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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 November 27, 1999, 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 93-0343990
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
14200 SW KARL BRAUN DRIVE
BEAVERTON, OREGON 97077
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 627-7111
26600 SW PARKWAY
WILSONVILLE, OREGON 97070-1000
(Address of principal executive offices) (Zip Code)
(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 DECEMBER 25, 1999 THERE WERE 47,252,593 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
- ------
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - 2
November 27, 1999 and May 29, 1999
Condensed Consolidated Statements of Operations - 3
for the Quarter ended November 27, 1999
and the Quarter ended November 28, 1998
for the Two Quarters ended November 27, 1999
and the Two Quarters ended November 28, 1998
Condensed Consolidated Statements of Cash Flows - 4
for the Two Quarters ended November 27, 1999
and the Two Quarters ended November 28, 1998
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURE 20
TEKTRONIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
Nov. 27, May 29,
(In thousands) 1999 1999
- ------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 57,860 $ 39,747
Accounts receivable - net 128,637 165,979
Inventories 120,870 158,305
Net assets of discontinued operations 341,799 338,990
Other current assets 93,636 83,417
---------- ----------
Total current assets 742,802 786,438
Property, plant and equipment - net 253,651 283,769
Deferred tax assets 55,347 56,405
Other long-term assets 139,494 121,723
---------- ----------
Total assets $1,191,294 $1,248,335
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 79,564 $ 115,687
Accounts payable 171,578 171,306
Accrued compensation 94,282 108,982
Deferred revenue 4,319 2,438
---------- ----------
Total current liabilities 349,743 398,413
Long-term debt 150,596 150,722
Other long-term liabilities 69,364 77,638
Shareholders' equity:
Common stock 142,608 143,263
Retained earnings 454,046 458,613
Accumulated other comprehensive income 24,937 19,686
---------- ----------
Total shareholders' equity 621,591 621,562
---------- ----------
Total liabilities and shareholders' equity $1,191,294 $1,248,335
========== ==========
The accompanying notes are an integral part of these condensed consolidated financial
statements.
2
TEKTRONIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Quarter ended Two quarters ended
Nov. 27, Nov. 28, Nov. 27, Nov. 28,
(In thousands except for per share amounts) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Net sales $ 261,271 $ 272,910 $ 542,018 $ 536,511
Cost of sales 141,274 185,579 297,729 331,516
----------- ----------- ----------- -----------
Gross profit 119,997 87,331 244,289 204,995
Research and development expenses 32,736 41,099 70,943 77,936
Selling, general and administrative
expenses 71,459 84,669 143,335 172,039
Equity in business ventures' loss 25 1,182 343 9,180
Non-recurring charges - 81,488 - 81,488
Charges related to the sale of the
Video and Networking division - - 26,100 -
----------- ----------- ----------- -----------
Operating income (loss) 15,777 (121,107) 3,568 (135,648)
Other expense - net 2,008 2,599 5,622 2,001
----------- ----------- ----------- -----------
Earnings (loss) from continuing
operations before taxes 13,769 (123,706) (2,054) (137,649)
Income tax expense (benefit) 4,828 (39,585) (78) (44,047)
----------- ----------- ----------- -----------
Earnings (loss) from continuing
operations 8,941 (84,121) (1,976) (93,602)
Discontinued operations:
Income (loss) from operations of
Color Printing and Imaging
(less applicable tax of $3,667, (824),
4,762, and 1,443, respectively) 6,245 (1,750) 8,680 3,068
----------- ----------- ----------- -----------
Net earnings (loss) $ 15,186 $ (85,871) $ 6,704 $ (90,534)
=========== =========== =========== ===========
Earnings (loss) per share - basic and
diluted $ 0.32 $ (1.82) $ 0.14 $ (1.87)
Earnings (loss) per share from
continuing operations - basic and
diluted $ 0.19 $ (1.79) $ (0.04) $ (1.93)
Earnings (loss) per share from
discontinued operations - basic
and diluted $ 0.13 $ (0.04) $ 0.18 $ 0.06
Dividends per share $ 0.12 $ 0.12 $ 0.24 $ 0.24
Average shares outstanding - basic 47,062 47,077 47,005 48,414
Average shares outstanding - diluted 47,636 47,077 47,468 48,583
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
TEKTRONIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Two quarters ended
Nov. 27, Nov. 28,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ 6,704 $ (90,534)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Income from discontinued operations (8,680) (3,068)
Depreciation and amortization expense 30,016 32,184
Restructuring charges - 27,760
Non-recurring charges - 92,774
Charges related to the sale of the Video
and Networking division 26,100 -
Gain on sale of investments (217) (6,465)
Equity in business ventures' loss 343 9,180
Changes in operating assets and liabilities:
Accounts receivable 42,342 66,637
Inventories (18,631) (35,171)
Other current assets (13,634) (54,724)
Accounts payable 4,047 (2,892)
Accrued compensation (11,721) (38,321)
Other-net (10,647) (7,901)
---------- ----------
Net cash provided by (used in) continuing operations 46,022 (10,541)
Net cash provided by discontinued operations 5,986 1,833
---------- ----------
Net cash provided by (used in) operating activities 52,008 (8,708)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment (22,536) (36,874)
Net proceeds from sale of business 22,600 -
Proceeds from sale of fixed assets 14,848 273
Proceeds from sale of investments 397 8,929
---------- ----------
Net cash provided by (used in) investing activities 15,309 (27,672)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short-term debt (36,123) 66,279
Issuance of long-term debt - -
Repayment of long-term debt (126) (511)
Issuance of common stock 12,889 931
Repurchase of common stock (14,573) (85,524)
Dividends (11,271) (11,658)
---------- ----------
Net cash used in financing activities (49,204) (30,483)
---------- ----------
Net increase (decrease) in cash and cash equivalents 18,113 (66,863)
Cash and cash equivalents at beginning of period 39,747 120,541
---------- ----------
Cash and cash equivalents at end of period $ 57,860 $ 53,678
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
Income taxes paid - net $ 3,999 $ 9,805
Interest paid 9,554 7,266
NON-CASH INVESTING ACTIVITIES
Note receivable for sale of Video and Networking assets $ 22,500 $ -
Common stock of Grass Valley Group, Inc. for sale of
Video and Networking assets 6,300 -
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The condensed consolidated financial statements and notes have been prepared by
the company without audit. Certain information and footnote disclosures normally
included in annual financial statements, prepared in accordance with generally
accepted accounting principles, have been condensed or omitted. Management
believes that the condensed statements include all necessary adjustments, which
are of a normal and recurring nature and are adequate to present 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 incorporated by reference in the company's latest annual
report on Form 10-K. The company's fiscal year is the 52 or 53 weeks ending the
last Saturday in May. Fiscal years 2000 and 1999 are 52 weeks.
DISCONTINUED OPERATIONS
On September 22, 1999, the company announced that it had reached an agreement
with Xerox Corporation (Xerox) to sell the net assets of the Color Printing and
Imaging division. On January 1, 2000, the company closed the sale of
substantially all of the assets of the division. The purchase price was $925.0
million in cash, with certain liabilities of the division assumed by Xerox.
Tektronix expects to realize a pre-tax gain on the sale of approximately $600.0
million. This gain will be recorded during the third quarter of 2000 as will the
loss from operations realized by the Color Printing and Imaging division during
the five weeks prior to the close of the sale and any transition costs or other
charges related to the transaction.
In accordance with Accounting Principles Board 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 company has accounted for the Color Printing and Imaging
division as a discontinued operation. Summarized results of operations for the
Color Printing and Imaging division were as follows:
Quarter ended Two quarters ended
Nov. 27, Nov. 28, Nov. 27, Nov. 28,
(In thousands except for per share amounts) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------
Net sales $ 189,753 $ 159,254 $ 345,157 $ 314,632
----------- ----------- ----------- -----------
Earnings (loss) before taxes 9,912 (2,574) 13,442 4,511
Income tax expense (benefit) 3,667 (824) 4,762 1,443
----------- ----------- ----------- -----------
Net earnings (loss) $ 6,245 $ (1,750) $ 8,680 $ 3,068
=========== =========== =========== ===========
Net earnings (loss) per share $ 0.13 $ (0.04) $ 0.18 $ 0.06
=========== =========== =========== ===========
Summarized net assets for the Color Printing and Imaging division were as
follows:
Nov 27, May 29,
(In thousands) 1999 1999
- -------------------------------------------------------------------------------
Current assets $ 253,141 $ 272,210
Long-term assets 173,620 177,810
Current liabilities (77,706) (98,633)
Long-term liabilities (7,256) (12,397)
------------ ------------
Net assets of discontinued operations $ 341,799 $ 338,990
============ ============
5
SALE OF VIDEO AND NETWORKING
On August 9, 1999, the company announced that it had reached an agreement to
sell substantially all of the operating assets of its Video and Networking
division to Grass Valley Group, Inc. During the first quarter of 2000, Tektronix
recorded pre-tax charges of $26.1 million for losses expected to be incurred in
connection with the transaction. These charges were calculated based upon the
excess of the estimated net book value of net assets transferred over the
proceeds, as well as asset impairments expected to be incurred as a result of
the sale. On September 24, 1999, the companies closed the transaction. Tektronix
received cash of $23.7 million, net of transaction costs of $1.1 million, a note
receivable of $22.5 million, and a 10% equity interest in that company, which is
accounted for under the cost method. Actual losses incurred in connection with
the transaction were $26.1 million.
NON-RECURRING CHARGES
In the second quarter of 1999, the company announced and began to implement a
series of actions (the plan) intended to align worldwide operations with current
market conditions and to improve the profitability of its operations. These
actions include a net reduction of approximately 15% of the company's worldwide
workforce, the exit from certain facilities and the streamlining of product and
service offerings.
Major actions are summarized by each of the three business divisions in which
the company has historically operated. Measurement's service business was
consolidated from several depots in the United States and Europe into two depots
in each of these geographies. This consolidation resulted in headcount
reductions and the write-down and disposal of redundant inventory through the
first quarter of 2000. Measurement closed the Bend, Oregon manufacturing
facility during the third quarter of 1999 and consolidated that process into its
Beaverton, Oregon facilities. This action resulted in headcount reductions and
lease settlements. Measurement reduced headcount throughout the division,
primarily in manufacturing. During the second quarter of 1999, Color Printing
and Imaging discontinued three product lines - wide format, dye sublimation and
B-size solid ink. This action resulted in write-offs of disposed inventory.
Color Printing and Imaging also reduced headcount throughout the division,
primarily in manufacturing. During 1999, Video and Networking discontinued
development, manufacturing, and sales of non-linear digital editing products
sold under the Lightworks name. This decision resulted in headcount reductions,
write-offs of disposed inventory, incremental sales returns and bad debts, and
costs to fulfill commitments to deliver software enhancements on previously sold
product. Outside of the divisions, selective involuntary terminations have
occurred throughout the execution of the plan.
The company recorded pre-tax charges of $125.7 million to account for these
actions, including restructuring charges of $115.8 million and other
non-recurring charges of $9.9 million for related actions. The $115.8 million in
restructuring charges include $27.1 million in charges to cost of sales for the
write-off of excess inventory resulting from discontinued product lines and
consolidation of service centers worldwide, $56.9 million in severance expense
related to employee separation, $14.8 million in charges to facilities for lease
cancellation fees and $17.0 million in charges to long-term assets associated
with discontinued product lines. The $9.9 million for related actions include
$5.1 million of expected sales returns of previously sold product, $0.8 million
of bad debt expense related to existing accounts receivable that will not be
collected and $4.0 million of costs to fulfill commitments to deliver software
enhancements on previously sold product, all associated with exiting the
non-linear digital editing business.
6
The pre-tax charges incurred under the plan impacted the company's results of
operations for the year ended May 29, 1999 as follows:
Location of charge in the
consolidated statements of
(In thousands) operations
- ----------------------------------------------------------------------------------------
Severance and benefits Non-recurring charges $ 56,924
Inventory write-offs Cost of sales 27,070
Lease buy-outs and
abandonment of facilities Non-recurring charges 16,942
Asset write-offs and impairments Non-recurring charges 14,804
Sales returns and allowances Net sales 5,120
Commitment for enhancements
related to discontinued products Research and development expenses 4,019
Bad debt expense related to Selling, general and
discontinued products administrative expenses 803
---------
$ 125,682
=========
The pre-tax charges incurred under the plan affected the company's financial
position in the following manner:
Equipment Payables
Accrued and other and other
(In thousands) compensation Inventories assets liabilities
- ---------------------------------------------------------------------------------------------------
Original charges $ 54,680 $ 27,760 $ 18,200 $ 19,894
1999 activity:
Cash paid out (20,844) - - (7,415)
Non-cash disposals or write-offs - (27,070) (17,055) -
Adjustments to plan 2,244 (690) (455) 4,049
--------- --------- --------- ---------
Balance May 29, 1999 $ 36,080 $ - $ 690 $ 16,528
--------- --------- --------- ---------
2000 activity:
Cash paid out (16,611) - - (8,327)
Non-cash disposals or write-offs - - (690) -
Adjustments to plan - - - -
--------- --------- --------- ---------
Balance November 27, 1999 $ 19,469 $ - $ - $ 8,201
========= ========= ========= =========
The charge of $54.7 million in accrued compensation reflects an original planned
headcount reduction of 1,371 employees worldwide. This charge was increased by a
net $2.2 million during the fourth quarter of 1999. The $2.2 million consists of
an $8.6 million reserve for severance of an additional 282 employees worldwide
across all responsibilities, offset in part by reversal of a $6.4 million
reserve for pension settlement that was not needed as settlement accounting was
not appropriate during the year. Headcount reduction under the current plan of
reorganization now totals 1,653 employees worldwide. Approximately 1,200
employees have been terminated under the plan. Severance of $37.5 million has
been paid to approximately 1,177 of these employees, while the other 23
employees will be paid severance in the third quarter of 2000. As a result of
the sale of the Color Printing and Imaging division, the company will need to
evaluate the severance reserves to determine whether all of the remaining
amounts are required. This process will take place during the third quarter, and
any excess reserve will be reversed to non-recurring charges.
7
The $27.8 million charge to inventories includes inventories related to the
consolidation of Measurement service offerings, the discontinuation of three
Color Printing and Imaging product lines and the discontinuation of non-linear
digital editing products sold under the Lightworks name, which were written off
during the second quarter of 1999.
The charge of $18.2 million for equipment and other assets includes asset
impairments of $17.4 million and $0.8 million in reserve for bad debt expense.
The impaired assets are primarily related to discontinued product lines in Color
Printing and Imaging and Video and Networking and include manufacturing assets
of $6.2 million, goodwill and other intangibles of $6.5 million, and leasehold
improvements and other assets of $4.7 million.
The $19.9 million charge for payables and other liabilities includes reserves
for lease buy-outs and abandonment of facilities, sales returns and allowances
and commitments for enhancements related to discontinued products. This reserve
was increased by $4.0 million during 1999 to provide for additional costs to
exit certain sales and service offices worldwide and to fulfill certain
contractual commitments, partly offset by a decrease in original sales returns
allowances. The $8.2 million reserve remaining at the end of the period mainly
represents future lease payments on abandoned facilities that will continue over
the lives of the lease contracts.
RECEIVABLES
On September 10, 1996, the company entered into a five-year revolving
receivables purchase agreement with Citibank NA to sell, without recourse, an
undivided interest of up to $50.0 million in a defined pool of trade accounts
receivable. Receivables of $50.0 million were sold under this agreement as of
November 27, 1999 and are therefore not reflected in the accounts receivable
balance in the accompanying Condensed Consolidated Balance Sheet.
INVENTORIES
Inventories consisted of:
Nov. 27, May 29,
(In thousands) 1999 1999
- -------------------------------------------------------------------------------
Materials and work in process $ 51,325 $ 54,766
Finished goods 69,545 103,539
---------- ----------
Inventories $ 120,870 $ 158,305
========== ==========
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of:
Nov. 27, May 29,
(In thousands) 1999 1999
- -------------------------------------------------------------------------------
Land $ 4,754 $ 4,642
Buildings 170,074 186,525
Machinery and equipment 350,302 405,978
---------- ----------
525,130 597,145
Accumulated depreciation and amortization (271,479) (313,376)
---------- ----------
Property, plant and equipment - net $ 253,651 $ 283,769
========== ==========
8
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) and its components, net of tax, are as follows:
Quarter ended Two quarters ended
Nov. 27, Nov. 28, Nov. 27, Nov. 28,
(In thousands) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 15,186 $ (85,871) $ 6,704 $ (90,534)
Other comprehensive income (loss):
Currency translation adjustment 5,207 14,733 5,157 11,242
Unrealized loss on
available-for-sale securities (60) (340) (277) (4,446)
Reclassification adjustment for
realized gains (losses) included
in net income 360 (1,415) 371 (3,879)
---------- ---------- ---------- ----------
Comprehensive income (loss) $ 20,693 $ (72,893) $ 11,955 $ (87,617)
========== ========== ========== ==========
BUSINESS SEGMENTS
The company has historically been organized based on the products and services
that it offers. During the periods reported, the company operated in three main
segments: Measurement, Color Printing and Imaging, and Video and Networking.
Operations for the Color Printing and Imaging division were accounted for as
discontinued during the quarter, and substantially all of the assets of the
division were sold to Xerox subsequent to quarter-end. In addition,
substantially all of the operating assets of the Video and Networking division
were sold to Grass Valley Group, Inc. in a transaction that closed September 24,
1999. Going forward, the only segment in which the company will operate is
Measurement.
The information provided below was obtained from internal information that was
provided to the company's chief operating decision-maker for the purpose of
corporate management. Assets, liabilities and expenses attributable to corporate
activity were not allocated to the three operating segments. Inter-segment sales
were not material and were included in net sales to external customers below.
Figures shown for 1999 were restated to include results for the VideoTele.com
product family within Measurement and exclude them from Video and Networking.
Quarter ended Two quarters ended
Nov. 27, Nov. 28, Nov. 27, Nov. 28,
(In thousands) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------
Net sales to external customers
(by division):
Measurement $ 253,325 $ 213,291 $ 481,359 $ 424,449
Video and Networking 7,946 59,619 60,659 112,062
---------- ---------- ---------- ----------
Net sales $ 261,271 $ 272,910 $ 542,018 $ 536,511
========== ========== ========== ==========
Net sales to external customers
(by region):
United States $ 140,484 $ 136,264 $ 287,695 $ 267,352
Europe 65,132 83,750 137,481 154,336
Pacific 29,399 27,718 57,924 61,090
Japan 14,746 13,953 35,547 30,005
Americas 11,510 11,225 23,371 23,728
---------- ---------- ---------- ----------
Net sales $ 261,271 $ 272,910 $ 542,018 $ 536,511
========== ========== ========== ==========
9
Operating income (loss):
Measurement $ 26,375 $ 14,743 $ 49,033 $ 26,134
Video and Networking (10,710) (13,285) (19,013) (30,861)
Charges related to the sale of the
Video and Networking division - - (26,100) -
Non-recurring charges - (120,534) - (120,534)
Business ventures' income (loss)
and other 112 (2,031) (352) (10,387)
---------- ---------- ---------- ----------
Operating income (loss) $ 15,777 $ (121,107) $ 3,568 $ (135,648)
========== ========== ========== ==========
INCOME TAXES
The provision for income tax expense (benefit) consisted of:
Quarter ended Two quarters ended
Nov. 27, Nov. 28, Nov. 27, Nov. 28,
(In thousands) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------
United States $ 1,448 $ (80,862) $ (23) $ (89,976)
State 483 (3,829) (8) (4,261)
Foreign 2,897 45,106 (47) 50,190
---------- ---------- ---------- ----------
Income tax expense (benefit) $ 4,828 $ (39,585) $ (78) $ (44,047)
========== ========== ========== ==========
The annual effective rate used to calculate 1999 income tax benefit from
continuing operations was 32%. The effective rate used to calculate income tax
on continuing operations for the second quarter of 2000 was 35%, while the rate
used to calculate income tax on discontinued operations was 37%. Management
currently expects the company's overall effective tax rate for fiscal year 2000
will be 37%.
FUTURE ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new statement will require recognition
of all derivatives as either assets or liabilities on the balance sheet at fair
value. The new statement is effective for the company's fiscal year 2002, as
deferred by SFAS No. 137, but early adoption is permitted. Management has not
yet completed an evaluation of the effects this standard will have on the
company's consolidated financial statements.
10
Item 2. Management's Discussion and Analysis of Financial
- ------- -------------------------------------------------
Condition and Results of Operations
-----------------------------------
GENERAL
The company has historically operated in three major business divisions:
Measurement, Color Printing and Imaging, and Video and Networking, as well as in
five major geographies: the United States; Europe; the Americas, including
Mexico, Canada and South America; the Pacific, excluding Japan; and Japan.
On August 9, 1999, the company announced that it had reached an agreement to
sell substantially all of the operating assets of its Video and Networking
division to Grass Valley Group, Inc. During the first quarter of fiscal year
2000, Tektronix recorded pre-tax charges of $26.1 million for losses expected to
be incurred in connection with the transaction. These charges were calculated
based upon the excess of the estimated net book value of net assets transferred
over the proceeds, as well as asset impairments expected to be incurred as a
result of the sale. On September 24, 1999, the companies closed the transaction.
Tektronix received cash of $23.7 million, net of transaction costs of $1.1
million, a note receivable of $22.5 million, and a 10% equity interest in that
company, which is accounted for under the cost method. Actual losses incurred in
connection with the transaction were $26.1 million.
Video and Networking operating results through September 24, 1999 have been
included in those from continuing operations for the periods reported. During
the quarter and two quarters ended November 27, 1999, Video and Networking
realized sales of $7.9 million and $60.7 million, respectively. For the same
periods, the division experienced operating losses of $10.7 million and $19.0
million, respectively. During the quarter and two quarters ended November 28,
1998, Video and Networking sales were $59.6 million and $112.1 million,
respectively. For these same periods, the division experienced operating losses
of $13.3 million and $30.9 million, respectively.
On September 22, 1999, the company announced that it had reached an agreement
with Xerox Corporation (Xerox) to sell the net assets of the Color Printing and
Imaging division. On January 1, 2000, the company closed the sale of
substantially all of the assets of the division. The purchase price was $925.0
million in cash, with certain liabilities of the division assumed by Xerox.
Tektronix expects to realize a pre-tax gain on the sale of approximately $600.0
million. This gain will be recorded during the third quarter of 2000 as will the
loss from operations realized by the Color Printing and Imaging division during
the five weeks prior to the close of the sale and any transition costs or other
charges related to the transaction.
In accordance with Accounting Principles Board 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 company has accounted for the Color Printing and Imaging
division as a discontinued operation. During the quarter and two quarters ended
November 27, 1999, Color Printing and Imaging realized sales of $189.8 million
and $345.2 million and operating income of $10.8 million and $14.9 million,
respectively. During the quarter and two quarters ended November 28, 1998, Color
Printing and Imaging realized sales of $159.3 million and $314.6 million,
respectively. For the same periods, the division experienced an operating loss
of $2.5 million and operating income of $4.7 million, respectively.
11
NON-RECURRING CHARGES
In the second quarter of fiscal year 1999, the company announced and began to
implement a series of actions (the plan) intended to align worldwide operations
with current market conditions and to improve the profitability of its
operations. Simultaneously, the company recorded pre-tax charges of $125.7
million to account for these actions. Through the execution of the plan, the
company began to decentralize. As a final step in the decentralization of the
company, management committed to sell the majority of the operating assets of
the Video and Networking division and the net assets of the Color Printing and
Imaging division in early fiscal year 2000. Substantially all division-specific
actions included in the plan were completed prior to the consummation of these
transactions.
As of November 27, 1999, reserves of $19.5 million and $8.2 million remain for
severance and other liabilities, respectively. As a result of the sale of the
Color Printing and Imaging division, the company will need to evaluate the
severance reserves to determine whether all of the remaining $19.5 million is
required. This process will take place during the third quarter, and any excess
reserve will be reversed to non-recurring charges. The remaining $8.2 million
reserve for other liabilities mainly represents future lease payments on
facilities that were abandoned as a result of the decentralization of the
company. These payments will continue over the lives of the lease contracts.
Management currently expects that actions related to the remaining reserves will
require approximately $27.7 million in cash.
RESULTS OF OPERATIONS
Quarter and Two Quarters Ended November 27, 1999
vs.
Quarter and Two Quarters Ended November 28, 1998
NET INCOME FROM CONTINUING OPERATIONS
The company recognized net income from continuing operations of $8.9 million, or
$0.19 per diluted share, during the second quarter of 2000 as compared to a net
loss from continuing operations of $84.1 million, or $1.79 per diluted share,
recognized during the same period in 1999. During the first half of 2000, the
company recognized a net loss from continuing operations of $2.0 million, or
$0.04 per diluted share, as compared to net loss from continuing operations of
$93.6 million, or $1.93 per diluted share, for the first half of 1999.
The company recognized pre-tax non-recurring charges of $26.1 million during the
first quarter of 2000 and $120.5 million during the second quarter of 1999.
Excluding these charges, Tektronix would have recognized net income from
continuing operations of $8.9 million, or $0.19 per diluted share, for the
current quarter, as compared to a net loss of $2.2 million, or $0.05 per diluted
share, for the same period in 1999. During the first half of 2000, the company
would have recognized net income from continuing operations of $13.4 million, or
$0.28 per diluted share, as compared to net loss from continuing operations of
$11.6 million, or $0.24 per diluted share for the first half of 1999.
NET INCOME FROM DISCONTINUED OPERATIONS
The company recognized net income from discontinued operations of $6.2 million,
or $0.13 per diluted share, for the second quarter of 2000, as compared to a net
loss of $1.8 million, or $0.04 per diluted share, for the same period in 1999.
For the first half of 2000, the company recognized $8.7 million, or $0.18 per
diluted share, in net income from discontinued operations, as compared to net
income of $3.1 million, or $0.06 per diluted share, for the first half of 1999.
12
SALES
Sales from continuing operations for the second quarter of 2000 were $261.3
million, down 4% from second quarter 1999 sales of $272.9 million. Sales for
Measurement were $253.3 million, as compared to sales of $213.3 million for the
second quarter of 1999. Measurement sales increased 19% over the prior year,
including growth in all geographies. The United States and the Pacific
experienced the most significant growth, up $25.4 million or 23% and $6.5
million or 29%, respectively. The majority of the increase was realized in sales
of oscilloscopes, wireless communication test products and logic analyzers.
Sales of these products increased due to positive market response to the launch
of new products at the end of 1999, continued growth in wireless communication
infrastructure and resurgence in the semiconductor industry.
Sales from continuing operations for the first half of 2000 were $542.0 million,
as compared to sales of $536.5 million for the first half of 1999. Measurement
sales were $481.4 million, as compared to sales of $424.4 million for the first
half of 1999. Measurement sales increased 13% over the prior year, including
growth in all geographies. The United States and Japan experienced the most
significant growth, up $38.6 million or 18% and $7.2 million or 27%,
respectively. Sales for the first half of 2000 increased in the same product
lines and for the same reasons discussed above under current quarter results.
ORDERS
Second quarter 2000 orders for Measurement were $241.6 million, up $34.6 million
or 17% over orders for the same period in 1999. Orders were up across all
geographies except Europe, where orders declined $7.1 million or 11%, as
compared to the same quarter of 1999. The decline in orders from Europe can be
attributed to a decline in the value of the Euro, as well as strong orders from
the region in the second quarter of 1999. Measurement orders from Europe for the
second quarter of 1999 were up 24% over those for the same quarter of 1998,
while orders from all other regions had declined. The United States and the
Pacific experienced the largest increases in orders during the current quarter,
up $31.1 million or 34% and $5.7 million or 21%, respectively. Orders from these
regions increased in the same product lines and for the same reasons as sales
increased for the quarter.
Measurement orders for the first half of 2000 were $485.3 million, up $89.0
million or 22% over orders for the same period in 1999. Orders were up across
all geographies, particularly in the United States and the Pacific. Orders from
the United States were $250.3 million, up $59.8 million or 31% from orders for
the same period in 1999. Orders from the Pacific were $62.0 million, up $12.9
million or 26% from orders for the same period in 1999. Orders were impacted by
the same favorable conditions that impacted sales.
GROSS PROFIT
The company's gross profit from continuing operations was $120.0 million for the
second quarter of 2000, an increase over gross profit of $87.3 million for the
same period in 1999. Excluding the non-recurring charges of $34.2 million, gross
profit was $121.6 million for the second quarter of 1999. As a percentage of net
sales, gross profit was 45.9% for the second quarter of 2000, as compared to
43.5% for the second quarter of 1999, excluding non-recurring charges.
The company's gross profit from continuing operations was $244.3 million for the
first half of 2000, an increase over gross profit of $205.0 million for the same
period in 1999. Excluding the non-recurring charges noted above, gross profit
was $239.2 million for the first half of 1999. As a percentage of net sales,
gross profit increased from 44.1%, excluding non-recurring charges, to 45.1% for
the first half of 2000.
Measurement gross profit improved from $103.0 million for the second quarter of
1999, to $122.7 million for the second quarter of 2000. As a percentage of net
sales, gross profit was 48.4%, as compared to 48.3% for the second quarter of
1999. Measurement gross profit for the first half of 2000 was $232.8 million, as
compared to $203.7 million for the first half of 1999. As a percentage of net
sales, gross profit was 48.4%, as compared to 48.0% for the first half of 1999.
The increase in both periods resulted mainly from higher margins on
oscilloscopes introduced during the third and fourth quarters of 1999.
13
OPERATING EXPENSES
Operating expenses from continuing operations were $104.2 million, down $104.2
million from $208.4 million for the second quarter of 1999, due mainly to $81.5
million in non-recurring charges in the prior year, as well as a decrease in
selling, general and administrative and research and development expenses.
Selling, general and administrative expenses were $71.5 million for the quarter,
a decrease of $13.2 million from the same period in 1999, primarily as a result
of only one month of Video and Networking results included in this quarter.
Research and development expenses were $32.7 million, $8.4 million lower than
those recognized in the second quarter of 1999. The decline was due mainly to
$4.0 million in non-recurring charges in the prior year, as well as only one
month of Video and Networking results included in the current quarter.
For the first half of 2000, operating expenses from continuing operations were
$240.7 million, down $99.9 million from $340.6 million for the first half of
1999, due mainly to lower non-recurring charges, as well as a decrease in
selling, general and administrative expenses and losses on investments accounted
for under the equity method. Non-recurring charges for the first half of 2000
were $26.1 million, $55.4 million lower than the $81.5 million recorded during
the first half of 1999. Selling, general and administrative expenses were $143.3
million, a decrease of $28.7 million from the same period in 1999, primarily as
a result of only one month of Video and Networking results included this year.
Losses on investments accounted for under the equity method were $0.3 million,
$8.8 million lower than those recognized in the same period of 1999, primarily
due to Tektronix' $7.2 million share of the loss reported by Merix Corporation
during the first half of 1999.
OPERATING MARGIN
Measurement operating income for the second quarter of 2000 was $26.4 million,
as compared to $14.7 million generated in the same period of 1999. Operating
margin was approximately 10.4% of sales for the quarter, as compared to 6.9% for
the second quarter of 1999. Management currently expects that the measurement
division will continue to see operating margins of approximately 10% through the
end of the year, excluding any non-recurring charges or transition costs.
INCOME TAXES
Income taxes increased from a benefit of $39.6 million for the second quarter of
1999 to expense of $4.8 million for the second quarter of 2000 as a result of
earnings before taxes. Income tax expense related to discontinued operations was
$3.7 million for the current quarter, as compared to a benefit of $0.8 million
for the second quarter of 1999. Income tax benefit was $0.1 million for the
first half of 2000, as compared to income tax benefit of $44.0 million for the
same period in 1999 as a result of decreased losses before taxes. Income tax
expense related to discontinued operations was $4.8 million for the first half
of 2000, as compared to $1.4 million for the first half of 1999.
The annual effective rate used to calculate 1999 income tax benefit from
continuing operations was 32%. The effective rate used to calculate income tax
on continuing operations for the second quarter of 2000 was 35%, while the rate
used to calculate income tax on discontinued operations was 37%. Management
currently expects the company's overall effective tax rate for fiscal year 2000
will be 37%.
FINANCIAL CONDITION
At November 27, 1999, the company held $57.9 million in cash and cash
equivalents and bank credit facilities totaling $308.4 million, of which $221.2
million was unused. Unused facilities include $146.7 million in lines of credit
and $74.5 million under revolving credit agreements with United States and
foreign banks. Net cash proceeds from the sale of the net assets of the Color
Printing and Imaging division will be used to pay down outstanding debt and
returned to shareholders through the repurchase of common stock, with a small
amount retained for other corporate purposes.
14
WORKING CAPITAL
At November 27, 1999, the company's working capital was $393.1 million, an
increase of $5.1 million from the end of 1999. Net assets from discontinued
operations were $341.8 million, an increase of $2.8 million during the first
half of the year. Excluding net assets of discontinued operations, working
capital was $51.3 million, a $2.3 million or 5% increase over year-end.
Current assets decreased $43.6 million during the first half of 2000, with
accounts receivable decreasing $37.3 million and inventory decreasing $37.4
million, offset in part by cash and cash equivalents increasing $18.1 million
and other current assets increasing $10.2 million.
Accounts receivable decreased due to a decrease of $50.9 million in Video and
Networking accounts receivable, which were excluded from the sale to Grass
Valley Group, Inc., offset in part by a decline of $5.0 million in securitized
receivables and an increase in Measurement accounts receivable resulting from
increased sales over the prior quarter.
Inventory declined due to $43.6 million of Video and Networking inventory that
did not remain at the end of the quarter as a result of the sale to Grass Valley
Group, Inc., offset in part by an increase in inventory in the Measurement
division. Measurement inventory, especially purchased materials and work in
process balances, were greater than those at year-end due to increased sales
over the prior quarter, as well as increased order backlog and production
forecasts going into the next quarter.
Cash and cash equivalents increased $18.1 million during the first half of the
year. Sources of cash included $46.0 million from continuing operations, $6.0
million from discontinued operations, $22.6 million in net proceeds from the
sale of Video and Networking and $14.8 million in proceeds from sales of real
estate and other fixed assets. Cash was consumed during the first half of the
year through capital expenditures of $22.5 million, dividends of $11.3 million
and a $36.1 million reduction in short-term debt.
Other current assets increased primarily due to the recording of the $5.0
million current portion of a note receivable from Grass Valley Group, Inc., as
well as an increase in current income tax benefits of $3.3 million associated
mainly with non-recurring charges recorded in connection with the sale of the
Video and Networking division.
Current liabilities decreased $48.7 million during the first half of 2000, due
mainly to a decrease in short-term debt of $36.1 million and a decrease in
accrued compensation of $14.7 million. Short-term debt declined as cash
requirements were met with cash received from the sale of Video and Networking
and other sources. Accrued compensation decreased mainly due to the transfer of
accrued payroll for Video and Networking employees to Grass Valley Group, Inc.,
payment of severance, as well as payment of year-end accruals of incentives and
commissions.
LONG-TERM FINANCIAL POSITION
Other long-term assets increased $17.8 million due mainly to the recording of
the $17.5 million long-term portion of a note receivable from Grass Valley
Group, Inc. and a 10% equity interest in that company, which is accounted for
under the cost method. Shareholders' equity was nearly flat, as compared to
year-end.
15
YEAR 2000 UPDATE
Subject to continued monitoring of third party suppliers, Tektronix, Inc.'s Year
2000 Program (Program) is complete, and no material problems have arisen since
the end of calendar year 1999. The Program addressed the issue of computer
programs and embedded computer chips being unable to distinguish between the
year 1900 and the year 2000. All of the company's business computer systems are
year 2000 ready. Other information technology projects have not been delayed due
to the implementation of the Year 2000 Program.
Program
Tektronix' Program was divided into three major sections: (1) infrastructure
(information, logistics and other technology used in the company's business,
including hardware and software, which is sometimes referred to as IT); (2)
products (hardware and software products delivered to customers); and (3)
external suppliers and providers (vendors, manufacturers and suppliers to the
company). The general phases common to all sections were: (1) identification and
prioritization of various systems through an extensive inventory of all items
used throughout the company including customer products and services and
material third party manufacturers, suppliers and vendors; (2) remediation of
material systems through replacement or updates; (3) testing, including the
sending, receiving and processing of various information types to ensure ongoing
functionality, integrity and accuracy; and (4) contingency planning to establish
alternate solutions for any material systems determined not to be year 2000
compliant. Material items were those believed by the company to have a risk
involving the safety of individuals or that may cause damage to property or the
environment, or affect the continuation of business activities or materially
affect revenues. All phases for all three sections are complete.
The company's products that are not year 2000 ready have been identified, and
the company has determined to what extent upgrades will be made available to
make non-compliant products ready. All newly introduced products will be year
2000 ready. The company maintains a web site for customers to review product
readiness, including product upgrades, customer-serviceable fixes, and
non-compliant products for which upgrades will not be available.
Material external suppliers have been identified and prioritized. Tektronix has
evaluated the preparedness of material external suppliers. Contingency plans
address alternatives in the event that a material supplier is unable to supply
materials or services due to a lack of preparedness. Evaluating supplier
readiness included written representations from suppliers regarding their year
2000 readiness programs, as well as onsite assessments. Assessments were
conducted using the criteria established by the High Tech Consortium, LLC, an
organization consisting of approximately 15 other high technology companies that
was organized for the purpose of developing review criteria and sharing the
results of common supplier readiness assessments.
Costs
Costs associated with modifications to become year 2000 ready, as well as the
total cost of the Year 2000 Program (but not including the costs of the Oracle
enterprise system), are estimated as follows:
(In thousands)
- -------------------------------------------------------------------------------
Costs incurred through November 27, 1999 $ 2,368
Estimated remaining costs 358
-------
Total costs $ 2,726
=======
The total costs associated with required modifications to become year 2000
ready, as well as the total costs of the Year 2000 Program, are not expected to
be material to the company's financial position or operating results. Such costs
are expensed as incurred in accordance with generally accepted accounting
principles.
16
Risks
The failure to correct a material year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the company's
results of operations, liquidity and financial condition. While the company is
not aware of any material 2000 related problems that have resulted from the new
year, due to the general uncertainty inherent in the year 2000 problem, the
company is unable to determine at this time whether the consequences of year
2000 failures will have a material impact on the company's results of
operations, liquidity or financial condition. The Year 2000 Program, which has
been completed, together with ongoing monitoring of suppliers during the Year
2000, is expected to significantly reduce the company's level of uncertainty
about the year 2000 problem and significantly reduce the risk of significant
interruptions of normal operations.
Tektronix believes that its most reasonably likely worst-case year 2000
scenarios would relate to problems with the systems of third parties rather than
with the company's internal systems or its products. The company believes the
risks are greatest with transportation supply chains and critical suppliers of
materials, because the company has less control over assessing and remediating
the year 2000 problems of third parties. A worst-case scenario involving a
transportation supply chain or a critical supplier of materials would be the
partial or complete shutdown of transportation facilities or the supplier, with
the resulting inability to provide critical materials to the company on a timely
basis. The company does not maintain the capability to replace most third-party
materials with internal production. Contingency planning includes alternatives
where efforts to work with critical suppliers to ensure year 2000 capability
have not been successful.
The company is not in a position to identify or to avoid all possible scenarios.
Contingency plans include mitigating the impact of various scenarios if they
were to occur. Due to the large number of variables involved, the company cannot
provide an estimate of the damage it might suffer if any of these scenarios were
to occur.
The above contains forward-looking statements including, without limitation,
statements relating to the company's plans, strategies, objectives,
expectations, intentions and resources and are made pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
Readers are cautioned that forward-looking statements contained in the "Year
2000 Update" should be read in conjunction with the company's disclosures under
"Forward-looking Statements."
FORWARD-LOOKING STATEMENTS
Statements and information included in this Form 10-Q that relate to the
company's goals, strategies and expectations as to future results and events are
based on the company's current expectations. They constitute forward-looking
statements subject to a number of risk factors that could cause actual results
to differ materially from those currently expected or desired.
As with many high technology companies, risk factors that could cause the
company's actual results or activities to differ materially from these
forward-looking statements include, but are not limited to: worldwide economic
and business conditions in the electronics industry; competitive factors,
including pricing pressures, technological developments and new products offered
by competitors; changes in product and sales mix, and the related effects on
gross margins; the company's ability to deliver a timely flow of competitive new
products, and market acceptance of these products; the availability of parts and
supplies from third-party suppliers on a timely basis and at reasonable prices;
inventory risks due to changes in market demand or the company's business
strategies; changes in effective tax rates; customer demand; currency
fluctuations; and the fact that a substantial portion of the company's sales are
generated from orders received during the quarter, making prediction of
quarterly revenues and earnings difficult.
Tektronix has other risk factors in its business, including, but not limited to:
the continued growth in wireless communication infrastructure and the
semiconductor industry; the effects of year 2000 compliance issues later in the
year; the timely introduction of new products scheduled during the current year,
which could be affected by engineering or other development program slippage,
the ability to ramp up production or to develop effective sales channels;
customers' acceptance of and demand for new products; the ability to reduce
expenditures; and other risk factors listed from time-to-time in the company's
Securities and Exchange Commission reports and press releases.
17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
Reference is made to Item 7A of the company's Annual Report on Form 10-K for the
year ended May 29, 1999.
18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibit:
(2) (i) Amended Asset Purchase Agreement between Tektronix, Inc.
and Xerox Corporation dated as of September 22, 1999 and
Amendment Nos. 1 and 2 thereto.
(27) (i) Financial Data Schedule.
--------------
(b) Reports on Form 8-K:
Tektronix filed a report on Form 8-K on October 12, 1999 with respect
to the sale of substantially all of the operating assets related to
its video content production business to Grass Valley Group, Inc.
19
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.
January 11, 2000 TEKTRONIX, INC.
By CARL W. NEUN
--------------------------------------
Carl W. Neun
Senior Vice President and
Chief Financial Officer
20
EXHIBIT INDEX
Exhibit No. Exhibit Description
----------- -------------------
(2) (i) Amended Asset Purchase Agreement between Tektronix,
Inc. and Xerox Corporation dated as of September 22,
1999 and Amendment Nos. 1 and 2 thereto.
(27) (i) Financial Data Schedule.