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: March 31, 1998 or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to ________________
Commission file number: 0-25426
NATIONAL INSTRUMENTS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-1871327
- ---------------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6504 Bridge Point Parkway
Austin, Texas 78730
- ---------------------------------------- -----------------------------------
(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 May 12, 1998
Common Stock - $0.01 par value 32,818,289
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NATIONAL INSTRUMENTS CORPORATION
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets
March 31, 1998 (unaudited) and December 31, 1997..............3
Consolidated Statements of Income (unaudited)
three months ended March 31, 1998 and 1997....................4
Consolidated Statements of Cash Flows (unaudited)
three months ended March 31, 1998 and 1997................... 5
Notes to Consolidated Financial Statements....................6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................8
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K................................15
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, December 31,
1998 1997
-------------- -------------
Assets (unaudited)
Current assets:
Cash and cash equivalents.................. $ 34,358 $ 31,943
Short-term investments..................... 50,991 51,067
Accounts receivable, net................... 40,079 37,411
Inventories................................ 15,497 15,505
Prepaid expenses and other current assets.. 5,431 5,387
Deferred income tax, net................... 7,892 7,900
-------------- -------------
Total current assets.................... 154,248 149,213
Property and equipment, net................... 54,479 46,805
Intangibles and other assets.................. 8,049 8,472
============== =============
Total assets............................ $ 216,776 $ 204,490
============== =============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt.......... $ 848 $ 851
Accounts payable........................... 16,344 16,946
Accrued compensation....................... 8,062 8,219
Accrued expenses and other liabilities..... 3,212 2,455
Income taxes payable..................... 9,251 4,871
Other taxes payable...................... 2,769 3,729
-------------- -------------
Total current liabilities............... 40,486 37,071
Long-term debt, net of current portion........ 4,992 5,151
Deferred income taxes......................... 514 514
-------------- -------------
Total liabilities....................... 45,992 42,736
-------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock: par value $.01; 60,000,000
shares authorized 32,756,104 and 32,656,473
shares issued and
outstanding, respectively................ 327 326
Additional paid-in capital.................... 47,524 47,160
Retained earnings............................. 125,046 116,215
Accumulated other comprehensive loss.......... (2,113) (1,947)
-------------- -------------
Total stockholders' equity.............. 170,784 161,754
============== =============
Total liabilities and stockholders' equity $ 216,776 $ 204,490
============== =============
The accompanying notes are an integral part of these financial statements.
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NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
--------------------------
1998 1997
------------ ------------
Net sales.......................................... $ 65,353 $ 54,571
Cost of sales...................................... 15,569 12,293
------------ ------------
Gross profit.................................... 49,784 42,278
------------ ------------
Operating expenses:
Sales and marketing............................. 24,530 19,962
Research and development........................ 7,750 6,477
General and administrative...................... 4,720 4,270
------------ ------------
Total operating expenses..................... 37,000 30,709
------------ ------------
Operating income............................. 12,784 11,569
Other income (expense):
Interest income, net............................ 670 698
Net foreign exchange loss....................... (274) (964)
------------- -----------
Income before income taxes................... 13,180 11,303
Provision for income taxes......................... 4,349 3,735
============ ============
Net income................................... $ 8,831 $ 7,568
============ ============
Basic earnings per share........................... $ 0.27 $ 0.23
============ ============
Weighted average shares outstanding - basic........ 32,668 32,475
============ ============
Diluted earnings per share......................... $ 0.26 $ 0.23
============ ============
Weighted average shares outstanding - diluted...... 34,100 33,450
============ ============
The accompanying notes are an integral part of these financial statements.
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NATIONAL INSTRUMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31,
-------------------------
1998 1997
----------- -----------
Cash flow from operating activities:
Net income...................................... $ 8,831 $ 7,568
Adjustments to reconcile net income to cash
provided by operating activities
Charges to income not requiring cash outlays:
Depreciation and amortization.............. 2,278 2,147
Changes in operating assets and liabilities:
Increase in accounts receivable............ (2,434) (1,582)
Increase in inventory...................... (15) (1)
Decrease in prepaid expenses and
other assets.......................... 658 83
Increase in current liabilities............ 3,650 1,111
----------- -----------
Net cash provided by operating activities.... 12,968 9,326
----------- -----------
Cash flow from investing activities:
Capital expenditures............................ (9,558) (2,837)
Additions to intangibles ....................... (1,066) (788)
Purchases of short-term investments............. (7,013) (12,508)
Sales of short-term investments................. 7,089 10,893
----------- -----------
Net cash used in investing activities........ (10,548) (5,240)
----------- -----------
Cash flow from financing activities:
Repayments of debt.............................. (208) (3,990)
Net proceeds from issuance of common stock...... 308 156
----------- -----------
Net cash used in financing activities........ 100 (3,834)
----------- -----------
Effect of translation rate changes on cash......... (105) (296)
----------- -----------
Net increase (decrease) in cash and cash equivalents 2,415 (44)
Cash and cash equivalents at beginning of period... 31,943 30,211
----------- -----------
Cash and cash equivalents at end of period......... $ 34,358 $ 30,167
=========== ===========
The accompanying notes are an integral part of these financial statements.
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NATIONAL INSTRUMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Basis of Presentation
The accompanying unaudited financial statements should be read in
conjunction with the consolidated financial statements and notes thereto for the
year ended December 31, 1997, 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 March 31, 1998 and December 31, 1997, and the
results of operations and cash flows for the three-month periods ended March 31,
1998 and 1997. Operating results for the three-month period ended March 31, 1998
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
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 the basic EPS and
diluted EPS for the three-month periods ended March 31, 1998 and 1997
respectively are as follows (in thousands):
(unaudited)
March 31,
1998 1997
---------- ----------
Weighted average shares outstanding-basic.............. 32,668 32,475
Plus: Common share equivalents
Stock options...................................... 1,432 975
========== ==========
Weighted average shares outstanding-diluted............ 34,100 33,450
========== ==========
At March 31, 1998 and March 31, 1997, options to acquire 129,000 and zero
shares, respectively, of common stock were not included in the computations of
diluted earnings per share because the effect of including the options would
have been anti-dilutive.
NOTE 3 - Inventories
Inventories consist of the following (in thousands):
March 31, December 31,
1998 1997
-------------- -------------
(unaudited)
Raw materials............................... $ 6,703 $ 6,985
Work-in-process............................. 1,264 1,315
Finished goods.............................. 7,530 7,205
============== =============
$ 15,497 $ 15,505
============== =============
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NOTE 4 - Comprehensive Income
In June 1997, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income." The new standard, which is
effective for financial statements issued for periods ending after December 15,
1997, established standards for reporting, in addition to net income,
comprehensive income and its components including, as applicable, foreign
currency items, minimum pension liability adjustments and unrealized gains and
losses on certain investments in debt and equity services. Upon adoption the
Company is also required to reclassify financial statements for earlier periods
provided for comparative purposes. The Company adopted this standard in the
first quarter of 1998. Total comprehensive loss at March 31, 1998 and 1997 is
$8.7 million and $6.7 million, respectively.
Reconciliation of accumulated other comprehensive loss (in thousands):
Cumulative Unrealized Accumulated
Foreign Currency Gain (Loss) Other
Translation on Comprehensive
Adjustment Securities Loss
------------------- ------------- ----------------
Balance at December 31,
1997...................... $ (2,052) $ 105 $ (1,947)
Current-period change..... (109) (57) (166)
=================== ============= ================
Balance at March 31, 1998. $ (2,161) $ 48 $ (2,113)
=================== ============= ================
NOTE 5 - Recently Adopted Accounting Requirements
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which the Company adopted in the first
quarter of 1998. The statement establishes standards for reporting information
about operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Under SFAS No. 131,
operating segments are to be determined consistent with the way that management
organizes and evaluates financial information internally for making operating
decisions and assessing performance. The adoption of this new accounting
standard is not expected to have a material impact on the consolidated balance
sheet or statement of income.
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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. 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
March 31,
---------------------------
1998 1997
------------ ------------
Net sales:
North America.................................. 57.0% 56.4%
Europe......................................... 29.1 27.5
Asia Pacific................................... 13.9 16.1
------------ ------------
Consolidated net sales......................... 100.0 100.0
Cost of sales..................................... 23.8 22.5
------------ ------------
Gross profit................................... 76.2 77.5
Operating expenses:
Sales and marketing............................ 37.5 36.6
Research and development....................... 11.9 11.9
General and administrative..................... 7.2 7.8
------------ ------------
Total operating expenses....................... 56.6 56.3
------------ ------------
Operating income............................ 19.6 21.2
Other income (expense):
Interest income, net........................... 1.0 1.3
Net foreign exchange loss...................... (.4) (1.8)
------------ ------------
Income before income taxes.................. 20.2 20.7
Provision for income taxes........................ 6.7 6.8
============ ============
Net income..................................... 13.5% 13.9%
============ ============
Net Sales. Consolidated net sales for the first quarter of 1998 increased
by $10.8 million or 20% over the comparable prior year quarter. The increase in
sales is primarily attributable to the introduction of new and upgraded products
and increased sales and marketing efforts. North American sales in the first
quarter of 1998 increased by 21% over the first quarter of 1997.
International sales as a percentage of consolidated sales for the quarter
remained consistent over the comparable 1997 period. Compared to 1997, the
Company's European sales increased by 27% to $19.1 million for the quarter ended
March 31, 1998. Sales in Asia Pacific increased by 3% to $9.1 million in the
quarter ended March 31, 1998 compared to 1997. The low sales growth rate in Asia
Pacific was impacted by the economic difficulties occurring in the region. The
Company expects sales outside of North America to continue to represent a
significant portion of its revenue.
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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.
Sales made by the Company's direct sales offices in Europe and Asia Pacific are
denominated in local currencies, and accordingly, the US dollar equivalent of
these sales is affected by changes in the value of the US dollar. Between the
first quarter of 1997 and the first quarter of 1998 the weighted average value
of the US dollar increased by 8.7%, causing an equivalent decrease in the US
dollar value of the Company's foreign currency sales and expenses. This weighted
average is calculated as the percentage change in the value of the currency
relative to the US dollar, multiplied by the proportion of international sales
recorded in the particular currency. If the weighted average value of the US
dollar in the first quarter of 1998 had been the same as that in the first
quarter of 1997, the Company's sales for the first quarter of 1998 would have
been $67.6 million, a 24% increase. This effect is 3.4% of consolidated net
sales in the aggregate. European sales for the first quarter of 1998 would have
been $20.2 million, a 35% increase in first quarter 1998 sales over first
quarter 1997. Asia Pacific sales for the first quarter of 1998 would have been
$10.1 million, a 15% increase in first quarter 1998 sales over first quarter
1997 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 reducing operating expenses by $647,000 for the quarter ended March 31, 1998.
If the current trend in the value of the US dollar continues throughout 1998, it
will continue to have the effect of lowering the US dollar equivalent of
international sales and operating expenses.
Gross Profit. As a percentage of net sales, gross profit decreased to 76.2%
for the first quarter of 1998 from 77.5% for the first quarter of 1997. The
lower margin for the first quarter ending March 31, 1998 compared to prior year
periods is partially attributable to the timing of the LabVIEW 5.0 release which
started shipping towards the end of the quarter. Also, LabWindows/CVI, which was
announced on December 1, 1997, will not ship until the middle of the second
quarter 1998. Software margins have historically been higher than hardware
margins. Therefore, any change in sales mix resulting in lower software sales
produces a lower consolidated gross margin.
The marketplace for the Company's products dictates that many of the
Company's products be shipped 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.
Sales and Marketing. Sales and marketing expenses for the first quarter of
1998 increased to $24.5 million, a 23% increase, as compared to the first
quarter of 1997. As a percentage of net sales, sales and marketing expenses were
37.5% and 36.6% for the three months ended March 31, 1998 and 1997,
respectively. The increase as a percentage of revenue is partially attributable
to the worldwide promotion and release of LabVIEW 5.0 in the first quarter of
1998 which increased sales and marketing expenses by $500,000. The increase in
these expenses in absolute dollar amounts is primarily attributable to increased
personnel, sales and marketing seminars, tradeshows, and other marketing
activities. 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 new recruiting, initial marketing and advertising campaign costs associated
with major new product releases, the opening of new sales offices and the timing
of domestic and international conferences and trade shows.
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Research and Development. Research and development expenses increased to
$7.7 million for the quarter ended March 31, 1998, a 20% increase, as compared
to $6.5 million for the three months ended March 31, 1997. As a percentage of
net sales, research and development expenses remained at 11.9% for the first
quarters ended March 31, 1998 and 1997, respectively. The increase in research
and development costs is mainly due to increases in personnel costs from
increased hiring. Research and development personnel increased from 332 at March
31, 1997 to 428 at March 31, 1998. The Company believes that a significant,
on-going investment in research and development is required to remain
competitive.
The Company capitalizes software development costs in accordance with the
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. Amortization expense totaled
$414,000 and $376,000 for the quarters ended March 31, 1998 and 1997,
respectively. Software development costs capitalized were $787,000 and $318,000
for the quarter ended March 31, 1998 and 1997, respectively. The amounts
capitalized in the first quarter of 1998 include LabVIEW 5.0, LabWindows 4.1 and
NI DAQ 6.0.
General and Administrative. General and administrative expenses for the
first quarter ended March 31, 1998 increased 10% to $4.7 million from $4.3
million for the comparable prior year period. As a percentage of net sales,
general and administrative expenses decreased to 7.2% for the quarter ended
March 31, 1998 from 7.8% for the first quarter of 1997. The decrease in general
and administrative expenses as a percent of sales is due to operational
efficiencies achieved as a result of increased systems integration during the
past two years. The Company's general and administrative expense increased in
absolute dollars mainly due to additional personnel. The Company expects that
general and administrative expense in future periods will increase in absolute
amounts and will fluctuate as a percentage of net sales.
Interest Income, Net. Net interest income in the first quarter of 1998
decreased to $670,000 from $698,000 in the first quarter of 1997. Net interest
income has represented approximately one percent or less of net sales and has
fluctuated as a result of investment balances, bank borrowings and interest
terms thereon.
Net Foreign Exchange Loss. Net foreign exchange losses recognized in the
first quarter of 1998 were $274,000 compared to $964,000 recognized in the first
quarter of 1997. Foreign exchange gains and losses are attributable to movements
between the US dollar and the local currencies in countries in which the
Company's sales subsidiaries are located. The decrease in net foreign exchange
losses recognized in the first quarter of 1998 is mainly due to the movement of
the Japanese yen which did not result in as extensive losses in 1998 as it did
in the first quarter of 1997. The Company recognizes the local currency as the
functional currency of its international subsidiaries. To minimize this foreign
currency risk the Company engages in hedging activities by utilizing foreign
exchange forward and option contracts.
The Company utilizes foreign currency forward exchange contracts against 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 forward contracts to 90 days and does not invest in
contracts for speculative purposes. The Company's hedging strategy has reduced
the foreign exchange losses recorded by $190,000 during the three-month period
ended March 31, 1998.
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In December 1997, the Company expanded its foreign currency hedging program
to also include foreign currency option contracts in order to reduce its
exposure of forecasted net foreign currency cash flows. The first quarter 1998
option contracts were not exercised at expiration. The Company's policy allows
for the purchase of 5% "out-of-the-money" foreign currency option contracts for
up to 80% of its risk and limits the duration of these contracts to 12 months.
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. If the US dollar continues to strengthen, the
Company could experience significant foreign exchange losses due to the foreign
exchange risks that are not addressed by the Company's hedging strategy. The
Company does not currently invest in contracts for speculative purposes.
Provision for Income Taxes. The provision for income taxes reflects an
effective tax rate of 33% for both the three months ended March 31, 1998 and
1997. As of March 31, 1998, ten of the Company's subsidiaries had available, for
income tax purposes, foreign net operating loss carryforwards of approximately
$1.3 million, of which $692,000 expire between 2000 and 2007. The remaining
$622,000 of loss carryforwards may be carried forward indefinitely to offset
future taxable income in the related tax jurisdictions.
Liquidity and Capital Resources
The Company is currently financing its operations and capital resources
through cash flow from operations. Historically, the Company also financed its
capital expenditures, such as the new manufacturing facility constructed in
1995, through borrowings from financial institutions. At March 31, 1998, the
Company had working capital of approximately $113.8 million compared to $112.1
million at December 31, 1997.
Accounts receivable increased to $40.1 million at March 31, 1998 from $37.4
million at December 31, 1997. Days sales outstanding decreased to 54 at March
31, 1998 compared to 57 at December 31, 1997. Inventory levels remained the same
with consolidated inventory balances of $15.5 million at March 31, 1998 and
December 31, 1997. Inventory turns of 4.0 represent an improvement over turns of
3.9 at December 31, 1997.
Cash used in the first three months of 1998 for the purchase of the
property and equipment totaled $9.6 million and for the capitalization of
software development costs totaled $787,000. The Company completed construction
of an office building next to its manufacturing facility in May 1998. The
Company has incurred approximately $21 million in construction costs as of March
31, 1998 and estimates approximately $11 million will be incurred during the
second quarter of 1998 resulting in a total cost of $32 million for the new
building including furniture, fixtures and equipment. These costs will be paid
out of the Company's existing working capital and future cash flows. The Company
anticipates the new building will result in additional quarterly operating
expenses in future quarters of $1.0 million.
The Company currently expects to fund expenditures for capital requirements
as well as liquidity needs created by changes in working capital from a
combination of available cash and short-term investment balances, internally
generated funds, and financing arrangements with its current financial
institutions. The Company has a $16.5 million credit agreement with NationsBank
of Texas, N.A. which consists of (i) an $8.0 million revolving line of credit,
and (ii) an $8.5 million manufacturing facility loan. As of March 31, 1998, the
Company had no outstanding balance on the revolving line of credit and a balance
of $5.8 million on the manufacturing facility loan. The revolving line of credit
expires on June 30, 1998. The Company's credit agreements contain certain
financial covenants and restrictions as to various matters, including the bank's
prior approval of significant mergers and acquisitions. Borrowings under the
line of credit are collateralized by substantially all of the Company's assets.
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The Company believes that its cash flow from operations, if any, existing
cash balances, short-term investments and available credit under the Company's
existing credit facilities, will be sufficient to meet its cash requirements for
at least the next twelve months.
Issues and Outlook
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 like the recent devaluation in
certain Asian currencies; 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 Asian currencies continue to weaken against the US dollar, and if the local
sales prices cannot be raised, the Company will experience a deterioration of
its Asian profit margin. In addition, the recent economic turmoil in Asia could
have an adverse effect on the Company's performance as we saw in the first
quarter of 1998 where sales growth in Asia dropped to 3%. This effect could
result in an adverse reaction in Europe and North America.
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 serves a number of industries such as
semiconductors, 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, 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's results of operations in the third quarter of
1998 may be adversely affected by lower sales levels in Europe which typically
occur during the summer months. 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
increased sales and marketing activities and increased intern personnel
expenses. In addition, the second and third quarters of 1998 will be impacted by
the new building, which will result in additional quarterly operating expenses
of $1.0 million.
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
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. 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.
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Operation in Intensely Competitive Markets. The markets in which the
Company operates are characterized by intense competition from numerous
competitors, and the Company expects to face further competition from new market
entrants in the future. A key competitor is Hewlett-Packard Company ("HP"),
which has been the leading supplier of traditional instrumentation solutions for
decades. Although HP offers its own line of proprietary instrument controllers,
HP 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. HP is aggressively advertising and
marketing products that are competitive with the Company's products. Because of
HP's strong position in the instrumentation business, changes in its marketing
strategy or product offerings could have a material adverse effect on the
Company 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. It is possible that one
or more of the Company's three regional information systems could experience a
complete or partial shutdown. If this shutdown occurred near the end of a
quarter it could impact the Company's product shipments and revenues as product
distribution is heavily dependent on the integrated management information
systems in each region. Accordingly, operating results in that quarter would be
adversely impacted due to the shipments which would not occur until the
following period.
Impact of Year 2000. Many computer systems experience problems handling
dates beyond the year 1999. Therefore, some computer hardware and software will
need to be modified prior to the year 2000 in order to remain functional.
Based on recent announcements by software and tool operating systems
vendors of potential Year 2000 issues, the Company is updating its recent
assessment of Year 2000 compliance in its current product versions. No
assurances can be made that problems will not arise such as customer problems
with other software programs, operating systems or hardware that disrupt their
use of the Company's products. There can be no assurances that such disruption
would not negatively impact costs and revenues in future years.
The Company has been assured by Oracle Corporation that all of the
Company's Oracle-based management information systems, which include the
manufacturing, distribution, finance, and order entry systems, are Year 2000
compliant with the exception of the management information system in Japan. The
Company expects to upgrade the Japanese system during 1998. The Company plans to
begin internal Year 2000 testing of the major management information systems
during 1998 as well as assess any additional Year 2000 issues worldwide. The
Company is aware that its current customer marketing database and customer
support software are not Year 2000 compliant. However, the Company expects to
upgrade both systems prior to year 2000 as part of on-going system upgrades.
The Company presently believes that with modifications to existing software
and conversions to new software, the Year 2000 issue can be mitigated. It is not
anticipated that there will be a significant increase in costs as much of the
Year 2000 activities will be a continuation of the on-going process to improve
all of the Company's systems. The Company plans to complete the Year 2000
project by mid 1999. However, if such modifications and conversions are not
made, or are not completed timely, the Year 2000 issue could have a material
impact on the operations of the Company. Specific factors that might cause a
material impact include, but are not limited to, availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, failure by third parties to timely convert their systems, and
similar uncertainties.
Page 13
<PAGE>
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.
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' efforts to protect its proprietary rights, unauthorized
parties may have in the past infringed or violated certain of the Company'
intellectual property rights. As is typical in the industry, the Company from
time to time may be notified that it is infringing certain patent or
intellectual property rights of others. While no actions are currently pending
by or against the Company, there can be no assurance that litigation will not be
initiated in the future which may cause significant litigation expense,
liability and a diversion of management' attention which may have a material
adverse affect on results of operations.
Dependence on Key Management and Technical Personnel. The Company' success
depends to a significant degree upon the continued contributions of its key
management, marketing, research and development and operational personnel. The
Company has no agreements providing for the employment of any of its key
employees for any fixed term and the Company' 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' 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, product development and operational personnel with experience in
managing large and rapidly changing companies as well as training, motivating
and supervising the employees. In addition, the recruiting environment for
engineering and other technical professionals is very competitive. Competition
for qualified software engineers is particularly intense. The Company also
recruits and employs foreign nationals to achieve its hiring goals primarily for
entry-level 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 if government requirements for temporary and permanent residence become
increasingly restrictive. 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.
Page 14
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
11.1 Computation of Earnings Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1998.
Page 15
<PAGE>
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: May 15, 1998
Page 16
<PAGE>
NATIONAL INSTRUMENTS CORPORATION
INDEX TO EXHIBITS
Exhibit No. Description Page
11.1 Statement Regarding Computation 19
of Earnings per Share
27.1 Financial Data Schedule 20
Page 17
<PAGE>
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE
(In thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
----------------------
1998 1997
---------- ----------
Net Income.......................................... $ 8,831 $ 7,568
Basic earnings per share............................ $ 0.27 $ 0.23
Weighted average shares outstanding-basic........... 32,668 32,475
Diluted earnings per share.......................... $ 0.26 0.23
Weighted average shares outstanding-diluted......... 34,100 33,450
Calculation of Weighted Average Shares:
Weighted Average Common Stock Outstanding-basic.. 32,668 32,475
Weighted Average Common Stock Options,
utilizing the treasury stock method............ 1,432 975
---------- ----------
Weighted average shares outstanding-diluted 34,100 33,450
========== ==========
Page 18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(This schedule contains summary financial information extracted from the
Consolidated Balance Sheet and Statements of Income filed as part of the March
31, 1998 Form 10-Q and is qualified in its entirety by reference to such report)
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 34358
<SECURITIES> 50991
<RECEIVABLES> 40079
<ALLOWANCES> 0
<INVENTORY> 15497
<CURRENT-ASSETS> 154248
<PP&E> 54479
<DEPRECIATION> 0
<TOTAL-ASSETS> 216776
<CURRENT-LIABILITIES> 40486
<BONDS> 0
0
0
<COMMON> 327
<OTHER-SE> 170457
<TOTAL-LIABILITY-AND-EQUITY> 216776
<SALES> 65353
<TOTAL-REVENUES> 65353
<CGS> 15569
<TOTAL-COSTS> 15569
<OTHER-EXPENSES> 37000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 13180
<INCOME-TAX> 4349
<INCOME-CONTINUING> 8831
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8831
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.26
</TABLE>
