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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, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-6462
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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 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 20, 1998 was $3.7 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 20, 1998 was 83,968,395 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement in connection with its 1998
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 manufacturer of electronic test systems and backplane
connection systems used in the electronics and telecommunications industries.
For financial information concerning these two industry segments, see "Note N:
Industry 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."
ELECTRONIC TEST SYSTEMS
The Company designs, manufactures, markets, and services electronic test
systems and related software used by component manufacturers in the design and
testing of their products and by electronic equipment manufacturers for the
design and testing of circuit boards and other assemblies. Manufacturers use
such systems and 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. The Company's electronic systems
are also used by telephone operating companies for the testing and maintenance
of their subscriber telephone lines and related equipment.
Electronic test systems produced by the Company include: (i) test systems
for a wide variety of semiconductors, including logic, memory, and mixed signal
integrated circuits ("semiconductor test systems"), (ii) test systems for
circuit boards and other assemblies ("circuit-board test systems"), (iii) test
systems for telephone lines and networks ("telecommunications test systems"),
and (iv) software test programs for communications networks, computerized
telecommunications systems, and other software products ("software test").
Semiconductor test systems accounted for 67% of consolidated net sales in 1997,
64% in 1996, and 69% in 1995. Circuit-board test systems accounted for 9% of
consolidated net sales in 1997, 13% in 1996, and 11% in 1995. Telecommunications
test systems accounted for 5% of consolidated net sales in 1997 and 7% in 1996
and 1995. Software test accounted for 2% of consolidated net sales in 1997 and
1% in 1996.
The Company's systems are extremely complex and require extensive support
both by the customer and by the Company. Prices for the Company's systems can
reach $5 million or more.
BACKPLANE CONNECTION SYSTEMS
The Company also manufactures backplane connection systems, 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 accounted for 17% of consolidated net sales in 1997, 15% in 1996, and
13% in 1995.
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MARKETING AND SALES
MARKETS
The Company sells its products across most sectors of the electronics
industry and to companies in other industries that use electronic devices in
high volume. No single customer accounted for 10% or more of consolidated net
sales in 1997. In 1997, 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 1997, 1996, and 1995. Sales are also made within
each of the Company's segments to customers who are government contractors.
Approximately 11% of backplane connection systems sales and less than 2% of
electronic test systems sales fell into this category during 1997.
The Company's customers outside the United States are located primarily in
Europe, the Asia Pacific region, and Japan. The Company sells in these areas
both directly and through non U.S. sales subsidiaries. Substantially all of the
Company's manufacturing activities are conducted in the United States.
Sales to customers outside the United States accounted for 51% of
consolidated net sales in 1997, 54% in 1996, and 52% in 1995. Sales of products
and services from locations outside the United States accounted for less than
10% of consolidated net sales in all periods presented. Identifiable assets of
the Company's non U.S. locations, consisting principally of operating assets
used in support of domestic export sales, were approximately $129.4 million at
December 31, 1997, $130.3 million at December 31, 1996, and $125.2 million at
December 31, 1995. Of these identifiable assets at December 31, 1997, $69.2
million were in Europe, $50.1 million were in Japan, and $10.1 million were in
the Asia Pacific region.
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.
DISTRIBUTION
The Company sells its products primarily through a direct sales force. The
Company has sales and service offices throughout North America, Europe, the Asia
Pacific region, and Japan.
COMPETITION
The Company faces substantial competition throughout the world, primarily
from electronic test systems manufacturers located in the United States, Europe,
and Japan, as well as internal suppliers at several of the Company's customers.
Some of these competitors have substantially greater financial and other
resources with which to pursue engineering, manufacturing, marketing, and
distribution of their products. 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, 1997, the Company's backlog of unfilled orders for
electronic test systems and backplane connection systems was approximately
$772.5 million and $90.0 million, respectively, compared with $433.9 million and
$82.5 million, respectively, on December 31, 1996. Of the backlog at December
31, 1997, approximately 88% of the electronic test systems backlog, and
approximately 86% of the backplane connection systems backlog are expected to be
delivered in 1998. The electronic test systems backlog at December 31, 1997
includes $20.3 million of United States government orders for M900 VXI Digital
Test subsystems for the U.S. Navy's Consolidated Automated Support System (CASS)
which are unfunded. The unfunded orders are for shipments scheduled to be
delivered in 1999. The Company's past experience
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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 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. The Company relies on certain intellectual property protections to
preserve its intellectual property rights. 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, 1997, the Company employed approximately 6,300 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 $162.5 million in
1997, $143.9 million in 1996, and $123.5 million in 1995. These expenditures
amounted to approximately 13% of consolidated net sales in 1997, 12% in 1996,
and 10% in 1995.
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 include laws such as 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.
BUSINESS EXPERIENCE FOR THE
EXECUTIVE OFFICER AGE POSITION PAST 5 YEARS
----------------- --- -------- ---------------------------
Alexander V. d'Arbeloff... 70 Chairman of the Board Chairman of the Board of the
Company since 1977; Chief
Executive Officer from 1996 to
1997; President of the Company
from 1971 to 1996; Director of
the Company since 1960.
George W. Chamillard...... 59 President, Chief Executive President and Chief Executive
Officer, and Member of the Officer beginning in 1997;
Board Director of the Company since
1996; President and Chief
Operating Officer from 1996 to
1997; Executive Vice President
of the Company from 1994 to
1996; Vice President of the
Company from 1981 to 1993.
Jeffrey R. Hotchkiss...... 50 Vice President and Chief Chief Financial Officer
Financial Officer beginning in 1997; Vice
President of the Company since
1990.
Michael A. Bradley........ 49 Vice President Vice President of the Company
since 1992.
John M. Casey............. 49 Vice President Vice President of the Company
since 1990.
Ronald J. Dias............ 54 Vice President Vice President of the Company
since 1988.
Donald J. Hamman.......... 46 Controller Controller of the Company since
1994; Director of Corporate
Accounting from 1986 to 1994.
John P. McCabe............ 53 Vice President Vice President of the Company
since 1994; Controller of the
Company from 1975 to 1994.
Stuart M. Osattin......... 52 Vice President and Treasurer Vice President of the Company
since 1994; Treasurer of the
Company since 1980.
Edward Rogas, Jr.......... 57 Vice President Vice President of the Company
since 1984.
David L. Sulman........... 54 Vice President Vice President of the Company
since 1994; Division General
Manager since 1993.
Jack A. VanWoerkom........ 44 Vice President and General Vice President and General
Counsel Counsel of the Company beginning
in 1998; Chief Legal Counsel and
Vice President Development of a
privately owned company from
1994 to 1997; Vice Chairman and
General Counsel of a real estate
investment firm from 1985 to
1993.
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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 INTEREST FLOOR SPACE
-------- -------- --------------
ELECTRONIC TEST SYSTEMS INDUSTRY SEGMENT:
Boston, Massachusetts.................................. Own 492,000
Boston, Massachusetts.................................. Lease 67,000
Agoura Hills, California............................... Own 572,000
Deerfield, Illinois.................................... Own 63,000
Walnut Creek, California............................... Lease 69,000
Kumamoto, Japan........................................ Own 28,000
San Jose, California................................... Own 120,000
BACKPLANE CONNECTION SYSTEMS INDUSTRY SEGMENT:
Nashua, New Hampshire.................................. Own 430,000
Plano, Texas........................................... Lease 18,000
Dublin, Ireland........................................ Lease 46,000
Included in the Agoura Hills property above is 212,000 square feet that the
Company is preparing for occupancy. In addition, 273,000 square feet of floor
space is under construction in North Reading, Massachusetts. The Company expects
to occupy the Agora Hills facility in 1998 and the North Reading facility in
1999.
ITEM 3: LEGAL PROCEEDINGS
The Company is not a party to any litigation that, in the opinion of
management, could reasonably be expected to have a material adverse impact on
the Company's financial position.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The following table shows the market range for the Company's Common Stock
based on reported sales prices on the New York Stock Exchange.
PERIOD HIGH LOW
------ ---- ---
1997 First Quarter........................................ $32 7/8 $23 5/8
Second Quarter....................................... 44 3/4 27
Third Quarter........................................ 58 1/2 40 1/8
Fourth Quarter....................................... 59 3/16 27 1/4
1996 First Quarter........................................ $27 7/8 $16 3/8
Second Quarter....................................... 22 1/2 16
Third Quarter........................................ 18 1/2 11 1/8
Fourth Quarter....................................... 26 1/4 15 1/2
The number of record holders of the Company's Common Stock at February 20,
1998 was 3,118.
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,
----------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales........................... $1,266,274 $1,171,615 $1,191,022 777,731 $633,139
========== ========== ========== ======== ========
Income from continuing operations... $ 127,608 $ 93,574 $ 159,284 76,390 $ 41,202
========== ========== ========== ======== ========
Income from continuing operations
per common share -- basic......... $ 1.53 $ 1.12 $ 1.95 0.98 $ 0.56
========== ========== ========== ======== ========
Income from continuing operations
per common share -- diluted....... $ 1.48 $ 1.10 $ 1.89 0.95 $ 0.54
========== ========== ========== ======== ========
Total assets........................ $1,251,674 $1,096,816 $1,023,831 759,480 $621,607
========== ========== ========== ======== ========
Long-term obligations............... $ 13,141 $ 15,650 $ 18,679 9,111 $ 9,942
========== ========== ========== ======== ========
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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,
------------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
Net sales................................................ $1,266,274 $1,171,615 $1,191,022
========== ========== ==========
Net income............................................... $ 127,608 $ 93,574 $ 159,284
========== ========== ==========
Increase (decrease) in net sales from preceding year:
Amount.............................................. $ 94,659 (19,407) $ 413,291
========== ========== ==========
Percentage.......................................... 8% (2)% 53%
========== ========== ==========
Increase (decrease) in net income from preceding year.... $ 34,034 $ (65,710) $ 82,894
========== ========== ==========
Percentage of net sales:
Net sales........................................... 100% 100% 100%
Expenses:
Cost of sales....................................... 58 62 54
Engineering and development......................... 13 12 10
Selling and administrative.......................... 15 15 15
---------- ---------- ----------
86 89 79
Other income (expense):
Merger expenses..................................... (1)
Net interest income................................. 1 1 1
---------- ---------- ----------
Income before income taxes.......................... 15 12 21
Provision for income taxes.......................... 5 4 8
---------- ---------- ----------
Net income............................................... 10% 8% 13%
========== ========== ==========
RESULTS OF OPERATIONS:
1997 compared to 1996
In 1997, sales increased 8% to a record level of $1,266.3 million from
$1,171.6 million in 1996. The year to year increase in sales was primarily due
to a 12% increase in shipments of semiconductor test systems. Semiconductor test
systems sales increased due to an increase in orders from semiconductor device
manufacturers for capacity expansion following reduced demand in 1996. Sales of
backplane connection systems grew 23% as a result of growth in demand from
networking, data storage and other high technology customers. Sales of software
test systems, while 2% of total sales, were up 180% over 1996 and included the
results of two new acquisitions in 1997 -- Softbridge, Inc. and RSW, Inc.
Offsetting these increases, sales of telecommunications test systems and circuit
board test systems decreased 18% and 23%, respectively, in 1997. Net income
increased from $93.6 million in 1996 to $127.6 million in 1997. Excluding the
effect of pre-tax nonrecurring charges of $5.0 million ($3.2 million after
taxes) in 1997 and $48.9 million ($32.0 million after taxes) in 1996,
comparative net income increased $5.2 million from $125.6 million in 1996 to
$130.8 million.
Incoming orders increased 54%, from $1,045.1 million in 1996 to $1,612.4
million in 1997. The increase in incoming orders was led by a 78% increase in
semiconductor test systems orders including significant orders for several new
products introduced by the Company in the fourth quarter of 1996. As a result of
the increase in orders, the Company's backlog grew 67% in 1997, finishing the
year at $862.5 million.
Cost of sales, as a percentage of sales, decreased from 62% in 1996 to 58%
in 1997. Cost of sales in 1996 included a $34.1 million nonrecurring charge in
connection with the consolidation of the VLSI product lines of Megatest and
Teradyne. Excluding the product line consolidation charge, cost of sales, as a
percentage of 1996 sales, was 59%. The remaining decrease in cost of sales
percentage was the result of increased utilization of the fixed and
semi-variable components of the Company's overhead structure.
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Engineering and development expenses increased from 12% of sales in 1996 to
13% of sales in 1997, an increase of $18.6 million. The expense increases were
primarily due to increased investment in new product development of
semiconductor and software test systems.
Selling and administrative expenses were 15% of sales in both 1996 and
1997. Expenses in 1996 included a one time charge of $10.8 million for salary
continuation and enhanced medical and pension benefits associated with an early
retirement program and other workforce reductions. Excluding this non-recurring
charge selling and administration increased from 14% of sales in 1996 to 15% in
1997. The increase was primarily related to the introduction and marketing of
new semiconductor test system products.
The Company's effective tax rate was 34% in 1997 compared with 33% in 1996.
The Company utilized export sales corporation benefits and certain research and
development tax credits in 1997 and 1996 to operate below the U. S. statutory
rate of 35%.
1996 compared to 1995
In 1996, sales declined 2% to $1,171. 6 million from $1,191.0 million
reached after 53% sales growth in 1995. The decrease was primarily in the
semiconductor test systems product lines, which fell 8% as a result of a
reduction in orders from semiconductor device manufacturers. Sales of
telecommunications test systems also declined by 4% with the completion of the
line-test equipment installation at Deutsche Telekom in Germany. Sales increased
in the other two major product lines of the Company: circuit-board test systems
grew by 19% driven by fulfilling government contracts and increased sales to
commercial customers; and backplane connection systems grew by 15% with strong
demand from the high technology commercial customer base. Net income decreased
from $159.3 million in 1995 to $93.6 million in 1996. Excluding the effect of
pre-tax nonrecurring charges of $48.9 million ($32.0 million after taxes) in
1996 and $5.6 million ($5.6 million after taxes) in 1995, comparative net income
decreased by $39.3 million from $164.9 million to $125.6 million.
Incoming orders decreased 27%, from $1,432.1 million in 1995 to $1,045.1
million in 1996. The most significant decline was in semiconductor test systems
orders which fell 37%. Circuit-board test systems orders, excluding the effect
of $98.0 million in multi-year government contracts received in 1995, were down
8% while backplane connection systems and telecommunications systems increased
49% and 21%, respectively. As a result of the overall decrease in orders, the
Company's backlog fell in 1996, finishing the year at $516.4 million (as
adjusted for $16.4 million in cancellations).
Cost of sales, as a percentage of sales, increased from 54% in 1995 to 62%
in 1996. The 1996 cost of sales included $34.1 million in one time charges
resulting from the Company's decision to accelerate the consolidation of the
VLSI product lines of Megatest and Teradyne. Excluding the product line
consolidation charge, cost of sales, as a percentage of 1996 sales, was 59%. The
remaining increase in cost of sales percentage was the result of the
relationship of fixed manufacturing costs and the costs associated with new
product introductions to the lower level of sales. In addition, there was an
unfavorable change in mix as a greater percentage of total Company sales was
backplane connection systems and circuit-board test systems, whose product
margins are generally lower than semiconductor test systems.
Engineering and development expenses, as a percentage of sales, increased
2% from 10% in 1995 to 12% in 1996. These expenses grew $20.4 million in 1996
primarily as a result of increased investment in new product development of
semiconductor test systems. During 1996, the Company announced major new
products in each of the three semiconductor markets in which it participates.
Selling and administrative expenses were 15% of sales in 1996 and 1995. In
1996, the Company provided $10.8 million for salary continuation payments and
enhanced pension and medical benefits associated with an early retirement
program and other workforce reductions. Excluding this provision selling and
administrative expenses were 14% of sales in 1996.
Interest income increased 36% in 1996 to $19.3 million due to an increase
in the Company's average invested balances and higher interest rates. Interest
expense decreased from $3.0 million in 1995 to $2.4 million in 1996 as an
outstanding capital equipment note was paid.
The Company's effective tax rate was 33% in 1996 compared with 36% in 1995.
The Company utilized export sales corporation benefits and certain research and
development tax credits in 1996 to operate below the
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U. S. statutory rate of 35%. In 1995, the effective rate was above the U. S.
statutory rate as certain merger expenses were nondeductible for income tax
purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and marketable securities balance
decreased $181.6 million in 1997, to $249.9 million. Cash generated from
operations decreased to $13.5 million in 1997 from $250.8 million in 1996,
principally due to increases in accounts receivable and inventory. Accounts
receivable increased $122.5 million in 1997 primarily as a result of a $150.4
million increase in sales in the fourth quarter of 1997 compared to the fourth
quarter of 1996. Inventories increased $133.4 million in 1997 in order to
support the Company's backlog commitment, which increased $346.1 million in
1997. Backlog at the end of 1997 includes a substantial number of the Company's
new products, which require longer manufacturing and test cycle times during
production ramp up. Cash was used to fund additions to property, plant and
equipment of $132.1 million in 1997 and $75.2 million in 1996. Property, plant
and equipment expenditures relate primarily to the expansion of production
capacity.
In 1996, the Company's Board of Directors authorized the repurchase of 5.0
million shares of the Company's stock on the open market. The Company purchased
2.6 million shares for $104.5 million in 1997 and 1.4 million shares for $29.8
million in 1996 under the buyback program. Cash of $44.1 million in 1997 and
$13.5 million in 1996 was generated from the sale of stock to employees under
the Company's stock option and stock purchase plans.
The Company believes its cash, cash equivalents, and marketable securities
balance of $249.9 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 in 1998.
Inflation has not had a significant long-term impact on earnings. If there
were inflation, the Company's efforts to cover cost increases with price
increases could be frustrated in the short-term by its relatively high backlog.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." Comprehensive income is the change in equity of an entity
during a period from transactions and other events from non-owner sources, such
as the cumulative effects from changes in accounting principles and changes in
equity due to fluctuating currency and investments. This statement requires that
changes in comprehensive income be shown in a financial statement that is
displayed with the same prominence as other financial statements. The statement
is effective for annual periods beginning after December 15, 1997 and the
Company will adopt its provisions in fiscal 1998. Reclassification for earlier
periods is required for comparative purposes. Management does not expect the
statement to have a material impact on its financial position or results of
operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information," which changes the manner in which public
companies report information about their operating segments. SFAS No. 131, which
is based on the management approach to segment reporting, establishes
requirements to report selected segment information quarterly and to report
entity-wide disclosures about products and services, major customers, and the
geographic locations in which the entity holds assets and reports revenue.
Management is currently evaluating the effects of this change on its reporting
of segment information. The Company will adopt SFAS No. 131 for its fiscal year
ending December 31, 1998.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition," which
provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions and supercedes SOP 91-1, "Software
Revenue Recognition." SOP 97-2 is effective for transactions entered into
beginning in 1998. Management does not expect the statement to have a material
impact on its financial position or results of operations.
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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 expenditure, 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. The most recent downturn, which
occurred in 1996, contributed to a 37% decline in semiconductor test system
orders. 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.
Also, the Company relies on certain intellectual property protections to
preserve its intellectual property rights. From time to time the Company is
notified that it may be in violation of patents held by others. Any invalidation
of the Company's intellectual property rights or assertions of patent
infringement against the Company which are ultimately successful, could have a
material adverse effect on the Company. Lengthy and expensive defense of the
Company's rights to technology used in its products could adversely affect the
Company's operating results.
The development of new technologies, commercialization of those
technologies into product, 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, primarily
from electronic test systems manufacturers located in the United States, Europe
and Japan, as well as several of the Company's customers. Some of these
competitors have substantially greater financial and other resources to pursue
engineering, manufacturing, marketing and distribution of their products.
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
10
12
managing distributors and representatives, difficulties in staffing and managing
international operations, difficulties in protecting the Company's intellectual
property and potentially adverse tax consequences.
In the recent past there has been significant economic instability in
several countries in Asia. Continued economic instability would increase the
likelihood of either a direct or indirect adverse impact on the Company's future
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. In particular, the Company has
introduced a significant number of new, complex test systems in 1996 and 1997,
and there can be no assurance that the Company will not experience delays in
shipment of such products or that such products will achieve customer
acceptance. 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.
Many computer systems experience problems handling dates beyond the year
1999. Therefore, some computer hardware and software will need to be modified
prior to the year 2000 in order to remain functional. The Company is assessing
both the internal readiness of its computer systems and the compliance of its
computer products and software sold to customers for handling the year 2000. The
Company expects to implement successfully the systems and programming changes
necessary to address year 2000 issues, and does not believe that the cost of
such actions will have a material effect on the Company's results of operations
or financial condition. There can be no assurance, however, that there will not
be a delay in, or increased costs associated with, the implementation of such
changes, and the Company's inability to implement such changes could have an
adverse effect on future results of operations.
11
13
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Shareholders of
TERADYNE, INC.:
We have audited the consolidated balance sheets of Teradyne, Inc. as of
December 31, 1997 and 1996, and the related consolidated statements of income,
cash flows, and changes in shareholders' equity for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Teradyne, Inc.
as of December 31, 1997 and 1996, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997 in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
January 16, 1998
12
14
TERADYNE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
1997 1996
---- ----
(IN THOUSANDS)
Current assets:
Cash and cash equivalents.............................. $ 74,668 $ 201,452
Marketable securities.................................. 18,693 48,266
Accounts receivable, less allowance for doubtful
accounts of $1,938 in 1997 and $1,936 in 1996......... 300,933 178,430
Inventories:
Parts............................................. 168,385 91,792
Assemblies in process............................. 103,972 47,162
---------- ----------
272,357 138,954
Deferred tax assets.................................... 40,530 32,340
Prepayments and other current assets................... 19,902 17,666
---------- ----------
Total current assets.............................. 727,083 617,108
Property, plant, and equipment:
Land................................................... 35,515 22,823
Buildings and improvements............................. 150,938 133,809
Machinery and equipment................................ 480,887 393,790
Construction in progress............................... 25,492 13,163
---------- ----------
Total............................................. 692,832 563,585
Less: Accumulated depreciation......................... (349,707) (290,088)
---------- ----------
Net property, plant, and equipment................ 343,125 273,497
Marketable securities....................................... 156,574 181,776
Other assets................................................ 24,892 24,435
---------- ----------
Total assets...................................... $1,251,674 $1,096,816
========== ==========
LIABILITIES
Current liabilities:
Notes payable -- banks................................. $ 6,632 $ 7,316
Current portion of long-term debt...................... 1,807 1,778
Accounts payable....................................... 58,685 34,482
Accrued employees' compensation and withholdings....... 77,299 58,696
Unearned service revenue and customer advances......... 49,122 62,771
Other accrued liabilities.............................. 65,642 53,537
Income taxes payable................................... 18,786 6,677
---------- ----------
Total current liabilities......................... 277,973 225,257
Deferred tax liabilities.................................... 23,429 13,898
Long-term debt.............................................. 13,141 15,650
Commitments (Note F)
---------- ----------
Total liabilities................................. 314,543 254,805
---------- ----------
SHAREHOLDERS' EQUITY
Common stock: $0.125 par value, 250,000 shares authorized,
83,303 and 82,480 issued and outstanding in 1997 and 1996,
respectively.............................................. 10,413 10,310
Additional paid-in capital.................................. 322,985 355,576
Retained earnings........................................... 603,733 476,125
---------- ----------
Total shareholders' equity........................ 937,131 842,011
---------- ----------
Total liabilities and shareholders' equity........ $1,251,674 $1,096,816
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
13
15
TERADYNE, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Net sales.............................................. $1,266,274 $1,171,615 $1,191,022
Expenses:
Cost of sales..................................... 734,370 724,624 646,382
Engineering and development....................... 162,500 143,931 123,487
Selling and administrative........................ 194,103 180,265 176,797
---------- ---------- ----------
1,090,973 1,048,820 946,666
---------- ---------- ----------
Income from operations................................. 175,301 122,795 244,356
Other income (expense):
Merger expenses................................... (5,600)
Interest income................................... 20,289 19,295 14,209
Interest expense.................................. (2,245) (2,427) (3,040)
---------- ---------- ----------
Income before income taxes............................. 193,345 139,663 249,925
Provision for income taxes............................. 65,737 46,089 90,641
---------- ---------- ----------
Net income............................................. $ 127,608 $ 93,574 $ 159,284
========== ========== ==========
Net income per common share -- basic................... $ 1.53 $ 1.12 $ 1.95
========== ========== ==========
Net income per common share -- diluted................. $ 1.48 $ 1.10 $ 1.89
========== ========== ==========
Shares used in net income per common share -- basic.... 83,434 83,262 81,629
========== ========== ==========
Shares used in net income per common share --
diluted.............................................. 86,319 85,060 84,253
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
14
16
TERADYNE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
Cash flows from operating activities:
Net income............................................ $ 127,608 $ 93,574 $ 159,284
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation....................................... 57,983 49,577 41,807
Amortization....................................... 1,168 1,326 1,339
Product line consolidation......................... 34,100
Workforce reduction provision...................... 10,810
Deferred income tax provision (credit)............. 1,341 (14,607) 3,920
Other non-cash items, net.......................... 1,377 (260) 4,881
Changes in operating assets and liabilities:
Accounts receivable.............................. (122,503) 74,990 (114,708)
Inventories...................................... (131,014) 20,584 (57,111)
Other assets..................................... (3,861) (4,117) (18,567)
Accounts payable and accruals.................... 41,261 (10,638) 60,361
Income taxes payable............................. 40,092 (4,515) 34,334
--------- --------- ---------
Net cash provided by operating activities..... 13,452 250,824 115,540
--------- --------- ---------
Cash flows from investing activities:
Additions to property, plant, and equipment........... (106,436) (59,494) (79,197)
Increase in equipment manufactured by the Company..... (25,695) (15,735) (14,004)
Purchases of held-to-maturity marketable securities... (111,033) (250,594) (190,961)
Maturities of held-to-maturity marketable
securities......................................... 206,556 248,733 126,619
Purchases of available-for-sale marketable
securities......................................... (192,174) (142,600)
Maturities of available-for-sale marketable
securities......................................... 151,426 8,081
--------- --------- ---------
Net cash used in investing activities................. (77,356) (211,609) (157,543)
--------- --------- ---------
Cash flows from financing activities:
Net payments under short-term borrowing agreements.... (4,100)
Payments of long-term debt............................ (2,410) (3,550) (1,015)
Additions to long-term debt........................... 12,500
Issuance of common stock under stock option and stock
purchase plans..................................... 44,065 13,455 24,914
Acquisition of treasury stock......................... (104,535) (29,833)
--------- --------- ---------
Net cash provided (used) by financing
activities.................................. (62,880) (19,928) 32,299
--------- --------- ---------
Increase (decrease) in cash and cash equivalents........ (126,784) 19,287 (9,704)
Adjustment to conform fiscal year of Megatest........... (10,346)
Cash and cash equivalents at beginning of year.......... 201,452 182,165 202,215
--------- --------- ---------
Cash and cash equivalents at end of year................ $ 74,668 $ 201,452 $ 182,165
========= ========= =========
Supplementary disclosure of cash flow information:
Cash paid during the year for:
Interest........................................... $ 2,257 $ 2,426 $ 3,092
Income taxes....................................... 31,971 68,089 52,339
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, 1997, 1996 AND 1995
SHARES COMMON ADDITIONAL
------------------- STOCK PAID-IN RETAINED
ISSUED REACQUIRED PAR VALUE CAPITAL EARNINGS
------ ---------- --------- ---------- --------
(IN THOUSANDS)
Balance, December 31, 1994................... 41,275 1,663 $ 4,952 $ 329,887 $238,047
Adjustment to conform fiscal year of
Megatest Corporation.................. 3 9 (14,780)
Issuance of stock to employees under
benefit plans......................... 1,614 202 22,940
Tax benefit from stock options.......... 17,549
Two-for-one stock split effected in the
form of a 100% stock dividend......... 42,892 1,664 5,154 (5,154)
Issuance of stock to employees under
benefit plans after the two-for-one
stock split........................... 177 21 1,751
Payment for fractional shares resulting
from merger........................... (12)
Net income.............................. 159,284
------ ----- ------- --------- --------
Balance, December 31, 1995................... 85,961 3,327 10,329 366,970 382,551
Issuance of stock to employees under
benefit plans......................... 1,281 160 13,295
Tax benefit from stock options.......... 4,965
Repurchase of stock..................... 1,435 (179) (29,654)
Net income.............................. 93,574
------ ----- ------- --------- --------
Balance, December 31, 1996................... 87,242 4,762 10,310 355,576 476,125
Issuance of stock to employees under
benefit plans......................... 3,373 422 43,643
Tax benefit from stock options.......... 27,982
Repurchase of stock..................... 2,550 (319) (104,216)
Net income.............................. 127,608
------ ----- ------- --------- --------
Balance, December 31, 1997................... 90,615 7,312 $10,413 $ 322,985 $603,733
====== ===== ======= ========= ========
The accompanying notes are an integral part of the consolidated financial
statements.
16
18
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. THE COMPANY
Teradyne, Inc. (the "Company") designs, manufactures, markets, and services
electronic test systems and related software used by component manufacturers in
the design and testing of their products and by electronic equipment
manufacturers for the design and testing of circuit boards and other assemblies.
Manufacturers use such systems and 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.
The Company's electronic systems are also used by telephone operating companies
for the testing and maintenance of their subscriber telephone lines and related
equipment.
The Company also manufactures backplane connection systems, principally for
the computer, telecommunications, 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.
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. On December 1, 1995, the Company completed its
acquisition of Megatest Corporation ("Megatest"), by means of a merger accounted
for as a pooling of interests. As a result of the merger, Megatest became a
wholly owned subsidiary of the Company.
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.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or
market (net realizable value).
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.
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
Revenue is recorded when products are shipped or, in instances where
products are configured to customer requirements, upon the successful completion
of final test procedures. Service revenue is recognized ratably over applicable
contract periods or as services are performed. In certain situations, revenue is
recorded
17
19
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
B. ACCOUNTING POLICIES -- (CONTINUED)
using the percentage of completion method based upon the completion of
measurable milestones, with changes to total estimated costs and anticipated
losses, if any, 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.
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.
The Company's practice is to provide U.S. Federal taxes on undistributed
earnings of the Company's non U.S. sales and service subsidiaries.
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.
Net Income per Common Share
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share". Statement 128 replaced the calculation of primary
and fully diluted net income per share with basic and diluted net income per
share. Unlike primary net income per share, basic net income per share excludes
any dilutive effect of options, warrants and convertible securities. Diluted net
income per share is very similar to the previously reported fully diluted net
income per share, except that the new treasury stock method used in determining
the dilutive effect of options uses the average market price for the period
rather than the higher of the average market price or the ending market price.
All net income per common share amounts have been restated to conform to the
Statement 128 requirements.
C. MERGER -- POOLING OF INTERESTS
On December 1, 1995, the Company acquired through a merger all of the
authorized and outstanding common stock of Megatest in exchange for
approximately 6.8 million shares of the Company's common stock using an exchange
ratio of 0.9091 of one share of the Company's common stock for each Megatest
share. In addition, all outstanding Megatest stock options were converted, at
the common stock exchange ratio, into options to purchase the Company's common
stock. Megatest manufactures electronic test systems for the integrated circuit
industry. Prior to the merger, Megatest prepared its financial statements on an
August 31 fiscal year end. Megatest's fiscal year has been changed to December
31 to conform to the Company's year end. Total net sales of $1,191.0 million for
the year ended December 31, 1995 consisted of $1,059.4 million of Teradyne net
sales and $131.6 million of Megatest net sales. Net income of $159.3 million for
the same period consisted of Teradyne net income of $157.2 million, Megatest net
income of $2.3 million and $0.2 million in debits related to conforming
accounting adjustments.
18
20
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
C. MERGER -- POOLING OF INTERESTS -- (CONTINUED)
The combined financial results reflect the restatement of Megatest's
provision for income taxes in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes". Due to the merger, Megatest's
previously unrecognized tax benefits of deductible temporary differences and
operating loss carryforwards were recognized by the combined company in the
restated period. The combined financial results also include adjustments, which
were immaterial to the combined financial statements, to conform accounting
policies of the two companies. Adjustments made to conform the accounting
policies of the two companies decreased net income by $0.2 million in 1995. All
other adjustments consist of reclassifications to conform financial statement
presentation. There were no intercompany transactions between the two companies
for the period presented. In connection with the merger, the Company recorded a
$5.6 million nonrecurring charge for transaction costs consisting primarily of
professional fees.
D. FINANCIAL INSTRUMENTS
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less at 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
or held-to-maturity as of December 31, 1997, and no securities classified as
trading at December 31, 1996. 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 market
value. Unrealized gains or losses on available-for-sale securities, if material,
are included, net of tax, in shareholders' equity until disposition. 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 sheet dates. The
short-term investments mature in less than one year. Long-term investments have
maturities of one to five years. At December 31, 1997 and 1996 these investments
are reported as follows (in thousands):
1997 1996
---------- ---------------------
AVAILABLE- AVAILABLE- HELD-TO-
FOR-SALE FOR-SALE MATURITY
---------- ---------- --------
Short-term marketable securities:
U.S. Treasury and government agency
securities.................................... $ 14,665 $ 8,575 $34,476
Corporate debt securities....................... 4,028 5,215
-------- -------- -------
$ 18,693 $ 13,790 $34,476
======== ======== =======
Long-term marketable securities:
U.S. Treasury and government agency
securities.................................... $ 60,937 $ 74,675 $61,047
Corporate debt securities....................... 95,637 46,054
-------- -------- -------
$156,574 $120,729 $61,047
======== ======== =======
19
21
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
D. FINANCIAL INSTRUMENTS -- (CONTINUED)
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 overseas net monetary position and firm
commitments. 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. Contracts related to an
anticipated transaction that is no longer likely to occur are terminated. Gains
or losses associated with the termination of the underlying contract for which a
firm commitment no longer exists are immediately included in selling, general
and administrative expenses. Forward currency contracts have maturities of less
than one year, unless they relate to long-term sales contracts denominated in a
non U.S. currency; these maturities are from one to three years.
At December 31, 1997, the Company had the following forward currency
contracts to buy U.S. dollars for non U.S. currencies and sell U.S. dollars for
non U.S. currencies for the following notional amounts (in millions):
BUY SELL
--- ----
Japanese yen............................................ $48.2 $2.1
Belgian francs.......................................... 7.8 1.8
French francs........................................... 2.5
German deutschemarks.................................... 1.8 4.6
Italian lira............................................ 1.2
----- ----
$61.5 $8.5
===== ====
At December 31, 1996 the face amount of outstanding forward currency contracts
to buy and sell U.S. dollars for non U.S. currencies was $48.8 million and $11.2
million, respectively.
The fair value of these contracts as of December 31, 1997 and 1996,
determined by applying year end currency exchange rates to the notional contract
amounts, represented a net unrealized gain of $4.1 million and $0.1 million,
respectively. 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, general 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, rated A1 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
diverse and geographically dispersed customers.
20
22
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
E. DEBT
Long-term debt at December 31, 1997 and 1996 consisted of the following (in
thousands):
1997 1996
---- ----
Mortgage notes payable............................... $10,122 $10,294
Capital equipment notes payable...................... 2,440 3,701
Other long-term debt................................. 2,386 3,433
------- -------
Total........................................... 14,948 17,428
Less current maturities.............................. 1,807 1,778
------- -------
$13,141 $15,650
======= =======
The total maturities of long-term debt for the succeeding five years and
thereafter are: 1998 - $1.8 million; 1999 -- $1.5 million; 2000 -- $4.9 million;
2001 -- $0.3 million; 2002 -- $0.3 million and $6.1 million thereafter.
Revolving Credit Agreement
The Company's available revolving credit line, in effect through January
31, 2000, is $120.0 million. At expiration of the revolver, any amounts
outstanding are converted into a two year term note. As of December 31, 1997, 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
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 require compliance with
certain restrictive financial covenants and principal prepayment clauses.
Short-term Borrowings
The weighted average interest rates on short-term borrowings outstanding as
of December 31, 1997 and 1996 were 2.1% and 2.0%, respectively.
F. COMMITMENTS
Rental expense for the years ended December 31, 1997, 1996, and 1995 was
$15.1 million, $14.6 million, and $13.1 million, respectively. Minimum annual
rentals under all noncancellable leases are: 1998 -- $8.0 million; 1999 -- $5.7
million; 2000 -- $3.3 million; 2001 -- $1.9 million; 2002 -- $1.1 million; and
$8.4 million thereafter, totaling $28.4 million.
21
23
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
G. 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):
1997 1996 1995
---- ---- ----
Net income......................................... $127,608 $93,574 $159,284
======== ======= ========
Shares used in net income per common
share -- basic................................... 83,434 83,262 81,629
Effect of dilutive securities:
Employee and director stock options........... 2,601 1,422 2,354
Employee stock purchase rights................ 284 376 270
-------- ------- --------
Dilutive potential common shares................. 2,885 1,798 2,624
-------- ------- --------
Shares used in net income per common
share -- diluted................................. 86,319 85,060 84,253
======== ======= ========
Net income per common share -- basic............... $ 1.53 $ 1.12 $ 1.95
======== ======= ========
Net income per common share -- diluted............. $ 1.48 $ 1.10 $ 1.89
======== ======= ========
Options to purchase 400,170 shares of common stock in 1997, 1,727,761
shares in 1996, and 16,410 shares in 1995 were outstanding during the years
there 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.
H. RETIREMENT BENEFITS
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 the plans consist primarily of equity and fixed income securities.
The components of net periodic pension cost were (in thousands):
1997 1996 1995
---- ---- ----
Service cost.......................................... $ 4,837 $4,398 $3,211
Interest cost......................................... 5,578 4,894 4,012
Actual return on plan assets.......................... (12,331) (6,676) (9,514)
Net amortization and deferral......................... 8,191 3,002 5,853
-------- ------ ------
$ 6,275 $5,618 $3,562
======== ====== ======
22
24
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
H. RETIREMENT BENEFITS -- (CONTINUED)
The following table sets forth the plans' funded status at December 31 (in
thousands):
1997 1996
-------------------------- --------------------------
U.S. PLAN NON U.S. PLANS U.S. PLAN NON U.S. PLANS
--------- -------------- --------- --------------
Actuarial present value of projected
benefit obligation:
Vested benefits..................... $(62,911) $ (6,316) $(50,676) $(6,627)
Non-vested benefits................. (3,579) (1,561) (2,933) (952)
-------- -------- -------- -------
Accumulated benefit obligation...... (66,490) (7,877) (53,609) (7,579)
Effect of projected future
compensation levels............... (14,278) (2,378) (10,997) (2,606)
-------- -------- -------- -------
Total projected benefit
obligation........................ (80,768) (10,255) (64,606) (10,185)
Plan assets at fair market value......... 71,075 6,734 55,926 5,850
-------- -------- -------- -------
Projected benefit obligation in excess of
plan assets............................ (9,693) (3,521) (8,680) (4,335)
Unrecognized prior service cost.......... 2,318 2,697
Unrecognized net loss (gain)............. 10,065 (1,056) 8,673 (622)
Unrecognized net (asset) liability at
transition............................. 746 973
Minimum pension liability adjustment..... (259) (99)
-------- -------- -------- -------
Net pension asset (liability)............ $ 2,690 $ (4,090) $ 2,690 $(4,083)
======== ======== ======== =======
Actuarial assumptions:
Discount rate....................... 7.00% 4.50% - 6.50% 7.25% 4.50% - 7.75%
Average increase in compensation
levels............................ 5.00% 3.50% - 4.25% 5.00% 3.50% - 5.25%
Expected long-term return on
assets............................ 9.00% 4.50% - 8.50% 9.00% 4.50% - 9.25%
In addition to the above plans, the Company has an unfunded supplemental
defined benefit pension plan in the United States to provide retirement benefits
in excess of levels allowed by the Employee Retirement Income Security Act
(ERISA). The actuarial present value of accumulated plan benefits totaled $4.4
million and $2.7 million at December 31, 1997 and 1996, respectively. Net
pension expense for this plan was $1.0 million, $0.7 million, and $0.5 million
in 1997, 1996, and 1995, respectively.
In 1996, the Company offered a voluntary early retirement incentive program
to certain employees. The special termination benefits include enhanced pension
benefits to the employees and medical and dental benefits to the employees and
their spouses. Pension benefits of $2.6 million to be paid from the Company's
existing pension plans relating to this program were included in current
liabilities at December 31, 1997 and December 31, 1996. In addition, $2.3
million and $2.5 million for postretirement medical and dental benefits were
included in liabilities at December 31, 1997 and 1996, respectively.
I. STOCK REPURCHASE PROGRAM
During 1996, the Company's Board of Directors authorized the purchase in
the open market of up to 5.0 million shares of common stock. The Company
repurchased 2.6 million shares at a cost of $104.5 million in 1997, and
repurchased 1.4 million shares at a cost of $29.8 million in 1996.
J. STOCK BASED COMPENSATION
At December 31, 1997, the Company had both stock option plans and stock
purchase plans. The Company applies APB Opinion 25 and related interpretations
in accounting for its plans. As such, the Company does not recognize
compensation cost arising from the awarding of stock grants under those 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. The effects of this pro forma disclosure are not
indicative of
23
25
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
J. STOCK BASED COMPENSATION -- (CONTINUED)
future amounts. Additional awards in future years are anticipated. The Company's
net income and net income per common share would have been reduced to the pro
forma amounts indicated below (in thousands, except per share amounts):
1997 1996 1995
---- ---- ----
Net income........................... As reported $127,608 $93,574 $159,284
Pro forma 115,371 86,421 154,433
Net income per common share --
basic.............................. As reported $ 1.53 $ 1.12 $ 1.95
Pro forma 1.38 1.04 1.89
Net income per common share --
diluted............................ As reported $ 1.48 $ 1.10 $ 1.89
Pro forma 1.34 1.02 1.83
Stock Option Plans
Under its stock option plans, all of which are fixed, the Company granted
options to certain directors, officers and employees 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 1997, 1996, and 1995 follows (in
thousands):
1997 1996 1995
---- ---- ----
Outstanding at January 1................................. 8,503 7,230 7,637
Options granted..................................... 3,176 2,401 2,717
Options exercised................................... (2,850) (795) (2,790)
Options canceled.................................... (263) (333) (334)
------ ----- ------
Outstanding at December 31............................... 8,566 8,503 7,230
====== ===== ======
Exercisable at December 31............................... 3,394 3,995 2,606
====== ===== ======
Available for grant at December 31....................... 5,683 5,042 4,912
====== ===== ======
Weighted average option exercise price information for the years 1997, 1996
and 1995 follows:
1997 1996 1995
---- ---- ----
Outstanding at January 1................................ $13.53 $13.63 $ 8.92
Options granted.................................... $36.44 $12.13 $19.80
Options exercised.................................. $11.75 $ 8.11 $ 6.92
Options canceled................................... $18.80 $18.61 $11.10
Outstanding at December 31.............................. $22.48 $13.53 $13.63
Exercisable at December 31.............................. $17.50 $12.46 $11.00
24
26
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
J. STOCK BASED COMPENSATION -- (CONTINUED)
Significant option groups outstanding at December 31, 1997 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 PRICE LIFE (YEARS) SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------------- ------------ ------ -------------- ------ --------------
$ 3.31 - $11.63................. 2.86 2,445 $10.88 1,167 $10.15
$11.83 - $19.63................. 1.88 1,283 $13.21 859 $13.14
$20.69 - $32.80................. 2.48 1,846 $21.36 874 $20.87
$36.50 - $46.19................. 4.37 2,992 $36.62 494 $36.50
----- -----
Total...................... 3.16 8,566 $22.48 3,394 $17.50
===== =====
The weighted average fair value at date of grant for options granted during
1997, 1996 and 1995 was $16.11, $4.79 and $8.69 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:
1997 1996 1995
---- ---- ----
Expected life (years).................................... 4.3 3.9 4.2
Interest rate............................................ 6.5% 6.7% 7.3%
Volatility............................................... 44.2% 41.8% 39.9%
Dividend yield........................................... 0.0% 0.0% 0.0%
Employee Stock Purchase Plans
During 1996, the Company adopted the 1996 Employee Stock Purchase Plan and
authorized 700,000 shares for future issuance. 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 1998, the Company issued 561,615 shares of common stock to
employees who participated in the plan during 1997 at a weighted-average price
of $20.43 per share. Currently, there are 122,828 shares reserved for issuance.
The weighted-average fair value of purchase rights granted in 1997, 1996
and 1995 was $7.70, $8.37 and $5.09, respectively. The fair value of the
employees' purchase rights was estimated using the Black-Scholes model with the
following assumptions for 1997, 1996 and 1995, respectively; dividend yield of
0.0% for all years; an expected life of 1 year for all years; expected
volatility of 45.5%, 44.7% and 38.8%; and risk-free interest rates of 5.6%, 5.2%
and 7.1%.
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. In 1994, the Company 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 $9.3 million in 1997, $6.3 million in 1996,
and $8.3 million in 1995.
25
27
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 $20
per share 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 $40 worth of Common Stock (or
other securities or consideration owned by the Company) for $20. The Rights will
expire March 26, 2000 unless earlier redeemed by the Company.
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):
1997 1996 1995
---- ---- ----
Income before income taxes:
United States................................. $161,942 $106,708 $212,551
Non U.S....................................... 31,403 32,955 37,374
-------- -------- --------
$193,345 $139,663 $249,925
======== ======== ========
Provision (credit) for income taxes:
Current:
U.S. Federal............................. $ 45,302 $ 40,033 $ 66,228
Non U.S. ................................ 13,053 14,802 12,604
State.................................... 6,041 5,861 7,889
-------- -------- --------
64,396 60,696 86,721
-------- -------- --------
Deferred:
U.S. Federal............................. 77 (13,667) (241)
Non U.S. ................................ 1,140 (632) 3,654
State.................................... 124 (308) 507
-------- -------- --------
1,341 (14,607) 3,920
-------- -------- --------
$ 65,737 $ 46,089 $ 90,641
======== ======== ========
26
28
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, 1997 and 1996 are as follows (in thousands):
1997 1996
-------- --------
Deferred tax assets:
Inventory valuations............................... $ 16,733 $ 19,148
Accruals........................................... 11,335 2,680
Vacation........................................... 6,907 4,200
In process research and development................ 2,456 2,726
Deferred revenue................................... 62 1,488
U.S. Federal operating loss carryforwards.......... 975 341
Tax credits........................................ 2,502 8,457
Other.............................................. 3,037 2,732
-------- --------
Total deferred tax assets............................... 44,007 41,772
-------- --------
Deferred tax liabilities:
Excess of tax over book depreciation............... (22,828) (14,919)
Amortization....................................... (818) (2,531)
Pension............................................ (827) (1,349)
Other.............................................. (2,433) (4,531)
-------- --------
Total deferred tax liabilities.......................... (26,906) (23,330)
-------- --------
Net deferred asset...................................... $ 17,101 $ 18,442
======== ========
A reconciliation of the effective tax rate for the years 1997, 1996, and
1995 follows:
1997 1996 1995
---- ---- ----
U.S. statutory federal tax rate..................... 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit...... 2.1 2.6 2.0
Utilization of operating loss carryforwards......... 0.3
Tax credits......................................... (1.6) (1.0) (0.6)
Export sales corporation............................ (2.8) (2.9) (2.3)
Non-deductible costs related to acquisitions........ 0.7 0.8
Change in valuation allowance....................... (0.8)
Other, net.......................................... 0.6 (0.7) 1.9
----- ----- -----
34.0% 33.0% 36.3%
===== ===== =====
At December 31, 1997 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 $2.2 million of U.S. business tax
credit carryforwards that expire in the years 1998 through 2005. All of these
losses and credits are limited in their use by "change in ownership" rules as
defined in the Internal Revenue Code of 1986.
27
29
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
N. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in two industry segments, which are the design,
manufacturing and marketing of electronic test systems and backplane connection
systems. Corporate assets consist of cash and cash equivalents, marketable
securities, and certain other assets.
ELECTRONIC BACKPLANE
TEST CONNECTION
SYSTEMS SYSTEMS CORPORATE
INDUSTRY INDUSTRY AND
SEGMENT SEGMENT ELIMINATIONS CONSOLIDATED
---------- ---------- ------------ ------------
(IN THOUSANDS)
1997
Sales to unaffiliated customers............. $1,047,742 $218,532 $1,266,274
Intersegment sales.......................... 16,235 $ (16,235)
---------- -------- --------- ----------
Net sales................................... 1,047,742 234,767 (16,235) 1,266,274
Operating income............................ 160,150 37,477 (22,326) 175,301
Identifiable assets......................... 771,353 155,213 325,108 1,251,674
Property additions.......................... 96,814 31,559 3,758 132,131
Depreciation and amortization expense....... 48,136 8,981 2,034 59,151
1996
Sales to unaffiliated customers............. $ 993,721 $177,894 $1,171,615
Intersegment sales.......................... 9,065 $ (9,065)
---------- -------- --------- ----------
Net sales................................... 993,721 186,959 (9,065) 1,171,615
Operating income............................ 112,036 29,561 (18,802) 122,795
Identifiable assets......................... 490,105 113,436 493,275 1,096,816
Property additions.......................... 54,694 16,666 3,869 75,229
Depreciation and amortization expense....... 42,039 7,448 1,416 50,903
1995
Sales to unaffiliated customers............. $1,035,721 $155,301 $1,191,022
Intersegment sales.......................... 12,325 $ (12,325)
---------- -------- --------- ----------
Net sales................................... 1,035,721 167,626 (12,325) 1,191,022
Operating income............................ 237,101 22,778 (15,523) 244,356
Identifiable assets......................... 640,597 91,205 292,029 1,023,831
Property additions.......................... 77,552 12,038 3,611 93,201
Depreciation and amortization expense....... 37,274 4,670 1,202 43,146
The Company's sales, including domestic export and non U.S. jurisdictional
sales (which amounted to less than 10% of total net sales in all periods
presented), to unaffiliated customers for the three years ended December 31 were
made in the following geographic areas:
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
Sales to unaffiliated customers:
United States..................................... $ 616,838 $ 536,826 $ 566,337
Asia Pacific region............................... 299,624 209,429 256,901
Europe............................................ 190,220 241,244 222,194
Japan............................................. 114,212 139,095 94,706
Other............................................. 45,380 45,021 50,884
---------- ---------- ----------
$1,266,274 $1,171,615 $1,191,022
========== ========== ==========
See "Item 1: Business -- Marketing and Sales" elsewhere in this report for
information on the Company's export and non U.S. jurisdictional activities,
identifiable assets of non U.S. subsidiaries, and major customers.
28
30
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.
1997
--------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
Net sales.................................... $248,302 $289,541 $336,747 $391,684
Expenses:
Cost of sales........................... 152,935 164,648 190,651 226,136
Engineering and development............. 33,308 42,635 41,663 44,894
Selling and administrative.............. 40,783 47,449 51,685 54,186
-------- -------- -------- --------
227,026 254,732 283,999 325,216
-------- -------- -------- --------
Income from operations....................... 21,276 34,809 52,748 66,468
Other income (expense):
Interest income......................... 5,665 5,234 5,198 4,192
Interest expense........................ (541) (565) (553) (586)
-------- -------- -------- --------
Income before income taxes................... 26,400 39,478 57,393 70,074
Provision for income taxes................... 9,240 14,476 18,196 23,825
-------- -------- -------- --------
Net income................................... $ 17,160 $ 25,002 $ 39,197 $ 46,249
======== ======== ======== ========
Net income per common share -- basic......... $ 0.21 $ 0.30 $ 0.47 $ 0.55
======== ======== ======== ========
Net income per common share -- diluted....... $ 0.20 $ 0.29 $ 0.45 $ 0.54
======== ======== ======== ========
1996
--------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
Net sales.................................... $348,967 $319,690 $261,671 $241,287
Expenses:
Cost of sales........................... 186,637 214,718 163,747 159,522
Engineering and development............. 36,740 38,426 35,022 33,743
Selling and administrative.............. 46,929 42,556 41,535 49,245
-------- -------- -------- --------
270,306 295,700 240,304 242,510
-------- -------- -------- --------
Income (loss) from operations................ 78,661 23,990 21,367 (1,223)
Other income (expense):
Interest income......................... 3,759 4,162 5,089 6,285
Interest expense........................ (642) (610) (513) (662)
-------- -------- -------- --------
Income before income taxes................... 81,778 27,542 25,943 4,400
Provision for income taxes................... 28,623 9,640 6,374 1,452
-------- -------- -------- --------
Net income................................... $ 53,155 $ 17,902 $ 19,569 $ 2,948
======== ======== ======== ========
Net income per common share -- basic......... $ 0.64 $ 0.21 $ 0.23 $ 0.04
======== ======== ======== ========
Net income per common share -- diluted....... $ 0.63 $ 0.21 $ 0.23 $ 0.03
======== ======== ======== ========
29
31
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 21,
1998, 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 21,
1998, 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 21,
1998, 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 21,
1998, 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.
30
32
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, 1997 and 1996
Statements of Income for the years ended December 31, 1997, 1996, and
1995
Statements of Cash Flows for the years ended December 31, 1997, 1996, and
1995
Statements of Changes in Shareholders' Equity for the years ended
December 31, 1997, 1996, and 1995
(a) 2. FINANCIAL STATEMENT SCHEDULES
Financial statement schedules have been omitted since either they are not
required or the 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, 1997.
31
33
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 Company, as amended
3.2 Amendment, dated May 23, 1996, to Exhibit 3.2 to the Company's Annual
Restated Articles of Organization of Report on Form 10-K for the fiscal year
the 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 The First National Bank of Boston
dated as of March 14, 1990
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
Multicurrency Revolving Credit
Agreement dated as of January 31, 1997
10.3 Second Amendment to Amended and
Restated Multicurrency Revolving Credit
Agreement dated as of May 20, 1997
10.4 Teradyne, Inc. Supplemental Executive
Retirement Plan
10.5 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).
10.6 Megatest Corporation 1990 Stock Option Exhibit 4.1 to the Company's
Plan Registration Statement on Form S-8
(Registration Statement No. 333-64683).
10.7 Megatest Corporation Director Stock Exhibit 4.2 to the Company's
Option Plan Registration Statement on Form S-8
(Registration Statement No. 333-64683).
10.8 1996 Stock Purchase Plan Exhibit 4.1 to the Company's
Registration Statement on Form S-8
(Registration Statement No. 333-07177).
10.9 Master Lease Agreement between Megatest Exhibit 10.10 to the Company's Annual
and General Electric Capital Report on Form 10-K for the fiscal year
Corporation dated August 10, 1995 ended December 31, 1995.
10.10 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.
10.11 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
32
34
EXHIBIT NO. DESCRIPTION SEC DOCUMENT REFERENCE
- ----------- ----------- ----------------------
10.12 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.
10.13 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.
10.14 1996 Non-Employee Director Stock Option
Plan
10.15 Letter Agreement dated June 1, 1997
between the Company and Member of Board
10.16 Letter Agreement dated June 1, 1997
between the Company and Member of Board
22.1 Subsidiaries of the Company
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule
27.2 Financial Data Schedule for the Form
10-Q for the nine months ended
September 28, 1997
27.3 Financial Data Schedule for the Form
10-Q for the six months ended June 29,
1997
27.4 Financial Data Schedule for the Form
10-Q for the three months ended March
30, 1997
27.5 Financial Data Schedule for the Form
10-K for the fiscal year ended December
31, 1996
27.6 Financial Data Schedule for the Form
10-Q for the nine months ended
September 29, 1996
27.7 Financial Data Schedule for the Form
10-Q for the six months ended June 30,
1996
27.8 Financial Data Schedule for the Form
10-Q for the three months ended March
31, 1996
27.9 Financial Data Schedule for the Form
10-K for the fiscal year ended December
31, 1995
33
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 26th day of March,
1998.
TERADYNE, INC.
BY:
----------------------------------
JEFFREY R. HOTCHKISS,
VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
Chairman of the Board March 26, 1998
- ---------------------------------------------------
ALEXANDER V. D'ARBELOFF
President, Chief Executive March 26, 1998
- --------------------------------------------------- Officer, and Member of the Board
GEORGE W. CHAMILLARD
Vice President and Chief March 26, 1998
- --------------------------------------------------- Financial Officer
JEFFREY R. HOTCHKISS
Controller (Principal Accounting March 26, 1998
- --------------------------------------------------- Officer)
DONALD J. HAMMAN
Director March 26, 1998
- ---------------------------------------------------
JAMES W. BAGLEY
Director March 26, 1998
- ---------------------------------------------------
ALBERT CARNESALE
Director March 26, 1998
- ---------------------------------------------------
DANIEL S. GREGORY
Director March 26, 1998
- ---------------------------------------------------
DWIGHT H. HIBBARD
Director March 26, 1998
- ---------------------------------------------------
JOHN P. MULRONEY
Director March 26, 1998
- ---------------------------------------------------
VINCENT M. O'REILLY
Director March 26, 1998
- ---------------------------------------------------
JAMES A. PRESTRIDGE
Director March 26, 1998
- ---------------------------------------------------
OWEN W. ROBBINS
Director March 26, 1998
- ---------------------------------------------------
RICHARD J. TESTA
Director March 26, 1998
- ---------------------------------------------------
PATRICIA S. WOLPERT
34