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.
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 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%.
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.
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
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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.
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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.
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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.
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| 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.
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Part II OTHER INFORMATION
| 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 |
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SIGNATURE
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 |
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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;
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
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 |
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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;
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
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 |
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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 |
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