- |
|
- |
Corporate bonds |
|
16,409 |
|
- |
|
16,409 |
|
- |
U.S. treasuries and agencies |
|
117,734 |
|
- |
|
117,734 |
|
- |
Foreign government bonds |
|
16,851 |
|
- |
|
16,851 |
|
- |
Time deposits |
|
2,912 |
|
2,912 |
|
- |
|
- |
Derivatives |
|
5,908 |
|
- |
|
5,908 |
|
- |
Total Assets |
$ |
226,437 |
$ |
69,535 |
$ |
156,902 |
$ |
- |
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Derivatives |
$ |
(3,538) |
$ |
- |
$ |
(3,538) |
$ |
- |
Total Liabilities |
$ |
(3,538) |
$ |
- |
$ |
(3,538) |
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Fair Value Measurements at Reporting Date Using |
||||||
Description |
|
December 31, 2012 |
|
Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
Significant Other Observable Inputs (Level 2) |
|
Significant Unobservable Inputs (Level 3) |
Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents available for sale: |
|
|
|
|
|
|
|
|
Money Market Funds |
$ |
20,656 |
$ |
20,656 |
$ |
- |
$ |
- |
U.S. Treasuries and Agencies |
|
- |
|
- |
|
- |
|
- |
Short-term investments available for sale: |
|
|
|
|
|
|
|
|
Municipal bonds |
|
1,466 |
|
- |
|
1,466 |
|
- |
Corporate bonds |
|
7,778 |
|
- |
|
7,778 |
|
- |
U.S. treasuries and agencies |
|
135,925 |
|
- |
|
135,925 |
|
- |
Foreign government bonds |
|
25,085 |
|
- |
|
25,085 |
|
- |
Time deposits |
|
2,912 |
|
2,912 |
|
- |
|
- |
Derivatives |
|
4,246 |
|
- |
|
4,246 |
|
- |
Total Assets |
$ |
198,068 |
$ |
23,568 |
$ |
174,500 |
$ |
- |
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Derivatives |
$ |
(2,804) |
$ |
- |
$ |
(2,804) |
$ |
- |
Total Liabilities |
$ |
(2,804) |
$ |
- |
$ |
(2,804) |
$ |
- |
8
We value our available-for-sale short-term investments based on pricing from third party pricing vendors, who may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. We classify all of our fixed income available-for-sale securities as having Level 2 inputs. The valuation techniques used to measure the fair value of our financial instruments having Level 2 inputs were derived from non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models, such as discounted cash flow techniques. We believe all of these sources reflect the credit risk associated with each of our available-for-sale short-term investments. Short-term investments available-for-sale consists of debt securities issued by states of the U.S. and political subdivisions of the U.S., corporate debt securities and debt securities issued by U.S. government organizations and agencies as well as debt securities issued by foreign governments. 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 similar instruments. We consider counterparty credit risk in the valuation of our derivatives. However, counterparty credit risk did not impact the valuation of our derivatives during the nine month period ended September 30, 2013. There were not any transfers in or out of Level 1 or Level 2 during the nine month period ended September 30, 2013.
9
Our foreign government bonds consist of German government sovereign debt denominated in Euro with maximum maturities of 24 months. Our short-term investments do not involve sovereign debt from any other country in Europe.
We did not have any items that were measured at fair value on a nonrecurring basis at September 30, 2013 and December 31, 2012.
The carrying value of net accounts receivable and accounts payable contained in the Consolidated Balance Sheets approximates fair value.
Note 5 – Derivative instruments and hedging activities
We recognize all of our derivative instruments as either assets or liabilities in our statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.
We have operations in over 50 countries. Sales outside of the Americas accounted for approximately 56% and 59% of our revenues during each of the three month periods ended September 30, 2013 and 2012, respectively, and 59% and 60% of our revenues during the nine month periods ended September 30, 2013 and 2012, 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 that are not designated as hedging instruments. None of our derivative instruments contain a credit-risk-related contingent feature.
Cash flow hedges
To help protect against the reduction in value caused by a fluctuation in foreign currency exchange rates of forecasted foreign currency cash flows resulting from international sales over the next one to three years, we have instituted a foreign currency cash flow hedging program. We hedge portions of our forecasted 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, and Hungarian forint) and limit the duration of these contracts to 40 months or less.
10
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 the following notional amounts:
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
US Dollar Equivalent |
||
|
|
As of September 30, 2013 |
|
As of December 31, |
|
|
(Unaudited) |
|
2012 |
Euro |
$ |
66,788 |
$ |
84,770 |
Japanese yen |
|
27,645 |
|
42,209 |
Hungarian forint |
|
22,461 |
|
36,005 |
British pound |
|
9,780 |
|
- |
Malaysian ringgit |
|
4,426 |
|
- |
Total forward contracts notional amount |
$ |
131,100 |
$ |
162,984 |
The contracts in the foregoing table had contractual maturities of 36 months or less at September 30, 2013 and December 31, 2012.
At September 30, 2013, we expect to reclassify $1.2 million of gains on derivative instruments from accumulated OCI to net sales during the next twelve months when the hedged international sales occur, $334,000 of gains on derivative instruments from accumulated OCI to cost of sales when the cost of sales are incurred and $283,000 of gains on derivative instruments from accumulated OCI to operating expenses during the next twelve months when the hedged operating expenses occur. Expected amounts are based on derivative valuations at September 30, 2013. Actual results may vary as a result of changes in the corresponding exchange rates subsequent to this date.
We did not record any ineffectiveness from our hedges during the three and nine month periods ended September 30, 2013 and 2012.
Other Derivatives
Other derivatives not designated as hedging instruments consist primarily of foreign currency forward contracts that we use to hedge our foreign denominated net receivable or net payable positions to protect against the change in value caused by a fluctuation in foreign currency exchange rates. We typically attempt to hedge up to 90% of our outstanding foreign denominated net receivables or net payables and typically limit the duration of these foreign currency forward contracts to approximately 120 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 September 30, 2013 and December 31, 2012, we held foreign currency forward contracts with a notional amount of $52 million and $69 million, respectively.
11
The following tables present 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives |
|||||
|
September 30, 2013 |
December 31, 2012 |
||||
(In thousands) |
(Unaudited) |
|
|
|
||
|
|
|
|
|
|
|
|
Balance Sheet Location |
|
Fair Value |
Balance Sheet Location |
|
Fair Value |
Derivatives designated as hedging instruments |
|
|
|
|
|
|
Foreign exchange contracts - ST forwards |
Prepaid expenses and other current assets |
$ |
3,692 |
Prepaid expenses and other current assets |
$ |
2,956 |
|
|
|
|
|
|
|
Foreign exchange contracts - LT forwards |
Other long-term assets |
|
2,017 |
Other long-term assets |
|
1,046 |
Total derivatives designated as hedging instruments |
|
$ |
5,709 |
|
$ |
4,002 |
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts - ST forwards |
Prepaid expenses and other current assets |
$ |
199 |
Prepaid expenses and other current assets |
$ |
244 |
Total derivatives not designated as hedging instruments |
|
$ |
199 |
|
$ |
244 |
|
|
|
|
|
|
|
Total derivatives |
|
$ |
5,908 |
|
$ |
4,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives |
|||||
|
September 30, 2013 |
December 31, 2012 |
||||
(In thousands) |
(Unaudited) |
|
|
|
||
|
|
|
|
|
|
|
|
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 |
$ |
(1,887) |
Accrued expenses and other liabilities |
$ |
(1,292) |
|
|
|
|
|
|
|
Foreign exchange contracts - LT forwards |
Other long-term liabilities |
|
(540) |
Other long-term liabilities |
|
(798) |
Total derivatives designated as hedging instruments |
|
$ |
(2,427) |
|
$ |
(2,090) |
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts - ST forwards |
Accrued expenses and other liabilities |
$ |
(1,111) |
Accrued expenses and other liabilities |
$ |
(714) |
Total derivatives not designated as hedging instruments |
|
$ |
(1,111) |
|
$ |
(714) |
|
|
|
|
|
|
|
Total derivatives |
|
$ |
(3,538) |
|
$ |
(2,804) |
12
The following tables present the effect of derivative instruments on our Consolidated Statements of Income for three month periods ended September 30, 2013 and 2012, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013 |
||||||||
(In thousands) |
||||||||
(Unaudited) |
||||||||
Derivatives in Cash Flow Hedging Relationship |
|
Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) |
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
|
Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion) |
|
Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion) |
Foreign exchange contracts - forwards and options |
$ |
(3,536) |
Net sales |
$ |
751 |
Net foreign exchange gain (loss) |
$ |
- |
|
|
|
|
|
|
|
|
|
Foreign exchange contracts - forwards and options |
|
698 |
Cost of sales |
|
(20) |
Net foreign exchange gain (loss) |
|
- |
|
|
|
|
|
|
|
|
|
Foreign exchange contracts - forwards and options |
|
467 |
Operating expenses |
|
15 |
Net foreign exchange gain (loss) |
|
- |
Total |
$ |
(2,371) |
|
$ |
746 |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012 |
||||||||
(In thousands) |
||||||||
(Unaudited) |
||||||||
Derivatives in Cash Flow Hedging Relationship |
|
Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) |
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
|
Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion) |
|
Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion) |
Foreign exchange contracts - forwards and options |
$ |
(2,119) |
Net sales |
$ |
857 |
Net foreign exchange gain (loss) |
$ |
- |
|
|
|
|
|
|
|
|
|
Foreign exchange contracts - forwards and options |
|
309 |
Cost of sales |
|
92 |
Net foreign exchange gain (loss) |
|
- |
|
|
|
|
|
|
|
|
|
Foreign exchange contracts - forwards and options |
|
164 |
Operating expenses |
|
62 |
Net foreign exchange gain (loss) |
|
- |
Total |
$ |
(1,646) |
|
$ |
1,011 |
|
$ |
- |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Derivatives not Designated as Hedging Instruments |
Location of Gain (Loss) Recognized in Income |
|
Amount of Gain (Loss) Recognized in Income |
|
Amount of Gain (Loss) Recognized in Income |
|
|
|
September 30, 2013 |
|
September 30, 2012 |
|
|
|
(Unaudited) |
|
(Unaudited) |
Foreign exchange contracts - forwards |
Net foreign exchange gain/(loss) |
$ |
(1,293) |
$ |
(1,164) |
|
|
|
|
|
|
Total |
|
$ |
(1,293) |
$ |
(1,164) |
13
The following tables present the effect of derivative instruments on our Consolidated Statements of Income for the nine month periods ended September 30, 2013 and 2012, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013 |
||||||||
(In thousands) |
||||||||
(Unaudited) |
||||||||
Derivatives in Cash Flow Hedging Relationship |
|
Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) |
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
|
Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion) |
|
Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion) |
Foreign exchange contracts - forwards and options |
$ |
459 |
Net sales |
$ |
2,713 |
Net foreign exchange gain (loss) |
$ |
- |
|
|
|
|
|
|
|
|
|
Foreign exchange contracts - forwards and options |
|
432 |
Cost of sales |
|
54 |
Net foreign exchange gain (loss) |
|
- |
|
|
|
|
|
|
|
|
|
Foreign exchange contracts - forwards and options |
|
390 |
Operating expenses |
|
5 |
Net foreign exchange gain (loss) |
|
- |
Total |
$ |
1,281 |
|
$ |
2,772 |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012 |
||||||||
(In thousands) |
||||||||
(Unaudited) |
||||||||
Derivatives in Cash Flow Hedging Relationship |
|
Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) |
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |