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 Litigation Reform Act of 1995 for all forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, forward-looking statements are not guarantees of performance and actual results could differ materially from those projected in the forward-looking statements as a result of a number of important factors, including those set forth under the heading “Risk Factors” 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, despite weaker 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 impairment loss 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 impairment loss 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.
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