calculation of compensation cost for share-based payment transactions after the effective date of SFAS No. 123R may be different from the calculation of compensation cost under SFAS No. 123, but such differences have not yet been quantified.
In December 2004, the FASB issued two FASB staff positions (FSP): FSP FAS 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, for the Tax Deduction Provided to U.S.-Based Manufacturers by the American Jobs Creation Act of 2004”; and FSP FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004.” FSP FAS 109-1 clarifies that the tax deduction for domestic manufacturers under the American Jobs Creation Act of 2004 (the “Act”) should be accounted for as a special deduction in accordance with SFAS No. 109, “Accounting for Income Taxes.” FSP FAS 109-2 provides enterprises more time (beyond the financial-reporting period during which the Act took effect) to evaluate the Act’s impact on the enterprise’s plan for reinvestment or repatriation of certain foreign earnings for purposes of applying SFAS No. 109. The FSPs went into effect upon being issued and did not have a significant effect on the consolidated financial statements of Tektronix.
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 Quarterly Report. See “Forward-Looking Statements” which precedes Part I of this Form 10-Q.
Our 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 us. During periods of reduced and declining demand, we may need to rapidly align our cost structure with prevailing market conditions while at the same time motivating and retaining key employees. Our pension plan obligations are affected by changes in market interest rates and the majority of plan assets are invested in publicly traded debt and equity securities which are affected by market risks. Our net sales and operating results could be adversely impacted by the reversal of any current trends or any future downturns or slowdowns in the rate of capital investment in these industries. In addition, the telecommunications industry has been going through a period of consolidation in which several major telecommunications operators have either merged with each other or been acquired. This consolidation activity may affect the overall level of capital expenditures made by these operators on test and measurement equipment, and may also affect the relative competitive position between Tektronix and its competitors in this market.
We sell our products to customers that participate in rapidly changing high technology markets, which are characterized by short product life cycles. Our 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 we sell test and measurement products that enable our customers to develop new technologies, we must accurately anticipate the ever-evolving needs of those customers and deliver appropriate products and new technologies at competitive prices to meet customer demands. Our 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. In addition, we face risks associated with bringing products into compliance with the “Restriction of Hazardous Substances” worldwide regulatory provisions, which include removing lead from current and future product designs. Failure to deliver compliant competitive products in a timely manner and at reasonable prices, as well as the costs associated with bringing existing products into compliance, could have an adverse effect on our results of operations, financial condition or cash flows.
There are additional product risks associated with sales of the network monitoring products, which were acquired in the Inet acquisition. Sales of these products are typically recognized upon the completion of system installation or customer acceptance. Changes or delays in the implementation or customer acceptance of our products could harm our financial results. Sales of our network monitoring
products are made predominantly to a small number of large communications carriers and involve significant capital expenditures as well as lengthy sales cycles and implementation processes, which could harm our financial results. We rely upon software licensed from third parties such as Oracle Corporation, Cognos Incorporated and others. If we are unable to maintain these software licenses on commercially reasonable terms, our business, financial condition and results of operations could be harmed.
In addition, we expect third party carrier spending for traditional networks to continue to decrease, which requires that we continue to develop products and applications for networks based on emerging next-generation wireless and packet-based technologies and standards. We may not successfully develop or acquire additional competitive products for these emerging technologies and standards.
Further, we have included security features in some of the network monitoring products that are intended to protect the privacy and integrity of customer data. Despite the existence of these security features, these products may be vulnerable to breaches in security due to unknown defects in the security mechanisms, as well as vulnerabilities inherent in the operating system or hardware platform on which the product runs and/or the networks linked to that platform. Security vulnerabilities, regardless of origin, could jeopardize the security of information stored in and transmitted through the computer systems of our customers. Any security problem may require significant capital expenditures to solve and could materially harm our reputation and product acceptance.
Competition
We compete 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 Corporation, Catapult Communications, LeCroy Corporation, Rohde & Schwarz, Yokogawa Electric Corporation and many other smaller companies. In general, the test and measurement industry is a highly competitive market based primarily on product performance, technology, customer service, product availability and price. Some of our 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 we compete. We face pricing pressures that may have an adverse impact on our earnings. If we are unable to compete effectively on these and other factors, it could have a material adverse affect on our results of operations, financial condition or cash flows. In addition, we enjoy a leadership position in certain core product categories, and continually develop and introduce new products designed to maintain that leadership, as well as to penetrate new markets. Failure to develop and introduce new products that maintain a leadership position or which fail to penetrate new markets may adversely affect operating results.
Supplier Risks
Our 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. We periodically experience 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. There is increased risk of supplier constraints in periods where we are increasing production volume to meet customer demands. 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 our future operating results. In addition, we use 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 our results of operations.
Operating in a Global Environment
We maintain operations in four major geographies: the Americas, including the United States, Mexico, Canada and South America; Europe, including Europe, Russia, the Middle East and Africa; the Pacific, including China, India, Korea and Singapore; and Japan. During the last fiscal year, more than half of our revenues were from international sales. In addition, some of our manufacturing operations and key suppliers are located in foreign countries, including China, where we expect to further expand our operations. 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
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international monetary conditions; tariff and trade policies; export license requirements and restrictions on the export of technology; import regulations; domestic and foreign tax policies; foreign governmental regulations; political unrest, wars and acts of terrorism; epidemic disease or other health concerns; and changes in other economic or political conditions. These factors, among others, could restrict or adversely impact our ability to sell in global markets, as well as our ability to manufacture products or procure supplies and could subject us to additional costs. In addition, a significant downturn in the global economy or a particular region could adversely affect our results of operations, financial position or cash flows.
Intellectual Property Risks
As a technology-based company, our success depends on developing and protecting our intellectual property. We rely generally on patent, copyright, trademark and trade secret laws in the United States and abroad. Electronic equipment as complex as most of our products, however, is generally not patentable in its entirety. We also license intellectual property from third parties and rely on those parties to maintain and protect their technology. We cannot be certain that actions we take to establish and protect proprietary rights will be adequate, particularly in countries (including China) where intellectual property rights are not highly developed or protected. If we are unable to adequately protect our technology, or if we are unable to continue to obtain or maintain licenses for protected technology from third parties, it could have a material adverse affect on our results of operations, financial position or cash flows. From time to time in the usual course of business, we receive notices from third parties regarding intellectual property infringement or take action against others with regard to intellectual property rights. Even where we are successful in defending or pursuing such claims, we may incur significant costs. In the event of a successful claim against us, we could lose our rights to needed technology or be required to pay license fees for the infringed rights, either of which could have an adverse impact on our business.
Environmental Risks
We are subject to a variety of federal, state, local and foreign environmental regulations relating to the use, storage, discharge and disposal of our hazardous chemicals used during our manufacturing process. We have closed a licensed hazardous waste management facility at our Beaverton, Oregon, campus and have entered into a consent order with the Oregon Department of Environmental Quality requiring certain remediation actions (see Part I, Item 1, “Environment” of Form 10-K). If we fail to comply with the consent order or any present or future regulations, we could be subject to future liabilities or the suspension of production. In addition, such regulations could restrict our ability to expand our facilities or could require us to acquire costly equipment, or to incur other significant expenses to comply with environmental regulations.
Possible Volatility of Stock Price
The price of our common stock may be subject to wide, rapid fluctuations. Such fluctuations may be due to factors specific to us, 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 stock prices 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.
Integration of Inet, Technologies, Inc.
On September 30, 2004, we acquired all of the outstanding common stock of Inet. We are continuing to integrate the operations of Inet into Tektronix. The successful integration of the Inet business is subject to a number of risk factors which could materially adversely affect our consolidated results of operations, financial condition and cash flows. These risks include the necessity of coordinating geographically separated organizations, integrating personnel with diverse business backgrounds, integrating Inet’s technology and products, combining different corporate cultures, retaining key employees, maintaining customer satisfaction and current bid processes, maintaining product development schedules, coordinating sales and marketing activities and preserving important distribution relationships; diversion of management’s attention with consequent negative impact upon our execution of our overall strategy; and failure to realize upon expected cost savings and other synergies from the merger.
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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 our business strategies, potential litigation and claims arising in the normal course of business, credit risk of customers, the fact that a substantial portion of our sales are generated from orders received during each quarter, and significant modifications to existing information systems.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk. |
Financial Market Risk
We are exposed to financial market risks, including interest rate, equity price and foreign currency exchange rate risks.
We maintain a short-term and long-term investment portfolio consisting of fixed rate commercial paper, corporate notes and bonds, U.S. Treasury and agency notes, asset backed securities and mortgage securities. The weighted average maturity of the portfolio, excluding mortgage securities, was 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 of similar instruments would decrease the value of certain of these investments. A 10% rise in interest rates as of February 26, 2005 would reduce the market value by $2.3 million, which would be reflected in Accumulated other comprehensive loss on the Consolidated Balance Sheets until sold at which time it would then be recognized in Other non-operating income (expense), net, on the Condensed Consolidated Statement of Operations.
At February 26, 2004, we had no bond indebtedness. The bonds were retired on August 1, 2003.
We are exposed to equity price risk primarily through our marketable equity securities portfolio, including investments in Merix Corporation, Tut Systems, Inc., and other companies. We have not entered into any hedging programs to mitigate equity price risk. An adverse change of 20% in the value of these securities would reduce the market value by $2.3 million, which would likely be reflected in Accumulated other comprehensive loss on the Consolidated Balance Sheets until sold. If the adverse change results in an impairment that is considered to be other-than-temporary, the loss on impairment would be charged to net earnings on the Consolidated Statements of Operations.
We are exposed to foreign currency exchange rate risk primarily through commitments denominated in foreign currencies. We utilize 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. Our policy is to only enter into derivative transactions when we have an identifiable exposure to risk, thus not creating additional foreign currency exchange rate risk. At February 26, 2005, a 10% adverse movement in exchange rates would result in a $2.0 million loss on Euro and Japanese Yen forward contracts with a notional amount of $19.9 million.
Item 4. | Controls and Procedures. |
(a) Our management has evaluated, under the supervision and with the participation of, the chief executive officer and chief financial officer, the effectiveness of the our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934. Based on that evaluation, the chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed is recorded, processed, summarized and reported in a timely manner, and that information was accumulated and communicated to our management, including the chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.
(b) There has been no change in our internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Part II. OTHER INFORMATION
Item 1. | Legal Proceedings. |
Tektronix is involved in various litigation matters, claims and investigations that occur in the normal course of business, including but not limited to patent, commercial, personnel and environmental matters. While the results of such matters cannot be predicted with certainty, management believes that their final outcome will not have a material adverse impact on our business, results of operations, financial condition or cash flows.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Purchases of Tektronix common stock during the third quarter ended February 26, 2005 were as follows:
Fiscal Period | | Total
Number
of Shares | | Average
Price
Paid Per
Share | | Total
Amount
Paid | | Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans
or Programs | | Maximum Dollar
Value of Shares
that May
Yet Be
Purchased | |
| |
| |
| |
| |
| |
| |
November 28, 2004 to December 25, 2004 | | | — | | $ | — | | $ | — | | | 20,381,979 | | $ | 465,874,155 | |
December 26, 2004 to January 22, 2005 | | | 192,900 | | | 28.83 | | | 5,561,774 | | | 20,574,879 | | | 460,312,381 | |
January 23, 2005 to February 26, 2005 | | | 485,100 | | | 28.67 | | | 13,907,832 | | | 21,059,979 | | | 446,404,549 | |
| |
|
| | | | |
|
| | | | | | | |
Total | | | 678,000 | | $ | 28.72 | | $ | 19,469,606 | | | | | | | |
| |
|
| | | | |
|
| | | | | | | |
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Item 6. | Exhibits. | | |
| | | |
(a) | Exhibit No. | | Exhibit Description |
|
| |
|
| (31.1) | | 302 Certification, Chief Executive Officer. |
| (31.2) | | 302 Certification, Chief Financial Officer. |
| (32.1) | | 906 Certification, Chief Executive Officer. |
| (32.2) | | 906 Certification, Chief Financial Officer. |
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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.
April 6, 2005 | TEKTRONIX, INC. |
| | |
| By | /s/ COLIN L. SLADE |
| |
|
| | Colin L. Slade
Senior Vice President and
Chief Financial Officer |
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EXHIBIT INDEX
Exhibit No. | | Exhibit Description |
| |
|
(31.1) | | 302 Certification, Chief Executive Officer. |
| | |
(31.2) | | 302 Certification, Chief Financial Officer. |
| | |
(32.1) | | 906 Certification, Chief Executive Officer. |
| | |
(32.2) | | 906 Certification, Chief Financial Officer. |
