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YoY shift: Neutral
Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is -0.04pp more bearish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
-0.12pp
Flat
Net-tone change vs last year's 10-K.
MD&A
+0.04pp
Flat
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
volatility+3
claims+2
difficult+2
loss+1
against+1
Positive rising
able+1
opportunities+1
efficient+1
benefit+1
easily+1
Risk Factors (Item 1A)
9,917 words
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Form 10-K, you should carefully consider the risk factors discussed below, which are not the only risks that we face. Our business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those described in this Risk Factor section of this Form 10-K. Any one or more of these factors could, directly or indirectly, cause our actual financial condition and operating results to vary materially from our past, or from our anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect our business, financial condition, operating results and stock price.
RISKS RELATED TO OUR ABILITY TO GROW OUR BUSINESS
A Global Shortage of Key Components Has and May Continue to Adversely Affect Our Business and Results of Operations. Various factors, including increased demand for certain components and production delays due to COVID-19 and other natural events and disasters, are contributing to shortages of certain components used in our products and increased in our ability to obtain a consistent supply of materials at pricing levels. The supply have increased the costs and lead times for certain components. Longer lead times may cause a significant to our production activities, which could have a substantial effect on our financial condition or results of operations. If we are in resolving any such component in a timely manner, we will experience a significant impact on the timing of revenue, a possible of revenue, or an increase in manufacturing costs, any of which would have a material impact on our operating results.
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
impairment+4
loss+2
restructuring+1
disruptions+1
challenges+1
Positive rising
charitable+3
best+2
gains+1
opportunity+1
efficiency+1
MD&A (Item 7)
8,123 words
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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,” "could," "can," “will,” “project,” "predict," “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," "opportunities" 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 Reform Act of 1995 for all forward-looking statements.
Uncertain Global Economic and Geopolitical Conditions, Including in China and other countries, Could Materially Adversely Affect Our Business and Results of Operations. Our operations and performance are sensitive to fluctuations in general economic and geopolitical conditions, both in the U.S. and globally. Uncertainty about global and regional economic conditions poses a risk to us as businesses may decrease or postpone spending in response to events such as continued trade tensions between the U.S. and China, or new or existing trade tensions with other countries, geopolitical instability, pandemics and other major public health issues including the COVID-19 pandemic, financial market volatility, tariffs or other trade restrictions, government regulatory actions, negative financial news or other factors. Negative trends or sentiments in worldwide and regional economic conditions have in the past and could again have a material adverse effect on demand for our products and services. For example, in recent years, there have been significant changes to U.S. trade policies, legislation, treaties and tariffs, in particular trade policies and tariffs affecting China. Some of these trade policies, including the U.S.’s trading relationship with China, have been renegotiated during this timeframe and are subject to further changes in the future. Changes to current policies by the U.S. or other governments could adversely affect our business, including potentially through increased import tariffs and other influences on U.S. trade relations with China and other countries. The imposition of additional tariffs or other trade barriers could increase our costs in certain markets, and may cause our customers to find alternative sourcing. Protectionist and retaliatory trade measures by any of the United States, China or another country could limit our customers’ ability to sell their products and services and could reduce demand for our customers’ products. Even if resolved, these trends could have a broad negative impact on the global industrial economy, which could have a material adverse impact on our business and our results of operations. In addition, the application of various regulations depends on the classification of our products which can change over time as such regulations are modified or interpreted. Furthermore, in connection with increasing tensions related to the ongoing conflict between Russia and Ukraine, the U.S. and other governments have imposed enhanced export controls on many products and sanctions on many industry sectors and parties in Russia. Although we discontinued sales in Russia during 2022, further escalation of geopolitical tensions could have a broader impact that expands into other markets where we do business, which could adversely affect our business and/or our supply chain, business partners or customers in the broader region.
We have continued to experience an increase in inflationary pressures in most of the jurisdictions in which we operate. We have and may continue to attempt to offset the effect of these inflationary pressures by increasing the prices of our products. These factors as well as others we may not contemplate could have a material adverse effect on the spending patterns of businesses including our current and potential customers which could have a material adverse effect on our net sales and our results of operations. See “Management's Discussion and Analysis of Financial Condition and Results of Operations - Current business outlook” in this Form 10-K for information regarding recent business conditions.
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We are Subject to Various Other Risks Associated with International Operations and Foreign Economies. Our international sales and operations are subject to inherent risks, including, but not limited to:
• tariffs and other trade barriers impacting China or other countries in which we have significant sales;
• increases in taxes or changes in U.S. or foreign tax laws, including a possible increase in the U.S. corporate income tax rate and other changes in tax policy,
• fluctuations in foreign currencies relative to the U.S. dollar;
• unexpected changes to currency policy or currency restrictions in foreign jurisdictions;
• geopolitical conflicts;
• major public health concerns, including the COVID-19 pandemic;
• delays in collecting trade receivable balances from customers in developing economies;
• unexpected changes in regulatory requirements;
• fluctuations in local economies;
• disparate and changing employment laws in foreign jurisdictions;
• difficulties in staffing and managing foreign operations;
• costs and risks of localizing products for foreign countries;
• enhanced exposure to potential unauthorized use, duplication, misappropriation, theft or other infringement or violation of our intellectual property rights;
• government actions throughout the world; and
• the burdens of complying with a wide variety of foreign laws.
Moreover, there can be no assurance that our international sales will continue at existing levels or grow in accordance with our efforts to increase foreign market penetration. In many foreign countries, particularly in those with developing economies, it is common for some persons or companies to engage in business practices that are prohibited by U.S. and other laws and regulations applicable to us such as the Foreign Corrupt Practices Act. Although we have policies and procedures designed to ensure compliance with these laws, there can be no assurance that all of our employees, contractors, distributors and agents, including those based in or from countries where practices which violate such laws and regulations may be customary, will not take actions in violation of the law or our policies. Any violation of foreign or U.S. laws or regulations by our employees, contractors, distributors or agents, even if such violation is prohibited by our policies, could have a material adverse effect on our business. We must also comply with various import and export regulations.
For example, from time to time, the U.S. government has sanctioned or added certain of our customers based in China to its “Entity List”, which imposes restrictions or prohibitions on sales to such customers. Although the addition of these customers to the Entity List did not have a material adverse effect on our business, financial condition and results of operations, the U.S. government has the power to place additional customers on the Entity List or impose other restrictions on these or other customers, distributors or suppliers, and such actions could prohibit us from selling products or providing services to such customers, receiving payments from such customers or purchasing products from such entities. These restrictive governmental actions and any similar measures that may be imposed on U.S. companies by the Chinese or other governments have at times limited or prevented us from doing business with certain of our customers or suppliers and harm our ability to compete effectively or otherwise negatively affect our ability to sell our products. As a result, even if we are currently in compliance with applicable regulations, there can be no assurance that we will not have to incur additional costs or take additional compliance actions in the future, or be able to continue selling to these customers. Failure to comply with these regulations could result in fines or termination of import and export privileges, which could have a material adverse effect on our operating results. Additionally, the regulatory environment in some countries is very restrictive as their governments try to protect their local economy and value of their local currency against the U.S. dollar.
We Continue to Face Risks Related to Adverse Public Health Matters, Including Epidemics and Pandemics such as the COVID-19 Pandemic. Any outbreaks of contagious diseases and other adverse public health developments in countries where we operate could have a material and adverse effect on our business, financial condition, liquidity and results of operations. For example, the COVID-19 pandemic has adversely affected our operations throughout the world, as well as the facilities of our suppliers and customers. These disruptions have included and may continue to include, depending on the specific location, logistical challenges and limitations, reduced demand from certain customers, and government regulations that require us to adjust or restrict our operations at certain of our facilities, incur additional costs, adapt to challenges presented by travel restrictions and “work-from-home” orders and/or require employee vaccinations. As new variants of the virus appear, especially variants that are more easily spread, cause more serious outcomes, or are resistant to existing vaccines, new health orders and safety protocols could further impact our on-site operations and our ability to manufacture, ship or deliver products and solutions to customers.
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Our Failure to Manage Our Partner and Distribution Channels Effectively could Result in a Loss of Revenue and Harm to Our Business. We are currently in the process of expanding our relationships with a number of distributors and other strategic partners, none of which are currently responsible for a material amount of our total net sales, in order to streamline and increase our worldwide sales to certain customers. Successfully managing our indirect distribution channel efforts to reach various customer segments for our products and services is a complex process across the broad range of geographies where we do business or plan to do business. While we have a focused strategy, plan, and team dedicated to making our sales through distributors a successful element of our business, our distributors and other strategic partners are independent businesses that we do not control. Notwithstanding the independence of these partners, we may face legal risk and potential reputational harm from the activities of these third parties including, but not limited to, export control violations, workplace conditions, corruption and anti-competitive behavior. If an agreement with one of our distributors or strategic partners were terminated, any prolongeddelay in securing a replacement could have a material negative impact on our net sales and results of operations.
We cannot be certain that our distribution and strategic partner channel will market or sell our products and services effectively. If our efforts to expand our distributor and strategic partner channels are not successful, we may lose sales opportunities, customers and revenue opportunities. These distributors and strategic partners may also sell our competitors’ products and services, and if they favor our competitors’ products or services for any reason, they may fail to market our products or services effectively or to devote resources necessary to market and sell our products. If these partners are OEMs, they may decide not to bundle our applications on their devices. In addition, the financial health of our distributors and strategic partners and our continuing relationships with them are important to our success. Some of these distributors and strategic partners may be unable to withstand adverse changes in economic conditions, which could result in insolvency, the inability of such distributors and strategic partners to obtain financing or a delay in paying their obligations to us. Although we have mitigation plans in place for many possible issues, these factors, as well as others we may not contemplate could result in a material negative impact to our net sales and results of operations.
We Rely on Management Information Systems and Interruptions in our Information Technology Systems or Cyber-Attacks on our Systems Could Adversely Affect Our Business. We rely on the efficient and uninterrupted operation of complex information technology systems and networks, including cloud-based and other outsourced services, to operate our business. We rely on a primary global center for our management information systems and on multiple systems in branches not covered by our global center. As with any information system, unforeseen issues may arise that could affect our ability to receive adequate, accurate and timely financial information, which in turn could inhibit effective and timely decisions. Furthermore, it is possible that our global center for information systems or our branch operations could experience a complete or partial shutdown. Any such shutdown of a significant system or network disruption could result from new system implementations, facility issues, energy blackouts, computer viruses, cyber-attacks, or security breaches including ransomware, some of which may remain undetected for an extended period. Threats to our information technology security can take a variety of forms and individuals or groups of hackers or sophisticated organizations including state-sponsored organizations, may take steps that attack or pose threats to our customers and our information technology infrastructure. If we were to experience a complete or partial shutdown, disruption or attack, it would likely adversely impact our product shipments and net sales, as order processing and product distribution are heavily dependent on our management information systems. Such an interruption could also result in a loss of our intellectual property or the release of sensitive competitive information or partner, customer or employee confidential information or personal data. Any loss of such information could harm our competitive position, result in a loss of customer confidence, and cause us to incur liability and significant costs to remedy the damages caused by the disruptions or security breaches. In addition, existing or changing laws and regulations governing our responsibility to safeguard private data could result in a significant increase in our operating or capital expenditures which are needed to comply with these laws or regulations. If any of the foregoing events were to occur, our operating results in the impacted periods would be adversely impacted.
From time to time, we have experienced attempts to breach our security and attempts to introduce malicious software into our information technology systems; however, such attacks have not previously resulted in any material damage known to us. For example, in December 2020, we were notified by Solarwinds Corporation, one of our suppliers, that a recent update to one of its network management software products contained data collection malware that had also been distributed to thousands of its other clients, including federal, state and local government agencies, educational institutions, private companies and governments around the world. Since becoming aware of this malware attack, we have taken steps to mitigate the known vulnerabilities, including ceasing to use the affected version of the software, and actively monitoring our organization’s corporate networks for related activity. If we experienced a similar type of malware attack on our own software products, it would likely disrupt our software and our customers, allow unauthorized users into our customers proprietary information, or cause other destructive outcomes. In December 2021, the Apache Software Foundation publicly disclosed a remote code execution (RCE) vulnerability in its Log4j 2 product (Log4j), an open-source component widely used in Java-based software applications to log and track error messages. In the subsequent weeks, the foundation disclosed several additional RCE vulnerabilities, expanding the opportunities for bad actors and attackers to remotely access a target using Log4j and potentially steal data, install malware or take control of the target's system. Certain applications within our infrastructure and product offerings did utilize the affected versions of Log4j.
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As a result of the factors above, cyber-attacks and security vulnerabilities could result in seriousharm to our reputation, business and financial condition. See Risk Factor "Our Products are Complex and May Contain Bugs, Vulnerabilities, Errors, or Design Flaws" for more discussion.
We are continually working to maintain reliable information technology systems to control costs and improve our ability to deliver our products in our markets worldwide. Our efforts include, but are not limited to the following: firewalls, antivirus protection, patches, log monitors, routine backups with offsite retention of storage media, system audits, data partitioning and routine password modifications. Our internal information technology systems environment continues to evolve, and our business policies and internal security controls may not keep pace as new threats emerge. In an effort to mitigate the spread of COVID-19, we have transitioned a significant number of our employees to a remote work environment. This change may exacerbate certain risks to our business, including an increased demand for information technology resources, an increased risk of phishing and other cybersecurity attacks, and an increased risk of unauthorized dissemination of sensitive personal information or proprietary or confidential information. No assurance can be given that our efforts to continue to enhance our systems will be successful. Although we maintain insurance to cover certain information technology risks, there can be no assurance that such insurance or the contractual limitations used by us to limit our liability will be sufficient to cover or limit any claims which may occur.
Our Product Revenues are Dependent on Certain Industries and Contractions in these Industries Could Have a Material Adverse Effect on Our Results of Operations. Sales of our products are dependent on customers in certain industries, particularly telecommunications, semiconductor, consumer electronics, automotive, energy, automated test equipment, and aerospace, defense and government. As we have experienced in the past, and as we may continue to experience in the future, downturns characterized by diminished product demand in any one or more of these industries may result in decreased sales and a material adverse effect on our operating results. A protracted economic slowdown or slower than expected recovery could continue to negatively affect the financial condition of our customers, which may result in additional delays in orders or payments and decreased sales, or an increase in bankruptcies or insolvencies. We cannot predict when and to what degree contractions in these industries may occur; however, any sharp or prolongedcontraction in one or more of these industries could have a material adverse effect on our business and results of operations.
Concentrations of Credit Risk and Uncertain Conditions in the Global Financial Markets May Adversely Affect Our Business and Results of Operations. By virtue of our holdings of cash, investment securities and foreign currency derivatives and interest rates swaps, we have exposure to many different counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks and investment banks. Many of these transactions expose us to credit risk in the event of a default of our counterparties. We continue to monitor the stability of the financial markets, particularly those in emerging markets. We can give no assurance that we will not be negatively impacted by any adverse outcomes in those markets. There can be no assurance that any losses or impairments to the carrying value of our financial assets as a result of defaults by our counterparties would not materially and adversely affect our business, financial position and results of operations.
We Operate in Intensely Competitive Markets. The markets in which we operate are characterized by intense competition from numerous competitors, some of which have larger market capitalization and resources than we do, and we may face further competition from new market entrants in the future. Key competitors are Advantest, Anritsu, Fortive, Keysight, Rohde & Schwarz, Teradyne and others. These competitors offer hardware and software products that provide solutions that directly compete with our software-defined automated test and automated measurement systems. Because these companies have strong positions in the instrumentation business, new product introductions by them, changes in their marketing strategy or product offerings or aggressive pricing strategies by them to gain market share could have a material adverse effect on our operating results.
We believe our ability to compete successfully depends on a number of factors both within and outside our control, including, but not limited to:
• general market and economic conditions;
• our ability to maintain and grow our business with our very large customers;
• our ability to meet the volume and service requirements of our large customers;
• success in developing and selling new products;
• product pricing, including the impact of currency exchange rates;
• industry consolidation, including acquisitions by us or our competitors;
• capacity utilization and the efficiency of manufacturing operations;
• timing of our new product introductions;
• new product introductions by competitors;
• the ability of competitors to more fully leverage low cost geographies for manufacturing or distribution;
• effectiveness of sales and marketing resources and strategies;
• adequate manufacturing capacity and supply of components and materials;
• strategic relationships with our suppliers and other third parties;
• product quality and performance;
• protection of our products by effective use of intellectual property laws;
• the financial strength of our competitors;
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• the outcome of any future litigation or commercial dispute;
• barriers to entry imposed by competitors with significant market power in new markets; and
• government actions throughout the world.
There can be no assurance that we will be able to compete successfully in the future.
We Make Significant Investments in New Products and Our Success Depends on New Product Introductions and Market Acceptance of Our Products. We plan to continue to make significant investments in research, development, and marketing for new and existing products and technologies. We have made and expect to make significant investments in software and other technology development related to new and enhanced features of our products. The market for our products is characterized by rapid technological change, evolving industry standards, changes in customer needs and frequent new product introductions, and is therefore highly dependent upon timely product innovation. Our success is dependent on our ability to successfully develop and introduce new and enhanced products on a timely basis to replace declining revenues from older products, and on increasing penetration in domestic and international markets. We will be at a competitive disadvantage if, over time, our competitors are more effective than us in their utilization of new technologies and evolving data analytics offerings. If we do not anticipate or keep pace with these technological and other changes impacting the test and measurement industry, it could also limit our ability to compete in desired markets. As has occurred in the past and as may be expected to occur in the future, we have experienced significant delays between the announcement and the commercial availability of new products. Any significant delay in releasing new products could have a material adverse effect on the ultimate success of a product and other related products and could impede continued sales of predecessor products, any of which could have a material adverse effect on our operating results. There can be no assurance that we will be able to introduce new products in accordance with announced release dates, that our new products will achieve market acceptance or that any such acceptance will be sustained for any significant period. Failure of our new products to achieve or sustain market acceptance could have a material adverse effect on our operating results. We have also recently transitioned the majority of our software offerings to a subscription-based licensing model. While we expect our subscription base, recurring revenue and cash flow to increase over time as a result of this licensing model transition, our ability to achieve these financial objectives is subject to risks and uncertainties and we expect some initial headwinds to our net sales and operating profitability during the transition period. Accelerating our subscription-based licensing offerings requires a considerable investment of technical, financial, legal and sales resources, and a scalable organization. Whether our transition will be successful and will accomplish our business and financial objectives is subject to uncertainties, including but not limited to: customer demand, attach and renewal rates, channel acceptance, our ability to further develop and scale infrastructure, our ability to include functionality and usability in such offerings that address customer requirements, and our costs. If we are unable to successfully establish these new offerings and navigate our business transition due to the foregoing risks and uncertainties, our business and financial results could be adversely impacted.
Our Manufacturing Capacity, and a Substantial Majority of our Warehousing and Distribution Capacity is Located Outside of the U.S. We manufacture a majority of our product volume at our facilities in Debrecen, Hungary and Penang, Malaysia. In order to enable timely shipment of products to our customers we maintain the substantial majority of our inventory at our international locations. In addition to being subject to the risks of maintaining such a concentration of manufacturing capacity and global inventory, these facilities and their operations are also subject to risks associated with doing business internationally, including, but not limited to:
• the volatility of the Hungarian forint and the Malaysian ringgit relative to the U.S. dollar;
• changing and potentially unstable political environments;
• major public health concerns, including the COVID-19 pandemic;
• significant and frequent changes in corporate tax laws;
• difficulty in managing manufacturing operations in foreign countries;
• challenges in expanding capacity to meet increased demand;
• difficulty in achieving or maintaining product quality;
• interruption to transportation flows for delivery of components to us and finished goods to our customers;
• restrictive labor codes; and
• increasing labor costs.
No assurance can be given that our efforts to mitigate these risks will be successful. Any failure to effectively deal with the risks above could result in an interruption in the operations of our facilities in Hungary or Malaysia which could have a material adverse effect on our operating results.
Our centralization of inventory and distribution from a limited number of shipping points is subject to inherent risks, including:
• burdens of complying with additional or more complex VAT and customs regulations; and
• concentration of inventory increasing the risks associated with fire, natural disasters and logistics disruptions to customer order fulfillment.
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Any failure or delay in distribution from our facilities in Hungary and Malaysia could have a material adverse effect on our operating results.
Our Business is Dependent on Key Suppliers and Distributors and Disruptions in these Businesses Could Adversely Affect Our Business and Results of Operations. Our manufacturing processes use large volumes of high-quality components and subassemblies supplied by outside sources. Several of these items are only available through limited sources. Limited source items purchased include custom application-specific integrated circuits ("ASICs"), chassis and other components. We have in the past experienced delays and quality problems in connection with limited source items, and there can be no assurance that these problems will not recur in the future. A protracted economic slowdown or continued economic uncertainty could negatively affect the financial condition of our suppliers, which may result in an increase in bankruptcies or insolvencies and decreased availability of raw materials. Accordingly, our failure to receive items from limited source item suppliers could result in a material adverse effect on our net sales and operating results. In the event that any of our limited source suppliers experience significant financial or operational difficulties due to adverse global economic conditions or otherwise, our business and operating results would likely be adversely impacted until we are able to secure another source for the required materials.
We use distributors to support our sales channels. In the event that any of our distributors experience significant financial or operational difficulties due to adverse global economic conditions or if we experience disruptions in the use of these distributors, our business and operating results would likely be adversely impacted until we are able to secure another distributor or establish direct sales capabilities in the affected market.
We Are Subject to the Risk of Product Liability Claims. Our products are designed to provide information upon which users may rely. Our products are also used in “real time” applications requiring extremely rapid and continuous processing and constant feedback. Such applications give rise to the risk that a failure or interruption of the system or application could result in economic damage, bodily harm or property damage. We attempt to assure the quality and accuracy of the processes contained in our products, and to limit our product liability exposure through contractual limitations on liability, limited warranties, express disclaimers and warnings as well as disclaimers contained in our “shrink wrap” and electronically displayed license agreements with end-users. If our products contain errors that produce incorrect results on which users rely or cause failure or interruption of systems or processes, customer acceptance of our products could be adversely affected. Further, we or our customers could be subject to product recall obligations, and we could be subject to liability claims that could have a material adverse effect on our operating results or financial position. Although we maintain insurance for certain types of claims, there can be no assurance that such insurance may provide sufficient coverage or any coverage for the claims which may occur. There can be no assurance that the contractual limitations used by us to limit our liability will be sufficient to limit any claims which may occur.
Our Business Depends on Our Proprietary Rights and We Have Been Subject to Intellectual Property Litigation. Our success depends on our ability to obtain and maintain patents and other proprietary rights relative to the technologies used in our principal products. Despite our efforts to protect our proprietary rights, unauthorized parties may have in the past infringed or violated certain of our intellectual property rights. We from time to time engage in litigation to protect our intellectual property rights. In monitoring and policing our intellectual property rights, we have been and may be required to spend significant resources. However, the steps we have taken to protect our intellectual property rights may not be adequate to prevent unauthorized use, copying, misappropriation, or theft of our intellectual property or other infringement on or violation of our intellectual property rights. Intellectual property laws differ in various jurisdictions in which we operate and are subject to change at any time, which could further restrict our ability to protect our intellectual property and proprietary rights. In particular, a portion of our revenues is derived from jurisdictions where adequately protecting intellectual property rights may prove more challenging or impossible. We may also not be able to detect unauthorized uses or take timely and effective steps to remedy unauthorized conduct. To prevent or respond to unauthorized uses of our intellectual property, we may be required to engage in costly and time-consuming litigation or other proceedings and we may not ultimately prevail. From time to time, we may be notified that we are infringing on certain patent or intellectual property rights of others. There can be no assurance that any future intellectual property dispute or litigation will not result in significant expense, liability, injunctionagainst the sale of some of our products, and a diversion of management’s attention, any of which may have a material adverse effect on our operating results.
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Our Business Depends on the Continued Service of Our Key Management, Technical Personnel and Operational Employees. Our success depends upon the continued contributions of our key management, sales, marketing, research and development and operational personnel, including Eric Starkloff, our President and Chief Executive Officer, and other members of our senior management and key employees. The loss of the services of one or more of our key employees in the future could have a material adverse effect on our operating results. We also believe our future success will depend upon our ability to attract and retain additional highly skilled management, technical, marketing, research and development, and operational personnel with experience in managing large and rapidly changing companies, as well as training, motivating and supervising employees. The market for hiring and retaining certain technical personnel, including software engineers, has become more competitive and intense in recent years. Failure to attract and retain a sufficient number of qualified technical personnel, including software engineers, or retain our key personnel could have a material adverse effect on our operating results. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be adversely affected. Effective succession planning is also key to our future success, and our failure to ensure smooth transitions involving our senior management could also adversely affect our operating results.
Our Operations are Subject to a Variety of Environmental Regulations and Costs that May Have a Material Adverse Effect on Our Business and Results of Operations. We must comply with many different governmental regulations related to the use, storage, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in our operations in the U.S., Hungary, and Malaysia. Although we believe that our activities conform to presently applicable environmental regulations, our failure to comply with present or future regulations could result in the imposition of fines, suspension of production or a cessation of operations. Any such environmental regulations could require us to acquire costly equipment or to incur other significant expenses to comply with such regulations. Any failure by us to control the use of or adequately restrict the discharge of hazardous substances could subject us to future liabilities.
We are Subject to Risks Associated with Our Website. We devote significant resources to maintaining our website, ni.com, as a key marketing, sales and support tool and expect to continue to do so in the future. Failure to properly maintain our website may interrupt our normal operations, including our ability to provide quotes, process orders, ship products, provide services and support to our customers, bill and track our customers, fulfill contractual obligations and otherwise run our business, which would have a material adverse effect on our results of operations. We host our website internally. Any failure to successfully maintain our website or any significant downtime or outages affecting our website could have a material adverse impact on our operating results.
Our Products are Complex and May Contain Bugs, Vulnerabilities, Errors, or Design Flaws. As has occurred in the past and as may be expected to occur in the future, our hardware products, software products and third-party components or operating systems on which our products are based may contain bugs, vulnerabilities, errors or design flaws. Our products also operate in conjunction with third-party products and components across a broad ecosystem, and, as has occurred in the past and as may be expected to occur in the future, these third-party products and components may contain bugs, vulnerabilities, errors or design flaws. Any of such bugs, vulnerabilities, errors or design flaws in our products, third-party components or operating systems on which our products are based, and third-party products and components in conjunction with which our products operate, or fixes to these issues, may have a negative impact on the performance of our products and may also be exploited by third parties, including state sponsored organizations, to conduct cyber-attacks. For example, if we experienced an attack on our software products similar to the attack that impacted our supplier Solarwinds, such attack could disrupt our software and our customers, allow unauthorized users into our customers' proprietary information, or cause other destructive outcomes. The negative impact of any of the foregoing matters could adversely impact the performance of our products, result in additional costs or liability claims, lead to reduced revenue, cause harm to our reputation or competitive position, and result in a material adverse impact on our operating results. Although we maintain insurance to cover certain information technology risks, there can be no assurance that such insurance or the contractual limitations used by us to limit our liability will be sufficient to cover or limit any claims which may occur.
Our Restructuring Activities May not be Successful and May Adversely Impact Employee Hiring and Retention, Our Results of Operations and Financial Condition. Over the past several years we have implemented workforce reduction plans intended to accelerate our growth strategy and further optimize our cost structure. During the first quarter of 2023, we announced a workforce reduction plan. Refer to Note 19 - Subsequent Events and Note 18 - Restructuring Activities of our Notes to Consolidated Financial Statements for additional information on these activities. Our restructuring activities may also subject us to reputational risks and litigation risks and expenses. We cannot provide any assurance that we will realize the anticipated cost savings and other benefits or that additional restructuring plans will not be required or implemented in the future. In addition, our restructuring plans may have other adverse consequences, such as attrition beyond our planned reduction in workforce, a negative effect on employee morale or on our ability to attract and retain highly skilled employees, which may result in weaknesses in our infrastructure and disruption to our operations, which could lead to a number of negative outcomes such as a negative impact on our ability to comply with legal or regulatory requirements, a loss of business opportunities to competitors, delays in or inability to complete our research and development roadmaps, reduced productivity among remaining employees, and other negative outcomes we cannot foresee at this time, all of which could result in a material, adverse impact on our ability to grow revenue and meet our profitability goals.
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RISKS RELATED TO OUR FINANCIAL PERFORMANC E
Key Customers or Large Orders May Expose Us to Significant Additional Business and Legal Risks that Could Have a Material Adverse Impact on our Business, Results of Operations and Financial Condition. We continue to make a concentrated effort to increase our net sales derived from orders for application-specific system offerings. These types of orders expose us to significant additional business and legal risks compared to smaller orders. Our very large customers frequently require contract terms that vary substantially from our standard terms of sale. At times, these orders include terms that impose critical delivery commitments and severe contractual liabilities if we fail to provide the required quantity of products at the required delivery times, impose product acceptance requirements and product performance evaluation requirements which create uncertainty with respect to the timing of our ability to recognize revenue from such orders, allow the customers to cancel or delay orders without liability, require us to develop specific product mitigation plans for product delivery constraints caused by unexpected or catastrophic situations to help assure quick production recovery, and that require most favored customer pricing, significant discounts, and extended payment terms. At times, these customers require broad indemnity obligations and large direct and consequential damage provisions in the event we breach our contracts with them. At times, these contracts have supply constraint requirements which mandate that we allocate large product inventories for a specific contract. These inventory requirements expose us to higher risks of inventory obsolescence and can adversely impact our ability to provide adequate product supply to other customers.
While we attempt to limit the number of contracts that contain the non-standard terms of sale described above and attempt to contractually limit our potential liability under such contracts, we have been, and expect to be, required to agree to some or all of such provisions to secure orders from very large customers and to continue to grow our business. These arrangements expose us to significant additional legal and operational risks which could result in a material adverse impact on our business, results of operations and financial condition. In addition, these larger orders are more volatile, are subject to greater discount variability and may contract at a faster pace during an economic downturn. We attempt to manage these risks but there can be no assurance that we will be successful in our efforts.
Our Gross Margin and Results of Operations Could Be Adversely Affected if We Are Unable To Accurately Forecast Demand for Our Products and Manage Product Inventory in an Effective and Efficient Manner. System orders make managing inventory levels more difficult as we have in the past and may have to in the future build large quantities of inventory in anticipation of future demand that may not materialize. System orders may also introduce additional short-term variability in our quarterly results as additional time may be required to convert these opportunities into sales. To the extent the amount of our net sales derived from key customers or large orders increases in future periods, either in absolute dollars or as a percentage of our overall business, our gross margins could decline, and we could experience greatervolatility in our financial results and business, and see a greaternegative financial impact from current and future downturns in the global industrial economy. System orders may also have an impact on the historical seasonal pattern of our net sales and our results of operations. In addition, our revenues and earnings forecasts for future fiscal quarters are often based on the expected seasonality or cyclicity of the markets in which we operate and the customers we serve. The sale of our solutions and services are dependent, to a large degree, on customers whose industries are subject to seasonal or cyclical trends in the demand for their products. For example, the consumer electronics market is particularly volatile, making demand difficult to anticipate. Making such estimations in an economic climate affected by inflation or recession, fluctuations in global currency, geopolitical tension and war is particularly difficult as increased volatility may impact seasonal trends making it more difficult to anticipate demand fluctuations.
Our Quarterly Results are Subject to Fluctuations Due to Various Factors that May Adversely Affect Our Business and Results of Operations. Our quarterly operating results have fluctuated in the past and may fluctuate significantly in the future due to a number of factors, including, but not limited to:
• changes in the amount of revenue derived from very large orders (including orders from our very large customers) and the pricing, margins, and other terms of such orders;
• major public health concerns such as pandemics or other factors;
• tariffs and trade restrictions imposed by the U.S. or other countries;
• fluctuations in foreign currency exchange rates;
• changes in global economic conditions;
• changes in the capacity utilization including at our manufacturing facilities;
• changes in the mix of products sold;
• the availability and pricing of components from third parties (especially limited sources);
• the difficulty in maintaining margins, including the higher margins traditionally achieved in international sales;
• changes in pricing policies by us, our competitors or suppliers;
• the timing, cost or outcome of any future intellectual property litigation or commercial disputes;
• changes in the seasonality or cyclically of the markets we serve;
• delays in product shipments caused by human error or other factors; or
• disruptions in transportation channels.
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We have Outstanding Debt and may Incur Other Debt in the Future, which could Adversely Affect Our Financial Condition, Liquidity and Results of Operations. We have outstanding debt under our existing term loan and revolving credit facility ("Credit Facility"). In the future, we may incur additional debt under such Credit Facility and/or under additional credit facilities or other borrowing instruments. Our incurrence of this debt, and increases in our aggregate levels of debt, may adversely affect our operating results and financial condition by, among other things:
• requiring a portion of our cash flow from operations to make interest payments on this debt;
• increasing our vulnerability to general adverse economic and industry conditions;
• reducing the cash flow available to fund capital expenditures and other corporate purposes and to grow our business; and
• limiting our flexibility in planning for, or reacting to, changes in our business and the industry.
Our Credit Facility imposes restrictions on us, including restrictions on our ability to create liens on our assets, the ability of our subsidiaries to incur indebtedness, the ability to make certain investments, consummate certain asset sales, or engage in certain transactions, and require us to maintain compliance with specified financial ratios. Our ability to comply with these ratios and other restrictions may be affected by events beyond our control. If we breach any of the covenants and do not obtain a waiver from the lenders, then, subject to applicable cure periods, our outstanding indebtedness could be declared immediately due and payable. Although we currently are in compliance with our debt agreements, if our operating and financial performance deteriorates, there would be an increased risk regarding future compliance with our debt covenants.
Our Variable Rate Indebtedness Subjects us to Interest Rate Risk, Which Could Cause Our Debt Service Obligations to Increase Significantly. Borrowings under our Credit Facility are at variable rates of interest, which expose us to interest rate risk. During the course of 2022, central banks across the globe raised benchmark interest rates to combat inflation. If interest rates increase, the amount required to service our outstanding variable rate indebtedness will increase even though the amount borrowed remains the same. In turn, our net income and cash flows, including cash available for servicing outstanding indebtedness, would correspondingly decrease. To mitigate interest rate volatility, we have entered into interest rate swaps exchanging some floating interest payments for fixed rate interest payments. While we may continue to hedge against variable interest rates, including through more interest rate swaps, any swaps or other hedging instruments we enter into may not fully mitigate our interest rate risk (see Note 15 - Debt of Notes to Consolidated Financial Statements for additional discussion of our current borrowings).
Compliance with Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 is Costly and Challenging . As required by Section 302 of the Sarbanes-Oxley Act of 2002, this Form 10-K contains our management’s certification of adequate disclosure controls and procedures as of December 31, 2022. This annual report on Form 10-K also contains a report by our management on our internal control over financial reporting including an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2022 and an attestation and report by our external auditors with respect to the effectiveness of our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002. While these assessments and reports did not reveal any material weaknesses in our internal control over financial reporting, compliance with Sections 302 and 404 is required for each future fiscal year end. We expect that the ongoing compliance with Sections 302 and 404 will continue to be both costly and challenging and there can be no assurance that material weaknesses will not be identified in future periods. Any adverse results from such ongoing compliance efforts could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.
Our Tax Returns and Other Tax Matters are Subject to Examination by the U.S. Internal Revenue Service and Other Tax Authorities and Governmental Bodies and the Results of These Examinations Could Have a Material Adverse Effect on Our Financial Condition. 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. These uncertain tax positions are subject to examination by the U.S. Internal Revenue Service and other tax authorities. There can be no assurance as to the outcome of any future examinations. If the ultimate determination of our taxes owed is for an amount in excess of amounts previously accrued, our operating results, cash flows, and financial condition could be materially adversely affected. Our tax years 2016 through 2022 remain open to examination by the major taxing jurisdictions to which we are subject.
If Tax Laws or Incentives Change or Cease to be in Effect, Our Income Taxes Could Increase Significantly. We are subject to federal, state, and local taxes in the United States and numerous foreign jurisdictions. We devote significant resources to evaluating our tax positions and our worldwide provision for taxes. Our financial results and tax treatment are susceptible to changes in tax, accounting, and other laws, regulations, principles, and interpretations in the United States and in other jurisdictions where we do business. With the existence of economic and political policies that favor domestic interests, it is possible that more countries will enact tax laws that either increase the tax rates, or reduce or change the tax incentives available to multinational companies like ours. Upon a change in tax laws in any territory where we do significant business, we may not be able to maintain our current tax rate or qualify for or maintain the benefits of any tax incentives offered, to the extent such incentives are offered.
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The profits from our manufacturing facility in Penang, Malaysia are free of tax under a 15-year tax holiday effective January 1, 2013. The tax holiday has been extended for a period of ten years starting from the year 2028. If we fail to satisfy the conditions of the tax holiday, this tax benefit may be terminated early. The expiration of the tax holiday in Malaysia could have a material adverse effect on our operating results. The profits from our Hungarian operations benefit from the fact that it is subject to an effective income tax rate that is lower than the U.S. federal statutory tax rate and enhanced deductions for certain qualified research, and development expenses in Hungary. The reduction or expiration of these benefits in Hungary and Malaysia could result in an increase in our future effective income tax rate which could have a material adverse effect on our operating results. (See Note 10 - Income taxes of Notes to Consolidated Financial Statements for additional discussion regarding the impact of these matters on our income taxes).
Acquisitions, Joint Ventures, Alliances, or Similar Strategic Relationships, or Dispositions of Any of Our Businesses, and the Related Integration or Separation Risks May Disrupt or Otherwise Have a Material Adverse Effect on Our Business and Financial Results. As part of our business strategy, we pursue selective acquisitions, as well as joint ventures, partnerships, alliances, or similar strategic transactions and relationships with third parties, to support our business. We may also undertake dispositions of certain of our businesses or products. Achieving the anticipated benefits of an acquisition or other strategic transaction depends upon the effectiveness of our diligence and whether the integration of the acquired business, products or technology is accomplishedefficiently and effectively. The successful integration of recent acquisitions, as well as potential future acquisitions, depends on a variety of factors, including but not limited to:
• the achievement of anticipated cost savings, synergies, business opportunities and growth prospects from combining the acquired company;
• the scalability of production, manufacturing and marketing of products of a newly acquired company to broader adjacent markets;
• the complexities of the technologies being integrated;
• the ability to cohesively integrate operations, product definitions, price lists, delivery, and technical support for products and solutions of a newly acquired company into our existing operations;
• the compatibility of our infrastructure, operations, policies and organizations with those of the acquired company;
• the retention of key employees; and
• the management of relationships with our strategic partners, suppliers, and customer base and the necessities of integrating and retaining key personnel with disparate business backgrounds and combining different corporate cultures.
The time invested in completing any strategic transaction as well as the integration of operations following a strategic transaction also requires the dedication of management resources, which may distract attention from our day-to-day business and may disrupt key research and development, marketing or sales efforts. Our inability to successfully integrate any of our acquisitions could harm our business. We may experience increased challenges related to our integration of acquired businesses, as well our ability to execute on potential acquisitions, as a result of the COVID-19 pandemic and its impact including travel restrictions, global demand uncertainty, and financial market volatility. The existing products or services previously sold or otherwise provided by entities we have acquired may be of a lesser quality than our products or could contain errors, vulnerabilities or malware that produce incorrect results on which users rely or cause failure or interruption of systems or processes, or be exploited to conduct cyber-attacks, that could subject us to liability claims that could have a material adverse effect on our operating results or financial position. Furthermore, products acquired, developed, or marketed in connection with acquisitions or other strategic transactions may not gain acceptance in our markets, and we may not achieve the anticipated or desired benefits of such transactions.
Similarly, any divestitures have inherent risks, including the inability to find potential buyers with favorable terms, the expense of selling the entity, business, or product line, the possibility that any anticipated sale will be delayed or will not occur, the potential impact on our cash flows and results of operations which may dilute our earnings per share, the potential delay or failure to realize the perceived strategic or financial merits of the divestment, difficulties in the separation of operations, services, information technology, products and personnel, potential loss of customers or employees, exposure to unanticipated liabilities, unexpected costs associated with such separation, diversion of management’s attention from other business concerns and potential post-closingclaims for allegedbreaches of related agreements, indemnification or other disputes.
Acquisitions may also expose us to unforeseen liabilities related to prior operations of businesses or entities we acquire, including as a result of such businesses or entities not having been operated in accordance with applicable laws.
Future acquisitions or dispositions could also result in the incurrence of additional debt, contingent liabilities or amortization expenses, or write-offs of goodwill and other intangible assets, any of which could harm our financial condition.
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Our Financial Performance is Subject to Risks Associated with Changes in the Value of the U.S. Dollar versus Local Currencies . The vast majority of our sales outside of the U.S. and a significant amount of certain types of expenses are paid in local currencies. Our hedging programs are designed to reduce, but not entirely eliminate, the impact of currency exchange rate movements. In the past, we have noted that significant volatility in foreign currency exchange rates in the markets in which we do business has had a significant impact on the revaluation of our foreign currency denominated firm commitments, on our ability to forecast our U.S. dollar equivalent net sales and expenses, and on the effectiveness of our hedging programs. If the local currencies in which we sell our products strengthenagainst the U.S. dollar, we have in the past, and in the future may need to, lower our prices in the local currency to remain competitive in our international markets. This could have a material adverse effect on our gross and net profit margins. If the local currencies in which we sell our products weakenagainst the U.S. dollar and if the local sales prices cannot be raised due to competitive pressures, we will experience a deterioration of our gross and net profit margins. In the past, these dynamics have also adversely affected our net sales growth in international markets and may pose similar challenges in the future. See “Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations” in this Form 10-K for further discussion on the effect that changes in the foreign currency exchange rates have had on our operating results. See “Current business outlook” in this Form 10-K for information regarding recent business conditions.
RISKS RELATED TO OUR COMMON STOCK
Provisions in Our Charter Documents and Delaware Law and Other Actions We Have Recently Taken May Delay or Prevent an Acquisition of Us. Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us without the consent of our Board of Directors. These provisions include a classified Board of Directors, prohibition of stockholder action by written consent, prohibition of stockholders to call special meetings and the requirement that the holders of at least 80% of our shares approve any business combination not otherwise approved by two-thirds of our Board of Directors. Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. In addition, our Board of Directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer. In addition, we may issue shares of any class or series of preferred stock in the future without shareholder approval upon such terms as our Board of Directors may determine, such as those underlying the shareholder rights agreement we adopted in January 2023. The rights of holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any such class or series of preferred stock that may be issued.
RISKS RELATED TO OUR STRATEGIC REVIEW PROCESS
Our Review of Potential Strategic Alternatives May Not Result in an Executed or Consummated Transaction or Other Strategic Alternative, and the Process of Reviewing Strategic Alternatives or its Conclusion Could Adversely Affect our Business and Our Stockholders. On January 13, 2023, we announced that our Board of Directors has initiated a review and evaluation of strategic options, in consultation with our financial and legal advisors, with the intent to unlock and maximize stockholder value. We are actively working with financial advisors and legal counsel in connection with this strategic review process.
Any potential transaction or other strategic alternative would be dependent on a number of factors that may be beyond our control, including, among other things, market conditions, industry trends, regulatory approvals, and the availability of financing for a potential transaction on reasonable terms. The process of reviewing potential strategic alternatives may be time consuming, distracting and disruptive to our business operations, which may cause concern to our current or potential employees, investors, strategic partners and other constituencies and may have a material impact on our business and operating results and/or result in increased volatility in our share price. We have and will continue to incur substantial expenses associated with identifying, evaluating and negotiating potential strategic alternatives. Further, the process may affect our ability to recruit and retain qualified personnel, business partners, and other stakeholders important to our success. There can be no assurance that any potential transaction or other strategic alternative, if consummated, will provide greater value to our stockholders than that reflected in the price of our common stock. Until the review process is concluded, perceived uncertainties related to our future may result in the loss of potential business opportunities and volatility in the market price of our common stock.
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Litigation
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” above and elsewhere in this Form 10-K, which could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements. 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.
Overview
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. No single customer represented more than 4% of our sales in 2022, 2021 or 2020.
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 and electronics, transportation, and aerospace, defense and government.
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• Leveraging a worldwide sales, distribution and manufacturing network
We distribute and sell our software and hardware products 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 continue to focus on scale and efficiency in serving our broad base of customers. This includes ongoing investment in our website, www.ni.com, for a better digital experience and significantly expanding the usage of our distributor channels. 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 57%, 59% and 60% of our revenues in each of 2022, 2021 and 2020. 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 14 - Segment information of Notes to Consolidated Financial Statements for details concerning the geographic breakdown of our net sales and long-lived assets, respectively).
We manufacture a majority of our products 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, geopolitical instability, supply chain constraints, inflationary pressures and tightening monetary policies. 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
We remain optimistic about our ability to drive revenue growth and further improve operating profitability in 2023, despiteweaker macroeconomic conditions and softening demand in certain end markets, such as our broader "Portfolio" and "Semiconductor" industry groups. We expect our customers will continue to make investments in emerging technologies related to 5G/mmWave, vehicle electrification, advanced driver assistance systems (“ADAS"), new space innovation, and advanced defense technology.
While we also expect to continue to experience some logistical challenges and cost pressures on our gross margin related to supply chain constraints over the next few quarters, we are confident in our ability to maintain competitive lead times as part of our strategic focus on application-specific system offerings. We have been able to mitigate some of the recent supply chain disruptions by expanding our supplier base, redesigning certain products to remove dependencies on certain components, and leveraging our modular platform to meet our customers' needs with available products.
During the first quarter of 2022, we accelerated our transition to a predominantly subscription-based licensing model for the majority of our software offerings. Revenue from software and related services was approximately 18% of our total revenue during 2022. While we expect our subscription base, recurring revenue and cash flow to increase over time as a result of this licensing model transition, we expect some initial headwinds to our net sales and operating profitability during the transition period. However, we expect recent additions and enhancements to our software portfolio will continue to differentiate our products and fuel demand across our end markets. We expect the transition to a subscription licensing model to result in a favorable year over year impact to our revenue beginning in 2023.
As part of our efforts to streamline our operations and enhance the experience of our customers, 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 1,000 accounts we have identified as having a high potential to maintain or expand our business through application-specific system 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 more than 30,000 accounts. The Broad-based tier currently represents approximately 30% of our total order value.
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We also continue to focus on scale and efficiency when engaging with our Broad-based customers. Our focus to streamline the process of doing business with NI means both scaling our costs and improving the experience of the large number of smaller accounts we serve. This commitment and focus include plans to continue investing in ni.com for a better digital experience and significantly expand the customer reach of our distributor channel during 2023 and beyond. We are also simplifying our product offerings for the Broad-based customers to make our products easier-to-use. We believe these actions will allow our direct sales force to accelerate our revenue growth through proactive engagements with accounts where we can deliver enterprise-level value. During 2022, sales to our distributors represented approximately 15% of our total net sales, compared to 10% in 2021. As of December 31, 2022, we estimate our distributors were carrying approximately $18 million of our products in inventory in total, and the majority of our distributors are not eligible for price adjustments or stock rotations related to their previous purchases. As of December 31, 2022 no single distributor accounted for more than 3% of our total net sales.
Restructuring
During the first quarter of 2023, we initiated a workforce reduction plan (the “2023 Plan”) intended to accelerate our growth strategy and further optimize our operations and cost structure. The 2023 Plan is expected to result in reductions to our worldwide headcount of approximately 4% during 2023, with a majority of the reductions occurring in the first quarter of 2023. In connection with the 2023 Plan, we currently estimate that we will incur pre-tax charges consisting primarily of cash termination benefits and other employee-related costs. We are continuing to evaluate the amount of these charges and expect that the majority of these charges will be recognized during the first quarter of 2023. See Note 19 – Subsequent Events to Notes to Consolidated Financial Statements for additional information on the 2023 Plan.
Acquisitions and divestitures
On May 2, 2022, we completed the acquisition of certain assets of, and assumed certain liabilities of, the test systems business of Germany-based Kratzer (the "TS Business"). As part of this integrated transaction, we also purchased 100% of the shares in certain subsidiaries of Kratzer including Kratzer Automation S.a.r.l. ("Kratzer France"), Kratzer Automation Inc. ("Kratzer US") and Kratzer Automation (Shanghai) Co., Ltd. ("Kratzer China"). The acquisitions of Kratzer France, Kratzer US, and Kratzer China were completed on June 1, 2022, June 2, 2022, and August 26, 2022, respectively. This transaction was accounted for as a business combination using the acquisition method of accounting. Total cash consideration for the transaction was $56.3 million inclusive of $0.7 million in cash acquired. All of the acquired assets and liabilities of the TS Business have been recorded at their respective fair values as of the acquisition date. The acquisition was funded by cash on hand. See Note 17 - Acquisitions of Notes to Consolidated Financial Statements for more information.
On February 28, 2022, we completed the acquisition of Heinzinger, comprising the electronic vehicle systems business of Heinzinger electronic GmbH for $22.5 million in total cash consideration, subject to certain post-closing adjustments. This transaction is being accounted for as a business combination using the acquisition method of accounting. All of the acquired assets and liabilities have been recorded at their respective fair values as of the acquisition date. Transaction costs have been expensed as incurred and were not material to the periods presented. The acquisition was funded by cash on hand. See Note 17 - Acquisitions of Notes to Consolidated Financial Statements for more information.
On October 19, 2021, we completed the acquisition of NHR, a manufacturer of test and measurement solutions for high power applications including electric vehicles and batteries. This transaction was accounted for as a business combination using the acquisition method of accounting. All of the acquired assets and liabilities of the acquired business were recorded at their respective fair values as of the acquisition date. Transaction costs were expensed as incurred. At the acquisition date, total consideration transferred was approximately $205 million, inclusive of $3 million in cash acquired. The acquisition was primarily funded by $200 million drawn under our prior credit facility. See Note 15 - Debt and Note 17 - Acquisitions of Notes to Consolidated Financial Statements for more information.
On April 23, 2021, we completed the acquisition of MonoDrive, Inc., a software company that specialized in signal processing and high-fidelity simulation software for validation of autonomous vehicles and ADAS for approximately $20 million in total cash consideration, subject to certain post-closing adjustments. This transaction was accounted for as a business combination using the acquisition method of accounting. All of the acquired assets and liabilities of the software company have been recorded at their respective fair values as of the acquisition date. We recognized approximately $17 million of goodwill and $4 million of other intangible assets as part of our preliminary purchase price allocation. Transaction costs have been expensed as incurred and were not material to the periods presented. See Note 17 - Acquisitions of Notes to Consolidated Financial Statements for more information.
On July 2, 2020, we completed our acquisition of OptimalPlus. Total proceeds used to acquire the business and replace certain unvested share options consisted of approximately $365 million in cash, inclusive of $18 million in cash acquired. (See Note 1 - Basis of presentation and Note 17 - Acquisitions of Notes to Consolidated Financial Statements for more information.)
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On January 15, 2020, we completed the sale of AWR Corporation ("AWR") for approximately $161 million. We recognized a gain of approximately $160 million on the sale. The gain is included within "Gain on sale of business/assets" in the consolidated statements of income, which also included approximately $1 million of transaction costs. (See Note 1 - Basis of presentation of Notes to Consolidated Financial Statements for more information.)
Strategic Review
On January 13, 2023, we announced that our Board of Directors has initiated a review and evaluation of strategic options, in consultation with our financial and legal advisors, with the intent to unlock and maximize shareholder value. The comprehensive review will include consideration of a full range of available strategic, business and financial alternatives, including solicitation of interest from potential acquirers and other transaction partners, some of whom have already approached the Company. In connection with the review and evaluation of strategic options, our Board of Directors adopted a limited duration stockholder rights plan in order to protect the best interests of the Company and its stockholders, help ensure that all interested parties have the opportunity to participate fairly in the strategic review and to provide our Board of Directors and stockholders time to make informed decisions. The stockholder rights plan is also intended to reduce the likelihood that any person or group gains control of the Company through open market accumulation or other tactics and reduce the likelihood that actions are taken by third parties that are not in the best interests of the Company and all of its stockholders. There is no assurance that this process will result in any specific transaction, including a business combination or acquisition of the Company, and there is no assurance as to the specific terms or timing for any agreed transaction if one were to result. We expect that this review and evaluation of strategic options will require that we devote significant resources and management time and attention, and will cause us to incur additional expenses and costs.
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Results of Operations
The following table sets forth, for the periods indicated, the percentage of net sales represented by geographic region and by certain items reflected in our Consolidated Statements of Income:
Years ended December 31,
Net sales:
Americas
EMEA
APAC
Consolidated net sales
Cost of sales
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Total operating expenses
Gain on sale of business/assets
Operating income
Other expense:
Income before income taxes
Provision for income taxes
Net income
Figures may not sum due to rounding.
A discussion regarding our financial condition and results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021 is presented below. A discussion of our financial condition and results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020 can be found under Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 22, 2022 (our “2021 Annual Report”).
Net Sales. The following table sets forth our net sales for the years ended December 31, 2022 and 2021, along with the percent changes between the corresponding periods.
Years ended December 31,
Change
($ in millions)
Dollars
Percentage
Product sales
Software maintenance sales
Total net sales
Figures may not sum due to rounding.
• The increase in product sales during 2022 was primarily attributable to stronger demand for our existing products, recent acquisitions, and price increases, which were partially offset by changes in foreign currency exchange rates. During 2022, we experienced double digit growth in our semiconductor and transportation industry-specific end markets. The impact of price increases favorably impacted net sales by approximately 7 percent compared to 2021. Revenue from recent acquisitions increased net sales by approximately 4 percent. The impact of changes in foreign currency exchanges rates reduced our net sales by approximately 4 percent. Additional discussion on the increase in net sales by geographic region is provided below. (See Note 2 - Revenue of our Notes to Consolidated Financial Statements for additional information on revenue by industry grouping).
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• The decrease in software maintenance sales during 2022 was primarily related to a decrease in software maintenance renewals for perpetual licenses and the impact of changes in foreign currency exchange rates on the subsequent recognition of previously deferred amounts, partially offset by growth in subscription licenses, due to the shift to a subscription license model.
The following table sets forth our net sales by geographic region for the years ended December 31, 2022 and 2021, along with the changes between the corresponding periods and the region’s percentage of total net sales.
Years ended December 31,
Change
($ in millions)
Dollars
Percentage
Americas
Percentage of total net sales
EMEA
Percentage of total net sales
APAC
Percentage of total net sales
Figures may not sum due to rounding.
We expect sales outside of the Americas to continue to represent a significant portion of our revenue. We intend to continue to expand our international presence by driving growth in existing 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 calculations. 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 years ended December 31, 2021). The impact of changes in foreign currency exchange rates on sales includes the net effect of related hedging activities described below.
The following table presents this information, along with the impact of changes in foreign currency exchange rates on sales denominated in local currencies, for the year ended December 31, 2022.
Year Ended December 31, 2021
Change
in Constant Dollars
Impact of changes in foreign currency exchange rates on net sales
Year Ended December 31, 2022
($ in millions)
GAAP
Net Sales
Dollars
Percentage
Dollars
Percentage
GAAP
Net Sales
Americas
EMEA
APAC
Total net sales
Figures may not sum due to rounding.
We use a foreign currency cash flow hedging program to help protect against changes in the U.S. dollar equivalent value caused by fluctuations in foreign currency exchange rates of forecasted foreign currency cash flows resulting from international sales. We hedge portions of our forecasted revenue denominated in foreign currencies with forward contracts. (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 consolidated sales for 2022 and 2021).
Gross Profit. The following table sets forth our gross profit and gross profit as a percentage of net sales for the years ended December 31, 2022, 2021, and 2020 along with the percentage changes in gross profit for the corresponding periods. We continue to focus on cost control and cost reduction measures throughout our manufacturing cycle.
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Years Ended December 31,
($ in millions)
Gross Profit
% change compared with prior period
Gross Profit as a percentage of net sales
The changes in our gross profit as a percentage of net sales were primarily related to the following:
Twelve Months Ended
December 31, 2021
Impact of increases in component costs
Impact of increase in outbound freight, material and other logistics
Impact of changes in foreign currency exchange rates
Impact of changes in sales mix related to acquired businesses
Impact of changes in inventory write-downs and restructuring activities
Impact of changes in amortization of capitalized software development costs and acquired intangibles
Impact of changes in sales mix excluding recent acquisitions
Impact of changes in our selling price
December 31, 2022
Operating Expenses. The following table sets forth our operating expenses for the years ended December 31, 2022 and 2021, along with the percentage changes between the corresponding periods and the line item as a percentage of total net sales.
Years Ended December 31,
($ in thousands)
Change
Sales and marketing
Percentage of total net sales
Research and development
Percentage of total net sales
General and Administrative
Percentage of total net sales
Total operating expenses
Percentage of total net sales
The $33 million increase in our total operating expenses during 2022 compared to 2021 was primarily related to the following:
• $21 million increase in personnel costs, primarily attributable to our recent acquisitions, as well as higher salaries and stock-based compensation expense and higher commissions due to strong bookings growth during the year, partially offset by decreases in expense under our variable compensation program and lower severance-related charges;
• $16 million increase primarily related to outside service costs and travel, partially offset by lower advertising and trade show spend;
• $12 million increase related to the amortization of acquisition-related intangibles;
• $10 million increase related to a charitable contribution into a Donor Advised Fund during the fourth quarter of 2022; and
• $26 million decrease resulting from changes in foreign currency exchange rates.
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Sales and Marketing
The primary drivers of the increase in sales and marketing expenses for the year ended December 31, 2022 compared to 2021 were related to an increase in salaries, commissions, travel, and the amortization of acquired intangibles partially offset by lower marketing and advertising spend and lower expense under our variable compensation program.
Research and Development
The primary drivers of the decrease in research and development expenses for the year ended December 31, 2022 compared to 2021 were related to lower expense under our variable compensation programs and a decrease in severance related costs partially offset by an increase in salaries and outside services.
General and administrative
The primary drivers of the increase in general and administrative expenses for the year ended December 31, 2022 compared to 2021 were related to an increase in salaries, outside services and a $10 million charitable contribution into a Donor Advised-Fund during the fourth quarter 2022, partially offset by a decrease in acquisition related expenses and lower expense under our variable compensation program.
Gain on Sale of Business/Assets. During July 2022, we sold approximately 75-acres of land in Williamson County, Texas and two office buildings in Aachen, Germany. We recognized a total gain of $34 million. These amounts are presented as "Gain on sales of business/asset" in our Consolidated Statements of Income, in accordance with ASC 360 - Property, Plant and Equipment (See Note 1 - Operations and Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements for further discussion).
Operating Income. For the year ended December 31, 2022, operating income was $192 million, an increase of 63% compared to 2021. As a percentage of net sales, operating income was 12% for the year ended December 31, 2022. The changes in operating income in absolute dollars and as a percent of sales in 2022 are attributable to the factors discussed in Net Sales, Gross Profit, Operating Expenses and Gain on Sale of Business/Asset above.
Other Expense.
• Interest Income. Interest income was $0.5 million for the year ended December 31, 2022. The $0.1 million increase in interest income compared to 2021 was primarily driven by higher interest rates despite lower cash and short-term investments.
• Interest Expense. Interest expense was approximately $16.6 million for the year ended December 31, 2022. The $13 million increase in interest expense compared to 2021 was due to additional borrowings under our Credit Facility and higher interest rates. Refer to Note 15 - Debt for additional information regarding the terms of our Credit Facility and related borrowings.
• Loss From Equity-Method Investments . Loss from equity-method investments was approximately $0.2 million for the year ended December 31, 2022. The improvement for the year ended December 31, 2022 compared to the same period in 2021 was primarily attributable to an impairmentloss of $3.5 million recorded in the three months ended March 31, 2021.
• Net Foreign Exchange Loss. Net foreign exchange loss was $10.2 million for the year ended December 31, 2022. Gains and losses on foreign currency are primarily due to the impact of re-measuring foreign currency monetary and liabilities into the functional currency of the corresponding entity. The amount of the gain or loss on foreign currency is driven by the volume of foreign currency transactions, and the foreign currency exchange rates for the period.
• Other Gain (Loss) . For the twelve months ended December 31, 2022, other gain was $6.3 million. The year over year increase was primarily related to a $3.4 million insurance recovery of an acquisition-related claim, a $1.3 million acquisition-related settlement received related to an acquisition after the measurement period closed and a $0.8 million liquidation payment from a former equity-method investee.
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Provision for Income Taxes. For the year ended December 31, 2022, our provision for income taxes reflected an effective tax rate of 19%. The factors that caused our effective tax rate to change year-over-year are detailed in the table below:
Years ended
December 31,
Effective tax rate for 2021
Change in mix of earnings in foreign jurisdictions with lower income tax rates
Global intangible low-taxed income inclusion ("GILTI")
Change in enhanced deduction for certain research and development expenses
Change in state income taxes, net of federal benefit
Change in intercompany prepaid tax asset
Amortization of intangible assets
Foreign-derived intangible income deduction
Global intangible low-taxed income deferred
Effective tax rate for 2022
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Other operational information
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 stock-based compensation, amortization of acquisition-related intangibles and fair value adjustments, acquisition-related transaction costs, disposal gains on sales of business/assets and related charitable contributions, tax effects on businesses held-for-sale, capitalization and amortization of internally developed software costs, and restructuring charges that were recorded in the line items indicated below (in thousands).
Years Ended December 31,
(In thousands)
Stock-based compensation
Cost of sales
Sales and marketing
Research and development
General and administrative
Provision for income taxes
Total
Years Ended December 31,
(In thousands)
Amortization of acquisition intangibles
Net sales
Cost of sales
Sales and marketing
Research and development
General and administrative
Other income
Provision for income taxes
Total
Years Ended December 31,
(In thousands)
Acquisition transaction costs, restructuring charges, and other (1)(2)
Net sales
Cost of sales
Sales and marketing
Research and development
General and administrative
Gain on sale of business/assets
Other income
Provision for income taxes
Total
(1): During the first quarter of 2021, we recognized a $3.5 million impairmentloss related to one of our equity-method investments.
(2): During 2022, the company recognized a gain of $34 million related to the sale of land and office buildings, presented within "Gain on sale of assets". The company also recognized a charitable contribution expense of $10 million related to an infrequent donation using a portion of the proceeds from the sale of the building, presented within "General and administrative".
Years Ended December 31,
(In thousands)
(Capitalization) and amortization of internally developed software costs
Cost of sales
Research and development
Provision for income taxes
Total
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Liquidity and Capital Resources
Overview
At December 31, 2022, we had $140 million in cash and cash equivalents. Our cash and cash equivalent balances are held in numerous financial institutions throughout the world, including substantial amounts held outside of the U.S. The following table presents the geographic distribution of our cash and cash equivalents as of December 31, 2022 (in millions):
(in millions)
Domestic
International
Total
Cash and Cash Equivalents
Figures may not sum due to rounding.
The following table presents our working capital:
(In thousands)
December 31, 2022
December 31, 2021
Increase/
(Decrease)
Working capital (1)
Cash and cash equivalents
(1) Includes current assets and current liabilities inclusive of cash and current portion of long-term debt
Our principal sources of liquidity include existing cash and cash equivalents balances and available borrowings under our Credit Facility, as well as the cash flows generated from our operations. The primary drivers of the net increase in working capital between December 31, 2021 and December 31, 2022 were:
• Cash, cash equivalents, and short-term investments decreased by $71 million. Additional analysis of the changes in our cash flows for the year ended December 31, 2022 compared to the year ended December 31, 2021 are discussed below.
• "Accounts receivable, net" increased by $104 million which is primarily related to the timing of billings during the fourth quarter of 2022 compared to the same period in 2021 and longer collection cycles due to changes in the mix of our customers and the related impact on our payment terms in connection with ongoing supply chain challenges. Days sales outstanding increased to 65 days at December 31, 2022, compared to 54 days at December 31, 2021.
• Inventory increased by $99 million. Inventory turns decreased to 1.4 at December 31, 2022, compared to 1.8 at December 31, 2021. The increase in inventory was primarily attributable to an increase in the volume of our raw materials to support increased demand for our products and minimize supply chain disruptions.
• Prepaid expenses and other current assets increased by $26 million, primarily related timing of prepaid insurance, other prepaid renewals and changes in the fair value of our foreign currency forward contracts.
• Accounts payable decreased by $4 million, primarily related to timing of invoice payments to our suppliers for raw materials.
• Accrued compensation decreased by $40 million primarily related to the decreased attainment under our variable pay programs during 2022 that are to be paid out in 2023 and a decrease in restructuring-related accruals.
• The current portion of deferred revenue decreased by $1 million due to changes in foreign currency exchange rates and lower deferrals for software maintenance due to our ongoing transition to a subscription license model, partially offset by additional deferrals for hardware-related service-type warranty obligations.
• Accrued expenses and other current liabilities increased by $88 million, primarily related to the effect of tax law changes on our current income tax liabilities, changes in the fair value of our foreign currency forward contracts, and the timing of our accruals for interest expense.
• Other taxes payable increased by $9 million, primarily related to the timing of payments for VAT and other indirect taxes.
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Analysis of Cash Flow
The following table summarizes the proceeds and (uses) of cash:
(In thousands)
December 31,
Cash provided by operating activities
Cash used by investing activities
Cash provided by (used by) financing activities
Effect of exchange rate changes on cash
Net change in cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Operating Activities Cash provided by operating activities for the year ended December 31, 2022 decreased by $101 million compared to the year ended December 31, 2021. This decrease was primarily due to a $51 million decrease in cash flow from changes in operating assets and liabilities during the year, further described below, and a $50 million decrease in net income excluding the effect of non-cash items including depreciation and amortization, stock-based compensation, disposal gain on sale of assets/business, loss from equity method investments, and deferred income taxes.
• The aggregate of changes in accounts receivable, inventory and accounts payable used net cash of $223 million for the year ended December 31, 2022 compared to net cash used of $141 million in the comparable period in 2021. 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. We have significantly increased inventory purchases in 2022 compared to 2021 to support current and anticipated demand for our products and minimize supply chain disruptions.
• The aggregate of changes in prepaid assets, deferred revenue and other assets and liabilities provided cash of $63 million during the year ended December 31, 2022 compared to $31 million in the comparable period in 2021.
Investing Activities Cash used in investing activities for the year ended December 31, 2022 decreased by $140 million compared to the same period in 2021, primarily related to the following:
• $167 million decrease in cash outflows related to acquisitions and other strategic investments in equity-method investees;
• $41 million increase in cash inflows related to proceeds received from the sale of our land and buildings during 2022;
• $60 million decrease in cash inflows related to the sale of short-term investments during 2021;and
• $7 million increase in cash outflows related to capital expenditures for long-lived assets.
Financing Activities Cash used by financing activities was $26 million for 2022 compared to $34 million of cash provided by financing activities for 2021. This was primarily related to a $97 million increase in cash used to repurchase our common stock partially offset by a $43 million net increase in borrowings under our Credit Facility. (See Note 12 – Authorized shares of common and preferred stock and stock-based compensation plans and Note 15 - Debt of Notes to Consolidated Financial Statements for additional discussion about our share repurchase program).
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Contractual Cash Obligations. Contractual obligations arise in the normal course of business and include debt and related interest payments, leases, purchase obligations, and warranty liabilities. See Note 9 - Leases of Notes to the Consolidated Financial Statements for additional information on our lease obligations. See Note 10 - Income Taxes of Notes to the Consolidated Financial Statements for additional information on our transition tax payables and other income tax payables. See Note 15 - Debt of Notes to the Consolidated Financial Statements for additional information on our debt obligations. See Note 16 - Commitment and Contingencies of Notes to Consolidated Financial Statements for additional information regarding our other contractual obligations.
Credit Agreement. See Note 15 - Debt of Notes to Consolidated Financial Statements for additional details on the terms of our Credit Facility.
Off-Balance Sheet Arrangements. We do not have any off-balance sheet debt. At December 31, 2022, 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 issuance of common stock through our employee stock purchase plan, available borrowing capacity under our Credit Facility will be sufficient to cover our working capital needs, capital expenditures, interest expense, investment requirements, commitments, payment of dividends to our stockholders and repurchases of our common stock for at least the next 12 months. We may seek to pursue additional financing or to raise additional funds by seeking additional credit financing, including through an increase in revolving and/or term loan commitments under our Credit Facility, 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 can 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:
• payment of dividends to our stockholders;
• interest expense paid on our Credit Facility;
• 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;
• our restructuring activities;
• the outcome of our strategic review process;
• 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 – Operations and summary of significant accounting policies of Notes to Consolidated Financial Statements for discussion regarding recently issued accounting pronouncements.
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Critical Accounting Estimates
The preparation of our financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Although these estimates are based on management's best knowledge of current events and actions that may impact the company in the future, actual results may be materially different from the estimates. Note 1 – Operations and summary of significant accounting policies in Item 8 of Part II of this Report, describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements.
The below accounting policies require significant judgments, assumptions, and estimates used in the preparation of the Consolidated Financial Statements and actual results could differ materially from the amounts reported based on these policies.
• Valuation of acquired intangible assets
When we acquire a business, a portion of the purchase price is typically allocated to identifiable intangible assets, such as acquired technology and customer relationships. Fair value of these assets is determined primarily using the income approach, which requires us to project future cash flows and apply an appropriate discount rate. We amortize intangible assets with finite lives over their expected useful lives. Significant management judgment is required in the forecasts of future operating results that are used in these valuations. The significant assumptions used to estimate the fair value of developed technology we acquired during 2022 included estimated revenue growth rates and royalty rates. Our estimates are based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. Incorrect estimates could result in future impairment charges, and those charges could be material to our results of operations.
• Long-lived Assets
Intangible assets with finite lives and property, plant and equipment are amortized or depreciated over their estimated useful life on a straight line basis. We monitor conditions related to these assets to determine whether events and circumstances warrant a revision to the remaining amortization or depreciation period. We test these assets for potential impairment whenever our management concludes events or changes in circumstances indicate that the carrying amount may not be recoverable.
We review goodwill for impairment annually during our fourth quarter and whenever events or changes in circumstances indicate the carrying value may not be recoverable. As defined in the authoritative guidance, a reporting unit is an operating segment, or one level below an operating segment. We have determined our single operating segment is a single report unit, and consequently, we use our market capitalization to estimate the fair value as part of our annual impairment testing. Our annual impairment test was performed as of November 30, 2022.
We review indefinite-lived intangible assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. The authoritative accounting guidance allows a qualitative approach for testing indefinite-lived intangible assets for impairment, similar to the impairment testing guidance for goodwill. It allows the option to first assess qualitative factors (events and circumstances) that could have affected the significant inputs used in determining the fair value of the indefinite-lived intangible asset. The qualitative factors assist in determining whether it is more-likely-than-not that the indefinite-lived intangible asset is impaired. An organization may choose to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to calculating its fair value. Our indefinite-lived intangible assets are in-process research and development ("IPR&D") intangible assets. In 2022, 2021 and 2020, we assessed impairment by performing a qualitative test. No impairments of indefinite-lived intangible assets were recorded in 2022, 2021 and 2020.
As of December 31, 2022 and 2021, we had goodwill of approximately $616 million and $576 million, respectively and the carrying value of our intangibles assets was approximately $201 million and $220 million, respectively.
No impairment of long-lived assets was identified during 2022, 2021, or 2020.
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• Accounting for 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.
Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our financial position or our results of operations. In estimating future tax consequences, all expected future events are considered other than enactments of changes in tax laws or rates. 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. Our continuing policy is to recognize interest and penalties related to income tax matters in income tax expense.
We have not entered into any advanced pricing or other agreements with the Internal Revenue Service with regard to any foreign jurisdictions. For additional discussion about our income taxes, including components of income before income taxes, our provision for income taxes charged to operations, components of our deferred tax assets and liabilities, a reconciliation of income taxes at the U.S. federal statutory rate to our effective tax rate and other tax matters, see Note 10 – Income taxes of Notes to Consolidated Financial Statements.
