Management Review
RESULTS OF OPERATIONS
OVERVIEW
Tektronix had record sales and orders for its fiscal year ended May
30, 1998. Net earnings for 1998 were $82.3 million, or $1.60 per
diluted share. Net earnings in 1997 of $114.8 million, or $2.29 per
share, increased 15% over fiscal 1996 earnings of $99.6 million, or
$1.95 per share. Fiscal year 1998 earnings included pre-tax non-
recurring charges of $79.0 million related to the $60.0 million
restructuring of the Video and Networking Division, $17.0 million of
acquired in-process research and development and $2.0 million of
integration costs associated with the acquisition of Siemens'
Communications Test Equipment GmbH (CTE). Excluding the non-recurring
charges, fiscal year 1998 earnings would have been $135.2 million, or
$2.63 per share, an increase of 18% over fiscal year 1997 earnings.
NET SALES AND PRODUCT ORDERS
Net sales in 1998 were $2.086 billion, an 8% increase over 1997
sales of $1.940 billion. Growth in the Measurement Business and Color
Printing and Imaging Divisions offset the slower sales of the Video
and Networking Division as product lines were streamlined. Sales to
customers in the United States of $1.078 billion were 5% above the
level for the prior year, and represented 52% of total sales.
International sales rose 10%, from $912.8 million to $1.008 billion,
with strong sales growth in Europe at $548.8 million, up $43.5 million
or 9% from 1997, and in the Americas at $114.7 million, up $36.5
million or 47% from 1997. Sales to the Pacific region, excluding
Japan, were up 3% to $209.0 million in 1998 from $202.4 million in
1997. Sales to Japan were up 7% to $135.6 million in 1998.
Net sales in 1997 were 10% higher than they were in 1996. U.S.
sales of $1.027 billion in 1997 were 15% above those of the prior
year.
Product orders for 1998 were $1.912 billion, an increase of 5% over
1997 orders of $1.829 billion. Orders in 1996 were $1.658 billion.
The following table summarizes the Company's net sales for the last
three years by its three business divisions:
IN THOUSANDS 1998 1997 1996
- ----------------------------------------------------------------
Measurement Business $ 962,858 $ 852,827 $ 812,250
Color Printing and Imaging 728,697 638,456 561,642
Video and Networking 394,247 448,799 394,966
Measurement Business sales of $962.9 million in 1998 represented 46%
of total sales and grew 13% from 1997. Growth in 1998 was driven by
sales of the TLA 700 logic analyzer and telecommunications test
products. Measurement Business sales in 1997 were 5% higher than in
1996 due to the introduction of new logic analyzer products and the
TDS 200 oscilloscope during the second half of the year. Product
orders in 1998 were $860.9 million, compared to $795.2 million in 1997
and $754.0 million in 1996.
Color Printing and Imaging sales increased 14%, from sales of $638.5
million in 1997 to $728.7 million in 1998. The introduction of three
new printers during the year (the Phaser 560, Phaser 380, and Phaser
360) and increased sales of printing supplies drove growth in sales
and orders. Color Printing and Imaging sales accounted for 35% of
total sales in 1998 compared to 33% in 1997. Sales in 1997 increased
14% over 1996, due to the introduction of the Phaser 350 in that year
and continued demand for the Phaser 550. Product orders rose 13% to
$687.3 million in 1998 from $607.5 million in 1997. Product orders
were $531.1 million in 1996.
Video and Networking sales in 1998 of $394.2 million were 12% lower
than in 1997 due to a reduction in product offerings through the
elimination of certain non-profitable product lines as well as general
weakness in the broadcast market. In addition, 1997 sales were
particularly strong in the netstation business, including two
significant installations of networked computers that year. The
decline was tempered by continued sales growth of the Profile PDR 200
professional video server. Sales increased 14%, from $395.0 million
in 1996 to $448.8 million in 1997, due to strength in Profile video
disk recorders and networked computers. Product orders were $363.8
million in 1998, down 15% from orders of $426.4 million in 1997.
Product orders in 1996 were $372.4 million.
OPERATING COSTS AND EXPENSES
Gross margin was 41.5% of sales in 1998. Excluding non-recurring
charges, gross margin would have been 43.3% of sales, an increase from
42.9% in 1997 due to cost management across all three divisions,
streamlining in Video and Networking to focus on profitable products,
and cost savings as a result of the restructuring of that business.
Non-recurring charges decreased reported gross margin due to $38.5
million of Video and Networking inventory written off as part of the
restructuring of that business. 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.
Research and development expenses were 9.7% of sales in 1998 and
1997 and 9.3% of sales in 1996 at $203.3 million, $188.2 million and
$164.3 million, respectively. Selling, general and administrative
expenses were $508.7 million, or 24.4% of sales, in 1998 compared to
$481.1 million, or 24.8% of sales, in 1997 and $437.9 million, or
24.8% of sales, in 1996.
Page 18
Operating margin was 5.5% of sales in 1998. Excluding non-recurring
charges, operating margins continued an increasing trend, rising to
9.3% in 1998 from 8.5% in 1997 and 8.1% in 1996. Increasing gross
margins and continued focus on cost management contributed to the
increase in 1998. The improvement in 1997 was due primarily to higher
gross margins, partly offset by higher research and development
spending and lower equity in business ventures' earnings.
Interest expense decreased 17% to $10.1 million due to a decrease in
both long-term and short-term debt balances in 1998. Interest expense
was $12.1 million in 1997, 13% less than the $14.0 million in 1996.
Other income was $17.6 million in 1998 compared with other income of
$15.9 million in 1997 and $12.9 million in 1996. The improvement
primarily reflected higher gains on sales of equity securities in
other companies. The Company continues to hold equity positions that
it intends to liquidate over time.
The Company's effective tax rate for 1998 was 33%, compared to 32%
in 1997 and 30% in 1996.
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 uses the economic value added (EVA) measure. EVA is
determined by the Company by deducting taxes and a cost of capital
charge from operating income, excluding non-recurring charges, 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. The Company generated EVA of $40.6
million in 1998, compared to $21.8 million in 1997 and $11.9 million
in 1996. The improvement in 1998 is a result of both the strong
earnings for the year, exclusive of non-recurring charges, and
continued improvements in invested capital, as average accounts
receivable and average inventories both decreased from 1997.
LIQUIDITY
The Company's financial condition continues to be strong. Cash
flows from operating activities and borrowing capacity are expected to
be sufficient to fund capital expenditures for fiscal year 1999,
currently estimated to be slightly less than 1998 expenditures. Cash
provided by operations of $167.8 million in 1998 was sufficient to
fund capital expenditures for increased manufacturing capacity. The
Company expects that cash payments required to carry out the remaining
restructuring activities will be approximately $8.0 million. At May
30, 1998, the Company maintained bank credit facilities totaling
$307.6 million, of which $303.1 million was unused. Unused facilities
include $153.1 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 $2.8 million from 1997. Cash decreased
$22.2 million as funds were expended to invest in facilities for
continued growth of Color Printing and Imaging and for the
acquisition of CTE. Accounts receivable increased by $40.5 million,
due in part to an increase in year over year sales in the fourth
quarter. Average days sales outstanding for the year improved from
54.6 days in 1997 to 51.1 days in 1998. Inventories decreased by
$23.7 million as Video and Networking streamlined product offerings
allowing for significantly lower inventory requirements. Color
Printing and Imaging inventories were down slightly for the year
despite increasing sales and orders.
Net property, plant and equipment increased by $82.0 million due to
capital expenditures of $155.1 million in 1998, primarily related to
the expansion of manufacturing capacity for Color Printing and
Imaging.
Net deferred tax assets increased $21.9 million due to timing
differences related to restructuring activities and a decline in the
deferred tax liability related to unrealized holding gains as
securities were sold and market prices on the remaining holdings
declined. Other long-term assets declined by $31.7 million due to
the disposition of certain of the Company's available-for-sale
securities, offset by the acquisition of identified intangibles.
Current liabilities increased by $45.7 million primarily due to
increases in trade payables, accrued compensation for incentive plans, and
accruals related to the remaining restructuring activities.
Shareholders' equity increased by $13.6 million, or 2%, over 1997.
Earnings net of dividends of $59.1 million was offset by a decrease in
unrealized holding gains of $28.7 million and a decrease in the
currency adjustment of $13.6 million.
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 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 mitigate 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
the company has an identifiable exposure to risk, and to only enter
into such transactions with creditworthy financial institutions.
Page 19
FUTURE ACCOUNTING CHANGES
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 130 establishes
requirements for disclosure of comprehensive income and becomes
effective for the first quarter ending August 1998. Reclassification
of earlier financial statements for comparative purposes is required.
SFAS No. 131 establishes standards for disclosure about operating
segments in annual financial statements and selected information in
interim financial reports. The new disclosures will first be presented
in the Company's annual report for the fiscal year ending May 1999.
Information presented for earlier years will be restated for
comparative purposes. Adoption of these statements may result in
additional disclosures but will have no impact on the Company's
consolidated financial statements.
In June 1998, the FASB issued SFAS NO. 133, "Accounting for
Derivative Instruments and Hedging Activities." The new statement will
require recognition of all derivatives as either assets or liabilities
on the balance sheet at fair value. The new statement is effective for
fiscal year 2001, but early adoption is encouraged. Management has
not completed an evaluation of the effects this standard will have on
the Company's consolidated financial statements.
YEAR 2000
In connection with the Company's ongoing program to standardize and
upgrade its key internal financial, information and operational
systems, an assessment has been made of the ability of these systems
to operate in, and to process transactions and data involving, the
year 2000 and beyond. The Company believes that all key internal
systems that are not already year 2000 ready will be modified,
upgraded or replaced prior to the year 2000. The Company is currently
engaged in assessing the capability of its products to handle the
transition to and operate in the year 2000, and has a plan in place to
address product issues prior to the year 2000. The Company is working
with major suppliers and customers to resolve year 2000 interface
issues. Management believes that the cost of these projects over the
next two years will not have a material effect on the Company's
financial position or overall trends in results of operations.
However, because of the existence of numerous systems and related
components within the Company and the interdependency of these
systems, it is possible that certain systems at the Company, or
systems at entities that provide services or goods for the Company,
may fail to operate in the year 2000. Although it is not currently
anticipated, the inability to complete the Company's year 2000 plans
on a timely basis or the failure of a system at the Company or at an
entity that provides services or goods to the Company may have a
material impact on future operating results or financial condition.
FORWARD LOOKING STATEMENTS
Statements and information included in the Chairman's letter and
Management Review and elsewhere in this report that relate to the
Company's goals, strategies and expectations as to future results and
events are based on the Company's current expectations. They
constitute forward looking statements subject to a number of risk
factors that could cause actual results to differ materially from
those currently expected or desired. As with many high technology
companies, risk factors that could cause the Company's actual results
or activities to differ materially from these forward looking
statements include, but are not limited to: worldwide economic and
business conditions in the electronics industry, including the
continuing effect of the Asian economic crisis on demand for the
Company's products; competitive factors, including pricing pressures,
technological developments and products offered by competitors;
changes in product and sales mix, and the related effects on gross
margins; the Company's ability to deliver a timely flow of competitive
new products, and market acceptance of these products; the
availability of parts and supplies from third party suppliers on a
timely basis and at reasonable prices; inventory risks due to changes
in market demand or the Company's business strategies; changes in
effective tax rates; customer demand; currency fluctuations; the fact
that a substantial portion of the Company's sales are generated from
orders received during the quarter, making prediction of quarterly
revenues and earnings difficult; and other risk factors listed from
time to time in the Company's Securities and Exchange Commission
reports and in press releases.
Additional risk factors specific to the Company's current plans and
expectations that could cause the Company's actual results or
activities to differ materially from those stated include: the
significant operational issues the Company faces in executing its
strategy in Video and Networking; the timely introduction of new
products scheduled during the Company's fiscal year, which could be
affected by engineering or other development program slippages, the
ability to ramp up production or to develop effective sales channels;
the customers' acceptance of, and demand for, those products; and
changes in the regulatory environment affecting the transition to high-
definition television within the time frame anticipated by the
Company.
Forward looking statements in this report speak only as of the date
made. The Company undertakes no obligation to publicly release the
result of any revisions to these forward looking statements which may
be made to reflect subsequent events or circumstances or to reflect
the occurrence of unanticipated events.
Page 20
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.
/s/ MERRILL A. MCPEAK
MERRILL A. MCPEAK
Chairman, Audit Committee
/s/ CARL W. NEUN
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 30, 1998 and May 31, 1997,
and the related consolidated statements of operations, shareholders'
equity, and cash flows for the years ended May 30, 1998, May 31, 1997,
and May 25, 1996. 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 30, 1998 and May 31, 1997, and the
results of their operations and their cash flows for the years ended
May 30, 1998, May 31, 1997, and May 25, 1996, in conformity with
generally accepted accounting principles.
Portland, Oregon
June 24, 1998
Page 21
Consolidated Statements of Operations
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
FOR THE YEARS ENDED MAY 30,1998 MAY 31,1997 MAY 25,1996
- ----------------------------------------------------------------------------------------
Net sales $2,085,802 $1,940,082 $1,768,858
Cost of sales 1,220,475 1,107,355 1,028,331
-----------------------------------
Gross profit 865,327 832,727 740,527
Research and development expenses 203,312 188,192 164,292
Selling, general and administrative expenses 508,749 481,083 437,949
Equity in business ventures' earnings 2,513 1,556 5,081
Non-recurring charges 40,478 - -
-----------------------------------
Operating income 115,301 165,008 143,367
Interest expense 10,076 12,111 13,985
Other income - net 17,589 15,905 12,884
-----------------------------------
Earnings before taxes 122,814 168,802 142,266
Income taxes 40,529 54,017 42,680
-----------------------------------
Net earnings $ 82,285 $ 114,785 $ 99,586
===================================
Basic earnings per share $ 1.63 $ 2.32 $ 2.00
Diluted earnings per share 1.60 2.29 1.95
Dividends per share 0.46 0.40 0.40
Average shares outstanding - basic 50,438 49,513 49,795
Average shares outstanding - diluted 51,320 50,236 50,986
The accompanying notes are an integral part of these consolidated financial
statements.
Page 22
Consolidated Balance Sheets
IN THOUSANDS MAY 30,1998 MAY 31,1997
- ----------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 120,541 $ 142,726
Accounts receivable - net 346,342 305,832
Inventories 214,347 238,040
Other current assets 67,432 64,913
-----------------------
Total current assets 748,662 751,511
Property, plant and equipment - net 425,153 343,130
Deferred tax assets 25,102 12,540
Other long-term assets 177,893 209,560
-----------------------
Total assets $1,376,810 $1,316,741
=======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 5,442 $ 6,155
Accounts payable 209,411 181,366
Accrued compensation 119,842 90,946
Deferred revenue 15,102 25,622
-----------------------
Total current liabilities 349,797 304,089
Long-term debt 150,681 151,579
Other long-term liabilities 91,391 89,790
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
50,345 in 1998, and 50,104 in 1997) 223,527 226,591
Retained earnings 532,679 473,582
Currency adjustment 20,813 34,447
Unrealized holding gains - net 7,922 36,663
-----------------------
Total shareholders' equity 784,941 771,283
-----------------------
Total liabilities and shareholders' equity $1,376,810 $1,316,741
=======================
The accompanying notes are an integral part of these consolidated financial
statements.
Page 23
Consolidated Statements of Cash Flows
IN THOUSANDS
FOR THE YEARS ENDED MAY 30,1998 MAY 31,1997 MAY 25,1996
- ----------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 82,285 $ 114,785 $ 99,586
Adjustments to reconcile net earnings to cash
provided by operating activities:
Depreciation expense 65,939 59,591 47,137
Inventory write-down related to restructuring 38,482 - -
Non-recurring charges 40,478 - -
Deferred taxes (5,400) 14,425 26,041
Gain on sale of investments (28,244) (27,678) (20,197)
Changes in operating assets and liabilities:
Accounts receivable (35,640) 66,403 (66,647)
Inventories (4,856) 26,754 (19,681)
Other current assets (5,119) 22,213 864
Accounts payable 21,027 (179) 1,037
Accrued compensation 4,087 (28,580) 14,026
Other liabilities 3,047 5,672 (33,622)
Other - net (8,326) 8,923 661
-----------------------------------
Net cash provided by operating activities 167,760 262,329 49,205
-----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment (155,066) (112,005) (106,708)
Acquisition of business (46,600) - -
Proceeds from sale of fixed assets 5,819 9,073 19,776
Proceeds from sale of investments 37,003 33,848 23,263
-----------------------------------
Net cash used by investing activities (158,844) (69,084) (63,669)
-----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short-term debt (517) (38,451) 7,339
Issuance of long-term debt 172 358 50,000
Repayment of long-term debt (1,023) (50,609) (3,020)
Issuance of common stock 35,358 26,018 18,104
Repurchase of common stock (38,422) (3,797) (29,985)
Dividends (23,188) (19,809) (19,944)
-----------------------------------
Net cash provided (used) by financing activities (27,620) (86,290) 22,494
-----------------------------------
Effect of exchange rate changes (3,481) (873) (3,147)
-----------------------------------
Increase (decrease) in cash and cash equivalents (22,185) 106,082 4,883
Cash and cash equivalents at beginning of year 142,726 36,644 31,761
-----------------------------------
Cash and cash equivalents at end of year $ 120,541 $ 142,726 $ 36,644
===================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
Income taxes paid $ 19,981 $ 13,663 $ 18,669
Interest paid 12,571 14,633 16,594
The accompanying notes are an integral part of these consolidated financial
statements.
Page 24
Consolidated Statements of Shareholders' Equity
COMMON STOCK UNREALIZED
IN THOUSANDS, ----------------- RETAINED CURRENCY HOLDING
EXCEPT PER SHARE AMOUNTS SHARES AMOUNT EARNINGS ADJUSTMENT GAINS - NET TOTAL
- -------------------------------------------------------------------------------------------
BALANCE MAY 27, 1995 49,624 $ 216,251 $ 298,964 $ 76,948 $ 12,052 $604,215
Shares issued to
employees 667 18,104 18,104
Shares repurchased (1,260) (29,985) (29,985)
Net earnings 99,586 99,586
Dividends -
$0.40 per share (19,944) (19,944)
Currency adjustment (24,879) (24,879)
Unrealized holding
gains - net 28,225 28,225
-----------------------------------------------------------------
BALANCE MAY 25, 1996 49,031 204,370 378,606 52,069 40,277 675,322
Shares issued to
employees 1,173 26,018 26,018
Shares repurchased (100) (3,797) (3,797)
Net earnings 114,785 114,785
Dividends-
$0.40 per share (19,809) (19,809)
Currency adjustment (17,622) (17,622)
Unrealized holding
gains - net (3,614) (3,614)
-----------------------------------------------------------------
BALANCE MAY 31, 1997 50,104 226,591 473,582 34,447 36,663 771,283
Shares issued to
employees 1,151 35,358 35,358
Shares repurchased (910) (38,422) (38,422)
Net earnings 82,285 82,285
Dividends-
$0.46 per share (23,188) (23,188)
Currency adjustment (13,634) (13,634)
Unrealized holding
gains - net (28,741) (28,741)
-----------------------------------------------------------------
BALANCE MAY 30, 1998 50,345 $ 223,527 $ 532,679 $ 20,813 $ 7,922 $784,941
=================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
Page 25
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 more than 8,600 people and
maintains operations in 25 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.
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.
EARNINGS PER SHARE
Basic earnings per share is based on the average number of common
shares outstanding during each period. Diluted earnings per share
reflects the potential shares issuable upon assumed exercise of
outstanding stock options based on the treasury stock method. All
share, per share and option amounts have been restated to give effect
to the three-for-two stock split effective October 31, 1997.
FISCAL YEAR
The Company's fiscal year is the 52 or 53 weeks ending the last
Saturday in May. Fiscal years 1998 and 1996 were 52 weeks; fiscal year
1997 was 53 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.
ACCOUNTS RECEIVABLE
Accounts receivable have been reduced by an allowance for doubtful
accounts, which was $4.8 million in 1998 and $3.1 million in 1997. The
charges to this reserve have not been material.
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 were reflected as operating cash
flows in the Statements of Cash Flows for the year ended May 31, 1997.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined on the first-in, first-out (FIFO) basis.
IN THOUSANDS 1998 1997
- ----------------------------------------------------------------
Materials and work in process $ 76,289 $ 134,743
Finished goods 138,058 103,297
-----------------------
Inventories $ 214,347 $ 238,040
=======================
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 1998 1997
- ----------------------------------------------------------------
Land $ 5,932 $ 6,096
Buildings 217,036 199,396
Machinery and equipment 594,677 493,791
-----------------------
817,645 699,283
Accumulated depreciation and amortization (392,492) (356,153)
-----------------------
Property, plant and equipment - net $ 425,153 $ 343,130
=======================
Page 26
INVESTMENTS
Investments in marketable equity securities are classified as
available-for-sale and reported at fair market value in the
consolidated balance sheets as 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 as other long-term assets at cost.
Amortization is provided on a straight-line basis over periods
generally not exceeding fifteen years. Long-lived assets and
intangibles are reviewed for impairment when events or circumstances
indicate costs may not be recoverable. If impairment exists, the
asset's book value will be written down to its fair value.
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. 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.
FUTURE ACCOUNTING CHANGES
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 130 establishes
requirements for disclosure of comprehensive income and becomes
effective for the first quarter ending August 1998. Reclassification
of earlier financial statements for comparative purposes is required.
SFAS No. 131 establishes standards for disclosure about operating
segments in annual financial statements and selected information in
interim financial reports. The new disclosures will first be presented
in the Company's annual report for the fiscal year ending May 1999.
Information presented for earlier years will be restated for
comparative purposes. Adoption of these statements may result in
additional disclosures but will have no impact on the Company's
consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The new statement will
require recognition of all derivatives as either assets or liabilities
on the balance sheet at fair value. The new statement becomes
effective in fiscal year 2001, but early adoption is encouraged.
Management has not completed an evaluation of the effects this
standard will have on the Company's consolidated financial statements.
RESTRUCTURING
In the second quarter of 1998, the Company announced and began to
implement a restructuring plan designed to return the Video and
Networking business to profitability. A pre-tax provision of $60.0
million was recorded to account for these actions, which included
streamlining its product offerings and reducing the unit's cost
structure to increase operational efficiency. The plan has resulted
in the separation of certain employees worldwide and the exiting of
certain facilities and product lines at an expected total cost of
$21.5 million. These costs are included in non-recurring charges for
the year ended May 30, 1998 in the Consolidated Statements of
Operations. In addition, the decision to streamline product offerings
required a $38.5 million write-down of inventories, which is included
in cost of sales for the year ended May 30, 1998 in the Consolidated
Statements of Operations.
ACQUISITION
On September 30, 1997, the Company acquired Siemens' Communications
Test Equipment GmbH (CTE), a wholly owned subsidiary of Siemens AG
based in Berlin, Germany, for $46.6 million in cash, including direct
acquisition costs. The transaction was accounted for by the purchase
method of accounting, and accordingly, the results of operations of
CTE have been included in the Company's financial statements since the
date of acquisition. Pro forma comparative results of operations are
not presented because they are not materially different from the
Company's reported results of operations. The purchase price was
allocated as follows:
IN THOUSANDS 1998
- ----------------------------------------------------------------
Fair value of identified net assets acquired $ 6,600
Acquired in-process research and development 17,000
Identified intangibles 23,000
-----------
Total purchase price $ 46,600
===========
Acquired in-process research and development of $17.0 million was
expensed in the second quarter of the current year (see Non-recurring
Charges below).
The identified intangibles include $18.0 million of completed
technology and $5.0 million of workforce-in-place and are being
amortized on a straight-line basis over 15 years.
NON-RECURRING CHARGES
IN THOUSANDS 1998
- ----------------------------------------------------------------
Restructuring of the Video and Networking Division $ 59,960
In-process research and development acquired in the
purchase of CTE 17,000
Integration costs associated with the
purchase of CTE 2,000
-----------
Total non-recurring charges 78,960
Inventory write-down included in cost of sales (38,482)
-----------
Non-recurring charges $ 40,478
===========
Page 27
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 1998 1997 1996
- ----------------------------------------------------------------------------------------
Net sales:
United States sales to customers $1,077,649 $1,027,294 $ 890,930
United States export sales to customers 263,717 258,984 271,446
United States transfers to affiliates 989,211 824,520 720,969
-----------------------------------
United States sales 2,330,577 2,110,798 1,883,345
-----------------------------------
European sales to customers 536,817 483,949 470,840
European transfers to affiliates 25,216 5,006 3,183
-----------------------------------
European sales 562,033 488,955 474,023
-----------------------------------
Other area sales to customers 207,619 169,855 135,642
Other area transfers to affiliates 29,641 22,975 23,815
-----------------------------------
Other area sales 237,260 192,830 159,457
-----------------------------------
Eliminations (1,044,068) (852,501) (747,967)
-----------------------------------
Net sales $2,085,802 $1,940,082 $1,768,858
===================================
Earnings before taxes:
United States $ 139,647 $ 178,930 $ 124,618
Europe 24,820 33,093 25,867
Other areas 5,022 (8,555) 8,174
Corporate and eliminations (46,675) (34,666) (16,393)
-----------------------------------
Earnings before taxes $ 122,814 $ 168,802 $ 142,266
===================================
Total assets:
United States $1,034,256 $ 991,928 $ 988,578
Europe 232,196 181,757 198,220
Other areas 87,445 89,663 69,883
Corporate and eliminations 22,913 53,393 71,815
-----------------------------------
Total assets $1,376,810 $1,316,741 $1,328,496
===================================
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.
OTHER LONG-TERM ASSETS
IN THOUSANDS 1998 1997
- ----------------------------------------------------------------------------
Investment in business ventures $ 76,226 $ 85,696
Licensing agreements and other intangibles - net 62,610 37,151
Investment in marketable equity securities 19,450 66,709
Property held for sale 11,366 13,939
Other 8,241 6,065
-----------------------
Other long-term assets $ 177,893 $ 209,560
=======================
Investment in business ventures includes a 50% investment in a
business venture in Japan and a 27% interest in Merix Corporation.
The Company's share of the assets, liabilities, net sales and net
earnings of the business venture in Japan, as well as the Company's
sales to, purchases from, and accounts receivable consisted of:
IN THOUSANDS 1998 1997 1996
- ----------------------------------------------------------------------------------------
Current assets $ 60,236 $ 55,322 $ 74,946
Property, plant and equipment - net 18,632 19,913 23,371
Other long-term assets 6,482 12,129 12,743
Current liabilities 20,562 18,511 32,775
Other long-term liabilities 9,162 8,988 9,323
-----------------------------------
Net sales $ 135,704 $ 152,054 $ 147,860
Gross profit 34,436 40,742 44,756
Operating income 849 3,068 113
Earnings before taxes 3,584 2,792 53
Net earnings (loss) 1,277 1,184 (306)
-----------------------------------
Sales to $ 117,173 $ 112,770 $ 114,307
Purchases from 17,810 19,596 13,650
Accounts receivable 12,354 9,866 9,524
At May 30, 1998, the carrying value of the Company's investment in
Merix was $17.6 million, with a fair value, based upon quoted market
price, of $19.7 million. The Company's portion of the undistributed
earnings of the business ventures was $20.7 million in 1998 and $20.2
million in 1997.
Proceeds from the sales of marketable equity securities in 1998,
1997 and 1996 were $37.0 million, $33.8 million and $23.3 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 1998, 1997 and 1996, unrealized holding
gains of $12.9 million, $58.8 million and $67.2 million (less deferred
taxes of $5.0 million, $22.1 million and $26.9 million), respectively,
were included as a separate component of shareholders' equity.
Licensing agreements and other intangibles have been reduced by
accumulated amortization of $25.3 million at fiscal year-end 1998 and
$17.5 million at fiscal year-end 1997.
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.
Page 28
SHORT-TERM AND LONG-TERM DEBT
The Company's short-term debt consisted of:
IN THOUSANDS 1998 1997
- ----------------------------------------------------------------------------
Lines of credit $ 4,466 $ 4,486
Current maturities of long-term debt 976 1,669
-----------------------
Short-term debt $ 5,442 $ 6,155
=======================
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 30, 1998, the Company
maintained bank credit facilities of $307.6 million, of which $303.1
million was unused. Unused facilities include $153.1 million in lines
of credit and $150.0 million under the revolving credit agreement. A
$20.0 million line of credit expires in October 1998 with all
remaining lines providing no specific expiration date.
The Company's long-term debt consisted of:
IN THOUSANDS 1998 1997
- ----------------------------------------------------------------------------
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 1,657 3,248
-----------------------
Long-term instruments 151,657 153,248
Current maturities (976) (1,669)
-----------------------
Long-term debt $ 150,681 $ 151,579
=======================
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 30, 1998, the Company had unrestricted
retained earnings of $156.9 million after meeting those requirements.
Aggregate long-term debt payments will be $1.0 million in 1999, $0.6
million in 2000, $0.1 million in 2001, none in 2002 and $50.0 million
in 2003.
OTHER LONG-TERM LIABILITIES
IN THOUSANDS 1998 1997
- ----------------------------------------------------------------------------
Accrued postretirement benefits $ 37,082 $ 41,778
Accrued pension 35,004 30,019
Other 19,305 17,993
-----------------------
Other long-term liabilities $ 91,391 $ 89,790
=======================
OTHER INCOME - NET
IN THOUSANDS 1998 1997 1996
- ----------------------------------------------------------------------------------------
Gain on sale of marketable equity securities $ 28,244 $ 27,678 $ 20,197
Loss on disposition of fixed assets (2,441) (5,031) (1,844)
Other (8,214) (6,742) (5,469)
-----------------------------------
Other income - net $ 17,589 $ 15,905 $ 12,884
===================================
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 $28.8 million in 1998, $27.4 million in 1997, and
$25.3 million in 1996. In addition, the Company has long-term or
minimum purchase agreements with various suppliers and vendors. 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 30, 1998 were:
OPERATING
IN THOUSANDS LEASES COMMITMENTS
- ----------------------------------------------------------------------------
1999 $ 20,032 $ 16,121
2000 14,902 9,262
2001 10,300 4,232
2002 7,208 334
2003 5,439 -
Future years 15,068 -
-----------------------
Total $ 72,949 $ 29,949
=======================
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 4,974,000 shares reserved for issuance under these plans at May
30, 1998. 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.
Most options granted after January 1, 1997, vest over two years and
expire five years from the date of grant. There were 1,172 employees
holding options at May 30, 1998.
Page 29
Additional information with respect to option activity is set forth
below:
OUTSTANDING EXERCISABLE
--------------------- -------------------
WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES IN EXERCISE SHARES IN EXERCISE
THOUSANDS PRICE THOUSANDS PRICE
- ---------------------------------------------------------------
May 27, 1995 3,539 $17 1,302 $14
Granted 1,470 30
Exercised (752) 15
Canceled (285) 23
- ---------------------------------------------------------------
May 25, 1996 3,972 $23 1,484 $17
Granted 1,088 32
Exercised (975) 17
Canceled (212) 27
- ---------------------------------------------------------------
May 31, 1997 3,873 $26 1,428 $21
Granted 1,149 40
Exercised (1,093) 23
Canceled (405) 30
- ---------------------------------------------------------------
May 30, 1998 3,524 $31 1,509 $26
===============================================================
The following table summarizes information about options
outstanding and exercisable at May 30, 1998:
OUTSTANDING EXERCISABLE
- -------------------------------- -----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE SHARES IN CONTRACTUAL EXERCISE SHARES IN EXERCISE
PRICES THOUSANDS LIFE PRICE THOUSANDS PRICE
- ---------------------------------------------------------------
$ 9-24 876 5.6 years $20 716 $19
25-30 821 7.7 years 29 316 28
31-36 707 4.4 years 34 393 34
37-40 280 4.2 years 40 76 40
41-47 840 4.6 years 40 8 43
- ---------------------------------------------------------------
3,524 5.5 years $31 1,509 $26
===============================================================
The Company accounts 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 cost 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 1998, 1997 and
1996 was $12, $11 and $10 per share, respectively.
The Company also has plans for certain executives and outside
directors that provide stock-based compensation other than options.
Under APB No. 25, compensation cost for these plans 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 cost is measured based on the market price of the stock
at the grant date. The weighted average grant-date fair value of the
shares granted under these plans during 1998, 1997 and 1996 was $41,
$31 and $25 per share, respectively. The total shares granted under
these plans and the compensation cost recognized in income were not
material.
The pro forma impact to both net earnings and earnings per share
from calculating stock-related compensation cost consistent with the
fair value alternative of SFAS No. 123 is indicated below:
1998 1997 1996
------------------------------
Pro forma net earnings (in thousands) $ 74,520 $ 109,240 $ 97,015
Pro forma earnings
per share -
basic $ 1.48 $ 2.21 $ 1.95
diluted 1.45 2.17 1.90
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:
1998 1997 1996
------------------------------
Expected life (in years) 3.0 5.0 5.0
Risk-free interest rate 5.8% 6.3% 5.7%
Volatility 40.0% 35.2% 33.9%
Dividend yield 1.2% 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
Page 30
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.
BENEFIT PLANS
PENSION AND POSTRETIREMENT BENEFIT PLANS
The Company has defined benefit retirement plans covering most
employees. The U.S. pension plan was amended in 1998, converting it
from a final average pay plan to a cash balance plan. Under the new
plan, an initial account was established for all participants who were
active employees as of December 31, 1997. Beginning January 1, 1998, a
specified percentage of eligible compensation will be credited to each
participant's account. In addition, each participant's account will
earn interest credits, based on the one-year Treasury Bill rate plus
0.5%. Upon separation from Tektronix, participating employees may
choose to have their account balances paid to them in the form of a
lump sum amount or as an annuity. As a result of this plan amendment,
the pension benefit obligation was reduced by $38.9 million, which is
being amortized as a reduction in pension expense over the average
remaining service period of the active participants in the plan.
For 1998, the Company increased the expected long-term rate of
return assumption to reflect historical rates of return on plan
assets. As a result of this change, pension expense in 1998 was
reduced by $3.8 million. The retirement rate assumption was also
revised to reflect actual demographic experience. As a result of this
change, the pension benefit obligation as of May 30, 1998, was
increased by $5.5 million. Finally, upon transition to the cash
balance plan on January 1, 1998, the discount rate was reduced to
reflect current market conditions. The impact of this change was to
increase the pension benefit obligation by $63.9 million.
The following tables provide information about changes in the
benefit obligation and plan assets and the funded status of the
Company's pension and postretirement benefit plans.
PENSION BENEFITS POSTRETIREMENT
BENEFITS
IN THOUSANDS 1998 1997 1998 1997
- ----------------------------------------------------- ---------------------
CHANGE IN BENEFIT OBLIGATION
Beginning balance $ 495,945 $ 512,270 $ 15,070 $ 16,952
Service cost 14,161 11,897 188 177
Interest cost 37,829 37,430 1,145 1,244
Actuarial (gain) loss 68,544 (35,106) 1,252 (1,209)
Plan amendments (38,882) (3,527) - -
CTE acquisition 2,732 - - -
Benefit payments (25,036) (22,934) (1,711) (2,094)
Other adjustments (1,565) (4,085) - -
-----------------------------------------------
Ending balance 553,728 495,945 15,944 15,070
===============================================
CHANGE IN FAIR VALUE OF PLAN ASSETS
Beginning balance 474,222 402,715 - -
Actual return 86,512 55,611 - -
Employer contributions 4,379 41,437 - -
Benefit payments (25,036) (22,934) - -
Other adjustments (1,349) (2,607) - -
-----------------------------------------------
Ending balance 538,728 474,222 - -
===============================================
Net unfunded status of the plan 15,000 21,723 15,944 15,070
Unrecognized initial net
asset (obligation) (124) 1,735 - -
Unrecognized prior service cost 46,320 9,834 16,026 18,697
Unrecognized net gain (loss) (37,414) (8,141) 9,112 11,110
-----------------------------------------------
Net liability recognized $ 23,782 $ 25,151 $ 41,082 $ 44,877
===============================================
The projected benefit obligation, accumulated benefit obligation, and
fair value of plan assets for certain non-U.S. plans with accumulated
benefit obligations in excess of plan assets were $18.7 million, $17.2
million and zero, respectively, for 1998, and $15.2 million, $13.1
million and zero, respectively, for 1997.
Page 31
Assumptions used in the accounting for the Company's pension and
postretirement benefit plans were:
ASSUMPTIONS ON A WEIGHTED
AVERAGE BASIS 1998 1997 1996
- ----------------------------------------------------------------------------
PENSION BENEFITS
Discount rate 7.0% 7.8% 7.6%
Rate of compensation increase 3.7% 3.8% 3.8%
Expected return on plan assets 10.9% 10.2% 9.3%
POSTRETIREMENT BENEFITS
Discount rate 7.3% 8.0% 7.8%
Rate of compensation increase 3.8% 3.8% 3.8%
Effective July 1, 1998, the Company replaced its self-funded
indemnity health plan for retirees with an insured indemnity plan.
Accordingly, the assumed health care cost trend rates used to measure
the expected cost of benefits were adjusted to reflect the terms of
the new plan. As a result, the annual rate of change in the cost of
health care benefits for 1999 under the new indemnity plan was assumed
to be a decrease of 14.3% for participants under the age of 65 and an
increase of 4.7% for participants age 65 and over. These rates were
assumed to increase to 13.5% and 16.0%, respectively, for 2000 and
2001, and then were assumed to decrease gradually until they reach an
ultimate rate of 5.3% and 5.5%, respectively, in 2007. For the
existing retiree HMO plans, the rate of increase in the cost of health
care benefits was assumed to be 9.8% for 1999, decreasing gradually to
a rate of 5.3% in 2004 and remaining at that level thereafter. A 1%
change in these assumptions would not have a material effect on either
the postretirement benefit obligation at May 30, 1998, or the benefit
credit reported for 1998.
The components of net pension benefit cost and postretirement benefit
credit recognized in income were:
IN THOUSANDS 1998 1997 1996
- ----------------------------------------------------------------------------
PENSION BENEFITS
Service cost $ 14,161 $ 12,084 $ 9,469
Interest cost 37,829 37,627 37,414
Expected return on plan assets (48,634) (39,335) (33,574)
Amortization of transition asset (2,059) (1,858) (1,835)
Amortization of prior service cost (2,209) (740) (780)
Recognized net loss 1,792 2,655 999
Other benefit plans 1,992 1,327 1,454
-----------------------------------
Net benefit cost $ 2,872 $ 11,760 $ 13,147
===================================
POSTRETIREMENT BENEFITS
Service cost $ 188 $ 177 $ 168
Interest cost 1,145 1,244 1,359
Amortization of prior service cost (2,671) (2,671) (2,671)
Recognized net gain (747) (631) (714)
-----------------------------------
Net benefit credit $ (2,085) $ (1,881) $ (1,858)
===================================
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's matching
contribution, which was previously invested entirely in Company stock,
was increased from 3% to 4% of compensation effective January 1, 1998,
and may now be invested in any one of the 401(k) plan funds. In
addition, the Company contributes Company stock to the plan for all
eligible employees equal to 2% of compensation. The Company's total
contributions were approximately $16.4 million in 1998, $14.2 million
in 1997, and $12.1 million in 1996.
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 1998 and 1997, the notional amounts of the
Company's outstanding contracts were $127.4 million and $113.6
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 deferred
gains or losses attributable to foreign exchange contracts are not
material.
Page 32
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 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 30, 1998, and May 31, 1997, were not material.
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 30, 1998, 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 1998 1997 1996
- ----------------------------------------------------------------------------------------
Current:
Federal $ 30,979 $ 21,457 $ 9,104
State 5,060 3,742 1,961
Non-U.S. 10,826 7,854 10,789
-----------------------------------
46,865 33,053 21,854
Deferred:
Federal (180) 15,921 16,363
State (460) 2,015 3,338
Non-U.S. (5,696) 3,028 1,125
-----------------------------------
(6,336) 20,964 20,826
-----------------------------------
Total provision $ 40,529 $ 54,017 $ 42,680
===================================
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 1998 1997 1996
- ----------------------------------------------------------------------------------------
Income taxes based on U.S. statutory rate $ 42,985 $ 59,081 $ 49,793
Foreign sales corporations (6,391) (5,935) (4,565)
Change in beginning of year valuation allowance (505) (3,824) (5,526)
State income taxes, net of U.S. tax 2,990 3,742 3,445
Other - net 1,450 953 (467)
----------------------------------
Total provision $ 40,529 $ 54,017 $ 42,680
==================================
Tax benefits of $7.8 million, $5.6 million and $5.0 million
associated with the exercise of employee stock options were credited
to common stock in 1998, 1997 and 1996, respectively.
Net deferred tax assets and liabilities are included in the
following consolidated balance sheet accounts:
IN THOUSANDS 1998 1997
- ----------------------------------------------------------------------------
Other current assets $ 52,434 $ 43,106
Deferred tax assets 25,102 12,540
-----------------------
Net deferred tax assets $ 77,536 $ 55,646
=======================
The temporary differences and carryforwards that give rise to
deferred tax assets and liabilities were as follows:
IN THOUSANDS 1998 1997
- ----------------------------------------------------------------------------
Deferred tax assets:
Reserves and other liabilities $ 43,179 $ 41,858
Accrued postretirement benefits 16,022 17,502
Accumulated depreciation 9,162 9,918
Intangibles 8,271 -
AMT and foreign tax credit carryforwards 8,243 14,088
Restructuring costs and separation programs 7,463 -
Accrued pension liability 6,632 6,289
Net operating losses of non-U.S. subsidiaries 5,324 10,432
-----------------------
Gross deferred tax assets 104,296 100,087
Less valuation allowance (2,600) (3,105)
-----------------------
Deferred tax assets 101,696 96,982
-----------------------
Deferred tax liabilities:
Software development costs (19,167) (17,464)
Unrealized gains on marketable equity securities (4,993) (22,092)
Unamortized LIFO reserve - (1,780)
-----------------------
Deferred tax liabilities (24,160) (41,336)
-----------------------
Net deferred tax assets $ 77,536 $ 55,646
=======================
At May 30, 1998, there were no unused foreign tax credit carryovers.
There were $8.2 million of alternative minimum tax (AMT) credits that
can be carried forward indefinitely.
Page 33
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. 30, NOV. 29, FEB. 28, MAY 30,
QUARTER ENDED 1997 1997 1998 1998
- ----------------------------------------------------------------------------------------
Net sales $ 481,274 $ 529,046 $ 517,570 $ 557,912
Gross profit 201,273 191,995 224,854 247,205
Operating income (loss) 38,317 (32,932) 48,599 61,317
Earnings (loss) before taxes 39,874 (31,667) 51,106 63,501
Net earnings (loss) 26,716 (21,217) 34,241 42,545
Basic earnings (loss) per share $ 0.53 $ (0.42) $ 0.68 $ 0.84
Diluted earnings (loss) per share 0.52 (0.42) 0.67 0.83
Average shares outstanding -
basic 50,303 50,546 50,483 50,452
diluted 51,442 50,546 51,408 51,413
Dividends per share $ 0.10 $ 0.12 $ 0.12 $ 0.12
Common stock prices:
High $ 43.50 $ 46.42 $ 46.25 $ 48.19
Low 36.42 37.08 35.56 36.06
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
Basic earnings per share $ 0.46 $ 0.54 $ 0.58 $ 0.74
Diluted earnings per share 0.45 0.53 0.57 0.72
Average shares outstanding -
basic 49,149 49,287 49,616 49,973
diluted 49,888 50,125 50,409 51,006
Dividends per share $ 0.10 $ 0.10 $ 0.10 $ 0.10
Common stock prices:
High $ 29.92 $ 32.67 $ 34.83 $ 39.83
Low 23.92 24.67 31.59 32.25
The Company's common stock is traded on the New York and Pacific
Stock Exchanges. There were 3,880 shareholders of record at June 24,
1998. 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.
All share and per share amounts have been restated to give effect to
the three-for-two stock split effective October 31, 1997.
Page 34