2001 Annual ReportTo Our Shareholders and Friends
Our Mission Our vision is to revolutionize the measurement and automation industry through an innovative concept and technology called virtual instrumentation, which we pioneered and continue to lead. With virtual instrumentation, we leverage off-the-shelf mainstream computer technologies, adding our own innovative software and modular hardware technologies to create powerful computer-based instrumentation solutions. Our approach empowers customers to easily build solutions that are open, flexible, and user-defined, as opposed to the closed, fixed-function, vendor-defined nature of traditional instrumentation solutions. With virtual instrumentation, our customers save time and money while leveraging the ever-increasing performance of personal computers.
Our Results The diversity of our business, across geographies, industries, and customers, was a key factor in withstanding the severe economic downturn better than our competitors. In 2001, we sold products to more than 24,000 different companies in more than 60 countries around the world, no single industry accounted for more than 10 percent of our total revenue, and our top 100 customers represented only 35 percent of our business. As we neared the end of a very difficult 2001, broad-based metrics, such as U.S. figures on gross domestic product and industrial production and the Institute of Supply Management's purchasing managers index indicated that the U.S. industrial economy may have begun to bottom and stabilize. Though our total revenue in the fourth quarter was down year-over-year, it was up 11 percent sequentially from the third quarter. This was in line with the seasonal increase we have historically seen in Q4 and indicated an inflection point for our revenue trend.
Our Product Mix The majority of our business today is from our newer computer-based virtual instrumentation products. Sales of these newer products, which represent a lower-cost alternative to traditional instruments, increased from 73 percent of our overall revenue in 2000 to 82 percent of our revenue by Q4 2001. We are looking to our newer strategic virtual instrumentation platforms, including National Instruments LabVIEW™, LabVIEW Real-Time, TestStand™, PXI, FieldPoint™, and machine vision as our core products for the future.
Our New Products Our investments paid off with a variety of exciting new products in 2001. We expanded our PXI modular instrumentation platform considerably, adding a complete new family of chassis and controllers that improve both cost and performance. We also introduced a variety of powerful new measurement modules that extend our virtual instrumentation capabilities to higher frequencies and greater accuracies. Our NIWeek launch of LabVIEW Real-Time for embedded systems built on PXI and FieldPoint 2000 was a watershed event for our company - opening up a whole new range of applications we can address in the real-time and embedded arena. The very strong sales growth of LabVIEW Real-Time, the success of its early adopters among our large customer base, and the excitement at our worldwide sales conference in January 2002, indicate these product platforms match well with our sales channel and our large installed base of existing customers.
Our New Opportunities Many of our latest product introductions, such as LabVIEW Real-Time for PXI and FieldPoint, give us a strong technology platform that has already resulted in key design successes in new areas that represent previously untapped market opportunities. For example, we made key sales in the automotive, military, and aerospace industries for high-performance real-time applications. These opportunities included a diversity of industrial machine monitoring and control applications that use PXI to integrate measurement with machine vision and motion control. We also saw strong growth throughout 2001 in sales of PXI systems for high-volume manufacturing applications, including consumer electronics applications such as testing Microsoft's Xbox game controllers, the latest generation mobile phones, DVDs, and more. Many of these design wins represent complete system solutions with nearly all of the system content from National Instruments. We believe our increased R & D investment will result in many more exciting new products planned for 2002 and beyond. To take full advantage of our new products and our new system-level sales opportunities, we have continued to invest in our sales force. The increased efficiency delivered by our award-winning ni.com™ Web site, for example, let us grow our global field sales force while decreasing our overall sales and general and administrative expenses. We worked hard during 2001 to sharpen and expand our skills, strategies, and tactics to compete successfully in larger system opportunities and to be prepared to make the most of any economic recovery. I am very pleased with the way our sales force is executing, and we look forward to bringing more exciting new products to our customers. Our FinancesOur employees did an outstanding job reacting to the rapidly declining industrial economy and controlling costs in 2001. For the year, our sales and general and administrative expenses were down 3 percent while our R & D investment was up 9 percent. This left our total expenses flat with 2000. At the same time, we maintained our strategy of focusing investment in R & D and our sales channel - ending 2001 with 1,350 engineers, up 217 from the prior year. Total headcount for 2001 was 2,849, up 338 from the year 2000. We had record cash flow from operations for the year of $57 million - up from $55 million in 2000. We achieved this tremendous result by reducing inventory and improving collections of accounts receivables. In 2001 we added $65 million in plant and equipment mainly related to the on-going construction of our new R & D facility in Austin, and the completion of our new manufacturing facility in Hungary. For 2002, we expect to see significantly reduced capital expenditures. Our new Hungarian manufacturing facility came on line in late October 2001. We are very pleased to see excellent quality from this new facility, and we believe that it will continue to deliver on these early results. Our expectation is that the new facility will reduce the labor and overhead costs for the products produced there by approximately 50 percent in the next two years. In addition, we expect the new operation to reduce our effective tax rate from 32 percent in 2001, to 28 percent in 2002. Achieving these lower tax rates and expenses is dependent on the successful ramp-up of production in Hungary. In 2001, NI delivered 13 percent operating margins. As the year came to a close, we were particularly pleased to see our operating margins in Q4 2001 up 53 percent sequentially, driven by an 11 percent sequential increase in revenue for the fourth quarter.
Our Culture
Our Future As we enter 2002, a primary challenge is to increase our growth rate. With the success of our newer system-level platforms, our increased R & D investment, and our many new products, we believe that we have more value to deliver our customers today than at any time in our history. We intend to increase our penetration into strategic new accounts and applications by leveraging our expanded product portfolio. Our vision is rock solid, and our company is strong and determined. Our goal is to continue to innovate and execute on our core vision for virtual instrumentation, and to deliver long-term value to our shareholders.
This letter contains forward-looking statements as defined under securities laws and such statements are intended to be covered by safe harbors created under the Securities Act of 1993, the Securities Act of 1934 and the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among other things, the predictions of future financial performance and the release of new products. Actual results could differ materially from those predicted in the forward-looking statements as a result of a number of risks and factors including further deterioration in the global economy, delays in release of new products and changes in foreign tax rates or labor costs. We direct you to the documents we file with the SEC for additional risks including our recently filed annual report on Form 10-K. |
Throughout our history, NI has delivered long-term value to our shareholders. While 2001 was the most challenging year our company has faced, I believe we executed well in a very tough environment and emerged stronger than ever before. We believe we gained market share; we effectively managed our expenses; we delivered solid profitability; and we generated record cash flow from operations. We also maintained our focus on our strategic long-term investments, and continue to build on our vision for virtual instrumentation.
