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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 August 28, 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.)
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 25, 1999 THERE WERE 47,248,734 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 I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - 2
August 28, 1999 and May 29, 1999
Condensed Consolidated Statements of Operations - 3
for the Quarter ended August 28, 1999
and the Quarter ended August 29, 1998
Condensed Consolidated Statements of Cash Flows - 4
for the Quarter ended August 28, 1999
and the Quarter ended August 29, 1998
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURE 18
1
TEKTRONIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
Aug. 28, May 29,
(In thousands) 1999 1999
- -----------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 43,063 $ 39,747
Accounts receivable - net 300,916 313,274
Inventories 292,403 273,370
Other current assets 96,142 93,267
---------- ----------
Total current assets 732,524 719,658
Property, plant and equipment - net 433,620 442,257
Deferred tax assets 55,795 56,405
Other long-term assets 143,282 141,045
---------- ----------
Total assets $1,365,221 $1,359,365
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 127,803 $ 115,687
Accounts payable 269,454 251,349
Accrued compensation 94,183 110,001
Deferred revenue 25,660 20,009
---------- ----------
Total current liabilities 517,100 497,046
Long-term debt 150,653 150,722
Other long-term liabilities 83,026 90,035
Shareholders' equity:
Common stock 150,512 143,263
Retained earnings 444,500 458,613
Accumulated other comprehensive income 19,430 19,686
---------- ----------
Total shareholders' equity 614,442 621,562
---------- ----------
Total liabilities and shareholders' equity $1,365,221 $1,359,365
========== ==========
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. 28, Aug. 29,
(In thousands except for per share amounts) 1999 1998
- ----------------------------------------------------------------------------------------------
Net sales $ 436,151 $ 418,979
Cost of sales 265,195 247,511
---------- ----------
Gross profit 170,956 171,468
Research and development expenses 49,433 51,172
Selling, general, and administrative
expenses 103,180 119,658
Equity in business ventures' loss 318 7,998
Charges related to the sale of the
Video and Networking division 26,100 -
---------- ----------
Operating loss (8,075) (7,360)
Interest expense (4,502) (3,216)
Other income - net 284 3,718
---------- ----------
Loss before taxes (12,293) (6,858)
Income tax benefit (3,811) (2,195)
---------- ----------
Net loss $ (8,482) $ (4,663)
========== ==========
Net loss per share - basic and diluted $ (0.18) $ (0.09)
Dividends per share $ 0.12 $ 0.12
Average shares outstanding - basic and diluted 46,991 49,475
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. 28, Aug. 29,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (8,482) $ (4,663)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization expense 19,596 18,277
Charges related to the sale of the Video
and Networking division 26,100 -
Gain on sale of investments - (4,107)
Equity in business ventures' loss 332 7,998
Changes in operating assets and liabilities:
Accounts receivable 12,358 73,804
Inventories (19,033) (10,763)
Other current assets (2,875) (15,181)
Accounts payable (7,996) (47,389)
Accrued compensation (15,818) (40,441)
Other-net (2,084) 2,493
---------- ----------
Net cash provided by (used in) operating activities 2,098 (19,972)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment (12,846) (24,188)
Proceeds from sale of fixed assets 1,209 44
Proceeds from sale of investments - 6,204
---------- ----------
Net cash used in investing activities (11,637) (17,940)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short-term debt 12,116 53,170
Issuance of long-term debt - 823
Repayment of long-term debt (69) (191)
Issuance of common stock 6,439 -
Repurchase of common stock - (78,815)
Dividends (5,631) (5,984)
---------- ----------
Net cash provided by (used in) financing activities 12,855 (30,997)
---------- ----------
Net increase (decrease) in cash and cash equivalents 3,316 (68,909)
Cash and cash equivalents at beginning of period 39,747 120,541
---------- ----------
Cash and cash equivalents at end of period $ 43,063 $ 51,632
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
Income taxes paid - net $ 679 $ 8,596
Interest paid 7,634 6,129
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.
SUBSEQUENT EVENT
On September 22, 1999, the company announced it had reached an agreement with
Xerox Corporation (Xerox) to sell the net assets of the Color Printing and
Imaging division for $950.0 million in cash. The transaction is expected to
close by the end of calendar 1999, subject to regulatory approval, and is
expected to result in a significant after-tax gain to Tektronix.
SALE OF VIDEO AND NETWORKING
On August 9, 1999, the company announced it had reached an agreement to sell
substantially all of the 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, a note receivable of $24.5 million, and a 10% equity interest in the
new company.
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. Management expects that the majority of the actions will be
substantially completed by the end of the third quarter of 2000 and expects to
require $36.1 million in cash to be used in connection with actions not yet
completed, primarily for severance and future lease payments on abandoned
facilities.
Major actions are summarized by each of the three business divisions.
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 reduction 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 reduction 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 reduction, 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
5
involuntary terminations have occurred and will occur throughout corporate
functions and in the company's foreign subsidiaries through the third quarter of
2000.
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.
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 (11,258) - - (5,272)
Non-cash disposals or write-offs - - (690) -
Adjustments to plan - - - -
--------- --------- --------- ---------
Balance August 28, 1999 $ 24,822 $ - $ - $ 11,256
========= ========= ========= =========
6
The charge of $54.7 million in accrued compensation reflects 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 1,100
employees have been terminated under the plan. Severance of $32.1 million has
been paid to approximately 1,025 of these employees, while the other 75
employees will be paid severance in the second quarter of 2000. As a result of
the agreement to sell 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 after the
transaction closes and all employees have been identified as employees of
Tektronix, employees of Xerox, voluntarily separated, or to be terminated. Any
excess reserve will be reversed to non-recurring charges.
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 $11.3 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 $30.0 million were sold under this agreement as of
August 28, 1999 and are therefore not reflected in the accounts receivable
balance in the accompanying Condensed Consolidated Balance Sheet.
INVENTORIES
Inventories consisted of:
Aug. 28, May 29,
(In thousands) 1999 1999
- --------------------------------------------------------------------------------
Materials and work in process $ 119,117 $ 118,624
Finished goods 173,286 154,746
---------- ----------
Inventories $ 292,403 $ 273,370
========== ==========
7
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of:
Aug. 28, May 29,
(In thousands) 1999 1999
- --------------------------------------------------------------------------------
Land $ 5,930 $ 5,764
Buildings 256,315 255,314
Machinery and equipment 587,552 591,210
---------- ----------
849,797 852,288
Accumulated depreciation and amortization (416,177) (410,031)
---------- ----------
Property, plant and equipment - net $ 433,620 $ 442,257
========== ==========
COMPREHENSIVE INCOME (LOSS)
Comprehensive loss and its components, net of tax, are as follows:
Quarter ended
Aug. 28, Aug. 29,
(In thousands) 1999 1998
- --------------------------------------------------------------------------------
Net loss $ (8,482) $ (4,663)
Other comprehensive income (loss):
Currency translation adjustment, net of taxes
of $33 and $2,327 (50) (3,491)
Unrealized loss on available-for-sale securities,
net of taxes of $146 and $1,980 (217) (4,106)
Reclassification adjustment for realized (gains)
losses, net of taxes of $(8) and $1,643 11 (2,464)
---------- ----------
Total comprehensive loss $ (8,738) $ (14,724)
========== ==========
BUSINESS SEGMENTS
The company is 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.
The information provided below is obtained from internal information that is
provided to the company's chief operating decision-maker for the purpose of
corporate management. Assets, liabilities and expenses attributable to corporate
activity are not allocated to the three operating segments. Inter-segment sales
are not material and are included in net sales to external customers below.
Figures shown for the first quarter of 1999 have been restated to include
results for the VideoTele.com product family within Measurement and exclude them
from Video and Networking.
Quarter ended
Aug. 28, Aug. 29,
(In thousands) 1999 1998
- --------------------------------------------------------------------------------
Net sales to external customers (by division):
Measurement $ 228,034 $ 211,158
Color Printing and Imaging 155,404 155,378
Video and Networking 52,713 52,443
---------- ----------
Net sales $ 436,151 $ 418,979
========== ==========
8
Net sales to external customers (by region):
United States $ 230,994 $ 222,797
Europe 122,343 117,138
Pacific 38,668 41,771
Japan 24,813 18,041
Americas 19,333 19,232
---------- ----------
Net sales $ 436,151 $ 418,979
========== ==========
Operating income (loss):
Measurement $ 22,658 $ 11,391
Color Printing and Imaging 3,985 6,744
Video and Networking (8,303) (17,576)
Charges related to the sale of the Video
and Networking division (26,100) -
Business ventures' loss and other (315) (7,919)
---------- ----------
Operating loss $ (8,075) $ (7,360)
========== ==========
INCOME TAXES
The provision for income tax benefit consisted of:
Quarter ended
Aug. 28, Aug. 29,
(In thousands) 1999 1998
- --------------------------------------------------------------------------------
United States $ (5,271) $ (7,779)
State (930) (1,373)
Foreign 2,390 6,957
---------- ----------
Income tax benefit $ (3,811) $ (2,195)
========== ==========
The effective rate used to calculate income tax benefit for the first quarter of
2000 was 31%. Subsequent to the end of the quarter, the company reached an
agreement with Xerox to sell the Color Printing and Imaging division. Should
this transaction receive regulatory approval and successfully close, Tektronix
would realize a significant gain. Management expects this gain would lead the
company to exit the year with an effective tax rate of approximately 35%. The
annual effective rate used to calculate 1999 income tax benefit was 32%.
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 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.
9
Item 2. Management's Discussion and Analysis of Financial
- ------- -------------------------------------------------
Condition and Results of Operations
-----------------------------------
GENERAL
During the periods reported, the company 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 it had reached an agreement to sell
substantially all of the 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, a note receivable of $24.5 million, and a 10%
equity interest in the new company.
On September 22, 1999, the company announced it had reached an agreement with
Xerox Corporation to sell the net assets of the Color Printing and Imaging
division for $950.0 million in cash. The transaction is expected to close by the
end of calendar 1999, subject to regulatory approval, and is expected to result
in a significant after-tax gain to Tektronix.
NON-RECURRING CHARGES
In the second quarter of fiscal year 1999, the company announced and began to
implement a series of actions intended to align worldwide operations with
current market conditions and to improve the profitability of its operations.
The company expects that, when fully implemented, these actions will reduce
ongoing annual costs by approximately $70.0 million. The 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.
Management expects that the majority of the actions will be substantially
completed by the end of the third quarter of 2000 and expects to require $36.1
million in cash to be used in connection with actions not yet completed,
primarily for severance and future lease payments on abandoned facilities.
Major actions are summarized by each of the three business divisions.
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 reduction 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 reduction 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 the third
and fourth quarters of 1999. 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 reduction,
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 and will occur throughout corporate functions and in the company's
foreign subsidiaries through the third quarter of 2000.
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
10
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.
RESULTS OF OPERATIONS
13 Weeks Ended August 28, 1999
vs.
13 Weeks Ended August 29, 1998
The company recognized a net loss of $8.5 million, or $0.18 per diluted share,
during the first quarter of 2000, compared to a net loss of $4.7 million, or
$0.09 per diluted share recognized during the same period of 1999. Excluding
pre-tax charges of $26.1 million related to the sale of substantially all of the
assets of the Video and Networking division, the company would have realized net
earnings of $9.5 million, or $0.20 per diluted share. Fiscal year 1999 results
included the company's 27% interest in the net loss reported by Merix
Corporation for the quarter, or $0.09 per share.
Sales for the first quarter of 2000 were $436.2 million, up 4% over first
quarter 1999 sales of $419.0 million. Sales were up in all geographies except
the Pacific, where sales declined $3.1 million or 7% from 1999. Both Measurement
and Video and Networking experienced declines in sales to this region. The
United States and Japan experienced the largest sales increases, up $8.2 million
or 4% and $6.8 million or 38%, respectively. The increase in sales to the United
States can be attributed mainly to Measurement and Video and Networking, while
the increase in sales to Japan can be attributed mainly to Measurement and Color
Printing and Imaging.
Orders were up over 1999 across all geographies. Measurement experienced an
increase in orders, while the other two business divisions experienced declines.
The net result was an overall $35.9 million or 9% increase over the first
quarter of 1999. The United States and Europe experienced the largest increases
in orders, up $10.8 million or 5% and $9.6 million or 9%, respectively. Both
Color Printing and Imaging and Video and Networking saw decreases in orders from
these regions, while Measurement experienced increases.
Measurement sales for the first quarter of 2000 were $228.1 million, up $16.9
million or 8% over sales of $211.2 million for the first quarter of 1999. The
largest increase was in sales to the United States, up $13.2 million or 12%. 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 the launch of new products, continued growth in wireless
communication infrastructure and resurgence in the semiconductor industry.
Measurement orders for the quarter were $243.7 million, up $54.4 million or 29%
over $189.3 million in 1999. The order increase resulted mainly from increases
in orders from the United States and Europe of $28.7 million or 29% and $12.9
million or 28%, respectively. Orders from the United States were impacted by the
same favorable conditions that impacted sales. European orders increased due to
positive market response to the division's newly-introduced oscilloscope.
Color Printing and Imaging sales were flat at $155.4 million for the first
quarter of 2000 and 1999. Sales to the United States declined $7.9 million or 9%
from 1999, while sales to all other regions improved. Although the division
experienced a 9% increase in unit sales, lower average selling prices caused
sales to the United States to decline. During the quarter, the division revised
its strategy for sales to distributors, which resulted in a reduction of
inventory in the distribution channel. Excluding this reduction, unit sales
would have grown approximately 30%. Sales to Europe and Japan increased over
1999, up $3.4
11
million or 7% and $2.0 million or 102%, respectively. European purchases of
consumables increased as the installed printer base consumed supplies included
with the initial sale. Sales to Japan increased due to the availability of
recently introduced Tektronix products that are more competitive with those
available from Japanese vendors.
Color Printing and Imaging orders for the quarter were $146.7 million, down $9.7
million or 6% from the first quarter of 1999. The decline in orders was
experienced across all regions except Asia, including the Pacific and Japan,
which contributed a $4.1 million combined increase. The largest order decline
was realized in the United States, down $12.0 million or 13% due mainly to a
large order placed in 1999 with no single comparable order placed in 2000, as
well as lower average selling prices.
Video and Networking sales were $52.7 million, nearly flat as compared to sales
of $52.4 million for 1999. Increased sales to the United States were nearly
offset by declines in sales to all other regions. The largest decline was
experienced in the Pacific, where sales were down $1.7 million or 26%. Excluding
sales recorded in the prior year associated with Network Displays, a product
line the company exited in December 1998, Video and Networking sales increased
$12.5 million or 31%. The increase was realized mainly in sales of editing
products distributed under agreement with Avid Technology, Inc. (Avid) and sales
of digital video storage products. Tektronix did not distribute Avid products in
the first quarter of 1999. Sales of digital video storage products were
particularly weak in the first quarter of 1999 as the industry delayed purchases
in anticipation of the move from analog to digital transmission.
Video and Networking orders were down $8.8 million or 18% compared to the first
quarter of 1999. The decline was realized across all geographies except the
Americas where orders were up slightly over the prior year. Excluding orders
recorded in 1999 associated with Network Displays, orders increased $2.2 million
or 6%. The order increase was led by orders for products distributed under
agreement with Avid, offset in part by a decline in orders of system solutions
and Grass Valley products. Systems solutions orders declined mainly as a result
of the cancellation and delay of orders due to the transition in ownership of
the business. The decline in Grass Valley product orders was mainly a result of
orders delayed in anticipation of the introduction of new products.
The company's gross profit decreased $0.5 million from the first quarter of 1999
to $171.0 million for the first quarter of 2000. As a percentage of net sales,
gross profit decreased from 40.9% to 39.2%. Measurement gross margin improved as
compared to 1999, while Color Printing and Imaging and Video and Networking
margins declined. Measurement gross margin improved due to higher margins on
oscilloscopes introduced during the third and fourth quarters of 1999. Color
Printing and Imaging gross margin decreased mainly due to lower average selling
prices and lower margins on consumables. The division experienced a temporary
shift in sales mix from one that is normally weighted with more profitable solid
ink consumables to one that was weighted with less profitable laser consumables.
Video and Networking gross margin declined due to an unfavorable sales mix. The
largest sales increase was in distributed products, which contribute lower
margin than manufactured products.
Operating expenses decreased by $25.9 million from the first quarter of 1999,
due mainly to a decrease in selling, general and administrative expenses, as
well as a decrease in losses realized on investments accounted for under the
equity method. Selling, general and administrative expenses were $103.2 million
for the quarter, a decrease of $16.5 million or 14% from the same period in 1999
as a result of restructuring and other cost-cutting actions taken by the
company. Losses on investments accounted for under the equity method were $7.7
million or 96% lower than those recognized in the first quarter of 1999 when
Merix Corporation recorded a $30.0 million restructuring charge. Research and
development expenses decreased $1.7 million or 3% to $49.4 million due mainly to
the discontinuation of three Color Printing and Imaging product lines and the
introduction of new printer products in the second quarter of 1999.
Income tax benefit increased from $2.2 million for the first quarter of 1999 to
$3.8 million for the first quarter of 2000 as a result of increased losses
before taxes. The effective rate used to calculate income tax benefit for first
quarter of 2000 was 31%. Subsequent to the end of the quarter, the company
reached an agreement with Xerox to sell the Color Printing and Imaging division.
Should this transaction receive regulatory
12
approval and successfully close, Tektronix would realize a significant gain.
Management expects this gain would lead the company to exit the year with an
effective tax rate of approximately 35%. The annual effective rate used to
calculate 1999 income tax benefit was 32%.
FINANCIAL CONDITION
At August 28, 1999, the company had $43.1 million of cash and cash equivalents
and bank credit facilities totaling $310.3 million, of which $175.1 million was
unused. Unused facilities include $119.3 million in lines of credit and $55.8
million under revolving credit agreements with United States and foreign banks.
Net cash proceeds from the sale of the Color Printing and Imaging division,
assuming the transaction receives regulatory approval, may be used to pay down
outstanding debt, returned to shareholders through the repurchase of common
stock or the payment of a special dividend, or used for other corporate
purposes.
The company realized a decrease in working capital of $7.2 million from the end
of 1999. Current assets increased $12.9 million during the quarter, with cash
and cash equivalents increasing $3.3 million, accounts receivable decreasing
$12.4 million, inventory increasing $19.0 million, and other current assets
increasing $2.9 million. Cash and cash equivalents increased $3.3 million while
short-term debt increased $12.1 million, for a total of approximately $15.4
million of cash consumed during the quarter. Cash requirements included capital
expenditures of $12.8 million, severance of $11.3 million, dividends of $5.6
million, and other operating, investing and financing requirements. Accounts
receivable decreased and inventory increased during the quarter due to an
overall sequential sales decline. Other current assets increased primarily from
an increase in net current tax benefits due to timing differences on taxes
related to restructuring actions and the tax benefit related to the net loss
realized during the quarter. Current liabilities increased $20.1 million during
the first quarter of 2000, with an increase in short-term debt of $12.1 million,
an increase in accounts payable of $18.1 million, and an increase in deferred
revenue of $5.7 million, offset in part by a decrease in accrued compensation of
$15.8 million. Accounts payable increased as a result of charges related to the
sale of substantially all of the assets of the Video and Networking division.
The increase in deferred revenue resulted as short-term deferred revenue was
transferred from long-term deferred revenue. Accrued compensation decreased
mainly due to payment of severance, as well as payment of year-end accruals of
incentives and commissions.
Other long-term assets increased $2.2 million due mainly to increases in
investments in affiliates and non-affiliates, as well as an increase in
capitalized expenses. Shareholders' equity decreased by $7.1 million from the
end of 1999 due to the net loss of $8.5 million, dividends of $5.6 million, a
net increase of $7.3 million in paid-in capital, including issuance and
forfeiture of common shares as well as a stock option exchange, a $0.2 million
decrease in unrealized holding gains and a $0.1 million decrease in the
accumulated currency translation adjustment.
13
YEAR 2000 UPDATE
Tektronix, Inc.'s Year 2000 Program (Program) is proceeding as planned. The
Program is addressing the issue of computer programs and embedded computer chips
being unable to distinguish between the year 1900 and the year 2000. To improve
access to business information through common, integrated computing systems
across the company, Tektronix replaced worldwide business systems with an
enterprise system that uses programs primarily from Oracle Corporation. This new
enterprise system makes substantially all of the company's business computer
systems year 2000 ready. Other information technology projects have not been
delayed due to the implementation of the Year 2000 Program.
Program
Tektronix' Program is 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 are: (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 are 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 substantially 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 website 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,
which are complete, 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 August 28, 1999 $ 2,346
Estimated remaining costs 371
---------
Total costs $ 2,717
=========
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
14
company's financial position or operating results. Such costs are expensed as
incurred in accordance with generally accepted accounting principles.
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. Due to the general
uncertainty inherent in the year 2000 problem, resulting in part from the
uncertainty of the year 2000 readiness of third-party suppliers and customers,
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 is expected
to significantly reduce the company's level of uncertainty about the year 2000
problem and, in particular, about the year 2000 compliance and readiness of its
material third-party suppliers. The company believes that, with the
implementation of new business systems and completion of the Program as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.
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 planning includes assessing scenarios and taking steps to mitigate
the impact of various scenarios if they were to occur. While substantially
complete, contingency planning will continue through 1999, as the company learns
more about the preparations and vulnerabilities of third parties regarding year
2000 issues. 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
15
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 ability of Tektronix to complete the sale of the Color Printing and Imaging
business and complete the strategic restructuring plan, including reducing its
expenditures; the potential disruption in the company's business and to its
employee base during the process of the restructuring and the sale of the Color
Printing and Imaging business; the effects of year 2000 compliance issues; 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; and other risk factors listed from
time-to-time in the company's Securities and Exchange Commission reports and
press releases.
16
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 23, 1999, the
shareholders voted on the election of five directors to the company's board of
directors. Pauline Lo Alker, A. Gary Ames, Paul C. Ely, Jr. and Frank C. Gill
were elected to serve three-year terms ending at the 2002 annual meeting of
shareholders, and Ralph V. Whitworth was elected to serve a one-year term ending
at the 2000 annual meeting of shareholders. The voting for each director was as
follows: 41,485,108 shares voted for Pauline Lo Alker, and 319,470 withheld;
41,480,332 voted for A. Gary Ames, and 324,246 withheld; 41,482,914 voted for
Paul C. Ely, Jr., and 321,664 withheld; 41,492,931 voted for Frank C. Gill, and
311,647 withheld; and 41,358,656 voted for Ralph V. Whitworth, and 445,922
withheld. The term of office of the company's other directors continued after
the 1999 annual meeting of shareholders, as follows: Gerry B. Cameron, Jerome J.
Meyer, and William D. Walker until the 2000 annual meeting of shareholders; and
David N. Campbell, A.M. Gleason, Merrill A. McPeak until the 2001 annual meeting
of shareholders.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits:
(10) +(i) 1998 Stock Option Plan, as amended.
+(ii) Non-Employee Directors Stock Compensation Plan, As
Amended Through Amendment No. 2.
+(iii) Non-Employee Directors' Deferred Compensation Plan,
1999 Restatement.
(27) (i) Financial Data Schedule.
--------------
+ Compensatory Plan or Arrangement.
(b) Reports on Form 8-K:
Tektronix filed a report on Form 8-K on July 1, 1999 with respect to
its announcement that its board of directors approved a plan to
separate into two independent companies, and that it intends to sell or
find a strategic alliance for its Video and Networking division,
excluding the VideoTele.com business unit.
17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
October 8, 1999 TEKTRONIX, INC.
By CARL W. NEUN
--------------------------------------
Carl W. Neun
Senior Vice President and
Chief Financial Officer
18
EXHIBIT INDEX
Exhibit
No. Exhibit Description
------- -------------------
(10) +(i) 1998 Stock Option Plan, as amended.
+(ii) Non-Employee Directors Stock Compensation Plan, As
Amended Through Amendment No. 2.
+(iii) Non-Employee Directors' Deferred Compensation Plan,
1999 Restatement.
(27) (i) Financial Data Schedule.
--------------
+ Compensatory Plan or Arrangement.