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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File Number 0-25426
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NATIONAL INSTRUMENTS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-1871327
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11500 North Mopac Expressway
Austin, Texas 78759
(address of principal executive offices) (zip code)
Registrant's telephone number, including area code:
(512) 338-9119
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of Class)
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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. |_|
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
The aggregate market value of voting stock held by non-affiliates of the
registrant at the close of business on February 15, 2002, was $1,096,601,216
based upon the last sales price reported for such date on the NASDAQ National
Market System. 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 December 31, 2001
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 15, 2002, registrant had outstanding
51,206,082 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part I and Part III incorporate certain information by reference from the
definitive proxy statement for the Annual Meeting of Stockholders to be held on
May 14, 2002 (the "Proxy Statement").
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-1-
PART I
Certain information required by Part III is omitted from this Report in
that the Registrant intends to file a definitive proxy statement pursuant to
Regulation 14A with the Securities and Exchange Commission (the "Proxy
Statement") relating to its 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 1. BUSINESS
National Instruments Corporation (the "Company" or "National Instruments")
is a leading supplier of measurement and automation products that engineers and
scientists use in a wide range of industries. These industries are spread across
a large and diverse market for test and measurement ("T&M") and industrial
automation ("IA") applications. The Company provides flexible application
software and modular, multifunction hardware that users combine with
industry-standard computers, networks and the Internet to create measurement and
automation systems, which the Company also refers to as "virtual instruments."
A virtual instrument is a user-defined measurement and automation system
that consists of an industry standard computer or workstation equipped with the
Company's 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 vendors.
The Company's 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 with industrial automation. The Company believes 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 short- and
long-term costs of developing, owning and operating measurement and automation
systems, and improves efficiency and precision of applications spanning
research, design, production and service.
The Company is based in Austin, Texas and was incorporated under the laws
of the State of Texas in May 1976 and was reincorporated in Delaware in June
1994. On March 13, 1995, the Company completed an initial public offering of
shares of its Common Stock. The Company's Common Stock, $0.01 par value, is
quoted on the NASDAQ National Market System under the trading symbol NATI.
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, and physical phenomena,
such as temperature, pressure, speed, flow, volume, torque and vibration. Common
instruments include voltmeters, signal generators, oscilloscopes, dataloggers,
spectrum analyzers, cameras, and temperature and pressure monitors and
controllers. Instruments generally perform three basic functions: data
acquisition and control; data analysis; and presentation of results. Instruments
are used pervasively in research, education, manufacturing and service
applications in numerous fields including electronics, automotive, aerospace,
telecommunications, medical research and pharmaceutical, semiconductor and
petrochemical.
Instruments and systems are used to facilitate research as well as product
design, production and service. In research and development settings, scientists
and engineers use instruments and systems to collect and analyze experimental
data and simulate manufacturing processes or techniques. In manufacturing
environments, engineers use instruments and systems to test and verify the
proper operation of the products being manufactured and to monitor and control
the manufacturing machines and processes. In service contexts, instruments and
systems are used to monitor, troubleshoot and repair products and processes.
Traditional Instrument Applications for Measurement and Automation
Instrument applications can be generally categorized as either T&M or IA.
T&M applications generally involve testing during the design, manufacture and
service of a wide variety of products. IA applications generally involve
automating the machinery and processes used in the production and distribution
of a wide variety of products and materials.
-2-
A typical T&M instrument is a stand-alone unit that has input, output and
analysis capabilities; knobs, switches and push buttons for user operation; and
gauges, meters or other displays for visual data presentation. Traditionally,
most T&M instruments were vendor-defined, fixed-function devices designed to
address specific applications. As a result, users had limited flexibility to
adapt their instruments to changing requirements. In the 1960's, vendors began
to incorporate integrated circuits, including programmable microcontrollers, to
increase instrument flexibility. In the mid-1970's, the General Purpose
Interface Bus ("GPIB" or "IEEE 488") was developed as a standard interface to
connect instruments to external computers. The first computer controllers for
GPIB instruments were based on proprietary hardware architectures. In the later
1970's, some minicomputers with general purpose but complex operating systems
were equipped for GPIB instrument control. In the early 1980's, personal
computers with limited processing power equipped with MS-DOS, a standard,
character-based operating system, began replacing minicomputers as the preferred
platforms for instrument control applications. In the 1990s, personal computers
with Windows operating systems and graphics-based application software grew in
popularity and became the dominant platforms for instrument control
applications. In the late 1990s, connectivity to the Internet and the ability
for personal computers to integrate and share data throughout the enterprise
further increased the popularity and use of PC-based instrumentation systems,
and new web-enabled tools enabled users to begin to easily leverage the internet
for networked and distributed measurement applications.
IA systems have long included mechanical devices, analog gauges and meters,
and since the 1960's, have also included electronic instruments such as data
loggers and strip chart recorders. In the 1970's, programmable logic controllers
("PLCs"), special-purpose, proprietary stand-alone industrial computers, were
introduced and were used primarily for "discrete" manufacturing applications
such as automobile assembly. PLCs have traditionally had primitive operator
interface panels incorporating buttons, lights and indicators. In parallel,
sophisticated instrumentation systems called distributed control systems
("DCSs") were also adopted to provide computer control of large-scale continuous
processes, such as those found in oil refineries. DCSs integrated a variety of
sensors and control elements using both analog and digital connections, all
controlled by a central computer running proprietary software. In the
mid-1980's, another approach became available when industrial PC-based IA
systems came into use. These early PC-based systems generally ran proprietary,
vendor-defined software and incorporated plug-in data acquisition boards or
interfaced to PLCs. In the 1990's, Ethernet networks grew in popularity as a
standard for connectivity between IA devices, instruments, and systems, and
personal computers with high-speed processors running Windows based operating
systems. In addition, graphics-based application software grew in popularity as
platforms for supervision and control of IA systems and applications. Finally,
just as in T&M applications, in the late 1990's connectivity to the internet
enabled users to leverage networked applications via the internet.
Limitations of Traditional Approaches to Instrumentation
Instruments and systems for both T&M and IA 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. These problems have been further
complicated in IA applications because specialized data transfer and
communications standards have not evolved rapidly or been widely adopted. For
example, PLCs, while greatly improving control of individual processes, created
multiple "islands of information" that were generally unable to communicate or
share data with other systems throughout the manufacturing enterprise.
Furthermore, proprietary instrumentation systems have traditionally been very
expensive, with IA 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 programmability of traditional systems
means that adopting these systems to changing requirements is both expensive and
time consuming, and users are often required to purchase multiple single-purpose
instruments.
Although desktop computers in the 1980's typically were based on open
architectures, until the 1990's they lacked higher-level application software
development tools and intuitive graphical user interfaces ("GUIs").
Consequently, the process of creating intuitive operator interface and control
panels was difficult and expensive. These early desktop computers also lacked
the power to rapidly process and analyze the volume of data characteristic of
many high data rate T&M and IA applications. In addition, desktop computers were
difficult to network reliably until standard network operating systems evolved
late in the decade. For all of these reasons, users and vendors were relatively
slow to incorporate desktop computers in their instrumentation systems.
-3-
In the 1990's, desktop and portable computers improved significantly in
data and graphics processing power, storage, communication, and networking
capabilities, user-friendliness and reliability. Nevertheless, users accustomed
to the flexibility, efficiency, power and open architecture of these
later-generation computers, and the highly evolved application software
available for business computing needs, have been generally frustrated in their
efforts to integrate these computers into measurement and automation solutions.
Standard desktop computers were not equipped with the hardware connections
required to control many types of instruments and lacked
instrumentation-specific application development tools, including GUI
development environments. Neither standard programming languages such as C/ C++
and Visual Basic, nor operating systems such as Windows, Linux and UNIX, are
"measurement aware." Without the aid of instrumentation-specific software to
facilitate the integration of various instrumentation system capabilities and
components, engineers and scientists could not easily utilize the full potential
of computers, networks and the Internet to meet their measurement and automation
requirements.
The Company's Approach to Measurement and Automation
The Company pioneered a new computer-based approach to measurement and
automation called virtual instrumentation in 1986 when it introduced its LabVIEW
application software, which is a graphical programming environment that empowers
users to easily build their own computer-based instruments and systems to meet
their specific measurement and automation needs. While a traditional instrument
bundles the data acquisition, analysis and presentation functions in a single,
stand-alone unit, a "virtual instrument" system consists of industry standard
computers or workstations equipped with the Company's user-friendly application
software, cost-effective hardware and driver software that together perform the
functions of instruments. By unbundling the key instrumentation functions,
virtual instruments represent a fundamental shift from hardware-centered
instrumentation systems to software-centered systems that exploit the
computational, display, productivity and connectivity capabilities of computers,
networks and the Internet. The Company's application software products give
users the power and flexibility to define, implement, modify and control the
core data acquisition, analysis, and presentation functions of instruments with
their computer. Users can mix and match their choice of the Company's DAQ, GPIB,
VXI, PXI, image acquisition, motion control or industrial communications
products to create virtual instrumentation systems that meet their specific
instrumentation needs. The Company's products empower users to monitor and
control instruments, create innovative computer-based systems that can replace
instruments at a lower cost, and integrate measurement functionality with
industrial automation and standard network connectivity to improve efficiency
and precision of applications spanning research, design, production and service.
Because much of the instrumentation functionality resides in the software, in a
significant sense, the software is the instrument.
User Benefits
Compared with traditional solutions, the Company believes its products and
computer-based, virtual instrumentation approach provide the following
significant customer benefits:
Performance, Ease-of-Use and Efficiency
The Company's virtual instrument application software brings the power and
ease-of-use of computers, networks and the Internet to the instrumentation
market. With features such as graphical programming, automatic code generation
capabilities, graphical tools libraries, ready-to-use example programs and
libraries of specific instrumentation functions, users can quickly build a
virtual instrument system that meets their individual application needs. For
example, a user may build the data acquisition and analysis functions of an
instrument by selecting and connecting icons representing particular
instrumentation functions and may customize the display on the computer's
monitor to reflect the desired presentation. With faster time to solution, users
have more time to optimize system functionality and performance, and can devote
more time to their core work rather than to programming instruments. In
addition, the continuous improvement in performance of PCs and the Internet,
which are the core platform for the Company's approach, result 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 and faster automation, and higher manufacturing
throughput.
Modularity, Reusability and Reconfigurability
The Company's products include reusable hardware and software modules that
offer considerable flexibility in configuring systems. This ability to reuse and
reconfigure instrument systems allows users to reduce development time and
maximize efficiency by eliminating duplicated programming efforts and to quickly
adapt their instruments to new and changing needs. In addition, these features
help protect both hardware and software investments against obsolescence.
-4-
Mix and Match Capabilities
The flexibility of the Company's virtual instrumentation approach permits
users to mix and match many combinations of GPIB, VXI, DAQ, PXI, image
acquisition, motion control and industrial communications products to build
customized measurement and automation solutions. The Company's open product
architecture provides a high level of integration between the Company's products
and other industry standard instrumentation products. This approach provides
users with the flexibility to mix and match the Company's and third-party
hardware components when developing custom virtual instrumentation systems.
Long-Term Compatibility Across Multiple Computer Platforms
The Company offers a variety of multi-platform software products so users
can choose the platform and programming methodology that best meets their needs
and skills. These software products also have portable, open architectures so
users can move their applications among multiple platforms and operating
systems. In addition, the Company strives to ensure long-term compatibility
between its products and the latest industry-standard computers, operating
systems, programming languages and tools, as well as backward compatibility with
its own product offerings.
Network and Integrate with Customers' Computing Environments
The Company's products facilitate connectivity of measurement and
automation systems with the enterprise by utilizing industry communication
standards such as the Web, Ethernet and TCP/IP. The Company's products provide
integrated Web support, data and file transfer between computers, distributed
access to databases and remote test and measurement and process monitoring
capabilities. In addition, the Company's products are also compatible with a
wide variety of familiar, easy-to-use software applications such as word
processors, spreadsheets, Web browsers, and databases. In many cases, a single
computer or workstation can serve both the instrumentation and general purpose
computing needs of scientists and engineers.
Large User Base
The Company supports and encourages the sharing of ideas, derived software
libraries and modules among its broad user base through its NI.com Web site,
user groups, newsletters, conferences and seminars. This large base of users
stimulates the expansion of the Company's network of approximately 600 third
party system integrators and consultants, who can save users time and money by
providing value-added expertise, software programs and integration of systems
for use with the Company's products.
Lower Total Solution Cost
The Company believes that its products and solutions offer
price/performance advantages over traditional instrumentation. Virtual
instrumentation provides users the ability to utilize industry standard
computers and workstations equipped with modular and reusable application
software, cost-effective hardware and driver software that together perform the
instrumentation functions that would otherwise be performed by costly,
proprietary instrumentation 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.
Strategy
The Company's objective is to be a leading supplier of measurement and
automation products and solutions to engineers, scientists and others in both
T&M and IA applications. To achieve this objective, the Company is pursuing a
strategy that includes the following elements:
Expand Broad Customer Base
Serve A Large and Diverse Market. The Company's products and services are
designed to serve a broad customer base across many industries. The Company
defines product features and capabilities by working closely with technically
sophisticated customers and seeks to achieve high unit volumes by selling these
same products to a large base of customers with diverse measurement and
automation needs.
Support Many Computer and Instrument Options. The Company diversifies its
customer base by accommodating many popular computer platforms and a variety of
instrumentation options. In addition, the Company expects to continue to create
or adapt products for computer systems and instrumentation options that gain
market acceptance. Customers are provided a range of price/performance options
through the Company's extensive line of products.
-5-
Provide Worldwide Marketing and Distribution. The Company uses multiple
coordinated distribution channels in its major world markets. The Company
devotes significant resources to direct sales activities in the United States
and in key international markets. In addition to its direct sales channel, the
Company's other distribution channels include distributors, OEMs, VARs and
systems integrators and consultants. By using this broad range of channels, the
Company seeks to develop and maintain relations with its customers and prospects
and to provide the levels of support, training and education required by the
market. To address the range of sales opportunities, the Company expects to
continue to pursue value-added sales channels through formal relationships with
OEMs, VARs, consultants or other third parties when such relationships can add
significant value to its products or revenues. The Company intends to expand
each of these distribution networks to take advantage of market opportunities.
Acquire New Technologies. The Company has in the past acquired companies,
products, and technologies to augment its product offerings, and intends to
continue to seek opportunities to satisfy customer needs and build market
penetration through acquisitions of new products and technologies in the future.
In connection with these acquisitions, the Company has leveraged its established
sales channels in an effort to accelerate the delivery of the acquired product
to the market.
Target Academic Environments. The Company markets and sells its products to
colleges and universities, increasing the potential for future growth as
students gain experience using the Company's products before entering the work
force.
Maintain High Levels of Customer Satisfaction
Offer Innovative Modular and Integrated Solutions. The Company intends to
continue to deliver innovative, modular software and hardware tools with open,
portable architectures that can be easily integrated to create instrumentation
systems and solutions. The Company solicits regular feedback from its customers,
resulting in the addition of new product features and enhanced performance, to
help ensure that existing and new products meet or surpass customer
expectations.
Provide Global Customer Support and Education. The Company's sales and
marketing engineers have the technical expertise necessary to understand
customers' instrumentation application needs and work with them to identify
cost-effective solutions using the virtual instrumentation approach. The Company
also offers comprehensive customer support, including technical support via the
NI.com Web site, electronic mail, bulletin boards, fax and telephone,
newsletters, warranty service and repair, upgrade programs, free and paid
seminars and technical classes. In 2001 the Company continued to invest to
leverage the Web for customer support. Through the Company's NI.com Web site,
customers have access to a growing range of support options to solve their own
problems directly over the Web, including software downloads, upgrades and bug
fixes, automated product configuration tools, knowledge databases of common
questions and answers, online seminars, live product demonstrations and
discussion forums.
Deliver Long-Term Compatibility. The Company emphasizes consistency in the
implementation of its products across different platforms and strives to
maintain a high degree of backward compatibility between existing and new
products, engendering a high degree of customer loyalty.
Leverage External and Internal Technology
Leverage Generally Available Technology. The Company leverages the research
and development efforts of vendors of personal computers and workstations,
operating systems, programming languages and software development tools, and
their suppliers. By integrating Web, networking and communications capabilities
directly in its software and hardware products, the Company's products allow
users of its virtual instrument approach to easily distribute measurement and
automation capabilities throughout factories and around the world, easily
integrate measurement and automation data throughout their organization and
across the enterprise and achieve advanced solutions at a lower development
cost.
Support Open Architecture on Multiple Platforms. The Company approaches the
market with an open architecture so users have the flexibility to combine the
Company's products with those from instrument suppliers, computer vendors and
competitors.
Leverage Core Technologies. The Company designs proprietary ASICs to
optimize performance and reduce production costs. The Company utilizes these
ASICs and its other internally developed hardware and software components in
multiple products to achieve consistency and compatibility between products.
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Develop and Support Industry Standards. The Company actively participates
in efforts to standardize key technologies by participating in industry
consortia and serving on standards committees, such as IEEE 488, VXI, Compact
PCI, PXI, PICmg, the Interchangeable Virtual Instrumentation Foundation, also
called IVI, Foundation Fieldbus, OPC, and ASAM. The Company's ongoing strategy
is to conform its products to established and emerging standards in both the
general computer and the instrumentation industries.
Products and Technology
The Company offers an extensive line of measurement and automation
products. Engineers, scientists and other users involved in T&M and IA
applications can use these products with computers, networks and the Internet to
develop customer-defined virtual instrument solutions. The Company's products
consist of application software, and hardware components together with related
driver software. In T&M applications, the Company's products can be used to
monitor and control traditional instruments or to create computer-based
instruments that can replace the traditional instruments. In IA applications,
the Company's products can be used in the same ways as in T&M and can also be
used to integrate measurement functionality with process automation
capabilities. The Company's products are designed to work either in an
integrated solution or separately. The Company believes that the flexibility,
functionality and ease of use of its application software promotes sales of the
Company's other software and hardware products.
Application Software
The Company believes that application software is playing an increasingly
important role in the development of computer-based instruments and systems in
measurement and automation applications. The Company's 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.
The Company's application software products include LabVIEW, Measurement Studio,
TestStand, Lookout, Measure, Virtual Bench, DIAdem, DASYLab, and Vilogger. The
Company's application software products are integrated with the Company's
hardware/driver software.
The Company offers a variety of software products for developing
measurement and automation applications to meet the different programming and
computer preferences of its customers. LabVIEW and Measurement Studio are
programming environments with which users can develop 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 and Measurement Studio
also have ready-to-use libraries for controlling hundreds of programmable
instruments, including serial, GPIB and VXI, the Company's plug-in DAQ boards
and PXI/PCI computer-based instruments. Once created, virtual instruments can be
modified or used as components of another program by the original developer or
another user.
The principal difference between LabVIEW 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 Measurement Studio,
users may program with the conventional, text-based language of C. Measurement
Studio also includes application-specific OLE or ActiveX controls and libraries
to the Microsoft Visual Basic, Visual C++ and Borland Delphi development
environments.
The latest revisions of LabVIEW and Measurement Studio software packages
feature enhanced capabilities to allow users to more easily integrate the Web
into their computer-based instrumentation applications. Measurement Studio 6.0,
a major upgrade, was introduced in 2001. LabVIEW 6i, which was introduced in
2000, allows the customer to easily communicate, share and control measurement
and automation systems and information with anyone on the Web, and customers can
use the Internet and Intranets to build distributed, networked systems
throughout their enterprise. In 2000, the Company also expanded the capabilities
of its LabVIEW Real Time software product to include support for the PXI and
FieldPoint hardware platform to allow users who have exceptional response
requirements to reliably execute an expanded range of system-level applications
even if the PC operating system crashes--solving a key objection some potential
users have had in the past to using PC technology for embedded devices or for
mission critical measurement and automation applications, and extending the
range of applications for computer-based measurement and automation.
-7-
The Company also sells a range of optional add-on products for LabVIEW and
Measurement Studio, such as advanced analysis libraries, database tools and
Internet integration, including the LabVIEW Datalogging and Supervisory Control
Module, an add-on module for high channel count applications in research and
development and manufacturing.
The Company also offers 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 and Measurement
Studio, C and C++, and VisualBasic, 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 the Company's strategy to broaden the reach of its
application software products across the corporate enterprise. In 2001, the
Company introduced TestStand 2.0, a significant upgrade of TestStand for high
volume manufacturing applications. This version allows testing of multiple units
in parallel on the same test system by simply adding additional measurement and
automation hardware. Users can therefore easily scale their test systems to
increase throughput or reduce test time without major software changes, which
lowers the cost to test each unit and increases their profit margin.
The Company's instrumentation software products also include DASYLab and
DIAdem. DASYLab is a schematic environment by which users can quickly configure
simple DAQ applications using both the Company's and third-party DAQ boards. The
Company introduced DASYLab 6.0 in 2001 as well as DIAdem 7.0. DIAdem is an easy
to use, rapid development environment for data acquisition, monitoring,
visualization, open and closed loop control, analysis, automation and
documentation. DIAdem features extensive off-line analysis capabilities,
including analysis functions specific to automotive test.
The Company's Lookout software product is targeted specifically for IA
applications. Lookout is a non-programming solution. Lookout is a human machine
interface/supervisory control and data acquisition ("HMI/SCADA") software
product that requires no programming or script writing. Lookout provides a
scalable architecture for applications ranging from HMIs to large, sophisticated
SCADA applications.
In 2001, the Company introduced VI Logger, a new software product targeted
specifically at Data Logging applications. VI Logger is built with LabVIEW
technology, and works with a wide variety of the Company's data acquisition and
signal conditioning hardware products.
Hardware Products and Related Driver Software
The Company's hardware and related driver software products include GPIB,
VXI, DAQ, PXI, image acquisition, motion control, and industrial communications.
The Company believes it can deliver significant cost/performance benefits to
users and clearly distinguish its products from competitive products by
designing proprietary ASICs for use in its hardware products. Software drivers
are necessary to link hardware to the operating system and the Company's
application software. The high level of integration between the Company's
products provides users with the flexibility to mix and match hardware
components when developing custom virtual instrumentation systems.
GPIB Interfaces/Driver Software. GPIB, also known as the IEEE 488 standard,
has existed since 1975 and defines the protocol for transferring data between
certain instruments and computers over an industry-standard cable. The computer
must be equipped with a GPIB interface. Driver software controls the interface
and the transfer of data between the instrument and the computer. GPIB is
largely used in T&M applications.
The Company began selling GPIB products in 1977 and is 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. The Company's
diverse portfolio of hardware and software products for GPIB instrument control
is available for a wide range of computers, workstations and minicomputers. The
Company's GPIB product line also includes products for portable computers such
as a PCMCIA-GPIB interface card, and products for controlling GPIB instruments
using the computer's standard parallel USB, IEEE 1394 (Firewire) and Ethernet
ports.
Portability of GPIB application programs is provided by the Company's
NI-488.2 driver software and NI-VISA driver software. The Company offers
networking capabilities through its GPIB products. With these products, users
can communicate with and control GPIB instruments from any point on an
Ethernet-based TCP/IP network. The Company also offers a variety of GPIB support
products, including converters, expanders, extenders, data buffers and GPIB
system analyzers as well as cables and other accessories.
-8-
VXI Modules/Driver Software. VXI is an industry standard high-end
instrumentation platform developed in 1987 through an industry consortium to
reduce the size and increase the performance of instrumentation systems for
automated test and measurement applications. With VXI, the physical size of
multiple instrument systems can be decreased and communication between
instruments and computers can be dramatically improved. Like GPIB, VXI is
supported by a variety of traditional third-party instrument manufacturers and
is largely used in T&M applications.
VXI instruments are modular in design and can be inserted into an
industry-standard chassis. Unlike GPIB instruments, VXI modules do not have a
front panel for manual operation or visual data presentation. Therefore,
software is necessary for users to create, define the functionality of and
operate VXI instrumentation systems. Today, VXI is being used primarily to
supplement or replace high-end GPIB products in T&M applications.
The Company is a leading supplier of VXI computer controller hardware and
the accompanying NI-VXI and NI-VISA driver software. The Company also offers a
variety of VXI DAQ modules with NI-DAQ driver software, as well as LabVIEW,
Measurement Studio and TestStand software products for VXI systems.
DAQ Hardware/Driver Software. 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. The Company believes that
computer-based DAQ products are typically a lower-cost solution than traditional
instrumentation.
The Company believes 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. The
Company offers 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.
The Company's DAQ products provide a range of price/performance options,
and include products for high-speed applications such as on-line monitoring and
control as well as products designed for long-term recording of slowly changing
data such as temperatures. The Company also offers products with features
comparable to stand-alone traditional instruments such as oscilloscopes, DMMs,
and function and arbitrary waveform generators. The Company offers DAQ
hardware/driver software products for numerous desktop and notebook computers.
The Company also offers SCXI (signal conditioning extensions for
instrumentation) hardware, which expands the types and quantity of sensors that
can be connected to the Company's data acquisition boards.
PXI Modular Instrumentation. The Company's PXI modular instrument platform,
which was introduced in 1997, is a desktop 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 derived from the VXI architecture. In essence, PXI is an
instrumentation PC with plenty of expansion slots to enable the company to
pursue complete system-level opportunities and deliver a much higher percentage
of the overall system content using the company's own products. PXI delivers
many of the benefits of VXI in a much smaller package and at lower prices. The
Company continues to expand its PXI product offerings with new modules, which
address a wide variety of measurement and automation applications. In 2001, the
Company introduced a new 18-slot chassis which more than doubles the number of
PXI slots that were previously available, and, in addition, introduced a variety
of new measurement modules, including an eight channel dynamic signal analyzer
module for PXI that is ideal for state-of-the-art sound and vibration
measurements, and a new frequency domain digitizer that extended the Company's
virtual instrumentation capabilities to higher frequencies and accuracies. The
Company also introduced a new family of embedded PXI controllers that
significantly improve the price and performance of PXI, and upgraded its LabVIEW
Real-Time software so that the PXI system platform can be used for embedded and
real-time applications. PXI also continues to gain acceptance as an open
industry standard, with endorsements from over 50 suppliers.
Machine Vision/Image Acquisition. In late 1996, the Company introduced its
first image acquisition hardware. With the advanced technologies in personal
computers and the Company's vision products, it is cost-effective for end-users
to integrate vision into their measurement and automation applications. The
Company's vision software is designed to work with many different software
environments, including LabVIEW, Visual Basic, C, and Measurement Studio and
hardware buses including PCI and PXI. Vision is commonly used in applications
ranging from quality control of manufactured products to biomedical cell
counting to security. In 2001, the Company expanded its machine vision solutions
with support for IEEE-1394 and Camera Link cameras, and new image acquisition
hardware for PXI.
-9-
Motion Control. During 1997, the Company introduced its 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 and Measurement Studio. The Company's
software tools for motion are easily integrated with the Company's other product
lines, allowing motion to be combined with image acquisition, test, measurement,
data acquisition and automation. The Company's computer-based motion products
allow users to leverage standard hardware and software in measurement and
automation applications to create robust, flexible solutions. In 2001, the
Company introduced new low-cost motion controllers for stepper and servo motors
and new power drives for servo motors.
Industrial Communications Interfaces. In mid-1995, the Company began
shipping its first interface boards for communicating with serial devices, such
as dataloggers and PLCs targeted for IA 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. National
Instruments offers four hardware and driver software product lines for
communication with industrial devices--Controller Area Network (CAN), DeviceNet,
Foundation Fieldbus, and RS-485 and RS-232. The Company's industrial
communication products are designed to work with standard serial software
drivers, and Windows versions of LabVIEW and Measurement Studio.
Distributed I/O and Embedded Control Hardware/Software. The Company
introduced its FieldPoint product for distributed I/O applications in mid-1997.
FieldPoint is an intelligent, distributed, and modular I/O system 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.
FieldPoint software provides seamless integration into the LabVIEW Real-Time and
LabVIEW Datalogging and Supervisory Control Modules, driver libraries for
support under LabVIEW, Measurement Studio and Lookout, and an OPC server that
provides wide compatibility of FieldPoint hardware with other industrial
automation software packages. The FieldPoint 2000 family of real-time network
control modules, which were introduced in 2001, enable LabVIEW Real-Time users
to download their LabVIEW code and easily create networked systems of
intelligent, real-time nodes for embedded measurement and control.
Customer Training Courses
The Company offers fee-based training classes and self-paced course kits
for many of its software and hardware products. On-site courses are quoted per
customer requests. The Company also offers programs to certify programmers and
instructors for its products.
Markets and Applications
The Company's products are used across many industries in a variety of
applications from research and development to production testing and industrial
control.
Customers
The Company has a broad customer base, with no customer accounting for more
than 3% of the Company's sales in 2001, 2000, or 1999.
Marketing
Through its worldwide marketing efforts, the Company strives to educate
engineers and scientists about the benefits of the Company's virtual
instrumentation philosophy, products and technology, and to highlight the
performance, ease of use and cost advantages of its products. The Company also
seeks to present its 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.
-10-
The Company reaches its intended audience through its Web site at NI.com as
well as the distribution of written and electronic materials including
demonstration versions of its software products, participation in tradeshows and
technical conferences and training and user seminars. An in-house staff develops
the NI.com Web site, advertising, publicity, and promotional materials that the
Company uses worldwide. The primary marketing/sales tool is the Company's Web
site at NI.com. Throughout 1999, 2000, and 2001, the Company invested
aggressively to enhance the content, performance, and features of NI.com as well
as to integrate E-commerce as a core component of the Company's business model.
Through NI.com, customers can view the Company's complete on-line catalog,
interactively configure systems, obtain pricing in a number of currencies, place
orders, track the status of orders, register products and obtain software
upgrades. The Company's believes its direct business model provides the
opportunity to leverage the Web heavily to reach customers and improve
operations.
The primary printed marketing/sales tool is the Company's catalog,
published annually and distributed worldwide. The catalog is approximately 800
pages, with detailed tutorial information that educates readers about the
Company's integrated product architecture and virtual instrumentation concept.
Short-form versions of the catalog are typically also available in languages of
major international markets, including French, German, Spanish and Japanese.
The Company also uses quarterly newsletters to educate current and
prospective customers about its products and technologies. These newsletters
include new product information, feature articles that educate readers about new
instrumentation technology, user solution case studies of real-world
applications, product news from Alliance Program members and key customers, and
event and customer education schedules. These newsletters are available in print
form and via email subscription. There are also many books available on the
Company's technology in English, German, French and other languages.
The Company actively markets its products in higher education environments,
and identifies many colleges, universities and trade and technical schools as
key accounts. The Company offers special academic pricing and products to enable
universities to utilize Company products in their classes and laboratories. The
Company believes its prominence in the higher education area can contribute to
its future success because students gain experience using the Company's products
before they enter the work force.
Sales and Distribution
The Company distributes its software and hardware products primarily
through a direct sales organization. The Company also uses independent
distributors, OEMs, VARs, system integrators and consultants to market its
products. The Company has sales offices in the United States and sales offices
and distributors in key international markets. Sales outside of North America
accounted for approximately 49%, 47%, and 47% of the Company's revenues in 2001,
2000, and 1999, respectively. The Company expects that a significant portion of
its 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 the Company's net sales, operating income and
identifiable assets.
Through all of its sales channels, the Company seeks to approach potential
customers with a highly technical sales force. The Company believes that the
majority of sales are made directly to those persons within an organization who
actually use the Company's products to integrate their own systems. The Company
identifies and targets major end-user accounts as those having a large number of
actual or potential end users, and believes that it achieves a high level of
repeat customer sales. The Company targets major accounts with a variety of
targeted sales and marketing campaigns such as seminars, user groups,
newsletters and direct mail.
Throughout 2001, the Company continued to invest aggressively to integrate
the Web as a core component of its direct sales model. The Company provides
worldwide on-line pricing for products in a number of currencies, allows
customers to order the complete catalog of products via the Web, provides a
variety of Web-based configuration tools to allow customers to more easily
select and order multiple compatible products for their systems, and offers
Prime Access business-to-business capabilities to allow key customers to conduct
business directly with the Company through secure, private pages at NI.com.
Direct Sales
The Company directly markets and sells its products in the Americas, Europe
and Asia. The Company has sales offices located throughout the United States and
in key international markets. Many of the Company's international sales offices
employ application engineering technical support specialists as well as sales,
marketing and administrative personnel.
-11-
The Company's international sales are subject to inherent risks, including
fluctuations in local economies; 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 Company's sales outside of North America are denominated in local
currencies, and accordingly, the Company is subject to the risks associated with
fluctuations in currency rates. In particular, increases in the value of the
dollar against foreign currencies decrease the dollar value of foreign sales
requiring the Company either to increase its price in the local currency, which
could render the Company's product prices noncompetitive, or to suffer reduced
revenues and gross margins as measured in US dollars. These dynamics have
adversely affected revenue growth in international markets in recent years. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 11 of Notes to Consolidated Financial Statements.
Distributors
The Company utilizes distributors primarily to market its products in
geographic areas not served by the Company's direct sales organization.
Generally, the Company's indirect sales customers do not maintain significant
inventory levels.
OEMs
The Company utilizes OEMs such as traditional instrument manufacturers and
automatic test equipment (ATE) system suppliers who offer integrated systems
and/or services to their customer bases. The Company approaches OEM accounts
with its standard product lines and offers quantity discounts based on volume
commitments and technical support capabilities and requirements. The Company
also promotes its sales and marketing capabilities to its OEMs by providing
specialized product training, documentation, packaging and part numbers to
simplify ordering, flexible shipping and warranty repair options and joint
promotion.
VARs, System Integrators and Consultants
The Company has relationships with third-party VARs, system integrators and
consultants who offer add-on products and system integration services. These
third-party developers expand the Company's market and sales opportunities by
adding value to the Company's standard products, making them suitable for
vertical market applications such as manufacturing automation or image
processing and analysis. The Company maintains a formal third-party
sales/marketing/training program, called the Alliance Program, which it uses to
work with many of the VARs, system integrators and consultants. Applicants must
be sponsored for membership by a Company sales engineer, pass qualification
criteria and pay a nominal annual membership fee. In late 1998, the Company
introduced an elite level of its Alliance Program called Select Integrators.
Select Integrators must qualify for the program based upon their level of
business with the Company. As of December 31, 2001, the Company's Alliance
Program had approximately 554 members including several Select Integrators. The
Company publishes on-line directories on its NI.com Web site of third-party
Alliance Program member products and services for use by its sales force and its
end users to locate additional products and/or services compatible with the
Company's products. The Company makes available to qualified third-parties the
opportunity to participate in joint marketing and sales programs, such as trade
shows, customer sales events and the Company's newsletters. In addition to its
relationships with third party VAR, system integrators and consultants, the
Company has a direct presence in the German systems integration market through
its German subsidiaries.
Customer Support
The Company believes the ability to provide comprehensive service and
support to its customers is an important factor in its business. The Company
permits customers to return products within 30 days from receipt for a refund of
the purchase price less a restocking charge, and generally provides a two-year
warranty on GPIB hardware products, a one-year warranty on other hardware
products, and a 90-day warranty on cables and software (medium only). Customers
may also purchase a one-year extended warranty on hardware products.
Historically, warranty costs have not been material. Some of the key elements of
the Company's service and support strategy include:
-12-
Customer Technical Support
The Company maintains a large staff of application engineers, all of whom
are highly qualified technical professionals. These application engineers
provide customer support by telephone, fax, electronic mail and world-wide Web
forums, and electronic bulletin boards, and are trained in both instrumentation
and computer technology. In 2001, the Company continued to invest heavily to
leverage the Web for customer support. Through the Company's NI.com web site,
customers have access to a growing range of support options to solve their own
problems directly over the Web, including software downloads, upgrades and bug
fixes, automated product configuration tools, knowledge databases of common
questions and answers, live Web chat capabilities, live product demonstrations,
and discussion forums.
Upgrades
The Company typically offers programs in which existing customers can
upgrade to the latest Company products for an upgrade fee. Application software
customers have the option of purchasing a one-year renewable maintenance and
support program, which entitles them to unspecified software upgrades and
priority access to the Company's technical support hotline.
Customer Education
The Company offers a variety of fee-based training classes ranging in scope
from basic and introductory courses for new users to advanced courses for
experienced users.
Competition
The markets in which the Company operates are characterized by intense
competition from numerous competitors, some of which are divisions of large
corporations having far greater resources than the Company, and the Company
expects to face further competition from new market entrants in the future. A
key competitor is Agilent Technologies Inc. ("Agilent"). The Company believes
Agilent is the dominant supplier of GPIB and VXI-compatible instruments and
systems. Agilent is also a leading supplier of equipment used in data
acquisition and control applications. Agilent offers its own line of GPIB
instrument controllers, as well as hardware and software add-on products for
third-party desktop computers and workstations that directly compete with the
Company's products. Agilent is aggressively advertising and marketing its
products and system integration services. Because of Agilent's dominance in the
instrumentation business, changes in its marketing strategy or product offerings
could have a material adverse affect on the Company. The Company also faces
competition from a variety of other competitors.
Certain of the Company's 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 the Company can offer, and
more extensive warranty support, system integration and service capabilities
than those of the Company. In addition, large competitors can often enter into
strategic alliances with key customers or target accounts of the Company, which
can potentially have a negative impact on the Company's success with those
accounts.
The Company believes its ability to compete successfully depends on a
number of factors both within and outside its control, including: product
pricing, quality and performance; success in developing new products; adequate
manufacturing capacity and supply of components and materials; efficiency of
manufacturing operations; effectiveness of sales and marketing resources and
strategies; success in leveraging the Web; strategic relationships with other
suppliers; timing of new product introductions by the Company or its
competitors; protection of the Company's products by effective use of
intellectual property laws; general market and economic conditions; and events
related to weather and government actions throughout the world. There can be no
assurance that the Company will be able to compete successfully in the future.
The Company is continually designing new and improved products to maintain
its competitive position. Because of the rapidly changing computer technology
for which many of the Company's products are designed, the Company believes that
its future success will depend in part on its ability to continue to improve its
products and technologies. In the past, certain competitors have cloned some of
the Company's hardware products at much lower prices, and promoted these
hardware products as being capable of running the Company's software. The
Company has responded to this tactic in the past by releasing new and improved
versions of its products that have improved performance and functionality in an
effort to surpass the competition. Certain competitors have also released
products similar to the Company's software products that the Company believed
infringed the Company's software patents. The Company has successfully abated
some infringement of its software patents through patent litigation activities.
-13-
Research and Development
The Company believes that its long-term growth and success depends, in
part, on delivering high quality software and hardware products on a timely
basis. The Company intends to focus its 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.
The Company's research and development staff strives to build quality into
products at the design stage in an effort to reduce overall development and
manufacturing costs. The Company's research and development staff also designs
proprietary ASICs, many of which are designed for use in several products. The
goal of the ASIC design program is to further differentiate the Company's
products from competing products, to improve manufacturability and to reduce
costs. The Company seeks to reduce the time to market for new and enhanced
products by sharing its internally developed hardware and software components
across multiple products.
In the past, the Company has experienced significant delays in the
introduction of new products. The Company's strategy of developing products
which depended upon third parties' commercially available technologies is
substantially dependent on the Company's ability to gain pre-release access to,
and to develop expertise in, current and future product developments of such
companies. There can be no assurance that the Company will continue to receive
such pre-release access from any of these companies, or, even with such access,
that the Company will be able to develop products on a timely basis that are
compatible with future releases.
The Company has implemented certain programs, including pre-release bug
analysis measures and enhanced project-tracking efforts, in order to improve the
product development process and to permit more accurate product development
scheduling. Nonetheless, there can be no assurance that the Company's research
and development efforts will not encounter delays or other difficulties, that
development efforts will result in commercially successful products, or that the
Company's products will not be rendered obsolete by changing technology or new
product announcements by other companies.
As of December 31, 2001, the Company employed 720 people in product
research and development. The Company's research and development expenses were
$60.7 million, $56.0 million, and $45.5 million for 2001, 2000, and 1999
respectively.
Intellectual Property
The Company relies on a combination of patent, trade secret, copyright and
trademark law, contracts and technical measures to establish and protect its
proprietary rights in its products. As of December 31, 2001, the Company held
152 United States patents (147 utility patents and 5 design patents) and 6
patents in foreign countries (3 patents registered in Europe in various
countries; 1 patent in Canada, and 2 patents in Japan), and had 164 patent
applications pending in the United States and foreign countries. Thirty eight of
such United States patents are software patents related to LabVIEW, and cover
fundamental aspects of the graphical programming approach used in LabVIEW. The
Company's patents expire from 2007 to 2020. No assurance can be given that the
Company's pending patent applications will result in the issuance of patents.
The Company also owns certain registered trademarks in the United States and
abroad.
Although the Company relies to some extent on trade secret protection for
much of its technology, and regularly obtains confidentiality agreements with
key customers who wish to know more about the Company's product development
philosophy and/or future directions, there can be no assurance that third
parties will not either independently develop the same or similar technology,
obtain unauthorized access to the Company's proprietary technology or misuse the
technology to which the Company has granted access.
The laws of certain foreign countries treat the protection of proprietary
rights of the Company in its products differently from those in the United
States, and in many cases the protection afforded by such foreign laws is not as
strong as in the United States. The Company believes that its products and their
use do not infringe the proprietary rights of third parties. There can be no
assurance, however, that infringement claims will not successfully be made.
-14-
Manufacturing and Suppliers
The Company manufactures a majority of its products at its facilities in
Austin, Texas. Product manufacturing operations at the Company can be divided
into four areas: electronic circuit card and module assembly; cable assembly;
technical manuals and product support documentation; and software duplication.
The Company manufactures most of the electronic circuit card assemblies and
modules in-house, although subcontractors are used from time to time. The
Company manufactures some of its electronic cable assemblies in-house, but many
assemblies are produced by subcontractors. The Company primarily subcontracts
its software duplication and packaging functions. Reliance on contract
manufacturers entails risks of quality problems, less control of product
pricing, and potential unavailability of or delays in delivery of products, any
of which could have a material adverse effect on the Company's results of
operations. There can be no assurance that the Company, together with its
third-party manufacturers, will be able to produce sufficient quantities of the
Company's products in a timely manner.
The Company has implemented a customer focused quality system that involves
all organizations. The Company's products are designed and tested in a formal
development process and are controlled in manufacturing and distribution to
assure that our customers' demands are met. Additionally, the Company is
committed to continuous improvement of the Company's products, services and
processes to assure long term customer satisfaction.
During 2001, the Company completed a new manufacturing operation in
Hungary. The new Hungarian operation is the Company's second manufacturing
facility and the Company estimates that by 2003 will source a significant
portion of the Company's global sales. Any delay in bringing this facility to
maximum capacity could have a material adverse effect on the results of
operations.
The marketplace dictates that many of the Company's products be shipped
very quickly after an order is received. Since purchased component and
manufacturing lead times are typically much longer than the short order
fulfillment time, the Company is required to keep adequate amounts of finished
goods inventory and must use an accurate system for forecasting demand for those
products in its production planning operations. Fluctuations in demand for the
Company's products typically result from month-to-month variations in the
quantity and mix of products and from normal, seasonal variations. A variety of
circumstances, including inaccurate forecasts of customer demand, poor
availability of purchased components, supplier quality problems, production
equipment problems, transport disruptions or damage to products in manufacturing
operations, could create a buildup of excess finished goods on the one hand or
an inability to timely deliver product on the other. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Engineering refinements to the Company's new hardware and software products
are fairly common. These changes can result in the disruption of the
manufacturing operation and concurrent delays in delivery dates. Finished goods
inventory at the Company's international warehouses and branches typically has a
short shelf life due to engineering changes and product upgrades initiated by
the Company's product development operation, and, if managed incorrectly, can
result in significant quantities of obsolete inventory. This relatively short
shelf life, and the resulting requirement to properly manage the quantity of
inventory to meet customer demand while minimizing inventory obsolescence, has
been and continues to be a challenge to the Company and its branch offices. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company obtains most of its electronic components from suppliers
located principally in the United States and Asia. Some of the components
purchased by the Company, including ASICs, are sole-sourced. Any disruption of
the Company's supply of sole or limited source components, whether resulting
from business demand, quality, production or delivery problems, could adversely
affect the Company's ability to manufacture its products, which could in turn
adversely affect the Company's business and results of operations. See
"Managements Discussion and Analysis of Financial Condition and Results of
Operations."
Backlog
The Company typically ships products shortly following the receipt of an
order. Accordingly, the Company's backlog typically represents less than 10 days
sales. Backlog should not be viewed as an indicator of future sales.
Employees
As of December 31, 2001, the Company had 2,849 employees, including 720 in
research and development, 1,312 in sales and marketing and customer support, 472
in manufacturing and 345 in administration and finance. None of the Company's
employees is represented by a labor union and the Company has never experienced
a work stoppage. The Company considers its employee relations to be good. For
three consecutive years, 1999, 2000, and 2001, the Company has been named among
the 100 Best Companies to Work for in America according to FORTUNE magazine.
-15-
ITEM 2. PROPERTIES
The Company's principal administrative, sales, marketing, manufacturing,
research and development activities are conducted at three Company-owned
buildings in Austin, Texas. The Company owns approximately 69 acres of land in
north Austin, Texas, on which are a 232,000 square foot office facility and a
140,000 square foot manufacturing and office facility. The Company is in the
process of constructing a new R&D building, a 380,000 square foot office
facility with estimated completion during the first quarter of 2002. The Company
also owns a 136,000 square foot office building in Austin, Texas in which it
houses certain of its sales operations. A portion of the 136,000 square foot
office building is currently leased to Trilogy, Inc. The Company also has a
148,000 square foot manufacturing facility in Debrecen, Hungary, that was
completed in the fall of 2001. The Company's 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 also owns another 19,375 square foot office building, a
portion of which is partially leased to BMS Modern Games. The remainder of this
office building is used by National Instruments Engineering.
As of December 31, 2001, the Company also leased a number of sales and
support offices in the United States and overseas. The Company believes existing
facilities are adequate to meet its current requirements.
ITEM 3. LEGAL PROCEEDINGS
During 2000, the Company was served by Cognex Corporation, asserting patent
infringement of two Cognex patents, copyright infringement, trademark
infringement and unfair competition. Cognex sought permanent injunctive relief,
actual monetary damages in an unspecified amount and attorney's fees and costs.
The Company filed a response to the lawsuit denying all claims. In the fourth
quarter of 2000, the Company accrued $2.5 million of anticipated intellectual
property defense costs that were probable of being incurred. The Company and
Cognex settled the dispute and Cognex dismissed the case with prejudice on
August 13, 2001.
During 2001, the Company filed a complaint in U.S. District Court, Western
District of Texas (Midland Division) for declaratory judgment arising from a
controversy between the Company and General Patent Corporation, General Patent
Corporation International, and Acticon Technologies, LLC ("Defendants")
concerning the enforceability, validity, and infringement of certain patents in
which Defendants claim an interest. Defendants claim that the Company infringes
these patents. The Company challenges the validity and enforceability of these
patents and asserts that it does not infringe the claims of these patents. The
Company seeks a declaratory judgment of invalidity and non-infringement.
Defendants seek damages in an unspecified amount, injunction of the sale of
certain products of the Company and attorney's fees and costs. The case is
currently in discovery and trial is set for May 5, 2003. Due to the inherent
uncertainties of litigation, there can be no assurance that this litigation will
not cause significant liability and a diversion of management's attention which
may have a material adverse effect on results of operations.
As a result of the aforementioned Cognex dismissal and the General Patent
Corporation matter, the Company has reduced its intellectual property defense
cost accrual by approximately $1.2 million.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
-16-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock, $0.01 par value, began trading on the Nasdaq
National Market System under the symbol NATI effective March 13, 1995. Prior to
that date, there was no public market for the Common Stock. The high and low
closing prices for the Common Stock, as reported by Nasdaq, are as indicated in
the following table.
High Low
2001
First Quarter 2001................... 56.125 31.563
Second Quarter 2001.................. 38.14 26.688
Third Quarter 2001................... 38.80 26.00
Fourth Quarter 2001.................. 39.70 25.37
High Low
2000
First Quarter 2000................... 50.188 34.938
Second Quarter 2000.................. 56.75 33.00
Third Quarter 2000................... 48.875 40.813
Fourth Quarter 2000.................. 52.438 37.063
At the close of business on February 15, 2002, there were approximately 678
holders of record of the Common Stock and approximately 10,500 shareholders of
beneficial interest.
The Company believes factors such as quarterly fluctuations in results of
operations, announcements by the Company or its competitors, technological
innovations, new product introductions, governmental regulations, litigation or
changes in earnings estimates by analysts may cause the market price of the
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 the Company's Common Stock.
To date, the Company has not paid any cash dividends on its Common Stock.
The Company currently anticipates that it will retain any available funds to
finance the growth and operation of its business and does not anticipate paying
any cash dividends in the immediate future.
-17-
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements, including the Notes to
Consolidated Financial Statements. The information set forth below is not
necessarily indicative of results of 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,
----------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
Statements of Income Data:
Net sales:
North America........................... $ 195,842 $ 215,960 $ 175,873 $ 153,435 $ 141,784
Europe.................................. 128,523 133,799 108,801 86,961 66,318
Asia Pacific............................ 60,910 60,390 44,909 33,834 32,777
---------- ---------- ---------- ---------- ----------
Consolidated net sales.................. 385,275 410,149 329,583 274,230 240,879
Cost of sales............................. 101,297 98,326 76,040 65,187 55,096
---------- ---------- ---------- ---------- ----------
Gross profit............................ 283,978 311,823 253,543 209,043 185,783
---------- ---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing..................... 145,555 147,377 120,886 100,783 87,096
Research and development................ 60,745 55,954 45,531 34,757 30,296
General and administrative.............. 29,234 32,077 24,258 20,455 18,508
---------- ---------- ---------- ---------- ----------
Total operating expenses.............. 235,534 235,408 190,675 155,995 135,900
---------- ---------- ---------- ---------- ----------
Operating income...................... 48,444 76,415 62,868 53,048 49,883
Other income (expense):
Interest income......................... 5,837 6,390 4,759 3,439 3,455
Interest expense........................ (26) (533) (404) (463) (502)
Net foreign exchange (loss) gain
and other.............................. (722) (1,159) 130 (224) (2,649)
---------- ---------- ---------- ---------- ----------
Income before income taxes and
cumulative effect of accounting change... 53,533 81,113 67,353 55,800 50,187
Provision for income taxes................ 17,131 25,956 21,553 18,414 16,562
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of
accounting change........................ 36,402 55,157 45,800 37,386 33,625
Cumulative effect of accounting change,
net of tax............................... -- -- (552) -- --
---------- ---------- ---------- ---------- ----------
Net income........................... $ 36,402 $ 55,157 $ 45,248 $ 37,386 $ 33,625
========== ========== ========== ========== ==========
Basic earnings per share:
Income before cumulative effect of
accounting change...................... $ 0.72 $ 1.10 $ 0.92 $ 0.76 $ 0.69
Cumulative effect of accounting change
net of tax............................. -- -- (0.01) -- --
---------- ---------- ---------- ---------- ----------
Basic earnings per share................ $ 0.72 $ 1.10 $ 0.91 $ 0.76 $ 0.69
========== ========== ========== ========== ==========
Diluted earnings per share:
Income before cumulative effect of
accounting change...................... $ 0.68 $ 1.03 $ 0.88 $ 0.73 $ 0.67
Cumulative effect of accounting change,
net of tax............................. -- -- (0.01) -- --
---------- ---------- ---------- ---------- ----------
Diluted earnings per share.............. $ 0.68 $ 1.03 $ 0.87 $ 0.73 $ 0.67
========== ========== ========== ========== ==========
Weighted average shares outstanding:
Basic................................... 50,910 50,332 49,776 49,248 48,845
Diluted................................. 53,651 53,564 52,203 51,150 50,484
December 31,
----------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(in thousands)
Balance Sheet Data:
Cash and cash equivalents................. $ 49,089 $ 75,277 $ 45,309 $ 51,538 $ 31,943
Short-term investments.................... 101,422 79,525 83,525 49,158 51,067
Working capital........................... 209,836 220,208 173,761 133,510 112,142
Total assets.............................. 424,619 389,350 318,753 249,786 204,490
Long-term debt, net of current portion.... -- -- 4,301 4,379 5,151
Total stockholders' equity................ 366,164 321,023 254,235 204,184 161,754
-18-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion in this document contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Actual results could differ materially from those projected in the
forward-looking statements throughout this document as a result of a number of
important factors. For a discussion of important factors that could affect the
Company's results, please refer to the risk factors set forth below in Factors
Affecting the Company's Business, in the financial line item discussions below
and elsewhere in this document.
Overview
National Instruments Corporation designs, develops, manufactures and
markets instrumentation and automation software and hardware for general
commercial, industrial and scientific applications. The Company offers hundreds
of products used to create virtual instrumentation systems for measurement and
automation. The Company has identified a large and diverse market for test and
measurement ("T&M") and industrial automation ("IA") applications. The Company's
products are used in a variety of applications from research and development to
production testing, monitoring and industrial control. In test and measurement
applications, the Company's products can be used to monitor and control
traditional instruments or to create computer-based instruments that can replace
traditional instruments. In industrial automation applications, the Company's
products can be used in the same ways as in test and measurement and can also be
used to integrate measurement functionality with process automation
capabilities. The Company sells to a large number of customers in a wide variety
of industries. No single customer accounted for more than 3% of the Company's
sales in 2001, 2000 or 1999.
The Company has been profitable in every year since 1990. However, there
can be no assurance that the Company's net sales will grow or that the Company
will remain profitable in future periods. As a result, the Company believes
historical results of operations should not be relied upon as indications of
future performance.
-19-
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of net sales represented by certain items reflected in the Company's
consolidated statements of income:
Years Ended December 31,
----------------------------------
2001 2000 1999
---------- ---------- ----------
Net sales:
North America.......................... 50.8 % 52.7 % 53.4 %
Europe................................. 33.4 32.6 33.0
Asia Pacific........................... 15.8 14.7 13.6
---------- ---------- ----------
Consolidated net sales................. 100.0 100.0 100.0
Cost of sales.............................. 26.3 24.0 23.1
---------- ---------- ----------
Gross profit........................... 73.7 76.0 76.9
Operating expenses:
Sales and marketing.................... 37.8 35.9 36.7
Research and development............... 15.8 13.7 13.8
General and administrative............. 7.5 7.8 7.3
---------- ---------- ----------
Total operating expenses........... 61.1 57.4 57.8
---------- ---------- ----------
Operating income................... 12.6 18.6 19.1
Other income (expense):
Interest income........................ 1.5 1.5 1.4
Interest expense....................... -- (0.1) (0.1)
Net foreign exchange loss.............. (0.2) (0.3) --
---------- ---------- ----------
Income before income taxes and cumulative
effect of accounting change............... 13.9 19.7 20.4
Provision for income taxes................. 4.5 6.3 6.5
---------- ---------- ----------
Income before cumulative effect of
accounting change......................... 9.4 13.4 13.9
Cumulative effect of accounting change,
net of tax................................ -- -- (0.2)
---------- ---------- ----------
Net income................................. 9.4 % 13.4 % 13.7 %
========== ========== ==========
Net Sales. In 2001, net sales for the Company's products were $385.3
million, a 6% decrease from the level achieved in 2000, which followed an
increase in net sales of 24% in 2000 over the level achieved in 1999. The
Company believes the decrease in sales in 2001 is primarily attributable to the
approximate 25% decline in the sales of certain hardware products that are used
to control traditional instruments, which resulted from the worsening of the
industrial economy and the severe deterioration of sales of traditional
instruments by other vendors used in test and measurement applications. In 2001,
the sales of hardware products that are used to control traditional instruments
represented 22% of revenue compared to 27% in 2000 and 25% in 1999.
North American revenue was $196.0 million in 2001, a decrease of 9% from
2000, following a 23% increase in 2000 over 1999. The Company believes the
decrease in sales and in the revenue growth rate in North America in 2001 is
primarily attributable to the decrease in sales of the Company's hardware
products that are used to control traditional instruments as a result of the
downturn in the test and measurement market. This downturn was most significant
in sales to customers in the telecommunications, instrumentation and
semiconductor capital equipment industries.
European revenue was $128.5 million in 2001, a decrease of 6% from 2000,
following a 23% increase in 2000 from 1999. Asia Pacific revenue grew 5% to
$60.9 million in 2001, which followed a 35% increase in 2000 over 1999 levels.
The Company believes the decrease in revenue in Europe, and the decrease in the
revenue growth rate in Asia Pacific in 2001 is primarily attributable to the
decrease in sales of the Company's hardware products that are used to control
traditional instruments, the result of the downturn in the industrial economy,
and the strengthening of the U.S. Dollar. See the discussion below for more
information concerning the impact of foreign currency fluctuations on sales
growth.
-20-
International sales (sales to customers outside of North America) accounted
for 49%, 47% and 47% of the Company's consolidated net sales for 2001, 2000 and
1999, respectively. The Company intends to continue to expand its international
operations by increasing its presence in existing markets, add a market presence
in some additional geographical markets and continue to use distributors to sell
its products in some countries.
Sales made by the Company's direct sales offices in Europe and Asia Pacific
are denominated in local currencies, and accordingly, the U.S. dollar equivalent
of these sales is affected by changes in the weighted average value of the U.S.
dollar. This weighted average is calculated as the percentage change in the
value of the currency relative to the U.S. dollar, multiplied by the proportion
of international sales recorded in the particular currency. Between 2001 and
2000, this weighted average value of the U.S. dollar increased by 6.0%, causing
an equivalent decrease in the U.S. dollar value of the Company's foreign
currency sales and expenses. If the weighted average value of the U.S. dollar
during 2001 had been the same as that in 2000, on a pro-forma basis, the
Company's sales for 2001 would have decreased by 2%. Pro-forma European sales
for 2001 would have increased by 6% over 2000 sales. Pro-forma Asia Pacific
sales for 2001 would have increased by 8% over 2000 sales. If the weighted
average value of the U.S. dollar during 2001 had been the same as that in 2000,
on a pro-forma basis, the Company's consolidated operating expenses would have
been $237.6 million, representing an increase of $2.2 million. The preceding
pro-forma amounts and percentages are not presented in accordance with generally
accepted accounting principles but are presented for comparative purposes.
Gross Profit. As a percentage of sales, gross profit represented 74%, 76%
and 77% in 2001, 2000 and 1999, respectively. The relatively high software
content of the Company's products is demonstrated in the gross margins achieved
by the Company. In 2001, approximately 60% of the lower margin is attributable
to reduced sales volume, with the remaining fraction of the lower margin
primarily due to unfavorable foreign currency exchange rates. There can be no
assurance that the Company will maintain its historical margins.
The Company established a new manufacturing facility in Hungary in the
forth quarter of 2001. The Company believes its current manufacturing capacity
is adequate to meet current needs.
Sales and Marketing. Sales and marketing expense in 2001 decreased 1% from
2000, which followed an increase of 22% in 2000 from 1999. The decrease in the
expense in 2001 is attributable to decreases in travel, advertising and
literature costs and special event activities. Sales and marketing personnel
increased by 127 during 2001 from 1,185 at December 31, 2000 to 1,312 at
December 31, 2001. Sales and marketing expense as a percentage of revenue was
38% in 2001, up from 36% in 2000 and 37% in 1999.
The Company expects sales and marketing expenses in future periods to
increase in absolute dollars, and to fluctuate as a percentage of sales based on
recruiting, initial 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 expense in 2001
increased 9% compared to 2000 following an increase of 23% in 2000 over 1999.
Excluding the pre-tax charge for the write-off of in-process research and
development, on a pro-forma basis, research and development expense grew 29% and
28% during 2000 and 1999, respectively. (See Note 8 of Notes to Consolidated
Financial Statements for a description of the Company's acquisitions.) The
increase in research and development expenditures in absolute amounts in each
period was primarily due to increases in personnel costs from hiring of
additional product development engineers. Research and development personnel
increased from 672 at December 31, 2000 to 720 at December 31, 2001. The Company
plans to continue making a significant investment in research and development in
order to remain competitive.
The Company capitalizes software development costs in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." The
Company amortizes such costs over the related product's estimated economic
useful life, generally three years, beginning when a product becomes available
for general release. Software amortization expense totaled $3.1 million, $2.6
million and $2.3 million during 2001, 2000 and 1999, respectively. Software
development costs capitalized during such years were $3.9 million, $5.0 million
and $2.8 million, respectively. The significant items capitalized in 2001 were
primarily the result of LabVIEW 6.1, Measurement Studio 6.0 and TestStand 2.0.
The increased levels of capitalization for 2000 were primarily a result of the
development of LabVIEW 6i, NI-DAQ 6.9 and MAX 2.1. (See Note 5 of Notes to
Consolidated Financial Statements for a description of intangibles.)
-21-
General and Administrative. General and administrative expenses in 2001
decreased 9% from 2000, which followed an increase of 32% in 2000 from 1999. A
significant amount of the decrease was due to reduced intellectual property
defense costs, the result of the net recovery of $1.2 million of intellectual
property defense costs accrued in the prior year, and to operational
efficiencies resulting from continued systems improvement. Implementation of
information systems to support the Hungarian manufacturing facility, upgrading
its worldwide business applications suite to Oracle's latest web-based release
11i and continued investment in the Company's web presence were the main areas
of focus for investment in the information systems department in 2001. The 2001
decrease followed a 32% increase in 2000 which was primarily driven by continued
development of web and e-commerce offerings and a $2.5 million charge recorded
in the fourth quarter of 2000 for defending our intellectual property. General
and administrative expenses as a percentage of revenue decreased to 7.5% during
2001 from 7.8% in 2000. The decrease in 2001 was primarily due to the recovery
of $1.2 million in 2001 of the $2.5 million accrual for future intellectual
property defense costs recorded in the fourth quarter of 2000. The Company
expects that general and administrative costs will increase in absolute amounts
and will fluctuate as a percentage of revenue as the Company continues to invest
in maintaining its existing systems, developing the infrastructure for the new
Hungarian manufacturing facility, and developing web based commerce and
management information systems.
Interest Income and Expense. Interest income decreased 9% in 2001 from
2000, which followed an increase of 34% in 2000 from 1999. The decrease in
interest income in 2001 was primarily due to lower yields on the Company's
investments. The primary source of interest income is from the investment of the
Company's cash. Net cash provided by operating activities in 2001 totaled $57.2
million. Interest expense decreased 95% in 2001, the result of full repayment of
debt outstanding in 2000.
Net Foreign Exchange Gain/Loss. The Company experienced net foreign
exchange losses of $1.4 million in 2001, compared to losses of $1.5 million in
2000 and gains of $130,000 in 1999. These results are attributable to movements
between the U.S. dollar and the local currencies in countries in which the
Company's sales subsidiaries are located. The Company recognizes the local
currency as the functional currency of its international subsidiaries.
The Company utilizes foreign currency forward contracts to hedge a majority
of its foreign currency denominated receivables in order to reduce its exposure
to significant foreign currency fluctuations. The Company typically limits the
duration of its "receivables" foreign currency forward contracts to 90 days.
The Company also utilizes foreign currency forward contracts and foreign
currency purchased option contracts in order to reduce its exposure to
fluctuations in future foreign currency cash flows. The Company purchases these
contracts for up to 100% of its forecasted cash flows in selected currencies
(primarily the euro and yen) and limits the duration of these contracts to 30
months. The foreign currency purchased option contracts are purchased
"at-the-money" or "out-of-the-money." As a result, the Company's hedging
activities only partially address its risks in foreign currency transactions,
and there can be no assurance that this strategy will be successful. The Company
does not invest in contracts for speculative purposes. (See Note 12 of Notes to
Consolidated Financial Statements for a description of the Company's forward and
purchased option contracts and hedged positions.) The Company's hedging strategy
reduced the foreign exchange loss for December 31, 2001 by $6.5 million and
reduced the net foreign exchange loss for December 31, 2000 by $10.2 million.
Effective January 1, 1999, the Company elected to adopt SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." (See Note 10 and
Note 11 of Notes to Consolidated Financial Statements.)
Provision for Income Taxes. The provision for income taxes reflects an
effective tax rate of 32% in 2001, 2000 and 1999. The effective tax rate is
lower than the Federal Statutory rate primarily as a result of tax-exempt
interest and the benefit of the Company's Foreign Sales Corporation. (See Note 6
of Notes to Consolidated Financial Statements.)
Liquidity and Capital Resources
The Company is currently financing its operations and capital expenditures
through cash flow from operations. At December 31, 2001, the Company had working
capital of approximately $209.8 million compared to $220.2 million at December
31, 2000.
Accounts receivable decreased to $53.6 million at December 31, 2001 from
$74.7 million at December 31, 2000, as a result of lower sales levels and
improved collections. Receivable days outstanding at December 31, 2001 decreased
to 51 days from 60 days at December 31, 2000. Consolidated inventory balances
have decreased to $32.6 million at December 31, 2001 from $33.3 million at
December 31, 2000. Inventory turns of 3.1 per year for 2001 represent a decrease
from turns of 3.3 per year for 2000 and reflect the decrease in sales from the
prior year.
-22-
Cash used for investing activities in 2001 includes $65.3 million for the
purchase of property and equipment and capitalization of software development
costs of $3.9 million.
In October of 2000, the Company began construction of an office building
("Mopac C") located on the North Austin campus. It is currently anticipated that
a significant portion of the construction costs will be paid out of the
Company's existing working capital. The Company estimates the total cost for the
new building, including furniture, fixtures and equipment, will range from $58
million to $62 million. In October of 2000, the Company entered into firm
commitments of approximately $60 million for the new building. The Company has
incurred approximately $44.4 million in construction costs as of December 31,
2001, with the remainder becoming payable in 2002. The actual level of spending
may vary depending on a variety of factors, including unforeseen difficulties in
construction. Upon completion of the Mopac C building, the Company intends to
vacate its existing 136,000 sq. ft. Millenium office building. The Company has
signed an agreement to lease the Millenium building to a third party and
currently estimates that the net rental income from this lease will offset
approximately 30% of the projected operating costs from the Mopac C building.
During 2001, the Company completed construction of a second manufacturing
facility located in Hungary. This European manufacturing facility became
operational in the forth quarter of 2001, and the Company estimates that by 2003
the facility will source a significant portion of the Company's sales. The
location of the facility has a cost base and tax rate significantly lower than
in the U.S., which should have the effect of reducing the cost of manufacturing
and lowering the consolidated tax rate. However, there can be no assurance that
the actual manufacturing costs and tax rates will be lower. The total cost for
the new facility, including furniture, fixtures and equipment, was approximately
$18.4 million.
The Company currently expects to fund expenditures for capital requirements
as well as liquidity needs created by changes in working capital from a
combination of available cash and short-term investment balances and internally
generated funds. The Company estimates that its budgeted capital expenditures
over the next fiscal year will be approximately $36 million. As of December 31,
2001, the Company had no debt outstanding to financial institutions.
The Company believes that the cash flow from operations, if any, existing
cash balances and short-term investments, will be sufficient to meet its cash
requirements for at least the next twelve months. Cash requirements for periods
beyond the next twelve months depend on the Company's profitability, its ability
to manage working capital requirements and its rate of growth.
Financial Risk Management
The Company's international sales are subject to inherent risks, including
fluctuations in local economies; 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 Company's sales outside of North America are denominated in local
currencies, and accordingly, the Company is subject to the risks associated with
fluctuations in currency rates. In particular, increases in the value of the
dollar against foreign currencies decrease the U.S. dollar value of foreign
sales requiring the Company either to increase its price in the local currency,
which could render the Company's product prices noncompetitive, or to suffer
reduced revenues and gross margins as measured in U.S. dollars. These dynamics
have adversely affected revenue growth in international markets in 2001 and in
previous years. The Company's foreign currency hedging program includes both
foreign currency forward and purchased option contracts to reduce the effect of
exchange rate fluctuations. However, the hedging program will not eliminate all
of the Company's foreign exchange risks. (See "Net Foreign Exchange Gain (Loss)"
and Note 11 of Notes to Consolidated Financial Statements.)
The marketplace for the Company's products dictates that many of the
Company's products be shipped very quickly after an order is received. As a
result, the Company is required to maintain significant inventories. Therefore,
inventory obsolescence is a risk for the Company due to frequent engineering
changes, shifting customer demand, the emergence of new industry standards and
rapid technological advances including the introduction by the Company or its
competitors of products embodying new technology. While the Company maintains
valuation allowances for excess and obsolete inventory and management continues
to monitor the adequacy of such valuation allowances, there can be no assurance
that such valuation allowances will be sufficient.
-23-
The Company has no debt or off-balance sheet debt. As of December 31, 2001,
the Company has non-cancelable operating lease obligations of approximately $5.4
million and contractual purchase commitments with various suppliers of general
components and customized inventory and components of approximately $6.0
million. As of December 31, 2001, the Company has outstanding guarantees for
payment of foreign operating leases, customs and foreign grants totaling
approximately $3.2 million. (See Note 13 of Notes to Consolidated Financial
Statements.) At December 31, 2001, the Company did not have any relationships
with any unconsolidated entities or financial partnerships, such as entities
often referred to as structured finance or special purpose entities, which would
have been established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes. As such, the
Company is not exposed to any financing, liquidity, market or credit risk that
could arise if the Company were engaged in such relationships.
Market Risk
The Company is exposed to a variety of risks, including foreign currency
fluctuations and changes in the market value of its investments. In the normal
course of business, the Company employs established policies and procedures to
manage its exposure to fluctuations in foreign currency values and changes in
the market value of its investments.
Foreign Currency Hedging Activities. The Company's objective in managing
its exposure to foreign currency exchange rate fluctuations is to reduce the
impact of adverse fluctuations in such exchange rates on the Company's earnings
and cash flow. Accordingly, the Company utilizes purchased foreign currency
option contracts and forward contracts to hedge its exposure on anticipated
transactions and firm commitments. The principal currencies hedged are the euro,
British pound and Japanese yen. The Company monitors its foreign exchange
exposures regularly to ensure the overall effectiveness of its foreign currency
hedge positions. However, there can be no assurance the Company's foreign
currency hedging activities will substantially offset the impact of fluctuations
in currency exchange rates on its results of operations and financial position.
Based on the foreign exchange instruments outstanding at December 31, 2001, 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 fair
market value of all instruments outstanding of approximately $8.9 million.
However, as the Company utilizes foreign currency instruments for hedging
anticipated and firmly committed transactions, management believes that a loss
in fair value for those instruments will be substantially offset by increases in
the value of the underlying exposure. (See Note 10 of Notes to Consolidated
Financial Statements for a description of the Company's financial instruments at
December 31, 2001 and 2000.)
Short-term Investments. The fair value of the Company's investments in
marketable securities at December 31, 2001 was $101.4 million. The Company's
investment policy is to manage its investment portfolio to preserve principal
and liquidity while maximizing the return on the investment portfolio through
the full investment of available funds. The Company diversifies the marketable
securities portfolio by investing in multiple types of investment-grade
securities. The Company's investment portfolio is primarily invested in
short-term securities with at least an investment grade rating to minimize
interest rate and credit risk as well as to provide for an immediate source of
funds. Based on the Company's investment portfolio and interest rates at
December 31, 2001, a 100 basis point increase or decrease in interest rates
would result in a decrease or increase of approximately $500,000, respectively,
in the fair value of the investment portfolio. Although changes in interest
rates may affect the fair value of the investment portfolio and cause unrealized
gains or losses, such gains or losses would not be realized unless the
investments are sold.
Recently Issued Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board, or FASB, issued
SFAS No. 141, "Business Combinations." SFAS No. 141 eliminates the
pooling-of-interests method of accounting for business combinations except for
qualifying business combinations that were initiated prior to July 1, 2001. The
purchase method of accounting is required to be used for all the business
combinations initiated after June 30, 2001. SFAS No. 141 also defines the
criteria for identifying intangible assets for recognition apart from goodwill.
The Company adopted SFAS No. 141 effective July 1, 2001. The adoption of this
accounting standard had no impact on the Company's current results of operations
or financial position.
-24-
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142, discontinues amortization of acquired goodwill and
instead requires annual impairment testing. Separable intangible assets will be
amortized over their useful economic lives and tested for impairment in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets to be Disposed of." Intangible assets with an indefinite useful economic
life will not be amortized until the life of the asset is determined to be
finite. For goodwill and indefinite-lived intangible assets acquired prior to
July 1, 2001, amortization will continue until adoption of SFAS No. 142 at which
time amortization will cease and a transitional impairment test will be
performed. Any impairment charges resulting from the initial application of the
new rules will be classified as a cumulative effect of change in accounting
principle. The Company adopted SFAS No. 142 effective January 1, 2002. As of
December 31, 2001, the Company had net goodwill of approximately $4.9 million
and related amortization expense of goodwill of $751,000, $716,000 and $180,000
for the years ended December 31, 2001, 2000 and 1999, respectively. Adoption of
SFAS No. 142 will not have a material impact on the Company's financial position
or future results of operations.
Also in July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The statement is effective for
financial statements for fiscal years beginning after June 15, 2002. The
adoption of SFAS No. 143 is not expected to have an impact on the Company's
financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes previous
guidance for financial accounting and reporting for the impairment or disposal
of long-lived assets and for segments of a business to be disposed of. The
Company adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 is
not expected to have an impact on the Company's financial position or results of
operations.
Critical Accounting Policies
The Company's critical accounting policies are as follows:
o Revenue recognition
Revenue from the sale and licensing of products is recognized on the
date the product is shipped to the customer. Revenue related to the
sale of maintenance contracts is deferred and amortized on a
straight-line basis over the service period.
o Estimating allowances, specifically sales returns, the allowance for
doubtful accounts and allowance for excess and obsolete inventory
The preparation of financial statements requires the Company to make
estimates and assumptions that affect the reported amount of assets
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. Specifically, the Company must make
estimates of potential future product returns related to current
period product revenue. Management analyzes historical returns,
current economic trends, and changes in customer demand and acceptance
of our products when evaluating the adequacy of the sales returns and
other allowances. Significant management judgments and estimates must
be made and used in connection with establishing the sales returns and
other allowances in any accounting period. The allowance for sales
returns was $1.5 million at December 31, 2001. Material differences
may result in the amount and timing of the Company's revenue for any
period if management made different judgments or utilized different
estimates. Similarly, our management must make estimates of the
uncollectability of our accounts receivables. Management specifically
analyzes accounts receivable and analyzes historical bad debts,
customer concentrations, customer credit-worthiness, current economic
trends and changes in our customer payment terms when evaluating the
adequacy of the allowance for doubtful accounts. The allowance for
doubtful accounts was $4.9 million at December 31, 2001. The Company
writes down its inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and
estimated market value based on assumptions on future demands and
market conditions. The allowance for excess and obsolete inventory was
$2.9 million at December 31, 2001. If actual market conditions are
less favorable than those projected by management, additional
inventory write downs may be required.
-25-
o Accounting for costs of computer software
The Company capitalizes 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.
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,
2001, unamortized capitalized software development costs was $7.5
million.
o Valuation of long-lived and intangible assets
The Company assesses the impairement of identifiable intangibles,
long-lived assets and related goodwill whenever events or changes in
circumstances indicate that the carrying value may not be recoverable.
Factors considered important which could trigger an impairment review
include the following:
o Significant underperformance relative to expected historical or
projected future operating results;
o Significant changes in the manner of the Company's use of the
acquired assets or the strategy for the overall business;
o Significant negative industry or economic trends;
o The Company's market capitalization relative to net book value.
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, 2001, the
Company had net goodwill of approximately $4.9 million.
Factors Affecting the Company's Business
U.S./Global Economic Slowdown. As occurred in 2001 when the worsening of
the industrial economy resulted in a deterioration of the test and measurement
market, the markets in which the Company does business could again experience
the negative effects of a slowdown in the U.S. and/or Global economies.
Downturns in the U.S. or Global economies could result in reduced purchasing and
capital spending in any of the markets served by the Company which could have a
material adverse effect on the Company's operating results.
Budgets. The Company has established an operating budget for 2002. The
Company's spending for 2002 could exceed this budget due to a number of factors;
including: additional marketing costs for any unplanned conferences and
tradeshows; increased costs from the over-hiring of product development
engineers or other personnel; increased manufacturing costs resulting from
component supply shortages and/or component price fluctuations; additional
construction costs and/or delays in the construction of the Mopac C office
building; failure of a third party tenant to pay rent for leased office space
and/or additional litigation expenses related to intellectual property
litigation. Any future decreased demand for our products could result in
decreased revenue and could require the Company to revise its budget and reduce
expenditures. Exceeding the established operating budget or failing to revise
its budget in response to any decrease in our revenue could have a material
adverse effect on the Company's operating results.
Risk of Component Shortages. As has occurred in the past, most recently in
the quarter ended March 31, 2001, and as may be expected to occur in the future,
supply shortages of components including sole source components can result in
significant additional costs and inefficiencies in manufacturing. If the Company
is unsuccessful in resolving any such component shortages, it will experience a
significant impact on the timing of revenue and/or an increase in manufacturing
costs, either of which would have a material adverse impact on the Company's
operating results.
Fluctuations in Quarterly Results. The Company's quarterly operating
results have fluctuated in the past and may fluctuate significantly in the
future due to a number of factors, including: changes in the mix of products
sold; the availability and pricing of components from third parties (especially
sole sources); the timing of orders; level of pricing of international sales;
fluctuations in foreign currency exchange rates; the difficulty in maintaining
margins, including the higher margins traditionally achieved in international
sales; and changes in pricing policies by the Company, its competitors or
suppliers. Specifically, if the local currencies in which the Company sells
weaken against the U.S. dollar, and if the local sales prices cannot be raised,
the Company will experience a deterioration of its gross and net profit margins.
The Company expects the strength of the U.S. dollar to have a negative effect on
gross and net profit margins in future quarters.
-26-
As has occurred in the past and as may be expected to occur in the future,
new software products of the Company or new operating systems of third parties
on which the Company's products are based, often contain bugs or errors that can
result in reduced sales and/or cause the Company's support costs to increase,
either of which could have a material adverse impact on the Company's operating
results. Furthermore, the Company has significant revenues from customers in
industries such as semiconductors, automated test equipment, telecommunications,
aerospace, defense and automotive which are cyclical in nature. Downturns in
these industries could have a material adverse effect on the Company's operating
results.
New Product Introductions and Market Acceptance. The market for the
Company's 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.
The Company's success is dependent in part on its 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. In the past, the Company has 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 the Company's operating results. There
can be no assurance that the Company 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 the Company's operating results. Moreover,
there can be no assurance that the Company's international sales will continue
at existing levels or grow in accordance with the Company's efforts to increase
foreign market penetration.
Risks Associated with Increased Development of Web Site. The Company has
devoted significant resources in developing its Web site as a key marketing and
sales tool and expects to continue to do so in the future. There can be no
assurance that the Company will be successful in its attempt to leverage the Web
to increase sales. The Company hosts its Web site internally. Failure to
successfully maintain the Web site and to protect it from hackers could have a
significant impact on the Company's results.
Operation in Intensely Competitive Markets. The markets in which the
Company operates are characterized by intense competition from numerous
competitors, some of which are divisions of large corporations having far
greater resources than the Company, and the Company expects 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 add-on products for
third-party desktop computers and workstations that provide solutions that
directly compete with the Company's virtual instrumentation products. Agilent is
aggressively advertising and marketing products that are competitive with the
Company's 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 the Company's operating results.
The Company believes its ability to compete successfully depends on a
number of factors both within and outside its control, including: new product
introductions by competitors; product pricing; quality and performance; success
in developing new products; adequate manufacturing capacity and supply of
components and materials; efficiency of manufacturing operations; effectiveness
of sales and marketing resources and strategies; strategic relationships with
other suppliers; timing of new product introductions by the Company; protection
of the Company's products by effective use of intellectual property laws;
general market and economic conditions; and government actions throughout the
world. There can be no assurance that the Company will be able to compete
successfully in the future.
Management Information Systems. During 2001, the Company devoted
significant resources to implementing information systems to support its new
manufacturing facility in Europe. The Company also devoted significant resources
to the evaluation and development of an advanced planning system for
manufacturing and to continued development of web offerings. On January 7, 2002,
the Company implemented I2 factory planner, an advanced manufacturing planning
system for enhanced predictability of material flow in its manufacturing
operation. The Company is currently monitoring the effects of this newly
implemented system on its inventory levels, manufacturing efficiency and
backlog. If the effect on inventory levels and material flow is adverse, it
could result in the Company having to attempt to revert back to its predecessor
system of material flow planning. If the effect of the new I2 planning system is
adverse and if the Company is unable to re-implement its previous planning
system in a timely manner, it could impact the Company's future product
shipments and revenues which accordingly could have a material adverse effect on
the results of operations. In 2002, the Company will also be focusing on
upgrading its Japanese office's business applications suite to Oracle's latest
web-based release 11i, and will continue to devote significant resources to the
development of the web. Failure to successfully implement these initiatives
could have a material adverse effect on the results of operations.
-27-
The Company relies on three primary regional centers for its management
information systems. As with any information system, unforeseen issues may arise
that could affect management's ability to receive adequate, accurate and timely
financial information, which in turn could inhibit effective and timely
decisions. Furthermore, it is possible that one or more of the Company's three
regional information systems could experience a complete or partial shutdown. If
such a shutdown occurred near the end of a quarter it could impact the Company's
product shipments and revenues, as product distribution is heavily dependent on
the integrated management information systems in each region. Accordingly,
operating results in that quarter would be adversely impacted due to the
shipments, which would not occur until following periods. The Company is working
to achieve reliable regional management information systems to control costs and
improve the ability to deliver its products in substantially all of its direct
markets worldwide. No assurance can be given that the Company's efforts will be
successful. The failure to receive adequate, accurate and timely financial
information could inhibit management's ability to make effective and timely
decisions.
Risks Associated with International Operations and Foreign Economies.
International sales are subject to inherent risks, including fluctuations in
local economies, 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 the burdens of complying with a wide variety of foreign laws.
The Company must also comply with various export regulations. Failure to ensure
compliance with these regulations could result in fines and/or termination of
export licenses, which could have a material adverse effect on the Company's
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 the
Company's 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 weighted average value of the U.S. dollar. This
weighted average is calculated as the percentage change in the value of the
currency relative to the dollar, multiplied by the proportion of international
sales recorded in the particular currency. Between 2001 and 2000, the weighted
average value of the U.S. dollar increased by 6.0%, causing an equivalent
decrease in the U.S. dollar value of the Company's foreign currency sales and
expenses. If the weighted average value during 2001 had been the same as that in
2000, the Company's sales for 2001 would have decreased by 2.0%. If the weighted
average value during 2001 had been the same as that in 2000, the Company's
consolidated operating expenses would have been $237.6 million, representing an
increase of $2.2 million. If the U.S. dollar strengthens again in the future, it
could have a materially adverse effect on the operating results of the Company.
As of December 31, 2001, the Company has $9.4 million of deferred gains on
yen foreign currency cash flow hedge contracts recorded in accumulated other
comprehensive income that are expected to be reclassified into earnings over the
next 24 months. If the yen fails to strengthen before the expiration of these
contracts, and if the Company is unable to increase prices in Japan and/or
globally, the Company will experience a deterioration of revenue and gross and
net profit margins, which could have a material adverse effect on the Company's
operating results.
Expansion of Manufacturing Capacity. During 2001, the Company completed
construction of a second manufacturing facility. This facility is located in
Hungary and became operational in the fourth quarter of 2001. The Company
estimates that by 2003, this facility will source a significant portion of the
Company's sales. Currently the Company is continuing to recruit and train the
local work force and is continuing to develop and implement information systems
to support its operation. This facility and its operation are also subject to
risks associated with a new manufacturing facility and with doing business
internationally, including difficulty in managing manufacturing operations in a
foreign country, difficulty in achieving or maintaining product quality,
interruption to transportation flows for delivery of components to us and
finished goods to our customers, and changes in the country's political or
economic conditions. No assurance can be given that the Company's efforts will
be successful. Accordingly, 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 the Company's results of
operations.
Products Dependent on Certain Industries. The Company's products are
dependent on customers in certain industries, particularly the
telecommunications, semiconductor, automotive, automated test equipment, defense
and aerospace industries. As has occurred in the past, most recently in the
quarter ended December 31, 2001, 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 the Company's operating results.
-28-
Dependence on Key Suppliers. The Company's 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 by the Company include custom
application-specific integration circuits ("ASICS") and other components. The
Company has 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, the failure to receive sole-source
components from suppliers could result in a material adverse effect on revenues
and results of operations.
Proprietary Rights and Intellectual Property Litigation. The Company's
success depends in part on its ability to obtain and maintain patents and other
proprietary rights relative to the technologies used in its principal products.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may have in the past infringed or violated certain of the Company's
intellectual property rights. As is typical in the industry, the Company from
time to time may be notified that it is infringing certain patent or
intellectual property rights of others. During 2001, the Company filed for
declaratory judgement concerning the enforceability, validity and infringement
of certain patents in which General Patent Corporation, General Patent
Corporation International and Acticon Technologies, LLC ("Defendants") claim an
interest. Defendants claim the Company infringes these patents and seeks damages
in an unspecified amount, injunction of the sale of certain products of the
Company and attorney's fees and costs. The Company asserts that it does not
infringe these patents and seeks a declaratory judgement of invalidity and
non-infringement. The case is currently in discovery and trial is set for May 5,
2003. Matters currently in litigation and any other intellectual property
litigation initiated in the future may cause significant litigation expense,
liability and a diversion of management's attention which may have a material
adverse effect on results of operations. In the fourth quarter of 2001, the
Company accrued $900,000, the estimated legal fees for defending intellectual
property litigation.
Dependence on Key Management and Technical Personnel. The Company's success
depends to a significant degree upon the continued contributions of its key
management, sales, marketing, research and development and operational
personnel, including Dr. Truchard and other members of senior management and key
technical personnel. The Company has no agreements providing for the employment
of any of its key employees for any fixed term and the Company's key employees
may voluntarily terminate their employment with the Company at any time. The
loss of the services of one or more of the Company's key employees in the future
could have a material adverse affect on operating results. The Company also
believes its future success will depend in large part upon its 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, including companies acquired through
acquisition, as well as training, motivating and supervising the employees. In
addition, 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. Failure to attract or retain qualified software engineers could have an
adverse effect on the Company's operating results. The Company also recruits and
employs foreign nationals to achieve its hiring goals primarily for engineering
and software positions. There can be no guarantee that the Company will continue
to be able to recruit foreign nationals to the current degree. These factors
further intensify competition for key personnel, and there can be no assurance
that the Company will be successful in retaining its existing key personnel or
attracting and retaining additional key personnel. Failure to attract and retain
a sufficient number of technical personnel could have a material adverse effect
on the results of operations.
Risk of Product Liability Claims. The Company's products are designed in
part to provide information upon which the users may rely. The Company attempts
to assure the quality and accuracy of the processes contained in its products,
and to limit its product liability exposure through contractual limitations on
liability, including disclaimers in its "shrink wrap" license agreements with
end-users. If future products contain errors that produce incorrect results on
which users rely, customer acceptance of the Company's products could be
adversely affected. Further, the Company could be subject to liability claims
that could have a material adverse effect on the Company's operating results or
financial position. Although the Company maintains liability insurance, there
can be no assurance that such insurance or the contractual provisions used by
the Company to limit its liability will be sufficient.
-29-
ITEM 7(a). MARKET RISK
Response to this item is included in "Item 7--Management's Discussion and
Analysis of Financial Condition and Results of Operations--Market Risk" above.
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-20 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
-30-
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant intends to file a definitive proxy statement pursuant to
Regulation 14A with the Securities and Exchange Commission (the "Proxy
Statement") relating to its 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 AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
incorporated by reference to the Company's Proxy Statement under the heading
"Election of Directors."
The information concerning the Company's executive officers required by
this Item is incorporated by reference to the Company's Proxy Statement under
the heading "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Election of Directors."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
From time to time the Company's 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. Starting in the fourth quarter of 2000, Jeffrey L. Kodosky and
James J. Truchard have made periodic sales of the Company's stock pursuant to
such plans.
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Election of Directors."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 2001, the Company acquired a 10% minority interest in another
company for $2.5 million. Because of the Company's ownership percentage and its
lack of control and inability to exert influence over this entity, this
investment is accounted for under the cost method. Sales to this company during
2001 were $96,000. The Company has no other minority investments in any other
entities.
In addition, the information required by this item is incorporated by
reference to the Company's Proxy Statement under the heading "Certain
Relationships and Related Transactions."
-31-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed with Report
1. Financial Statements. See Index to Consolidated Financial
Statements at page F-1 of this Form 10-K and the Financial
Statements and Notes thereto which are included at pages F-2 to
F-20 of this Form 10-K.
2. Exhibits
Exhibit
Number Description
------ -----------
3.1* Certificate of Incorporation of the Company.
3.2* Bylaws of the Company.
4.1* Specimen of Common Stock certificate of the Company.
4.2* Rights Agreement dated as of May 19, 1994, between the Company and
The First National Bank of Boston.
10.1* Form of Indemnification Agreement.
10.2* 1994 Incentive Plan.
10.3* 1994 Employee Stock Purchase Plan.
11.0 Computation of Earnings Per Share.
21.1 Subsidiaries of the Company.
23.0 Consent of Independent Accountants.
24.0 Power of Attorney.
* Incorporated by reference to the Company's Registration Statement on
Form S-1 (Reg. No. 33-88386) declared effective March 13, 1995.
(b) Reports on Form 8-K
Not Applicable.
(c) Exhibits
See Item 14(a)(2) above.
-32-
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 22, 2002 BY: /s/ 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 attorneys-in-fact, each with the power of
substitution, for him 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 conforming all that each of said attorneys-in-fact, or his
substitute or substitutes, any 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/ James J. Truchard Chairman of the Board and
Dr. James J. Truchard President (Principal Executive February 22, 2002
Officer)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
/s/ Alexander M. Davern Chief Financial Officer and
Alexander M. Davern Treasurer (Principal Financial February 21, 2002
and Accounting Officer)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
/s/ Jeffrey L. Kodosky
Jeffrey L. Kodosky Director February 23, 2002
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
/s/ L. Wayne Ashby
L. Wayne Ashby Director February 18, 2002
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
/s/ Donald M. Carlton
Dr. Donald M. Carlton Director February 20, 2002
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
/s/ Ben G. Streetman
Ben G. Streetman Director February 22, 2002
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
/s/ R. Gary Daniels
R. Gary Daniels Director February 18, 2002
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
/s/ Charles J. Roesslein
Charles J. Roesslein Director February 22, 2002
- --------------------------------------------------------------------------------
-33-
NATIONAL INSTRUMENTS CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page No.
Financial Statements:
Report of Independent Accountants..................................... F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000.......... F-3
Consolidated Statements of Income for the Three Years Ended
December 31, 2001................................................... F-4
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 2001................................................... F-5
Consolidated Statements of Stockholders' Equity for the Three Years
Ended December 31, 2001............................................. F-6
Notes to Consolidated Financial Statements............................ F-7
Financial Statement Schedules:
For the Three Years Ended December 31, 2001
Schedule II--Valuation and Qualifying Accounts.................. S-1
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
-F1-
Report of Independent Accountants
To the Board of Directors and Stockholders
of National Instruments Corporation
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of National Instruments Corporation and its subsidiaries at December
31, 2001 and 2000, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Austin, Texas
January 15, 2002
-F2-
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
------------------------
2001 2000
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents........................ $ 49,089 $ 75,277
Short-term investments........................... 101,422 79,525
Accounts receivable, net......................... 53,624 74,704
Inventories, net................................. 32,607 33,292
Prepaid expenses and other current assets........ 20,608 13,499
Deferred income taxes, net....................... 6,408 8,262
---------- ----------
Total current assets......................... 263,758 284,559
Property and equipment, net...................... 137,360 84,694
Intangibles and other assets..................... 23,501 20,097
---------- ----------
Total assets................................. $ 424,619 $ 389,350
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 28,958 $ 30,365
Accrued compensation............................. 8,944 12,720
Accrued expenses and other liabilities........... 6,819 9,923
Income taxes payable............................. 1,298 3,366
Other taxes payable.............................. 7,903 7,977
---------- ----------
Total current liabilities.................... 53,922 64,351
Deferred income taxes, net........................... 4,533 3,976
---------- ----------
Total liabilities............................ 58,455 68,327
---------- ----------
Commitments and contingencies (Note 13) -- --
Stockholders' equity:
Common stock: par value $0.01; 180,000,000 shares
authorized; 51,162,469 and 50,634,603 shares
issued and outstanding, respectively........... 512 506
Additional paid-in capital....................... 78,261 69,534
Retained earnings................................ 290,408 254,006
Accumulated other comprehensive loss............. (3,017) (3,023)
---------- ----------
Total stockholders' equity................... 366,164 321,023
---------- ----------
Total liabilities and stockholders' equity... $ 424,619 $ 389,350
========== ==========
The accompanying notes are an integral part of these financial statements.
-F3-
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
For the Years
Ended December 31,
----------------------------------
2001 2000 1999
---------- ---------- ----------
Net sales................................. $ 385,275 $ 410,149 $ 329,583
Cost of sales............................. 101,297 98,326 76,040
---------- ---------- ----------
Gross profit.......................... 283,978 311,823 253,543
---------- ---------- ----------
Operating expenses:
Sales and marketing................... 145,555 147,377 120,886
Research and development.............. 60,745 55,954 45,531
General and administrative............ 29,234 32,077 24,258
---------- ---------- ----------
Total operating expenses.......... 235,534 235,408 190,675
---------- ---------- ----------
Operating income...................... 48,444 76,415 62,868
Other income (expense):
Interest income....................... 5,837 6,390 4,759
Interest expense...................... (26) (533) (404)
Net foreign exchange loss............. (1,424) (1,482) (354)
Other income.......................... 702 323 484
---------- ---------- ----------
Income before income taxes and
cumulative effect of accounting change... 53,533 81,113 67,353
Provision for income taxes................ 17,131 25,956 21,553
---------- ---------- ----------
Income before cumulative effect of
accounting change........................ 36,402 55,157 45,800
Cumulative effect of accounting change,
net of tax............................... -- -- (552)
---------- ---------- ----------
Net income........................ $ 36,402 $ 55,157 $ 45,248
========== ========== ==========
Basic earnings per share:
Income before cumulative effect of
accounting change.................... $ 0.72 $ 1.10 $ 0.92
Cumulative effect of accounting
change, net of tax................... -- -- (0.01)
---------- ---------- ----------
Basic earnings per share.............. $ 0.72 $ 1.10 $ 0.91
========== ========== ==========
Diluted earnings per share:
Income before cumulative effect of
accounting change.................... $ 0.68 $ 1.03 $ 0.88
Cumulative effect of accounting
change, net of tax................... -- -- (0.01)
---------- ---------- ----------
Diluted earnings per share............ $ 0.68 $ 1.03 $ 0.87
========== ========== ==========
Weighted average shares outstanding:
Basic................................. 50,910 50,332 49,776
Diluted............................... 53,651 53,564 52,203
The accompanying notes are an integral part of these financial statements.
-F4-
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended December 31,
----------------------------------
2001 2000 1999
---------- ---------- ----------
Cash flow from operating activities:
Net income........................................................... $ 36,402 $ 55,157 $ 45,248
Adjustments to reconcile net income to cash provided by operating
activities:
Charges to income not requiring cash outlays:
Depreciation and amortization................................ 16,802 16,345 13,026
Provision (benefit) for deferred income taxes................ 2,186 (832) 798
Purchase of in-process research & development................ -- -- 2,130
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable................... 21,080 (16,425) (9,963)
Decrease (increase) in inventory............................. 685 (7,131) (9,002)
Increase in prepaid expenses and other assets................ (9,574) (1,655) (7,761)
(Decrease) increase in accounts payable...................... (1,407) 7,047 6,075
(Decrease) increase in taxes and other liabilities........... (9,021) 2,490 6,185
---------- ---------- ----------
Net cash provided by operating activities................ 57,153 54,996 46,736
---------- ---------- ----------
Cash flow from investing activities:
Payments for acquisitions, net of cash received...................... -- -- (13,072)
Capital expenditures................................................. (65,274) (27,631) (9,452)
Additions to intangibles............................................. (4,903) (6,930) (2,188)
Purchases of short-term investments.................................. (149,505) (97,685) (268,965)
Sales of short-term investments...................................... 127,608 101,685 234,808
---------- ---------- ----------
Net cash used in investing activities.................... (92,074) (30,561) (58,869)
---------- ---------- ----------
Cash flow from financing activities:
Repayments of long-term debt......................................... -- (5,177) (1,435)
Proceeds from issuance of common stock, net of repurchases .......... 8,733 10,710 7,339
---------- ---------- ----------
Net cash provided by financing activities................ 8,733 5,533 5,904
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents................. (26,188) 29,968 (6,229)
Cash and cash equivalents at beginning of period..................... 75,277 45,309 51,538
---------- ---------- ----------
Cash and cash equivalents at end of period........................... $ 49,089 $ 75,277 $ 45,309
========== ========== ==========
Cash paid for interest and income taxes
Interest......................................................... $ 26 $ 601 $ 336
Income taxes..................................................... $ 15,814 $ 26,776 $ 21,283
The accompanying notes are an integral part of these financial statements.
-F5-
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Accumulated
Common Common Additional Other Total
Stock Stock Paid-In Retained Comprehensive Stockholders'
(Shares) Amount Capital Earnings Gain/(Loss) Equity
----------- ------ ---------- -------- ------------- -------------
Balance at December 31, 1998............. 49,414,110 $ 495 $ 51,496 $153,601 $ (1,408) $ 204,184
Net income............................... 45,248 45,248
Foreign currency translation adjustment
(net of $647 tax benefit)............... (1,374) (1,374)
Unrealized loss on securities available
for sale (net of $0 tax benefit)........ (534) (534)
Unrealized loss on derivative instruments
(net of $295 tax benefit)............... (628) (628)
Issuance of common stock under employee
plans................................... 633,072 5 7,334 7,339
----------- ------ ---------- -------- ------------- -------------
Balance at December 31, 1999............. 50,047,182 $ 500 $ 58,830 $198,849 $ (3,944) $ 254,235
Net income............................... 55,157 55,157
Foreign currency translation adjustment
(net of $1,126 tax benefit)............. (2,090) (2,090)
Unrealized gain on securities available
for sale (net of $75 tax expense)....... 202 202
Unrealized gain on derivative instruments
(net of $1,512 tax expense)............. 2,809 2,809
Issuance of common stock under employee
plans................................... 587,421 6 10,704 10,710
----------- ------ ---------- -------- ------------- -------------
Balance at December 31, 2000............. 50,634,603 $ 506 $ 69,534 $254,006 $ (3,023) $ 321,023
Net income............................... 36,402 36,402
Foreign currency translation adjustment
(net of $1,137 tax benefit)............. (2,417) (2,417)
Unrealized loss on securities available
for sale (net of $0 tax benefit)........ (167) (167)
Unrealized gain on derivative instruments
(net of $1,449 tax expense)............. 2,590 2,590
Issuance of common stock under employee
plans................................... 649,666 6 12,236 12,242
Repurchase and retirement of common stock (121,800) (3,509) (3,509)
----------- ------ ---------- -------- ------------- -------------
Balance at December 31, 2001............. 51,162,469 $ 512 $ 78,261 $290,408 $ (3,017) $ 366,164
=========== ====== ========== ======== ============= =============
The accompanying notes are an integral part of these financial statements.
-F6-
NATIONAL INSTRUMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Operations and summary of significant accounting policies
National Instruments Corporation (the "Company") is a Delaware Corporation.
The Company engages in the design, development, manufacture and marketing of
instrumentation software and specialty computer plug-in cards and accessories
that users combine with industry standard computers, networks and the Internet
to create measurement and automation systems. The Company offers hundreds of
products used to create virtual instrumentation systems for general, commercial,
industrial and scientific applications. The Company's products may be used in
different environments, and consequently, specific application of the Company's
products is determined by the customer and often is not known to the Company.
The Company approaches all markets with essentially the same products, which are
used in a variety of applications from research and development to production
testing and industrial control. The following industries and applications are
served worldwide by the Company: 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. The
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 the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Certain prior year amounts have been reclassified to conform with the 2001
presentation.
Use of estimates
Judgments and estimates by management are required in the preparation of
financial statements to conform with generally accepted accounting principles.
The estimates and underlying assumptions affect the reported amounts of assets
and liabilities, the disclosure of contingencies at the balance sheet date and
the reported revenues and expenses for the period. Actual results could differ
from those 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
Short-term investments consist of corporate, state and municipal securities
with readily determinable fair market values and original maturities in excess
of three months. The Company's investments are classified as available-for-sale
and accordingly are reported at fair value, with unrealized gains and losses
reported as other comprehensive income. Unrealized losses are charged against
income when a decline in fair value is determined to be other than temporary.
The specific identification method is used to determine the cost of securities
sold.
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, with respect
to raw materials, is replacement cost and, with respect to work-in-process and
finished goods, is net realizable value.
-F7-
NATIONAL INSTRUMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Inventory is shown net of allowance for excess and obsolete inventory of
$2.9 million and $2.5 million at December 31, 2001 and 2000, respectively.
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 and three to five years for
equipment. Leasehold improvements are depreciated over the shorter of the life
of the lease or the asset.
Intangible assets
The Company has capitalized costs related to the development and
acquisition of certain software products. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 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. 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 realizable value when necessary.
The excess purchase price over the fair value of assets acquired is
recorded as goodwill and is amortized using the straight-line method over ten
years. Intangible assets are periodically assessed for impairment of value and
any loss is recognized upon impairment.
Concentrations of credit risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of foreign currency forward
and option contracts, cash and cash equivalents, short-term investments and
trade accounts receivable. In management's opinion, no significant concentration
of credit risk exists for the Company.
The Company's counterparties in its foreign currency forward and option
contracts are major financial institutions. The Company does not anticipate
nonperformance by these counterparties. The Company maintains cash and cash
equivalents with various financial institutions located in many countries
worldwide. The Company's short-term investments are diversified among and
limited to high-quality securities with high credit ratings. 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 amount of trade accounts receivable from
any individual customer at December 31, 2001 was not in excess of $1.3 million.
Revenue recognition
Sales revenue is recognized on the date the product is shipped to the
customer. Provision is made for estimated sales returns based on actual
historical experience. Revenue related to the sale of maintenance contracts is
deferred and amortized on a straight-line basis over the service period.
Deferred revenue at December 31, 2001 and 2000 is $2.6 million and $3.0 million
respectively.
Accounts receivable are net of allowances for doubtful accounts of $4.9
million and $4.5 million at December 31, 2001 and 2000, respectively.
Warranty expense
The Company offers a one-year limited warranty on most hardware products
and a 90-day warranty on software products, which is included in the sales price
of many of its products. Provision is made for estimated future warranty costs
at the time of sale.
Legal defense costs
The Company accrues for legal defense costs on an undiscounted basis, in
accordance with SFAS No. 5, "Accounting for Loss Contingencies," when such costs
are considered probable of being incurred and are reasonably estimable. The
Company periodically evaluates available information, both internal and
external, relative to such contingencies and adjusts this accrual as necessary.
-F8-
Advertising expense
The Company expenses its costs of advertising as incurred. Advertising
expense for the years ended December 31, 2001, 2000 and 1999 is $30.4 million,
$35.4 million and $34.1 million, respectively.
Foreign currency translation
The functional currency for the Company's international 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; sales
and expenses are translated at average rates. The resultant gains or losses from
translation are included in a separate component of other comprehensive income.
Gains and losses resulting from remeasuring monetary asset and liability
accounts that are denominated in a currency other than a subsidiary's functional
currency are included in determining net income.
Foreign currency hedging instruments
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," on January 1, 1999. In accordance with the transition
provisions of SFAS No. 133, the Company recorded a net-of-tax cumulative-effect
adjustment of $552,000 in earnings to recognize the fair value of its
derivatives designated as cash-flow hedging instruments at the date of adoption.
All of the Company's derivative instruments are recognized on the balance
sheet at their fair value. The Company currently uses foreign currency forward
and purchased option contracts to hedge its exposure to material foreign
currency denominated receivables and forecasted foreign currency cash flows.
On the date the derivative contract is entered into, the Company designates
its derivative as either a hedge of the fair value of foreign currency
denominated receivables ("fair-value" hedge) or as a hedge of the variability of
foreign currency cash flows to be received ("cash flow" hedge). Changes in the
fair market value of a fair-value hedge are recorded, along with the loss or
gain on the re-measurement of foreign-currency-denominated receivables, in
current earnings. Changes in the fair value of derivatives that are highly
effective as--and that are designated and qualify as--cash flow hedges under
SFAS No. 133 are recorded in other comprehensive income. These amounts are
subsequently reclassified into earnings in the period during which the hedge
transaction is realized. As of December 31, 2001, the Company has not entered
into a derivative contract for speculative purposes.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as fair-value or cash flow hedges to
specific assets and liabilities on the balance sheet or to specific firm
commitments or forecasted transactions. The Company also formally assesses, both
at the hedge's inception and on an ongoing basis, whether the derivatives that
are used to hedge forecasted transactions are highly effective in offsetting
changes in cash flows of hedged items.
The Company prospectively discontinues hedge accounting if (1) it is
determined that the derivative is no longer highly effective in offsetting
changes in the fair value or cash flows of a hedged item (including firm
commitments or forecasted transactions); (2) the derivative expires or is sold,
terminated or exercised; (3) the derivative is de-designated as a hedge
instrument, because it is unlikely that a forecasted transaction will occur; (4)
the hedged firm commitment no longer meets the definition of a firm commitment;
or (5) management determines that designation of the derivative as a hedge
instrument is no longer appropriate.
When hedge accounting is discontinued because it is probable that a
forecasted transaction will not occur, the derivative will continue to be
carried on the balance sheet at its fair value, and gains and losses that were
accumulated in other comprehensive income will be recognized immediately in
earnings. In all other situations where hedge accounting is discontinued, the
derivative will be carried as its fair value on the balance sheet, with changes
in its fair value recognized in current-period earnings.
Income taxes
The Company accounts for income taxes under the asset and liability method
as set forth in SFAS No. 109, "Accounting for Income Taxes." The provision for
income taxes is based on pretax financial accounting income. 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.
-F9-
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. Common share equivalents include stock options. The number of common
share equivalents outstanding relating to stock options is computed using the
treasury stock method.
The reconciliation of the denominators used to calculate the basic EPS and
diluted EPS for the years ended December 31, 2001, 2000 and 1999, respectively
are as follows (in thousands):
Years Ended December 31,
2001 2000 1999
-------- -------- --------
Weighted average shares outstanding-basic.... 50,910 50,332 49,776
Plus: Common share equivalents
Stock options............................... 2,741 3,232 2,427
-------- -------- --------
Weighted average shares outstanding-diluted.. 53,651 53,564 52,203
======== ======== ========
Stock options to acquire 1,394,000, 990,000 and 58,000 shares for the years
ended December 31, 2001, 2000 and 1999, respectively were excluded from the
computations of diluted earnings per share because the effect of including stock
options would have been anti-dilutive.
Stock-based compensation plans
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." As allowed by SFAS No. 123, the
Company continues to apply the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock issued to Employees" and related interpretations
in accounting for its plans. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock.
Comprehensive income
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income,"
which established standards for reporting in addition to net income,
comprehensive income and its components including, as applicable, foreign
currency items, minimum pension liability adjustments and unrealized gains and
losses on certain investments in debt and equity securities. Total comprehensive
income for 2001, 2000 and 1999 was $36.4 million, $56.1 million and $42.7
million, respectively.
Recently Issued Accounting Pronouncements
In 2000, the Company adopted Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements," which provides guidance in
applying generally accepted accounting principles to certain revenue recognition
issues. The adoption of SAB 101 did not have a material impact on the Company's
financial position or overall trends in results of operations.
In July 2001, the Financial Accounting Standards Board, or FASB, issued
SFAS No. 141, "Business Combinations." SFAS No. 141 eliminates the
pooling-of-interests method of accounting for business combinations except for
qualifying business combinations that were initiated prior to July 1, 2001. The
purchase method of accounting is required to be used for all the business
combinations initiated after June 30, 2001. SFAS No. 141 also defines the
criteria for identifying intangible assets for recognition apart from goodwill.
The Company adopted SFAS No. 141 effective July 1, 2001. The adoption of this
accounting standard had no impact on the Company's current results of operations
or financial position.
-F10-
Also in July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142, discontinues amortization of acquired goodwill
and instead requires annual impairment testing. Separable intangible assets will
be amortized over their useful economic lives and tested for impairment in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets to be Disposed of." Intangible assets with an indefinite useful economic
life will not be amortized until the life of the asset is determined to be
finite. For goodwill and indefinite-lived intangible assets acquired prior to
July 1, 2001, amortization will continue until adoption of SFAS No. 142 at which
time amortization will cease and a transitional impairment test will be
performed. Any impairment charges resulting from the initial application of the
new rules will be classified as a cumulative effect of change in accounting
principle. The Company adopted SFAS No. 142 effective January 1, 2002. As of
December 31, 2001, the Company had goodwill of approximately $4.9 million and
amortization of goodwill of $751,000, $716,000 and $180,000 for the years ended
December 31, 2001, 2000 and 1999, respectively. Adoption of SFAS No. 142 will
not have a material impact on the Company's financial position or future results
of operations.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The statement is effective for
financial statements for fiscal years beginning after June 15, 2002. The
adoption of SFAS No. 143 is not expected to have an impact on the Company's
financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes previous
guidance for financial accounting and reporting for the impairment or disposal
of long-lived assets and for segments of a business to be disposed of. The
Company adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 is
not expected to have an impact on the Company's financial position or results of
operations.
Note 2: Short-term investments
Short-term investments at December 31, 2001 and 2000, consisting of
corporate, state and municipal securities, were acquired at an aggregate cost of
$101.0 million and $78.3 million, respectively. The contractual maturities of
these securities, which are classified as available-for-sale and carried at fair
value, are as follows (in thousands):
December 31,
----------------------
2001 2000
---------- ----------
Less than 90 days............................. $ 14,004 $ 990
90 days to one year........................... 36,799 55,969
One year through two years.................... 23,233 19,484
Two years through three years................. 27,386 3,082
---------- ----------
$ 101,422 $ 79,525
Note 3: Inventories
Inventories, net consist of the following (in thousands):
December 31,
----------------------
2001 2000
---------- ----------
Raw materials................................. $ 15,394 $ 17,298
Work-in-process............................... 824 978
Finished goods................................ 16,389 15,016
---------- ----------
$ 32,607 $ 33,292
-F11-
Note 4: Property and equipment
Property and equipment consist of the following (in thousands):
December 31,
----------------------
2001 2000
---------- ----------
Land.......................................... $ 5,665 $ 5,208
Buildings..................................... 66,819 55,242
Furniture and equipment....................... 93,608 78,221
---------- ----------
166,092 138,671
Accumulated depreciation...................... (73,159) (60,552)
Construction-in-progress...................... 44,427 6,575
---------- ----------
$ 137,360 $ 84,694
Depreciation expense for the years ended December 31, 2001, 2000 and 1999,
is $12.6 million, $12.8 million and $10.5 million, respectively.
Note 5: Intangibles and other assets
Intangibles at December 31, 2001 and 2000 include capitalized software
development costs of $7.5 million and $6.7 million (net of accumulated
amortization of $11.7 million and $8.5 million), respectively, and goodwill of
$4.9 million and $5.9 million in 2001 and 2000 (net of accumulated amortization
of $1.6 million and $900,000), respectively. Total amortization costs were $4.2
million, $3.5 million and $2.5 million for the years ended December 31, 2001,
2000 and 1999, respectively. Substantially all of these amounts were
amortization of software development costs.
Note 6: Income taxes
The components of income before the provision for income taxes are as
follows (in thousands):
Years Ended December 31,
----------------------------------
2001 2000 1999
---------- ---------- ----------
Domestic.............................. $ 47,085 $ 68,982 $ 57,189
Foreign............................... 6,448 12,131 10,164
---------- ---------- ----------
$ 53,533 $ 81,113 $ 67,353
The provision for income taxes charged to operations is as follows (in
thousands):
Years Ended December 31,
----------------------------------
2001 2000 1999
---------- ---------- ----------
Current tax expense:
U.S. federal...................... $ 12,856 $ 22,902 $ 17,858
State............................. 1,575 2,043 1,165
Foreign........................... 1,878 1,843 1,732
---------- ---------- ----------
Total current................. 16,309 26,788 20,755
---------- ---------- ----------
Deferred tax expense (benefit):
U.S. federal...................... 1,078 (2,031) 1,394
State............................. 123 (12) 115
Foreign........................... (379) 1,211 (711)
---------- ---------- ----------
Total deferred................ 822 (832) 798
---------- ---------- ----------
Total provision............... $ 17,131 $ 25,956 $ 21,553
========== ========== ==========
-F12-
Deferred tax liabilities (assets) at December 31, 2001 and 2000 as follows
(in thousands):
December 31,
--------------------
2001 2000
-------- --------
Capitalized software............................ $ 2,548 $ 2,202
Unrealized gain on derivative instruments....... 2,588 1,174
Depreciation and amortization................... 1,088 263
Unrealized exchange gain........................ 381 --
Undistributed earnings of foreign subsidiaries.. 114 --
-------- --------
Gross deferred tax liabilities.................. 6,719 3,639
-------- --------
Operating loss carryforwards.................... (1,180) (685)
Vacation and other accruals..................... (1,559) (1,835)
Inventory valuation and warranty provisions..... (3,611) (2,124)
Doubtful accounts and sales provisions.......... (1,615) (1,434)
Unrealized exchange loss........................ -- (436)
Intercompany profit............................. (1,234) (1,162)
Undistributed earnings of foreign subsidiaries.. -- (155)
Accrued legal expenses.......................... (319) (923)
Other........................................... (797) (442)
-------- --------
Gross deferred tax assets....................... (10,315) (9,196)
-------- --------
Valuation allowance............................. 557 332
-------- --------
Net deferred tax asset.......................... $(3,039) $(5,225)
======== ========
A reconciliation of income taxes at the U.S. federal statutory income tax
rate to the effective tax rate follows:
Years Ended December 31,
----------------------------
2001 2000 1999
-------- -------- --------
U.S. federal statutory tax rate............... 35% 35% 35%
Foreign sales corporation benefit............. (2) (2) (2)
Foreign taxes less than federal statutory rate (1) (1) (1)
Research and development tax credit........... (1) -- --
Tax exempt interest........................... (2) (2) (2)
State income taxes, net of federal tax benefit 3 2 2
Effective tax rate............................ 32% 32% 32%
-------- -------- --------
As of December 31, 2001, fourteen of the Company's subsidiaries have
available, for income tax purposes, foreign net operating loss carryforwards of
approximately $6.5 million, of which $1.1 million expire during the years 2003 -
2010 and $5.4 million of which may be carried forward indefinitely.
The Company has not provided for U.S. federal income and foreign
withholding taxes on approximately $8.0 million of certain non-U.S.
subsidiaries' undistributed earnings as of December 31, 2001. These earnings
would become subject to taxes of approximately $1.6 million, if they were
actually or deemed to be remitted to the parent company as dividends or if the
Company should sell its stock in these subsidiaries. The Company currently
intends to reinvest indefinitely these undistributed earnings.
Note 7: Acquisition
On August 31, 1999, the Company acquired all of the issued and outstanding
shares of common stock of GfS Systemtechnik GmbH and related companies for $12.8
million. The acquisition was accounted for as a purchase. The Company recorded a
$2.1 million pre-tax charge against earnings in 1999 for the write-off of
in-process GfS research and development technology that had not reached the
working model stage. The Company also recorded $1.1 million of capitalized
software development costs and $7.7 million of goodwill related to the
acquisition, which are included in intangibles and other assets. The
consolidated financial statements include the operating results from the date of
acquisition. Pro-forma results of operations have not been presented because the
effects of those operations were not material.
-F13-
Note 8: Stockholders' equity
Common stock
On July 22, 1999, the Company declared a stock split effected in the form
of a dividend of one share of common stock for each two shares of common stock
outstanding. The dividend was paid on August 20, 1999 to holders of record as of
the close of business on August 5, 1999. All share information included in the
accompanying consolidated financial statements and notes has been retroactively
adjusted to reflect the exchange and stock split.
Stock repurchases and retirements
In 1998, the Company's Board of Directors approved the repurchase and
retirement of shares of common stock to reduce the dilutive effect of the
Company's stock plans. Pursuant to this repurchase program, the Company has
repurchased and retired a total of 121,800 shares for approximately $3.5
million.
Stock-based compensation plans
At December 31, 2001, the Company has two active stock-based compensation
plans and one inactive plan. The two active stock-based compensation plans are
the 1994 Incentive Stock Option Plan and the Employee Stock Purchase Plan. No
compensation cost has been recognized in the Company's financial statements for
the stock option plan and the stock purchase plan. If compensation cost for the
Company's two active stock-based compensation plans were determined based on the
fair value at the grant date for awards under those plans consistent with the
method established by SFAS No. 123, the Company's net income would have been
reduced by $14.1 million, $10.9 million and $6.5 million in 2001, 2000 and 1999,
respectively. The pro-forma effect on basic earnings per share would have been a
reduction of $0.28, $0.22 and $0.13 in 2001, 2000 and 1999, respectively. The
pro-forma effect on diluted earnings per share would have been a reduction of
$0.26, $0.20 and $0.13 for 2001, 2000 and 1999, respectively.
-F14-
Stock option plans
The stockholders of the Company approved the 1994 Incentive Stock Option
Plan on May 9, 1994. At the time of approval, 6,075,000 shares of the Company's
common stock were reserved for issuance under this plan. In 1997, an additional
4,725,000 shares of the Company's common stock were reserved for issuance under
this plan. The 1994 Plan, administered by the Compensation Committee of the
Board of Directors, provides for granting of incentive awards in the form of
stock options to directors, executive officers and employees of the Company and
its subsidiaries. Awards under the plan must be granted within ten years of the
effective date of the 1994 Plan. Options granted may be 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. Stock options must be exercised within
ten years from date of grant. Stock options are issued at market price at the
grant date. Shares available for grant at December 31, 2001 were 1,997,740.
Transactions under all plans are summarized as follows:
Number of Weighted
shares under average exercise
option price
------------ ----------------
Outstanding at December 31, 1998 5,592,134 $13.69
Exercised.................................. (498,514) 9.94
Canceled................................... (522,905) 16.22
Granted.................................... 946,247 20.41
------------ ----------------
Outstanding at December 31, 1999............... 5,516,962 14.95
Exercised.................................. (443,544) 11.56
Canceled................................... (209,966) 24.98
Granted.................................... 1,451,062 47.92
------------ ----------------
Outstanding at December 31, 2000............... 6,314,514 22.40
Exercised.................................. (388,474) 11.52
Canceled................................... (191,940) 33.00
Granted.................................... 1,520,527 32.13
------------ ----------------
Outstanding at December 31, 2001............... 7,254,627 $24.74
============ ================
Options exercisable at December 31:
1999....................................... 2,398,305 11.99
2000....................................... 2,964,530 14.20
2001....................................... 3,683,015 17.52
Weighted
Weighted average, grant date fair average fair
value of options granted during: value
----------------
1999....................................... 946,247 $ 8.57
2000....................................... 1,451,062 25.17
2001....................................... 1,520,527 16.71
-F15-
December 31, 2001
---------------------------------------------------------------
Options Outstanding Options Exercisable
---------------------------------- ----------------------------
Weighted
Weighted average
Number of average remaining Number of Weighted
options exercise contractual options average
Exercise price outstanding price life (yrs) exercisable exercise price
- -------------- ----------- -------- ----------- ----------- --------------
$ 6.44 - $ 8.89.............................. 1,374,461 $ 7.97 3 1,276,623 $ 7.91
9.11 - 14.44.............................. 1,191,444 14.21 5 934,474 14.19
14.83 - 22.96.............................. 1,766,155 20.91 7 994,796 21.10
23.33 - 30.50.............................. 149,233 27.82 8 41,200 27.45
31.56 - 51.56.............................. 2,773,334 39.83 9 435,922 43.74
----------- -------- ----------- ----------- --------------
7,254,627 24.74 7 3,683,015 17.52
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
2001 2000 1999
-------- -------- --------
Dividend expense yield................... 0 % 0 % 0 %
Expected life............................ 5 years 5 years 5 years
Expected volatility...................... 43.1% 40.6% 35.5%
Risk-free interest rate.................. 4.7% 6.8% 4.8%
Employee stock purchase plan
The Company's stock purchase plan became effective March 13, 1995 upon the
first date of registration of the Company's common stock. The plan permits
substantially all domestic employees and employees of designated subsidiaries to
acquire the Company's common stock at a purchase price of 85% of the lower of
the market price at the beginning or the end of the participation period. The
semi-annual periods begin on October 1 and April 1 of each year. Employees may
designate up to 15% of their compensation for the purchase of common stock.
Common stock reserved for future employee purchases aggregated 2,183,283 shares
at December 31, 2001. Shares issued under this plan were 278,469 in 2001. The
weighted average fair value of the employees' purchase rights, as shown below
was estimated using the Black-Scholes model with the following assumptions:
2001 2000 1999
-------- -------- --------
Dividend expense yield................... 0% 0% 0%
Expected life............................ 6 months 6 months 6 months
Expected volatility...................... 41% 58% 38%
Risk-free interest rate.................. 5.1% 5.6% 4.2%
Weighted average, grant date fair value of purchase rights granted under the
Employee Stock Purchase Plan:
Number Weighted
of average
shares fair value
------- ----------
1999..................................... 160,830 $ 6.79
2000..................................... 158,158 14.54
2001..................................... 290,082 7.95
Stockholders' rights plan
The Board of Directors and stockholders approved and adopted the Rights
Agreement prior to the Company's initial public offering (the "offering"). On
March 13, 1995, the effective date of the offering, the Board of Directors
declared a dividend distribution of one common share purchase right for each
outstanding share of Common Stock. The rights become exercisable under certain
conditions involving acquisition of the Company's Common Stock. Under certain
other conditions where the Company is consolidated or merged, each holder of a
right shall have the right to receive, upon exercise of the right, shares of
Common Stock of the Company, or acquiring company, having a value of twice the
exercise price of the right. The rights expire on March 13, 2005, and may be
redeemed in whole by the Company for $0.01 per right. The rights are excluded
from earnings per share computations because they qualify as contingent shares
and therefore are excluded as long as the conditions that require issuance of
the shares are not imminent.
-F16-
Note 9: Employee retirement plan
The Company has a defined contribution retirement plan pursuant to Section
401(k) of the Internal Revenue Code. Substantially all domestic employees with
at least one year 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. Company
contributions vest immediately. The Company's policy prohibits participants from
direct investment in shares of common stock of the Company. Company
contributions charged to expense were $1.6 million, $1.3 million and $1.1
million in 2001, 2000 and 1999, respectively.
Note 10: Financial instruments
Fair value of financial instruments
The estimated fair value amounts disclosed below have been determined by
the Company using available market information and valuation methodologies
described below. However, considerable judgment is required in interpreting
market data to develop these estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the Company
could realize in a current market exchange. The use of different market
assumptions could have a significant effect on the estimates. For certain
financial instruments of the Company, including cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities, the carrying
amount approximates fair value due to the short-term maturity of these
instruments. The estimated fair values of the other assets (liabilities) of the
Company's remaining financial instruments at December 31, 2001 and 2000 are as
follows (in thousands):
December 31,
----------------------------------------------
2001 2000
---------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Short-term investments........ $ 101,422 $ 101,422 $ 79,525 $ 79,525
Other assets/liabilities:
Forward contracts......... 2,391 2,391 3,293 3,293
Purchased options......... 2,873 2,873 871 871
The fair values of short-term investments and foreign currency forward and
purchased option contracts were estimated based upon quotes from brokers as of
the applicable balance sheet date.
Note 11: Derivative instruments and hedging activities
The Company has operations in over 30 countries. Forty-nine percent of the
Company's revenues are generated outside North America. The Company's activities
expose it to a variety of market risks, including the effects of changes in
foreign-currency exchange rates and interest rates. These financial risks are
monitored and managed by the Company as an integral part of its overall risk
management program.
The Company maintains a foreign-currency risk management strategy that uses
derivative instruments (foreign currency forward and purchased options
contracts) to protect its interests from fluctuations in earnings and cash flows
caused by the volatility in currency exchange rates. Movements in
foreign-currency exchange rates pose a risk to the Company's operations and
competitive position, since exchange rate changes may affect the profitability,
cash flow, and business and/or pricing strategies of non-U.S. based competitors.
Foreign currency fair value and cash flow hedges
The Company's foreign sales are denominated in the customers' local
currency. The Company purchases 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.
At December 31, 2001, the Company held forward contracts with notional
amounts totaling $31.9 million that were designated as foreign currency fair
value hedges of the Company's foreign denominated receivables. These contracts,
which are for 90-day periods, had a fair value of $289,000. The Company recorded
a net gain of $2.0 million for fair value hedges for the year ended December 31,
2001, which was recorded in "Foreign Currency Gain(Loss)." The Company hedges up
to 90% of its outstanding foreign denominated receivables.
-F17-
At December 31, 2001, the Company held forward contracts with a notional
amount of $17.1 million and option contracts with notional amounts totaling
$54.1 million that were designated as foreign currency cash flow hedges related
to the Company's anticipated sales transactions. These contracts, which are for
terms up to twenty-four months, had a fair value of $4.2 million and a net
unrealized deferred gain of $4.2 million recorded in "Accumulated Other
Comprehensive Income." The Company hedges up to 100% of anticipated foreign
currency denominated cash inflows for the following 1 to 36 months. The Company
recorded a net gain of $4.4 million for cash flow hedges for the year ended
December 31, 2001, which was included in "Net Revenue."
As of December 31, 2001, $9.0 million of deferred gains on cash flow hedges
recorded in "Accumulated Other Comprehensive Income" are expected to be
reclassified to earnings during the next twelve months. The actual foreign sales
expected to occur over the next twelve months will necessitate the reclassifying
to earnings of these derivative gains.
Hedge ineffectiveness of a foreign currency option contract designated as a
cash flow hedge is measured by comparing the hedging instrument's cumulative
change in fair value from inception to maturity to the forecasted transaction's
terminal value. As of December 31, 2001, no amounts were excluded from the
assessment of hedge effectiveness. For the year ended December 31, 2001, the
Company recognized a net gain of $174,000 (reported in the "Net Foreign Exchange
Gain/(Loss)" line item in the Consolidated Statement of Income), which
represented the net ineffectiveness of all cash-flow hedges.
Note 12: Segment information
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," the Company determines 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 the Company's reportable segments. It
also requires disclosures about products and services, geographic areas and
major customers.
While the Company sells its products to many different industries, its
management has chosen to organize the Company by geographic areas, and as a
result has determined that it has one reportable segment. Substantially all of
the interest income, interest expense, depreciation and amortization is recorded
in North America. Net sales, operating income and identifiable assets,
classified by the major geographic areas in which the Company operates, are as
follows (in thousands):
Years Ended December 31,
----------------------------------
2001 2000 1999
---------- ---------- ----------
Net sales:
North America:
Unaffiliated customer sales....... $ 195,842 $ 215,960 $ 175,873
Geographic transfers.............. 58,041 55,524 41,739
---------- ---------- ----------
253,883 271,484 217,612
Europe:
Unaffiliated customer sales....... 128,523 136,355 108,801
---------- ---------- ----------
Asia Pacific:
Unaffiliated customer sales....... 60,910 57,834 44,909
---------- ---------- ----------
Eliminations.......................... (58,041) (55,524) (41,739)
---------- ---------- ----------
$ 385,275 $ 410,149 $ 329,583
========== ========== ==========
Years Ended December 31,
2001 2000 1999
---------- ---------- ----------
Operating income:
North America............................. $ 40,624 $ 57,188 $ 48,679
Europe.................................... 41,229 48,180 39,603
Asia Pacific.............................. 27,336 27,001 20,117
Unallocated:
Research and development expenses......... (60,745) (55,954) (45,531)
---------- ---------- ----------
$ 48,444 $ 76,415 $ 62,868
========== ========== ==========
-F18-
December 31,
----------------------
2001 2000
---------- ----------
Identifiable assets:
North America............................. $ 349,209 $ 324,881
Europe.................................... 65,201 52,056
Asia Pacific.............................. 10,209 12,413
---------- ----------
$ 424,619 $ 389,350
========== ==========
Total sales outside the United States for 2001, 2000 and 1999 was $189.8
million, $217.3 million and $171.6 million, respectively.
Note 13: Commitments and contingencies
The Company has commitments under noncancelable operating leases primarily
for office facilities and equipment. Future minimum lease payments as of
December 31, 2001, for each of the next five years are as follows (in
thousands):
2002......................................... $1,654
2003......................................... 1,478
2004......................................... 1,433
2005......................................... 869
Thereafter................................... --
------
$5,434
======
Rent expense under operating leases was approximately $5.4 million, $3.5
million and $3.6 million for the years ended December 31, 2001, 2000 and 1999,
respectively.
As of December 31, 2001, the Company has non-cancelable purchase
commitments with various suppliers of customized inventory and inventory
components totaling approximately $6.0 million over the next twelve months.
As of December 31, 2001, the Company has outstanding guarantees for payment
of foreign operating leases, customs and foreign grants totaling approximately
$3.2 million.
Note 14: Litigation
During 2000, the Company was served by Cognex Corporation, asserting patent
infringement of two Cognex patents, copyright infringement, trademark
infringement and unfair competition. Cognex sought permanent injunctive relief,
actual monetary damages in an unspecified amount and attorney's fees and costs.
The Company filed a response to the lawsuit denying all claims. In the fourth
quarter of 2000, the Company accrued $2.5 million of anticipated intellectual
property defense costs that were probable of being incurred. The Company and
Cognex settled the dispute and Cognex dismissed the case with prejudice on
August 13, 2001.
During 2001, the Company filed a complaint in U.S. District Court, Western
District of Texas (Midland Division) for declaratory judgment arising from a
controversy between the Company and General Patent Corporation, General Patent
Corporation International, and Acticon Technologies, LLC ("Defendants")
concerning the enforceability, validity, and infringement of certain patents in
which Defendants claim an interest. Defendants claim that the Company infringes
these patents. The Company challenges the validity and enforceability of these
patents and asserts that it does not infringe the claims of these patents. The
Company seeks a declaratory judgment of invalidity and non-infringement.
Defendants seek damages in an unspecified amount, injunction of the sale of
certain products of the Company and attorney's fees and costs. The case is
currently in discovery and trial is set for May 5, 2003. Due to the inherent
uncertainties of litigation, there can be no assurance that this litigation will
not cause significant liability and a diversion of management's attention which
may have a material adverse effect on results of operations.
During 2001, as a result of the aforementioned Cognex dismissal and the
General Patent Corporation matter, the Company has reduced its intellectual
property defense cost accrual by approximately $1.2 million.
-F19-
Note 15: Related party transactions
During 2001, the Company acquired a 10% minority interest in another
company for $2.5 million. Because of the Company's ownership percentage and its
lack of control and inability to exert influence over this entity, this
investment is accounted for under the cost method. Sales to this company during
2001 were $96,000. The Company has no other minority investments in any other
entities.
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, 2001 are as follows (in thousands,
except per share data):
Three Months Ended
--------------------------------------
Mar. 31, Jun. 30, Sep. 30, Dec. 31,
2001 2001 2001 2001
-------- -------- -------- --------
Net sales............................... $108,080 $ 97,707 $ 85,062 $ 94,426
Gross profit............................ 81,207 72,079 61,774 68,918
Operating income........................ 19,890 12,085 6,509 9,960
Net income.............................. 13,947 9,430 5,685 7,340
Basic earnings per share................ $ 0.28 $ 0.19 $ 0.11 $ 0.14
Weighted average shares
outstanding-basic...................... 50,701 50,887 50,956 51,095
Diluted earnings per share.............. $ 0.26 $ 0.18 $ 0.11 $ 0.14
Weighted average shares
outstanding-diluted.................... 53,873 53,450 53,288 53,524
Three Months Ended
--------------------------------------
Mar. 31, Jun. 30, Sep. 30, Dec. 31,
2001 2001 2001 2001
-------- -------- -------- --------
Net sales............................... $ 94,105 $ 99,550 $102,247 $114,247
Gross profit............................ 71,865 75,520 77,830 86,607
Operating income........................ 18,053 20,175 18,404 19,783
Net income.............................. 12,664 14,431 13,197 14,864
Basic earnings per share................ $ 0.25 $ 0.29 $ 0.26 $ 0.29
Weighted average shares
outstanding-basic...................... 50,112 50,274 50,364 50,567
Diluted earnings per share.............. $ 0.24 $ 0.27 $ 0.25 $ 0.28
Weighted average shares
outstanding-diluted.................... 53,415 53,567 53,612 53,642
-F20-
SCHEDULE II
NATIONAL INSTRUMENTS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Allowance for doubtful accounts
Balance at Provision Write-Offs Balance
Beginning for Bad Charged to at End
Year Description of Period Debt Expense Allowances of Period
- ------------- ------------------------------- ---------- ------------ ---------- ---------
1999......... Allowance for doubtful accounts $ 3,670 $ 1,455 $ 982 $ 4,143
2000......... Allowance for doubtful accounts 4,143 1,962 1,589 4,516
2001......... Allowance for doubtful accounts 4,516 1,579 1,175 4,920
Valuation allowances for excess and obsolete inventory
Balance at Provision Write-Offs Balance
Beginning for Bad Charged to at End
Year Description of Period Debt Expense Allowances of Period
- ------------- ------------------------------- ---------- ------------ ---------- ---------
1999......... Valuation allowances for excess
and obsolete inventory $ 1,804 $ 1,244 $ 694 $ 2,354
2000......... Valuation allowances for excess
and obsolete inventory 2,354 1,090 978 2,466
2001......... Valuation allowances for excess
and obsolete inventory 2,466 1,082 682 2,866
-S1-