NATIONAL INSTRUMENTS CORP [NATI] Filings

10-Q 1 nati-20230630.htm 10-Q nati-20230630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: June 30, 2023

☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ________________ to ________________

Commission file number: 000-25426

NATIONAL INSTRUMENTS CORPORATION

(Exact name of registrant as specified in its charter)


Delaware						74-1871327
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

11500 North MoPac Expressway
Austin,						78759
Texas
(Address of principal executive offices)						(Zip code)

Registrant's telephone number, including area code: (512) 683-0100

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol(s)	Name of exchange on which registered
Common Stock, $0.01 par value	NATI	The Nasdaq Stock Market LLC
Preferred Share Purchase Rights	N/A	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.


Class			Outstanding at July 24, 2023
Common Stock, $0.01 par value			132,797,497

NATIONAL INSTRUMENTS CORPORATION

INDEX


PART I. FINANCIAL INFORMATION		Page No.

Item 1	Financial Statements:

	Condensed Consolidated Balance Sheets
	June 30, 2023 (unaudited) and December 31, 2022	3

	Condensed Consolidated Statements of Income
	(unaudited) for the three and six months ended June 30, 2023 and 2022	4

	Condensed Consolidated Statements of Comprehensive Income
	(unaudited) for the three and six months ended June 30, 2023 and 2022	5

	Condensed Consolidated Statements of Cash Flows
	(unaudited) for the six months ended June 30, 2023 and 2022	6

	Condensed Consolidated Statements of Stockholders' Equity
	(unaudited) for the three and six months ended June 30, 2023 and 2022	7

	Notes to Condensed Consolidated Financial Statements	9

Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3	Quantitative and Qualitative Disclosures about Market Risk	52

Item 4	Controls and Procedures	53


PART II. OTHER INFORMATION

Item 1	Legal Proceedings	53

Item 1A	Risk Factors	53

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	55

Item 3	Defaults Upon Senior Securities	55

Item 4	Mine Safety Disclosures	55

Item 5	Other Information	55

Item 6	Exhibits	57

	Signatures and Certifications	58

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

NATIONAL INSTRUMENTS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)


	June 30,		December 31,
	2023		2022
Assets	(unaudited)
Cash and cash equivalents	$	139,243	$	139,799

Accounts receivable, net	389,926		445,279
Inventories, net	401,626		388,164
Prepaid expenses and other current assets	123,949		115,677
Total current assets	1,054,744		1,088,919
Property and equipment, net	283,907		265,380
Goodwill	638,459		615,734
Intangible assets, net	192,904		200,850
Operating lease right-of-use assets	68,062		59,176

Other long-term assets	124,918		128,479
Total assets	$	2,362,994	$	2,358,538
Liabilities and stockholders' equity
Accounts payable	$	60,514	$	54,639
Accrued compensation	49,575		71,422
Deferred revenue - current	158,247		137,208
Operating lease liabilities - current	16,608		13,834
Other taxes payable	55,622		67,615
Debt, current	25,000		25,000
Accrued expenses and other current liabilities	58,833		153,157
Total current liabilities	424,399		522,875

Deferred income taxes	5,983		1,676
Income tax payable - non-current	22,581		40,646
Deferred revenue - non-current	60,094		63,066
Operating lease liabilities - non-current	36,486		30,588
Debt, non-current	564,373		516,637
Other long-term liabilities	31,558		26,926
Total liabilities	1,145,474		1,202,414
Commitments and contingencies
Stockholders' equity:
Preferred stock: par value $0.01; 5,000,000 shares authorized; none issued and outstanding	—		—
Common stock: par value $0.01; 360,000,000 shares authorized; 132,797,497 shares and 131,004,965 shares issued and outstanding, respectively	1,328		1,310
Additional paid-in capital	1,251,971		1,207,420
Retained deficit	(11,295)		(14,741)
Accumulated other comprehensive loss	(24,484)		(37,865)
Total stockholders’ equity	1,217,520		1,156,124
Total liabilities and stockholders’ equity	$	2,362,994	$	2,358,538

The accompanying notes are an integral part of the financial statements.

NATIONAL INSTRUMENTS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

(unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022

Net sales:
Product	$	379,436	$	354,805	$	779,835	$	698,489
Software maintenance	37,368		40,710		73,794		82,281
Total net sales	416,804		395,515		853,629		780,770

Cost of sales:
Product	113,625		123,307		241,181		238,332
Software maintenance	4,862		4,167		10,012		8,370
Total cost of sales	118,487		127,474		251,193		246,702

Gross profit	298,317		268,041		602,436		534,068

Operating expenses:
Sales and marketing	123,101		124,908		240,443		245,064
Research and development	83,801		85,589		170,438		167,750
General and administrative	50,504		36,772		93,719		69,949

Total operating expenses	257,406		247,269		504,600		482,763

Operating income	40,911		20,772		97,836		51,305

Other expense	(8,500)		(3,505)		(11,519)		(3,473)
Income before income taxes	32,411		17,267		86,317		47,832
Provision for income taxes	1,919		4,833		8,896		10,162

Net income	$	30,492	$	12,434	$	77,421	$	37,670

Basic earnings per share	$	0.23	$	0.09	$	0.59	$	0.29

Weighted average shares outstanding - basic	132,369		131,973		131,850		132,039

Diluted earnings per share	$	0.23	$	0.09	$	0.58	$	0.28

Weighted average shares outstanding - diluted	134,171		132,708		133,693		132,948

Dividends declared per share	$	0.28	$	0.28	$	0.56	$	0.56

The accompanying notes are an integral part of these financial statements.

NATIONAL INSTRUMENTS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022

Net income	$	30,492	$	12,434	$	77,421	$	37,670
Other comprehensive income (loss), before tax and net of reclassification adjustments:
Foreign currency translation adjustment	1,227		(9,640)		6,116		8,027

Unrealized gain on derivative instruments	10,843		6,161		9,167		(13,446)
Other comprehensive income (loss), before tax	12,070		(3,479)		15,283		(5,419)
Tax expense related to items of other comprehensive income	2,286		1,507		1,902		1,930
Other comprehensive income (loss), net of tax	9,784		(4,986)		13,381		(7,349)
Comprehensive income	$	40,276	$	7,448	$	90,802	$	30,321

The accompanying notes are an integral part of these financial statements.

NATIONAL INSTRUMENTS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Six Months Ended
	June 30,
	2023		2022
Cash flow from operating activities:
Net income	$	77,421	$	37,670
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization	45,541		45,742
Stock-based compensation	30,388		40,804
Gain from equity-method investees	(5,597)		(131)

Deferred income taxes	2,488		943
Changes in operating assets and liabilities	(75,368)		(169,930)
Net cash provided by (used in) operating activities	74,873		(44,902)

Cash flow from investing activities:
Acquisitions, net of cash received	(23,024)		(72,802)
Capital expenditures	(35,477)		(24,509)


Capitalization of internally developed software	(925)		(187)
Additions to other intangibles	(3,811)		(2,478)




Net cash used in investing activities	(63,237)		(99,976)

Cash flow from financing activities:
Proceeds from revolving line of credit	120,000		175,000
Payments on revolving line of credit	(60,000)		—



Payments on term loan	(12,500)		—

Proceeds from issuance of common stock	17,377		17,859
Repurchase of common stock	—		(70,000)
Dividends paid	(73,975)		(74,034)
Payments for taxes related to net share settlement of equity awards	(3,076)		—
Net cash (used in) provided by financing activities	(12,174)		48,825

Effect of exchange rate changes on cash	(18)		(4,180)

Net change in cash and cash equivalents	(556)		(100,233)
Cash and cash equivalents at beginning of period	139,799		211,106
Cash and cash equivalents at end of period	$	139,243	$	110,873

The accompanying notes are an integral part of these financial statements.

NATIONAL INSTRUMENTS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data and per share data)

(unaudited)




	Common Stock Shares	Common Stock Amount		Additional-Paid in Capital		Retained Deficit		Accumulated Other Comprehensive Loss		Total Stockholders' Equity
Balance at March 31, 2023	131,498,380	$	1,315	$	1,231,894	$	(4,627)	$	(34,268)	$	1,194,314
Net income	—	—		—		30,492		—		30,492
Other comprehensive gain, net of tax	—	—		—		—		9,784		9,784
Issuance of common stock under employee plans	1,351,884	14		8,407		—		—		8,421
Payments for taxes related to net share settlement of equity awards	(52,767)	(1)		(3,075)		—		—		(3,076)
Stock-based compensation	—	—		14,745		—		—		14,745




Dividends paid (1)	—	—		—		(37,160)		—		(37,160)
Balance at June 30, 2023	132,797,497	1,328		1,251,971		(11,295)		(24,484)		1,217,520

	Common Stock Shares	Common Stock Amount		Additional-Paid in Capital		Retained Deficit		Accumulated Other Comprehensive Loss		Total Stockholders' Equity
Balance at December 31, 2022	131,004,965	1,310		1,207,420		(14,741)		(37,865)		1,156,124
Net income	—	—		—		77,421		—		77,421
Other comprehensive gain, net of tax	—	—		—		—		13,381		13,381
Issuance of common stock under employee plans	1,845,299	19		17,358		—		—		17,377
Payments for taxes related to net share settlement of equity awards	(52,767)	(1)		(3,075)		—		—		(3,076)
Stock-based compensation	—	—		30,268		—		—		30,268




Dividends paid (1)	—	—		—		(73,975)		—		(73,975)
Balance at June 30, 2023	132,797,497	$	1,328	$	1,251,971	$	(11,295)	$	(24,484)	$	1,217,520

(1) Cash dividends declared per share of common stock were $0.28 for the three months ended June 30, 2023, and $0.56 for the six months ended June 30, 2023.

The accompanying notes are an integral part of these financial statements.


	June 30, 2022
	(Unaudited)
	Common Stock Shares	Common Stock Amount		Additional-Paid in Capital		Retained Earnings		Accumulated Other Comprehensive Income/(Loss)		Total Stockholders' Equity
Balance at March 31, 2022	131,876,464	$	1,319	$	1,152,349	$	76,264	$	(22,494)	$	1,207,438
Net income	—	—		—		12,434		—		12,434
Other comprehensive loss, net of tax	—	—		—		—		(4,986)		(4,986)
Issuance of common stock under employee plans	1,426,756	14		8,601		—		—		8,615
Stock-based compensation	—	—		20,609		—		—		20,609

Repurchase of common stock	(986,876)	(10)		(8,428)		(30,107)		—		(38,545)

Dividends paid (1)	—	—		—		(37,058)		—		(37,058)
Balance at June 30, 2022	132,316,344	1,323		1,173,131		21,533		(27,480)		1,168,507

	Common Stock Shares	Common Stock Amount		Additional-Paid in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders' Equity
Balance at December 31, 2021	132,293,898	1,323		1,129,647		112,858		(20,131)		1,223,697
Net income	—	—		—		37,670		—		37,670
Other comprehensive loss, net of tax	—	—		—		—		(7,349)		(7,349)
Issuance of common stock under employee plans	1,781,374	18		17,841		—		—		17,859
Stock-based compensation	—	—		40,664		—		—		40,664

Repurchase of common stock	(1,758,928)	(18)		(15,021)		(54,961)		—		(70,000)

Dividends paid (1)	—	—		—		(74,034)		—		(74,034)
Balance at June 30, 2022	132,316,344	$	1,323	$	1,173,131	$	21,533	$	(27,480)	$	1,168,507

(1) Cash dividends declared per share of common stock were $0.28 for the three months ended June 30, 2022, and $0.56 for the six months ended June 30, 2022.

The accompanying notes are an integral part of these financial statements.

NATIONAL INSTRUMENTS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Basis of presentation

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended December 31, 2022, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on February 21, 2023 (the "Form 10-K"). In our opinion, the accompanying condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring items) considered necessary to state fairly our financial position at June 30, 2023 and December 31, 2022, the results of our operations and comprehensive income for the three and six months ended June 30, 2023 and 2022, our cash flows for the six months ended June 30, 2023 and 2022 and our statement of stockholders' equity for the three and six months ended June 30, 2023 and 2022. Our operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States.

Reclassifications

Certain reclassifications have been made to prior period amounts to conform to the current period presentation.

Summary of Significant Accounting Policies

There were no material changes to our significant accounting policies during the three and six months ended June 30, 2023 compared to the significant accounting policies described in our 2022 Form 10-K.

Other (Expense) Income

Other (expense) income, net consisted of the following amounts:


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	(Unaudited)				(Unaudited)
	2023		2022		2023		2022
Interest income	$	426	$	58	$	751	$	104
Interest expense	(9,741)		(2,500)		(18,088)		(3,792)
Gain (loss) from equity-method investments	819		(471)		5,597		131
Net foreign exchange gain (loss)	721		(769)		420		(1,935)
Other	(725)		177		(199)		2,019
Other expense, net	$	(8,500)	$	(3,505)	$	(11,519)	$	(3,473)

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities on our condensed consolidated balance sheet includes the following amounts (in thousands):


	As of June 30, 2023		As of December 31,
	(unaudited)		2022
Income taxes payable - current	$	—	$	87,186
Hedge payable - current	6,242		18,117
Accrued liabilities	31,779		26,851
Other	20,812		21,003
Total	$	58,833	$	153,157

Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding during each period. Diluted EPS is computed by dividing net income by the weighted average number of common shares and common share equivalents outstanding (if dilutive) during each period. The number of common share equivalents, which includes time-based restricted stock units ("RSUs") and performance-based restricted stock units ("PRSUs"), is computed using the treasury stock method.

The reconciliation of the denominators used to calculate basic EPS and diluted EPS for the three and six months ended June 30, 2023 and 2022 are as follows (in thousands):


	Three Months Ended June 30,		Six Months Ended June 30,
	(Unaudited)		(Unaudited)
	2023	2022	2023	2022
Weighted average shares outstanding-basic	132,369	131,973	131,850	132,039
Plus: Common share equivalents
RSUs & PRSUs	1,802	735	1,843	909
Weighted average shares outstanding-diluted	134,171	132,708	133,693	132,948

Shares issuable upon vesting of RSU awards of 70,300 shares and 2,026,000 shares for the three months ended June 30, 2023 and 2022, respectively, and 68,600 shares and 1,324,000 shares for the six months ended June 30, 2023 and 2022, respectively, were excluded in the computations of diluted EPS because the effect of including the shares issuable upon vesting of RSU awards would have been anti-dilutive.

Note 2 - Revenue

Revenue Recognition

Revenue is recognized upon transfer of control of the promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of our products or services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.

Disaggregation of Revenues

We disaggregate revenue from contracts with customers based on the timing of transfer of goods or services to customers (point-in-time or over time), geographic region based primarily on the billing location of the customer and customer industry grouping.

Total net sales based on the timing of transfer of goods or services to customers and geographic region are as follows:


			Three Months Ended June 30,
			(Unaudited)
	2023						2022
(In thousands)
Net sales:	Point-in-Time(1)		Over Time		Total		Point-in-Time(1)		Over Time		Total
Americas	$	160,298	$	27,210	$	187,508	$	134,337	$	26,080	$	160,417
EMEA	93,221		18,731		111,952		76,092		20,591		96,683
APAC	105,833		11,511		117,344		127,858		10,557		138,415
Total net sales(1)	$	359,352	$	57,452	$	416,804	$	338,287	$	57,228	$	395,515
(1) Net sales contains hedging gains and losses, which do not represent revenues recognized from customers. Refer to Note 5 - Derivative instruments and hedging activities of Notes to Condensed Consolidated Financial Statements for more information on the impact of our hedging activities on our results of operations.


			Six Months Ended June 30,
			(Unaudited)
	2023						2022
(In thousands)
Net sales:	Point-in-Time(1)		Over Time		Total		Point-in-Time(1)		Over Time		Total
Americas	$	312,640	$	52,854	$	365,494	$	267,326	$	52,302	$	319,628
EMEA	187,918		36,215		224,133		155,331		41,720		197,051
APAC	241,481		22,521		264,002		242,853		21,238		264,091
Total net sales(1)	$	742,039	$	111,590	$	853,629	$	665,510	$	115,260	$	780,770
(1) Net sales contains hedging gains and losses, which do not represent revenues recognized from customers. Refer to Note 5 - Derivative instruments and hedging activities of Notes to Condensed Consolidated Financial Statements for more information on the impact of our hedging activities on our results of operations.

The industry grouping used to disaggregate net sales is determined at the customer account level. Accounts assigned to one of our three industry-specific groupings are either designated as Semiconductor and Electronics, Transportation, or Aerospace, Defense and Government ("ADG"). We are able to leverage the investments in these areas to also serve a broad base of diverse customers in the other industries we serve, which are included in our Portfolio grouping. We periodically review and update the groupings of customers assigned to a particular industry grouping to ensure that our revenue disaggregation aligns with the way we currently manage our business. As part of this process, we reclassified certain customer accounts between industry groups during the first quarter of 2023. The prior period presented below has been recast to conform to the current period presentation.


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	(Unaudited)
Industry Grouping	2023		2022		2023		2022
Portfolio	$	134,706	$	116,216	$	270,615	$	240,919
Semiconductor & Electronics	91,584		116,370		205,341		220,395
Aerospace, Defense & Government	111,895		99,521		225,010		194,024
Transportation	78,619		63,408		152,663		125,432
Total net sales	$	416,804	$	395,515	$	853,629	$	780,770

Information about Contract Balances

Amounts billed in advance of services being provided are accounted for as deferred revenue. Nearly all of our deferred revenue balance is related to extended hardware and software maintenance contracts. Payment terms and conditions vary by contract type, although payment is typically due within 30 to 90 days of contract inception. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing.

Changes in deferred revenue, current and non-current, during the six months ended June 30, 2023 were as follows:



(In thousands)	Amount
Balance as of December 31, 2022	$	200,274
Deferral of revenue billed in current period, net of recognition	88,220
Recognition of revenue deferred in prior periods	(72,909)
Acquisitions/Divestitures	2,414
Foreign currency translation impact	342
Balance as of June 30, 2023 (unaudited)	$	218,341

For the six months ended June 30, 2023, revenue recognized from performance obligations satisfied in prior periods (for example, due to changes in transaction price) was not material. Amounts recognized as revenue in excess of amounts billed are recorded as unbilled receivables. Unbilled receivables which are anticipated to be invoiced in the next twelve months are included in "Other current assets" on the condensed consolidated balance sheet. Based on the nature of our contracts with customers, we do not typically recognize unbilled receivables related to revenues recognized in excess of amounts billed. For the six months ended June 30, 2023 and December 31, 2022, the amounts recorded that were related to unbilled receivables were not material.

Unsatisfied Performance Obligations

Revenue expected to be recognized in any future period related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less and contracts where revenue is recognized as invoiced, was approximately $111 million as of June 30, 2023. Because we typically invoice customers at contract inception, this amount is included in our current and non-current deferred revenue balances and primarily relates to multi-year payments for hardware service and software service offerings. As of June 30, 2023, we expect to recognize approximately 25% of the revenue related to these unsatisfied performance obligations during the remainder of 2023, 43% during 2024, and 32% thereafter.

Assets Recognized from the Costs to Obtain a Contract with a Customer

We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs meet the requirements to be capitalized. Capitalized incremental costs related to initial contracts and renewals are amortized over the same period because the commissions paid on both the initial contract and renewals are commensurate with one another. Total capitalized costs to obtain a contract were not material during the periods presented and are included in other long-term assets on our condensed consolidated balance sheets.

Note 3 – Investments

Equity-Method Investments

The carrying value of our equity method investments was $29 million and $29 million as of June 30, 2023 and December 31, 2022, respectively. During the three months ended June 30, 2023 and 2022, net sales to our equity-method investees were approximately $0.3 million and $1.3 million, respectively. During the six months ended June 30, 2023 and 2022, net sales to our equity-method investees were approximately $0.8 million and $2.8 million, respectively. During the three and six months ended June 30, 2023 and 2022, purchases from our equity-method investees were not material.

Our proportionate share of the income/(loss) from equity-method investments is included within "Other expense." Refer to Note 17 - Acquisitions of Notes to Condensed Consolidated Financial Statements for additional discussion on a step acquisition of one of our existing equity-method investments, SET GmbH ("SET"), during the first quarter of 2023.

Note 4 – Fair value measurements

We define fair value to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market that market participants may use when pricing the asset or liability.

We follow a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value measurement is determined based on the lowest level input that is significant to the fair value measurement. The three values of the fair value hierarchy are the following:

Level 1 – Quoted prices in active markets for identical assets or liabilities

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly

Level 3 – Inputs that are not based on observable market data

Assets and liabilities measured at fair value on a recurring basis are summarized below:


	Fair Value Measurements at Reporting Date Using
(In thousands)	(Unaudited)
Description	June 30, 2023		Level 1		Level 2		Level 3
Assets








Derivatives (interest rate swaps)	4,467		—		4,467		—
Derivatives (foreign exchange contracts)	13,410		—		13,410		—
Total Assets	$	17,877	$	—	$	17,877	$	—

Liabilities

Derivatives (foreign exchange contracts)	$	(6,267)	$	—	$	(6,267)	$	—
Total Liabilities	$	(6,267)	$	—	$	(6,267)	$	—


(In thousands)	Fair Value Measurements at Reporting Date Using
Description	December 31, 2022		Level 1		Level 2		Level 3
Assets









Derivatives (interest rate swaps)	2,299				2,299
Derivatives (foreign exchange contracts)	10,025		—		10,025		—
Total Assets	$	12,324	$	—	$	12,324	$	—

Liabilities
Derivatives (interest rate swaps)	$	(1,013)	$	—	$	(1,013)	$	—
Derivatives (foreign exchange contracts)	$	(18,313)	$	—	$	(18,313)	$	—
Total Liabilities	$	(19,326)	$	—	$	(19,326)	$	—

The valuation techniques used to measure the fair value of our financial instruments having Level 2 inputs were derived from non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models, such as discounted cash flow techniques.

Derivatives include foreign currency forward and interest rate swap contracts. Our derivatives are valued using an income approach (Level 2) based on the spot rate less the contract rate multiplied by the notional amount. We consider counterparty credit risk in the valuation of our derivatives. However, counterparty credit risk did not impact the valuation of our derivatives during the six months ended June 30, 2023. There were no transfers in or out of Level 1 or Level 2 during the six months ended June 30, 2023.

Non-financial assets such as equity-method investments, goodwill, intangible assets, and property, plant and equipment are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment is recognized. The amounts related to all assets and liabilities required to be measured at fair value on a nonrecurring basis were not material at June 30, 2023 and December 31, 2022.

We did not have any items that were measured at fair value on a nonrecurring basis at June 30, 2023 and December 31, 2022. The carrying value of net accounts receivable, accounts payable, and long-term debt contained in the condensed consolidated balance sheets approximates fair value.

Note 5 – Derivative instruments and hedging activities

We recognize all of our derivative instruments as either assets or liabilities in our statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.

We have direct operations in approximately 40 countries. Sales outside of the Americas accounted for approximately 55% and 59% of our net sales during the three months ended June 30, 2023 and 2022, respectively, and approximately 57% and 59% during the six months ended June 30, 2023 and 2022, respectively. Our activities expose us to a variety of market risks, including the effects of changes in foreign currency exchange rates. These financial risks are monitored and managed by us as an integral part of our overall risk management program.

The vast majority of our foreign sales are denominated in the customers' local currency. Movements in foreign currency exchange rates pose a risk to our operations and competitive position, in that exchange rate changes may affect our profitability and cash flow, and the business or pricing strategies of our non-U.S. based competitors. We use foreign currency forward contracts as hedges of forecasted sales and expenses that are denominated in foreign currencies and as hedges of foreign currency denominated financial assets or liabilities. These contracts are entered into to help protect against the risk that the eventual dollar-net-cash inflows or outflows resulting from these transactions will be adversely affected by changes in exchange rates. We designate foreign currency forward contracts as cash flow hedges of forecasted net sales or forecasted expenses. In addition, we hedge our foreign currency denominated balance sheet exposures using foreign currency forward contracts that are not designated as hedging instruments. None of our derivative instruments contain a credit-risk-related contingent feature.

Cash flow hedges

To help minimize the financial impact of fluctuations in foreign currency exchange rates of forecasted foreign currency cash flows resulting from international sales over the next one to three years, we have instituted a foreign currency cash flow hedging program. We hedge portions of our forecasted net sales and forecasted expenses denominated in foreign currencies with forward contracts. For forward contracts, when the value of the dollar changes significantly against the foreign currencies, the change in the present value of future foreign currency cash flows may be offset by the change in the fair value of the forward contracts designated as hedges. We use foreign currency forward contracts for up to 100% of our forecasted exposures in selected currencies (primarily in Euro, Japanese yen, Hungarian forint, British pound, Malaysian ringgit, Korean won and Chinese yuan) and limit the duration of these contracts to 40 months or less.

For foreign currency derivative instruments that are designated and qualify as a cash flow hedge, the gain or loss on the derivative is reported as a component of accumulated other comprehensive income ("OCI") and reclassified into earnings in the same line item (net sales, operating expenses, or cost of sales) associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. Cash flows from derivative instruments are classified in the statement of cash flows in the same category as the cash flows from the hedged or economically hedged item, primarily in operating activities. Hedge effectiveness of foreign currency forwards designated as cash flow hedges is measured by comparing the hedging instrument’s cumulative change in fair value from inception to maturity to the forecasted transaction’s terminal value.

We held forward contracts designated as cash flow hedges with the following notional amounts:


(In thousands)	US Dollar Equivalent
	As of June 30, 2023		As of December 31,
	(Unaudited)		2022
British pound	$	16,688	$	13,929
Chinese yuan	94,463		73,419
Euro	130,162		109,091
Hungarian forint	8,813		19,529
Japanese yen	28,647		21,285
Korean won	20,298		14,048
Malaysian ringgit	2,941		8,856
Total forward contracts notional amount	$	302,012	$	260,157

The contracts in the foregoing table had contractual maturities of 18 months or less at June 30, 2023 and 12 months or less at December 31, 2022.

At June 30, 2023, we expected to reclassify $5.0 million of gains on derivative instruments from accumulated OCI to net sales during the next twelve months when the hedged international sales occur, $0.6 million of losses on derivative instruments from accumulated OCI to cost of sales during the next twelve months when the hedged cost of sales are incurred and $0.5 million of losses on derivative instruments from accumulated OCI to operating expenses during the next twelve months when the hedged operating expenses occur. Expected amounts are based on derivative valuations at June 30, 2023. Actual results may vary materially as a result of changes in the corresponding exchange rates subsequent to this date.

In 2022, we entered into interest rate swap agreements with an aggregate notional value of $300 million and a term of three years. The economic effect of the swap agreements is to mitigate the uncertainty of the cash flows associated with floating-rate interest payments due under our term loan and revolving credit facility (“Credit Facility") by fixing the underlying annual interest rate for a portion of our outstanding debt under the Credit Facility at 3.9%, plus a margin. We have designated these interest rate swap agreements as qualifying hedging instruments and are accounting for these as cash flow hedges pursuant to ASC 815, Derivatives and Hedging.

The fair values of these interest rate swap agreements are included in prepaid expenses and other current assets and other long-term liabilities in our condensed consolidated balance sheets at June 30, 2023 and December 31, 2022. Changes in the fair values of these interest rate swap agreements are reported in accumulated other comprehensive loss in our condensed consolidated balance sheets and an amount is reclassified out of accumulated other comprehensive loss into Other (expense) income in the same period that the corresponding interest expense is recognized.

We do not use any interest rate swap agreements for trading purposes.

Other Derivatives

Other derivatives not designated as hedging instruments consist primarily of foreign currency forward contracts that we use to hedge our foreign denominated monetary assets and liabilities to help protect against the change in value caused by a fluctuation in foreign currency exchange rates. We typically attempt to hedge up to 90% of our outstanding foreign denominated net receivables or net payables and typically limit the duration of these foreign currency forward contracts to approximately 90 days or less. The gain or loss on the derivatives as well as the offsetting gain or loss on the hedge item attributable to the hedged risk is recognized in current earnings under the line item “Other expense.” As of June 30, 2023 and December 31, 2022, we held foreign currency forward contracts that were not designated as hedging instruments with a notional amount of $341 million and $282 million, respectively.

The following tables present the fair value of derivative instruments on our Condensed Consolidated Balance Sheets at June 30, 2023 and December 31, 2022, respectively.


	Asset Derivatives
		June 30, 2023		December 31, 2022
(In thousands)		(Unaudited)
	Balance Sheet Location	Fair Value		Fair Value

Derivatives designated as hedging instruments
Foreign exchange contracts - ST forwards	Prepaid expenses and other current assets	$	8,074	$	8,968
Interest rate contracts - ST forwards	Prepaid expenses and other current assets	3,411		2,299
Interest rate contracts - LT forwards	Other long-term assets	1,056		—
Foreign exchange contracts - LT forwards	Other long-term assets	893		—
Total derivatives designated as hedging instruments		$	13,434	$	11,267

Derivatives not designated as hedging instruments
Foreign exchange contracts - ST forwards	Prepaid expenses and other current assets	$	4,443	$	1,057
Total derivatives not designated as hedging instruments		$	4,443	$	1,057

Total derivatives		$	17,877	$	12,324


	Liability Derivatives
		June 30, 2023		December 31, 2022
(In thousands)		(Unaudited)
	Balance Sheet Location	Fair Value		Fair Value

Derivatives designated as hedging instruments
Foreign exchange contracts - ST forwards	Accrued expenses and other current liabilities	$	(4,202)	$	(9,940)
Foreign exchange contracts - LT forwards	Other long-term liabilities	(25)		(196)
Interest rate contracts - LT forwards	Other long-term liabilities	—		(1,013)
Total derivatives designated as hedging instruments		$	(4,227)	$	(11,149)

Derivatives not designated as hedging instruments
Foreign exchange contracts - ST forwards	Accrued expenses and other current liabilities	$	(2,040)	$	(8,177)
Total derivatives not designated as hedging instruments		$	(2,040)	$	(8,177)

Total derivatives		$	(6,267)	$	(19,326)

The following tables present the effect of derivative instruments on our Condensed Consolidated Statements of Income for the three months ended June 30, 2023 and 2022, respectively:


June 30, 2023
(In thousands)
(Unaudited)
Derivatives in Cash Flow Hedging Relationship	Gain or (Loss) Recognized in OCI on Derivative		Location of Gain or (Loss) Reclassified from Accumulated OCI into Income	Gain or (Loss) Reclassified from Accumulated OCI into Income
Foreign exchange contracts - forwards	$	4,682	Net sales	$	3,646

Foreign exchange contracts - forwards	557		Cost of sales	(412)

Foreign exchange contracts - forwards	458		Operating expenses	(302)

Interest rate swap contracts - forwards	5,146		Other (expense) income	802
Total	$	10,843		$	3,734


June 30, 2022
(In thousands)
(Unaudited)
Derivatives in Cash Flow Hedging Relationship	Gain or (Loss) Recognized in OCI on Derivative		Location of Gain or (Loss) Reclassified from Accumulated OCI into Income	Gain or (Loss) Reclassified from Accumulated OCI into Income
Foreign exchange contracts - forwards	$	10,252	Net sales	$	5,055

Foreign exchange contracts - forwards	(2,446)		Cost of sales	(860)

Foreign exchange contracts - forwards	(1,645)		Operating expenses	(691)


Total	$	6,161		$	3,504

(In thousands)

Derivatives not Designated as Hedging Instruments

Location of Gain (Loss) Recognized in Income

Amount of Gain (Loss) Recognized in Income

June 30, 2023

June 30, 2022

(Unaudited)

Foreign exchange contracts - forwards

Other (expense) income

4,176

3,590

Total

4,176

3,590

The following tables present the effect of derivative instruments on our Condensed Consolidated Statements of Income for the six months ended June 30, 2023 and 2022, respectively:


June 30, 2023
(In thousands)
(Unaudited)
Derivatives in Cash Flow Hedging Relationship	Gain or (Loss) Recognized in OCI on Derivative		Location of Gain or (Loss) Reclassified from Accumulated OCI into Income	Gain or (Loss) Reclassified from Accumulated OCI into Income
Foreign exchange contracts - forwards	$	2,953	Net sales	$	5,890

Foreign exchange contracts - forwards	1,700		Cost of sales	(972)

Foreign exchange contracts - forwards	1,334		Operating expenses	(630)

Interest rate swap contracts - forwards	3,180		Other (expense) income	1,329
Total	$	9,167		$	5,617


June 30, 2022
(In thousands)
(Unaudited)
Derivatives in Cash Flow Hedging Relationship	Gain or (Loss) Recognized in OCI on Derivative		Location of Gain or (Loss) Reclassified from Accumulated OCI into Income	Gain or (Loss) Reclassified from Accumulated OCI into Income
Foreign exchange contracts - forwards	$	12,136	Net sales	$	6,794

Foreign exchange contracts - forwards	(2,467)		Cost of sales	(1,187)

Foreign exchange contracts - forwards	(1,642)		Operating expenses	(931)


Total	$	8,027		$	4,676


(In thousands)
Derivatives not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income	Amount of Gain (Loss) Recognized in Income		Amount of Gain (Loss) Recognized in Income
		June 30, 2023		June 30, 2022
		(Unaudited)		(Unaudited)
Foreign exchange contracts - forwards	Other (expense) income	$	3,319	$	2,787
Total		$	3,319	$	2,787

Note 6 – Inventories, net

Inventories, net consist of the following:


	June 30, 2023		December 31,
(In thousands)	(Unaudited)		2022

Raw materials	$	278,308	$	273,311
Work-in-process	10,670		14,968
Finished goods	137,661		119,302
Total	$	426,639	$	407,581
Less: Inventory reserve	$	(25,013)	$	(19,417)
Total	$	401,626	$	388,164

Note 7 – Intangible assets, net and goodwill

Intangible assets at June 30, 2023 and December 31, 2022 are as follows:


	June 30, 2023
(In thousands)	(Unaudited)						December 31, 2022
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Capitalized software development costs	$	11,399	$	(8,477)	$	2,922	$	18,810	$	(15,321)	$	3,489
Acquired technology	179,519		(68,372)		111,147		167,686		(54,351)		113,335
Customer relationships	92,778		(32,904)		59,874		98,827		(33,514)		65,313