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4-Traders Homepage  >  Shares  >  Nasdaq  >  National Instruments Corp    NATI

Delayed Quote. Delayed  - 07/31 04:00:00 pm
28.96 USD   +4.32%
07/28 NATIONAL INSTRU : Austin's National Instruments tops Wall Street pro..
07/28 NATIONAL INSTRU : posts 2Q profit
07/28 NATIONAL INSTRU : NI Declares Quarterly Dividend
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NATIONAL INSTRUMENTS : DE/ Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

07/31/2015 | 11:51am US/Eastern

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Any statements contained herein regarding our future financial performance, operations or other matters (including, without limitation, statements to the effect that we "believe," "expect," "plan," "may," "will," "project," "continue," or "estimate" or other variations thereof or comparable terminology or the negative thereof) should be considered forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of important factors, including those set forth under the heading "Risk Factors" beginning on page 34, and in the discussion below. Readers are also encouraged to refer to the documents regularly filed by us with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2014, for further discussion of our business and the risks attendant thereto.



Overview


National Instruments Corporation ("we", "us" or "our") designs, manufactures and sells systems to engineers and scientists that accelerate productivity, innovation and discovery. Our graphical system design approach to engineering provides an integrated software and hardware platform that speeds the development of systems needing measurement and control. We believe that our long-term vision and focus on technology supports the success of our customers, employees, suppliers and stockholders. We sell to a large number of customers in a wide variety of industries. We have been profitable in every year since 1990.

The key strategies that we focus on in running our business are the following:

Expanding our broad customer base

We strive to increase our already broad customer base and to grow our large order business by serving a large market on many computer platforms, through a global marketing and distribution network. We also seek to acquire new technologies and expertise from time to time to open new opportunities for our existing product portfolio.

Maintaining a high level of customer satisfaction

To maintain a high level of customer satisfaction we strive to offer innovative, modular and integrated products through a global sales and support network. We strive to maintain a high degree of backwards compatibility across different platforms to preserve the customer's investment in our products. In this time of intense global competition, we believe that it is crucial that we continue to offer products with high quality and reliability, and that our products provide cost-effective solutions for our customers.

Leveraging external and internal technology

Our product strategy is to provide superior products by leveraging generally available technology, supporting open architectures on multiple platforms and leveraging our core technologies such as custom application specific integrated circuits ("ASICs") across multiple products.

We sell into test and measurement ("T&M") and industrial/embedded applications in a broad range of industries and are subject to the economic and industry forces that drive those markets. It has been our experience that the performance of these industries and our performance are impacted by general trends in industrial production for the global economy and by the specific performance of certain vertical markets that are intensive consumers of measurement technologies. Examples of these markets are semiconductor capital equipment, telecom and mobile devices, consumer electronics, defense, aerospace and automotive.

Leveraging a worldwide sales, distribution and manufacturing network

We distribute and sell our software and hardware products primarily through a direct sales organization. We also use independent distributors, OEMs, VARs, system integrators, and consultants to market and sell our products. We have sales offices in the U.S. and sales offices and distributors in key international markets. Sales outside of the Americas accounted for approximately 58% and 62% of our net sales during the three month periods ended June 30, 2015 and 2014, respectively, and approximately 59% and 61% of our net sales during the six month periods ended June 30, 2015 and 2014, respectively. The vast majority of our foreign sales are denominated in the customers' local currency, which exposes us to the effects of changes in foreign currency exchange rates. We expect that a significant portion of our total net sales will continue to be derived from international sales. (See "Note 12 - Segment information" of Notes to Consolidated Financial Statements for details concerning the geographic breakdown of our net sales).




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We manufacture a substantial majority of our product volume at our facilities in Debrecen, Hungary and Penang, Malaysia. Additional production, primarily of RF products and of low volume, complex or newly introduced products is done in Austin, Texas, however, we are transitioning all of our Austin based manufacturing activities to our manufacturing facilities in Hungary and Malaysia by the end of the third quarter. As of June 30, 2015, we had successfully transferred approximately 75% of our Austin based production into Hungary and Malaysia. In 2015, our site in Malaysia is expected to produce approximately 30% of our global production. This production is being generated by transferring existing products from our Austin production facility in support of anticipated growth in our business and introducing new products directly into our Malaysian facility. Our site in Hungary is expected to produce approximately 65% of our global production in 2015. Our product manufacturing operations can be divided into four areas: electronic circuit card and module assembly; chassis and cable assembly; technical manuals and product support documentation; and software duplication. Most of our electronic circuit card assemblies, modules and chassis are manufactured in house, although subcontractors are used from time to time. The majority of our electronic cable assemblies are produced by subcontractors; however, we do manufacture some on an exception basis. Our software duplication, technical manuals and product support documentation is primarily produced by subcontractors.

Delivering high quality, reliable products

We believe that our long-term growth and success depend on delivering high quality software and hardware products on a timely basis. Accordingly, we focus significant efforts on research and development. We focus our research and development efforts on enhancing existing products and developing new products that incorporate appropriate features and functionality to be competitive with respect to technology, price and performance. Our success also depends on our ability to obtain and maintain patents and other proprietary rights related to technologies used in our products. We have engaged in litigation and where necessary, will likely engage in future litigation to protect our intellectual property rights. In monitoring and policing our intellectual property rights, we have been and may be required to spend significant resources.

Our operating results fluctuate from period to period due to changes in global economic conditions and a number of other factors. As a result, we believe our historical results of operations should not be relied upon as indications of future performance. There can be no assurance that our net sales will grow or that we will remain profitable in future periods.



Current business outlook


Many of the industries we serve have historically been cyclical and have experienced periodic downturns. In assessing our business, we consider the trends in the Global Purchasing Managers' Index ("PMI"), global industrial production as well as industry reports on the specific vertical industries that we target. Historically, our business cycles have generally followed the expansion and contraction cycles in the global industrial economy as measured by the Global PMI. In the three month period ended June 30, 2015, the average of the Global PMI was 51.1, the lowest quarterly average since the first quarter of 2013. The average of the new order element of the Global PMI was 51.3 for the quarter ended June 30, 2015. During the three month period ended June 30, 2015, the PMI in the U.S. and the Eurozone maintained readings above 50. We are unable to predict whether the industrial economy, as measured by the PMI, will remain above the neutral reading of 50, strengthen or contract during the remainder of 2015.

During the three month periods ended June 30, 2015 and 2014, we received $10 million and $27 million in new orders from our largest customer, respectively, and in the six month periods ended June 30, 2015 and 2014, we received $13 million and $39 million in new orders from this customer, respectively. During the three month periods ended June 30, 2015 and 2014, we recognized net sales of $9 million and $20 million from these orders, respectively, and in the six month periods ended June 30, 2015 and 2014, we recognized net sales of $14 million and $27 million from these orders, respectively. The timing and amount of orders from this customer are unpredictable and therefore can cause unusual variations in the results and trends of our business.

During the second quarter of 2015, we continued to experience challenges in our business as a result of the continued strength of the U.S. dollar and increasing weakness in the personal computer ("PC") market. In the second quarter of 2015, we also saw a 1.7% year over year decrease from orders under $20,000, a 4.6% year over year decrease from orders between $20,000 and $100,000, and a 16% year over year decrease from orders over $100,000. Excluding our largest customer, orders over $100,000 were up 9% year over year.




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During the second quarter of 2015, we continued to experience broad volatility in the foreign exchange markets and a strong U.S. dollar in many of the currency markets where we have exposure. As of the date of this filing, the U.S. dollar index, as tracked by the St. Louis Federal Reserve, remains near a ten year high. The change in exchange rates in the second quarter of 2015 compared to the second quarter of 2014 had the effect of decreasing our net sales by $19 million or 6%, decreasing Americas sales by $3.9 million or 3.3%, decreasing European sales by $12 million or 14%, decreasing East Asia sales by $2.1 million or 2.6%, and decreasing sales in Emerging Markets by $1.5 million or 5.2%. For the third quarter of 2015, we expect that the strong U.S. dollar will continue to have a negative impact on the U.S. dollar equivalent of our foreign currency denominated sales. The Euro represents our most significant exposure and where we expect to see the greatest negative impact from the strength of the U.S. dollar during the third quarter of 2015 compared to third quarter of 2014. We have hedging programs in place to help mitigate the risks associated with these types of foreign currency risks. However, there can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in the foreign currency markets in which we do business. (See "Note 5 - Derivative instruments and hedging activities" of Notes to Consolidated Financial Statements for additional details concerning hedging programs.)



Results of Operations



The following table sets forth, for the periods indicated, the percentage of net
sales represented by certain items reflected in our Consolidated Statements of
Income:





                                Three Months Ended June 30,       Six Months Ended June 30,
                                        (Unaudited)                      (Unaudited)
                                  2015              2014             2015            2014
Net sales:
 Americas                             42.0  %           38.4  %         41.4  %         39.4  %
 Europe                               27.6              26.7            27.8            28.0
 East Asia                            23.2              25.8            22.8            23.8
 Emerging Markets                      7.2               9.1             8.0             8.8
Total net sales                      100.0             100.0           100.0           100.0
Cost of sales                         25.4              26.2            25.9            25.6
Gross profit                          74.6              73.8            74.1            74.4
Operating expenses:
 Sales and marketing                  37.1              38.2            37.4            38.7
 Research and development             18.4              17.9            19.6            18.6
 General and administrative            7.7               7.6             7.8             7.7
Total operating expenses              63.1              63.6            64.9            65.0
Operating income                      11.5              10.2             9.3             9.3
Other income (expense):
Interest income                        0.1               0.1             0.1             0.1
Net foreign exchange loss             (0.2)             (0.2)           (0.4)           (0.1)
Other income, net                      0.0               0.1             0.1             0.1
Income before income taxes            11.4              10.2             9.1             9.4
Provision for income taxes             3.2               2.4             2.4             2.1
Net income                             8.3  %            7.8  %          6.8  %          7.2  %

Figures may not sum due to rounding.

Results of Operations for the three and six month periods ended June 30, 2015 and 2014

Net Sales. Our net sales were $302 million and $313 million for the three month periods ended June 30, 2015 and 2014, respectively, a decrease of 3.5%. For such periods, product sales were $274 million and $288 million, respectively, a decrease of 5% and software maintenance sales were $28 million and $24 million, respectively, an increase of 14%. Software maintenance sales grew at a faster rate than our overall net sales as a result of increased sales of our enterprise software agreements.

For the six month periods ended June 30, 2015 and 2014, our net sales were $591 million and $597 million, respectively, a decrease of 1%. For the same periods, product sales were $535 million and $550 million, respectively, a decrease of 3%, and software maintenance sales were $56 million and $47 million, respectively, an increase of 19%. Software maintenance sales grew at a faster rate than overall net sales as a result of a greater mix of software sales during the six month period ended June 30, 2015, compared to the six month period ended June 30, 2014.





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We do not typically maintain a large amount of order backlog as orders typically translate to sales quickly. As such, any weakness in orders typically has a pronounced impact on our net sales in the short term.

The factors that most significantly impacted our net sales were the year over year change in orders from our largest customer and the year over year impact of changes in the foreign currency exchange markets, both discussed in more detail below.

Large orders, defined as orders with a value greater than $100,000, decreased by 16% year over year during the three months ended June 30, 2015, compared to the year over year increase of 43% in the three month period ended June 30, 2014. In the six month period ended June 30, 2015, large orders decreased by 5% year over year compared to the year over year increase of 15% during the six month period ended June 30, 2014. A significant factor in the contraction of our large orders in the three and six month periods ended June 30, 2015, compared to the comparable periods in 2014 was the result of a decrease in orders from our largest customer. Year over year, orders from our largest customer decreased by 64% in the three months ended June 30, 2015, and decreased by 66% in the six month period ended June 30, 2015. Excluding the impact of our largest customer, large orders increased by 9% year over year during the three month period ended June 30, 2015, and increased by 22% year over year during the six month period ended June 30, 2015. Orders from our largest customer are discussed in more detail below. During the three month periods ended June 30, 2015 and 2014, large orders were 23% and 26% of our total orders, respectively, and for each of the six month periods ended June 30, 2015 and 2014, large orders were 23% of our total orders. Large orders are more volatile, are subject to greater discount variability and may contract at a faster pace during an economic downturn.

We are serving several different applications for our largest customer. During the three month periods ended June 30, 2015 and 2014, we received $10 million and $27 million, respectively, in orders from our largest customer. During the six month periods ended June 30, 2015 and 2014, we received $13 million and $39 million, respectively, in new orders from our largest customer. In the three month periods ended June 30, 2015 and 2014, we recognized net sales of $9 million and $20 million, respectively, from these orders, and in the six month periods ended June 30, 2015 and 2014, we recognized net sales of $14 million and $27 million, respectively.

For the three month periods ended June 30, 2015 and 2014, net sales in the Americas were $127 million and $120 million, respectively, an increase of 6%. Sales in the Americas, as a percentage of net sales were 42% and 38% in the three month periods ended June 30, 2015 and 2014, respectively. In Europe, net sales were $83 million and $84 million in the three month periods ended June 30, 2015 and 2014, respectively, a decrease of less than 1%. Sales in Europe, as a percentage of net sales were 28% and 27% in the three month periods ended June 30, 2015 and 2014, respectively. In East Asia, net sales were $70 million and $81 million in the three month periods ended June 30, 2015 and 2014, respectively, a decrease of 13%. Sales in East Asia, as a percentage of net sales were 23% and 26% in three month periods ended June 30, 2015 and 2014, respectively. In Emerging Markets, net sales were $22 million and $28 million in the three month periods ended June 30, 2015 and 2014, respectively, a decrease of 24%. Sales in Emerging Markets, as a percentage of net sales were 7% and 9%, respectively, in the three month periods ended June 30, 2015 and 2014.

For the six month periods ended June 30, 2015 and 2014, net sales in the Americas were $245 million and $235 million, respectively, an increase of 4%. Sales in the Americas, as a percentage of net sales were 41% and 39% in the six month periods ended June 30, 2015 and 2014, respectively. In Europe, net sales were $164 million and $167 million in the six month periods ended June 30, 2015 and 2014, respectively, a decrease of 2%. Sales in Europe, as a percentage of net sales were 28% in each of the six month periods ended June 30, 2015 and 2014. In East Asia, net sales were $135 million and $142 million in the six month periods ended June 30, 2015 and 2014, respectively, a decrease of 5%. Sales in East Asia, as a percentage of net sales were 23% and 24% in the six month periods ended June 30, 2015 and 2014, respectively. In Emerging Markets, net sales were $47 million and $53 million in the six month periods ended June 30, 2015 and 2014, respectively, a decrease of 10%. Sales in Emerging Markets, as a percentage of net sales were 8% and 9% in the six month periods ended June 30, 2015 and 2014, respectively.

We expect sales outside of the Americas to continue to represent a significant portion of our net sales. We intend to continue to expand our international operations by increasing our presence in existing markets, adding a presence in some new geographical markets and continuing the use of distributors to sell our products in some countries.

Almost all of the sales made by our direct sales offices in the Americas (excluding the U.S.), Europe, East Asia, and Emerging Markets are denominated in local currencies, and accordingly, the U.S. dollar equivalent of these sales is affected by changes in foreign currency exchange rates. For the three month period ended June 30, 2015, in local currency terms, our net sales increased by $9 million or 2.7%, Americas sales increased by $11 million or 9%, European sales increased by $12 million or 14%, East Asia sales decreased by $8.6 million or 11%, and Emerging Markets sales decreased by $5.3 million or 19%, compared to the three month period ended June 30, 2014. During this same period, the change in exchange rates had the effect of decreasing our net sales by $19 million or 6.2%, decreasing Americas sales by $3.9 million or 3.3%, decreasing European sales by $12 million or 14.3%, decreasing East Asia sales by $2.1 million or 2.6%, and decreasing sales in Emerging Markets by $1.5 million or 5.2%, respectively.





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For the six month period ended June 30, 2015, in local currency terms, our net sales increased by $30 million or 5%, Americas sales increased by $15 million or 6%, European sales increased by $20 million or 12%, sales in East Asia decreased by $4.4 million or 3%, and sales in Emerging Markets decreased by $794,000 or 2%, compared to the six month period ended June 30, 2014. During this same period, the change in exchange rates had the effect of decreasing our net sales by $36 million or 6.1%, decreasing Americas sales by $5.4 million or 2.3%, decreasing European sales by $23 million or 14%, decreasing East Asia sales by $3 million or 2.2%, and decreasing sales in Emerging Markets by $4.6 million or 8.8%.

To help protect against changes in U.S. dollar equivalent value caused by fluctuations in foreign currency exchange rates of forecasted foreign currency cash flows resulting from international sales, we have instituted a foreign currency cash flow hedging program. We hedge portions of our forecasted net sales denominated in foreign currencies with average rate forward contracts. During the three month periods ended June 30, 2015 and 2014, these hedges had the effect of increasing our net sales by $5.2 million and decreasing our net sales by $231,000, respectively. During the six month periods ended June 30, 2015 and 2014, these hedges had the effect of increasing our net sales by $10.3 million and $115,000, respectively. (See "Note 5 - Derivative instruments and hedging activities" of Notes to Consolidated Financial Statements for further discussion regarding our cash flow hedging program and its related impact on our net sales for 2015 and 2014).

Gross Profit. For the three month periods ended June 30, 2015 and 2014, gross profit was $225 million and $231 million, respectively. As a percentage of sales, gross profit was 75% and 74% for the three month periods ended June 30, 2015 and 2014, respectively. For the six month periods ended June 30, 2015 and 2014, gross profit was $438 million and $444 million, respectively. As a percentage of sales, gross profit was 74% for each of the six month periods ended June 30, 2015 and 2014. Our gross profit as a percentage of sales is impacted by many factors including changes in the amount of orders from our largest customer and changes in the foreign currency exchange markets. We continue to focus on cost control and cost reduction measures throughout our manufacturing cycle.

For the three month periods ended June 30, 2015 and 2014, the change in exchange rates had the effect of decreasing our cost of sales by $2.5 million and $93,000, respectively. For the six month periods ended June 30, 2015 and 2014, the change in exchange rates had the effect of decreasing our cost of sales by $4.3 million and $596,000, respectively. To help protect against changes in our cost of sales caused by a fluctuation in foreign currency exchange rates of forecasted foreign currency cash flows, we have a foreign currency cash flow hedging program. We hedge portions of our forecasted costs of sales denominated in foreign currencies with average rate forward contracts. During the three month periods ended June 30, 2015 and 2014, these hedges had the effect of increasing our cost of sales by $509,000 and decreasing our cost of sales by $101,000, respectively. During the six month periods ended June 30, 2015 and 2014, these hedges had the effect of increasing our cost of sales by $842,000 and decreasing our cost of sales by $182,000, respectively. (See "Note 5 - Derivative instruments and hedging activities" of Notes to Consolidated Financial Statements for further discussion regarding our cash flow hedging program and its related impact on our cost of sales for 2015 and 2014).

Operating Expenses. For the three month periods ended June 30, 2015 and 2014, operating expenses were $190 million and $199 million, respectively, a decrease of 4%. As a percentage of sales, operating expenses were 63% and 64% for the three month periods ended June 30, 2015 and 2014, respectively. During the three month period ending June 30, 2015, the year over year change in exchange rates had the effect of decreasing our operating expenses by $11 million. Additionally, there were increases in operating expenses including travel, building and equipment costs of $4.0 million which were partially offset by decreases in personnel, marketing, and outside services costs of $1.6 million.

For the six month periods ended June 30, 2015 and 2014, operating expenses were $383 million and $389 million, respectively, a decrease of 1%. As a percentage of sales, operating expenses were 65% for each of the six month periods ended June 30, 2015 and 2014. During the six month period ending June 30, 2015, the year over year change in exchange rates had the effect of decreasing our operating expenses by $19 million. During the six month period ended June 30, 2015, software development costs increased by $5.4 million as a result of a decrease in capitalization of software development costs compared to the six month period ended June 30, 2014. Additionally, there were increases in operating expenses including personnel related expenses of $2.3 million and travel, building and equipment costs of $8 million which were partially offset by decreases in marketing and outside services costs of $1.5 million.

We believe that our long-term growth and success depends on developing high quality software and hardware products on a timely basis. We are focused on leveraging recent investments in research and development and in our field sales force and taking actions to help ensure those resources are concentrated in areas and on initiatives that will contribute to future growth in our business. For the three month periods ended June 30, 2015 and 2014, our sales and marketing expenses were $112 million and $119 million, respectively, and our research and development expenses were $55 million and $56 million, respectively. For the six month periods ended June 30, 2015 and 2014, our sales and marketing expenses were $221 million and $231 million, respectively, and our research and development expenses were $116 million and $111 million, respectively. The increase in research and development expenses for the six month period ended June 30, 2015, compared to the six month period ended June 30, 2014, was primarily driven by the decrease in capitalized software development costs during the first quarter of 2015. Overall headcount for our operating functions increased by 79 from June 30, 2014 to June 30, 2015.





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Operating Income. For the three month periods ended June 30, 2015 and 2014, operating income was $35 million and $32 million, respectively, an increase of 8%. As a percentage of net sales, operating income was 11% and 10%, respectively, in these same periods. For the six month periods ended June 30, 2015 and 2014, operating income was $55 million and $56 million, respectively, a decrease of 2%. As a percentage of net sales, operating income was 9% in each of these same periods. The increases in operating income in absolute dollars and as a percentage of sales for the three month period ended June 30, 2015, compared to the three month period ended June 30, 2014, and the decrease in operating income in absolute dollars for the six month period ended June 30, 2015 compared to the six month period ended June 30, 2014, is attributable to the factors discussed in Net Sales, Gross Profit and Operating Expenses above.

Interest Income. For the three month periods ended June 30, 2015 and 2014, interest income was $341,000 and $234,000, respectively. For the six month periods ended June 30, 2015 and 2014, interest income was $694,000 and $431,000, respectively. We continue to see low yields for high quality investment alternatives that comply with our corporate investment policy. We do not expect yields in these types of investments to increase significantly during the remainder of 2015.

Net Foreign Exchange Loss. For the three month periods ended June 30, 2015 and 2014, net foreign exchange loss was $(577,000) and $(603,000), respectively. During the six month periods ended June 30, 2015 and 2014, net foreign exchange loss was $(2.3) million and $(553,000), respectively. These results are attributable to movements in the foreign currency exchange rates between the U.S. dollar and foreign currencies in subsidiaries for which our functional currency is not the U.S. dollar. During the second quarter of 2015, we continued to see broad volatility in the foreign currency exchange markets and a strong U.S. dollar in many of the currency markets where we have exposure, with the U.S. dollar index, as tracked by the St. Louis Federal Reserve, near a ten year high. We cannot predict the direction or degree of future volatility in these exchange rates. In the past, we have noted that significant volatility in foreign currency exchange rates in the markets in which we do business has had a significant impact on the revaluation of our foreign currency denominated firm commitments, on our ability to forecast our U.S. dollar equivalent net sales and expenses and on the effectiveness of our hedging programs. In the past, these dynamics have also adversely affected our net sales growth in international markets and may pose similar challenges in the future. We recognize the local currency as the functional currency in virtually all of our international subsidiaries.

We utilize foreign currency forward contracts to hedge our foreign denominated net foreign currency balance sheet positions to help protect against the change in value caused by a fluctuation in foreign currency exchange rates. We typically hedge up to 90% of our outstanding foreign denominated net receivable or payable positions and typically limit the duration of these foreign currency forward contracts to approximately 90 days. The gain or loss on these derivatives as well as the offsetting gain or loss on the hedged item attributable to the hedged risk is recognized in current earnings under the line item "Net foreign exchange loss". Our hedging strategy decreased our foreign exchange gains by $1.3 million and $742,000 in the three month period ended June 30, 2015 and June 30, 2014, respectively. Our hedging strategy decreased our foreign exchange losses by $639,000 in the six month period ended June 30, 2015 and decreased our foreign exchange gains by $810,000 in the six month period ended June 30, 2014. (See "Note 5 - Derivative instruments and hedging activities" of Notes to Consolidated Financial Statements for a further description of our derivative instruments and hedging activities.)

Provision for Income Taxes. For the three month periods ended June 30, 2015 and 2014, our provision for income taxes reflected an effective tax rate of 28% and 23%, respectively. For the six month periods ended June 30, 2015 and 2014, our provision for income taxes reflected an effective tax rate of 26% and 23%, respectively. The factors that caused our effective tax rate to change year-over-year are detailed in the table below:





                                                 Three Months Ended   Six Months Ended
                                                   June 30, 2015       June 30, 2015
                                                    (Unaudited)         (Unaudited)
Effective tax rate at June 30, 2014                             23  %              23  %
Change in profit in foreign jurisdictions with                   1
reduced tax rates                                                                    -
Change in enhanced deduction for certain                         3
research and development expenses                                                   2
Change in intercompany profit                                    2                  2
Change in tax benefit from equity awards                         1                  1
Decrease in unrecognized tax benefits                           (2)                (2)
Effective tax rate at June 30, 2015                             28  %              26  %




(See "Note 9 - Income taxes" of Notes to Consolidated Financial Statements for further discussion regarding our effective tax rate).




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Other operational metrics


We believe that the following additional unaudited operational metrics assist investors in assessing our operational performance relative to our others in our industry and to our historical results.

Charges related to stock-based compensation, amortization of acquired intangibles and acquisition related transaction costs. For the three and six month periods ended June 30, 2015 and 2014, the gross charges related to stock-based compensation as a component of cost of sales, sales and marketing, research and development, general and administrative expenses, the provision for income taxes and the total charges were as follows:



                                  Three Months Ended June 30,      Six Months Ended June 30,
(In thousands)                            (Unaudited)                     (Unaudited)
                                     2015             2014            2015            2014
Stock-based compensation
Cost of sales                  $          472   $          358  $         928   $         799
Sales and marketing                     2,806            2,767          5,449           5,578
Research and development                2,171            2,273          4,632           4,724
General and administrative                904              930          1,735           1,780
Provision for income taxes             (1,920)          (1,797)        (3,486)         (3,633)
Total                          $        4,433   $        4,531  $       9,258   $       9,248




For the three and six month periods ended June 30, 2015 and 2014,  the gross
charges related to the amortization of acquisition related intangibles as a
component of cost of sales, sales and marketing, research and development, other
income, net,  the provision for income taxes and the total charges were as
follows:



                                  Three Months Ended June 30,      Six Months Ended June 30,
(In thousands)                            (Unaudited)                     (Unaudited)
                                     2015             2014            2015            2014
Amortization of acquired
intangibles
Cost of sales                  $        2,640   $        2,663  $       5,215   $       5,329
Sales and marketing                       438              452            876             918
Research and development                  318              400            662             806
Other income, net                         149              167            303             337
Provision for income taxes             (1,155)          (1,216)        (2,317)         (2,440)
Total                          $        2,390   $        2,466  $       4,739   $       4,950




For the three and six month periods ended June 30, 2015 and 2014,  the gross
charges related to acquisition related transaction costs as a component of cost
of sales, sales and marketing, research and development, general and
administrative expenses, the provision for income taxes and the total charges
were as follows:



                                  Three Months Ended June 30,      Six Months Ended June 30,
(In thousands)                            (Unaudited)                     (Unaudited)
                                     2015             2014           2015             2014
Acquisition transaction costs
and restructuring
Cost of sales                  $         232    $            - $         805    $            -
Sales and marketing                         -              88               -             176
Research and development                    -             153               -             306
General and administrative                 4               42            205              107
Provision for income taxes               (82)             (99)          (331)            (206)
Total                          $         154    $         184  $         679    $         383






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Liquidity and Capital Resources

Working Capital, Cash and Cash Equivalents and Short-term Investments. Cash, cash equivalents and short-term investments decreased by $48 million to $423 million at June 30, 2015 from $471 million at December 31, 2014. The following table presents our working capital, cash and cash equivalents and short-term investments:





                                        June 30, 2015   December 31,     Increase/
 (In thousands)                          (unaudited)        2014        (Decrease)

 Working capital                      $      682,880  $     700,163  $      (17,283)
 Cash and cash equivalents (1)               232,784        274,030         (41,246)
 Short-term investments (1)                  190,016        197,163          (7,147)
 Total cash, cash equivalents and     $               $              $
 short-term investments                      422,800        471,193         (48,393)

(1) Included in working capital

During the six month period ended June 30, 2015, our working capital decreased by $17 million compared to December 31, 2014. Overall, current assets decreased by $21 million while current liabilities decreased by $3.9 million. The decrease in our current assets was the result of a $48 million decrease in cash, cash equivalents and short-term investments, offset by an increase in accounts receivable of $3.2 million, an increase in prepaid expenses and other current assets of $11 million and an increase in inventory of $14 million. The decrease in current liabilities was the result of a decrease in accrued compensation of $6.1 million and a decrease in accounts payable, accrued expenses and other liabilities of $1.3 million, offset by an increase in deferred revenue of $3.6 million. The overall decrease in our working capital was primarily the result of the decrease in our cash, cash equivalents and short-term investments due to payments related to our acquisitions of $25 million, our corporate dividend of $49 million, and the repurchase of shares of our common stock of $8.5 million.

Accounts receivable increased by $3.2 million to $206 million at June 30, 2015, from $202 million at December 31, 2014. Days sales outstanding increased to 62 days at June 30, 2015, compared to 56 days at December 31, 2014. The increase in our days sales outstanding is due to lower net sales as well as aging of some accounts in Emerging Markets, primarily in Russia and India.

Inventory increased by $14 million to $187 million at June 30, 2015, from $173 million at December 31, 2014. Inventory turns were 1.7 and 1.8 at June 30, 2015 and December 31, 2014, respectively. The increase in our inventory balance was driven by planned increases in product levels to support the transition of our manufacturing operations from Austin, Texas to Debrecen, Hungary and Penang, Malaysia.

Prepaid expenses and other current assets increased $11 million to $81 million at June 30, 2015, from $70 million at December 31, 2014. The increase in our prepaid expenses and other current assets was primarily the result of an increase in other receivables of $11 million primarily related to a 2015 tax provision and reclaimable value added taxes, offset by a $5.4 million decrease in the fair value of our currency hedging contracts. The timing of payments of insurance, maintenance, and other service contracts accounted for the remaining $5.1 million of this change. (See "Note 5 - Derivative instruments and hedging activities" of Notes to Consolidated Financial Statements for a further description of our derivative instruments and hedging activities.)

Our cash and cash equivalent balances are held in numerous financial institutions throughout the world, including substantial amounts held outside of the U.S., however, the majority of our cash and investments that are located outside of the U.S. are denominated in the U.S. dollar with the exception of $28 million U.S. dollar equivalent of corporate bonds that are denominated in Euro. At June 30, 2015, we had $423 million in cash, cash equivalents and short-term investments. Approximately $79 million or 19% of these amounts were held in domestic accounts with various financial institutions and $344 million or 81% was held in accounts outside of the U.S. with various financial institutions. At June 30, 2015, we had cash and cash equivalents of $233 million, of which $79 million or 34% was held in domestic accounts and $154 million or 66% was held in various accounts of our foreign subsidiaries. At June 30, 2015, we had short-term investments of $190 million, all of which was held in investment accounts of our foreign subsidiaries. Most of the amounts held outside of the U.S. could be repatriated to the U.S., but under current law, would be subject to U.S. federal income taxes, less applicable foreign tax credits. We have provided for the U.S. federal tax liability on these amounts for financial statement purposes, except for foreign earnings that are considered indefinitely reinvested outside of the U.S. Repatriation could result in additional U.S. federal income tax payments in future years. We utilize a variety of tax planning and financing strategies with the objective of having our worldwide cash available in the locations in which it is needed.


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Cash Provided by and (Used in) in the three and six month periods ended June 30, 2015 and 2014. The following table summarizes the proceeds and (uses) of cash:




                                                     Six Months Ended June 30,
   (In thousands)                                           (unaudited)
                                                        2015            2014
   Cash provided by operating activities          $      50,783   $      68,438
   Cash used in investing activities                    (49,968)        (41,408)
   Cash used in financing activities                    (42,061)        (19,797)
   Net change in cash equivalents                       (41,246)          7,233
   Cash and cash equivalents at beginning of year       274,030         230,263
   Cash and cash equivalents at end of period     $     232,784   $     237,496



For the six month periods ended June 30, 2015 and 2014, cash provided by operating activities was $51 million and $68 million, respectively, a decrease of $18 million. This decrease was due to a decrease in net income of $3.3 million and a decrease in cash provided by our operating items of $14 million.

Investing activities used cash of $50 million during the six month period ended June 30, 2015, as a result of the purchase price of two acquisitions for $25 million, net of cash received, capital expenditures of $21 million, capitalization of internally developed software and other intangibles of $11 million offset by the net sale of short-term investments of $7 million. Capital expenditures during the six month period ended June 30, 2015 included leasehold improvements, expansion of existing facilities, computers, equipment and furniture and fixtures to support operations throughout our business. Investing activities used cash of $41 million during the six month period ended June 30, 2014, as the result of capital expenditures of $22 million and capitalization of internally developed software and other intangibles of $18 million.

Financing activities used cash of $42 million during the six month period ended June 30, 2015, which was the net result of $49 million used to pay dividends and $8.5 million used to repurchase shares of our common stock, offset by $14 million received from the issuance of our common stock from the exercise of employee stock options and from our employee stock purchase plan. Financing activities used cash of $20 million during the six month period ended June 30, 2014, which was the net result of $17 million received from the issuance of our common stock from the exercise of employee stock options and from our employee stock purchase plan, offset by $38 million used to pay dividends to our stockholders.

From time to time, our Board of Directors has authorized various programs to repurchase shares of our common stock depending on market conditions and other factors. Under the current program, we repurchased a total of 288,004 shares of our common stock at a weighted average price per share of $29.67 during the six months ended June 30, 2015. We did not make any purchases under this program during the years ended December 31, 2014 and 2013. At June 30, 2015, there were 3,644,241 shares remaining available for repurchase under this program. This repurchase program does not have an expiration date.

During the six month period ended June 30, 2015, we received less proceeds from the exercise of stock options compared to the six month period ended June 30, 2014. At June 30, 2015, there were no options outstanding as all remaining options were either exercised or expired during the six month period ended June 30, 2015. (See "Note 11 - Authorized shares of common and preferred stock and stock-based compensation plans" of Notes to Consolidated Financial Statements for additional discussion about our equity compensation plans).

Contractual Cash Obligations. Purchase obligations primarily represent purchase commitments for customized inventory and inventory components. At June 30, 2015, we had non-cancelable purchase commitments with various suppliers of customized inventory and inventory components totaling approximately $7 million.

Guarantees are related to payments of customs and foreign grants. At June 30, 2015, we had outstanding guarantees for payment of customs and foreign grants totaling approximately $4.0 million. At December 31, 2014, we had outstanding guarantees for payment of customs, foreign grants and potential customer disputes totaling approximately $12 million.


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Loan Agreement. On May 9, 2013, we entered into a Loan Agreement (the "Loan Agreement") with Wells Fargo Bank, National Association. The Loan Agreement provides for a $50 million unsecured revolving line of credit with a scheduled maturity date of May 9, 2018 (the "Maturity Date"). Proceeds of loans made under the Loan Agreement may be used for working capital and other general corporate purposes. We may prepay the loans under the Loan Agreement in whole or in part at any time without premium or penalty. Certain of our existing and future material domestic subsidiaries are required to guaranty our obligations under the Loan Agreement. We may choose to borrow funds against this line of credit in future periods to have sufficient domestic cash to fund continued dividends to our stockholders, to fund potential acquisitions or other domestic general corporate purposes without the need to repatriate foreign earnings. At June 30, 2015, we did not have any amounts outstanding under this line of credit.

Off-Balance Sheet Arrangements. We do not have any off-balance sheet debt. At June 30, 2015, we did not have any relationships with any unconsolidated entities or financial partnerships, such as entities often referred to as structured finance entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we were engaged in such relationships.

Prospective Capital Needs. We believe that our existing cash, cash equivalents and short-term investments, together with cash generated from operations as well as from the purchase of common stock through our employee stock purchase plan and available borrowings under our loan agreement will be sufficient to cover our working capital needs, capital expenditures, investment requirements, commitments, payment of dividends to our stockholders and repurchases of our common stock for at least the next 12 months, although the use of certain of our funds for domestic purposes may require us to repatriate foreign earnings which would be subject to the U.S. federal statutory tax rate of 35%. We may also seek to pursue additional financing or to raise additional funds by selling equity or debt to the public or in private transactions. If we elect to raise additional funds, we may not be able to obtain such funds on a timely basis on acceptable terms, if at all. If we raise additional funds by issuing additional equity or convertible debt securities, the ownership percentages of our existing stockholders would be reduced. In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to those of our common stock. We may also choose to repatriate foreign earnings which would be subject to the U.S. federal statutory tax rate of 35% and therefore, would likely have a material adverse effect on our effective tax rate and on our net income and earnings per share. We could also choose to reduce certain expenditures or payments of dividends or suspend our program to repurchase shares of our common stock. Historically, we have not had to rely on debt, public or private, to fund our operating, financing or investing activities.

Although we believe that we have sufficient capital to fund our operating activities for at least the next 12 months, our future capital requirements may vary materially from those now planned. We anticipate that the amount of capital we will need in the future will depend on many factors, including:

· repurchases of our common stock;

· payment of dividends to our stockholders;

· acquisitions of other businesses, assets, products or technologies;

· difficulties and the high tax costs associated with the repatriation of

earnings;

· required levels of research and development and other operating costs;

· our business, product, capital expenditure and research and development plans,

and product and technology roadmaps;

· the overall levels of sales of our products and gross profit margins;

· the levels of inventory and accounts receivable that we maintain;

· general economic and political uncertainty and specific conditions in the

markets we address, including any volatility in the industrial economy in the

various geographic regions in which we do business;

· the inability of certain of our customers who depend on credit to have access

    to their traditional sources of credit to finance the purchase of products from
    us, which may lead them to reduce their level of purchases or to seek credit or
    other accommodations from us;

· capital improvements for new and existing facilities;

· our relationships with suppliers and customers; and

· the level of stock purchases under our employee stock purchase plan.

Recently Issued Accounting Pronouncements

See "Note 15 - Recently issued accounting pronouncements" in Notes to Consolidated Financial Statements.


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