MANAGEMENT REVIEW
RESULTS OF OPERATIONS
OVERVIEW Tektronix had record orders, sales and earnings in its fiscal year
ended May 31, 1997. Net earnings in 1997 of $114.8 million, or $3.48 per share,
increased 15% over fiscal 1996 earnings of $99.6 million, or $3.00 per share.
Net earnings in 1996 were 22% higher than 1995 earnings of $81.6 million, or
$2.50 per share.
NET SALES AND PRODUCT ORDERS Net sales in 1997 were $1.940 billion, up 10%
from $1.769 billion in 1996. The sales growth resulted from a strong flow of
new products from all divisions. Products introduced within the last two years
accounted for approximately 73% of 1997 product sales, increasing from 67% in
1996 and 62% in 1995. Sales to customers in the United States of $1.027 billion
were 15% above the level for the prior year, and represented 53% of total sales.
The improved domestic sales level is primarily the result of the favorable
response to new products. International sales rose 4% from $877.9 million to
$912.8 million, as strong sales growth in the Pacific region, excluding Japan,
and in the Americas was tempered by flat sales in Europe and Japan and the
stronger U.S. dollar. Net sales in 1996 were 18% higher than in 1995. U.S.
sales of $890.9 million in 1996 were 17% above the prior year. International
sales rose 21%, from $724.7 million in 1995 to $877.9 million in 1996, with
improvement across all geographic regions, but especially in the Pacific.
Product orders for 1997 were $1.829 billion, compared to $1.658 billion in 1996
and $1.413 billion in 1995.
The following table summarizes the Company's net sales for the last three
years by its three business divisions:
IN THOUSANDS 1997 1996 1995
- -------------------------------------------------------------------------
Measurement Business $852,827 $812,250 $731,061
Color Printing and Imaging 638,456 561,642 454,961
Video and Networking 448,799 394,966 303,213
Measurement Business sales in 1997 accounted for 44% of total sales and grew 5%
from the prior year. The growth was due to the favorable response to its new
products, particularly handheld electronic tools and telecommunications test
products, and the introduction of the TDS 200 oscilloscopes and the TLA 700
logic analyzers in the second half of the year. Sales growth was constrained
somewhat by component shortages during part of the year and by a decline in
orders from Sony/Tektronix, the Company's joint venture in Japan. The
Sony/Tektronix order decline was primarily due to a change in its inventory
stocking strategy during the year. Measurement Business sales in 1996 were 11%
higher than in 1995 with well-received new product introductions in digital
oscilloscopes, signal processors, handheld electronic tools and
telecommunications test products. Product orders in 1997 were $795.2 million,
compared to $754.0 million in 1996 and $667.1 million in 1995.
Color Printing and Imaging sales increased 14% from 1996 with the
successful launch of the Phaser 350 color solid ink printer for the office
market in the second quarter and the Phaser 600 color wide-format printer in the
third quarter, which strengthened sales into the specialty printer markets.
Also contributing to the sales increase was continued strong demand for the
Phaser 550 color laser printer in the office market. Color Printing and Imaging
sales made up 33% of total sales. Sales and orders were strong in the U.S. and
in the Pacific, excluding Japan. Color Printing and Imaging sales in 1996
increased 23% over 1995, due primarily to market acceptance of new products.
Product orders rose 14% to $607.5 million from $531.1 million in 1996. Product
orders were $433.9 million in 1995.
Video and Networking sales increased 14% from 1996 due to strength in
Profile video disk recorders and business network computers. Sales and orders
were particularly strong in the fourth quarter due to the introduction of the
Profile PDR 200 Profile professional file server and the Lightworks V.I.P
nonlinear digital editing system. Video and Networking sales rose 30% in 1996
from 1995, due primarily to the introduction of new products. Product orders,
at $426.4 million in 1997, increased 15% from the prior year's $372.4 million.
Product orders were $311.6 million in 1995.
OPERATING COSTS AND EXPENSES Gross margins increased to 42.9% in 1997 from
41.9% in 1996 due to an improved mix of higher margin supplies sales in Color
Printing and Imaging and lower manufacturing costs in Video and Networking.
Gross margins decreased to 41.9% in 1996 from 45.3% in 1995, caused primarily by
increased sales through alternative distribution channels, the impacts of
increased systems integration sales from Video and Networking and changes in
product mix.
Research and development (R&D) expenses were 9.7% of sales compared with
9.3% in 1996 and 11.1% in 1995. The increase in R&D expenses in 1997 was
planned to fund the high level of new product development. The reduction in the
rate of R&D spending in 1996 occurred as the Company concentrated on more
focused projects and experienced delays in hiring certain technical positions.
Page 16
Selling, general and administrative expenses were 24.8% of sales in 1997 and
1996, and 26.7% in 1995.
Equity in business ventures' earnings decreased to $1.6 million in 1997
from $5.1 million in 1996 and $4.3 million in 1995, primarily due to lower 1997
profitability at Merix Corporation, which had accounted for a substantial
portion of the business ventures' earnings in the previous two years.
Operating margins increased year over year, rising from 7.7% in 1995 to
8.1% in 1996 and 8.5% in 1997. The improvement in 1997 was due primarily to
higher gross margins, partly offset by higher R&D spending and lower equity in
business ventures' earnings. The improvement in 1996 was due to lower operating
expenses as a percentage of sales, partly offset by lower gross margins. Video
and Networking improved operating results in 1997, but continued to operate at a
loss for the year. The Company expects Video and Networking to be profitable in
1998.
Interest expense declined in 1997 compared to 1996 due to lower borrowings,
which was the result of increased cash flows from operations. The increase in
interest expense from 1995 to 1996 was due to higher borrowings to fund working
capital needs. Other income was $15.9 million in 1997 compared with income of
$12.9 million in 1996 and $4.7 million in 1995. The improvement primarily
reflected higher gains on sales of stock in other companies. The Company
continues to hold equity positions that it intends to liquidate over time.
The Company recorded taxes on 1997 results at the effective rate of 32%,
compared with 30% in 1996 and 26% in 1995, with the increase in the rate due to
increased domestic earnings and the consumption of certain foreign tax credits.
Net earnings of $114.8 million for 1997 were 15% higher than for the prior
year due to the increase in sales and the improvement in operating margins,
partly offset by the higher effective tax rate. The growth in sales and
improved operating margins in 1996, partly offset by the higher effective tax
rate, resulted in a 22% increase in net earnings over 1995.
The Company expects fiscal 1998 sales and earnings growth to be in the
range of 10 to 15 percent.
FINANCIAL CONDITION
OVERVIEW Tektronix continues to focus on improving the efficient management
of the capital invested in its business. To monitor that progress, the Company
is using the economic value added (EVA) measure. EVA is determined by the
Company by deducting taxes and a cost of capital charge from operating income,
which management believes provides an objective means of determining if the
Company's earnings are able to cover the cost of financing its invested capital.
Invested capital is the average net assets of the Company excluding cash and
debt. In 1997, the Company generated EVA of $21.8 million compared to $11.9
million in 1996 and $11.7 million in 1995. The improvement in 1997 is a result
of both the record earnings for the year and the significant improvement in
invested capital, especially in the reduction of accounts receivable and
inventories.
LIQUIDITY The Company's financial condition is strong. Cash flows from
operating activities and borrowing capacity from existing lines of credit are
expected to be sufficient to meet current and anticipated future needs. In
1997, cash provided by operating activities totaled $262.3 million, which was
partially used in investing activities of $69.1 million and financing activities
of $86.3 million. At May 31, 1997, the Company maintained bank credit
facilities totaling $300.3 million, of which $293.4 million was unused. Unused
facilities include $143.4 million in lines of credit and $150.0 million under a
revolving credit agreement from United States and foreign banks. Additional
details, including maturity dates of agreements and certain financial covenants,
are included under "Short-term and Long-term Debt" in the Notes to Consolidated
Financial Statements.
BALANCE SHEET Current assets decreased by $2.1 million as lower accounts
receivable, inventories and other current assets were offset by a $106.1 million
increase in cash. Accounts receivable decreased by $69.5 million, due primarily
to improved sales terms and collections and the $50.0 million securitization of
receivables, partially offset by an increase in year over year sales in the
fourth quarter of $53.2 million. Inventories decreased by $26.6 million as the
Company focused additional attention on working capital efficiencies. Other
current assets decreased because of a reduction in prepaid income taxes.
Net property, plant and equipment increased by $35.6 million due to capital
expenditures of $112.0 million in 1997, primarily related to facilities
improvements and implementation of information systems. The Company expects to
increase capital expenditures in 1998 to approximately $150 million, due
primarily to increased investment in the growth of Color Printing and Imaging.
Deferred tax assets declined by $15.7 million due to the reversal of
temporary differences between book and tax income. Other long-term assets
declined by $24.6 million due to the disposition of some of the Company's equity
investments and a decline in the translated U.S. dollar book value of the
Company's business venture in Japan caused by the stronger dollar.
Current liabilities decreased by $61.2 million, primarily due to reductions
in short-term debt and accrued compensation. Short-term debt was reduced by
$38.5 million due to strong operating cash flows. Accrued compensation
decreased by $29.1 million due to the payment of pension liabilities of $39.1
million, partly offset by higher payroll,
Page 17
incentive and commission accruals. Long-term debt decreased due to the
redemption of $50.0 million of commercial paper that had been classified as
long-term debt in 1996.
Shareholders' equity increased by $96.0 million, or 14%, due to earnings
net of dividends. Additional equity resulting from the Company's issuance of
common stock for the exercise of stock options was offset by declines in
currency adjustment and unrealized holding gains.
DERIVATIVES AND FOREIGN EXCHANGE
The Company has exposure to interest rate risk, primarily from its use of
short-term and long-term borrowings to finance operations, and to investment
risk, primarily from its equity investment portfolio. The Company has not
entered into any significant derivatives to hedge against these interest rate or
investment risks.
The Company is also exposed to exchange rate risk on transactions and
commitments denominated in foreign currencies and uses foreign exchange
contracts to offset this risk. Changes in foreign exchange rates are not
expected to have a significant effect on the Company's financial position,
results of operations or cash flows. The Company's policy is to only enter into
derivative transactions when it has an identifiable exposure to risk, and to
only enter into such transactions with creditworthy financial institutions.
FUTURE ACCOUNTING CHANGES
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." SFAS No. 128 requires all companies whose capital structures include
convertible securities and options to make a dual presentation of basic and
diluted earnings per share.
The new standard becomes effective beginning with the Company's third quarter
ending on February 28, 1998. The pro forma diluted earnings per share under
SFAS No. 128 is $3.43 in 1997 and $2.93 in 1996, based upon average shares
outstanding of 33.5 million and 34.0 million, respectively.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes requirements for disclosure of comprehensive
income and becomes effective for the Company's fiscal year ending May 1999.
Reclassification of earlier financial statements for comparative purposes is
required.
In June 1997, the FASB 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. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. This statement supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise." The new standard becomes effective for the
Company's fiscal year ending May 1999, and requires that comparative information
from earlier years be restated to conform to the requirements of this standard.
FORWARD LOOKING STATEMENTS
Statements and information included in the Chairman's letter and Management
Review 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. Risk factors include, but are not limited to: worldwide economic and
business conditions in the electronics industry; customer order patterns, demand
and acceptance of new or recently introduced products; competitive factors,
including pricing pressures, technological developments and new products;
changes in product and sales mix; timing of new products; availability of
reasonably priced parts from suppliers; inventory valuation risks; the timing
and importance of orders received during a quarter, making prediction of
quarterly revenues and earnings difficult; currency fluctuations; the
significant operational issues the Company faces in executing its strategy in
Video and Networking; changes in the regulatory environment affecting the
transition to high-definition television within the time frame anticipated by
the Company; changes in effective tax rates; and other risk factors listed from
time to time in the Company's Securities and Exchange Commission reports,
including, but not limited to, the quarterly reports on Form 10-Q, the annual
report on Form 10-K and press releases.
Page 18
MANAGEMENT'S LETTER
The consolidated financial statements of Tektronix, Inc. and subsidiaries have
been prepared by management and have been audited by Tektronix' independent
auditors, Deloitte & Touche LLP, as stated in their independent auditors'
report. Management is responsible for the consolidated financial statements,
which have been prepared in conformity with generally accepted accounting
principles and include amounts based on management's judgment.
Management is also responsible for maintaining internal control, including
systems designed to provide reasonable assurance that assets are safeguarded and
that transactions are executed and recorded in accordance with established
policies and procedures.
Tektronix' controls and systems were developed by Tektronix management and
have the full support and endorsement of the Board of Directors. Compliance is
mandatory.
The Board of Directors is responsible for the Company's financial and
accounting policies, practices and reports. Its Audit Committee, composed
entirely of outside directors, meets regularly with the independent auditors,
representatives of management, and the internal auditors to review accounting,
reporting, auditing and internal control matters. Both the independent auditors
and the internal auditors have free access to the Audit Committee, with and
without management representatives in attendance.
MERILL A. MCPEAK
Chairman, Audit Committee
CARL W. NEUN
Senior Vice President and
Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
TO THE DIRECTORS AND SHAREHOLDERS OF TEKTRONIX, INC.:
We have audited the accompanying consolidated balance sheets of Tektronix, Inc.
and subsidiaries as of May 31, 1997 and May 25, 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years ended May 31, 1997, May 25, 1996, and May 27, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Tektronix, Inc. and
subsidiaries at May 31, 1997 and May 25, 1996, and the results of their
operations and their cash flows for the years ended May 31, 1997, May 25, 1996,
and May 27, 1995, in conformity with generally accepted accounting principles.
Portland, Oregon
June 23, 1997
Page 19
CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
FOR THE YEARS ENDED MAY 31,1997 MAY 25,1996 MAY 27,1995
- --------------------------------------------------------------------------------
Net sales $1,940,082 $1,768,858 $1,497,962
Cost of sales 1,107,355 1,028,331 819,871
---------------------------------------
Gross profit 832,727 740,527 678,091
Research and development expenses 188,192 164,292 166,171
Selling, general and administrative
expenses 481,083 437,949 400,567
Equity in business ventures' earnings 1,556 5,081 4,268
---------------------------------------
Operating income 165,008 143,367 115,621
Interest expense 12,111 13,985 10,203
Other income - net 15,905 12,884 4,744
---------------------------------------
Earnings before taxes 168,802 142,266 110,162
Income taxes 54,017 42,680 28,578
---------------------------------------
Net earnings $ 114,785 $ 99,586 $ 81,584
---------------------------------------
---------------------------------------
Earnings per share $ 3.48 $ 3.00 $ 2.50
Dividends per share $ 0.60 $ 0.60 $ 0.60
Average shares outstanding 33,009 33,197 32,578
The accompanying notes are an integral part of these consolidated financial
statements.
Page 20
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS
MAY 31,1997 MAY 25,1996
- ----------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 142,726 $ 36,644
Accounts receivable- net 305,832 375,309
Inventories 238,040 264,624
Other current assets 64,913 77,003
-------------------------
Total current assets 751,511 753,580
Property, plant and equipment - net 343,130 307,563
Property held for sale 13,939 18,903
Deferred tax assets 12,540 28,247
Other long-term assets 195,621 220,203
-------------------------
Total assets $1,316,741 $1,328,496
-------------------------
-------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 6,155 $ 44,645
Accounts payable 181,366 178,353
Accrued compensation 90,946 120,044
Deferred revenue 25,622 22,295
-------------------------
Total current liabilities 304,089 365,337
Long-term debt 151,579 201,955
Other long-term liabilities 89,790 85,882
Commitments and contingencies - -
Shareholders' equity:
Preferred stock, no par value
(authorized 1,000 shares; none issued) - -
Common stock, no par value
(authorized 80,000 shares; issued
and outstanding 33,402 in 1997,
and 32,687 in 1996) 226,591 204,370
Retained earnings 473,582 378,606
Currency adjustment 34,447 52,069
Unrealized holding gains - net 36,663 40,277
-------------------------
Total shareholders' equity 771,283 675,322
-------------------------
Total liabilities and shareholders'
equity $1,316,741 $1,328,496
-------------------------
-------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Page 21
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
FOR THE YEARS ENDED MAY 31,1997 MAY 25,1996 MAY 27,1995
- -----------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $114,785 $99,586 $81,584
Adjustments to reconcile net earnings
to cash provided (used) by operating
activities:
Depreciation expense 59,591 47,137 40,857
Deferred taxes 14,425 26,041 (966)
Gain on sale of investments (27,678) (20,197) (14,314)
Accounts receivable 66,403 (66,647) (29,991)
Inventories 26,754 (19,681) (64,923)
Other current assets 22,213 864 (8,338)
Accounts payable (179) 1,037 (5,059)
Accrued compensation (28,580) 14,026 24,602
Other liabilities 5,672 (33,622) (22,866)
Other long-term assets 316 (1,424) (48,102)
Other - net 8,607 2,085 (10,516)
------------------------------------
Net cash provided (used) by
operating activities 262,329 49,205 (58,032)
------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and
equipment (112,005) (106,708) (103,818)
Proceeds from sale of fixed assets 9,073 19,776 43,482
Proceeds from sale of investments 33,848 23,263 23,920
------------------------------------
Net cash used by investing
activities (69,084) (63,669) (36,416)
------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short-term debt (38,451) 7,339 67,092
Issuance of long-term debt 358 50,000 1,396
Repayment of long-term debt (50,609) (3,020) (602)
Issuance of common stock 26,018 18,104 40,480
Repurchase of common stock (3,797) (29,985) (8,382)
Dividends (19,809) (19,944) (18,435)
------------------------------------
Net cash provided (used) by
financing activities (86,290) 22,494 81,549
------------------------------------
Effect of exchange rate changes (873) (3,147) 1,207
------------------------------------
Increase (decrease) in cash and cash
equivalents 106,082 4,883 (11,692)
Cash and cash equivalents at beginning
of year 36,644 31,761 43,453
------------------------------------
Cash and cash equivalents at end of year $142,726 $36,644 $31,761
------------------------------------
------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
Income taxes paid $13,663 $18,669 $10,018
Interest paid 14,633 16,594 13,775
NONCASH INVESTING ACTIVITIES
Fair value adjustment to
securities available-for-sale $(8,373) $47,042 $20,086
Income tax effect related to fair
value adjustment 4,759 (18,817) (8,034)
The accompanying notes are an integral part of these consolidated financial
statements.
Page 22
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
UNREALIZED
C O M M O N S T O C K RETAINED CURRENCY HOLDING
SHARES AMOUNT EARNINGS ADJUSTMENT GAINS - NET TOTAL
- --------------------------------------------------------------------------------------------------------------
BALANCE MAY 28, 1994 32,197 $184,153 $235,815 $52,811 $ - $472,779
Shares issued to
employees 1,179 40,480 40,480
Shares repurchased (293) (8,382) (8,382)
Net earnings 81,584 81,584
Dividends-
$0.60 per share (18,435) (18,435)
Currency adjustment 24,137 24,137
Unrealized holding
gains - net 12,052 12,052
---------------------------------------------------------------------------------
BALANCE MAY 27, 1995 33,083 216,251 298,964 76,948 12,052 604,215
Shares issued to
employees 444 18,104 18,104
Shares repurchased (840) (29,985) (29,985)
Net earnings 99,586 99,586
Dividends -
$0.60 per share (19,944) (19,944)
Currency adjustment (24,879) (24,879)
Unrealized holding
gains - net 28,225 28,225
---------------------------------------------------------------------------------
BALANCE MAY 25, 1996 32,687 204,370 378,606 52,069 40,277 675,322
Shares issued to
employees 782 26,018 26,018
Shares repurchased (67) (3,797) (3,797)
Net earnings 114,785 114,785
Dividends-
$0.60 per share (19,809) (19,809)
Currency adjustment (17,622) (17,622)
Unrealized holding
gains - net (3,614) (3,614)
---------------------------------------------------------------------------------
BALANCE MAY 31, 1997 33,402 $226,591 $473,582 $34,447 $36,663 $771,283
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Page 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTING POLICIES
THE COMPANY Tektronix, Inc. ("Tektronix" or "the Company") is a global
high-technology company based on a portfolio of measurement, color printing, and
video and networking businesses. Headquartered in Wilsonville, Oregon, Tektronix
employs 8,400 people and maintains operations in 23 countries outside the United
States. Tektronix was founded in 1946.
FINANCIAL STATEMENT PRESENTATION The consolidated financial statements
include the accounts of Tektronix and its majority-owned subsidiaries.
Investments in joint ventures and minority-owned companies where the Company
exercises significant influence are accounted for on the equity basis.
Significant intercompany transactions and balances have been eliminated.
Certain items have been reclassified to conform with the current year's
presentation with no effect on previously reported earnings. Per share amounts
are based on the weighted average number of shares outstanding during the year.
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimated.
FISCAL YEAR The Company's fiscal year is the 52 or 53 weeks ending the last
Saturday in May. Fiscal year 1997 was 53 weeks; fiscal years 1996 and 1995 were
52 weeks.
FOREIGN CURRENCY TRANSLATION For most non-U.S. subsidiaries, the local
currency is the functional currency and, therefore, assets and liabilities are
translated into U.S. dollars at current exchange rates, and net earnings are
translated at average exchange rates for the year. Gains and losses resulting
from the translation of net assets are reported as a separate component of
shareholders' equity. Gains and losses from foreign currency transactions are
included in net earnings.
DERIVATIVES Gains and losses on foreign exchange contracts used to hedge
existing assets and liabilities are recognized in income in the period in which
the related hedged transaction occurs. Gains and losses related to hedges of
firm commitments are deferred and included in the basis of the hedged
transaction when it is completed.
CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash deposits in
banks and highly liquid investments with original maturities of three months or
less at the time of purchase.
INVENTORIES Inventories are stated at the lower of cost or market. Cost is
determined on the first-in, first-out (FIFO) basis.
IN THOUSANDS 1997 1996
- ---------------------------------------------------------------------------
Materials and work in process $134,743 $141,798
Finished goods 103,297 122,826
------------------------
Inventories $238,040 $264,624
------------------------
------------------------
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at
cost. Depreciation is based on the estimated useful lives of the assets,
ranging from ten to forty years for buildings and three to seven years for
machinery and equipment, and is generally provided using the straight-line
method.
IN THOUSANDS 1997 1996
- ----------------------------------------------------------------------------
Land $ 6,096 $ 6,721
Buildings 199,396 194,644
Machinery and equipment 493,791 475,178
------------------------
699,283 676,543
Accumulated depreciation and amortization (356,153) (368,980)
------------------------
Property, plant and equipment - net $343,130 $307,563
------------------------
------------------------
Property held for sale is stated at the lower of cost or estimated fair value
less costs to sell and includes certain properties no longer used in the
Company's operations.
INVESTMENTS Investments in marketable equity securities are classified as
available-for-sale and reported at fair value in the consolidated balance sheets
under other long-term assets. The unrealized holding gains and losses are
excluded from earnings and reported, net of deferred income taxes, as a separate
component of shareholders' equity.
INTANGIBLE ASSETS Intangible assets are included in other long-term assets at
cost. Amortization is provided on a straight-line basis over periods generally
not exceeding ten years. Intangible assets are continually reviewed to
determine that the carrying values have not been impaired.
INCOME TAXES Deferred income taxes, reflecting the impact of temporary
differences between the assets and liabilities recognized for financial
reporting purposes and amounts recognized for tax purposes, are based on tax
laws currently enacted.
Page 24
Deferred tax assets are reduced by a valuation allowance when it is more likely
than not that some portion of the deferred tax assets will not be realized.
ENVIRONMENTAL COSTS The Company accrues environmental costs when it is
probable that the Company has incurred a liability and the amount can be
reasonably estimated. Environmental costs are expensed or capitalized, as
appropriate, depending on their future economic benefit.
FUTURE ACCOUNTING CHANGES In February 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings per Share." SFAS No. 128 requires all companies whose
capital structures include convertible securities and options to make a dual
presentation of basic and diluted earnings per share. The new standard becomes
effective beginning with the Company's third quarter ending on February 28,
1998. The pro forma diluted earnings per share under SFAS No. 128 is $3.43 in
1997 and $2.93 in 1996, based upon average shares outstanding of 33.5 million
and 34.0 million, respectively.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes requirements for disclosure of comprehensive
income and becomes effective for the Company's fiscal year ending May 1999.
Reclassification of earlier financial statements for comparative purposes is
required.
In June 1997, the FASB 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. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. This statement supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise." The new standard becomes effective for the
Company's fiscal year ending May 1999, and requires that comparative information
from earlier years be restated to conform to the requirements of this standard.
BUSINESS SEGMENTS
The Company and its affiliates operate predominately in a single industry
segment: the design, manufacture, sale and service of electronic measurement,
design and display instruments and systems used in science, industry and
education. Geographically, the Company operates primarily in the industrialized
world. Net sales, earnings before taxes and total assets in the United States,
Europe and other geographical areas were:
IN THOUSANDS 1997 1996 1995
- -----------------------------------------------------------------------------
Net sales:
United States sales to customers $1,027,294 $ 890,930 $ 766,991
United States export sales to customers 258,984 271,446 224,657
United States transfers to affiliates 824,520 720,969 434,959
-----------------------------------
United States sales 2,110,798 1,883,345 1,426,607
-----------------------------------
European sales to customers 483,949 470,840 392,070
European transfers to affiliates 5,006 3,183 3,783
-----------------------------------
European sales 488,955 474,023 395,853
-----------------------------------
Other area sales to customers 169,855 135,642 114,244
Other area transfers to affiliates 22,975 23,815 15,184
-----------------------------------
Other area sales 192,830 159,457 129,428
-----------------------------------
Eliminations (852,501) (747,967) (453,926)
-----------------------------------
Net sales $1,940,082 $1,768,858 $1,497,962
-----------------------------------
-----------------------------------
Earnings before taxes:
United States $ 178,930 $ 124,618 $ 123,800
Europe 33,093 25,867 (6,618)
Other areas (8,555) 8,174 6,678
Corporate and eliminations (34,666) (16,393) (13,698)
-----------------------------------
Earnings before taxes $ 168,802 $ 142,266 $ 110,162
-----------------------------------
-----------------------------------
Total assets:
United States $ 991,928 $ 988,578 $ 851,435
Europe 181,757 198,220 217,808
Other areas 89,663 69,883 47,530
Corporate and eliminations 53,393 71,815 101,529
-----------------------------------
Total assets $1,316,741 $1,328,496 $1,218,302
-----------------------------------
-----------------------------------
Transfers of products and services are made at arms-length prices between
geographic areas. The profit on transfers between geographic areas is not
recognized until sales are made to unaffiliated customers. Area earnings before
taxes include all directly incurred and allocable costs, except identified
corporate expenses. Assets are those that are specifically associated with the
operations of each geographic area.
Net sales to the United States government were not more than 2% of net
sales in any of the past three years, and no other customer accounted for more
than 2% of net sales.
NON-U.S. AFFILIATES
The Company has operating subsidiaries located in Australia, Austria, Belgium,
Brazil, Canada, China, Denmark, Finland, France, Germany, India, Italy, Japan,
Korea, Mexico, The Netherlands, Norway, Singapore, Spain, Sweden, Switzerland,
Taiwan, and the United Kingdom. The assets, liabilities, net
Page 25
sales and net earnings of non-U.S. subsidiaries are included in the consolidated
financial statements in these amounts:
IN THOUSANDS 1997 1996 1995
- ------------------------------------------------------------------------------
Current assets $214,776 $207,333 $223,651
Property, plant and equipment - net 39,631 34,295 28,214
Other long-term assets 11,612 11,835 18,420
Current liabilities 65,769 65,303 93,104
Other long-term liabilities 21,486 18,030 33,991
---------------------------------
Net sales $653,804 $606,482 $506,314
Gross profit 125,440 132,237 130,598
Operating income 27,585 36,502 4,192
Earnings before taxes 24,538 34,041 60
Net earnings (loss) 13,656 22,738 (908)
The Company has a 50% investment in a business venture in Japan. The Company's
share of the assets, liabilities, net sales and net earnings of this business
venture, as well as the Company's arms-length sales to, purchases from, and
accounts receivable consisted of:
IN THOUSANDS 1997 1996 1995
- ------------------------------------------------------------------------------
Current assets $ 55,322 $ 74,946 $ 84,787
Property, plant and equipment - net 19,913 23,371 28,080
Other long-term assets 12,129 12,743 14,123
Current liabilities 18,511 32,775 29,002
Other long-term liabilities 8,988 9,323 10,148
---------------------------------
Net sales $152,054 $147,860 $113,645
Gross profit 40,742 44,756 40,246
Operating income (loss) 3,068 113 (1,422)
Earnings before taxes 2,792 53 204
Net earnings (loss) 1,184 (306) (28)
---------------------------------
Sales to $112,770 $114,307 $83,217
Purchases from 19,596 13,650 10,259
Accounts receivable 9,866 9,524 5,199
There are no significant restrictions that prevent dividends to the parent
company from non-U.S. affiliates. The Company received dividends from business
ventures of $0.6 million in 1997 and $4.7 million in 1996. There were no
dividends received in 1995.
ACCOUNTS RECEIVABLE
On September 10, 1996, the Company entered into a five-year revolving receivable
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 sold under this agreement are reflected as a
reduction of accounts receivable in the balance sheet at May 31, 1997, and as
operating cash flows in the statements of cash flows for the year ended May 31,
1997.
Accounts receivable have been reduced by an allowance for doubtful accounts,
which was $3.1 million in 1997 and $6.3 million in 1996. The net charges to this
reserve have not been material.
OTHER LONG-TERM ASSETS
IN THOUSANDS 1997 1996
- ---------------------------------------------------------------------------
Investment in business ventures $ 85,696 $ 97,409
Investment in marketable equity securities 66,709 78,117
Licensing agreements and other intangibles - net 37,151 28,873
Other 6,065 15,804
-----------------------
Other long-term assets $195,621 $220,203
-----------------------
-----------------------
Investment in business ventures includes the business venture in Japan discussed
in the "Non-U.S. Affiliates" note and a 35% interest in Merix Corporation. At
May 31, 1997, the carrying value of the Company's investment in Merix was $21.1
million, with a fair value, based upon quoted market price, of $34.2 million.
The Company's portion of the undistributed earnings of the business ventures was
$20.2 million in 1997 and $19.2 million in 1996.
Proceeds from the sales of marketable equity securities in 1997, 1996 and
1995 were $33.8 million, $23.3 million and $23.9 million, respectively.
Realized gains were computed based on the average cost of the underlying
securities and are disclosed in the "Other Income - Net" note. At the end of
1997, 1996 and 1995, net unrealized holding gains of $58.8 million, $67.2
million and $20.1 million (less deferred taxes of $22.1 million, $26.9 million
and $8.0 million), respectively, were included as a separate component of
shareholders' equity.
Licensing agreements and other intangibles have been reduced by accumulated
amortization of $17.5 million in 1997 and $10.9 million in 1996.
SHORT-TERM AND LONG-TERM DEBT
The Company's short-term debt consisted of:
IN THOUSANDS 1997 1996
- ----------------------------------------------------------------------------
Lines of credit $4,486 $12,564
Commercial paper - 30,663
---------------------
Short-term instruments 4,486 43,227
Current maturities of long-term debt 1,669 1,418
---------------------
Short-term debt $6,155 $44,645
---------------------
---------------------
Page 26
The Company has a $150.0 million revolving credit agreement with Morgan Guaranty
Trust Company of New York, as agent, that matures in July 2001. The Company has
an agreement with U.S. National Bank of Oregon to issue up to $100.0 million in
commercial paper, backed by the revolving credit agreement. At May 31, 1997, the
Company maintained bank credit facilities of $300.3 million, of which $293.4
million was unused. Unused facilities include $143.4 million in lines of credit
and $150.0 million under the revolving credit agreement. A $20.0 million line of
credit expires in October 1997 with all remaining lines providing no specific
expiration date.
The Company's long-term debt consisted of:
IN THOUSANDS 1997 1996
- ----------------------------------------------------------------------------
7.5% Notes due August 1, 2003 $100,000 $100,000
7.625% Notes due August 15, 2002 50,000 50,000
Other long-term agreements 3,248 3,387
Commercial paper - 49,986
-----------------------
Long-term instruments 153,248 203,373
Current maturities (1,669) (1,418)
-----------------------
Long-term debt $151,579 $201,955
-----------------------
-----------------------
Certain of the Company's debt agreements require the maintenance of specified
interest rate coverage ratios and a minimum consolidated tangible net worth. At
May 31, 1997, the Company had unrestricted retained earnings of $167.1 million
after meeting those requirements.
Aggregate long-term debt payments will be $1.7 million in 1998, $1.2
million in 1999, $0.3 million in 2000, $0.1 million in 2001 and none in 2002.
OTHER LONG-TERM LIABILITIES
IN THOUSANDS 1997 1996
- --------------------------------------------------------------------------------
Accrued postretirement benefits $41,778 $46,953
Accrued pension 30,019 23,037
Other 17,993 15,892
---------------------
Other long-term liabilities $89,790 $85,882
---------------------
---------------------
OTHER INCOME - NET
IN THOUSANDS 1997 1996 1995
- --------------------------------------------------------------------------------
Gain on sale of marketable equity securities $27,678 $20,197 $14,314
Loss on disposition of fixed assets (5,031) (1,844) (447)
Currency losses (753) (1,322) (2,231)
Other (5,989) (4,147) (6,892)
-------------------------------
Other income - net $15,905 $12,884 $ 4,744
-------------------------------
-------------------------------
COMMITMENTS AND CONTINGENCIES
The Company leases a portion of its capital equipment and certain of its
facilities under operating leases that expire at various dates. Rental expense
was $27.4 million in 1997, $25.3 million in 1996, and $28.0 million in 1995. In
addition, the Company has long-term or minimum purchase agreements with various
suppliers. The future minimum obligations under operating leases and other
commitments having an initial or remaining noncancelable term in excess of one
year as of May 31, 1997 were:
IN THOUSANDS OPERATING LEASES COMMITMENTS
- ------------------------------------------------------------------------
1998 $16,518 $ 8,257
1999 12,764 4,287
2000 7,114 3,856
2001 4,849 1,424
2002 3,658 -
Future years 18,563 -
----------------------
Total $63,466 $17,824
----------------------
----------------------
In the normal course of business, the Company and its subsidiaries are parties
to various legal claims, actions and complaints, including matters involving
patent infringement and other intellectual property claims. Although it is not
possible to predict with certainty whether or not the Company and its
subsidiaries will ultimately be successful in any of these legal matters or, if
not, what the impact might be, the Company believes that disposition of these
matters will not have a material adverse effect on the Company's financial
position, results of operations or cash flows.
SHAREHOLDERS' EQUITY
STOCK OPTION AND INCENTIVE COMPENSATION PLANS The Company has stock option
plans for selected employees. There were 4,085,000 shares reserved for issuance
under these plans at May 31, 1997. Under the terms of the plans, incentive stock
options are granted at an option price not less than the market value at the
date of grant. Nonqualified stock options may not be granted at less than 100%
of the market value on the valuation date selected by the Board of Directors.
Options granted prior to January 1, 1997, generally vest over four years and
expire ten years from the date of grant. Certain options granted after January
1, 1997, vest over two years and expire five years from the date of grant.
There were 1,025 employees holding options at May 31, 1997.
Page 27
Additional information with respect to option activity is set forth below:
OUTSTANDING EXERCISABLE
------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
OPTIONS IN THOUSANDS OF SHARES PRICE OF SHARES PRICE
- ----------------------------------------------------------------------------
May 28, 1994 2,866 $21 1,262 $20
Granted 812 36
Exercised (1,102) 20
Canceled (217) 25
---------------------------------------------------
May 27, 1995 2,359 $26 868 $21
Granted 980 45
Exercised (501) 22
Canceled (190) 35
---------------------------------------------------
May 25, 1996 2,648 $34 989 $25
Granted 725 48
Exercised (650) 26
Canceled (141) 41
---------------------------------------------------
May 31, 1997 2,582 $39 952 $31
---------------------------------------------------
---------------------------------------------------
The following table summarizes information about options outstanding and
exercisable at May 31, 1997:
OPTIONS IN THOUSANDS
OUTSTANDING EXERCISABLE
-------------------------------------- ---------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OF SHARES LIFE PRICE OF SHARES PRICE
- ----------------------------------------------------------------------------
$13 - 19 55 4.4 years $17 55 $17
20 - 29 503 5.5 years 24 418 24
31 - 46 1,398 8.2 years 40 403 37
49 - 60 626 5.5 years 52 76 51
- ---------------------------------------------------------------------------
2,582 6.9 years $39 952 $31
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
The Company has elected to continue to account for stock options according to
APB Opinion No. 25, "Accounting for Stock Issued to Employees." Under APB No.
25, no compensation expense is recognized in the Company's consolidated
financial statements for employee stock options because the exercise price of
the options equals the market price of the underlying stock on the date of
grant. Alternatively, under the fair value method of accounting provided for by
SFAS No. 123, "Accounting for Stock-Based Compensation," the measurement of
compensation expense is based on the fair value of employee stock options at the
grant date and requires the use of option pricing models to value the options.
The weighted average estimated fair value of options granted during 1997 and
1996 was $17 and $15 per share, respectively.
The Company also has plans for certain executives that provide for stock
awards based on financial performance over one- and three-year periods. Under
APB No. 25, compensation expense is measured based on the market price of the
stock at the date the terms of the award become fixed. Under the fair value
approach of SFAS No. 123, compensation expense is measured based on the market
price of the stock at the grant date. The weighted average grant-date fair value
of performance-based stock awards granted during 1997 and 1996 was $46 and $38
per share, respectively. The total shares issued under these plans and the
corresponding compensation expense recognized in income was not material for
both 1997 and 1996.
The pro forma impact to both net earnings and earnings per share from
calculating stock-related compensation expense consistent with the fair value
alternative of SFAS No. 123 is indicated below:
1997 1996
- ---------------------------------------------------------------
Pro forma net earnings (in thousands) $109,240 $97,015
Pro forma earnings per share $ 3.31 $ 2.92
The fair value of each option was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions:
1997 1996
- ----------------------------------------------------------------
Expected life (in years) 5.0 5.0
Risk-free interest rate 6.3% 5.7%
Volatility 35.2% 33.9%
Dividend yield 1.3% 1.4%
For purposes of the pro forma disclosures, the estimated fair value of the
stock-based awards is amortized over the vesting period. Because SFAS No. 123
is applicable only to awards granted after May 27, 1995, the pro forma effect
will not be fully reflected until 1999.
SHAREHOLDER RIGHTS AGREEMENT In August 1990, the Company's Board of Directors
approved a shareholder rights agreement and declared a dividend of one right for
each outstanding common share. Each right entitles the holder to purchase one
one-thousandth of a share of no par preferred stock at an exercise price of $60,
subject to adjustment. Generally, the rights become exercisable ten days after a
person or group acquires or commences a tender offer that would result in
beneficial ownership of 20% or more of the common shares. In addition, the
rights become exercisable if any party becomes the beneficial owner of 10% or
more of the outstanding common shares and is determined by the Board to be an
adverse party. Upon the occurrence of certain additional events specified in the
shareholder rights agreement, each right would entitle its holder to purchase
common shares of the Company (or, in some cases, a potential acquiring company)
or other property having a value of twice the right's exercise price. The
rights, which are not currently exercisable, expire in September 2000, but may
be redeemed by action of the Board prior to that time, under certain
circumstances, for $0.01 per right.
Page 28
BENEFIT PLANS
PENSION PLANS The Company has defined benefit retirement plans covering most
employees. Benefits upon retirement or termination are based on length of
service and final average compensation at retirement.
The Company's funding policy is to contribute amounts determined annually
on an actuarial basis that provide for current and future benefits in accordance
with funding requirements of applicable laws and regulations of the countries in
which the plans are located. Assets of funded benefit plans are held primarily
in trust accounts. The majority of the assets are invested in common stocks,
bonds and real estate, with the balance primarily in cash and short-term
investments.
The following tables set forth the funded status and the amounts recognized
in the consolidated financial statements for the Company's defined benefit
retirement plans:
1997
-------------------------
ASSETS ACCUMULATED
EXCEED BENEFITS
ACCUMULATED EXCEED
IN THOUSANDS BENEFITS ASSETS
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $422,737 $12,794
-----------------------
-----------------------
Accumulated benefit obligation $428,453 $15,093
-----------------------
-----------------------
Projected benefit obligation $478,503 $17,442
Plan assets at fair value 474,222 -
-----------------------
Projected benefit obligation in excess of plan assets 4,281 17,442
Unrecognized initial net asset (obligation) 3,415 (1,680)
Unrecognized prior service cost 10,529 (695)
Unrecognized net gain (loss) (10,490) 2,349
-----------------------
Pension liability $ 7,735 $17,416
-----------------------
-----------------------
1996
-------------------------
ASSETS ACCUMULATED
EXCEED BENEFITS
ACCUMULATED EXCEED
IN THOUSANDS BENEFITS ASSETS
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $48,647 $391,149
----------------------
----------------------
Accumulated benefit obligation $52,672 $399,571
----------------------
----------------------
Projected benefit obligation $61,329 $453,778
Plan assets at fair value 55,982 349,571
----------------------
Projected benefit obligation in excess of plan assets 5,347 104,207
Unrecognized initial net asset (obligation) (342) 4,255
Unrecognized prior service cost (715) 7,943
Unrecognized net loss (6,398) (58,968)
----------------------
Pension (asset) liability $(2,108) $ 57,437
----------------------
----------------------
Assumptions used in the accounting for the defined benefit plans were:
1997 1996 1995
- -----------------------------------------------------------------------------------------------
Overall weighted average discount rates 7.8% 7.6% 8.1%
Overall rates of increase in compensation levels 3.8% 3.8% 4.8%
Expected long-term rate of return on plan assets 10.2% 9.3% 9.3%
Net pension expense includes the following components:
IN THOUSANDS 1997 1996 1995
- -----------------------------------------------------------------------------------------------
Service cost $12,084 $ 9,469 $ 8,983
Interest cost 37,627 37,414 33,693
Actual return on plan assets (56,863) (76,138) (36,587)
Net amortization and deferral 17,585 40,948 3,987
--------------------------------------
Net periodic pension expense 10,433 11,693 10,076
Other benefit plans 1,327 1,454 928
--------------------------------------
Net pension expense $11,760 $13,147 $11,004
--------------------------------------
--------------------------------------
POSTRETIREMENT BENEFITS In 1995, the Company modified its postretirement
welfare programs to eliminate company-paid benefits for employees who retire
after July 31, 1995. Subsidies provided to pre-1995 retirees were phased out
gradually and were eliminated effective January 1, 1997. Current and future
retirees who have accumulated certain insurance credits, however, may continue
to apply them toward the purchase of medical and life insurance benefits. These
revisions resulted in an unrecognized prior service cost gain of $26.7 million
that will be amortized over ten years as a reduction in postretirement benefit
expense.
The status of the Company's unfunded postretirement benefit obligation was:
IN THOUSANDS 1997 1996
- ---------------------------------------------------------------------------
Accumulated postretirement benefit obligation (APBO):
Current retirees $ 9,459 $10,453
Active employees eligible to retire 3,067 3,467
Other active employees 2,544 3,033
----------------------
Total accumulated obligation 15,070 16,953
Unrecognized net gain 11,110 10,532
Unrecognized prior service cost gain 18,697 21,368
----------------------
Accrued postretirement benefits $44,877 $48,853
----------------------
----------------------
Page 29
The net postretirement benefit credit includes the following components:
IN THOUSANDS 1997 1996 1995
- ----------------------------------------------------------------------------
Service cost $ 177 $ 168 $ 184
Interest cost 1,244 1,359 1,286
Net amortization (3,302) (3,385) (3,587)
--------------------------------------
Postretirement benefit credit $(1,881) $(1,858) $(2,117)
--------------------------------------
--------------------------------------
The discount rate and rate of salary increase used in determining the APBO for
1997 was 8.0% and 3.8%, respectively. For 1996, these rates were 7.8% and 3.8%.
The health care cost trend rates used in measuring the APBO at May 31, 1997,
ranged from 7.8% to 9.8%, depending on the specific plan, and are assumed to
decrease gradually until they reach 5.3% to 5.8% in the year 2006 and remain at
5.3% thereafter. The health care cost trend rates in 1996 ranged from 8.2% to
10.8%, and were assumed to decline to 5.3% over a similar period. The health
care cost trend rate assumptions can have a significant effect on the amounts
reported. However, because of the plan amendments adopted in 1995, increasing
the assumptions by one percent would not have a material impact on either the
APBO at May 31, 1997, or the postretirement benefit credit for 1997.
EMPLOYEE SAVINGS PLAN The Company has an employee savings plan that qualifies
as a deferred salary arrangement under Section 401(k) of the Internal Revenue
Code. Participating U.S. employees may defer up to 15% of their compensation,
subject to certain regulatory limitations. Employee contributions are invested,
at the employees' direction, among a variety of investment alternatives. The
Company matches the contributions up to 3% of compensation. In addition, the
Company makes a contribution to the plan for each qualifying employee equal to
2% of compensation. The Company's contributions, which are invested entirely in
Company stock, were approximately $14.2 million in 1997, $12.1 million in 1996,
and $11.1 million in 1995.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes derivative financial instruments to reduce the impact of
foreign exchange risks where internal netting strategies cannot be effectively
employed. The Company does not hold or issue derivative financial instruments
for trading purposes. The Company's derivative activities do not create risk
because fluctuations in the value of the instruments used for hedging purposes
are offset by fluctuations in the value of the underlying exposures being
hedged.
The notional or contract amounts of the hedging instruments do not
represent amounts exchanged by the parties and, thus, are not a measure of the
Company's exposure due to the use of derivatives. The amounts exchanged are
calculated on the basis of the notional amounts and other terms of the
instruments. The Company is exposed to credit-related losses in the event of
nonperformance by counterparties to financial instruments. However, the Company
has entered into these instruments with creditworthy financial institutions and
considers the risk of nonperformance to be remote.
FOREIGN EXCHANGE RISK MANAGEMENT The Company uses foreign exchange contracts
to hedge its exchange rate risks. At the end of 1997 and 1996, the notional
amount of the Company's outstanding contracts was $32.1 million and $97.6
million, respectively. Generally, these contracts have maturities that do not
exceed one year and require the Company to exchange foreign currencies for U.S.
dollars at maturity. The purpose of the Company's hedging activities is to
reduce the risk that the eventual cash flows of the underlying assets,
liabilities and firm commitments will be adversely affected by changes in
exchange rates. The unrecognized loss attributable to foreign exchange contracts
at May 31, 1997 was $0.2 million.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For short-term financial instruments, including cash and cash equivalents,
accounts receivable, short-term debt, accounts payable and accrued compensation,
the carrying amount approximates the fair value because of the immediate or
short-term nature of those instruments. The fair value of marketable equity
securities is based on quoted market prices at the reporting date. The fair
value of long-term receivables and long-term debt is estimated based on quoted
market prices for similar instruments or by discounting expected cash flows at
rates currently available to the Company for instruments with similar risks and
maturities. The differences between the fair values and carrying amounts of the
Company's financial instruments, including derivatives, at May 31, 1997, and May
25, 1996, were not material.
Page 30
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade accounts receivable. The risk is
limited due to the large number of entities comprising the Company's customer
base and their dispersion across many different industries and geographies. At
May 31, 1997, the Company had no significant concentrations of credit risk.
INCOME TAXES
The components of earnings before taxes on a geographical basis are contained in
the "Business Segments" note. The provision for income taxes consisted of:
IN THOUSANDS 1997 1996 1995
- ----------------------------------------------------------------------------
Current:
Federal $21,457 $ 9,104 $17,779
State 3,742 1,961 4,041
Non-U.S. 7,854 10,789 6,624
--------------------------------------
33,053 21,854 28,444
Deferred:
Federal 15,921 16,363 4,649
State 2,015 3,338 641
Non-U.S. 3,028 1,125 (5,156)
--------------------------------------
20,964 20,826 134
--------------------------------------
Total provision $54,017 $42,680 $28,578
--------------------------------------
--------------------------------------
The provisions differ from the amounts that would result by applying the U.S.
statutory rate to earnings before taxes. A reconciliation of the difference is:
IN THOUSANDS 1997 1996 1995
- ----------------------------------------------------------------------------
Income taxes based on U.S.
statutory rate $59,081 $49,793 $38,557
Foreign sales corporations (5,935) (4,565) (3,196)
Change in beginning of year
valuation allowance (3,824) (5,526) (6,842)
State income taxes, net of U.S. tax 3,742 3,445 3,043
Other - net 953 (467) (2,984)
--------------------------------------
Total provision $54,017 $42,680 $28,578
--------------------------------------
--------------------------------------
Tax benefits of $5.6 million, $5.0 million and $7.3 million associated with the
exercise of employee stock options were credited to equity in 1997, 1996 and
1995, respectively.
Net deferred tax assets and liabilities are included in the following
consolidated balance sheet accounts:
IN THOUSANDS 1997 1996
- ---------------------------------------------------------------------------
Other current assets $43,106 $40,410
Deferred tax assets 12,540 28,247
----------------------
Net deferred tax assets $55,646 $68,657
----------------------
----------------------
The temporary differences and carryforwards that give rise to deferred tax
assets and liabilities were as follows:
IN THOUSANDS 1997 1996
- ------------------------------------------------------------------------------
Deferred tax assets:
Reserves and other liabilities $ 41,858 $ 48,544
Accrued postretirement benefits 17,502 19,053
AMT and foreign tax credit carryforwards 14,088 20,932
Net operating losses of non-U.S. subsidiaries 10,432 12,727
Accumulated depreciation 9,918 14,999
Accrued pensionliability 6,289 3,765
-----------------------
Gross deferred tax assets 100,087 120,020
Less valuation allowance (3,105) (6,929)
-----------------------
Deferred tax assets 96,982 113,091
Deferred tax liabilities:
Unrealized gains on marketable equity securities (22,092) (26,851)
Software development costs (17,464) (11,993)
Unamortized LIFO reserve (1,780) (5,590)
-----------------------
Deferred tax liabilities (41,336) (44,434)
-----------------------
Net deferred tax assets $55,646 $68,657
-----------------------
-----------------------
At May 31, 1997, there were $3.4 million of unused foreign tax credits that, if
not used, will expire in 1998. There were $10.7 million of alternative minimum
tax (AMT) credits that can be carried forward indefinitely.
U.S. taxes have not been provided on $99.5 million of accumulated
unremitted earnings of non-U.S. subsidiaries because such earnings are or will
be reinvested in operations or will be offset by appropriate credits for foreign
income taxes paid.
Page 31
QUARTERLY FINANCIAL DATA (UNAUDITED)
In the opinion of management, this unaudited quarterly financial summary
includes all adjustments necessary to present fairly the results for the periods
represented (in thousands, except per share amounts):
AUG. 31, NOV. 30, MAR. 1, MAY 31,
QUARTER ENDED 1996 1996 1997 1997
- -------------------------------------------------------------------------------
Net sales $440,115 $477,166 $478,886 $543,915
Gross profit 191,272 199,762 205,233 236,460
Operating income 32,874 38,452 41,255 52,427
Earnings before taxes 33,405 38,905 42,297 54,195
Net earnings 22,715 26,456 28,762 36,852
Earnings per share $ 0.69 $ 0.81 $ 0.87 $ 1.11
Dividends per share 0.15 0.15 0.15 0.15
Common stock prices:
High $ 44.88 $ 49.00 $ 52.25 $ 59.75
Low 35.88 37.00 47.38 48.38
AUG. 26, NOV. 25, FEB. 24, MAY 25,
QUARTER ENDED 1995 1995 1996 1996
- -------------------------------------------------------------------------------
Net sales $401,022 $443,598 $433,500 $490,738
Gross profit 169,940 186,672 179,835 204,080
Operating income 32,059 39,054 31,451 40,803
Earnings before taxes 32,385 37,587 32,068 40,226
Net earnings 22,670 26,310 22,448 28,158
Earnings per share $ 0.68 $ 0.79 $ 0.67 $ 0.86
Dividends per share 0.15 0.15 0.15 0.15
Common stock prices:
High $ 52.38 $ 61.88 $ 57.38 $ 46.88
Low 41.50 43.88 40.75 29.75
The Company's common stock is traded on the New York and Pacific Stock
Exchanges. There were 4,059 shareholders of record at June 23, 1997. The market
prices quoted above are the composite prices reported by The Wall Street Journal
rounded to full cents per share.
Dividends are paid at the discretion of the Board of Directors dependent
upon their judgment of the Company's future earnings, expenditures and financial
condition.
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