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OFFON

NATIONAL INSTRUMENTS CORPORATION

(NATI)
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NATIONAL INSTRUMENTS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/02/2021 | 01:14pm EDT
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
ended December 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 the U.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").

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•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 the U.S.
and sales offices and distributors in key international markets. Sales outside
of the Americas accounted for approximately 61% and 60% of our net sales during
the three months ended June 30, 2021 and 2020, respectively, and approximately
62% and 60% of our net sales during the six months ended June 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 and Penang, 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.

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During the three months ended June 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 ended June 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 of June 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 ended June 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 ended June 30, 2021, we saw continued volatility in the
exchange rates between the U.S. dollar and many of the currency markets where we
have exposure. During the first half of 2021, the U.S. dollar index, as tracked
by the St. Louis Federal 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.

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Results of Operations for the three and six months ended June 30, 2021 and 2020


Net Sales.  The following table sets forth our net sales for the three and six
months ended June 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 - Summary

Net sales for the three and six months ended June 30, 2021 were up 15 percent and 12 percent, respectively, compared to the same period in 2020.


•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.

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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 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
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 the Americas (excluding the U.S.), EMEA, and
APAC are denominated in local currencies, and accordingly, the U.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 than U.S. Dollars are converted into U.S. Dollars at constant
exchange rates (i.e., the average rates in effect during the three and six
months ended June 30, 2020).

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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 ended June 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 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 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 ended June 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 ended June 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 ended June 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 June 30, 2021

The year over year increase of $24 million in our operating expenses during the three months ended June 30, 2021 was primarily related to the following:


•$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 ended June 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 ended June 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 ended June 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 June 30, 2021

The year over year increase of $41 million in our operating expenses during the six months ended June 30, 2021 was primarily related to the following:



•$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 ended June 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
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Research and Development


The primary drivers of the increase in research and development expenses for the
six months ended June 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 ended June 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, on January 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 ended June 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 ended June 30,
2021 and 2020, respectively. For the six months ended June 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 ended June
30, 2021 and 2020, respectively. The increase in operating income in absolute
dollars for the three months ended June 30, 2021, compared to the three months
ended June 30, 2020, is attributable to the factors discussed in Net Sales,
Gross Profit and Operating Expenses above. The decrease in operating income in
absolute dollars for the six months ended June 30, 2021, compared to the six
months ended June 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 in Net Sales, Gross Profit and Operating Expenses above.

Other (Expense) Income.


• Interest Income. For the three months ended June 30, 2021 and 2020, interest
income was $0.1 million and $1.0 million, respectively. For the six months ended
June 30, 2021 and 2020, interest income was $0.3 million and $3.3 million,
respectively. During the six months ended June 30, 2021, the Federal 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 ended June 30, 2021 and 2020, interest
expense was approximately $1.2 million, and $0.1 million, respectively. For the
six months ended June 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 ended June 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 ended June 30, 2021
and 2020, loss from equity-method investments was approximately $0.9 million.
For the six months ended June 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 ended June 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 ended March 31, 2021.

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•Net Foreign Exchange Gain/Loss. For the three months ended June 30, 2021 and
2020, net foreign exchange loss was $0.9 million and $0.8 million, respectively.
During the six months ended June 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 the U.S. dollar and
foreign currencies in subsidiaries for which our functional currency is not the
U.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 ended June 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 ended June 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          

$ 932 $ 2,305 $ 1,736 Sales and marketing

                                         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 $ 13,562 $ (110,116) (1): During the first quarter of 2020, we recognized a gain of approximately $160 million related to the divestiture of AWR, presented within "Gain on sale of business/assets". (2): During the first quarter of 2021, we recognized a $3.5 million impairment loss related to one of our equity-method investments.



                                                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


At June 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 the U.S., however, all of our short-term investments that are located
outside of the U.S. are denominated in the U.S. dollar. The following table
presents the geographic distribution of our cash, cash equivalents, and
short-term investments as of June 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 $ (55,624)

(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 December 31, 2020 and June 30, 2021 were:


•Cash, cash equivalents, and short-term investments decreased by $56 million for
the six-month period ended June 30, 2021. Additional analysis of the changes in
our cash flows for the period ended June 30, 2021 compared to the year ended
December 31, 2020 is discussed below;

•Accounts receivable, net decreased by $8 million. Days sales outstanding increased to 57 days at June 30, 2021, compared to 56 days at December 31, 2020. The decrease in accounts receivable is primarily related to quarterly fluctuations in our net sales;


•Inventory increased by $17 million. Inventory turns on a trailing twelve month
basis were 1.6 at June 30, 2021 and 1.7 at December 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;

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•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 $9 million primarily related to the timing of payments for VAT and other indirect taxes.

Analysis of Cash Flow


The following table summarizes our cash flow results for the six months ended
June 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 ended June 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 ended June 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 ended June 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.





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Investing Activities


Cash provided by investing activities decreased by $238 million for the six
months ended June 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 in January 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 ended June 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 ended
June 30, 2021, compared to the same period in 2020.

Financing Activities


Cash provided by financing activities decreased by $69 million for the six
months ended June 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 of December 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. At June 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 of June 30, 2021.

Below are the payments due by period for our debt outstanding as of June 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:
                                       47
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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.

                                       48

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