Disaggregation of Revenues
We disaggregate revenue from contracts with customers based on the timing of transfer of goods or services to customers (point-in-time or over time) and geographic region based on the billing location of the customer. The geographic regions that are tracked are the Americas (United States, Canada and Latin America), EMEIA (Europe, Middle East, India and Africa) and APAC (Australia, New Zealand, Southeast Asia and China). Total net sales based on the disaggregation criteria described above are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
(In thousands)
|
|
|
(Unaudited)
|
|
|
|
2018
|
|
2017 (1)
|
|
|
|
|
|
|
|
|
|
Net sales:
|
|
Point-in-Time
|
Over Time
|
Total
|
|
Point-in-Time
|
Over Time
|
Total
|
Americas
|
|
$
|
115,214
|
|
27,702
|
|
$
|
142,916
|
|
|
$
|
108,988
|
|
24,203
|
|
$
|
133,191
|
|
EMEIA
|
|
79,952
|
|
19,461
|
|
99,413
|
|
|
73,459
|
|
19,818
|
|
93,277
|
|
APAC
|
|
95,837
|
|
7,961
|
|
103,798
|
|
|
84,678
|
|
9,775
|
|
94,453
|
|
Total net sales (2)
|
|
$
|
291,003
|
|
55,124
|
|
$
|
346,127
|
|
|
$
|
267,125
|
|
53,796
|
|
$
|
320,921
|
|
(1) As discussed in "Note 1 - Basis of presentation", prior periods have not been adjusted for adoption of ASU 2014-09
|
(2) Net sales contains hedging gains and losses, which do not represent revenues recognized from customers. See "Note 5 - Derivative instruments and hedging activities" for more information on the impact of our hedging activities on our results of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
(In thousands)
|
|
|
(Unaudited)
|
|
|
|
2018
|
|
2017 (1)
|
|
|
|
|
|
|
|
|
|
Net sales:
|
|
Point-in-Time
|
Over Time
|
Total
|
|
Point-in-Time
|
Over Time
|
Total
|
Americas
|
|
$
|
317,426
|
|
75,003
|
|
$
|
392,429
|
|
|
$
|
300,043
|
|
73,234
|
|
$
|
373,277
|
|
EMEIA
|
|
257,346
|
|
57,520
|
|
314,866
|
|
|
232,270
|
|
56,295
|
|
288,565
|
|
APAC
|
|
267,773
|
|
23,965
|
|
291,738
|
|
|
251,626
|
|
26,167
|
|
277,793
|
|
Total net sales (2)
|
|
$
|
842,545
|
|
156,488
|
|
$
|
999,033
|
|
|
$
|
783,939
|
|
155,696
|
|
$
|
939,635
|
|
(1) As discussed in "Note 1 - Basis of presentation", prior periods have not been adjusted for adoption of ASU 2014-09
|
(2) Net sales contains hedging gains and losses, which do not represent revenues recognized from customers. See "Note 5 - Derivative instruments and hedging activities" for more information on the impact of our hedging activities on our results of operations
|
Information about Contract Balances
Amounts collected in advance of services being provided are accounted for as deferred revenue. Nearly all of our deferred revenue balance is related to extended hardware and software maintenance contracts. Payment terms and conditions vary by contract type, although payment is typically due within 30 to 90 days of contract inception. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers, such as invoicing at the beginning of a subscription term with a portion of the revenue recognized ratably over the contract period, or to provide customers with financing, such as multi-year on-premises licenses that are invoiced annually with revenue recognized upfront.
Changes in deferred revenue, current and long-term, during the
nine
months ended
September 30, 2018
were as follows:
|
|
|
|
|
|
Amount
|
|
(In thousands)
|
Deferred Revenue at December 31, 2017
|
$
|
154,380
|
|
Impact of adopting new revenue standard
|
(10,064
|
)
|
Deferred Revenue at January 1, 2018
|
$
|
144,316
|
|
Deferral of revenue billed in current period, net of recognition
|
116,507
|
|
Recognition of revenue deferred in prior periods
|
(105,291
|
)
|
Foreign currency translation impact
|
(3,372
|
)
|
Balance as of September 30, 2018 (unaudited)
|
$
|
152,160
|
|
For the
nine
months ended
September 30, 2018
, revenue recognized from performance obligations related to prior periods (for example, due to changes in transaction price) was not material. Amounts recognized as revenue in excess of amounts billed are recorded as unbilled receivables. Unbilled receivables which are anticipated to be invoiced in the next twelve months are included in "accounts receivable, net" on the consolidated balance sheet. Based on the nature of our contracts with customers, we do not typically recognize unbilled receivables related to revenues recognized in excess of amounts billed. For the nine months ended
September 30, 2018
, amounts recognized related to unbilled receivables were not material.
Unsatisfied Performance Obligations
Revenue expected to be recognized in any future period related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less, and excluding contracts where revenue is recognized as invoiced, was approximately
$54.9 million
as of
September 30, 2018
. Since we typically invoice customers at contract inception, this amount is included in our current and non-current deferred revenue balances. As of
September 30, 2018
, we expect to recognize approximately
12%
of the revenue related to these unsatisfied performance obligations during the remainder of 2018,
44%
during 2019, and
44%
thereafter.
Assets Recognized from the Costs to Obtain a Contract with a Customer
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs meet the requirements to be capitalized. Capitalized incremental costs related to initial contracts and renewals are amortized over the same period because the commissions paid on both the initial contract and renewals are commensurate with one another. Total capitalized costs to obtain a contract were immaterial during the periods presented and are included in other long-term assets on our consolidated balance sheets.
Practical Expedients
As discussed in "Note 1 - Basis of presentation" and elsewhere in "Note 2 - Revenue," we have elected the following practical expedients in accordance with the new revenue standard:
|
|
•
|
We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses.
|
|
|
•
|
We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
|
|
|
•
|
We do not consider the time value of money for contracts with original durations of one year or less.
|
Note 3 –
Short-term investments
The following tables summarize unrealized gains and losses related to our short-term investments designated as available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2018
|
(In thousands)
|
|
(Unaudited)
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
Adjusted Cost
|
|
Unrealized Gain
|
|
Unrealized Loss
|
|
Fair Value
|
Corporate bonds
|
|
$
|
147,158
|
|
|
$
|
211
|
|
|
$
|
(823
|
)
|
|
$
|
146,546
|
|
U.S. treasuries and agencies
|
|
24,468
|
|
|
—
|
|
|
(5
|
)
|
|
24,463
|
|
Time deposits
|
|
19
|
|
|
—
|
|
|
—
|
|
|
19
|
|
Total Short-term investments
|
|
$
|
171,645
|
|
|
$
|
211
|
|
|
$
|
(828
|
)
|
|
$
|
171,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
As of December 31, 2017
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
Adjusted Cost
|
|
Unrealized Gain
|
|
Unrealized Loss
|
|
Fair Value
|
Corporate bonds
|
|
$
|
120,341
|
|
|
$
|
182
|
|
|
$
|
(395
|
)
|
|
$
|
120,128
|
|
Time deposits
|
|
1,760
|
|
|
—
|
|
|
—
|
|
|
1,760
|
|
Total Short-term investments
|
|
$
|
122,101
|
|
|
$
|
182
|
|
|
$
|
(395
|
)
|
|
$
|
121,888
|
|
The following tables summarize the contractual maturities of our short-term investments designated as available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2018
|
(In thousands)
|
|
(Unaudited)
|
|
|
Adjusted Cost
|
|
Fair Value
|
Due in less than 1 year
|
|
$
|
67,609
|
|
|
$
|
67,511
|
|
Due in 1 to 5 years
|
|
104,036
|
|
|
103,517
|
|
Total available-for-sale debt securities
|
|
$
|
171,645
|
|
|
$
|
171,028
|
|
|
|
|
|
|
Due in less than 1 year
|
|
Adjusted Cost
|
|
Fair Value
|
Corporate bonds
|
|
$
|
43,122
|
|
|
$
|
43,029
|
|
U.S. treasuries and agencies
|
|
24,468
|
|
|
24,463
|
|
Time deposits
|
|
19
|
|
|
19
|
|
Total available-for-sale debt securities
|
|
$
|
67,609
|
|
|
$
|
67,511
|
|
|
|
|
|
|
Due in 1 to 5 years
|
|
Adjusted Cost
|
|
Fair Value
|
Corporate bonds
|
|
$
|
104,036
|
|
|
$
|
103,517
|
|
Total available-for-sale debt securities
|
|
$
|
104,036
|
|
|
$
|
103,517
|
|
Note 4 – Fair value measurements
We define fair value to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market that market participants may use when pricing the asset or liability.
We follow a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value measurement is determined based on the lowest level input that is significant to the fair value measurement. The three values of the fair value hierarchy are the following:
Level 1 –
Quoted prices in active markets for identical assets or liabilities
Level 2 –
Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly
Level 3 –
Inputs that are not based on observable market data
Assets and liabilities measured at fair value on a recurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
(In thousands)
|
|
(Unaudited)
|
Description
|
|
September 30, 2018
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents available for sale:
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
120,395
|
|
|
$
|
120,395
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Short-term investments available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
146,546
|
|
|
—
|
|
|
146,546
|
|
|
—
|
|
U.S. treasuries and agencies
|
|
24,463
|
|
|
—
|
|
|
24,463
|
|
|
—
|
|
Time deposits
|
|
19
|
|
|
19
|
|
|
—
|
|
|
—
|
|
Derivatives
|
|
9,296
|
|
|
—
|
|
|
9,296
|
|
|
—
|
|
Total Assets
|
|
$
|
300,719
|
|
|
$
|
120,414
|
|
|
$
|
180,305
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
(1,724
|
)
|
|
$
|
—
|
|
|
$
|
(1,724
|
)
|
|
$
|
—
|
|
Total Liabilities
|
|
$
|
(1,724
|
)
|
|
$
|
—
|
|
|
$
|
(1,724
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Fair Value Measurements at Reporting Date Using
|
Description
|
|
December 31, 2017
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents available for sale:
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
61,423
|
|
|
$
|
61,423
|
|
|
$
|
—
|
|
|
$
|
—
|
|
U.S. treasuries and agencies
|
|
39,461
|
|
|
—
|
|
|
39,461
|
|
|
—
|
|
Short-term investments available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
120,128
|
|
|
—
|
|
|
120,128
|
|
|
—
|
|
Time deposits
|
|
1,760
|
|
|
1,760
|
|
|
—
|
|
|
—
|
|
Derivatives
|
|
7,232
|
|
|
—
|
|
|
7,232
|
|
|
—
|
|
Total Assets
|
|
$
|
230,004
|
|
|
$
|
63,183
|
|
|
$
|
166,821
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
(12,743
|
)
|
|
$
|
—
|
|
|
$
|
(12,743
|
)
|
|
$
|
—
|
|
Total Liabilities
|
|
$
|
(12,743
|
)
|
|
$
|
—
|
|
|
$
|
(12,743
|
)
|
|
$
|
—
|
|
We value our available-for-sale short-term investments based on pricing from third party pricing vendors, who may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. We classify all of our fixed income available-for-sale securities as having Level 2 inputs. The valuation techniques used to measure the fair value of our financial instruments having Level 2 inputs were derived from non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models, such as discounted cash flow techniques. We believe all of these sources reflect the credit risk associated with each of our available-for-sale short-term investments. Short-term investments available-for-sale consists of debt securities issued by states of the U.S. and political subdivisions of the U.S., corporate debt securities and debt securities issued by U.S. government organizations and agencies. All of our short-term investments available-for-sale have contractual maturities of less than
60 months
.
Derivatives include foreign currency forward contracts. Our foreign currency forward contracts are valued using an income approach (Level 2) based on the spot rate less the contract rate multiplied by the notional amount. We consider counterparty credit risk in the valuation of our derivatives. However, counterparty credit risk did not impact the valuation of our derivatives during the
nine months ended September 30, 2018
. There were no transfers in or out of Level 1 or Level 2 during the
nine months ended September 30, 2018
.
As of
September 30, 2018
, our short-term investments did not include sovereign debt from any country other than the United States.
We did not have any items that were measured at fair value on a nonrecurring basis at
September 30, 2018
and
December 31, 2017
. The carrying value of net accounts receivable, accounts payable, and long-term debt contained in the consolidated balance sheets approximates fair value.
Note 5 – Derivative instruments and hedging activities
We recognize all of our derivative instruments as either assets or liabilities in our statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.
We have operations in approximately
50
countries. Sales outside of the Americas accounted for approximately
59%
and
58%
of our net sales during the three months ended
September 30, 2018
and
2017
, and approximately
61%
and
60%
of our net sales during the
nine months ended September 30, 2018
and
2017
, respectively. Our activities expose us to a variety of market risks, including the effects of changes in foreign currency exchange rates. These financial risks are monitored and managed by us as an integral part of our overall risk management program.
We maintain a foreign currency risk management strategy that uses derivative instruments (foreign currency forward contracts) to help protect our earnings and cash flows from fluctuations caused by the volatility in currency exchange rates. Movements in foreign currency exchange rates pose a risk to our operations and competitive position, in that exchange rate changes may affect our profitability and cash flow, and the business or pricing strategies of our non-U.S. based competitors.
The vast majority of our foreign sales are denominated in the customers’ local currency. We purchase foreign currency forward contracts as hedges of forecasted sales that are denominated in foreign currencies and as hedges of foreign currency denominated financial assets or liabilities. These contracts are entered into to help protect against the risk that the eventual dollar-net-cash inflows resulting from such sales or firm commitments will be adversely affected by changes in exchange rates. We also purchase foreign currency forward contracts as hedges of forecasted expenses that are denominated in foreign currencies. These contracts are entered into to help protect against the risk that the eventual dollar-net-cash outflows resulting from foreign currency operating and cost of sales expenses will be adversely affected by changes in exchange rates.
We designate foreign currency forward contracts as cash flow hedges of forecasted net sales or forecasted expenses. In addition, we hedge our foreign currency denominated balance sheet exposures using foreign currency forward contracts that are not designated as hedging instruments. None of our derivative instruments contain a credit-risk-related contingent feature.
Cash flow hedges
To help protect against the reduction in value caused by a fluctuation in foreign currency exchange rates of forecasted foreign currency cash flows resulting from international sales over the next
one
to
three
years, we have instituted a foreign currency cash flow hedging program. We hedge portions of our forecasted net sales and forecasted expenses denominated in foreign currencies with forward contracts. For forward contracts, when the dollar strengthens significantly against the foreign currencies, the change in the present value of future foreign currency cash flows may be offset by the change in the fair value of the forward contracts designated as hedges. We purchase foreign currency forward contracts for up to
100%
of our forecasted exposures in selected currencies (primarily in Euro, Japanese yen, Hungarian forint, British pound, Malaysian ringgit, Korean won and Chinese yuan) and limit the duration of these contracts to
36
months or less.
For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (“OCI”) and reclassified into earnings in the same line item (net sales, operating expenses, or cost of sales) associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings or expenses during the current period and are classified as a component of “net foreign exchange gain (loss).” Hedge effectiveness of foreign currency forwards designated as cash flow hedges are measured by comparing the hedging instrument’s cumulative change in fair value from inception to maturity to the forecasted transaction’s terminal value.
We held forward contracts designated as cash flow hedges with the following notional amounts:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
US Dollar Equivalent
|
|
|
As of September 30, 2018
|
|
As of December 31,
|
|
|
(Unaudited)
|
|
2017
|
Chinese yuan
|
|
$
|
64,020
|
|
|
$
|
39,197
|
|
Euro
|
|
164,488
|
|
|
177,406
|
|
Japanese yen
|
|
10,754
|
|
|
22,857
|
|
Hungarian forint
|
|
28,284
|
|
|
41,296
|
|
British pound
|
|
16,197
|
|
|
9,931
|
|
Malaysian ringgit
|
|
26,325
|
|
|
28,287
|
|
Korean won
|
|
10,984
|
|
|
—
|
|
Total forward contracts notional amount
|
|
$
|
321,052
|
|
|
$
|
318,974
|
|
The contracts in the foregoing table had contractual maturities of
27
months or less and
24
months or less at
September 30, 2018
and
December 31, 2017
, respectively.
At
September 30, 2018
, we expect to reclassify
$5.1 million
of gains on derivative instruments from accumulated OCI to net sales during the next twelve months when the hedged international sales occur,
$0.2 million
of gains on derivative instruments from accumulated OCI to cost of sales during the next twelve months when the cost of sales are incurred and
$0.3 million
of gains on derivative instruments from accumulated OCI to operating expenses during the next twelve months when the hedged operating expenses occur. Expected amounts are based on derivative valuations at
September 30, 2018
. Actual results may vary materially as a result of changes in the corresponding exchange rates subsequent to this date.
The gains and losses recognized in earnings due to hedge ineffectiveness were not material for each of the
nine months ended September 30, 2018
and
2017
and are included as a component of net income under the line item “net foreign exchange gain (loss).”
Other Derivatives
Other derivatives not designated as hedging instruments consist primarily of foreign currency forward contracts that we use to hedge our foreign denominated net receivable or net payable positions to help protect against the change in value caused by a fluctuation in foreign currency exchange rates. We typically attempt to hedge up to
90%
of our outstanding foreign denominated net receivables or net payables and typically limit the duration of these foreign currency forward contracts to approximately
90
days or less. The gain or loss on the derivatives as well as the offsetting gain or loss on the hedge item attributable to the hedged risk is recognized in current earnings under the line item “net foreign exchange gain (loss).” As of
September 30, 2018
and
December 31, 2017
, we held foreign currency forward contracts that were not designated as hedging instruments with a notional amount of
$52 million
and
$63 million
, respectively.
The following tables present the fair value of derivative instruments on our Consolidated Balance Sheets at
September 30, 2018
and
December 31, 2017
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
September 30, 2018
|
|
December 31, 2017
|
(In thousands)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Balance Sheet Location
|
|
Fair Value
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts - ST forwards
|
|
Prepaid expenses and other current assets
|
|
$
|
6,717
|
|
|
Prepaid expenses and other current assets
|
|
$
|
4,707
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts - LT forwards
|
|
Other long-term assets
|
|
2,016
|
|
|
Other long-term assets
|
|
2,339
|
|
Total derivatives designated as hedging instruments
|
|
|
|
$
|
8,733
|
|
|
|
|
$
|
7,046
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts - ST forwards
|
|
Prepaid expenses and other current assets
|
|
$
|
563
|
|
|
Prepaid expenses and other current assets
|
|
$
|
187
|
|
Total derivatives not designated as hedging instruments
|
|
|
|
$
|
563
|
|
|
|
|
$
|
187
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
9,296
|
|
|
|
|
$
|
7,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
|
September 30, 2018
|
|
December 31, 2017
|
(In thousands)
|
|
(Unaudited)
|
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts - ST forwards
|
|
Other current liabilities
|
|
$
|
(1,078
|
)
|
|
Other current liabilities
|
|
$
|
(7,487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts - LT forwards
|
|
Other long-term liabilities
|
|
(493
|
)
|
|
Other long-term liabilities
|
|
(3,959
|
)
|
Total derivatives designated as hedging instruments
|
|
|
|
$
|
(1,571
|
)
|
|
|
|
$
|
(11,446
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts - ST forwards
|
|
Other current liabilities
|
|
$
|
(153
|
)
|
|
Other current liabilities
|
|
$
|
(1,297
|
)
|
Total derivatives not designated as hedging instruments
|
|
|
|
$
|
(153
|
)
|
|
|
|
$
|
(1,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
(1,724
|
)
|
|
|
|
$
|
(12,743
|
)
|
The following tables present the effect of derivative instruments on our Consolidated Statements of Income for
three months ended September 30, 2018
and
2017
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
(In thousands)
|
(Unaudited)
|
Derivatives in Cash Flow Hedging Relationship
|
|
Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
|
|
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
|
|
Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
|
|
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
|
|
Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
|
Foreign exchange contracts - forwards
|
|
$
|
3,569
|
|
|
Net sales
|
|
$
|
1,424
|
|
|
Net foreign exchange gain/(loss)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts - forwards
|
|
(96
|
)
|
|
Cost of sales
|
|
74
|
|
|
Net foreign exchange gain/(loss)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts - forwards
|
|
(157
|
)
|
|
Operating expenses
|
|
111
|
|
|
Net foreign exchange gain/(loss)
|
|
—
|
|
Total
|
|
$
|
3,316
|
|
|
|
|
$
|
1,609
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
(In thousands)
|
(Unaudited)
|
Derivatives in Cash Flow Hedging Relationship
|
|
Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
|
|
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
|
|
Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
|
|
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
|
|
Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
|
Foreign exchange contracts - forwards
|
|
$
|
(5,804
|
)
|
|
Net sales
|
|
$
|
(1,401
|
)
|
|
Net foreign exchange gain/(loss)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts - forwards
|
|
1,421
|
|
|
Cost of sales
|
|
(105
|
)
|
|
Net foreign exchange gain/(loss)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts - forwards
|
|
1,247
|
|
|
Operating expenses
|
|
(148
|
)
|
|
Net foreign exchange gain/(loss)
|
|
—
|
|
Total
|
|
$
|
(3,136
|
)
|
|
|
|
$
|
(1,654
|
)
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
Derivatives not Designated as Hedging Instruments
|
|
Location of Gain (Loss) Recognized in Income
|
|
Amount of Gain (Loss) Recognized in Income
|
|
Amount of Gain (Loss) Recognized in Income
|
|
|
|
|
September 30, 2018
|
|
September 30, 2017
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
Foreign exchange contracts - forwards
|
|
Net foreign exchange gain/(loss)
|
|
$
|
865
|
|
|
(887
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
865
|
|
|
$
|
(887
|
)
|
The following tables present the effect of derivative instruments on our Consolidated Statements of Income for the
nine months ended
September 30, 2018
and
2017
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
(In thousands)
|
(Unaudited)
|
Derivatives in Cash Flow Hedging Relationship
|
|
Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
|
|
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
|
|
Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
|
|
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
|
|
Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
|
Foreign exchange contracts - forwards
|
|
$
|
16,128
|
|
|
Net sales
|
|
$
|
(2,491
|
)
|
|
Net foreign exchange gain/(loss)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts - forwards
|
|
(2,422
|
)
|
|
Cost of sales
|
|
717
|
|
|
Net foreign exchange gain/(loss)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts - forwards
|
|
(2,128
|
)
|
|
Operating expenses
|
|
888
|
|
|
Net foreign exchange gain/(loss)
|
|
—
|
|
Total
|
|
11,578
|
|
|
|
|
$
|
(886
|
)
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
(In thousands)
|
(Unaudited)
|
Derivatives in Cash Flow Hedging Relationship
|
|
Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
|
|
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
|
|
Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
|
|
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
|
|
Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
|
Foreign exchange contracts - forwards
|
|
$
|
(20,601
|
)
|
|
Net sales
|
|
$
|
1,348
|
|
|
Net foreign exchange gain/(loss)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts - forwards
|
|
5,901
|
|
|
Cost of sales
|
|
(1,083
|
)
|
|
Net foreign exchange gain/(loss)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts - forwards
|
|
5,230
|
|
|
Operating expenses
|
|
(1,127
|
)
|
|
Net foreign exchange gain/(loss)
|
|
—
|
|
Total
|
|
$
|
(9,470
|
)
|
|
|
|
$
|
(862
|
)
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
Derivatives not Designated as Hedging Instruments
|
|
Location of Gain (Loss) Recognized in Income
|
|
Amount of Gain (Loss) Recognized in Income
|
|
Amount of Gain (Loss) Recognized in Income
|
|
|
|
|
September 30, 2018
|
|
September 30, 2017
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
Foreign exchange contracts - forwards
|
|
Net foreign exchange gain/(loss)
|
|
$
|
678
|
|
|
(4,065
|
)
|
Total
|
|
|
|
$
|
678
|
|
|
$
|
(4,065
|
)
|
Note 6 – Inventories, net
Inventories, net consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31,
|
(In thousands)
|
|
(Unaudited)
|
|
2017
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
100,603
|
|
|
$
|
91,513
|
|
Work-in-process
|
|
10,291
|
|
|
8,938
|
|
Finished goods
|
|
81,518
|
|
|
84,141
|
|
Total
|
|
$
|
192,412
|
|
|
$
|
184,592
|
|
Note 7 – Intangible assets, net
Intangible assets at
September 30, 2018
and
December 31, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
(In thousands)
|
|
(Unaudited)
|
|
December 31, 2017
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Capitalized software development costs
|
|
$
|
118,424
|
|
|
$
|
(38,154
|
)
|
|
$
|
80,270
|
|
|
$
|
116,691
|
|
|
$
|
(30,345
|
)
|
|
$
|
86,346
|
|
Acquired technology
|
|
95,691
|
|
|
(89,507
|
)
|
|
6,184
|
|
|
96,198
|
|
|
(87,341
|
)
|
|
8,857
|
|
Patents
|
|
34,248
|
|
|
(21,264
|
)
|
|
12,984
|
|
|
33,163
|
|
|
(19,931
|
)
|
|
13,232
|
|
Other
|
|
51,049
|
|
|
(34,426
|
)
|
|
16,623
|
|
|
45,565
|
|
|
(30,707
|
)
|
|
14,858
|
|
Total
|
|
$
|
299,412
|
|
|
$
|
(183,351
|
)
|
|
$
|
116,061
|
|
|
$
|
291,617
|
|
|
$
|
(168,324
|
)
|
|
$
|
123,293
|
|
Software development costs capitalized for the
three months ended September 30, 2018
and
2017
were
$1.9 million
and
$10.1 million
, respectively, and related amortization expense was
$6.9 million
and
$5.7 million
, respectively. For the
nine months ended September 30, 2018
and
2017
, capitalized software development costs were
$13.8 million
and
$35.8 million
, respectively, and related amortization expense was
$19.9 million
and
$16.5 million
, respectively. Capitalized software development costs for the
three months ended September 30, 2018
and
2017
included costs related to stock based compensation of
$0.1 million
and
$0.5 million
, respectively. For the
nine months ended September 30, 2018
and
2017
, capitalized software development costs included costs related to stock based compensation of
$0.6 million
and
$1.4 million
, respectively. The related amounts in the table above are net of fully amortized assets.
Amortization of capitalized software development costs is computed on an individual product basis for those products available for market and is recognized based on the product’s estimated economic life, generally
three
to
six
years. Acquired technology and other intangible assets are amortized over their useful lives, which range from
three
to
eight
years. Patents are amortized using the straight-line method over their estimated period of benefit, generally
10
to
17
years. Total intangible assets amortization expenses were
$9.0 million
and
$8.7 million
for the
three months ended September 30, 2018
and
2017
, respectively, and
$26.4 million
and
$25.7 million
for the
nine months ended September 30, 2018
and
2017
, respectively.
Note 8 – Goodwill
The carrying amount of goodwill as of
September 30, 2018
, was as follows:
|
|
|
|
|
|
Amount
|
|
(In thousands)
|
Balance as of December 31, 2017
|
$
|
266,783
|
|
Foreign currency translation impact
|
(3,664
|
)
|
Balance as of September 30, 2018 (unaudited)
|
$
|
263,119
|
|
The excess purchase price over the fair value of assets acquired is recorded as goodwill. As we have
one
operating segment comprised of components with similar economic characteristics, we allocate goodwill to
one
reporting unit for goodwill impairment testing. Goodwill is tested for impairment on an annual basis, and between annual tests if indicators of potential impairment exist, using a fair-value-based approach based on the market capitalization of the reporting unit. Effective for the annual goodwill impairment test for 2018 and for future testing, we will perform the required annual testing as of November 30 of each year rather than on February 28. In anticipation of this change, we reperformed our annual goodwill impairment test as of November 30, 2017 and determined that it was more likely than not that the estimated fair value for the reporting unit exceeded the carrying amount and that no impairment existed as of the assessment date. We do not believe that the change in the date of the annual goodwill impairment test is a material change in the method of applying an accounting principle nor do we expect that it will result in any delay, acceleration or impact to the results of the impairment testing. We believe this date is preferable because it aligns with the timing of our annual planning process which largely occurs during the fourth quarter. Retrospective application to prior periods is impracticable as we are unable to objectively determine, without the use of hindsight, the assumptions that would be used in those earlier periods.
No
impairment of goodwill was identified during the
nine
months ended
September 30, 2018
or the twelve months ended
December 31, 2017
.
Note 9 – Income taxes
We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Valuation allowances are established when necessary to reduce deferred tax assets to amounts which are more likely than not to be realized. We had a valuation allowance of $
78 million
at
September 30, 2018
and
December 31, 2017
. A majority of the valuation allowance is related to the deferred tax assets of National Instruments Hungary Kft. (“NI Hungary”).
We account for uncertainty in income taxes recognized in our financial statements using prescribed recognition thresholds and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on our tax returns. We had
$9.0 million
and
$10.2 million
of unrecognized tax benefits at
September 30, 2018
and
December 31, 2017
, respectively, all of which would affect our effective income tax rate if recognized. We recorded a gross increase in unrecognized tax benefits of
$1 million
and
$1.6 million
for the
three and nine
months ended
September 30, 2018
, respectively, as a result of the tax positions taken during these and prior periods. We recorded a gross decrease in unrecognized tax benefits of
$3.1 million
for each of the three-and nine-month periods ended September 30, 2018 as a result of closing open tax years and the enactment-date effects of the Tax Cuts and Jobs Act. As of
September 30, 2018
, it is reasonably possible that we will recognize tax benefits in the amount of
$3.4 million
in the next twelve months due to the closing of open tax years. The nature of the uncertainty is related to deductions taken on returns that have not been examined by the applicable tax authority. Our continuing policy is to recognize interest and penalties related to income tax matters in income tax expense. As of
September 30, 2018
, we had approximately
$1.2 million
accrued for interest related to uncertain tax positions. The tax years 2009 through
2018
remain open to examination by the major taxing jurisdictions to which we are subject.
Our provision for income taxes reflected an effective tax rate of
11%
and
12%
for the
three months ended September 30, 2018
and
2017
, respectively, and
13%
and
15%
for the
nine months ended September 30, 2018
and
2017
, respectively. For the
three and nine
months ended
September 30, 2018
, our effective tax rate was lower than the U.S. federal statutory rate of
21%
as a result of an enhanced deduction for certain research and development expenses, profits in foreign jurisdictions with reduced income tax rates, the research and development tax credit, a tax benefit from disqualifying dispositions of equity awards that do not ordinarily result in a tax benefit, excess tax benefits from share-based compensation, and the deduction for foreign-derived deduction eligible income, offset by the U.S. tax on global intangible low-taxed income. For the
three and nine
months ended
September 30, 2017
, our effective tax rate was lower than the U.S. federal statutory rate of
35%
as a result of an enhanced deduction for certain research and development expenses, profits in foreign jurisdictions with reduced income tax rates, the research and development tax credit, a tax benefit from disqualifying dispositions of equity awards that do not ordinarily result in a tax benefit, and excess tax benefits from share-based compensation.
Our earnings in Hungary are subject to a statutory tax rate of
9%
. In addition, our research and development activities in Hungary benefit from a tax law in Hungary that provides for an enhanced deduction for qualified research and development expenses. The tax position of our Hungarian operations resulted in income tax benefits of
$2.6 million
and
$4.3 million
for the
three months ended September 30, 2018
and
2017
, respectively, and
$7.1 million
and
$11.6 million
for the
nine months ended September 30, 2018
and
2017
, respectively.
Earnings from our operations in Malaysia are free of tax under a tax holiday effective January 1, 2013. This tax holiday expires in 2027. If we fail to satisfy the conditions of the tax holiday, this tax benefit may be terminated early. The income tax benefits of the tax holiday for the
three and nine
months ended
September 30, 2018
were approximately
$0.8 million
and
$1.9 million
, respectively. The impact of the tax holiday on a per share basis for each of the
three and nine
months ended
September 30, 2018
was a benefit of
$0.01
per share. The income tax benefits of the tax holiday for the
three and nine
months ended
September 30, 2017
were approximately
$0.8 million
and
$1.9 million
, respectively. The impact of the tax holiday on a per share basis for each of the
three and nine
months ended
September 30, 2017
was a benefit of
$0.01
per share.
No other taxing jurisdictions had a significant impact on our effective tax rate. We have not entered into any advanced pricing or other agreements with the IRS with regard to any foreign jurisdictions.
The Tax Cuts and Jobs Act was enacted on December 22, 2017. The Act reduced the federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign earnings.
We are applying the guidance in SAB 118 when accounting for the enactment-date effects of the Act. As of
September 30, 2018
, we had not completed our accounting for the tax effects of enactment of the Act. However, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. At December 31, 2017, we recognized a provisional amount of
$69.9 million
,
which is included as a component of income tax expense from continuing operations.
During the three month period ended
September 30, 2018
, we recognized a
$(1.8) million
adjustment to the provisional amounts recorded at December 31, 2017, primarily related to foreign withholding and distribution taxes. We expect to finalize our calculation during the fourth quarter of 2018.
The Act subjects a U.S. shareholder to tax on global intangible low-taxed income ("GILTI") earned by certain foreign subsidiaries. The FASB staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the years the tax is incurred as a period expense only. Given the complexity of the GILTI provisions, we are still evaluating the effects of the GILTI provisions and have not yet determined our accounting policy. At
September 30, 2018
, because we are still evaluating the GILTI provisions and our analysis of future taxable income that is subject to GILTI, we have included GILTI related to current-year operations only in our estimated annual effective tax rate and have not provided additional GILTI on deferred items.
Note 10 – Comprehensive income
Our comprehensive income is comprised of net income, foreign currency translation, unrealized gains and losses on forward contracts and securities classified as available-for-sale. The accumulated OCI, net of tax, for the
nine months ended
September 30, 2018
and
2017
, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
(Unaudited)
|
(In thousands)
|
|
Currency translation adjustment
|
|
Investments
|
|
Derivative instruments
|
|
Accumulated other comprehensive income/(loss)
|
Balance as of December 31, 2017
|
|
$
|
(12,717
|
)
|
|
$
|
(782
|
)
|
|
(3,010
|
)
|
|
$
|
(16,509
|
)
|
Current-period other comprehensive (loss)
income
|
|
(7,360
|
)
|
|
(404
|
)
|
|
10,692
|
|
|
2,928
|
|
Reclassified from accumulated OCI into income
|
|
—
|
|
|
—
|
|
|
886
|
|
|
886
|
|
Income tax expense
|
|
—
|
|
|
30
|
|
|
2,449
|
|
|
2,479
|
|
Balance as of September 30, 2018
|
|
$
|
(20,077
|
)
|
|
$
|
(1,216
|
)
|
|
$
|
6,119
|
|
|
$
|
(15,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
(Unaudited)
|
(In thousands)
|
|
Currency translation adjustment
|
|
Investments
|
|
Derivative instruments
|
|
Accumulated other comprehensive income/(loss)
|
Balance as of December 31, 2016
|
|
$
|
(37,174
|
)
|
|
$
|
(669
|
)
|
|
3,222
|
|
|
$
|
(34,621
|
)
|
Current-period other comprehensive income (loss)
|
|
21,890
|
|
|
187
|
|
|
(10,332
|
)
|
|
11,745
|
|
Reclassified from accumulated OCI into income
|
|
—
|
|
|
—
|
|
|
862
|
|
|
862
|
|
Income tax expense (benefit)
|
|
13
|
|
|
14
|
|
|
(3,360
|
)
|
|
(3,333
|
)
|
Balance as of September 30, 2017
|
|
$
|
(15,297
|
)
|
|
$
|
(496
|
)
|
|
$
|
(2,888
|
)
|
|
$
|
(18,681
|
)
|
Note 11 – Authorized shares of common and preferred stock and stock-based compensation plans
Authorized shares of common and preferred stock
Following approval by the Company’s Board of Directors and stockholders, on May 14, 2013, the Company’s certificate of incorporation was amended to increase the authorized shares of common stock by
180,000,000
shares to a total of
360,000,000
shares. As a result of this amendment, the total number of shares which the Company is authorized to issue is
365,000,000
shares, consisting of (i)
5,000,000
shares of preferred stock, par value
$0.01
per share, and (ii)
360,000,000
shares of common stock, par value
$0.01
per share.
Restricted stock plan
Our stockholders approved our 2005 Incentive Plan (the “2005 Plan”) in May 2005. At the time of approval,
4,050,000
shares of our common stock were reserved for issuance under this plan, as well as the number of shares which had been reserved but not issued under our 1994 Incentive Plan which terminated in May 2005 (the “1994 Plan”), and any shares that returned to the 1994 Plan as a result of termination of options or repurchase of shares issued under such plan. The 2005 Plan, administered by the Compensation Committee of the Board of Directors, provided for granting of incentive awards in the form of restricted stock and RSUs to directors, executive officers and employees of the Company and its subsidiaries. Awards vest over a
three
,
five
or
ten
-year period, beginning on the date of grant. Vesting of
ten
year awards may accelerate based on the Company’s previous year’s earnings and growth but
ten
year awards cannot accelerate to vest over a period of less than
five
years. The 2005 Plan terminated on May 11, 2010, except with respect to outstanding awards previously granted thereunder. There were
3,362,304
shares of common stock that were reserved but not issued under the 2005 Plan as of May 11, 2010.
Our stockholders approved our 2010 Incentive Plan (the “2010 Plan”) on May 11, 2010. At the time of approval,
3,000,000
shares of our common stock were reserved for issuance under this plan, as well as the
3,362,304
shares of common stock that were reserved but not issued under the 1994 Plan and the 2005 Plan as of May 11, 2010, and any shares that are returned to the 1994 Plan and the 2005 Plan as a result of the forfeiture or termination of options or RSUs or repurchase of shares issued under these plans. The 2010 Plan, administered by the Compensation Committee of the Board of Directors, provides for granting of incentive awards in the form of restricted stock and RSUs to employees, directors and consultants of the Company and employees and consultants of any parent or subsidiary of the Company. Awards vest over a
three
,
five
or
ten
-year period, beginning on the date of grant. Vesting of
ten
year awards may accelerate based on the Company’s previous year’s earnings and growth but
ten
year awards cannot accelerate to vest over a period of less than
five
years. The 2010 Plan terminated on May 12, 2015, except with respect to the outstanding awards previously granted thereunder. There were
2,518,416
shares of common stock that were reserved but not issued under the 2010 Plan as of May 12, 2015.
Our stockholders approved our 2015 Equity Incentive Plan (the “2015 Plan”) on May 12, 2015. At the time of approval,
3,000,000
shares of our common stock were reserved for issuance under this plan, as well as the
2,518,416
shares of common stock that were reserved but not issued under the 2010 Plan as of May 12, 2015, and any shares that were returned to the 1994, 2005, and the 2010 Plans as a result of the forfeiture or termination of options or RSUs or repurchase of shares issued under these plans. The 2015 Plan, administered by the Compensation Committee of the Board of Directors, provides for the granting of incentive awards in the form of restricted stock and RSUs to employees, directors and consultants of the Company and employees and consultants of any parent or subsidiary of the Company. Awards vest over a
three
,
four
,
five
or
ten
-year period, beginning on the date of grant. Vesting of ten year awards may accelerate based on the Company’s previous year’s earnings and growth but
ten
year awards cannot accelerate to vest over a period of less than
five
years. There were
3,026,600
shares available for grant under the 2015 Plan at
September 30, 2018
.
During the
three months ended September 30, 2018
, we did not make any changes in accounting principles or methods of estimates related to the 2005, 2010 and 2015 Plans.
Employee stock purchase plan
Our employee stock purchase plan permits substantially all domestic employees and employees of designated subsidiaries to acquire our common stock at a purchase price of
85%
of the lower of the market price at the beginning or the end of the purchase period. The plan has quarterly purchase periods generally beginning on February 1, May 1, August 1 and November 1 of each year. Employees may designate up to
15%
of their compensation for the purchase of common stock under this plan. On May 9, 2017, our stockholders approved an additional
3,000,000
shares for issuance under our employee stock purchase plan. At
September 30, 2018
, we had
2,187,766
shares of common stock reserved for future issuance under this plan. We issued
680,131
shares under this plan in the
nine months ended September 30, 2018
and the weighted average purchase price of the employees’ purchase rights was
$35.91
per share. During the
nine months ended September 30, 2018
, we did not make any changes in accounting principles or methods of estimates with respect to such plan.
Authorized Preferred Stock and Preferred Stock Purchase Rights Plan
We have
5,000,000
authorized shares of preferred stock. On January 21, 2004, our Board of Directors designated
750,000
of these shares as Series A Participating Preferred Stock in conjunction with the adoption of a Preferred Stock Rights Agreement which expired on May 10, 2014. There were
no
shares of preferred stock issued and outstanding at
September 30, 2018
.
Stock repurchases and retirements
From time to time, our Board of Directors has authorized various programs for our repurchase of shares of our common stock depending on market conditions and other factors. Under the current program, we did not make any share repurchases during the
nine months ended September 30, 2018
or the
nine months ended September 30, 2017
. At
September 30, 2018
, there were
1,134,247
shares remaining available for repurchase under this program. This repurchase program does not have an expiration date.
Note 12 –
Segment and geographic information
We operate as
one
operating segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker, who is our chief executive officer, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker evaluates our financial information and resources and assesses the performance of these resources on a consolidated basis. Since we operate in
one
operating segment, all required financial segment information can be found in the condensed consolidated financial statements and the notes thereto.
We sell our products in
three
geographic regions which consist of Americas; Europe, Middle East, India, and Africa (EMEIA); and Asia-Pacific (APAC). Our sales to these regions share similar economic characteristics, similar product mix, similar customers, and similar distribution methods. Revenue from the sale of our products, which are similar in nature, and software maintenance is reflected as total net sales in our Consolidated Statements of Income. (See "Note 2 -Revenue" of Notes to consolidated financial statements for total net sales by the major geographic areas in which we operate).
Based on the billing location of the customer, total sales outside the U.S. for the three months ended
September 30, 2018
and
2017
were
$213 million
and
$195 million
, respectively, and
$635 million
and
$588 million
for the
nine months ended September 30, 2018
and
2017
, respectively. Total property and equipment, net, outside the U.S. was
$132 million
as of
September 30, 2018
and
$132 million
at
December 31, 2017
.
Note 13 - Debt
On May 9, 2013, we entered into a Loan Agreement (the “Loan Agreement”) with Wells Fargo Bank (the “Lender”). The Loan Agreement provided for a
$50 million
unsecured revolving line of credit with a scheduled maturity date of May 9, 2018 (the “Maturity Date”). On October 29, 2015, we entered into a First Amendment to Loan Agreement (the “Amendment”) with the Lender, which amended our Loan Agreement to among other things, (i) increase the unsecured revolving line of credit from
$50 million
to
$125 million
, (ii) extend the Maturity Date of the line of credit from May 9, 2018 to October 29, 2020, and (iii) provide us with an option to request increases to the line of credit of up to an additional
$25 million
in the aggregate, subject to consent of the Lender and terms and conditions to be mutually agreed between us and the Lender. On April 27, 2018, we entered into a Second Amendment to Loan Agreement (the "Second Amendment") which amended the Loan Agreement, as amended by the Amendment to, among other things, (i) reduce the revolving line of credit from
$125.0 million
to
$5.0 million
, (ii) reduce the letter of credit sublimit under the line of credit from
$10.0 million
to
$5.0 million
and (iii) require us and our subsidiaries to comply with certain of the affirmative and negative covenants under the Loan Agreement only if loans are outstanding under the Loan Agreement or if we have not reimbursed any drawing under a letter of credit issued under the Loan Agreement within five business days following the request of the Lender.
The loans bear interest, at our option, at a base rate determined in accordance with the Loan Agreement, plus a spread of
0.0%
to
0.50%
, or a LIBOR rate plus a spread of
1.13%
to
2.00%
, in each case with such spread determined based on a ratio of consolidated indebtedness to EBITDA, determined in accordance with the Loan Agreement. Principal, together with all accrued and unpaid interest, is due and payable on the Maturity Date. We are also obligated to pay a quarterly commitment fee, payable in arrears, based on the available commitments at a rate of
0.18%
to
0.30%
, with such rate determined based on the ratio described above. The Loan Agreement contains customary affirmative and negative covenants. The affirmative covenants include, among other things, delivery of financial statements, compliance certificates and notices; payment of taxes and other obligations; maintenance of existence; maintenance of properties and insurance; and compliance with applicable laws and regulations. The negative covenants include, among other things, limitations on indebtedness, liens, mergers, consolidations, acquisitions and sales of assets, investments, changes in the nature of the business, affiliate transactions and certain restricted payments. The Loan Agreement also requires us to maintain a ratio of consolidated indebtedness to EBITDA equal to or less than
3.25
to
1.00
, and a ratio of consolidated EBITDA to interest expense greater than or equal to
3.00
to
1.00
, in each case determined in accordance with the Loan Agreement. As of
September 30, 2018
, we were in compliance with all applicable covenants in the Loan Agreement.
The Loan Agreement contains customary events of default including, among other things, payment defaults, breaches of covenants or representations and warranties, cross-defaults with certain other indebtedness, bankruptcy and insolvency events, judgment defaults and change in control events, subject to grace periods in certain instances. Upon an event of default, the lender may declare all or a portion of the outstanding obligations payable by us to be immediately due and payable and exercise other rights and remedies provided for under the Loan Agreement. Under certain circumstances, a default interest rate will apply on all obligations during the existence of an event of default under the Loan Agreement at a per annum rate of interest equal to
2.00%
above the otherwise applicable interest rate. Proceeds of loans made under the Loan Agreement may be used for working capital and other general corporate purposes. We may prepay the loans under the Loan Agreement in whole or in part at any time without premium or penalty. Certain of our existing and future material domestic subsidiaries are required to guaranty our obligations under the Loan Agreement.
As of
September 30, 2018
, we had
no
outstanding borrowings under this line of credit. During the
three months ended September 30, 2018
and
September 30, 2017
, we incurred interest expense related to our outstanding borrowings of
$0
and
$176,000
, respectively. During the
nine months ended September 30, 2018
and
September 30, 2017
, we incurred interest expense related to our outstanding borrowings of
$0
and
$519,000
, respectively. As of
September 30, 2018
and
September 30, 2017
, the weighted-average interest rate on the revolving line of credit was
3.4%
and
2.4%
, respectively. These charges are included in “Other income (loss), net” in our Consolidated Statements of Income.
Note 14 – Commitments and contingencies
We offer a
one
-year limited warranty on most hardware products which is included in the terms of sale of such products. We also offer optional extended warranties on our hardware products for which the related revenue is recognized ratably over the warranty period. Provision is made for estimated future warranty costs at the time of the sale for the estimated costs that may be incurred under the standard warranty. Our estimate is based on historical experience and product sales during the period. The warranty reserve for the
nine months ended
September 30, 2018
and
2017
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
(In thousands)
|
|
(Unaudited)
|
|
|
2018
|
|
2017
|
Balance at the beginning of the period
|
|
$
|
2,846
|
|
|
$
|
2,686
|
|
Accruals for warranties issued during the period
|
|
2,224
|
|
|
1,929
|
|
Accruals related to pre-existing warranties
|
|
335
|
|
|
193
|
|
Settlements made (in cash or in kind) during the period
|
|
(2,235
|
)
|
|
(1,983
|
)
|
Balance at the end of the period
|
|
$
|
3,170
|
|
|
$
|
2,825
|
|
As of
September 30, 2018
, we had non-cancelable purchase commitments with various suppliers of customized inventory and inventory components totaling approximately
$7.3 million
over the next twelve months.
As of
September 30, 2018
, we had outstanding guarantees for payment of customs and foreign grants totaling less than
$0.1 million
, which are generally payable over the next twelve months.
Note 15 – Restructuring
Since the first quarter of 2017, we have been taking steps to optimize our processes, reduce job duplication, evaluate where we should shift and centralize activities, improve efficiencies, and rebalance our resources on higher return activities. This has led to headcount reductions. The timing and scope of our headcount reductions will vary.
A summary of the charges in our consolidated statement of operations resulting from our restructuring activities is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(In thousands)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Cost of sales
|
|
$
|
(179
|
)
|
|
79
|
|
|
$
|
(150
|
)
|
|
986
|
|
Research and development
|
|
631
|
|
|
86
|
|
|
1,607
|
|
|
1,382
|
|
Sales and marketing
|
|
3,676
|
|
|
1,618
|
|
|
8,354
|
|
|
7,997
|
|
General and Administration
|
|
373
|
|
|
207
|
|
|
1,538
|
|
|
801
|
|
Total restructuring and other related costs
|
|
$
|
4,501
|
|
|
1,990
|
|
|
$
|
11,349
|
|
|
11,166
|
|
A summary of balances and activity related to our restructuring activity is shown below:
|
|
|
|
|
|
Restructuring Liability
|
|
(in thousands)
|
Balance as of December 31, 2017
|
$
|
5,408
|
|
Income statement expense
|
11,349
|
|
Cash payments
|
(12,923
|
)
|
Balance as of September 30, 2018
|
$
|
3,834
|
|
The restructuring liability of
$3.8 million
at
September 30, 2018
relating to our restructuring activity is recorded in the “accrued compensation” line item of our consolidated balance sheet.
Note 16 – Litigation
We are not currently a party to any material litigation. However, in the ordinary course of our business, we have in the past, are currently and will likely become involved in various legal proceedings, claims, and regulatory, tax or government inquiries and investigations, and could incur uninsured liability in any one or more of them. We also periodically receive notifications from various third parties related to alleged infringement of patents or intellectual property rights, commercial disputes or other matters. No assurances can be given with respect to the extent or outcome of any investigation, litigation or dispute.
Note 17 – Subsequent events
On
October 24, 2018
, our Board of Directors declared a quarterly cash dividend of
$0.23
per common share, payable on
December 3, 2018
, to stockholders of record on
November 12, 2018
.