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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, 1999
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:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $0.125 per share 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 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. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 27, 2000 was $14.6 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 27, 2000 was 172,399,504 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement in connection with its 2000
annual meeting of shareholders are incorporated by reference into Part III.
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TERADYNE, INC.
FORM 10-K
PART I
ITEM 1: BUSINESS
Teradyne, Inc. is a leading manufacturer of automatic test equipment
("ATE") and related software for the electronics and communications industries.
Products include systems to test semiconductors ("semiconductor test systems"),
circuit-boards ("circuit-board test systems"), telephone lines and networks
("telecommunication test systems"), and software ("software test systems"). The
Company is also a leading manufacturer of backplanes and associated connectors
used in electronic systems ("backplane connection systems"). Circuit-board test
systems, telecommunications test systems, and software test systems have been
combined into "other test systems" for purposes of reporting the Company's
operating segments. For financial information concerning these operating
segments, see "Note N: Operating Segment and Geographic Information" in Notes to
Consolidated Financial Statements. Unless the context indicates otherwise, the
term "Company" as used herein includes Teradyne, Inc. and all its subsidiaries.
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 the Company'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."
PRODUCTS
Semiconductor test systems produced by the Company are used by electronic
component manufacturers in the design and testing of a wide variety of
semiconductor products, including logic, memory, mixed signal, and system on a
chip integrated circuits. Semiconductor test systems are sold to semiconductor
manufacturers and subcontractors to the semiconductor industry. Semiconductor
manufacturers use the Company's semiconductor test systems to measure product
performance, to improve product quality, to shorten time to market, to enhance
manufacturability, to conserve labor costs, and to increase production yields.
Semiconductor test systems accounted for 68% of consolidated net sales in 1999,
65% in 1998, and 67% in 1997.
Backplane connection systems are used principally for the computer,
communications, and military/aerospace industries. A backplane is an assembly
into which printed circuit boards are inserted that provides for the
interconnection of electrical signals between the circuit boards and the other
elements of the system. The Company produces both printed circuit and metal
backplanes, along with mating circuit-board connectors. Backplane connection
systems customers include makers of data storage systems, telecommunications
gear, and routers and servers. In addition, backplane connection systems have a
long-standing military/aerospace customer base. Backplane connection systems
accounted for 21% of consolidated net sales in 1999, 18% in 1998, and 17% in
1997.
Circuit-board test systems are used by electronic equipment manufacturers
for the design and testing of circuit boards and other assemblies. Circuit-board
test systems are also sold to customers across most sectors of the electronics
industry and to companies in other industries that use electronic devices in
high volume. Similar to semiconductor test systems, circuit-board test systems
customers use their test systems and related software to increase product
performance, to improve product quality, to shorten time to market, to enhance
manufacturability, to conserve labor costs, and to increase production yields.
Circuit-board test systems accounted for 6% of consolidated net sales in 1999,
10% in 1998, and 9% in 1997.
Telecommunications test systems are used by telephone operating companies
for the testing and maintenance of their subscriber telephone lines and related
equipment. Telecommunications test systems accounted for 2% of consolidated net
sales in 1999 and 5% in 1998 and 1997.
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Software test systems are used by a number of industries to test
communications networks, computerized telecommunication systems, and web based
applications. Software test systems accounted for 3% of consolidated net sales
in 1999 and 2% in 1998 and 1997.
SALES AND DISTRIBUTION
The Company's systems are extremely complex and require extensive support
both by the customer and the Company. Prices for the Company's systems can reach
$3 million or more. In 1999, principally all of the Company's operating segments
reported sales to Motorola Inc. accounting for a total of 11% of consolidated
net sales. In 1999, the Company's three largest customers accounted for 26% of
consolidated net sales.
Direct sales to United States government agencies accounted for less than
2% of consolidated net sales in 1999, 1998, and 1997. Approximately 4% of other
test systems segment sales were to United States government agencies in 1999.
Sales are also made within each of the Company's segments to customers who are
government contractors. Approximately 5% of backplane connection systems sales
and approximately 16% of other test systems segment sales fell into this
category during 1999.
The Company has sales and service offices throughout North America, Europe,
the Asia Pacific region, and Japan as the Company's customers outside the United
States are located primarily in those geographic areas. The Company sells in
these areas predominantly utilizing a direct sales force. Substantially all of
the Company's manufacturing activities are conducted in the United States. Sales
to customers outside the United States accounted for 52% of consolidated net
sales in 1999, 46% in 1998, and 51% in 1997.
The Company is subject to the inherent risks involved in international
trade, such as political and economic instability, restrictive trade policies,
controls on funds transfer, currency fluctuations, difficulties in managing
distributors, potentially adverse tax consequences, and the possibility of
difficulty in accounts receivable collection. The Company attempts to reduce the
effects of currency fluctuations by hedging part of its exposed position 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."
COMPETITION
The Company faces substantial competition, throughout the world, in each
operating segment. Some of these competitors have substantially greater
financial and other resources with which to pursue engineering, manufacturing,
marketing, and distribution of their products. The Company also faces
competition from internal suppliers at several of its customers. Competition is
principally based on technical performance, equipment and service reliability,
reputation and price. New product introductions by the Company's competitors
could cause a decline in sales or loss of market acceptance of existing
products.
BACKLOG
On December 31, 1999, the Company's backlog of unfilled orders for
semiconductor test systems, backplane connection systems and other test systems
segments was approximately $700.0 million, $175.4 million, and $104.1 million,
respectively, compared with $334.0 million, $131.1 million and $114.7 million,
respectively on December 31, 1998. Of the backlog at December 31, 1999,
approximately 99% of the semiconductor test systems backlog and backplane
connection systems backlog and approximately 68% of the other test systems
backlog are expected to be delivered in 2000. The Company's past experience
indicates that a portion of orders included in the backlog may be canceled.
There are no seasonal factors related to the backlog.
RAW MATERIALS
The Company's products require a wide variety of electronic and mechanical
components. The Company can experience occasional delays in obtaining timely
delivery of certain items. Additionally, the Company could experience a
temporary adverse impact if any of its sole source suppliers ceased to deliver
products. Any prolonged inability of the Company to obtain adequate yields or
deliveries, or any other circumstances that
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would require the Company to seek alternative sources of supply could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
PATENTS AND LICENSES
The development of products by the Company, both hardware and software, is
largely based on proprietary information. The Company protects its rights in
proprietary information through various methods such as copyrights, trademarks,
patents and patent applications, software license agreements, and employee
agreements. Any invalidation of the Company's intellectual property rights could
have a material adverse effect on the Company's business.
EMPLOYEES
As of December 31, 1999 the Company employed 7,500 people. Since the
inception of the Company's business, there have been no work stoppages or other
labor disturbances. The Company has no collective bargaining contracts.
ENGINEERING AND DEVELOPMENT ACTIVITIES
The highly technical nature of the Company's products requires a large and
continuing engineering and development effort. Engineering and development
expenditures for new and improved products were approximately $228.6 million in
1999, $195.2 million in 1998, and $162.5 million in 1997. These expenditures
amounted to approximately 13% of consolidated net sales in 1999, 1998, and 1997.
ENVIRONMENTAL AFFAIRS
The Company's manufacturing facilities are subject to numerous laws and
regulations designed to protect the environment, particularly from manufacturing
plant wastes and emissions. These laws include the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, the Superfund Amendment and
Reauthorization Act of 1986, the Occupational Safety and Health Act, the Clean
Air Act, the Clean Water Act, the Resource Conservation and Recovery Act of
1976, and the Hazardous and Solid Waste Amendments of 1984. In the opinion of
management, the costs associated with complying with these laws and regulations
have not had and are currently not expected to have a material adverse effect
upon the financial position of the Company.
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EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names of all executive officers of the
Company and certain other information relating to their positions held with the
Company and other business experience. Executive officers of the Company 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
----------------- --- -------- ----------------------------------------
Alexander V. d'Arbeloff........ 72 Chairman of the Board Chairman of the Board of the Company
since 1977; Chief Executive Officer of
the Company from 1996 to 1997; President
of the Company from 1971 to 1996;
Director of the Company since 1960.
George W. Chamillard........... 61 President, Chief President and Chief Executive Officer of
Executive Officer, the Company since 1997; Director of the
and Member of the Company since 1996; President and Chief
Board Operating Officer of the Company from
1996 to 1997; Executive Vice President
of the Company from 1994 to 1996.
Michael A. Bradley............. 51 Vice President and Chief Financial Officer beginning in
Chief Financial 1999; Vice President of the Company
Officer since 1992.
Edward Rogas, Jr............... 59 Senior Vice President Senior Vice President beginning in 2000;
Vice President of the Company from 1984
to 1999.
David L. Sulman................ 56 Senior Vice President Senior Vice President beginning in 2000;
Vice President of the Company from 1994
to 1999.
Eileen Casal................... 41 Vice President and Vice President and General Counsel of
General Counsel the Company since March 1999; From
September 1986 to February 1999, Ms.
Casal served in various legal positions
at Stratus Computer, Inc.: including
Vice President, General Counsel and
Assistant Secretary.
John M. Casey.................. 51 Vice President Vice President of the Company since
1990.
Ronald J. Dias................. 56 Vice President Vice President of the Company since
1988.
Donald J. Hamman............... 48 Controller Controller of the Company since 1994.
Jeffrey R. Hotchkiss........... 52 Vice President Chief Financial Officer from 1997 to
1999; Vice President of the Company
since 1990.
Stuart M. Osattin.............. 54 Vice President and Vice President and Treasurer of the
Treasurer Company since 1994.
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ITEM 2: PROPERTIES
The Company's executive offices are in Boston, Massachusetts. Manufacturing
and other operations are carried on in several locations. The following table
provides certain information as to the Company's principal general offices and
manufacturing facilities.
APPROXIMATE
PROPERTY SQUARE FEET OF
LOCATION OPERATING SEGMENT INTEREST FLOOR SPACE
-------- ----------------- -------- --------------
Boston, Massachusetts................ Semiconductor Test & General Offices Own 492,000
Agoura Hills, California............. Semiconductor Test Own 572,000
North Reading, Massachusetts......... Semiconductor & Circuit Board Test Own 273,000
Nashua, New Hampshire................ Backplane Connection Own 570,000
San Jose, California................. Semiconductor Test Own 120,000
Walnut Creek, California............. Circuit Board Test Lease 69,000
Kumamoto, Japan...................... Semiconductor Test Own 66,000
Deerfield, Illinois.................. Telecommunication Test Own 63,000
Dublin, Ireland...................... Backplane Connection Lease 46,000
Approximately 112,000 square feet of the floor space the Company owns in
Agoura Hills is unoccupied and therefore available for future expansion.
ITEM 3: LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. Management does not believe these actions will have
a material affect on the financial position or results of operations of the
Company.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The following table shows the market range for the Company's Common Stock
based on reported sale prices on the New York Stock Exchange, after giving
effect to the two-for-one stock split effected in the form of a 100% stock
dividend distributed on August 31, 1999.
PERIOD HIGH LOW
------ ---- ---
1999 First Quarter......................................... $32 1/2 $21 1/8
Second Quarter....................................... 36 23 3/8
Third Quarter........................................ 41 7/8 32
Fourth Quarter....................................... 66 29 1/2
1998 First Quarter......................................... $24 1/4 $13 7/8
Second Quarter....................................... 21 3/4 12 3/8
Third Quarter........................................ 14 1/8 8 5/8
Fourth Quarter....................................... 22 3/4 7 1/2
The number of record holders of the Company's Common Stock at February 27,
2000 was 2,520.
The Company has never paid cash dividends because it has been its 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 the Company's earnings, capital requirements, and financial
condition. The Company presently expects to retain all of its earnings for use
in the business.
ITEM 6: SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,*
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales............................ $1,790,912 $1,489,151 $1,266,274 $1,171,615 $1,191,022
========== ========== ========== ========== ==========
Income from continuing operations.... $ 191,694 $ 102,117 $ 127,608 $ 93,574 $ 159,284
========== ========== ========== ========== ==========
Income from continuing operations per
common share - basic............... $ 1.12 $ 0.61 $ 0.76 $ 0.56 $ 0.98
========== ========== ========== ========== ==========
Income from continuing operations per
common share - diluted............. $ 1.07 $ 0.59 $ 0.74 $ 0.55 $ 0.95
========== ========== ========== ========== ==========
Total assets............... $1,568,213 $1,312,814 $1,251,674 $1,096,816 $1,023,831
========== ========== ========== ========== ==========
Long-term obligations................ $ 8,948 $ 13,200 $ 13,141 $ 15,650 $ 18,679
========== ========== ========== ========== ==========
- ---------------
* Note: Previously published financial data have been restated to give effect to
the two-for-one stock split effected in the form of a 100% stock dividend
distributed on August 31, 1999.
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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SELECTED RELATIONSHIPS WITHIN THE CONSOLIDATED
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Net sales.............................................. $1,790,912 $1,489,151 $1,266,274
========== ========== ==========
Net income............................................. $ 191,694 $ 102,117 $ 127,608
========== ========== ==========
Increase in net sales from preceding year:
Amount............................................ $ 301,761 $ 222,877 $ 94,659
========== ========== ==========
Percentage........................................ 20% 18% 8%
========== ========== ==========
Increase (decrease) in net income from preceding
year................................................. $ 89,577 $ (25,491) $ 34,034
========== ========== ==========
Percentage of net sales:
Net sales......................................... 100% 100% 100%
Expenses:
Cost of sales................................ 59 64 58
Engineering and development.................. 13 13 13
Selling and administrative................... 14 14 15
---------- ---------- ----------
85 91 86
Net interest income.................................... 1 1 1
---------- ---------- ----------
Income before income taxes............................. 15 10 15
Provision for income taxes............................. 4 3 5
---------- ---------- ----------
Net income............................................. 11% 7% 10%
========== ========== ==========
RESULTS OF OPERATIONS:
1999 compared to 1998
Sales increased 20% in 1999 to a record $1,790.9 million from $1,489.2
million in 1998. Semiconductor test systems shipments increased by 25% due to
increased orders resulting from capacity expansion at semiconductor
manufacturers and subcontractors. Sales of backplane connection systems to
unaffiliated customers grew 39% as a result of continued growth in demand from
networking, data storage, and other high technology customers. Other test
systems sales were down 18% from 1998 with decreases in telecommunications test
systems of 45% and circuit-board test systems of 20%. These decreases were a
result of telecommunication customers reducing investment in traditional voice
testing technology and circuit-board test systems customers seeking lower cost
solutions and or new solutions to test increasing complex circuit-boards. Other
test systems sales decreases were offset slightly by an increase of 42% in sales
of software test systems to customers within the telecommunication and web-based
application development markets.
Net income grew $89.6 million to $191.7 million in 1999 from $102.1 million
in 1998. Income before income taxes increased $127.9 million from $145.9 million
in 1998 to $273.8 million in 1999. Semiconductor test systems and backplane
connection systems income before income taxes increased $183.4 million and $29.2
million, respectively in 1999 due to increased sales. Other test systems income
before income taxes decreased $46.5 million in 1999 resulting in a loss before
income taxes of $14.3 million in 1999. This decrease in income before income
taxes was due to decreased sales coupled with the Company maintaining its
engineering and development of new products.
Incoming orders increased 82% from $1,206.5 million in 1998 to a record
$2,190.6 million in 1999. Orders increased in nearly all operating segments and
were led by a 130% increase in semiconductor test systems orders. Backplane
connection systems and software test systems orders both increased 34% and
circuit-board
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test systems orders increased by a modest 4%. Orders for telecommunications test
systems decreased 59% in 1999. As a result of record bookings, the Company's
backlog increased 69% to a record $979.5 million.
Costs of sales as a percentage of sales decreased from 64% of sales in 1998
to 59% of sales in 1999. Included in cost of sales in 1998 was a $23.0 million
charge for excess inventory. The charge resulted from the drop in demand for
semiconductor test systems products. Excluding this charge cost of sales
decreased from 62% to 59%. The decrease in cost of sales was primarily due to
the increased utilization of the Company's manufacturing overhead as sales
volume increased while certain components of cost of sales remained fixed.
Engineering and development expenses were 13% of sales in both 1999 and
1998 representing a year over year increase of $33.4 million. The increase was
primarily due to new product development expenses in semiconductor test systems
although there were increased expenses related to product development in each of
the Company's operating segments.
Selling and administrative expenses were 14% of sales in both 1999 and 1998
representing a year over year increase of $43.5 million. The increase was due to
higher compensation related expenses and spending in support of increased
semiconductor test systems and software test systems sales.
Interest income increased $3.8 million to $17.3 million in 1999 compared to
1998 due to an increase in the Company's average invested balances.
The Company's effective tax rate was 30% in 1999 and 1998. The Company
utilized export sales corporation benefits and certain research and development
tax credits to operate below the U.S. statutory rate of 35%.
1998 compared to 1997
Sales increased 18% in 1998 to $1,489.2 million from $1,266.3 million in
1997. Due to a strong backlog at the beginning of 1998, semiconductor test
systems shipments increased by 14%, despite a decline in sales by the
semiconductor test equipment market as a whole. Sales of backplane connection
systems to unaffiliated customers grew 23% as a result of growth in demand from
networking, data storage, and other high technology customers. Other test
systems sales were up 31% from 1997 with increases in circuit-board test systems
of 28%, telecommunications test systems of 20%, and software test systems of
77%. Net income fell from $127.6 million in 1997 to $102.1 million in 1998.
Excluding the effect of pre-tax special charges of $23.0 million for excess raw
material inventory and $5.0 million for acquired in-process technology in 1998
and 1997, respectively, income before income taxes decreased $29.5 million from
$198.4 million in 1997 to $168.9 million in 1998.
Incoming orders decreased 25% from $1,612.4 million in 1997 to $1,206.5
million in 1998. A 40% drop in semiconductor test system orders drove the
decline. Offsetting that decline, backplane connection systems orders grew 36%
and software test systems orders increased by 73%. Orders for circuit-board test
systems and telecommunications test systems decreased 3% and 38%, respectively.
The Company's backlog fell 33% to $579.8 million as a result of the decrease in
orders.
Costs of sales as a percentage of sales, excluding a 1998 charge of $23.0
million for excess inventory, increased from 58% of sales in 1997 to 62% of
sales in 1998. The charge for excess inventory resulted from the drop in demand
for semiconductor test systems products. The increase in cost of sales was
primarily due to higher costs related to the increased shipment of new
semiconductor test systems products and the relationship of fixed manufacturing
costs to the lower semiconductor test systems shipment volume in the second half
of 1998. In addition, backplane connection systems 1998 cost of sales, as a
percentage of sales, increased over 1997 as a result of capacity expansion at
its printed circuit-board facility and the costs to support production activity
of connector design wins at several new customers.
Engineering and development expenses were 13% of sales in both 1997 and
1998 representing a year over year increase of $32.6 million. The increases were
primarily in semiconductor test systems although there were increased expenses
related to product development in each of the operating segments.
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Selling and administrative expenses increased by $18.8 million in 1998 over
1997, representing a decrease from 15% of sales in 1997 to 14% of sales in 1998.
The dollar increase was primarily related to the introduction and marketing of
new semiconductor and software test system products.
The Company's effective tax rate was 30% in 1998 compared to 34% in 1997.
The tax rate declined due to increases in certain research and development tax
credits and increases in export sales corporation benefits.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and marketable securities balance
increased $89.5 million in 1999, to $387.4 million. The Company has been able to
generate cash from operating activities in each of the last three years. The
primary source of cash from operating activities has been net income, as
adjusted to exclude the effects of non-cash items such as depreciation and
amortization. Net income from operating activities, adjusted to exclude the
effects of non-cash items, for each of the last three years was $278.3 million
in 1999, $186.0 million in 1998, and $189.5 million 1997. The other source or
use of cash from operating activities has been changes in assets and liabilities
other than those assets and liabilities resulting from investing and financing
activities. The cash effect of changes in assets and liabilities for each of the
last three years was: a $89.2 million source in 1999, a $52.6 million source in
1998; and an $176.0 million use in 1997.
The Company used $244.8 million of cash for investing activities in 1999,
$101.6 million in 1998, and $77.4 million in 1997. Investing activities consist
of purchases, sales, and maturities of marketable securities and purchases of
capital assets to support long-term growth. Capital expenditures were $151.2
million in 1999, $164.4 million in 1998, and $132.1 million in 1997.
The Company used $126.8 million of cash for financing activities in 1999,
$26.2 million in 1998, and $62.9 million in 1997. Financing activities include
sales and repurchases of the Company's common stock, as well as repayments of
debt. During 1999, 1998, and 1997 net common stock activity used $125.5 million,
$24.6 million, and $60.5 million of cash, respectively. Since 1996, the Company
has used $393.3 million of cash to repurchase 16.2 million shares of its common
stock on the open market.
The Company believes its cash, cash equivalents, and marketable securities
balance of $387.4 million, together with other sources of funds, including cash
flow generated from operations and the available borrowing capacity of $120.0
million under its line of credit agreement, will be sufficient to meet working
capital and capital expenditure requirements for the foreseeable future.
Inflation has not had a significant long-term impact on earnings.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133." SFAS No. 137 amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which was issued
in June 1998 and was to be effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. SFAS No. 137 defers the effective date of SFAS
No. 133 to be effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. Accordingly, the Company will adopt the provisions of SFAS
No. 133 for its 2001 fiscal year. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and the type of hedge transaction. Management is currently
evaluating the effects of this change on its recording of derivatives and
hedging activities.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes the SEC's view in applying generally accepted
accounting principles to selected revenue recognition issues. The application of
the guidance in SAB 101 will be required in the Company's fiscal year 2000. The
effects of applying this guidance will be reported as a cumulative effect
adjustment resulting from a change in
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accounting principle. The Company has not completed its evaluation of SAB 101
and is therefore unable to determine its impact.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
EXCHANGE RATE RISK MANAGEMENT
The Company regularly enters into forward contracts in European and
Japanese currencies to hedge its overseas net monetary position and firm
commitments. The Company's firm commitments consist of certain orders received
in currencies other than U.S. dollars. Forward currency contracts generally have
maturities of less than one year. These contracts are used to reduce the
Company'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. The Company does not engage in currency speculation.
At December 31, 1999 the face amount of outstanding forward currency
contracts to buy U.S. dollars for non U.S. currencies was $62.4 million. A 10%
fluctuation in exchange rates for these currencies would change the fair value
by approximately $6.2 million. However, since these contracts hedge non U.S.
currency transactions, any change in the fair value of the contracts would be
offset by opposite changes in the underlying value of the transactions being
hedged. The hypothetical movement was estimated by calculating the fair value of
the forward currency contracts at December 31, 1999 and comparing that with
those calculated using hypothetical forward currency exchange rates.
INTEREST RATE RISK MANAGEMENT
Due to its short-term duration the fair value of the Company's cash and
investment portfolio at December 31, 1999 approximated carrying value. Market
risk was estimated as the potential decrease in fair value resulting from a
hypothetical 10% increase in interest rates for issues contained in the
investment portfolio. The resulting hypothetical fair value was not materially
different from the year-end carrying value.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided by the Company, statements made by
its employees or information included in its filings with the Securities and
Exchange Commission (including this Form 10-K and the Company's Annual Report to
Shareholders) may contain statements which are not historical facts, so-called
"forward looking statements," which involve risks and uncertainties. In
particular, statements in "Item 1: Business" relating to the Company's delivery
time of unfilled orders, and in "Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations" relating to the sufficiency of
capital to meet working capital and planned capital expenditures, may be forward
looking statements. The Company's actual future results may differ significantly
from those stated in any forward looking statements. Factors that may cause such
differences include, but are not limited to, the factors discussed below. Each
of these factors, and others, are discussed from time to time in the Company's
filings with the Securities and Exchange Commission.
The Company's future results are subject to substantial risks and
uncertainties. The Company's business and results of operations depend in
significant part upon capital expenditures of manufacturers of semiconductors,
which in turn depend upon the current and anticipated market demand for
semiconductors and products incorporating semiconductors. The semiconductor
industry has been highly cyclical with recurring periods of over supply, which
often have had a severe effect on the semiconductor industry's demand for test
equipment, including systems manufactured and marketed by the Company. The
Company believes that the markets for newer generations of semiconductors will
also be subject to similar fluctuations. There can be no assurance that any
future increase in semiconductor test systems bookings for a calendar quarter
will be sustained in subsequent quarters. In addition, any factor adversely
affecting the semiconductor industry or particular segments within the
semiconductor industry may adversely affect the Company's business, financial
condition and operating results.
10
12
The Company relies on certain intellectual property protections to preserve
its intellectual property rights, including patents, copyrights, and trade
secrets. While the Company believes that its patents, copyrights, and trade
secrets have value, in general no single one is in itself essential. The Company
believes that its technological position depends primarily on the technical
competence and creative ability of its research and development personnel. From
time to time the Company is notified that it may be in violation of patents held
by others. An assertion of patent infringement against the Company, if
successful, could have a material adverse effect on the Company or could require
a lengthy and expensive defense which could adversely affect the Company's
operating results.
The development of new technologies, commercialization of those
technologies into products, and market acceptance and customer demand for those
products is critical to the Company'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.
The Company faces substantial competition, throughout the world, in each
operating segment. Some of these competitors have substantially greater
financial and other resources to pursue engineering, manufacturing, marketing
and distribution of their products. The Company also faces competition from
internal suppliers at several of its customers. Certain of the Company's
competitors have introduced or announced new products with certain performance
characteristics which may be considered equal or superior to those currently
offered by the Company. The Company 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 the Company's existing products.
Moreover, increased competitive pressure could lead to intensified price based
competition, which could materially adversely affect the Company's business,
financial condition and results of operations.
The Company derives a significant portion of its total revenue from
customers outside the United States. International sales are subject to
significant risks, including unexpected changes in legal and regulatory
requirements and policy changes affecting the Company's markets, changes in
tariffs, exchange rates and other barriers, political and economic instability,
difficulties in accounts receivable collection, difficulties in managing
distributors and representatives, difficulties in staffing and managing
international operations, difficulties in protecting the Company's intellectual
property and potentially adverse tax consequences.
The Company's semiconductor test systems operating segment generates a
significant portion of its revenue from customers operating in South Asian
countries and Taiwan. Although the economies of South Asian countries and Taiwan
have stabilized to some degree since mid fiscal 1998, if these economies
deteriorate the negative economic developments would increase the likelihood of
either a direct or indirect adverse impact on the Company's future operating
results.
The Company'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
and cancellation of customer orders; changes in product mix; the Company's
ability to introduce new products and technologies on a timely basis;
introduction of products and technologies by the Company's competitors; market
acceptance of the Company'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. As a result of the foregoing and
other factors, the Company may 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.
YEAR 2000
As of the Company's fiscal month ended February 27, 2000 the Company has
not experienced any material negative impact related to the Year 2000 problem in
any of its business-critical functions. Based upon
11
13
our ability to deliver our products and services without interruption and
information received from vendors and service providers, the Company has no
reason to believe that there will be any material adverse impact on the
Company's financial condition or results of operations relating to any Year 2000
problem. However, if the information received from vendors and service providers
is not accurate or happens to change, then there could be an unforeseen material
adverse impact on the Company's results of operations or financial condition.
The Company will continue to monitor its systems and operations until it is
reasonably assured that no significant business interruptions will occur as a
result of the Year 2000 problem.
The aggregate costs incurred by the Company in addressing its Year 2000
problem were within the $5.0 million estimate previously reported by the
Company.
12
14
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 14(a)(1) on page 34 present fairly, in all material
respects, the financial position of Teradyne, Inc. and its subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
In addition, in our opinion, the financial statement schedule listed in the
index appearing under Item 14(a)(2) on page 34 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, 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 the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 14, 2000
13
15
TERADYNE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
1999 1998
---------- ----------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 181,345 $ 185,514
Marketable securities.................................. 66,316 15,914
Accounts receivable, less allowance for doubtful
accounts of $4,410 and $2,395 in 1999 and 1998,
respectively.......................................... 296,159 219,303
Inventories:
Parts.................................................. 123,300 154,706
Assemblies in process.................................. 145,393 111,641
---------- ----------
268,693 266,347
Deferred tax assets.................................... 49,716 49,262
Prepayments and other current assets................... 45,458 23,200
---------- ----------
Total current assets.............................. 907,687 759,540
Property, plant, and equipment:
Land................................................... 41,774 41,060
Buildings and improvements............................. 238,136 171,895
Machinery and equipment................................ 692,383 591,897
Construction in progress............................... 9,693 52,699
---------- ----------
Total............................................. 981,986 857,551
---------- ----------
Less: Accumulated depreciation............................. (484,247) (422,594)
Net property, plant, and equipment................ 497,739 434,957
Marketable securities....................................... 139,752 96,494
Other assets................................................ 23,035 21,823
---------- ----------
Total assets...................................... $1,568,213 $1,312,814
========== ==========
LIABILITIES
Current liabilities:
Notes payable -- banks................................. $ 8,221 $ 7,393
Current portion of long-term debt...................... 4,659 1,309
Accounts payable....................................... 104,335 45,042
Accrued employees' compensation and withholdings....... 117,314 68,431
Unearned service revenue and customer advances......... 60,096 64,674
Other accrued liabilities.............................. 66,223 54,071
Accrued income taxes................................... 31,478 14,770
---------- ----------
Total current liabilities......................... 392,326 255,690
Deferred tax liabilities.................................... 13,907 17,554
Long-term debt.............................................. 8,948 13,200
Commitments (Note E)...................................
---------- ----------
Total liabilities................................. 415,181 286,444
========== ==========
SHAREHOLDERS' EQUITY
Common stock, $0.125 par value, 250,000 shares authorized,
170,319 and 83,744 net shares issued and outstanding in
1999 and 1998, respectively............................... 21,290 10,468
Additional paid-in capital.................................. 234,198 310,052
Retained earnings........................................... 897,544 705,850
---------- ----------
Total shareholders' equity........................ 1,153,032 1,026,370
---------- ----------
Total liabilities and shareholders' equity........ $1,568,213 $1,312,814
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
14
16
TERADYNE, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales.............................................. $1,790,912 $1,489,151 $1,266,274
Expenses:
Cost of sales..................................... 1,047,752 947,174 734,370
Engineering and development....................... 228,570 195,158 162,500
Selling and administrative........................ 256,392 212,885 194,103
---------- ---------- ----------
1,532,714 1,355,217 1,090,973
---------- ---------- ----------
Income from operations................................. 258,198 133,934 175,301
Interest income........................................ 17,307 13,514 20,289
Interest expense....................................... (1,656) (1,566) (2,245)
---------- ---------- ----------
Income before income taxes............................. 273,849 145,882 193,345
Provision for income taxes............................. 82,155 43,765 65,737
---------- ---------- ----------
Net income............................................. $ 191,694 $ 102,117 $ 127,608
========== ========== ==========
Net income per common share -- basic................... $ 1.12 $ 0.61 $ 0.76
========== ========== ==========
Net income per common share -- diluted................. $ 1.07 $ 0.59 $ 0.74
========== ========== ==========
Shares used in net income per common share -- basic.... 170,519 167,645 166,868
========== ========== ==========
Shares used in net income per common share --diluted... 178,550 171,930 172,638
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
15
17
TERADYNE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
SHARES COMMON ADDITIONAL
-------------------- STOCK PAID-IN RETAINED
ISSUED REACQUIRED PAR VALUE CAPITAL EARNINGS TOTAL
------- ---------- -------------- ---------- -------- ----------
(IN THOUSANDS)
Balance, December 31, 1996.... 87,242 4,762 $10,310 $ 355,576 $476,125 $ 842,011
Issuance of stock to employees
under benefit plans......... 3,373 422 43,643 44,065
Tax benefit from stock
options..................... 27,982 27,982
Repurchase of stock........... 2,550 (319) (104,216) (104,535)
Net income.................... 127,608 127,608
------- ------ ------- --------- -------- ----------
Balance, December 31, 1997.... 90,615 7,312 10,413 322,985 603,733 937,131
Issuance of stock to employees
under benefit plans......... 1,796 224 26,355 26,579
Tax benefit from stock
options..................... 11,701 11,701
Repurchase of stock........... 1,355 (169) (50,989) (51,158)
Net income.................... 102,117 102,117
------- ------ ------- --------- -------- ----------
Balance, December 31, 1998.... 92,411 8,667 10,468 310,052 705,850 1,026,370
Issuance of stock to employees
under benefit plans......... 3,205 401 60,730 61,131
Repurchase of stock........... 1,366 (171) (86,980) (87,151)
Two-for-one stock split
effected in the form of a
100% stock dividend......... 95,616 10,033 10,698 (10,698) 0
Issuance of stock to employees
under benefit plans after
two-for-one stock split..... 1,973 246 20,947 21,193
Tax benefit from stock
options..................... 60,462 60,462
Repurchase of stock after
two-for-one stock split..... 2,820 (352) (120,315) (120,667)
Net income.................... 191,694 191,694
------- ------ ------- --------- -------- ----------
Balance, December 31, 1999.... 193,205 22,886 $21,290 $ 234,198 $897,544 $1,153,032
======= ====== ======= ========= ======== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
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18
TERADYNE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
Cash flows from operating activities:
Net income............................................ $ 191,694 $ 102,117 $ 127,608
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation....................................... 85,279 75,351 57,983
Amortization....................................... 1,107 953 1,168
Charge for excess inventory........................ 23,000
Deferred income tax provision (credit)............. (4,101) (14,607) 1,341
Other non-cash items, net.......................... 4,354 (804) 1,377
Changes in operating assets and liabilities:
Accounts receivable.............................. (76,856) 81,630 (122,503)
Inventories...................................... (2,346) (16,990) (131,014)
Other assets..................................... (24,576) (1,184) (3,861)
Accounts payable and accruals.................... 115,750 (18,530) 41,261
Accrued income taxes............................. 77,171 7,685 40,092
--------- --------- ---------
Net cash provided by operating activities............... 367,476 238,621 13,452
--------- --------- ---------
Cash flows from investing activities:
Additions to property, plant, and equipment........ (119,780) (119,457) (106,436)
Increase in equipment manufactured by the
Company.......................................... (31,376) (44,983) (25,695)
Purchases of held-to-maturity marketable
securities....................................... (177,650) (20,000) (111,033)
Maturities of held-to-maturity marketable
securities....................................... 118,990 20,000 206,556
Purchases of available-for-sale marketable
securities....................................... (204,824) (162,092) (192,174)
Proceeds from sales and maturities of
available-for-sale marketable securities......... 169,824 224,951 151,426
--------- --------- ---------
Net cash used in investing activities................... (244,816) (101,581) (77,356)
--------- --------- ---------
Cash flows from financing activities:
Payments of long-term debt......................... (1,333) (1,615) (2,410)
Issuance of common stock under stock option and
stock purchase plans............................. 82,323 26,579 44,065
Acquisition of treasury stock...................... (207,819) (51,158) (104,535)
--------- --------- ---------
Net cash used by financing activities................... (126,829) (26,194) (62,880)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents........ (4,169) 110,846 (126,784)
Cash and cash equivalents at beginning of year.......... 185,514 74,668 201,452
--------- --------- ---------
Cash and cash equivalents at end of year................ $ 181,345 $ 185,514 $ 74,668
========= ========= =========
Supplementary disclosure of cash flow information:
Cash paid during the year for:
Interest......................................... $ 1,615 $ 1,525 $ 2,257
Income taxes..................................... $ 22,747 $ 47,225 $ 31,971
The accompanying notes are an integral part of the consolidated financial
statements.
17
19
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. THE COMPANY
Teradyne, Inc. (the "Company") designs, manufactures, markets, and services
test systems and related software, and backplanes and associated connectors. The
Company has five principal products; semiconductor test systems, backplane
connection systems, circuit-board test systems, telecommunications test systems,
and software test systems.
Semiconductor test systems are used by electronic component manufacturers
in the design and testing of their products. Backplane connection systems are
used principally for the computer, communications, and military/aerospace
industries. A backplane is an assembly into which printed circuit boards are
inserted that provides for the interconnection of electrical signals between the
circuit boards and the other elements of the system. Circuit-board test systems
are used by electronic equipment manufacturers for the design and testing of
circuit boards and other assemblies. Telecommunication test systems are used by
telephone operating companies for the testing and maintenance of their
subscriber telephone lines and related equipment. Software test systems are used
by a number of industries to test communications networks, computerized
telecommunication systems, and client/server applications.
B. ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions are
eliminated. Certain prior years' amounts were reclassified to conform to the
current year presentation.
Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reported periods. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes the SEC's view in applying generally accepted
accounting principles to selected revenue recognition issues. The application of
the guidance in SAB 101 will be required in the Company's fiscal year 2000. The
effects of applying this guidance will be reported as a cumulative effect
adjustment resulting from a change in accounting principle. The Company has not
completed its evaluation of SAB 101 and is therefore unable to determine its
impact.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or
market (net realizable value). Inventories include materials, labor, and
manufacturing overhead costs.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. 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.
18
20
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
B. ACCOUNTING POLICIES -- (CONTINUED)
The Company 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 and improvements -- 5 to 40 years; and
machinery and equipment -- 2 to 10 years.
Revenue Recognition
Product revenue is recognized upon shipment. The Company's products are
generally subject to warranty, and the Company provides for such estimated costs
when product revenue is recognized. The Company recognizes service revenue as
the services are provided or ratably over the period of the related contract, as
applicable. The Company unbundles service revenue from product sales and
maintenance services from software license fees based upon amounts charged when
such elements are separately sold. For certain contracts eligible under American
Institute of Certified Public Accountants ("AICPA") Statement of Position No.
81-1, revenue is recognized using the percentage-of-completion accounting method
based upon an efforts-expended method. In all cases, changes to total estimated
costs and anticipated losses, if any, are recognized in the period in which
determined.
Engineering and Development Costs
The Company's products are highly technical in nature and require a large
and continuing engineering and development effort. All engineering and
development costs are expensed as incurred.
Impairment of Long-Lived Assets
The Company 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
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 on a discounted
cash flow basis.
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. Federal 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
U.S.. U.S. Federal 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, 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. 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 and
unrealized gains and losses resulting from currency remeasurement are included
in operations.
19
21
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
B. ACCOUNTING POLICIES -- (CONTINUED)
Net Income per Common Share
Basic net income per common share is calculated by dividing net income by
the weighted average number of common shares outstanding during the period.
Diluted net income per common share is calculated by dividing net 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.
Other Comprehensive Income
Comprehensive income does not materially differ from net income, for the
years ended December 31, 1999, 1998 and 1997.
C. FINANCIAL INSTRUMENTS
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less at the date of acquisition to be cash
equivalents.
Marketable Securities
The Company 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, 1999, and no securities classified as trading or
held-to-maturity at December 31, 1998. Securities are classified as
held-to-maturity when the Company 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, unless the difference between the fair value and amortized cost is
immaterial in which case they are carried at amortized cost. Unrealized gains or
losses on available-for-sale securities are not material and therefore have not
been recorded. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in interest
income. The cost of securities sold is based on the specific identification
method.
The fair market value of cash equivalents and short-term and long-term
investments in marketable securities is substantially equal to the carrying
value and represents the quoted market prices at the balance
20
22
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
C. FINANCIAL INSTRUMENTS -- (CONTINUED)
sheet dates. The short-term investments mature in less than one year. Long-term
investments have maturities of one to ten years. At December 31, 1999 and 1998
these investments are reported as follows (in thousands):
1999 1998
---------------------- ----------
AVAILABLE- HELD-TO- AVAILABLE-
FOR-SALE MATURITY FOR-SALE
---------- -------- ----------
Short-term marketable securities:
U.S. Treasury and government agency
securities.................................. $ 910 $58,659 $ 8,142
Corporate debt securities..................... 6,747 7,772
======== ======= =======
$ 7,657 $58,659 $15,914
======== ======= =======
Long-term marketable securities:
U.S. Treasury and government agency
securities.................................. $ 69,098 $37,888
Corporate debt securities..................... 70,654 58,606
-------- -------
$139,752 $96,494
======== =======
Other
For all other balance sheet financial instruments, the carrying amount
approximates fair value.
Off-Balance Sheet Risk
The Company regularly enters into forward contracts in European and
Japanese currencies to hedge its non U.S. currency net monetary position and
firm commitments. The Company's firm commitments consist of certain orders
received in currencies other than U.S. dollars. Forward currency contracts
generally have maturities of less than one year. These contracts are used to
reduce the Company'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. The Company does not engage in currency speculation. Gains
or losses associated with the termination of the underlying contract for which a
firm commitment no longer exists are immediately included in selling and
administrative expenses.
At December 31, 1999, the Company had the following forward currency
contracts to buy U.S. dollars for non U.S. currencies with the following
notional amounts totaling $62.4 million; $25.8 million Japanese yen, $21.7 Euro,
$13.7 million British pound sterling, and $1.2 million Swedish Krona. At
December 31, 1998 the face amount of outstanding forward currency contracts to
buy and sell U.S. dollars for non U.S. currencies was $36.4 million and $10.3
million, respectively.
The fair value of these contracts as of December 31, 1999 and 1998,
determined by applying year-end currency exchange rates to the notional contract
amounts, represented a net unrealized gain of $1.0 million in 1999 and a net
unrealized loss of $0.2 million in 1998. The Company's policy is to defer gains
and losses on these contracts until the corresponding losses and gains are
recognized on the items being hedged. Both the contract gains and losses and the
gains and losses on the items being hedged are included in selling and
administrative expenses.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash investments, forward
currency contracts, and accounts receivable. The Company maintains cash
investments primarily in U.S. Treasury and government agency securities and
corporate debt securities,
21
23
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
C. FINANCIAL INSTRUMENTS -- (CONTINUED)
rated AA or higher, which have minimal credit risk. The Company 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.
D. DEBT
Long-term debt at December 31, 1999 and 1998 consisted of the following (in
thousands):
1999 1998
---- ----
Mortgage notes payable................................. $ 9,699 $ 9,939
Capital equipment notes payable........................ 0 1,087
Other long-term debt................................... 3,908 3,483
------- -------
Total............................................. 13,607 14,509
Less current maturities.............................. 4,659 1,309
------- -------
$ 8,948 $13,200
======= =======
The total maturities of long-term debt for the succeeding five years and
thereafter are: 2000 -- $4.7 million; 2001 -- $0.2 million; 2002 -- $0.3
million; 2003 -- $0.3 million; 2004 -- $0.3 million and $7.8 million thereafter.
Revolving Credit Agreement
The Company's available revolving credit line, in effect through January
31, 2001, is $120.0 million. At expiration of the revolver, any amounts
outstanding are converted into a two year term note. As of December 31, 1999, no
amounts were outstanding under this agreement. The terms of this line of credit
include restrictive covenants regarding working capital, tangible net worth, and
leverage. Interest rates on borrowings are either at the stated prime rate,
based upon Eurocurrency, or certificate of deposit interest rates. Pursuant to
the terms of the credit agreement, the Company may incur additional indebtedness
of up to $30.0 million outside the agreement provided that the liabilities of
the Company, exclusive of deferred income taxes and subordinated debt, shall not
exceed 100% of the Company's tangible net worth.
Mortgage Notes Payable
In 1983, the Company received 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 a mortgage on the Company's property at 321
Harrison Avenue which may, at the Company's option, become subordinated to
another mortgage up to a maximum of $5.0 million. Interest for the first 4 1/2
years of the note was capitalized up to a principal amount of $5.0 million.
Since September 30, 1987, the Company has been making semi-annual interest
payments.
In conjunction with the purchase of operating facilities in San Jose, the
Company received a $5.5 million mortgage loan which matures on August 31, 2000.
The loan is collateralized by a mortgage on the San Jose facilities. The loan
bears interest at 8.1% per annum and is payable in 59 consecutive monthly
installments of $0.05 million with a $4.6 million balloon payment due at
maturity. The terms of this mortgage note payable include principal prepayment
penalty clauses.
22
24
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
D. DEBT -- (CONTINUED)
Short-term Borrowings
The weighted average interest rates on short-term borrowings outstanding as
of December 31, 1999 and 1998 was 1.8% and 2.1%, respectively.
E. COMMITMENTS
Rental expense for the years ended December 31, 1999, 1998, and 1997 was
$18.8 million, $17.7 million, and $15.1 million, respectively. Minimum annual
rentals under all noncancellable leases are: 2000 -- $11.6 million; 2001 -- $8.9
million; 2002 -- $6.2 million; 2003 -- $4.2 million; 2004 -- $1.7 million; and
$6.5 million thereafter, totaling $39.1 million.
F. NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net
income per common share (in thousands, except per share amounts):
1999 1998 1997
---- ---- ----
Net income............................................ $191,694 $102,117 $127,608
======== ======== ========
Shares used in net income per common share -- basic... 170,519 167,645 166,868
Effect of dilutive securities:
Employee and director stock options.............. 7,540 3,494 5,202
Employee stock purchase rights................... 491 791 568
-------- -------- --------
Dilutive potential common shares.................... 8,031 4,285 5,770
-------- -------- --------
Shares used in net income per common
share -- diluted.................................... 178,550 171,930 172,638
-------- -------- --------
Net income per common share -- basic.................. $ 1.12 $ 0.61 $ 0.76
======== ======== ========
Net income per common share -- diluted................ $ 1.07 $ 0.59 $ 0.74
======== ======== ========
Options to purchase 0.1 million shares of common stock in 1999, 4.0 million
shares in 1998, and 0.8 million shares in 1997 were outstanding during the years
then ended, but were not included in the year to date calculation of diluted net
income per share because the options' exercise price was greater than the
average market price of the common shares during those periods.
G. RETIREMENT PLANS
The Company has defined benefit pension plans covering substantially all
domestic employees and employees of certain non U.S. subsidiaries. Benefits
under these plans are based on the employees' years of service and compensation.
The Company'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, the Company has an unfunded supplemental defined
benefit plan in the United States to provide retirement benefits in excess of
levels allowed by the Employment Retirement Income Security Act (ERISA).
On December 31, 1999, the U.S. defined benefit pension plan (the "U.S.
plan") was amended to update all participating employees accrued benefit to
reflect their average pay over the last five years.
During the fourth quarter of 1999, the Company offered all eligible
domestic employees participating in the U.S. plan a choice; to continue to have
benefits grow in the U.S. plan and continue to be eligible for the current
Savings plan match described in "Note: K Savings Plan" or to stop growing
benefits in the U.S plan
23
25
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
G. RETIREMENT PLANS -- (CONTINUED)
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.
The expense of these defined benefit pension plans and the December 31
balances of plan assets and obligations are shown below (in thousands):
1999 1998 1997
---- ---- ----
EXPENSE
Service cost............................................ $ 7,874 $5,852 $5,057
Interest cost........................................... 8,247 6,789 6,031
Expected return on plan assets.......................... (7,394) (6,317) (5,413)
Amortization of unrecognized:
Net transition obligation.......................... 102 81 67
Prior service cost................................. 612 584 525
Net loss........................................... 1,592 1,196 1,024
Other................................................... (87) -- --
------- ------ ------
Total expense........................................... $10,946 $8,185 $7,291
======= ====== ======
1999 1998 1997
---- ---- ----
WEIGHTED AVERAGE ASSUMPTIONS
Discount rate............................................... 7.75% 7.0% 7.0%
Expected return on plan assets.............................. 9.0% 9.0% 9.0%
Salary progression rate..................................... 5.0% 5.0% 5.0%
ASSETS AND OBLIGATIONS 1999 1998
---------------------- -------- -------
Projected benefit obligation:
Beginning of year......................................... $121,234 $98,149
Service cost.............................................. 7,874 5,852
Interest cost............................................. 8,247 6,789
Actuarial (gain) loss..................................... (10,983) 12,132
Benefits paid............................................. (3,324) (2,309)
Plan amendment............................................ 6,820
Curtailment............................................... (5,682)
Non U.S. currency movement................................ 360 621
-------- -------
End of year............................................... 124,546 121,234
Fair value of plan assets:
Beginning of year......................................... 93,594 77,809
Company contributions..................................... 6,131 6,224
Actual return............................................. 14,996 11,668
Benefits paid............................................. (3,324) (2,309)
Non U.S. currency movement................................ 138 202
-------- -------
End of year................................................. 111,535 93,594
-------- -------
Funded status............................................... (13,011) (27,640)
24
26
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
G. RETIREMENT PLANS -- (CONTINUED)
ASSETS AND OBLIGATIONS 1999 1998
- ---------------------- -------- -------
Unrecognized prior service cost............................. 7,566 3,571
Unrecognized net transition obligation...................... 646 567
Unrecognized net actuarial (gain) loss...................... (5,993) 17,136
-------- -------
Accrued pension cost........................................ (10,792) $(6,366)
======== =======
The following table provides amounts recognized in the statement of
financial position as of December 31, of both years (in thousands):
1999 1998
-------- --------
Prepaid pension cost................................... $ 554 $ 2,519
Accrued benefit liability.............................. (11,346) (8,885)
-------- --------
Accrued pension cost................................... $(10,792) ($ 6,366)
-------- --------
There is no additional minimum pension liability to be recognized as of
December 31, 1999 and 1998. 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 were $19.9 million,
$13.4 million and $3.7 million, respectively, as of December 31, 1999 and $17.6
million, $11.5 million and $2.5 million, respectively, as of December 31, 1998.
H. COMMON STOCK REPURCHASE PROGRAM
The Company's Board of Directors has authorized the repurchase of 20.0
million shares of the Company's stock on the open market. In 1999, the Company
repurchased 5.6 million shares at a cost of $207.8 million, increasing the
cumulative shares purchased under this program through 1999 to 16.2 million
shares at an aggregate cost of $393.3 million. The Company records treasury
stock at cost.
I. COMMON STOCK SPLIT
On July 30, 1999 the Company's Board of Directors authorized a two-for-one
stock split effected in the form of a 100% stock dividend distributed on August
31, 1999 to shareholders of record as of August 17, 1999. As a result of the
stock split, the accompanying consolidated financial statements reflect an
increase in the number of outstanding shares of common stock and the transfer of
the par value of these additional shares from paid-in capital. All share and per
share amounts have been restated to reflect the retroactive effect of the stock
split, except for the capitalization of the Company.
J. STOCK BASED COMPENSATION
At December 31, 1999, the Company had both stock option plans and stock
purchase plans. The Company previously adopted SFAS No. 123 "Accounting for
Stock-Based Compensation" (Statement 123), and as permitted by this standard,
will continue to apply Accounting Principles Board (APB) Opinion 25 and related
interpretations in accounting for its plans. The Company is required to disclose
pro forma net income and net income per common share amounts had compensation
cost for the Company's stock based compensation plans been determined based on
the fair value at the grant dates for awards under those plans. Had compensation
expense for the stock based compensation plans been consistent with the method
of Statement 123, amounts reported for 1999, 1998, and 1997, respectively would
have been; net income of $153.6 million, $ 77.8 million and $115.4 million; net
income per common share -- basic of $0.90; $0.46 and $0.69; and net income per
common share -- diluted of $0.86, $0.45 and $0.67. The impact to reported net
income and per common share amounts of this pro forma disclosure are not
comparable among 1999, 1998,
25
27
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
J. STOCK BASED COMPENSATION -- (CONTINUED)
and 1997 as Statement 123 did not apply to awards prior to 1995. The amounts of
this pro forma disclosure are also not indicative of the impact on net income
for future years.
Stock Option Plans
Under its stock option plans, all of which are fixed, the Company granted
options to directors, officers, certain employees, and other individuals
entitling them to purchase common stock at 100% of market value at the date of
grant. Stock options granted generally have a maximum term of five years and
vest over four years.
Stock option plan activity for the years 1999, 1998, and 1997 follows (in
thousands):
1999 1998 1997
---- ---- ----
Outstanding at January 1................................. 21,548 17,132 17,006
Options granted..................................... 5,631 13,778 6,352
Options exercised................................... (7,272) (2,470) (5,700)
Options canceled.................................... (682) (6,892) (526)
------ ------ ------
Outstanding at December 31............................... 19,225 21,548 17,132
====== ====== ======
Exercisable at December 31............................... 6,355 8,398 6,788
====== ====== ======
Available for grant at December 31....................... 13,867 18,816 11,366
====== ====== ======
Weighted average option exercise price information for the years 1999, 1998
and 1997 follows:
1999 1998 1997
---- ---- ----
Outstanding at January 1................................. $ 9.73 $11.24 $ 6.77
Options granted..................................... $32.13 $11.48 $18.22
Options exercised................................... $ 9.03 $ 6.18 $ 5.88
Options canceled.................................... $12.68 $17.74 $ 9.40
Outstanding at December 31............................... $16.44 $ 9.73 $11.24
Exercisable at December 31............................... $12.59 $ 8.66 $ 8.75
Significant option groups outstanding at December 31, 1999 and related
weighted average price and life information follows (options in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- ------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
RANGE OF CONTRACTUAL AVERAGE AVERAGE
EXERCISE PRICES LIFE (YEARS) SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------------- ------------ ------ -------------- ------ --------------
$3.44 - $9.19...................... 1.68 2,315 $ 5.88 1,497 $ 5.83
$9.59.............................. 3.57 5,233 $ 9.59 1,660 $ 9.59
$9.81 - $11.81..................... 3.03 5,599 $11.57 2,158 $11.21
$12.52 - $44.50.................... 4.62 6,078 $30.86 1,040 $29.99
------ -----
Total......................... 3.52 19,225 $16.44 6,355 $12.59
====== =====
On August 20, 1998, the Stock Option Committee of the Board of Directors
(the "Option Committee") approved a reduction, effective August 27, 1998, in the
exercise price of certain outstanding stock options held by officers and
employees of the Company. Action was taken to attempt to restore the long-term
incentive feature of employee stock options. The Option Committee believed that
at their original exercise prices, the disparity between the exercise price of
these options and recent market prices for the Company's Common
26
28
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
J. STOCK BASED COMPENSATION -- (CONTINUED)
Stock did not provide meaningful long-term incentive to officers and employees
holding these options to perform to their maximum potential and work toward the
success of the Company. In connection with this action the Company canceled
options to purchase 6.4 million shares. The canceled options were originally
granted between May 15, 1997 and July 1, 1998 at exercise prices ranging from
$18.25 to $20.94 per share. New options to purchase 6.4 million shares at $9.59
were then granted. All vesting under the canceled options was lost and new
vesting periods were started. The effect of this option repricing on the above
pro forma disclosures is considered, under Statement 123, a modification of the
terms of the outstanding options. Accordingly, the 1999 and 1998 pro forma
disclosures include compensation cost for the incremental fair value, under
Statement 123, resulting from such modification.
The weighted average fair value at date of grant for options granted during
1999, 1998 and 1997 was $16.21, $5.35 and $8.06 per option, respectively. The
fair value of options at date of grant was estimated using the Black-Scholes
model with the following weighted average assumptions:
1999 1998 1997
---- ---- ----
Expected life (years)............................... 4.1 4.3 4.3
Interest rate....................................... 6.1% 5.5% 6.5%
Volatility.......................................... 56.7% 47.9% 44.2%
Dividend yield...................................... 0.0% 0.0% 0.0%
Employee Stock Purchase Plans
The Company has an Employee Stock Purchase plan. Under this plan, eligible
employees may purchase shares of common stock through 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 the Company's common stock on the
first business day in January (July for new hires) or the last business day of
December. In January 2000, the Company issued 1.0 million shares of common stock
to employees who participated in the plan during 1999 at a weighted-average
price of $17.96 per share. Currently, there are 2.2 million shares reserved for
issuance.
The weighted-average fair value of purchase rights granted in 1999, 1998
and 1997 was $8.18, $6.51 and $3.85, respectively. The fair value of the
employees' purchase rights was estimated using the Black-Scholes model with the
following assumptions for 1999, 1998 and 1997, respectively; dividend yield of
0.0% for all years; an expected life of 1 year for all years; expected
volatility of 58.4%, 58.8% and 45.5%; and risk-free interest rates of 4.5%, 5.5%
and 5.6%.
K. SAVINGS PLANS
The Company sponsors a Savings Plan covering substantially all U.S.
employees. Under this plan, employees may contribute up to 12% of their
compensation (subject to Internal Revenue Service limitations). The Company
annually matches employee contributions up to 6% of such compensation at rates
ranging from 50% to 100%. The Company's contributions vest after two years,
although contributions for those employees with five years of service vest
immediately. The Company has also established a Supplemental Savings Plan to
provide savings benefits in excess of those allowed by ERISA. The provisions of
this plan are the same as the Savings Plan. Under the Company's savings plans,
amounts charged to operations were $9.8 million in 1999 and $9.3 million in 1998
and 1997.
Beginning in January 2000, domestic employees who elected to discontinue
participation in the Company's retirement plan see "Note: G Retirement Plans"
and all new domestic employees are eligible for an increased minimum Company
match of 100% on contributions up to 5%.
27
29
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
L. STOCKHOLDER RIGHTS PLAN
The Company's Board of Directors adopted a Stockholder Rights Plan on March
14, 1990, under which a dividend of one Common Stock Purchase Right was
distributed for each outstanding share of Common Stock. The Plan entitles Stock
Purchase Right holders to purchase shares of the Company's common stock for $10
per share subject to adjustment (the "Purchase Price") in certain events, such
as a tender offer to acquire 30% or more of the Company's outstanding shares.
Under some circumstances, such as a determination by continuing Directors, that
an acquiring party's interests are adverse to those of the Company, the Plan
entitles such holders (other than an acquiring party or adverse party) to
purchase Common Stock (or other securities or consideration owned by the
Company) having a value equal to two times the Purchase Price of the right for
the Purchase Price. The Rights expired on March 26, 2000.
M. INCOME TAXES
The components of income before income taxes and the provision for income
taxes as shown in the consolidated statements of income are as follows (in
thousands)
1999 1998 1997
---- ---- ----
Income before income taxes:
United States................................. $239,453 $131,571 $161,942
Non U.S....................................... 34,396 14,311 31,403
-------- -------- --------
$273,849 $145,882 $193,345
======== ======== ========
Provision (credit) for income taxes:
Current:
U.S. Federal............................. $ 65,104 $ 43,501 $ 45,302
Non U.S.................................. 14,296 11,021 13,053
State.................................... 6,856 3,850 6,041
-------- -------- --------
86,256 58,372 64,396
-------- -------- --------
Deferred:
U.S. Federal.................................. (184) (6,102) 77
Non U.S....................................... (3,461) (7,655) 1,140
State......................................... (456) (850) 124
-------- -------- --------
(4,101) (14,607) 1,341
-------- -------- --------
$ 82,155 $ 43,765 $ 65,737
======== ======== ========
28
30
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
M. INCOME TAXES -- (CONTINUED)
Significant components of the Company's deferred tax assets (liabilities)
as of December 31, 1999 and 1998 are as follows (in thousands):
1999 1998
---- ----
Deferred tax assets:
Inventory valuations.......................... $ 25,600 $ 28,605
Accruals...................................... 5,861 9,786
Vacation...................................... 6,675 7,257
In process research and development........... 2,652 2,751
Deferred revenue.............................. 3,902 2,741
U.S. Federal operating loss carryforwards..... 341 350
Tax credits................................... 3,672 1,955
Other......................................... 1,013 0
-------- --------
Total deferred tax assets.......................... 49,716 53,445
-------- --------
Deferred tax liabilities:
Excess of tax over book depreciation.......... (8,824) (15,292)
Amortization.................................. (1,303) (2,023)
Pension....................................... (3,023) (3,482)
Other......................................... (757) (940)
-------- --------
Total deferred tax liabilities..................... (13,907) (21,737)
-------- --------
Net deferred asset................................. $ 35,809 $ 31,708
======== ========
At December 31, 1999 the Company has U.S. Federal operating loss
carryforwards of approximately $1.0 million that expire in the years 2000
through 2002. The Company has approximately $1.6 million of U.S. business tax
credit carryforwards that expire in the years 2007 through 2011. In addition,
the Company has $1.8 in research and experimentation tax credits eligible to be
realized beginning in October 2000. These losses and credits are limited in
their use by "change in ownership" rules as defined in the Internal Revenue Code
of 1986.
A reconciliation of the effective tax rate for the years 1999, 1998, and
1997 follows:
1999 1998 1997
---- ---- ----
U.S. statutory federal tax rate..................... 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit...... 1.5 1.3 2.1
Tax credits......................................... (1.3) (3.1) (1.6)
Export sales corporation............................ (4.7) (3.4) (2.8)
Non-deductible costs related to acquisitions........ 0.7
Other, net.......................................... (0.5) 0.2 0.6
---- ---- ----
30.0% 30.0% 34.0%
==== ==== ====
U.S. federal taxes have not been provided for approximately $30.0 million
of cumulative undistributed earnings of a non-U.S. manufacturing subsidiary. The
Company intends to reinvest these earnings indefinitely in operations outside
the US.
29
31
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
N. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
The Company has five principal operating segments which are the design,
manufacturing and marketing of semiconductor test systems, backplane connection
systems, circuit-board test systems, telecommunication test systems, and
software test systems. These operating segments were determined based upon the
nature of the products and services offered. The Company has three reportable
segments; semiconductor test systems segment, backplane connection systems
segment, and other test systems segment. The other test systems segment is
comprised of circuit-board test systems, telecommunication test systems, and
software test systems.
The Company 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 1999, principally all of the
Company's operating segments reported sales to Motorola Inc. accounting for a
total of 11% of consolidated net sales. During 1998 and 1997 no individual
customer accounted for more than 10% of consolidated net sales.
SEMICONDUCTOR BACKPLANE OTHER
TEST CONNECTION TEST CORPORATE
SYSTEMS SYSTEMS SYSTEMS AND
SEGMENT SEGMENT SEGMENT ELIMINATIONS CONSOLIDATED
------------- ---------- -------- ------------ ------------
1999
Sales to unaffiliated customers... $1,210,543 $373,051 $207,318 -- $1,790,912
Intersegment sales................ -- 15,069 -- ($15,069) --
---------- -------- -------- -------- ----------
Net sales......................... 1,210,543 388,120 207,318 (15,069) 1,790,912
Income (loss) before taxes (1).... 287,960 63,249 (14,298) (63,062) 273,849
Total assets (2).................. 564,536 219,763 94,096 686,656 1,565,051
Property additions (3)............ 47,054 38,500 8,493 57,109 151,156
Depreciation and amortization
expense(3)...................... 32,086 18,567 8,357 27,376 86,386
1998
Sales to unaffiliated customers... $ 967,147 $268,363 $253,641 -- $1,489,151
Intersegment sales................ -- 11,473 -- ($11,473) --
---------- -------- -------- -------- ----------
Net sales......................... 967,147 279,836 253,641 (11,473) 1,489,151
Income before taxes (1)........... 104,586 34,027 32,245 (24,976) 145,882
Total assets (2).................. 510,938 189,338 114,734 497,804 1,312,814
Property additions (3)............ 87,390 31,417 5,866 39,767 164,440
Depreciation and amortization
expense(3)...................... 39,973 14,079 7,581 14,671 76,304
30
32
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
N. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION -- (CONTINUED)
SEMICONDUCTOR BACKPLANE OTHER
TEST CONNECTION TEST CORPORATE
SYSTEMS SYSTEMS SYSTEMS AND
SEGMENT SEGMENT SEGMENT ELIMINATIONS CONSOLIDATED
------------- ---------- -------- ------------ ------------
1997
Sales to unaffiliated customers... $ 849,144 $218,532 $194,092 4,506 $1,266,274
Intersegment sales................ -- 16,235 -- ($16,235) --
---------- -------- -------- -------- ----------
Net sales......................... 849,144 234,767 194,092 (11,729) 1,266,274
Income before taxes (1)........... 166,766 33,501 10,431 (17,353) 193,345
Total assets (2).................. 593,290 159,116 118,813 380,455 1,251,674
Property additions (3)............ 76,555 31,523 10,555 13,498 132,131
Depreciation and amortization
expense(3)...................... 34,304 9,486 5,118 10,243 59,151
- ---------------
(1) Income before taxes of the principal businesses exclude the effects of
employee profit sharing, management incentive compensation, other
unallocated expenses, net interest income, and certain special charges. In
1997 the Company recorded a special charge of $5.0 million for acquired
in-process technology.
(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.
Information as to the Company's sales in different geographical areas is as
follows (in thousands):
1999 1998 1997
---- ---- ----
Sales to unaffiliated customers (1):
United States..................................... $ 859,638 $ 797,143 $ 616,838
Asia Pacific region............................... 519,364 266,409 299,624
Europe............................................ 268,637 247,795 190,220
Japan............................................. 89,546 102,900 114,212
Other............................................. 53,727 74,904 45,380
---------- ---------- ----------
$1,790,912 $1,489,151 $1,266,274
========== ========== ==========
- ---------------
(1) Sales are attributable to geographic areas based on location of customer
site.
Because a substantial portion of the Company'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.
31
33
SUPPLEMENTARY INFORMATION
(UNAUDITED)
The following sets forth certain unaudited consolidated quarterly
statements of operations data for each of the Company's last eight quarters. In
management's opinion, this quarterly information reflects all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation 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 the Company
and the notes thereto included elsewhere herein.
1999*
--------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
Net sales.................................... $344,454 $400,904 $497,039 $548,515
Expenses:
Cost of sales.............................. 219,858 236,940 281,299 309,655
Engineering and development................ 47,724 56,829 60,331 63,686
Selling and administrative................. 54,481 59,386 70,470 72,055
-------- -------- -------- --------
322,063 353,155 412,100 445,396
-------- -------- -------- --------
Income from operations....................... 22,391 47,749 84,939 103,119
Interest income.............................. 3,778 3,842 4,794 4,893
Interest expense............................. (462) (442) (217) (535)
-------- -------- -------- --------
Income before income taxes................... 25,707 51,149 89,516 107,477
Provision for income taxes................... 7,712 15,345 26,855 32,243
-------- -------- -------- --------
Net income................................... $ 17,995 $ 35,804 $ 62,661 $ 75,234
======== ======== ======== ========
Net income per common share -- basic......... $ 0.11 $ 0.21 $ 0.37 $ 0.44
======== ======== ======== ========
Net income per common share -- diluted....... $ 0.10 $ 0.20 $ 0.35 $ 0.42
======== ======== ======== ========
1998*
--------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
Net sales.................................... $431,569 $406,236 $335,227 $316,119
Expenses:
Cost of sales.............................. 251,947 246,457 239,131 209,639
Engineering and development................ 48,922 49,164 49,569 47,503
Selling and administrative................. 58,713 57,549 47,288 49,335
-------- -------- -------- --------
359,582 353,170 335,988 306,477
-------- -------- -------- --------
Income (loss) from operations................ 71,987 53,066 (761) 9,642
Interest income.............................. 3,473 2,871 2,756 4,414
Interest expense............................. (247) (266) (120) (933)
-------- -------- -------- --------
Income before income taxes................... 75,213 55,671 1,875 13,123
Provision for income taxes................... 25,572 16,311 600 1,282
-------- -------- -------- --------
Net income................................... $ 49,641 $ 39,360 $ 1,275 $ 11,841
======== ======== ======== ========
Net income per common share -- basic......... $ 0.30 $ 0.24 $ 0.01 $ 0.07
======== ======== ======== ========
Net income per common share -- diluted....... $ 0.29 $ 0.23 $ 0.01 $ 0.07
======== ======== ======== ========
- ---------------
* Note: Previously published quarterly financial data have been restated to give
effect to the two-for-one stock split effected in the form of a 100% stock
dividend distributed on August 31, 1999.
32
34
ITEM 9: CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Certain information relating to directors and executive officers of the
Company, executive compensation, security ownership of certain beneficial owners
and management, and certain relationships and related transactions is
incorporated by reference herein from the Company's definitive proxy statement
in connection with its Annual Meeting of Shareholders to be held on May 25,
2000, 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 the
Company, executive compensation, security ownership of certain beneficial owners
and management, and certain relationships and related transactions is
incorporated by reference herein from the Company's definitive proxy statement
in connection with its Annual Meeting of Shareholders to be held on May 25,
2000, 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.
Certain information relating to directors and executive officers of the
Company, executive compensation, security ownership of certain beneficial owners
and management, and certain relationships and related transactions is
incorporated by reference herein from the Company's definitive proxy statement
in connection with its Annual Meeting of Shareholders to be held on May 25,
2000, 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 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Certain information relating to directors and executive officers of the
Company, executive compensation, security ownership of certain beneficial owners
and management, and certain relationships and related transactions is
incorporated by reference herein from the Company's definitive proxy statement
in connection with its Annual Meeting of Shareholders to be held on May 25,
2000, 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.
33
35
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) 1. FINANCIAL STATEMENTS
The following consolidated financial statements are included in Item 8:
Balance Sheets as of December 31, 1999 and 1998
Statements of Income for the years ended December 31, 1999, 1998, and
1997
Statements of Changes in Shareholders' Equity for the years ended
December 31, 1999, 1998, and 1997
Statements of Cash Flows for the years ended December 31, 1999, 1998,
and 1997
(a) 2. FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedule is included in Item
14(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) REPORT ON FORM 8-K
There have been no Form 8-K filings during the three months ended December
31, 1999.
34
36
ITEM 14(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 AT
BEGINNING OF COST AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ------------ ---------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS)
----------------------------------------------------------------
Valuation reserve deducted in the balance
sheet from the asset to which it
applies:
Accounts receivable:
1999 Allowance for doubtful accounts..... $2,395 $1,407 $ 804 $196 $4,410
====== ====== ====== ==== ======
1998 Allowance for doubtful accounts..... $1,938 $ 17 $1,044 $604 $2,395
====== ====== ====== ==== ======
1997 Allowance for doubtful accounts..... $1,936 $ -- $ 50 $ 48 $1,938
====== ====== ====== ==== ======
35
37
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 3.1 to the Company's Annual
Company, as amended Report on Form 10-K for the fiscal year
ended December 31, 1997.
3.2 Amendment, dated May 23, 1996, to Exhibit 3.2 to the Company's Annual
Restated Articles of Organization of the Report on Form 10-K for the fiscal year
Company, as amended ended December 31, 1996.
3.3 Amended and Restated Bylaws of the Exhibit 3.3 to the Company's Annual
Company Report on Form 10-K for the fiscal year
ended December 31, 1996.
4.1 Rights Agreement between the Company and Exhibit 4.1 to the Company's Annual
The First National Bank of Boston dated Report on Form 10-K for the fiscal year
as of March 14, 1990 ended December 31, 1997.
10.1 Amended and Restated Multicurrency Exhibit 10.3 to the Company's Annual
Revolving Credit Agreement dated as of Report on Form 10-K for the fiscal year
January 1, 1996. ended December 31, 1995.
10.2 First Amendment to Amended and Restated Exhibit 10.2 to the Company's Annual
Multicurrency Revolving Credit Agreement Report on Form 10-K for the fiscal year
dated as of January 31, 1997 ended December 31, 1997.
10.3 Second Amendment to Amended and Restated Exhibit 10.3 to the Company's Annual
Multicurrency Revolving Credit Agreement Report on Form 10-K for the fiscal year
dated as of May 20, 1997 ended December 31, 1997.
10.4 Third Amendment to Amended and Restated Exhibit 10.4 to the Company's Annual
Multicurrency Revolving Credit Agreement Report on Form 10-K for the fiscal year
dated as of August 21, 1998 ended December 31, 1998
10.5 Fourth Amendment to Amended and Restated
Multicurrency Revolving Credit Agreement
dated October 1, 1999.
10.6 Teradyne, Inc. Supplemental Executive Exhibit 10.4 to the Company's Annual
Retirement Plan Report on Form 10-K for the fiscal year
ended December 31, 1997.
10.7 1991 Employee Stock Option Plan, as Exhibit 4.2 to the Company's
amended Registration Statement on Form S-8
(Registration Statement No. 333-07177).
10.8 Megatest Corporation 1990 Stock Option Exhibit 4.1 to the Company's
Plan Registration Statement on Form S-8
(Registration Statement No. 333-64683).
10.9 Megatest Corporation Director Stock Exhibit 4.2 to the Company's
Option Plan Registration Statement on Form S-8
(Registration Statement No. 333-64683).
10.10 1996 Stock Purchase Plan Exhibit 4.1 to the Company's
Registration Statement on Form S-8
(Registration Statement No. 333-07177).
10.11 Master Lease Agreement between Megatest Exhibit 10.10 to the Company's Annual
and General Electric Capital Corporation Report on Form 10-K for the fiscal year
dated August 10, 1995 ended December 31, 1995.
10.12 Loan and Security Agreement between Exhibit 10.11 to the Company's Annual
Megatest and the CIT Group/Equipment Report on Form 10-K for the fiscal year
Financing, Inc. dated August 14, 1995 ended December 31, 1995.
36
38
EXHIBIT NO. DESCRIPTION SEC DOCUMENT REFERENCE
- ----------- ----------- ----------------------
10.13 Deed of Trust, Financing Statement, Exhibit 10.12 to the Company's Annual
Security Agreement and Fixture Filing Report on Form 10-K for the fiscal year
between Megatest and the Sun Life ended December 31, 1995.
Assurance Company of Canada (U.S.) dated
August 25, 1995
10.14 1997 Employee Stock Option Plan Exhibit 10.14 to the Company's Annual
Report on Form 10-K for the fiscal year
ended December 31, 1996.
10.15 Letter Agreement dated January 24, 1997 Exhibit 10.15 to the Company's Annual
between the Company and Executive Report on Form 10-K for the fiscal year
Officer ended December 31, 1996.
10.16 1996 Non-Employee Director Stock Option Exhibit 10.15 to the Company's Annual
Plan Report on Form 10-K for the fiscal year
ended December 31, 1996.
10.17 Letter Agreement dated June 1, 1997 Exhibit 10.15 to the Company's Annual
between the Company and Member of Board Report on Form 10-K for the fiscal year
ended December 31, 1997.
10.18 Letter Agreement dated June 1, 1997 Exhibit 10.16 to the Company's Annual
between the Company and Member of Board Report on Form 10-K for the fiscal year
ended December 31, 1997.
21.1 Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
27.2 Financial Data Schedule for the Form
10-Q for the nine months ended October
3, 1999
27.3 Financial Data Schedule for the Form
10-Q for the six months ended July 4,
1999
27.4 Financial Data Schedule for the Form
10-Q for the three months ended April 4,
1999
27.5 Financial Data Schedule for the Form Exhibit 27.1 to the Company's Annual
10-Q for the fiscal year ended December Report on Form 10-K for the fiscal year
31, 1998 ended December 31, 1998.
27.6 Financial Data Schedule for the Form Exhibit 27.2 to the Company's Annual
10-Q for the nine months ended September Report on Form 10-K for the fiscal year
27, 1998 ended December 31, 1998.
27.7 Financial Data Schedule for the Form Exhibit 27.3 to the Company's Annual
10-Q for the six months ended June 28, Report on Form 10-K for the fiscal year
1998 ended December 31, 1998.
27.8 Financial Data Schedule for the Form Exhibit 27.4 to the Company's Annual
10-Q for the three months ended March Report on Form 10-K for the fiscal year
29, 1998 ended December 31, 1998.
27.9 Financial Data Schedule for the Form Exhibit 27.1 to the Company's Annual
10-K for the fiscal year ended December Report on Form 10-K for the fiscal year
31, 1997 ended December 31, 1997.
27.10 Financial Data Schedule for the Form Exhibit 27.2 to the Company's Annual
10-Q for the nine months ended September Report on Form 10-K for the fiscal year
28, 1997 ended December 31, 1997.
27.11 Financial Data Schedule for the Form Exhibit 27.3 to the Company's Annual
10-Q for the six months ended June 29, Report on Form 10-K for the fiscal year
1997 ended December 31, 1997.
27.12 Financial Data Schedule for the Form Exhibit 27.4 to the Company's Annual
10-Q for the three months ended March Report on Form 10-K for the fiscal year
30, 1997 ended December 31, 1997.
37
39
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 24th day of March,
2000.
TERADYNE, INC.
By: /s/ MICHAEL A. BRADLEY
------------------------------------
MICHAEL A. BRADLEY,
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
--------- -----
Chairman of the Board March , 2000
- ---------------------------------------------------
ALEXANDER V. D'ARBELOFF
/s/ GEORGE W. CHAMILLARD President, Chief Executive Officer, March 24, 2000
- --------------------------------------------------- and Member of the Board
GEORGE W. CHAMILLARD
/s/ MICHAEL A. BRADLEY Vice President and March 24, 2000
- --------------------------------------------------- Chief Financial Officer
MICHAEL A. BRADLEY
/s/ DONALD J. HAMMAN Controller (Principal March 24, 2000
- --------------------------------------------------- Accounting Officer)
DONALD J. HAMMAN
Director March , 2000
- ---------------------------------------------------
JAMES W. BAGLEY
/s/ ALBERT CARNESALE Director March 24, 2000
- ---------------------------------------------------
ALBERT CARNESALE
/s/ DANIEL S. GREGORY Director March 24, 2000
- ---------------------------------------------------
DANIEL S. GREGORY
Director March , 2000
- ---------------------------------------------------
DWIGHT H. HIBBARD
/s/ JOHN P. MULRONEY Director March 24, 2000
- ---------------------------------------------------
JOHN P. MULRONEY
/s/ VINCENT M. O'REILLY Director March 24, 2000
- ---------------------------------------------------
VINCENT M. O'REILLY
Director March , 2000
- ---------------------------------------------------
JAMES A. PRESTRIDGE
/s/ OWEN W. ROBBINS Director March 24, 2000
- ---------------------------------------------------
OWEN W. ROBBINS
Director March , 2000
- ---------------------------------------------------
RICHARD J. TESTA
38
40
SIGNATURE TITLE
--------- -----
/s/ ROY A. VALLEE Director March 24, 2000
- ---------------------------------------------------
ROY A. VALLEE
/s/ PATRICIA S. WOLPERT Director March 24, 2000
- ---------------------------------------------------
PATRICIA S. WOLPERT
39