UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarter ended August 31, 2002, or,
| [ ] | 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 1-4837
TEKTRONIX, INC.
(Exact name of registrant as specified in its charter)
| OREGON (State or other jurisdiction of incorporation or organization) |
93-0343990 (IRS Employer Identification No.) |
| 14200 SW KARL BRAUN DRIVE BEAVERTON, OREGON (Address of principal executive offices) |
97077 (Zip Code) |
(503) 627-7111
Registrant’s telephone number, including area code
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
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 [x] No [ ]
AT SEPTEMBER 28, 2002 THERE WERE 86,989,970 COMMON SHARES OF TEKTRONIX, INC. OUTSTANDING.
(Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.)
TEKTRONIX, INC. AND SUBSIDIARIES
INDEX
| SIGNATURE AND CERTIFICATIONS | 23 |
Part I
| Item 1. | Financial Statements |
Condensed Consolidated Statements of Operations
(Unaudited)
| Quarter ended | |||||||
| (In thousands, except per share amounts) | Aug. 31, 2002 |
Aug. 25, 2001 |
|||||
| Net sales | $ | 206,304 | $ | 216,582 | |||
| Cost of sales | 104,708 | 108,344 | |||||
| Gross profit | 101,596 | 108,238 | |||||
| Research and development expenses | 26,323 | 34,166 | |||||
| Selling, general and administrative expenses | 58,057 | 57,251 | |||||
| Equity in business ventures’ loss | 1,453 | 982 | |||||
| Business realignment costs | 9,565 | 7,928 | |||||
| (Gain) loss on disposal of fixed assets | (15 | ) | 390 | ||||
| Operating income | 6,213 | 7,521 | |||||
| Interest income | 7,545 | 10,068 | |||||
| Interest expense | (2,063 | ) | (2,690 | ) | |||
| Other expense, net | (497 | ) | (3,630 | ) | |||
| Income before taxes | 11,198 | 11,269 | |||||
| Income tax (benefit) expense | (8,581 | ) | 3,944 | ||||
| Income from continuing operations | 19,779 | 7,325 | |||||
| Discontinued operations: | |||||||
| Gain on sale of Color Printing and Imaging (less applicable income tax expense of $504) |
— | 937 | |||||
| Net earnings | $ | 19,779 | $ | 8,262 | |||
| Net earnings per share – basic and diluted | $ | 0.22 | $ | 0.09 | |||
| Income per share from continuing operations – basic and diluted | 0.22 | 0.08 | |||||
| Income per share from discontinued operations – basic and diluted | — | 0.01 | |||||
| Weighted average shares outstanding – basic | 89,474 | 92,040 | |||||
| Weighted average shares outstanding – diluted | 89,808 | 92,815 | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Balance Sheets
(Unaudited)
| (In thousands) | Aug. 31, 2002 |
May 25, 2002 |
|||||
ASSETS |
|||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 108,249 | $ | 262,994 | |||
| Short-term marketable investments | 196,609 | 193,644 | |||||
| Trade accounts receivable, net of allowance for doubtful accounts of $4,949 and $5,047, respectively |
98,027 | 100,325 | |||||
| Inventories | 113,188 | 125,086 | |||||
| Other current assets | 70,489 | 65,107 | |||||
| Total current assets | 586,562 | 747,156 | |||||
| Property, plant and equipment, net | 137,686 | 143,251 | |||||
| Long-term marketable investments | 380,050 | 301,104 | |||||
| Deferred tax assets | 60,455 | 64,522 | |||||
| Other long-term assets | 117,530 | 128,156 | |||||
| Total assets | $ | 1,282,283 | $ | 1,384,189 | |||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|||||||
| Current liabilities: | |||||||
| Accounts payable and accrued liabilities | $ | 136,955 | $ | 155,953 | |||
| Accrued compensation | 50,869 | 57,562 | |||||
| Current portion of long-term debt | 57,314 | 41,765 | |||||
| Deferred revenue | 18,126 | 18,103 | |||||
| Total current liabilities | 263,264 | 273,383 | |||||
| Long-term debt | — | 57,302 | |||||
| Other long-term liabilities | 112,301 | 126,348 | |||||
| Shareholders’ equity: | |||||||
| Common stock, no par value (authorized 400,000 shares; issued and outstanding 88,039 at August 31, 2002 and 90,509 at May 25, 2002) |
227,333 | 231,035 | |||||
| Retained earnings | 751,379 | 774,282 | |||||
| Accumulated other comprehensive loss | (71,994 | ) | (78,161 | ) | |||
| Total shareholders’ equity | 906,718 | 927,156 | |||||
| Total liabilities and shareholders’ equity | $ | 1,282,283 | $ | 1,384,189 | |||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Quarter ended | |||||||
| (In thousands) | Aug. 31, 2002 |
Aug. 25, 2001 |
|||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||
| Net earnings | $ | 19,779 | $ | 8,262 | |||
| Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: |
|||||||
| Pre-tax gain on the sale of Color Printing and Imaging | — | (1,441 | ) | ||||
| Depreciation and amortization expense | 9,133 | 10,186 | |||||
| Asset impairments | 8,270 | — | |||||
| Tax benefit of option exercises | 29 | — | |||||
| (Gain) loss on the disposition/impairment of fixed assets | (15 | ) | 654 | ||||
| (Gain) loss on the disposition of marketable equity securities | (398 | ) | 1,327 | ||||
| Bad debt expense | 77 | 237 | |||||
| Deferred income tax benefit | (1,298 | ) | (4,460 | ) | |||
| Equity in business ventures’ loss | 1,453 | 982 | |||||
| Changes in operating assets and liabilities: | |||||||
| Accounts receivable | 2,221 | 46,659 | |||||
| Inventories | 11,898 | (2,566 | ) | ||||
| Other current assets | (3,943 | ) | 2,327 | ||||
| Accounts payable | (18,998 | ) | (51,286 | ) | |||
| Accrued compensation | (6,693 | ) | (48,792 | ) | |||
| Deferred revenue | 24 | 2,476 | |||||
| Other long-term assets and liabilities, net | (8,934 | ) | 2,586 | ||||
| Net cash provided by (used in) operating activities | 12,605 | (32,849 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
| Acquisition of property, plant and equipment | (2,720 | ) | (6,780 | ) | |||
| Proceeds from the disposition of fixed assets | 513 | 235 | |||||
| Net (purchases) sales of short-term marketable investments | (3,390 | ) | 103,496 | ||||
| Net (purchases) sales of long-term marketable investments | (73,616 | ) | 10,296 | ||||
| Net cash (used in) provided by investing activities | (79,213 | ) | 107,247 | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
| Repayment of long-term debt | (41,753 | ) | (3,533 | ) | |||
| Proceeds from employee stock plans | 3,307 | 4,184 | |||||
| Repurchase of common stock | (49,691 | ) | (4,801 | ) | |||
| Net cash used in financing activities | (88,137 | ) | (4,150 | ) | |||
| Net (decrease) increase in cash and cash equivalents | (154,745 | ) | 70,248 | ||||
| Cash and cash equivalents at beginning of period | 262,994 | 292,429 | |||||
| Cash and cash equivalents at end of period | $ | 108,249 | $ | 362,677 | |||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOWS | |||||||
| Income taxes (refunded) paid | $ | (6,479 | ) | $ | 7,933 | ||
| Interest paid | 3,973 | 4,705 | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
1. The Company
Tektronix, Inc. (“Tektronix” or the “Company”) manufactures, markets and services test, measurement and monitoring solutions to a wide variety of customers in many industries, including computing, communications, semiconductors, broadcast, education, government, military/aerospace, automotive and consumer electronics. Tektronix enables its customers to design, manufacture, deploy, monitor and service next-generation global communications networks, computing and advanced technologies. Revenue is derived principally through the development and marketing of a broad range of products including: oscilloscopes; logic analyzers; communication test equipment, including mobile test equipment and optical test equipment; video test equipment; and related components, support services and accessories. The Company maintains operations in four major geographies: the Americas, including the United States, Mexico, Canada and South America; Europe, including the Middle East and Africa; the Pacific, excluding Japan; and Japan.
2. Financial Statement Presentation
The condensed consolidated financial statements and notes thereto have been prepared by the Company without audit. Certain information and footnote disclosures normally included in annual financial statements, prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted. The consolidated financial statements include the accounts of Tektronix and its majority-owned subsidiaries. Investments in joint ventures and minority-owned companies where the Company exercises significant influence are accounted for under the equity method with the Company’s percentage of earnings included in Equity in business ventures’ loss on the Condensed Consolidated Statements of Operations. Significant intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform to the current year’s presentation with no effect on previously reported earnings. The Company’s fiscal year is the 52 or 53 weeks ending the last Saturday in May. Fiscal year 2003 is 53 weeks, while fiscal year 2002 was 52 weeks. Due to this convention, the first quarter of fiscal year 2003 was 14 weeks compared to the first quarter of fiscal year 2002, which was 13 weeks.
The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions, including those used to record the results of discontinued operations, affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the revenues and expenses reported during the period. Actual results may differ from estimated amounts. Management believes that the condensed consolidated statements include all necessary adjustments, which are of a normal and recurring nature and are adequate to fairly present the financial position, results of operations and cash flows for the interim periods. The condensed information should be read in conjunction with the financial statements and notes thereto in the Company’s annual report on Form 10-K for the year ended May 25, 2002.
3. Sale of Color Printing and Imaging
On January 1, 2000, the Company sold substantially all of the assets of the Color Printing and Imaging division (“CPID”) to Xerox. The Company accounted for CPID as a discontinued operation in accordance with Accounting Principles Board (“APB”) Opinion No. 30, “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” The sales price was $925.0 million in cash, with certain liabilities of the division assumed by Xerox. During fiscal year 2000, Tektronix recorded a net gain of $340.3 million on this sale. The net gain was calculated as the excess of the proceeds received over the net book value of the assets transferred, $198.5 million in income tax expense, a $60.0 million accrual for estimated liabilities related to the sale and $14.4 million in transaction and related costs. The accrual
for estimated liabilities related to the sale was $36.0 million as of August 31, 2002 and May 25, 2002. In the first quarter of fiscal year 2002, the Company recorded $1.4 million in Gain on sale of CPID as a result of settling certain indemnities related to the original sales transaction.
4. Repurchase of Common Stock
On March 15, 2000, the Board of Directors authorized the purchase of up to $550.0 million of the Company’s common stock on the open market or through negotiated transactions. During the first quarter of fiscal year 2003, the Company repurchased a total of 2.7 million shares for $49.7 million. As of August 31, 2002, the Company has repurchased a total of 11.0 million shares at an average price of $23.53 per share totaling $257.8 million under this authorization.
5. Business Realignment Costs
During the first quarter of fiscal year 2003, the Company incurred $9.6 million of business realignment costs including $8.3 million resulting from the impairment of an intangible asset and $1.5 million of severance resulting from actions to realign the Company’s cost structure. The intangible asset impairment relates to acquired Bluetooth technology and was impaired due to a lower than previously anticipated market potential. The impairment was determined using the present value of estimated cash flows related to the asset. The $1.5 million in severance related business realignment costs resulted from the termination of 37 employees. This was offset by reversals of $0.6 million relating to previously recorded business realignment costs. The Company also incurred $0.4 million in business realignment costs associated with the closure of certain facilities. These actions do not relate to the previously announced 2000 Plan or the 1999 Plan discussed below.
As of August 31, 2002, the Company maintained liabilities of $4.8 million related to the severance expenses of 104 employees and $3.7 million related to the exit from certain operations for business realignment activities recorded in fiscal years 2002 and 2003.
The 2000 Plan
In the third quarter of fiscal year 2000, the Company announced and began to implement a series of actions (the “2000 Plan”) intended to consolidate worldwide operations and transition the Company from a portfolio of businesses to a single smaller business focused on test, measurement and monitoring products, resulting in a pre-tax charge of $64.8 million. As of August 31, 2002, the remaining accrued liabilities under the 2000 Plan totaled $1.0 million.
The 1999 Plan
In the second quarter of fiscal year 1999, the Company announced and began to implement a series of actions (the “1999 Plan”) intended to align the Company’s worldwide operations with market conditions and to improve the profitability of its operations, resulting in a pre-tax charge of $125.7 million. As of August 31, 2002, all actions under this Plan had been completed.
6. Earnings Per Share
| Quarter ended | |||||||
| (In thousands except per share amounts) | Aug. 31, 2002 |
Aug. 25, 2001 |
|||||
| Net earnings | $ | 19,779 | $ | 8,262 | |||
| Weighted average shares used for | |||||||
| basic earnings per share | 89,474 | 92,040 | |||||
| Effect of dilutive stock options | 334 | 775 | |||||
| Weighted average shares used for | |||||||
| dilutive earnings per share | 89,808 | 92,815 | |||||
| Net earnings per share – basic | $ | 0.22 | $ | 0.09 | |||
| Net earnings per share – diluted | $ | 0.22 | $ | 0.09 | |||
Options to purchase an additional 7,107,806 and 2,671,211 shares of common stock were outstanding at August 31, 2002, and August 25, 2001, respectively, but were not included in the computation of diluted net earnings per share because their effect would be antidilutive.
7. Marketable Investments
The Company records its investments as available-for-sale securities which allows the Company to maximize the investment returns by reacting to fluctuations in interest rates. This requires the investments to be recorded at market value with the resulting gains and losses included, net of tax, in Accumulated other comprehensive loss on the Condensed Consolidated Balance Sheets.
Short-term marketable investments held at August 31, 2002 consisted of:
| (In thousands) | Amortized cost |
Unrealized gains |
Unrealized losses |
Market value |
|||||||||
| Commercial paper | $ | 4,108 | $ | — | $ | — | $ | 4,108 | |||||
| Certificates of deposit | 8,248 | 17 | — | 8,265 | |||||||||
| Corporate notes and bonds | 76,116 | 771 | — | 76,887 | |||||||||
| Asset backed securities | 68,855 | — | (297 | ) | 68,558 | ||||||||
| Mortgage backed securities | 2,554 | — | (31 | ) | 2,523 | ||||||||
| Federal agency notes and bonds | 36,159 | 109 | — | 36,268 | |||||||||
| Short-term marketable investments | $ | 196,040 | $ | 897 | $ | (328 | ) | $ | 196,609 | ||||
Short-term marketable investments held at May 25, 2002 consisted of:
| (In thousands) | Amortized cost |
Unrealized gains |
Unrealized losses |
Market value |
|||||||||
| Commercial paper | $ | 10,962 | $ | — | $ | — | $ | 10,962 | |||||
| Certificates of deposit | 9,358 | 6 | — | 9,364 | |||||||||
| Corporate notes and bonds | 87,056 | 1,099 | (46 | ) | 88,109 | ||||||||
| Asset backed securities | 65,841 | 234 | (291 | ) | 65,784 | ||||||||
| Mortgage backed securities | 4,555 | — | (26 | ) | 4,529 | ||||||||
| Federal agency notes and bonds | 14,878 | 18 | — | 14,896 | |||||||||
| Short-term marketable investments | $ | 192,650 | $ | 1,357 | $ | (363 | ) | $ | 193,644 | ||||
Long-term marketable investments held at August 31, 2002 consisted of:
| (In thousands) | Amortized cost |
Unrealized gains |
Unrealized losses |
Market value |
|||||||||
| Corporate notes and bonds | $ | 69,251 | $ | 1,751 | $ | — | $ | 71,002 | |||||
| Asset backed securities | 69,260 | 2,282 | — | 71,542 | |||||||||
| Mortgage backed securities | 121,529 | 2,046 | — | 123,575 | |||||||||
| Federal agency notes and bonds | 91,054 | 1,326 | — | 92,380 | |||||||||
| U.S. Treasuries | 20,894 | 657 | — | 21,551 | |||||||||
| Long-term marketable investments | $ | 371,988 | $ | 8,062 | $ | — | $ | 380,050 | |||||
Long-term marketable investments held at May 25, 2002 consisted of:
| (In thousands) | Amortized cost |
Unrealized gains |
Unrealized losses |
Market value |
|||||||||
| Corporate notes and bonds | $ | 52,059 | $ | 951 | $ | (10 | ) | $ | 53,000 | ||||
| Asset backed securities | 48,929 | 663 | (3 | ) | 49,589 | ||||||||
| Mortgage backed securities | 90,510 | 665 | (54 | ) | 91,121 | ||||||||
| Federal agency notes and bonds | 85,891 | 519 | (11 | ) | 86,399 | ||||||||
| U.S. Treasuries | 20,984 | 15 | (4 | ) | 20,995 | ||||||||
| Long-term marketable investments | $ | 298,373 | $ | 2,813 | $ | (82 | ) | $ | 301,104 | ||||
Investments in corporate equity securities are classified as available-for-sale and reported at fair market value on the Condensed Consolidated Balance Sheets and are included in Other long-term assets. The related unrealized holding gains and losses are excluded from earnings and included, net of tax, in Accumulated other comprehensive loss on the Condensed Consolidated Balance Sheets. Corporate equity securities classified as available-for-sale and the related unrealized holding gains were as follows:
| (In thousands) | Aug. 31, 2002 |
May 25, 2002 |
|||||
| Unamortized cost basis of corporate equity securities | $ | 4,378 | $ | 4,378 | |||
| Gross unrealized holding gains | 2,012 | 9,677 | |||||
| Fair value of corporate equity securities | $ | 6,390 | $ | 14,055 | |||
8. Inventories
Inventories are stated at the lower of cost or market. Cost is determined based on a currently-adjusted standard basis, which approximates actual cost on a first-in, first-out basis. The Company periodically reviews its inventory for obsolete or slow-moving items. Inventories consisted of the following:
| (In thousands) | Aug. 31, 2002 |
May 25, 2002 |
|||||
| Materials | $ | 6,252 | $ | 5,446 | |||
| Work in process | 42,398 | 45,867 | |||||
| Finished goods | 64,538 | 73,773 | |||||
| Inventories | $ | 113,188 | $ | 125,086 | |||
9. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
| Quarter ended | |||||||
| (In thousands) | Aug. 31, 2002 |
May 25, 2002 |
|||||
| Land | $ | 1,656 | $ | 1,656 | |||
| Buildings | 145,882 | 145,801 | |||||
| Machinery and equipment | 252,121 | 260,011 | |||||
| Accumulated depreciation | (261,973 | ) | (264,217 | ) | |||
| Property, plant and equipment, net | $ | 137,686 | $ | 143,251 | |||
10. Comprehensive Income
Comprehensive income and its components, net of tax, are as follows:
| Quarter ended | |||||||
| (In thousands) | Aug. 31, 2002 |
Aug. 25, 2001 |
|||||
| Net earnings | $ | 19,779 | $ | 8,262 | |||
| Other comprehensive income: | |||||||
| Currency translation adjustment, net of taxes of $6,597 and $1,540, respectively |
9,896 | 2,310 | |||||
| Unrealized (loss) gain on available-for-sale securities, net of taxes of ($1,104) and $1,200, respectively |
(1,656 | ) | 1,532 | ||||
| Additional minimum pension liability, net of taxes of ($1,174) and zero, respectively |
(2,073 | ) | — | ||||
| Total comprehensive income | $ | 25,946 | $ | 12,104 | |||
Accumulated other comprehensive loss consisted of the following:
| (In thousands) | Foreign currency translation |
Unrealized holding gains (losses) on available-for- sale securities |
Additional minimum pension liability |
Accumulated other comprehensive loss |
|||||||||
| Balance as of May 25, 2002 | $ | 5,424 | $ | 8,154 | $ | (91,739 | ) | $ | (78,161 | ) | |||
| First quarter activity | 9,896 | (1,656 | ) | (2,073 | ) | 6,167 | |||||||
| Balance as of Aug. 31, 2002 | $ | 15,320 | $ | 6,498 | $ | (93,812 | ) | $ | (71,994 | ) | |||
11. Business Segments
The Company’s revenue is derived principally through the development and marketing of a range of test and measurement products in several operating segments that have similar economic characteristics as well as similar customers, production processes and distribution methods. Accordingly, the Company reports as a single Measurement segment. It is impractical to report net sales by product group.
| Quarter ended | |||||||
| (In thousands) | Aug. 31, 2002 |
Aug. 25, 2001 |
|||||
| Consolidated net sales to external customers by region: | |||||||
| Americas | |||||||
| United States | $ | 95,501 | $ | 118,950 | |||
| Other Americas | 5,350 | 9,279 | |||||
| Europe | 42,908 | 42,256 | |||||
| Pacific | 42,886 | 27,559 | |||||
| Japan | 19,659 | 18,538 | |||||
| Net sales | $ | 206,304 | $ | 216,582 | |||
12. Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This Statement supersedes FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal of a segment of a business. SFAS No. 144 maintains the method for recording an impairment on assets to be held under SFAS No. 121 and establishes a single accounting model based on the framework established in SFAS No. 121 for long-lived assets to be disposed of by sale. This statement also broadens the presentation of discontinued operations to include more disposal transactions. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal year 2003. The Company adopted the provisions of this statement, which did not have a material impact on the financial results of the Company, as of the beginning of the first quarter of fiscal year 2003.
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. This statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Management believes the adoption of the provisions of this statement will not have a material effect on the Company’s consolidated financial statements.
13. Subsequent Event
During the third quarter of fiscal year 2002, the Company reached an agreement with Sony Corporation (“Sony”) to acquire Sony’s 50% interest in Sony/Tektronix Corporation (“Sony/Tektronix”) through a redemption of Sony’s shares for 8 billion Yen or approximately $65.7 million at September 30, 2002. This transaction closed on September 30, 2002, at which time the Company obtained 100% ownership of Sony/Tektronix. Concurrent with the close of this transaction, the Sony/Tektronix entity entered into an agreement to borrow up to 9 billion Yen, or approximately $73.9 million at an interest rate of 1.75% above the Tokyo Inter Bank Offering Rate. This facility, which includes certain financial covenants for this Japan subsidiary and the Company, expires September 29, 2006. This credit facility was utilized, in part, to fund a portion of the redemption of shares from Sony and the remainder will provide operating capital for this Japan subsidiary. The Company accounted for its investment in Sony/Tektronix under the equity method prior to this redemption. The transaction was accounted for by the purchase method of accounting, and accordingly, beginning on the date of acquisition the results of operations, financial position and cash flows of Sony/Tektronix will be consolidated in the Company’s financial statements. Management of the Company believes it is not practicable to present a condensed balance sheet, purchased research and development assets if any, or purchase price allocation details at this time.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Forward-Looking Statements
Statements and information included in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements in this Quarterly Report on Form 10-Q include statements regarding Tektronix’ expectations, intentions, beliefs and strategies regarding the future, including cost reduction efforts related to the economic and technology downturn, settlement of potential claims, and the acquisition of Sony Corporation’s 50% interest in Sony/Tektronix Corporation, which prior to September 30, 2002 was equally owned by Sony Corporation and Tektronix. The Company may make other forward-looking statements from time to time, including in press releases and public conference calls and webcasts. All forward-looking statements made by Tektronix are based on information available to Tektronix at the time the statements are made, and Tektronix assumes no obligation to update any forward-looking statements. It is important to note that actual results are subject to a number of risks and uncertainties that could cause actual results to differ materially from those included in such forward-looking statements. Some of these risks and uncertainties are discussed below in the Risks and Uncertainties section at the end of this Management’s Discussion.
General
Tektronix, Inc. manufactures, markets and services test, measurement and monitoring solutions to a wide variety of customers in many industries, including computing, communications, semiconductors, broadcast, education, government, military/aerospace, automotive and consumer electronics. Tektronix enables its customers to design, manufacture, deploy, monitor and service next-generation global communications networks, computing and advanced technologies. Revenue is derived principally through the development and marketing of a broad range of products including: oscilloscopes; logic analyzers; communication test equipment, including mobile test equipment and optical test equipment; video test equipment; and related components, support services and accessories. The Company maintains operations in four major geographies: the Americas, including the United States, Mexico, Canada and South America; Europe, including the Middle East and Africa; the Pacific, excluding Japan; and Japan.
Recent Transaction
During the third quarter of fiscal year 2002, the Company reached an agreement with Sony Corporation (“Sony”) to acquire Sony’s 50% interest in Sony/Tektronix Corporation (“Sony/Tektronix”) through a redemption of Sony’s shares for 8 billion Yen or approximately $ 65.7 million at September 30, 2002. This transaction closed on September 30, 2002, at which time the Company obtained 100% ownership of Sony/Tektronix. Concurrent with the close of this transaction, the Sony/Tektronix entity entered into an agreement to borrow up to 9 billion Yen, or approximately $73.9 million. This credit facility was utilized, in part, to fund the redemption of shares from Sony and the remainder will provide operating capital for this Japan subsidiary. The Company accounted for its investment in Sony/Tektronix under the equity method prior to this redemption. The transaction was accounted for by the purchase method of accounting, and accordingly, beginning on the date of acquisition the results of operations, financial position and cash flows of Sony/Tektronix will be consolidated in the Company’s financial statements.
Business Realignment Costs
During the first quarter of fiscal year 2003, the Company incurred $9.6 million of business realignment costs including $8.3 million resulting from the impairment of an intangible asset and $1.5 million of severance resulting from actions to realign the Company’s cost structure. The intangible asset impairment relates to acquired Bluetooth technology and was impaired due to a lower than previously anticipated market potential. The impairment was determined using the present value of estimated cash flows related to the asset. The $1.5 million in severance related business realignment costs resulted from the termination of 37 employees. This was offset by reversals of $0.6 million relating to previously recorded
business realignment costs. The Company also incurred $0.4 million in business realignment costs associated with the closure of certain facilities.
Critical Accounting Estimates
Management has identified the Company’s “critical accounting estimates” which are those that are most important to the portrayal of the financial condition and operating results of the Company and require difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Significant estimates underlying the accompanying consolidated financial statements and the reported amount of net sales and expenses include contingent liabilities, intangible asset valuation, inventory valuation, pension plan assumptions and the assessment of the valuation of deferred income taxes and income tax reserves.
Contingent Liabilities
The Company is subject to claims or litigation concerning patent infringement, environmental and employment issues, as well as settlement of liabilities related to prior dispositions of assets. As a result, liabilities have been established based upon management’s best estimate of the ultimate outcome of these contingent liabilities. The Company reviews the status of its litigation, indemnities and other contingencies on a regular basis and adjustments are made as information becomes available. As of August 31, 2002, the Company had $45.2 million recorded as contingent liabilities in Accounts payable and accrued liabilities on the Condensed Consolidated Balance Sheet.
As a result of divestiture activities, the Company is subject to certain indemnities and other contingencies due to contractual obligations entered into at the time of these divestitures. Included in these liabilities is a reserve for contingent liabilities related to the sale of CPID to Xerox on January 1, 2000. As of August 31, 2002, the Company had $36.0 million recorded as a reserve for liabilities associated with the sale of CPID, which is included in the $45.2 million of total contingent liabilities noted above. The $36.0 million of reserves primarily relates to liabilities retained by the Company at the time of sale and contingent contractual indemnities.
The Company continues to closely monitor the status of the CPID related contingent liabilities based on information received. The liability will be adjusted as settlements are completed or more information becomes available that will change the likely outcome. Changes to the estimate of liabilities or differences between these estimates and the ultimate amount of settlement will be recorded in Discontinued operations in the Condensed Consolidated Statement of Operations in the period such events occur.
The remaining $9.2 million of contingent liabilities includes amounts related to environmental, patent infringement and employment issues, as well as liabilities related to other prior dispositions of assets.
Intangible assets
The Company adopted the Financial Accounting Standards Board (“FASB”) Statements of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets” on accounting for business combinations and goodwill as of the beginning of fiscal year 2002. Accordingly, the Company no longer amortizes goodwill from acquisitions, but continues to amortize other acquisition-related intangibles and costs. As of August 31, 2002, the Company has $55.1 million of goodwill recorded in Other long-term assets on the Condensed Consolidated Balance Sheet.
In conjunction with the implementation of the new accounting rules for goodwill, the Company completed a goodwill impairment analysis as of the beginning of fiscal year 2002 with an update at the end of the second quarter ended November 24, 2001, and found no impairment. As required by the new rules, the Company will perform a similar review annually, or earlier if indicators of potential impairment exist. The impairment review is based on a discounted cash flow approach that uses estimates of future market share and revenues and costs for the reporting units as well as appropriate discount rates. The estimates used are consistent with the plans and estimates that the Company uses to manage the underlying businesses. However, if the Company fails to deliver new products for these groups, if the products fail to gain expected market acceptance, or if market conditions in the related businesses are unfavorable, revenue and cost forecasts may not be achieved, and the Company may incur charges for impairment of goodwill.
For non-goodwill intangible assets, the Company amortizes the cost over the estimated useful life and assesses any impairment by estimating the future cash flow from the associated asset in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. As of August 31, 2002, the Company had $7.2 million of non-goodwill intangible assets recorded in Other long-term assets, which includes patents and licenses for certain technology. If the estimated undiscounted cash flow related to these assets decreases in the future or the useful life is shorter than originally estimated, the Company may incur charges to impair these assets. The impairment is based on the estimated discounted cash flow associated with the asset. An impairment could result if the underlying technology fails to gain market acceptance, the Company fails to deliver new products related to these technology assets, the products fail to gain expected market acceptance or if market conditions in the related businesses are unfavorable.
During the quarter ended August 31, 2002, the Company impaired an intangible asset related to acquired Bluetooth technology resulting in an expense of $8.3 million, which is included in Business realignment costs in the Condensed Consolidated Statement of Operations.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined based on currently-adjusted standard costs, which approximates actual cost on a first-in, first-out basis. The Company’s inventory includes raw materials, work-in-process, finished goods and demonstration equipment of $113.2 million as of August 31, 2002. The Company reviews its recorded inventory and estimates a write-down for obsolete or slow-moving items. These write-downs reduce the inventory value of these obsolete or slow-moving items to their net realizable value. Such estimates are difficult to make under current economic conditions. The write-down is based on current and forecasted demand and therefore, if actual demand and market conditions are less favorable than those projected by management, additional write-downs may be required. In addition, saturation of the used equipment market can negatively impact the net realizable value of the Company’s demonstration equipment. If actual market conditions are different than anticipated, Cost of sales in the Condensed Consolidated Statement of Operations may be different than expected in the period in which more information becomes available.
Pension plan
Benefit plans are a significant cost of doing business and yet represent obligations that will be settled far in the future and therefore are subject to certain estimates. Pension accounting is intended to reflect the recognition of future benefit costs over the employee’s approximate service period based on the terms of the plans and the investment and funding decisions made by the Company. The accounting standards require that management make assumptions regarding such variables as the expected long-term rate of return on assets and the rate applied to determine service cost and interest cost to arrive at pension income and cost for the year. For the prior fiscal year ended May 25, 2002, the Company’s estimated long-term rate of return on plan assets was 9.6%. Management will continue to assess the expected long-term rate of return on plan assets assumption based on relevant market conditions as prescribed by accounting principles generally accepted in the United States of America, and will make adjustments to the assumption as appropriate. Pension income or expense is allocated to Cost of sales, Research and development and Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.
Income Taxes
The Company is subject to taxation from federal, state and international jurisdictions. The Company’s annual provision for income taxes and the determination of the resulting deferred tax assets and liabilities involves a significant amount of management judgment and is based on the best information available at the time. The actual income tax liabilities to the jurisdictions with respect to any fiscal year are ultimately determined long after the financial statements have been published. The Company believes that adequate liabilities have been established for any additional tax and interest that may be assessed. The liabilities are frequently reviewed for their adequacy. As of August 31, 2002, the Company was subject to income tax audits for fiscal years 1998 through 2002. Included in these years subject to audit are the sales of the Color Printing and Imaging Division
and the Video and Networking Division which were complex transactions from a tax perspective. The liabilities associated with these years will ultimately be resolved when events such as the completion of audits by the taxing jurisdictions occur. To the extent the audits or other events result in a material adjustment to the accrued estimates, the effect would be recognized in Income tax (benefit) expense in the Condensed Consolidated Statement of Operations in the period of the event.
Subsequent to August 31, 2002, the Company negotiated a settlement with the United States Internal Revenue Service (“IRS”) with respect to their audit of the fiscal years 1998 through 2000. As a result of the audits settled and the current audit activity in progress, the Company revised its estimated liability for income taxes as of August 31, 2002. The revision resulted in a $12.5 million net reduction of previously estimated liabilities. This had the effect of reducing Accounts payable and accrued liabilities on the Condensed Consolidated Balance Sheet and decreased the Income tax expense on the Condensed Consolidated Statement of Operations. With the completion of the IRS audit for fiscal years 1998 through 2000, the Company’s open years for United States federal purposes are now 2001 and 2002. As of August 31, 2002, the Company maintains estimated liabilities for open IRS and other taxing jurisdiction assessments, as discussed above. The settlement of additional open audits or changes in other circumstances could result in further material adjustment to the estimated liability and the associated tax expense in the period in which such events occur.
Judgment is also applied in determining whether deferred tax assets will be realized in full or in part. When it is more likely than not that all or some portion of specific deferred tax assets such as foreign tax credit carryovers will not be realized, a valuation allowance must be established for the amount of the deferred tax assets that are determined not to be realizable. As of August 31, 2002, the Company had established a valuation allowance against various deferred tax assets. Accordingly, if the Company’s facts or financial results were to change thereby impacting the likelihood of realizing the deferred tax assets, judgment would have to be applied to determine changes to the amount of the valuation allowance required to be in place on the financial statements in any given period. The Company continually evaluates strategies that could allow the future utilization of its deferred tax assets.
First Quarter Fiscal Year 2003 Compared to First Quarter Fiscal Year 2002
Economic Conditions
Beginning in fiscal year 2001 and continuing during fiscal year 2002, economic conditions have had a negative impact on many markets into which the Company sells products including, but not limited to, optical design and manufacturing, mobile handset manufacturing, automated test equipment, telecommunications and semiconductor design and manufacturing. Capital spending within these industries, the area that most impacts the Company, declined significantly in fiscal year 2002. The telecommunications and optical industries experienced the most substantial downturns during fiscal year 2002. These conditions adversely impacted the Company throughout fiscal year 2002, and have continued into fiscal year 2003. In response to the reduced level of orders and associated sales, the Company incurred business realignment costs of $27.0 million during fiscal year 2002. These costs were incurred in an effort to reduce fixed costs in future periods by reducing headcount and restructuring operations in certain foreign and domestic locations. During the first quarter of fiscal year 2003, the Company incurred business realignment costs of $9.6 million, as discussed above. Management of the Company is unable to predict the ultimate severity and duration of the recent economic conditions or their impact on the Company.
Product Orders
Product orders consist of cancelable commitments to purchase currently produced products by customers with delivery scheduled generally within six months of being recorded. Consolidated product orders for the first quarter of fiscal year 2003 were $194.9 million, an increase of $30.3 million or 18% from product orders of $164.6 million in the first quarter of fiscal year 2002. These increases were primarily due to an extra week of operations in the current quarter as the Company’s first quarter of fiscal year 2003 has 14 weeks as compared to 13 weeks in the first quarter of the prior year, unusually high order cancellations in the first quarter of the prior year in response to declining economic conditions, and strong customer response to new product introductions.
The Americas and Japan experienced the largest increases in orders. Orders from the Americas were $90.2 million, an increase of $20.5 million or 29% from the first quarter of the prior year which was primarily due to the United States, which increased to $84.3 million, or 35%, from $62.6 million in the prior year. Growth in the United States as compared with the prior year is primarily attributable to abnormally high cancellations in this geography in the prior year, which have subsequently returned to levels more consistent with historical averages. Orders from Japan were $22.7 million, an increase of $8.1 million or 55% from the first quarter fiscal year 2002 orders primarily due to the timing of orders within the fiscal year and a large one-time order in the first quarter of fiscal year 2003. In addition, orders from the Pacific, excluding Japan, were $43.7 million, up $6.4 million or 17% from the first quarter of the prior year. Orders from Europe declined to $38.3 million, a decrease of $4.7 million or 11% from the first quarter of fiscal year 2002.
Net Sales
Consolidated net sales of $206.3 million for the first quarter of fiscal year 2003 decreased $10.3 million or 5% from the first quarter of fiscal year 2002 net sales of $216.6 million. This decrease is primarily due to strong sales in the first quarter of the prior year as the Company reduced backlog significantly during that period.
The Americas experienced sales declines with net sales of $100.9 million, down $27.3 million or 21% from net sales of $128.2 million in the first quarter of the prior year, which was primarily due to the United States, which declined $23.4 million or 20% to $95.5 million of net sales in the first quarter of the current year. All other geographies experienced increases in net sales. The largest increase was from the Pacific with net sales of $42.9 million, up $15.3 million or 56% from net sales of $27.6 million during the same quarter in the prior year. Net sales from Japan were $19.7 million, up $1.2 million or 6% from net sales of $18.5 million during the first quarter of fiscal year 2002. Net sales from Europe were $42.9 million, up $0.6 million or 2% from net sales of $42.3 million in the same quarter of the prior year.
Gross Profit and Gross Margin
Consolidated gross profit was $101.6 million for the first quarter of fiscal year 2003, a decrease of 6% from gross profit of $108.2 million for the first quarter of fiscal year 2002. This decrease was primarily due to the lower sales in the current quarter. In addition, gross margin for the first quarter of fiscal year 2003 was 49%, a slight decrease from 50% for the same quarter in the prior year. These decreases in gross profit and gross margin are attributable to slightly higher sales discounts in the current year and certain fixed costs being spread over a lower relative sales base.
Operating Expenses
For the first quarter of fiscal year 2003, operating expenses were $95.4 million, a decrease of $5.3 million from $100.7 million for the first quarter of fiscal year 2002. This resulted in operating income of $6.2 million, or 3% of net sales during the first quarter of the current year, compared with operating income of $7.5 million, or 3% of net sales in the same quarter of the prior year.
Research and development expenses were $26.3 million during the first quarter of fiscal year 2003, a decrease of $7.9 million from $34.2 million in the same quarter in the prior year. As a percentage of net sales, research and development expenses decreased to 13% in the first quarter of the current year from 16% a year ago. These decreases are the net result of higher spending related to new product launches in the first quarter of fiscal year 2002 partially offset by an extra week of operations in the current quarter.
Selling, general and administrative expenses were $58.1 million or 28% of net sales for the first quarter of fiscal year 2003, an increase of $0.8 million from $57.3 million, or 26% of net sales for the prior year. The increase was primarily due to higher labor related spending as a result of the extra week of operations included in the current quarter as well as a lower level of Company mandated shutdown activity as compared to shutdown activity in the prior year comparable quarter, offset by the positive impact of cost reduction actions taken during fiscal year 2002 and the first quarter of fiscal year 2003.
Equity in business ventures’ loss was $1.5 million for the first quarter of fiscal year 2003, compared with equity losses of $1.0 million in the same quarter a year ago. The loss is primarily the result of further weakening in the Japanese economy and its impact on the financial performance of Sony/Tektronix Corporation, in which the Company had a 50% equity ownership as of August 31, 2002.
Business realignment costs of $9.6 million were incurred for the first quarter of fiscal year 2003 as compared with $7.9 million in the prior year. The $9.6 million of costs in the current quarter included $8.3 million of an impairment of acquired Bluetooth technology, $1.5 million of severance related costs, offset by $0.6 million of reversals related to previously recorded business realignment costs. The Company also incurred $0.4 million in business realignment costs associated with the closure of certain facilities. The $7.9 million of costs in the prior year were primarily severance related costs intended to better align operating expense levels with lower sales levels. See the Business Realignment Costs section of the Management’s Discussion and Analysis for further information on these charges.
Non-Operating Income / Expense
Interest expense was $2.1 million for the first quarter of fiscal year 2003, as compared with $2.7 million in the same quarter of the prior year. The decrease in interest expense is due to a reduction in the average balance of outstanding debt due to the Company’s retirement of outstanding long-term debt throughout the prior year and the extinguishment of $41.8 million of long-term debt at the scheduled payment date of August 15, 2002.
Interest income was $7.5 million in the first quarter of fiscal year 2003 as compared with $10.1 million in the same quarter a year ago. The decrease in interest income can be primarily attributed to lower returns on investments in the first quarter of fiscal year 2003 as compared to investment returns in the same period of fiscal year 2002 due to decreases in interest rates and to a lesser degree, a lower average balance of cash and marketable investments during the comparative periods.
Other expense, net was $0.5 million in the first quarter of fiscal year 2003 as compared with $3.6 million in the prior year. This includes items such as foreign currency translation and other miscellaneous fees and expenses. The decrease from the prior year is primarily due to the positive impact of foreign currency translation experienced in the quarter ended August 31, 2002.
Income Taxes
Income tax (benefit) expense from continuing operations was a benefit of $8.6 million for the first quarter of fiscal year 2003 and expense of $3.9 million for the same quarter of fiscal year 2002. The benefit in fiscal year 2003 was comprised of a $12.5 million income tax benefit resulting from the settlement of the IRS audit of the Company’s fiscal years 1998, 1999 and 2000, offset in part by income tax expense on earnings of $3.9 million. The effective tax rate in both periods, excluding the IRS settlements, was 35%.
Net Earnings
The Company recognized consolidated net earnings of $19.8 million for the quarter ended August 31, 2002, up from $8.3 million for the quarter ended August 25, 2001. This increase was primarily due to the $12.5 million tax benefit discussed in the Income Taxes section above.
Earnings Per Share
For the quarter ended August 31, 2002, the Company recognized $0.22 net earnings per basic and diluted share. For the quarter ended August 25, 2001, the Company recognized basic and diluted earnings per share of $0.09. The increase in earnings per share is a result of increased net earnings discussed above and a decrease in the weighted average basic and diluted shares outstanding due to share repurchases.
Financial Condition, Liquidity and Capital Resources
Financial Condition
At August 31, 2002, the Company’s working capital was $323.3 million, a decrease of $150.5 million from the end of fiscal year 2002. Current assets decreased $160.6 million primarily due to a decrease in cash and cash equivalents as the Company converted $78.9 million of its cash and cash equivalents to long-term marketable investments. In addition, the Company extinguished $41.8 million of debt at its due date in August 2002 and repurchased $49.7 million of its common stock. These decreases were partially offset by $12.6 million in cash provided by operations. Inventories decreased $11.9 million to $113.2 million as a result of the Company’s on-going efforts to reduce levels of demonstration equipment, improve inventory turns, and to a lesser extent, inventory write-offs incurred during the first quarter. Current liabilities decreased $10.1 million in the first quarter ended August 31, 2002 as a result of decreases in accounts payable due to a reduction in the taxes payable and relatively lower operating expenses during the period. Accrued compensation decreased in the first quarter of 2003 due to the payment of incentive compensation earned in the prior year. These decreases were partially offset by a $15.5 million increase in Current portion of long-term debt, which reflects the $57.3 million August 2003 maturity of the Company’s debt reduced by the $41.8 million payment of debt on August 15, 2002.
Property, plant and equipment, net, decreased $5.6 million during the first quarter of fiscal year 2003 to $137.7 million. The decrease was due mainly to $8.3 million of depreciation expense during the quarter. This decrease was partially offset by approximately $2.7 million in capital expenditures during the same period.
The Company funded the pension plan with $15.0 million during the quarter ended August 31, 2002 based on an agreement with the Pension Benefit Guaranty Company. This funding reduced Other long-term liabilities on the Condensed Consolidated Balance Sheet.
On March 15, 2000, the Board of Directors authorized the purchase of up to $550.0 million of the Company’s common stock on the open market or through negotiated transactions. This repurchase authority allows the Company, at management’s discretion, to selectively repurchase its common stock from time to time in the open market or in privately negotiated transactions depending on market price and other factors. During the first quarter of fiscal year 2003, the Company repurchased a total of 2.7 million shares for $49.7 million. As of August 31, 2002, the Company has repurchased a total of 11.0 million shares at an average price of $23.53 per share totaling $257.8 million under this authorization. The Company will continue to repurchase shares under this authorization when deemed economically beneficial.
Liquidity and Capital Resources
As of August 31, 2002, the Company held $684.9 million in cash and cash equivalents and marketable investments excluding corporate equity securities, a decrease of $72.8 million from the balance of $757.7 million at May 25, 2002. Activity during the first quarter of fiscal year 2003 included the repurchase of common stock, the extinguishment of debt and the funding of the pension plan. These uses of cash were offset by net earnings and other positive operating cash flows.
At August 31, 2003, the Company maintained unsecured bank credit facilities totaling $72.6 million, of which $70.9 million was unused.
During the third quarter of fiscal year 2002, the Company reached an agreement with Sony to acquire Sony’s 50% interest in Sony/Tektronix through a redemption of Sony’s shares for 8 billion Yen or approximately $65.7 million at September 30, 2002. This transaction closed on September 30, 2002, at which time the Company obtained 100% ownership of Sony/Tektronix. Concurrent with the close of this transaction, the Sony/Tektronix entity entered into an agreement to borrow up to 9 billion Yen, or approximately $73.9 million at an interest rate of 1.75% above the Tokyo Inter Bank Offering Rate. This facility, which includes certain financial covenants for this Japan subsidiary and the Company, expires September 29, 2006. This credit facility was utilized, in part, to fund a portion of the
redemption of shares from Sony and the remainder will provide operating capital for this Japan subsidiary. The Company accounted for its investment in Sony/Tektronix under the equity method prior to this redemption. The transaction was accounted for by the purchase method of accounting, and accordingly, beginning on the date of acquisition the results of operations, financial position and cash flows of Sony/Tektronix will be consolidated in the Company’s financial statements.
Cash on hand, cash flows from operating activities and current borrowing capacity are expected to be sufficient to fund operations, acquisitions and potential acquisitions, capital expenditures and contractual obligations through fiscal year 2003.
Recent Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This Statement supersedes FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal of a segment of a business. SFAS No. 144 maintains the method for recording an impairment on assets to be held under SFAS No. 121 and establishes a single accounting model based on the framework established in SFAS No. 121 for long-lived assets to be disposed of by sale. This statement also broadens the presentation of discontinued operations to include more disposal transactions. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal year 2003. The Company adopted the provisions of this statement, which did not have a material impact on the financial results of the Company, as of the beginning of the first quarter of fiscal year 2003.
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. This statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Management believes the adoption of the provisions of this statement will not have a material effect on the Company’s consolidated financial statements.
Risks and Uncertainties
Described below are some of the risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Annual Report. See “Forward-Looking Statements” at the beginning of this Item 2.
Market Risk and Cyclical Downturns in the Markets in Which Tektronix Competes
Tektronix’ business depends on capital expenditures of manufacturers in a wide range of industries, including the telecommunications, semiconductor, and computer industries. Each of these industries has historically been very cyclical and has experienced periodic downturns, which have had a material adverse impact on the industries’ demand for equipment, including test and measurement equipment manufactured and marketed by Tektronix. In particular, the telecommunications industry, including but not limited to the optical segment, have experienced a more dramatic decline than other industries. In addition, the severity and length of the downturn may also affect overall access to capital which could adversely affect the Company’s customers across many industries. During periods of reduced and declining demand, Tektronix may need to rapidly align its cost structure with prevailing market conditions while at the same time motivating and retaining key employees. As discussed above in this Item 2, the Company’s sales and orders have been affected by the current downturn in its markets. The ultimate severity of this downturn, and how long it will last, is unknown. No assurance can be given that Tektronix’ net sales and operating results will not be further adversely impacted by the current or any future downturns or slowdowns in the rate of capital investment in these industries.
Timely Delivery of Competitive Products
Tektronix sells its products to customers that participate in rapidly changing high technology markets, which are characterized by short product life cycles. The Company’s ability to deliver a timely flow of competitive new products and market acceptance of those products, as well as the ability to increase production or to develop and maintain effective sales channels, is essential to growing the business. Because Tektronix sells test and measurement products that enable its customers to develop new technologies, the Company must accurately predict the ever-evolving needs of those customers and deliver appropriate products and technologies at competitive prices to meet customer demands. The Company’s ability to deliver such products could be affected by engineering or other development program delays as well as the availability of parts and supplies from third party providers on a timely basis and at reasonable prices. Failure to deliver competitive products in a timely manner and at a reasonable price could have an adverse effect on the results of operations, financial condition or cash flows of the Company.
Competition
In general, Tektronix competes with a number of companies in specialized areas of other test and measurement products and one large broad line measurement products supplier, Agilent Technologies. Other competitors include Acterna Corporation, Anritsu, LeCroy Corporation, Spirent, Yokogawa and many other smaller companies. Competition in the Company’s business is based primarily on product performance, technology, customer service, product availability and price. Some of the Company’s competitors may have greater resources to apply to each of these factors and in some cases have built significant reputations with the customer base in each market in which Tektronix competes. The Company may face pricing pressures that may have an adverse impact on the Company’s earnings. If the Company is unable to compete effectively on these and other factors, it could have a material adverse effect on the Company’s results of operations, financial condition or cash flows.
Supplier Risks
The Company’s manufacturing operations are dependent on the ability of suppliers to deliver quality components, subassemblies and completed products in time to meet critical manufacturing and distribution schedules. The Company periodically experiences constrained supply of certain component parts in some product lines as a result of strong demand in the industry for those parts. Such constraints, if persistent, may adversely affect operating results until alternate sourcing can be developed. Volatility in the prices of these component parts, an inability to secure enough components at reasonable prices to build new products in a timely manner in the quantities and configurations demanded or, conversely, a temporary oversupply of these parts, could adversely affect the Company’s future operating results. In addition, the Company uses certain sole sourced components which are integral to a variety of products. Disruption in key sole sourced suppliers could have a significant adverse effect on the Company’s results of operations.
Worldwide Economic and Market Conditions
The Company maintains operations in four major geographies: the Americas, including the United States, Mexico, Canada and South America; Europe, including the Middle East and Africa; the Pacific, excluding Japan; and Japan. During the last fiscal year, nearly one half of the Company’s revenues were from international sales. In addition, some of the Company’s manufacturing operations and key suppliers are located in foreign countries. As a result, the business is subject to the worldwide economic and market conditions risks generally associated with doing business globally, such as fluctuating exchange rates, the stability of international monetary conditions, tariff and trade policies, domestic and foreign tax policies, foreign governmental regulations, political unrest, wars and other acts of terrorism and changes in other economic or political conditions. These factors, among others, could influence the Company’s ability to sell in global markets, as well as its ability to manufacture products or procure supplies. A significant downturn in the global economy could adversely affect the Company’s results of operations, financial position or cash flows.
Intellectual Property Risks
As a technology-based company, Tektronix’ success depends on developing and protecting its intellectual property. Tektronix relies generally on patent, copyright, trademark and trade secret laws in the United States and abroad. Electronic equipment as complex as most of the Company’s products, however, is generally not patentable in its entirety. Tektronix also licenses intellectual property from third parties and relies on those parties to maintain and protect their technology. The Company cannot be certain that actions the Company takes to establish and protect proprietary rights will be adequate. If the Company is unable to adequately protect its technology, or if the Company is unable to continue to obtain or maintain licenses for protected technology from third parties, it could have a material adverse affect on the Company’s results of operations, financial position or cash flows. From time to time in the usual course of business, the Company receives notices from third parties regarding intellectual property infringement or takes action against others with regard to intellectual property rights. Even where the Company is successful in defending or pursuing such claims, the Company may incur significant costs. In the event of a successful claim against the Company, Tektronix could lose its rights to needed technology or be required to pay license fees for the infringed rights, either of which could have an adverse impact on the Company’s business.
Environmental Risks
Tektronix is subject to a variety of federal, state, local and foreign environmental regulations relating to the use, storage, discharge and disposal of its hazardous chemicals used during the Company’s manufacturing process. The Company has operated and is in the process of closing a licensed hazardous waste management facility at its Beaverton, Oregon campus. If Tektronix fails to comply with any present and future regulations, the Company could be subject to future liabilities or the suspension of production. In addition, such regulations could restrict the Company’s ability to expand its facilities or could require Tektronix to acquire costly equipment, or to incur other significant expenses to comply with environmental regulations.
Sony/Tektronix Corporation Acquisition
Acquisition of Sony Corporation’s 50% interest in Sony/Tektronix Corporation was completed at the end of September 2002. Upon completion of the transaction, the Company’s ownership of Sony/Tektronix increased from 50% to 100%, and the Company is now exposed to a greater financial impact from Sony/Tektronix operations. The acquisition will likely negatively impact the Company’s results of operations during fiscal year 2003. In addition, operation of Sony/Tektronix as a wholly owned business will involve additional risks, including integration risks, the risks of doing business as a foreign owner in Japan and risks related to the economic environment in Japan.
Possible Volatility of Stock Price
The price of the Company’s common stock may be subject to wide, rapid fluctuations. Such fluctuations may be due to factors specific to the Company, such as changes in operating results or changes in analysts’ estimates regarding earnings. Fluctuations in the stock price may also be due to factors relating to the telecommunications, semiconductor, and computer industries or to the securities markets in general. Fluctuations in the stock price have often been unrelated to the operating performance of the specific companies whose stocks are traded. Shareholders should be willing to incur the risk of such fluctuations.
Other Risk Factors
Other risk factors include but are not limited to changes in the mix of products sold, regulatory and tax legislation, changes in effective tax rates, inventory risks due to changes in market demand or the Company’s business strategies, potential litigation and claims arising in the normal course of business, credit risk of customers, the fact that a substantial portion of the Company’s sales are generated from orders received during each quarter and other risk factors.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Financial Market Risk
The Company is exposed to financial market risks, including interest rate, equity price and foreign currency exchange rate risks.
The Company maintains a short-term and long-term investment portfolio consisting of fixed rate commercial paper, corporate notes and bonds, asset backed securities and mortgage securities. The weighted average maturity of the portfolio, excluding mortgage securities, is two years or less. Mortgage securities may have a weighted average life of less than seven years and are managed consistent with the Lehman Mortgage Index. An increase in interest rates would decrease the value of certain of these investments. A 10% adverse change in interest rates would reduce the market value by $2.5 million, which would be reflected in Other comprehensive loss on the Condensed Consolidated Balance Sheets until sold.
At August 31, 2002, the Company’s debt obligation had a fixed interest rate. The fair value of this debt instrument at August 31, 2002 was $59.3 million compared to the carrying value of $57.3 million. A hypothetical 10% adverse change in interest rates would have a $0.1 million negative impact on the fair value which would not be reflected in the Company’s financial statements.
The Company is exposed to equity price risk primarily through its marketable equity securities portfolio, including investments in Merix Corporation and other companies. The Company has not entered into any hedging programs to mitigate equity price risk. In management’s opinion, an adverse change of 20% in the value of these securities would reduce the market value by $1.3 million, which would be reflected in Other comprehensive loss on the Condensed Consolidated Balance Sheets until sold.
The Company is exposed to foreign currency exchange rate risk primarily through transactions and commitments denominated in foreign currencies. The Company utilizes derivative financial instruments, primarily forward foreign currency exchange contracts, generally with maturities of one to three months, to mitigate this risk where natural hedging strategies cannot be employed. The Company’s policy is to only enter into derivative transactions when the Company has an identifiable exposure to risk, thus not creating additional foreign currency exchange rate risk. The potential loss in fair value at August 31, 2002, for such contracts resulting from a hypothetical 10% adverse change in all foreign currency exchange rates is approximately $2.6 million. This loss would be mitigated by corresponding gains on the underlying exposures.
| Item 4. | Controls and Procedures |
(a) Evaluation of disclosure controls and procedures. The Company’s chief executive officer and chief financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date (the “Evaluation Date”) within 90 days before the filing date of this quarterly report, have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were effective and designed to ensure that material information relating to the Company and the Company’s consolidated subsidiaries would be made known to them by others within those entities.
(b) Changes in internal controls. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect those controls subsequent to the Evaluation Date.
| Item 4. | Submission of Matters to a Vote of Security Holders |
At the Company’s annual meeting of shareholders on September 26, 2002, the shareholders voted on the election of three directors to the Company’s board of directors. Pauline Lo Alker, A. Gary Ames, and Frank C. Gill were elected to serve three-year terms ending at the 2005 annual meeting of shareholders. The voting for each director was as follows:
| FOR | WITHHELD | ||||||
| Pauline Lo Alker | 70,164,761 | 11,935,682 | |||||
| A. Gary Ames | 67,935,899 | 14,164,544 | |||||
| Frank C. Gill | 70,130,299 | 11,970,144 | |||||
The term of office of the Company’s other directors continued after the 2002 annual meeting of shareholders, as follows: Gerry B. Cameron and Jerome J. Meyer until the 2003 annual meeting of shareholders; and David N. Campbell, Merrill A. McPeak and Richard H. Wills until the 2004 annual meeting of shareholders.
At the meeting, the shareholders also voted to approve the Company’s 2002 Stock Incentive Plan. The number of shares voted for approval of the 2002 Stock Incentive Plan was 48,113,033, the number voted against approval was 25,092,287, the number abstaining was 1,299,776 and there were 7,595,347 broker non-votes. A copy of the 2002 Stock Incentive Plan is filed herewith as an exhibit.
| Item 6. | Exhibits and Reports on Form 8-K |
(a) Exhibits
(10) 2002 Stock Incentive Plan, as amended (Compensatory Plan or Arrangement)
(99.1) Certification of Richard H. Wills
(99.2) Certification of Colin L. Slade
(b) Reports on Form 8-K
Tektronix filed a report on Form 8-K on August 12, 2002 with respect to the Statement under Oath of the Principal Executive Officer and Principal Financial Officer Regarding Facts and Circumstances Relating to Exchange Act Filings (reported under Item 9 of Form 8-K).
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| October 4, 2002 |
TEKTRONIX, INC. | ||
| By: | /s/ COLIN SLADE | ||
| Colin Slade | |||
| Senior Vice President and Chief Financial Officer | |||
I, Richard H. Wills, President and Chief Executive Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tektronix, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| Date: October 4, 2002 |
|||
| /s/ RICHARD H. WILLS | |||
| Richard H. Wills | |||
| President and Chief Executive Officer | |||
I, Colin L. Slade, Senior Vice President and Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tektronix, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| Date: October 4, 2002 |
|||
| /s/ COLIN L. SLADE | |||
| Colin L. Slade | |||
| Senior Vice President and Chief Financial Officer | |||
EXHIBIT INDEX
| Exhibit No | Description | ||
| (10) | 2002 Stock Incentive Plan, as amended (Compensatory Plan or Arrangement) | ||
| (99.1) | Certification of Richard H. Wills | ||
| (99.2) | Certification of Colin L. Slade |