<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 1)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MAY 30, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
__________
COMMISSION FILE NUMBER 1-4837
TEKTRONIX, INC.
(Exact name of Registrant as specified in its charter)
OREGON 93-0343990
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14200 SW KARL BRAUN DRIVE
BEAVERTON, OREGON 97077
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code:
(503) 627-7111
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange on
Title of each class which registered
------------------- ------------------------
<S> <C>
Common Shares, New York Stock Exchange
without par value Pacific Stock Exchange
Series A No Par Preferred New York Stock Exchange
Shares Purchase Rights Pacific Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant was approximately $1,345,950,348 at August 3, 1998.
At August 3, 1998 there were 49,638,025 Common Shares of the Registrant
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
Document Part of 10-K into which incorporated
-------- ------------------------------------
<S> <C>
Registrant's Proxy Statement Part III
dated August 20, 1998
</TABLE>
<PAGE>
EXPLANATORY NOTE
Amendment to Annual Report on Form 10-K
for Fiscal Year End May 30, 1998
This filing on Form 10-K/A amends the Registrant's Annual Report on
Form 10-K with respect to Item 5. - Market for the Registrant's Common Equity
and Related Stockholder Matters, Item 7. - Management's Discussion and Analysis
of Financial Condition and Results of Operations, Item 8. - Financial Statements
and Supplementary Data and Item 14. - Exhibits, Financial Statement Schedules,
and Reports on Form 8-K and Exhibits 13, 27 and 99.
Except as noted above, the Registrant's Annual Report on Form 10-K for
the fiscal year ended May 30, 1998, remains as originally filed with the
Securities and Exchange Commission.
2
<PAGE>
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The information required by this item is included on page 27 of Exhibit
99 incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required by this item is included on pages 1 through 5
of Exhibit 99 incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is included on pages 8 through 28
of Exhibit 99 incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8 - K
(a) The following documents are filed as part of this report:
(1) Financial Statements.
The following documents are included in Exhibit 99 to the pages
indicated and are incorporated herein by reference:
<TABLE>
<CAPTION>
Page in Exhibit 99
<S> <C>
Independent Auditors' Report 7
Consolidated Statements of Operations 8
Consolidated Balance Sheets 9
Consolidated Statements of Cash Flows 10
Consolidated Statements of Shareholders' Equity 11
Notes to Consolidated Financial Statements 12
</TABLE>
(2) Financial Statement Schedules.
No financial statement schedules are required to be filed with this
report.
Separate financial statements for the Registrant have been omitted
because the Registrant is primarily an operating company and the subsidiaries
included in the consolidated financial statements are substantially totally
held. All subsidiaries of the Registrant are included in the consolidated
financial statements. Summarized financial information for 50 percent or less
owned persons in which the Registrant has an interest, and for which summarized
financial information must be provided, is included in the Notes to Consolidated
Financial Statements appearing in Exhibit 99.
3
<PAGE>
(3) Exhibits:
(3)(i) Restated Articles of Incorporation, as
amended. Incorporated by reference to
Exhibit (3) of Form 10-Q dated September 28,
1990, SEC File No. 1-4837.
(ii) Bylaws, as amended. Incorporated by
reference to Exhibit (3) of Form 10-K dated
August 21, 1997, SEC File No. 1-4837.
(4)(i) Indenture dated as of November 16, 1987, as
amended by First Supplemental Indenture
dated as of July 13, 1993, covering the
Registrant's 7 1/2% notes due August 1,
2003, and the Registrant's 7 5/8% notes due
August 15, 2002. Indenture incorporated by
reference to Exhibit 4(i) of Form 10-K dated
August 22, 1990, SEC File No. 1-4837.
(ii) Pursuant to Item 601(b)(4)(iii) of
Regulation S-K, the Registrant agrees to
furnish to the Commission upon request
copies of agreements relating to other
indebtedness.
+(10) (i) 1982 Stock Option Plan, as amended.
Incorporated by reference to Exhibit 10(iii)
of Form 10-K dated August 22, 1989, SEC File
No. 1-4837.
+(ii) Stock Incentive Plan, as amended.
Incorporated by reference to Exhibit 10(ii)
of Form 10-Q dated April 9, 1993, SEC File
No. 1-4837.
+(iii) Restated Annual Performance Improvement
Plan. Incorporated by reference to Exhibit
10(i) of Form 10-Q dated April 9, 1993, SEC
File No. 1-4837.
+(iv) Restated Deferred Compensation Plan.
Incorporated by reference to Exhibit 10(i)
of Form 10-Q dated December 20, 1984, SEC
File No. 1-4837.
+(v) Retirement Equalization Plan, Restatement.
Incorporated by reference to Exhibit 10(v)
of Form 10-K dated August 20, 1996, SEC File
No. 1-4837.
+(vi) Indemnity Agreement entered into between the
Company and its named officers and
directors. Incorporated by reference to
Exhibit 10(ix) of Form 10-K dated August 18,
1996, SEC File No. 1-4837.
+(vii) Form of Executive Severance Agreement
entered into between the Company and its
named officers. Incorporated by reference to
Exhibit 10(ix) of Form 10-K dated August 9,
1995, SEC File No. 1-4837.
+(viii) Executive Compensation and Benefits
Agreement (Jerome J. Meyer) dated as of
October 24, 1990.
4
<PAGE>
Incorporated by reference to Exhibit 10(ii)
of Form 10-Q dated December 21, 1990, SEC
File No. 1-4837.
+(ix) Amendment to Supplemental Executive
Retirement Agreement (Jerome J. Meyer).
Incorporated by reference to Exhibit 10(ii)
of Form 10-Q dated October 7, 1994, SEC File
No. 1-4837.
+(x) Amendment to Supplemental Executive
Retirement Agreement (Jerome J. Meyer) dated
June 16, 1998.
+(xi) Executive Compensation and Benefits
Agreement (Carl W. Neun) dated as of March
29, 1993. Incorporated by reference to
Exhibit 10(xiv) of Form 10-K dated August
11, 1994, SEC File No. 1-4837.
+(xii) Amendment to Supplemental Executive
Retirement Agreement (Carl W. Neun) dated
September 24, 1997. Incorporated by
reference to Exhibit 10(i) of Form 10-Q
dated January 13, 1998, SEC File No. 1-4837.
(xiii) Rights Agreement dated as of August 16,
1990. Incorporated by reference to Exhibit 1
of Form 8-K dated August 27, 1990, SEC File
No. 1-4837.
+(xiv) Non-Employee Directors' Deferred
Compensation Plan, 1995 Restatement dated
July 1, 1995. Incorporated by reference to
Exhibit 10(xv) of Form 10-K dated August 9,
1995, SEC File No. 1-4837.
+(xv) Non-Employee Directors' Stock Compensation
Plan. Incorporated by reference to Exhibit
10(xvi) of Form 10-K dated August 9, 1995,
SEC File No. 1-4837.
+(xvi) Supplemental Executive Retirement Plan for
named executive officers dated September 26,
1996. Incorporated by reference to Exhibit
10(xvi) of Form 10-K dated May 31, 1997, SEC
File No. 1-4837.
(21) Subsidiaries of the Registrant.
(23) Independent Auditors' Consent.
(24) Powers of Attorney.
(27) Financial Data Schedule, as amended.
(99) Amended Financial Statements and Financial
Information
+ Compensatory Plan or Arrangement
(b) No reports on Form 8-K have been filed during the last quarter
of the period covered by this Report.
5
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TEKTRONIX, INC.
By: /s/ Colin L. Slade
------------------------------------------------
Colin L. Slade, Vice President and
Chief Financial Officer
Dated: May 16, 2000
6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
<S> <C>
(3)(i) Restated Articles of Incorporation, as amended.
Incorporated by reference to Exhibit (3) of Form 10-Q
dated September 28, 1990, SEC File No. 1-4837.
(ii) Bylaws, as amended. Incorporated by reference to
Exhibit (3) of Form 10-K dated August 21, 1997, SEC
File No. 1-4837.
(4)(i) Indenture dated as of November 16, 1987, as amended by
First Supplemental Indenture dated as of July 13,
1993, covering the Registrant's 7 1/2% notes due
August 1, 2003, and the Registrant's 7 5/8% notes due
August 15, 2002. Indenture incorporated by reference
to Exhibit 4(i) of Form 10-K dated August 22, 1990,
SEC File No. 1-4837.
(ii) Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the
Registrant agrees to furnish to the Commission upon
request copies of agreements relating to other
indebtedness.
+(10)(i) 1982 Stock Option Plan, as amended. Incorporated by
reference to Exhibit 10(iii) of Form 10-K dated August
22, 1989, SEC File No. 1-4837.
+(ii) Stock Incentive Plan, as amended. Incorporated by
reference to Exhibit 10(ii) of Form 10-Q dated April
9, 1993, SEC File No. 1-4837.
+(iii) Restated Annual Performance Improvement Plan.
Incorporated by reference to Exhibit 10(i) of Form
10-Q dated April 9, 1993, SEC File No. 1-4837.
+(iv) Restated Deferred Compensation Plan. Incorporated by
reference to Exhibit 10(i) of Form 10-Q dated December
20, 1984, SEC File No. 1-4837.
+(v) Retirement Equalization Plan, Restatement.
Incorporated by reference to Exhibit 10(v) of Form
10-K dated August 20, 1996, SEC File No. 1-4837.
+(vi) Indemnity Agreement entered into between the Company
and its named officers and directors. Incorporated by
reference to Exhibit 10(ix) of Form 10-K dated August
18, 1996, SEC File No. 1-4837.
+(vii) Form of Executive Severance Agreement entered into
between the Company and its named officers.
Incorporated by reference to Exhibit 10(ix) of Form
10-K dated August 9, 1995, SEC File No. 1-4837.
<PAGE>
<CAPTION>
<S> <C>
+(viii) Executive Compensation and Benefits Agreement (Jerome
J. Meyer) dated as of October 24, 1990. Incorporated
by reference to Exhibit 10(ii) of Form 10-Q dated
December 21, 1990, SEC File No. 1-4837.
+(ix) Amendment to Supplemental Executive Retirement
Agreement (Jerome J. Meyer). Incorporated by reference
to Exhibit 10(ii) of Form 10-Q dated October 7, 1994,
SEC File No. 1-4837.
+(x) Amendment to Supplemental Executive Retirement
Agreement (Jerome J. Meyer) dated June 16, 1998.
+(xi) Executive Compensation and Benefits Agreement (Carl W.
Neun) dated as of March 29, 1993. Incorporated by
reference to Exhibit 10(xiv) of Form 10-K dated August
11, 1994, SEC File No. 1-4837.
+(xii) Amendment to Supplemental Executive Retirement
Agreement (Carl W. Neun) dated September 24, 1997.
Incorporated by reference to Exhibit 10(i) of Form
10-Q dated January 13, 1998, SEC File No. 1-4837.
(xiii) Rights Agreement dated as of August 16, 1990.
Incorporated by reference to Exhibit 1 of Form 8-K
dated August 27, 1990, SEC File No. 1-4837.
+(xiv) Non-Employee Directors' Deferred Compensation Plan,
1995 Restatement dated July 1, 1995. Incorporated by
reference to Exhibit 10(xv) of Form 10-K dated August
9, 1995, SEC File No. 1-4837.
+(xv) Non-Employee Directors' Stock Compensation Plan.
Incorporated by reference to Exhibit 10(xvi) of Form
10-K dated August 9, 1995, SEC File No. 1-4837.
+(xvi) Supplemental Executive Retirement Plan for named
executive officers dated September 26, 1996.
Incorporated by reference to Exhibit 10(xvi) of Form
10-K dated May 31, 1997, SEC File No. 1-4837.
(21) Subsidiaries of the Registrant.
(23) Independent Auditors' Consent.
(24) Powers of Attorney.
(27) Financial Data Schedule, as amended.
(99) Amended Financial Statements and Financial Information
</TABLE>
+ Compensatory Plan or Arrangement
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-30-1998
<PERIOD-END> MAY-30-1998
<CASH> 120,541
<SECURITIES> 0
<RECEIVABLES> 346,342<F1>
<ALLOWANCES> 0
<INVENTORY> 214,347
<CURRENT-ASSETS> 748,662
<PP&E> 817,645
<DEPRECIATION> 392,492
<TOTAL-ASSETS> 1,376,810
<CURRENT-LIABILITIES> 349,797
<BONDS> 150,681
223,527
0
<COMMON> 0
<OTHER-SE> 561,414<F2>
<TOTAL-LIABILITY-AND-EQUITY> 1,376,810
<SALES> 2,085,802
<TOTAL-REVENUES> 2,085,802
<CGS> 1,220,475
<TOTAL-COSTS> 1,220,475
<OTHER-EXPENSES> 750,026
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,076
<INCOME-PRETAX> 122,814
<INCOME-TAX> 40,529
<INCOME-CONTINUING> 82,285
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 82,285
<EPS-BASIC> 1.63
<EPS-DILUTED> 1.60
<FN>
<F1>AMOUNT REPRESENTS NET ACCOUNTS RECEIVABLE.
<F2>AMOUNT INCLUDES RETAINED EARNINGS AND OTHER COMPREHENSIVE INCOME.
</FN>
</TABLE>
<PAGE>
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 severance
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.
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. The objective of the plan was to reduce the unit's cost structure
to increase operational efficiency.
The plan has resulted in the separation of approximately 280 employees
worldwide and the exiting of certain facilities and product lines at an expected
total cost of $21.5 million. The actions included streamlining its product
offerings by discontinuing certain products in the Grass Valley line, certain
non-linear digital editing products sold under the Lightworks name, and exiting
the Network Displays business. As a result of the reduction in headcount and
product offerings, the Company's facility in Grass Valley, California, was
closed and consolidated into the nearby Nevada City, California, facility. The
Grass Valley facility is owned by the Company and is held for sale. 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 downsize the business and streamline product
offerings resulted in obsolete inventory that was written off. Numerous products
were discontinued, requiring a $38.5 million write-down of inventories now
considered obsolete, which is included in cost of sales for the year ended May
30, 1998 in the Consolidated Statements of Operations.
The Company expects these actions to reduce costs by approximately $30.0
million per year once fully implemented. The implementation will be
substantially complete by the end of the second quarter of 1999. The cash
required for these actions is approximately $15.8 million. As of May 30, 1998,
$9.2 million of this cash has been spent, with the remainder to be paid out
through the second quarter of 1999.
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.
1
<PAGE>
The following table summarizes the Company's net sales for the last three
years by its three business divisions:
<TABLE>
<CAPTION>
IN THOUSANDS 1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
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, including those
from CTE. 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. This inventory included finished
goods and components related to products that were discontinued in an effort to
focus the company on products that generate the highest margins. 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.
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.
2
<PAGE>
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 operations and capital expenditures through May 2000. 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.
3
<PAGE>
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.
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.
4
<PAGE>
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.
5
<PAGE>
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.
MERRILL A. MCPEAK
Chairman, Audit Committee
CARL W. NEUN
Senior Vice President and
Chief Financial Officer
6
<PAGE>
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.
Deloitte & Touche LLP
Portland, Oregon
June 24, 1998
7
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
FOR THE YEARS ENDED MAY 30,1998 MAY 31,1997 MAY 25,1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 $ 14,785 $ 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.
</TABLE>
8
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
IN THOUSANDS MAY 30,1998 MAY 31,1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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.
</TABLE>
9
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
IN THOUSANDS
FOR THE YEARS ENDED MAY 30,1998 MAY 31,1997 MAY 25,1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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.
</TABLE>
10
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
IN THOUSANDS, COMMON STOCK RETAINED HOLDING CURRENCY
EXCEPT PER SHARE AMOUNTS SHARES AMOUNT EARNINGS GAINS - NET ADJUSTMENT TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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.
</TABLE>
11
<PAGE>
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.
12
<PAGE>
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
The company periodically evaluates its inventory in terms of obsolete or
slow-moving items. Inventories are stated at the lower of cost or market. Cost
is determined on the first-in, first-out (FIFO) basis.
<TABLE>
<CAPTION>
IN THOUSANDS 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Materials and work in process $ 76,289 $ 134,743
Finished goods 138,058 103,297
------------------------
Inventories $ 214,347 $ 238,040
========================
</TABLE>
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.
<TABLE>
<CAPTION>
IN THOUSANDS 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
===========================
</TABLE>
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.
13
<PAGE>
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.
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:
<TABLE>
<CAPTION>
IN THOUSANDS 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
Identified intangibles $ 23,000
Acquired in-process research and development 17,000
Fair value of identified net assets acquired 6,600
----------
Total purchase price $ 46,600
==========
</TABLE>
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.
The completed technology of $18.0 million acquired consists of several
products in the telecommunications test equipment market that supplemented the
company's current product offerings. The valuation of the completed technology
was determined by calculating the net present value of future cash flows based
on predicted revenues and expenses associated with the existing products. A
discount rate of 16% was used in the valuation of the completed technology.
The acquired in-process research and development ("IPR&D") of $17.0 million
was comprised of several projects in the telecommunication test equipment
market. The value of the IPR&D was expensed in the second quarter of fiscal year
1998 because at the time of the acquisition technological feasibility had not
been established and no future alternative uses existed for any of the projects.
To determine the valuation of in-process technology, management considered
the state of development of each project, the expected time and cost to complete
each project, the expected income from the projects, and the risks associated
with the development. These risks include technological feasibility issues,
demand for the final products, and competition. The Income Approach was utilized
in determining the valuation of the IPR&D. This approach determines the net
present value of the future cash flows based on predicted revenues and costs
associated with the first generation of products, using a discount rate
commensurate with the risks identified. A discount rate of 26% was used in the
valuation of the IPR&D.
14
<PAGE>
Research and development costs to bring the projects from the acquired
company to technological feasibility were approximately $5.0 million, and the
products were completed at various dates during fiscal year 1998 and fiscal year
1999.
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. The cash required for these actions is
approximately $15.8 million. As of May 30, 1998, $9.2 million of this cash has
been spent, with the remainder to be paid out through the second quarter of
1999.
The restructuring charges incurred during the quarter ended November 29, 1997
affected the Company's financial position in the following manner:
<TABLE>
<CAPTION>
Equipment Payables
Accrued and other and other
(In thousands) compensation Inventories assets liabilities
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Original charges $ 14,933 $ 38,482 $ 5,706 $ 839
Activity for the year
ended May 30, 1998:
Cash paid out 8,778 -- -- 397
Non-cash disposals or
write-offs 38,482 5,706 -
------------- -------------- -------------- ---------------
Balance May 30, 1998 $ 6,155 $ -- $ -- $ 442
============= ============= ============== ===============
</TABLE>
The charge of $14.9 million in accrued compensation reflects headcount
reductions of 411 employees worldwide. Approximately 225 employees were
terminated and paid severance of $8.8 million under this plan through the end of
1998.
NON-RECURRING CHARGES
Non-recurring charges consisted of:
<TABLE>
<CAPTION>
LOCATION OF CHARGE IN THE
IN THOUSANDS STATEMENTS OF OPERATIONS 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Severance and benefits Non-recurring charges $14,933
Inventory write-offs Cost of sales 38,482
Asset write-offs and impairments Non-recurring charges 5,706
Lease buy-outs and
abandonment of facilities Non-recurring charges 839
Acquired in-process research
and development Non-recurring charges 17,000
Severance costs associated
with the purchase of CTE Non-recurring charges 2,000
----------
$78,960
==========
</TABLE>
15
<PAGE>
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:
<TABLE>
<CAPTION>
IN THOUSANDS 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
================================================
</TABLE>
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.
16
<PAGE>
OTHER LONG-TERM ASSETS
<TABLE>
<CAPTION>
IN THOUSANDS 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
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
==========================
</TABLE>
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:
<TABLE>
<CAPTION>
IN THOUSANDS 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
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.
SHORT-TERM AND LONG-TERM DEBT
The Company's short-term debt consisted of:
<TABLE>
<CAPTION>
IN THOUSANDS 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
Lines of credit $ 4,466 $ 4,486
Current maturities of long-term debt 976 1,669
------------------------
Short-term debt $ 5,442 $ 6,155
========================
</TABLE>
17
<PAGE>
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:
<TABLE>
<CAPTION>
IN THOUSANDS 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
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
============================
</TABLE>
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
<TABLE>
<CAPTION>
IN THOUSANDS 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
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
======================
</TABLE>
18
<PAGE>
OTHER INCOME - NET
<TABLE>
<CAPTION>
IN THOUSANDS 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
================================================
</TABLE>
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:
<TABLE>
<CAPTION>
OPERATING
IN THOUSANDS LEASES COMMITMENTS
- -------------------------------------------------------------------------------------
<S> <C> <C>
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
=============================
</TABLE>
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.
19
<PAGE>
Additional information with respect to option activity is set forth below:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------- -------------------------
WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES IN EXERCISE SHARES IN EXERCISE
THOUSANDS PRICE THOUSANDS PRICE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
==============================================================================================================
</TABLE>
The following table summarizes information about options outstanding and
exercisable at May 30, 1998:
<TABLE>
<CAPTION>
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
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 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
==============================================================================================================
</TABLE>
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.
20
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
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.
21
<PAGE>
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.
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
IN THOUSANDS 1998 1997 1998 1997
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
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
=================================================================
</TABLE>
22
<PAGE>
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. Assumptions used in the accounting for the Company's pension and
postretirement benefit plans were:
<TABLE>
<CAPTION>
ASSUMPTIONS ON A WEIGHTED
AVERAGE BASIS 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
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:
<TABLE>
<CAPTION>
IN THOUSANDS 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
=====================================
</TABLE>
23
<PAGE>
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.
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.
24
<PAGE>
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:
<TABLE>
<CAPTION>
IN THOUSANDS 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
===============================================
</TABLE>
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:
<TABLE>
<CAPTION>
IN THOUSANDS 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
==============================================
</TABLE>
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:
<TABLE>
<CAPTION>
IN THOUSANDS 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Other current assets $ 52,434 $ 43,106
Deferred tax assets 25,102 12,540
---------------------------
Net deferred tax assets $ 77,536 $ 55,646
===========================
</TABLE>
25
<PAGE>
The temporary differences and carryforwards that give rise to deferred tax
assets and liabilities were as follows:
<TABLE>
<CAPTION>
IN THOUSANDS 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
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
========================
</TABLE>
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.
26
<PAGE>
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):
<TABLE>
<CAPTION>
AUG. 30, NOV. 29, FEB. 28, MAY 30,
QUARTER ENDED 1997 1997 1998 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
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. See also the "Acquisition"
and the "Restructuring" footnotes for information that affects the comparability
of the quarterly information above.
27
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
AMOUNTS ARE IN MILLIONS, EXCEPT PER SHARE CONSOLIDATED FINANCIAL PERFORMANCE
AND EMPLOYEES. RETURNS ARE BASED
ON AVERAGE NET ASSETS 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 2,085.8 $ 1,940.1 $ 1,768.9 $ 1,498.0 $ 1,342.5
Gross margin 41.5% 42.9% 41.9% 45.3% 46.1%
Excluding non-recurring charges(1) 43.3% 42.9% 41.9% 45.3% 46.1%
Research and
development expenses 9.7% 9.7% 9.3% 11.1% 11.9%
Selling, general and
administrative expenses 24.4% 24.8% 24.8% 26.7% 27.6%
Operating margin 5.5% 8.5% 8.1% 7.7% 6.5%
Excluding non-recurring charges(1) 9.3% 8.5% 8.1% 7.7% 6.5%
Pretax margin 5.9% 8.7% 8.0% 7.4% 6.5%
Excluding non-recurring charges(1) 9.7% 8.7% 8.0% 7.4% 6.5%
Earnings margin 3.9% 5.9% 5.6% 5.4% 4.6%
Excluding non-recurring charges(1) 6.5% 5.9% 5.6% 5.4% 4.6%
Net earnings $ 82.3 $ 114.8 $ 99.6 $ 81.6 $ 61.5
Excluding non-recurring charges(1) $ 135.2 $ 114.8 $ 99.6 $ 81.6 $ 61.5
Basic earnings per share $ 1.63 $ 2.32 $ 2.00 $ 1.67 $ 1.27
Excluding non-recurring charges(1) $ 2.68 $ 2.32 $ 2.00 $ 1.67 $ 1.27
Diluted earnings per share $ 1.60 $ 2.29 $ 1.95 $ 1.64 $ 1.25
Excluding non-recurring charges(1) $ 2.63 $ 2.29 $ 1.95 $ 1.64 $ 1.25
Weighted average shares
outstanding -
basic 50.4 49.5 49.8 48.9 48.5
diluted 51.3 50.2 51.0 49.8 49.3
Dividends per share $ 0.46 $ 0.40 $ 0.40 $ 0.40 $ 0.40
Cash and cash equivalents $ 120.5 $ 142.7 $ 36.6 $ 31.8 $ 43.0
Total assets $ 1,376.8 $ 1,316.7 $ 1,328.5 $ 1,218.3 $ 1,002.8
Long-term debt $ 150.7 $ 151.6 $ 202.0 $ 105.0 $ 104.9
Total debt $ 156.1 $ 157.7 $ 246.6 $ 192.6 $ 124.0
Total capitalization $ 784.9 $ 771.3 $ 675.3 $ 604.2 $ 472.8
Return on equity 10.6% 15.9% 15.6% 15.2% 13.5%
Excluding non-recurring charges(1) 16.8% 15.9% 15.6% 15.2% 13.5%
Ending shares outstanding 50.3 50.1 49.0 49.6 48.3
Book value per share $ 15.59 $ 15.39 $ 13.77 $ 12.18 $ 9.79
Closing share price $ 38.25 $ 38.25 $ 25.25 $ 30.67 $ 19.17
Capital expenditures $ 155.1 $ 112.0 $ 106.7 $ 103.8 $ 71.9
Depreciation expense $ 65.9 $ 59.6 $ 47.1 $ 40.9 $ 55.3
Square feet in use 4.0 3.8 4.1 4.3 5.0
Employees 8,630 8,392 7,929 7,712 8,591
Net sales per employee
(in thousands) $ 241.7 $ 231.2 $ 223.1 $ 194.2 $ 156.3
Revenue from new products(2) 74% 73% 67% 62% 50%
</TABLE>
(1) Amounts for 1998 do not include non-recurring charges of $79.0 million
pre-tax, $52.9 million net of tax ($1.05 per basic share, $1.03 per diluted
share). See also the "Management Review" and the "Non-recurring Charges" Note to
the Consolidated Financial Statements.
(2) Represents percentage of total product sales generated by products
introduced within the last two years.
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