UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended: June 30, 2015 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 (State or other jurisdiction of incorporation or organization) |
|
74-1871327 (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 ☒ 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 ☒
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 July 28, 2015 |
Common Stock - $0.01 par value |
128,859,698 |
NATIONAL INSTRUMENTS CORPORATION
INDEX
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Page No. |
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Item 1 |
Financial Statements: |
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June 30, 2015 (unaudited) and December 31, 2014 |
2 |
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(unaudited) for the three and six month periods ended June 30, 2015 and 2014 |
3 |
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(unaudited) for the three and six month periods ended June 30, 2015 and 2014 |
4 |
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(unaudited) for the six month periods ended June 30, 2015 and 2014 |
5 |
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6 |
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Item 2 |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
21 |
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Item 3 |
31 |
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Item 4 |
33 |
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Item 1 |
34 |
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Item 1A |
34 |
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Item 2 |
43 |
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Item 5 |
43 |
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Item 6 |
44 |
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45 |
1
PART I - FINANCIAL INFORMATION
ITEM 1.Financial Statements
NATIONAL INSTRUMENTS CORPORATION
(in thousands, except share data)
June 30, |
December 31, |
|||
2015 |
2014 |
|||
Assets |
(unaudited) |
|||
Current assets: |
||||
Cash and cash equivalents |
$ |
232,784 |
$ |
274,030 |
Short-term investments |
190,016 | 197,163 | ||
Accounts receivable, net |
205,568 | 202,329 | ||
Inventories, net |
187,411 | 173,052 | ||
Prepaid expenses and other current assets |
80,885 | 70,075 | ||
Deferred income taxes, net |
30,016 | 31,171 | ||
Total current assets |
926,680 | 947,820 | ||
Property and equipment, net |
264,146 | 264,086 | ||
Goodwill |
167,491 | 144,325 | ||
Intangible assets, net |
76,488 | 78,282 | ||
Other long-term assets |
21,397 | 20,978 | ||
Total assets |
$ |
1,456,202 |
$ |
1,455,491 |
Liabilities and stockholders' equity |
||||
Current liabilities: |
||||
Accounts payable |
$ |
57,289 |
$ |
58,603 |
Accrued compensation |
27,679 | 33,774 | ||
Deferred revenue - current |
109,514 | 105,964 | ||
Accrued expenses and other liabilities |
12,985 | 14,714 | ||
Other taxes payable |
36,333 | 34,602 | ||
Total current liabilities |
243,800 | 247,657 | ||
Deferred income taxes |
45,765 | 47,406 | ||
Liability for uncertain tax positions |
10,280 | 10,127 | ||
Deferred revenue - long-term |
26,705 | 26,452 | ||
Other long-term liabilities |
10,026 | 6,353 | ||
Total liabilities |
336,576 | 337,995 | ||
Commitments and contingencies |
||||
Stockholders' equity: |
||||
Preferred stock: par value $0.01; 5,000,000 shares authorized; none issued and outstanding |
- |
- |
||
Common stock: par value $0.01; 360,000,000 shares authorized; 128,860,566 shares and 127,849,271 shares issued and outstanding, respectively |
1,289 | 1,278 | ||
Additional paid-in capital |
693,107 | 662,889 | ||
Retained earnings |
449,023 | 464,993 | ||
Accumulated other comprehensive loss |
(23,793) | (11,664) | ||
Total stockholders’ equity |
1,119,626 | 1,117,496 | ||
Total liabilities and stockholders’ equity |
$ |
1,456,202 |
$ |
1,455,491 |
The accompanying notes are an integral part of the financial statements.
2
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended |
Six Months Ended |
|||||||
June 30, |
June 30, |
|||||||
2015 |
2014 |
2015 |
2014 |
|||||
Net sales: |
||||||||
Product |
$ |
273,807 |
$ |
288,224 |
$ |
535,381 |
$ |
550,488 |
Software maintenance |
27,984 | 24,487 | 55,923 | 46,897 | ||||
Total net sales |
301,791 | 312,711 | 591,304 | 597,385 | ||||
Cost of sales: |
||||||||
Product |
75,621 | 80,642 | 150,502 | 150,263 | ||||
Software maintenance |
1,054 | 1,179 | 2,509 | 2,760 | ||||
Total cost of sales |
76,675 | 81,821 | 153,011 | 153,023 | ||||
Gross profit |
225,116 | 230,890 | 438,293 | 444,362 | ||||
Operating expenses: |
||||||||
Sales and marketing |
111,855 | 119,374 | 221,408 | 231,290 | ||||
Research and development |
55,409 | 55,851 | 115,929 | 111,110 | ||||
General and administrative |
23,165 | 23,640 | 46,136 | 46,113 | ||||
Total operating expenses |
190,429 | 198,865 | 383,473 | 388,513 | ||||
Operating income |
34,687 | 32,025 | 54,820 | 55,849 | ||||
Other income: |
||||||||
Interest income |
341 | 234 | 694 | 431 | ||||
Net foreign exchange loss |
(577) | (603) | (2,251) | (553) | ||||
Other income, net |
25 | 265 | 653 | 353 | ||||
Income before income taxes |
34,476 | 31,921 | 53,916 | 56,080 | ||||
Provision for income taxes |
9,534 | 7,398 | 13,970 | 12,834 | ||||
Net income |
$ |
24,942 |
$ |
24,523 |
$ |
39,946 |
$ |
43,246 |
Basic earnings per share |
$ |
0.19 |
$ |
0.19 |
$ |
0.31 |
$ |
0.34 |
Weighted average shares outstanding - basic |
128,682 | 126,887 | 128,363 | 126,433 | ||||
Diluted earnings per share |
$ |
0.19 |
$ |
0.19 |
$ |
0.31 |
$ |
0.34 |
Weighted average shares outstanding - diluted |
129,337 | 127,512 | 129,013 | 127,123 | ||||
Dividends declared per share |
$ |
0.19 |
$ |
0.15 |
$ |
0.38 |
$ |
0.30 |
The accompanying notes are an integral part of these financial statements.
3
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
Three Months Ended |
Six Months Ended |
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June 30, |
June 30, |
|||||||
2015 |
2014 |
2015 |
2014 |
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Net income |
$ |
24,942 |
$ |
24,523 |
$ |
39,946 |
$ |
43,246 |
Other comprehensive income, before tax and net of reclassification adjustments: |
||||||||
Foreign currency translation adjustment |
4,467 | 581 | (10,484) | (558) | ||||
Unrealized (loss) gain on securities available-for-sale |
283 | (100) | 789 | 92 | ||||
Unrealized (loss) gain on derivative instruments |
(7,718) | (87) | (6,736) | (1,960) | ||||
Other comprehensive (loss) gain, before tax |
(2,968) | 394 | (16,431) | (2,426) | ||||
Tax (benefit) expense related to items of other comprehensive income |
(1,387) | 133 | (4,302) | (640) | ||||
Other comprehensive (loss) gain, net of tax |
(1,581) | 261 | (12,129) | (1,786) | ||||
Comprehensive income |
$ |
23,361 |
$ |
24,784 |
$ |
27,817 |
$ |
41,460 |
The accompanying notes are an integral part of these financial statements. |
4
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended |
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June 30, |
||||
2015 |
2014 |
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Cash flow from operating activities: |
||||
Net income |
$ |
39,946 |
$ |
43,246 |
Adjustments to reconcile net income to net cash provided by operating activities: |
||||
Depreciation and amortization |
36,502 | 33,357 | ||
Stock-based compensation |
12,745 | 12,881 | ||
Tax (benefit) expense from deferred income taxes |
(1,561) | 1,398 | ||
Tax benefit from stock option plans |
(937) | (1,055) | ||
Changes in operating assets and liabilities: |
||||
Accounts receivable |
(2,748) | (30,140) | ||
Inventories |
(12,228) | 4,815 | ||
Prepaid expenses and other assets |
(19,544) | (25,942) | ||
Accounts payable |
(2,082) | 7,368 | ||
Deferred revenue |
3,692 | 10,499 | ||
Taxes, accrued expenses and other liabilities |
(3,002) | 12,011 | ||
Net cash provided by operating activities |
50,783 | 68,438 | ||
Cash flow from investing activities: |
||||
Capital expenditures |
(20,626) | (22,109) | ||
Capitalization of internally developed software |
(11,446) | (16,797) | ||
Additions to other intangibles |
(520) | (1,634) | ||
Acquisitions, net of cash received |
(24,523) |
- |
||
Purchases of short-term investments |
(29,649) | (80,515) | ||
Sales and maturities of short-term investments |
36,796 | 79,647 | ||
Net cash used in investing activities |
(49,968) | (41,408) | ||
Cash flow from financing activities: |
||||
Proceeds from issuance of common stock |
14,416 | 17,124 | ||
Repurchase of common stock |
(8,545) |
- |
||
Dividends paid |
(48,869) | (37,976) | ||
Tax benefit from stock option plans |
937 | 1,055 | ||
Net cash used in financing activities |
(42,061) | (19,797) | ||
Net change in cash and cash equivalents |
(41,246) | 7,233 | ||
Cash and cash equivalents at beginning of period |
274,030 | 230,263 | ||
Cash and cash equivalents at end of period |
$ |
232,784 |
$ |
237,496 |
The accompanying notes are an integral part of these financial statements.
5
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, 2014, 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 June 30, 2015 and December 31, 2014, and the results of our operations and comprehensive income for the three and six month periods ended June 30, 2015, and the cash flows for the six month period ended June 30, 2015. Our operating results for the three and six month periods ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States.
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 six month periods ended June 30, 2015 and 2014, are as follows:
Three Months Ended June 30, |
Six Months Ended June 30, |
||||||
(In thousands) |
(In thousands) |
||||||
(Unaudited) |
(Unaudited) |
||||||
2015 |
2014 |
2015 |
2014 |
||||
Weighted average shares outstanding-basic |
128,682 | 126,887 | 128,363 | 126,433 | |||
Plus: Common share equivalents |
|||||||
Stock options and RSUs |
655 | 625 | 650 | 690 | |||
Weighted average shares outstanding-diluted |
129,337 | 127,512 | 129,013 | 127,123 |
Stock awards to acquire 556,000 shares and 13,500 shares for the three month periods ended June 30, 2015 and 2014, respectively, and 304,000 shares and 29,400 shares for the six month periods ended June 30, 2015 and 2014, 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:
As of June 30, 2015 |
||||||||||
(In thousands) |
(Unaudited) |
|||||||||
Gross |
Gross |
Cumulative |
||||||||
Adjusted Cost |
Unrealized Gain |
Unrealized Loss |
Translation Adjustment |
Fair Value |
||||||
Cash |
$ |
133,791 |
$ |
- |
$ |
- |
$ |
- |
$ |
133,791 |
Money Market Accounts |
98,993 |
- |
- |
- |
98,993 | |||||
Corporate bonds |
126,798 | 60 | (132) | (8,922) | 117,804 | |||||
U.S. treasuries and agencies |
69,231 | 69 |
- |
- |
69,300 | |||||
Foreign government bonds |
- |
- |
- |
- |
- |
|||||
Time deposits |
2,912 |
- |
- |
- |
2,912 | |||||
Cash, cash equivalents, and short-term investments |
$ |
431,725 |
$ |
129 |
$ |
(132) |
$ |
(8,922) |
$ |
422,800 |
6
(In thousands) |
December 31, 2014 |
|||||||||
Gross |
Gross |
Cumulative |
||||||||
Adjusted Cost |
Unrealized Gain |
Unrealized Loss |
Translation Adjustment |
Fair Value |
||||||
Cash |
$ |
149,598 |
$ |
- |
$ |
- |
$ |
- |
$ |
149,598 |
Money Market Accounts |
124,432 |
- |
- |
- |
124,432 | |||||
Corporate bonds |
118,242 | 54 | (254) | (4,966) | 113,076 | |||||
U.S. treasuries and agencies |
73,919 | 1 | (8) |
- |
73,912 | |||||
Foreign government bonds |
8,841 | 8 |
- |
(1,586) | 7,263 | |||||
Time deposits |
2,912 |
- |
- |
- |
2,912 | |||||
Cash, cash equivalents, and short-term investments |
$ |
477,944 |
$ |
63 |
$ |
(262) |
$ |
(6,552) |
$ |
471,193 |
The following tables summarize the contractual maturities of our short-term investments designated as available-for-sale:
As of June 30, 2015 |
||||
(In thousands) |
(Unaudited) |
|||
Adjusted Cost |
Fair Value |
|||
Due in less than 1 year |
$ |
104,303 |
$ |
104,371 |
Due in 1 to 5 years |
94,638 | 85,645 | ||
Total available-for-sale debt securities |
$ |
198,941 |
$ |
190,016 |
Due in less than 1 year |
Adjusted Cost |
Fair Value |
||
Corporate bonds |
$ |
36,937 |
$ |
36,959 |
U.S. treasuries and agencies |
64,454 | 64,500 | ||
Foreign government bonds |
- |
- |
||
Time deposits |
2,912 | 2,912 | ||
Total available-for-sale debt securities |
$ |
104,303 |
$ |
104,371 |
Due in 1 to 5 years |
Adjusted Cost |
Fair Value |
||
Corporate bonds |
$ |
89,861 |
$ |
80,845 |
U.S. treasuries and agencies |
4,777 | 4,800 | ||
Total available-for-sale debt securities |
$ |
94,638 |
$ |
85,645 |
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
7
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 |
June 30, 2015 |
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 |
$ |
98,993 |
$ |
98,993 |
$ |
- |
$ |
- |
Short-term investments available for sale: |
||||||||
Corporate bonds |
117,804 |
- |
117,804 |
- |
||||
U.S. treasuries and agencies |
69,300 |
- |
69,300 |
- |
||||
Time deposits |
2,912 | 2,912 |
- |
- |
||||
Derivatives |
12,356 |
- |
12,356 |
- |
||||
Total Assets |
$ |
301,365 |
$ |
101,905 |
$ |
199,460 |
$ |
- |
Liabilities |
||||||||
Derivatives |
$ |
(8,131) |
$ |
- |
$ |
(8,131) |
$ |
- |
Total Liabilities |
$ |
(8,131) |
$ |
- |
$ |
(8,131) |
$ |
- |
(In thousands) |
Fair Value Measurements at Reporting Date Using |
|||||||
Description |
December 31, 2014 |
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 |
$ |
124,432 |
$ |
124,432 |
$ |
- |
$ |
- |
Short-term investments available for sale: |
||||||||
Corporate bonds |
113,076 |
- |
113,076 |
- |
||||
U.S. treasuries and agencies |
73,912 |
- |
73,912 |
- |
||||
Foreign government bonds |
7,263 |
- |
7,263 |
- |
||||
Time deposits |
2,912 | 2,912 |
- |
- |
||||
Derivatives |
16,151 |
- |
16,151 |
- |
||||
Total Assets |
$ |
337,746 |
$ |
127,344 |
$ |
210,402 |
$ |
- |
Liabilities |
||||||||
Derivatives |
$ |
(4,253) |
$ |
- |
$ |
(4,253) |
$ |
- |
Total Liabilities |
$ |
(4,253) |
$ |
- |
$ |
(4,253) |
$ |
- |
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 36 months.
8
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 six month period ended June 30, 2015. There were no transfers in or out of Level 1 or Level 2 during the six month period ended June 30, 2015.
As of June 30, 2015, our short-term investments did not include sovereign debt from any country other than the United States.
We did not have any items that were measured at fair value on a nonrecurring basis at June 30, 2015 and December 31, 2014.
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 58% and 62% of our net sales during the three month periods ended June 30, 2015 and 2014, respectively, and 59% and 61% of our net sales during the six month periods ended June 30, 2015 and 2014, 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, in that exchange rate changes may affect our profitability and cash flow, and the business or pricing strategies of our non-U.S. based competitors.
The vast majority of our foreign sales are denominated in the customers’ local currency. We purchase foreign currency forward 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 sales 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 net sales or forecasted expenses. In addition, we hedge our foreign currency denominated balance sheet exposures using foreign currency forward contracts that are not designated as hedging instruments. None of our derivative instruments contain a credit-risk-related contingent feature.
Cash flow hedges
To help protect against the reduction in value caused by a fluctuation in foreign currency exchange rates of forecasted foreign currency cash flows resulting from international sales over the next one to three years, we have instituted a foreign currency cash flow hedging program. We hedge portions of our forecasted net sales and forecasted expenses denominated in foreign currencies with forward 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, Hungarian forint, British pound, and Malaysian ringgit) and limit the duration of these contracts to 40 months or less.
9
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 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 June 30, 2015 |
As of December 31, |
|||
(Unaudited) |
2014 |
|||
Euro |
$ |
54,053 |
$ |
97,198 |
Japanese yen |
3,451 | 7,798 | ||
Hungarian forint |
52,086 | 61,067 | ||
British pound |
11,227 | 22,809 | ||
Malaysian ringgit |
16,072 | 10,241 | ||
Total forward contracts notional amount |
$ |
136,889 |
$ |
199,113 |
The contracts in the foregoing table had contractual maturities of 36 months or less at June 30, 2015 and December 31, 2014.
At June 30, 2015, we expect to reclassify $12 million of gains on derivative instruments from accumulated OCI to net sales during the next twelve months when the hedged international sales occur, $1.9 million of losses on derivative instruments from accumulated OCI to cost of sales during the next twelve months when the cost of sales are incurred and $1.5 million of losses on derivative instruments from accumulated OCI to operating expenses during the next twelve months when the hedged operating expenses occur. Expected amounts are based on derivative valuations at June 30, 2015. Actual results may vary materially 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 six month periods ended June 30, 2015 and 2014.
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 or less. The gain or loss on the derivatives as well as the offsetting gain or loss on the hedge item attributable to the hedged risk is recognized in current earnings under the line item “net foreign exchange loss.” As of June 30, 2015 and December 31, 2014, we held foreign currency forward contracts with a notional amount of $81 million and $78 million, respectively.
10
The following tables present the fair value of derivative instruments on our Consolidated Balance Sheets at June 30, 2015 and December 31, 2014, respectively.
Asset Derivatives |
||||||
June 30, 2015 |
December 31, 2014 |
|||||
(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 |
$ |
11,598 |
Prepaid expenses and other current assets |
$ |
14,492 |
Foreign exchange contracts - LT forwards |
Other long-term assets |
- |
Other long-term assets |
- |
||
Total derivatives designated as hedging instruments |
$ |
11,598 |
$ |
14,492 | ||
Derivatives not designated as hedging instruments |
||||||
Foreign exchange contracts - ST forwards |
Prepaid expenses and other current assets |
$ |
758 |
Prepaid expenses and other current assets |
$ |
1,659 |
Total derivatives not designated as hedging instruments |
$ |
758 |
$ |
1,659 | ||
Total derivatives |
$ |
12,356 |
$ |
16,151 |
Liability Derivatives |
||||||
June 30, 2015 |
December 31, 2014 |
|||||
(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 |
$ |
(3,373) |
Accrued expenses and other liabilities |
$ |
(1,937) |
Foreign exchange contracts - LT forwards |
Other long-term liabilities |
(3,830) |
Other long-term liabilities |
(1,536) | ||
Total derivatives designated as hedging instruments |
$ |
(7,203) |
$ |
(3,473) | ||
Derivatives not designated as hedging instruments |
||||||
Foreign exchange contracts - ST forwards |
Accrued expenses and other liabilities |
$ |
(928) |
Accrued expenses and other liabilities |
$ |
(780) |
Total derivatives not designated as hedging instruments |
$ |
(928) |
$ |
(780) | ||
Total derivatives |
$ |
(8,131) |
$ |
(4,253) |
11
The following tables present the effect of derivative instruments on our Consolidated Statements of Income for three month periods ended June 30, 2015 and 2014, respectively:
June 30, 2015 |
||||||||
(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 |
$ |
(8,096) |
Net sales |
$ |
5,201 |
Net foreign exchange gain/(loss) |
$ |
- |
Foreign exchange contracts - forwards and options |
258 |
Cost of sales |
(509) |
Net foreign exchange gain/(loss) |
- |
|||
Foreign exchange contracts - forwards and options |
120 |
Operating expenses |
(378) |
Net foreign exchange gain/(loss) |
- |
|||
Total |
$ |
(7,718) |
$ |
4,314 |
$ |
- |
June 30, 2014 |
||||||||
(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 |
$ |
58 |
Net sales |
$ |
(231) |
Net foreign exchange gain/(loss) |
$ |
- |
Foreign exchange contracts - forwards and options |
(142) |
Cost of sales |
101 |
Net foreign exchange gain/(loss) |
- |
|||
Foreign exchange contracts - forwards and options |
(3) |
Operating expenses |
86 |
Net foreign exchange gain/(loss) |
- |
|||
Total |
$ |
(87) |
$ |
(44) |
$ |
- |
(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 |
||
June 30, 2015 |
June 30, 2014 |
||||
(Unaudited) |
(Unaudited) |
||||
Foreign exchange contracts - forwards |
Net foreign exchange gain/(loss) |
$ |
(1,306) |
$ |
(742) |
Total |
$ |
(1,306) |
$ |
(742) |
12
The following tables present the effect of derivative instruments on our Consolidated Statements of Income for the six month periods ended June 30, 2015 and 2014, respectively:
June 30, 2015 |
||||||||
(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 |
$ |
(2,893) |
Net sales |
$ |
10,282 |
Net foreign exchange gain/(loss) |
$ |
- |
Foreign exchange contracts - forwards and options |
(1,959) |
Cost of sales |
(842) |
Net foreign exchange gain/(loss) |
- |
|||
Foreign exchange contracts - forwards and options |
(1,884) |
Operating expenses |
(742) |
Net foreign exchange gain/(loss) |
- |
|||
Total |
$ |
(6,736) |
$ |
8,698 |
$ |
- |
June 30, 2014 |
||||||||
(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 |
$ |
(977) |
Net sales |
$ |
115 |
Net foreign exchange gain/(loss) |
$ |
- |
Foreign exchange contracts - forwards and options |
(739) |
Cost of sales |
182 |
Net foreign exchange gain/(loss) |
- |
|||
Foreign exchange contracts - forwards and options |
(244) |
Operating expenses |
104 |
Net foreign exchange gain/(loss) |