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National Instruments 10-Q 2012

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Graphic
  6. Graphic
a033112.htm
 
 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

T  Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended:  March 31, 2012 or

£  Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ________________ to ________________

Commission file number:  0-25426


National Instruments logo
NATIONAL INSTRUMENTS CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
 
74-1871327
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
     
11500 North MoPac Expressway
Austin, Texas
 
 
78759
(address of principal executive offices)
 
(zip code)

Registrant's telephone number, including area code:  (512) 338-9119
__________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes T  No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes T  No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer T                                          Accelerated filer £                                Non-accelerated filer £                                            Smaller reporting company £
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £  No T

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
   
   
Class
Outstanding at April 26, 2012
Common Stock - $0.01 par value
121,041,612

NATIONAL INSTRUMENTS CORPORATION

INDEX

     
     
Page No.
     
Item 1
Financial Statements:
 
     
   
 
March 31, 2012 (unaudited) and December 31, 2011
3
     
   
 
(unaudited) for the three months ended March 31, 2012 and 2011
4
     
   
 
(unaudited) for the three months ended March 31, 2012 and 2011
5
     
   
 
(unaudited) for the three months ended March 31, 2012 and 2011
6
     
 
Notes to Consolidated Financial Statements
7
     
    Item 2
21
     
Item 3
29
     
Item 4
32
     
     
 
     
     
Item 1
33
     
Item 1A
33
     
Item 2
41
     
Item 5
41
     
Item 6
42
     
 
44


 
 

 




ITEM 1.
Financial Statements

NATIONAL INSTRUMENTS CORPORATION
(in thousands, except share data)





             
   
March 31, 2012
   
December 31,
 
   
(unaudited)
   
2011
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 238,510     $ 142,608  
Short-term investments
    138,896       223,504  
Accounts receivable, net
    155,386       157,056  
Inventories, net
    140,408       131,995  
Prepaid expenses and other current assets
    32,911       38,082  
Deferred income taxes, net
    27,767       26,304  
Total current assets
    733,878       719,549  
Property and equipment, net
    192,944       190,148  
Goodwill
    130,975       130,747  
Intangible assets, net
    81,042       83,866  
Other long-term assets
    31,916       29,984  
Total assets
  $ 1,170,755     $ 1,154,294  
Liabilities and stockholders' equity
               
Current liabilities:
               
Accounts payable
  $ 41,629     $ 41,111  
Accrued compensation
    24,656       29,616  
Deferred revenue
    95,448       90,074  
Accrued expenses and other liabilities
    34,619       37,612  
Other taxes payable
    20,047       24,507  
Total current liabilities
    216,399       222,920  
Deferred income taxes
    43,058       43,186  
Liability for uncertain tax positions
    20,270       19,494  
Other long-term liabilities
    15,714       16,683  
Total liabilities
    295,441       302,283  
Commitments and contingencies
               
Stockholders' equity:
               
Preferred stock:  par value $0.01; 5,000,000 shares authorized; none issued and outstanding
    -       -  
Common stock:  par value $0.01; 180,000,000 shares authorized; 121,041,331 and 120,677,143 shares issued and outstanding, respectively
    1,210       1,207  
Additional paid-in capital
    485,989       471,830  
Retained earnings
    384,147       382,474  
Accumulated other comprehensive income (loss)
    3,968       (3,500 )
Total stockholders’ equity
    875,314       852,011  
Total liabilities and stockholders’ equity
  $ 1,170,755     $ 1,154,294  

The accompanying notes are an integral part of these financial statements

 
 

 

NATIONAL INSTRUMENTS CORPORATION
(in thousands, except per share data)
(unaudited)


             
   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
             
Net sales:
           
Product
  $ 239,335     $ 218,610  
Software maintenance
    21,798       19,240  
Total net sales
    261,133       237,850  
                 
Cost of sales:
               
Product
    59,791       50,958  
Software maintenance
    1,557       1,518  
Total cost of sales
    61,348       52,476  
                 
Gross profit
    199,785       185,374  
                 
Operating expenses:
               
Sales and marketing
    100,052       87,155  
Research and development
    54,015       42,868  
General and administrative
    21,374       18,839  
Total operating expenses
    175,441       148,862  
                 
Operating income
    24,344       36,512  
                 
Other income:
               
Interest income
    230       341  
Net foreign exchange (loss)
    (888 )     (223 )
Other income, net
    104       446  
Income before income taxes
    23,790       37,076  
Provision for income taxes
    5,148       6,615  
                 
Net income
  $ 18,642     $ 30,461  
                 
Basic earnings per share
  $ 0.15     $ 0.26  
                 
Weighted average shares outstanding - basic
    120,908       118,693  
                 
Diluted earnings per share
  $ 0.15     $ 0.25  
                 
Weighted average shares outstanding - diluted
    121,972       120,443  
                 
Dividends declared per share
  $ 0.14     $ 0.10  

The accompanying notes are an integral part of these financial statements.


 
 

 

NATIONAL INSTRUMENTS CORPORATION
(in thousands)
(unaudited)


             
   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
             
             
Net income
  $ 18,642     $ 30,461  
Other comprehensive income, before tax and net of reclassification adjustments:
               
Foreign currency translation adjustment
    3,382       5,275  
Unrealized gain (loss) on securities available-for-sale, net
    1,013       (424 )
Unrealized gain on derivative instruments, net
    3,885       2,846  
Other comprehensive income, before tax
    8,280       7,697  
Tax provision related to items of other comprehensive income
    (812 )     (477 )
Other comprehensive income, net of tax
    7,468       7,220  
Comprehensive income
  $ 26,110     $ 37,681  


The accompanying notes are an integral part of these financial statements.

 

 
 

 


NATIONAL INSTRUMENTS CORPORATION
(in thousands)
(unaudited)


             
   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
Cash flow from operating activities:
           
Net income
  $ 18,642     $ 30,461  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    14,115       10,973  
Stock-based compensation
    6,303       4,590  
Tax (benefit) from deferred income taxes
    (1,567 )     (560 )
Tax (benefit) from stock option plans
    (246 )     (1,327 )
Changes in operating assets and liabilities:
               
Accounts receivable
    1,671       (4,933 )
Inventories
    (8,413 )     (16,643 )
Prepaid expenses and other assets
    9,468       14,995  
Accounts payable
    518       3,071  
Deferred revenue
    5,374       6,137  
Taxes and other liabilities
    (12,361 )     (5,134 )
Net cash provided by operating activities
    33,504       41,630  
                 
Cash flow from investing activities:
               
Capital expenditures
    (9,054 )     (9,580 )
Capitalization of internally developed software
    (3,740 )     (3,731 )
Additions to other intangibles
    (333 )     (436 )
Purchases of short-term investments
    -       (27,176 )
Sales and maturities of short-term investments
    84,608       27,931  
Net cash provided/(used) by investing activities
    71,481       (12,992 )
                 
Cash flow from financing activities:
               
Proceeds from issuance of common stock
    7,605       17,050  
Dividends paid
    (16,934 )     (11,868 )
Tax benefit from stock option plans
    246       1,327  
Net cash (used)/provided by financing activities
    (9,083 )     6,509  
                 
Net change in cash and cash equivalents
    95,902       35,147  
Cash and cash equivalents at beginning of period
    142,608       219,447  
Cash and cash equivalents at end of period
  $ 238,510     $ 254,594  


                                     The accompanying notes are an integral part of these financial statements.




 
 

 


NATIONAL INSTRUMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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, 2011, included in our annual report on Form 10-K, filed with the Securities and Exchange Commission. In our opinion, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring items) considered necessary to present fairly our financial position at March 31, 2012 and December 31, 2011, and the results of our operations, comprehensive income, and cash flows for the three month periods ended March 31, 2012 and March 31, 2011. Operating results for the three month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States.


Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding during each period. Diluted EPS is computed by dividing net income by the weighted average number of common shares and common share equivalents outstanding (if dilutive) during each period. The number of common share equivalents, which include stock options and restricted stock units (“RSUs”), is computed using the treasury stock method.

The reconciliation of the denominators used to calculate basic EPS and diluted EPS for the three month periods ended March 31, 2012 and 2011, respectively, are as follows:


             
   
Three months ended March 31,
 
   
(In thousands)
 
   
(Unaudited)
 
   
2012
   
2011
 
Weighted average shares outstanding-basic
    120,908       118,693  
Plus: Common share equivalents
               
Stock options, restricted stock units
    1,064       1,750  
Weighted average shares outstanding-diluted
    121,972       120,443  
                 

Stock awards to acquire 719,158 shares for the three month period ended March 31, 2012 were excluded in the computations of diluted EPS because the effect of including the stock awards would have been anti-dilutive. There were no shares excluded in the computation for the three month period ended March 31, 2011.


The following table summarizes unrealized gains and losses related to our short-term investments designated as available-for-sale:

                               
   
As of March 31, 2012
 
(In thousands)
 
(Unaudited)
 
         
Gross
   
Gross
   
Cumulative
       
   
Adjusted Cost
   
Unrealized Gain
   
Unrealized Loss
   
Translation Adjustment
   
Fair Value
 
Cash
  $ 99,152     $ -     $ -     $ -     $ 99,152  
Money Market Accounts
    129,359       -       -       -       129,359  
Municipal bonds
    5,111       6       -       -       5,117  
Corporate bonds
    9,225       9       (3 )     -       9,231  
U.S. treasuries and agencies
    98,433       -       (6 )     -       98,427  
Foreign government bonds
    36,381       179       (11 )     (3,504 )     33,045  
Time deposits
    3,075       -       -       -       3,075  
Total short-term investments
  $ 380,736     $ 194     $ (20 )   $ (3,504 )   $ 377,406  
       
(In thousands)
 
As of December 31, 2011
 
           
Gross
   
Gross
   
Cumulative
         
   
Adjusted Cost
   
Unrealized Gain
   
Unrealized Loss
   
Translation Adjustment
   
Fair Value
 
Cash
  $ 106,431     $ -     $ -     $ -     $ 106,431  
Money Market Accounts
    22,677       -       -       -       22,677  
Municipal bonds
    12,381       11       -       -       12,392  
Corporate bonds
    18,631       -       (67 )     -       18,564  
U.S. treasuries and agencies
    170,926       2       (9 )     -       170,919  
Foreign government bonds
    36,460       240       (1 )     (4,482 )     32,217  
Time deposits
    2,912       -       -       -       2,912  
Total short-term investments
  $ 370,418     $ 253     $ (77 )   $ (4,482 )   $ 366,112  

The following table summarizes the contractual maturities of our short-term investments designated as available-for-sale:
 
             
   
As of March 31, 2012
 
(in thousands)
 
(Unaudited)
 
   
Adjusted Cost
   
Fair Value
 
Due in less than 1 year
  $ 142,186     $ 139,594  
Due in 1 to 5 years
    10,039       9,301  
Total available-for-sale debt securities
  $ 152,225     $ 148,895  
                 
Due in less than 1 year
 
Adjusted Cost
   
Fair Value
 
Municipal bonds
  $ 5,111     $ 5,117  
Corporate bonds
    8,200       8,209  
U.S. treasuries and agencies
    98,434       98,427  
Foreign government bonds
    27,366       24,766  
Time deposits
    3,075       3,075  
Total available-for-sale debt securities
  $ 142,186     $ 139,594  
                 
Due in 1 to 5 years
 
Adjusted Cost
   
Fair Value
 
Corporate bonds
  $ 1,025     $ 1,022  
Foreign government bonds
    9,014       8,279  
Total available-for-sale debt securities
  $ 10,039     $ 9,301  
 

We define fair value to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market that market participants may use when pricing the asset or liability.

We follow a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value measurement is determined based on the lowest level input that is significant to the fair value measurement. The three values of the fair value hierarchy are the following:

Level 1 – Quoted prices in active markets for identical assets or liabilities

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly

Level 3 – Inputs that are not based on observable market data

Assets and liabilities measured at fair value on a recurring basis are summarized below:
 
   
Fair Value Measurements at Reporting Date Using
 
(In thousands)
 
(Unaudited)
 
Description
 
March 31, 2012
   
Quoted Prices in Active Markets for Identical Assets (Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable Inputs (Level 3)
 
Assets
                       
Cash and cash equivalents available for sale:
                       
Money Market Funds
  $ 129,359     $ 129,359     $ -     $ -  
U.S. treasuries and agencies
    9,999       -       9,999       -  
Short-term investments available for sale:
                               
Municipal bonds
    5,117       -       5,117       -  
Corporate bonds
    9,231       -       9,231       -  
U.S. treasuries and agencies
    88,428       -       88,428          
Foreign government bonds
    33,045       -       33,045       -  
Time deposits
    3,075       3,075       -       -  
Derivatives
    4,823       -       4,823       -  
Total Assets
  $ 283,077     $ 132,434     $ 150,643     $ -  
                                 
Liabilities
                               
Derivatives
  $ (1,932 )   $ -     $ (1,932 )   $ -  
Total Liabilities
  $ (1,932 )   $ -     $ (1,932 )   $ -  

(In thousands)
 
Fair Value Measurements at Reporting Date Using
 
Description
 
December 31, 2011
   
Quoted Prices in Active Markets for Identical Assets (Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable Inputs (Level 3)
 
Assets
                       
Cash and cash equivalents available for sale:
                       
Money Market Funds
  $ 22,677     $ 22,677     $ -     $ -  
U.S. Treasuries and Agencies
    13,500       -       13,500       -  
Short-term investments available for sale:
                               
Municipal bonds
    12,392       -       12,392       -  
Corporate bonds
    18,564       -       18,564       -  
U.S. treasuries and agencies
    157,419       -       157,419       -  
Foreign government bonds
    32,217       -       32,217       -  
Time deposits
    2,912       2,912       -       -  
Derivatives
    4,297       -       4,297       -  
Total Assets
  $ 263,978     $ 25,589     $ 238,389     $ -  
                                 
Liabilities
                               
Derivatives
  $ (4,542 )   $ -     $ (4,542 )   $ -  
Total Liabilities
  $ (4,542 )   $ -     $ (4,542 )   $ -  
 
We value our available-for-sale short term investments based on pricing from third party pricing vendors, who may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. We classify all of our fixed income available-for-sale securities as having Level 2 inputs. The valuation techniques used to measure the fair value of our financial instruments having Level 2 inputs were derived from non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models, such as discounted cash flow techniques. We believe all of these sources reflect the credit risk associated with each of our available for sale short term investments. Short-term investments available-for-sale consists of debt securities issued by states of the U.S. and political subdivisions of the U.S., corporate debt securities and debt securities issued by U.S. government corporations and agencies as well as debt securities issued by foreign governments. All short-term investments available-for-sale have contractual maturities of less than 24 months.

Derivatives include foreign currency forward and option contracts. Our foreign currency forward contracts are valued using an income approach (Level 2) based on the spot rate less the contract rate multiplied by the notional amount. Our foreign currency option contracts are valued using a market approach based on the quoted market prices which are derived from observable inputs including current and future spot rates, interest rate spreads as well as quoted market prices of similar instruments. We consider counterparty credit risk in the valuation of our derivatives. However, counterparty credit risk did not impact the valuation of our derivatives during the three month period ended March 31, 2012. There were not any transfers in or out of Level 1 or Level 2 during the three month period ended March 31, 2012.

We did not have any items that were measured at fair value on a nonrecurring basis at March 31, 2012 and December 31, 2011.

The carrying value of net accounts receivable and accounts payable contained in the Consolidated Balance Sheet approximates fair value.


We recognize all of our derivative instruments as either assets or liabilities in our statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.

We have operations in over 40 countries. Sales outside of the Americas accounted for approximately 59% of our revenues during each of the three month periods ended March 31, 2012 and March 31, 2011. Our activities expose us to a variety of market risks, including the effects of changes in foreign currency exchange rates. These financial risks are monitored and managed by us as an integral part of our overall risk management program.

We maintain a foreign currency risk management strategy that uses derivative instruments (foreign currency forward and purchased option contracts) to help protect our earnings and cash flows from fluctuations caused by the volatility in currency exchange rates. Movements in foreign currency exchange rates pose a risk to our operations and competitive position, since exchange rate changes may affect our profitability and cash flow, and the business or pricing strategies of our non-U.S. based competitors.

The vast majority of our foreign sales are denominated in the customers’ local currency. We purchase foreign currency forward and option contracts as hedges of forecasted sales that are denominated in foreign currencies and as hedges of foreign currency denominated receivables. These contracts are entered into to help protect against the risk that the eventual dollar-net-cash inflows resulting from such sales or firm commitments will be adversely affected by changes in exchange rates. We also purchase foreign currency forward contracts as hedges of forecasted expenses that are denominated in foreign currencies. These contracts are entered into to help protect against the risk that the eventual dollar-net-cash outflows resulting from foreign currency operating and cost of revenue expenses will be adversely affected by changes in exchange rates.

We designate foreign currency forward and purchased option contracts as cash flow hedges of forecasted revenues or forecasted expenses. In addition, we hedge our foreign currency denominated balance sheet exposures using foreign currency forward contracts that are not designated as hedging instruments. None of our derivative instruments contain a credit-risk-related contingent feature.

Cash flow hedges

To help protect against the reduction in value caused by a fluctuation in foreign currency exchange rates of forecasted foreign currency cash flows resulting from international sales over the next one to two years, we have instituted a foreign currency cash flow hedging program. We hedge portions of our forecasted revenue and forecasted expenses denominated in foreign currencies with forward and purchased option contracts. For forward contracts, when the dollar strengthens significantly against the foreign currencies, the change in the present value of future foreign currency cash flows may be offset by the change in the fair value of the forward contracts designated as hedges. For option contracts, when the dollar strengthens significantly against the foreign currencies, the change in the present value of future foreign currency cash flows may be offset by the change in the fair value of the option contracts net of the premium paid designated as hedges. Our foreign currency purchased option contracts are purchased “at-the-money” or “out-of-the-money”. We purchase foreign currency forward and option contracts for up to 100% of our forecasted exposures in selected currencies (primarily in Euro, Japanese yen, British pound sterling, Korean won and Hungarian forint) and limit the duration of these contracts to 40 months or less.

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (“OCI”) and reclassified into earnings in the same line item (net sales, operating expenses, or cost of sales) associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings or expenses during the current period and are classified as a component of “net foreign exchange gain (loss)”. Hedge effectiveness of foreign currency forwards and purchased option contracts designated as cash flow hedges are measured by comparing the hedging instrument’s cumulative change in fair value from inception to maturity to the forecasted transaction’s terminal value.

We held forward contracts with the following notional amounts:


(In thousands)
 
US Dollar Equivalent
 
   
As of March 31,
       
   
2012
   
As of December 31,
 
   
(Unaudited)
   
2011
 
Euro
  $ 44,385     $ 60,992  
Japanese yen
    34,497       43,569  
Korean won
    1,833       3,309  
Hungarian forint
    31,589       28,189  
Total forward contracts notional amount
  $ 112,304     $ 136,059  

The contracts in the foregoing table had contractual maturities of 24 months or less at March 31, 2012 and December 31, 2011, respectively.

At March 31, 2012, we expect to reclassify $1.6 million of gains on derivative instruments from accumulated other comprehensive income to net sales during the next twelve months when the hedged international sales occur, $355,000 of gains on derivative instruments from accumulated OCI to cost of sales when the cost of sales are incurred and $166,000 of gains on derivative instruments from accumulated OCI to operating expenses during the next twelve months when the hedged operating expenses occur. Expected amounts are based on derivative valuations at March 31, 2012. Actual results may vary as a result of changes in the corresponding exchange rate subsequent to this date.

We did not record any ineffectiveness from our hedges during the three month periods ended March 31, 2012 and 2011.

Other Derivatives

Other derivatives not designated as hedging instruments consist primarily of foreign currency forward contracts that we use to hedge our foreign denominated net receivable or net payable positions to protect against the change in value caused by a fluctuation in foreign currency exchange rates. We typically attempt to hedge up to 90% of our outstanding foreign denominated net receivables or net payables and typically limit the duration of these foreign currency forward contracts to approximately 120 days. The gain or loss on the derivatives as well as the offsetting gain or loss on the hedge item attributable to the hedged risk is recognized in current earnings under the line item “net foreign exchange gain (loss)”. As of March 31, 2012 and December 31, 2011, we held foreign currency forward contracts with a notional amount of $52.5 million and $53.8 million, respectively.

The following tables present the fair value of derivative instruments on our Consolidated Balance Sheets and the effect of derivative instruments on our Consolidated Statements of Income.

Fair Values of Derivative Instruments:

 
Asset Derivatives
 
 
March 31, 2012
 
December 31, 2011
 
(In thousands)
(Unaudited)
         
                 
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
Derivatives designated as hedging instruments
               
Foreign exchange contracts - ST forwards
Prepaid expenses and other current assets
  $ 2,558  
Prepaid expenses and other current assets
  $ 2,500  
                     
Foreign exchange contracts - LT forwards
Other long-term assets
    1,247  
Other long-term assets
    190  
Total derivatives designated as hedging instruments
    $ 3,805       $ 2,690  
                     
Derivatives not designated as hedging instruments
                   
                     
Foreign exchange contracts - ST forwards
Prepaid expenses and other current assets
  $ 1,018  
Prepaid expenses and other current assets
  $ 1,607  
Total derivatives not designated as hedging instruments
    $ 1,018       $ 1,607  
                     
Total derivatives
    $ 4,823       $ 4,297  
 
 
 
Liability Derivatives
 
 
March 31, 2012
 
December 31, 2011
 
(In thousands)
(Unaudited)
         
                 
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
Derivatives designated as hedging instruments
               
Foreign exchange contracts - ST forwards
Accrued expenses and other liabilities
  $ (422 )
Accrued expenses and other liabilities
  $ (2,007 )
                     
Foreign exchange contracts - LT forwards
Other long-term liabilities
    (731 )
Other long-term liabilities
    (1,770 )
Total derivatives designated as hedging instruments
    $ (1,153 )     $ (3,777 )
                     
Derivatives not designated as hedging instruments
                   
                     
Foreign exchange contracts - ST forwards
Accrued expenses and other liabilities
  $ (779 )
Accrued expenses and other liabilities
  $ (765 )
Total derivatives not designated as hedging instruments
    $ (779 )     $ (765 )
                     
Total derivatives
    $ (1,932 )     $ (4,542 )

Effect of derivative instruments on our Consolidated Statements of Income for the three month periods ended March 31, 2012 and 2011, respectively:

March 31, 2012
 
(In thousands)
 
(Unaudited)
 
Derivatives in Cash Flow Hedging Relationship
 
Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
 
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
 
Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
 
Foreign exchange contracts - forwards and options
  $ 462  
Net sales
  $ 476  
Net foreign exchange gain (loss)
  $ -  
                             
Foreign exchange contracts - forwards and options
    2,248  
Cost of sales
    (8 )
Net foreign exchange gain (loss)
    -  
                             
Foreign exchange contracts - forwards and options
    1,175  
Operating expenses
    55  
Net foreign exchange gain (loss)
    -  
Total
  $ 3,885       $ 523       $ -  
 
 
March 31, 2011
 
(In thousands)
 
(Unaudited)
 
Derivatives in Cash Flow Hedging Relationship
 
Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
 
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
 
Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
 
Foreign exchange contracts - forwards and options
  $ (396 )
Net sales
  $ (757 )
Net foreign exchange gain (loss)
  $ -  
                             
Foreign exchange contracts - forwards and options
    2,154  
Cost of sales
    344  
Net foreign exchange gain (loss)
    -  
                             
Foreign exchange contracts - forwards and options
    1,088  
Operating expenses
    145  
Net foreign exchange gain (loss)
    -  
Total
  $ 2,846       $ (268 )     $ -  


Derivatives not Designated as Hedging Instruments
Location of Gain (Loss) Recognized in Income
 
Amount of Gain (Loss) Recognized in Income
   
Amount of Gain (Loss) Recognized in Income
 
     
March 31, 2012
   
March 31, 2011
 
     
(Unaudited)
   
(Unaudited)
 
Foreign exchange contracts - forwards
Net foreign exchange gain/(loss)
  $ (1,030 )   $ (993 )
                   
Total
    $ (1,030 )   $ (993 )


Inventories, net consist of the following:

   
March 31, 2012
   
December 31,
 
(In thousands)
 
(Unaudited)
   
2011
 
             
Raw materials
  $ 63,113     $ 56,139  
Work-in-process
    4,860       5,708  
Finished goods
    72,435       70,148  
    $ 140,408     $ 131,995  


Intangibles at March 31, 2012 and December 31, 2011 are as follows:

   
March 31, 2012
       
(In thousands)
 
(Unaudited)
   
December 31, 2011
 
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net Carrying Amount
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net Carrying Amount
 
Capitalized software development costs
  $ 57,004     $ (33,176 )   $ 23,828     $ 53,086     $ (29,606 )   $ 23,480  
Acquired technology
    67,989       (34,633 )     33,356       67,918       (32,210 )     35,708  
Patents
    22,602       (8,351 )     14,251       21,875       (7,992 )     13,883  
Other
    23,886       (14,279 )     9,607       24,614       (13,819 )     10,795  
    $ 171,481     $ (90,439 )   $ 81,042     $ 167,493     $ (83,627 )   $ 83,866  

Software development costs capitalized for the three month periods ended March 31, 2012 and 2011 were $3.9   million for both periods, and related amortization expense was $3.6 million and $3.2 million, respectively. Capitalized software development costs for the three month periods ended March 31, 2012 and 2011 included costs related to stock based compensation of $178,000 and $149,000, respectively.

Amortization of capitalized software development costs is computed on an individual product basis for those products available for market and is recognized based on the product’s estimated economic life, generally three years. Acquired core technology and intangible assets are amortized over their useful lives, which range from three to eight years. Patents are amortized using the straight-line method over their estimated period of benefit, generally 10 to 17 years. Total intangible assets amortization expenses were $7.5 million and $5.2 million for the three months ended March 31, 2012 and March 31, 2011, respectively.


The carrying amount of goodwill as of March 31, 2012, is as follows:

   
Amount
 
   
(In thousands)
 
Balance as of December 31, 2011
  $ 130,747  
Acquisitions
    -  
Divestitures
    -  
Foreign currency translation impact
    228  
Balance as of March 31, 2012 (unaudited)
  $ 130,975  

The excess purchase price over the fair value of assets acquired is recorded as goodwill. As we have one operating segment, we allocate goodwill to one reporting unit for goodwill impairment testing. Goodwill is tested for impairment on an annual basis, and between annual tests if indicators of potential impairment exist, using a fair-value-based approach based on the market capitalization of the reporting unit. Our annual impairment test was performed as of February 29, 2012. No impairment of goodwill was identified during 2012 and 2011. Goodwill is deductible for tax purposes in certain jurisdictions.


We account for income taxes under the asset and liability method. 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.

We account for uncertainty in income taxes recognized in our financial statements using prescribed recognition thresholds and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on our tax returns. We had $20.3 million and $19.5 million of unrecognized tax benefits at March 31, 2012 and December 31, 2011, respectively, all of which would affect our effective income tax rate if recognized. We recorded a gross increase in unrecognized tax benefits of $1.1 million for the three month period ended March 31, 2012, as a result of tax positions taken during the period. We recorded a gross decrease in unrecognized tax benefits of $285,000 for the three month period ended March 31, 2012 related to settlements with taxing authorities. As of March 31, 2012, it is deemed reasonable that we will recognize tax benefits in the amount of $2.2 million in the next twelve months due to the closing of open tax years. The nature of the uncertainty with regard to the amount of the benefit we may recognize is related to deductions taken on returns that have not been examined by the applicable tax authority. Our continuing policy is to recognize interest and penalties related to income tax matters in income tax expense. As of March 31, 2012, we have approximately $874,000 accrued for interest related to uncertain tax positions. The tax years 2005 through 2011 remain open to examination by the major taxing jurisdictions to which we are subject.

Our provision for income taxes reflected an effective tax rate of 22% and 18% for the three month periods ended March 31, 2012 and 2011, respectively. For the three month period ended March 31, 2012, our effective tax rate was lower than the U.S. federal statutory rate of 35% as a result of an enhanced deduction for certain research and development expenses and profits in foreign jurisdictions with reduced income tax rates. For the three month period ended March 31, 2011, our effective tax rate was lower than the U.S. federal statutory rate of 35% as a result of a tax benefit from equity awards that do not ordinarily result in a tax benefit, an enhanced deduction for certain research and development expenses, profits in foreign jurisdictions with reduced income tax rates and the U.S. federal research and development credit.

Our earnings in Hungary are subject to a statutory tax rate of 19%. The difference between this rate and the statutory U.S. rate of 35% resulted in income tax benefits of $2.1 million and $3.4 million for the three month periods ended March 31, 2012 and 2011, respectively. No countries other than Hungary had a significant impact on our effective tax rate. We have not entered into any advanced pricing or other agreements with the Internal Revenue Service with regard to any foreign jurisdictions.

The tax position of our Hungarian operation continues to benefit from assets created by the restructuring of our operations in Hungary. In addition, our research and development activities in Hungary continue to benefit from a tax law in Hungary that provides for an enhanced deduction for qualified research and development expenses. Partial release of the valuation allowance on assets from the restructuring and the enhanced tax deduction for research expenses resulted in income tax benefits of $3.1 million and $4.8 million for the three month periods ended March 31, 2012 and 2011, respectively.


Our comprehensive income is comprised of net income, foreign currency translation, unrealized gains and losses on forward and option contracts and securities classified as available for sale. The accumulated other comprehensive income, net of tax, for the three month periods ended March 31, 2012 and 2011, consists of the following:


   
Other Comprehensive Income
 
   
(Unaudited)
 
(In thousands)
 
Currency translation adjustment
   
Unrealized gain/(loss) on investments
   
Derivative instruments
   
Accumulated other comprehensive income
 
Balance as of December 31, 2011
  $ (1,543 )   $ (664 )   $ (1,293 )   $ (3,500 )
Current-period other comprehensive income
    3,382       1,013       3,073       7,468  
Balance as of March 31, 2012
  $ 1,839     $ 349     $ 1,780     $ 3,968  
 
 
   
Other Comprehensive Income
 
   
(Unaudited)
 
(In thousands)
 
Currency translation adjustment
   
Unrealized gain/(loss) on investments
   
Derivative instruments
   
Accumulated other comprehensive income
 
Balance as of December 31, 2010
  $ (496 )   $ 196     $ (410 )   $ (710 )
Current-period other comprehensive income
    5,275       (424 )     2,369       7,220  
Balance as of March 31, 2011
  $ 4,779     $ (228 )   $ 1,959     $ 6,510  


Stock option plans

Our stockholders approved the 1994 Incentive Stock Option Plan (the “1994 Plan”) on May 9, 1994. At the time of approval, 13,668,750 shares of our common stock were reserved for issuance under this plan. In 1997, an additional 10,631,250 shares of our common stock were reserved for issuance under this plan, and an additional 1,125,000 shares were reserved for issuance under this plan in 2004. The 1994 Plan terminated in May 2005, except with respect to outstanding awards previously granted thereunder.

Awards under the plan were either incentive stock options within the meaning of Section 422 of the Internal Revenue Code or nonqualified options. The right to purchase shares under the options vests over a five to ten-year period, beginning on the date of grant. Vesting of ten year awards may accelerate based on the Company’s previous year’s earnings and revenue growth but shares cannot accelerate to vest over a period of less than five years. Stock options must be exercised within ten years from date of grant. Stock options were issued with an exercise price which was equal to the market price of our common stock at the grant date. We estimate potential forfeitures of stock grants and adjust compensation cost recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods. During the three month period ended March 31, 2012, we did not make any changes in accounting principles or methods of estimates.

Restricted stock plan

Our stockholders approved our 2005 Incentive Plan (the “2005 Plan”) on May 10, 2005. At the time of approval, 4,050,000 shares of our common stock were reserved for issuance under this plan, as well as the number of shares which had been reserved but not issued under the 1994 Plan (our incentive stock option plan which terminated in May 2005), and any shares that returned to the 1994 Plan as a result of termination of options or repurchase of shares issued under such plan. The 2005 Plan, administered by the Compensation Committee of the Board of Directors, provided for granting of incentive awards in the form of restricted stock and RSUs to directors, executive officers and employees of the Company and its subsidiaries. Awards vest over a three, five or ten-year period, beginning on the date of grant. Vesting of ten year awards may accelerate based on the Company’s previous year’s earnings and growth but ten year awards cannot accelerate to vest over a period of less than five years. The 2005 Plan terminated on May 11, 2010, except with respect to outstanding awards previously granted thereunder. There were 3,362,304 shares of common stock that were reserved but not issued under the 1994 Plan and the 2005 Plan as of May 11, 2010.

Our stockholders approved our 2010 Incentive Plan (the “2010 Plan”) on May 11, 2010. At the time of approval, 3,000,000 shares of our common stock were reserved for issuance under this plan, as well as the 3,362,304 shares of common stock that were reserved but not issued under the 1994 Plan and the 2005 Plan as of May 11, 2010, and any shares that are returned to the 1994 Plan and the 2005 Plan as a result of forfeiture or termination of options or RSUs or repurchase of shares issued under these plans. The 2010 Plan, administered by the Compensation Committee of the Board of Directors, provides for granting of incentive awards in the form of restricted stock and RSUs to employees, directors and consultants of the Company and employees and consultants of any parent or subsidiary of the Company. Awards vest over a three, five or ten-year period, beginning on the date of grant. Vesting of ten year awards may accelerate based on the Company’s previous year’s earnings and growth but ten year awards cannot accelerate to vest over a period of less than five years. There were 5,076,349 shares available for grant under the 2010 Plan at March 31, 2012.

We estimate potential forfeitures of RSUs and adjust compensation cost recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods. During the three month period ended March 31, 2012, we did not make any changes in accounting principles or methods of estimates related to the 2010 Plan.

Employee stock purchase plan

Our employee stock purchase plan permits substantially all domestic employees and employees of designated subsidiaries to acquire our common stock at a purchase price of 85% of the lower of the market price at the beginning or the end of the purchase period. The plan has quarterly purchase periods generally beginning on February 1, May 1, August 1 and November 1 of each year. Employees may designate up to 15% of their compensation for the purchase of common stock under this plan. On May 10, 2011, our stockholders approved an additional 3,000,000 shares for issuance under our employee stock purchase plan, and at March 31, 2012, we had 3,417,316 shares of common stock reserved for future issuance under this plan. We issued 262,822 shares under this plan in the three month period ended March 31, 2012. The weighted average fair value of the employees’ purchase rights was $22.70 per share and was estimated using the Black-Scholes model. During the three months ended March 31, 2012, we did not make any changes in accounting principles or methods of estimates with respect to such plan.

Authorized Preferred Stock and Preferred Stock Purchase Rights Plan

We have 5,000,000 authorized shares of preferred stock. On January 21, 2004, our Board of Directors designated 750,000 of these shares as Series A Participating Preferred Stock in conjunction with its adoption of a Preferred Stock Rights Agreement (the “Rights Agreement”) and declaration of a dividend of one preferred share purchase right (a “Right”) for each share of common stock outstanding held as of May 10, 2004 or issued thereafter. Each Right will entitle its holder to purchase one one-thousandth of a share of National Instruments’ Series A Participating Preferred Stock at an exercise price of $200, subject to adjustment, under certain circumstances. The Rights Agreement was not adopted in response to any effort to acquire control of National Instruments.

The Rights only become exercisable in certain limited circumstances following the tenth day after a person or group announces acquisitions of or tender offers for 20% or more of our common stock. In addition, if an acquirer (subject to certain exclusions for certain current stockholders of National Instruments, an “Acquiring Person”) obtains 20% or more of our common stock, then each Right (other than the Rights owned by an Acquiring Person or its affiliates) will entitle the holder to purchase, for the exercise price, shares of our common stock having a value equal to two times the exercise price. Under certain circumstances, our Board of Directors may redeem the Rights, in whole, but not in part, at a purchase price of $0.01 per Right. The Rights have no voting privileges and are attached to and automatically traded with our common stock until the occurrence of specified trigger events. The Rights will expire on the earlier of May 10, 2014 or the exchange or redemption of the Rights.

There were not any shares of preferred stock issued and outstanding at March 31, 2012.


We determine operating segments using the management approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of our operating segments. It also requires disclosures about products and services, geographic areas and major customers.

We have defined our operating segment based on geographic regions. We sell our products in three geographic regions. Our sales to these regions share similar economic characteristics, similar product mix, similar customers, and similar distribution methods. Accordingly, we have elected to aggregate these three geographic regions into a single operating segment. Revenue from the sale of our products which are similar in nature and software maintenance are reflected as total net sales in our Consolidated Statements of Income.

Total net sales, operating income, interest income and long-lived assets, classified by the major geographic areas in which we operate, are as follows:

   
Three Months Ended
 
(In thousands)
 
March 31,
 
   
(Unaudited)
 
   
2012
   
2011
 
Net sales:
           
Americas:
  $ 107,292     $ 97,364  
Europe:
    75,707       71,056  
Asia Pacific:
    78,134       69,430  
    $ 261,133     $ 237,850  
                 
 
   
Three Months Ended
 
(In thousands)
 
March 31,
 
   
(Unaudited)
 
      2012       2011  
Operating income:
               
Americas
  $ 12,942     $ 18,587  
Europe
    34,637       34,876  
Asia Pacific
    30,780       25,917  
Unallocated:
               
Research and development expenses
    (54,015 )     (42,868 )
    $ 24,344     $ 36,512  
                 
 
   
Three Months Ended
 
(In thousands)
 
March 31,
 
   
(Unaudited)
 
      2012       2011  
Interest income:
               
Americas
  $ 91     $ 149  
Europe
    94       158  
Asia Pacific
    45       34  
    $ 230     $ 341  
                 
 
   
March 31,
   
December 31,
 
(In thousands)
    2012       2011  
   
(Unaudited)
         
Long-lived assets:
               
Americas
  $ 111,132     $ 110,153  
Europe
    47,050       47,000  
Asia Pacific
    34,762       32,995  
    $ 192,944     $ 190,148  

Total sales outside the U.S. for the three month periods ended March 31, 2012 and 2011 were $163.4 million and $148.9 million, respectively.


We offer a one-year limited warranty on most hardware products, with a two or three-year warranty on a subset of our hardware products, which is included in the sales price of many of our products. Provision is made for estimated future warranty costs at the time of the sale for the estimated costs that may be incurred under the basic limited warranty. Our estimate is based on historical experience and product sales during the period.

The warranty reserve for the three month periods ended March 31, 2012 and 2011, respectively, was as follows:

   
Three months ended March 31,
 
   
(In thousands)
 
   
(Unaudited)
 
   
2012
   
2011
 
Balance at the beginning of the period
  $ 1,271     $ 921  
Accruals for warranties issued during the period
    570       818  
Settlements made (in cash or in kind) during the period
    (543 )     (818 )