UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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T ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended: December 31, 2008 or
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£ TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
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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
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74-1871327
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification Number)
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11500
North MoPac Expressway
Austin,
Texas
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78759
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(address
of principal executive offices)
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(zip
code)
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Registrant's
telephone number, including area code: (512) 338-9119
Securities registered pursuant to Section 12(b) of the Act:
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Title
of Each Class
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Name of Each Exchange on Which Registered |
| Common Stock, $0.01 par value | The NASDAQ Stock Market, LLC |
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock Purchase Rights
__________________________
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes T No
£
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes £ No
T
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 if disclosure of delinquent filers pursuant to Item 405 of
Reguation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. T
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):
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Large
accelerated filer T
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Accelerated
filer £
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Non-accelerated
filer £
(Do not check if a
smaller reporting company)
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Smaller
reporting company £
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No
T
The aggregate
market value of voting and non-voting common equity held by non-affiliates of
the registrant at the close of business on June 30, 2008, was $1,476,445,214
based upon the last sales price reported for such date on the NASDAQ Stock
Market. For purposes of this disclosure, shares of Common Stock held by persons
who hold more than 5% of the outstanding shares of Common Stock and shares held
by officers and directors of the registrant as of June 30, 2008 have been
excluded in that such persons may be deemed to be affiliates. This determination
is not necessarily conclusive.
At the close of
business on February 25, 2009 registrant had outstanding 77,543,208 shares of
Common Stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Part III incorporates certain information
by reference from the definitive proxy statement to be filed by the registrant
for its Annual Meeting of Stockholders to be held on May 12, 2009 (the “Proxy
Statement”).
PART
I
This
Form 10-K 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 the future financial performance
or operations of the Company (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 9, and elsewhere in this Form 10-K. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. You should not place undue reliance on these forward-looking
statements. We disclaim any obligation to update information contained in any
forward-looking statement.
ITEM
1. BUSINESS
National
Instruments Corporation (“we” 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, multifunction 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 are
based in Austin, Texas and were incorporated under the laws of the State of
Texas in May 1976 and were reincorporated in Delaware in June 1994. On March 13,
1995, we completed an initial public offering of shares of our common stock. Our
common stock, $0.01 par value, is quoted on the NASDAQ Stock Market under the
trading symbol NATI.
Our
Internet website address is http://www.ni.com. Our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 are available through our Internet website as
soon as reasonably practicable after we electronically file such material with,
or furnish them to, the SEC. Our Internet website and the information contained
therein or connected thereto are not intended to be incorporated into this
Annual Report on Form 10-K.
Industry
Background
Engineers
and scientists have long used instruments to observe, better understand and
manage the real-world phenomena, events and processes related to their
industries or areas of expertise. Instruments measure and control electrical
signals, such as voltage, current and power, as well as physical phenomena, such
as temperature, pressure, speed, flow, volume, torque and vibration. Common
general-purpose instruments include voltmeters, signal generators,
oscilloscopes, data loggers, spectrum analyzers, cameras, and temperature and
pressure monitors and controllers. Some traditional instruments are also highly
application specific, designed to measure specific signals for particular
vertical industries or applications. Instruments used for industrial automation
applications include data loggers, strip chart recorders, programmable logic
controllers (“PLCs”), and proprietary turn-key devices and/or systems designed
to automate specific vertical applications. Measurement and control
functionality is also used in a variety of embedded and/or real-time
applications, such as machine monitoring, machine control, and embedded design
and prototyping.
Measurement
and automation applications can be generally categorized as either test and
measurement (“T&M”) or industrial/embedded. T&M applications generally
involve testing during the research, design, manufacture and service of a wide
variety of products. Industrial/embedded applications generally involve
designing, prototyping and deploying the machinery and processes used in the
production and distribution of a wide variety of products and
materials.
Instruments
and systems for design, control, and test applications have historically shared
common limitations, including: fixed, vendor-defined functionality, proprietary,
closed architectures that were generally difficult to program and integrate with
other systems; and inflexible operator interfaces that were usually cumbersome
to operate and change. Proprietary instrumentation systems have traditionally
been very expensive, with industrial/embedded system prices ranging as high as
several million dollars and T&M instrumentation system prices often ranging
in the hundreds of thousands of dollars. In addition, the limitations on the
programmability of traditional systems means that adapting these systems to
changing requirements can be both expensive and time consuming, and users are
often required to purchase multiple single-purpose instruments.
Our
Approach to Measurement and Automation
A virtual
instrument is a user-defined measurement and automation system that consists of
an industry standard computer (which may be a mainstream general-purpose
computer, workstation, handheld PDA device, or a version of an industry standard
computer, workstation, or handheld PDA that is specially designed and packaged
for harsh industrial or embedded environments) equipped with our user-friendly
application software, cost-effective hardware and driver software. Virtual
instrumentation represents a fundamental shift from traditional
hardware-centered instrumentation systems to software-centered systems that
exploit the computational, display, productivity and connectivity capabilities
of computers, networks and the Internet. Because virtual instruments exploit
these computation, connectivity, and display capabilities, users can define and
change the functionality of their instruments, rather than being restricted by
fixed-functions imposed by traditional instrument and automation vendors. Our
products empower users to monitor and control traditional instruments, create
innovative computer-based systems that can replace traditional instruments at a
lower cost, and develop systems that integrate measurement functionality
together with industrial and embedded capabilities. We believe that giving users
flexibility to create their own user-defined virtual instruments for an
increasing number of applications in a wide variety of industries, and letting
users leverage the latest technologies from computers, networking and
communications shortens system development time and reduces both the short- and
long-term costs of developing, owning and operating measurement and automation
systems, and improves the efficiency and precision of applications spanning
research, design, production and service.
Compared
with traditional solutions, we believe our products and computer-based, virtual
instrumentation approach provide the following significant customer
benefits:
Performance,
Ease of Use and Efficiency
Our
virtual instrument application software brings the power and ease of use of
computers, PDAs, networks and the Internet to instrumentation. With features
such as graphical programming, automatic code generation capabilities, graphical
tools libraries, ready-to-use example programs, libraries of specific
instrumentation functions, and the ability to deploy their applications on a
range of platforms, users can quickly build a virtual instrument system that
meets their individual application needs. In addition, the continuous
performance improvement of PC and networking technologies, which are the core
platform for our approach, results in direct performance benefits for virtual
instrument users in the form of faster execution for software-based measurement
and automation applications, resulting in shorter test times, faster automation,
and higher manufacturing throughput.
Modularity,
Reusability and Reconfigurability
Our
products include reusable hardware and software modules that offer considerable
flexibility in configuring systems. This ability to reuse and reconfigure
measurement and automation systems allows users to reduce development time and
improve efficiency by eliminating duplicated programming efforts and to quickly
adapt their systems to new and changing needs. In addition, these features help
protect both hardware and software investments against
obsolescence.
Lower
Total Solution Cost
We
believe that our products and solutions offer price/performance and energy
efficiency advantages over traditional solutions. Virtual instrumentation
provides users the ability to utilize industry standard computers and
workstations, portable PDAs and other handheld devices, as well as ruggedized
industrial computers equipped with modular and reusable application software,
cost-effective hardware and driver software that together perform the functions
that would otherwise be performed by costly, proprietary systems. In addition,
virtual instrumentation gives users the flexibility and portability to adapt to
changing needs, whereas traditional closed systems are both expensive and time
consuming to adapt, if adaptable at all.
Products
and Technology
We offer
an extensive line of measurement and automation products. Our products consist
of application software, and hardware components together with related driver
software. Our products are designed to work either in an integrated solution or
separately; however, customers generally purchase our software and hardware
together. We believe that the flexibility, functionality and ease of use of our
application software promotes sales of our other software and hardware
products.
Application
Software
We
believe that application software is playing an increasingly important role in
the development of computer-based instruments and systems in measurement and
automation applications. Our application software products leverage the
increasing capability of computers, networks and the Internet for data analysis,
connectivity and presentation power to bring increasing efficiency and precision
to measurement and automation applications. Our application software products
include LabVIEW, LabVIEW Real-Time, LabVIEW FPGA, Measurement Studio,
LabWindows/CVI, DIAdem,
TestStand, and Multisim. Our application software products are integrated with
our hardware/driver software.
We offer
a variety of software products for developing measurement and automation
applications to meet the different programming and computer preferences of our
customers. LabVIEW, LabWindows/CVI, and Measurement Studio are programming
environments with which users can develop graphical user interfaces (“GUIs”),
control instruments, and acquire, analyze and present data. With these software
products, users can design custom virtual instruments by creating a GUI on the
computer screen through which they operate the actual program and control
selected hardware. Users can customize front panels with knobs, buttons, dials
and graphs to emulate control panels of instruments or add custom graphics to
visually represent the control and operation of processes. LabVIEW,
LabWindows/CVI and Measurement Studio also have ready-to-use libraries for
controlling thousands of programmable instruments, including our hardware
products, as well as traditional serial, General Purpose Interface Bus (“GPIB”),
VME extensions for instrumentation (“VXI”), Ethernet and USB measurement and
automation devices from other vendors.
The
principal difference between LabVIEW, LabWindows/CVI, and Measurement Studio is
in the way users develop programs. With LabVIEW, users program graphically,
developing application programs by connecting icons to create “block diagrams”
which are natural design notations for scientists and engineers. With LabVIEW
Real-Time, the user’s application program can be easily configured to execute
using a real-time operating system kernel instead of the Windows operating
system, which allows users to easily build virtual instrument solutions for
mission-critical applications that require highly reliable operation. In
addition, with LabVIEW Real-Time, users can easily configure their programs to
execute remotely on embedded processors inside PXI systems, on embedded
processors inside Fieldpoint distributed I/O systems, or on processors embedded
on plug-in PC data acquisition boards. With LabVIEW FPGA, the user’s application
can be configured to execute directly in silicon via a Field Programmable Gate
Array (“FPGA”) residing on one of our reconfigurable I/O hardware products.
LabVIEW FPGA allows users to easily build their own highly specialized, custom
hardware devices for ultra high-performance requirements or for unique or
proprietary measurement or control protocols. With LabWindows/CVI, users program
using the conventional, text-based language of C. Measurement Studio consists of
measurement and automation add-on libraries and additional tools for programmers
that use Microsoft’s Visual Basic, Visual C++, Visual C#, and Visual Studio.NET
development environments.
We offer
a software product called TestStand targeted for T&M applications in a
manufacturing environment. TestStand is a test management environment for
organizing, controlling, and running automated production test systems on the
factory floor. It also generates customized test reports and integrates product
and test data across the customers’ enterprise and across the Internet.
TestStand manages tests that are written in LabVIEW, LabWindows/CVI, Measurement
Studio, C and C++, and Visual Basic, so test engineers can easily share and
re-use test code throughout their organization and from one product to the next.
TestStand is a key element of our strategy to broaden the reach of our
application software products across the corporate enterprise.
In 2005,
we acquired Electronics Workbench and its suite of software for electronic
design automation. The Electronics Workbench flagship product, Multisim Circuit
Simulation Software, is widely used for electronic circuit design, board layout,
and electrical engineering training programs by companies and academic
institutions including Sony, Boeing, MIT, and DeVry. This acquisition
strengthened the integration between our functional test and design tools and
has advanced our graphical system design technology.
Hardware
Products and Related Driver Software
Our
hardware and related driver software products include data acquisition (“DAQ”),
PCI extensions for instrumentation (“PXI”) chassis and controllers, image
acquisition, motion control, Distributed I/O, Modular Instruments and Embedded
Control Hardware/Software, industrial communications interfaces, GPIB
interfaces, and VXI Controllers. The high level of integration between our
products provides users with the flexibility to mix and match hardware
components when developing custom virtual instrumentation systems.
DAQ Hardware/Driver
Software. Our DAQ hardware and driver software products are
“instruments on a board” that users can combine with sensors, signal
conditioning hardware and software to acquire analog data and convert it into a
digital format that can be accepted by a computer. We believe that
computer-based DAQ products are typically a lower-cost solution than traditional
instrumentation. We believe that applications suitable for automation with
computer-based DAQ products are widespread throughout many industries, and that
many systems currently using traditional instrumentation (either manual or
computer-controlled) could be displaced by computer-based DAQ systems. We offer
a range of computer-based DAQ products, including models for digital, analog and
timing input-output, and for transferring data directly to a computer’s
random-access memory. In 2005, we acquired the operating assets of both
Measurement Computing Corporation and IOtech, Inc., two smaller data acquisition
companies, whose products complemented and extended our data acquisition
offerings, including portable and vibration measurement products.
PXI Modular Instrumentation
Platform. Our PXI modular instrument platform, which was
introduced in 1997, is a standard PC packaged in a small, rugged form factor
with expansion slots and instrumentation extensions. It combines mainstream PC
software and PCI hardware with advanced instrumentation capabilities. In
essence, PXI is an instrumentation PC with several expansion slots to enable us
to pursue complete system-level opportunities and deliver a much higher
percentage of the overall system content using our own products. We continue to
expand our PXI product offerings with new modules, which address a wide variety
of measurement and automation applications. PXI continues to gain acceptance,
with numerous endorsements from our customers, engineering trade publications
and industry analysts. In 2006, we introduced our first PXI Express products
which provide backward software compatibility with PXI while providing advanced
capabilities for high-performance instrumentation, such as RF
instrumentation.
Machine Vision/Image
Acquisition. In 1996, we introduced our first image
acquisition hardware which provides users with a cost-effective solution to
integrate vision into their measurement and automation applications. Our vision
software is designed to work with many different software environments,
including LabVIEW, LabWindows/CVI, Visual Basic, C, and Measurement Studio. In
2002, we expanded our software offering with an easy-to-use menu driven machine
vision software that can run as a stand-alone vision system. The software can
also generate LabVIEW code. In 2003, we introduced our Vision Builder software
for automated inspection and our Compact Vision System, which is a small,
ruggedized, industrial vision system that can connect up to three IEEE-1394
cameras and that is easily programmed using Vision Builder. In 2007, we
introduced our first integrated Smart Cameras which leverage our LabVIEW
software to provide integrated solutions for many inspection and other
industrial/embedded applications.
Motion
Control. During 1997, we introduced our first line of motion
control hardware, software and peripheral products. This intelligent PC-based
motion control hardware is programmable from industry standard development
environments including LabVIEW, LabWindows/CVI and Measurement Studio. Our
software tools for motion are easily integrated with our other product lines,
allowing motion to be combined with image acquisition, test, measurement, data
acquisition and automation. Our computer-based motion products allow users to
leverage standard hardware and software in measurement and automation
applications to create robust, flexible solutions.
Distributed I/O and Embedded Control
Hardware/Software. FieldPoint is an intelligent, distributed,
and modular I/O system, first introduced by us in 1997, that gives industrial
system developers an economical solution for distributed data acquisition,
monitoring and control applications. Suitable for direct connection to
industrial signals, FieldPoint includes a wide array of rugged and isolated
analog and digital I/O modules, terminal base options, and network modules. With
LabVIEW Real-Time users can download their LabVIEW code and easily create
networked systems of intelligent, real-time nodes for embedded measurement and
control. In late 2002, we launched Compact FieldPoint, a smaller and even more
rugged intelligent distributed I/O product that is also an execution target for
LabVIEW Real-Time. In 2004 we introduced CompactRIO, an advanced embedded
control and acquisition system powered by our reconfigurable I/O (“RIO”)
technology. Compact RIO leverages LabVIEW Real-Time and LabVIEW FPGA for
industrial control, process monitoring, and embedded machine applications that
require intelligent I/O products with a small form factor, a wide operating
temperature, and resistance to shock and vibration.
Industrial Communications
Interfaces. In 1995, we began shipping our first interface
boards for communicating with serial devices, such as data loggers and PLCs
targeted for industrial/embedded applications, and benchtop instruments, such as
oscilloscopes, targeted for T&M applications. Industrial applications need
the same high-quality, easy-to-use hardware and software tools for communicating
with industrial devices such as process instrumentation, PLCs, single-loop
controllers, and a variety of I/O and DAQ devices. We offer hardware and driver
software product lines for communication with industrial devices—Controller Area
Network (“CAN”), DeviceNet, Foundation Fieldbus, and RS-485 and
RS-232.
GPIB Interfaces/Driver
Software. We began selling GPIB products in 1977 and are a
leading supplier of GPIB interface boards and driver software to control
traditional GPIB instruments. These traditional instruments are manufactured by
a variety of third-party vendors and are used primarily in T&M applications.
Our diverse portfolio of hardware and software products for GPIB instrument
control is available for a wide range of computers. Our GPIB product line also
includes products for portable computers such as a personal computer memory card
(“PCMCIA”)-GPIB interface card, and products for controlling GPIB instruments
using the computer’s standard parallel, USB, IEEE 1394 (“Firewire”), Ethernet,
and serial ports.
VXI Controllers//Driver
Software. We are a leading supplier of VXI computer controller
hardware and the accompanying NI-VXI and NI-VISA driver software. We also offer
LabVIEW, LabWindows/CVI, Measurement Studio and TestStand software products for
VXI systems.
Customer
Training Courses
We offer
fee-based training classes and self-paced course kits for many of our software
and hardware products. On-site courses are quoted per customer requests. We also
offer programs to certify programmers and instructors for our
products.
Markets
and Applications
Our
products are used across many industries in a variety of applications including
research and development, simulation and modeling, product design and
validation, production testing and industrial control and field and factory
service and repair. We serve the following industries and applications
worldwide: advanced research, automotive, automated test equipment, commercial
aerospace, computers and electronics, continuous process manufacturing,
education, government/defense, medical research/pharmaceutical, power/energy,
semiconductors, telecommunications and others.
Customers
We have a
broad customer base, with no customer accounting for more than 3% of our sales
in 2008, 2007 or 2006.
Marketing
Through
our worldwide marketing efforts, we strive to educate engineers and scientists
about the benefits of our virtual instrumentation philosophy, products and
technology, and to highlight the performance, ease of use and cost advantages of
our products. We also seek to present our position as a technological leader
among producers of instrumentation software and hardware and to help promulgate
industry standards that will benefit users of computer-based
instrumentation.
We reach
our intended audience through our Web site at ni.com as well as through the
distribution of written and electronic materials including demonstration
versions of our software products, participation in tradeshows and technical
conferences and training and user seminars.
We
actively market our products in higher education environments, and we identify
many colleges, universities and trade and technical schools as key accounts. We
offer special academic pricing and products to enable universities to utilize
our products in their classes and laboratories. We believe our prominence in the
higher education area can contribute to our future success because students gain
experience using our products before they enter the work force.
Sales
and Distribution
We sell
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. Our Hungarian manufacturing
facility sources a substantial majority of our sales throughout the world. We
have sales offices in the United States and sales offices and distributors in
key international markets. Sales outside of the United States accounted for
approximately 61%, 59% and 57%, of our revenues in 2008, 2007 and 2006,
respectively. We expect that a significant portion of our total revenues will
continue to be derived from international sales. (See Note
12 of Notes to Consolidated Financial Statements for details concerning the
geographic breakdown of our net sales, operating income, interest income and
identifiable assets.)
We
believe the ability to provide comprehensive service and support to our
customers is an important factor in our business. We permit customers to return
products within 30 days from receipt for a refund of the purchase price less a
restocking charge. Our products are generally warranted against defects in
materials and workmanship for one year from the date we ship the products to our
customers. Historically, warranty costs have not been material.
The
marketplace for our products dictates that many of our products be shipped very
quickly after an order is received. As a result, we are required to maintain
significant inventories. Therefore, inventory obsolescence is a risk for us due
to frequent engineering changes, shifting customer demand, the emergence of new
industry standards and rapid technological advances including the introduction
by us or our competitors of products embodying new technology. We strive to
mitigate this risk by monitoring inventory levels against product demand and
technological changes. There can be no assurance that we will be successful in
these efforts in the future.
Our
foreign operations are subject to certain risks set forth on page 13 under “We are Subject
to Various Risks Associated with International Operations and Foreign
Economies.”
See
discussion regarding fluctuations in our quarterly results and seasonality in
ITEM 1A, Risk Factors, “Our Revenues are Subject to Seasonal
Variations.”
Competition
The
markets in which we operate are characterized by intense competition from
numerous competitors, some of which are divisions of large corporations having
far greater resources than we have, and we expect to face further competition
from new market entrants in the future. A key competitor is Agilent Technologies
Inc. (“Agilent”). Agilent offers its own line of instrument controllers, and
also offers hardware and software products that provide solutions that directly
compete with our virtual instrumentation products. Agilent is aggressively
advertising and marketing products that are competitive with our products.
Because of Agilent's strong position in the instrumentation business, change in
its marketing strategy or product offerings could have a material adverse effect
on our operating results.
Some of
our competitors have substantial competitive advantages in terms of breadth of
technology, sales, marketing and support capability and resources, including the
number of sales and technical personnel and their ability to cover a geographic
area and/or particular account more extensively and with more complete solutions
than we can offer, and more extensive warranty support, system integration and
service capabilities than those we have. In addition, large competitors can
often enter into strategic alliances with our key customers or target accounts,
which can potentially have a negative impact on our success with those
accounts.
We
believe our ability to compete successfully depends on a number of factors both
within and outside our control, including:
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new
product introductions by
competitors;
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product
pricing;
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the
impact of foreign exchange rates on product
pricing;
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quality
and performance;
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success
in developing new products;
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adequate
manufacturing capacity and supply of components and
materials;
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efficiency
of manufacturing operations;
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effectiveness
of sales and marketing resources and
strategies;
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strategic
relationships with other suppliers;
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timing
of our new product introductions;
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protection
of our products by effective use of intellectual property
laws;
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the
outcome of any material intellectual property
litigation;
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general
market and economic conditions; and
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government
actions throughout the world.
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There can
be no assurance that we will be able to compete successfully in the
future.
Research
and Development
We
believe that our long-term growth and success depends on delivering high quality
software and hardware products on a timely basis. We intend to 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 and price/performance.
Our
research and development staff strives to build quality into products at the
design stage in an effort to reduce overall development and manufacturing costs.
Our research and development staff also designs proprietary application specific
integrated circuits (“ASICs”), many of which are designed for use in several of
our products. The goal of our ASIC design program is to further differentiate
our products from competing products, to improve manufacturability and to reduce
costs. We seek to reduce our time to market for new and enhanced products by
sharing our internally developed hardware and software components across
multiple products.
As of
December 31, 2008, we employed 1,415 people in product research and development.
Our research and development expenses were $143.1 million, $126.5 million and
$113.1 million for 2008, 2007 and 2006, respectively.
Intellectual
Property
We rely
on a combination of patent, trade secret, copyright and trademark law, contracts
and technical measures to establish and protect our proprietary rights in our
products. As of December 31, 2008, we held 444 United States patents (437
utility patents and 7 design patents) and 20 patents in foreign countries (18
patents registered in Europe in various countries; and 2 patents in Japan), and
had 286 patent applications pending in the United States and foreign countries.
106 of our issued United States patents are software patents related to LabVIEW,
and cover fundamental aspects of the graphical programming approach used in
LabVIEW. Our patents expire from 2011 to 2026. We do not expect that the
expiration of certain of our patents beginning in 2011 will have a significant
impact on our business. No assurance can be given that our pending patent
applications will result in the issuance of patents. We also own certain
registered trademarks in the United States and abroad. See further discussion
regarding risks associated with our patents in ITEM 1A, Risk Factors, “Our Business
Depends on Our Proprietary Rights and We are Subject to Intellectual Property
Litigation.”
Manufacturing
and Suppliers
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 use subcontractors in Asia to manufacture a significant
portion of our chassis. 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 obtain
our electronic components from suppliers located principally in the United
States, Europe and Asia. Some of the components purchased by us, including
ASICs, are sole sourced. Any disruption of our supply of sole or limited source
components, whether resulting from business demand, quality, production or
delivery problems, could adversely affect our ability to manufacture our
products, which could in turn adversely affect our business and results of
operations.
See “Our Manufacturing
Operations are Subject to a Variety of Environmental Regulations and
Costs” at page 14 for discussion of environmental matters as they may
affect our business.
Backlog
We
typically ship products shortly following the receipt of an order. Accordingly,
our backlog typically represents less than 5 days sales. Backlog should not be
viewed as an indicator of our future sales.
Employees
As of
December 31, 2008, we had 5,157 employees worldwide, including 1,415 in research
and development, 2,407 in sales and marketing and customer support, 763 in
manufacturing and 572 in administration and finance. None of our employees are
represented by a labor union and we have never experienced a work stoppage. We
consider our employee relations to be good. For ten consecutive years, from 1999
to 2008, we have been named among the 100 Best Companies to Work for in America
according to FORTUNE
magazine.
Declining General
Economic Conditions and Fluctuations in the Global Credit and Equity Markets
Have Adversely Affected Our Financial Condition and Results of
Operations. Our business is
sensitive to changes in general economic conditions, both in the U.S. and
globally. Due to the recent tightening of credit markets and concerns regarding
the availability of credit, our current or potential customers have delayed or
reduced purchases of our products which has adversely affected our revenues and
therefore harmed our business and results of operations. In addition, the
continuing turmoil in the financial markets is likely to continue to have an
adverse effect on the U.S. and world economies, which could continue to
negatively impact the spending patterns of businesses including our current and
potential customers. There can be no assurances that government responses to the
disruptions in the financial markets will restore confidence in the U.S. and
global markets. The global industrial economy is currently in a recession. Many
economists and other experts are predicting that this recession in the U.S. and
global economies will likely continue through the remainder of 2009 and possibly
beyond. We are unable to predict how long this recession will last. We expect
our business to continue to be adversely impacted by this downturn in the U.S.
or global economies. In particular, our business has fluctuated in the past
based on changes in the global Purchasing Managers Index (“PMI”). We are unable
to predict the impact that all of these recent changes in the markets will have
on our business and these events make forecasting our results more
difficult.
Concentrations of
Credit Risk and Negative Conditions in the Global Financial Markets May
Adversely Affect Our Financial Condition and Result of Operations. We have exposure to
many different counterparties, and routinely execute transactions with
counterparties in the financial services industry, including commercial banks
and investment banks. Many of these transactions expose us to credit risk in the
event of a default of our counterparties. We have policies relating to initial
credit rating requirements and to exposure limits to counterparties (as
described in Note 1 of Notes to Consolidated Financial
Statements), which are designed to mitigate credit and liquidity risk. There can
be no assurance, however, that any losses or impairments to the carrying value
of our financial assets as a result of defaults by our counterparties, would not
materially and adversely affect our business, financial position and results of
operations.
Negative
Conditions in the Global Credit Markets Have Impaired the Liquidity of a Portion
of Our Investment Portfolio. Our long-term investments consist
of Aaa/A/AAA rated investments in auction rate securities that we originally
purchased for $8.6 million. These auction rate securities consist of education
loan revenue bonds. Auction rate securities are variable rate debt instruments
whose interest rates are typically reset approximately every 7 to 35 days. On
December 26, 2008, and in prior auction periods beginning in February 2008, the
auction process for these securities failed. Prior to the failure of the auction
process, we had classified these investments as short-term but are now reporting
them as long-term due to the fact that the underlying securities generally have
longer dated contractual maturities which are in excess of the guidelines
provided for in our corporate investment policy. The auction rate securities are
classified as available-for-sale. At December 31, 2008, we reported these
long-term investments at their estimated fair market value of $7.0 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 December 31, 2008, we reported the
Rights agreement at its estimated fair market value of $1.6 million. We continue
to have the ability to hold the debt instruments to their ultimate maturity and
have not made a determination as to whether we will exercise our right under the
Rights agreement described above. As such, we have recorded the unrealized loss
related to the auction rate securities and the unrealized gain related to the
Rights agreement as a component of other income (expense), in our Consolidated
Statements of Income. The estimated fair market value of the Rights agreement is
also included as a component of our long-term investments. 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
Statement of Financial Accounting Standards (“SFAS”) 157, Fair Value Measurements. The
debt instruments underlying the auction rate securities have redemption features
which call for redemption at 100% of par value and had a minimum rating of
Aaa/A/AAA at December 31, 2008. Both of these factors, along with current credit
curves for like securities, and discount factors to account for the illiquidity
of the market for these securities were considered in determining the fair
market value of the auction rate securities as well as our corresponding Rights
agreement at December 31, 2008. (See Note 3 of Notes to
Consolidated Financial Statements for additional discussion).
We do not
consider these investments as liquid in the short-term and therefore continued
to classify them as long-term investments at December 31, 2008. The auction rate
market is not expected to provide liquidity for these securities in the
foreseeable future. Should we need or desire to access the funds invested in
those securities prior to their maturity or prior to our exercise period under
the Rights agreement discussed above, we may be unable to find a buyer in a
secondary market outside the auction process or if a buyer in a secondary market
is found, we would likely realize a loss.
We Have
Established a Budget and Variations From Our Budget Will Affect Our Financial
Results. We established an operating budget for 2009. Our
budgets are established based on the estimated revenue from forecasted sales of
our products which are based on economic conditions in the markets in which we
do business as well as the timing and volume of our new products and the
expected penetration of both new and existing products in the marketplace. Any
future decreased demand for our products could result in decreased revenue and
could require us to revise our budget and reduce expenditures. Exceeding our
established operating budget or failing to reduce expenditures in response to
any decrease in revenue could have a material adverse effect on our operating
results. Our spending could exceed our budgets due to a number of factors,
including:
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additional
marketing costs for new product introductions and/or for conferences and
tradeshows;
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increased
costs from hiring more product development engineers or other
personnel;
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additional
costs related to acquisitions, if
any;
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increased
manufacturing costs resulting from component supply shortages and/or
component price fluctuations;
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additional
expenses related to intellectual property litigation;
and/or
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additional
costs associated with our incremental investment in our field sales
force.
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Our Business is
Dependent on Key Suppliers. Our manufacturing
processes use large volumes of high-quality components and subassemblies
supplied by outside sources. Several of these components are available through
sole or limited sources. Sole source components purchased include custom
application specific integrated circuits (“ASICs”), chassis and other
components. We have in the past experienced delays and quality problems in
connection with sole source components, and there can be no assurance that these
problems will not recur in the future. Accordingly, our failure to receive sole
source components from suppliers could result in a material adverse effect on
our revenues and operating results. In the event that any of our key suppliers
experience significant financial or operational difficulties due to adverse
global economic conditions or otherwise, our business and operating results
would likely be adversely impacted until we are able to secure another source
for the required materials.
We May Experience
Component Shortages. As has occurred in the past and as may be
expected to occur in the future, supply shortages of components used in our
products, including sole source components, can result in significant additional
costs and inefficiencies in manufacturing. If we are unsuccessful in resolving
any such component shortages in a timely manner, we will experience a
significant impact on the timing of revenue, a possible loss of revenue, and/or
an increase in manufacturing costs, any of which would have a material adverse
impact on our operating results.
Our Quarterly
Results are Subject to Fluctuations Due to Various
Factors. Our quarterly operating results have fluctuated in
the past and may fluctuate significantly in the future due to a number of
factors, including:
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changes
in the economy or credit markets in the U.S. or
globally;
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changes
in the mix of products sold;
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the
availability and pricing of components from third parties (especially sole
sources);
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fluctuations
in foreign currency exchange rates;
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the
timing, cost or outcome of intellectual property
litigation;
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the
difficulty in maintaining margins, including the higher margins
traditionally achieved in international sales;
and,
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changes
in pricing policies by us, our competitors or
suppliers.
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During
the three months ended December 31, 2008, the U.S. dollar experienced general
strengthening against most major currencies compared to the three months ended
December 31, 2007. This caused our consolidated sales to decrease by 1% in the
fourth quarter of 2008 compared to the fourth quarter of 2007. For the year
ended December 31, 2008, the U.S. dollar was generally weaker against most major
currencies which had the effect of increasing our consolidated sales by 4%
compared to the year ended December 31, 2007. If the local currencies in which
we sell our products strengthen against the U.S. dollar, we may need to lower
our prices in the local currency to remain competitive in our international
markets which could have a material adverse effect on our gross and net profit
margins. If the local currencies in which we sell our products weaken against
the U.S. dollar and if the local sales prices cannot be raised due to
competitive pressures, we will experience a deterioration of our gross and net
profit margins.
Our Products are
Complex and May Contain Bugs or Errors. As has occurred in the
past and as may be expected to occur in the future, our new software products or
new operating systems of third parties on which our products are based often
contain bugs or errors that can result in reduced sales and/or cause our support
costs to increase, either of which could have a material adverse impact on our
operating results.
Our Revenues are Subject to Seasonal
Variations. In recent years, our revenues have been
characterized by seasonality, with revenues typically growing from the first
quarter to the second quarter, being relatively constant from the second quarter
to the third quarter, growing in the fourth quarter compared to the third
quarter and declining from the fourth quarter of the current year to the first
quarter of the following year. This historical trend has been affected and may
continue to be affected in the future by declines in the global industrial
economy, the economic impact of larger orders as well as the timing of new
product introductions and/or acquisitions, if any. During the fourth quarter
of 2008, we experienced a sequential decline in revenue from the third quarter
of 2008 due to the severe contraction in the global industrial economy, which is
contrary to the typical seasonality described above. Our first quarter of 2009
may also have a sequential revenue decline from the fourth quarter of 2008,
greater than what has occurred in the past. We cannot predict when or if we will
return to our typical historical revenue pattern. We believe the
historical pattern of seasonality of our revenue results from the international
mix of our revenue and the variability of the budgeting and purchasing cycles of
our customers throughout each international region. In addition, our total
operating expenses have in the past tended to increase in each successive
quarter and have fluctuated as a percentage of revenue based on the seasonality
of our revenue. In 2009, we plan to sustain our strategic investments in
research and development and field sales while limiting expense growth
elsewhere.
Our Product
Revenues are Dependent on Certain Industries. Sales of our
products are dependent on customers in certain industries, particularly the
telecommunications, semiconductor, automotive, automated test equipment, defense
and aerospace industries. As experienced in the past, and as may be expected to
occur in the future, downturns characterized by diminished product demand in any
one or more of these industries could result in decreased sales, which could
have a material adverse effect on our operating results.
Our Success
Depends on New Product Introductions and Market Acceptance of Our
Products. The market for our products is characterized by
rapid technological change, evolving industry standards, changes in customer
needs and frequent new product introductions, and is therefore highly dependent
upon timely product innovation. Our success is dependent on our ability to
successfully develop and introduce new and enhanced products on a timely basis
to replace declining revenues from older products, and on increasing penetration
in domestic and international markets. As has occurred in the past and as may be
expected to occur in the future, we have experienced significant delays between
the announcement and the commercial availability of new products. Any
significant delay in releasing new products could have a material adverse effect
on the ultimate success of a product and other related products and could impede
continued sales of predecessor products, any of which could have a material
adverse effect on our operating results. There can be no assurance that we will
be able to introduce new products in accordance with announced release dates,
that new products will achieve market acceptance or that any such acceptance
will be sustained for any significant period. Failure of new products to achieve
or sustain market acceptance could have a material adverse effect on our
operating results. Moreover, there can be no assurance that our international
sales will continue at existing levels or grow in accordance with our efforts to
increase foreign market penetration.
We are Subject to
Risks Associated with Our Web Site. We devote resources to
maintain our Web site as a key marketing, sales and support tool and expect to
continue to do so in the future. However, there can be no assurance that we will
be successful in our attempt to leverage the Web to increase sales. We host our
Web site internally. Any failure to successfully maintain our Web site or any
significant downtime or outages affecting our Web site could have a material
adverse impact on our operating results.
We Operate in
Intensely Competitive Markets. The markets in which we operate
are characterized by intense competition from numerous competitors, some of
which are divisions of large corporations having far greater resources than we
have, and we expect to face further competition from new market entrants in the
future. A key competitor is Agilent Technologies Inc. (“Agilent”). Agilent
offers its own line of instrument controllers, and also offers hardware and
software products that provide solutions that directly compete with our virtual
instrumentation products. Agilent is aggressively advertising and marketing
products that are competitive with our products. Because of Agilent’s strong
position in the instrumentation business, changes in its marketing strategy or
product offerings could have a material adverse effect on our operating
results.
We
believe our ability to compete successfully depends on a number of factors both
within and outside our control, including:
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new
product introductions by
competitors;
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product
pricing;
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the
impact of foreign exchange rates on product
pricing;
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quality
and performance;
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success
in developing new products;
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adequate
manufacturing capacity and supply of components and
materials;
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efficiency
of manufacturing operations;
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effectiveness
of sales and marketing resources and
strategies;
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strategic
relationships with other suppliers;
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timing
of our new product introductions;
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protection
of our products by effective use of intellectual property
laws;
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the
outcome of any material intellectual property
litigation;
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general
market and economic conditions;
and,
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government
actions throughout the world.
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There can
be no assurance that we will be able to compete successfully in the
future.
We Rely on
Management Information Systems and any Disruptions in Our Systems Would
Adversely Affect Us. We rely on a primary global center for
our management information systems and on multiple systems in branches not
covered by our global center. As with any information system, unforeseen issues
may arise that could affect our ability to receive adequate, accurate and timely
financial information, which in turn could inhibit effective and timely
decisions. Furthermore, it is possible that our global center for information
systems could experience a complete or partial shutdown. If such a shutdown
occurred, it could impact our product shipments and revenues, as order
processing and product distribution are heavily dependent on our management
information systems. Accordingly, our operating results in such periods would be
adversely impacted. We are continually working to maintain reliable systems to
control costs and improve our ability to deliver our products in our markets
worldwide. No assurance can be given that our efforts will be
successful.
During
2008, we continued to devote resources to the enhancement of systems to support
the shipment of products from our manufacturing facility and warehouse in
Hungary directly to customers worldwide, and to the continued development of our
web offerings. There can be no assurance that we will not experience
difficulties with these new systems. Difficulties with these new systems may
interrupt our normal operations, including our ability to provide quotes,
process orders, ship products, provide services and support to our customers,
bill and track our customers, fulfill contractual obligations and otherwise run
our business. Any disruption occurring with these systems may have a material
adverse effect on our operating results. We plan to continue to devote resources
to the systems that support shipment of product from our manufacturing facility
and warehouse in Hungary directly to our customers worldwide, and to the
continued development of our web offerings during 2009. Any failure to
successfully implement these initiatives could have a material adverse effect on
our operating results.
We are Subject to
Risks Associated with Our Centralization of Inventory and
Distribution. Currently, shipments to our customers worldwide
are primarily sourced from our warehouse facility in Debrecen, Hungary.
Shipments to almost all customers in the Americas were previously sourced from
our warehouse in Austin, Texas. In July 2007, our Austin distribution operations
were transferred to Debrecen, Hungary, and in October 2007, our Japanese
distribution operations were also transferred to Debrecen, Hungary. Shipments to
some of our customers in Asia are currently made either out of local inventory
managed by our branch operations in various Asian countries or from a
centralized distribution point in Singapore. We will continue to devote
resources to centralizing our distribution to a limited number of shipping
points. Our planned centralization of inventory and distribution from a limited
number of shipping points is subject to inherent risks, including:
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burdens
of complying with additional and/or more complex VAT and customs
regulations; and,
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severe
concentration of inventory increasing the risks associated with fire,
natural disasters and logistics disruptions to customer order
fulfillment.
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No
assurance can be given that our efforts will be successful. Any difficulties
with the centralization of distribution or delays in the implementation of the
systems or processes to support this centralized distribution could result in
interruption of our normal operation, including our ability to process orders
and ship products to our customers. Any failure or delay in successfully
centralizing our inventory in and distribution from our facility in Hungary
could have a material adverse effect on our operating results.
A Substantial
Majority of Our Manufacturing Capacity is Located in Hungary. Our Hungarian
manufacturing and warehouse facility sources a substantial majority of our
sales. During 2008, we continued to enhance the systems and processes that
support the direct shipment of product orders to our customers worldwide from
our manufacturing facility in Hungary. In order to enable timely shipment of
products to our customers we also maintain the vast majority of our inventory at
our Hungary warehouse facility. In addition to being subject to the risks of
maintaining such a concentration of manufacturing capacity and global inventory,
this facility and its operation are also subject to risks associated with doing
business internationally, including:
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difficulty
in managing manufacturing operations in a foreign
country;
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difficulty
in achieving or maintaining product
quality;
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interruption
to transportation flows for delivery of components to us and finished
goods to our customers; and,
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changes
in the country’s political or economical
conditions.
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No
assurance can be given that our efforts will be successful. Accordingly, a
failure to deal with these factors could result in interruption in the
facility’s operation or delays in expanding its capacity, either of which could
have a material adverse effect on our operating results.
We are Subject to Various Risks Associated with International
Operations and Foreign Economies. Our international sales
are subject to inherent risks, including:
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fluctuations
in local economies;
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fluctuations
in foreign currencies relative to the U.S.
dollar;
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difficulties
in staffing and managing foreign
operations;
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greater
difficulty in accounts receivable
collection;
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costs
and risks of localizing products for foreign
countries;
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unexpected
changes in regulatory requirements;
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tariffs
and other trade barriers;
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difficulties
in the repatriation of earnings;
and,
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the
burdens of complying with a wide variety of foreign
laws.
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In many
foreign countries, particularly in those with developing economies, it is common
to engage in business practices that are prohibited by U.S. regulations
applicable to us such as the Foreign Corrupt Practices Act. Although we
implement policies and procedures designed to ensure compliance with these laws,
there can be no assurance that all of our employees, contractors and agents,
including those based in or from countries where practices which violate such
U.S. laws may be customary, will not take actions in violation of our policies.
Any violation of foreign or U.S. laws by our employees, contractors or agents,
even if such violation is prohibited by our policies, could have a material
adverse effect on our business. We must also comply with various import and
export regulations. The application of these various regulations depends on the
classification of our products which can change over time as such regulations
are modified or interpreted. As a result, even if we are currently in compliance
with applicable regulations, there can be no assurance that we will not have to
incur additional costs or take additional compliance actions in the future.
Failure to comply with these regulations could result in fines and/or
termination of import and export privileges, which could have a material adverse
effect on our operating results. Additionally, the regulatory environment in
some countries is very restrictive as their governments try to protect their
local economy and value of their local currency against the U.S. dollar. Sales
made by our international direct sales offices are denominated in local
currencies, and accordingly, the U.S. dollar equivalent of these sales is
affected by changes in the foreign currency exchange rates. Net of hedging
results, the change in exchange rates had the effect of increasing our
consolidated sales by 4% in the year ended December 31, 2008 compared to the
year ended December 31, 2007. Since most of our international operating expenses
are also incurred in local currencies, the change in exchange rates had the
effect of increasing our operating expenses by $15.1 million over these same
periods. Currently, we are experiencing significant volatility in foreign
currency exchange rates in many of the markets in which we do business. This has
had a significant impact on the revaluation of our foreign currency denominated
firm commitments and on our ability to forecast U.S. dollar equivalent revenues
and expenses. In the past, these dynamics have also adversely affected our
revenue growth in international markets and will likely pose similar challenges
in the future.
Our Income Tax
Rate is Affected by Tax Benefits in Hungary. As a result of
certain foreign investment incentives available under Hungarian law, the profit
from our Hungarian operation was subject to a reduced income tax rate. This
special tax status terminated on January 1, 2008, with the merger of our
Hungarian manufacturing operations with its Hungarian parent company. The tax
position of our Hungarian operation continues to benefit from assets created by
the restructuring of our operations in Hungary. These benefits may not be
available in the future due to changes in Hungary’s political condition and/or
tax laws. The reduction or elimination of these tax benefits in Hungary or
future changes in U.S. law pertaining to taxation of foreign earnings could
result in an increase in our future effective income tax rate, which could have
a material adverse effect on our operating results.
Our Business
Depends on Our Proprietary Rights and We are Subject to Intellectual Property
Litigation. Our success
depends on our ability to obtain and maintain patents and other proprietary
rights relative to the technologies used in our principal products. Despite our
efforts to protect our proprietary rights, unauthorized parties may have in the
past infringed or violated certain of our intellectual property rights. We from
time to time engage in litigation to protect our intellectual property rights.
In monitoring and policing our intellectual property rights, we have been and
may be required to spend significant resources. We from time to time may be
notified that we are infringing certain patent or intellectual property rights
of others. There can be no assurance that any existing intellectual property
litigation or any intellectual property litigation initiated in the future, will
not cause significant litigation expense, liability, injunction against some of
our products, and a diversion of management’s attention, any of which may have a
material adverse effect on our operating results.
Our Reported
Financial Results May be Adversely Affected by Changes in Accounting Principles
Generally Accepted in the United States. We prepare our
financial statements in conformity with accounting principles generally accepted
in the U.S. These accounting principles are subject to interpretation by the
Financial Accounting Standards Board, the American Institute of Certified Public
Accountants, the Securities and Exchange Commission and various bodies formed to
interpret and create appropriate accounting policies. A change in these policies
or interpretations could have a significant effect on our reported financial
results, and could affect the reporting of transactions completed before the
announcement of a change.
Compliance With
Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 is Costly and
Challenging. As required by Section 302 of the Sarbanes-Oxley
Act of 2002, this Form 10-K contains our managements’ certification of adequate
disclosure controls and procedures as of December 31, 2008. This report on Form
10-K also contains a report by our management on our internal control over
financial reporting including an assessment of the effectiveness of our internal
control over financial reporting as of December 31, 2008. This Form 10-K also
contains an attestation and report by our external auditors with respect to the
effectiveness of internal control over financial reporting under Section 404.
While these assessments and reports did not reveal any material weaknesses in
our internal control over financial reporting, compliance with Sections 302 and
404 is required for each future fiscal year end. We expect that the ongoing
compliance with Sections 302 and 404 will continue to be both very costly and
very challenging and there can be no assurance that material weaknesses will not
be identified in future periods. Any adverse results from such ongoing
compliance efforts could result in a loss of investor confidence in our
financial reports and have an adverse effect on our stock price.
Our Business
Depends on the Continued Service of Key Management and Technical
Personnel. Our success
depends upon the continued contributions of our key management, sales,
marketing, research and development and operational personnel, including Dr.
Truchard, our Chairman and Chief Executive Officer, and other members of our
senior management and key technical personnel. We have no agreements providing
for the employment of any of our key employees for any fixed term and our key
employees may voluntarily terminate their employment with us at any time. The
loss of the services of one or more of our key employees in the future could
have a material adverse effect on our operating results. We also believe our
future success will depend upon our ability to attract and retain additional
highly skilled management, technical, marketing, research and development, and
operational personnel with experience in managing large and rapidly changing
companies, as well as training, motivating and supervising employees. The
recruiting environment for software engineering, sales and other technical
professionals is very competitive. Competition for qualified software engineers
is particularly intense and is likely to result in increased personnel costs.
Our failure to attract or retain qualified software engineers could have an
adverse effect on our operating results. We also recruit and employ foreign
nationals to achieve our hiring goals primarily for engineering and software
positions. There can be no guarantee that we will continue to be able to recruit
foreign nationals at the current rate. There can be no assurance that we will be
successful in retaining our existing key personnel or attracting and retaining
additional key personnel. Failure to attract and retain a sufficient number of
our key personnel could have a material adverse effect on our operating
results.
Our Manufacturing
Operations are Subject to a Variety of Environmental Regulations and
Costs. We must
comply with many different governmental regulations related to the use, storage,
discharge and disposal of toxic, volatile or otherwise hazardous chemicals used
in our manufacturing operations in the U.S. and in Hungary. Although we believe
that our activities conform to presently applicable environmental regulations,
our failure to comply with present or future regulations could result in the
imposition of fines, suspension of production or a cessation of operations. Any
such environmental regulations could require us to acquire costly equipment or
to incur other significant expenses to comply with such regulations. Any failure
by us to control the use of or adequately restrict the discharge of hazardous
substances could subject us to future liabilities.
We Are Subject to
the Risk of Product Liability Claims. Our products are
designed to provide information upon which users may rely. Our products are also
used in “real time” applications requiring extremely rapid and continuous
processing and constant feedback. Such applications give rise to the risk that
failure or interruption of the system or application could result in economic
damage or bodily harm. We attempt to assure the quality and accuracy of the
processes contained in our products, and to limit our product liability exposure
through contractual limitations on liability, limited warranties, express
disclaimers and warnings as well as disclaimers contained in our “shrink wrap”
license agreements with end-users. If our products contain errors that produce
incorrect results on which users rely or cause failure or interruption of
systems or processes, customer acceptance of our products could be adversely
affected. Further, we could be subject to liability claims that could have a
material adverse effect on our operating results or financial position. Although
we maintain liability insurance for product liability matters, there can be no
assurance that such insurance or the contractual limitations used by us to limit
our liability will be sufficient to cover or limit any claims which may
occur.
Our Acquisitions
are Subject to a Number of Related Costs and Challenges. We have from time
to time acquired, and may in the future acquire, complementary businesses,
products or technologies. Achieving the anticipated benefits of an acquisition
depends upon whether the integration of the acquired business, products or
technology is accomplished efficiently and effectively. In addition, successful
acquisitions may require, among other things, integration of product offerings,
manufacturing operations and coordination of sales and marketing and R&D
efforts. These difficulties can become more challenging due to the need to
coordinate geographically separated organizations, the complexities of the
technologies being integrated, and the necessities of integrating personnel with
disparate business backgrounds and combining two different corporate cultures.
The integration of operations following an acquisition also requires the
dedication of management resources, which may distract attention from our
day-to-day business and may disrupt key R&D, marketing or sales efforts. The
inability of our management to successfully integrate any future acquisition
could harm our business. Some of the existing products previously sold by some
of the entities we have acquired are of lesser quality than our products and/or
could contain errors that produce incorrect results on which users rely or cause
failure or interruption of systems or processes that could subject us to
liability claims that could have a material adverse effect on our operating
results or financial position. Furthermore, products acquired in connection with
acquisitions may not gain acceptance in our markets, and we may not achieve the
anticipated or desired benefits of such transaction.
Provisions in Our
Charter Documents and Delaware Law and Our Stockholder Rights Plan May Delay or
Prevent an Acquisition of Us. Our certificate of
incorporation and bylaws and Delaware law contain provisions that could make it
more difficult for a third party to acquire us without the consent of our Board
of Directors. These provisions include a classified Board of Directors,
prohibition of stockholder action by written consent, prohibition of
stockholders to call special meetings and the requirement that the holders of at
least 80% of our shares approve any business combination not otherwise approved
by two-thirds of the Board of Directors. Delaware law also imposes some
restrictions on mergers and other business combinations between us and any
holder of 15% or more of our outstanding common stock. In addition, our Board of
Directors has the right to issue preferred stock without stockholder approval,
which could be used to dilute the stock ownership of a potential hostile
acquirer. Our Board of Directors adopted a new stockholders rights plan on
January 21, 2004, pursuant to which we declared a dividend of one right for each
share of our common stock outstanding as of May 10, 2004. This rights plan
replaced a similar rights plan that had been in effect since our initial public
offering in 1995. Unless redeemed by us prior to the time the rights are
exercised, upon the occurrence of certain events, the rights will entitle the
holders to receive upon exercise thereof shares of our preferred stock, or
shares of an acquiring entity, having a value equal to twice the then-current
exercise price of the right. The issuance of the rights could have the effect of
delaying or preventing a change of control of us.
ITEM
1B. UNRESOLVED
STAFF COMMENTS
None.
ITEM
2. PROPERTIES
Our
principal corporate and research and development activities are conducted at
three buildings we own in Austin, Texas. We own approximately 69 acres of land
in north Austin, Texas, on which are a 232,000 square foot office facility, a
140,000 square foot manufacturing and office facility, and a 380,000 square foot
research and development facility. We also own a 136,000 square foot office
building in Austin, Texas which is being leased to third-parties. Our principal
manufacturing and distribution activities are conducted at our 239,000 square
foot manufacturing and distribution facility in Debrecen, Hungary which we own.
Our German subsidiary, National Instruments Engineering GmbH & Co. KG, owns
a 25,500 square foot office building in Aachen, Germany in which a majority of
its activities are conducted. National Instruments Engineering owns another
19,375 square foot office building in Aachen, Germany, which is partially leased
to third-parties.
As of
December 31, 2008, we also leased a number of sales and support offices in the
United States and various countries throughout the world. Our facilities are
currently being utilized below maximum capacity to allow for future headcount
growth and design/construction cycles, as needed. We believe our existing
facilities are adequate to meet our current requirements.
ITEM
3. LEGAL
PROCEEDINGS
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 June 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 June
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. There
were not any charges against this accrual during the three months ended December
31, 2008. For the year ended December 31, 2008, we charged a total of $7,500
against this accrual. To date, we have charged a cumulative total of $618,500
against this accrual.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter
was submitted to a vote of our security holders during the fourth quarter of the
fiscal year covered by this report.
ITEM
5. MARKET
FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERSAND ISSUER
PURCHASES OF EQUITY SECURITIES
Our
common stock, $0.01 par value, began trading on The NASDAQ Stock Market under
the symbol NATI effective March 13, 1995. Prior to that date, there was no
public market for our common stock. The high and low closing prices for our
common stock, as reported by Nasdaq for the two most recent fiscal years, are as
indicated in the following table.
|
High
|
Low
|
|||||||
|
2008
|
||||||||
|
First
Quarter
2008
|
$ | 32.43 | $ | 24.55 | ||||
|
Second
Quarter
2008
|
32.32 | 25.97 | ||||||
|
Third
Quarter
2008
|
35.15 | 26.26 | ||||||
|
Fourth
Quarter
2008
|
28.41 | 20.50 | ||||||
|
2007
|
||||||||
|
First
Quarter
2007
|
$ | 27.89 | $ | 25.25 | ||||
|
Second
Quarter
2007
|
32.71 | 25.24 | ||||||
|
Third
Quarter
2007
|
34.45 | 30.07 | ||||||
|
Fourth
Quarter
2007
|
35.06 | 30.76 | ||||||
At the
close of business on February 23, 2009, there were approximately 487 holders of
record of our common stock and approximately 26,460 shareholders of beneficial
interest.
We
believe factors such as quarterly fluctuations in our results of operations,
announcements by us or our competitors, technological innovations, new product
introductions, governmental regulations, litigation, changes in earnings
estimates by analysts or changes in our financial guidance may cause the market
price of our common stock to fluctuate, perhaps substantially. In addition,
stock prices for many technology companies fluctuate widely for reasons that may
be unrelated to their operating results. These broad market and industry
fluctuations may adversely affect the market price of our common
stock.
Our cash
dividend payments for the two most recent fiscal years are indicated in the
following table on a per share basis. The dividends were paid on the dates set
forth below;
|
2008
|
||||
|
March
3,
2008
|
$ | 0.11 | ||
|
June
2,
2008
|
0.11 | |||
|
September
2,
2008
|
0.11 | |||
|
December
1,
2008
|
0.11 | |||
|
2007
|
||||
|
March
5,
2007
|
$ | 0.07 | ||
|
June
4,
2007
|
0.07 | |||
|
September
4,
2007
|
0.10 | |||
|
December
3,
2007
|
0.10 | |||
Our
policy as to future dividends will be based on, among other considerations, our
views on potential future capital requirements related to research and
development, expansion into new market areas, investments and acquisitions,
share dilution management, legal risks, and challenges to our business
model.
See Item
12 for information regarding securities authorized for issuance under our equity
compensation plans.
Performance
Graph
The
following graph compares the cumulative total return to stockholders of NI’s
common stock from December 31, 2003 to December 31, 2008 to the cumulative
return over such period of (i) Nasdaq Composite Index and (ii) Russell 2000
Index. The graph assumes that $100 was invested on December 31, 2003 in NI’s
common stock and in each of the other two indices and the reinvestment of all
dividends, if any. Stockholders are cautioned against drawing any conclusions
from the data contained therein, as past results are not necessarily indicative
of future performance.
The
information contained in the Performance Graph shall not be deemed to be
“soliciting material” or to be “filed” with the SEC, nor shall such information
be incorporated by reference into any future filing under the Securities Act of
1933, as amended (the “Securities Act”), or the Exchange Act, except to the
extent that NI specifically incorporates it by reference into any such filing.
The graph is presented in accordance with SEC requirements.
ISSUER PURCHASES OF EQUITY
SECURITIES
|
Period
|
Total
number of shares
|
Average
price paid per share
|
Total
number of shares purchased as part of a publicly announced plan or
program
|
Maximum
number of shares that may yet be purchased under the plan or program
(1)
|
||||||||||||
|
October
1, 2008 to October 31, 2008
|
68,297 | $ | 25.01 | 68,297 | 2,643,922 | |||||||||||
|
November
1, 2008 to November 30, 2008
|
1,682,013 | $ | 22.76 | 1,682,013 | 961,909 | |||||||||||
|
December
1, 2008 to December 31, 2008
|
238,817 | $ | 22.74 | 238,817 | 723,092 | |||||||||||
|
Total
|
1,989,127 | $ | 22.84 | 1,989,127 | ||||||||||||
(1) For
the past several years, we have maintained various stock repurchase programs. On
April 25, 2008, 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 797,461 to 3.0 million. Our repurchase plan does not have an
expiration date.
ITEM
6. SELECTED
CONSOLIDATED FINANCIAL DATA
The
following selected consolidated financial data should be read in conjunction
with our consolidated financial statements, including the Notes to Consolidated
Financial Statements contained in this Form 10-K. The information set forth
below is not necessarily indicative of the results of our future operations. The
information should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”
|
Years Ended December 31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||||||
|
Statements
of Income Data:
|
||||||||||||||||||||
|
Net
sales:
|
||||||||||||||||||||
|
Americas
|
$ | 355,878 | $ | 331,482 | $ | 317,780 | $ | 275,524 | $ | 243,651 | ||||||||||
|
Europe .
|
267,373 | 230,940 | 193,364 | 171,499 | 164,895 | |||||||||||||||
|
Asia
Pacific
|
197,286 | 177,956 | 149,263 | 124,818 | 105,542 | |||||||||||||||
|
Consolidated
net
sales
|
820,537 | 740,378 | 660,407 | 571,841 | 514,088 | |||||||||||||||
|
Cost
of
sales
|
207,109 | 185,267 | 173,348 | 151,939 | 137,992 | |||||||||||||||
|
Gross
profit
|
613,428 | 555,111 | 487,059 | 419,902 | 376,096 | |||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||
|
Sales
and
marketing
|
307,409 | 264,060 | 232,050 | 208,650 | 186,208 | |||||||||||||||
|
Research
and
development
|
143,140 | 126,515 | 113,095 | 87,841 | 84,692 | |||||||||||||||
|
General
and
administrative
|
67,162 | 62,445 | 54,192 | 45,199 | 42,500 | |||||||||||||||
|
Total
operating
expenses
|
517,711 | 453,020 | 399,337 | 341,690 | 313,400 | |||||||||||||||
|
Operating
income
|
95,717 | 102,091 | 87,722 | 78,212 | 62,696 | |||||||||||||||
|
Other
income (expense):
|
||||||||||||||||||||
|
Interest
income
|
5,996 | 9,822 | 6,847 | 3,758 | 2,905 | |||||||||||||||
|
Net
foreign exchange gain
(loss)
|
(3,737 | ) | 1,672 | 740 | (1,566 | ) | 1,287 | |||||||||||||
|
Other
income (expense),
net
|
161 | (158 | ) | (7 | ) | 276 | (2,075 | ) | ||||||||||||
|
Income
before income
taxes
|
98,137 | 113,427 | 95,302 | 80,680 | 64,813 | |||||||||||||||
|
Provision
for income
taxes
|
13,310 | 6,394 | 22,594 | 19,163 | 16,203 | |||||||||||||||
|
Net
income
|
$ | 84,827 | $ | 107,033 | $ | 72,708 | $ | 61,517 | $ | 48,610 | ||||||||||
|
Basic
earnings per
share
|
$ | 1.08 | $ | 1.35 | $ | 0.91 | $ | 0.78 | $ | 0.62 | ||||||||||
|
Weighted
average shares outstanding - basic
|
78,567 | 79,468 | 79,519 | 78,552 | 78,680 | |||||||||||||||
|
Diluted
earnings per
share
|
$ | 1.07 | $ | 1.32 | $ | 0.89 | $ | 0.76 | $ | 0.59 | ||||||||||
|
Weighted
average shares outstanding - diluted
|
79,515 | 81,043 | 81,519 | 80,910 | 82,096 | |||||||||||||||
|
Cash
dividends paid per common
share
|
$ | 0.44 | $ | 0.34 | $ | 0.24 | $ | 0.20 | $ | 0.18 | ||||||||||
|
December 31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||
|
Cash
and cash
equivalents
|
$ | 229,400 | $ | 194,839 | $ | 100,287 | $ | 55,864 | $ | 76,216 | ||||||||||
|
Short-term
investments
|
6,220 | 93,838 | 150,190 | 119,846 | 150,392 | |||||||||||||||
|
Working
capital
|
398,292 | 419,874 | 379,733 | 274,686 | 309,635 | |||||||||||||||
|
Total
assets
|
832,591 | 818,812 | 721,220 | 608,336 | 582,093 | |||||||||||||||
|
Long-term
debt, net of current
portion
|
— | — | — | — | — | |||||||||||||||
|
Total
stockholders’
equity
|
664,438 | 661,086 | 596,682 | 503,850 | 486,449 | |||||||||||||||
Beginning
with this Form 10-K, we are separately reporting software maintenance revenue
and cost of software maintenance revenue in our Consolidated
Statements of Income. We have added this disclosure due to the increasing
percentage of our revenue coming from software maintenance. As part of this
expanded disclosure, some technical support costs previously reported as a
component of sales and marketing expense are now reported as cost of software
maintenance. This change has had no impact on our operating income, net income
or earnings per share. All amounts shown above have been reclassified to conform
to this new presentation. The effect of these changes for the years 2007, 2006,
2005 and 2004 are as follows:
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||
|
Cost
of sales as previously
reported
|
$ | 182,189 | $ | 170,326 | $ | 149,309 | $ | 135,473 | ||||||||
|
Technical
support costs previously reported as sales and marketing
|
3,078 | 3,022 | 2,630 | 2,519 | ||||||||||||
|
Cost
of sales adjusted for
reclassification
|
$ | 185,267 | $ | 173,348 | $ | 151,939 | $ | 137,992 | ||||||||
|
Sales
and marketing as previously
reported
|
$ | 267,138 | $ | 235,072 | $ | 211,280 | $ | 188,727 | ||||||||
|
Technical
support costs previously reported as sales and marketing
|
(3,078 | ) | (3,022 | ) | (2,630 | ) | (2,519 | ) | ||||||||
|
Sales
and marketing adjusted for reclassification
|
$ | 264,060 | $ | 232,050 | $ | 208,650 | $ | 186,208 | ||||||||
The
following “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” 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 9, and elsewhere in this Form 10-K. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. You should not place undue reliance on these forward-looking
statements. We disclaim any obligation to update information contained in any
forward-looking statement.
Overview
National
Instruments Corporation (“we” 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 2008, 2007 or 2006.
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. While we continue our
efforts to expand our customer base, we are also benefiting from our efforts in
increasing order size from both new and existing customers.
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. The global industrial
economy is currently in a recession. Many economists and other experts are
predicting that this recession in the U.S. and global economies will likely
continue through the remainder of 2009 and possibly beyond. We are unable to
predict how long this recession will last. We expect our business to continue to
be adversely impacted by this downturn in the U.S. or global
economies.
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
United States and sales offices and distributors in key international markets.
Sales outside of the Americas accounted for approximately 57%, 55%, and 52% of
our revenues in 2008, 2007 and 2006, 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 of Notes to Consolidated
Financial Statements for details concerning the geographic breakdown of our net
sales, operating income, interest income and identifiable 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 use subcontractors in Asia to manufacture a significant
portion of our chassis. 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 and price/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 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.
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:
|
Years Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Net
sales:
|
||||||||||||
|
Americas
|
43.4% | 44.8% | 48.1% | |||||||||
|
Europe
|
32.6 | 31.2 | 29.3 | |||||||||
|
Asia
Pacific
|
24.0 | 24.0 | 22.6 | |||||||||
|
Consolidated
net
sales
|
100.0 | 100.0 | 100.0 | |||||||||
|
Cost
of
sales
|
25.2 | 25.0 | 26.2 | |||||||||
|
Gross
profit
|
74.8 | 75.0 | 73.8 | |||||||||
|
Operating
expenses:
|
||||||||||||
|
Sales
and
marketing
|
37.5 | 35.7 | 35.2 | |||||||||
|
Research
and
development
|
17.4 | 17.1 | 17.1 | |||||||||
|
General
and
administrative
|
8.2 | 8.4 | 8.2 | |||||||||
|
Total
operating
expenses
|
63.1 | 61.2 | 60.5 | |||||||||
|
Operating
income
|
11.7 | 13.8 | 13.3 | |||||||||
|
Other
income (expense):
|
||||||||||||
|
Interest
income
|
0.7 | 1.3 | 1.0 | |||||||||
|
Net
foreign exchange gain
(loss)
|
(0.5) | 0.2 | 0.1 | |||||||||
|
Other
income (expense),
net
|
— | — | — | |||||||||
|
Income
before income
taxes
|
11.9 | 15.3 | 14.4 | |||||||||
|
Provision
for income
taxes
|
1.6 | 0.8 | 3.4 | |||||||||
|
Net
income
|
10.3% | 14.5% | 11.0% | |||||||||
Beginning
with this Form 10-K, we are separately reporting software maintenance revenue
and cost of software maintenance revenue in our Consolidated
Statements of Income. We have added this disclosure due to the increasing
percentage of our revenue coming from software maintenance. As part of this
expanded disclosure, some technical support costs previously reported as a
component of sales and marketing expense are now reported as cost of software
maintenance. This change has had no impact on our operating income, net income
or earnings per share. All amounts shown above have been reclassified to conform
to this new presentation, the effect of these changes for the years 2007 and
2006 are as follows:
|
2007
|
2006
|
|||||||
|
Cost
of sales as previously
reported
|
24.6% | 25.8% | ||||||
|
Technical
support costs previously reported as sales and marketing
|
0.4 | 0.4 | ||||||
|
Cost
of sales adjusted for
reclassification
|
25.0% | 26.2% | ||||||
|
Sales
and marketing as previously
reported
|
36.1% | 35.6% | ||||||
|
Technical
support costs previously reported as sales and marketing
|
(0.4) | (0.4) | ||||||
|
Sales
and marketing adjusted for
reclassification
|
35.7% | 35.2% | ||||||
Net
Sales. Consolidated net sales were $820.5 million, $740.4
million and $660.4 million for the years ended December 31, 2008, 2007 and 2006,
respectively, an increase of 11% in 2008 over 2007 following an increase in 2007
of 12% from the level achieved in 2006. The increase in 2008 can primarily be
attributed to volume growth in the areas of modular instruments, particularly RF
test products, PXI, software and CompactRIO which performed very well in light
of the industry contraction. The increases in these areas were offset by
declines in revenue from instrument control products which are the most
sensitive to downturns in the Global PMI. For 2007, the increase in revenue
compared to 2006, can primarily be attributed to increased market acceptance of
our virtual instrumentation and graphical system design products, which
constitute the vast majority of our product portfolios as well as the
introduction of new and upgraded products in all regions.
Sales in
the Americas were $355.9 million, $331.5 million and $317.8 million for the
years ended December 31, 2008, 2007 and 2006, respectively, an increase of 7% in
2008 over 2007 following an increase in 2007 of 4% from the level achieved in
2006. Sales outside of the Americas, as a percentage of consolidated sales,
increased to 57% in 2008 from 55% and 52% in 2007 and 2006, respectively,
primarily as a result of faster sales growth outside of the Americas. Sales in
Europe were $267.4 million, $230.9 million and $193.4 million for the years
ended December 31, 2008, 2007 and 2006, respectively, an increase of 16% in 2008
over 2007 following an increase in 2007 of 19% from the level achieved in 2006.
Sales in Asia were $197.3 million, $178.0 million and $149.3 million for the
years ended December 31, 2008, 2007 and 2006, respectively, an increase of 11%
in 2008 over 2007 following an increase in 2007 of 19% from the level achieved
in 2006. 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 Americas, outside of the
United States, 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 2008, net of hedging
results, the change in exchange rates had the effect of increasing our
consolidated sales by $33.8 million or 4%, increasing Americas sales by $1.7
million or 0.5%, increasing European sales by $27.8 million or 12%, and
increasing sales in Asia Pacific by $4.3 million or 2% compared to 2007. For
2007, net of hedging results, the change in exchange rates had the effect of
increasing our consolidated sales by $19.5 million or 3%, increasing Americas
sales by $1.5 million or 0.5%, increasing European sales by $14.4 million or 9%,
and increasing sales in Asia Pacific by $3.6 million or 2% compared to
2006.
Gross
Profit. As a percentage of sales, gross margin was 75% in
2008, 75% in 2007 and 74% in 2006. Gross margin remained flat in 2008 compared
to 2007 primarily as a result of the net impact of the favorable impact of
higher sales volume and improved product margins resulting from both price
increases and cost reductions on certain products, offset by the impact of
increased charges related to the amortization of acquisition related
intangibles, and the impact of foreign currency exchange rates. For 2008,
charges related to acquisition related intangibles increased to $3.6 million
compared to $2.7 million in 2007. For 2008, the net impact of foreign currency
exchange rates had the effect of increasing our cost of goods sold by $1.1
million or 4%. The higher margin in 2007 compared to 2006 is attributable to the
net impact of favorable foreign currency exchange rates, the favorable impact of
higher sales volume, improved product margins resulting from both price
increases and cost reductions on certain products, offset by the unfavorable
impact of increased stock-based compensation, and the unfavorable impact of
costs incurred to transition our Austin, Texas distribution activities to
Hungary.
Sales and
Marketing. Sales and marketing expenses were $307.4 million,
$264.1 million and $232.1 million for the years ended December 31, 2008, 2007
and 2006, respectively, an increase of 16% in 2008 over 2007 following an
increase in 2007 of 14% from the level achieved in 2006. As a percentage of net
sales, sales and marketing expenses were 38%, 36% and 35% for 2008, 2007 and
2006, respectively. The increase in sales and marketing expense for 2008, both
in absolute dollars and as a percentage of sales, was consistent with our plan
to make additional investments in our field sales force during 2008.
Approximately 65% of the increase can be attributed to the increase in sales and
marketing personnel, increases in stock-based compensation and the increase in
variable compensation from higher sales volume. In addition, during 2008, the
net impact of foreign currency exchange rates had the effect of increasing our
sales and marketing expense by $10 million or 3%. For 2007, approximately 68% of
the increase in sales and marketing expense was attributable to an increase in
sales and marketing personnel, increases in stock-based compensation and the
increase in variable compensation from higher sales volume. We plan to continue
to make additional investments in our field sales force in 2009. However, due to
the dramatic downturn in the industrial economy during the last half of 2008 and
due to the fact that we cannot anticipate when this downturn might ease, our
field sales expansion during 2009 will likely be less than it was in 2008. We
expect sales and marketing expenses in future periods to increase in absolute
dollars, and 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 $143.1
million, $126.5 million and $113.1 million for the years ended December 31,
2008, 2007 and 2006, respectively, an increase of 13% in 2008 over 2007
following an increase in 2007 of 12% from the level achieved in 2006. As a
percentage of net sales, research and development expenses were 17% for each of
2008, 2007 and 2006. The increase in research and development expenses in
absolute dollars in 2008 was primarily due to increases in personnel costs from
the hiring of additional product development engineers as well as increases
related to stock-based compensation and is consistent with our plan to continue
to grow our research and development capacity in line with the overall revenue
growth of the company. During 2008, we had a net increase of 109 people in our
worldwide R&D group. In addition, during 2008, the net impact of foreign
currency exchange rates had the effect of increasing our research and
development expense by $2.7 million or 2%. The increase in research and
development expenses in absolute dollars in 2007 compared to 2006 was primarily
due to increases in personnel costs from the hiring of additional product
development engineers as well as increases related to stock-based compensation.
During 2007, we had a net increase of 184 people in our worldwide R&D group.
We plan to continue to make additional investments in our research and
development group in 2009. However, due to the dramatic downturn in the
industrial economy during the last half of 2008 and due to the fact that we
cannot anticipate when this downturn might ease, our research and development
expansion during 2009 will likely be less than it was in 2008.
We
capitalize software development costs in accordance with SFAS 86, Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed. 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 $10.3 million, $8.9
million and $9.1 million during 2008, 2007 and 2006, respectively. Internally
developed software costs capitalized during 2008, 2007 and 2006 were $9.5
million, $8.3 million and $7.4 million, respectively. (See Note
6 of Notes to Consolidated Financial Statements for a description of
intangibles).
General and
Administrative. General and administrative expenses were $67.2
million, $62.4 million and $54.2 million for the years ended December 31, 2008,
2007 and 2006, respectively, an increase of 8% in 2008 over 2007 following an
increase in 2007 of 15% from the level achieved in 2006. As a percentage of net
sales, general and administrative expenses were 8% for each of 2008, 2007 and
2006. During 2008, the increase in absolute dollars compared to 2007 can
primarily be attributed to the net impact of foreign currency exchange rates
which had the effect of increasing our general and administrative expense by
$2.4 million or 4%. In 2007, the increase in general and administrative expenses
was primarily attributable to increases in personnel costs due to the increase
in general and administrative personnel and increases in stock-based
compensation as well as severance and lease termination costs incurred as a
result of the restructuring of our Dublin, Ireland operations. 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
$6.0 million, $9.8 million and $6.8 million for the years ended December 31,
2008, 2007 and 2006, respectively, a decrease of 39% in 2008 over 2007 following
an increase in 2007 of 44% from the level achieved in 2006. The decrease in 2008
compared to 2007 is attributable to a decrease in invested funds as well as to
the rapid rate of decrease in interest rates during the second half of 2008. The
increase in interest income in 2007 compared to 2006 was primarily driven by an
increase in invested funds. The primary 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
gain (loss) was ($3.7) million, $1.7 million and $0.7 million for the years
ended December 31, 2008, 2007 and 2006, respectively. These results are
attributable to movements in the foreign currency exchange rates between the
U.S. dollar and foreign currencies in countries where 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
receivable positions to protect against the reduction in value caused by a
fluctuation in foreign currency exchange rates. We typically hedge up to 90% of
our outstanding foreign denominated net receivables 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).
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
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 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 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 11 of Notes to Consolidated Financial
Statements for a description of our forward and purchased option contracts and
hedged positions). Our hedging strategy reduced our foreign exchange losses by
$1.2 million in 2008 and reduced our foreign exchange gains by $1.1 million in
2007.
Provision for
Income Taxes. Our provision for income taxes reflected an
effective tax rate of 14%, 6% and 24% for the years ended December 31, 2008,
2007 and 2006, respectively. For 2008, our effective tax rate is lower than the
U.S. federal statutory rate of 35% primarily as a result of the research credit,
reduced tax rates in certain foreign jurisdictions, the partial release of a
deferred tax asset valuation allowance, and a decrease in uncertain tax
positions. For 2007, our effective tax rate was lower than the U.S. federal
statutory rate of 35% primarily as a result of the research credit, reduced tax
rates in certain foreign jurisdictions, tax exempt interest and the partial
release of a deferred tax asset valuation allowance. For 2006, our effective tax
rate was lower than the U.S. federal statutory rate of 35% primarily as a result
of the research credit, reduced tax rates in foreign jurisdictions and tax
exempt interest. The increase in our effective tax rate in 2008 compared to 2007
is primarily due to the fact that the partial release of the valuation allowance
in 2008 was $8.7 million compared to $18.3 million in 2007. The partial release
of the valuation allowance has the effect of decreasing our effective tax rate
in the period in which it is released. The decrease in our effective tax rate in
2007 compared to 2006 was due to increased profits in foreign jurisdictions with
reduced income tax rates and the partial release of a valuation allowance on
deferred tax assets recorded as a result of the restructuring of our
manufacturing operation in Hungary.
In
October 2008, the U.S. President signed into law the Emergency Economic
Stabilization Act of 2008, which extended the research credit for two years with
effect from January 1, 2008. The effects of this new legislation is included in
our income for the period that includes the enactment date in accordance with
SFAS 109, Accounting for
Income Taxes.
Liquidity
and Capital Resources
Working Capital,
Cash and Cash Equivalents, Short-term Investments and Long-term
Investments. The following table presents our working capital,
cash and cash equivalents and marketable securities (in thousands):
|
December 31,
2008
|
December 31,
2007
|
Increase/
(Decrease)
|
||||||||||
|
Working
capital
|
$ | 398,292 | $ | 419,874 | $ | (21,582 | ) | |||||
|
Cash
and cash equivalents (1)
|
229,400 | 194,839 | 34,561 | |||||||||
|
Short-term
investments (1)
|
6,220 | 93,838 | (87,618 | ) | ||||||||
|
Long-term
investments
|
10,500 | — | 10,500 | |||||||||
|
Total
cash, cash equivalents, short and long-term investments
|
$ | 246,120 | $ | 288,677 | $ | (42,557 | ) | |||||
(1) Included in working
capital
Our
working capital and short-term investments decreased by $21.6 million and $87.6
million, respectively, in 2008 compared to 2007 primarily due to repurchases of
shares of our common stock, dividend payments, capital expenditures and net cash
paid for acquisitions, offset in part by cash provided by
operations.
Our cash
and cash equivalent balances are held in numerous financial institutions
throughout the world, including substantial amounts held outside of the U.S.,
however, the majority of our cash and investments that are located outside of
the U.S. are denominated in the U.S. dollar. Most of the amounts held outside of
the U.S. could be repatriated to the U.S., but under current law, would be
subject to U.S. federal income taxes, less applicable foreign tax credits. In
some countries repatriation of certain foreign balances is restricted by local
laws. We have provided for the U.S. federal tax liability on these amounts for
financial statement purposes, except for foreign earnings that are considered
indefinitely reinvested outside of the U.S. Repatriation could result in
additional U.S. federal income tax payments in future years. We utilize a
variety of tax planning and financing strategies with the objective of having
our worldwide cash available in the locations in which it is
needed.
Cash Provided and
(Used) in 2008 and 2007. Cash and cash
equivalents increased to $229.4 million at December 31, 2008 from $194.8 million
at December 31, 2007 as a result of the net effect of cash provided by operating
activities, cash provided by investing activities and cash used in financing
activities. The following table summarizes the proceeds and (uses) of cash (in
thousands):
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Cash
provided by operating
activities
|
$ | 121,818 | $ | 147,372 | ||||
|
Cash
provided by investing
activities
|
18,756 | 14,536 | ||||||
|
Cash
(used in) investing
activities
|
(106,013 | ) | (67,356 | ) | ||||
|
Net
increase in cash
equivalents
|
34,561 | 94,552 | ||||||
|
Cash
and cash equivalents at beginning of
year
|
194,839 | 100,287 | ||||||
|
Cash
and cash equivalents at end of
year
|
$ | 229,400 | $ | 194,839 | ||||
Our
operating activities provided $121.8 million and $147.4 million for the years
ended December 31, 2008 and 2007, respectively, a 17% decrease in 2008 compared
to 2007. In 2008, cash provided by operating activities was primarily the result
of $84.8 million in net income and $51.3 million in net non-cash operating
expenses which primarily consisted of depreciation and amortization, stock-based
compensation, and benefits from deferred income taxes, offset in part by $14.3
million in net cash used by changes in operating assets and liabilities,
principally a $24.6 million increase in inventory. In 2007, cash provided by
operating activities was primarily the result of $107.0 million in net income
and $34.4 million in net non-cash operating expenses which primarily consisted
of depreciation and amortization, stock-based compensation, and benefits from
deferred income taxes, as well as $5.9 million in net cash provided by changes
in operating assets and liabilities, principally a decrease in taxes and other
liabilities of $19.7 million.
Accounts
receivable decreased to $121.5 million at December 31, 2008 from $131.3 million
at December 31, 2007, as a result of lower sales levels in the fourth quarter of
2008 compared to the fourth quarter of 2007 as well as a decrease in days sales
outstanding to 57 days at December 31, 2008 compared to 61 days at December 31,
2007. We typically bill customers on an open account basis subject to our
standard net thirty day payment terms. If, in the longer term, our revenue
increases, it is likely that our accounts receivable balance will also increase.
Our accounts receivable could also increase if customers delay their payments or
if we grant extended payment terms to customers, both of which are more likely
to occur during challenging economic times when our customers may face issues
gaining access to sufficient funding or credit.
Consolidated
inventory balances increased to $107.4 million at December 31, 2008 from $82.7
million at December 31, 2007. Inventory turns decreased to 2.1 per year for 2008
compared to 2.3 per year for 2007. The increase in inventory in 2008 was driven
primarily by increased production in anticipation of high demand levels during
the fourth quarter of 2008 which did not materialize as a result of the sharp
drop in the global industrial economy during the last quarter of 2008. Our
inventory levels will continue to be determined based upon our anticipated
demand for products and our need to keep sufficient inventory on hand to meet
our customers’ demands. Such considerations are balanced against the risk of
obsolescence or potentially excess inventory levels. In the near future, we will
likely work towards reducing our inventory from the balance at December 31,
2008, due to the continued slowdown in the industrial economy. Rapid changes in
industrial demand could have a significant impact on our inventory balances in
the future.
Investing
activities provided cash of $18.8 million in 2008, which was primarily the
result of the net sale of $77.1 million of short-term investments, offset by the
purchase of property and equipment of $25.8 million, a net cash payment of $17.3
million related to the acquisition of microLEX Systems ApS (see Note 15 of Notes to Consolidated Financial Statements),
capitalization of internally developed software of $9.5 million and the
acquisition of other intangibles of $3.0 million. Investing activities provided
cash of $14.5 million in 2007, which was primarily the result of the net sale of
$56.4 million of short-term investments, offset by the purchase of property and
equipment of $24.9 million, capitalization of internally developed software of
$8.3 million and the acquisition of other intangibles of $6.4
million.
Financing
activities used $106.0 million in 2008, which was primarily the result of $103.6
million used to repurchase our common stock and $34.7 million used to pay
dividends to our shareholders, offset by $31.2 million received as a result of
the issuance of our common stock from the exercise of stock options and our
employee stock purchase plan. Financing activities used $67.4 million in 2007,
which was primarily the result of $79.7 million used to repurchase our common
stock and $27.1 million used to pay dividends to our shareholders, offset by
$36.5 million received as a result of the issuance of our common stock from the
exercise of stock options and our employee stock purchase plan.
From time
to time our Board of Directors has authorized various programs to repurchase
shares of our common stock depending on market conditions and other factors.
Under such programs, we repurchased a total of 4,110,042, 2,730,125 and 607,910
shares of our common stock at weighted average prices of $25.22, $29.20 and
$27.16 per share, in the years ended December 31, 2008, 2007 and 2006,
respectively.
On April
25, 2008, our Board of Directors authorized our current program to repurchase up
to 3.0 million shares of our common stock. At December 31, 2008, there were
723,092 shares remaining for repurchases under this program. On January 23,
2009, our Board of Directors approved a new share repurchase program which
increased the aggregate number of shares of common stock that we are authorized
to repurchase up to 3.0 million shares. Our repurchase plan does not have an
expiration date.
The
average price of our common stock decreased during the second half of 2008
compared to the previous year, and as a result, fewer stock options were
exercised by employees, and we received reduced proceeds from the exercise of
stock options in 2008. The timing and number of stock option exercises and the
amount of cash proceeds we receive through those exercises are not within our
control, and in the future we may not generate as much cash from the exercise of
stock options as we have in the past. Moreover, it is now our practice to issue
restricted stock units and not stock options to eligible employees which will
reduce the number of stock options available for exercise in the future. Unlike
the exercise of stock options, the issuance of shares upon vesting of restricted
stock units does not result in any cash proceeds to us.
Contractual Cash
Obligations. The following summarizes our contractual cash
obligations as of December 31, 2008 (in thousands):
|
Payments Due by Period
|
||||||||||||||||||||||||||||
|
Total
|
2009
|
2010
|
2011
|
2012
|
2013
|
Beyond
|
||||||||||||||||||||||
|
Long-term
debt
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
|
Capital
lease obligations
|
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Operating
leases
|
50,252 | 12,394 | 11,199 | 7,312 | 5,064 | 3,229 | 11,054 | |||||||||||||||||||||
|
Other
long-term obligations
|
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Total
contractual cash obligations
|
$ | 50,252 | $ | 12,394 | $ | 11,199 | $ | 7,312 | $ | 5,064 | $ | 3,229 | $ | 11,054 | ||||||||||||||
The
following summarizes our other commercial commitments as of December 31, 2008
(in thousands):
|
Total
|
2009
|
2010
|
2011
|
2012
|
2013
|
Beyond
|
||||||||||||||||||||||
|
Guarantees
|
$ | 2,403 | $ | 2,403 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
|
Purchase
obligations
|
8,379 | 8,379 | — | — | — | — | — | |||||||||||||||||||||
|
Total
commercial commitments
|
$ | 10,782 | $ | 10,782 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
We have
commitments under non-cancelable operating leases primarily for office
facilities throughout the world. Certain leases require us to pay property
taxes, insurance and routine maintenance, and include escalation clauses. As of
December 31, 2008, we have non-cancelable operating lease obligations of
approximately $50.3 million compared to $25.5 million at December 31, 2007. Rent
expense under operating leases was $11.7 million, $10.2 million and $8.7 million
for the years ended December 31, 2008, 2007 and 2006, respectively.
Purchase
obligations primarily represent purchase commitments for customized inventory
and inventory components. As of December 31, 2008, we have non-cancelable
purchase commitments with various suppliers of customized inventory and
inventory components totaling approximately $8.4 million over the next twelve
months. At December 31, 2007, we had non-cancelable purchase commitments with
various suppliers of customized inventory and inventory components totaling
approximately $8.3 million.
Guarantees
are related to payments of customs and foreign grants. As of December 31, 2008,
we have outstanding guarantees for payment of customs and foreign grants
totaling approximately $2.4 million. As of December 31, 2007, we had outstanding
guarantees for payment of customs and foreign grants totaling approximately $4.7
million.
Off-Balance Sheet
Arrangements. We do not have any debt
or off-balance sheet debt. As of December 31, 2008, we did not have any
relationships with any unconsolidated entities or financial partnerships, such
as entities often referred to as structured finance entities, which would have
been established for the purpose of facilitating off-balance sheet
arrangements. As such, we are not exposed to any financing,
liquidity, market or credit risk that could arise if we were engaged in such
relationships.
Prospective
Capital Needs. We believe that our existing cash, cash
equivalents and marketable securities, together with cash generated from
operations and from the exercise of employee stock options and the purchase of
common stock through our employee stock purchase plan, will be sufficient to
cover our working capital needs, capital expenditures, investment requirements,
commitments, payment of dividends to our shareholders and repurchases of our
common stock for at least the next 12 months. However, we may choose or be
required to raise additional funds by selling equity or debt securities to the
public or to selected investors, or by borrowing money from financial
institutions. Historically, we have not had to rely on debt, public or private,
to fund our operating, financing or investing activities. We could also choose
or be required to reduce certain expenditures, such as payments of dividends or
repurchases of our common stock. In addition, even though we may not need
additional funds, we may still elect to sell additional equity or debt
securities or obtain credit facilities for other reasons. If we elect to raise
additional funds, we may not be able to obtain such funds on a timely basis on
acceptable terms, if at all. If we raise additional funds by issuing additional
equity or convertible debt securities, the ownership percentages of existing
shareholders would be reduced. In addition, the equity or debt securities that
we issue may have rights, preferences or privileges senior to those of our
common stock.
Although
we believe that we have sufficient capital to fund our activities for at least
the next 12 months, our future capital requirements may vary materially from
those now planned. We anticipate that the amount of capital we will need in the
future will depend on many factors, including:
|
·
|
general
economic and political conditions and specific conditions in the markets
we address, including the continuing volatility in the industrial economy,
current general economic volatility and trends in the industrial economy
in various geographic regions in which we do
business;
|
|
·
|
the
inability of certain of our customers who depend on credit to have access
to their traditional sources of credit to finance the purchase of products
from us, particularly in the current global economic environment, which
may lead them to reduce their level of purchases or to seek credit or
other accommodations from us;
|
|
·
|
the
overall levels of sales of our products and gross profit
margins;
|
|
·
|
our
business, product, capital expenditure and research and development plans,
and product and technology
roadmaps;
|
|
·
|
the
market acceptance of our products;
|
|
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repurchases
of our common stock;
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required
levels of research and development and other operating
costs;
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litigation
expenses, settlements and
judgments;
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the
levels of inventory and accounts receivable that we
maintain;
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acquisitions
of other businesses, assets, products or
technologies;
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royalties
payable by or to us;
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changes
in our compensation policies;
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capital
improvements for new and existing
facilities;
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technological
advances;
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our
competitors’ responses to our products and our anticipation of and
responses to their products;
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our
relationships with suppliers and customers;
and,
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the
level of exercises of stock options and stock purchases under our employee
stock purchase plan.
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In
addition, we may require additional capital to accommodate planned future
long-term growth, hiring, infrastructure and facility needs.
Recently
Issued Accounting Pronouncements
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements. This
standard defines fair value, establishes a framework for measuring fair value in
accounting principles generally accepted in the United States of America, and
expands disclosure about fair value measurements. This pronouncement applies
under other accounting standards that require or permit fair value measurements.
Accordingly, this statement does not require any new fair value measurement.
This statement is effective for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. However, SFAS 157 is amended by
FSP FAS 157-1, Application of
FASB Statement 157 to FASB Statement 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13, which excludes from the scope of this
provision arrangements accounted for under SFAS 13, Accounting for Leases. SFAS
157 is also amended by FSP FAS 157-2, Effective Date of FASB Statement
157, which delays the effective date of SFAS 157 for all nonfinancial
assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually). This FSP partially defers the effective date of SFAS 157 to
fiscal years beginning after November 15, 2008, and interim periods within those
fiscal years for items within the scope of this FSP. In October 2008, SFAS 157
was amended again by FSP 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active, which
clarifies the application of SFAS 157 in a market that is not active and
provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active. The FSP is effective upon issuance, including prior periods for which
financial statements have not been issued. We adopted SFAS 157 on January 1,
2008, except as it applies to those nonfinancial assets and nonfinancial
liabilities as noted in FSP FAS 157-2. The partial adoption of SFAS 157 did not
have a material impact on our consolidated financial position or results of
operations. We also adopted FSP 157-3 on September 30, 2008 as required and
concluded it did not have a significant impact on our consolidated financial
position or results of operations. (See Note 3 of Notes to
Consolidated Financial Statements).
In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities – including an amendment of FASB Statement
115. This standard permits an entity to measure many financial
instruments and certain other assets and liabilities at fair value on an
instrument-by-instrument basis. This statement is effective for fiscal years
beginning after November 15, 2007. We adopted SFAS 159 on January 1, 2008 as
required. The adoption of SFAS 159 did not have a significant impact on our
financial position or results of operations as we did not elect the fair value
option for items within the scope of this statement.
In
December 2007, the FASB issued SFAS 141R, Business Combinations—a replacement
of FASB Statement 141, which significantly changes the principles and
requirements for how the acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any non-controlling interest in the acquiree. The statement also provides
guidance for recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. This statement is effective prospectively, except for
certain retrospective adjustments to deferred tax balances, for fiscal years
beginning after December 15, 2008. We are currently evaluating the requirements
of SFAS 141R and have not yet determined the impact on our consolidated
financial statements.
In March
2008, the FASB issued SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities. This statement changes the disclosure
requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for under Statement 133 and its related interpretations, and (c)
how derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. This statement is effective for
fiscal years and interim periods beginning after November 15, 2008. Early
application is encouraged. We are currently evaluating the requirements of SFAS
161 and have not yet determined the impact on our consolidated financial
statements.
In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets. FSP FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS 142, Goodwill and Other Intangible
Assets. The intent of the position is to improve the consistency between
the useful life of a recognized intangible asset under SFAS 142 and the period
of expected cash flows used to measure the fair value of the asset under SFAS
141R, Business
Combinations, and other U.S. generally accepted accounting principles.
The provisions of FSP FAS 142-3 are effective for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early adoption
is prohibited. We are currently evaluating the requirements of FSP FAS 142-3 and
have not yet determined the impact on our consolidated financial
statements.
Critical
Accounting Policies
The
preparation of our financial statements in conformity with generally accepted
accounting principles requires us to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues, expenses and related
disclosures of contingent assets and liabilities. We base our estimates on past
experience and other assumptions that we believe are reasonable under the
circumstances, and we evaluate these estimates on an ongoing basis. Our critical
accounting policies are those that affect our financial statements materially
and involve difficult, subjective or complex judgments by management. Although
these estimates are based on management's best knowledge of current events and
actions that may impact the company in the future, actual results may be
materially different from the estimates.
Our
critical accounting policies are as follows:
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Revenue
recognition
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We derive
revenue primarily from the sale/licensing of integrated hardware and software
solutions. Independent sales of application software licenses include post
contract support services. In addition, training services are sold separately.
The products and services are generally sold under standardized licensing and
sales arrangements with payment terms ranging from net 30 days in the United
States to net 30 days and up to net 90 days in some international markets.
Approximately 85% of our product/license sales include both hardware and
software in the customer arrangement, with a small percentage of sales including
other services. We offer rights of return and standard warranties for product
defects related to our products. The rights of return are generally for a period
of up to 30 days after the delivery date. The standard warranties cover periods
ranging from 90 days to three years. We do not enter into contracts requiring
product acceptance from the customer.
Revenue
is recognized in accordance with the provisions of SOP 97-2 when persuasive
evidence of an arrangement exists, delivery has occurred, the fee is fixed or
determinable, and collectability is probable. We enter into certain arrangements
where we are obligated to deliver multiple products and/or services (“multiple
elements”). In these transactions, we allocate the total revenue among the
elements based on vendor specific objective evidence (“VSOE”) of fair value as
determined by the sales price of each element when sold separately.
When VSOE
of fair value is available for the undelivered element of a multiple element
arrangements, sales revenue is generally recognized on the date the product is
shipped, using the residual method under SOP 97-2, with a portion of revenue
recorded as deferred (unearned) due to applicable undelivered elements.
Undelivered elements for our multiple element arrangements with a customer are
generally restricted to post contract support and training and education. The
amount of revenue allocated to these undelivered elements is based on the VSOE
of fair value for those undelivered elements. Deferred revenue due to
undelivered elements is recognized ratably on a straight-line basis over the
service period or when the service is completed. When VSOE of fair value is not
available for the undelivered element of a multiple element arrangement, sales
revenue is generally recognized ratably, on a straight-line basis over the
service period of the undelivered element, generally 12 months or when the
service is completed in accordance with the subscription method under SOP 97-2.
Deferred revenue at December 31, 2008 and 2007 was $45.5 million and $36.1
million, respectively.
The
application of SOP 97-2 requires judgment, including whether a software
arrangement includes multiple elements, and if so, whether VSOE of fair value
exists for those elements. Changes to the elements in a software arrangement,
the ability to identify VSOE for those elements, the fair value of the
respective elements, and changes to a product’s estimated life cycle could
materially impact the amount of our earned and unearned revenue. Judgment is
also required to assess whether future releases of certain software represent
new products or upgrades and enhancements to existing products.
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Estimating
allowances for sales returns
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The
preparation of financial statements requires that we make estimates and
assumptions of potential future product returns related to current period
product revenue. We analyze historical returns, current economic trends, and
changes in customer demand and acceptance of our products when evaluating the
adequacy of our sales returns allowance. Significant judgments and estimates
must be made and used in connection with establishing the sales returns
allowance in any accounting period. A provision for estimated sales returns is
made by reducing recorded revenue by the amount of the allowance. Accounts
receivable is reported net of the allowance for sales returns. The allowance for
sales returns was $1.8 million and $1.7 million at December 31, 2008 and 2007,
respectively. Material differences may result in the amount and timing of our
revenue for any period if we made different judgments or utilized different
estimates or if actual results varied materially from our
estimates.
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Estimating
allowances, specifically the allowance for doubtful accounts and the
adjustment for excess and obsolete
inventories
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The
preparation of financial statements requires that we make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. In addition to estimating an allowance for sales returns, we must also
make estimates about the uncollectability of our accounts receivables. We
specifically analyze accounts receivable and analyze historical bad debts,
customer concentrations, customer credit-worthiness and current economic trends
when evaluating the adequacy of our allowance for doubtful accounts. Our
allowance for doubtful accounts was $3.9 million and $3.9 million at December
31, 2008 and 2007, respectively. We also write down our inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of inventory and estimated market value based on assumptions of future demand
and market conditions. Our allowance for excess and obsolete inventories was
$4.4 million and $4.2 million at December 31, 2008 and 2007, respectively.
Significant judgments and estimates must be made and used in connection with
establishing these allowances. Material differences may result in the amount and
timing of our bad debt and inventory obsolescence if we made different judgments
or utilized different estimates or if actual results varied materially from our
estimates.
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Accounting
for costs of computer software
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We
capitalize costs related to the development and acquisition of certain software
products. Capitalization of costs begins when technological feasibility has been
established and ends when the product is available for general release to
customers. Technological feasibility for our products is established when the
product is available for beta release. Judgment is required in determining when
technological feasibility of a product is established. Amortization is computed
on an individual product basis for those products available for market and has
been recognized based on the product’s estimated economic life, generally three
years. At each balance sheet date, the unamortized costs are reviewed by
management and reduced to net realized value when necessary. As of December 31,
2008, unamortized capitalized software development costs was $14.3
million.
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Valuation
of long-lived and intangible assets
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We assess
the impairment of identifiable intangibles, long-lived assets and related
goodwill whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. As we have one reporting segment, we allocate
goodwill to one reporting unit for goodwill impairment testing. Factors
considered important which could trigger an impairment review include the
following:
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significant
underperformance relative to expected historical or projected future
operating results;
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significant
changes in the manner of our use of the acquired assets or the strategy
for our overall business;
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significant
negative industry or economic trends;
and,
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our
market capitalization relative to net book
value.
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When it
is determined that the carrying value of intangibles, long-lived assets and
related goodwill may not be recoverable based upon the existence of one or more
of the above indicators of impairment, the measurement of any impairment is
determined and the carrying value is reduced as appropriate. As of December 31,
2008, we had net goodwill of approximately $64.6 million.
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Accounting
for income taxes
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We
account for income taxes under the asset and liability method that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in our financial statements or
tax returns. Judgment is required in assessing the future tax consequences of
events that have been recognized in our financial statements or tax returns.
Variations in the actual outcome of these future tax consequences could
materially impact our financial position or our results of operations. In
estimating future tax consequences, all expected future events are considered
other than enactments of changes in tax laws or rates. Valuation allowances are
established when necessary to reduce deferred tax assets to amounts which are
more likely than not to be realized.
As a
result of certain foreign investment incentives available under Hungarian law,
the profit from our Hungarian operation was subject to a reduced income tax
rate. This special tax status terminated on January 1, 2008, with the merger of
our Hungary manufacturing operations with its Hungarian parent company. The tax
position of our Hungarian operation continues to benefit from assets created by
the restructuring of our operations in Hungary. We expect profit from our
Hungarian operation in future periods to result in realization of a portion of
these assets. Partial release of the valuation allowance on these assets
resulted in income tax benefits of $8.7 million and $18.3 million for the years
ended December 31, 2008 and 2007, respectively. These benefits may not be
available in the future due to changes in Hungary’s political condition and/or
tax laws. The reduction or elimination of these tax benefits in Hungary or
future changes in U.S. law pertaining to taxation of foreign earnings could
result in an increase in our future effective income tax rate, which could have
a material adverse effect on our operating results.
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Loss
contingencies
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We accrue
for probable losses from contingencies including legal defense costs, on an
undiscounted basis, in accordance with SFAS 5, Accounting for Loss
Contingencies, when such costs are considered probable of being incurred
and are reasonably estimable. We periodically evaluate available information,
both internal and external, relative to such contingencies and adjust this
accrual as necessary. Disclosure of a contingency is required if there is at
least a reasonable possibility that a loss has been incurred. In determining
whether a loss should be accrued we evaluate, among other factors, the degree of
probability of an unfavorable outcome and the ability to make a reasonable
estimate of the amount of loss. Changes in these factors could materially impact
our financial position or our results of operation.
ITEM
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial
Risk Management
Our
international sales are subject to inherent risks, including fluctuations in
local economies; fluctuations in foreign currencies relative to the U.S. dollar;
difficulties in staffing and managing foreign operations; greater difficulty in
accounts receivable collection; costs and risks of localizing products for
foreign countries; unexpected changes in regulatory requirements, tariffs and
other trade barriers; difficulties in the repatriation of earnings and burdens
of complying with a wide variety of foreign laws. The vast majority of our sales
outside of North America are denominated in local currencies, and accordingly,
we are subject to the risks associated with fluctuations in currency rates.
During 2008, the U.S. dollar generally traded lower against other major
currencies that impact our business. This had the effect of increasing our
consolidated sales by 4% compared to 2007. Since most of our international
operating expenses are also incurred in local currencies, the change in exchange
rates had the effect of increasing our operating expenses by $15.1 million over
the same period. Currently, we are experiencing significant volatility in
foreign currency exchange rates in many of the markets in which we do business.
This has had a significant impact on the revaluation of our foreign currency
denominated firm commitments and on our ability to forecast U.S. dollar
equivalent revenues and expenses. If the local currencies in which we sell our
products strengthen against the U.S. dollar, we may need to lower our prices in
the local currency to remain competitive in our international markets which
could have a material adverse effect on our gross and net profit margins. If the
local currencies in which we sell our products weaken against the U.S. dollar
and if the local sales prices cannot be raised due to competitive pressures, we
will experience a deterioration of our gross and net profit margins. Our foreign
currency hedging program includes both foreign currency forward and purchased
option contracts to reduce the effect of exchange rate fluctuations. However,
our hedging program will not eliminate all of our foreign exchange risks,
particularly when market conditions experience the recent level of volatility.
(See “Net Foreign Exchange Gain (Loss)” and Note 11 of Notes to
Consolidated Financial Statements).
Inventory
Management
The
marketplace for our products dictates that many of our products be shipped very
quickly after an order is received. As a result, we are required to maintain
significant inventories. Therefore, inventory obsolescence is a risk for us due
to frequent engineering changes, shifting customer demand, the emergence of new
industry standards and rapid technological advances including the introduction
by us or our competitors of products embodying new technology. While we adjust
for excess and obsolete inventories and we monitor the valuation of our
inventories, there can be no assurance that our valuation adjustments will be
sufficient.
Market
Risk
We are
exposed to a variety of risks, including foreign currency fluctuations and
changes in the market value of our investments. In the normal course of
business, we employ established policies and procedures to manage our exposure
to fluctuations in foreign currency values and changes in the market value of
our investments.
Cash,
Cash Equivalents and Short-Term Investments
At
December 31, 2008, we had $235.6 million in cash, cash equivalents and
short-term investments. We maintain cash and cash equivalents with various
financial institutions located in many countries throughout the world.
Approximately $75 million or 32% of these amounts were held in domestic accounts
with financial institutions and $161 million or 68% was held in accounts outside
of the United States with financial institutions. Cash and cash equivalents
consisted of $101 million or 44% of our cash and cash equivalents were held in
cash in various operating accounts throughout the world, $73 million or 32% was
held in time deposits which had original maturities of less than 90 days, $55
million or 24% was held in money market accounts. The most significant of our
operating accounts was our domestic operating account which held approximately
$15 million or 7% of our total cash and cash equivalents at a bank that carried
an AAA rating at December 31, 2008. Our short-term investment balance of $6.2
million was held in our investment account in the United States. We maintain an
investment portfolio of various types of security holdings and maturities.
Pursuant to SFAS 157, Fair
Value Measurements, cash equivalents and 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 inactive markets. The
goal of our investment policy is to manage our investment portfolio to preserve
principal and liquidity while maximizing the return on our investment portfolio
through the full investment of available funds. We place our cash investments in
instruments that meet credit quality standards, as specified in our corporate
investment policy guidelines. These guidelines also limit the amount of credit
exposure to any one issue, issuer or type of instrument. Other than our auction
rate securities discussed below, at December 31, 2008, our cash equivalents and
short-term investments carried ratings from the major credit rating agencies
that were in accordance with our corporate investment policy. Our investment
policy allows investments in the following; government and federal agency
obligations, repurchase agreements (“Repos”), certificates of deposit and time
deposits, corporate obligations, medium term notes and deposit notes, commercial
paper including asset-backed commercial paper (“ABCP”), puttable bonds, general
obligation and revenue bonds, money market funds, taxable commercial paper,
corporate notes/bonds, municipal notes, municipal obligations, variable rate
demand notes and tax exempt commercial paper. All such instruments must carry
minimum ratings of A1/P1/F1, MIG1/VMIG1/SP1 and A2/A/A, as applicable, all of
which are considered “investment grade”. Our investment policy for marketable
securities requires that all securities mature in three years or less, with a
weighted average maturity of no longer than 18 months with at least 10% maturing
in 90 days or less.
We
account for our investments in debt and equity instruments under SFAS 115, Accounting for Certain Investments
in Debt and Equity Securities and Financial Accounting Standards Board
(“FASB”) Staff Position (“FSP”), SFAS No. 115-1, The Meaning of Other-Than-Temporary
Impairment and Its
Application to Certain Investments. Our investments are classified as
available-for-sale and accordingly are reported at fair value, with unrealized
gains and losses reported as other comprehensive income, a component of
shareholders’ equity. Unrealized losses are charged against income when a
decline in fair value is determined to be other than temporary. Investments with
maturities beyond one year are classified as short-term based on their highly
liquid nature and because such marketable securities represent the investment of
cash that is available for current operations. The fair value of our short-term
investments in marketable securities at December 31, 2008 and 2007 was $6.2
million and $93.8 million, respectively. The decrease was primarily due to the
net sale of $77.1 million of our short-term investments during 2008 primarily to
fund the repurchase of shares of our common stock. We follow the guidance
provided by FSP FAS 115-1 to assess whether our investments with unrealized loss
positions are other than temporarily impaired. Realized gains and losses and
declines in value judged to be other than temporary are determined based on the
specific identification method and are reported in other income (expense), net,
in our Consolidated Statements of Income.
Long-Term
Investments
Our
long-term investments consist primarily of Aaa/A/AAA rated investments in
auction rate securities that we originally purchased for $8.6 million. These
auction rate securities consist of education loan revenue bonds. Auction rate
securities are variable rate debt instruments whose interest rates are typically
reset approximately every 7 to 35 days. On December 26, 2008, and in prior
auction periods beginning in February 2008, the auction process for these
securities failed. Prior to the failure of the auction process, we had
classified these investments as short-term but are now reporting them as
long-term due to the fact that the underlying securities generally have longer
dated contractual maturities which are in excess of the guidelines provided for
in our corporate investment policy. The auction rate securities are classified
as available-for-sale. At December 31, 2008, we reported these long-term
investments at their estimated fair market value of $7.0 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 December 31, 2008, we reported the
Rights agreement at its estimated fair market value of $1.6 million. We continue
to have the ability to hold the debt instruments to their ultimate maturity and
have not made a determination as to whether we will exercise our right under the
Rights agreement described above. As such, we have recorded the unrealized loss
related to the auction rate securities and the unrealized gain related to the
Rights agreement as a component of other income (expense), in our Consolidated Statements of Income. The estimated fair market
value of the Rights agreement is also included as a component of our long-term
investments. 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 SFAS 157, Fair Value Measurements. The
debt instruments underlying the auction rate securities have redemption features
which call for redemption at 100% of par value and had a minimum rating of
Aaa/A/AAA at December 31, 2008. Both of these factors, along with current credit
curves for like securities, and discount factors to account for the illiquidity
of the market for these securities were considered in determining the fair
market value of the auction rate securities as well as our corresponding Rights
agreement at December 31, 2008. (See Note 3 of Notes to
Consolidated Financial Statements for additional discussion).
We do not
consider these investments as liquid in the short-term and therefore continued
to classify them as long-term investments at December 31, 2008. The auction rate
market is not expected to provide liquidity for these securities in the
foreseeable future. Should we need or desire to access the funds invested in
those securities prior to their maturity or prior to our exercise period under
the Rights agreement discussed above, we may be unable to find a buyer in a
secondary market outside the auction process or if a buyer in a secondary market
is found, we would likely realize a loss.
Interest
Rate Risk
Investments
in both fixed rate and floating rate instruments carry a degree of interest rate
risk. Fixed rate securities may have their market value adversely impacted due
to an increase in interest rates, while floating rate securities may produce
less income than expected if interest rates fall. Due in part to these factors,
our future investment income may fall short of expectations due to changes in
interest rates or if the decline in fair value of our publicly traded debt
investments is judged to be other-than-temporary. We may suffer losses in
principal if we are forced to sell securities that have declined in market value
due to changes in interest rates. However, because any debt securities we hold
are classified as available-for-sale, no gains or losses are realized in the
income statement due to changes in interest rates unless such securities are
sold prior to maturity or unless declines in value are determined to be
other-than-temporary. These securities are reported at fair value with the
related unrealized gains and losses included in accumulated other comprehensive
income (loss), a component of shareholders’ equity, net of tax.
In a
declining interest rate environment, as short-term investments mature,
reinvestment occurs at less favorable market rates. Given the short-term nature
of certain investments, the current interest rate environment of low or
declining rates may negatively impact our investment income.
In order
to assess the interest rate risk associated with our investment portfolio, we
performed a sensitivity analysis to determine the impact a change in interest
rates would have on the value of the investment portfolio assuming a 100 basis
point parallel shift in the yield curve. Based on our investment positions as of
December 31, 2008, a 100 basis point increase or decrease in interest rates
across all maturities would result in a $673,000 increase or decrease in the
fair market value of the portfolio. As of December 31, 2007, a similar 100 basis
point shift in the yield curve would have resulted in a $972,000 increase or
decrease in the fair market value of the portfolio. Such losses would only be
realized if we sold the investments prior to maturity or if there is a other
than temporary impairment.
Actual
future gains and losses associated with our investments may differ from the
sensitivity analyses performed as of December 31, 2008 due to the inherent
limitations associated with predicting the changes in the timing and level of
interest rates and our actual exposures and positions.
Current
economic conditions have had widespread negative effects on the financial
markets. Due to credit concerns and lack of liquidity in the short-term funding
markets, we shifted a larger percentage of our portfolio to money market funds,
U.S. Treasuries and time deposits during 2008. This has negatively impacted and
will likely to continue to negatively impact our investment income, particularly
if yields continue to decline or stay at low levels.
Exchange
Rate Risk
Our
objective in managing our exposure to foreign currency exchange rate
fluctuations is to reduce the impact of adverse fluctuations in such exchange
rates on our earnings and cash flow. Accordingly, we utilize purchased foreign
currency option and forward contracts to hedge our exposure on anticipated
transactions and firm commitments. The principal currencies hedged are the Euro,
British pound, Japanese yen, Korean won and Hungarian forint. We monitor our
foreign exchange exposures regularly to help ensure the overall effectiveness of
our foreign currency hedge positions. Throughout 2008, we experienced
significant volatility in foreign currency exchange rates in many of the markets
in which we do business. Therefore, there can be no assurance that our foreign
currency hedging activities will substantially offset the impact of fluctuations
in currency exchanges rates on our results of operations and financial position.
Based on the foreign exchange instruments outstanding at December 31, 2008 and
2007, an adverse change (defined as 20% in the Asian currencies and 10% in all
other currencies) in exchange rates would result in a decline in the aggregate
settlement value of all of our instruments outstanding of approximately $30.6
million and $10.0 million, respectively. However, as we utilize foreign currency
instruments for hedging anticipated and firmly committed transactions, we
believe that a loss in settlement value for those instruments will be
substantially offset by increases in the value of the underlying exposure. (See
Note 11 of Notes to Consolidated Financial Statements for
further description of our derivative instruments and hedging activities at
December 31, 2008 and 2007).
ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The
information required by this item is incorporated by reference to the
Consolidated Financial Statements set forth on pages F-1 through F-30
hereof.
ITEM
9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL
DISCLOSURE
There
were no disagreements with accountants on accounting and financial disclosure
for the year ended December 31, 2008.
ITEM
9A. CONTROLS
AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
As of the
end of the period covered by this Annual Report on Form 10-K, as required by
paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Securities Exchange Act of
1934, as amended, we evaluated under the supervision of our Chief Executive
Officer and our Chief Financial Officer, the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the
Securities Exchange Act of 1934, as amended). Based on this evaluation, our
Chief Executive Officer and our Chief Financial Officer have concluded that our
disclosure controls and procedures are effective to ensure that information we
are required to disclose in reports that we file or submit under the Securities
Exchange Act of 1934 (i) is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms, and (ii) is accumulated and communicated to our management, including our
Chief Executive Officer and our Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. Our disclosure controls and
procedures are designed to provide reasonable assurance that such information is
accumulated and communicated to our management. Our disclosure controls and
procedures include components of our internal control over financial reporting.
Management’s assessment of the effectiveness of our internal control over
financial reporting is expressed at the level of reasonable assurance because a
control system, no matter how well designed and operated, can provide only
reasonable, but not absolute, assurance that the control system’s objectives
will be met.
Management
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting to provide reasonable assurance regarding the
reliability of our financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles. Internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the company, (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a
material effect on the financial statements.
Management
assessed our internal control over financial reporting as of December 31, 2008,
which was the end of our fiscal year. Management based its assessment on
criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Management’s
assessment included evaluation of such elements as the design and operating
effectiveness of key financial reporting controls, process documentation,
accounting policies, and our overall control environment. This assessment is
supported by testing and monitoring performed by our finance
organization.
Based on
our assessment, management has concluded that our internal control over
financial reporting was effective as of the end of the fiscal year to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external reporting purposes in
accordance with generally accepted accounting principles. We reviewed the
results of management’s assessment with the Audit Committee of our Board of
Directors.
Our
independent registered public accounting firm, Ernst & Young LLP, audited
our consolidated financial statements, and independently assessed the
effectiveness of our internal control over financial reporting. Ernst &
Young LLP has issued their report, which is included in Part II, Item 8 of this
Form 10-K.
Changes
in Internal Control over Financial Reporting
During
the three months ended December 31, 2008, there was no change in our internal
control over financial reporting identified in connection with the evaluation
required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
ITEM
9B. OTHER
INFORMATION
None.
Certain
information required by Part III is omitted from this Report in that we intend
to file a definitive proxy statement pursuant to Regulation 14A with the
Securities and Exchange Commission (the “Proxy Statement”) relating to our
annual meeting of stockholders not later than 120 days after the end of the
fiscal year covered by this Report, and such information is incorporated by
reference herein.
ITEM
10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
information concerning our directors required by this Item pursuant to Item 401
of Regulation S-K will appear in our Proxy Statement under the section “Election
of Directors” and such information is incorporated herein by
reference.
The
information concerning our executive officers required by this Item pursuant to
Item 401 of Regulation S-K will appear in our Proxy Statement under the section
“Executive Officers” and such information is incorporated herein by
reference.
The
information required by this Item pursuant to Item 405 of Regulation S-K
regarding compliance with Section 16(a) of the Securities Exchange Act of 1934,
as amended, will appear in our Proxy Statement under the section “Section 16(a)
Beneficial Ownership Reporting Compliance” and such information is incorporated
herein by reference.
The
information concerning our code of ethics that applies to our principal
executive officer, our principal financial officer, our controller or person
performing similar functions required by this Item pursuant to Item 406 of
Regulation S-K will appear in our Proxy Statement under the section “Code of
Ethics” and such information is incorporated herein by reference.
The
information required by this Item pursuant to Item 407(c)(3) of Regulation S-K
regarding material changes, if any, to procedures by which security holders may
recommend nominees to our board of directors will appear in our Proxy Statement
under the section “Deadline for Receipt of Stockholder Proposals” and such
information is incorporated herein by reference.
The
information required by this Item pursuant to Item 407(d)(4) and Item 407(d)(5)
of Regulation S-K regarding our Audit Committee and our audit committee
financial expert(s), respectively, will appear in our Proxy Statement under the
heading “Corporate Governance” and such information is incorporated herein by
reference.
ITEM
11. EXECUTIVE
COMPENSATION
The
information required by this Item pursuant to Item 402 of Regulation S-K
regarding director compensation will appear in our Proxy Statement under the
section “Board Compensation” and such information is incorporated herein by
reference.
The
information required by this Item pursuant to Item 402 of Regulation S-K
regarding executive officer compensation, including our Compensation Discussion
& Analysis, will appear in our Proxy Statement under the section “Executive
Compensation” and such information is incorporated herein by
reference.
The
information required by this Item pursuant to Item 407(e)(4) of Regulation S-K
will appear in our Proxy Statement under the section “Compensation Committee
Interlocks and Insider Participation” and such information is incorporated
herein by reference.
The
information required by this Item pursuant to Item 407(e)(5) will appear in our
Proxy Statement under the section “Compensation Committee Report” and such
information is incorporated herein by reference.
ITEM
12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDER
MATTERS
From time
to time our directors, executive officers and other insiders may adopt stock
trading plans pursuant to Rule 10b5-1(c) promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended.
Jeffrey L. Kodosky and James J. Truchard have made periodic sales of our stock
pursuant to such plans.
The
information required by this Item pursuant to Item 403 of Regulation S-K
concerning security ownership of certain beneficial owners and management will
appear in our Proxy Statement under the section “Security Ownership” and such
information is incorporated herein by reference.
The
information required by this Item pursuant to Item 201(d) of Regulation S-K
concerning securities authorized for issuance under equity compensation plans
will appear in our Proxy Statement under the section “Equity Compensation Plans
Information” and such information is incorporated herein by
reference.
ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
During
2002, we irrevocably contributed approximately $3.6 million to the National
Instruments Foundation, a 501(c)(3) charitable foundation established in 2002
for the purpose of continued promotion of scientific and engineering research
and education at higher education institutions worldwide. Two of the four
directors of the National Instruments Foundation are current officers of
National Instruments.
In
addition, the information required by this Item pursuant to Item 404 of
Regulation S-K will appear in our Proxy Statement under the section “Certain
Relationships and Related Transactions” and such information is incorporated
herein by reference.
The
information required by this Item pursuant to Item 407(a) of Regulation S-K
regarding the independence of our directors will appear in our Proxy Statement
under the section “Corporate Governance” and such information is incorporated
herein by reference.
ITEM
14. PRINCIPAL
ACCOUNTING FEES AND SERVICES
The
information concerning principal accountant fees and services required by this
Item is incorporated by reference to our Proxy Statement under the heading
“Independent Public Accountants.”
The
information concerning pre-approval policies for audit and non-audit services
required by this Item is incorporated by reference to our Proxy Statement under
the heading “Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Auditors.”
PART
IV
ITEM
15. EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
(a)
|
Documents
Filed with Report
|
1. Financial
Statements.
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Report
of Independent Registered Public Accounting Firm
|
F-3
|
|
F-4
|
|
|
F-5
|
|
|
F-6
|
|
|
F-7
|
|
|
F-8
|
2. Financial Statement
Schedules.
None
3. Exhibits.
|
Exhibit
Number
|
Description
|
|
|
3.1(2)
|
Certificate
of Incorporation, as amended, of the Company.
|
|
|
3.2(11)
|
Amended
and Restated Bylaws of the Company.
|
|
|
3.3(4)
|
Certificate
of Designation of Rights, Preferences and Privileges of Series A
Participating Preferred Stock of the Company.
|
|
|
4.1(1)
|
Specimen
of Common Stock certificate of the Company.
|
|
|
4.2(3)
|
Rights
Agreement dated as of January 21, 2004, between the Company and EquiServe
Trust Company, N.A.
|
|
|
10.1(1)
|
Form
of Indemnification Agreement.
|
|
|
10.2(5)
|
1994
Incentive Plan, as amended.*
|
|
|
10.3(9)
|
1994
Employee Stock Purchase Plan.*
|
|
|
10.4(6)
|
Long-Term
Incentive Program.*
|
|
|
10.5(7)
|
2005
Incentive Plan.*
|
|
|
10.6(8)
|
National
Instruments Corporation Annual Incentive Program.*
|
|
|
10.7(12)
|
2008
Annual Incentive Program Goals and Awards for the Named Executive
Oficers.*
|
|
|
10.8(10)
|
Form
of Restricted Stock Unit Award Agreement (Non-Employee
Director).*
|
|
|
10.9(10)
|
Form
of Restricted Stock Unit Award Agreement (Performance
Vesting).*
|
|
|
10.10(10)
|
Form
of Restricted Stock Unit Award Agreement (Current
Employee).*
|
|
|
10.11(10)
|
Form
of Restricted Stock Unit Award Agreement (Newly Hired
Employee).*
|
|
|
21.1
|
Subsidiaries
of the Company.
|
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm.
|
|
|
24.0
|
Power
of Attorney (included on page 35).
|
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of
2002.
|
|
|
(1)
|
Incorporated by reference to the Company's Registration Statement on Form S-1 (Reg. 33-88386) declared effective March 13, 1995. |
| (2) | Incorporated by reference to the same-numbered exhibit filed with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003. |
| (3) | Incorporated by reference to exhibit 4.1 filed with the Company's Current Report on Form 8-K filed on January 28, 2004. |
| (4) | Incorporated by reference to the same-numbered exhibit filed with the Company's Form 8-K on April 27, 2004. |
| (5) | Incorporated by reference to the same-numbered exhibit filed with the Company's Form 10-Q on August 5, 2004. |
| (6) | Incorporated by reference to exhibit 99.1 filed with the Company's Current Report on Form 8-K filed on October 22, 2008. |
| (7) | Incorporated by reference to exhibit A of the Company's Proxy Statement dated and filed on April 4, 2005. |
| (8) | Incorporated by reference to exhibit 99.2 filed with the Company's Current Report on Form 8-K filed on October 22, 2008. |
| (9) | Incorporated by reference to exhibit 10.3 filed with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2006. |
| (10) | Incorporated by reference to the same-numbered exhibit filed with the Company's Form 10-Q on August 2, 2006. |
| (11) | Incorporated by reference to the same-numbered exhibit filed with the Company's AnnualReport on Form 10-K for the fiscal year ended December 31, 2007. |
| (12) | Incorporated by reference to exhibit 99.1 filed with the Company's Form 8-K filed on March 21, 2008. |
| * | Management Contract or Compensatory Plan or Arrangement. |
|
(b)
|
Exhibits
|
See Item
15(a)(3) above.
|
(c)
|
Financial
Statement Schedules
|
See Item
15(a)(2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Registrant | |||
| NATIONAL INSTRUMENTS CORPORATION | |||
|
February
26, 2009
|
By:
|
/s/ Dr. James J. Truchard | |
| Dr. James J. Truchard | |||
| Chairman of the Board and President | |||
POWER
OF ATTORNEY
KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Dr. James J. Truchard and Alexander M. Davern, jointly
and severally, his or her attorneys-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Capacity
in Which Signed
|
Date
|
||
|
/s/
Dr. James J. Truchard
|
Chairman
of the Board and President
(Principal Executive Officer)
|
February
26, 2009
|
||
|
Dr.
James J. Truchard
|
||||
|
/s/
Alex M. Davern
|
Chief
Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
|
February
26, 2009
|
||
|
Alex
M. Davern
|
||||
|
/s/
Jeffrey L. Kodosky
|
Director
|
February
26, 2009
|
||
|
Jeffrey
L. Kodosky
|
||||
| /s/ Dr. Donald M. Carlton | Director | February 26, 2009 | ||
| Dr. Donald M. Carlton | ||||
| /s/ Dr. Ben G. Streetman | Director | February 26, 2009 | ||
| Dr. Ben G. Streetman | ||||
| /s/ R. Gary Daniels | Director | February 26, 2009 | ||
| R. Gary Daniels | ||||
| /s/ Charles J. Roesslein | Director | February 26, 2009 | ||
| Charles J. Roesslein | ||||
| /s/ Duy-Loan T. Le | Director | February 26, 2009 | ||
| Duy-Loan T. Le | ||||
| /s/ John Medica | Director | February 26, 2009 | ||
| John Medica |
NATIONAL
INSTRUMENTS CORPORATION
INDEX
TO FINANCIAL STATEMENTS
|
Page No.
|
|
|
Financial
Statements:
|
|
|
Report
of Independent Registered Public Accounting
Firm
|
F-2
|
|
Report
of Independent Registered Public Accounting
Firm
|
F-3
|
|
Consolidated Balance Sheets as of December 31, 2008 and
2007
|
F-4
|
|
Consolidated Statements of Income for each of the Three
Years in the period Ended December 31, 2008
|
F-5
|
|
Consolidated Statements of Cash Flows for each of the
Three Years in the period Ended December 31, 2008
|
F-6
|
|
Consolidated Statements of Stockholders’ Equity for each
of the Three Years in the period Ended December 31, 2008
|
F-7
|
|
F-8
|
All
schedules are omitted because they are not applicable.
Report
of Independent Registered Public Accounting Firm
The
Board of Directors and Shareholders of National Instruments
Corporation:
We have
audited National Instruments Corporation’s internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). National Instruments Corporation’s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management Report
on Internal Control over Financial Reporting. Our responsibility is to express
an opinion on the company’s internal control over financial reporting based on
our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, National Instruments Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008,
based on the COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of National
Instruments Corporation as of December 31, 2008 and 2007, and the related
consolidated statements of income, stockholders’ equity, and cash flows for each
of the three years in the period ended December 31, 2008 and our report dated
February 23, 2009 expressed an unqualified opinion thereon.
/s/
Ernst & Young LLP
Austin,
Texas
February 23, 2009
Report
of Independent Registered Public Accounting Firm
The
Board of Directors and Shareholders of National Instruments
Corporation:
We have
audited the accompanying consolidated balance sheets of National Instruments
Corporation as of December 31, 2008 and 2007, and the related consolidated
statements of income, stockholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2008. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of National Instruments
Corporation at December 31, 2008 and 2007, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2008, in conformity with U.S. generally accepted accounting
principles.
As
discussed in Note 8 to the consolidated financial statements, effective
January 1, 2007, the Company adopted Financial Accounting Standard Board (FASB)
Interpretation No. 48 “Accounting for Uncertainty in Income Taxes (an
interpretation of FASB Statement No. 109).
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), National Instruments Corporation’s internal
control over financial reporting as of December 31, 2008, based on criteria
established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 23, 2009
expressed an unqualified opinion thereon.
/s/
Ernst & Young LLP
Austin,
Texas
February
23, 2009
NATIONAL
INSTRUMENTS CORPORATION
(in
thousands, except share data)
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash
equivalents
|
$ | 229,400 | $ | 194,839 | ||||
|
Short-term
investments
|
6,220 | 93,838 | ||||||
|
Accounts
receivable,
net
|
121,548 | 131,282 | ||||||
|
Inventories,
net
|
107,358 | 82,675 | ||||||
|
Prepaid
expenses and other current
assets
|
43,062 | 27,815 | ||||||
|
Deferred
income taxes,
net
|
21,435 | 14,761 | ||||||
|
Total
current
assets
|
529,023 | 545,210 | ||||||
|
Long-term
investments
|
10,500 | — | ||||||
|
Property
and equipment,
net
|
154,477 | 151,462 | ||||||
|
Goodwill,
net
|
64,561 | 54,111 | ||||||
|
Intangible
assets,
net
|
41,915 | 40,357 | ||||||
|
Other
long-term
assets
|
32,115 | 27,672 | ||||||
|
Total
assets
|
$ | 832,591 | $ | 818,812 | ||||
|
Liabilities
and Stockholders’ Equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 30,876 | $ | 36,187 | ||||
|
Accrued
compensation
|
22,012 | 25,778 | ||||||
|
Deferred
revenue
|
45,514 | 36,091 | ||||||
|
Accrued
expenses and other
liabilities
|
18,848 | 10,437 | ||||||
|
Other
taxes
payable
|
13,481 | 16,843 | ||||||
|
Total
current
liabilities
|
130,731 | 125,336 | ||||||
|
Deferred
income
taxes
|
25,157 | 21,221 | ||||||
|
Other
long-term
liabilities
|
12,265 | 11,169 | ||||||
|
Total
liabilities
|
168,153 | 157,726 | ||||||
|
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; 77,193,063
and 79,405,359 shares issued and outstanding, respectively
|
772 | 794 | ||||||
|
Additional
paid-in
capital
|
39,673 | 89,809 | ||||||
|
Retained
earnings
|
613,510 | 563,418 | ||||||
|
Accumulated
other comprehensive
income
|
10,483 | 7,065 | ||||||
|
Total
stockholders’
equity
|
664,438 | 661,086 | ||||||
|
Total
liabilities and stockholders’
equity
|
$ | 832,591 | $ | 818,812 | ||||
The
accompanying notes are an integral part of these financial
statements.
NATIONAL
INSTRUMENTS CORPORATION
(in
thousands, except per share data)
|
For
the Years
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Net
sales:
|
||||||||||||
|
Product
|
$ | 765,441 | $ | 701,589 | $ | 623,453 | ||||||
|
Software
maintenance
|
55,096 | 38,789 | 36,954 | |||||||||
|
Total
net
sales
|
820,537 | 740,378 | 660,407 | |||||||||
|
Cost
of sales:
|
||||||||||||
|
Product
|
201,064 | 180,556 | 168,770 | |||||||||
|
Software
maintenance
|
6,045 | 4,711 | 4,578 | |||||||||
|
Total
cost of
sales
|
207,109 | 185,267 | 173,348 | |||||||||
|
Gross
profit
|
613,428 | 555,111 | 487,059 | |||||||||
|
Operating
expenses:
|
||||||||||||
|
Sales
and
marketing
|
307,409 | 264,060 | 232,050 | |||||||||
|
Research
and
development
|
143,140 | 126,515 | 113,095 | |||||||||
|
General
and
administrative
|
67,162 | 62,445 | 54,192 | |||||||||
|
Total
operating
expenses
|
517,711 | 453,020 | 399,337 | |||||||||
|
Operating
income
|
95,717 | 102,091 | 87,722 | |||||||||
|
Other
income (expense):
|
||||||||||||
|
Interest
income
|
5,996 | 9,822 | 6,847 | |||||||||
|
Net
foreign exchange gain
(loss)
|
(3,737 | ) | 1,672 | 740 | ||||||||
|
Other
income (expense),
net
|
161 | (158 | ) | (7 | ) | |||||||
|
Income
before income
taxes
|
98,137 | 113,427 | 95,302 | |||||||||
|
Provision
for income
taxes
|
13,310 | 6,394 | 22,594 | |||||||||
|
Net
income
|
$ | 84,827 | $ | 107,033 | $ | 72,708 | ||||||
|
Basic
earnings per
share
|
$ | 1.08 | $ | 1.35 | $ | 0.91 | ||||||
|
Weighted
average shares outstanding -
basic
|
78,567 | 79,468 | 79,519 | |||||||||
|
Diluted
earnings per
share
|
$ | 1.07 | $ | 1.32 | $ | 0.89 | ||||||
|
Weighted
average shares outstanding -
diluted
|
79,515 | 81,043 | 81,519 | |||||||||
|
Dividends
declared per
share
|
$ | 0.44 | $ | 0.34 | $ | 0.24 | ||||||
The
accompanying notes are an integral part of these financial
statements.
NATIONAL
INSTRUMENTS CORPORATION
(in
thousands)
|
For the Years Ended December
31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Cash
flow from operating activities:
|
||||||||||||
|
Net
income
|
$ | 84,827 | $ | 107,033 | $ | 72,708 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and
amortization
|
37,103 | 36,605 | 34,181 | |||||||||
|
Stock-based
compensation
|
19,854 | 17,754 | 14,507 | |||||||||
|
(Benefit
from) deferred income
taxes
|
(4,475 | ) | (16,954 | ) | (1,012 | ) | ||||||
|
Tax
benefit from stock option
plans
|
(1,213 | ) | (2,964 | ) | (4,271 | ) | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Accounts
receivable
|
12,159 | (14,047 | ) | (21,502 | ) | |||||||
|
Inventories
|
(24,578 | ) | (5,537 | ) | (14,311 | ) | ||||||
|
Prepaid
expenses and other
assets
|
(10,340 | ) | (12,330 | ) | 1,305 | |||||||
|
Accounts
payable
|
(5,648 | ) | 4,186 | 1,169 | ||||||||
|
Deferred
revenue
|
9,423 | 13,883 | 6,190 | |||||||||
|
Taxes
and other
liabilities
|
4,706 | 19,743 | 8,927 | |||||||||
|
Net
cash provided by operating
activities
|
121,818 | 147,372 | 97,891 | |||||||||
|
Cash
flow from investing activities:
|
||||||||||||
|
Acquisitions,
net of cash
received
|
(17,310 | ) | — | — | ||||||||
|
Capital
expenditures
|
(25,771 | ) | (24,864 | ) | (18,503 | ) | ||||||
|
Capitalization
of internally developed
software
|
(9,487 | ) | (8,263 | ) | (7,370 | ) | ||||||
|
Additions
to other
intangibles
|
(3,010 | ) | (6,447 | ) | (3,115 | ) | ||||||
|
Purchases
of short-term
investments
|
(9,061 | ) | (87,586 | ) | (244,238 | ) | ||||||
|
Sales
and maturities of short-term
investments
|
86,179 | 143,938 | 213,894 | |||||||||
|
Purchases
of foreign currency option
contracts
|
(2,784 | ) | (2,242 | ) | — | |||||||
|
Net
cash provided by (used in) investing
activities
|
18,756 | 14,536 | (59,332 | ) | ||||||||
|
Cash
flow from financing activities:
|
||||||||||||
|
Proceeds
from issuance of common
stock
|
31,150 | 36,460 | 37,146 | |||||||||
|
Repurchase
of common
stock
|
(103,641 | ) | (79,728 | ) | (16,519 | ) | ||||||
|
Dividends
paid
|
(34,735 | ) | (27,052 | ) | (19,034 | ) | ||||||
|
Tax
benefit from stock option
plans
|
1,213 | 2,964 | 4,271 | |||||||||
|
Net
cash provided by (used in) financing
activities
|
(106,013 | ) | (67,356 | ) | 5,864 | |||||||
|
Net
change in cash and cash
equivalents
|
34,561 | 94,552 | 44,423 | |||||||||
|
Cash
and cash equivalents at beginning of
period
|
194,839 | 100,287 | 55,864 | |||||||||
|
Cash
and cash equivalents at end of
period
|
$ | 229,400 | $ | 194,839 | $ | 100,287 | ||||||
|
Cash
paid for interest and income taxes:
|
||||||||||||
|
Interest
|
$ | 116 | $ | 159 | $ | 41 | ||||||
|
Income
taxes
|
$ | 17,214 | $ | 21,147 | $ | 9,827 | ||||||
The
accompanying notes are an integral part of these financial
statements.
NATIONAL
INSTRUMENTS CORPORATION
(in
thousands, except share data)
|
Common
Stock
Shares
|
Common
Stock
Amount
|
Additional
Paid-In
Capital
|
Deferred
Compensation
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Income/(Loss)
|
Total
Stockholders’
Equity
|
|||||||||||||||||||||
|
Balance
at December 31, 2005
|
79,276,086 | $ | 793 | $ | 91,430 | $ | (16,547 | ) | $ | 429,859 | $ | (1,685 | ) | $ | 503,850 | ||||||||||||
|
Net
income
|
72,708 | 72,708 | |||||||||||||||||||||||||
|
Foreign
currency translation adjustment
(net of $1,434 tax
expense)
|
4,542 | 4,542 | |||||||||||||||||||||||||
|
Unrealized
gain on securities available-for-sale
(net of $0 tax
expense)
|
78 | 78 | |||||||||||||||||||||||||
|
Unrealized
loss on derivative instruments
(net of $138 tax
benefit)
|
(436 | ) | (436 | ) | |||||||||||||||||||||||
|
Total comprehensive
income
|
76,892 | ||||||||||||||||||||||||||
|
Issuance
of common stock under employeeplans, including tax
benefits
|
2,028,966 | 20 | 37,127 | 37,147 | |||||||||||||||||||||||
|
Stock-based
compensation
|
14,506 | 14,506 | |||||||||||||||||||||||||
|
Repurchase
and retirement of common stock
|
(607,910 | ) | (6 | ) | (16,513 | ) | (16,519 | ) | |||||||||||||||||||
|
Effect
of adoption of SFAS 123R
|
(813,305 | ) | (8 | ) | (16,539 | ) | 16,547 | — | |||||||||||||||||||
|
Dividends
paid
|
(19,034 | ) | (19,034 | ) | |||||||||||||||||||||||
|
Disqualified
dispositions
|
(160 | ) | (160 | ) | |||||||||||||||||||||||
|
Effect
of adoption of FIN48
|
(96 | ) | (96 | ) | |||||||||||||||||||||||
|
Balance
at December 31, 2006
|
79,883,837 | $ | 799 | $ | 109,851 | $ | — | $ | 483,437 | $ | 2,499 | $ | 596,586 | ||||||||||||||
|
Net
income
|
107,033 | 107,033 | |||||||||||||||||||||||||
|
Foreign
currency translation adjustment
(net of $286 tax
expense)
|
4,483 | 4,483 | |||||||||||||||||||||||||
|
Unrealized
gain on securities available-for-sale
(net of $13 tax
expense)
|
200 | 200 | |||||||||||||||||||||||||
|
Unrealized
loss on derivative instruments
(net of $7 tax
benefit)
|
(117 | ) | (117 | ) | |||||||||||||||||||||||
|
Total comprehensive
income
|
111,599 | ||||||||||||||||||||||||||
|
Issuance
of common stock under employeeplans, including tax
benefits
|
2,251,657 | 22 | 36,438 | 36,460 | |||||||||||||||||||||||
|
Stock-based
compensation
|
17,754 | 17,754 | |||||||||||||||||||||||||
|
Repurchase
and retirement of common stock
|
(2,730,135 | ) | (27 | ) | (79,701 | ) | (79,728 | ) | |||||||||||||||||||
|
Dividends
paid
|
(27,052 | ) | (27,052 | ) | |||||||||||||||||||||||
|
Disqualified
dispositions
|
5,467 | 5,467 | |||||||||||||||||||||||||
|
Balance
at December 31, 2007
|
79,405,359 | $ | 794 | $ | 89,809 | $ | — | $ | 563,418 | $ | 7,065 | $ | 661,086 | ||||||||||||||
|
Net
income
|
84,827 | 84,827 | |||||||||||||||||||||||||
|
Foreign
currency translation adjustment
(net of $681 tax
benefit)
|
(4,188 | ) | (4,188 | ) | |||||||||||||||||||||||
|
Unrealized
loss on securities available-for-sale
(net of $82 tax
benefit)
|
(502 | ) | (502 | ) | |||||||||||||||||||||||
|
Unrealized
gain on derivative instruments
(net of $1,320 tax
expense)
|
8,108 | 8,108 | |||||||||||||||||||||||||
|
Total comprehensive
income
|
88,245 | ||||||||||||||||||||||||||
|
Issuance
of common stock under employeeplans, including tax
benefits
|
1,897,746 | 19 | 31,131 | 31,150 | |||||||||||||||||||||||
|
Stock-based
compensation
|
19,854 | 19,854 | |||||||||||||||||||||||||
|
Repurchase
and retirement of common stock
|
(4,110,042 | ) | (41 | ) | (103,600 | ) | (103,641 | ) | |||||||||||||||||||
|
Dividends
paid
|
(34,735 | ) | (34,735 | ) | |||||||||||||||||||||||
|
Disqualified
dispositions
|
2,479 | 2,479 | |||||||||||||||||||||||||
|
Balance
at December 31, 2008
|
77,193,063 | $ | 772 | $ | 39,673 | $ | — | $ | 613,510 | $ | 10,483 | $ | 664,438 | ||||||||||||||
The
accompanying notes are an integral part of these financial
statements.
NATIONAL
INSTRUMENTS CORPORATION
National
Instruments Corporation is a Delaware corporation. We provide flexible
application software and modular, multifunction 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 offer hundreds of
products used to create virtual instrumentation systems for general, commercial,
industrial and scientific applications. Our products may be used in different
environments, and consequently, specific application of our products is
determined by the customer and generally is not known to us. We approach all
markets with essentially the same products, which are used in a variety of
applications from research and development to production testing, monitoring and
industrial control. The following industries and applications are served by us
worldwide: advanced research, automotive, commercial aerospace, computers and
electronics, continuous process manufacturing, education, government/defense,
medical research/pharmaceutical, power/energy, semiconductors, automated test
equipment, telecommunications and others. These financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America.
Principles
of consolidation
The
Consolidated Financial Statements include the accounts of National Instruments
Corporation and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Certain
prior year amounts have been reclassified to conform to the 2008 presentation as
shown in the following tables:
|
2007 Balances as
presented in the current year Consolidated Balance
Sheet
|
(a)
|
2007 Balances as presented in the prior year
Consolidated Balance Sheet
|
||||||||||
|
Prepaid
expenses and other current assets
|
27,815 | 4,503 | 23,312 | |||||||||
|
Deferred
income taxes,
net
|
14,761 | (4,503) | 19,264 | |||||||||
|
(a)
|
These
amounts represent income taxes on intercompany profit previously included
in deferred tax expenses and reclassified to current tax expense for
comparability to corresponding amounts reported in 2008. The
reclassification did not have any impact on our total income tax
expense.
|
|
2007
|
2006
|
|||||||
|
Cost
of sales as previously reported
|
$ | 182,189 | $ | 170,326 | ||||
|
Technical
support costs previously reported as sales and marketing
(b)
|
3,078 | 3,022 | ||||||
|
Cost
of sales adjusted for reclassification
|
$ | 185,267 | $ | 173,348 | ||||
|
Sales
and marketing as previously reported
|
$ | 267,138 | $ | 235,072 | ||||
|
Technical
support costs previously reported as sales and marketing
(b)
|
(3,078 | ) | (3,022 | ) | ||||
|
Sales
and marketing adjusted for reclassification
|
$ | 264,060 | $ | 232,050 | ||||
|
(b)
|
Beginning
with this Form 10-K, we are separately reporting software maintenance
revenue and cost of software maintenance revenue in our Consolidated Statements of Income. We have added this
disclosure due to the increasing percentage of our revenue coming from
software maintenance. As part of this expanded disclosure, some technical
support costs previously reported as a component of sales and marketing
expense are now reported as cost of software maintenance. This change has
had no impact on our operating income, net income or earnings per
share.
|
Use
of estimates
The
preparation of our financial statements in conformity with generally accepted
accounting principles requires us to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues, expenses and related
disclosures of contingent assets and liabilities. We base our estimates on past
experience and other assumptions that we believe are reasonable under the
circumstances, and we evaluate these estimates on an ongoing basis. Our critical
accounting policies are those that affect our financial statements materially
and involve difficult, subjective or complex judgments by management. Although
these estimates are based on management's best knowledge of current events and
actions that may impact the company in the future, actual results may be
materially different from the estimates.
Cash
and cash equivalents
Cash and
cash equivalents include cash and highly liquid investments with maturities of
three months or less at the date of acquisition.
Short-Term
Investments
We
maintain an investment portfolio of various types of security holdings and
maturities. Pursuant to SFAS 157, Fair Value Measurements,
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 inactive markets. We place our cash investments in instruments
that meet credit quality standards, as specified in our corporate investment
policy guidelines. These guidelines also limit the amount of credit exposure to
any one issue, issuer or type of instrument. Our investment policy allows
investments in the following; government and federal agency obligations,
repurchase agreements (“Repos”), certificates of deposit and time deposits,
corporate obligations, medium term notes and deposit notes, commercial paper
including asset-backed commercial paper (“ABCP”), puttable bonds, general
obligation and revenue bonds, money market funds, taxable commercial paper,
corporate notes/bonds, municipal notes, municipal obligations, variable rate
demand notes and tax exempt commercial paper. All such instruments must carry
minimum ratings of A1/P1/F1, MIG1/VMIG1/SP1 and A2/A/A, as applicable, all of
which are considered “investment grade”. Our investment policy for marketable
securities requires that all securities mature in three years or less, with a
weighted average maturity of no longer than 18 months with at least 10% maturing
in 90 days or less.
We
account for our investments in debt and equity instruments under SFAS 115, Accounting for Certain Investments
in Debt and Equity Securities and Financial Accounting Standards Board
(“FASB”) Staff Position (“FSP”), SFAS No. 115-1, The Meaning of Other-Than-Temporary
Impairment and Its
Application to Certain Investments. Our investments are classified as
available-for-sale and accordingly are reported at fair value, with unrealized
gains and losses reported as other comprehensive income, a component of
shareholders’ equity. Unrealized losses are charged against income when a
decline in fair value is determined to be other than temporary. Investments with
maturities beyond one year are classified as short-term based on their highly
liquid nature and because such marketable securities represent the investment of
cash that is available for current operations. We follow the guidance provided
by FSP FAS 115-1 to assess whether our investments with unrealized loss
positions are other than temporarily impaired. Realized gains and losses and
declines in value judged to be other than temporary are determined based on the
specific identification method and are reported in other income (expense), net,
in our Consolidated Statements of Income.
Accounts
Receivable, net
Accounts
receivable are recorded net of allowance for sales returns of $1.8 million and
$1.7 million at December 31, 2008 and 2007, respectively, and net of allowances
for doubtful accounts of $3.9 million and $3.9 million at December 31, 2008 and
2007, respectively. A provision for estimated sales returns is made by reducing
recorded revenue based on historical experience. We analyze historical returns,
current economic trends and changes in customer demand and acceptance of our
products when evaluating the adequacy of our sales returns allowance. Our
allowance for doubtful accounts is based on historical experience. We analyze
historical bad debts, customer concentrations, customer creditworthiness and
current economic trends when evaluating the adequacy of our allowance for
doubtful accounts.
|
Year
|
Description
|
Balance
at
Beginning
of Period
|
Provision
for
Bad
Debt
Expense
|
Write-Offs
Charged
to
Allowances
|
Balance
at
End
of
Period
|
||||||||||||
|
2006
|
Allowance
for doubtful accounts and sales returns
|
$ | 4,734 | $ | 33 | $ | 407 | $ | 4,360 | ||||||||
|
2007
|
Allowance
for doubtful accounts and sales returns
|
4,360 | 1,940 | 698 | 5,602 | ||||||||||||
|
2008
|
Allowance
for doubtful accounts and sales returns
|
5,602 | 447 | 367 | 5,682 | ||||||||||||
Inventories
Inventories
are stated at the lower-of-cost or market. Cost is determined using standard
costs, which approximate the first-in first-out (“FIFO”) method. Cost includes
the acquisition cost of purchased components, parts and subassemblies, in-bound
freight costs, labor and overhead. Market is replacement cost with respect to
raw materials and is net realizable value with respect to work in process and
finished goods.
Inventory
is shown net of adjustment for excess and obsolete inventories of $4.4 million
and $4.2 million at December 31, 2008 and 2007, respectively.
Long-Term
Investments
Our
long-term investments primarily consist of Aaa/A/AAA auction rate securities.
These auction rate securities consist of education loan revenue bonds. Auction
rate securities are variable rate debt instruments whose interest rates are
typically reset approximately every 7 to 35 days. On December 26, 2008, and in
prior auction periods beginning in February 2008, the auction process for these
securities failed. Prior to the failure of the auction process, we had
classified these investments as short-term but are now reporting them as
long-term due to the fact that the underlying securities generally have longer
dated contractual maturities which are in excess of the guidelines provided for
in our corporate investment policy. The auction rate securities are classified
as available-for-sale. 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. We
continue to have the ability to hold the debt instruments to their ultimate
maturity and have not made a determination as to whether we will exercise our
right under the Rights agreement described above. As such, we have recorded the
unrealized loss related to the auction rate securities and the unrealized gain
related to the Rights agreement as a component of other income (expense), in our
Consolidated Statements of Income. The estimated fair market value of the Rights
agreement is also included as a component of our long-term investments. 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 SFAS 157, Fair
Value Measurements. The debt instruments underlying the auction rate
securities have redemption features which call for redemption at 100% of par
value and had a minimum rating of Aaa/A/AAA at December 31, 2008. Both of these
factors, along with current credit curves for like securities, and discount
factors to account for the illiquidity of the market for these securities were
considered in determining the fair market value of the auction rate securities
as well as our corresponding Rights agreement at December 31, 2008. (See Note 3 of Notes to Consolidated Financial Statements for
additional discussion).
Property
and equipment
Property
and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, which range
from twenty to forty years for buildings, three to seven years for purchased
internal use software and for equipment which are each included in furniture and
equipment. Leasehold improvements are depreciated over the shorter of the life
of the lease or the asset.
Intangible
assets
We
capitalize costs related to the development and acquisition of certain software
products. In accordance with SFAS 86, Accounting for the Costs of Computer
Software to Be Sold, Leased or Otherwise Marketed, capitalization of
costs begins when technological feasibility has been established and ends when
the product is available for general release to customers. Technological
feasibility for our products is established when the product is available for
beta release. Amortization 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. At each balance sheet date, the unamortized costs for all
intangible assets are reviewed by management and reduced to net realizable value
when necessary.
Goodwill
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. In accordance with SFAS 142,
Goodwill and Other Intangible
Assets, 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 on February 28, 2008. No
impairment of goodwill has been identified during the period presented. Goodwill
is deductible for tax purpose in certain jurisdictions.
Concentrations
of credit risk
We
maintain cash and cash equivalents with various financial institutions located
in many countries throughout the world. At December 31, 2008, $101 million or
44% of our cash and cash equivalents was held in cash in various operating
accounts with financial institutions throughout the world, $73 million or 32%
was held in time deposits which had original maturities of less than 90 days,
$55 million or 24% was held in money market accounts. The most significant of
our operating accounts was our domestic operating account which held
approximately $15 million or 7% of our total cash and cash equivalents at a bank
that carried an AAA rating at December 31, 2008. Of these amounts, approximately
$68 million or 30% was held in domestic accounts with financial institutions and
$161 million or 70% was held in accounts outside of the United States with
financial institutions.
At
December 31, 2008, $7.0 million or 42% of our investments was held in auction
rate securities and $6.2 million or 37% was held in tax exempt municipal bonds.
The goal of our investment policy is to manage our investment portfolio to
preserve principal and liquidity while maximizing the return on our investment
portfolio through the full investment of available funds. We place our cash
investments in instruments that meet credit quality standards, as specified in
our corporate investment policy guidelines. These guidelines also limit the
amount of credit exposure to any one issue, issuer or type of instrument. At
December 31, 2008, our cash equivalents and short-term investments carried
ratings from the major credit rating agencies that were in accordance with our
corporate investment policy. Our investment policy allows investments in the
following; government and federal agency obligations, repurchase agreements
(“Repos”), certificates of deposit and time deposits, corporate obligations,
medium term notes and deposit notes, commercial paper including asset-backed
commercial paper (“ABCP”), puttable bonds, general obligation and revenue bonds,
money market funds, taxable commercial paper, corporate notes/bonds, municipal
notes, municipal obligations, variable rate demand notes and tax exempt
commercial paper. All such instruments must carry minimum ratings of A1/P1/F1,
MIG1/VMIG1/SP1 and A2/A/A, as applicable, all of which are considered
“investment grade”. Our investment policy for marketable securities requires
that all securities mature in three years or less, with a weighted average
maturity of no longer than 18 months with at least 10% maturing in 90 days or
less. We actively monitor our investment portfolio to ensure compliance with our
investment objective to preserve capital, meet liquidity requirements and
maximize return on our investments. We do not require collateral or enter into
master netting arrangements to mitigate our credit risk. (See Note 2 of Notes to Consolidated Financial
Statements).
At
December 31, 2008, we held foreign currency forward and option contracts with an
aggregate notional amount of $285 million with various counterparties and with
varying maturity dates. Our counter parties in our foreign currency forward and
option contracts are major financial institutions. We do not anticipate
nonperformance by these counterparties. (See Note 11 of
Notes to Consolidated Financial Statements).
Concentration
of credit risk with respect to trade accounts receivable is limited due to the
large number of customers and their dispersion across many countries and
industries. The amount of sales to any individual customer did not exceed 3% of
revenue for the periods presented. The largest trade account receivable from any
individual customer at December 31, 2008 was approximately $1.5
million.
Key
supplier risk
Our
manufacturing processes use large volumes of high-quality components and
subassemblies supplied by outside sources. Several of these components are
available through sole or limited sources. Supply shortages of or quality
problems in connection with some of these key components could require us to
procure components from replacement suppliers, which would cause significant
delays in fulfillment of orders and likely result in additional costs. In order
to manage this risk, we maintain safety stock of some of these single sourced
components and subassemblies and perform regular assessments of suppliers
performance, grading key suppliers in critical areas such as quality and
“on-time” delivery.
Revenue
recognition
We derive
revenue primarily from the sale/licensing of integrated hardware and software
solutions. Independent sales of application software licenses include post
contract support services. In addition, training services are sold separately.
The products and services are generally sold under standardized licensing and
sales arrangements with payment terms ranging from net 30 days in the United
States to net 30 days and up to net 90 days in some international markets.
Approximately 85% of our product/license sales include both hardware and
software in the customer arrangement, with a small percentage of sales including
other services. We offer rights of return and standard warranties for product
defects related to our products. The rights of return are generally for a period
of up to 30 days after the delivery date. The standard warranties cover periods
ranging from 90 days to three years. We do not enter into contracts requiring
product acceptance from the customer.
Revenue
is recognized in accordance with the provisions of SOP 97-2 when persuasive
evidence of an arrangement exists, delivery has occurred, the fee is fixed or
determinable, and collectability is probable. We enter into certain arrangements
where we are obligated to deliver multiple products and/or services (“multiple
elements”). In these transactions, we allocate the total revenue among the
elements based on vendor specific objective evidence (“VSOE”) of fair value as
determined by the sales price of each element when sold separately.
When VSOE
of fair value is available for the undelivered element of a multiple element
arrangements, sales revenue is generally recognized on the date the product is
shipped, using the residual method under SOP 97-2, with a portion of revenue
recorded as deferred (unearned) due to applicable undelivered elements.
Undelivered elements for our multiple element arrangements with a customer are
generally restricted to post contract support and training and education. The
amount of revenue allocated to these undelivered elements is based on the VSOE
of fair value for those undelivered elements. Deferred revenue due to
undelivered elements is recognized ratably on a straight-line basis over the
service period or when the service is completed. When VSOE of fair value is not
available for the undelivered element of a multiple element arrangement, sales
revenue is generally recognized ratably, on a straight-line basis over the
service period of the undelivered element, generally 12 months or when the
service is completed in accordance with the subscription method under SOP 97-2.
Deferred revenue at December 31, 2008 and 2007 was $45.5 million and $36.1
million, respectively.
The
application of SOP 97-2 requires judgment, including whether a software
arrangement includes multiple elements, and if so, whether VSOE of fair value
exists for those elements. Changes to the elements in a software arrangement,
the ability to identify VSOE for those elements, the fair value of the
respective elements, and changes to a product’s estimated life cycle could
materially impact the amount of earned and unearned revenue. Judgment is also
required to assess whether future releases of certain software represent new
products or upgrades and enhancements to existing products.
Product
revenue
Our
product revenue is generated predominantly from the sales of measurement and
automation products. Our products consist of application software and hardware
components together with related driver software.
Software
maintenance revenue
Software
maintenance revenue is post contract customer support that provides the customer
with unspecified upgrades/updates and technical support.
Warranty
reserve
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 pursuant to SFAS 5, Accounting for Loss
Contingencies, 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 years ended December 31, 2008 and 2007, respectively,
was as follows (in thousands):
|
2008
|
2007
|
|||||||
|
Balance
at the beginning of the
period
|
$ | 750 | $ | 867 | ||||
|
Accruals
for warranties issued during the
period
|
1,836 | 1,625 | ||||||
|
Settlements
made (in cash or in kind) during the period
|
(1,634 | ) | (1,742 | ) | ||||
|
Balance
at the end of the
period
|
$ | 952 | $ | 750 | ||||
Loss
contingencies
We accrue
for probable losses from contingencies including legal defense costs, on an
undiscounted basis, in accordance with SFAS 5, Accounting for Loss Contingencies,
when such costs are considered probable of being incurred and are
reasonably estimable. We periodically evaluate available information, both
internal and external, relative to such contingencies and adjust this accrual as
necessary.
Advertising
expense
We
expense costs of advertising as incurred. Advertising expense for the years
ended December 31, 2008, 2007 and 2006 was $19.3 million, $20.0 million and
$20.3 million, respectively.
Foreign
currency translation
The
functional currency for our international sales operations is the applicable
local currency. The assets and liabilities of these operations are translated at
the rate of exchange in effect on the balance sheet date and sales and expenses
are translated at average rates. The resulting gains or losses from translation
are included in a separate component of other comprehensive income. Gains and
losses resulting from re-measuring monetary asset and liability accounts that
are denominated in a currency other than a subsidiary’s functional currency are
included in net foreign exchange gain (loss) and are included in net
income.
Foreign
currency hedging instruments
All of
our derivative instruments are recognized on the balance sheet at their fair
value. We currently use foreign currency forward and purchased option contracts
to hedge our exposure to material foreign currency denominated receivables and
forecasted foreign currency cash flows.
On the
date the derivative contract is entered into, we designate the derivative as a
hedge of the variability of foreign currency cash flows to be received or paid
(“cash flow” hedge) or as a hedge of our foreign denominated net receivable
positions (“other derivatives”). Changes in the fair value of derivatives that
are designated and qualify as cash flow hedges under SFAS 133 and that are
deemed to be highly effective are recorded in other comprehensive income. These
amounts are subsequently reclassified into earnings in the period during which
the hedged transaction is realized. The gain or loss on the other derivatives as
well as the offsetting gain or loss on the hedged item attributable to the
hedged risk is recognized in current earnings under the line item “Net foreign
exchange gain (loss)”. We do not enter into derivative contracts for speculative
purposes.
We
formally document all relationships between hedging instruments and hedged
items, as well as our risk-management objective and strategy for undertaking
various hedge transactions. This process includes linking all derivatives that
are designated as cash flow hedges to specific forecasted transactions. We also
formally assess, both at the hedge’s inception and on an ongoing basis, whether
the hedging instruments are highly effective in offsetting changes in cash flows
of hedged items.
We
prospectively discontinue hedge accounting if (1) it is determined that the
derivative is no longer highly effective in offsetting changes in the fair value
of a hedged item (forecasted transactions); or (2) the derivative is
de-designated as a hedge instrument, because it is unlikely that a forecasted
transaction will occur. When hedge accounting is discontinued, the derivative is
sold and the resulting gains and losses are recognized immediately in
earnings.
Income
taxes
We
account for income taxes under the asset and liability method as set forth in
SFAS 109, Accounting for
Income Taxes. 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.
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 years ended December 31, 2008, 2007 and 2006, respectively, are as
follows (in thousands):
|
Years Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Weighted
average shares
outstanding-basic
|
78,567 | 79,468 | 79,519 | |||||||||
|
Plus:
Common share equivalents
|
||||||||||||
|
Stock
options, restricted stock
units
|
948 | 1,575 | 2,000 | |||||||||
|
Weighted
average shares
outstanding-diluted
|
79,515 | 81,043 | 81,519 | |||||||||
Stock
options to acquire 2,402,934, 2,304,078 and 3,295,000 shares for the years ended
December 31, 2008, 2007 and 2006, respectively, were excluded in the
computations of diluted EPS because the effect of including the stock options
would have been anti-dilutive.
Stock-based
compensation
Effective
January 1, 2006, we adopted SFAS 123R Share-based Payment, using
the modified-prospective-transition method. Under this method, prior periods are
not restated. Under this transition method, stock compensation cost recognized
beginning January 1, 2006 includes: (a) compensation cost for all share-based
payments granted prior to, but not yet vested as of January 1, 2006, based on
the grant date fair value estimated in accordance with the original provisions
of SFAS 123, and (b) compensation cost for all share-based payments granted on
or subsequent to January 1, 2006, based on the grant-date fair value estimated
in accordance with the provisions of SFAS 123R.
Prior to
adopting SFAS 123R, we presented all tax benefits of deductions resulting from
the exercise of stock grants as operating cash flows in our Consolidated
Statements of Cash Flows. SFAS 123R requires the cash flows resulting from the
tax benefits from tax deductions in excess of the compensation cost recognized
(excess tax benefits) to be classified as financing cash flows. As a result,
$1.2 million, $3.0 million and $4.3 million of excess tax benefits for the years
ended December 31, 2008, 2007 and 2006, respectively, have been classified as
financing cash flows.
Prior to
the effective date of SFAS 123R, we applied Accounting Principles Board Opinion
25 (“APB 25”), Accounting for
Stock Issued to Employees, and related interpretations for our stock
option grants. APB 25 provides that the compensation expense relative to our
stock options is measured based on the intrinsic value of the stock option at
date of grant.
As a
result of adopting SFAS 123R on January 1, 2006, our income before income taxes
and net income for the year ended December 31, 2006 were $9.4 million and $8.7
million lower, respectively, than if we had continued to account for share-based
compensation under APB 25. Basic and diluted earnings per share for the year
ended December 31, 2006 were $0.11 and $0.11 lower, respectively, than if we had
continued to account for share-based compensation under APB 25. Deferred
stock-based compensation balances previously required under APB 25 were adjusted
against previously recorded common stock and additional paid-in capital balances
upon adoption of SFAS 123R, as required.
Pro-forma
disclosures for the years ended December 31, 2008, 2007 and 2006 are not
presented because the amounts are recognized in our Consolidated Statements
of Income. For the years ended December 31, 2008, 2007 and 2006, total
stock-based compensation was $15.1 million, net of tax of $4.6 million, $13.7
million, net of tax of $3.8 million and $11.7 million, net of tax of $2.4
million, respectively. (See Note 9 of Notes to Consolidated
Financial Statements).
Comprehensive
income
Our
comprehensive income is comprised of net income, foreign currency translation
and unrealized gains and losses on forward and option contracts and securities
available-for-sale. Comprehensive income for 2008, 2007 and 2006 was $88.2
million, $111.6 million and $76.9 million, respectively.
Recently
Issued Accounting Pronouncements
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements. This
standard defines fair value, establishes a framework for measuring fair value in
accounting principles generally accepted in the United States of America, and
expands disclosure about fair value measurements. This pronouncement applies
under other accounting standards that require or permit fair value measurements.
Accordingly, this statement does not require any new fair value measurement.
This statement is effective for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. However, SFAS 157 is amended by
FSP FAS 157-1, Application of
FASB Statement 157 to FASB Statement 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13, which excludes from the scope of this
provision arrangements accounted for under SFAS 13, Accounting for Leases. SFAS
157 is also amended by FSP FAS 157-2, Effective Date of FASB Statement No.
157, which delays the effective date of SFAS 157 for all nonfinancial
assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually). This FSP partially defers the effective date of SFAS 157 to
fiscal years beginning after November 15, 2008, and interim periods within those
fiscal years for items within the scope of this FSP. In October 2008, SFAS 157
was amended again by FSP 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active, which
clarifies the application of SFAS 157 in a market that is not active and
provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active. The FSP is effective upon issuance, including prior periods for which
financial statements have not been issued. We adopted SFAS 157 on January 1,
2008, except as it applies to those nonfinancial assets and nonfinancial
liabilities as noted in FSP FAS 157-2. The partial adoption of SFAS 157 did not
have a material impact on our consolidated financial position or results of
operations. We also adopted FSP 157-3 on September 30, 2008 as required and
concluded it did not have a significant impact on our consolidated financial
position or results of operations. (See Note 3 of Notes to
Consolidated Financial Statements).
In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities – including an amendment of FASB Statement
115. This standard permits an entity to measure many financial
instruments and certain other assets and liabilities at fair value on an
instrument-by-instrument basis. This statement is effective for fiscal years
beginning after November 15, 2007. We adopted SFAS 159 on January 1, 2008 as
required. The adoption of SFAS 159 did not have a significant impact on our
financial position or results of operations as we did not elect the fair value
option for items within the scope of this statement.
In
December 2007, the FASB issued SFAS 141R, Business Combinations—a replacement
of FASB Statement 141, which significantly changes the principles and
requirements for how the acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any non-controlling interest in the acquiree. The statement also provides
guidance for recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. This statement is effective prospectively, except for
certain retrospective adjustments to deferred tax balances, for fiscal years
beginning after December 15, 2008. We are currently evaluating the requirements
of SFAS 141R and have not yet determined the impact on our consolidated
financial statements.
In March
2008, the FASB issued SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities. This statement changes the disclosure
requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for under Statement 133 and its related interpretations, and (c)
how derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. This statement is effective for
fiscal years and interim periods beginning after November 15, 2008. Early
application is encouraged. We are currently evaluating the requirements of SFAS
161 and have not yet determined the impact on our consolidated financial
statements.
In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets. FSP FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS 142, Goodwill and Other Intangible
Assets. The intent of the position is to improve the consistency between
the useful life of a recognized intangible asset under SFAS 142 and the period
of expected cash flows used to measure the fair value of the asset under SFAS
141R, Business
Combinations, and other U.S. generally accepted accounting principles.
The provisions of FSP FAS 142-3 are effective for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early adoption
is prohibited. We are currently evaluating the requirements of FSP FAS 142-3 and
have not yet determined the impact on our consolidated financial
statements.
Cash,
cash equivalents, short-term and long-term investments consist of the following
(in thousands):
|
As of
December 31, 2008
|
As of
December 31, 2007
|
|||||||
|
Cash
and cash equivalents:
|
||||||||
|
Cash
|
$ | 100,967 | $ | 94,257 | ||||
|
Cash
equivalents:
|
||||||||
|
Municipal
securities
|
— | — | ||||||
|
Time
deposits
|
73,400 | — | ||||||
|
Money
market
accounts
|
55,033 | 100,582 | ||||||
|
Total
cash and cash
equivalents
|
$ | 229,400 | $ | 194,839 | ||||
|
Short-term
investments:
|
||||||||
|
Municipal
securities
|
$ | 6,220 | $ | 61,250 | ||||
|
Auction
rate
securities
|
— | 32,588 | ||||||
|
Long-term
investments:
|
||||||||
|
Auction
rate
securities
|
6,964 | — | ||||||
|
Auction
rate securities put
option
|
1,636 | — | ||||||
|
Other
long-term
investments
|
1,900 | — | ||||||
|
Total
investments
|
$ | 16,720 | $ | 93,838 | ||||
|
Total
cash, cash equivalents and investments
|
$ | 246,120 | $ | 288,677 | ||||
The
following table summarizes unrealized gains and losses related to our
investments designated as available-for-sale (in thousands):
|
As
of December 31, 2008
|
||||||||||||||||
|
Adjusted Cost
|
Gross
Unrealized Gain
|
Gross
Unrealized Loss
|
Fair Value
|
|||||||||||||
|
Municipal
Securities
|
$ | 6,199 | $ | 28 | $ | (7 | ) | $ | 6,220 | |||||||
|
Auction
rate
securities
|
8,600 | — | (1,636 | ) | 6,964 | |||||||||||
|
Auction
rate securities put
option
|
— | 1,636 | — | 1,636 | ||||||||||||
|
Other
long-term
investments
|
1,900 | — | — | 1,900 | ||||||||||||
|
Total
investments
|
$ | 16,699 | $ | 1,664 | $ | (1,643 | ) | $ | 16,720 | |||||||
|
As
of December 31, 2007
|
||||||||||||||||
|
Adjusted Cost
|
Gross
Unrealized Gain
|
Gross
Unrealized Loss
|
Fair Value
|
|||||||||||||
|
Municipal
Securities
|
$ | 61,105 | $ | 146 | $ | (1 | ) | $ | 61,250 | |||||||
|
Auction
rate
securities
|
32,588 | — | — | 32,588 | ||||||||||||
|
Auction
rate securities put
option
|
— | — | — | — | ||||||||||||
|
Total
investments
|
$ | 93,693 | $ | 146 | $ | (1 | ) | $ | 93,838 | |||||||
Effective
January 1, 2008, we adopted SFAS 157, Fair Value Measurements. SFAS
157 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. In accordance with FSP FAS 157-2, Effective Date of FASB Statement
157, we will defer the adoption of SFAS 157 for our nonfinancial assets
and nonfinancial liabilities, except those items recognized or disclosed at fair
value on an annual or more frequently recurring basis, until January 1, 2009.
The partial adoption of SFAS 157 did not have a material impact on our fair
value measurements.
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.
|
Fair
Value Measurements at Reporting Date Using
|
||||||||||||||||
|
Description
|
December 31, 2008
|
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
|
$ | 55,033 | $ | 55,033 | $ | — | $ | — | ||||||||
|
Time
deposits
|
73,400 | 73,400 | — | — | ||||||||||||
|
Short-term
investments available-for-sale
|
6,220 | 6,220 | — | — | ||||||||||||
|
Long-term
investments available-for-sale
|
8,600 | — | — | 8,600 | ||||||||||||
|
Derivatives
|
15,786 | — | 15,786 | — | ||||||||||||
|
Total
Assets
|
$ | 159,039 | $ | 134,653 | $ | 15,786 | $ | 8,600 | ||||||||
|
Liabilities
|
||||||||||||||||
|
Derivatives
|
(4,452 | ) | — | (4,452 | ) | — | ||||||||||
|
Total
Liabilities
|
$ | (4,452 | ) | $ | — | $ | (4,452 | ) | $ | — | ||||||
|
Fair Value Measurements Using Significant
Unobservable Inputs
(Level 3)
|
||||
|
Long-term investments
available-for-sale
|
||||
|
Beginning
Balance, January 1,
2008
|
$ | — | ||
|
Total
gains (realized/unrealized)
|
||||
|
Included
in
earnings
|
1,636 | |||
|
Included
in other comprehensive
income
|
— | |||
|
Total
losses (realized/unrealized)
|
||||
|
Included
in
earnings
|
(1,636 | ) | ||
|
Included
in other comprehensive
income
|
— | |||
|
Purchases,
issuances and
settlements
|
— | |||
|
Transfer
in and/or out of Level
3
|
8,600 | |||
|
Ending
Balance, December 31,
2008
|
$ | 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
inactive markets.
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.
Long-term
investments transferred into Level 3 during 2008, were transferred in at their
fair market value at the beginning of the period. We have historically reported
the fair market value of these securities at par as any differences between par
value and the purchase price or settlement value have historically been
comprised of accrued interest. The securities transferred into Level 3 during
2008, consist of Aaa/A/AAA rated investments in auction rate securities that we
originally purchased for $8.6 million. These auction rate securities consist of
education loan revenue bonds. Auction rate securities are variable rate debt
instruments whose interest rates are typically reset approximately every 7 to 35
days. On December 26, 2008, and in prior auction periods beginning in February
2008, the auction process for these securities failed. Prior to the failure of
the auction process, we had classified these investments as short-term but are
now reporting them as long-term due to the fact that the underlying securities
generally have longer dated contractual maturities which are in excess of the
guidelines provided for in our corporate investment policy. The auction rate
securities are classified as available-for-sale. At December 31, 2008, we
reported these long-term investments at their estimated fair market value of
$7.0 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 December 31, 2008, we
reported the Rights agreement at its estimated fair market value of $1.6
million. We continue to have the ability to hold the debt instruments to their
ultimate maturity and have not made a determination as to whether we will
exercise our right under the Rights agreement described above. As such, we have
recorded the unrealized loss related to the auction rate securities and the
unrealized gain related to the Rights agreement as a component of other income
(expense), in our Consolidated Statements of Income. The estimated fair market
value of the Rights agreement is also included as a component of our long-term
investments. 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 SFAS 157, Fair Value Measurements. The
debt instruments underlying the auction rate securities have redemption features
which call for redemption at 100% of par value and had a minimum rating of
Aaa/A/AAA at December 31, 2008. Both of these factors, along with current credit
curves for like securities, and discount factors to account for the illiquidity
of the market for these securities were considered in determining the fair
market value of the auction rate securities as well as our corresponding Rights
agreement at December 31, 2008.
Note
4 – Inventories
Inventories,
net consist of the following (in thousands):
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Raw
materials
|
$ | 48,004 | $ | 40,521 | ||||
|
Work-in-process
|
4,150 | 3,511 | ||||||
|
Finished
goods
|
55,204 | 38,643 | ||||||
| $ | 107,358 | $ | 82,675 | |||||
Property
and equipment consist of the following (in thousands):
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Land
|
$ | 7,210 | $ | 7,248 | ||||
|
Buildings
|
136,802 | 134,609 | ||||||
|
Furniture
and
equipment
|
144,979 | 127,357 | ||||||
| 288,991 | 269,214 | |||||||
|
Accumulated
depreciation
|
(134,514 | ) | (117,752 | ) | ||||
| $ | 154,477 | $ | 151,462 | |||||
Depreciation
expense for the years ended December 31, 2008, 2007 and 2006, was $20.9 million,
$22.2 million and $20.2 million, respectively.
Intangibles
at December 31, 2008 and 2007 are as follows:
|
2008
|
2007
|
|||||||||||||||||||||||
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
Carrying Amount
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
Carrying Amount
|
|||||||||||||||||||
|
Capitalized
software development costs
|
$ | 75,321 | $ | (61,055 | ) | $ | 14,266 | $ | 65,834 | $ | (50,722 | ) | $ | 15,112 | ||||||||||
|
Acquired
technology
|
27,503 | (16,804 | ) | 10,699 | 21,228 | (12,976 | ) | 8,252 | ||||||||||||||||
|
Patents
|
16,068 | (4,506 | ) | 11,562 | 14,598 | (3,789 | ) | 10,809 | ||||||||||||||||
|
Other
|
11,401 | (6,013 | ) | 5,388 | 10,919 | (4,735 | ) | 6,184 | ||||||||||||||||
| $ | 130,293 | $ | (88,378 | ) | $ | 41,915 | $ | 112,579 | $ | (72,222 | ) | $ | 40,357 | |||||||||||
Software
development costs capitalized during 2008, 2007 and 2006 were $9.5 million, $8.3
million and $7.4 million, respectively, and related amortization was $10.3
million, $8.9 million and $9.1 million, 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 $16.2
million, $14.4 million and $13.9 million for the years ended December 31, 2008,
2007 and 2006, respectively.
Capitalized
software development costs, acquired technology, patents and other have
weighted-average useful lives of 2.1 years, 2.1 years, 6.0 years, and 2.0 years,
respectively, as of December 31, 2008. The estimated future amortization expense
related to intangible assets as of December 31, 2008 is as follows:
|
Amount
(in thousands)
|
||||
|
2009
|
$ | 16,542 | ||
|
2010
|
11,532 | |||
|
2011
|
7,346 | |||
|
2012
|
3,034 | |||
|
2013
|
1,183 | |||
|
Thereafter
|
2,278 | |||
| $ | 41,915 | |||
Acquired
core technology and intangible assets are amortized over their useful lives,
which range from three to eight years. Amortization expense for intangible
assets acquired was approximately $4.2 million and $3.2 million for 2008 and
2007, respectively, of which approximately $3.6 million and $2.7 million was
recorded in cost of sales and approximately $580 thousand and $480 thousand was
recorded in operating expenses, for 2008 and 2007, respectively. The estimated
amortization expense of intangible assets acquired for the current fiscal year
and in future years will be recorded in our Consolidated
Statements of Income as follows (in thousands):
|
Fiscal Year
|
Cost of Sales
|
Acquisition related costs and amortization,
net
|
Total
|
|||||||||
|
2009
|
$ | 3,299 | $ | 502 | $ | 3,801 | ||||||
|
2010
|
2,765 | 341 | 3,106 | |||||||||
|
2011
|
2,121 | 214 | 2,335 | |||||||||
|
2012
|
1,126 | 206 | 1,332 | |||||||||
|
Thereafter
|
87 | 75 | 162 | |||||||||
|
Total
|
$ | 9,398 | $ | 1,338 | $ | 10,736 | ||||||
The
carrying amount of goodwill for 2007 and 2008 are as follows:
|
Amount
(in thousands)
|
||||
|
Balance
as of December 31,
2006
|
$ | 53,343 | ||
|
Acquisitions/purchase
accounting
adjustments
|
— | |||
|
Divestitures
|
— | |||
|
Foreign
currency translation
impact
|
768 | |||
|
Balance
as of December 31,
2007
|
$ | 54,111 | ||
|
Acquisitions/purchase
accounting
adjustments
|
10,818 | |||
|
Divestitures
|
— | |||
|
Foreign
currency translation
impact
|
(368 | ) | ||
|
Balance
as of December 31,
2008
|
$ | 64,561 | ||
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. In accordance with SFAS 142,
Goodwill and Other Intangible
Assets, 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 on February 28, 2008. No
impairment of goodwill has been identified during the period presented. Goodwill
is deductible for tax purpose in certain jurisdictions. (For discussion of the
2008 acquisition, see Note 15 of Notes to Consolidated
Financial Statements).
Note
8 – Income taxes
The
components of income before income taxes are as follows (in
thousands):
|
Years Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Domestic
|
$ | 15,921 | $ | 31,685 | $ | 40,681 | ||||||
|
Foreign
|
82,216 | 81,742 | 54,621 | |||||||||
| $ | 98,137 | $ | 113,427 | $ | 95,302 | |||||||
The
provision for income taxes charged to operations is as follows (in
thousands):
|
Years Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Current
tax expense:
|
||||||||||||
|
U.S.
federal
|
$ | 14,631 | $ | 15,957 | $ | 17,166 | ||||||
|
State
|
1,391 | 1,155 | 901 | |||||||||
|
Foreign
|
18,910 | 9,925 | 5,283 | |||||||||
|
Total
current
|
34,932 | 27,037 | 23,350 | |||||||||
|
Deferred
tax expense (benefit):
|
||||||||||||
|
U.S.
federal
|
(11,008 | ) | 628 | (526 | ) | |||||||
|
State
|
(373 | ) | (156 | ) | (90 | ) | ||||||
|
Foreign
|
(1,570 | ) | (2,783 | ) | (140 | ) | ||||||
|
Total
deferred
|
(12,951 | ) | (2,311 | ) | (756 | ) | ||||||
|
Reduction
in valuation
allowance
|
(8,671 | ) | (18,332 | ) | — | |||||||
|
Total
provision
|
$ | 13,310 | $ | 6,394 | $ | 22,594 | ||||||
Certain
immaterial prior year amounts have been reclassified to conform to the 2008
presentation.
Deferred
tax liabilities (assets) at December 31, 2008 and 2007 as follows (in
thousands):
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Capitalized
software
|
$ | 4,615 | $ | 4,998 | ||||
|
Depreciation
and
amortization
|
9,536 | 7,031 | ||||||
|
Unrealized
gain on derivative
instruments
|
4,153 | — | ||||||
|
Unrealized
exchange
gain
|
— | 1,222 | ||||||
|
Undistributed
earnings of foreign
subsidiaries
|
10,075 | 9,634 | ||||||
|
Gross
deferred tax
liabilities
|
28,379 | 22,885 | ||||||
|
Operating
loss
carryforwards
|
(43,360 | ) | (46,705 | ) | ||||
|
Intangibles
|
(58,987 | ) | (79,139 | ) | ||||
|
Vacation
and other
accruals
|
(4,890 | ) | (5,450 | ) | ||||
|
Inventory
valuation and warranty
provisions
|
(12,665 | ) | (4,135 | ) | ||||
|
Doubtful
accounts and sales
provisions
|
(1,512 | ) | (1,764 | ) | ||||
|
Unrealized
exchange
loss
|
(1,345 | ) | — | |||||
|
Deferred
revenue .
|
(71 | ) | (55 | ) | ||||
|
Accrued
rent
expenses
|
(117 | ) | (115 | ) | ||||
|
Accrued
legal
expenses
|
(1,466 | ) | (1,457 | ) | ||||
|
Unrealized
loss on derivative
instruments
|
— | (213 | ) | |||||
|
10%
minority stock
investment
|
(920 | ) | (912 | ) | ||||
|
Stock-based
compensation
|
(5,353 | ) | (3,536 | ) | ||||
|
Other
|
(783 | ) | (651 | ) | ||||
|
Gross
deferred tax
assets
|
(131,469 | ) | (144,132 | ) | ||||
|
Valuation
allowance
|
85,815 | 106,990 | ||||||
|
Net
deferred tax liability
(asset)
|
$ | (17,275 | ) | $ | (14,257 | ) | ||
Certain
prior year amounts have been reclassified to conform to the 2008 presentation as
shown in the following tables:
|
2007 Balances
as presented
in the current year Note 8: Income
Taxes
|
(a)
|
2007 Balances
as presented
in the prior year
Note 7: Income Taxes
|
||||||||||
|
Inventory
valuation and warranty provision
|
(4,135) | 1,924 | (6,059) | |||||||||
|
Intercompany
profit
|
— | 2,580 | (2,580) | |||||||||
| Deferred income taxes, net | 14,761 | (4,503) | 19,264 | |||||||||
|
(a)
|
These
amounts represent income taxes on intercompany profit previously included
in deferred tax expense and reclassified to current tax expense for
comparability to corresponding amounts reported in 2008. The
reclassification did not have any impact on our total income tax
expense.
|
A
reconciliation of income taxes at the U.S. federal statutory income tax rate to
the effective tax rate follows:
|
Years Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
U.S.
federal statutory tax
rate
|
35% | 35% | 35% | |||||||||
|
Foreign
sales corporation/ETI
benefit
|
— | — | (1) | |||||||||
|
Domestic
production
activities
|
— | (1) | (1) | |||||||||
|
Foreign
taxes more (less) than federal statutory
rate
|
(14) | (14) | (11) | |||||||||
|
Change
in valuation
allowance
|
(9) | (16) | — | |||||||||
|
Research
and development tax
credit
|
(2) | (1) | (1) | |||||||||
|
Tax
exempt
interest
|
(1) | (1) | (1) | |||||||||
|
State
income taxes, net of federal tax
benefit
|
1 | 1 | 1 | |||||||||
|
Employee
share-based
compensation
|
2 | 2 | 3 | |||||||||
|
Other
|
2 | 1 | — | |||||||||
|
Effective
tax
rate
|
14% | 6% | 24% | |||||||||
As of
December 31, 2008, eleven of our subsidiaries have available, for income tax
purposes, foreign net operating loss carryforwards of an aggregate of
approximately $265.4 million, of which $6.5 million expire during the years 2010
- 2017 and $258.9 million of which may be carried forward indefinitely. Our tax
valuation allowance relates to the realizability of certain of these foreign net
operating loss carryforwards and benefits of tax deductible goodwill in excess
of book goodwill.
We
maintain a manufacturing facility in Hungary. As a result of certain foreign
investment incentives available under Hungarian law, the profit from our
Hungarian operation was subject to a reduced income tax rate. This special tax
status terminated on January 1 2008, with the merger of our Hungary
manufacturing operations with its Hungarian parent company. The merger was
effective on January 1, 2008. The aggregate tax benefit of the exemption was
$8.7 million and $5.4 million for the years ended December 31, 2007 and 2006,
respectively.
In 2003,
we restructured the organization of our manufacturing operation in Hungary. The
tax deductible goodwill in excess of book goodwill created by this restructuring
resulted in our being required to record a gross deferred tax asset of $91.0
million. The amortization of this excess tax deductible goodwill resulted in a
$40.9 million and $43.8 million deferred tax asset for the associated net
operating loss for the years ended December 31, 2008 and 2007, respectively. As
of December 31, 2008 and 2007, the gross deferred tax asset related to the
excess tax goodwill was $62.3 million and $81.5 million, respectively. Because
we do not expect to have sufficient taxable income in the relevant jurisdiction
in future periods to realize the full benefit of these deferred tax assets, a
valuation allowance has been established in the amount of $85.5 million and
$107.0 million as of December 31, 2008 and 2007, respectively. Following the
approval of the merger of our Hungarian manufacturing operation with its
Hungarian parent company in December 2007, we released $8.7 million and $18.3
million in 2008 and 2007, respectively, of the valuation allowance previously
established for the excess tax deductible goodwill to reflect the tax benefit we
expect to realize in future periods.
We have
not provided for U.S. federal income and foreign withholding taxes on
approximately $255.1 million of certain non-U.S. subsidiaries’ undistributed
earnings as of December 31, 2008. These earnings would become subject to taxes
of approximately $91.6 million, if they were actually or deemed to be remitted
to the parent company as dividends or if we should sell our stock in these
subsidiaries. We currently intend to reinvest indefinitely these undistributed
earnings.
We
adopted the provisions of FASB Interpretation 48 (“FIN 48”), Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement 109, on January 1, 2007. FIN
48 clarifies 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. The cumulative effect of adopting FIN
48 was $96 thousand, which was recorded as a reduction in beginning retained
earnings upon adoption, as required. We recognized no material adjustment to the
liability for unrecognized income tax benefits. A reconciliation of the
beginning and ending amount of unrecognized tax benefit is as follows (in
thousands):
|
2008
|
2007
|
|||||||
|
Balance
at beginning of
period
|
$ | 8,273 | $ | 4,643 | ||||
|
Additions
based on tax positions related to the current
year
|
1,946 | 3,321 | ||||||
|
Additions
for tax positions of prior
years
|
366 | 309 | ||||||
|
Reductions
as a result of the lapse of the applicable statute of
limitations
|
(1,221 | ) | — | |||||
|
Balance
at end of
period
|
$ | 9,364 | $ | 8,273 | ||||
All of
our unrecognized tax benefits at December 31, 2008 would affect our effective
income tax rate if recognized. As of December 31, 2008, it is deemed reasonably
possible that the Company will recognize tax benefits in the amount of $1.6
million in the next twelve months due to the closing of open tax years. The
nature of the uncertainty relates to deductions taken on returns that have not
been examined by the applicable tax authority.
We
recognize interest and penalties related to income tax matters in income tax
expense. During the years ended December 31, 2008 and 2007, we recognized
interest expense related to uncertain tax positions of approximately $365,000
and $204,000, respectively. The tax years 2001 through 2008 remain open to
examination by the major taxing jurisdictions in which we file income tax
returns.
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 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. As part of the
requirements of SFAS 123R, the Company is required to 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.
Transactions
under all stock option plans are summarized as follows:
|
Number
of
shares
under
option
|
Weighted
average
exercise
price
|
|||||||
|
Outstanding
at December 31,
2005
|
8,478,233 | $ | 21.05 | |||||
|
Exercised
|
(1,398,617 | ) | 13.16 | |||||
|
Canceled
|
(164,943 | ) | 27.32 | |||||
|
Granted
|
— | — | ||||||
|
Outstanding
at December 31,
2006
|
6,914,673 | $ | 22.49 | |||||
|
Exercised
|
(1,515,107 | ) | 15.22 | |||||
|
Canceled
|
(104,925 | ) | 27.33 | |||||
|
Granted
|
— | — | ||||||
|
Outstanding
at December 31,
2007
|
5,294,641 | $ | 24.47 | |||||
|
Exercised
|
(925,743 | ) | 17.30 | |||||
|
Canceled
|
(96,331 | ) | 26.98 | |||||
|
Granted
|
— | — | ||||||
|
Outstanding
at December 31,
2008
|
4,272,567 | $ | 25.97 | |||||
|
Options
exercisable at December 31:
|
||||||||
|
2006
|
5,384,470 | $ | 21.53 | |||||
|
2007
|
4,368,972 | 24.17 | ||||||
|
2008
|
3,812,334 | 26.00 | ||||||
The
aggregate intrinsic value of stock options at exercise, represented in the table
above, was $11.0 million, $22.3 million and $25.5 million for the years ended
December 31, 2008, 2007 and 2006, respectively. Total unrecognized stock-based
compensation expense related to non-vested stock options was approximately $6.0
million as of December 31, 2008, related to approximately 460,000 shares with a
per share weighted average fair value of $16.45. We anticipate this expense to
be recognized over a weighted average period of approximately 3.5
years.
|
Outstanding and Exercisable by Price
Range
|
||||||||||||||||||||||
|
As of December 31, 2008
|
||||||||||||||||||||||
|
Options Outstanding
|
Options Exercisable
|
|||||||||||||||||||||
|
Range of Exercise
prices
|
Number
outstanding
as
of
12/31/2008
|
Weighted
average
remaining
contractual life
|
Weighted
average
exercise
price
|
Number
exercisable
as
of
12/31/2008
|
Weighted
average
exercise price
|
|||||||||||||||||
|
$
12.22 - $ 21.04
|
1,589,870 | 2.28 | $ | 19.37 | 1,431,561 | $ | 19.24 | |||||||||||||||
|
$
21.25 - $ 30.51
|
1,427,826 | 4.80 | $ | 27.98 | 1,137,357 | $ | 27.91 | |||||||||||||||
| $ 30.71 - $ 34.38 | 1,254,871 | 1.28 | $ | 32.05 | 1,243,416 | $ | 32.05 | |||||||||||||||
| $ 12.22 - $ 34.38 | 4,272,567 | 2.83 | $ | 25.97 | 3,812,334 | $ | 26.00 | |||||||||||||||
The
weighted average remaining contractual life of options exercisable as of
December 31, 2008 was 2.63 years. The aggregate intrinsic value of options
outstanding as of December 31, 2008 was ($6.9) million. The aggregate intrinsic
value of options currently exercisable as of December 31, 2008 was ($6.3)
million. No options were granted in the years ended December 31, 2008, 2007 and
2006 as our incentive option plan terminated in May 2005.
Restricted
stock plan
Our
stockholders approved the 2005 Incentive Plan (the “2005 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 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 December 31, 2008 were 2,540,115. As part of the
requirements of SFAS 123R, the Company is required to estimate potential
forfeitures of restricted stock units 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.
Transactions
under the 2005 Plan are summarized as follows:
|
RSUs
|
||||||||
|
Number
of RSUs
|
Weighted
Average Grant Price
|
|||||||
|
Balance
at January 1,
2006
|
798,305 | $ | 22.24 | |||||
|
Granted
|
693,805 | $ | 32.21 | |||||
|
Earned
|
(113,794 | ) | $ | 31.67 | ||||
|
Canceled
|
(53,383 | ) | $ | 25.93 | ||||
|
Balance
at December 31,
2006
|
1,324,933 | $ | 26.77 | |||||
|
Granted
|
801,780 | $ | 27.90 | |||||
|
Earned
|
(209,303 | ) | $ | 27.85 | ||||
|
Canceled
|
(75,776 | ) | $ | 27.64 | ||||
|
Balance
at December 31,
2007
|
1,841,634 | $ | 26.86 | |||||
|
Granted
|
763,182 | $ | 28.51 | |||||
|
Earned
|
(320,251 | ) | $ | 29.42 | ||||
|
Canceled
|
(119,337 | ) | $ | 28.19 | ||||
|
Balance
at December 31,
2008
|
2,165,228 | $ | 26.99 | |||||
Total
unrecognized stock-based compensation expense related to non-vested restricted
stock units was approximately $56.8 million as of December 31, 2008, related to
2,165,228 shares with a per share weighted average fair value of $26.99. We
anticipate this expense to be recognized over a weighted average period of
approximately 6.1 years.
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
each period. The plan has quarterly purchase periods on February 1, May 1,
August 1 and November 1 of each year. During the annual shareholders meeting
held on May 7, 2007, our shareholders approved an additional 3,000,000 shares of
common stock to be reserved for issuance under the employee stock purchase plan.
Employees may designate up to 15% of their compensation for the purchase of
common stock. Common stock reserved for future employee purchases aggregated
2,593,607 shares at December 31, 2008. Shares issued under this plan were
679,983 and 549,719 in the years ended December 31, 2008 and 2007, respectively.
During 2008, the weighted average fair value of the employees’ purchase rights
was $23.01 per share and was estimated using the Black-Scholes model with the
following assumptions:
|
2008
|
2007
|
2006
|
||||||||||
|
Dividend
expense
yield
|
0.3% | 0.3% | 0.2% | |||||||||
|
Expected
life
|
3
months
|
3
months
|
3
months
|
|||||||||
|
Expected
volatility
|
26% | 23% | 29% | |||||||||
|
Risk-free
interest
rate
|
3.8% | 5.0% | 4.5% | |||||||||
Weighted
average, grant date fair value of purchase rights granted under the Employee
Stock Purchase Plan are as follows:
|
Number
of shares
|
Weighted
average
fair value
|
|||||||
|
2006
|
539,541 | $ | 6.62 | |||||
|
2007
|
549,719 | 6.19 | ||||||
|
2008
|
679,983 | 5.86 | ||||||
Stock-based
compensation included in total cost of sales and operating expenses for the
years ended December 31, 2008, 2007 and 2006 are summarized as follows (in
thousands):
|
2008
|
2007
|
2006
|
||||||||||
|
Stock-based
compensation
|
||||||||||||
|
Total
cost of
sales
|
$ | 1,063 | $ | 911 | $ | 598 | ||||||
|
Sales
and
marketing
|
8,479 | 7,322 | 6,008 | |||||||||
|
Research
and
development
|
7,121 | 6,435 | 5,201 | |||||||||
|
General
and
administrative
|
3,084 | 2,866 | 2,333 | |||||||||
|
Provision
for income
taxes
|
(4,601 | ) | (3,839 | ) | (2,403 | ) | ||||||
|
Total
|
$ | 15,146 | $ | 13,695 | $ | 11,737 | ||||||
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.
Stock
repurchases and retirements
Since
1998, our Board of Directors approved and we maintained various stock repurchase
programs. Pursuant to these plans we had purchased and retired a total of
7,354,966 shares for approximately $184.9 million from 1998 through December 31,
2007. At the end of December 2007, there were 2,630,595 share authorized under
such plans. In February 2008, we repurchased 1,833,134 shares under the existing
plan for approximately $49.1 million. On April 25, 2008, our Board of Directors
approved a new share repurchase plan that increased the aggregate number of
shares from 797,461 to 3.0 million. During the remainder of 2008, we purchased
an additional 2,276,908 shares under the plan approved in April 2008 for
approximately $54.5 million. At December 31, 2008, there were 723,092 shares
available for repurchase under the plan approved in April 2008. Our share
repurchase plan does not have an expiration date.
Note
10 – Employee retirement plan
We have a
defined contribution retirement plan pursuant to Section 401(k) of the Internal
Revenue Code. Substantially all domestic employees with at least 30 days of
continuous service are eligible to participate and may contribute up to 15% of
their compensation. The Board of Directors has elected to make matching
contributions equal to 50% of employee contributions, which may be applied to a
maximum of 6% of each participant’s compensation. Employees are eligible for
matching contributions after one year of continuous service. Company
contributions vest immediately. Our policy prohibits participants from direct
investment in shares of our common stock within the plan. Company contributions
charged to expense were $3.7 million, $3.3 million and $3.0 million in 2008,
2007 and 2006, respectively.
SFAS
133(R), Accounting for
Derivative Instruments and Hedging Activities, as amended requires
companies to recognize all of its 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. Approximately 57% of our revenues are generated
outside the Americas. 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 options contracts) to
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 purchased options 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
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 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.
In
accordance with SFAS 133(R), we designate foreign currency forward and option
contracts as cash flow hedges of forecasted revenues or forecasted expenses. In
addition, we hedge our foreign currency denominated receivables using foreign
currency forward contracts. These derivatives are not designated as hedging
instruments under SFAS 133(R). None of our derivative instruments contain a
credit-risk-related contingent feature.
Cash
flow hedges
To
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 and 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 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 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 and reclassified into
earnings or expenses in the same line item (net revenue, operating expenses, or
cost of revenue) 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 in the
same line item associated with the forecasted transaction. Hedge effectiveness
of foreign currency forwards and option contracts designated as a 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. Ineffectiveness for the years ended December 31, 2008, 2007 and 2006 was
not significant. No amounts were excluded from the assessment of hedge
effectiveness nor were there any amounts of ineffectiveness recorded in our
Consolidated Statements of Income for the years ended
December 31, 2008, 2007 and 2006.
We held
forward contracts with a notional amount of $54.9 million dollar equivalent of
Euro, $6.2 million dollar equivalent of British pound sterling, $18.9 million
dollar equivalent of Japanese yen, $4.7 million dollar equivalent of South
Korean won and $21.7 million dollar equivalent of Hungarian forint at December
31, 2008. We held forward contracts with a notional amount of $35.7 million
dollar equivalent of Euro, $1.5 million dollar equivalent of British pound
sterling and $5.7 million dollar equivalent of Japanese yen at December 31,
2007. The fair value of these contracts, which are for terms up to 24 months, is
an asset of $6.1 million and a liability of $1.1 million at December 31, 2008
and 2007, respectively. We recorded a net unrealized deferred gain of $6.1
million and a net unrealized deferred loss of $1.1 million in accumulated other
comprehensive income at December 31, 2008 and 2007, respectively, related to
these forward contracts.
We held
option contracts with a notional amount of $111.3 million dollar equivalent of
Euro at December 31, 2008. We held option contracts with a notional amount of
$6.9 million dollar equivalent of British pound sterling and $75.3 million of
dollar equivalent of Euro at December 31, 2007. The fair value of these
contracts, which are for terms up to 24 months, is an asset of $9.5 million and
an asset of $2.7 million at December 31, 2008 and 2007, respectively. We
recorded a net unrealized deferred gain of $5.8 million and a net unrealized
deferred gain of $466,000 in accumulated other comprehensive income at December
31, 2008 and 2007, respectively, related to these option contracts.
We
recorded net gains of $273,000, net losses of $3.0 million and net losses of
$1.0 million for cash flow hedges for the years ended December 31, 2008, 2007
and 2006, respectively, which was included in net sales. We recorded net losses
of $7 thousand and net losses of $3 thousand for cash flow hedges for the year
ended December 31, 2008, which was included in cost of sales and operating
expenses, respectively.
At
December 31, 2008, we expect to reclassify $6.0 million of gains and $1.8
million of losses on derivative instruments from accumulated other comprehensive
income to net sales during the next twelve months when the hedged international
sales occur. At December 31, 2008, we expect to reclassify $1.9 million of gains
on derivative instruments from accumulated other comprehensive income to cost of
sales and $528 thousand of gains on derivative instruments from accumulated
other comprehensive income to operating expenses during the next twelve months
when the hedged international expenses occur.
Other
Derivatives
Other
derivatives not designated as hedging instruments under SFAS 133 consist
primarily of foreign currency forward contracts that we use to hedge our foreign
denominated net receivable positions to protect against the reduction in value
caused by a fluctuation in foreign currency exchange rates. We typically hedge
up to 90% of our outstanding foreign denominated net receivables 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). As of December
31, 2008 and 2007, we held forward contracts with a notional amount of $67.1
million and $14.6 million, respectively. The fair value of these contracts is a
liability of $536 thousand and a liability of $39 thousand at December 31, 2008
and 2007, respectively. We recorded net gains of $1.2 million, net losses of
$1.1 million and net losses of $1.0 million for the years ended December 31,
2008, 2007 and 2006, respectively, related to hedges of foreign denominated
receivables.
In
accordance with SFAS 131, Disclosures about Segments of an
Enterprise and Related 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):
|
Years Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Net
sales:
|
||||||||||||
|
Americas:
|
||||||||||||
|
Unaffiliated customer
sales
|
$ | 355,878 | $ | 331,482 | $ | 317,780 | ||||||
|
Geographic
transfers
|
132,563 | 115,709 | 125,096 | |||||||||
| 488,441 | 447,191 | 442,876 | ||||||||||
|
Europe:
|
||||||||||||
|
Unaffiliated customer
sales
|
267,373 | 230,940 | 193,364 | |||||||||
|
Geographic
transfers
|
204,282 | 159,992 | 159,369 | |||||||||
| 471,655 | 390,932 | 352,733 | ||||||||||
|
Asia
Pacific:
|
||||||||||||
|
Unaffiliated customer
sales
|
197,286 | 177,956 | 149,263 | |||||||||
|
Eliminations
|
(336,845 | ) | (275,701 | ) | (284,465 | ) | ||||||
| $ | 820,537 | $ | 740,378 | $ | 660,407 | |||||||
|
Years Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Operating
income:
|
||||||||||||
|
Americas
|
$ | 71,467 | $ | 76,292 | $ | 67,644 | ||||||
|
Europe
|
105,748 | 92,469 | 78,402 | |||||||||
|
Asia
Pacific
|
61,642 | 59,845 | 54,771 | |||||||||
|
Unallocated:
|
||||||||||||
|
Research
and development
expenses
|
(143,140 | ) | (126,515 | ) | (113,095 | ) | ||||||
| $ | 95,717 | $ | 102,091 | $ | 87,722 | |||||||
|
Years Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Interest
income:
|
||||||||||||
|
Americas
|
$ | 2,603 | $ | 5,138 | $ | 6,561 | ||||||
|
Europe
|
3,291 | 4,485 | 241 | |||||||||
|
Asia
Pacific
|
102 | 199 | 45 | |||||||||
| $ | 5,996 | $ | 9,822 | $ | 6,847 | |||||||
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Long-lived
assets:
|
||||||||
|
Americas
|
$ | 107,701 | $ | 104,782 | ||||
|
Europe
|
39,280 | 40,661 | ||||||
|
Asia
Pacific
|
7,496 | 6,019 | ||||||
| $ | 154,477 | $ | 151,462 | |||||
Total
sales outside the United States for 2008, 2007 and 2006 were $499.3 million,
$437.0 million and $373.7 million, respectively.
Note 13 – Commitments, contingencies and
leases
We have
commitments under non-cancelable operating leases primarily for office
facilities throughout the world. Certain leases require us to pay property
taxes, insurance and routine maintenance, and include escalation clauses. Future
minimum lease payments as of December 31, 2008, for each of the next five years
are as follows (in thousands):
|
2009
|
$ | 12,394 | ||
|
2010
|
11,199 | |||
|
2011
|
7,312 | |||
|
2012
|
5,064 | |||
|
2013
|
3,229 | |||
|
Thereafter
|
11,054 | |||
| $ | 50,252 |
Rent
expense under operating leases was approximately $11.7 million, $10.2 million
and $8.7 million for the years ended December 31, 2008, 2007 and 2006,
respectively.
As of
December 31, 2008, we have non-cancelable purchase commitments with various
suppliers of customized inventory and inventory components totaling
approximately $8.4 million over the next twelve months.
As of
December 31, 2008, we have outstanding guarantees for payment of customs and
foreign grants totaling approximately $2.4 million.
Note
14 – 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 June 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 June
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 thousand related to this contingency.
There were not any charges against this accrual during the three months ended
December 31, 2008. For the year ended December 31, 2008, we charged a total of
$8 thousand against this accrual. To date, we have charged a cumulative total of
$619 thousand against this accrual.
On
February 1, 2008, we acquired all of the outstanding shares of microLEX Systems
ApS, (“microLEX”) a premier provider of virtual instrumentation-based video,
audio and mixed-signal test solutions. This acquisition was accounted for as a
business combination. The purchase price of the acquisition, which included
legal and accounting fees, was $17.8 million in cash. The allocation of the
purchase price was determined using the fair value of assets and liabilities
acquired as of February 1, 2008. We funded the purchase price from existing cash
balances. Our consolidated financial statements include the operating results
from the date of acquisition. Pro-forma results or operations have not been
presented because the effects of those operations were not material. The
purchase price allocation is preliminary and is subject to future adjustment
during the allocation period as defined in SFAS 141, Business Combinations. The
following table summarizes the allocation of the purchase price of microLEX (in
thousands):
|
Goodwill
|
$ | 10,818 | ||
|
Acquired
core
technology
|
5,201 | |||
|
Non-competition
agreements
|
159 | |||
|
Trademarks
|
119 | |||
|
Customer
relationships
|
354 | |||
|
Current
assets
acquired
|
3,057 | |||
|
Long-term
assets
acquired
|
20 | |||
|
Current
liabilities
assumed
|
(486 | ) | ||
|
Deferred
tax
liabilities
|
(1,458 | ) | ||
|
Total
assets
acquired
|
$ | 17,784 |
Goodwill
is not deductible for tax purposes. Existing technology, non-competition
agreements, trademarks, and customer relationships have useful lives of 5 years,
3 years, 3 years, and 5 years, respectively, from the date of acquisition. These
assets are not deductible for tax purposes.
Note
16 – Quarterly results (unaudited)
The
following quarterly results have been derived from unaudited consolidated
financial statements that, in the opinion of management, reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such quarterly information. The operating results for any
quarter are not necessarily indicative of the results to be expected for any
future period. The unaudited quarterly financial data for each of the eight
quarters in the two years ended December 31, 2008 are as follows (in thousands,
except per share data):
|
Three Months Ended
|
||||||||||||||||
|
Mar.
31,
2008
|
Jun.
30,
2008
|
Sep.
30,
2008
|
Dec.
31,
2008
|
|||||||||||||
|
Net
sales
|
$ | 192,918 | $ | 210,474 | $ | 215,038 | $ | 202,107 | ||||||||
|
Gross
profit
|
143,849 | 157,034 | 160,531 | 152,014 | ||||||||||||
|
Operating
income
|
18,065 | 27,834 | 27,946 | 21,872 | ||||||||||||
|
Net
income
|
17,616 | 24,734 | 23,159 | 19,318 | ||||||||||||
|
Basic
earnings per
share
|
$ | 0.22 | $ | 0.32 | $ | 0.29 | $ | 0.25 | ||||||||
|
Weighted
average shares outstanding-basic
|
78,840 | 78,484 | 78,834 | 78,110 | ||||||||||||
|
Diluted
earnings per
share
|
$ | 0.22 | $ | 0.31 | $ | 0.29 | $ | 0.25 | ||||||||
|
Weighted
average shares outstanding-diluted
|
79,825 | 79,549 | 79,841 | 78,522 | ||||||||||||
|
Dividends
declared per
share
|
$ | 0.11 | $ | 0.11 | $ | 0.11 | $ | 0.11 | ||||||||
|
Three Months Ended
|
||||||||||||||||
|
Mar.
31,
2007
|
Jun.
30,
2007
|
Sep.
30,
2007
|
Dec.
31,
2007
|
|||||||||||||
|
Net
sales
|
$ | 171,641 | $ | 179,497 | $ | 184,426 | $ | 204,814 | ||||||||
|
Gross
profit
|
128,858 | 134,620 | 137,435 | 154,198 | ||||||||||||
|
Operating
income
|
22,102 | 24,199 | 24,556 | 31,234 | ||||||||||||
|
Net
income
|
19,049 | 20,751 | 21,540 | 45,693 | ||||||||||||
|
Basic
earnings per
share
|
$ | 0.24 | $ | 0.26 | $ | 0.27 | $ | 0.58 | ||||||||
|
Weighted
average shares outstanding-basic
|
79,842 | 79,363 | 79,226 | 79,460 | ||||||||||||
|
Diluted
earnings per
share
|
$ | 0.23 | $ | 0.26 | $ | 0.27 | $ | 0.56 | ||||||||
|
Weighted
average shares outstanding-diluted
|
81,232 | 80,788 | 80,874 | 81,155 | ||||||||||||
|
Dividends
declared per
share
|
$ | 0.07 | $ | 0.07 | $ | 0.10 | $ | 0.10 | ||||||||
Beginning
with this Form 10-K, we are separately reporting software maintenance revenue
and cost of software maintenance revenue in our Consolidated
Statements of Income. We have added this disclosure due to the increasing
percentage of our revenue coming from software maintenance. As part of this
expanded disclosure, some technical support costs previously reported as a
component of sales and marketing expense are now reported as cost of software
maintenance. This change has had no impact on our operating income, net income
or earnings per share. All amounts shown above have been reclassified to conform
to this new presentation, the effect of these changes for the three months ended
March 31, June 30, September 30 and December 31, 2007 are as follows (in
thousands):
|
Three Months Ended
|
||||||||||||||||
|
Mar.
31,
2007
|
Jun.
30,
2007
|
Sep.
30,
2007
|
Dec.
31,
2007
|
|||||||||||||
|
Gross
profit as presented in the prior year Note 16: Quarterly Results
(unaudited)
|
$ | 129,493 | $ | 135,426 | $ | 138,207 | $ | 155,063 | ||||||||
|
Technical
support costs previously reported as sales and marketing
|
(635 | ) | (806 | ) | (772 | ) | (865 | ) | ||||||||
|
Gross
profit as presented in the current year Note 16: Quarterly Results
(unaudited)
|
$ | 128,858 | $ | 134,620 | $ | 137,435 | $ | 154,198 | ||||||||
Note
17 – Subsequent events
On
January 23, 2009, our Board of Directors declared a quarterly cash dividend of
$0.12 per common share, payable March 2, 2009, to shareholders of record on
February 9, 2009.
Since
December 31, 2008, we have repurchased 131,768 shares of our common stock at an
average price of $22.02 under our share repurchase plan. The maximum number of
shares that may yet be purchased under the plan is 591,324.
On
January 23, 2009, our Board of Directors approved a new share purchase plan
which increased the aggregate number of shares of common stock that we are
authorized to repurchase from 591,324 to 3.0 million. This repurchase plan does
not have an expiration date.