| TEKTRONIX INC discussed below in Item 1A Risk Factors of Part I of this Form 10-K 1 _________________________________________________________________ [61]Table of Contents PART I Item 1 |
| The Company Tektronix is a leading supplier of test, measurement, and monitoring products, solutions and services to the communications, computer, and semiconductor industries worldwide |
| With over 60 years of experience, Tektronix provides general purpose test and measurement; video test, measurement, and monitoring; and communications network management and diagnostic products that enable our customers to design, build, deploy, and manage next-generation global communications networks, computing, pervasive, and advanced technologies |
| Tektronix derives revenue principally by developing, manufacturing, and selling a broad range of products and related components, support services, and accessories |
| Tektronix is organized around two business platforms: the Instruments Business and the Communications Business |
| The Instruments Business includes general purpose test and measurement products and video test, measurement, and monitoring products |
| The Communications Business includes telecommunications network management solutions and services and network diagnostics products |
| We maintain operations and conduct business in four major geographies: the Americas, Europe, the Pacific, and Japan |
| Tektronix is an Oregon corporation organized in 1946 |
| Our headquarters is located in Beaverton, Oregon, and we conduct our operations worldwide Item 1A Risk Factors |
| Risks and Uncertainties Described below are some of the risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Annual Report |
| See “Forward-Looking Statements” that precedes Part I of this Form 10-K We compete in a cyclical market |
| Our business depends on capital expenditures of customers in a wide range of industries, including the telecommunications, semiconductor, and computer industries |
| Each of these industries has historically been cyclical and has experienced periodic downturns, which have had a material adverse impact on the demand for equipment and services manufactured and marketed by us |
| During periods of reduced and declining demand, we may need to rapidly align our cost structure with prevailing market conditions while at the same time motivate and retain key employees |
| Our net sales and operating results could be adversely affected by the reversal of any favorable trends or any future downturns or slowdowns in the rate of capital investment in these industries |
| In addition, the telecommunications industry has been going through a period of consolidation in which several major telecommunications operators and equipment manufacturers have either merged with each other or been acquired |
| This consolidation activity may affect the overall level of capital expenditures made by these operators for test and measurement equipment, and may also affect the relative competitive position between us and our competitors in this market |
| The industries we serve experience rapid changes in technology |
| We sell our products to customers that participate in rapidly changing high technology markets, which are characterized by short product life cycles |
| Our ability to deliver a timely flow of competitive new products and market acceptance of those products, as well as the ability to increase production or to develop and maintain effective sales channels, is essential to growing the business |
| Because we sell test, measurement and monitoring products that enable our customers to develop new technologies, we must accurately anticipate the ever-evolving 9 _________________________________________________________________ [69]Table of Contents needs of those customers and deliver appropriate products and technologies at competitive prices to meet customer demands |
| Our ability to deliver those products could be affected by engineering or other development program delays as well as the availability of parts and supplies from third-party providers on a timely basis and at reasonable prices |
| In addition, we face risks associated with designing products and obtaining components that are compliant with the “Restriction of Hazardous Substances” worldwide regulatory provisions, which include removing lead from current and future product designs |
| We also expect spending for traditional networks to continue to decrease, which requires that we continue to develop products and applications for networks based on emerging next-generation wireless and packet-based technologies and standards |
| We may not successfully develop or acquire additional competitive products for these emerging technologies and standards |
| Failure to timely develop or acquire competitive and reasonably priced products that are compliant with evolving regulatory standards could have an adverse effect on our results of operations, financial condition, or cash flows |
| Competition is intense, may intensify and could result in increased downward pricing pressure, reduced margins and the loss of market share |
| We compete with a number of companies in specialized areas of other test and measurement products and one large broad line measurement products supplier, Agilent Technologies |
| Other competitors include Anritsu Corporation, Catapult Communications Corporation, Harris Corporation, JDS Uniphase Corporation, LeCroy Corporation, NetHawk Group, Rohde & Schwarz, Spirent Communications, Yokogawa Electric Corporation, and many other smaller companies |
| In general, the test and measurement industry is a highly competitive market based primarily on product performance, technology, customer service, product availability, and price |
| Some of our competitors may have greater resources to apply to each of these factors and in some cases have built significant reputations with the customer base in each market in which we compete |
| We face pricing pressures that may have an adverse impact on our earnings |
| If we are unable to compete effectively on these and other factors, it could have a material adverse effect on our results of operations, financial condition, or cash flows |
| In addition, we enjoy a leadership position in various core product categories, and continually develop and introduce new products designed to maintain that leadership, as well as to penetrate new markets |
| Failure to develop and introduce new products that maintain a leadership position or that fail to penetrate new markets may adversely affect operating results |
| We obtain various key components, services and licenses from sole and limited source suppliers |
| Our manufacturing operations are dependent on the ability of suppliers to deliver high quality components, subassemblies and completed products in time to meet critical manufacturing and distribution schedules |
| We periodically experience constrained supply of component parts in some product lines as a result of strong demand in the industry for those parts |
| We buy a significant portion of our circuit boards from one supplier and a significant portion of our Application Specific Integrated Chips (“ASICs”) from two suppliers |
| Both circuit boards and ASICs are important components of our products and are built to Tektronix’ specifications |
| We believe other suppliers could build the circuit boards, however there are a limited number of suppliers that could build ASICs to Tektronix’ specifications |
| These constraints, if persistent, may adversely affect operating results until alternate sourcing can be developed |
| There is increased risk of supplier constraints in periods where we are increasing production volume to meet customer demands |
| Volatility in the prices of these component parts, an inability to secure enough components at reasonable prices to build new products in a timely manner in the quantities and configurations demanded or, conversely, a temporary oversupply of these parts, could adversely affect our future operating results |
| In addition, we use various sole source components that are integral to a variety of products |
| Disruption in key sole source suppliers could have a significant adverse effect on our results of operations |
| We are dependent on various third-party logistics providers to distribute our products throughout the world |
| Any disruptions in their ability to ship products to our customers could have a significant adverse effect on our results of operations |
| We rely upon software licensed from third parties |
| If we are unable to maintain these software licenses on commercially reasonable terms, our business, financial condition, results of operations, or cash flow could be harmed |
| 10 _________________________________________________________________ [70]Table of Contents Changes or delays in the implementation or customer acceptance of our products could harm our financial results |
| Revenues for a significant portion of our network management solution products are typically recognized upon the completion of system installation or customer acceptance |
| Delays caused by us or our customers in the commencement or completion of scheduled product installations and acceptance testing may occur from time to time |
| Changes or delays in the implementation or customer acceptance of our products could harm our financial results |
| There are additional product risks associated with sales of the network management products |
| Sales of our network management products often involve large contracts and custom development criteria |
| Because a significant portion of our total revenues on a quarterly basis is derived from projects requiring explicit acceptance by the customer, product installation and/or development delays could materially harm our financial results for a particular period |
| Additionally, we may be subject to penalties or other customer claims for failure to meet contractually agreed upon milestones or deadlines, which could include cancellation of an order and impairment of the associated inventory |
| Our network management business and reputation could suffer if we do not prevent security breaches |
| We have included security features in some of the network management products that are intended to protect the privacy and integrity of customer data |
| Despite the existence of these security features, these products may be vulnerable to breaches in security due to unknown defects in the security mechanisms, as well as vulnerabilities inherent in the operating system or hardware platform on which the product runs or the networks linked to that platform |
| Security vulnerabilities, regardless of origin, could jeopardize the security of information stored in and transmitted through the computer systems of our customers |
| Any security problem may require significant expenditures to solve and could materially harm our reputation and product acceptance |
| A significant portion of our revenues are from international customers, and, as a result, our business may be harmed by political and economic conditions in foreign markets and the challenges associated with operating internationally |
| We maintain operations and conduct business in four major geographies: the Americas, Europe, the Pacific, and Japan |
| Some of our manufacturing operations and key suppliers are located in foreign countries, including China, where we expect to further expand our operations |
| As a result, business is subject to the worldwide economic and market condition risks generally associated with doing business globally, such as fluctuating exchange rates; the stability of international monetary conditions; tariff and trade policies; export license requirements and technology export restrictions; import regulations; domestic and foreign tax policies; foreign governmental regulations; political unrest, wars and acts of terrorism; epidemic disease and other health concerns; and changes in other economic and political conditions |
| These factors, among others, could restrict or adversely affect our ability to sell in global markets, as well as our ability to manufacture products or procure supplies, and could subject us to additional costs |
| In addition, a significant downturn in the global economy or a particular region could adversely affect our results of operations, financial condition, or cash flows |
| Our success depends on our ability to maintain and protect our intellectual property and the intellectual property licensed from others |
| As a technology-based company, our success depends on developing and protecting our intellectual property |
| We rely generally on patent, copyright, trademark and trade secret laws in the United States and abroad |
| Electronic equipment as complex as most of our products, however, is generally not patentable in its entirety |
| We also license intellectual property from third parties and rely on those parties to maintain and protect their technology |
| We cannot be certain that actions we take to establish and protect proprietary rights will be adequate, particularly in countries (including China) where intellectual property rights are not highly developed or protected |
| If we are unable to adequately protect our technology, or if we are unable to continue to obtain or maintain licenses for protected technology from third parties, it could have a material adverse effect on our results of operations, financial condition, or cash flows |
| From time to time in the usual course of business, we receive notices from third parties 11 _________________________________________________________________ [71]Table of Contents regarding intellectual property infringement or take action against others with regard to intellectual property rights |
| Even where we are successful in defending or pursuing infringement claims, we may incur significant costs |
| In the event of a successful claim against us, we could lose our rights to needed technology or be required to pay license fees for the infringed rights, either of which could have an adverse impact on our business |
| We are subject to environmental regulations |
| We are subject to a variety of federal, state, local and foreign environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during our manufacturing process |
| We have closed a licensed hazardous waste management facility at our Beaverton, Oregon campus and have entered into a consent order with the Oregon Department of Environmental Quality requiring certain remediation actions |
| If we fail to comply with the consent order or any present or future regulations, we could be subject to future liabilities or the suspension of production |
| In addition, environmental regulations could restrict our ability to expand our facilities or could require us to acquire costly equipment, or to incur other significant expenses to comply with environmental regulations |
| Our defined benefit pension plans are subject to financial market risks |
| Our defined benefit pension plan obligations are affected by changes in market interest rates and the majority of plan assets are invested in publicly traded debt and equity securities, which are affected by market risks |
| Significant changes in market interest rates, decreases in the fair value of plan assets and investment losses on plan assets may adversely impact our operating results |
| See “Critical Accounting Estimates — Pension Plans” in Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations of Part II of this Form 10-K below for additional discussion |
| Our reported results of operations will be materially and adversely affected by our adoption of SFAS 123R Statement of Financial Accounting Standards (“SFAS”) Nodtta 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”), which will be effective in our first quarter of fiscal year 2007, will result in our recognition of substantial compensation expense relating to our stock incentive plan and employee stock purchase plan |
| We currently use the intrinsic value method to measure compensation expense for stock-based awards to our employees |
| Under this standard, we generally have not recognized any compensation expense related to stock option grants we issue under our stock incentive plans or the discounts we provide under our employee stock purchase plan |
| Under the new rules, we will be required to adopt a fair value-based method for measuring the compensation expense related to employee stock awards, which will lead to substantial additional compensation expense and will have a material adverse effect on our reported results of operations |
| See Note 4 of the Notes to Consolidated Financial Statements under Part II Item 8 Financial Statements and Supplementary Data of this Report for the pro forma impact on net earnings and earnings per share from calculating stock-related compensation cost under the fair value alternative of SFAS Nodtta 123 |
| However, the calculation of compensation cost for share-based payment transactions after the effective date of SFAS Nodtta 123R may be different from the calculation of compensation cost under SFAS Nodtta 123, but such differences have not yet been quantified |
| We face other risk factors |
| Our business could be impacted by macroeconomic factors |
| The recent volatility in energy prices and rising interest rates could have a negative impact on the economy overall and could adversely affect our results of operations, financial condition, or cash flows |
| Other risk factors include but are not limited to changes in the mix of products sold, regulatory and tax legislation, changes in effective tax rates, inventory risks due to changes in market demand or our business strategies, potential litigation and claims arising in the normal course of business, credit risk of customers, the fact that a substantial portion of our sales during a quarter are generated from orders received during that quarter, and significant modifications to existing information systems |
| If any of these risks occur, they could adversely affect our results of operations, financial condition, or cash flows |
| 12 _________________________________________________________________ [72]Table of Contents further in Item 1A Risk Factors of Part I of this Form 10-K above |
| The markets that we serve are very diverse and include a cross-section of technology industries |
| Accordingly, our business is cyclical and tends to correlate to the overall performance of the technology sector |
| During the latter part of fiscal year 2003, we began to experience the stabilization of certain markets that had been depressed as a result of the general downturn in the technology sector |
| Fiscal year 2004 saw a more broad-based recovery |
| During fiscal year 2005, growth rates moderated as compared to the prior fiscal year |
| In the fourth quarter of fiscal year 2005 and into the first quarter of fiscal year 2006 orders softened in a number of our product areas and in most regions |
| Toward the end of the first quarter of fiscal year 2006, our markets began to strengthen and that strengthening continued through the remainder of fiscal year 2006 |
| We face significant competition in many of the markets in which we sell our products |
| Tektronix competes on many factors including product performance, technology, product availability, and price |
| To compete effectively, we must deliver compelling products to the market in a timely manner |
| Accordingly, we make significant investments into the research and development of new products and the sales channels necessary to deliver products to the market |
| Even during periods where economic conditions have reduced our revenues, such as those experienced in fiscal years 2002 and 2003, we continued to invest significantly in the development of new products and sales channels |