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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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 No. 1-6462
TERADYNE, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2272148
(State or Other Jurisdiction of (I.R.S.Employer
Incorporation or Organization) Identification No.)
321 Harrison Avenue, Boston, Massachusetts 02118
(Address of Principal Executive Offices) (Zip Code)
617-482-2700
(Registrant's Telephone Number, Including Area Code)
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 the
filing requirements for the past 90 days. Yes X No _
-
The number of shares outstanding of the registrant's only class of
Common Stock as of July 26, 2002 was 183,056,306 shares.
1
TERADYNE, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
June 30, 2002 and December 31, 2001 ....................................... 3
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2002 and July 1, 2001 ................. 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2002 and July 1, 2001 ........................... 5
Notes to Condensed Consolidated Financial Statements ........................ 6-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............................. 15-23
Item 3. Quantitative and Qualitative Disclosures about Market Risk ................... 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................................ 24
Item 4. Submission of Matters to a Vote of Security Holders .......................... 24
Item 6. Exhibits and Reports on Form 8-K ............................................. 24-25
Exhibit Index ........................................................................ 24
2
TERADYNE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2002 December 31, 2001
------------- -----------------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 312,285 $ 317,591
Marketable securities ....................................................... 28,948 50,096
Accounts receivable ......................................................... 207,167 169,630
Income tax receivable and prepaid amounts ................................... 9,318 97,000
Inventories:
Parts ....................................................................... 197,895 262,520
Assemblies in process ....................................................... 137,525 132,097
Finished goods .............................................................. 7,033 12,372
------------ ------------
342,453 406,989
Deferred tax assets ......................................................... 116,148 141,013
Prepayments and other current assets ........................................ 27,629 24,703
------------ ------------
Total current assets ............................................................ 1,043,948 1,207,022
Property, plant, and equipment, at cost: ........................................ 1,459,726 1,444,529
Less: accumulated depreciation. ............................................. (674,669) (608,963)
------------ ------------
Net property, plant, and equipment ..................................... 785,057 835,566
Marketable securities ........................................................... 239,319 218,544
Deferred tax assets - long-term ................................................. 116,780 4,313
Goodwill ........................................................................ 194,972 190,276
Other assets .................................................................... 78,487 86,670
------------ ------------
Total assets ........................................................... $ 2,458,563 $ 2,542,391
============ ============
LIABILITIES
Current liabilities:
Notes payable - banks ....................................................... $ 7,097 $ 6,557
Current portion of long-term debt ........................................... 1,325 1,263
Accounts payable ............................................................ 69,857 59,761
Accrued employees' compensation and withholdings ............................ 86,817 98,519
Deferred revenue and customer advances ...................................... 46,813 52,220
Other accrued liabilities ................................................... 66,191 76,519
Income taxes payable ........................................................ 9,107 1,292
------------ ------------
Total current liabilities .............................................. 287,207 296,131
Long-term other accrued liabilities ............................................. 38,941 30,194
Long-term debt .................................................................. 451,253 451,682
Commitments and contingencies (Note K) ..........................................
------------ ------------
Total liabilities ...................................................... 777,401 778,007
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, $0.125 par value, 1,000,000 shares authorized, 183,048 and 181,119
net shares issued and outstanding at June 30, 2002 and
December 31, 2001, respectively .............................................. 22,881 22,640
Additional paid-in capital ...................................................... 648,004 600,541
Accumulated other comprehensive loss ............................................ (10,799) (7,742)
Retained earnings ............................................................... 1,021,076 1,148,945
------------ ------------
Total shareholders' equity ............................................. 1,681,162 1,764,384
------------ ------------
Total liabilities and shareholders' equity ............................. $ 2,458,563 $ 2,542,391
============ ============
The accompanying notes, together with the Notes to Consolidated Financial
Statements included in Teradyne's Annual Report on Form 10-K for the year ended
December 31, 2001 are an integral part of the condensed consolidated financial
statements.
3
TERADYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
------------- ------------ ------------- ------------
(In thousands, except per share amounts)
Net sales ......................................... $ 309,898 $ 365,823 $ 557,906 $ 971,012
Expenses:
Cost of sales ................................ 239,194 297,422 456,746 666,436
Engineering and development .................. 72,371 71,029 141,624 154,599
Selling and administrative ................... 75,609 65,908 150,658 139,194
Restructuring and other charges .............. - 3,356 5,042 9,061
-------------- -------------- -------------- ---------------
387,174 437,715 754,070 969,290
-------------- -------------- -------------- ---------------
(Loss) income from operations ..................... (77,276) (71,892) (196,164) 1,722
Interest income .............................. 4,526 5,149 8,730 11,343
Interest expense ............................. (5,390) (296) (10,724) (540)
Other income and expense, net ................ (1,124) 12,918 (1,637) 10,438
-------------- -------------- -------------- ---------------
(Loss) income before taxes ........................ (79,264) (54,121) (199,795) 22,963
(Benefit from) provision for income taxes ......... (28,535) (13,940) (71,926) 9,185
-------------- -------------- -------------- ---------------
Net (loss) income ................................. $ (50,729) $ (40,181) $ (127,869) $ 13,778
============== ============== ============== ===============
Net (loss) income per common share - basic ........ $ (0.28) $ (0.23) $ (0.70) $ 0.08
============== ============== ============== ===============
Net (loss) income per common share - diluted ...... $ (0.28) $ (0.23) $ (0.70) $ 0.08
============== ============== ============== ===============
Shares used in calculations of net (loss) income
per common share - basic ...................... 182,934 174,538 182,633 174,164
============== ============== ============== ===============
Shares used in calculations of net (loss) income
per common share - diluted .................... 182,934 174,538 182,633 180,151
============== ============== ============== ===============
==================================================================================================================================
The accompanying notes, together with the Notes to Consolidated Financial
Statements included in Teradyne's Annual Report on Form 10-K for the year ended
December 31, 2001 are an integral part of the condensed consolidated financial
statements.
4
TERADYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended
------------------------
June 30, 2002 July 1, 2001
------------- ------------
(In thousands)
Cash flows from operating activities:
Net (loss) income .......................................................... $ (127,869) $ 13,778
Adjustments to reconcile net (loss) income to net cash used for
operating activities:
Depreciation ............................................................ 74,512 62,333
Amortization ............................................................ 4,004 3,386
Gain on sale of business ................................................ - (14,779)
Impairment of fixed assets .............................................. 824 -
Provision for doubtful accounts ......................................... 1,206 -
Deferred income tax (benefit) provision ................................. (87,602) 20,588
Other non-cash items, net ............................................... 7,670 4,264
Changes in operating assets and liabilities, net of business sold:
Accounts receivable ................................................ (38,744) 180,856
Inventories ........................................................ 64,535 32,416
Income tax receivable and other assets ............................. 85,847 5,954
Accounts payable, deferred revenue and accruals .................... (5,496) (310,755)
Income taxes payable ............................................... 15,085 (17,122)
------------- -------------
Net cash used for operating activities ......................... (6,028) (19,081)
------------- -------------
Cash flows from investing activities:
Additions to property, plant and equipment ................................. (30,708) (138,844)
Increase in equipment manufactured by Teradyne ............................. (8,973) (34,635)
Proceeds from the sale of business ......................................... - 26,250
Purchases of available-for-sale marketable securities ...................... (169,875) (84,253)
Maturities of available-for-sale marketable securities ..................... 139,893 77,161
Purchases of held-to-maturity marketable securities ........................ (109,811) (938)
Maturities of held-to-maturity marketable securities ....................... 139,587 29,539
------------- -------------
Net cash used for investing activities ............................. (39,887) (125,720)
------------- -------------
Cash flows from financing activities:
Payments of long term debt ................................................. 174 (836)
Issuance of common stock under employee stock
option and stock purchase plans ........................................ 40,435 47,252
------------- -------------
Net cash flows provided by financing activities ................ 40,609 46,416
------------- -------------
Decrease in cash and cash equivalents ........................................... (5,306) (98,385)
Cash and cash equivalents at beginning of period ................................ 317,591 242,421
------------- -------------
Cash and cash equivalents at end of period ...................................... $ 312,285 $ 144,036
============= =============
Supplementary disclosure of cash flow information:
Cash paid (received) during the period for:
Interest ......................................................... $ 6,135 $ 480
Income taxes ..................................................... $ (86,736) $ 27,381
The accompanying notes, together with the Notes to Consolidated Financial
Statements included in Teradyne's Annual Report on Form 10-K for the year ended
December 31, 2001 are an integral part of the condensed consolidated financial
statements.
5
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. Teradyne, Inc.
Teradyne, Inc. is the world's largest supplier of automatic test equipment
and is also a leading provider of high performance interconnection systems and
electronic manufacturing services.
Teradyne's automatic test equipment products include systems that:
- test semiconductors ("Semiconductor Test Systems");
- test and inspect circuit-boards ("Circuit Board Test and
Inspection Systems"); and
- test high speed voice and data communication ("Broadband Test
Systems").
Teradyne's interconnection systems products and services ("Connection Systems")
include:
- high bandwidth backplane assemblies and associated connectors
used in electronic systems; and
- electronic manufacturing services of assemblies that include
Teradyne backplanes and connectors.
Broadband Test Systems and Diagnostic Solutions have been combined into
"Other Test Systems" for purposes of disclosing Teradyne's reportable segments.
B. Risks and Uncertainties
Teradyne's future results of operations involve a number of risks and
uncertainties. These factors include, but are not limited to, the slowdown in
economies worldwide, the effects of the hostilities begun in September 2001, the
current and anticipated market for electronics, risks associated with any
measures Teradyne takes to address the current slowdown in the market, failure
to adequately protect Teradyne's intellectual property rights, failure to
develop new technologies or customers' failure to accept new products, risks
associated with acquisitions and divestitures, securities class action
litigation due to past or future stock activity, competition, including new
product introduction from Teradyne's competitors and competitive pricing
pressures, risks of operating internationally, risks associated with attracting
and retaining key employees, risks if Teradyne's suppliers do not meet its
products or delivery requirements, risks associated with obligations and
potential liabilities under environmental regulations, Teradyne's debt service
obligations with respect to its sale in 2001 of convertible senior notes and a
mortgage financing completed in 2001 with respect to certain of its owned real
estate assets, provisions of Teradyne's charter and by-laws and Massachusetts
law that make a takeover of Teradyne more difficult, timing of customer orders
or any deferral or cancellation of orders previously received, reliance on sole
source suppliers, potential retrofit costs, and the timing of investments in
engineering and development. At present, Teradyne cannot say how long the
current business downturn will last or when the situation will improve. In the
absence of significant improvement, orders could remain low or decline, and the
amount of Teradyne's inventory, deferred tax assets, and certain long-lived
assets, including goodwill, considered realizable could be significantly
reduced.
C. Accounting Policies
Basis of Presentation
The condensed consolidated interim financial statements include the accounts
of Teradyne and its subsidiaries. All significant intercompany balances and
transactions have been eliminated. The year-end condensed consolidated balance
sheet data were derived from audited financial statements, but do not include
all disclosures required by generally accepted accounting principles.
Certain costs in the second quarter and first six months of 2001 have been
reclassified from cost of sales into engineering and development and selling and
administrative. These reclassified costs consist of new product development
costs incurred in manufacturing engineering, test technology and applications
engineering costs supporting sales. The costs reclassified from cost of sales to
engineering and development represent work performed to develop and implement
manufacturing and test processes focused on the introduction of new product
platforms. The costs reclassified from cost of sales to selling and
administrative represent the development of applications programming used to
demonstrate new product capabilities. The impact of the reclassifications is
detailed below:
Quarter Ended Six Months Ended
July 1, 2001 July 1, 2001
-------------- ----------------
Increase/(Decrease)
(in thousands)
Cost of sales ............................. ($13,839) ($30,432)
Engineering and development ............... 9,705 22,078
Selling and administrative ................ 4,134 8,354
On October 26, 2001 Teradyne completed its acquisition of GenRad, Inc. of
Westford, MA, a leading manufacturer of electronic automatic test equipment,
related software and diagnostic solutions. The GenRad business has been made
part of the Circuit Board Test and Inspection Systems operating segment. GenRad
activity is reflected in Teradyne's results of operations since the acquisition
date.
6
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
C. Accounting Policies - (Continued)
Preparation of Financial Statements
The accompanying condensed consolidated interim financial statements are
unaudited. However, in the opinion of management, all adjustments (consisting
only of normal recurring accrual entries) necessary for a fair statement of the
results for the interim periods have been made. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reported periods. Actual results could differ from those
estimates.
Other Comprehensive (Loss) Income
The components of comprehensive (loss) income are as follows (in thousands):
For the Three Months Ended
--------------------------
June 30, 2002 July 1, 2001
------------- ------------
Net loss ................................... $ (50,729) $ (40,181)
Unrealized loss on marketable
securities, net of applicable tax
of ($1,073) and ($124) ................... (1,907) (578)
--------- ---------
Comprehensive loss ......................... $ (52,636) $ (40,759)
========= =========
For the Six Months Ended
-------------------------
June 30, 2002 July 1, 2001
------------- ------------
Net (loss) income .......................... $(127,869) $ 13,778
Unrealized (loss) gain on marketable
securities, net of applicable tax of
($1,716) and $1,040 ...................... (3,057) 1,560
--------- ---------
Comprehensive (loss) income ................ $(130,926) $ 15,338
========= =========
D. Recently Issued Accounting Pronouncements
In August 2001, FASB issued SFAS 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets." SFAS 143 provides the
accounting requirements for retirement obligations associated with tangible
long-lived assets. SFAS 143 is effective for financial statements for fiscal
years beginning after June 15, 2002. Teradyne has determined that SFAS 143 will
not have an impact on its financial position and results of operations.
In October 2001, FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 requires one method of accounting for
long lived assets disposed of by sale. SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001. Teradyne
adopted SFAS 144 effective January 1, 2002. SFAS 144 did not have an impact on
Teradyne's financial position or results of operations.
In May 2002, FASB issued SFAS 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of
April 2002." SFAS 145 rescinds FASB Statement No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," and an amendment of that statement, FASB Statement
No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements."
SFAS 145 also rescinds FASB Statement No. 44, "Accounting for Intangible Assets
of Motor Carriers." SFAS 145 amends FASB Statement No. 13, "Accounting for
Leases," to eliminate an inconsistency between the required accounting
7
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
D. Recently Issued Accounting Pronouncements - (Continued)
for sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. SFAS 145 also amends other existing authoritative pronouncements
to make various technical corrections, clarify meanings, or describe their
applicability under changed conditions. SFAS 145 is effective for financial
statements for fiscal years beginning after May 15, 2002. Teradyne is currently
assessing SFAS 145 but does not believe it will have an impact on Teradyne's
financial position and results of operations.
In July 2002, FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS 146 requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan and nullifies Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS 146 is to be applied prospectively to
exit or disposal activities initiated after December 31, 2002.
E. Goodwill and Intangible Assets
In July 2001, FASB issued SFAS 142, "Goodwill and Other Intangible Assets."
SFAS 142 requires, among other things, the discontinuance of goodwill
amortization and includes provisions for the reclassification of certain
existing recognized intangibles as goodwill, reassessment of the useful lives of
existing recognized intangibles, and reclassification of certain intangibles out
of previously reported goodwill.
Intangible assets
Teradyne adopted SFAS 142 on January 1, 2002. In accordance with this
statement Teradyne reassessed the classification of its goodwill and intangible
assets. This analysis, which was completed during the quarter ended March 31,
2002, resulted in the reclassification of workforce related intangibles of $0.4
million to goodwill. Also, in accordance with this statement, Teradyne
reassessed the useful lives of its acquired amortized intangible assets and
determined the lives were appropriate.
Acquired amortized intangible assets consist of the following:
June 30, 2002
(in thousands)
Gross Net Weighted
Carrying Accumulated Carrying Average
Amount Amortization Amount Useful Life
------ ------------ ------ -----------
Completed technology ................................ $35,600 $ 3,350 $32,250 7.2 years
Service and software maintenance contracts
and customer relationships ........................ 8,993 3,114 5,879 5.8 years
Tradenames and trademarks ........................... 3,800 317 3,483 8.0 years
------- ------- -------
Total intangible assets ............................. $48,393 $ 6,781 $41,612 7.0 years
======= ======= =======
Aggregate amortization expense for the three and six months ended June 30, 2002
was $1.9 million and $3.8 million, respectively. Estimated amortization expense
for each of the five succeeding fiscal years is as follows (in thousands):
Year Amount
---- ------
2002 $7,406
2003 6,694
2004 6,175
2005 6,175
2006 6,175
Goodwill
Teradyne has identified two reporting units with goodwill, Connection
Systems and Circuit Board Test and Inspection Systems, which are also operating
and reportable segments. The changes in the carrying amounts of goodwill during
the three and six months ended June 30, 2002 are as follows:
8
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
E. Goodwill and Intangible Assets - (Continued)
Circuit Board
Test and
Connection Inspection
Systems Systems Total
---------- ------------- --------
(in thousands)
Balance at December 31, 2001 ................................ $ 48,649 $ 141,627 $ 190,276
Employee termination costs .................................. - 3,437 3,437
Reclassification of workforce ............................... 407 - 407
-------- --------- ---------
Balance at March 31, 2002 ................................... $ 49,056 $ 145,064 $ 194,120
Employee termination costs .................................. - 852 852
-------- --------- ---------
Balance at June 30, 2002 .................................... $ 49,056 $ 145,916 $ 194,972
======== ========= =========
SFAS 142 requires Teradyne to complete a transitional goodwill impairment
test six months from the date of adoption. As of March 31, 2002, Teradyne
completed the transitional goodwill impairment test and no adjustment to
goodwill was necessary. As of January 1, 2002, Teradyne ceased the amortization
of goodwill. The following is the effect on net income and net income per share
had SFAS 142 been in effect for the three and six months ended July 1, 2001 (in
thousands, except per share amounts):
Three Months Six Months
Ended Ended
July 1, 2001 July 1, 2001
------------ ------------
Net (loss) income .............................................. ($40,181) $13,778
Add back: Impact of goodwill amortization,
net of tax of $335 and $696 .................................... $ 781 $ 1,625
--------- -------
Adjusted net (loss) income ..................................... ($39,400) $15,403
========= =======
Net (loss) income per share - basic ............................ ($0.23) $ 0.08
Add back: Impact of goodwill amortization,
net of taxes ................................................... $0.00 $ 0.01
--------- -------
Adjusted net (loss) income per share - basic ................... ($0.23) $ 0.09
========= =======
Net (loss) income per share - diluted .......................... ($0.23) $ 0.08
Add back: Impact of goodwill amortization,
net of taxes ................................................... $0.00 $ 0.01
--------- -------
Adjusted net (loss) income per share - diluted ................. ($0.23) $ 0.09
========= =======
F. Divestitures
On June 22, 2001, Teradyne sold its aerospace and defense connector and
backplane business to Amphenol Corporation of Wallingford, Connecticut for cash
proceeds of $26.3 million. This transaction resulted in a pre-tax gain of $14.8
million which has been recorded in other income and expense, net.
9
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
G. Net Income (Loss) per Common Share
The following table sets forth the computation of basic and diluted net
income (loss) per common share (in thousands, except per share amounts):
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
------------- ------------ ------------- ------------
Net (loss) income .......................................... $ (50,729) $ (40,181) $ (127,869) $ 13,778
========= ========== ========== ========
Shares used in net (loss) income per common
share - basic ............................................ 182,934 174,538 182,633 174,164
Effect of dilutive securities:
Employee and director stock options ............... - - - 5,669
Employee stock purchase rights .................... - - - 318
--------- ---------- ---------- --------
Dilutive potential common shares ...................... - - - 5,987
--------- ---------- ---------- --------
Shares used in net (loss) income per common
share - diluted .......................................... 182,934 174,538 182,633 180,151
========= ========== ========== ========
Net (loss) income per common share - basic ................. $ (0.28) $ (0.23) $ (0.70) $ 0.08
========= ========== ========== ========
Net (loss) income per common share - diluted ............... $ (0.28) $ (0.23) $ (0.70) $ 0.08
========= ========== ========== ========
All options and equivalent shares related to the convertible notes outstanding
for the second quarter ended and for the first six months ended June 30, 2002
were excluded from the calculation of diluted net loss per share because the
effect would have been antidilutive. For the second quarter ended and for the
six month period ended June 30, 2002, there were 22.3 million and 24.6 million
options outstanding, respectively. For each of the second quarter ended and the
first six months ended June 30, 2002, there were 15.4 million equivalent shares
related to the convertible notes outstanding. For the second quarter ended July
1, 2001, there were 20.3 million options outstanding. For purposes of computing
diluted earnings per share, weighted average common share equivalents do not
include stock options with an exercise price that exceeds the average fair
market value of Teradyne's common stock. Accordingly, options to purchase 1.2
million shares of common stock for the six months ended July 1, 2001 were not
included in the calculation of diluted net income per share.
H. Workforce Reduction, Asset Impairments, and Inventory Provision
During the first quarter of 2002, Teradyne recorded a pre-tax charge of
$5.0 million in connection with a workforce reduction. The $5.0 million
provision for severance benefits was recorded in restructuring and other
charges. There were 220 employees terminated in the first quarter of 2002 across
all functional groups. Teradyne paid approximately $3.0 million of the
restructuring charge during the first six months of 2002. All remaining benefits
will be paid by the end of 2003. In the second quarter of 2002, Teradyne
recorded a $0.2 million provision for severance benefits in selling and
administrative expenses.
During the second quarter of 2001, Teradyne also recorded a pre-tax
charge of $3.4 million in connection with a workforce reduction. The $3.4
million provision for severance benefits was recorded in restructuring and other
charges. There were 600 employees terminated in the second quarter of 2001
across all functional groups. All benefits were paid by the end of the fourth
quarter of 2001.
During the first quarter of 2001, Teradyne also recorded a pre-tax
charge of $5.7 million in connection with a workforce reduction. The $5.7
million provision for severance benefits was recorded in restructuring and other
charges. There were 650 employees terminated in the first quarter of 2001 across
all functional groups. All benefits were paid by the end of the fourth quarter
of 2001.
The table below summarizes activity relating to restructuring and other
charges:
10
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
H. Workforce Reduction, Asset Impairments, and Inventory Provision - (Continued)
Severance Lease Payments
and on Vacated
Benefits Facilities Total
-------- ---------- -----
(in thousands)
Balance at December 31, 2001 $ 13,523 $ 1,676 $ 15,199
First quarter, 2002 provision 5,042 -- 5,042
Cash payments (6,384) (180) (6,564)
-------- -------- -------
Balance at March 31, 2002 $ 12,181 $ 1,496 $ 13,677
-------- -------- -------
Second quarter, 2002 provision 219 -- 219
Cash payments (3,668) (180) (3,848)
-------- -------- -------
Balance at June 30, 2002 $ 8,732 $ 1,316 $ 10,048
======== ======== =======
The accrual for severance and benefits is reflected in accrued
employees' compensation and withholdings and the accrual for lease payments on
vacated facilities is reflected in other accrued liabilities.
During the first quarter of 2002, Teradyne management concluded in
accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," that certain Semiconductor Test Systems long-lived assets
held for disposal were impaired as the estimated fair value was less than the
carrying value of these assets. The charge for the impaired assets held for
disposal was $0.8 million and was recorded in cost of sales.
During the second quarter of 2001, Teradyne recorded a $37.9 million
pre-tax provision for excess inventory due to the sharp decline in incoming
Semiconductor Test Systems and Connection Systems orders. The inventory
provision was recorded in cost of sales.
On October 26, 2001 Teradyne completed its acquisition of GenRad, Inc.
of Westford, MA, a leading manufacturer of electronic automatic test equipment,
related software and diagnostic solutions. In connection with its restructuring
plan for GenRad, Inc., in the first and second quarter of 2002, Teradyne
recorded involuntary employee termination costs of $3.4 million and $0.9
million, respectively.
The table below summarizes activity relating to GenRad employee
termination costs:
Severance
and Benefits
------------
Balance at December 31, 2001 ..................... $4,008
First quarter, 2002 employee termination costs ... 3,437
Cash payments .................................... (544)
------
Balance at March 31, 2002 ........................ $6,901
Second quarter, 2002 employee termination costs .. 852
Cash payments .................................... (1,479)
------
Balance at June 30, 2002 ......................... $6,274
======
I. Stock Based Compensation
Teradyne has both employee and non-employee stock option plans and an
employee stock purchase plan. Teradyne previously adopted the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," and as
permitted by this standard, will continue to apply Accounting Principles Board
Opinion 25 and related interpretations in accounting for its plans. Teradyne is
required to annually disclose the pro forma net income and net income per common
share amounts as if compensation costs for Teradyne's stock based compensation
plans had been determined based on the fair value at the grant dates for awards
under those plans. Had compensation expense for the stock based compensation
plans been accounted for at fair value according to SFAS 123, amounts reported
in the Statement of Operations for the three and six months ending June 30, 2002
and July 1, 2001 would have been (in millions, except per share amounts):
For the Three Months Ended For The Six Months Ended
June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
----------- ---------- ----------- ----------
Net loss .............................. ($67.5) ($53.8) ($161.7) ($17.8)
Net loss per common share--basic ...... ($0.37) ($0.31) ($ 0.89) ($0.10)
Net loss per common share--diluted .... ($0.37) ($0.31) ($ 0.89) ($0.10)
Stock Option Plans
Under its stock option plans, all of which are fixed accounting plans,
Teradyne granted options to directors, officers, certain employees, and other
individuals entitling them to purchase common stock at 100% of the fair market
value on the date of grant. Options granted to employees prior to September 2001
vest in equal installments over four years and have a maximum term of five
years. Beginning in September 2001 options granted to employees vest in equal
installments over four years but have a maximum term of seven years. In
addition, in 2001, Teradyne made a one-time option grant to all employees that
vests over two years and has a term of seven years.
11
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
I. Stock Based Compensation - (Continued)
The weighted average grant date fair value for options granted during
the three and six month periods ending June 30, 2002 was $18.68 and $17.73,
respectively, per option and for the three and six month periods ending July 1,
2001, was $18.05 and $19.76, respectively, per option. The fair value of options
at date of grant was estimated using the Black-Scholes option pricing model with
the following weighted average assumptions:
For the Three Months Ended For The Six Months Ended
June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
------------- ------------ ------------- ------------
Expected life (years) .......... 4.3 4.3 4.3 4.3
Interest rate .................. 4.3% 3.7% 4.1% 3.7%
Volatility ..................... 67.1% 67.0% 67.1% 67.0%
Dividend yield ................. 0.0% 0.0% 0.0% 0.0%
Employee Stock Purchase Plan
Under the Teradyne Employee Stock Purchase Plan, eligible employees may
purchase shares of common stock through regular payroll deductions of up to 10%
of their compensation. The price paid for the common stock is equal to 85% of
the lower of the fair market value of Teradyne's common stock on the first
business day in January (July for new hires) or the last business day of
December. The weighted average fair value of employee stock purchase rights
granted for the three and six month periods ended June 30, 2002 was $9.04 and
for the three and six month period ending July 1, 2001 was $14.60. The fair
value of the employees' purchase rights was estimated using the Black-Scholes
option pricing model with the following assumptions:
For the Three and Six Months Ended
June 30, 2002 July 1, 2001
------------- ------------
Expected life (years) ....... 1.0 1.0
Interest rate ............... 2.1% 2.2%
Volatility .................. 58.5% 67.0%
Dividend yield .............. 0.0% 0.0%
J. Operating Segment Information
Teradyne has four principal operating segments which are the design,
manufacturing and marketing of Semiconductor Test Systems, Connection Systems,
Circuit Board Test and Inspection Systems, and Other Test Systems. These
operating segments were determined based upon the nature of the products and
services offered. The Other Test Systems segment is comprised of Broadband Test
Systems and Diagnostic Solutions.
On October 26, 2001 Teradyne completed its acquisition of GenRad, Inc.
of Westford, MA, a leading manufacturer of electronic automatic test equipment,
related software and diagnostic solutions. The GenRad business has been made
part of the Circuit Board Test and Inspection Systems operating segment. GenRad
activity is reflected in Teradyne's results of operations since the acquisition
date.
Teradyne evaluates performance based on several factors, of which the
primary financial measure is business segment income before taxes. The
accounting policies of the business segments are the same as those described in
"Note B: Accounting Policies" in Teradyne's Annual Report on Form 10-K for the
year ended December 31, 2001. Intersegment sales are accounted for at fair value
as if sales were to third parties. Operating segment information for the three
and six month periods ended June 30, 2002 and July 1, 2001 follows (in
thousands):
Semiconductor Circuit Board
Test Connection Test & Inspection Other Test Corporate
Systems Systems Systems Systems and
Segment Segment Segment Segment Eliminations Consolidated
------- ------- ------- ------- ------------ ------------
Three months ended June 30, 2002:
- --------------------------------
Sales to unaffiliated customers $ 144,624 $ 102,554 $ 40,239 $ 22,481 - $ 309,898
Intersegment sales - 2,626 - - ($2,626) -
---------- --------- ------------ --------- ------- ------------
Net sales 144,624 105,180 40,239 22,481 (2,626) 309,898
Income (loss) before taxes (1) ($ 52,087) $ 786 ($22,746) $ 1,106 ($6,323) ($ 79,264)
========== ========= ============ ========= ======= ============
12
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
J. Operating Segment Information - (Continued)
Semiconductor Circuit Board
Test Connection Test & Inspection Other Test Corporate
Systems Systems Systems Systems and
Segments Segments Segments Segments Eliminations Consolidated
-------- -------- -------- -------- ------------ ------------
Three months ended July 1, 2001:
- -------------------------------
Sales to unaffiliated customers $ 169,703 $ 151,240 $ 33,249 $ 11,631 - $ 365,823
Intersegment sales - 1,089 - - ($1,089) -
------------- --------- ------------ --------- ------- ------------
Net sales 169,703 152,329 33,249 11,631 (1,089) 365,823
Income (loss) before taxes (1) ($ 64,705) $ 18,440 ($ 2,666) - ($5,190) ($ 54,121)
============= ========= ============ ========= ======= ============
Semiconductor Circuit Board
Test Connection Test & Inspection Other Test Corporate
Systems Systems Systems Systems and
Segments Segments Segments Segments Eliminations Consolidated
-------- -------- -------- -------- ------------ ------------
Six months ended June 30, 2002:
- ------------------------------
Sales to unaffiliated customers $ 232,150 $ 198,341 $ 79,202 $ 48,213 - $ 557,906
Intersegment sales - 2,685 - - ($2,685) -
------------- --------- ------------ --------- ------- ------------
Net sales 232,150 201,026 79,202 48,213 (2,685) 557,906
Income (loss) before taxes (1) ($131,441) ($ 1,694) ($53,555) $ 3,980 ($17,085) ($199,795)
============= ========= ============ ========= ======= ============
Six months ended July 1, 2001:
- -----------------------------
Sales to unaffiliated customers $ 525,824 $ 355,883 $ 67,275 $ 22,030 - $ 971,012
Intersegment sales - 3,073 - - ($3,073) -
------------- --------- ------------ --------- ------- ------------
Net sales 525,824 358,956 67,275 22,030 (3,073) 971,012
Income (loss) before taxes (1) ($ 5,212) $ 46,992 ($ 7,296) ($ 209) ($11,312) $ 22,963
============= ========= ============ ========= ======= ============
(1) Income (loss) before taxes of the principal businesses excludes the effects
of employee profit sharing, management incentive compensation,
restructuring charges, other unallocated expenses, and net interest and
other expense.
K. Commitments and Contingencies
In connection with the August 2000 acquisition of each of Herco Technology
Corp., a California company, and Perception Laminates, Inc., a California
company, a complaint was filed by the former owners of those companies on or
about September 5, 2001 naming as defendants Teradyne and two of its executive
officers. The case was originally filed in the Superior Court in San Diego
County, California, and was subsequently removed by the defendants to federal
court. On or about November 14, 2001, Teradyne and the two individual defendants
filed a motion to dismiss the amended complaint in its entirety. The federal
court granted in part and denied in part that motion to dismiss. The claims that
were dismissed were dismissed with prejudice. At the federal court's request,
the plaintiffs filed a second amended complaint on March 4, 2002 setting forth
their remaining claims. The second amended complaint alleges, among other
things, that the sale of Teradyne's common stock to the former owners violated
certain California securities statutes and common law. In addition, the second
amended complaint alleges that Teradyne breached certain contractual obligations
in the agreements relating to the acquisitions. The second amended complaint
seeks unspecified damages, including compensatory, consequential and punitive
damages, and recovery of reasonable attorneys' fees and costs. On March 25,
2002, Teradyne and the two individual defendants filed their answer to the
second amended complaint. Teradyne filed a motion for partial summary judgment
on August 9, 2002. A hearing on that motion has been scheduled for September 23,
2002.
Teradyne and two of its executive officers are named as defendants in three
purported class action complaints that were filed in the United States District
Court for the District of Massachusetts, Boston, Massachusetts, on or about
13
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
K. Commitments and Contingencies - (Continued)
October 16, 2001, October 19, 2001 and November 7, 2001. The complaints allege,
among other things, that the defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, by making, during the period from July 14, 2000
until October 17, 2000, material misrepresentations and omissions to the
investing public regarding Teradyne's business operations and future prospects.
The complaints seek unspecified damages, including compensatory damages and
recovery of reasonable attorneys' fees and costs. A motion for the designation
of one or more lead plaintiffs was heard by the court on July 2, 2002. No ruling
has yet been issued.
Teradyne disputes all of the claims above and believes they are without
merit, and intends to defend vigorously against the lawsuits. However, an
adverse resolution of any of the lawsuits could have a material adverse effect
on Teradyne's financial position or results of operations. Teradyne is not
presently able to reasonably estimate potential losses, if any, related to any
of the lawsuits and therefore has not accrued for any potential losses from the
lawsuits.
In 2001, Teradyne was designated as a "potentially responsible party"
("PRP") at a clean-up site in California. Teradyne does not believe that it has
any liability for the cleanup of the California site, and has requested the
state of California to remove Teradyne's name from the list of PRPs, however,
the State of California has not as yet agreed to do so. Teradyne cannot predict
what its liability, if any, may be for the clean-up of this site and can give no
assurance that it will not materially adversely affect Teradyne's financial
condition or results of operations.
In addition, Teradyne is subject to legal proceedings and claims that arise
in the ordinary course of business. Management does not believe these actions
will have a material adverse effect on Teradyne's financial position or results
of operations.
L. Subsequent Event
On August 8, 2002, Teradyne announced its intention to cease production at
its San Diego printed circuit board facility and to layoff 125 people employed
there. Related severance costs will total approximately $1 million. Currently,
the San Diego facility's tangible assets total about $44 million, of which a
significant portion will likely be impaired resulting in a significant charge in
the third quarter of 2002.
Teradyne continues to consolidate manufacturing operations, increase
outsourcing, and complete the GenRad integration, all of which will result in
further charges. Workforce reductions arising from these actions are expected to
result in severance costs of approximately $6 million in the third quarter of
2002.
14
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
SELECTED RELATIONSHIPS WITHIN THE CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
------------- ------------ ------------- ------------
(In thousands) (In thousands)
Net sales .............................................. $ 309,898 $ 365,823 $ 557,906 $ 971,012
=============== ============= ============== ==============
Net (loss) income ...................................... $ (50,729) $ (40,181) $ (127,869) $ 13,778
=============== ============= ============== ==============
Percentage of net sales:
Net sales ......................................... 100.0% 100.0% 100.0% 100.0%
Expenses:
Cost of sales ................................. 77.2 81.3 81.9 68.6
Engineering and development ................... 23.4 19.4 25.4 15.9
Selling and administrative .................... 24.4 18.0 27.0 14.3
Restructuring and other charges ............... - 0.9 0.9 0.9
Other and interest, net ....................... 0.6 (4.8) 0.6 (2.1)
--------------- ------------- -------------- --------------
125.6 114.8 135.8 97.6
(Loss) income before taxes ........................ (25.6) (14.8) (35.8) 2.4
(Benefit from) provision for income taxes ......... (9.2) (3.8) (12.9) 1.0
--------------- ------------- -------------- --------------
Net (loss) income ................................. (16.4)% 11.0% (22.9)% 1.4%
=============== ============= ============== ==============
(Benefit from) provision for income taxes as a
percentage of income before taxes ................. (36.0%) (25.8%) (36.0%) 40.0%
=============== ============= ============== ==============
Results of Operations
Revenue
Teradyne recorded sales of $309.9 million in the second quarter of 2002, a
decrease of $55.9 million or 15% from the second quarter of 2001. Semiconductor
Test Systems sales and Connection Systems sales to unaffiliated customers
decreased 15% and 32%, respectively, from the second quarter of 2001 due to
lower unit volume of shipments and pricing pressure particularly in Connection
Systems. More specifically, the decrease in Semiconductor Test Systems reflects
declines in the high performance logic and memory test areas, offset by an
increase, 22% year over year, in mixed signal tester sales, primarily in
Southeast Asia. The decline in Connection Systems revenue is due to reductions
in capital spending by end users in the telecommunications and corporate data
processing industries, and the corresponding reduced demand for products
supplied by Connection Systems customers. Circuit Board Test and Inspection
Systems and Other Test Systems sales increased by 21% and 93%, respectively,
from the second quarter of 2001 due to GenRad related sales which Teradyne
acquired in October of 2001.
Teradyne recorded sales of $557.9 million in the first six months of 2002,
a decrease of $413.1 million or 43% from the first six months of 2001.
Semiconductor Test Systems sales and Connection Systems sales to unaffiliated
customers decreased 56% and 44%, respectively, from the first six months of
2001. The decline in the Semiconductor Test Systems was across all product
types, but with the largest decline in the high performance logic area. By
geography, Semiconductor Test Systems revenue was down over 50% in all
geographies other than Southeast Asia, which was down by 22% and grew to
represent 32% of the Semiconductor Test System sales for the first six months of
2002 versus representing only 18% of the Semiconductor Test Systems sales for
the first six months of 2001. The decrease in Connection Systems revenue on a
year to date basis is largely due to declines in end user demand for
telecommunications and corporate data processing infrastructures. Circuit Board
Test and Inspection Systems and Other Test Systems sales increased by 18% and
119%, respectively, from the first six months of 2001 due to GenRad related
sales which Teradyne acquired in October of 2001. Included in the first six
months of 2001 sales of $971.0 million was the recognition of $98.7 million
which resulted in $48.8 million of income (net of tax of $20.9 million) related
to shipments in 2000 where title was retained until payment was received.
Teradyne no longer retains title until receipt of payment.
Teradyne's business has been adversely impacted by the slowdown in
economies worldwide. Teradyne has also been adversely affected by the cyclical
nature of the electronics and semiconductor industries, which experience
recurring periods of oversupply of products and equipment of the type Teradyne
sells. These factors have resulted in a downturn in the demand for Teradyne's
products. During the first six months of 2002, orders declined significantly
compared with the orders Teradyne received during the first six months of 2001.
The depth and duration of the down cycle has been unprecedented to Teradyne and
at present, Teradyne cannot say how long the current downturn will last or when
the situation will improve. In the absence of significant improvement, orders
could remain low or decline, and the amount of Teradyne's inventory, deferred
tax assets, and certain long-lived assets, including goodwill, considered
realizable could be significantly reduced.
15
Bookings
Incoming net orders were $228.3 million in the second quarter of 2002
compared to $210.2 million in the second quarter of 2001. The increase in
incoming net orders was led by a 118% increase in Semiconductor Test System
orders. This increase was a result of growth in demand for mixed signal testers,
which was driven by end markets for wireless, consumer electronics, mass storage
and broadband products. The increase in Semiconductor Test Systems orders was
partially offset by a decrease of 81% in Connection Systems orders. Circuit
Board Test and Inspection Systems and Other Test Systems net orders increased by
204% and 252%, respectively, due to GenRad related orders which Teradyne
acquired in October of 2001. Teradyne experienced cancellations of $44.4 million
and $77.7 million in the second quarter of 2002 and 2001, respectively. Of the
second quarter of 2002 cancellations $42.0 million was in Connection Systems
business, primarily from large telecommunications customers compared to $45.0
million of cancellations in Connection Systems in the second quarter of 2001.
Semiconductor Test Systems had cancellations of $30.6 million in the second
quarter 2001. Approximately half of those cancellations were from subcontract
manufacturers who replaced the test capacity represented by the canceled orders
with orders for newer generation products.
Incoming net orders were $438.7 million in the first six months of 2002
compared to $567.2 million in the first six months of 2001. The decrease in
incoming net orders was led by a 79% decrease in Connection Systems orders which
was partially offset by an increase of 25% in Semiconductor Test System orders.
Circuit Board Test and Inspection Systems and Other Test Systems net orders
increased by 116% and 312%, respectively, due to GenRad related orders which
Teradyne acquired in October of 2001. Teradyne experienced cancellations of
$71.6 million and $102.6 million in the first six months of 2002 and 2001,
respectively. Of the $71.6 million in cancellations during the first six months
of 2002, $65.9 million was in Connection Systems, again, primarily driven by
cancellations from large telecommunications customers. Of the $102.6 million in
cancellations during the first six months of 2001, $55.0 million was in
Connection Systems and $45.5 million was in Semiconductor Test Systems.
Teradyne's net orders for its four principal operating segments were as follows:
(in millions)
Quarter Ended Six Months Ended
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
---- ---- ---- ----
Semiconductor Test Systems ................... $138.9 $ 63.7 $228.6 $183.1
Connection Systems ........................... $ 24.0 $125.8 $ 70.4 $331.8
Circuit Board Test and Inspection Systems .... $ 47.1 $ 15.5 $ 83.2 $ 38.6
Other Test Systems ........................... $ 18.3 $ 5.2 $ 56.5 $ 13.7
------ ------ ------ ------
$228.3 $210.2 $438.7 $567.2
Customers may delay delivery of products or cancel orders suddenly and
without significant notice, subject to possible cancellation penalties. Due to
possible customer changes in delivery schedules and cancellation of orders,
Teradyne's backlog at any particular date is not necessarily indicative of the
actual sales for any succeeding period. Delays in delivery schedules and/or
cancellations of backlog during any particular period could have a material
adverse effect on Teradyne's business and results of operations.
Gross Margin
Certain costs in the second quarter and first six months of 2001 have
been reclassified from cost of sales into engineering and development and
selling and administrative. These reclassified costs consist of new product
development costs incurred in manufacturing engineering, test technology and
applications engineering costs supporting sales. The costs reclassified from
cost of sales to engineering and development represent work performed to develop
and implement manufacturing and test processes focused on the introduction of
new product platforms. The costs reclassified from cost of sales to selling and
administrative represent the development of applications programming used to
demonstrate new product capabilities. The impact of the reclassifications is
detailed below:
Quarter Ended Six Months Ended
July 1, 2001 July 1, 2001
Increase / (Decrease) ------------ ------------
(in thousands)
Cost of sales .................... ($13,839) ($30,432)
Engineering and development ...... 9,705 22,078
Selling and administrative ....... 4,134 8,354
Gross margin increased to 23% of sales in the second quarter of 2002
from 19% of sales in the second quarter of 2001. The percentage increase in the
second quarter of 2002 was primarily attributable to an inventory provision in
the second quarter of 2002 of $3.5 million compared to an inventory provision in
the second quarter of 2001 of $37.9 million which was due to the sharp decline
in incoming Semiconductor Test Systems and Connection Systems orders.
Gross margin decreased to 18% of sales in the first six months of 2002
from 31% of sales in the first six months of 2001. The percentage decrease in
the first six months of 2002 was primarily attributable to a decreased
utilization of Teradyne's manufacturing overhead, as sales volume decreased
while certain components of cost of sales remained fixed. The decrease in the
percentage of gross margin was also impacted to a lesser extent by increased
competitive price pressure on Connection Systems products and the
16
mix of Teradyne's business changes as Connection Systems and Circuit Board Test
and Inspection System sales, which have lower gross margins, become a larger
percentage of Teradyne's business.
Inventory provision for excess and obsolete inventory was $9.7 million
in the first six months of 2002 compared to $51.7 million in the first six
months of 2001. During the first quarter of 2002, Teradyne recorded an asset
impairment in Semiconductor Test Systems of $0.8 million for certain impaired
manufacturing assets.
Engineering and Development
Engineering and development expenses, as a percentage of sales,
increased to 23% in the second quarter and 25% in the first six months of 2002
from 19% and 16%, respectively, in the second quarter and first six months of
2001. Spending increased by $1.3 million during the second quarter of 2002
compared to the second quarter of 2001. This increase was a result of
Semiconductor Test System projects. Spending decreased by $13.0 million in the
first six months of 2002 compared to the first six months of 2001. The decrease
was primarily due to lower material costs and the impact of workforce
reductions.
Selling and Administrative
Selling and administrative expenses increased to 24% of sales in the
second quarter of 2002 from 18% of sales in the second quarter of 2001 with
spending increasing by $9.7 million. Selling and administrative expenses
increased to 27% of sales in the first six months of 2002 from 14% of sales in
the first six months of 2001 with spending increasing by $11.5 million. The
increase in spending in the second quarter and first six months of 2002 was due
to additional expenses resulting from Teradyne's purchase of GenRad in the
fourth quarter of 2001. The additional selling and administrative expense was
partially offset by workforce reductions and pay cuts.
Restructuring and Other Charges
During the first quarter of 2002, Teradyne recorded a pre-tax charge of
$5.0 million in connection with a workforce reduction. The $5.0 million
provision for severance benefits was recorded in restructuring and other
charges. There were 220 employees terminated in the first quarter of 2002 across
all functional groups. Teradyne paid approximately $3.0 million of the
restructuring charge during the first six months of 2002. All remaining benefits
will be paid by the end of 2003. In the second quarter of 2002, Teradyne
recorded $0.2 million provision for severance benefits in selling and
administrative expenses.
During the second quarter of 2001, Teradyne also recorded a pre-tax
charge of $3.4 million in connection with a workforce reduction. The $3.4
million provision for severance benefits was recorded in restructuring and other
charges. There were 600 employees terminated in the second quarter of 2001
across all functional groups. All benefits were paid by the end of the fourth
quarter of 2001.
During the first quarter of 2001, Teradyne also recorded a pre-tax
charge of $5.7 million in connection with a workforce reduction. The $5.7
million provision for severance benefits was recorded in restructuring and other
charges. There were 650 employees terminated in the first quarter of 2001 across
all functional groups. All benefits were paid by the end of the fourth quarter
of 2001.
The table below summarizes activity relating to restructuring and other
charges:
Severance Lease Payments
and on Vacated
Benefits Facilities Total
-------- ---------- -----
(in thousands)
Balance at December 31, 2001 $ 13,523 $ 1,676 $ 15,199
First quarter, 2002 provision 5,042 -- 5,042
Cash payments (6,384) (180) (6,564)
-------- -------- --------
Balance at March 31, 2002 $ 12,181 $ 1,496 $ 13,677
-------- -------- --------
Second quarter, 2002 provision 219 -- 219
Cash payments (3,668) (180) (3,848)
-------- -------- --------
Balance at June 30, 2002 $ 8,732 $ 1,316 $ 10,048
======== ======== ========
The accrual for severance and benefits is reflected in accrued
employees' compensation and withholdings and the accrual for lease payments on
vacated facilities is reflected in other accrued liabilities.
On October 26, 2001 Teradyne completed its acquisition of GenRad, Inc.
of Westford, MA, a leading manufacturer of electronic automatic test equipment,
related software and diagnostic solutions. In connection with its restructuring
plan for GenRad, Inc., in the first and second quarter of 2002, Teradyne
recorded involuntary employee termination costs of $3.4 million and $0.9
million, respectively.
The table below summarizes activity relating to GenRad employee
termination costs:
Severance
and
Benefits
---------
Balance at December 31, 2001...................................... $ 4,008
First quarter, 2002 employee termination costs.................... 3,437
Cash payments..................................................... (544)
-------
Balance at March 31, 2002......................................... $ 6,901
Second quarter, 2002 employee termination costs................... 852
Cash payments..................................................... (1,479)
-------
Balance at June 30, 2002.......................................... $ 6,274
=======
17
Teradyne will incur additional restructuring charges in the third quarter
of 2002. On August 8, 2002, Teradyne announced its intention to cease production
at its San Diego printed circuit board facility and to layoff 125 people
employed there. Related severance costs will total approximately $1 million.
Currently, the San Diego facility's tangible assets total about $44 million, of
which a significant portion will likely be impaired resulting in a significant
charge in the third quarter of 2002.
Teradyne continues to consolidate manufacturing operations, increase
outsourcing, and complete the GenRad integration, all of which will result in
further charges. Workforce reductions arising from these actions are expected to
result in severance costs of approximately $6 million in the third quarter of
2002.
Interest Income and Expense
Interest income decreased by $0.6 million to $4.5 million in the second
quarter of 2002 compared to the second quarter of 2001 and decreased by $2.6
million to $8.7 million in the first six months of 2002 compared to the first
six months of 2001. The decreases in interest income were attributable to
decreases in the average invested balances and lower interest rates. Interest
expense increased by $5.1 million to $5.4 million in the second quarter of 2002
compared to the second quarter of 2001 and increased by $10.2 million to
$10.7 million in the first six months of 2002 compared to the first six months
of 2001. The increase in interest expense was primarily attributable to interest
expense related to convertible notes which Teradyne issued in the fourth quarter
of 2001.
Other Income and Expense
Teradyne recorded a loss of $1.1 million during the second quarter of 2002
and $1.6 million during the first six months of 2002 in other expense for the
fair value of warrants held in LogicVision, a publicly traded company. Included
in other expense in the second quarter and first six months of 2001 is
Teradyne's proportionate share of a loss related to an equity method investment
of $1.9 million and $4.3 million, respectively. The carrying value of this
equity investment was zero at December 31, 2001. Included in other income in the
first six months of 2001 is a gain from the sale of Connection Systems aerospace
and defense business of $14.8 million.
Income Taxes
Teradyne's overall effective tax rate was 36% in the second quarter of 2002
and 36% for the first six months of 2002. The effective tax rate benefit for the
year ended 2001 was 38%. The change in the tax rate is a result of lower
favorable tax attributes from Teradyne's foreign sales corporation and state
income taxes.
On a quarterly basis, Teradyne evaluates the realizability of its deferred
tax assets and assesses the need for a valuation allowance. Realization of
Teradyne's net deferred tax assets is dependent on its ability to generate
approximately $666 million of future taxable income. Teradyne believes that it
is more likely than not that its net deferred tax assets will be realized based
on forecasted income. The amount of the net deferred tax assets actually
realized could vary if there are differences in the timing or amount of future
reversals of existing deferred tax liabilities or changes in the actual amounts
of future taxable income. Teradyne has incurred significant losses from
operations over several quarters. If Teradyne continues to incur significant
losses from operations for an extended period of time, Teradyne would be
required to establish a valuation allowance against all or a significant portion
of its net deferred tax assets. To the extent Teradyne establishes a valuation
allowance, an expense will be recorded within the provision for income taxes
line in the Statement of Operations.
In response to an adverse World Trade Organization (WTO) finding that the
U.S. Foreign Sales Credit (FSC) tax provisions were a prohibited export subsidy,
the U.S. repealed FSC and enacted replacement legislation (Extraterritorial
Income Exclusion Act of 2000). The European Union filed a WTO challenge to the
new law and the WTO has upheld the European Union's challenge. The U.S. has
decided to appeal and the appellate process and final resolution of this matter
could extend beyond 2002. The U.S. government and industry groups are evaluating
options. It is not possible to predict what impact, if any, this issue will have
on future earnings pending final resolution of the challenge. During the years
ended December 31, 2001, 2000, and 1999, the FSC benefited Teradyne's effective
tax rate as follows:
2001 2000 1999
------ ------ ------
Export sales corporation (0.7%) (4.8%) (4.7%)
Liquidity and Capital Resources
Teradyne's cash, cash equivalents and marketable securities balance
decreased by $5.7 million in the first six months of 2002, to $580.6 million.
Teradyne used cash from operating activities of $6.0 million and $19.1 million
in the first six months of 2002 and the first six months of 2001, respectively.
Cash used from net (loss) income, excluding the effects of non-cash items, was
$127.3 million in the first six months of 2002 and cash generated from net
income, excluding the effects of non-cash items, was $89.6 million for the first
six months of 2001. Changes in operating assets and liabilities generated cash
of $121.2 million in the first six months of 2002 due to the receipt of a tax
refund of $85.2 million in March 2002 and decreased inventory balances. In the
first six months of 2001, changes in operating assets and liabilities net of
businesses sold used cash of $108.7 million.
18
Teradyne used $39.9 million of cash for investing activities in the first
six months of 2002 and $125.7 million in the first six months of 2001. Investing
activities consist of purchases, sales, and maturities of marketable securities,
proceeds from the sale of business, and purchases of capital assets to support
long-term growth. Capital expenditures were $39.7 million in the first six
months of 2002 and $173.5 million in the first six months of 2001. The decrease
in capital expenditures was due to actions taken by Teradyne beginning in 2001
to reduce planned capital expenditures due to current market conditions.
Financing activities provided $40.6 million and $46.4 million of cash
during the first six months of 2002 and 2001, respectively. Financing activities
include issuance of Teradyne's common stock through employee stock option and
stock purchase plans and repayments of debt. During the first six months of 2002
and 2001, common stock activity provided cash of $40.4 million and $47.3
million, respectively.
Teradyne believes its cash, cash equivalents, and marketable securities
balance of $580.6 million will be sufficient to meet working capital and
expenditure needs for the foreseeable future. Depending on market conditions and
funding requirements, Teradyne may seek additional external financing. Inflation
has not had a significant long-term impact on earnings
Certain Factors That May Affect Future Results
From time to time, information provided by Teradyne, statements made by its
employees or information included in its filings with the Securities and
Exchange Commission (including this Form 10-Q) contain statements that are not
purely historical, but are forward looking statements, made under Section 21E of
the Securities Exchange Act of 1934, which involve risks and uncertainties. In
particular, forward looking statements made herein include projections, plans,
and objectives for Teradyne's business, financial condition, operating results,
future operations, or future economic performance, statements relating to the
sufficiency of capital to meet working capital requirements, capital
expenditures, expectations as to customer orders and statements relating to
backlog, bookings and cancellations and gross margins. Teradyne's actual future
results may differ materially from those stated in any forward looking
statements. Factors that may cause such differences include, but are not limited
to, the factors discussed below. These factors, and others, are discussed from
time to time in Teradyne's filings with the Securities and Exchange Commission,
including in Teradyne's Annual Report on Form 10-K for the year ended
December 31, 2001.
Teradyne's Business Is Impacted by the Slowdown in Economies Worldwide.
Teradyne's business has been negatively impacted by the slowdown in the
global economies that began in the second half of 2000. The uncertainty
regarding the growth rate of the worldwide economies and concerns regarding
corporate governance have caused companies to reduce capital investments and may
cause further reduction of such investments. These reductions have been
particularly severe in the electronics and semiconductor industry which Teradyne
serves and have contributed to Teradyne incurring losses in recent periods.
Teradyne cannot predict if or when the growth rate of worldwide economies will
rebound, whether the growth rate of its business will rebound when the worldwide
economies begin to grow, or if or when Teradyne will return to profitability.
The effects of the economic decline are being felt across all of Teradyne's
business segments and have significantly slowed customer orders.
Teradyne's Business is Dependent on the Current and Anticipated Market for
Electronics.
Teradyne's business and results of operations depend in significant part
upon capital expenditures of manufacturers of semiconductors and other
electronics, which in turn depend upon the current and anticipated market demand
for those products. The current and anticipated market demand for electronics
has been impacted by the economic slowdown that began in the latter portions of
2000 and the effects of the hostilities begun in September 2001. Historically,
the electronics and semiconductor industry has been highly cyclical with
recurring periods of over-supply, which often have had a severe negative effect
on demand for test equipment, including systems manufactured and marketed by
Teradyne. Teradyne believes that the markets for newer generations of electronic
products such as those that Teradyne manufactures and markets will also be
subject to similar fluctuations. Teradyne is dependent on the timing of customer
orders and the deferral or cancellation of previous customer orders could have
an adverse effect on its results of operations. Teradyne cannot assure that the
downward trend in new orders will turn around in the future or that any increase
in sales or new orders for a calendar quarter will be sustained in subsequent
quarters. In addition, any factor adversely affecting the electronics industry
or particular segments within the electronics industry may adversely affect
Teradyne's business, financial condition and operating results.
Teradyne Has Taken and Expects to Continue to Take Measures to Address the
Current Slowdown in the Market for Its Products Which Could Have Long-term
Negative Effects on Teradyne's Business.
Teradyne has taken and expects to take additional measures to address the
current slowdown in the market for its products. In particular, Teradyne has
reduced its workforce, frozen hiring, closed facilities, delayed salary
increases, reduced the pay of substantially all employees, implemented
furloughs, discontinued its Flash 750 memory product line, recorded asset
impairment charges and reduced its planned capital expenditures and expense
budgets. These measures have reduced expenses in the face of decreased revenues
due to decreased or cancelled customer orders. However, each measure Teradyne
has taken and any additional measures taken in the future to contain
19
expenditures could have long-term negative effects on Teradyne's business by
reducing its pool of technical talent, decreasing or slowing improvements in its
products, and making it more difficult for Teradyne to respond to customers or
competitors.
Teradyne's Business May Be Adversely Impacted by Acquisitions Which May Affect
Its Ability to Manage and Maintain Its Business.
Since Teradyne's inception, it has acquired a number of businesses. In the
future, Teradyne may undertake additional acquisitions of businesses that
complement its existing operations. Such past or future acquisitions could
involve a number of risks, including:
- the possibility that one or more such acquisitions may not close due
to closing conditions in the acquisition agreements, the inability to
obtain regulatory approval, or the inability to meet conditions
imposed for government or court approvals for the transaction;
- the diversion of the attention of management and other key personnel;
- the inability to effectively integrate an acquired business into
Teradyne's culture, product and service delivery methodology and other
standards, controls, procedures and policies;
- the inability to retain the management, key personnel and other
employees of an acquired business;
- the inability to retain the customers of an acquired business;
- the possibility that Teradyne's reputation will be adversely affected
by customer satisfaction problems of an acquired business;
- potential known or unknown liabilities associated with an acquired
business, including but not limited to regulatory, environmental and
tax liabilities;
- the amortization of acquired identifiable intangibles, which may
adversely affect Teradyne's reported results of operations; and
- litigation which has or which may arise in the future in connection
with such acquisitions.
For example, in connection with the August 2000 acquisition of each of
Herco Technology Corp., a California company, and Perception Laminates, Inc., a
California company, a complaint was filed by the former owners of those
companies on or about September 5, 2001 naming as defendants Teradyne and two of
its executive officers. This case is further described in "Item 1: Legal
Proceedings" on this Form 10-Q. Teradyne cannot predict the outcome of the
lawsuit at this time, and can give no assurance that it will not materially
adversely affect Teradyne's financial position or results of operations.
Additionally, in 2001, Teradyne was designated as a "potentially
responsible party" ("PRP") at a clean-up site related to an acquisition of a
business, in California. Teradyne does not believe that it has any liability for
the clean-up of the California site, and has requested the State of California
to remove Teradyne's name from the list of PRPs, however, the State of
California has not as yet agreed to do so. Teradyne cannot predict what its
liability, if any, may be for the clean-up of this site and can give no
assurance that it will not materially adversely affect Teradyne's financial
condition or results of operations.
In addition to the foregoing, any acquired business could significantly
underperform relative to Teradyne's expectations.
Teradyne Currently Faces, and in the Future May Be the Subject of, Securities
Class Action Litigation Due to Past or Future Stock Price Volatility.
When the market price of a stock has been volatile, holders of that stock
sometimes institute securities class action litigation against the company that
issued the stock. Currently, Teradyne and two of its executive officers are
named as defendants in three purported class action complaints that were filed
in the United States District Court for the District of Massachusetts, Boston,
Massachusetts, on or about October 16, 2001, October 19, 2001 and November 7,
2001. The complaints allege, among other things, that the defendants violated
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, by making,
during the period from July 14, 2000 until October 17, 2000, material
misrepresentations and omissions to the investing public regarding Teradyne's
business operations and future prospects. The complaints seek unspecified
damages, including compensatory damages and recovery of reasonable attorneys'
fees and costs. Teradyne strongly believes that the purported class action
complaints lack merit and it intends to defend against the claims vigorously.
However, Teradyne could incur substantial costs defending the lawsuits. The
lawsuits could also divert the time and attention of Teradyne's management.
Teradyne cannot predict the outcome of the lawsuits at this time, and can give
no assurance that they will not materially adversely affect Teradyne's financial
position or results of operations.
20
Teradyne's Business May be Adversely Impacted by Divestitures of Lines of
Business Which May Affect Its Ability to Manage and Maintain Its Business.
Since Teradyne's inception, it has divested itself of certain lines of
business. In the future, Teradyne may undertake additional such divestitures.
Such past or future divestitures could involve a number of risks, including:
- the diversion of the attention of management and other key personnel;
- disruptions and other effects caused by the divestiture of a line of
business on Teradyne's culture, product and service delivery
methodology and other standards, controls, procedures and policies;
- customer satisfaction problems caused by the loss of a divested line
of business; and
- the decreased diversification of Teradyne's product lines caused by
the divestiture of a line of business which may make Teradyne's
operating results subject to increased market fluctuations.
If Teradyne Is Unable to Protect Its Intellectual Property, Teradyne May Lose a
Valuable Asset or May Incur Costly Litigation to Protect Its Rights.
Teradyne's products incorporate technology that it protects in several
ways, including patents, copyrights and trade secrets. While Teradyne believes
that its patents, copyrights and trade secrets have value in general, no single
one is in itself essential. At times, Teradyne has been notified that it may be
in violation of patents held by others. An assertion of patent infringement
against Teradyne, if successful, could have a material adverse effect on its
ability to sell its products, or could require a lengthy and expensive defense
which could adversely affect its operating results.
If Teradyne Fails to Develop New Technologies to Adapt to Its Customers' Needs
and if Its Customers Fail to Accept Its New Products, Teradyne's Revenues Will
Be Adversely Affected.
Teradyne believes that its technological position depends primarily on the
technical competence and creative ability of its engineers. Teradyne's
development of new technologies, commercialization of those technologies into
products, and market acceptance and customer demand for those products is
critical to Teradyne's success. Successful product development and introduction
depends upon a number of factors, including:
- new product selection;
- development of competitive products by competitors;
- timely and efficient completion of product design;
- timely and efficient implementation of manufacturing; and
- assembly processes and product performance at customer locations.
Intense Competition in Teradyne's Industry May Affect Its Revenues.
Teradyne faces substantial competition throughout the world in each of its
operating segments. Some of Teradyne's competitors have substantial financial
and other resources to pursue engineering, manufacturing, marketing and
distribution of their products. Teradyne also faces competition from internal
suppliers at several of its customers. Some of Teradyne's competitors have
introduced or announced new products with certain performance characteristics
which may be considered equal or superior to those Teradyne currently offers.
Teradyne expects its competitors to continue to improve the performance of their
current products and to introduce new products or new technologies that provide
improved cost of ownership and performance characteristics. New product
introductions by competitors could cause a decline in sales or loss of market
acceptance of Teradyne's products. Moreover, increased competitive pressure
could lead to intensified price based competition, which could materially
adversely affect Teradyne's business, financial condition and results of
operations.
Teradyne Is Subject to Risks of Operating Internationally.
Teradyne derives a significant portion of its total revenue from customers
outside the United States. Teradyne's international sales are subject to
significant risks and difficulties, including:
- unexpected changes in legal and regulatory requirements and in policy
changes affecting international markets;
- changes in tariffs and exchange rates;
- political and economic instability and acts of terrorism;
- difficulties in accounts receivable collection;
- difficulties in staffing and managing international operations; and
- potentially adverse tax consequences, such as the World Trade
Organization's dispute against the U.S. Foreign Sales Credit.
21
Teradyne's Business May Suffer if it is Unable to Attract and Retain Key
Employees.
Competition for certain employees with skills required by Teradyne for
its Semiconductor Test Systems segment is intense in the high technology
industry. Teradyne's success will depend on its ability to attract and retain
key technical employees in this business segment. The loss of one or more key or
other employees, Teradyne's inability to attract additional qualified employees
or the delay in hiring key personnel could each have a material adverse effect
on Teradyne's business, results of operations or financial condition.
If Teradyne's Suppliers do not Meet Teradyne's Product or Delivery Requirements,
Teradyne Could Have Reduced Revenues and Earnings.
The availability of certain components, including semiconductor chips,
may be in short supply from time to time because of high industry demand or the
inability of some vendors to consistently meet our quality or delivery
requirements. If any of Teradyne's suppliers were to cancel contracts or
commitments with Teradyne or fail to meet the quality or delivery requirements
needed to satisfy customer orders for Teradyne's products, Teradyne could lose
time-sensitive customer orders and have significantly decreased quarterly
revenues and earnings, which would have a material adverse effect on our
business, results of operations and financial condition. In addition, Teradyne
relies upon third-party contract manufacturers for certain subsystems used in
its products, and Teradyne's ability to meet customer orders for those products
depends upon the timeliness and quality of the work performed by these
subcontractors, over whom Teradyne does not exercise any control.
Teradyne May Incur Significant Liabilities if It Fails to Comply With
Environmental Regulations.
Teradyne is subject to environmental regulations relating to the use,
storage, discharge, site cleanup, and disposal of hazardous chemicals used in
its manufacturing processes. If Teradyne fails to comply with present and future
regulations, or is required to perform site remediation, Teradyne could be
subject to future liabilities or the suspension of production. Present and
future regulations may also:
- restrict Teradyne's ability to expand its facilities;
- require Teradyne to acquire costly equipment; or
- require Teradyne to incur other significant costs and expenses.
Teradyne Has Substantially Increased Its Indebtedness.
On October 24, 2001, Teradyne completed a private placement of $400
million principal amount of 3.75% Convertible Senior Notes (the "Notes") due
2006 and received net proceeds of $389 million. On December 19, 2001, Teradyne
obtained a loan of approximately $45 million in the form of a 7.5% mortgage loan
maturing on January 1, 2007 (the "Mortgage"). As a result, Teradyne has incurred
approximately $445 million principal amount of additional indebtedness,
substantially increasing its ratio of debt to total capitalization. Teradyne may
incur substantial additional indebtedness in the future. The level of Teradyne's
indebtedness, among other things, could:
- make it difficult for Teradyne to make payments on its debt and
other obligations;
- make it difficult for Teradyne to obtain any necessary future
financing for working capital, capital expenditures, debt service
requirements or other purposes;
- require the dedication of a substantial portion of any cash flow
from operations to service for indebtedness, thereby reducing the
amount of cash flow available for other purposes, including capital
expenditures;
- limit Teradyne's flexibility in planning for, or reacting to
changes in, its business and the industries in which Teradyne
competes;
- place Teradyne at a possible competitive disadvantage
with respect to less leveraged competitors and competitors that
have better access to capital resources; and
- make Teradyne more vulnerable in the event of a further downturn in
its business.
There can be no assurance that Teradyne will be able to meet its debt
service obligations, including its obligations under the Notes and the Mortgage.
Teradyne May Not Be Able to Satisfy a Change in Control Offer.
The indenture governing the Notes contains provisions that apply to a
change in control of Teradyne. If someone triggers a change in control as
defined in the indenture, Teradyne may be required to offer to purchase the
Notes with cash. If Teradyne has to make that offer, Teradyne cannot be sure
that it will have enough funds to pay for all the Notes that the holders could
tender.
In the event of a change in control of Teradyne, the mortgage lender
may elect to declare all amounts due under the Mortgage to be immediately due
and payable, and may elect to take possession of or sell the property subject to
the Mortgage.
22
Teradyne May Not Be Able to Pay Its Debt and Other Obligations.
If Teradyne's cash flow is inadequate to meet its obligations, Teradyne
could face substantial liquidity problems. If Teradyne is unable to generate
sufficient cash flow or otherwise obtain funds necessary to make required
payments on the Notes, the Mortgage, or certain of its other obligations,
Teradyne would be in default under the terms thereof, which would permit the
holders of those obligations to accelerate their maturity and also could cause
defaults under future indebtedness Teradyne may incur. Any such default could
have a material adverse effect on Teradyne's business, prospects, financial
position and operating results. In addition, Teradyne cannot assure that it
would be able to repay amounts due in respect of the Notes or the Mortgage if
payment of those obligations were to be accelerated following the occurrence of
any other event of default as defined in the instruments creating those
obligations. Moreover, Teradyne cannot assure that it will have sufficient funds
or will be able to arrange for financing to pay the principal amount due on the
Notes or the Mortgage at their respective maturities.
Teradyne May Need Additional Financing, Which Could Be Difficult to Obtain.
Teradyne expects that its existing cash and marketable securities, cash
generated from operations, the proceeds of the Notes offering in October 2001
and the proceeds from the Mortgage financing in December 2001, will be
sufficient to meet Teradyne's cash requirements to fund operations and expected
capital expenditures for the foreseeable future. In the event Teradyne may need
to raise additional funds, Teradyne cannot be certain that it will be able to
obtain such additional financing on favorable terms, if at all. Further, if
Teradyne issues additional equity securities, stockholders may experience
additional dilution or the new equity securities may have rights, preferences or
privileges senior to those of existing holders of common stock. Future
financings may place restrictions on how Teradyne operates its business. If
Teradyne cannot raise funds on acceptable terms, if and when needed, Teradyne
may not be able to develop or enhance its products and services, take advantage
of future opportunities, grow its business or respond to competitive pressures,
which could seriously harm Teradyne's business.
Provisions of Teradyne's Charter and By-Laws and Massachusetts Law Make a
Takeover of Teradyne More Difficult.
Teradyne's basic corporate documents, its stockholder rights plan, and
Massachusetts law contain provisions that could discourage, delay or prevent a
change in the control of Teradyne, even if a change of control might be regarded
as beneficial to some or all of Teradyne's stockholders.
Teradyne's Operating Results Are Likely to Fluctuate Significantly.
Teradyne's quarterly and annual operating results are affected by a
wide variety of factors that could materially adversely affect revenues and
profitability, including:
- competitive pressures on selling prices;
- the timing of customer orders and the deferral or cancellation of
orders previously received;
- provisions for excess and obsolete inventory;
- allowances for deferred tax assets;
- charges for certain long-lived assets, including goodwill;
- changes in product mix;
- Teradyne's ability to introduce new products and technologies on a
timely basis;
- the introduction of products and technologies by Teradyne's
competitors;
- market acceptance of Teradyne's and its competitors' products;
- fulfilling backlog on a timely basis;
- reliance on sole source suppliers;
- potential retrofit costs;
- the level of orders received which can be shipped in a quarter; and
- the timing of investments in engineering and development.
In particular, due to Teradyne's introduction of a number of new,
complex test systems in 2001 and the planned introduction of other such systems
in 2002, there can be no assurance that Teradyne will not experience delays in
shipment of its products or that its products will achieve customer acceptance.
As a result of the foregoing and other factors, Teradyne has and may
continue to experience material fluctuations in future operating results on a
quarterly or annual basis which could materially and adversely affect its
business, financial condition, operating results and stock price.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
There were no material changes in Teradyne's exposure to market risk from
December 31, 2001.
23
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
In connection with the August 2000 acquisition of each of Herco
Technology Corp., a California company, and Perception Laminates, Inc., a
California company, a complaint was filed by the former owners of those
companies on or about September 5, 2001 naming as defendants Teradyne and two of
its executive officers. The case was originally filed in the Superior Court in
San Diego County, California, and was subsequently removed by the defendants to
federal court. On or about November 14, 2001, Teradyne and the two individual
defendants filed a motion to dismiss the amended complaint in its entirety. The
federal court granted in part and denied in part that motion to dismiss. The
claims that were dismissed were dismissed with prejudice. At the federal court's
request, the plaintiffs filed a second amended complaint on March 4, 2002
setting forth their remaining claims. The second amended complaint alleges,
among other things, that the sale of Teradyne's common stock to the former
owners violated certain California securities statutes and common law. In
addition, the second amended complaint alleges that Teradyne breached certain
contractual obligations in the agreements relating to the acquisitions. The
second amended complaint seeks unspecified damages, including compensatory,
consequential and punitive damages, and recovery of reasonable attorneys' fees
and costs. On March 25, 2002, Teradyne and the two individual defendants filed
their answer to the second amended complaint. Teradyne filed a motion for
partial summary judgment on August 9, 2002. A hearing on that motion is
scheduled for September 23, 2002.
Teradyne and two of its executive officers are named as defendants in
three purported class action complaints that were filed in the United States
District Court for the District of Massachusetts, Boston, Massachusetts, on or
about October 16, 2001, October 19, 2001 and November 7, 2001. The complaints
allege, among other things, that the defendants violated Sections 10(b) and
20(a) of the Securities Exchange Act of 1934, by making, during the period from
July 14, 2000 until October 17, 2000, material misrepresentations and omissions
to the investing public regarding Teradyne's business operations and future
prospects. The complaints seek unspecified damages, including compensatory
damages and recovery of reasonable attorneys' fees and costs. A motion for the
designation on one or more lead plaintiffs was heard by the court on July 2,
2002. No ruling has yet been issued.
Teradyne disputes all of the claims above and believes they are without
merit, and intends to defend vigorously against the lawsuits. However, an
adverse resolution of any of the lawsuits could have a material adverse effect
on Teradyne's financial position or results of operations. Teradyne is not
presently able to reasonably estimate potential losses, if any, related to any
of the lawsuits and therefore has not accrued for any potential losses from the
lawsuits.
In addition, Teradyne is subject to legal proceedings and claims that
arise in the ordinary course of business. Management does not believe these
actions will have a material adverse effect on Teradyne's financial position or
results of operations.
Item 4: Submission of Matters to a Vote of Security Holders
The annual meeting of security holders of Teradyne was held May 23, 2002. The
following were elected as Directors:
Total Vote Total Vote Withheld
Nominee For Each Nominee For Each Nominee
- ------- ---------------- -------------------
James W. Bagley 147,558,920 2,034,562
Vincent M. O'Reilly 147,550,223 2,043,259
The security holders approved an amendment to the 1996 Employee Stock Purchase
Plan to increase the aggregate number of shares of Common Stock that may be
issued pursuant to said plan by 5,000,000 shares, with 141,175,893 shares voting
in favor, 7,557,649 shares voting against, and 859,940 shares abstaining.
In addition, the security holders ratified the selection of the firm of
PricewaterhouseCoopers LLP as auditors for the fiscal year ending December 31,
2002, with 144,382,667 shares voting in favor, 4,463,093 shares voting against,
and 747,722 shares abstaining.
Item 6: Exhibits and Reports on Form 8-K
(a): Exhibits
Exhibit Number Description
- -------------- -----------
10.1 1991 Employee Stock Option Plan, as amended*
10.2 1997 Employee Stock Option Plan, as amended*
10.3 1996 Employee Stock Purchase Plan, as amended*
99.1 Certification pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
99.2 Certification pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
- ----------
* Indicates management contract or compensatory plans.
** Teradyne has the originally signed certificate and will provide it to the
Securities and Exchange Commission upon request.
(b): Reports on Form 8-K
There were no Form 8-K filings by Teradyne during the quarter ended June 30,
2002, as none were required.
24
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the
registrant has duly caused this report to be
signed on its behalf by the undersigned
thereunto duly authorized.
TERADYNE, INC.
-----------------------------
Registrant
/s/ GREGORY R. BEECHER
-----------------------------
Gregory R. Beecher
Vice President and
Chief Financial Officer
(Principal Financial Officer)
August 13, 2002
25