NATIONAL INSTRUMENTS CORPORATION National Instruments Corporation and its subsidiaries (referred to as the "Company," "we," "us," "our," "National Instruments" or "NI") has made forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are subject to risks and uncertainties. Any statements contained herein regarding our future financial performance, operations, plans, investments, expected effects of investments, or other matters (including, without limitation, statements to the effect that we "believe," "expect," "plan," "intend to," "may," "will," "project," "anticipate," "continue," "strive to," "endeavor to," "seek to," "are committed to," "remaining committed to," "are encouraged by," "remain cautious," "remain optimistic," "estimate", "focus on"; statements of "goals,""commitments," "strategy" or "visions"; or other variations thereof or comparable terminology or the negative thereof) should be considered forward-looking statements. All forward-looking statements are based on current expectations and projections of future events. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, forward-looking statements are not guarantees of performance and 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" below and in "Part 1, Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 (the "Form 10-K"). Actual results could differ materially from those stated or implied by our forward-looking statements, due to risks and uncertainties associated with our business or under different assumptions or conditions. You should not place undue reliance on any of these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The following discussion should be read in conjunction with the Form 10-K filed with theU.S. Securities and Exchange Commission (the "SEC") and the condensed consolidated financial statements and accompanying notes included in Part 1, Item 1 of this Form 10-Q. Overview and Current Business Outlook For more than 40 years, we have enabled engineers and scientists around the world to accelerate productivity, innovation and discovery. Our software-centric platform provides an advanced approach through integration of software and modular hardware to create automated test and automated measurement systems. We believe our long-term track record of innovation and our differentiated platform help support the success of our customers, employees, suppliers, community and stockholders. We have been profitable in every year since 1990. We sell to a large number of customers in a wide variety of industries. The key strategies that we focus on in running our business are the following: •Expanding our available market opportunity We strive to increase our available market by identifying new opportunities in existing customers, attracting and serving new customers, and expanding our business to market adjacencies. Our large network of existing customers provides a broad base from which to expand. •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 backward compatibility across different platforms to preserve the customer's investment in our products. In this time of intense global competition, we believe 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 by leveraging our core technologies across multiple products. We sell into test and measurement and industrial/embedded applications in a broad range of industries and are subject to the economic and industry forces that drive those markets. Examples of these types of customers include semiconductor, transportation, and aerospace, defense and government ("ADG"). 33 --------------------------------------------------------------------------------
•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, original equipment manufacturers, value added resellers, system integrators, and consultants to market and sell our products. We have sales offices in theU.S. and sales offices and distributors in key international markets. Sales outside of theAmericas accounted for approximately 61% and 60% of our net sales during the three months endedJune 30, 2021 and 2020, respectively, and approximately 62% and 60% of our net sales during the six months endedJune 30, 2021 and 2020, 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 revenues will continue to be derived from international sales. (See Note 2 - Revenue and Note 12 - Segment and geographic information of Notes to Consolidated Financial Statements for details concerning the geographic breakdown of our net sales and long-lived assets, respectively). We manufacture substantially all of our product volume at our facilities in Debrecen,Hungary andPenang, Malaysia . •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 when necessary, and will likely engage in future litigation to protect our intellectual property rights. Our operating results fluctuate from period to period due to changes in global economic conditions and a number of other factors such as the impact of the COVID-19 pandemic. 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 not decline, or that we will remain profitable in future periods. Current Business Outlook During the second quarter of 2021, we continued to see strong demand from our customers across the geographic regions and end markets that we serve. Although we expect the strength and duration of the recent trends will vary by region and end market, we expect our customers will continue to make investments in emerging technologies related to 5G/mmWave, vehicle electrification, and advanced driver assistance systems (ADAS). We also anticipate that recent additions and enhancements to our software offerings will differentiate our products and fuel demand across our various end markets. Additionally, during the second quarter of 2021, we continued to experience shortages of certain components in our supply chain due to global capacity constraints that were amplified by the COVID-19 pandemic and increasing global demand. Historically, our backlog levels have remained fairly consistent at the end of each quarter, representing approximately a week of quarterly sales activity, and the majority of these orders are fulfilled quickly within the following quarter. However, due to the shortage of certain components from our suppliers and the increase in demand from our customers, our backlog at the end of the second quarter was more than four times the historical average, representing approximately one month of quarterly sales activity. Longer lead times to fulfill orders for certain offerings have continued to shift the timing of revenue recognition into future periods and increased our costs to obtain a consistent supply of certain components. Consequently, while we expect some temporary headwinds related to the supply chain constraints to continue while global supply chains adjust to the significant increases in demand, we are optimistic about our ability to maintain competitive lead times while continuing to maintain higher backlog levels as part of our strategic focus on system offerings through the remainder of 2021. We remain committed to maintaining our critical investments and capacity to run our business while continuing to innovate. Furthermore, we continue to focus on scale and efficiency in serving our broad-based customers. Our focus to streamline the process of doing business with NI means both reducing our costs and improving the experience of the large number of smaller accounts we serve. This commitment and focus include plans to invest in ni.com for a better digital experience and significantly expand the usage of our distributor channel in 2021 and beyond. We believe these actions will allow our direct sales force to support proactive engagements with accounts where we can deliver enterprise-level value. 34 -------------------------------------------------------------------------------- During the three months endedJune 30, 2021 , indirect sales through our distributor channel increased to approximately 8% of our total sales, compared to 2% in the same period of 2020 and during the six months endedJune 30, 2021 , indirect sales through our distributor channels increased to approximately 6% of our total net sales, compared to 2% in the same period of 2020. As ofJune 30, 2021 , our distributors did not have significant amounts of inventory on-hand and were not eligible for any variable adjustments related to their previous purchases. As part of our efforts to streamline the process of doing business with NI, we have also increased our focus on customer account tiers when assessing trends in our order growth. Specifically, we have grouped our customers into tiers based on their historical spending patterns and potential for future order growth. Our "Focus" account tiers are comprised of approximately 2,500 accounts we have identified as having a high potential to maintain or expand our business through system-level offerings. The Focus tier currently represents approximately 70% of our total order value. Our "Broad-based" account tier is comprised of the remainder of our customer base of approximately 30,000 accounts. The Broad-based tier currently represents approximately 30% of our total order value. During the three months endedJune 30, 2021 , orders from our Focus accounts and Broad-based accounts increased by 28% and 49%, respectively, compared to the same period in 2020. During the six months endedJune 30, 2021 , we saw continued volatility in the exchange rates between theU.S. dollar and many of the currency markets where we have exposure. During the first half of 2021, theU.S. dollar index, as tracked by the St. LouisFederal Reserve , was approximately 6% weaker compared to the first half of 2020 resulting in a modest year over year benefit to our US dollar equivalent sales. We cannot predict to what degree foreign currency markets will fluctuate in the future. See Results of Operations -Net Sales below for additional discussion on the impact of foreign exchange rates on our net sales and Note 5 - Derivative instruments and hedging activities of Notes to Consolidated Financial Statements for a further description of our derivative instruments and hedging activities.
Acquisitions and divestitures
Refer to Note 1 - Basis of presentation and Note 17 - Acquisitions of Notes to Consolidated Financial Statements for additional information on our acquisitions and divestitures during the periods presented.
Critical Accounting Estimates
In preparing our consolidated financial statements, we make assumptions,
judgments and estimates that can have a significant impact on our net sales,
operating income and net income, as well as on the value of certain assets and
liabilities on our condensed consolidated balance sheets. We base our
assumptions, judgments and estimates on historical experience and other factors
that we believe to be reasonable under the circumstances. At least quarterly, we
evaluate our assumptions, judgments and estimates, and make changes as deemed
necessary.
These estimates may change as new events occur and additional information is
obtained. Actual results could differ materially from these estimates under
different assumptions or conditions. For further information about our critical
accounting estimates, see the discussion in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," under the heading
"Critical Accounting Estimates" in our Form 10-K. There have been no material
changes to our critical accounting policies and estimates since the Form 10-K.
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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)
2021 2020 2021 2020
Net sales:
Americas 38.8 % 40.4 % 38.3 % 40.4 %
EMEA 25.7 24.8 25.6 26.4
APAC 35.4 34.8 36.0 33.2
Total net sales 100.0 100.0 100.0 100.0
Cost of sales 28.6 28.5 28.5 27.8
Gross profit 71.4 71.5 71.5 72.2
Operating expenses:
Sales and marketing 32.1 35.0 33.4 36.2
Research and development 23.5 21.3 23.7 22.2
General and administrative 8.7 9.7 9.3 9.1
Total operating expenses 64.3 66.0 66.5 67.6
Gain on sale of business/asset - - - 26.2
Operating income 7.1 5.4 5.0 30.8
Other expense (0.9) (0.4) (1.2) (0.1)
Income before income taxes 6.2 5.1 3.8 30.7
Provision for income taxes 1.2 1.5 0.6 7.2
Net income 5.0 % 3.6 % 3.2 % 23.5 %
Figures may not sum due to rounding.
36
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Results of Operations for the three and six months ended
Net Sales . The following table sets forth our net sales for the three and six months endedJune 30, 2021 and 2020 along with the changes between the corresponding periods. Three Months Ended June 30, Six Months Ended June 30, (Unaudited) (Unaudited) Change Change (In millions) 2021 2020 Dollars Percentage 2021 2020 Dollars Percentage Product sales$ 306.5 $ 266.3 40.2 15%$ 601.6 $ 540.2 61.3 11%
Software maintenance sales 40.2 35.1 5.1 15% 80.3 70.5 9.8 14% Total net sales$ 346.7 $ 301.3 45.4 15%$ 681.9 $ 610.7 71.2 12%
Figures may not sum due to rounding.
Net sales for the three and six months ended
•The increase in product sales was primarily attributable to strong demand for our system-level offerings, particularly in semiconductor and electronics test solutions as well as our transportation-related offerings. Additionally, we implemented price increases for certain offerings which increased net sales by approximately 5 percent compared to the same periods in 2020.
•The increase in software maintenance sales was primarily related to additional billings from annual renewals of software maintenance programs and our enterprise-level licensing arrangements during the trailing twelve months.
37
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Net Sales by Region
The following table sets forth our net sales by geographic region for the three
and six months ended June 30, 2021 and 2020 along with the changes between the
corresponding periods and the region's percentage of total net sales.
Three Months Ended June 30, Six Months Ended June 30,
(Unaudited) (Unaudited)
Change Change
(In millions) 2021 2020 Dollars Percentage 2021 2020 Dollars Percentage
Americas $134.7 $121.7 13.0 11% $261.4 $246.7 14.7 6%
Percentage of total net
sales 38.8 % 40.4 % 38.3 % 40.4 %
EMEA $89.2 $74.7 14.5 19% $174.7 $161.4 13.3 8%
Percentage of total net
sales 25.7 % 24.8 % 25.6 % 26.4 %
APAC $122.9 $105.0 17.9 17% $245.8 $202.6 43.2 21%
Percentage of total net
sales 35.4 % 34.8 % 36.0 % 33.2 %
Figures may not sum due to rounding.
We expect sales outside of theAmericas 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 certain new geographical markets and continuing to increase the use of distributors to sell our products in some countries. Almost all of the sales made by our direct sales offices in theAmericas (excluding theU.S. ), EMEA, and APAC are denominated in local currencies, and accordingly, theU.S. dollar equivalent of these sales is affected by changes in foreign currency exchange rates. In order to provide a framework for assessing how our underlying business performed excluding the effects of foreign currency fluctuations between periods, we compare the percentage change in our results from period to period using constant currency disclosure. To calculate the change in constant currency, current and comparative prior period results for entities reporting in currencies other thanU.S. Dollars are converted intoU.S. Dollars at constant exchange rates (i.e., the average rates in effect during the three and six months endedJune 30, 2020 ). 38 -------------------------------------------------------------------------------- The following tables present this information, along with the impact of changes in foreign currency exchange rates on sales denominated in local currencies, for the three and six months endedJune 30, 2021 . Three Months Ended Change Impact of changes in foreign currency
Three Months Ended
June 30, 2020 in Constant Dollars exchange rates on net sales June 30, 2021
GAAP GAAP
(In millions) Net Sales Dollars Percentage Dollars Percentage Net Sales
Americas $ 121.7 12.6 10.4% 0.4 0.3% $ 134.7
EMEA $ 74.7 10.9 14.6% 3.6 4.8% $ 89.2
APAC $ 105.0 14.4 13.7% 3.5 3.3% $ 122.9
Total net sales $ 301.3 38.0 12.6% 7.4 2.5% $ 346.7
Six Months Ended Change Impact of changes in foreign currency Six Months Ended
June 30, 2020 in Constant Dollars exchange rates on net sales June 30, 2021
GAAP GAAP
(In millions) Net Sales Dollars Percentage Dollars Percentage Net Sales
Americas $ 246.7 14.2 5.7% 0.5 0.2% $ 261.4
EMEA $ 161.4 6.7 4.1% 6.6 4.1% $ 174.7
APAC $ 202.6 36.1 17.8% 7.1 3.5% $ 245.8
Total net sales $ 610.7 57.0 9.3% 14.2 2.4% $ 681.9
Figures may not sum due to rounding.
To help protect against changes inU.S. dollar equivalent value caused by fluctuations in foreign currency exchange rates of forecasted foreign currency cash flows resulting from international sales, we have 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 months endedJune 30, 2021 and 2020, these hedges had the effect of decreasing our net sales by$2.4 million and increasing our net sales by$2.7 million , respectively. During the six months endedJune 30, 2021 and 2020, these hedges had the effect of decreasing our net sales by$4.4 million and increasing our net sales by$5.3 million , 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 2021 and 2020). Gross Profit. Our gross profit as a percentage of sales is impacted by many factors including changes in the amount of revenues from our large customers and changes in the foreign currency exchange markets. We continue to focus on cost control and cost reduction measures throughout our manufacturing cycle. The following table sets forth our gross profit and gross profit as a percentage of net sales for the three and six months endedJune 30, 2021 and 2020 along with the percentage changes in gross profit for the corresponding periods. Three Months Ended June 30, Six Months Ended June 30, (Unaudited) (Unaudited) (In millions) 2021 2020 2021 2020 Gross Profit$247.5 $215.4 $487.2 $441.0 % change compared with prior period 14.9% 10.5% Gross Profit as a percentage of net sales 71.4% 71.5% 71.5% 72.2% 39
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The decreases in our gross profit and gross profit as a percentage of net sales were primarily related to the following:
Three Months Ended Six Months Ended
(Unaudited) (Unaudited)
June 30, 2020 71.5 % 72.2 %Impact of amortization of acquired intangible and other purchase accounting adjustments
(1.3) % (1.5) %
Impact of increases in outbound freight and other
logistics costs due to COVID-19 - % (0.3) %
Impact of changes in sales mix and sales price 0.4 % 0.5 %
Changes in foreign currency exchange rates 0.8 % 0.6 %
June 30, 2021 71.4 % 71.5 %
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 months ended June 30, 2021 and 2020, these
hedges had the effect of decreasing our cost of sales by less than $0.1 million
and increasing our cost of sales by $0.9 million , respectively. During the six
months ended June 30, 2021 and 2020, these hedges had the effect of increasing
our cost of sales by less than $0.1 million and increasing our cost of sales by
$1.4 million , 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 2021 and 2020).
Operating Expenses. The following table sets forth our operating expenses for
the three and six months ended June 30, 2021 and 2020, along with the percentage
changes between the corresponding periods and the line item as a percentage of
total net sales.
Three Months Ended June 30, Six Months Ended June 30,
(Unaudited) (Unaudited)
(In thousands) 2021 2020 Change 2021 2020 Change
Sales and marketing $ 111,199 $ 105,419 5% $ 227,983 $ 221,165 3%
Percentage of total net sales 32% 35% 33% 36%
Research and development $ 81,434 $ 64,225 27% $ 161,520 $ 135,846 19%
Percentage of total net sales 23% 21% 24% 22%
General and administrative $ 30,277 $ 29,369 3% $ 63,636 $ 55,549 15%
Percentage of total net sales 9% 10% 9% 9%
Total operating expenses $ 222,910 $ 199,013 12% $ 453,139 $ 412,560 10%
Percentage of total net sales 64% 66% 66% 68%
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Operating Expenses - Three Months Ended
The year over year increase of
•$10 million increase in non-acquisition personnel costs, primarily attributable to additional accruals for estimated attainment under our variable compensation programs and stock-based compensation expense (due to comparatively higher stock prices on the grant date of unvested awards and a shorter average service period for our awards) partially offset by a reduction in severance-related costs associated with our restructuring activities; •$10 million increase attributable to amortization of acquisition-related intangibles and higher operating costs related to our recently acquired OptimalPlus business, partially offset by lower acquisition-related transaction costs; •$3 million increase related to the year over year impact of changes in foreign currency exchange rates; and •$1 million increase related to lower software development costs eligible for capitalization. Sales and Marketing The primary drivers of the increase in sales and marketing expenses for the three months endedJune 30, 2021 compared to the same period in 2020 were additional costs related to accruals under our variable compensation programs and the amortization of acquired intangibles, which were partially offset by lower severance-related charges and a reduction in headcount.
Research and Development
The primary drivers of the increase in research and development expenses for the three months endedJune 30, 2021 compared to the same period in 2020 were additional personnel costs related to accruals under our variable compensation programs, salaries, stock-based compensation and an anticipated decrease in software development costs eligible for capitalization.
General and administrative
The primary drivers of the increase in general and administrative expenses for the three months endedJune 30, 2021 compared to the same period in 2020 were additional personnel costs related to accruals under our variable compensation programs and stock-based compensation.
Operating Expenses - Six Months Ended
The year over year increase of
•$25 million increase related to the amortization of acquisition-related intangibles, additional operating costs of our recently acquired OptimalPlus business, and transaction and integration costs related to a one-time redemption fee associated with recently acquired intellectual property; •$12 million increase in non-acquisition personnel costs, primarily attributable to additional accruals for estimated attainment under our variable compensation programs and additional stock-based compensation expense (due to comparatively higher stock prices on the grant date of unvested awards and a shorter average service period for our awards), partially offset by lower salaries and benefits due to lower headcount and reduced severance costs; •$6 million increase related to the year over year impact of changes in foreign currency exchange rates; •$2 million increase related to lower software development costs eligible for capitalization; and •$(4) million decrease in travel and event related expenses related to the travel restrictions from COVID-19 and strategic cost saving initiatives.
Sales and Marketing
The primary drivers of the increase in sales and marketing expenses for the six months endedJune 30, 2021 compared to the same period in 2020 were additional costs associated with accruals under our variable compensation programs, higher salaries and the amortization of acquired intangibles, which were partially offset by lower travel, severance-related costs and a reduction in headcount. 41 --------------------------------------------------------------------------------
Research and Development
The primary drivers of the increase in research and development expenses for the six months endedJune 30, 2021 compared to the same period in 2020 were additional personnel costs associated with accruals under our variable compensation programs, higher salaries, stock-based compensation, as well as an anticipated decrease in software development costs eligible for capitalization, which were partially offset by lower severance-related costs.
General and administrative
The primary drivers of the increase in general and administrative expenses for the six months endedJune 30, 2021 compared to the same period in 2020 were additional personnel costs associated with accruals under our variable compensation programs, stock-based compensation, and severance, as well as a one-time redemption fee associated with recently acquired intellectual property. Gain on sale of business/assets. As previously disclosed, onJanuary 15, 2020 , we completed the sale of our AWR subsidiary and recognized a gain on the sale of$160 million . These amounts are presented as "Gain on sale of business/assets" in our Consolidated Statements of Income. Operating Income. For the three months endedJune 30, 2021 and 2020, operating income was$25 million and$16 million , respectively. As a percentage of net sales, operating income was 7.1% and 5.4% for the three months endedJune 30, 2021 and 2020, respectively. For the six months endedJune 30, 2021 and 2020, operating income was$34 million and$188 million , respectively. As a percentage of net sales, operating income was 5.0% and 30.8% for the six months endedJune 30, 2021 and 2020, respectively. The increase in operating income in absolute dollars for the three months endedJune 30, 2021 , compared to the three months endedJune 30, 2020 , is attributable to the factors discussed inNet Sales , Gross Profit and Operating Expenses above. The decrease in operating income in absolute dollars for the six months endedJune 30, 2021 , compared to the six months endedJune 30, 2020 , is primarily attributable to the approximately$160 million gain on sale of our AWR subsidiary in 2020, partially offset by the factors discussed inNet Sales , Gross Profit and Operating Expenses above.
Other (Expense) Income.
• Interest Income. For the three months endedJune 30, 2021 and 2020, interest income was$0.1 million and$1.0 million , respectively. For the six months endedJune 30, 2021 and 2020, interest income was$0.3 million and$3.3 million , respectively. During the six months endedJune 30, 2021 , theFederal Reserve maintained the federal funds rate target to a range of zero to 0.25%. This will likely continue to have a negative impact on our interest income for the remainder of 2021. • Interest Expense. For the three months endedJune 30, 2021 and 2020, interest expense was approximately$1.2 million , and$0.1 million , respectively. For the six months endedJune 30, 2021 and 2020, interest expense was approximately$1.9 million , and$0.1 million , respectively. These interest charges are due to interest on outstanding borrowings, commitment fees and amortization of deferred costs related to our Credit Agreement. During the three months endedJune 30, 2021 , we amended and restated in its entirety and refinanced our existing Credit Agreement. We recognized approximately$0.6 million of expense related to the portion of debt issuance costs that were allocated to the previous Credit Agreement and accounted for as an extinguishment of debt. Refer to Note 13 - Debt for additional information regarding the terms of our Credit Agreement and related borrowings. •Loss From Equity-Method Investments. For the three months endedJune 30, 2021 and 2020, loss from equity-method investments was approximately$0.9 million . For the six months endedJune 30, 2021 and 2020, loss from equity-methods investment was approximately$5.4 million and$1.9 million , respectively. The increase in the six months endedJune 30, 2021 compared to the same period in 2020 was primarily attributable to an impairment loss of$3.5 million recorded in the three months endedMarch 31, 2021 . 42 -------------------------------------------------------------------------------- •Net Foreign Exchange Gain/Loss. For the three months endedJune 30, 2021 and 2020, net foreign exchange loss was$0.9 million and$0.8 million , respectively. During the six months endedJune 30, 2021 and 2020, net foreign exchange loss was$1.5 million and$1.3 million , respectively. These results are attributable to movements in the foreign currency exchange rates between theU.S. dollar and foreign currencies in subsidiaries for which our functional currency is not theU.S. dollar. We recognize the local currency as the functional currency in virtually all of our international subsidiaries. See "Results of Operations -Net Sales " above for additional discussion on the impact of foreign exchange rates on our net sales of operations for the three and six months endedJune 30, 2021 . Provision for Income Taxes. For the three months ended June 30, 2021 and 2020, our provision for income taxes reflected an effective tax rate of 20% and 29%, respectively. For the six months endedJune 30, 2021 and 2020, our provision for income taxes reflected an effective tax rate of 16% and 24%, 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, 2021 June 30, 2021 (Unaudited) (Unaudited) Effective tax rate at June 30, 2020 29 % 24 % Transition tax on deferred foreign income (5) (1) Employee share-based compensation and other discrete (7) items (4) Gain on sale of AWR business (3) (1) Enhanced deduction for certain research and (2) development expenses
(2)
Foreign taxes greater than federal statutory rate - (2)
Research and development tax credit 1 1
Change in unrecognized tax benefits 1 1
Global intangible low-taxed income inclusion ("GILTI") 3 3
Effective tax rate at June 30, 2021 20 % 16 %
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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 others in our
industry and to our historical results. The following tables provide details
with respect to the amount of GAAP charges related to certain items that were
recorded in the line items indicated below (in thousands).
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) (Unaudited) (Unaudited)
2021 2020 2021 2020
Stock-based compensation
Cost of sales $ 1,191
6,922 6,467 12,617 11,642
Research and development 6,180 4,428 11,893 7,947
General and administrative 5,854 3,404 10,520 6,008
Provision for income taxes (3,916) (2,905) (7,241) (4,406)
Total $ 16,231 $ 12,326 $ 30,094 $ 22,927
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) (Unaudited) (Unaudited)
2021 2020 2021 2020
Amortization of acquisition-related
intangibles and fair value adjustments
Net sales $ 738 $ - $ 1,551 $ -
Cost of sales $ 4,226 $ 635 $ 8,497 $ 1,381
Sales and marketing 2,357 480 4,528 966
Research and development - 28 - 55
Other expense 554 117 948 241
Provision for income taxes (979) (133) (1,969) (290)
Total $ 6,896 $ 1,127 $ 13,555 $ 2,353
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) (Unaudited) (Unaudited)
2021 2020 2021 2020
Acquisition-related transaction and
integration costs, restructuring charges,
and other(1)(2)
Cost of sales $ (118) $ - $ (43) $ 20
Sales and marketing 839 1,239 5,487 7,612
Research and development 548 147 1,036 4,816
General and administrative 873 3,399 6,539 2,385
Gain on sale of business/assets - - - (159,753)
Other expense 280 - 4,006 128
Provision for income taxes (578) (78) (3,463) 34,676
Total $ 1,844 $
4,707
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) (Unaudited) (Unaudited)
2021 2020 2021 2020
Capitalization and amortization of
internally developed software costs
Cost of sales $ 6,227 $ 7,144 $ 13,101 $ 14,226
Research and development (495) (1,181) (721) (3,095)
Provision for income taxes (1,204) (1,252) (2,600) (2,337)
Total $ 4,528 $ 4,711 $ 9,780 $ 8,794
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Liquidity and Capital Resources
Overview
AtJune 30, 2021 , we had$265 million in cash, cash equivalents and short-term investments. Our cash and cash equivalent balances are held in numerous financial institutions throughout the world, including substantial amounts held outside of theU.S. , however, all of our short-term investments that are located outside of theU.S. are denominated in theU.S. dollar. The following table presents the geographic distribution of our cash, cash equivalents, and short-term investments as ofJune 30, 2021 (in millions): Domestic International Total Cash and cash equivalents$113.3 $137.1 $250.4 45% 55% Short-term investments$10.1 $4.0 $14.1 72% 28% Total cash, cash equivalents and short-term investments$123.4 $141.1 $264.5 47% 53% The following table presents our working capital, cash and cash equivalents and short-term investments: June 30, 2021 December 31, Increase/ (In thousands) (unaudited) 2020 (Decrease) Working capital$ 483,339 $ 467,655 $ 15,684 Cash and cash equivalents (1) 250,421 260,232 (9,811) Short-term investments (1) 14,110 59,923 (45,813) Total cash, cash equivalents and short-term investments$ 264,531 $
320,155
(1) Included in working capital
Our principal sources of liquidity include cash, cash equivalents, cash
generated from the sale and maturity of marketable securities, cash flows
generated from our operations, cash generated from purchase of common stock
through our employee stock purchase plan and available borrowings under our
Credit Agreement. The primary drivers of the net increase in working capital
between
•Cash, cash equivalents, and short-term investments decreased by$56 million for the six-month period endedJune 30, 2021 . Additional analysis of the changes in our cash flows for the period endedJune 30, 2021 compared to the year endedDecember 31, 2020 is discussed below;
•Accounts receivable, net decreased by
•Inventory increased by$17 million . Inventory turns on a trailing twelve month basis were 1.6 atJune 30, 2021 and 1.7 atDecember 31, 2020 . The increase in inventory was primarily attributable to an increase in raw materials to support increased demand for our products and minimize supply chain disruptions; •The current portion of deferred revenue decreased by$6 million , which was primarily related to the timing of annual software maintenance renewals for our enterprise-level licensing arrangements; •Accrued compensation decreased by$18 million attributable to annual payments under our variable compensation programs related to 2020 performance and severance payments under our current restructuring initiative, partially offset by accruals related to expected payouts under our 2021 variable compensation programs; 45 -------------------------------------------------------------------------------- •Other current liabilities decreased by$16 million which was primarily related to income tax payments and changes in the fair value of foreign currency forward contracts designated as hedging instruments; and
•Other taxes payable decreased by
Analysis of Cash Flow
The following table summarizes our cash flow results for the six months endedJune 30, 2021 and 2020. Six Months Ended June 30, (In thousands) (unaudited) 2021 2020 Cash provided by operating activities$ 52,323 $ 101,498 Cash (used in) provided by investing activities (6,315)
231,791
Cash (used in) provided by financing activities (54,932)
13,936
Effect of exchange rate changes on cash (887)
(636)
Net change in cash and cash equivalents (9,811)
346,589
Cash and cash equivalents at beginning of period 260,232
194,616
Cash and cash equivalents at end of period$ 250,421 $ 541,205 Operating Activities Cash provided by operating activities is comprised of net income adjusted for certain items and changes in working capital. Cash flows from operating activities can fluctuate significantly from period to period as working capital needs and the timing of payments for income taxes, variable pay, restructuring activities, and other items impact reported cash flows. Cash provided by operating activities for the six months endedJune 30, 2021 decreased by$49 million compared to the same period in 2020. This decrease was primarily due to a$111 million decrease in cash provided by changes in operating assets and liabilities during the year, further described below, partially offset by an increase of$62 million in net income adjusted for certain non-cash operating items, including stock-based compensation, depreciation and amortization, and gains on sale of assets/businesses: •The aggregate of accounts receivable, inventory and accounts payable used net cash of$7 million during the six months endedJune 30, 2021 compared to net cash provided of$19 million in the comparable period in 2020. The amount of cash flow generated from or used by the aggregate of accounts receivable, inventory and accounts payable depends upon the cash conversion cycle, which represents the number of days that elapse from the day we pay for the purchase of raw materials and components to the collection of cash from our customers and can be significantly impacted by the timing of shipments and purchases, as well as collections and payments in a period. •The aggregate of other movements in assets and liabilities used net operating cash of$57 million during the six months endedJune 30, 2021 compared to net operating cash provided of$29 million in the comparable period in 2020. The year over year change is primarily attributable to the timing of payments of federal income taxes, variable compensation programs and severance payments under our current restructuring initiative. 46
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Investing Activities
Cash provided by investing activities decreased by$238 million for the six months endedJune 30, 2021 compared to the same period in 2020. This was primarily attributable to a$160 million decrease in proceeds received from the sale of our AWR subsidiary inJanuary 2020 , a$32 million increase in cash outflows related to acquisitions and equity-method investments, and a net sale of short-term investments of$46 million in the six months endedJune 30, 2021 compared to a net sale of short-term investments of$101 million during the same period in 2020. The decrease in investing inflows was partially offset by a decrease of$10 million in capital expenditures and internally developed software costs that were eligible for capitalization during the six months endedJune 30, 2021 , compared to the same period in 2020.
Financing Activities
Cash provided by financing activities decreased by$69 million for the six months endedJune 30, 2021 compared to the same period in 2020. This was primarily related to an$89 million decrease in net proceeds received under our term and revolving loan facilities, net of issuance costs, and an increase in cash outflows of$3 million related to our quarterly dividends, partially offset by a decrease in cash outflows of$24 million related to shares repurchased during the comparable period in 2020. (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 and share repurchase program). Contractual Cash Obligations. Information related to our contractual obligations as ofDecember 31, 2020 can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations-Contractual Obligations," in Part II-Item 7 of the Form 10-K. AtJune 30, 2021 , there were no material changes outside the ordinary course of business to our contractual obligations from those reported in our Form 10-K. See Note 8 - Leases of Notes to Consolidated Financial Statements for additional information regarding our non-cancellable operating lease obligations as ofJune 30, 2021 . Below are the payments due by period for our debt outstanding as ofJune 30, 2021 : Payments due by period (In thousands) Total Less than one year One to three years Three to five years
More than five years
Revolving line of credit $ 100,000 - - 100,000 -
Credit Agreement. Refer to Note 13 - Debt of Notes to Consolidated Financial
Statements for additional details on our secured revolving loan facility. As of
June 30, 2021 , we had approximately $400 million in available borrowing capacity
under the Credit Agreement. Proceeds of additional borrowings made under the
Credit Agreement may be used for working capital and other general corporate
purposes. We may prepay the loans under the Credit Agreement in whole or in part
at any time without premium or penalty. Certain of our future material domestic
subsidiaries are required to guaranty our obligations under the Credit
Agreement.
Off-Balance Sheet Arrangements. We do not have any off-balance sheet debt. At
June 30, 2021 , 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, cash
generated from the purchase of common stock through our employee stock purchase
plan and available borrowing under our Credit 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. We may also seek to pursue
additional financing or to raise additional funds by seeking an additional
increase in our secured revolving line of credit under our Credit Agreement or
selling equity or debt to the public or in private transactions from time to
time. If we elect to raise additional funds, we may not be able to obtain such
funds on a timely basis or 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.
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:
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•payment of dividends to our stockholders;
•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;
•acquisitions of other businesses, assets, products or technologies;
•repurchase of our common stock;
•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 facilities;
•our relationships with suppliers and customers; and
•the amount of proceeds received as a result of our employee stock purchase
plan.
Recently Issued Accounting Pronouncements
See Note 1 - Basis of presentation in Notes to Consolidated Financial Statements.
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