Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 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 Number)
321 HARRISON AVENUE,
BOSTON, MASSACHUSETTS 02118
(Address of principal executive
offices) (Zip Code)
Registrant's telephone number, including area code: (617) 482-2700
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
Common Stock, par value
$0.125 per share New York Stock Exchange
Common Stock Purchase
Rights New York Stock Exchange
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 [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12(b-2).
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or in any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of June 28, 2002 was $4.3 billion based upon the composite
closing price of the registrant's Common Stock on the New York Stock Exchange
on that date.
The number of shares outstanding of the registrant's only class of Common
Stock as of February 21, 2003 was 184,891,145 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement in connection with its 2003
annual meeting of shareholders are incorporated by reference into Part III.
================================================================================
TERADYNE, INC.
FORM 10-K
PART I
Item 1: Business
Teradyne, Inc. is the world's largest supplier of automatic test equipment,
a leading provider of high performance interconnection systems and an emerging
provider of 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");
. diagnose and test automotive electronics systems ("Diagnostic
Solutions"); 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 reporting Teradyne's operating segments.
For financial information concerning Teradyne's operating segments, see "Note
T: Operating Segment and Geographic Information" in Notes to Consolidated
Financial Statements.
Statements in this Annual Report on Form 10-K which are not historical
facts, so called "forward looking statements," are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that all forward looking statements involve risks and
uncertainties, including those detailed in Teradyne's filings with the
Securities and Exchange Commission. See also "Item 7: Management's Discussion
and Analysis of Financial Condition and Results of Operations--Certain Factors
That May Affect Future Results" and "Note E: Risks and Uncertainties" in Notes
to Consolidated Financial Statements.
Products
Semiconductor Test Solutions
Teradyne produces Semiconductor Test Systems which are used in the
manufacturing and testing of a wide variety of integrated devices, including
"system on a chip (SOC)", mixed signal, logic, and memory integrated circuits.
Semiconductor Test Systems are sold to Integrated Device Manufacturers (IDMs)
and to subcontractors (Subcons), that perform design and/or manufacturing
functions for the IDMs. The Subcon sector is further divided into companies
that perform design of integrated circuits without manufacturing capabilities
which, often referred to as "Fabless" companies, companies which have wafer
manufacturing capability called Foundries and companies which provide test and
assembly services for the final packaged devices. These customers use
Teradyne's Semiconductor Test Systems to:
. measure product performance;
. improve and control product quality;
. improve device design;
2
. reduce time to market;
. enhance manufacturability;
. minimize labor costs; and
. increase production yields,
with the overall benefit of comprehensively testing advanced performance
devices while reducing their total costs associated with testing.
The semiconductor test market is comprised of two sub-markets. The first
sub-market is system on a chip (SOC) device testing, which includes the testing
of a broad range of analog, mixed signal, and logic devices used in automotive,
communications, consumer, computer and electronic game applications. The second
sub-market is memory device testing, which includes the testing of dynamic
random access memory ("DRAMs") of all types (synchronous, double data rate
("DDR") and Rambus/TM/), static random access memory ("SRAMs") and flash memory.
Teradyne products within the Semiconductor Test Systems market include:
System on a Chip ("SOC") Test Solutions
System On a Chip devices integrate analog, digital, and embedded memory to
implement a complete function on a single chip. The SOC market spans a huge
range of functionality, from very simple low cost devices such as operational
amplifiers or voltage regulators to complex digital signal processors and
microprocessors. Teradyne offers a suite of test solutions to cover this range
in the most economical way for each segment. The main test equipment products
are described below:
The J750 and J750K test systems are designed to address the highest volume
semiconductor devices. Devices such as microcontrollers are at the heart of
almost every consumer electronics product, from small appliances to automotive
engine controllers. These devices are produced in enormous quantities. The
lowest cost of test at very high production throughput rates is essential to
meeting the economic requirements in these markets. Teradyne's J750 test
systems combine compact packaging, high throughput, and ease of production
test. This was possible due to the high level of integration in the design. A
single circuit board in the J750 test system provides up to 64 digital
input/output channels. This innovative approach eliminated the traditional
"mainframe", creating a "tester in the test head." Its "zero footprint" design
reduces the total cost of ownership and allows for more efficient use of
production floor space. The J750 platform technology was used to create
Teradyne's IP750 Image Sensor test system. The IP750 is focused on testing
current and future image sensor devices used in digital cameras and other
imaging products.
The Catalyst and Catalyst-Tiger test systems are designed to test a broad
range of higher performance integrated mixed signal and system on chip devices.
The Catalyst is designed to test devices requiring data rates up to 400 Mega
bytes per second (or M bps) with a broad range of analog performance. Over
1,000 Catalyst systems are in use today at IDMs and Subcons testing integrated
circuits for DVD players, cellular phones, networking appliances,
telecommunications systems, computer peripherals, and many other applications.
Teradyne estimates that over 75% of the world's cell phones include devices
tested on Teradyne's Catalyst systems, or its predecessor, the A500 series of
test systems.
The "Tiger" version of Catalyst provides similar analog capability, but
extends the digital performance up to 1.6 Giga bps on up to 1,024 input/output
channels. This extended digital performance enables complete functional testing
of the world's most demanding mixed signal and high speed logic integrated
circuits, used in computer graphics, personal computer chip set,
microprocessor, and networking applications. The Tiger is installed at both
IDMs and Subcons around the world.
3
High performance devices such as microprocessors require high performance
automatic test equipment for both functional ("Does it function properly?") and
structural ("Is it constructed properly?") testing. Teradyne's J973EP is one of
the only Very Large Scale Integration, ("VLSI") test systems designed for the
wide range of testing capability needed for structural to functional testing in
a single test system. This product's flexible configuration provides the
ability to switch between functional and structural test in real time,
minimizing test cost by matching test performance to device test requirements.
The J973EP expands the performance curve on accuracy, precision device power,
and differential bus testing.
Teradyne's most recently introduced test system, the FLEX, is the beginning
of the next generation of high throughput general purpose SOC test systems and
combines the integration and parallelism of the J750 with the synchronization
and instrument flexibility of the Catalyst. FLEX, introduced in April of 2002,
employs a unique "SOC tester per pin" architecture bringing a higher degree of
parallelism to mixed signal and SOC testing. By testing more functions and more
devices at the same time ("in parallel") FLEX increases the production
efficiency of mixed signal device testing. The core of FLEX design employs a
"universal slot" concept, which provides the user the flexibility to install
any instrument or tester resource into any of the tester "slots". FLEX is
similar to the J750 in that the instrumentation tends to be implemented on self
contained circuit boards that plug into the test head. This modular design and
the universal slot architecture adds a level of adaptability and flexibility to
production testing which is new to the industry. FLEX covers a range of devices
in the consumer electronics area, including automotive, higher performance
microcontrollers, and power control. FLEX will be expanded to cover wireless
and other integrated mixed signal device areas over time. FLEX currently covers
devices in the consumer electronics area, including automotive, higher
performance microcontroller and power control applications. Its capabilities
are rapidly being expanded to cover the other major segments of the SOC device
market.
Memory Test Solutions
Reducing cost of test is especially crucial in the highly price sensitive
memory device market. Teradyne's Probe-One DRAM memory test system delivers one
of the lowest test costs. Recently, market demand for the system has been very
limited. Teradyne's other memory test offering is the J996 memory test system
which provides high throughput solutions for both probe and package test. At
the end of 2002, Teradyne discontinued the J996 product after a last time buy
was offered to Teradyne's customers.
Connection Systems Solutions
Connection Systems offers a total system solution with a broad suite of
technologically differentiated capabilities including high performance printed
circuits, high-speed, high-density connectors, multi-gigabit backplane
assemblies, electromechanical integration and systems integration and test
services. Connection System's technology can be found in such products as
Internet routers, computer servers, mass data storage systems and telecom
switches.
Connection Systems produces complex printed circuit boards, including large
format boards called "backplanes" (over 0.400 inches thick, up to 36 inches
wide and 54 inches long, and over 60 layers) and high speed and high density
smaller format boards called "daughter cards". A backplane plays the crucial
role of locating and supporting printed circuit boards within a system,
enabling the printed circuit boards to "talk" to each other and to the outside
world. Connectors are key elements in the system linking a backplane with
printed circuit boards (daughter cards) that perform specific functions. High
bandwidth capability packed in a small amount of space is an important
technological advantage of Teradyne's connectors. Connection System's VHDM(R)
and VHDM-HSD/TM/ connector families have become a standard in the industry for
high-speed, high-density interconnect. The GbX/TM/ connector, (introduced in
2001) and NexLev connector, have the highest density on the market today in
their respective applications and enable data rates to 10 Giga bits per second.
Connection Systems also provides electronic manufacturing services, including
backplane assembly, electro-mechanical integration of sub-assemblies, and
systems integration and test.
4
An essential element of the Connection Systems business is its design and
applications engineering expertise at every step in the process. By working
early with customers in the system design cycle, this expertise helps balance
critical cost and performance needs. In addition, Connection System's program
management services become an extension of the customer's operation, delivering
quick turn prototypes and high technology production volumes.
Circuit Board Test and Inspection Solutions
The central element of almost every electronic product is a printed circuit
board assembly. A circuit board assembly includes all the components and their
interconnections that cause the board to perform its intended functions. As
more and more product functionality is packed into smaller packages, such as
personnel digital assistants (PDAs), phone handsets and laptop computers, both
the circuit boards and their components become increasingly complex. The
circuit board assembly manufacturing process is also complex and demands a
number of test and inspection steps. Teradyne circuit board assembly test and
inspection equipment is used throughout the manufacturing process to ensure
high production yields, to maintain overall product quality, to diagnose faults
quickly where and when they occur, and to reduce total manufacturing cost. The
Teradyne circuit board assembly and inspection product range includes the
following products:
In-Circuit Test
In-circuit test systems examine the assembled and soldered printed circuit
board for proper construction under both power-off and power-on conditions.
Defective components and solder joints are identified quickly and precisely.
High throughput, relatively low cost fault identification and diagnostic
accuracy are valued features which cause in-circuit testers to be used
universally in every electronics production line. Teradyne in-circuit products
support a full range of circuit board test applications, including high-volume
production, selective or sample test, prototype testing and final or system
test. Accordingly, Teradyne offers a wide variety of capabilities and options
with its Spectrum 8000-series, Z1800-series and GR TestStation product lines.
Imaging Inspection
As circuit boards become increasingly dense and complex, achieving the
electrical contact required for the traditional in-circuit test method is
becoming more difficult, time-consuming and expensive. "Loss of (electrical)
access" is a primary driver behind the increasing popularity of imaging
inspection systems, which examine the circuit board for physical qualities
including correct component presence and orientation, the absence of electrical
opens and solder quality. Teradyne's imaging inspection systems employ one of
two technologies: automated optical inspection ("AOI"), whereby a visual image
of the board is captured and analyzed; and automated x-ray inspection ("AXI"),
which captures an x-ray image of the board. Each technology has particular
strengths in analyzing various board defect classes. For example, AOI is the
preferred technology for evaluating and diagnosing component-related defects,
while AXI is the preferred technology for analyzing hidden solder-related
defects. Teradyne's Optima 7000-series AOI systems employ advanced and patented
lighting, camera, software, and mechanics, resulting in highly reliable,
repeatable, and accurate optical inspection at high line speeds. The AXI
product line offers fast throughput with high resolution on both its
two-dimensional (2D) and three-dimensional (3D) models, and is the only product
line that includes a combined 2D/3D capability.
Military/Aerospace Test & Diagnostics
The Mil/Aero Test Solutions business unit applies Teradyne's expertise in
the functional test and diagnosis of assemblies of electronics to the military
and commercial aerospace markets. These solutions come in the form of systems,
instruments, and software products.
Teradyne's traditional focus in the military market has been to provide test
and diagnostic solutions for Factory and Depot level maintenance and repair
activities. These solutions are typically deployed in stable, fixed
5
environments with an emphasis on fast, accurate diagnostics down to a
repairable component on a replaceable unit. Teradyne has recently begun to
exploit architectural components that allow the repackaging of our solutions
into smaller, lighter, ruggedized implementations enabling Teradyne to expand
our served markets to include the Intermediate and Operational areas of the
military market. The requirements here are to isolate failures down to the
smallest replaceable unit in a mobile, harsh environment. The failed unit is
then passed back to the Depot or Factory for further diagnosis down to the
repairable component before being cycled back into stock. In the Commercial
Aerospace market, Teradyne utilizes the same functional test and diagnostics
capabilities that apply to the Military markets to test the increasing complex
electronic functions found in today's aircraft.
The success of our Mil/Aero product line has been demonstrated by recent
design wins on major Department of Defense programs such as the F-35 Joint
Strike Fighter, C-17, and RT-CASS, as well as with Aerospace customers such as
Boeing. These design-ins lay the foundation for significant growth potential,
as Teradyne is serving much larger markets than in the past.
Diagnostic Solutions
Diagnostic Solutions is a supplier of automotive manufacturing and service
bay test and diagnostic systems for electronics used in vehicles throughout
their lifecycle, from design through manufacture to after sale service. As the
number and complexity of electronic systems and software proliferate in
vehicles, the ability to manufacture and service those vehicles becomes
increasingly dependent on electronic diagnostic equipment. Diagnostic Solutions
predominately falls into two categories:
Vehicle Configuration and Test Systems ("VCATS")
Diagnostic Solution's VCATS products serve the automotive Original Equipment
Manufacturer ("OEM") sector. Used directly on automotive production lines,
Diagnostic Solutions connects to the vehicle to test and program (or
"configure") the electronic systems on vehicles. These include engine control
modules and subsystems such as braking, navigation and air conditioning.
Diagnostic Solutions is also able to link to an OEM's manufacturing control
system in order to provide statistical quality reports to operators and
management. In addition, Diagnostic Solutions also provides VCATS solutions to
Tier 1 suppliers to the OEMs.
OEM Service Diagnostics
OEM Dealer service technicians use Diagnostic Solution's systems to find
faults and perform routine service functions in order to help maintain the
quality of vehicles in use by their customers, and to reduce OEM warranty
costs. Historically, the focus has been on fixing faults in the service bay,
but is growing to include constant monitoring of the vehicle to predict and
prevent failure.
Broadband Test Solutions
Broadband Test Systems provides Celerity and NetFlare Test Systems for
testing speed characteristics and quality of telephone and cable television
lines connected to homes and businesses. These state-of-the-art systems support
cable and telephone company service provider's goals to sell and deploy DSL and
high-speed data services sooner and improve the efficiency of qualification,
provisioning, and customer care. Celerity and NetFlare together provide test
coverage across approximately 30 million lines. Broadband Test Systems also
provides voice network maintenance solutions for the communications industry.
Testing more than 120 million access lines worldwide for many of the world's
largest telecommunications companies, including British Telecommunications,
Deutsche Telecom and Verizon, Teradyne's 4TEL access network test system
reduces operating costs and increases customer satisfaction by reliably
detecting and identifying line faults within a telecommunications access
network.
6
Teradyne products within the Broadband Test Systems market include:
4TEL & 4TEL II Voice Test Systems
Teradyne's 4TEL voice test system automates the ability to precisely
identify and isolate faults within a telecommunications network, thus providing
cost savings to telephone operating companies. The 4TEL II voice test system
uses expert system technology to further isolate faults to such zones as
exchange hardware, exchange wiring, access cable, and inside or outside
customer premises, without the need for customer isolation equipment.
The 4TEL and 4TEL II test systems enable telephone operating companies to
automate customer care and field repair processes resulting in substantial
reductions in network maintenance and operating costs.
NetFlare/TM/ End-to-End Internet Testing
Cable and telephone company service providers can reduce broadband service
call handling time and erroneous truck dispatches while at the same time
increase customer satisfaction and reduce customer churn with Teradyne's
NetFlare system. This proven technology allows the consumer or call center
representative to emulate the consumer's network experience and determine the
source of a problem and the jurisdiction in the network designating the
appropriate mechanism for repair. For example, NetFlare technology
automatically measures throughput and latency as the consumer experiences it,
determines whether the broadband service provider commitment is met, and
identifies the network source of the problem. NetFlare significantly reduces
average call handling time and reduces the necessity for further technical
support. In particular cases when a truck dispatch is required, NetFlare can
assist in reducing "fault not found" conditions and can help designate the
appropriate level of technical expertise for dispatch.
Celerity/TM/ DSL Loop Qualification Test System
Service providers need to know which telephone lines between the central
office and the customer are qualified for broadband digital subscriber line
("DSL") service and which are not. Existing cable records are typically
insufficient. Teradyne's Celerity product uses accurate insertion loss, length
and load coil detection, all measured through the narrowband voice switch, to
qualify millions of lines for DSL service in hours, and develops a database
immediately showing which lines are qualified, which lines require conditioning
and which lines are disqualified. This information is then used to augment
existing records systems to support point-of-sale and marketing efforts of DSL.
In addition, Celerity performs real time provisioning testing that provides
detailed loop qualification information and tests in-service DSL lines,
identifying the presence and dispatch location of faults that affect data
transmission.
Celerity is a revenue enhancement tool as it finds more DSL-ready lines in
the network that can be sold to residential and small business customers.
Celerity also helps reduce the cost of provisioning DSL through automation of
the loop qualification process and reduction of field dispatches.
7
Summary of Net Sales by Operating Segment
Teradyne's four principal operating segments accounted for the following
percentage of consolidated net sales for each of last three years:
% of consolidated net sales
--------------------------
2002 2001 2000
---- ---- ----
Semiconductor Test Systems............... 46% 50% 67%
Connection Systems....................... 32 38 24
Circuit Board Test and Inspection Systems 14 9 5
Other Test Systems....................... 8 3 4
--- --- ---
Total.................................... 100% 100% 100%
Investor Information
Teradyne, a Massachusetts corporation incorporated on September 23, 1960, is
subject to the informational requirements of the Securities Exchange Act of
1934 (the "Exchange Act"). Therefore, Teradyne files periodic reports, proxy
statements and other information with the Securities and Exchange Commission
(the "SEC"). Such reports, proxy statements and other information may be
obtained by visiting the Public Reference Room of the SEC at 450 Fifth Street,
NW, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. In addition,
the SEC maintains an Internet site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding issuers that
file electronically.
You can access financial and other information at Teradyne's Investor
Relations website. The address is www.teradyne.com. We make available, free of
charge, copies of our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act through
Teradyne's website as soon as reasonably practicable after filing such material
electronically or otherwise furnishing it to the SEC.
Sales and Distribution
Prices for Teradyne's systems can reach $3 million or more. In 2002, 2001,
and 2000 no single customer accounted for more than 10% of Teradyne's
consolidated net sales. In 2002, 2001, and 2000 Teradyne's three largest
customers accounted for 23%, 24%, and 21% of consolidated net sales,
respectively.
Direct sales to United States government agencies accounted for less than 2%
of consolidated net sales in 2002, 2001 and 2000. Approximately 10% of Circuit
Board Test and Inspection Systems sales in 2002 were to United States
government agencies and another 15% was made to customers who are government
contractors.
Teradyne has sales and service offices located throughout North America,
South East Asia, Europe, Taiwan, Japan, and Korea as Teradyne's customers
outside the United States are located primarily in these geographic areas.
Teradyne sells in these areas predominantly through a direct sales force.
Primarily all of Teradyne's manufacturing activities are conducted in the
United States. Sales to customers outside the United States accounted for 54%
of consolidated net sales in 2002, 49% in 2001, and 54% in 2000. Sales to
customers located in Taiwan were 9% of consolidated net sales in 2002 and 10%
of consolidated net sales in 2001 and 2000. Sales are attributed to geographic
areas based on the location of the customer site.
Teradyne is subject to the inherent risks involved in international trade,
such as:
. Political and economic instability and acts of terrorism;
. Restrictive trade policies;
8
. Controls on funds transfer;
. Currency fluctuations;
. Difficulties in managing distributors;
. Potentially adverse tax consequences; and
. Accounts receivable collection.
Teradyne attempts to reduce the effects of currency fluctuations by hedging
those currency exposures associated with certain assets and liabilities
denominated in non-functional currencies and by conducting some of its
international transactions in U.S. dollars or dollar equivalents. See also
"Item 7A. Quantitative and Qualitative Disclosures About Market Risks" and
"Note G: Financial Instruments" in Notes to Consolidated Financial Statements.
Competition
Teradyne faces substantial competition, throughout the world in each of its
operating segments. Some of these 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
that 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.
Backlog
At December 31, 2002 and 2001, Teradyne's backlog of unfilled orders in each
of its four principal operating segments was as follows:
(in millions)
-------------
2002 2001
------ ------
Semiconductor Test Systems............... $240.0 $317.2
Connection Systems....................... 104.2 357.6
Circuit Board Test and Inspection Systems 53.4 55.5
Other Test Systems....................... 43.3 32.7
------ ------
$440.9 $763.0
The decrease in Semiconductor Test Systems and Connection Systems backlog of
$77.2 million and $253.4 million respectively was primarily due to customer
cancellations and demand reductions. Of the backlog at December 31, 2002,
approximately 93% of the Semiconductor Test Systems backlog, 99% of the
Connection Systems backlog, 94% of Circuit Board Test and Inspection Systems
backlog, and 92% of the Other Test Systems backlog is expected to be delivered
in 2003. Generally, Teradyne's backlog policy requires delivery of products and
services within twelve months, except for service agreements where delivery may
cover a continuous period of up to thirty-six months.
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.
9
Raw Materials
Teradyne's products require a wide variety of electronic and mechanical
components from 4,000 suppliers of which 55 represent 80% of the spending.
Teradyne can experience occasional delays in obtaining timely delivery of
certain items. Additionally, Teradyne could experience a temporary adverse
impact if any of its sole source suppliers ceased to deliver products.
Approximately 30% of material purchases require some custom work where having
multiple suppliers would be cost prohibitive. Any prolonged inability to obtain
adequate supplies, or any other circumstances that would require Teradyne to
seek alternative sources of supply could have a material adverse effect on its
business, financial condition, and results of operations.
Patents and Licenses
Teradyne's development of its products, both hardware and software, is based
in significant part on proprietary information and technology. Teradyne
protects its rights in proprietary information and technology through various
methods, such as:
. patents and patent applications;
. copyrights;
. trademarks;
. trade secrets;
. business practices;
. software license agreements, non-disclosure agreements and other
contracts; and
. employee agreements.
However, these protections might not be effective in all circumstances.
Competitors might independently develop similar technology or exploit
Teradyne's proprietary technology and/or information in countries where
Teradyne lacks enforceable intellectual property rights (IP) or enforcement of
such rights through the legal system provides an insufficient deterrent. Also,
IP protections can be invalidated through legal processes. While Teradyne does
not believe that any single piece of intellectual property or proprietary
rights is essential to its business, if a significant portion of Teradyne's
intellectual property or proprietary rights is invalidated or ineffective,
Teradyne's business could be materially affected.
Employees
As of December 31, 2002, Teradyne employed approximately 7,200 people. Since
the inception of Teradyne's business, there have been no work stoppages or
other labor disturbances. Teradyne has no collective bargaining contracts.
Engineering and Development Activities
The highly technical nature of Teradyne's products requires a large and
continuing engineering and development effort. Engineering and development
expenditures were approximately $293.9 million in 2002, $287.3 million in 2001,
and $348.0 million in 2000. These expenditures amounted to approximately 24% of
consolidated net sales in 2002, 20% in 2001, and 11% in 2000.
Environmental Affairs
Teradyne is subject to various federal, state and local government laws and
regulations relating to the protection of employee health and safety and the
environment. Teradyne accrues for all known environmental liabilities when it
becomes probable that Teradyne will incur cleanup costs and those costs can
reasonably be estimated. The amounts accrued do not cover sites that are in the
preliminary stages of investigation. Estimated environmental costs are not
expected to materially affect the financial position or results of Teradyne's
operations in future periods. However, estimates of future costs are subject to
change due to protracted cleanup periods and changing environmental remediation
laws and regulations.
10
In 2001, Teradyne was designated as a "potentially responsible party"
("PRP") at a clean-up site in Los Angeles, California. This claim arises out of
Teradyne's acquisition of Perception Laminates, Inc. in August 2000. Prior to
that date, Perception Laminates had itself acquired certain assets of Alco
Industries Inc. under an asset purchase agreement dated July 30, 1992. Neither
Teradyne nor Perception Laminates have ever conducted any operations at the Los
Angeles site. Teradyne has asked the State of California to drop the PRP
designation, but California has not yet agreed to do so. Management does not
believe the outcome of this matter will have a material adverse effect on
Teradyne's financial position or results of operations but there can be no
assurance that any such outcome would not have a material adverse effect on
Teradyne's financial position or results of operations.
In August 2002, Teradyne was designated as a PRP at a site in Whittier,
California. Teradyne was identified as a PRP based on shipments from its
Woodland Hills, California and Agoura Hills, California sites during 1983 and
1984. Based upon review of the shipping documents, Teradyne believes that any
potential liability is limited to that of a de minimus contributor to the site.
Management does not believe that any potential liability for the clean-up of
this site will have a material adverse effect on Teradyne's financial position
or results of operations but there can be no assurance that any potential
liability would not have a material adverse effect on Teradyne's financial
position or results of operations.
11
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names of all executive officers of
Teradyne and certain other information relating to their positions held with
Teradyne and other business experience. Executive officers of Teradyne do not
have a specific term of office but rather serve at the discretion of the Board
of Directors.
Executive Officer Age Position Business Experience For The Past 5 Years
----------------- --- -------------------------- ----------------------------------------------
George W. Chamillard 64 President, Chairman of the Chairman of the Board since 2000; President
Board, and Chief and Chief Executive Officer of Teradyne since
Executive Officer 1997; Director of Teradyne since 1996;
President and Chief Operating Officer of
Teradyne from 1996 to 1997; Executive Vice
President of Teradyne from 1994 to 1996.
Gregory R. Beecher.. 45 Vice President, Chief Vice President and Chief Financial Officer of
Financial Officer and Teradyne since 2001 and Treasurer of
Treasurer Teradyne since February 2003; Partner at
PricewaterhouseCoopers LLP from 1993 to
2001.
Michael A. Bradley.. 54 President of President of Semiconductor Test since 2001;
Semiconductor Test Vice President of Teradyne from 1992 to
2001; Chief Financial Officer of Teradyne
from 1999 to 2001.
Eileen Casal........ 44 Vice President, General Vice President, General Counsel and Clerk of
Counsel and Clerk Teradyne since January, 2003; Vice President,
General Counsel and Corporate Secretary of
GSI Lumonics Inc. from May 2001 until
January 2003; Vice President, General
Counsel and Corporate Secretary of Adero,
Inc. from April 2000 until March 2001; Vice
President, General Counsel and Assistant
Clerk of Teradyne, Inc. from April 1999 to
April 2000; and from 1986 until March 1999,
Ms. Casal held a number of legal positions at
Stratus Computer, Inc. including Vice
President, General Counsel and Clerk.
John M. Casey....... 54 President of Circuit Board President of Circuit Board Test and Inspection
Test and Inspection since 2002; Vice President of Teradyne since
1990.
G. Richard MacDonald 54 Controller Controller of Teradyne since 2001; Controller
of Teradyne's Industrial Consumer Division
from 1989 to 2001.
Edward Rogas, Jr.... 62 Senior Vice President Senior Vice President of Teradyne since 2000;
Vice President of Teradyne from 1984 to 1999.
Richard E. Schneider 45 President of Connection President of Connection Systems since 2001;
Systems Vice President of Teradyne from 1998 to
2001; Connections Systems manager from
1998 to 2001; Connection Systems Business
Development manager from 1997 to 1998.
12
Item 2: Properties
The following table provides certain information as to Teradyne's principal
general offices and manufacturing facilities.
Approximate
Major Square Feet of
Location Operating Segment Activity+ Floor Space
-------- ----------------- --------- --------------
Properties Owned:
Nashua, New Hampshire........ Connection Systems 2-3-4-5 524,000
Boston, Massachusetts........ Semiconductor Test & General Offices 1-2-3-4-5 492,000
North Reading, Massachusetts. Semiconductor Test & Circuit Board
Test and Inspection 2-3-4-5 273,000
North Reading, Massachusetts. Unoccupied 425,000(a)
North Reading, Massachusetts. Unoccupied 242,000(b)
Agoura Hills, California..... Semiconductor Test 2-3 360,000
Agoura Hills, California..... Unoccupied 212,000(c)
San Diego, California........ Unoccupied 192,000 (c)
San Jose, California......... Semiconductor Test 3-5 120,000
Stoughton, Massachusetts..... Unoccupied 120,000(c)
La Verne, California......... Connection Systems 2 93,000
Kumamoto, Japan.............. Semiconductor Test 2-3-4-5 66,000
Deerfield, Illinois.......... Broadband Test 2-3-4-5 63,000
---------
Subtotal of Owned Properties................................................. 3,182,000
Properties Leased:
Westford, Massachusetts...... Circuit Board Test and Inspection 2-3-4-5 230,000
Woburn, Massachusetts........ Semiconductor Test 2-6 205,000
Hudson, New Hampshire........ Connection Systems 2 144,000
Mexicali, Mexico............. Connection Systems 2 112,000
Nashua, New Hampshire........ Unoccupied 107,000(d)
Walnut Creek, California..... Unoccupied 98,000 (e)
Shanghai, China.............. Connection Systems, Circuit Board Test and
Inspection, and Semiconductor Test 2 87,000
Bedford, Massachusetts....... Semiconductor Test 3 80,000
Manchester, England.......... Diagnostic Solutions 2-3-4-5 75,000
Agoura Hills, California..... Semiconductor Test 6 59,000
Stoughton, Massachusetts..... Unoccupied 55,000(d)
Nashua, New Hampshire........ Connection Systems 6 55,000
Plano, Texas................. Unoccupied 50,000(d)
Winston-Salem, North Carolina Connection Systems 2 49,000
Dublin, Ireland.............. Connection Systems 2 46,000
Fremont, California.......... Connection Systems 2 46,000
Bracknell, England........... Semiconductor Test, Broadband Test and
Circuit Board Test 3-5 44,000
Tai Yuan, Taiwan............. Semiconductor Test and Circuit Board Test 5 43,000
---------
Subtotal of Leased Properties................................................ 1,585,000
---------
Total Square Feet of Floor Space............................................. 4,767,000
=========
+ Major activities have been separated into the following categories: 1.
Corporate Administration, 2. Manufacturing, 3. Research and Development, 4.
Marketing, 5. Sales and Administration and 6. Storage and Distribution
(a) This space is unoccupied.
(b) This space is currently being leased to two companies.
(c) This space is held for sale.
(d) This space is currently being subleased.
(e) This space is unoccupied and is currently being marketed for sublease.
13
Item 3: Legal Proceedings
After the August 2000 acquisition of Herco Technology Corp. and Perception
Laminates, Inc. the former owners of those companies filed a complaint on
September 5, 2001 against Teradyne and two of its executive officers. The case
is now pending in Federal District Court, San Diego, California. Teradyne and
the two individual defendants filed a motion to dismiss the complaint in its
entirety. The court granted the motion in part, and the only remaining claims
were that the sale of Teradyne's common stock to the former owners violated
certain California securities statutes and common law and that Teradyne
breached certain contractual obligations in the agreements relating to the
acquisitions. Teradyne's subsequent motion for partial summary judgment with
respect to the breach of contract claims was granted on November 7, 2002. The
plaintiffs have asked the Court to reconsider its ruling or, alternatively, for
leave to appeal both the dismissal of claims and summary judgment rulings to
the Ninth Circuit Court of Appeals. Teradyne has opposed these motions. No
ruling has yet been issued. Other than the above described motions, only a
small portion of the original complaint relating to alleged fraud in connection
with setting the transaction price remains pending before the District Court.
Teradyne has answered and denied all liability. Management does not believe
that the outcome of these claims will have a material adverse effect on
Teradyne's financial position or results of operations but there can be no
assurance that any such claims would not have a material adverse effect on
Teradyne's financial position or results of operations.
Also arising out of the August 2000 acquisition of Herco Technology Corp.
and Perception Laminates, Inc. is a demand for arbitration, made on or about
October 19, 2001, by the former owners of those companies, which was filed with
the American Arbitration Association. The arbitration is with respect to
environmental indemnification claims initially asserted by Teradyne under the
respective acquisition agreements. These claims arose in connection with
environmental matters related to Herco Technology Corp. and Perception
Laminates, Inc. facilities in California. The arbitration demand by the former
owners seeks release of certain shares of Teradyne's common stock being held in
escrow pursuant to the terms of the acquisition agreements and damages related
to failure to release the escrow. Teradyne has counterclaimed for enforcement
of the environmental indemnity provisions of the acquisition agreements.
Hearings in connection with the arbitration have been completed and the parties
are currently completing post-hearing briefs for submission to the arbitrators.
Management does not believe that the outcome of these claims will have a
material adverse effect on Teradyne's financial position or results of
operations but there can be no assurance that any such claims would not have a
material adverse effect on Teradyne's financial position or results of
operations.
Teradyne and two of its executive officers were named as defendants in three
purported class action complaints that were filed in Federal District Court,
Boston, Massachusetts, in October and November 2001. The court consolidated the
cases and has appointed three lead plaintiffs. On November 8, 2002, plaintiffs
filed and served a consolidated amended class action complaint. The complaint
alleges, 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 complaint seeks unspecified damages, including compensatory
damages and recovery of reasonable attorneys' fees and costs. Teradyne filed a
motion to dismiss all claims asserted in the complaint on February 7, 2003.
Teradyne's motion has not yet been heard. Claims asserted in this case are
similar to the claims asserted in the case discussed above, which is pending in
the Federal District Court in San Diego, California. Teradyne believes it has
meritorious defenses to the claims and will defend itself vigorously.
Management does not believe that the outcome of these claims will have a
material adverse effect on Teradyne's financial position or results of
operations but there can be no assurance that any such claims would not have a
material adverse effect on Teradyne's financial position or results of
operations.
By letter dated October 22, 2002, counsel for Electro Mechanical Solutions,
Inc., and several affiliated debtors including PRECISMetals in Chapter 11
bankruptcy cases pending in the United States Bankruptcy Court for the Northern
District of California (collectively, the "Debtors"), asserted that Teradyne
received payments in 2001 totaling $12.4 million from PRECISMetals in the 90
days prior to the bankruptcy filing and that those
14
payments constitute avoidable preferential transfers. Teradyne believes that it
has good faith defenses to the alleged preferential transfers and intends to
contest the claims vigorously. Management does not believe that the outcome of
these claims will have a material adverse effect on Teradyne's financial
position or results of operations but there can be no assurance that any such
claims would not have a material adverse effect on Teradyne's financial
position or results of operations.
In October 1998, a former employee of GenRad, Inc., which Teradyne acquired
on October 26, 2001, instituted an arbitration proceeding against GenRad
alleging breach of his severance agreement. Teradyne believes that the
employee's claims are without merit. The last arbitration hearing was conducted
on October 28, 2002, and a decision is expected by May 2003. Management does
not believe that the outcome of this proceeding will have a material adverse
effect on Teradyne's financial position or results of operations but there can
be no assurance that the outcome would not have a material adverse effect on
Teradyne's financial position or results of operations.
Teradyne has also been designated as a potentially responsible party ("PRP")
with respect to environmental clean-up matters at two sites in California. See
the discussion of these items in Item 1: "Environmental Matters" above.
Teradyne disputes all of the claims above and believes they are without
merit, and intends to defend vigorously against them. However, an adverse
resolution of any of the claims 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 claims and therefore as of December 31, 2002 had not accrued for any
potential losses from the claims.
In addition, Teradyne is subject to legal proceedings, claims and
investigations that arise in the ordinary course of business such as but not
limited to patent, commercial and environmental matters. There are no such
matters pending that Teradyne expects to be material to its business, financial
position or results of operations but there can be no assurance that any such
matters would not have a material adverse effect on Teradyne's business,
financial position or results of operations.
Item 4: Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5: Market for Registrant's Common Equity and Related Shareholder Matters
The following table shows the market range for Teradyne's Common Stock based
on reported sale prices on the New York Stock Exchange.
Period High Low
------ ------ ------
2001 First Quarter. $44.05 $29.05
Second Quarter 47.21 26.25
Third Quarter. 37.45 18.43
Fourth Quarter 33.00 18.50
2002 First Quarter. $39.99 $26.15
Second Quarter 40.20 22.81
Third Quarter. 24.20 8.82
Fourth Quarter 17.58 7.10
The number of record holders of Teradyne's Common Stock at February 21, 2003
was 4,784.
Teradyne has never paid cash dividends because it has been Teradyne's policy
to use earnings to finance expansion and growth. Payment of future cash
dividends will rest within the discretion of the Board of Directors and will
depend, among other things, upon Teradyne's earnings, capital requirements, and
financial condition. Teradyne presently expects to retain all of its earnings
for use in the business.
15
Item 6: Selected Financial Data
Years Ended December 31,*
--------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
Consolidated Statement of Operations Data:
Net sales................................ $1,222,236 $1,440,581 $3,043,946 $1,790,912 $1,489,151
========== ========== ========== ========== ==========
(Loss) income before cumulative effect of
change in accounting principle......... (718,469) (202,215) 517,754 191,694 102,117
========== ========== ========== ========== ==========
(Loss) income before cumulative effect of
change in accounting principle per
common share--basic.................... (3.93) (1.15) 2.99 1.12 0.61
========== ========== ========== ========== ==========
(Loss) income before cumulative effect of
change in accounting principle per
common share--diluted.................. (3.93) (1.15) 2.86 1.07 0.59
========== ========== ========== ========== ==========
Consolidated Balance Sheet Data:
Total assets............................. 1,894,677 2,542,391 2,355,868 1,568,213 1,312,814
========== ========== ========== ========== ==========
Long-term obligations.................... 450,561 451,682 8,352 8,948 13,200
========== ========== ========== ========== ==========
*Note: Previously published financial data prior to 2000 has not been
restated to give the pro forma effect of the adoption of the provisions of SAB
101. See "Note C: Change in Accounting Principle in 2000" in Notes to
Consolidated Financial Statements for further information.
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Annual Report
on Form 10-K. In addition to the historical information contained in this
document, the discussion in this Annual Report on Form 10-K contains
forward-looking statements, made pursuant to the Private Securities Litigation
Reform Act of 1995, that involve risks and uncertainties, such as statements of
Teradyne's plans, expectations and intentions. The cautionary statements made
in this Annual Report on Form 10-K should be read as being applicable to all
related forward-looking statements whenever they appear in this Annual Report
on Form 10-K. Teradyne's actual results could differ materially from the
results contemplated by these and any other forward-looking statements. Factors
that could contribute to such differences include those discussed below as well
as those cautionary statements and other factors set forth in "Certain Factors
That May Affect Future Results" and elsewhere herein.
Critical Accounting Policies and Estimates
Teradyne has identified the policies discussed below as critical to
understanding its business and its results of operations. The impact and any
associated risks related to these policies on its business operations is
discussed throughout Management's Discussion and Analysis of Financial
Condition and Results of Operations where such policies affect its reported and
expected financial results.
Preparation of Financial Statements and Use of Estimates
The preparation of consolidated financial statements requires Teradyne to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
liabilities. On an on-going basis, Teradyne evaluates its estimates, including
those related to inventories, investments, goodwill, intangible and other
long-lived assets, bad debts, income taxes, pensions, warranties,
16
contingencies and litigation. Teradyne bases its estimates on historical
experience and on appropriate and customary assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Revenue Recognition
Teradyne recognizes revenue when there is persuasive evidence of an
arrangement, title and risk of loss have passed, delivery has occurred or the
services have been rendered, the sales price is fixed or determinable and
collection of the related receivable is reasonably assured. It is Teradyne's
policy to require an arrangement with its customers, either in the form of a
written or electronic contract or purchase order containing all of the terms
and conditions governing the arrangement, prior to the recognition of revenue.
Title and risk of loss generally passes to the customer at the time of delivery
of the product to a common carrier. At the time of the transaction, Teradyne
assesses whether the sales price is fixed or determinable based upon the
payment terms of the arrangement. If a significant portion of the sales price
is not due within normal payment terms, the sales price may not be deemed fixed
and revenue would be recognized as the amounts become due. Teradyne does not
offer a right of return on its products.
Teradyne assesses collectibility based on a number of factors, including
past transaction and collection history with a customer and the
credit-worthiness of the customer. Teradyne performs on-going credit
evaluations of its customer's financial condition but generally does not
require collateral from its customers. If Teradyne determines that
collectibility of the sales price is not reasonably assured, revenue is
deferred until such time as collection becomes reasonably assured, which is
generally upon receipt of payment from the customer.
Revenue is recognized upon delivery provided that customer acceptance
criteria can be demonstrated prior to shipment. Where the criteria cannot be
demonstrated prior to shipment, or in the case of new products, revenue is
deferred until acceptance has been received. For multiple element arrangements,
Teradyne defers the greater of the fair value of any undelivered elements of
the contract or the portion of the sales price which is not payable until the
undelivered elements are delivered. Teradyne also defers the portion of the
sales price that is not due until acceptance, which represents deferred profit.
Fair value is the price charged when the element is sold separately. In order
to recognize revenue the functionality of the undelivered elements must not be
essential to the delivered elements. Installation is not considered essential
to the functionality of the product as these services do not alter the product
capabilities, do not require specialized skills or tools and can be performed
by the customers or other vendors. In addition to installation, other elements
may include extended warranties, customer support and undelivered products.
Service revenue is recognized over the contractual period or as the services
are performed. Teradyne's products are generally subject to warranty and
related costs are provided for in cost of sales when product revenue is
recognized.
Interconnection systems and electronic manufacturing assembly services
revenue is recognized upon shipment or delivery according to the shipping terms
of the arrangement as there is no installation required and there are no
contractual acceptance requirements.
For certain contracts eligible for contract accounting under Statement of
Accounting Position No. 81-1, "Accounting for Performance of Construction-Type
and Certain Production-Type Contracts," revenue is recognized using the
percentage-of-completion accounting method based upon an efforts-expended
method. These arrangements require significant production, modification or
customization. In all cases, changes to total estimated costs and anticipated
losses, if any, are recognized in the period in which determined. To date
revenue under contract accounting has not been material.
Inventories
Inventories which include materials, labor and manufacturing overhead are
stated at the lower of cost (first-in, first-out basis) or net realizable
value. On a quarterly basis, Teradyne uses consistent methodologies to
17
evaluate all inventory for net realizable value. Teradyne records a provision
for excess and obsolete inventory when such a writedown is identified through
the quarterly review process. The inventory valuation is based upon assumptions
about future demand, product mix and possible alternative uses.
Income Taxes
On a quarterly basis, Teradyne evaluates the realizability of its deferred
tax assets and assesses the need for a valuation allowance. As a result of its
review undertaken at December 31, 2002, Teradyne concluded under applicable
accounting criteria that it was more likely than not that its deferred tax
assets would not be realized and established a full valuation allowance. Until
an appropriate level of profitability is reached, Teradyne does not expect to
recognize tax benefits on operating losses in future results of operations.
Goodwill, Intangible and Long-Lived Assets
Teradyne assesses the impairment of identifiable intangibles, long-lived
assets and goodwill whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. Factors Teradyne considers important
in the determination of an impairment include significant underperformance
relative to expected historical or projected future operating results,
significant changes in the manner of Teradyne's use of the acquired asset, a
change in the strategy for Teradyne's overall business and significant negative
industry or economic trends. When Teradyne determines that the carrying value
of intangibles and long-lived assets may not be recoverable based upon the
existence of one or more of the above indicators of impairment, Teradyne
measures any impairment based on a projected discounted cash flow method using
a discount rate commensurate with the associated risks. Teradyne assesses
goodwill for impairment at least annually, on a reporting basis, or more
frequently when events and circumstances occur indicating that the recorded
goodwill may be impaired. If the book value of a reporting unit exceeds its
fair value, the implied fair value of goodwill is compared with the carrying
amount of goodwill. If the carrying amount of goodwill exceeds the implied fair
value, an impairment loss is recorded in an amount equal to that excess.
Allowance for Doubtful Accounts
The volatility of the industries that Teradyne serves can cause certain of
its customers to experience shortages of cash flows, which can impact their
ability to make required payments. Teradyne maintains allowances for doubtful
accounts for estimated losses resulting from the inability of its customers to
make required payments. Estimated allowances for doubtful accounts are reviewed
periodically taking into account the customer's current payment history, the
customer's current financial statements and other information regarding the
customer's credit worthiness. If the financial condition of Teradyne's
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required.
18
SELECTED RELATIONSHIPS WITHIN THE CONSOLIDATED
STATEMENTS OF OPERATIONS
Year Ended December
31,
---------------------
2002 2001 2000
----- ----- -----
(dollars in thousands)
Percentage of net sales:
Net Revenue:
Products.................................................................... 81.2% 85.6% 92.9%
Service..................................................................... 18.8 14.4 7.1
----- ----- -----
Total net revenue....................................................... 100.0 100.0 100.0
Expenses:
Cost of products............................................................ 67.9 70.5 48.3
Cost of service............................................................. 13.1 10.1 4.5
----- ----- -----
Total cost of sales..................................................... 81.0 80.6 52.8
Engineering and development................................................. 24.0 20.0 11.4
Selling and administrative.................................................. 23.8 18.7 12.4
Restructuring and other charges............................................. 16.7 5.2 --
----- ----- -----
145.5 124.5 76.6
Net interest and other (expense) income........................................ (0.4) 1.9 0.9
----- ----- -----
(Loss) income before income taxes and cumulative effect of change in accounting
principle.................................................................... (45.9) (22.6) 24.3
Provision for (benefit from) income taxes...................................... 12.9 (8.6) 7.3
----- ----- -----
(Loss) income before cumulative effect of change in accounting principle....... (58.8) (14.0) 17.0
Cumulative effect of change in accounting principle............................ -- -- (2.1)
----- ----- -----
Net (loss) income.............................................................. (58.8)% (14.0)% 14.9%
===== ===== =====
Results of Operations:
2002 compared to 2001
Business Overview
Teradyne saw an encouraging start to 2002, as first quarter sales were up
13% over the fourth quarter of 2001, followed by 25% quarter to quarter growth
in the second quarter. Net sales growth slowed to 7% in the third quarter
followed by flat quarter to quarter performance in the fourth quarter. The
combination of a continued weak economy, weak demand for technology products,
and the uncertain world political environment overwhelmed the recovery that
appeared to be starting early in the year.
As of the end of 2002, Teradyne's customers in general have lowered their
inventory levels and reduced their overall cost structures, resulting in
improved quarterly financial performance. Additionally, utilization of
Teradyne's semiconductor test equipment, and semiconductor test equipment in
general, has increased over the last year. This has resulted from increased
volumes of units shipped by Teradyne's Semiconductor industry customers. These
are generally signs of potential increases in demand for Teradyne's products.
However, a number of Teradyne's customers continue to lose money, although at a
reduced rate. In the Semiconductor industry, this is occurring as decreased
unit prices have offset the unit volume gains. As a result, Teradyne's
customers continue to defer orders until the last possible moment. Until
Teradyne's customers see significant and sustained increases in their business
levels, both in units and dollars, Teradyne's orders could remain low or see a
further decline. If Teradyne sees further declines in its own order rates, the
amount of Teradyne's inventory and certain long-lived assets considered
realizable could be significantly reduced.
19
Bookings
Net orders increased 12% to $905.3 million in 2002 from $808.2 million in
2001. Net orders increased by 63% and 65% in Semiconductor Test Systems and
Circuit Board Test and Inspection Systems, respectively. Connection Systems net
orders decreased by 61%. The increase in Semiconductor orders was driven by
increased demand for SOC products by Teradyne's Integrated Device Manufacturers
(IDMs) and Subcon customers, primarily for use in Asian facilities. The
increase in orders for Circuit Board Test and Inspection largely resulted from
the full year impact of the GenRad acquisition. The decrease in Connection
System orders reflects the impact of cancellations, which are described in the
next paragraph. Other Test Systems net orders increased 286%, mostly due to the
addition of a full year of activity from Diagnostic Solutions that was part of
the GenRad acquisition.
Teradyne experienced cancellations of $159.0 million and $285.5 million
during 2002 and 2001, respectively. For 2002, cancellations of $53 million and
$105 million occurred in the Semiconductor Test Systems and Connection System
businesses, respectively. The Semiconductor Test Systems cancellations were
largely for orders that were booked in late 2000 and early 2001 by Subcons in
anticipation of further increases in their own demand. Cancellations in the
Connection Systems business were from major customers in the telecommunication
and information technology infrastructure industries, as their own demand
levels dropped.
Teradyne's net orders for its four principal operating segments for 2002 and
2001 were as follows:
(in millions)
-------------
2002 2001
------ ------
Semiconductor Test Systems............... $480.5 $294.0
Connection Systems....................... 149.8 385.0
Circuit Board Test and Inspection Systems 167.8 101.4
Other Test Systems....................... 107.2 27.8
------ ------
$905.3 $808.2
Teradyne's net bookings by region as a percentage of total net bookings were
as follows:
2002 2001
---- ----
United States.... 44% 55%
South East Asia.. 19 12
Europe........... 18 24
Japan............ 9 3
Taiwan........... 6 3
Korea............ 2 1
Rest of the World 2 2
--- ---
100% 100%
Teradyne's backlog decreased 42% to $440.9 million in 2002 from $763.0
million in 2001. At December 31, 2002 and 2001, Teradyne's backlog of unfilled
orders for its four principal operating segments was as follows:
(in millions)
-------------
2002 2001
------ ------
Semiconductor Test Systems............... $240.0 $317.2
Connection Systems....................... 104.2 357.6
Circuit Board Test and Inspection Systems 53.4 55.5
Other Test Systems....................... 43.3 32.7
------ ------
$440.9 $763.0
20
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.
Revenue
Teradyne's four principal operating segments accounted for the following
percentages of consolidated net sales for each of last three years:
% of consolidated net sales
--------------------------
2002 2001 2000
---- ---- ----
Semiconductor Test Systems............... 46% 50% 67%
Connection Systems....................... 32 38 24
Circuit Board Test and Inspection Systems 14 9 5
Other Test Systems....................... 8 3 4
--- --- ---
Total.................................... 100% 100% 100%
Teradyne's sales by region as a percentage of total sales were as follows:
2002 2001
---- ----
United States........................... 46% 51%
Europe.................................. 18 19
South East Asia......................... 17 12
Taiwan.................................. 9 10
Japan................................... 6 4
Korea................................... 2 1
Rest of the World....................... 2 3
---- ----
100 % 100 %
Product sales decreased 20% in 2002 to $992.1 million from $1,233.7 million
in 2001. Service revenue increased largely due to the GenRad acquisition to
$230.1 million in 2002 from $206.9 million in 2001. Service revenue is derived
from the servicing of Teradyne's installed base of products and includes
maintenance contracts, customer support, extended warranties and parts sales.
Semiconductor Test Systems sales decreased 22%, to $557.6 million in 2002 from
$717.7 million in 2001, Connection Systems sales decreased 27%, to $397.0
million in 2002 from $540.8 million in 2001, and Circuit Board Test and
Inspection Systems sales increased 29%, to $170.8 million in 2002 from $132.4
million in 2001. Other Test Systems sales increased 95%, to $96.9 million in
2002 from $49.7 million in 2001. Year to year increases in sales for Teradyne's
Circuit Board Test and Inspection Systems and Other Test Systems largely
resulted from the full year impact of the acquisition of GenRad during the
fourth quarter of 2001.
Of the decrease in Semiconductor Test System sales, $98.7 million was due to
the accounting impact of the implementation of SAB 101, which is further
described in the next paragraph. The Connection Systems business saw downward
pricing pressure during 2002, as the average selling prices declined by
approximately 15% due to price pressures from both customers and competitors in
the face of a weak economy. Additionally, year to year results for Teradyne's
Semiconductor and Connection Systems businesses were impacted by 2001's steady
decline in quarterly sales, which was followed by a recovery to approximately
the current run-rate levels in the first half of 2002. The relatively stronger
first half of 2001, which followed Teradyne's record sales year of 2000,
further contributed to annual results for 2001 that exceeded 2002 for these
businesses.
21
During the fourth quarter of 2000, Teradyne implemented Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB 101)
retroactive to the beginning of the year. Included in 2001 sales was $98.7
million related to shipments of customer orders in 2000 where title was
retained by Teradyne until customer payment in order to perfect a security
interest. Teradyne no longer retains title until customer payment.
In 2002 and 2001, no single customer accounted for more than 10% of
consolidated net sales. In 2002 and 2001, Teradyne's three largest customers
accounted for 23% and 24% of consolidated net sales, respectively.
Gross Margin
Gross margin, as a percentage of net sales, decreased to 19.0% in 2002 from
19.4% in 2001. The decrease in the gross margin rate in 2002 compared to 2001
was affected by the following items:
Rate
Differential
------------
2002 charges described below.......................................................... (3.7)%
2001 charges described below.......................................................... 9.7
Higher gross margins on revenue orginally recorded in 2000 which was reversed and
recorded in 2001 because title did not pass until payment*.......................... (3.0)
Decreased utilization of Teradyne's manufacturing overhead, as sales volume decreased
while certain components of cost of sales remained fixed............................ (1.8)
Primarily related to price pressures described above, net of favorable product mix and
product cost reduction activities................................................... (1.6)
----
Total................................................................................ (0.4)
====
* This accounting change impacted 2001 as described above.
During the year ended December 31, 2002, an excess and obsolete inventory
provision of $39.0 million was recorded in cost of sales of which $20.7 million
related to the lack of demand for the Probe-One product and the discontinuance
of the J996 product after a last time buy offer to Teradyne's customers.
Additionally, due to consolidating and downsizing of manufacturing locations,
approximately $5.7 million of incremental accelerated depreciation was
classified in cost of sales.
During 2001, Teradyne recorded a provision of $139.7 million for excess and
obsolete inventory including discontinued product lines. The total inventory
provision for excess and obsolete inventory, excluding the discontinued product
lines, was $105.2 million in 2001 and was principally due to the sharp decline
in incoming Semiconductor Test Systems and Connection Systems orders. During
the third quarter of 2001, Teradyne recorded a charge of $32.3 million related
to an inventory writedown for the discontinuance of its Flash 750 memory
product.
Engineering and Development
Engineering and development expenses, as a percentage of sales, increased to
24% in 2002 from 20% in 2001, with spending increasing by $6.6 million. The
increase in spending was primarily due to the additional expense base resulting
from Teradyne's purchase of GenRad in the fourth quarter of 2001 which
increased spending by approximately $23.0 million and to a lesser extent the
granting of the prior year's previously frozen salary increases during the
third quarter of 2002 which increased spending by approximately $6.0 million.
The additional engineering and development expense was partially offset by
reductions in discretionary spending across all of Teradyne's engineering
groups which decreased spending by approximately $23.2 million. As described in
the Gross Margin section above, Teradyne recorded a charge for incremental
accelerated depreciation of $0.8 million which is classified in Engineering and
Development.
22
Selling and Administrative
Selling and administrative expenses increased to 24% of sales in 2002 from
19% of sales in 2001, with spending increasing by $20.3 million. The increase
in spending was principally due to additional expenses resulting from
Teradyne's purchase of GenRad in the fourth quarter of 2001, with an additional
increase coming from the granting of the prior year's previously frozen salary
increases during the third quarter of 2002. The additional selling and
administrative expense was partially offset by workforce reductions and
reductions in discretionary spending. As described in the Gross Margin section
above, Teradyne recorded a charge for incremental accelerated depreciation of
$1.1 million which is classified in Selling and Administrative.
Restructuring and Other Charges
The table below summarizes activity for the year ended December 31, 2002,
relating to restructuring and other charges:
Goodwill and Severance
Intangible Fixed Asset Facility and
Asset Impairment Impairment Related Benefits Total
---------------- ----------- -------- --------- ---------
(in thousands)
Balance at December 31, 2001.... $ -- $ -- $ 1,676 $ 13,523 $ 15,199
2002 provision.................. 86,196 69,734 25,751 22,495 204,176
Cash payments................... -- -- (2,187) (22,724) (24,911)
Asset write-downs............... (86,196) (69,734) -- -- (155,930)
-------- -------- ------- -------- ---------
Balance at December 31, 2002.... $ -- $ -- $25,240 $ 13,294 $ 38,534
======== ======== ======= ======== =========
The table below summarizes activity for the year ended December 31, 2001, relating to restructuring and
other charges:
Severance
Fixed Asset Facility and
Impairment Related Benefits Total
----------- -------- --------- ---------
(in thousands)
2001 provision....................................... $ 35,338 $ 1,676 $ 37,278 $ 74,292
Cash payments........................................ -- -- (23,755) (23,755)
Asset write-downs.................................... (35,338) -- -- (35,338)
-------- ------- -------- ---------
Balance at December 31, 2001......................... $ -- $ 1,676 $ 13,523 $ 15,199
======== ======= ======== =========
During the year ended December 31, 2002, Teradyne recorded $86.2 million in
goodwill and intangibles impairment charges. SFAS 142 provides that goodwill of
a reporting unit be tested for impairment on an annual basis and between annual
tests in certain circumstances including a significant adverse change in the
business outlook. During the third quarter of 2002, as a result of significant
change in the business outlook, Teradyne tested the goodwill related to the
Circuit Board Test and Inspection Systems segment for impairment as of
September 29, 2002. Teradyne concluded that the carrying value of the assets
and liabilities associated with the Circuit Board Test and Inspection Systems
segment exceeded its fair value. In the third quarter of 2002, Teradyne
recognized a $78.5 million goodwill impairment charge. The impairment charge
was measured by comparing the implied fair value of the goodwill associated
with the Circuit Board Test and Inspection Systems segment to its carrying
value. The fair value of the segment was estimated using the expected present
value of future cash flows.
During the year ended December 31, 2002, Teradyne's management concluded, in
accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," that certain long-lived assets held for sale were impaired
as the estimated fair value was less than the carrying value of these assets,
and recorded charges of $69.7 million. The charge for the Connection Systems
segment included $25.6 million
23
relating to a held for sale printed circuit board facility in San Diego,
California, $2.6 million relating to a held for sale facility in Nashua, New
Hampshire, and $17.9 million primarily related to manufacturing equipment which
was taken out of service during 2002 and is held for sale. The Semiconductor
Test Systems segment recorded a charge of $12.0 million primarily for assets
held for sale as a result of the lack of demand for the Probe-One product and
the discontinuance of the J996 product after a last time buy offer to our
customers, a charge of $9.7 million related to the write down of manufacturing
facilities that are held for sale in California, and $0.8 million related to
the write down of foundry manufacturing equipment that are held for sale. In
addition, an asset impairment charge was recorded of $1.1 million related to a
Corporate facility sold in the first quarter of 2003. Teradyne expects the sale
of these held for sale assets to occur within a year. The carrying value of
Teradyne's assets held for sale is $45.3 million as of December 31, 2002. These
assets are included in Property, Plant, and Equipment.
During the year ended December 31, 2001, Teradyne recorded a charge of $35.3
million for impaired long-lived assets, consisting of the following: $12.0
million for a held for sale facility in the Connection Systems segment, certain
impaired manufacturing assets in the Connection Systems segment of $15.4
million, and equipment manufactured by Teradyne used in manufacturing and
engineering and development relating to the discontinuance of the Flash 750
product line in Semiconductor Test Systems segment of $7.9 million.
During the year ended December 31, 2002, Teradyne recorded a charge of $25.8
million relating to future lease commitments for vacated manufacturing and
administrative space which will be exited prior to the end of the lease term.
The charge of $25.8 million includes $18.8 million at Circuit Board Test and
Inspection Systems, $5.0 million at Connection Systems and $2.0 million at
Semiconductor Test Systems. The lease accruals are expected to be paid out over
the lease terms, the latest of which expires in 2010. During the fourth quarter
of 2001, Teradyne recorded charges for vacated office space under operating
leases at Circuit Board Test and Inspection Systems of $1.7 million. The
accrual for lease payments on vacated facilities is reflected in other accrued
liabilities and long-term other accrued liabilities.
Teradyne recorded a charge for severance and related benefits during 2002 of
$22.5 million. There were approximately 1,010 employees terminated across all
functional groups during 2002. All remaining severance benefits payable to
these employees will be paid by the end of the first quarter of 2004. Teradyne
recorded a charge for severance and related benefits during 2001 of $37.3
million. There were approximately 2,900 employees terminated across all
functional groups during 2001. As of December 31, 2002, Teradyne has paid all
severance benefits relating to the 2001 terminations. The accrual for severance
and benefits is reflected in accrued employees' compensation and withholdings.
The restructuring actions taken during 2002 are expected to generate cost
savings of approximately $88 million annually across all areas of operations.
In connection with its restructuring plan for GenRad in 2002, Teradyne
recorded $4.3 million of additional goodwill relating to the finalization of
its involuntary termination plan and recorded $2.2 million of additional
goodwill relating to the completion of facility exit plans for GenRad operating
locations. The table below summarizes activity relating to GenRad employee
termination and facility closure costs (in thousands):
Severance Facility
and Benefits Related Total
------------ -------- -------
Balance at December 31, 2001 $ 1,006 $ -- $ 1,006
Employee termination costs.. 4,289 -- 4,289
Leased facility costs....... -- 2,167 2,167
Cash payments............... (4,970) (450) (5,420)
------- ------ -------
Balance at December 31, 2002 $ 325 $1,717 $ 2,042
======= ====== =======
24
During the first quarter of 2003, Teradyne had a reduction in workforce of
approximately 295 people. The estimated severance charge from this reduction in
personnel totals approximately $6.0 million.
Interest income and expense
Interest income decreased by $5.8 million to $17.0 million during the year
ended December 31, 2002 compared to the year ended December 31, 2001. The
decreases in interest income were attributable to lower interest rates.
Interest expense increased by $17.7 million to $21.8 million during the year
ended December 31, 2002 compared to the year ended December 31, 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, net
Other income and expense, net for the year ended December 31, 2002 and 2001
includes the following:
Gain/(loss) 2002 2001
----------- ------- -------
(in thousands)
----------------
Repayment of loan by divested entity (1).................. $ 7,144 --
Other than temporary impairment of common stock investment (3,115) --
Writedown of investment in an engineering service provider (2,288) $(1,800)
Fair value adjustment on warrants......................... (2,051) 2,035
Sale of Connection Systems aerospace and defense business. -- 14,779
Equity investment (2)..................................... -- (6,974)
------- -------
Total..................................................... $ (310) $ 8,040
======= =======
- --------
(1) The loan had previously been valued at zero due to its uncertainty of
collection.
(2) Teradyne's proportionate share of a loss related to an equity investment in
Empirix, Inc. The carrying value of this equity investment was zero at
December 31, 2002 and 2001.
(Loss) income before taxes
(Loss) income before income taxes was a loss of $560.9 million in 2002
compared to a loss of $326.2 million in 2001. Semiconductor Test Systems,
Connection Systems, and Circuit Board Test and Inspection Systems loss before
income taxes increased $18.1 million, $56.6 million, and $158.9 million,
respectively in 2002 due to decreased sales in Semiconductor Test Systems and
Connection Systems, goodwill and intangible asset impairments in Circuit Board
Test and Inspection Systems and the market conditions described above. Other
Test Systems income before income taxes increased $4.7 million due to the
addition of Diagnostics Solutions in the fourth quarter of 2001 as part of the
GenRad acquisition.
Income taxes
For the year ended December 31, 2002, Teradyne recorded a tax provision of
$157.5 million resulting in a tax rate of 28%. The tax rate of 28% is primarily
due to the recording of a provision for income taxes to establish a full
valuation allowance against net deferred tax assets. As a result of its review
undertaken at December 31, 2002, Teradyne concluded under applicable accounting
criteria that it was more likely than not that its deferred tax assets would
not be realized. Until an appropriate level of profitability is reached,
Teradyne will not record tax benefits on operating losses in future results of
operations.
The effective tax rate benefit for the year ended 2001 was 38%. Teradyne's
effective tax rate for the year ended 2001 primarily reflects the U.S.
statutory income tax rate, the net effect of state taxes and the effect of tax
benefits from its Ireland manufacturing operations. Tax exemptions relating to
Ireland operations are effective through 2010.
25
2001 compared to 2000
Bookings
Net orders decreased 76% to $808.2 million in 2001 from $3,320.9 million in
2000. Net orders decreased in all operating segments and were led by a 85%
decrease in Semiconductor Test Systems net orders. Connection Systems net
orders, Circuit Board Test and Inspection Systems net orders, and Other Test
Systems net orders decreased 64%, 33%, and 78%, respectively. Teradyne
experienced cancellations of $285.5 million during 2001. Teradyne's net orders
for its four principal operating segments for 2001 and 2000 were as follows:
(in millions)
---------------
2001 2000
------ --------
Semiconductor Test Systems............... $294.0 $1,960.5
Connection Systems....................... 385.0 1,082.0
Circuit Board Test and Inspection Systems 101.4 151.6
Other Test Systems....................... 27.8 126.8
------ --------
$808.2 $3,320.9
Teradyne's backlog decreased 45% to $763.0 million in 2001 from $1,382.1
million in 2000. At December 31, 2001 and 2000, Teradyne's backlog of unfilled
orders for its four principal operating segments was as follows:
(in millions)
---------------
2001 2000
------ --------
Semiconductor Test Systems............... $317.2 $ 742.1
Connection Systems....................... 357.6 534.4
Circuit Board Test and Inspection Systems 55.5 68.4
Other Test Systems....................... 32.7 37.2
------ --------
$763.0 $1,382.1
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.
Revenue
Product sales decreased 56% in 2001 to $1,233.7 million from $2,828.9
million in 2000. Service revenue declined slightly in 2001 to $206.9 million
from $215.1 million in 2000 as the overall business declined. Semiconductor
Test Systems sales decreased 65%, to $717.7 million in 2001 from $2,044.3
million in 2000, Connection Systems sales decreased 26%, to $540.8 million in
2001 from $734.6 million in 2000, and Circuit Board Test and Inspection Systems
sales decreased 6%, to $132.4 million in 2001 from $141.2 million in 2000.
These decreases reflect the overall economic and industry market conditions
described below. Circuit Board Test and Inspection Systems sales include the
two-month impact of the GenRad acquisition which contributed sales of $19.0
million. Other Test Systems sales decreased 60%, to $49.7 million in 2001 from
$124.1 million in 2000, which principally reflects the divestiture of Software
Test Systems at the end of 2000 as well as the overall economic and industry
market conditions described below. During the fourth quarter of 2000, Teradyne
implemented Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial
Statements" (SAB 101) retroactive to the beginning of the year. Included in
2001 sales was $98.7 million related to shipments of customer orders in 2000
where title was retained by Teradyne until customer payment in order to perfect
a security interest. Teradyne no longer retains title until customer payment.
26
Teradyne's business has been adversely impacted by the slowdown in economies
worldwide including the effects of the hostilities begun in September 2001.
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 2001,
orders declined significantly across all of Teradyne's product lines when
compared with the orders Teradyne received during 2000.
In 2001 and 2000, no single customer accounted for more than 10% of
consolidated net sales. In 2001, Teradyne's three largest customers accounted
for 24% of consolidated net sales.
Gross Margin
Gross margin, as a percentage of net sales, decreased to 19.4% in 2001 from
47.2% in 2000. The percentage decrease in 2001 was attributable to the
decreased utilization of Teradyne's manufacturing capacity, as sales volume
decreased while certain components of costs of sales remained fixed and
additional inventory provisions. The decrease in the percentage of gross margin
was also impacted to a lesser extent by increased competitive price pressure as
current semiconductor products mature and the 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 $105.2 million in
2001, which excludes the inventory writedowns for product line discontinuance,
compared to $27.5 million in 2000, included in cost of sales. The increase in
the inventory provision was caused by the worldwide economic slowdown during
2001. Between 2000 and 2001, orders declined by approximately $2,512.7 million,
a 76% decrease. This drop in orders combined with lead time requirements for
inventory procurement and Teradyne's new product introduction plans
necessitated additional charges for excess and obsolete inventory. During 2001,
Teradyne recorded an inventory writedown in Semiconductor Test Systems due to
the discontinuance of the Flash 750 product line of $32.3 million.
Engineering and Development
Engineering and development expenses, as a percentage of sales, increased to
20% in 2001 from 11% in 2000, with spending decreasing by $60.7 million. This
spending decrease was primarily due to lower prototype material costs and the
impact of workforce reductions, salary cuts, and furloughs in Semiconductor
Test Systems and Circuit Board Test and Inspection Systems, excluding the
impact of the GenRad acquisition. Connection Systems engineering and
development spending increased 5% from 2000 to 2001.
Selling and Administrative
Selling and administrative expenses increased to 19% of sales in 2001 from
12% of sales in 2000, with spending decreasing by $107.7 million. The decrease
in spending was principally due to certain cost containment programs such as
workforce reductions, salary cuts, and furloughs.
Restructuring and Other Charges
Restructuring and other charges include a workforce reduction and early
retirement provision of $37.3 million, a charge of $15.4 million for certain
impaired manufacturing assets at Connection Systems, a charge for a Connection
Systems impaired facility of $12.0 million, a charge for impaired assets of
$7.9 million relating to the discontinuance of the Flash 750 product line in
Semiconductor Test Systems, and a charge for vacated space under certain
operating leases of $1.7 million in Circuit Board Test and Inspection Systems.
There were approximately 2,900 employees terminated in 2001 across all
functional groups. All severance benefits for employees terminated in 2001 were
paid by the fourth quarter of 2002.
27
Below is a table summarizing activity relating to restructuring and other
charges:
Severance
Fixed Asset Facility and
Impairment Related Benefits Total
----------- -------- --------- --------
(in thousands)
2001 provision.............. $ 35,338 $1,676 $ 37,278 $ 74,292
Cash payments............... -- -- (23,755) (23,755)
Asset write-downs........... (35,338) -- -- (35,338)
-------- ------ -------- --------
Balance at December 31, 2001 $ -- $1,676 $ 13,523 $ 15,199
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.
Interest income and expense
Interest income decreased by $2.4 million to $22.7 million in 2001 compared
to $25.1 million in 2000. The decrease in 2001 was attributable to decreases in
the average invested balances and lower interest rates. Interest expense
increased by $2.3 million as a result of interest expense for two months
associated with Teradyne's convertible notes.
Other income and expense
Included in other income in 2001 is a gain from the sale of Connections
Systems aerospace and defense business of $14.8 million. Included in other
expense for 2001 is Teradyne's proportionate share of a loss related to an
equity method investment of $7.0 million.
(Loss) income before taxes
(Loss) income before income taxes and cumulative effect of change in
accounting principle was a loss of $326.2 million in 2001 compared to income of
$739.6 million in 2000. Semiconductor Test Systems, Connection Systems, Circuit
Board Test and Inspection Systems, and Other Test Systems income before income
taxes decreased $923.3 million, $178.0 million, $43.2 million, and $4.0
million, respectively in 2001 due to decreased sales in each group and the
market conditions described above.
Income taxes
Teradyne's effective tax rate benefit was 38% in 2001. The effective tax
rate provision for the year ended 2000 was 30%. The change in the tax rate is a
result of a loss in 2001. In 2000, Teradyne was able to reduce its effective
tax rate with tax benefits from its foreign sales corporation and Ireland
manufacturing operations.
Liquidity and Capital Resources
Teradyne's cash, cash equivalents and marketable securities balance
decreased $45.2 million in 2002, to $541.1 million. Teradyne used cash from
operating activities of $4.2 million in 2002 and $79.0 million in 2001 and
generated cash from operating activities in 2000 of $470.9 million. Net income
(loss), adjusted to exclude the effects of non-cash items, used cash of $241.9
million in 2002, used cash of $74.0 million in 2001, and provided cash of
$501.6 million in 2000. Changes in operating assets and liabilities, net of
businesses sold and acquired provided cash of $237.7 million in 2002 primarily
due to decreased inventory balances and the receipt of a tax refund of $85.2
million in March 2002. Changes in operating assets and liabilities used cash of
$5.0 million in 2001 and used cash of $30.7 million in 2000.
28
Teradyne used $102.2 million of cash for investing activities in 2002,
$247.3 million in 2001, and $312.3 million in 2000. Investing activities
consist of purchases, sales, and maturities of marketable securities, proceeds
from the sale of businesses, cash acquired in business acquisitions, cash paid
for assets, and purchases of capital assets. Capital expenditures decreased by
$165.1 million in 2002 compared with 2001, across all operating segments but
primarily in the Connection Systems segment. This was due to the actions taken
by Teradyne in 2002 to reduce planned capital expenditures due to current
market conditions. Capital expenditures were $76.4 million in 2002, $241.4
million in 2001, and $298.2 million in 2000.
Teradyne obtained $40.4 million of cash from financing activities in 2002,
obtained $401.5 million in 2001, and used $97.5 million in 2000. Financing
activities include the issuance of convertible notes, mortgage borrowings,
sales and repurchases of Teradyne's common stock, as well as repayments of
debt. In 2001, Teradyne assumed debt of $89.7 million from the GenRad
acquisition which Teradyne repaid on October 26, 2001. During 2002, 2001, and
2000 issuances of common stock under stock option and stock purchase plans
generated $41.2 million, $58.5 million, and $55.3 million, respectively.
Teradyne used cash for the acquisition of treasury stock of $147.5 million in
2000. Since 1996, Teradyne has used $540.8 million of cash to repurchase 20.0
million shares of its common stock on the open market though no cash was used
in 2002 and 2001 to repurchase shares of common stock.
On October 24, 2001, Teradyne issued $400 million principal amount of 3.75%
Convertible Senior Notes due 2006 (the "Notes") in a private placement and
received net proceeds of $389 million. The Notes are convertible at the option
of the holders at a rate which is equivalent to a conversion price of
approximately $26.00 per share, which is equal to a conversion rate of
approximately 38.4615 shares of common stock per $1,000 principal amount of
Notes. The Notes are redeemable by Teradyne at any time after October 18, 2004
at specified prices. Teradyne began making annual interest payments of $15
million, paid semi-annually, on the Notes commencing on April 15, 2002. The
Notes are senior unsecured obligations of Teradyne that rank equally with
Teradyne's existing and future unsecured and unsubordinated indebtedness. In
the event of a change in control by which Teradyne merges with or sells
substantially all of its assets to a third party, the holders of the Notes may
be able to require Teradyne to redeem some or all of the Notes either in
discounted Teradyne common stock or in cash. On February 8, 2002, the
Securities and Exchange Commission declared effective a Registration Statement
on Form S-3 covering both the Notes and the shares of common stock into which
they can be converted.
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"). Principal payments are made according to a twenty-year
amortization schedule through December 2006, with the remaining principal due
on January 1, 2007. Teradyne began making monthly principal and interest
payments of $0.4 million on February 1, 2002.
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. GenRad's business has been made part
of the Circuit Board Test and Inspection Systems operating segment excluding
the Diagnostic Solutions business. Diagnostic Solutions has been made part of
the Other Test Systems operating segment. Under the terms of the acquisition,
each outstanding share of GenRad common stock was converted into 0.1733 shares
of Teradyne common stock. The total number of Teradyne shares exchanged for the
shares of GenRad, based on the shares of GenRad outstanding as of the closing,
was approximately 5.0 million.
29
The following table reflects Teradyne's current contractual obligations:
Non-cancelable Convertible Mortgage
Lease Interest Senior Notes Notes Other
Commitments on Debt* Notes Payable Payable Debt Total
-------------- -------- ----------- -------- ------- ------ --------
(in thousands)
2003....... $ 23,843 $18,468 $ 1,088 $6,704 $ 277 $ 50,380
2004....... 20,450 18,380 1,172 277 40,279
2005....... 17,592 18,284 1,263 277 37,416
2006....... 13,004 17,936 $400,000 1,244 277 432,461
2007....... 10,840 671 39,224 277 51,012
Beyond 2007 19,993 865 5,040 1,510 27,408
-------- ------- -------- ------- ------ ------ --------
TOTAL...... $105,722 $74,604 $400,000 $49,031 $6,704 $2,895 $638,956
* Includes interest on convertible notes.
Teradyne believes its cash, cash equivalents, and marketable securities
balance of $541.1 million will be sufficient to meet working capital and
expenditure needs for at least the next twenty-four months. Depending on market
conditions and funding requirements, Teradyne may seek additional external
financing. Inflation has not had a significant long-term impact on earnings.
Employee Stock Options
Teradyne's equity compensation program is a broad-based, long-term retention
program that is intended to attract and retain talented employees and align
stockholder and employee interests. Teradyne considers its equity compensation
program critical to Teradyne's operation and productivity. Approximately 80% of
Teradyne's employees participate in its equity compensation program. Of the
stock options Teradyne granted in 2002, 89% went to employees other than the
Chief Executive Officer and the five other most highly compensated executive
officers.
Stock option plan activity for the years 2002, 2001, and 2000 follows (in
thousands):
2002 2001 2000
------ ------- ------
Outstanding at January 1.......... 29,750 22,745 19,225
Options granted................ 7,205 10,289 7,905
Options exercised.............. (1,152) (2,766) (3,217)
Options canceled............... (2,382) (518) (1,168)
------ ------- ------
Outstanding at December 31........ 33,421 29,750 22,745
====== ======= ======
Exercisable at December 31........ 19,296 13,545 8,758
====== ======= ======
Available for grant at January 1.. 29,841 4,612 11,349
Grants............................ (7,205) (10,289) (7,905)
Cancellations..................... 2,382 518 1,168
Additional shares reserved........ -- 35,000 --
------ ------- ------
Available for grant at December 31 25,018 29,841 4,612
====== ======= ======
30
Employee and Executive Option Grants
Year Ended December 31,
-----------------------
2002 2001 2000
------ ------ -----
Net grants during the period as a percentage of outstanding shares at the end of
such period................................................................... 2.63% 5.39% 3.90%
Grants to Named Executive Officers* during the period as a percentage of
outstanding shares at the end of such period.................................. 0.44% 0.63% 0.25%
Grants to Named Executive Officers* during the period as a percentage of total
options granted during such period............................................ 11.24% 11.16% 5.53%
Cumulative options held by Named Executive Officers* as a percentage of
total options outstanding at the end of such period........................... 10.33% 8.88% 8.44%
* The term "Named Executive Officers" as used in these notes, includes the
Chief Executive Officer and the five other most highly compensated executive
officers.
Summary of in-the-money and out-of the-money option information at December
31, 2002:
Exercisable Unexercisable Total
----------------------- ----------------------- -----------------------
Weighted-Average Weighted-Average Weighted-Average
December 31, 2002 Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ----------------- ------ ---------------- ------ ---------------- ------ ----------------
(Shares in thousands)
In-the-Money............. 6,394 $10.67 132 $11.64 6,526 $10.69
Out-of-the-Money(1)...... 12,902 29.68 13,993 23.57 26,895 26.50
------ ------ ------ ------ ------ ------
Total Options Outstanding 19,296 $23.38 14,125 $23.45 33,421 $23.41
====== ====== ====== ====== ====== ======
(1) Out-of-the-money options are those options with an exercise price equal to
or above $13.01, the closing price of Teradyne's common stock as of
December 31, 2002.
Executive Options
Options granted to Named Executive Officers, year-to-date, as of December
31, 2002:
Individual Grants
--------------------------------------------------
Number of Percent of Total
Securities Options Granted to Exercise
Underlying Employees Year to Price Per Expiration
Options Granted Date(1) Share Date 5%(2) 10%(2)
---------- ------------------ --------- ---------- ---------- ----------
George W. Chamillard 300,000 4.16% $17.48 7/19/09 $2,134,835 $4,975,072
Gregory R. Beecher.. 100,000 1.39 17.48 7/19/09 711,612 1,658,357
Michael A. Bradley.. 115,000 1.60 17.48 7/19/09 818,353 1,907,111
John M. Casey....... 80,000 1.11 17.48 7/19/09 569,289 1,326,686
Edward Rogas, Jr.... 115,000 1.60 17.48 7/19/09 818,353 1,907,111
Richard E. Schneider 100,000 1.39 17.48 7/19/09 711,612 1,658,357
(1) Based on a year-to-date total of 7,205,435 shares subject to options
granted during the year ended December 31, 2002 to employees under
Teradyne's option plans.
(2) Potential Realizable Value at Assumed Annual Rates of Stock Price
Appreciation for Option Term. Amounts reported in these columns represent
amounts that may be realized upon exercise of the options immediately prior
to the expiration of their term assuming the specified compounded rates of
appreciation (5% and 10%) of Teradyne's common stock over the term of the
options. These numbers are calculated based on rules promulgated by the
Securities and Exchange Commission and do not reflect Teradyne's
31
estimate of future stock price increases. Actual gains, if any, on stock
option exercises and common stock holdings are dependent on the timing of
such exercise and the future performance of Teradyne's common stock. There
can be no assurance that the rates of appreciation assumed in this table can
be achieved or that the amounts reflected will be received by the
individuals.
Year-to-date option exercises and aggregate remaining option holdings and
option values of Named Executive Officers as of December 31, 2002:
Number of Securities
Underlying Unexercised Values of Unexercised
Options at In-the Money Options at
Shares Acquired December 31, 2002 December 31, 2002(1)
on Year-to-Date Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- --------------- -------- ----------- ------------- ----------- -------------
George W. Chamillard 0 $0 785,714 681,855 $726,217 $0
Gregory R. Beecher.. 0 0 59,391 196,570 0 0
Michael A. Bradley.. 0 0 328,922 202,459 403,258 0
John M. Casey....... 0 0 221,215 136,856 241,955 0
Edward Rogas, Jr.... 0 0 325,922 203,459 449,395 0
Richard E. Schneider 0 0 132,841 149,120 78,609 0
(1) Option values based on stock price of $13.01, the closing price of
Teradyne's common stock as of December 31, 2002
Equity Compensation Plans
In addition to Teradyne's 1996 Employee Stock Purchase Plan discussed in
"Note P: Stock Based Compensation," Teradyne maintains three equity
compensation plans under which its equity securities are authorized for
issuance to the Corporation's employees, directors and/or consultants:
1) 1991 Employee Stock Option Plan;
2) 1997 Employee Stock Option Plan; and
3) 1996 Non-Employee Director Stock Option Plan
The purpose of these plans is to promote the interests of Teradyne by
attracting and retaining the services of qualified and talented persons to
serve as employees, directors and/or consultants of Teradyne. Except for the
1997 Employee Stock Option Plan, each of the foregoing plans was approved by
Teradyne's shareholders.
The following table presents information about these plans as of December
31, 2002:
(1) (2) (3)
-------------------- -------------------- -------------------------------
Number of securities Number of securities remaining
to be issued upon Weighted-average available for future issuance
exercise of exercise price of under stock option compensation
outstanding options, outstanding options, plans (excluding securities
Plan category warrants, and rights warrants, and rights reflected in column(1))
------------- -------------------- -------------------- -------------------------------
(Shares in thousands)
Stock option plans approved by
shareholders.................... 6,719 $21.78 3,804
Stock option plans not approved by
shareholders(1)................. 26,124 $22.70 21,214
------ ------ ------
Total............................. 32,843 $22.51 25,018
====== ====== ======
(1) In connection with the acquisition of GenRad, Inc. in October 2001 (the
"Acquisition"), Teradyne assumed the outstanding options granted under the
GenRad, Inc. 1991 Equity Incentive Plan, the GenRad, Inc. 1991 Directors'
Stock Option Plan and the GenRad, Inc. 1997 Non-Qualified Employee Stock
Option Plan
32
(collectively, the "GenRad Plans"). Upon the consummation of the
Acquisition, these options became exercisable for shares of Teradyne common
stock based on an exchange ratio of 0.1733 shares of Teradyne common stock
for each share of GenRad common stock. No additional options will be granted
pursuant to the GenRad Plans. As of December 31, 2002, there were
outstanding options exercisable for an aggregate of 578 shares of Teradyne
common stock pursuant to the GenRad Plans, with a weighted average exercise
price of $74.77 per share.
1991 Employee Stock Option Plan (the "1991 Plan")
Under the 1991 Plan, Teradyne is authorized to issue options which qualify
as incentive stock options under the Internal Revenue Code of 1986, as amended
("ISOs") and non-qualified stock options ("NQOs"), up to a maximum of
30,000,000 shares of Teradyne common stock. ISOs may be granted only to
employees of Teradyne and its subsidiaries and NQOs may be granted to
employees, consultants and directors who are also employees of Teradyne. ISOs
must be granted at an exercise price of at least 100% of fair market value of
the common stock on the date of grant, and in the case of an employee owning
more than 10% of the outstanding voting stock of Teradyne, the price per share
must be at least 110% of the fair market value on the date of grant. No more
than 200,000 NQOs may be granted at an exercise price less than fair market
value. All other NQOs must be granted at an exercise price of at least 100% of
fair market value on the date of grant. No employee may be granted options to
purchase, in the aggregate, more than 300,000 shares of common stock under the
1991 Plan during any fiscal year. Teradyne's Compensation Committee administers
the 1991 Plan and specifies at the time of grant of an option whether such
option will be an ISO or NQO, the number of shares subject to the option, its
exercise price and other pertinent terms, including vesting provisions.
Generally, the term of each option may be for a period not exceeding ten years
from the date of grant. Under certain circumstances, if an employee retires
from Teradyne, such employee's option may expire prior to expiration of its
stated term if such employee is engaged by a competitor of Teradyne. The 1991
Plan is a fixed accounting plan which expires in 2011.
The 1997 Employee Stock Option Plan (the "1997 Plan")
Under the 1997 Plan, Teradyne is authorized to issue ISOs to employees of
Teradyne and its subsidiaries, and NQOs, stock awards and authorizations to
purchase Teradyne common stock to employees, consultants or directors (provided
that no options may be granted to non-employee directors) up to a maximum of
53,000,000 shares. ISOs must be granted at an exercise price of at least 100%
of fair market value of the common stock on the date of grant and in the case
of an employee owning more than 10% of the outstanding voting stock of
Teradyne, the price per share must be at least 110% of the fair market value on
the date of grant. No more than 400,000 NQOs may be granted at an exercise
price less than fair market value. All other NQOs must be granted at an
exercise price of at least 100% of fair market value on the date of grant. No
employee may be granted an option to acquire more than 4,000,000 shares of
common stock under the 1997 Plan during any fiscal year. Teradyne's
Compensation Committee administers the 1997 Plan and specifies at the time of
grant of an award, the pertinent terms of such award, including, if such award
is an option, whether such option will be an ISO or NQO, the number of shares
subject to the award, its exercise price and vesting provisions. Generally, the
term of each award may be for a period not exceeding ten years from the date of
grant. Under certain circumstances, if an employee retires from Teradyne, such
employee's award may expire prior to expiration of its stated term if such
employee is engaged by a competitor of Teradyne. The 1997 Plan is a fixed
accounting plan which expires in 2007.
Options granted prior to September 2001 under the 1991 and 1997 Plans vest
in equal installments over four years and have a maximum term of five years.
Beginning in September 2001, options granted under the 1991 and 1997 Plans vest
in equal installments over four years and have a maximum term of seven years.
In addition, Teradyne made a one-time grant to all employees under the 1991 and
1997 Plans that vests over two years and has a term of seven years.
1996 Non-Employee Director Stock Option Plan (the "1996 Plan")
Each non-employee director of Teradyne is entitled to participate in the
1996 Plan. Under the 1996 Plan, Teradyne is authorized to issue options to
purchase up to a maximum of 1,600,000 shares of common stock. The 1996 Plan
provides for the automatic grant (i) of an option to purchase 22,500 shares of
Teradyne common stock
33
to each non-employee director who becomes a member of the Board of Directors on
or after August 26, 1999, (ii) on February 5, 2001, of an option to purchase
6,750 shares of Teradyne common stock to each person who was a non-employee
director on February 7, 2000, (iii) on February 5, 2001, of an option to
purchase 15,750 shares of Teradyne common stock to each non-employee who became
a new member of the Board during February 2000, and (iv) of an option to
purchase 11,250 shares of Teradyne common stock to each person who is a
non-employee director on the first Monday in February in each year beginning on
February 5, 2001 and continuing throughout the term of the Plan. No other
options shall be granted under the terms of the 1996 Plan. Options granted
under the 1996 Plan must be NQOs, shall be granted at 100% of the fair market
value of the common stock on the date of grant. Options granted under the 1996
Plan prior to January 2002 expire five years following the date of grant and
options granted thereafter expire seven years following the date of grant.
Options granted under the 1996 Plan prior to February 5, 2001 become
exercisable at the rate of 25% per year and options granted on or after
February 5, 2001 are immediately exercisable. Teradyne's Compensation Committee
administers the 1996 Plan. Generally, if an optionee ceases to be a director of
Teradyne other than by reason of death, no further installments of his or her
options become exercisable and the options terminate after three months.
However, under certain circumstances, unless a board member becomes a director
of a competitor of Teradyne, if the board member goes into government service
or retires from the Board of Directors, such option may be exercised within its
original terms. The 1996 Plan is a fixed accounting plan which expires in 2006.
Recently Issued Accounting Pronouncements
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. Teradyne has
determined that the adoption of SFAS 146 will not have a material impact on its
financial position and results of operations.
In December of 2002, FASB issued SFAS 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an Amendment of FASB Statement No.
123." SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of
the method used on reported results. The amendments to SFAS 123 in SFAS 148
shall be effective for financial statements for fiscal years ending after
December 15, 2002. The amendment to SFAS 123 and the amendment to Accounting
Principles Board No. 28, "Interim Financial Reporting," in SFAS 148 shall be
effective for financial reports containing condensed financial statements for
interim periods beginning after December 15, 2002. Teradyne has determined that
SFAS 148 will not have a material impact on its financial position and results
of operations and has adopted the disclosure requirements in this Form 10-K.
In February 2003, FASB issued Emerging Issues Task Force 00-21 ("EITF
00-21"), "Revenue Arrangements with Multiple Deliverables". EITF 00-21 requires
revenue arrangements with multiple deliverables to be divided into separate
units of accounting. If the deliverables in the arrangement meet certain
criteria, arrangement consideration should be allocated among the separate
units of accounting based on their relative fair values. Applicable revenue
recognition criteria should be considered separately for separate units of
accounting. The guidance in EITF 00-21 is effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. Teradyne is
currently in the process of reviewing EITF 00-21.
In November 2002, FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
It also clarifies that a guarantor is required to recognize, at
34
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and initial
measurement provisions of this Interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002, irrespective of
the guarantor's fiscal year-end. The disclosure requirements in this
Interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. Teradyne has determined that the
adoption of FIN 45 will not have a material impact on its financial statements
and results of operations and has adopted the disclosure requirements in this
Form 10-K.
In January 2003, FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," which addresses consolidation by
a business of variable interest entities in which it is the primary
beneficiary. The Interpretation is effective immediately for certain disclosure
requirements and variable interest entities created after January 31, 2003, and
periods beginning after June 15, 2003 for variable interest entities created
before February 1, 2003. Teradyne does not expect that the adoption of FIN 46
to have a material impact on its financial position and results of operations.
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-K) 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 demand for Teradyne's
products and statements relating to backlog, bookings and cancellations, gross
margins and pricing considerations. These statements are neither promises nor
guarantees but involve risks and uncertainties, both known and unknown, which
could cause Teradyne's actual future results to 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.
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 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. 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 continue to result in
significantly reduced customer orders.
Current Geopolitical Turmoil and the Continuing Threat of Domestic and
International Terrorist Attacks May Adversely Impact Teradyne's Revenues.
International turmoil, exacerbated by the war in Iraq and the escalating
tensions in North Korea have contributed to an uncertain political and economic
climate, both in the United States and globally, which may affect Teradyne's
ability to generate revenue on a predictable basis. In addition, recent
terrorist attacks internationally and the threat of future terrorist attacks
both domestically and internationally have negatively impacted an already
weakened worldwide economy. As Teradyne sells products both in the United
States and internationally, the threat of future terrorist attacks may
adversely affect Teradyne's business. These conditions make it difficult for
Teradyne, and it customers, to accurately forecast and plan future business
activities and could have a material adverse effect on Teradyne's business,
financial condition and results of operations.
35
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 continued slump in new orders will turn around
in the future or that any increase in sales or new orders for a calendar year
will be sustained in subsequent years. 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 continue to take measures to address the
current slowdown in the market for its products. In particular, Teradyne has
reduced its workforce, closed facilities, reduced the pay of certain employees,
implemented furloughs, discontinued certain of its product lines, implemented
material cost reduction programs, 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 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, increasing
Teradyne's debt, 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 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 on or about September 5, 2001 and is
now pending in Federal District Court, San Diego, California, by the former
owners of those companies naming as defendants Teradyne and two of its
executive officers. This case is further described in "Item 3: Legal
Proceedings" in this Form 10-K.
36
Additionally, in 2001, Teradyne was designated as a "potentially responsible
party" ("PRP") at a clean-up site in Los Angeles, California. This claim arises
out of Teradyne's acquisition of Perception Laminates, Inc. in August 2000.
Prior to that date, Perception Laminates had itself acquired certain assets of
Alco Industries Inc. under an asset purchase agreement dated July 30, 1992.
Neither Teradyne nor Perception Laminates have ever conducted any operations at
the Los Angeles site. Teradyne has asked the State of California to drop the
PRP designation, but California has not yet agreed to do so. This case is
further described in "Item 1: Business" under "Environmental Affairs" in this
Form 10-K.
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.
Teradyne and two of its executive officers were named as defendants in three
purported class action complaints that were filed in Federal District Court,
Boston, Massachusetts, in October and November 2001. The court consolidated the
cases and has appointed three lead plaintiffs. On November 8, 2002, plaintiffs
filed and served a consolidated amended class action complaint. The complaint
alleges, 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 complaint seeks unspecified damages, including compensatory
damages and recovery of reasonable attorneys' fees and costs. Teradyne filed a
motion to dismiss all claims asserted in the complaint on February 7, 2003.
Teradyne's motion has not yet been heard. Claims asserted in this case are
similar to the claims asserted in the case discussed in "Item 3: Legal
Proceedings," which is pending in the Federal District Court in San Diego,
California. Teradyne believes it has meritorious defenses to the claims and
will defend itself vigorously. Management does not believe that the outcome of
these claims will have a material adverse effect on Teradyne's financial
position or results of operations but there can be no assurance that any such
claims would not have a material adverse effect on Teradyne's financial
position or results of operations.
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.
37
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.
Teradyne Is Subject to Intense Competition.
Teradyne faces significant 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;
. compliance with customs regulations;
. changes in tariffs and exchange rates;
. political and economic instability, acts of terrorism and international
conflicts;
. 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.
Teradyne's Business May Suffer if it is Unable to Attract and Retain Key
Employees.
Competition for certain employees with skills required by Teradyne 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.
38
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 Teradyne's 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 Teradyne's
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 and statutory strict
liability 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. 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 Certain Obligations in the Event of a
Change in Control.
The indenture governing the Notes contains provisions that apply to a change
in control of Teradyne. If a change in control as defined in the indenture is
triggered, 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.
39
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.
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 sustains continued
losses or 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 next twenty-four months. However, Teradyne has a
finite amount of cash and in the event Teradyne may need to raise additional
funds, due to on-going losses or other reasons, Teradyne cannot be certain that
it will be able to obtain such additional financing on favorable terms, if at
all, particularly in light of Teradyne's continued quarterly losses. 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.
If Teradyne is Required to Account for Options Under Its Employee Stock Plans
as a Compensation Expense, Teradyne's Compensation Expense Would Be Increased.
There has been an increasing public debate about the proper accounting
treatment for employee stock options. Teradyne currently discloses pro forma
compensation expense quarterly by calculating the grants fair value and
disclosing the impact on net (loss) earnings and net (loss) earnings per share
in a footnote to the consolidated financial statements. It is possible that
future laws and regulations will require Teradyne to record the fair value of
all stock options as compensation expense in its consolidated statement of
operations. Note B, "Accounting Policies," of the consolidated financial
statements reflects the impact that such a change in accounting treatment would
have had on Teradyne's net (loss) income and (loss) earnings per share if it
had been in effect during the past three years. Also included in Item 7:
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," Teradyne has included stock-based compensation disclosures that
exceed current disclosure requirements.
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.
40
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;
. 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 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 7a: Quantitative and Qualitative Disclosures About Market Risks
Concentration of Credit Risk
Financial instruments which potentially subject Teradyne to concentrations
of credit risk consist principally of cash investments, forward currency
contracts, and accounts receivable. Teradyne maintains cash investments
primarily in U.S. Treasury and government agency securities and corporate debt
securities, rated AA or higher, which have minimal credit risk. Teradyne places
forward currency contracts with high credit-quality financial institutions in
order to minimize credit risk exposure. Concentrations of credit risk with
respect to accounts receivable are limited due to the large number of
geographically dispersed customers. Teradyne performs ongoing credit
evaluations of its customers' financial condition and does not require
collateral to secure accounts receivable.
Exchange Rate Risk Management
Teradyne regularly enters into forward contracts in European and Japanese
currencies to hedge its overseas net monetary position. Forward currency
contracts generally have maturities of less than one year. These contracts are
used to reduce Teradyne's risk associated with exchange rate movements, as
gains and losses on these contracts are intended to offset exchange losses and
gains on underlying exposures. Teradyne does not engage in currency speculation.
At December 31, 2002 and 2001, the face amount of outstanding forward
currency contracts to buy U.S. dollars to hedge those currency exposures
associated with certain assets and liabilities denominated in non-functional
currencies was $11.9 million and $11.0 million, respectively. A 10% fluctuation
in exchange rates for 2002 and 2001 currencies would change the fair value by
approximately $1.2 million and $1.3 million,
41
respectively. However, since these contracts hedge non-U.S. currency assets and
liabilities, any change in the fair value of the contracts would be offset by
opposite changes in the underlying value of these assets and liabilities being
hedged. The hypothetical movement was estimated by calculating the fair value
of the forward currency contracts at December 31, 2002 and comparing that with
those calculated using hypothetical forward currency exchange rates.
Interest Rate Risk Management
Teradyne is exposed to potential loss due to changes in interest rates. The
principal interest rate exposure is to changes in domestic interest rates.
Investments with interest rate risk include short and long-term marketable
securities. Debt with interest rate risk includes the fixed rate convertible
debt and mortgages.
In order to estimate the potential loss due to interest rate risk, a 10%
fluctuation in interest rates was assumed. Since the convertible debt was
"out-of- the-money" at year end, it was treated as a fixed rate debt security
and the analysis assumes that the entire principal amount is repaid in full at
maturity and the exercise of the embedded equity option is ignored. Market risk
for the short and long-term marketable securities was estimated as the
potential decrease in the fair value resulting from a hypothetical increase in
interest rates for securities contained in the investment portfolio. On this
basis, the potential loss in fair value from changes in interest rates is $6.9
million and $7.1 million as of December 31, 2002 and 2001, respectively. The
potential loss reflects a fair value loss on debt offset by a fair value gain
on investments. Teradyne expects to hold its debt to maturity or conversion,
whichever is sooner. Therefore, the realization of the potential loss on the
debt obligations is unlikely.
42
REPORT OF MANAGEMENT
Management is responsible for the preparation and integrity of the
consolidated financial statements appearing in this Annual Report on Form 10-K.
The financial statements were prepared in conformity with accounting principles
generally accepted in the United States of America appropriate in the
circumstances and, accordingly, include some amounts based on management's best
judgments and estimates.
Management is responsible for maintaining a system of internal controls and
procedures to provide reasonable assurance, at an appropriate cost/benefit
relationship, that assets are safeguarded and that transactions are authorized,
recorded and reported properly. The internal control system is augmented by
appropriate reviews by management, written policies and guidelines, careful
selection and training of qualified personnel and a written code of business
ethics applicable to all employees of Teradyne and its subsidiaries. Management
believes that Teradyne's internal controls provide reasonable assurance that
assets are safeguarded against material loss from unauthorized use or
disposition and that the financial records are reliable for preparing financial
statements and other data and maintaining accountability for assets.
The Audit Committee of the Board of Directors, composed solely of Directors
who are not employees or officers of Teradyne, meets periodically with the
independent accountants, internal auditors and management to discuss internal
controls, auditing and financial reporting matters. The Audit Committee reviews
with the independent accountants the scope and results of the audit. The Audit
Committee also meets with the independent accountants without management
present to ensure that the independent accountants have free access to the
Audit Committee.
The independent accountants, PricewaterhouseCoopers LLP, are engaged to
audit the consolidated financial statements of Teradyne and to conduct such
tests and related procedures as they deem necessary in accordance with auditing
standards generally accepted in the United States of America. The opinion of
the independent accountants, based upon their audits of the consolidated
financial statements, is contained in this Annual Report on Form 10-K.
/S/ GEORGE W. CHAMILLARD
- --------------------------------------
George W. Chamillard
Chairman, President and Chief Executive Officer
/S/ GREGORY R. BEECHER
- --------------------------------------
Gregory R. Beecher
Vice President and Chief Financial Officer
March 26, 2003
43
Item 8: Financial Statements and Supplementary Data
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Shareholders of Teradyne, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of Teradyne, Inc. and its subsidiaries at December 31, 2002
and 2001, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
As discussed in Note C to the consolidated financial statements, during the
year ended December 31, 2000 the Company changed its method of recognizing
revenue.
As discussed in Note I to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets on
January 1, 2002, in accordance with Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets."
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
January 13, 2003
44
TERADYNE, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
2002 2001
---------- ----------
(in thousands)
ASSETS
Current assets:.............................................
Cash and cash equivalents.................................. $ 251,521 $ 317,591
Marketable securities...................................... 73,833 50,096
Accounts receivable, less allowance for doubtful accounts
of $5,749 and $6,294 in 2002 and 2001, respectively...... 174,838 169,630
Income tax receivable and prepaid amounts.................. 4,816 97,000
Inventories
Parts.................................................... 165,149 262,520
Assemblies in process.................................... 106,156 132,097
Finished goods........................................... 8,245 12,372
---------- ----------
279,550 406,989
Deferred tax assets........................................ -- 141,013
Prepayments and other current assets....................... 24,715 24,703
---------- ----------
Total current assets.................................... 809,273 1,207,022
Property, plant, and equipment:
Land....................................................... 73,394 73,141
Buildings and improvements................................. 353,641 348,710
Machinery and equipment.................................... 952,830 918,163
Construction in progress................................... 40,615 104,515
---------- ----------
Total................................................... 1,420,480 1,444,529
---------- ----------
Less: Accumulated depreciation............................. (735,214) (608,963)
---------- ----------
Net property, plant, and equipment......................... 685,266 835,566
Marketable securities....................................... 215,703 218,544
Deferred tax assets--long-term.............................. -- 4,313
Goodwill.................................................... 118,203 190,276
Intangible and other assets................................. 66,232 86,670
---------- ----------
Total assets............................................ $1,894,677 $2,542,391
========== ==========
LIABILITIES
Current liabilities:
Notes payable--banks....................................... $ 6,704 $ 6,557
Current portion of long-term debt.......................... 1,365 1,263
Accounts payable........................................... 63,328 59,761
Accrued employees' compensation and withholdings........... 96,848 78,727
Deferred revenue and customer advances..................... 27,615 52,220
Other accrued liabilities.................................. 73,918 76,519
Accrued income taxes....................................... 9,587 1,292
---------- ----------
Total current liabilities............................... 279,365 276,339
Long-term other accrued liabilities......................... 136,278 49,986
Long-term debt.............................................. 450,561 451,682
---------- ----------
Total liabilities........................................... 866,204 778,007
---------- ----------
Commitments and contingencies (Note J)
SHAREHOLDERS' EQUITY
Common stock, $0.125 par value, 1,000,000 shares
authorized, 209,851 and 207,774 shares issued in 2002 and
2001, respectively and 183,196 and 181,119 shares
outstanding in 2002 and 2001, respectively................. 26,231 25,972
Additional paid-in capital.................................. 1,195,246 1,154,266
Treasury stock, at cost, 26,655 shares in 2002 and 2001..... (557,057) (557,057)
Accumulated other comprehensive loss........................ (66,423) (7,742)
Retained earnings........................................... 430,476 1,148,945
---------- ----------
Total shareholders' equity.............................. 1,028,473 1,764,384
---------- ----------
Total liabilities and shareholders' equity.................. $1,894,677 $2,542,391
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
45
TERADYNE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
----------------------------------
2002 2001 2000
---------- ---------- ----------
(in thousands,
except per share amounts)
Net revenue:...........................................
Products.............................................. $ 992,127 $1,233,728 $2,828,892
Services.............................................. 230,109 206,853 215,054
---------- ---------- ----------
Total net revenue.................................. 1,222,236 1,440,581 3,043,946
Expenses:
Cost of products...................................... 829,172 1,016,236 1,468,885
Cost of services...................................... 160,395 145,496 138,489
---------- ---------- ----------
Total cost of sales................................ 989,567 1,161,732 1,607,374
Engineering and development........................... 293,922 287,318 348,024
Selling and administrative............................ 290,376 270,084 377,783
Restructuring and other charges....................... 204,176 74,292 --
---------- ---------- ----------
1,778,041 1,793,426 2,333,181
---------- ---------- ----------
(Loss) income from operations.......................... (555,805) (352,845) 710,765
Interest income........................................ 16,953 22,743 25,106
Interest expense....................................... (21,783) (4,091) (1,841)
Other income and expense, net.......................... (310) 8,040 5,618
---------- ---------- ----------
(Loss) income before income taxes and cumulative
effect of change in accounting principle.............. (560,945) (326,153) 739,648
Provision for (benefit from) income taxes.............. 157,524 (123,938) 221,894
---------- ---------- ----------
(Loss) income before cumulative effect of change in
accounting principle.................................. (718,469) (202,215) 517,754
Cumulative effect of change in accounting principle,
net of applicable tax of $27,488 (Note C)............. -- -- (64,138)
---------- ---------- ----------
Net (loss) income...................................... $ (718,469) $ (202,215) $ 453,616
========== ========== ==========
(Loss) income per common share before cumulative
effect of change in accounting principle--basic....... $ (3.93) $ (1.15) $ 2.99
========== ========== ==========
Cumulative effect of change in accounting
principle--basic...................................... $ -- $ -- $ (0.37)
========== ========== ==========
Net (loss) income per common share--basic.............. $ (3.93) $ (1.15) $ 2.62
========== ========== ==========
(Loss) income per common share before cumulative
effect of change in accounting principle--diluted..... $ (3.93) $ (1.15) $ 2.86
========== ========== ==========
Cumulative effect of change in accounting
principle--diluted.................................... $ -- $ -- $ (0.35)
========== ========== ==========
Net (loss) income per common share--diluted............ $ (3.93) $ (1.15) $ 2.51
========== ========== ==========
Shares used in net income per common share--basic...... 182,861 175,828 173,312
========== ========== ==========
Shares used in net income per common share--diluted.... 182,861 175,828 181,011
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
46
TERADYNE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 2002, 2001 and 2000
Shares
------------------
Accumulated
Common Additional Other Total
Stock Par Paid-in Treasury Comprehensive Retained Shareholders'
Issued Reacquired Value Capital Stock Loss Earnings Equity
------- ---------- --------- ---------- --------- ------------- ---------- -------------
(in thousands)
Balance, December 31,
1999...................... 193,205 22,886 $24,151 $ 640,922 $(409,585) $ 0 $ 897,544 $1,153,032
Issuance of stock to
employees under
benefit plans............. 4,168 521 54,742 55,263
Tax benefit from stock
options................... 88,046 88,046
Shares issued to effect
acquisition............... 1,841 230 104,256 104,486
Repurchase of stock........ 3,769 (147,472) (147,472)
Comprehensive income:
Net income................. 453,616 453,616
Total comprehensive
income..................
------- ------ ------- ---------- --------- -------- ---------- ----------
Balance, December 31,
2000...................... 199,214 26,655 $24,902 $ 887,966 $(557,057) $ 0 $1,351,160 $1,706,971
Issuance of stock to
employees under
benefit plans............. 3,609 451 58,092 58,543
Tax benefit from stock
options................... 23,319 23,319
Shares issued to effect
acquisition............... 4,951 619 184,889 185,508
Comprehensive loss:
Net loss................... (202,215) (202,215)
Unrealized gains on
investments, net of
tax of $2,168............. 3,546 3,546
Additional minimum
pension liability, net
of tax of $6,918.......... (11,288) (11,288)
Total comprehensive
loss....................
------- ------ ------- ---------- --------- -------- ---------- ----------
Balance, December 31,
2001...................... 207,774 26,655 $25,972 $1,154,266 $(557,057) $ (7,742) $1,148,945 $1,764,384
Issuance of stock to
employees under
benefit plans............. 2,077 259 40,980 41,239
Comprehensive loss:
Net loss................... (718,469) (718,469)
Foreign currency
translation
adjustment................ (104) (104)
Reclassification adjustment
for loss on marketable
securities included in net
loss net of applicable tax
of $0..................... 942 942
Unrealized gains on
investments, net of
applicable tax of
$0........................ 829 829
Additional minimum
pension liability, net
of applicable tax of
$0........................ (60,348) (60,348)
Total comprehensive
loss....................
------- ------ ------- ---------- --------- -------- ---------- ----------
Balance, December 31,
2002...................... 209,851 26,655 $26,231 $1,195,246 $(557,057) $(66,423) $ 430,476 $1,028,473
======= ====== ======= ========== ========= ======== ========== ==========
Comprehensive
Income (Loss)
-------------
Balance, December 31,
1999......................
Issuance of stock to
employees under
benefit plans.............
Tax benefit from stock
options...................
Shares issued to effect
acquisition...............
Repurchase of stock........
Comprehensive income:
Net income................. $ 453,616
---------
Total comprehensive
income.................. $ 453,616
=========
Balance, December 31,
2000......................
Issuance of stock to
employees under
benefit plans.............
Tax benefit from stock
options...................
Shares issued to effect
acquisition...............
Comprehensive loss:
Net loss................... $(202,215)
Unrealized gains on
investments, net of
tax of $2,168............. 3,546
Additional minimum
pension liability, net
of tax of $6,918.......... (11,288)
---------
Total comprehensive
loss.................... $(209,957)
=========
Balance, December 31,
2001......................
Issuance of stock to
employees under
benefit plans.............
Comprehensive loss:
Net loss................... $(718,469)
Foreign currency
translation
adjustment................ (104)
Reclassification adjustment
for loss on marketable
securities included in net
loss net of applicable tax
of $0..................... 942
Unrealized gains on
investments, net of
applicable tax of
$0........................ 829
Additional minimum
pension liability, net
of applicable tax of
$0........................ (60,348)
---------
Total comprehensive
loss.................... $(777,150)
=========
Balance, December 31,
2002......................
The accompanying notes are an integral part of the consolidated financial
statements.
47
TERADYNE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-------------------------------
2002 2001 2000
--------- --------- ---------
(in thousands)
Cash flows from operating activities:
Net (loss) income.................................. $(718,469) $(202,215) $ 453,616
Adjustments to reconcile net (loss) income to
net cash (used for) provided by operating
activities:
Depreciation..................................... 151,811 130,949 99,929
Amortization..................................... 7,878 7,719 1,933
Gain on sale of business......................... -- (14,779) --
Impairment of long-lived assets.................. 155,930 35,338 --
Provision for doubtful accounts.................. 1,073 1,192 1,337
Deferred income tax provision (credit)........... 145,326 (47,091) (44,242)
Other non-cash items, net........................ 14,530 14,869 (10,997)
Changes in operating assets and liabilities,
net of businesses sold and acquired:
Accounts receivable............................. (6,281) 285,232 (115,267)
Inventories..................................... 128,275 158,669 (235,319)
Other assets.................................... 89,775 (74,688) 7,589
Accounts payable, deferred revenue and
accruals....................................... 17,609 (367,568) 226,798
Accrued income taxes............................ 8,295 (6,599) 85,482
--------- --------- ---------
Net cash (used for) provided by operating
activities......................................... (4,248) (78,972) 470,859
--------- --------- ---------
Cash flows from investing activities:
Additions to property, plant, and equipment........ (46,434) (198,180) (235,189)
Increase in equipment manufactured by the Company.. (29,925) (43,269) (63,053)
Proceeds from sale of business, net of expenses.... -- 26,250 --
Purchases of held-to-maturity marketable
securities....................................... (139,716) (230,255) (409,180)
Maturities of held-to-maturity marketable
securities....................................... 139,697 156,984 394,006
Purchases of available-for-sale marketable
securities....................................... (255,161) (1,876) (177,864)
Proceeds from sales and maturities of
available-for-sale marketable securities......... 237,741 31,415 177,104
Cash paid for acquisition of assets................ (8,392) -- --
Cash acquired in acquisition....................... -- 11,593 1,885
--------- --------- ---------
Net cash used by investing activities............... (102,190) (247,338) (312,291)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from convertible notes, net............... -- 389,000 --
Proceeds from mortgage notes payable............... -- 45,000 --
Payments of long-term debt......................... (871) (91,063) (5,283)
Issuance of common stock under stock option and
stock purchase plans............................. 41,239 58,543 55,263
Acquisition of treasury stock...................... -- -- (147,472)
--------- --------- ---------
Net cash provided by (used for) financing
activities......................................... 40,368 401,480 (97,492)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents.... (66,070) 75,170 61,076
Cash and cash equivalents at beginning of year...... 317,591 242,421 181,345
--------- --------- ---------
Cash and cash equivalents at end of year............ $ 251,521 $ 317,591 $ 242,421
========= ========= =========
Supplementary disclosure of cash flow information:
Cash paid (received) during the year for:
Interest......................................... $ 12,263 $ 1,275 $ 1,728
Income taxes (received) paid..................... $ (88,823) $ (29,182) $ 130,416
Businesses acquired:
Fair value of assets acquired.................... $ 364,412 $ 119,887
Liabilities assumed.............................. $ 172,872 $ 15,401
Common stock issued.............................. $ 185,508 $ 104,486
The accompanying notes are an integral part of the consolidated financial
statements.
48
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. THE COMPANY
Teradyne, Inc. is the world's largest supplier of automatic test equipment,
a leading provider of high performance interconnection systems and an emerging
provider of 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");
. diagnose and test automotive electronics systems ("Diagnostic
Solutions"); 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. ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Teradyne and
its subsidiaries. All significant intercompany balances and transactions are
eliminated. Certain prior years' amounts were reclassified to conform to the
current year presentation.
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
excluding the Diagnostic Solutions business. Diagnostic Solutions has been made
part of the Other Test Systems operating segment. GenRad activity is reflected
in Teradyne's results of operations since the acquisition date.
Preparation of Financial Statements and Use of Estimates
The preparation of consolidated financial statements requires Teradyne to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
liabilities. On an on-going basis, Teradyne evaluates its estimates, including
those related to inventories, investments, goodwill, intangible and other
long-lived assets, bad debts, income taxes, pensions, warranties, contingencies
and litigation. Teradyne bases its estimates on historical experience and on
appropriate and customary assumptions that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ significantly from these
estimates.
Revenue Recognition
In accordance with the guidance provided by the Securities and Exchange
Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements", Teradyne recognizes revenue when there is persuasive
evidence of an arrangement, title and risk of loss have passed, delivery has
occurred or the services have been rendered, the sales price is fixed or
determinable and collection of the related receivable is reasonably assured.
49
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
B. ACCOUNTING POLICIES--(Continued)
For equipment where there is hardware and software that is incidental to the
product, revenue is recognized upon shipment provided that customer acceptance
criteria can be demonstrated prior to shipment. Where the criteria cannot be
demonstrated prior to shipment, or in the case of new products, revenue is
deferred until acceptance has been received. For multiple element arrangements,
Teradyne defers the greater of the fair value of any undelivered elements of
the contract or the portion of the sales price which is not payable until the
undelivered elements are delivered. Teradyne also defers the portion of the
sales price that is not due until acceptance, which represents deferred profit.
Fair value is the price charged when the element is sold separately. In order
to recognize revenue the functionality of the undelivered elements must not be
essential to the delivered elements. Installation is not considered essential
to the functionality of the product as these services do not alter the product
capabilities, do not require specialized skills or tools and can be performed
by the customers or other vendors. In addition to installation, other elements
may include extended warranties, customer support and undelivered products.
Service revenue is recognized over the contractual period or as the services
are performed. Teradyne's products are generally subject to warranty and
related costs are provided for in cost of sales when product revenue is
recognized.
Interconnection systems and electronic manufacturing assembly services
revenue is recognized upon shipment or delivery according to the shipping terms
of the arrangement as there is no installation required and there are no
contractual acceptance requirements.
For transactions involving the sale of software which is not incidental to
the product, revenue is recognized in accordance with American Institute of
Certified Public Accountants ("AICPA") Statement of Position No. 97-2 (SOP No.
97-2), "Software Revenue Recognition," as amended by SOP No. 98-9 "Modification
of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions." Teradyne recognizes revenue when there is persuasive evidence of
an arrangement, delivery has occurred, the sales price is fixed or determinable
and collectibility is probable. Revenue is deferred in instances when vendor
specific objective evidence of fair value of undelivered elements is not
determinable. Vendor specific evidence of fair value is the price charged when
the element is sold separately. Revenue for the separate elements is only
recognized where the functionality of the undelivered element is not essential
to the delivered element.
For certain contracts eligible for contract accounting under SOP No. 81-1
"Accounting for Performance of Construction-type and Certain Production-Type
Contracts," revenue is recognized using the percentage-of-completion accounting
method based upon an efforts-expended method. These arrangements require
significant production, modification or customization. In all cases, changes to
total estimated costs and anticipated losses, if any, are recognized in the
period in which determined.
Inventories
Inventories which include materials, labor and manufacturing overhead are
stated at the lower of cost (first-in, first-out basis) or net realizable
value. On a quarterly basis, Teradyne uses consistent methodologies to evaluate
all inventory for net realizable value. Teradyne records a provision for excess
and obsolete inventory when such a writedown is identified through the
quarterly review process. The inventory valuation is based upon assumptions
about future demand, product mix and possible alternative uses.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost and depreciated over the
estimated useful lives of the assets. Leasehold improvements and major renewals
are capitalized and included in property, plant, and equipment accounts while
expenditures for maintenance and repairs and minor renewals are charged to
expense. When assets are retired, the assets and related allowances for
depreciation and amortization are removed from the accounts and any resulting
gain or loss is reflected in operations.
50
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
B. ACCOUNTING POLICIES--(Continued)
Teradyne provides for depreciation of its assets principally on the
straight-line method with the cost of the assets being charged to expense over
their useful lives as follows:
Buildings........................... 40 years
Buildings improvements.............. 5 to 10 years
Leasehold improvements.............. 5 to 10 years
Furniture and fixtures.............. 10 years
Test systems manufactured internally 6 years
Machinery and equipment............. 3 to 5 years
Software............................ 3 to 5 years
Goodwill, Intangible and Long-Lived Assets
Beginning January 1, 2002 all goodwill amortization ceased in accordance
with SFAS No. 142, "Goodwill and Other Intangible Assets." Intangible assets
are amortized over their estimated useful economic life using the straight line
method and are carried at cost less accumulated amortization. Goodwill
resulting from the GenRad acquisition which was completed after June 30, 2001
was not being amortized in accordance with the requirements of SFAS No. 142.
Prior to January 1, 2002 all other goodwill was amortized over their estimated
useful economic life using the straight line method and are carried at cost
less accumulated amortization. Teradyne assesses goodwill for impairment at
least annually, on a reporting unit basis, or more frequently when events and
circumstances occur indicating that the recorded goodwill may be impaired. If
the book value of a reporting unit exceeds its fair value, the implied fair
value of goodwill is compared with the carrying amount of goodwill. If the
carrying amount of goodwill exceeds the implied fair value, an impairment loss
is recorded in an amount equal to that excess.
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," requires one method of accounting
for long lived assets disposed of by sale. SFAS 144 was effective for financial
statements issued for fiscal years beginning after December 15, 2001. Teradyne
reviews long-lived assets for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully
recoverable or that the useful lives of these assets are no longer appropriate.
Each impairment test is based on a comparison of the estimated undiscounted
cash flows to the recorded value of the asset. If an impairment is indicated,
the asset is written down to its estimated fair value based on a discounted
cash flow analysis. The cash flow estimates used to determine the impairment,
if any, contain management's best estimates using appropriate assumptions and
projections at that time.
Engineering and Development Costs
Teradyne's products are highly technical in nature and require a large and
continuing engineering and development effort. Software development costs
incurred prior to the establishment of technological feasibility are charged to
expense. Software development costs incurred subsequent to the establishment of
technological feasibility are capitalized until the product is available for
release to customers. To date, the period between achieving technological
feasibility and general availability of the product has been short and software
development costs eligible for capitalization have not been material.
Engineering and development costs are expensed as incurred.
Advertising Costs
Teradyne expenses all advertising costs as incurred. Advertising costs were
$6.5 million, $10.3 million, and $16.8 million in 2002, 2001, and 2000,
respectively.
51
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
B. ACCOUNTING POLICIES--(Continued)
Product Warranty
Teradyne generally provides a one year warranty on its products commencing
upon installation. A provision is recorded upon revenue recognition to cost of
sales for estimated warranty expense based upon historical experience. Related
costs are expensed as incurred. The balance below is included in other accrued
liabilities.
Balance
--------------
(in thousands)
Balance at December 31, 2001................................................ $ 9,584
Accruals for warranties issued during the period............................ 11,991
Accruals related to pre-existing warranties (including changes in estimates) 902
Settlements made during the period.......................................... (13,390)
--------
Balance at December 31, 2002................................................ $ 9,087
========
When Teradyne receives revenue for extended warranties beyond one year it is
deferred and recognized on a straight line basis over the contract period.
Related costs are expensed as incurred. The balance below is included in
deferred revenue.
Balance
--------------
(in thousands)
Balance at December 31, 2001..................... $ 4,954
Deferral of new extended warranty revenue........ 1,208
Recognition of extended warranty deferred revenue (4,028)
-------
Balance at December 31, 2002..................... $ 2,134
=======
Employee Stock Option Plans and Employee Stock Purchase Plan
Teradyne accounts for its stock option plans and stock purchase plan under
the provisions of Accounting Principles Board Opinion No. 25 "Accounting For
Stock Issued to Employees" ("APB 25") and makes pro forma footnote disclosures
as though the fair value method under Statement of Financial Accounting
Standard No. 123, "Accounting For Stock-Based Compensation" ("FAS 123"), was
followed. Teradyne's employee stock purchase plan is a non-compensatory plan
and its stock option plans are accounted for using the intrinsic value method
under the provisions of APB 25. Had compensation for Teradyne's stock based
compensation plans been accounted for at fair value the amounts reported in the
Statement of Operations for the years 2002, 2001, and 2000 would have been (in
millions, except per share amounts):
2002 2001 2000
------- ------- ------
(Loss) income before cumulative effect of change in accounting principle as
reported.................................................................. $(718.5) $(202.2) $517.8
Deduct: Total stock-based employee compensation expense determined under
fair value method, net of related tax effects............................. (110.3) (73.5) (59.8)
Pro forma (loss) income before cumulative effect of change in accounting
principle................................................................. (828.8) (275.7) 458.0
(Loss) income before cumulative effect of change in accounting principle per
common share--basic as reported........................................... (3.93) (1.15) 2.99
(Loss) income before cumulative effect of change in accounting principle per
common share--basic pro forma............................................. (4.53) (1.57) 2.64
(Loss) income before cumulative effect of change in accounting principle per
common share--diluted as reported......................................... (3.93) (1.15) 2.86
(Loss) income before cumulative effect of change in accounting principle per
common share--diluted pro forma........................................... (4.53) (1.57) 2.53
52
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
B. ACCOUNTING POLICIES--(Continued)
2002 2001 2000
------- ------- ------
Net (loss) income as reported........................................... $(718.5) $(202.2) $453.6
Deduct: Total stock-based employee compensation expense determined under
fair value method, net of related tax effects......................... (110.3) (73.5) (59.8)
Pro forma net (loss) income............................................. (828.8) (275.7) 393.8
Net (loss) income per common share-basic as reported.................... (3.93) (1.15) 2.62
Net (loss) income per common share-basic pro forma...................... (4.53) (1.57) 2.27
Net (loss) income per common share-diluted as reported.................. (3.93) (1.15) 2.51
Net (loss) income per common share-diluted pro forma.................... (4.53) (1.57) 2.18
The weighted average grant date fair value for options granted during 2002,
2001 and 2000 was $9.58, $11.90 and $15.34 per option, respectively. The fair
value of options at date of grant was estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions:
2002 2001 2000
---- ---- ----
Expected life (years) 4.3 4.3 4.2
Interest rate........ 3.4% 3.7% 5.7%
Volatility........... 67.1% 67.0% 63.7%
Dividend yield....... 0.0% 0.0% 0.0%
The weighted-average fair value of employee stock purchase rights granted in
2002, 2001 and 2000 was $5.29, $12.56, and $17.98, respectively. The fair value
of the employees' purchase rights was estimated using the Black-Scholes option
pricing model with the following assumptions for 2002, 2001 and 2000,
respectively:
2002 2001 2000
---- ---- ----
Expected life (years) 1.0 1.0 1.0
Interest rate........ 1.3% 2.2% 6.0%
Volatility........... 63.9% 67.0% 81.5%
Dividend yield....... 0.0% 0.0% 0.0%
Investments in Other Companies
Teradyne holds minority interests in public and private companies having
operations or technology in areas within its strategic focus. These investments
are included in other long-term assets and include investments accounted for at
cost and under the equity method of accounting. Under the equity method of
accounting, which generally applies to investments that represent a 20 to 50
percent ownership of the equity securities of the investees, Teradyne's
proportionate share of the earnings or losses of the investees is included in
other income and expense. Teradyne records an impairment charge when it
believes an investment has experienced a decline in value that is
other-than-temporary. At December 31, 2002 and 2001, these investments were
$6.2 million and $14.4 million, respectively.
53
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
B. ACCOUNTING POLICIES--(Continued)
Income Taxes
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The measurement of deferred tax assets is
reduced by a valuation allowance if, based upon weighted available evidence, it
is more likely than not that some or all of the deferred tax assets will not be
realized.
U.S. income taxes are provided for on the retained earnings of non-U.S.
sales and service subsidiaries whose earnings are expected to be remitted to
the United States. U.S. income taxes are not provided for on the earnings of a
non-U.S. manufacturing subsidiary which are expected to be reinvested
indefinitely in operations outside the U.S.
Translation of Non U.S. Currencies
Assets and liabilities of non U.S. subsidiaries except for Diagnostic
Solutions, which are denominated in currencies other than the U.S. dollar, are
remeasured into U.S. dollars at rates of exchange in effect at the end of the
fiscal year except nonmonetary assets and liabilities which are remeasured
using historical exchange rates. The functional currency for non-U.S.
subsidiaries is the U.S. dollar except for Diagnostic Solutions. Diagnostic
Solutions local currency is its functional currency. Revenue and expense
amounts are remeasured using an average of exchange rates in effect during the
year, except those amounts related to nonmonetary assets and liabilities, which
are remeasured at historical exchange rates. Net realized gains and losses
resulting from currency remeasurement are included in operations and were
immaterial for years ended December 31, 2002, 2001, and 2000.
Net (Loss) Income per Common Share
Basic net (loss) income per common share is calculated by dividing net
(loss) income by the weighted average number of common shares outstanding
during the period. Diluted net (loss) income per common share is calculated by
dividing net (loss) income by the sum of the weighted average number of common
shares plus additional common shares that would have been outstanding if
potential dilutive common shares had been issued for granted stock option and
stock purchase rights. Diluted net (loss) earnings per share for 2002 and 2001
excludes the potentially dilutive effect of common stock equivalents as their
effect is antidilutive.
Allowance for Doubtful Accounts
The volatility of the industries that Teradyne serves can cause certain of
its customers to experience shortages of cash flows, which can impact their
ability to make required payments. Teradyne maintains
allowances for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. Estimated allowances for
doubtful accounts are reviewed periodically taking into account the customer's
current payment history, the customer's current financial statements and other
information regarding the customer's credit worthiness. If the financial
condition of Teradyne's customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
54
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
B. ACCOUNTING POLICIES--(Continued)
Other Comprehensive (Loss) Income
Comprehensive (loss) income includes net (loss) income, minimum pension
liability adjustments, unrealized gains and losses on certain investments in
debt and equity securities, and cumulative translation adjustments.
C. CHANGE IN ACCOUNTING PRINCIPLE IN 2000
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). SAB 101 summarizes certain areas of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. During the fourth quarter of 2000, Teradyne implemented the SEC's
SAB 101 guidelines, retroactive to the beginning of the year. This was reported
as a cumulative effect of a change in accounting principle as of January 1,
2000. The cumulative effect of the change in accounting principle on prior
years resulted in a charge to income of $64.1 million (net of income taxes of
$27.5 million) or $0.35 per diluted share which has been included in income for
the fiscal year ending December 31, 2000. For the fiscal year ending December
31, 2000, Teradyne recognized $126.1 million in revenue that is included in the
cumulative effect adjustment as of January 1, 2000. Included in 2001 sales was
$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.
Title is no longer retained until payment as a normal business practice.
D. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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. Teradyne has
determined that the adoption of SFAS 146 will not have a material impact on its
financial position and results of operations.
In December of 2002, FASB issued SFAS 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an Amendment of FASB Statement No.
123." SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of
the method used on reported results. The amendments to SFAS 123 in SFAS 148
shall be effective for financial statements for fiscal years ending after
December 15, 2002. The amendment to SFAS 123 and the amendment to Accounting
Principles Board No. 28, "Interim Financial Reporting," in SFAS 148 shall be
effective for financial reports containing condensed financial statements for
interim periods beginning after December 15, 2002. Teradyne has determined that
SFAS 148 will not have a material impact on its financial position and results
of operations and has adopted the disclosure requirements in this Form 10-K.
In February 2003, FASB issued Emerging Issues Task Force 00-21 ("EITF
00-21"), "Revenue Arrangements with Multiple Deliverables." EITF 00-21 requires
revenue arrangements with multiple deliverables to be divided into separate
units of accounting. If the deliverables in the arrangement meet certain
criteria, arrangement consideration should be allocated among the separate
units of accounting based on their relative fair values. Applicable revenue
recognition criteria should be considered separately for separate units of
accounting. The
55
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
D. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS--(Continued)
guidance in EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. The guidance in EITF 00-21 is
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. Teradyne is currently in the process of reviewing EITF
00-21.
In November 2002, FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
It also clarifies that a guarantor is required to recognize, at the inception
of a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of this Interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The disclosure requirements in this Interpretation
are effective for financial statements of interim or annual periods ending
after December 15, 2002. Teradyne has determined that the adoption of FIN 45
will not have a material impact on its financial statements and results of
operations and has adopted the disclosure requirements in this Form 10-K.
In January 2003, FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," which addresses consolidation by
a business of variable interest entities in which it is the primary
beneficiary. The Interpretation is effective immediately for certain disclosure
requirements and variable interest entities created after January 31, 2003, and
periods beginning after June 15, 2003 for variable interest entities created
before February 1, 2003. Teradyne does not expect that the adoption of FIN 46
to have a material impact on its financial position and results of operations.
E. 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 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 and 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 introductions from Teradyne's competitors and competitive
pricing pressures, risks of operating internationally, and risks associated
with attracting and retaining key employees, possible requirement to expense
stock options, risks associated with Teradyne's suppliers' failure to meet
Teradyne's product or delivery requirements, risks associated with, among other
things, obligations and potential liabilities under environmental laws and
regulations, Teradyne's debt service obligations with respect to its issuance
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 and 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 can predict neither the duration of the current slump
nor when or if the situation is likely to materially improve. In the absence of
significant improvement, orders could remain low or decline further, and the
amount of Teradyne's inventory and certain long-lived assets considered
realizable could be significantly reduced.
56
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
F. ACQUISITIONS AND DIVESTITURES
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. GenRad's
business has been made part of the Circuit Board Test and Inspection Systems
operating segment excluding the Diagnostic Solutions business. Diagnostic
Solutions has been made part of the Other Test Systems segment. Under the terms
of the acquisition, each outstanding share of GenRad common stock was converted
into 0.1733 shares of Teradyne common stock. Under the terms of the
acquisition, Teradyne assumed approximately $89.7 million of debt which
Teradyne repaid on October 26, 2001. The results of GenRad have been included
since the acquisition date.
The primary reasons for Teradyne's acquisition of GenRad, and the factors
that contributed to a purchase price that resulted in recognition of goodwill,
are:
. the combination of Teradyne's circuit board test systems with GenRad
will strengthen Teradyne's product offerings;
. Teradyne's global presence in Europe and Asia among large electronics
manufacturing services companies and original equipment manufacturers in
the circuit board test and inspection markets will be strengthened as a
result of the acquisition; and
. to enable Teradyne to compete more effectively in the circuit board test
and inspection markets.
Based on the exchange ratio of 0.1733 shares of Teradyne common stock for
each GenRad share, Teradyne issued approximately 5.0 million common shares and
1.2 million vested employee stock options in the exchange, which increased
common stockholders' equity by approximately $185.5 million. The common stock
was valued at $34.90 per share, which was Teradyne's average common stock price
over a five-day trading period, which included the public announcement date of
August 2, 2001 and two days before and after the public announcement date. The
employee stock options were valued using the Black-Scholes option pricing
model, based on following assumptions prevalent at the August 2001 announcement
date:
Expected life (years) 6.0
Interest rate........ 4.1%
Volatility........... 63.2%
Dividend yield....... 0.0%
This transaction was accounted for using the purchase method of accounting
as required by SFAS 141, "Business Combinations," which was issued in the
second quarter of 2001.
57
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
F. ACQUISITIONS AND DIVESTITURES--(Continued)
Based on the purchase price allocation, the following table summarizes the
fair values of the assets acquired and liabilities assumed on October 26, 2001:
(in thousands)
--------------
Consideration:
Common stock issued............................ $172,761
Employee stock options......................... 12,747
Transaction costs.............................. 6,032
--------
Total consideration........................ $191,540
--------
Assets and liabilities acquired:
Cash and cash equivalents...................... $ 11,593
Accounts receivable............................ 40,124
Inventories.................................... 57,863
Other current assets........................... 7,847
Property, plant, & equipment................... 28,568
Long-term net deferred tax asset............... 25,534
Intangible assets.............................. 44,700
--------
Total identifiable assets acquired......... 216,229
--------
Accounts payable.................................. 23,956
Accrued employees' compensation and benefits...... 31,507
Other accrued liabilities......................... 17,059
Deferred revenue.................................. 10,700
Long-term debt.................................... 89,650
--------
Total liabilities acquired................. 172,872
--------
Total net identifiable assets acquired..... 43,357
--------
Goodwill.......................................... 148,183
--------
Total net assets acquired.................. $191,540
========
The $44.7 million of intangible assets consists of $35.6 million of
completed technology, $5.3 million of service and software maintenance
contracts and customer relationships, and $3.8 million of tradenames and
trademarks. The intangible assets are subject to amortization with a weighted
average amortization period of 7 years.
Goodwill related to the GenRad acquisition is reported as part of the
Circuit Board Test and Inspection Systems segment and is not deductible for tax
purposes. In 2002, Teradyne recorded impairment charges of $86.2 million
against its Circuit Board Test and Inspection Systems goodwill and intangible
assets. See Note I: "Goodwill and Intangible and Other Assets", for further
information.
In connection with its restructuring plan for GenRad in 2002, Teradyne
recorded $4.3 million of additional goodwill relating to the finalization of
its involuntary employee termination plan and recorded $2.2 million of
additional goodwill relating to the completion of facility exit plans for
GenRad operating locations. All remaining severance benefits payable to these
employees will be paid by the end of the third quarter of 2003.
58
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
F. ACQUISITIONS AND DIVESTITURES--(Continued)
The table below summarizes activity relating to GenRad employee termination
and facility closure costs (in thousands):
Severance Facility
and Benefits Related Total
------------ -------- -------
Balance at December 31, 2001 $ 1,006 $ -- $ 1,006
Employee termination costs.. 4,289 -- 4,289
Leased facility costs....... -- 2,167 2,167
Cash payments............... (4,970) (450) (5,420)
------- ------ -------
Balance at December 31, 2002 $ 325 $1,717 $ 2,042
======= ====== =======
The following unaudited pro forma data presents information as if GenRad had
been acquired at the beginning of each period presented. The pro forma amounts
include an adjustment for amortization of intangibles of $5.1 million in 2001
and $6.2 million in 2000. The pro forma amounts do not reflect any benefits
from economies which might be achieved from combining the operations. The pro
forma information does not necessarily reflect the actual results that would
have occurred had the companies been combined during the periods presented, nor
is it necessarily indicative of the future results of operations of the
combined companies:
Year Ended
----------------------
2001 2000
---------- ----------
(in thousands except
per share amounts)
Revenue............................................................................ $1,609,374 $3,385,601
(Loss) income before cumulative effect of change in accounting principle........... (361,811) 535,079
Net (loss) income.................................................................. (361,811) 470,941
(Loss) income before cumulative effect of change in accounting principle--per share
of common stock
Basic........................................................................... $ (2.01) $ 3.00
Diluted......................................................................... $ (2.01) $ 2.88
(Loss) income--per share of common stock
Basic........................................................................... $ (2.01) $ 2.64
Diluted......................................................................... $ (2.01) $ 2.53
On August 9, 2002, Teradyne acquired certain assets of Precision Concepts
Inc. ("PCI"), of Winston-Salem, North Carolina through a bankruptcy court
sanctioned sale of assets. PCI was a sole source supplier of certain components
to Connection Systems. The acquisition is part of the Connection Systems
operating segment. The cost of the acquired manufacturing assets and inventory
was $8.4 million in cash. There is no ongoing customer revenue stream that was
acquired. The operations will be used to satisfy internal demand in the
Connection Systems segment. Based on the purchase price allocation, the
following table summarizes the fair values of the assets acquired on August 9,
2002:
(in thousands)
--------------
Consideration:
Cash paid..................... $8,392
------
Total consideration....... $8,392
======
Assets acquired:
Inventories................... $ 838
Property, plant, & equipment.. 7,554
------
Total assets acquired..... $8,392
======
59
F. ACQUISITIONS AND DIVESTITURES--(Continued)
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 gain of $14.8 million
which has been recorded in other income and expense.
On August 15, 2000, Teradyne acquired two California-based companies, both
in the printed circuit board (PCB) industry: Herco Technology Corp. of San
Diego, California, a fabricator of printed circuit boards, and Perception
Laminates, Inc. of La Verne, California, which supplies PCB laminates and is a
major supplier to Herco. The acquisitions are part of the Connection Systems
operating segment. The cost of the acquired companies was $104.5 million with
approximately 1.8 million shares of common stock issued. The acquisitions were
accounted for using the purchase method of accounting and accordingly, the
results have been included in our consolidated results of operations from the
date of acquisition. As of January 1, 2002, goodwill resulting from the
acquisitions is no longer amortized.
The components of the purchase price allocation are as follows:
(in thousands)
--------------
Current assets............... $ 20,140
Property, plant and equipment 41,650
Acquired intangibles......... 4,736
Goodwill..................... 53,361
Less: Liabilities assumed.... 15,401
--------
Total........................ $104,486
========
On December 29, 2000, Teradyne sold a controlling interest in its software
test business to an investor group led by Matrix Partners of Waltham,
Massachusetts for approximately $28.7 million. The gain from the sale was
immaterial. Teradyne has retained an ownership position of approximately 22% in
the new company called Empirix. Teradyne has accounted for its investment in
Empirix under the equity method of accounting. At December 31, 2002 and 2001,
the carrying value of Teradyne's investment in Empirix was zero.
G. FINANCIAL INSTRUMENTS
Cash Equivalents
Teradyne considers all highly liquid investments with original maturities of
three months or less at the date of acquisition to be cash equivalents.
Marketable Securities
Teradyne classifies investments in marketable securities as trading,
available-for-sale or held-to-maturity at the time of purchase and periodically
re-evaluates such classification. There were no securities classified as
trading at December 31, 2002 or 2001. Securities are classified as
held-to-maturity when Teradyne has the positive intent and ability to hold the
securities to maturity. Held-to-maturity securities are stated at cost with
corresponding premiums or discounts amortized over the life of the investment
to interest income. Securities classified as available-for-sale are reported at
fair value. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in interest
income. Unrealized gains and losses are included in accumulated other
comprehensive income. The cost of securities sold is based on the specific
identification method.
60
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
G. FINANCIAL INSTRUMENTS--(Continued)
The short-term marketable securities mature in less than one year. Long-term
marketable securities have maturities of one to five years. At December 31,
2002 and 2001 these investments are reported as follows (in thousands):
Available-for-Sale
--------------------------------------
Fair Market Net Unrealized Held-to-
Cost Value Gain/(Loss) Maturity
2002 ----------- ----------- -------------- --------
Short-term marketable securities:
U.S. Treasury and government agency securities $ 21,617 $ 21,817 $ 200 $29,905
Corporate debt securities..................... 21,740 22,111 371
----------- -------- ------ -------
$ 43,357 $ 43,928 $ 571 $29,905
=========== ======== ====== =======
Long-term marketable securities:
U.S. Treasury and government agency securities $ 102,889 $104,781 $1,892
Corporate debt securities..................... 107,024 110,922 3,898
----------- -------- ------
$ 209,913 $215,703 $5,790
=========== ======== ======
Available-for-Sale
-----------------------------------
Fair Market Net Unrealized Held-to-
Cost Value Gain/(Loss) Maturity
2001 -------- ----------- -------------- --------
Short-term marketable securities:
U.S. Treasury and government agency securities $ 7,255 $ 7,282 $ 27 $30,000
Corporate debt securities..................... 12,634 12,814 180
-------- -------- ------ -------
$ 19,889 $ 20,096 $ 207 $30,000
======== ======== ====== =======
Long-term marketable securities:
U.S. Treasury and government agency securities 133,456 $133,958 $ 502
Corporate debt securities..................... 82,390 84,586 2,196
-------- -------- ------
$215,846 $218,544 $2,698
======== ======== ======
Other
As of December 31, 2002, the estimated fair value of Teradyne's convertible
notes was approximately $359 million compared to the carrying value of $400
million. The estimated fair value of the convertible notes is based on the
quoted market price of the convertible notes on December 31, 2002.
Fair values for Teradyne's non-convertible debt were determined based on
interest rates that are currently available to Teradyne for the issuance of
debt with similar terms and remaining maturities for debt issues and
approximate carrying values.
For all other balance sheet financial instruments, the carrying amount
approximates fair value.
Derivatives
Teradyne adopted SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS 137 and SFAS 138 in the first quarter
of 2001. SFAS 133 requires Teradyne to recognize all derivatives on the balance
sheet at fair value. Adoption of SFAS 133 did not have a material impact on
Teradyne's financial position and results of operations.
61
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
G. FINANCIAL INSTRUMENTS--(Continued)
Teradyne conducts business in a number of foreign countries, with certain
transactions denominated in local currencies. The purpose of Teradyne's foreign
currency management is to minimize the effect of exchange rate fluctuations on
certain foreign denominated net monetary assets and anticipated cash flows. The
terms of currency instruments used for hedging purposes are consistent with the
timing of the transactions being hedged. Teradyne does not use derivative
financial instruments for trading or speculative purposes.
Teradyne enters into foreign currency forward contracts to hedge currency
exposures associated with monetary assets and liabilities denominated in
non-functional currencies. These contracts are used to reduce Teradyne's risk
associated with exchange rate movements, as gains and losses on these contracts
are intended to offset exchange losses and gains on underlying exposures.
Changes in the fair value of these derivatives are
recorded immediately in earnings which are used to offset the changes in the
underlying net monetary position being hedged.
At December 31, 2002, Teradyne had the following forward currency contracts
to buy U.S. dollars for non U.S. currencies with the following notional amounts
totaling $11.9 million; $5.0 million Japanese Yen, $6.4 million British pound
sterling, and $0.5 million Swedish Krona. At December 31, 2001, the face amount
of outstanding forward currency contracts to buy U.S. dollars for non U.S.
currencies was $11.0 million. The fair value of the outstanding contracts at
December 31, 2002 and 2001 was not material. Realized gains related to forward
contracts hedging net monetary position were $0.9 million, $4.1 million, and
$7.0 million for 2002, 2001, and 2000, respectively. Both the contract gains
and losses and the gains and losses on the items being hedged are included in
selling and administrative expenses.
Teradyne holds warrants to purchase 0.3 million shares of common stock of
LogicVision, Inc., a public technology company, at an exercise price of $4.86
per share. In accordance with SFAS 133, Teradyne recorded a loss of $2.1
million and a gain of $2.0 million in other income and expense for the changes
in fair value of the warrants for the year ended December 31, 2002 and 2001,
respectively. The fair value of the warrant is included in other assets.
Concentration of Credit Risk
Financial instruments which potentially subject Teradyne to concentrations
of credit risk consist principally of marketable securities, forward currency
contracts, and accounts receivable. Teradyne maintains cash investments
primarily in U.S. Treasury and government agency securities and corporate debt
securities, rated AA or higher, which have minimal credit risk. Teradyne places
forward currency contracts with high credit-quality financial institutions in
order to minimize credit risk exposure. Concentrations of credit risk with
respect to accounts receivable are limited due to the large number of
geographically dispersed customers. Teradyne performs ongoing credit
evaluations of its customers' financial condition but does not require
collateral to secure accounts receivable.
H. DEBT
Long-term debt at December 31, 2002 and 2001 consisted of the following (in
thousands):
2002 2001
-------- --------
Convertible senior notes $400,000 $400,000
Mortgage notes payable.. 49,031 50,040
Other long-term debt.... 2,895 2,905
-------- --------
Total................... 451,926 452,945
Less current maturities. 1,365 1,263
-------- --------
$450,561 $451,682
-------- --------
62
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
H. DEBT--(Continued)
The total maturities of long-term debt for the succeeding five years and
thereafter are: 2003--$1.4 million; 2004--$1.4 million; 2005--$1.5 million;
2006--$401.5 million; 2007--$39.5 million; and $6.6 million thereafter.
Convertible Senior Notes
In 2001, Teradyne issued $400 million principal amount of 3.75% Convertible
Senior Notes due 2006 (the "Notes") in a private placement and received net
proceeds of $389 million. The Notes are convertible at the option of the
holders at a rate which is equivalent to a conversion price of approximately
$26.00 per share, which is equal to a conversion rate of approximately 38.4615
shares of common stock per $1,000 principal amount of Notes. On or after
October 18, 2004, Teradyne may redeem the Notes in whole or in part at the
prices set forth below. The redemption price, expressed as a percentage of
principal amount, is as follows for the designated periods:
Period Redemption Price
------ ----------------
Beginning on October 18, 2004 and ending on October 14, 2005 101.50%
Beginning on October 15, 2005 and ending on October 14, 2006 100.75%
and thereafter equal to 100% of the principal amount.
Teradyne began making annual interest payments of up to $15 million, paid
semi-annually, on the Notes on April 15, 2002. The Notes are senior unsecured
obligations of Teradyne that rank equally with Teradyne's existing and future
unsecured and unsubordinated indebtedness. In the event of a change in control
by which Teradyne merges with or sells substantially all of its assets to a
third party, the holders of the Notes may be able to require Teradyne to redeem
some or all of the Notes either in discounted Teradyne common stock or in cash.
Mortgage Notes Payable
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. This loan is
collateralized by certain Teradyne California real estate properties. Principal
payments are made according to a twenty-year amortization schedule through
December 2006, with the remaining principal due on January 1, 2007. Teradyne
began making monthly principal and interest payments of $0.4 million on
February 1, 2002.
In 1983, Teradyne obtained a loan of $4.5 million from the Boston
Redevelopment Authority in the form of a 3% mortgage loan maturing March 31,
2013. This loan is collateralized by Teradyne's property at 321 Harrison
Avenue, which may, at Teradyne's option, become subordinated to another
mortgage up to a maximum of $5.0 million. Interest for the first 41/2 years of
the loan was capitalized up to a principal amount of $5.0 million. Since
September 30, 1987, Teradyne has been making semi-annual interest payments.
Short-term Borrowings
The weighted average interest rates on short-term borrowings outstanding in
Japan as of December 31, 2002 and 2001 was 1.2% for both years.
63
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
I. GOODWILL, INTANGIBLE AND OTHER ASSETS
At December 31, 2002 and 2001, the goodwill and intangible and other assets
were:
2002 2001
-------- --------
(In thousands)
Goodwill................................................................. $118,203 $190,276
======== ========
Intangible and other assets:
Completed technology.................................................. $ 28,649 $ 35,600
Service and software maintenance contracts and customer relationships. 8,633 8,993
Tradenames and trademarks............................................. 3,800 3,800
Other intangibles assets.............................................. -- 1,535
-------- --------
Total intangible assets........................................... 41,082 49,928
Less accumulated amortization............................................ (10,288) (3,602)
-------- --------
Total net intangible assets....................................... 30,794 46,326
Other assets............................................................. 35,438 40,344
-------- --------
Net intangible and other assets................................... $ 66,232 $ 86,670
======== ========
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 amortizable intangible
assets and determined the lives were appropriate.
64
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
I. GOODWILL AND INTANGIBLE AND OTHER ASSETS--(Continued)
Amortizable intangible assets consist of the following:
December 31, 2002
------------------------------------------
Gross Net Weighted
Carrying Accumulated Carrying Average
Amount Amortization Amount Useful Life
-------- ------------ -------- -----------
(in thousands)
Completed technology................................... $28,649 $ 5,790 $22,859 7.5 years
Service and software maintenance contracts and customer
relationships........................................ 8,633 3,944 4,689 5.7 years
Tradenames and trademarks.............................. 3,800 554 3,246 8.0 years
------- ------- -------
Total intangible assets............................. $41,082 $10,288 $30,794 6.1 years
======= ======= =======
December 31, 2001
------------------------------------------
Gross Net Weighted
Carrying Accumulated Carrying Average
Amount Amortization Amount Useful Life
-------- ------------ -------- -----------
(in thousands)
Completed technology................................... $35,600 $ 832 $34,768 7.2 years
Service and software maintenance contracts and customer
relationships........................................ 8,993 2,054 6,939 5.8 years
Tradenames and trademarks.............................. 3,800 79 3,721 8.0 years
Workforce and other.................................... 1,535 637 898 5.9 years
------- ------- -------
Total intangible assets............................. $49,928 $ 3,602 $46,326 6.9 years
======= ======= =======
During 2002, Teradyne recorded an intangible asset impairment charge of $7.2
million related to the divestiture of two product lines in its Circuit Board
Test and Inspection Systems segment. The charge was recorded in Restructuring
and Other Charges in the consolidated Statement of Operations.
Aggregate amortization expense for the year ended December 31, 2002 and 2001
was $7.3 million and $3.0 million, respectively. Estimated amortization expense
for each of the five succeeding fiscal years is as follows (in thousands):
Year Amount
---- ------
2003 $7,315
2004 4,703
2005 4,703
2006 4,703
2007 4,548
65
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
I. GOODWILL AND INTANGIBLE AND OTHER ASSETS--(Continued)
Goodwill
Teradyne has identified two reporting units with goodwill, Connection
Systems and Circuit Board Test and Inspection Systems, which are also
reportable segments. The changes in the carrying amounts of goodwill during the
year ended December 31, 2002 and 2001 are as follows:
Circuit Board
Test and
Connection Inspection
Systems Systems Total
---------- ------------- --------
(in thousands)
Balance at December 31, 2000............. $52,283 $ 390 $ 52,673
Goodwill acquired........................ 141,627 141,627
Amortization............................. (3,634) (390) (4,024)
------- -------- --------
Balance at December 31, 2001............. $48,649 $141,627 $190,276
Reclassification of workforce............ 407 -- 407
Finalization of purchase price allocation -- 6,456 6,456
Goodwill impairment...................... -- (78,936) (78,936)
------- -------- --------
Balance at December 31, 2002............. $49,056 $ 69,147 $118,203
======= ======== ========
66
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
I. GOODWILL AND INTANGIBLE AND OTHER ASSETS--(Continued)
SFAS 142 requires Teradyne to complete a transitional goodwill impairment
test within six months from the date of adoption. Following the adoption of
SFAS 142, Teradyne completed an initial impairment test, during the first
quarter of 2002, based on the comparison of the fair value of the reporting
units with their respective carrying value as of January 1, 2002. Teradyne
concluded that there was no impairment in either the Circuit Board Test and
Inspection Systems segment or the Connection Systems segment as of adoption. As
of January 1, 2002, Teradyne ceased the amortization of goodwill. SFAS 142
provides that goodwill of a reporting unit be tested for impairment on an
annual basis and between annual tests in certain circumstances including a
significant adverse change in the business outlook. During the third quarter of
2002, as a result of significant change in the business outlook, Teradyne
retested the goodwill related to the Circuit Board Test and Inspection Systems
segment for impairment as of September 29, 2002. Teradyne concluded that the
carrying value of the assets and liabilities associated with the Circuit Board
Test and Inspection Systems segment exceeded its fair value. In the third
quarter of 2002, Teradyne recognized a $78.5 million goodwill impairment charge
recorded in Restructuring and Other Charges in the consolidated Statements of
Operations. The impairment charge was measured by comparing the implied fair
value of the goodwill associated with the Circuit Board Test and Inspection
Systems segment to its carrying value. The fair value of the segment was
estimated using the expected present value of future cash flows.
The following is the pro-forma effect on net (loss) income and net (loss)
income per share had SFAS 142 been in effect for the years ended December 31,
2001 and 2000 (in thousands, except per share amounts):
Year Ended
-------------------------
December 31, December 31,
2001 2000
------------ ------------
Net (loss) income.......................... $(202,215) $453,616
Add back: Impact of goodwill amortization.. 4,024 1,443
--------- --------
Adjusted net (loss) income................. $(198,191) $455,059
========= ========
Net (loss) income per share--basic......... $ (1.15) $ 2.62
Add back: Impact of goodwill amortization.. 0.02 0.01
--------- --------
Adjusted net (loss) income per share--basic $ (1.13) $ 2.63
========= ========
Net loss per share--diluted................ $ (1.15) $ 2.51
Add back: Impact of goodwill amortization.. 0.02 0.01
--------- --------
Adjusted net loss per share--diluted....... $ (1.13) $ 2.52
========= ========
J. COMMITMENTS AND CONTINGENCIES
Rental expense for the years ended December 31, 2002, 2001, and 2000 was
$32.4 million, $26.0 million, and $21.3 million, respectively.
67
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
J. COMMITMENTS AND CONTINGENCIES--(Continued)
The following table reflects Teradyne's current non-cancelable operating
lease commitments:
Non-cancelable
Lease
Commitments
--------------
(in thousands)
2003.................................... $ 23,843
2004.................................... 20,450
2005.................................... 17,592
2006.................................... 13,004
2007.................................... 10,840
Beyond 2007............................. 19,993
--------
Total................................... $105,722
After the August 2000 acquisition of Herco Technology Corp. and Perception
Laminates, Inc. the former owners of those companies filed a complaint on
September 5, 2001 against Teradyne and two of its executive officers. The case
is now pending in Federal District Court, San Diego, California. Teradyne and
the two individual defendants filed a motion to dismiss the complaint in its
entirety. The court granted the motion in part, and the only remaining claims
were that the sale of Teradyne's common stock to the former owners violated
certain California securities statutes and common law and that Teradyne
breached certain contractual obligations in the agreements relating to the
acquisitions. Teradyne's subsequent motion for partial summary judgment with
respect to the breach of contract claims was granted on November 7, 2002. The
plaintiffs have asked the court to reconsider its ruling or, alternatively, for
leave to appeal both the Court's ruling regarding dismissal of claims and
summary judgment to the Ninth Circuit Court of Appeals. Teradyne has opposed
these motions. No ruling by the Court has yet been issued. A small portion of
the original complaint relating to alleged fraud in connection with setting the
transaction price remains pending before the District Court. Teradyne has
answered and denied all liability. Management does not believe that the
outcomes of these claims will have a material adverse effect on Teradyne's
financial position or results of operations but there can be no assurance that
any such claims would not have a material adverse effect on Teradyne's
financial position or results of operations.
Also arising out of the August 2000 acquisition of Herco Technology Corp.
and Perception Laminates, Inc. is a demand for arbitration, made on or about
October 19, 2001, by the former owners of those companies, which was filed with
the American Arbitration Association. The arbitration is with respect to
environmental indemnification claims initially asserted by Teradyne under the
respective acquisition agreements. These claims arose in connection with
environmental matters related to Herco Technology Corp. and Perception
Laminates, Inc. facilities in California. The arbitration demand by the former
owners seeks release of certain shares of Teradyne's common stock being held in
escrow pursuant to the terms of the acquisition agreements and damages related
to failure to release the escrow. Teradyne has counterclaimed for enforcement
of the environmental indemnity provisions of the acquisition agreements.
Hearings in connection with the arbitration have been completed and the parties
are currently completing post-hearing briefs for submission to the arbitrators.
Management does not believe that the outcome of these claims will have a
material adverse effect on Teradyne's financial position or results of
operations but there can be no assurance that any such claims would not have a
material adverse effect on Teradyne's financial position or results of
operations.
Teradyne and two of its executive officers were named as defendants in three
purported class action complaints that were filed in Federal District Court,
Boston, Massachusetts, in October and November 2001. The court consolidated the
cases and has appointed three lead plaintiffs. On November 8, 2002, plaintiffs
filed and served a consolidated amended class action complaint. The complaint
alleges, among other things, that the defendants violated Sections 10(b) and
20(a) of the Securities Exchange Act of 1934, by making, during the
68
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
J. COMMITMENTS AND CONTINGENCIES--(Continued)
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 complaint seeks unspecified damages, including
compensatory damages and recovery of reasonable attorneys' fees and costs.
Teradyne filed a motion to dismiss all claims asserted in the complaint on
February 7, 2003. Teradyne's motion has not yet been heard. Claims asserted in
this case are similar to the claims asserted in the case discussed above, which
is pending in the Federal District Court in San Diego, California. Teradyne
believes it has meritorious defenses to the claims and will defend itself
vigorously. Management does not believe that the outcomes of these claims will
have a material adverse effect on Teradyne's financial position or results of
operations but there can be no assurance that any such claims would not have a
material adverse effect on Teradyne's financial position or results of
operations.
By letter dated October 22, 2002, counsel for Electro Mechanical Solutions,
Inc., and several affiliated debtors including PRECISMetals in Chapter 11
bankruptcy cases pending in the United States Bankruptcy Court for the Northern
District of California (collectively, the "Debtors"), asserted that Teradyne
received payments in 2001 totaling $12.4 million from PRECISMetals in the 90
days prior to the bankruptcy filing and that those payments constitute
avoidable preferential transfers. Teradyne believes that it has good faith
defenses to the alleged preferential transfers and intends to contest the
claims vigorously. Management does not believe that the outcomes of these
claims will have a material adverse effect on Teradyne's financial position or
results of operations but there can be no assurance that any such claims would
not have a material adverse effect on Teradyne's financial position or results
of operations.
In 2001, Teradyne was designated as a "potentially responsible party"
("PRP") at a clean-up site in Los Angeles, California. This claim arises out of
Teradyne's acquisition of Perception Laminates, Inc. in August 2000. Prior to
that date, Perception Laminates had itself acquired certain assets of Alco
Industries Inc. under an asset purchase agreement dated July 30, 1992. Neither
Teradyne nor Perception Laminates have ever conducted any operations at the Los
Angeles site. Teradyne has asked the State of California to drop the PRP
designation, but California has not yet agreed to do so. Management does not
believe that the outcome of this matter will have a material adverse effect on
Teradyne's financial position or results of operations but there can be no
assurance that any such outcome would not have a material adverse effect on
Teradyne's financial position or results of operations.
In August 2002, Teradyne was designated as a PRP at a site in Whittier,
California. Teradyne was identified as a PRP based on shipments from its
Woodland Hills, California and Agoura Hills, California sites during 1983 and
1984. Based upon review of the shipping documents, Teradyne believes that any
potential liability is limited to that of a de minimus contributor to the site.
Management does not believe that any potential Teradyne's liability for the
clean-up of this site will have a material adverse effect on Teradyne's
financial position or results of operations but there can be no assurance that
any potential liability would not have a material adverse effect on Teradyne's
financial position or results of operations.
In October 1998, a former employee of GenRad, Inc., which Teradyne acquired
on October 26, 2001, instituted an arbitration proceeding against GenRad
alleging breach of his severance agreement. Teradyne believes that the
employee's claims are without merit. The last arbitration hearing was conducted
on October 28, 2002, and a decision is expected by May 2003. Management does
not believe that the outcome of this proceeding will have a material adverse
effect on Teradyne's financial position or results of operations but there can
be no assurance that the outcome would not have a material adverse effect on
Teradyne's financial position or results of operations.
Teradyne disputes all of the claims above and believes they are without
merit, and intends to defend vigorously against them. However, an adverse
resolution of any of the claims could have a material adverse
69
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
J. COMMITMENTS AND CONTINGENCIES--(Continued)
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 claims and therefore as of December 31, 2002 had not accrued for any
potential losses from the claims.
In addition, Teradyne is subject to legal proceedings, claims and
investigations that arise in the ordinary course of business such as but not
limited to patent, commercial and environmental matters. There are no such
matters pending that Teradyne expects to be material with respect to its
business, financial position or results of operation but there can be no
assurance that any such matters would not have a material adverse effect on
Teradyne's business, financial position or results of operations.
Guarantees and Indemnification Obligations
Teradyne provides an indemnification, to the extent permitted by law, to its
officers, directors, employees and agents for liabilities arising from certain
events or occurrences while the officer, director, employee, or agent, is or
was serving, at Teradyne's request in such capacity. With respect to
acquisitions, Teradyne provides indemnifications to or assumes indemnification
obligations for the current and former directors, officers and employees of the
acquired companies in accordance with the acquired companies' bylaws and
charter. As a matter of practice, Teradyne has maintained directors and officer
liability insurance coverage including coverage for directors and officers of
acquired companies. Two Teradyne Executive Officers are named defendants in a
securities case pending in the Federal District Court in San Diego, CA and two
other Teradyne Executive Officers are named defendants in the securities class
action pending in the Federal District Court in Boston, MA. Each of these
Executive Officers has invoked the indemnification provisions described herein
and insurance claims have been submitted to and are being processed by the
Company's director and officer liability insurance provider.
Teradyne enters into agreements in the ordinary course of business with
customers, resellers, distributors, integrators and suppliers. Most of these
agreements require Teradyne to defend and/or indemnify the other party against
intellectual property infringement claims brought by a third party with respect
to Teradyne's products. From time to time, Teradyne also indemnifies customers
and business partners for damages, losses and liabilities they may suffer or
incur relating to personal injury, personal property damage, product liability,
and environmental claims relating to the use of Teradyne's products and
services or resulting from the acts or omissions of Teradyne, its employees,
authorized agents or subcontractors. On occasion, Teradyne has also provided
guarantees to customers regarding the performance of its products in addition
to the warranty described below.
As a matter of ordinary business course, Teradyne warrants that its
products, including software products, will substantially perform in accordance
with its standard published specifications in effect at the time of delivery.
Most warranties have a one year duration commencing from installation. A
provision is recorded upon revenue recognition to cost of sales for estimated
warranty expense upon historical experience. When Teradyne receives revenue for
extended warranties beyond the standard duration, it is deferred and recognized
on a straight line basis over the contract period. Related costs are expensed
as incurred. As of December 31, 2002 and 2001, Teradyne had a product warranty
accrual of $9.1 million and $9.6 million, respectively in other accrued
liabilities and revenue deferrals related to extended warranties of $2.1
million and $5.0 million, respectively in deferred revenue.
In addition, and in the ordinary course of business, Teradyne provides
minimum purchase guarantees to certain of its vendors to ensure continuity of
supply against the market demand. Although some of these guarantees provide
penalties for cancellations and/or modifications to the purchase commitments as
the market demand decreases, most of the guarantees do not. Therefore, as the
market demand decreases, Teradyne re-evaluates these guarantees and determines
what charges, if any, should be recorded.
70
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
J. COMMITMENTS AND CONTINGENCIES--(Continued)
With respect to its agreements covering product, business or entity
divestitures and acquisitions, Teradyne provides certain representations,
warranties and covenants to divestiture purchasers and agrees to indemnify and
hold such purchasers harmless against breaches of such representations,
warranties and covenants. Many of the indemnification claims have a definite
expiration date while some remain in force indefinitely. With respect to its
acquisitions, Teradyne may, from time to time, assume the liability for certain
events or occurrences that took place prior to the date of acquisition.
As a matter of ordinary business course, Teradyne occasionally guarantees
certain indebtedness obligations of its subsidiary companies, limited to the
borrowings from the financial institutions.
Except as otherwise indicated above, all such guarantees and obligations
were in effect prior to December 31, 2002 and, based on historical experience
and information known as of December 31, 2002, Teradyne has not recorded any
liabilities for them as of December 31, 2002.
K. NET (LOSS) INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net
(loss) income per common share (in thousands, except per share amounts):
2002 2001 2000
--------- --------- --------
(Loss) income before cumulative effect of change in accounting
principle............................................................. $(718,469) $(202,215) $517,754
Cumulative effect of change in accounting principle..................... -- -- (64,138)
--------- --------- --------
Net (loss) income....................................................... $(718,469) $(202,215) $453,616
========= ========= ========
Shares used in (loss) income per common share--basic.................... 182,861 175,828 173,312
Effect of dilutive securities:
Employee and director stock options..................................... -- -- 7,293
Employee stock purchase rights.......................................... -- -- 406
--------- --------- --------
Dilutive potential common shares........................................ -- -- 7,699
--------- --------- --------
Shares used in (loss) income per common share--diluted.................. 182,861 175,828 181,011
========= ========= ========
(Loss) income before cumulative effect of change in accounting principle
per common share--basic............................................... $ (3.93) $ (1.15) $ 2.99
Cumulative effect of change in accounting principle--basic.............. $ -- $ -- $ (0.37)
--------- --------- --------
Net (loss) income per common share--basic............................... $ (3.93) $ (1.15) $ 2.62
========= ========= ========
(Loss) income before cumulative effect of change in accounting principle
per common share--diluted............................................. $ (3.93) $ (1.15) $ 2.86
Cumulative effect of change in accounting principle--diluted............ $ -- $ -- $ (0.35)
--------- --------- --------
Net (loss) income per common share--diluted............................. $ (3.93) $ (1.15) $ 2.51
========= ========= ========
All options and equivalent shares related to the convertible notes
outstanding in 2002 and 2001 were excluded from the calculation of diluted net
loss per share because the effect would have been antidilutive. As of December
31, 2002, and 2001, there were 33.4 million and 29.8 million options
outstanding, respectively. As of December 31, 2002 and 2001, there were 15.4
million equivalent shares related to the convertible notes shares
71
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
K. NET (LOSS) INCOME PER COMMON SHARE--(Continued)
outstanding. For purposes of computing diluted earnings per share, weighted
average common share equivalents do not include stock options with an exercise
price that exceed the average fair market value of Teradyne's common stock.
Accordingly, options to purchase 1.5 million shares of common stock in 2000
were not included in the calculation of diluted net income per share.
L. RESTRUCTURING AND OTHER CHARGES
The table below summarizes activity for the year ended December 31, 2002,
relating to restructuring and other charges:
Goodwill and
Intangible Severance
Asset Fixed Asset Facility and
Impairment Impairment Related Benefits Total
------------ ----------- -------- --------- ---------
(in thousands)
Balance at December 31, 2001 $ -- $ -- $ 1,676 $ 13,523 $ 15,199
2002 provision.............. 86,196 69,734 25,751 22,495 204,176
Cash payments............... -- -- (2,187) (22,724) (24,911)
Asset write-downs........... (86,196) (69,734) -- -- (155,930)
-------- -------- ------- -------- ---------
Balance at December 31, 2002 $ -- $ -- $25,240 $ 13,294 $ 38,534
======== ======== ======= ======== =========
The table below summarizes activity for the year ended December 31, 2001,
relating to restructuring and other charges:
Severance
Fixed Asset Facility and
Impairment Related Benefits Total
----------- -------- --------- --------
(in thousands)
2001 provision.............. $ 35,338 $1,676 $ 37,278 $ 74,292
Cash payments............... -- -- (23,755) (23,755)
Asset write-downs........... (35,338) -- -- (35,338)
-------- ------ -------- --------
Balance at December 31, 2001 $ -- $1,676 $ 13,523 $ 15,199
======== ====== ======== ========
During the year ended December 31, 2002, Teradyne recognized an $86.2
million goodwill and intangibles asset impairment charge. See Footnote I,
Goodwill and Intangible Assets.
During the year ended December 31, 2002, Teradyne's management concluded, in
accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," that certain long-lived assets held for sale were impaired
as the estimated fair value was less than the carrying value of these assets,
and recorded charges of $69.7 million. The charge for the Connection Systems
segment included $25.6 million relating to a held for sale printed circuit
board facility in San Diego, California, $2.6 million related to a held for
sale facility in Nashua, New Hampshire, and $17.9 million primarily related to
manufacturing equipment which was taken out of service during 2002 and is held
for sale. The Semiconductor Test Systems segment recorded a charge of $12.0
million primarily for assets held for sale as a result of the lack of demand
for the Probe-One product and the discontinuance of the J996 product after a
last time buy offer to our customers, a charge of $9.7 million related to the
write down of manufacturing facilities that is held for sale in California, and
$0.8 million related to the write down of foundry manufacturing equipment that
are held for sale. In addition, an asset impairment charge was recorded of $1.1
million related to a Corporate facility sold in the first quarter of 2003.
Teradyne
72
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
L. RESTRUCTURING AND OTHER CHARGES-- (Continued)
expects the sale of these held for sale assets to occur within a year. The
carrying value of Teradyne's assets held for sale is $45.3 million as of
December 31, 2002. These assets are included in Property, Plant, and Equipment.
During the year ended December 31, 2001, Teradyne recorded a charge of $35.3
million for impaired long-lived assets, consisting of the following: $12.0
million for held for sale a facility in the Connection Systems segment, certain
impaired manufacturing assets in the Connection Systems segment of $15.4
million, and equipment manufactured by Teradyne used in manufacturing and
engineering and development relating to the discontinuance of the Flash 750
product line in Semiconductor Test Systems segment of $7.9 million.
During the year ended December 31, 2002, Teradyne recorded a charge of $25.8
million relating to future lease commitments for vacated manufacturing and
administrative space which will be exited prior to the end of the lease term.
The charge of $25.8 million includes $18.8 million at Circuit Board Test and
Inspection Systems, $5.0 million at Connection Systems and $2.0 million at
Semiconductor Test Systems. The lease accruals are expected to be paid out over
the lease terms, the latest of which expires in 2010. During the fourth quarter
of 2001, Teradyne recorded charges for vacated office space under operating
leases at Circuit Board Test and Inspection Systems of $1.7 million. The
accrual for lease payments on vacated facilities is reflected in other accrued
liabilities and long-term other accrued liabilities.
Teradyne recorded a charge for severance and related benefits during 2002 of
$22.5 million. There were approximately 1,010 employees terminated across all
functional groups during 2002. All remaining severance benefits payable to
these employees will be paid by the end of the first quarter of 2004. Teradyne
recorded a charge for severance and related benefits during 2001 of $37.3
million. There were approximately 2,900 employees terminated across all
functional groups. As of December 31, 2002 Teradyne has paid all severance
benefits relating to the 2001 terminations. The accrual for severance and
benefits is reflected in accrued employees' compensation and withholdings.
M. OTHER CHARGES
The table below reflects certain operating statement activity for the year
ended December 31, 2002 and 2001:
Excess and
Obsolete Accelerated
Inventory Depreciation Total
---------- ------------ --------
(In thousands)
2002 Activity:
Cost of sales............... $ 39,021 $5,667 $ 44,688
Engineering and development. 838 838
Selling and administrative.. 1,144 1,144
-------- ------ --------
Total 2002 charges...... $ 39,021 $7,649 $ 46,670
======== ====== ========
2001 Activity:
Cost of sales............... $139,683 $139,683
-------- ------ --------
Total 2001 charges...... $139,683 -- $139,683
======== ====== ========
During the year ended December 31, 2002, an excess and obsolete provision of
$39.0 million was recorded in cost of sales of which $20.7 million related to
the lack demand for the Probe-One product and the discontinuance of the J996
product after a last time buy offer to Teradyne's customers.
73
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
M. OTHER CHARGES--(Continued)
During 2002, Teradyne recorded a $7.6 million charge for accelerated
depreciation which relates to the incremental additional depreciation over the
normal depreciation expense for long-lived assets as a result of the decision
to consolidate locations and therefore shorten the service period. The charge
includes $4.5 million at the Connection Systems segment related to the Hudson,
NH and Fremont, CA facilities; $2.2 million at the Circuit Board Test and
Inspection segment related to the Westford, MA facility; $0.6 million at the
Semiconductor Test segment related to the Bedford, MA facility; and $0.3
million at Corporate related to a Boston facility.
During 2001, Teradyne recorded a provision of $139.7 million for excess and
obsolete inventory and for discontinued product lines. The total inventory
provision for excess and obsolete inventory, excluding the discontinued product
lines, was $105.2 million in 2001 and was principally due to the sharp decline
in incoming Semiconductor Test Systems and Connection Systems orders. During
the third quarter of 2001, Teradyne recorded a charge of $32.3 million related
to an inventory writedown for the discontinuance of its Flash 750 memory
product. During the fourth quarter of 2001, Teradyne recorded a charge of $2.3
million for discontinued inventory due to overlapping product lines as a result
of the consummation of the GenRad acquisition.
Other income and expense, net for the year ended December 31, 2002 and 2001
includes the following:
Gain/(loss) 2002 2001
----------- ------- -------
(in thousands)
Repayment of loan by divested entity (1).................. $ 7,144 --
Other than temporary impairment of common stock investment (3,115) --
Writedown of investment in an engineering service provider (2,288) $(1,800)
Fair value adjustment on warrants......................... (2,051) 2,035
Sale of Connection Systems aerospace and defense business. -- 14,779
Equity investment (2)..................................... -- (6,974)
------- -------
Total.................................................. $ (310) $ 8,040
======= =======
- --------
(1) The loan had previously been valued at zero due to its uncertainty of
collection.
(2) Teradyne's proportionate share of a loss related to an equity investment in
Empirix, Inc. The carrying value of this equity investment was zero at
December 31, 2002 and 2001.
N. RETIREMENT PLANS
Defined Benefit Pension Plans
Teradyne has defined benefit pension plans covering a majority of domestic
employees and employees of certain non U.S. subsidiaries. Benefits under these
plans are based on employees' years of service and compensation. Teradyne's
funding policy is to make contributions to the plans in accordance with local
laws and to the extent that such contributions are tax deductible. The assets
of these plans consist primarily of equity and fixed income securities. In
addition, Teradyne has an unfunded supplemental executive defined benefit plan
in the United States to provide retirement benefits in excess of levels allowed
by the Employment Retirement Income Security Act (ERISA) and the Internal
Revenue Code (the "IRC").
During the fourth quarter of 1999, Teradyne offered all eligible domestic
employees participating in the U.S. plan a choice: to continue to have benefits
accumulate in the U.S. plan and continue to be eligible for the then current
Savings Plan match described in "Note Q: Savings Plans" or to stop accumulating
benefits in the U.S plan and be eligible for an increased match in the Savings
Plan. The accrued benefit of those employees who selected the enhanced Savings
Plan match was frozen on January 1, 2000 resulting in an insignificant
curtailment gain.
74
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
N. RETIREMENT PLANS--(Continued)
The expense of these defined benefit pension plans and the December 31
balances of plan assets and obligations are shown below (in thousands):
2002 2001 2000
-------- -------- -------
EXPENSE
Service cost.................................. $ 6,140 $ 6,369 $ 6,365
Interest cost................................. 12,702 10,210 8,972
Expected return on plan assets................ (11,232) (10,029) (8,589)
Amortization of unrecognized:
Net transition obligation.................. 78 74 89
Prior service cost......................... 734 766 843
Net loss................................... 357 264 206
Curtailment loss (gain)/employee contributions -- 2,402 (89)
-------- -------- -------
Total expense................................. $ 8,779 $ 10,056 $ 7,797
======== ======== =======
2002 2001 2000
---- ---- ----
WEIGHTED AVERAGE ASSUMPTIONS
Discount rate............................................. 6.0% 7.0% 7.5%
Expected return on plan assets............................ 9.0 9.0 9.0
Salary progression rate................................... 5.0 5.0 5.0
75
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
N. RETIREMENT PLANS--(Continued)
2002 2001
--------- --------
ASSETS AND OBLIGATIONS
Projected benefit obligation:
Beginning of year.................. $ 181,049 $139,472
Service cost....................... 6,140 6,369
Interest cost...................... 12,702 10,210
Actuarial (gain) loss.............. 37,833 15,329
Benefits paid...................... (4,562) (4,171)
Plan amendment..................... 381 212
Curtailment........................ -- (947)
GenRad acquisition................. -- 15,695
Non U.S. currency movement......... 3,624 (1,120)
--------- --------
End of year........................ 237,167 181,049
Fair value of plan assets:
Beginning of year.................. 115,217 114,512
Company contributions.............. 10,539 6,050
Plan participants' contributions... 70 71
Actual return...................... (15,713) (10,964)
Benefits paid...................... (4,562) (4,171)
GenRad acquisition................. -- 10,365
Non U.S. currency movement......... 741 (646)
--------- --------
End of year........................... 106,292 115,217
--------- --------
Funded status......................... (130,875) (65,832)
Unrecognized prior service cost....... 5,408 5,315
Unrecognized net transition obligation 242 306
Unrecognized net actuarial loss....... 107,563 43,261
--------- --------
Net amount recognized................. $ (17,662) $(16,950)
========= ========
The impact of the GenRad acquisition and an early retirement program
increased the projected benefit obligation by $15.9 million in 2001. GenRad had
its own retirement plan for its employees, which was merged into Teradyne's
plan during 2001. In the third quarter of 2001, Teradyne provided certain
employees the option to retire early.
The following table provides amounts recognized in the statement of
financial position as of December 31, (in thousands):
2002 2001
--------- --------
Prepaid pension cost................ $ 4,915 $ 926
Accrued pension liability........... (107,106) (40,104)
Intangible asset.................... 5,961 4,022
Accumulated other comprehensive loss 78,568 18,206
--------- --------
Net amount recognized............... $ (17,662) $(16,950)
========= ========
76
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
N. RETIREMENT PLANS--(Continued)
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets for 2002 and 2001 were as follows:
2002 2001
------ ------
(In millions)
Projected benefit obligation.. $237.2 $181.0
Accumulated benefit obligation 206.2 154.8
Fair value of plan assets..... $106.3 $115.2
An additional minimum pension liability adjustment of $62.3 million was
required during 2002 as the accumulated benefit obligation of $206.2 million
exceeded the $106.3 million of pension plan assets at year-end. The $99.9
million difference was reduced by an accrued/prepaid benefit cost of $17.7
million and the beginning of the year additional minimum pension liability of
$22.2 million previously recorded.
Post retirement benefit plans
In addition to receiving pension benefits, U.S. Teradyne employees who meet
retirement eligibility requirements as of their termination dates may
participate in Teradyne's Welfare Plan, which includes medical, dental and
death benefits. Death benefits provide a fixed sum to retirees' survivors and
is available to all retirees. Substantially all of our current U.S. employees
could become eligible for these benefits, and the existing benefit obligation
relates primarily to those employees. Post-retirement benefit expense was not
material in 2000. For the years ended December 31, 2002 and 2001, Teradyne's
net post retirement benefit costs were comprised of (in thousands):
2002 2001
------ ------
EXPENSE
Service cost............................................. $1,003 $ 784
Interest cost............................................ 1,924 1,050
Amortization of unrecognized:
Net transition obligation............................. 287 330
Prior service cost.................................... 79 --
Net loss.............................................. 140 29
------ ------
Total expense............................................ $3,433 $2,193
====== ======
2002 2001
------ ------
WEIGHTED AVERAGE ASSUMPTIONS
Discount rate............................................ 6.0% 7.0%
Initial medical trend.................................... 9.0 9.0
Ultimate medical trend................................... 5.0 5.0
Medical cost trend rate decrease to ultimate rate in year 2007 2007
77
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
N. RETIREMENT PLANS--(Continued)
2002 2001
ASSETS AND OBLIGATIONS -------- --------
Projected benefit obligation:
Beginning of year.................. $ 25,813 $ 12,027
Service cost....................... 1,003 784
Interest cost...................... 1,924 1,050
Actuarial (gain) loss.............. 6,895 1,105
Benefits paid...................... (2,803) (674)
Plan amendment..................... 915 2,647
GenRad acquisition................. -- 8,874
-------- --------
End of year........................ 33,747 25,813
Fair value of plan assets:
Beginning of year.................. -- --
Company contributions.............. 2,803 674
Benefits paid...................... (2,803) (674)
-------- --------
End of year........................... -- --
-------- --------
Funded status......................... (33,747) (25,813)
Unrecognized prior service cost....... 834 --
Unrecognized net transition obligation 2,872 3,159
Unrecognized net actuarial loss....... 8,817 2,862
-------- --------
Net amount recognized................. $(21,224) $(19,792)
======== ========
The following table provides amounts recognized in long-term other accrued
liabilities in the statement of financial position as of December 31, (in
thousands):
2002 2001
-------- --------
Accrued post retirement benefit costs $(21,224) $(19,792)
Assumed health care trend rates could have a significant effect on the
amounts reported for health care plans. A one percentage point change in the
assumed health care cost trend rates for the year ended December 31, 2002 would
have the following effects:
1 Percentage 1 Percentage
Point Increase Point Decrease
-------------- --------------
(in thousands)
Effect on total service and interest cost components $ 382 $ (332)
Effect on postretirement benefit obligations........ $3,387 $(3,067)
O. COMMON STOCK REPURCHASE PROGRAM
On November 16, 2000, Teradyne's Board of Directors authorized the
repurchase of an additional 10.0 million shares, resulting in an aggregate
authorization of up to 30.0 million shares of Teradyne's stock on the open
market. During 2000, Teradyne repurchased 3.8 million shares at a cost of
$147.5 million, increasing the cumulative shares purchased under this program
through 2000 to 20.0 million shares at an aggregate cost of $540.8 million.
During 2002 and 2001, Teradyne did not repurchase any stock. Teradyne records
treasury stock at its acquisition cost.
78
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
P. STOCK BASED COMPENSATION
Stock Option Plans
Under its stock option plans, all of which are fixed accounting plans,
Teradyne grants options 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 and 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.
Stock option plan activity for the years 2002, 2001, and 2000 follows (in
thousands):
2002 2001 2000
------ ------- ------
Outstanding at January 1.......... 29,750 22,745 19,225
Options granted................ 7,205 10,289 7,905
Options exercised.............. (1,152) (2,766) (3,217)
Options canceled............... (2,382) (518) (1,168)
------ ------- ------
Outstanding at December 31........ 33,421 29,750 22,745
====== ======= ======
Exercisable at December 31........ 19,296 13,545 8,758
====== ======= ======
Available for grant at January 1.. 29,841 4,612 11,349
Grants............................ (7,205) (10,289) (7,905)
Cancellations..................... 2,382 518 1,168
Additional shares reserved........ -- 35,000 --
------ ------- ------
Available for grant at December 31 25,018 29,841 4,612
====== ======= ======
Weighted average option exercise price information for the years 2002, 2001
and 2000 follows:
2002 2001 2000
------ ------ ------
Outstanding at January 1.. $25.28 $22.79 $16.44
Options granted........ 18.09 23.33 34.73
Options exercised...... 15.79 10.89 11.49
Options canceled....... 35.31 32.15 30.62
Outstanding at December 31 23.41 25.28 22.79
Exercisable at December 31 23.38 24.94 16.71
79
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
P. STOCK BASED COMPENSATION--(Continued)
Significant option groups outstanding at December 31, 2002 and related
weighted average price and remaining contractual life information follows
(options in thousands):
Options Outstanding Options Exercisable
------------------------------------ -----------------------
Weighted-
Average
Remaining
Contractual Weighted-Average Weighted-Average
Range Of Exercise Prices Life (Years) Shares Exercise Price Shares Exercise Price
- ------------------------ ------------ ------ ---------------- ------ ----------------
$ 3.82-$17.48...... 3.61 12,928 $14.03 7,673 $11.80
$19.16-$27.66...... 5.37 8,915 22.08 3,982 21.97
$28.13-$32.13...... 2.52 9,528 29.70 6,244 29.95
$32.78-$173.11..... 3.98 2,050 59.14 1,397 61.63
------ ------
Total.............. 3.79 33,421 23.41 19,296 23.38
====== ======
Employee Stock Purchase Plan
Under the Teradyne 1996 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. In January 2003, Teradyne issued 1.7 million shares of common stock
to employees who participated in the plan during 2002 at a weighted-average
price of $11.13 per share. Currently, there are 3.7 million shares reserved for
issuance.
Q. SAVINGS PLAN
Teradyne sponsors an employee retirement Savings Plan covering substantially
all U.S. employees. Under Teradyne's savings plan, employees may contribute up
to 15% of their compensation (subject to Internal Revenue Service limitations).
Teradyne annually matches employee contributions up to 6% of such compensation
at rates ranging from 50% to 100% for employees in the defined benefit plan.
For all other employees, Teradyne annually matches up to 5% of such
compensation at rates ranging from 100% to 150%. Teradyne's contributions vest
25% per year for the first four years of employment, although contributions for
those employees with four years of service vest immediately. Teradyne has also
established an unfunded Supplemental Savings Plan to provide savings benefits
in excess of those allowed by ERISA and the IRC. The provisions of this plan
are the same as the Savings Plan. Under Teradyne's savings plans, amounts
charged to operations were $14.2 million in 2002, $14.6 million in 2001, and
$16.6 million in 2000.
R. STOCKHOLDER RIGHTS PLAN
Teradyne's Board of Directors adopted a Stockholder Rights Plan on November
16, 2000, under which a dividend of one Common Stock Purchase Right (each a
"Right") was distributed for each outstanding share of Common Stock. The plan
entitles Right holders to purchase shares of Teradyne's common stock for $540
per share subject to adjustment (the "Purchase Price") in certain events, such
as a tender offer to acquire 20% or more of Teradyne's outstanding shares.
Under some circumstances, the Plan entitles such holders (other than an
acquiring party or adverse party) to purchase Common Stock (or other securities
or consideration owned by Teradyne) having a value equal to two times the
Purchase Price of the Right for the Purchase Price. The Rights expire on
November 27, 2010.
80
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
S. INCOME TAXES
The components of (loss) income before income taxes and the provision for
(benefit from) income taxes as shown in the consolidated statements of
operations are as follows (in thousands)
2002 2001 2000
--------- --------- --------
(Loss) income before income taxes and cumulative effect of change in
accounting principle:
United States.................................................... $(585,550) $(324,800) $655,103
Non U.S.......................................................... 24,605 (1,353) 84,545
--------- --------- --------
$(560,945) $(326,153) $739,648
========= ========= ========
Provision (credit) for income taxes:
Current:
U.S. Federal..................................................... $ 9,155 $ (90,149) $182,202
Non U.S.......................................................... 2,408 (3,093) 29,393
State............................................................ 635 751 19,703
--------- --------- --------
12,198 (92,491) 231,298
========= ========= ========
Deferred:
U.S. Federal..................................................... 126,513 (24,739) (4,529)
Non U.S.......................................................... 6,796 43 (3,172)
State............................................................ 12,017 (6,751) (1,703)
--------- --------- --------
145,326 (31,447) (9,404)
--------- --------- --------
$ 157,524 $(123,938) $221,894
========= ========= ========
Significant components of Teradyne's deferred tax assets (liabilities) as of
December 31, 2002 and 2001 are as follows (in thousands):
2002 2001
--------- --------
Deferred tax assets:
Net operating loss carryforwards..... $ 199,280 $ 45,728
Tax credits.......................... 26,905 33,922
Inventory valuations................. 45,005 31,669
Accruals............................. 41,079 24,565
Research and development............. 18,579 19,821
Vacation............................. 10,256 6,141
Deferred revenue..................... 4,532 5,391
Pension.............................. 29,124 6,918
Other................................ 12,227 8,037
--------- --------
Gross deferred tax assets............... 386,987 182,192
--------- --------
Less: valuation allowance............... (361,314) --
--------- --------
Total deferred tax assets............... 25,673 182,192
========= ========
Deferred tax liabilities:
Excess of tax over book depreciation. (10,283) (17,012)
Amortization......................... (12,818) (16,218)
Pension.............................. -- (1,102)
Other................................ (2,572) (2,534)
--------- --------
Total deferred tax liabilities.......... (25,673) (36,866)
--------- --------
Net deferred assets..................... $ -- $145,326
========= ========
81
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
S. INCOME TAXES--(Continued)
At December 31, 2002 Teradyne had U.S. Federal operating loss carryforwards
of approximately $535.7 million due to the acquisition of GenRad and operating
losses that expire in the years 2003 through 2022, state net operating loss
carryforwards of $217.2 million that expire in the years 2006 through 2022, and
foreign net operating loss carryforwards of $15.1 million that expire in the
years 2006 and thereafter. These losses are limited in their use by "change in
ownership" rules as defined in the Internal Revenue Code of 1986.
Teradyne has approximately $26.9 million of tax credit carryforwards that
expire in years 2003 through 2020. Business tax credits of approximately $18.8
million expire in the years 2019 through 2020. Teradyne has foreign tax credits
of approximately $6.1 million expiring 2005 through 2007 and alternative
minimum tax credits of approximately $2.0 million, which do not expire.
As a result of the review undertaken at December 31, 2002, Teradyne
concluded under applicable accounting criteria that it was appropriate to
establish a full valuation allowance for its net deferred tax assets. Until an
appropriate level of profitability is reached, Teradyne will not record tax
benefits on operating losses in future results of operations. The valuation
allowance includes $26.4 million for net deferred tax assets resulting from
minimum pension liabilities and other direct charges or credits to equity.
A reconciliation of the effective tax rate for the years 2002, 2001, and
2000 follows:
2002 2001 2000
----- ----- ----
U.S. statutory federal tax rate............... (35.0)% (35.0)% 35.0%
State income taxes, net of federal tax benefit (0.6) (1.8) 1.6
Tax credits................................... -- -- (0.8)
Export sales corporation...................... (0.1) (0.7) (4.8)
Nondeductible goodwill........................ 4.9 0.6 0.1
Establishment of valuation allowance.......... 59.7 -- --
Other, net.................................... (0.9) (1.1) (1.1)
----- ----- ----
28.0% (38.0)% 30.0%
===== ===== ====
As of December 31, 2002, a deferred tax liability has not been established
for approximately $19.6 million for cumulative undistributed earnings of a
non-U.S. manufacturing subsidiary. Teradyne intends to reinvest these earnings
indefinitely in operations outside the US.
T. OPERATING SEGMENT AND GEOGRAPHIC 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,
excluding the Diagnostic Solutions business. Diagnostic Solutions has been made
part of the Other Test Systems operating segment. GenRad activity is reflected
in Teradyne's results of operations since the acquisition date.
82
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
T. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION--(Continued)
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." Intersegment sales are accounted for at fair
value as if sales were to third parties. During 2002, 2001 and 2000 no
individual customer accounted for more than 10% of consolidated net sales.
Circuit
Board
Test &
Semiconductor Connection Inspection Other Test Corporate
Test Systems Systems Systems Systems And
Segment Segment Segment Segment Eliminations Consolidated
------------- ---------- ---------- ---------- ------------ ------------
2002
Sales to unaffiliated customers. $ 557,623 $396,993 $ 170,759 $96,861 -- $1,222,236
Intersegment sales.............. -- 10,525 -- -- $ (10,525) --
--------- -------- --------- ------- ---------- ----------
Net sales....................... 557,623 407,518 170,759 96,861 (10,525) 1,222,236
(Loss) income before taxes(1)... (266,134) (79,601) (200,401) 1,160 (15,969) (560,945)
Total assets(2)................. 720,228 317,153 209,541 58,344 589,411 1,894,677
Property additions(3)........... 48,681 21,885 1,076 968 3,749 76,359
Depreciation and amortization
expense(3)..................... 61,765 62,115 16,242 3,575 15,992 159,689
2001
Sales to unaffiliated customers. $ 717,655 $540,755 $ 132,448 $49,723 -- $1,440,581
Intersegment sales.............. -- 4,119 -- -- $ (4,119) --
--------- -------- --------- ------- ---------- ----------
Net sales....................... 717,655 544,874 132,448 49,723 (4,119) 1,440,581
(Loss) income before taxes(1)... (248,001) (22,970) (41,475) (3,555) (10,152) (326,153)
Total assets(2)................. 643,412 417,296 353,605 56,455 1,071,623 2,542,391
Property additions(3)........... 82,307 103,416 2,605 1,760 51,361 241,449
Depreciation and amortization
expense(3)..................... 56,014 55,588 6,881 2,314 17,871 138,668
Circuit
Board
Test &
Semiconductor Connection Inspection Other Test Corporate
Test Systems Systems Systems Systems And SAB
Segment Segment Segment Segment Eliminations Adjustments(4) Consolidated
------------- ---------- ---------- ---------- ------------ -------------- ------------
2000
Sales to unaffiliated
customers.................... $2,044,330 $734,642 $141,208 $124,133 -- $ (367) $3,043,946
Intersegment sales............ -- 29,294 -- -- $(29,294) -- --
---------- -------- -------- -------- -------- ------- ----------
Net sales..................... 2,044,330 763,936 141,208 124,133 (29,294) (367) 3,043,946
(Loss) income before
taxes(1)..................... 675,315 155,040 1,761 415 (92,729) (154) 739,648
Total assets(2)............... 920,629 511,083 86,161 19,174 780,926 37,895 2,355,868
Property additions(3)......... 119,705 92,403 4,878 4,394 76,862 -- 298,242
Depreciation and amortization
expense(3)................... 47,497 33,118 3,357 2,906 14,984 -- 101,862
(1) Income before taxes of the principal businesses exclude the effects of
employee profit sharing, management incentive compensation, other
unallocated expenses, and net interest and other income, which are included
in Corporate and Eliminations.
83
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
T. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION--(Continued)
(2) Total business assets are directly attributable to each business. Corporate
assets consist of cash and cash equivalents, marketable securities,
unallocated fixed assets of support divisions and common facilities and
certain other assets.
(3) Corporate property additions and depreciation and amortization expense
include items attributable to the unallocated fixed assets of support
divisions and common facilities.
(4) Corporate adjustment reflects the impact of SAB 101 on sales, income before
taxes, and total assets in 2000. During the fourth quarter of 2000 Teradyne
implemented SAB 101. Segments reflect their results before the change in
accounting principle.
Information as to Teradyne's sales in different geographical areas is as
follows (in thousands):
2002 2001 2000
---------- ---------- ----------
Sales to unaffiliated customers(1):
United States................... $ 561,090 $ 733,617 $1,407,110
Europe.......................... 224,904 264,314 425,694
South East Asia................. 213,156 172,094 626,060
Taiwan.......................... 106,509 148,852 306,611
Japan........................... 71,767 59,745 119,883
Korea........................... 22,029 13,726 88,833
Rest of the World............... 22,781 48,233 69,755
---------- ---------- ----------
$1,222,236 $1,440,581 $3,043,946
========== ========== ==========
(1) Sales are attributable to geographic areas based on location of customer
site.
Because a substantial portion of Teradyne's sales are derived from the sales
of product manufactured in the United States, long-lived assets located outside
the United States are less than 10% of total assets.
84
SUPPLEMENTARY INFORMATION
(Unaudited)
The following sets forth certain unaudited consolidated quarterly statements
of operations data for each of Teradyne's last eight quarters. In management's
opinion, this quarterly information reflects all adjustments, consisting only
of normal recurring adjustments, necessary for a fair statement for the periods
presented. Such quarterly results are not necessarily indicative of future
results of operations and should be read in conjunction with the audited
consolidated financial statements of Teradyne and the notes thereto included
elsewhere herein.
2002
-----------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
--------- -------- --------- ---------
Net Revenue:
Products............................... $ 193,072 $251,907 $ 272,352 $ 274,796
Services............................... 54,936 57,991 58,380 58,802
--------- -------- --------- ---------
Total net revenue................... 248,008 309,898 330,732 333,598
Expenses:
Cost of products....................... 177,196 199,818 215,036 237,122
Cost of services....................... 39,532 39,376 41,195 40,292
--------- -------- --------- ---------
Total cost of sales................. 216,728 239,194 256,231 277,414
Engineering and development............ 69,253 72,371 78,002 74,296
Selling and administrative............. 75,049 75,390 74,318 65,619
Restructuring and other charges........ 5,866 219 138,883 59,208
--------- -------- --------- ---------
366,896 387,174 547,434 476,537
--------- -------- --------- ---------
Loss from operations....................... (118,888) (77,276) (216,702) (142,939)
Interest income............................ 4,204 4,526 4,357 3,866
Interest expense........................... (5,334) (5,390) (5,447) (5,612)
Other income and expense, net.............. (513) (1,124) 1,264 63
--------- -------- --------- ---------
Loss before income taxes................... (120,531) (79,264) (216,528) (144,622)
(Benefit from) provision for income taxes.. (43,391) (28,535) (49,695) 279,145
--------- -------- --------- ---------
Net loss................................... $ (77,140) $(50,729) $(166,833) $(423,767)
========= ======== ========= =========
Net loss per common share--basic........... $ (0.42) $ (0.28) $ (0.91) $ (2.31)
========= ======== ========= =========
Net loss per common share--diluted......... $ (0.42) $ (0.28) $ (0.91) $ (2.31)
========= ======== ========= =========
2001
-----------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
--------- -------- --------- ---------
Net Revenue:
Products............................... $ 548,185 $314,446 $ 204,405 $ 166,692
Services............................... 57,004 51,377 44,950 53,522
--------- -------- --------- ---------
Total net revenue................... 605,189 365,823 249,355 220,214
Expenses:
Cost of products....................... 328,890 261,705 214,315 211,326
Cost of services....................... 40,124 35,717 32,197 37,458
--------- -------- --------- ---------
Total cost of sales................. 369,014 297,422 246,512 248,784
Engineering and development............ 83,570 71,029 64,667 68,052
Selling and administrative............. 73,286 65,908 59,928 70,962
Restructuring and other charges........ 5,705 3,356 48,122 17,109
--------- -------- --------- ---------
531,575 437,715 419,229 404,907
Income (loss) from operations.............. 73,614 (71,892) (169,874) (184,693)
Interest income............................ 6,194 5,149 4,553 6,847
Interest expense........................... (244) (296) (286) (3,265)
Other income and expense, net.............. (2,480) 12,918 (1,914) (484)
--------- -------- --------- ---------
Income (loss) before income taxes.......... 77,084 (54,121) (167,521) (181,595)
Provision for (benefit from) income taxes.. 23,125 (13,940) (64,117) (69,006)
--------- -------- --------- ---------
Net income (loss).......................... $ 53,959 $(40,181) $(103,404) $(112,589)
========= ======== ========= =========
Net income (loss) per common share--basic.. $ 0.31 $ (0.23) $ (0.59) $ (0.63)
========= ======== ========= =========
Net income (loss) per common share--diluted $ 0.30 $ (0.23) $ (0.59) $ (0.63)
========= ======== ========= =========
Item 9: Changes and disagreements with accountants on accounting and financial
disclosure
None.
85
PART III
Item 10: Directors and executive officers of the registrant.
Certain information relating to directors and executive officers of
Teradyne, executive compensation, security ownership of certain beneficial
owners and management and related stockholder matters, and certain
relationships and related transactions is incorporated by reference herein from
Teradyne's definitive proxy statement in connection with its Annual Meeting of
Shareholders to be held on May 22, 2003, which proxy statement will be filed
with the Securities and Exchange Commission not later than 120 days after the
close of the fiscal year. For this purpose, the Management Compensation and
Development Committee Report and Performance Graph included in such proxy
statement are specifically not incorporated herein. (Also see "Item
1--Executive Officers of the Company" elsewhere in this report.)
Item 11: Executive compensation.
Certain information relating to directors and executive officers of
Teradyne, executive compensation, security ownership of certain beneficial
owners and management and related stockholder matters, and certain
relationships and related transactions is incorporated by reference herein from
Teradyne's definitive proxy statement in connection with its Annual Meeting of
Shareholders to be held on May 22, 2003, which proxy statement will be filed
with the Securities and Exchange Commission not later than 120 days after the
close of the fiscal year. For this purpose, the Management Compensation and
Development Committee Report and Performance Graph included in such proxy
statement are specifically not incorporated herein.
Item 12: Security ownership of certain beneficial owners and management and
related stockholder matters.
Certain information relating to directors and executive officers of
Teradyne, executive compensation, security ownership of certain beneficial
owners and management and related stockholder matters, and certain
relationships and related transactions is incorporated by reference herein from
Teradyne's definitive proxy statement in connection with its Annual Meeting of
Shareholders to be held on May 22, 2003, which proxy statement will be filed
with the Securities and Exchange Commission not later than 120 days after the
close of the fiscal year. For this purpose, the Management Compensation and
Development Committee Report and Performance Graph included in such proxy
statement are specifically not incorporated herein. Also see "Equity
Compensation Plans" in "Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Item 13: Certain relationships and related transactions.
Certain information relating to directors and executive officers of
Teradyne, executive compensation, security ownership of certain beneficial
owners and management and related stockholder matters, and certain
relationships and related transactions is incorporated by reference herein from
Teradyne's definitive proxy statement in connection with its Annual Meeting of
Shareholders to be held on May 22, 2003, which proxy statement will be filed
with the Securities and Exchange Commission not later than 120 days after the
close of the fiscal year. For this purpose, the Management Compensation and
Development Committee Report and Performance Graph included in such proxy
statement are specifically not incorporated herein.
Item 14: Controls and procedures.
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation as of a date within 90 days of the filing of this annual report,
Teradyne's management with the Chief Executive Officer and Chief Financial
Officer as participants and supervisors have concluded that Teradyne's
disclosure controls and procedures, as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities and Exchange Act of 1934 (the Exchange Act), are effective
to ensure that information required to be disclosed by Teradyne in reports that
it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms.
(b) Changes in internal controls. There were no significant changes in
Teradyne's internal controls or, to Teradyne's knowledge, in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
86
PART IV
Item 15: Exhibits, Financial Statement Schedules And Reports On Form 8-K.
(a) 1. Financial Statements
The following consolidated financial statements are included in Item 8:
Report of Independent Accountants
Balance Sheets as of December 31, 2002 and 2001
Statements of Operations for the years ended December 31, 2002, 2001, and
2000
Statements of Shareholders' Equity for the years ended December 31, 2002,
2001, and 2000
Statements of Cash Flows for the years ended December 31, 2002, 2001, and
2000
(a) 2. Financial Statement Schedules
The following consolidated financial statement schedule is included in Item
15(d):
Schedule II--Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted since they are
either not required or information is otherwise included.
(a) 3. Listing Of Exhibits
The Exhibits which are filed with this report or which are incorporated by
reference herein are set forth in the Exhibit Index.
(b) Reports On Form 8-K
There were no Form 8-K filings by Teradyne during the quarter ended December
31, 2002, as none were required.
Item 15(d) Financial Statement Schedules
TERADYNE, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
-------- ---------- --------------------- ---------- ---------
Additions
---------------------
Balance at Charged to Charged to Balance
Beginning Cost and Other at End of
Description of Period Expenses Accounts Deductions Period
----------- ---------- ---------- ---------- ---------- ---------
(thousands of dollars)
Valuation reserve deducted in the balance sheet from
the asset to which it applies:
Accounts receivable:
2002 Allowance for doubtful accounts............. $6,294 $1,073 $ -- $1,618 $5,749
====== ====== ===== ====== ======
2001 Allowance for doubtful accounts............. $5,176 $1,192 $ -- $ 74 $6,294
====== ====== ===== ====== ======
2000 Allowance for doubtful accounts............. $4,410 $1,337 $ -- $ 571 $5,176
====== ====== ===== ====== ======
87
EXHIBIT INDEX
The following designated exhibits are, as indicated below, either filed
herewith or have heretofore been filed with the Securities and Exchange
Commission and are referred to and incorporated by reference to such filings.
Exhibit
No. Description SEC Document Reference
- ------- ----------- ----------------------
3.1 Restated Articles of Organization of the Exhibit 3.01 to the Company's Quarterly
Company, as amended Report on Form 10-Q for the quarter ended
July 2, 2000.
3.2 Amended and Restated Bylaws of the Company Exhibit 3.3 to the Company's Annual Report
on Form 10-K for the fiscal year ended
December 31, 1996.
4.1 Rights Agreement between the Company Exhibit 4.1 to the Company's Form 8-K filed
and Fleet National Bank dated as of November 20, 2000.
November 17, 2000
4.2 Indenture by and between the Company and State Exhibit 4.4 to the Company's Registration
Street Bank and Trust Company as Trustee Statement on Form S-3 (Registration
dated as of October 24, 2001, including the Statement No. 333-75632).
form of Note
4.3 Form of Note Included in Exhibit 4.4 to the Company's
Registration Statement on Form S-3
(Registration Statement No. 333-75632).
4.4 Registration Rights Agreement by and between Exhibit 4.6 to the Company's Registration
the Company and Goldman, Sachs & Co. and Statement on Form S-3 (Registration
Banc of America Securities LLC dated as of Statement No. 333-75632).
October 24, 2001
10.1 Teradyne, Inc. Supplemental Executive Exhibit 10.4 to the Company's Annual Report
Retirement Plan* on Form10-K for the fiscal year ended
December 31, 1997.
10.2 1991 Employee Stock Option Plan, as amended* Exhibit 4.2 to the Company's Registration
Statement on Form S-8 (Registration
Statement No. 333-07177).
10.3 Amendment to 1991 Stock Plan dated Exhibit 10.3 to the Company's Annual Report
March 9, 2001* on Form 10-K for the fiscal year ended
December 31, 2000.
10.4 Megatest Corporation 1990 Stock Option Plan* Exhibit 4.1 to the Company's Registration
Statement on Form S-8 (Registration
StatementNo. 333-64683).
10.5 Megatest Corporation Director Stock Option Exhibit 4.2 to the Company's Registration
Plan* Statement on Form S-8 (Registration
Statement No. 333-64683).
10.6 1996 Employee Stock Purchase Plan, as Exhibit 10.6 to the Company's Annual Report
amended* on Form 10-K for the fiscal year ended
December 31, 2001.
10.7 Master Lease Agreement between Megatest and Exhibit 10.10 to the Company's Annual Report
General Electric Capital Corporation dated on Form 10-K for the fiscal year ended
August 10, 1995 December 31, 1995.
88
Exhibit
No. Description SEC Document Reference
- ------- ----------- ----------------------
10.8 Loan and Security Agreement between Megatest Exhibit 10.11 to the Company's Annual Report
and the CIT Group/Equipment Financing, Inc. on Form 10-K for the fiscal year ended
dated August 14, 1995 December 31, 1995.
10.9 Deed of Trust, Financing Statement, Security Exhibit 10.12 to the Company's Annual Report
Agreement and Fixture Filing between on Form 10-K for the fiscal year ended
Megatest and the Sun Life Assurance Company December 31, 1995.
of Canada (U.S.) dated August 25, 1995
10.10 1997 Employee Stock Option Plan, as amended* Exhibit 10.01 to the Company's Quarterly
Report on Form 10-Q for the quarter ended
July 1, 2001.
10.11 1996 Non-Employee Director Stock Option Plan, Exhibit 10.11 to the Company's Annual Report
as amended* on Form 10-K for the fiscal year ended
December 31, 2001.
10.12 GenRad, Inc. 1991 Equity Incentive Plan* Exhibit 4.4 to the Company's Registration
Statement on Form S-8 (Registration
Statement No. 333-73700).
10.13 GenRad, Inc. 1991 Directors' Stock Option Plan* Exhibit 4.5 to the Company's Registration
Statement on Form S-8 (Registration
Statement No. 333-73700).
10.14 GenRad, Inc. 1997 Non-Qualified Employee Exhibit 4.6 to the Company's Registration
Stock Option Plan* Statement on Form S-8 (Registration
Statement No. 333-73700).
10.15 GenRad, Inc. Non-Statutory Stock Option Exhibit 4.7 to the Company's Registration
Agreement by and between Robert M. Statement on Form S-8 (Registration
Dutkowsky and GenRad, Inc.* Statement No. 333-73700).
10.16 Change in Control Agreement dated Exhibit 10.16 to the Company's Annual Report
October 19, 2001 between the Company on Form 10-K for the fiscal year ended
and Executive Officer* December 31, 2001.
10.17 Change in Control Agreement dated Exhibit 10.17 to the Company's Annual Report
October 19, 2001 between the Company on Form 10-K for the fiscal year ended
and Executive Officer* December 31, 2001.
10.18 Change in Control Agreement dated Exhibit 10.18 to the Company's Annual Report
October 19, 2001 between the Company on Form 10-K for the fiscal year ended
and Executive Officer* December 31, 2001.
10.19 Change in Control Agreement dated Exhibit 10.19 to the Company's Annual Report
March 19, 2002 between the Company on Form 10-K for the fiscal year ended
and Executive Officer* December 31, 2001.
10.20 Change in Control Agreement dated Exhibit 10.20 to the Company's Annual Report
October 19, 2001 between the Company on Form 10-K for the fiscal year ended
and Executive Officer* December 31, 2001.
10.21 Change in Control Agreement dated Exhibit 10.21 to the Company's Annual Report
October 2, 2001 between the Company on Form 10-K for the fiscal year ended
and Executive Officer* December 31, 2001.
10.22 Change in Control Agreement dated Exhibit 10.22 to the Company's Annual Report
October 19, 2001 between the Company on Form 10-K for the fiscal year ended
and Executive Officer* December 31, 2001.
89
Exhibit
No. Description SEC Document Reference
- ------- ----------- ----------------------
10.23 Change in Control Agreement dated Exhibit 10.23 to the Company's Annual Report
October 19, 2001 between the Company on Form 10-K for the fiscal year ended
and Executive Officer* December 31, 2001.
10.24 Change in Control Agreement dated Exhibit 10.24 to the Company's Annual Report
October 19, 2001 between the Company on Form 10-K for the fiscal year ended
and Executive Officer* December 31, 2001.
10.25 Promisory Note dated December 19, 2001 between Exhibit 10.25 to the Company's Annual Report
the Company, as borrower, and General Electric on Form 10-K for the fiscal year ended
Capital Business Asset Funding Corporation, as December 31, 2001.
lender
10.26 Form of Commercial Deed of Trust, Security Exhibit 10.26 to the Company's Annual Report
Agreement, Assignment of Leases and on Form 10-K for the fiscal year ended
Rents, and Fixture Filing Agreement dated December 31, 2001.
December 19, 2001 between the Company, as
borrower, and General Electric Capital
Business Asset Funding Corporation, as lender
10.27 Form of Assignment of Rents and Leases Exhibit 10.27 to the Company's Annual Report
Agreement dated December 19, 2001 between on Form 10-K for the fiscal year ended
the Company, as borrower, and General Electric December 31, 2001.
Capital Business Asset Funding Corporation, as
lender
10.28 Form of Certificate and Indemnity Agreement Exhibit 10.28 to the Company's Annual Report
regarding Hazardous Substances dated on Form 10-K for the fiscal year ended
December 19, 2001 between the Company, as December 31, 2001.
borrower, and General Electric Capital Business
Asset Funding Corporation, as lender
10.29 Lease Agreements dated July 26, 1996 between Exhibit 10 to GenRad, Inc.'s Quarterly Report on
GenRad, Inc. and Michelson Farm-Westford Form 10-Q for the quarter ended June 29, 1996
Technology Park Trust (Commission File No. 1-8045).
10.30 Change in Control Agreement dated January 31, Filed herewith.
2003 between the Company and the Executive
Officer*
14.1 Ethics Policy: Teradyne's Standards of Business Filed herewith.
Conduct
21.1 Subsidiaries of the Company Filed herewith.
23.1 Consent of PricewaterhouseCoopers LLP Filed herewith.
99.1 Certification of CEO (Section 906) Filed herewith.
99.2 Certification of CFO (Section 906 Filed herewith.
* Indicates management contracts or compensatory plans
90
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized this 26th day of
March, 2003.
TERADYNE, INC.
By: /s/ GREGORY R. BEECHER
-----------------------------
Gregory R. Beecher,
Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ GEORGE W. CHAMILLARD Chairman of the Board, March 26, 2003
- ----------------------------- President, and Chief
George W. Chamillard Executive Officer
(Principal Executive
Officer)
/s/ GREGORY R. BEECHER Vice President Chief March 26, 2003
- ----------------------------- Financial Officer and
Gregory R. Beecher Treasurer
(Principal Financial Officer)
/s/ G. RICHARD MACDONALD Controller, Principal March 26, 2003
- ----------------------------- Accounting Officer
G. Richard MacDonald
/s/ JAMES W. BAGLEY Director March 26, 2003
- -----------------------------
James W. Bagley
/s/ ALBERT CARNESALE Director March 26, 2003
- -----------------------------
Albert Carnesale
/s/ JOHN P. MULRONEY Director March 26, 2003
- -----------------------------
John P. Mulroney
/s/ VINCENT M. O'REILLY Director March 26, 2003
- -----------------------------
Vincent M. O'Reilly
/s/ ROY A. VALLEE Director March 26, 2003
- -----------------------------
Roy A. Vallee
/s/ PATRICIA S. WOLPERT Director March 26, 2003
- -----------------------------
Patricia S. Wolpert
91
CERTIFICATIONS
I, George W. Chamillard, certify that:
1. I have reviewed this annual report on Form 10-K of Teradyne, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
By: /s/__George W. Chamillard
George W. Chamillard
Chief Executive Officer
92
I, Gregory R. Beecher, certify that:
1. I have reviewed this annual report on Form 10-K of Teradyne, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
By: /s/__Gregory R. Beecher
Gregory R. Beecher
Chief Financial Officer
93