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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ---
Exchange Act of 1934
For the fiscal quarter ended: September 30, 2002 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 (zip code)
offices)
Registrant's telephone number, including area code: (512) 338-9119
---------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 5, 2002
Common Stock - $0.01 par value 50,993,284
NATIONAL INSTRUMENTS CORPORATION
INDEX
Page No.
PART I. FINANCIAL INFORMATION --------
Item 1 Financial Statements:
Consolidated Balance Sheets
September 30, 2002 (unaudited) and December 31, 2001 3
Consolidated Statements of Income (unaudited)
Three months and nine months ended September 30, 2002
and 2001 4
Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3 Quantitative and Qualitative Disclosures About Market Risk 19
Item 4 Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 20
Item 6 Exhibits and Reports on Form 8-K 20
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, December 31,
2002 2001
------------- ------------
Assets (unaudited)
Current assets:
Cash and cash equivalents................... $ 66,200 $ 49,089
Short-term investments...................... 77,185 101,422
Accounts receivable, net.................... 55,518 53,624
Inventories, net............................ 39,622 32,607
Prepaid expenses and other current assets... 14,805 20,608
Deferred income tax, net.................... 7,708 6,408
------------- ------------
Total current assets..................... 261,038 263,758
Property and equipment, net.................... 150,720 137,360
Intangibles and other assets................... 25,268 23,501
------------- ------------
Total assets............................. $ 437,026 $ 424,619
============= ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable............................ $ 26,147 $ 28,958
Accrued compensation........................ 10,874 8,944
Accrued expenses and other liabilities...... 8,963 6,819
Income taxes payable........................ 6,110 1,298
Other taxes payable......................... 9,708 7,903
------------- ------------
Total current liabilities................ 61,802 53,922
Deferred income taxes.......................... 3,230 4,533
------------- ------------
Total liabilities........................ 65,032 58,455
------------- ------------
Commitments and contingencies -- --
Stockholders' equity:
Common Stock: par value $0.01; 180,000,000
shares authorized; 50,769,239 and
51,162,469 shares issued and outstanding,
respectively................................ 508 512
Additional paid-in capital..................... 65,308 78,261
Retained earnings.............................. 311,849 290,408
Accumulated other comprehensive loss........... (5,671) (3,017)
------------- ------------
Total stockholders' equity............... 371,994 366,164
------------- ------------
Total liabilities and stockholders' equity $ 437,026 $ 424,619
============= ============
The accompanying notes are an integral part of these financial statements.
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net sales....................... $ 96,020 $ 85,062 $ 284,264 $ 290,849
Cost of sales................... 25,196 23,288 77,157 75,789
---------- ---------- ---------- ----------
Gross profit.................. 70,824 61,774 207,107 215,060
---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing.......... 36,679 34,275 105,653 109,167
Research and development..... 16,095 14,920 47,762 45,950
General and administrative... 9,444 6,070 26,072 21,459
---------- ---------- ---------- ----------
Total operating expenses.. 62,218 55,265 179,487 176,576
---------- ---------- ---------- ----------
Operating income.......... 8,606 6,509 27,620 38,484
Other income (expense):
Interest income, net......... 785 1,303 2,419 4,574
Net foreign exchange gain
(loss)...................... (612) 341 (1,288) (921)
Other income................. 506 206 1,028 601
---------- ---------- ---------- ----------
Income before income taxes...... 9,285 8,359 29,779 42,738
Provision for income taxes...... 2,600 2,674 8,338 13,676
---------- ---------- ---------- ----------
Net income................ $ 6,685 $ 5,685 $ 21,441 $ 29,062
========== ========== ========== ==========
Basic earnings per share........ $ 0.13 $ 0.11 $ 0.42 $ 0.57
========== ========== ========== ==========
Weighted average shares
outstanding-basic.............. 51,195 50,956 51,286 50,848
========== ========== ========== ==========
Diluted earnings per share...... $ 0.13 $ 0.11 $ 0.40 $ 0.54
========== ========== ========== ==========
Weighted average shares
outstanding-diluted............ 52,906 53,288 53,603 53,682
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
----------------------
2002 2001
---------- ----------
Cash flow from operating activities:
Net income.......................................... $ 21,441 $ 29,062
Adjustments to reconcile net income to cash
provided by operating activities:
Charges to income not requiring cash outlays:
Depreciation and amortization.................. 14,862 12,393
Provision for (benefit from) deferred income
taxes.......................................... (2,605) 1,067
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable..... (1,894) 21,356
Increase in inventory.......................... (7,015) (1,702)
Decrease (increase) in prepaid expense and
other assets................................... 3,154 (8,971)
Increase in current liabilities................ 5,677 1,507
---------- ----------
Net cash provided by operating activities........ 33,620 54,712
---------- ----------
Cash flow from investing activities:
Capital expenditures................................ (24,753) (45,149)
Additions to intangibles ........................... (5,239) (3,918)
Purchases of short-term investments................. (106,294) (110,790)
Sales of short-term investments..................... 130,531 101,855
---------- ----------
Net cash used in investing activities............ (5,755) (58,002)
---------- ----------
Cash flow from financing activities:
Proceeds from issuance of common stock.............. 6,666 6,233
Repurchase of common stock.......................... (17,420) (3,433)
---------- ----------
Net cash (used in) provided by financing
activities....................................... (10,754) 2,800
---------- ----------
Net increase (decrease) in cash and cash equivalents... 17,111 (490)
Cash and cash equivalents at beginning of period....... 49,089 75,277
---------- ----------
Cash and cash equivalents at end of period............. $ 66,200 $ 74,787
========== ==========
Non-cash financing activities:
Accrued liability for repurchase of common stock.... $ 2,203 $ --
========== ==========
The accompanying notes are an integral part of these financial statements.
NATIONAL INSTRUMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto for the
year ended December 31, 2001, included in the Company's annual report on Form
10-K, filed with the Securities and Exchange Commission. In the opinion of
management, the accompanying consolidated financial statements reflect all
adjustments (consisting only of normal recurring items) considered necessary to
present fairly the financial position of National Instruments Corporation and
its consolidated subsidiaries at September 30, 2002 and December 31, 2001, and
the results of operations for the three-month and nine-month periods ended
September 30, 2002 and 2001, and the cash flows for the nine-month periods ended
September 30, 2002 and 2001. Operating results for the three-month and
nine-month periods ended September 30, 2002 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2002.
NOTE 2 - Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted average number of common shares outstanding during each period. Diluted
EPS is computed by dividing net income by the weighted average number of common
shares and common share equivalents outstanding (if dilutive) during each
period. 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 basic EPS and diluted
EPS for the three-month and nine-month periods ended September 30, 2002 and
2001, respectively, are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
(unaudited) (unaudited)
2002 2001 2002 2001
---------- ---------- ---------- ----------
Weighted average shares
outstanding-basic............... 51,195 50,956 51,286 50,848
Plus: Common share equivalents
Stock options................ 1,711 2,332 2,317 2,834
---------- ---------- ---------- ----------
Weighted average shares
outstanding-diluted............. 52,906 53,288 53,603 53,682
========== ========== ========== ==========
Stock options to acquire 3,071,000 and 1,541,000 shares for the quarters ended
September 30, 2002 and 2001, respectively, and 1,545,000 and 1,382,000 shares
for the nine months ended September 30, 2002 and 2001, respectively, were not
included in the computations of diluted earnings per share because the effect of
including the stock options would have been anti-dilutive.
NOTE 3 - Inventories
Inventories, net consist of the following (in thousands):
September 30, 2002 December 31, 2001
(unaudited)
------------------ -----------------
Raw materials............... $ 20,811 $ 15,394
Work-in-process............. 1,855 824
Finished goods.............. 16,956 16,389
------------------ -----------------
$ 39,622 $ 32,607
================== =================
NOTE 4 - Comprehensive Income
Total comprehensive income for the quarters ended September 30, 2002 and 2001 is
$6.5 million and $4.7 million, respectively, and includes other comprehensive
loss of $235,000 and $1.0 million, respectively. For the first nine months of
2002 and 2001, comprehensive income is $18.8 million and $29.8 million,
respectively, and includes other comprehensive loss of $2.7 million and other
comprehensive income of $697,000, respectively.
NOTE 5 - Segment Information
While the Company sells its products to many different markets, 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):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
(unaudited) (unaudited)
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net sales:
Americas:
Unaffiliated customer sales... $ 50,432 $ 44,671 $ 147,620 $ 151,729
Geographic transfers.......... 15,087 12,329 42,329 41,591
---------- ---------- ---------- ----------
65,519 57,000 189,949 193,320
---------- ---------- ---------- ----------
Europe:
Unaffiliated customer sales... 27,065 26,991 85,430 93,879
---------- ---------- ---------- ----------
Asia Pacific:
Unaffiliated customer sales... 18,523 13,400 51,214 45,241
---------- ---------- ---------- ----------
Eliminations.................... (15,087) (12,329) (42,329) (41,591)
---------- ---------- ---------- ----------
$ 96,020 $ 85,062 $ 284,264 $ 290,849
========== ========== ========== ==========
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
(unaudited) (unaudited)
2002 2001 2002 2001
---------- ---------- ---------- ----------
Operating income:
Americas........................ $ 7,625 $ 8,583 $ 25,778 $ 34,268
Europe.......................... 7,337 7,524 24,149 29,801
Asia Pacific.................... 9,739 5,322 25,455 20,365
Unallocated:
Research and development
expenses........................ (16,095) (14,920) (47,762) (45,950)
---------- ---------- ---------- ----------
$ 8,606 $ 6,509 $ 27,620 $ 38,484
========== ========== ========== ==========
September 30, December 31,
2002 2001
(unaudited)
------------- ------------
Identifiable assets:
Americas........................ $ 358,987 $ 349,209
Europe.......................... 58,516 65,201
Asia Pacific.................... 19,523 10,209
------------- ------------
$ 437,026 $ 424,619
============= ============
NOTE 6 - Commitments and Contingencies
The Company has filed two complaints in the U.S. District Court, Eastern
District of Texas (Marshall Division) against The MathWorks, Inc. ("Defendant")
for patent infringement. In the first complaint, filed January 25, 2001, the
Company claims that the Defendant infringes certain of the Company's U.S.
patents. The Defendant challenges the validity and enforceability of these
patents and asserts that it does not infringe the claims of these patents. The
case is scheduled for trial on January 6, 2003. In the second complaint, filed
October 21, 2002, the Company claims that the Defendant infringes certain other
of the Company's U.S. patents. In each case, the Company seeks monetary damages,
injunction of the sale of certain products of the Defendant, and attorney's fees
and costs. For both complaints, the Company expects to incur legal expenses of
approximately $2.4 million over the next six months. Due to the inherent
uncertainties of litigation, there may be significant changes in the amount and
timing of these expected expenses.
NOTE 7 - Subsequent Events
On October 16, 2002, the Company and Trilogy Software, Inc. ("Trilogy") settled
a dispute regarding Trilogy's buy-out of the lease of the Company's Millenium
office building, which will result in a gain from lease termination. The Company
also announced its intention to contribute approximately $4 million during the
fourth quarter of 2002 to a 501(c)(3) charitable foundation to continue its
promotion of scientific and engineering research and education at higher
education institutions worldwide. The expense associated with this donation is
expected to offset the impact of the net gain from lease termination and
additional lease consolidation in the Company's results of operations.
NOTE 8 - Recently Issued Accounting Pronouncements
In May 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections as of April 2002. The Statement rescinds SFAS No. 4 and requires
that only unusual or infrequent gains and losses from extinguishment of debt
should be classified as extraordinary items, consistent with APB Opinion 30.
This Statement amends SFAS No. 13 to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends certain existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The adoption
of SFAS No. 145 did not have a material effect on the Company's financial
position or results of operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). This Statement requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred as opposed to on the date of an
entity's commitment to an exit plan, which was the practice employed under EITF
Issue 94-3. The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. SFAS No. 146 is not expected to have a material effect on the
Company's financial position or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Any statements contained herein
regarding the future financial performance or operations of the Company
(including, without limitation, statements to the effect that the Company
"expects," "plans," "may," "will," "projects," "continues," or "estimates" or
other variations thereof or comparable terminology or the negative thereof)
should be considered forward-looking statements. Actual results could differ
materially from those projected in the forward-looking statements as a result of
a number of important factors. For a discussion of important factors that could
affect the Company's results, please refer to the Issues and Outlook section and
financial statement line item discussions below. Readers are also encouraged to
refer to the Company's Annual Report on Form 10-K for further discussion of the
Company's business and the risks and opportunities attendant thereto.
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:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net sales:
Americas 52.5% 52.5% 51.9% 52.2%
Europe 28.2 31.7 30.1 32.3
Asia Pacific 19.3 15.8 18.0 15.5
---------- ---------- ---------- ----------
Consolidated net sales 100.0 100.0 100.0 100.0
Cost of sales 26.2 27.4 27.2 26.1
---------- ---------- ---------- ----------
Gross profit 73.8 72.6 72.8 73.9
---------- ---------- ---------- ----------
Sales and marketing 38.2 40.3 37.2 37.5
Research and development 16.8 17.5 16.8 15.8
General and administrative 9.8 7.1 9.1 7.4
---------- ---------- ---------- ----------
Total operating expenses 64.8 64.9 63.1 60.7
---------- ---------- ---------- ----------
Operating income 9.0 7.7 9.7 13.2
Other income (expense):
Interest income, net 0.8 1.5 0.8 1.6
Net foreign exchange gain (loss) (0.6) 0.4 (0.5) (0.3)
Other income 0.5 0.2 0.4 0.2
---------- ---------- ---------- ----------
Income before income taxes 9.7 9.8 10.4 14.7
Provision for income taxes 2.7 3.1 2.9 4.7
---------- ---------- ---------- ----------
Net income 7.0% 6.7% 7.5% 10.0%
========== ========== ========== ==========
Net Sales. Consolidated net sales increased by $11.0 million or 12.9% for
the three months ended September 30, 2002 to $96.0 million from $85.1 million
for the three months ended September 30, 2001, and decreased $6.6 million or
2.3% to $284.3 million for the nine months ended September 30, 2002 from $290.8
million for the comparable period in the prior year. The increase in sales in
the third quarter of 2002 was primarily attributable to the introduction of new
and upgraded products, increased market acceptance of the Company's products in
each of the geographical areas in which the Company operates, and an expanded
customer base. The decrease in sales for the first nine months of 2002 is
attributable to the approximate 16% decline in the sales of hardware products
that are used to control traditional instruments, which resulted from the
downturn in the industrial economy and the severe deterioration of sales of
traditional instruments by other vendors used in test and measurement
applications. In the nine month period ended September 30, 2002, the sales of
hardware products that are used to control traditional instruments represented
19% of revenue compared to 23% in the comparable prior year period.
Sales in the Americas in the third quarter of 2002 increased by 13% from
the third quarter of 2001 and sales in the Americas for the nine months ended
September 30, 2002 decreased by 3% from the nine months ended September 30,
2001. Sales outside of North America, as a percentage of consolidated sales for
the quarter ended September 30, 2002 remained constant at 47.5% compared to the
quarter ended September 30, 2001 and for the nine months ended September 30,
2002 increased to 48.1% from 47.8% over the comparable 2001 period as a result
of stronger sales in Asia Pacific. Compared to the corresponding periods in
2001, the Company's European sales remained flat at approximately $27 million
for the quarter ended September 30, 2002 and decreased by 9% to $85.4 million
for the nine months ended September 30, 2002. Sales in Asia Pacific increased by
38% to $18.5 million for the quarter ended September 30, 2002 compared to the
same period in 2001 and increased 13% to $51.2 million for the nine months ended
September 30, 2002 compared to the same period in 2001. The Company expects
sales outside of North America to continue to represent a significant portion of
its revenue.
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 the third
quarter of 2001 and the third quarter of 2002 the weighted value of the U.S.
dollar decreased by 10.5%, causing an equivalent increase 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 in the third quarter of 2002 had been the same
as that in the third quarter of 2001, on a pro-forma basis the Company's sales
for the third quarter of 2002 would have increased by 10%. Pro-forma European
sales for the third quarter of 2002 would have decreased by 2% from the third
quarter 2001. Pro-forma Asia Pacific sales for the third quarter of 2002 would
have increased by 26% from third quarter 2001 sales. If the weighted average
value of the dollar in the nine months ended September 30, 2002 had been the
same as that in the nine months ended September 30, 2001, on a pro-forma basis
the Company's year-to-date sales would have decreased by 4% from the 2001
year-to-date sales. Since most of the Company's international operating expenses
are also incurred in local currencies, the change in exchange rates had the
effect of increasing operating expenses $3.4 million for the nine months ended
September 30, 2002 and by $1.8 million for the quarter ended September 30, 2002.
Gross Profit. As a percentage of net sales, gross profit increased to 73.8%
for the third quarter of 2002 from 72.6% for the third quarter of 2001 and
decreased to 72.8% for the first nine months of 2002 from 73.9% for the
comparable period a year ago. The gross margin increase in the third quarter of
2002 is primarily attributable to favorable foreign exchange rates, and to the
impact of fixed charges relative to higher sales volume. The decrease in the
gross margin for the first nine months of 2002 compared to the comparable prior
year period is primarily due to the reduced sales of certain hardware products
that are used to control traditional instruments, and to inventory writedowns
resulting from lower sales volume of certain products. There can be no assurance
that the Company will maintain its historical margins.
The Company established a new manufacturing facility in Hungary in 2001.
The Company believes its current manufacturing capacity is adequate to meet
current needs.
Sales and Marketing. Sales and marketing expenses for the third quarter of
2002 increased to $36.7 million, a 7.0% increase, as compared to the third
quarter of 2001, and decreased 3.2% to $105.7 million for the first nine months
of 2002 from the comparable 2001 period. As a percentage of net sales, sales and
marketing expenses were 38.2% and 40.3% for the quarters ended September 30,
2002 and 2001, respectively, and 37.2% and 37.5% for the nine months ended
September 30, 2002 and 2001, respectively. Approximately 76% of the decrease in
these expenses for the nine months ended September 30, 2002, is attributable to
decreases in advertising and literature costs, and approximately 24% of the
decrease is the result of decreased special event activity. Approximately 70% of
the increase in sales and marketing expenses for the quarter ended September 30,
2002, is attributable to the increase in sales and marketing personnel both
internationally and in North America and approximately 30% of the increase is
attributable to increased advertising costs. 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 expenses increased to
$16.1 million for the quarter ended September 30, 2002, a 7.9% increase, as
compared to $14.9 million for the three months ended September 30, 2001, and
increased 3.9% to $47.8 million for the nine months ended September 30, 2002
from $46.0 million in the comparable 2001 period. As a percentage of net sales,
research and development expenses represented 16.8% and 17.5% for the third
quarters ended September 30, 2002 and 2001, respectively, and 16.8% and 15.8%
for the nine months ended September 30, 2002 and 2001, respectively. The
increase in research and development costs in absolute amounts in each period
and as a percentage of sales for the nine months ended September 30, 2002 is due
to increases in personnel costs from hiring of additional product development
engineers. Research and development personnel increased from 728 at September
30, 2001 to 802 at September 30, 2002. The Company plans to continue making a
significant investment in research and development in order to remain
competitive and continue revenue growth.
The Company capitalizes software development costs in accordance with 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
$953,000 and $802,000 for the quarters ended September 30, 2002 and 2001,
respectively, and $3.0 million and $2.3 million during the nine months ended
September 30, 2002 and 2001, respectively. Software development costs
capitalized were $1.5 million and $1.2 million for the quarters ended September
30, 2002 and 2001, respectively, and $3.0 million and $3.2 million for the first
nine months of 2002 and 2001, respectively.
General and Administrative. General and administrative expenses for the
quarter ended September 30, 2002 increased 55.6% to $9.4 million from $6.1
million for the comparable prior year period. For the first nine months of 2002,
general and administrative expenses increased 21.4% to $26.1 million from $21.4
million for the first nine months of 2001. As a percentage of net sales, general
and administrative expenses increased to 9.8% for the quarter ended September
30, 2002 from 7.1% for the third quarter of 2001. During the first nine months
of 2002, general and administrative expenses as a percentage of sales increased
to 9.1% from 7.4% in the comparable prior year period. The increase in general
and administrative expenses for the quarter and nine months ended September 30,
2002, from the comparable prior year periods is attributable to increased
litigation costs of $1.2 million and $3.5 million, respectively, associated with
a legal action by the Company brought against The MathWorks, Inc. in 2001 to
enforce the Company's intellectual property, compared to a gain of approximately
$1.2 million in the third quarter of 2001, recorded upon the settlement of a
previous case. The Company expects to incur litigation expenses related to the
MathWorks case of approximately $2.4 million over the next six months. (See Note
6 - Commitments and Contengencies). The Company expects that general and
administrative expenses in future periods will increase in absolute amounts and
will fluctuate as a percentage of revenue.
Interest Income, Net. Net interest income in the third quarter of 2002
decreased to $785,000 from $1.3 million in the third quarter of 2001 and
decreased to $2.4 million for the first nine months of 2002 from $4.6 million
for the comparable 2001 period. Net interest income has historically represented
less than two percent of revenue and has fluctuated as a result of investment
balances, bank borrowings and interest terms thereon. The decrease in interest
income for the quarter and nine months ended September 30, 2002 was 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 Foreign Exchange Gain (Loss). The Company experienced net foreign
exchange losses of $612,000 in the third quarter of 2002 compared to gains of
$341,000 in the third quarter of 2001. Net foreign exchange losses of $1.3
million were recognized for the first nine months of 2002 compared to losses of
$921,000 for the first nine months of 2001. Foreign exchange gains and losses
are attributable to movements between the U.S. dollar and the local currencies
in countries in which the Company's subsidiaries are located. The net foreign
exchange losses in the third quarter of 2002 is mainly due to the strengthening
of the U.S. dollar.
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, yen and pound sterling) and limits the duration of these
contracts to 40 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.
The Company's hedging strategy reduced the foreign exchange losses by $10,000
during the quarter ended September 30, 2002, and reduced the foreign exchange
gains by $3.7 million for the nine months ended September 30, 2002.
Provision for Income Taxes. The provision for income taxes reflects an
effective tax rate of 28% for the three and nine months ended September 30, 2002
and 32% for the three and nine months ended September 30, 2001. The decrease in
the effective rate resulted from income tax benefits attributable to the
extraterritorial income exclusion and a change in the distribution of income
among taxing jurisdictions, particularly the impact of the Company's new
manufacturing facility in Hungary. The effective tax rate is lower than the U.S.
federal statutory rate of 35% primarily as a result of the extraterritorial
income exclusion, tax-exempt interest and reduced tax rates in certain foreign
jurisdictions.
Subsequent Events
On October 16, 2002, the Company and Trilogy Software, Inc. ("Trilogy")
settled a dispute regarding Trilogy's buy-out of the lease of the Company's
Millenium office building, which will result in a gain from lease termination.
The Company also announced its intention to contribute approximately $4 million
during the fourth quarter of 2002 to a 501(c)(3) charitable foundation to
continue its promotion of scientific and engineering research and education at
higher education institutions worldwide. The expense associated with this
donation is expected to offset the impact of the net gain from lease termination
and additional lease consolidation in the Company's results of operations.
Liquidity and Capital Resources
The Company is currently financing its operations and capital expenditures
through cash flow from operations. At September 30, 2002, the Company had
working capital of approximately $199.2 million compared to $209.8 million at
December 31, 2001. In the first nine months of 2002, the Company generated $33.6
million of cash provided by operating activities, primarily from net income of
$21.4 million.
Accounts receivable increased to $55.5 million at September 30, 2002 from
$53.6 million at December 31, 2001. Days sales outstanding decreased to 53 at
September 30, 2002 compared to 57 at September 30, 2001. Consolidated inventory
balances increased to $39.6 million at September 30, 2002 from $32.6 million at
December 31, 2001. Inventory turns of 2.6 represent a decrease from turns of 3.1
at December 31, 2001. The increase in inventory was due to the planned increase
in finished goods and safety stock inventory which enabled the Company to reduce
delivery time of products to customers thereby increasing customer satisfaction.
Cash used in the first nine months of 2002 for the purchase of the property and
equipment totaled $24.8 million, $17.4 million was used for the repurchase of
common stock and $3.0 million was used for the capitalization of software
development costs.
During the third quarter of 2002, the Company completed construction of,
and began its move into an office building ("Mopac C") located on the North
Austin campus. The total cost for the new building, including furniture,
fixtures and equipment was approximately $57.4 million. The Company expects to
consolidate its leaseholds and complete its move into "Mopac C" by December 31,
2002. As part of this the Company intends to lease the remaining 84,000 sq. ft.
of its Millenium office building.
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. As of September 30, 2002, the Company had no debt outstanding.
The Company believes that 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 will 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. As has occurred
in the past, most recently in the quarter ended March 31, 2002, these dynamics
have adversely affected revenue growth in international markets. 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)").
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.
The Company has no debt or off-balance sheet debt. As of September 30,
2002, the Company has outstanding guarantees for payment of foreign operating
leases, customs and foreign grants totaling approximately $3.3 million. At
September 30, 2002, 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 September 30, 2002, 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 $13.7 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.
Short-term Investments. The fair value of the Company's investments in
marketable securities at September 30, 2002 was $77.2 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
September 30, 2002, a 100 basis point increase or decrease in interest rates
would result in a decrease or increase of approximately $625,000, respectively,
in the fair value of the investment portfolio, which is not significantly
different from December 31, 2001. 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.
Non-Audit Services
Prior to adoption of the Sarbanes-Oxley Act of 2002, the Company's Audit
Committee modified its charter to require pre-approval of the following
non-audit services: tax research and consultations; international tax
consulting; tax assistance and compliance in international locations; assistance
with transfer pricing; expatriate tax services; consultations and assistance
with other taxes including state and local taxes, sales and use taxes, customs
and duties; review of intercompany agreements; and assistance with international
manufacturing tax issues. The Company is currently monitoring the developments
regarding possible new regulations as a result of the recent adoption of the
Sarbanes-Oxley Act of 2002, and will comply with any new requirements.
Recently Issued Accounting Pronouncements
In May 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections as of April 2002. The Statement rescinds SFAS No. 4 and requires
that only unusual or infrequent gains and losses from extinguishment of debt
should be classified as extraordinary items, consistent with APB Opinion 30.
This Statement amends SFAS No. 13 to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends certain existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The adoption
of SFAS No. 145 did not have a material effect on our financial position or
results of operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). This Statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred as opposed to on the date
of an entity's commitment to an exit plan, which was the practice employed under
EITF Issue 94-3. The provisions of this Statement are effective for exit or
disposal activities that are initiated after December 31, 2002, with early
application encouraged. SFAS No. 146 is not expected to have a material effect
on the Company's financial position or results of operations.
Factors Affecting the Company's Business and Prospects
U.S./Global Economic Slowdown. As recently experienced, when the worsening
of the industrial economy resulted in a deterioration of the test and
measurement and industrial automation markets, 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 the remainder
of 2002. The Company's spending for the remainder of the year could exceed this
budget due to a number of factors; including: additional marketing costs for
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 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 revenue could have a material adverse effect on the
Company's operating results.
Risk of Component Shortages. As has occurred in the past and as may be
expected to occur in the future, supply shortages of components used in our
products, including sole source components, can result in significant additional
costs and inefficiencies in manufacturing. If 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.
If the U.S. dollar strengthens in the future, it could have a material adverse
effect on gross and net profit margins.
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.
In recent years, with the exception of 2001, the Company's revenues have
been characterized by seasonality, with revenues typically being relatively
constant in the first, second and third quarters, growing in the fourth quarter
and being relatively flat or declining from the fourth quarter of the year to
the first quarter of the following year. The Company believes the seasonality of
its revenue results from the international mix of its revenue and the
variability of the budgeting and purchasing cycles of its customers throughout
each international region. In addition, total operating expenses have in the
past tended to be higher in the second and third quarters of each year, due to
recruiting and significantly increased intern personnel expenses.
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 adverse impact on the Company's operating 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. 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. 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
assurances 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 comply
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 the third quarter of 2001 and the third quarter of
2002, the weighted average value of the U.S. dollar decreased by 10.5%, causing
an equivalent increase in the U.S. dollar value of the Company's foreign
currency sales and expenses. If the weighted average value during the third
quarter of 2002 had been the same as that in the third quarter of 2001, on a
pro-forma basis the Company's sales for the third quarter of 2002 would have
increased by 10%. If the weighted average value of the dollar in the nine months
ended September 30, 2002 had been the same as in the comparable prior year
period, on a pro-forma basis the Company's year-to-date sales would have
decreased by 4% over 2001 year-to-date sales. If the weighted average value
during the third quarter of 2002 had been the same as that in the third quarter
of 2001, on a pro-forma basis the Company's consolidated operating expenses
would have been $60.4 million. If the U.S. dollar strengthens in the future, it
could have a materially adverse effect on the operating results of the Company.
As of September 30, 2002, the Company has $2.6 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 15 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. This facility
sources 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.
Income Tax Rate. The Company established a manufacturing facility in
Hungary in 2001. As a result of certain foreign investment incentives available
under Hungarian law, the profit from the Company's Hungarian operation is
currently exempt from income tax through 2011. These benefits may not be
available in the future due to changes in Hungary's political condition and/or
tax laws. Specifically, Hungary has applied for inclusion into the European
Union. In order for Hungary to gain acceptance into the European Union, the
Hungarian government may choose to change existing tax laws which could result
in the reduction or elimination of these foreign investment incentives. The
reduction or elimination of these foreign investment incentives would result in
the reduction or elimination of certain tax benefits thereby increasing the
Company's future effective income tax rate, which could have a material adverse
effect on the Company's results of operations.
The Company receives a substantial income tax benefit from the
extraterritorial income exemption ("ETI") under U.S. law. The ETI rules provide
that a percentage of the profits from products and intangibles exported from the
U.S. are exempt from U.S. tax. This benefit may not be available in the future
as the ETI has been ruled an illegal export subsidy by the World Trade
Organization. Legislation has been introduced in Congress that would repeal the
ETI as of December 31, 2002. The repeal of the ETI would result in the
elimination of this tax benefit thereby increasing the Company's future
effective income tax rate, which could have a material adverse effect on the
Company's results of operations.
Products Dependent on Certain Industries. Sales of the Company's products
are dependent on customers in certain industries, particularly the
telecommunications, semiconductor, automotive, automated test equipment, defense
and aerospace industries. As experienced in the past, and as may be expected to
occur in the future, downturns characterized by diminished product demand in any
one or more of these industries could result in decreased sales, which could
have a material adverse effect on the Company's results of operations.
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 integrated 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.
Stock-based Compensation Plans. 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. The Company currently adheres to the disclosure only
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and as
such, no compensation cost has been recognized in the Company's financial
statements for the stock option plan and the stock purchase plan. The Company is
currently monitoring the recent discussions related to possible new regulations
regarding the accounting treatment for stock options. The Company will comply
with any changes in the accounting of stock options required by the FASB. If the
fair value based method of accounting for stock options established under SFAS
No. 123 were adopted effective January 1, 2002, for the options granted during
2002, the Company estimates it would have recognized stock option expense of
approximately $204,000 and $378,000 for the quarter and nine month periods ended
September 30, 2002, respectively. If the Company were to adopt the accounting
provision of SFAS No. 123, the adoption would be prospective. Accordingly, the
Company would expect stock option expense to increase in the future if
additional stock options are issued.
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. The Company is currently involved in litigation in
federal court alleging patent infringement by the products of a defendant. 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. There
can be no assurance that this litigation or any other intellectual property
litigation initiated in the future will not cause significant litigation
expense, liability and a diversion of management's attention which may have a
material adverse effect on the Company's results of operations.
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, the Company's Chairman and Chief Executive
Officer, 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 Company's 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Response to this item is included in "Item 2 - Management's Discussion and
Analysis of Financial Conditions and Results of Operations - Market Risk" above.
Item 4. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer, after
evaluating the effectiveness of the Company's disclosure controls and procedures
(as defined in Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of
1934, as amended) as of a date within 90 days of the filing of this quarterly
report (the "Evaluation Date"), have concluded that, as of the Evaluation Date,
the Company's disclosure controls and procedures were effective to ensure the
timely collection, evaluation and disclosure of information relating to the
Company that would potentially be subject to disclosure under the Securities
Exchange Action of 1934, as amended, and the rules and regulations promulgated
thereunder. There were no significant changes in the Company's internal controls
or in other factors that could significantly affect the internal controls
subsequent to the Evaluation Date.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has filed two complaints in the U.S. District Court, Eastern
District of Texas (Marshall Division) against The MathWorks, Inc. ("Defendant")
for patent infringement. In the first complaint, filed January 25, 2001, the
Company claims that the Defendant infringes certain of the Company's U.S.
patents. The Defendant challenges the validity and enforceability of these
patents and asserts that it does not infringe the claims of these patents. The
case is scheduled for trial on January 6, 2003. In the second complaint, filed
October 21, 2002, the Company claims that the Defendant infringes certain other
of the Company's U.S. patents. In each case, the Company seeks monetary damages,
injunction of the sale of certain products of the Defendant, and attorney's fees
and costs. For both complaints, the Company expects to incur legal expenses of
approximately $2.4 million over the next six months. Due to the inherent
uncertainties of litigation, there may be significant changes in the amount and
timing of these expected expenses.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
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.
11.1 Computation of Earnings Per Share.
99.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
* 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.
No reports on Form 8-K were filed by the Company during the quarter ended
September 30, 2002.
SIGNATURE
Pursuant to the requirements 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.
NATIONAL INSTRUMENTS CORPORATION
Registrant
BY: /s/ Alex Davern
Alex Davern
Chief Financial Officer and Treasurer
(principal financial and accounting
officer)
Dated: November 7, 2002
I, James Truchard, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National Instruments
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 7, 2002
/s/ James Truchard
James Truchard
Chief Executive Officer
I, Alexander Davern, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National Instruments
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 7, 2002
/s/ Alexander Davern
Alexander Davern
Chief Financial Officer
NATIONAL INSTRUMENTS CORPORATION
INDEX TO EXHIBITS
Exhibit No. Description Page
11.1 Statement Regarding Computation 25
of Earnings per Share
99.1 Certification of Chief Executive 26
Officer and Chief Financial
Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant
to Section 906 of the
Sarbanes-Oxley Act of 2002