================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarter ended August 29, 1998, 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.)
26600 SW PARKWAY
WILSONVILLE, OREGON 97070-1000
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 627-7111
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ___X___ No ______
AT SEPTEMBER 26, 1998 THERE WERE 47,315,284 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.
--------
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - 2
August 29, 1998 and May 30, 1998
Condensed Consolidated Statements of Operations - 3
for the Quarter ended August 29, 1998
and the Quarter ended August 30, 1997
Condensed Consolidated Statements of Cash Flows - 4
for the Quarter ended August 29, 1998
and the Quarter ended August 30, 1997
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
Part II. Other Information 11
SIGNATURE 12
TEKTRONIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
Aug. 29, May 30,
(In thousands) 1998 1998
- -------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 51,632 $ 120,541
Accounts receivable - net 272,538 346,342
Inventories 237,533 214,347
Other current assets 82,613 67,432
----------- -----------
Total current assets 644,316 748,662
Property, plant and equipment - net 432,243 425,153
Deferred tax assets 29,253 25,102
Other long-term assets 151,812 177,893
----------- -----------
Total assets $ 1,257,624 $ 1,376,810
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 58,612 $ 5,442
Accounts payable 174,446 209,411
Accrued compensation 79,401 119,842
Deferred revenue 18,705 15,102
----------- -----------
Total current liabilities 331,164 349,797
Long-term debt 151,333 150,681
Other long-term liabilities 89,709 91,391
Shareholders' equity:
Common stock 144,712 223,527
Retained earnings 522,032 532,679
Accumulated other comprehensive income 18,674 28,735
----------- -----------
Total shareholders' equity 685,418 784,941
----------- -----------
Total liabilities and shareholders' equity $ 1,257,624 $ 1,376,810
=========== ===========
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
Aug. 29, Aug. 30,
(In thousands except for per share amounts) 1998 1997
- -------------------------------------------------------------------------------------------
Net sales $ 418,979 $ 481,274
Cost of sales 247,511 280,001
----------- -----------
Gross profit 171,468 201,273
Research and development expenses 51,172 46,215
Selling, general, and administrative
expenses 119,658 116,908
Equity in business ventures'
earnings (loss) (7,998) 167
----------- -----------
Operating income (loss) (7,360) 38,317
Other income - net 502 1,557
----------- -----------
Earnings (loss) before taxes (6,858) 39,874
Income tax expense (benefit) (2,195) 13,158
----------- -----------
Net earnings (loss) $ (4,663) $ 26,716
=========== ===========
Basic earnings (loss) per share $ (0.09) $ 0.53
Diluted earnings (loss) per share $ (0.09) $ 0.52
Dividends per share $ 0.12 $ 0.10
Average shares outstanding - basic 49,475 50,303
Average shares outstanding - diluted 49,475 51,442
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)
Quarter ended
Aug. 29, Aug. 30,
(In thousands) 1998 1997
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ (4,663) $ 26,716
Adjustments to reconcile net earnings to cash
provided by (used in) operating activities:
Depreciation expense 16,248 15,517
Gain on sale of investments (4,107) (6,667)
Changes in operating assets and liabilities:
Accounts receivable 73,177 27,732
Inventories (23,399) (13,630)
Other current assets 6,549 370
Accounts payable (34,129) (28,377)
Accrued compensation (40,399) (21,795)
Other-net (10,090) 10,428
----------- -----------
Net cash provided by (used in) operating activities (20,813) 10,294
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment (24,188) (27,829)
Proceeds from sale of fixed assets 44 4,164
Proceeds from sale of investments 6,204 7,316
----------- -----------
Net cash used in investing activities (17,940) (16,349)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short-term debt 53,226 76
Issuance of long-term debt 823 --
Repayment of long-term debt (191) (656)
Issuance of common stock -- 5,233
Repurchase of common stock (78,815) (1,722)
Dividends (5,984) (5,021)
----------- -----------
Net cash used in financing activities (30,941) (2,090)
Effect of exchange rate changes 785 (1,060)
----------- -----------
Decrease in cash and cash equivalents (68,909) (9,205)
Cash and cash equivalents at beginning of year 120,541 142,726
----------- -----------
Cash and cash equivalents at end of quarter $ 51,632 $ 133,521
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
Income taxes paid - net $ 8,596 $ 8,984
Interest paid 6,129 6,030
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 1999 and 1998 are 52 weeks.
All share and per share amounts have been restated to give effect to the
three-for-two stock split effective October 31, 1997.
COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income," as of the first quarter of fiscal year
1999. SFAS No. 130 establishes new rules for the reporting of comprehensive
income and its components, but has no impact on the Company's net earnings or
total shareholders' equity.
Comprehensive income (loss) and its components, net of tax, are as follows:
Quarter ended
Aug. 29, Aug. 30,
(In thousands) 1998 1997
- ------------------------------------------------------------------------------------------------
Net earnings (loss) $ (4,663) $ 26,716
Other comprehensive income (loss):
Currency translation adjustment, net of taxes
of $2,327 and $483 (3,491) (725)
Unrealized gain (loss) on available-for-sale securities,
net of taxes of $1,980 and $2,255 (4,106) (2,651)
Reclassification adjustment for realized gains included
in net income, net of taxes of $1,643 and $2,667 (2,464) (4,000)
----------- -----------
Total comprehensive income (loss) $ (14,724) $ 19,340
=========== ===========
INVENTORIES
Inventories consisted of:
Aug. 29, May 30,
(In thousands) 1998 1998
- ------------------------------------------------------------------------------------------------
Materials and work in process $ 88,320 $ 76,289
Finished goods 149,213 138,058
----------- -----------
Inventories $ 237,533 $ 214,347
=========== ===========
5
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of:
Quarter ended
Aug. 29, Aug. 30,
(In thousands) 1998 1997
- ------------------------------------------------------------------------------------------------
Land $ 5,990 $ 5,932
Buildings 228,515 217,036
Machinery and equipment 602,124 594,677
----------- -----------
836,629 817,645
Accumulated depreciation and amortization (404,386) (392,492)
----------- -----------
Property, plant and equipment - net $ 432,243 $ 425,153
=========== ===========
INCOME TAXES
The provision for income tax expense (benefit) consisted of:
Quarter ended
Aug. 29, Aug. 30,
(In thousands) 1998 1997
- ------------------------------------------------------------------------------------------------
United States $ (7,779) $ 9,211
State (1,373) 1,887
Foreign 6,957 2,060
----------- -----------
Income tax expense (benefit) $ (2,195) $ 13,158
=========== ===========
The provision for income taxes was calculated using an estimated annual
effective rate of 32% and 33%, for the quarters ended August 29, 1998, and
August 30, 1997, respectively.
FUTURE ACCOUNTING CHANGES
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for disclosure about operating segments in annual
financial statements and selected information in interim financial reports. The
new disclosures will first be presented in the Company's annual report for the
fiscal year ending May 1999. Information presented for earlier years will be
restated for comparative purposes. Adoption of this statement may result in
additional disclosures but will have no impact on the Company's consolidated
financial position or results of operations.
In June 1998, the FASB issued 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 fiscal year 2001, 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.
6
Item 2. Management's Discussion and Analysis of Financial
- ------- -------------------------------------------------
Condition and Results of Operations
-----------------------------------
RESULTS OF OPERATIONS
13 Weeks Ended August 29, 1998
vs.
13 Weeks Ended August 30, 1997
Sales for the first quarter of fiscal year 1999 were $419.0 million, down 13%
from first quarter 1998 sales of $481.3 million. Sales were down in all
geographies except Europe, which posted modest increases over 1998. Japan was
the hardest hit region across all three business units with a decrease in sales
of 54%, or $20.4 million from the first quarter of 1998. Orders were down
approximately 14% across all geographies with Asia, including Japan the hardest
hit. Sales and orders grew strongly in the first quarter of 1998, making the
decrease in 1999 more pronounced. The Company recognized a net loss of $0.09 per
share during the quarter. The Company's 27% interest in the loss reported by
Merix Corporation for the quarter amounted to $0.09 per share. Without this
impact, the Company would have realized break-even operations.
Measurement Business sales for the first quarter of 1999 were $206.5 million,
down 9% from sales of $227.7 million in the first quarter of 1998. Orders for
the quarter were $179.8 million, down 14% from $209.1 million in 1998. Most of
the decline was in general purpose equipment such as oscilloscopes and logic
analyzers. The decline reflected the effects of the Asian economic crisis,
including its effect on other regions of the world, and a decline in orders from
the semiconductor industry as capital spending has been reduced as a result of
weakening demand in that industry. Management believes that the decline is due
to market softness and that the Company is maintaining its market share.
Telecommunications test equipment sales increased compared to the first quarter
of 1998 because of the additional sales from CTE, the business acquired from
Siemens AG during the second quarter of 1998.
Color Printing and Imaging sales were flat at $155.4 million compared to $155.7
million in 1998. Orders were up approximately 5% during the quarter to $156.4
million. Sales and orders were strong in the U.S., but generally weak elsewhere
in the world, particularly in Asia, including Japan. The decline was a result of
cautionary capital spending, in part due to Asia, and a delay in orders
industry-wide in anticipation of new product introductions during the Company's
second quarter. Additionally, sales in last year's first quarter were very
strong with the introduction of the Phaser 560.
Video and Networking sales were $57.1 million, down 42% from sales of $97.9
million in 1998. Orders were also down 42% compared to the first quarter of
1998. The decline was realized across all geographies and nearly all product
lines. Sales to the broadcast industry were particularly weak as the industry
has delayed purchases in anticipation of the move from analog to digital
transmission. The broadcast industry is also experiencing market softness as
advertising revenues are flattening. This primarily affected sales of Grass
Valley products and the Profile line of video disk recorders. Profile products
are also experiencing increased price and product competition from new market
entrants. Sales in the network displays business decreased as compared to the
first quarter of 1998 due to the absence of large orders during the quarter and
a slower than expected transition to Windows-based terminals. The Company plans
to exit the network displays business. The Company believes that the current
line of Lightworks non-linear digital editors is near the end of its product
life cycle. Accordingly, the Company entered into a strategic
7
alliance with Avid Technology, Inc. to market Avid's non-linear editing
equipment, and the Company will discontinue development of the Lightworks line.
Gross profit decreased $29.8 million or 15% from the first quarter of 1998,
primarily as a result of declining sales. Gross margin decreased from 41.8% to
40.9% of net sales because of lower than anticipated volumes in all three
businesses. Research and development expenses increased to $51.2 million for the
quarter from $46.2 million in the first quarter of 1998 as the Company prepares
for significant new product announcements in the second quarter. Sales, general
and administrative expenses were $119.7 million for the quarter, an increase of
$2.8 million over the first quarter of 1998. This represents a significant
increase as a percent of sales from 24.3% in 1998 to 28.6% for the current
quarter, as a result of decreased sales in 1999. The Company realized a loss of
$8.0 million from its equity investments in business ventures during the
quarter, primarily related to its 27% interest in Merix Corporation. This
compares to break-even earnings in business ventures in the first quarter of
1998. Income taxes decreased significantly from expense of $13.2 million for the
first quarter of 1998 to a benefit of $2.2 million for the current quarter as a
result of decreased earnings before taxes. The estimated annual effective rates
used to calculate income taxes were 32% in 1999 and 33% in 1998.
FINANCIAL CONDITION
The Company's financial condition continues to be strong. At August 29, 1998,
the Company had $51.6 million of cash and cash equivalents, and bank credit
facilities totaling $357.5 million, of which $225.8 million was unused. Unused
facilities include $75.8 million in lines of credit and $150.0 million under a
revolving credit agreement from United States and foreign banks.
The Company realized a decrease in working capital of $85.7 million from the end
of 1998. Current assets decreased $104.3 million during the quarter with
accounts receivable decreasing $73.8 million, cash decreased $68.9 million,
inventory increased $23.2 million, and other current assets increased $15.2
million. Cash in the amount of $78.6 million was used to repurchase
approximately 3.2 million common shares during the period. Capital expenditures
used $24.2 million of cash, and $20.8 million of cash was used in operations
during the quarter. Accounts receivable decreased and inventory increased as a
result of lower sales during the quarter. Other current assets increased
primarily from an increase in net current tax benefits due to payments related
to taxes on 1998 earnings and the benefit related to the current period net
loss. Current liabilities decreased $18.6 million during the quarter. Accounts
payable decreased $35.0 million and accrued compensation decreased $40.4 million
from payment of year-end accruals for incentives and commissions. Short-term
debt increased $53.2 million during the quarter as the Company utilized credit
facilities to finance a portion of the cash consumed.
Long-term assets decreased from sales of investments, declining market values of
the remaining investments held for sale, and the recognition of losses on
investments accounted for under the equity method. The remaining unrealized
holding gains in the Company's investment portfolio are $1.4 million, net of
deferred taxes.
Shareholders' equity decreased by $99.5 million because of the net loss of $4.7
million, dividends paid of $6.0 million, the repurchase of 3.2 million common
shares for $78.6 million, and a decrease in accumulated other comprehensive
income of $10.1 million from decreased unrealized holding gains and decreased
currency translation adjustment.
8
OUTLOOK
The Company expects the current softness in orders and sales to continue for
several quarters. During the second quarter, the Company announced a business
restructuring plan aimed at significantly reducing expenses. The plan will
include workforce reductions of approximately 10% of the worldwide workforce and
the exiting of certain product lines. The Company expects to take a yet to be
determined charge against earnings during the second quarter to recognize the
cost of these actions.
The Company also announced authority to repurchase an additional 5 million
shares of common stock. This represents the total authorized at this time.
YEAR 2000
Many information technology hardware and software systems, as well as other
equipment using microprocessors, can accept only two digit entries in the date
code field. To operate using dates after December 31, 1999, the date code fields
will need to accept four digit entries to distinguish twenty-first century dates
from twentieth century dates. This is commonly referred to as the "Year 2000"
issue.
The Company has commenced a program to identify, remediate, test and develop
contingency plans for the Year 2000 issue (the Y2k Program). Significant issues
are expected to be identified by January of 1999. All phases are expected to be
completed prior to July of 1999. The Y2k Program includes a review of (1)
information and other technology systems used in the Company's internal
business; (2) the Company's hardware and software products delivered to
customers; and (3) third party vendors, manufacturers and suppliers. An
assessment has been made of the key internal systems, and the Company believes
that systems that are not already Year 2000 ready will be modified, upgraded or
replaced. The Company is currently assessing its products, and is working with
third party vendors, manufacturers and suppliers to identify and resolve Year
2000 issues. The Company does not believe that the historical or anticipated
costs of remediation have had, or will have, a material effect on the Company's
financial condition or results of operations. However, because of the existence
of numerous systems and related components within the Company and the
interdependency of these systems, it is possible that certain systems at the
Company, or systems at entities that provide services or goods for the Company,
may fail to operate in the Year 2000. The Company is continuing to evaluate the
risks to the Company of failure to be Year 2000 compliant and to develop a
contingency plan. Although it is not currently anticipated, the inability to
complete the Company's Y2k Program on a timely basis or the failure of a system
at the Company or at an entity that provides services or goods to the Company
may have a material impact on future operating results or financial condition.
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, including the continuing effect of the Asian economic
crisis on demand for the Company's products; competitive factors, including
pricing pressures, technological developments and new products offered by
competitors;
9
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; 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; and other risk factors listed from time to time in the
Company's Securities and Exchange Commission reports and in press releases.
Additional risk factors specific to the Company's current plans and
expectations that could cause the Company's actual results or activities to
differ materially from those stated include: the significant operational issues
the Company faces in executing its strategy in Video and Networking; the
Company's ability to successfully implement its strategic direction and
restructuring actions, including reducing its expenditures; the effect of Year
2000 compliance issues; the timely introduction of new products scheduled during
the Company's fiscal year, which could be affected by engineering or other
development program slippages, the ability to ramp up production or to develop
effective sales channels; the customers' acceptance of, and demand for, those
products; and changes in the regulatory environment affecting the transition to
high-definition television within the time frame anticipated by the Company.
Forward-looking statements in this report speak only as of the date made.
The Company undertakes no obligation to publicly release the result of any
revisions to these forward looking statements which may be made to reflect
subsequent events or circumstances or to reflect the occurrence of unanticipated
events.
10
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 24, 1998,the
shareholders voted on the election of three directors to the Company's board of
directors. David N. Campbell, A.M. Gleason, and Merrill A. McPeak were elected
to serve a three-year term ending at the Year 2001 annual meeting of
shareholders. The voting for each director was as follows: 40,317,409 shares
voted for David N. Campbell, and 1,194,079 withheld; 40,786,924 voted for A.M.
Gleason, and 724,564 withheld; and 40,776,863 voted for Merrill A. McPeak, and
734,625 withheld. The term of office of the Company's other directors continued
after the 1997 annual meeting of shareholders, as follows: Pauline Lo Alker, A.
Gary Ames, and Paul C. Ely, Jr. until the 1999 annual meeting of shareholders;
and Gerry B. Cameron, Jerome J. Meyer, and William D. Walker until the 2000
annual meeting of shareholders.
At the meeting, the shareholders also voted to approve the Company's 1998 Stock
Option Plan (the "Stock Option Plan"). The number of shares voted for approval
of the Stock Option Plan was 28,964,499, the number voted against approval was
7,808,038, the number abstaining was 129,983 and there were 4,608,968 broker
non-votes. A copy of the Stock Option Plan is filed herewith as an exhibit.
At the meeting, the shareholders also voted to approve amendments to the
Company's Articles of Incorporation to increase the number of authorized shares
of common stock of the Company from 80,000,000 shares to 200,000,000 shares (the
"Amendments"). The number of shares voted for approval of the Amendments was
23,020,855, the number voted against approval was 18,373,131, the number
abstaining was 117,502 and there were no broker non- votes. A copy of the
Restated Articles of Incorporation as amended is filed herewith as an exhibit.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
(3) (i) Restated Articles of Incorporation, as amended
(10)(i) 1998 Stock Option Plan
(27)(i) Financial Data Schedule.
(b) No reports on Form 8-K have been filed during the quarter for which
this report is filed.
11
SIGNATURES
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 9, 1998 TEKTRONIX, INC.
By CARL W. NEUN
--------------------------------------
Carl W. Neun
Senior Vice President and
Chief Financial Officer
12