Back to GetFilings.com
1
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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-6462
------------------------
TERADYNE, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2272148
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
321 HARRISON AVENUE, BOSTON, MASSACHUSETTS 02118
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 482-2700
------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $0.125 per share New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days. Yes[X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or in any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 26, 1999 was $4.1 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 26, 1999 was 85,088,987 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement in connection with its 1999
annual meeting of shareholders are incorporated by reference into Part III.
2
TERADYNE, INC.
FORM 10-K
PART I
ITEM 1: BUSINESS
Teradyne, Inc. is a leading manufacturer of automatic test equipment
("ATE") and related software for the electronics and communications industries.
Products include systems to test semiconductors ("semiconductor test systems"),
circuit-boards ("circuit-board test systems"), telephone lines and networks
("telecommunication test systems"), and software ("software test systems"). The
Company is also a leading manufacturer of backplanes and associated connectors
used in electronic systems ("backplane connection systems"). Circuit-board test
systems, telecommunications test systems, and software test systems have been
combined into "other test systems" for purposes of reporting the Company's
operating segments. For financial information concerning these operating
segments, see "Note M: Operating Segment and Geographic Information" in Notes to
Consolidated Financial Statements. Unless the context indicates otherwise, the
term "Company" as used herein includes Teradyne, Inc. and all its subsidiaries.
Statements in this Annual Report on Form 10-K which are not historical
facts, so called "forward looking statements," are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that all forward looking statements involve risks and
uncertainties, including those detailed in the Company's filings with the
Securities and Exchange Commission. See also "Item 7: Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Certain Factors
That May Affect Future Results."
PRODUCTS
Semiconductor test systems produced by the Company are used by electronic
component manufacturers in the design and testing of a wide variety of
semiconductor products, including logic, memory, mixed signal, and system on a
chip integrated circuits. Semiconductor test systems are sold to semiconductor
manufacturers and subcontractors to the semiconductor industry. Semiconductor
manufacturers use the Company's semiconductor test systems to measure product
performance, to improve product quality, to shorten time to market, to enhance
manufacturability, to conserve labor costs, and to increase production yields.
Semiconductor test systems accounted for 65% of consolidated net sales in 1998,
67% in 1997, and 65% in 1996.
Backplane connection systems are used principally for the computer,
communications, and military/ aerospace industries. A backplane is an assembly
into which printed circuit boards are inserted that provides for the
interconnection of electrical signals between the circuit boards and the other
elements of the system. The Company produces both printed circuit and metal
backplanes, along with mating circuit-board connectors. Backplane connection
systems customers include makers of data storage systems, telecommunications
gear, and routers and servers. In addition, backplane connection systems have a
long-standing military/ aerospace customer base. Backplane connection systems
accounted for 18% of consolidated net sales in 1998, 17% in 1997, and 15% in
1996.
Circuit-board test systems are used by electronic equipment manufacturers
for the design and testing of circuit boards and other assemblies. Circuit-board
test systems are also sold to customers across most sectors of the electronics
industry and to companies in other industries that use electronic devices in
high volume. Similar to semiconductor test systems, circuit-board test systems
customers use their test systems and related software to increase product
performance, to improve product quality, to shorten time to market, to enhance
manufacturability, to conserve labor costs, and to increase production yields.
Circuit-board test systems accounted for less than 10% of consolidated net sales
in 1998, 9% in 1997, and 13% in 1996.
Telecommunications test systems are used by telephone operating companies
for the testing and maintenance of their subscriber telephone lines and related
equipment. Telecommunications test systems accounted for 5% of consolidated net
sales in 1998, 1997 and 1996.
1
3
Software test systems are used by a number of industries to test
communications networks, computerized telecommunication systems, and
client/server applications. Software test systems accounted for 2% of
consolidated net sales in 1998 and 1997 and 1% in 1996.
SALES AND DISTRIBUTION
The Company's systems are extremely complex and require extensive support
both by the customer and the Company. Prices for the Company's systems can reach
$5 million or more. No single customer accounted for 10% or more of consolidated
net sales in 1998. In 1998, the Company's three largest customers accounted for
23% of consolidated net sales.
Direct sales to United States government agencies accounted for less than
2% of consolidated net sales in 1998, 1997, and 1996. Approximately 7% of other
test systems segment sales were to United States government agencies in 1998.
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 approximately 16% of other test systems segment sales fell into this
category during 1998.
The Company has sales and service offices throughout North America, Europe,
the Asia Pacific region, and Japan as the Company's customers outside the United
States are located primarily in those geographic areas. The Company sells in
these areas both directly and through non U.S. sales subsidiaries utilizing a
direct sales force. Substantially all of the Company's manufacturing activities
are conducted in the United States. Sales to customers outside the United States
accounted for 46% of consolidated net sales in 1998, 51% in 1997, and 54% in
1996.
The Company is subject to the inherent risks involved in international
trade, such as political and economic instability, restrictive trade policies,
controls on funds transfer, currency fluctuations, difficulties in managing
distributors, potentially adverse tax consequences, and the possibility of
difficulty in accounts receivable collection. The Company attempts to reduce the
effects of currency fluctuations by hedging part of its exposed position and by
conducting some of its international transactions in U.S. dollars or dollar
equivalents. See also "Item 7A. Quantitative and Qualitative Disclosures About
Market Risks."
COMPETITION
The Company faces substantial competition, throughout the world, in each
operating segment. Some of these competitors have substantially greater
financial and other resources with which to pursue engineering, manufacturing,
marketing, and distribution of their products. The Company also faces
competition from internal suppliers at several of its customers. Competition is
principally based on technical performance, equipment and service reliability,
reputation and price. New product introductions by the Company's competitors
could cause a decline in sales or loss of market acceptance of existing
products.
BACKLOG
On December 31, 1998, the Company's backlog of unfilled orders for
semiconductor test systems, backplane connection systems and other test systems
segments was approximately $334.0 million, $131.1 million, and $114.7 million,
respectively, compared with $619.3 million, $90.0 million and $153.2 million,
respectively on December 31, 1997. The $282.7 million year over year decrease in
the Company's backlog was primarily due to the semiconductor industry downturn,
which has significantly reduced demand for the Company's semiconductor test
systems. Of the backlog at December 31, 1998, approximately 98% of the
semiconductor test systems backlog, approximately 97% of the backplane
connection systems backlog and approximately 67% of the other test systems
backlog are expected to be delivered in 1999. The Company's past experience
indicates that a portion of orders included in the backlog may be canceled.
There are no seasonal factors related to the backlog.
2
4
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. 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, 1998 the Company employed approximately 6,800 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 $195.2 million in
1998, $162.5 million in 1997, and $143.9 million in 1996. These expenditures
amounted to approximately 13% of consolidated net sales in 1998 and 1997 and 12%
in 1996.
ENVIRONMENTAL AFFAIRS
The Company's manufacturing facilities are subject to numerous laws and
regulations designed to protect the environment, particularly from manufacturing
plant wastes and emissions. These laws include the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, the Superfund Amendment and
Reauthorization Act of 1986, the Occupational Safety and Health Act, the Clean
Air Act, the Clean Water Act, the Resource Conservation and Recovery Act of
1976, and the Hazardous and Solid Waste Amendments of 1984. In the opinion of
management, the costs associated with complying with these laws and regulations
have not had and are currently not expected to have a material adverse effect
upon the financial position of the Company.
3
5
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... 71 Chairman of the Board Chairman of the Board of the
Company since 1977; Chief
Executive Officer of the Company
from 1996 to 1997; President of
the Company from 1971 to 1996;
Director of the Company since
1960.
George W. Chamillard...... 60 President, Chief Executive President and Chief Executive
Officer, and Member of the Officer of the Company beginning
Board in 1997; Director of the Company
since 1996; President and Chief
Operating Officer of the Company
from 1996 to 1997; Executive
Vice President of the Company
from 1994 to 1996.
Jeffrey R. Hotchkiss...... 51 Vice President and Chief Chief Financial Officer
Financial Officer beginning in 1997; Vice
President of the Company since
1990.
Michael A. Bradley........ 50 Vice President Vice President of the Company
since 1992.
John M. Casey............. 50 Vice President Vice President of the Company
since 1990.
Ronald J. Dias............ 55 Vice President Vice President of the Company
since 1988.
Donald J. Hamman.......... 47 Controller Controller of the Company since
1994.
Stuart M. Osattin......... 53 Vice President and Treasurer Vice President of the Company
since 1994; Treasurer of the
Company since 1980.
Edward Rogas, Jr.......... 58 Vice President Vice President of the Company
since 1984.
David L. Sulman........... 55 Vice President Vice President of the Company
since 1994.
4
6
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
OPERATING PROPERTY SQUARE FEET OF
LOCATION SEGMENT INTEREST FLOOR SPACE
-------- --------- -------- --------------
Boston, Massachusetts......................... Semiconductor & Own 492,000
Circuit Board Test
Agoura Hills, California...................... Semiconductor Test Own 572,000
Nashua, New Hampshire......................... Backplane Connection Own 530,000
San Jose, California.......................... Semiconductor Test Own 120,000
Walnut Creek, California...................... Circuit Board Test Lease 69,000
Kumamoto, Japan............................... Semiconductor Test Own 65,000
Deerfield, Illinois........................... Telecommunication Test Own 63,000
Dublin, Ireland............................... Backplane Connection Lease 46,000
Currently 273,000 square feet of floor space is under construction in North
Reading, Massachusetts. The Company expects to occupy the North Reading facility
in the first half of 1999. Approximately 112,000 square feet of the floor space
the Company owns in Agoura Hills is unoccupied and therefore available for
future expansion.
ITEM 3: LEGAL PROCEEDINGS
The Company is 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.
5
7
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The following table shows the market range for the Company's Common Stock
based on reported sales prices on the New York Stock Exchange.
PERIOD HIGH LOW
------ ---- ---
1998 First Quarter........................................ $48 7/16 $27 3/4
Second Quarter....................................... 43 7/16 24 5/8
Third Quarter........................................ 28 1/4 17 1/4
Fourth Quarter....................................... 45 7/16 15
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
The number of record holders of the Company's Common Stock at February 26,
1999 was 2,630.
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,
------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales......................... $1,489,151 $1,266,274 $1,171,615 $1,191,022 $777,731
========== ========== ========== ========== ========
Income from continuing
operations...................... $ 102,117 $ 127,608 $ 93,574 $ 159,284 $ 76,390
========== ========== ========== ========== ========
Income from continuing operations
per common share -- basic....... $ 1.22 $ 1.53 $ 1.12 $ 1.95 $ 0.98
========== ========== ========== ========== ========
Income from continuing operations
per common share -- diluted..... $ 1.19 $ 1.48 $ 1.10 $ 1.89 $ 0.95
========== ========== ========== ========== ========
Total assets...................... $1,312,814 $1,251,674 $1,096,816 $1,023,831 $759,480
========== ========== ========== ========== ========
Long-term obligations............. $ 13,200 $ 13,141 $ 15,650 $ 18,679 $ 9,111
========== ========== ========== ========== ========
6
8
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,
--------------------------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
Net sales.............................................. $1,489,151 $1,266,274 $1,171,615
========== ========== ==========
Net income............................................. $ 102,117 $ 127,608 $ 93,574
========== ========== ==========
Increase (decrease) in net sales from preceding year:
Amount............................................ $ 222,877 $ 94,659 $ (19,407)
========== ========== ==========
Percentage........................................ 18% 8% (2)%
========== ========== ==========
Increase (decrease) in net income from preceding
year................................................. $ (25,491) $ 34,034 $ (65,710)
========== ========== ==========
Percentage of net sales:
Net sales......................................... 100% 100% 100%
Expenses:
Cost of sales..................................... 64 58 62
Engineering and development....................... 13 13 12
Selling and administrative........................ 14 15 15
---------- ---------- ----------
91 86 89
Net interest income............................... 1 1 1
---------- ---------- ----------
Income before income taxes........................ 10 15 12
Provision for income taxes........................ 3 5 4
---------- ---------- ----------
Net income............................................. 7% 10% 8%
========== ========== ==========
RESULTS OF OPERATIONS:
1998 compared to 1997
Sales increased 18% in 1998 to a record $1,489.2 million from $1,266.3
million in 1997. Due to a strong backlog at the beginning of 1998, semiconductor
test systems shipments increased by 14%, despite a decline in sales by the
semiconductor test equipment market as a whole. Sales of backplane connection
systems to unaffiliated customers grew 23% as a result of growth in demand from
networking, data storage, and other high technology customers. Other test
systems sales were up 31% from 1997 with increases in circuit-board test systems
of 28%, telecommunications test systems of 20%, and software test systems of
77%. Net income fell from $127.6 million in 1997 to $102.1 million in 1998.
Excluding the effect of pre-tax special charges of $23.0 million for excess raw
material inventory and $5.0 million for acquired in-process technology in 1998
and 1997, respectively, income before income taxes decreased $29.5 million from
$198.4 million in 1997 to $168.9 million in 1998.
Incoming orders decreased 25% from $1,612.4 million in 1997 to $1,206.5
million in 1998. A 40% drop in semiconductor test system orders drove the
decline. Offsetting that decline, backplane connection systems orders grew 36%
and software test systems orders increased by 73%. Orders for circuit-board test
systems and telecommunications test systems decreased 3% and 38%, respectively.
The Company's backlog fell 33% to $579.8 million as a result of the decrease in
orders.
Costs of products sold as a percentage of sales, excluding a 1998 charge of
$23.0 million for excess inventory, increased from 58% of sales in 1997 to 62%
of sales in 1998. The charge for excess inventory resulted from the drop in
demand for semiconductor test systems products. The increase in cost of sales
was primarily due to higher costs related to the increased shipment of new
semiconductor test systems products and the relationship of fixed manufacturing
costs to the lower semiconductor test systems shipment volume in the second half
of 1998. In addition, backplane connection systems 1998 cost of sales, as a
percentage of sales, increased over 1997 as a result of capacity expansion at
its printed circuit-board facility and the costs to support production activity
of connector design wins at several new customers.
7
9
Engineering and development expenses were 13% of sales in both 1997 and
1998 which represents an increase of $32.6 million. The increases were primarily
in semiconductor test systems although there were increased expenses related to
product development in each of the operating segments.
Selling and administrative expenses increased by $18.8 million in 1998 over
1997, representing a decrease from 15% of sales in 1997 to 14% of sales in 1998.
The dollar increase was primarily related to the introduction and marketing of
new semiconductor and software test system products.
The Company's effective tax rate was 30% in 1998 compared to 34% in 1997.
The tax rate declined due to increases in certain research and development tax
credits and increases in export sales corporation benefits.
1997 compared to 1996
In 1997, sales increased 8% to a then 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 to unaffiliated customers grew 23% as a result of
growth in demand from networking, data storage and other high technology
customers. In the other test systems segment, 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 Software, Inc. Offsetting
these increases, sales of telecommunications test systems and circuit board test
systems decreased 3% 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
special 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 in 1997.
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, which included 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 special 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.
Engineering and development expenses increased from 12% of sales in 1996 to
13% of sales in 1997, which was 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 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 special
charge, selling and administrative 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%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and marketable securities balance
increased $48.0 million in 1998, to $297.9 million. Cash generated from
operations increased to $238.6 million in 1998 from $13.5 million in 1997,
principally due to changes in accounts receivable and inventory. Accounts
receivable decreased $81.6 million in 1998 from 1997 and increased $122.5
million in 1997 from 1996. These changes resulted from
8
10
varying sales levels in the fourth quarters of the three years. Inventories
decreased $6.0 million in 1998 from 1997, including the effect of a non-cash
$23.0 million charge for excess inventory, after an increase of $133.4 million
in 1997. The 1997 increase was due to anticipated demand for semiconductor test
systems. Cash was used to fund additions to property, plant and equipment of
$164.4 million in 1998 and $132.1 million in 1997. Property, plant and equipment
expenditures relate primarily to the expansion of production capacity in
semiconductor test and backplane connection systems.
In 1998, the Company's Board of Directors authorized the repurchase of 5.0
million additional shares of the Company's stock on the open market increasing
to 10.0 million the total number of shares authorized for repurchase. The
Company repurchased 1.4 million shares and 2.6 million shares for $51.2 million
and $104.5 million in 1998 and 1997, respectively. The cumulative total through
1998, under the buyback program which began in 1996, aggregates to 5.3 million
shares at a cost of $185.5 million. Cash of $26.6 million in 1998 and $44.1
million in 1997 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 $297.9 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 for the foreseeable future.
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 limited in the short-term by its relatively high backlog.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. The statement
is effective for fiscal years beginning after June 15, 1999. Management is
currently evaluating the effects of this change on its recording of derivatives
and hedging activities. The Company will adopt SFAS No. 133 for its fiscal year
ending December 31, 2000.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Internal Use Software," which provides
guidance on the accounting for the costs of software developed or obtained for
internal use. SOP 98-1 is effective for fiscal years beginning after December
15, 1998. Management does not expect the statement to have a material impact on
its financial position or results of operations.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
EXCHANGE RATE RISK MANAGEMENT
The Company regularly enters into forward contracts in European and
Japanese currencies to hedge its overseas net monetary position and firm
commitments. The Company's firm commitments consist of certain orders received
in currencies other than U.S. dollars. Forward currency contracts have
maturities of less than one year. These contracts are used to reduce the
Company's risk associated with exchange rate movements, as gains and losses on
these contracts are intended to offset exchange losses and gains on underlying
exposures. The Company does not engage in currency speculation.
At December 31, 1998 the face amount of outstanding forward currency
contracts to buy and sell U.S. dollars for non U.S. currencies was $36.4 million
and $10.3 million, respectively. A 10% fluctuation in exchange rates for these
currencies would change the fair value by approximately $2.6 million. However,
since these contracts hedge non U.S. currency transactions, any change in the
fair value of the contracts would be offset by changes in the underlying value
of the transactions being hedged. The hypothetical movement was
9
11
estimated by calculating the fair value of the forward currency contracts at
December 31, 1998 and comparing that with those calculated using hypothetical
forward currency exchange rates.
INTEREST RATE RISK MANAGEMENT
Due to its short-term duration the fair value of the Company's cash and
investment portfolio at December 31, 1998 approximated carrying value. Interest
rate risk was estimated as the potential decrease in fair value resulting from a
hypothetical 10% increase in interest rates for issues contained in the
investment portfolio. The resulting hypothetical fair value was not materially
different from the year-end carrying value.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided by the Company, statements made by
its employees or information included in its filings with the Securities and
Exchange Commission (including this Form 10-K and the Company's Annual Report to
Shareholders) may contain statements which are not historical facts, so-called
"forward looking statements," which involve risks and uncertainties. In
particular, statements in "Item 1: Business" relating to the Company's delivery
time of unfilled orders, and in "Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations" relating to the sufficiency of
capital to meet working capital and planned capital expenditures, may be forward
looking statements. The Company's actual future results may differ significantly
from those stated in any forward looking statements. Factors that may cause such
differences include, but are not limited to, the factors discussed below. Each
of these factors, and others, are discussed from time to time in the Company's
filings with the Securities and Exchange Commission.
The Company's future results are subject to substantial risks and
uncertainties. The Company's business and results of operations depend in
significant part upon capital expenditures of manufacturers of semiconductors,
which in turn depend upon the current and anticipated market demand for
semiconductors and products incorporating semiconductors. The semiconductor
industry has been highly cyclical with recurring periods of over supply, which
often have had a severe effect on the semiconductor industry's demand for test
equipment, including systems manufactured and marketed by the Company. The
Company believes that the markets for newer generations of semiconductors will
also be subject to similar fluctuations. There can be no assurance that any
future increase in semiconductor test systems bookings for a calendar quarter
will be sustained in subsequent quarters. In addition, any factor adversely
affecting the semiconductor industry or particular segments within the
semiconductor industry may adversely affect the Company's business, financial
condition and operating results.
The Company relies on certain intellectual property protections to preserve
its intellectual property rights, including patents, copyrights, and trade
secrets. While the Company believes that its patents, copyrights, and trade
secrets have value, in general no single one is in itself essential. The Company
believes that its technological position depends primarily on the technical
competence and creative ability of its research and development personnel. From
time to time the Company is notified that it may be in violation of patents held
by others. An assertion of patent infringement against the Company, if
successful, could have a material adverse effect on the Company or could require
a lengthy and expensive defense which could adversely affect the Company's
operating results.
The development of new technologies, commercialization of those
technologies into products, and market acceptance and customer demand for those
products is critical to the Company's success. Successful product development
and introduction depends upon a number of factors, including new product
selection, development of competitive products by competitors, timely and
efficient completion of product design, timely and efficient implementation of
manufacturing and assembly processes and product performance at customer
locations.
The Company faces substantial competition, throughout the world, in each
operating segment. Some of these competitors have substantially greater
financial and other resources to pursue engineering, manufacturing, marketing
and distribution of their products. The Company also faces competition from
internal suppliers at several of its customers. Certain of the Company's
competitors have introduced or announced new products
10
12
with certain performance characteristics which may be considered equal or
superior to those currently offered by the Company. The Company expects its
competitors to continue to improve the performance of their current products and
to introduce new products or new technologies that provide improved cost of
ownership and performance characteristics. New product introductions by
competitors could cause a decline in sales or loss of market acceptance of the
Company's existing products. Moreover, increased competitive pressure could lead
to intensified price based competition, which could materially adversely affect
the Company's business, financial condition and results of operations.
The Company derives a significant portion of its total revenue from
customers outside the United States. International sales are subject to
significant risks, including unexpected changes in legal and regulatory
requirements and policy changes affecting the Company's markets, changes in
tariffs, exchange rates and other barriers, political and economic instability,
difficulties in accounts receivable collection, difficulties in managing
distributors and representatives, difficulties in staffing and managing
international operations, difficulties in protecting the Company's intellectual
property and potentially adverse tax consequences.
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
operating results.
The Company's quarterly and annual operating results are affected by a wide
variety of factors that could materially adversely affect revenues and
profitability, including: competitive pressures on selling prices; the timing
and cancellation of customer orders; changes in product mix; the Company's
ability to introduce new products and technologies on a timely basis;
introduction of products and technologies by the Company's competitors; market
acceptance of the Company's and its competitors' products; fulfilling backlog on
a timely basis; reliance on sole source suppliers; potential retrofit costs; the
level of orders received which can be shipped in a quarter; and the timing of
investments in engineering and development. As a result of the foregoing and
other factors, the Company may experience material fluctuations in future
operating results on a quarterly or annual basis which could materially and
adversely affect its business, financial condition, operating results and stock
price.
YEAR 2000 READINESS
The "Year 2000 problem" arose because many existing computer programs use
only the last two digits to refer to a year. Therefore, these computer programs
do not properly recognize a year that begins with "20" instead of "19". If not
corrected, many computer applications could fail or create erroneous results.
The Company is employing a combination of internal resources and outside
consultants to coordinate and implement its program for Year 2000 readiness.
The Company has committed to having all its current products Year 2000
ready in advance of the Year 2000. All of the Company's current products have
been assessed, using industry accepted test procedures, and most have been
determined to be Year 2000 ready. The Company has also evaluated which of its
former products, still in use but no longer sold, will be made Year 2000 ready.
The schedule of Company products which will or will not be made Year 2000 ready
is published and updated regularly by the Company on its web site.
The Company has completed an inventory and assessment of internal business
systems that use date-sensitive software. The Company is actively working with
suppliers and using consultants and internal engineering resources to modify or
replace internal business systems depending on the level of criticality for the
Company's ongoing operations.
The Company is also at risk of disruption to its business if Year 2000
problems are experienced by its key suppliers. To mitigate this risk, the
Company has contacted its suppliers to assess their Year 2000 readiness and
continually monitors the progress of its key suppliers. Alternate suppliers are
being qualified in appropriate circumstances.
Most of the Company's effort toward Year 2000 readiness is funded as
ongoing operating expenses, as a part of ongoing software support operations.
The Company is not able to estimate the amount of accelerated
11
13
upgrade costs which have been or will be incurred for third party software or
systems. Expenditures directly related to the Year 2000 readiness program,
consisting primarily of dedicated staff and consulting services, are estimated
at less than $5.0 million through 1999.
The Company believes that its Year 2000 readiness project will be completed
on a timely basis. The Company believes that the year 2000 transition will not
have a material adverse effect on the Company's financial condition or overall
trends in its operating results. However, there can be no assurance that
unexpected delays or problems, including failure of Year 2000 readiness programs
by its product and service suppliers, will not occur and have an adverse effect
on the Company's financial condition or performance, or its competitive
position.
The Company has not yet adopted formal contingency plans, but such plans
are under active development at this time.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Shareholders of
Teradyne, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, changes in shareholders' equity and
of cash flows present fairly, in all material respects, the consolidated
financial position of Teradyne, Inc. and its subsidiaries at December 31, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 15, 1999
12
14
TERADYNE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
1998 1997
---- ----
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 185,514 $ 74,668
Marketable securities.................................. 15,914 18,693
Accounts receivable, less allowance for doubtful
accounts of $2,395 and $1,938 in 1998 and 1997,
respectively.......................................... 219,303 300,933
Inventories:
Parts............................................. 154,706 168,385
Assemblies in process............................. 111,641 103,972
---------- ----------
266,347 272,357
Deferred tax assets.................................... 49,262 40,530
Prepayments and other current assets................... 23,200 19,902
---------- ----------
Total current assets.............................. 759,540 727,083
Property, plant, and equipment:
Land................................................... 41,060 35,515
Buildings and improvements............................. 171,895 150,938
Machinery and equipment................................ 591,897 480,887
Construction in progress............................... 52,699 25,492
---------- ----------
Total............................................. 857,551 692,832
Less: Accumulated depreciation......................... (422,594) (349,707)
---------- ----------
Net property, plant, and equipment................ 434,957 343,125
Marketable securities....................................... 96,494 156,574
Other assets................................................ 21,823 24,892
---------- ----------
Total assets...................................... $1,312,814 $1,251,674
========== ==========
LIABILITIES
Current liabilities:
Notes payable -- banks................................. $ 7,393 $ 6,632
Current portion of long-term debt...................... 1,309 1,807
Accounts payable....................................... 45,042 58,685
Accrued employees' compensation and withholdings....... 68,431 77,299
Unearned service revenue and customer advances......... 64,674 49,122
Other accrued liabilities.............................. 54,071 65,642
Income taxes payable................................... 14,770 18,786
---------- ----------
Total current liabilities......................... 255,690 277,973
Deferred tax liabilities.................................... 17,554 23,429
Long-term debt.............................................. 13,200 13,141
Commitments (Note E)
---------- ----------
Total liabilities................................. 286,444 314,543
---------- ----------
SHAREHOLDERS' EQUITY
Common stock, $0.125 par value, 250,000 shares authorized,
83,744 and 83,303 net shares issued and outstanding in
1998 and 1997, respectively............................... 10,468 10,413
Additional paid-in capital.................................. 310,052 322,985
Retained earnings........................................... 705,850 603,733
---------- ----------
Total shareholders' equity........................ 1,026,370 937,131
---------- ----------
Total liabilities and shareholders' equity........ $1,312,814 $1,251,674
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
13
15
TERADYNE, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales............................................... $1,489,151 $1,266,274 $1,171,615
Expenses:
Cost of sales...................................... 947,174 734,370 724,624
Engineering and development........................ 195,158 162,500 143,931
Selling and administrative......................... 212,885 194,103 180,265
---------- ---------- ----------
1,355,217 1,090,973 1,048,820
---------- ---------- ----------
Income from operations.................................. 133,934 175,301 122,795
Interest income.................................... 13,514 20,289 19,295
Interest expense................................... (1,566) (2,245) (2,427)
---------- ---------- ----------
Income before income taxes.............................. 145,882 193,345 139,663
Provision for income taxes.............................. 43,765 65,737 46,089
---------- ---------- ----------
Net income.............................................. $ 102,117 $ 127,608 $ 93,574
========== ========== ==========
Net income per common share -- basic.................... $ 1.22 $ 1.53 $ 1.12
========== ========== ==========
Net income per common share -- diluted.................. $ 1.19 $ 1.48 $ 1.10
========== ========== ==========
Shares used in net income per common share -- basic..... 83,822 83,434 83,262
========== ========== ==========
Shares used in net income per common share -- diluted... 85,965 86,319 85,060
========== ========== ==========
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,
-----------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
Cash flows from operating activities:
Net income............................................ $ 102,117 $ 127,608 $ 93,574
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation....................................... 75,351 57,983 49,577
Amortization....................................... 953 1,168 1,326
Product line consolidation......................... 34,100
Workforce reduction provision...................... 10,810
Charge for excess inventory........................ 23,000
Deferred income tax provision (credit)............. (14,607) 1,341 (14,607)
Other non-cash items, net.......................... (804) 1,377 (260)
Changes in operating assets and liabilities:
Accounts receivable.............................. 81,630 (122,503) 74,990
Inventories...................................... (16,990) (131,014) 20,584
Other assets..................................... (1,184) (3,861) (4,117)
Accounts payable and accruals.................... (18,530) 41,261 (10,638)
Income taxes payable............................. 7,685 40,092 (4,515)
--------- --------- ---------
Net cash provided by operating activities..... 238,621 13,452 250,824
--------- --------- ---------
Cash flows from investing activities:
Additions to property, plant, and equipment........... (119,457) (106,436) (59,494)
Increase in equipment manufactured by the Company..... (44,983) (25,695) (15,735)
Purchases of held-to-maturity marketable securities... (20,000) (111,033) (250,594)
Maturities of held-to-maturity marketable
securities......................................... 20,000 206,556 248,733
Purchases of available-for-sale marketable
securities......................................... (162,092) (192,174) (142,600)
Maturities of available-for-sale marketable
securities......................................... 224,951 151,426 8,081
--------- --------- ---------
Net cash used in investing activities................. (101,581) (77,356) (211,609)
--------- --------- ---------
Cash flows from financing activities:
Payments of long-term debt............................ (1,615) (2,410) (3,550)
Issuance of common stock under stock option and stock
purchase plans..................................... 26,579 44,065 13,455
Acquisition of treasury stock......................... (51,158) (104,535) (29,833)
--------- --------- ---------
Net cash used by financing activities......... (26,194) (62,880) (19,928)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents........ 110,846 (126,784) 19,287
Cash and cash equivalents at beginning of year.......... 74,668 201,452 182,165
--------- --------- ---------
Cash and cash equivalents at end of year................ $ 185,514 $ 74,668 $ 201,452
========= ========= =========
Supplementary disclosure of cash flow information:
Cash paid during the year for:
Interest........................................... $ 1,525 $ 2,257 $ 2,426
Income taxes....................................... $ 47,225 $ 31,971 $ 68,089
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, 1998, 1997 AND 1996
SHARES COMMON ADDITIONAL
------------------- STOCK PAID-IN RETAINED
ISSUED REACQUIRED PAR VALUE CAPITAL EARNINGS
------ ---------- --------- ---------- --------
(IN THOUSANDS)
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
Issuance of stock to employees under
benefit plans......................... 1,796 224 26,355
Tax benefit from stock options.......... 11,701
Repurchase of stock..................... 1,355 (169) (50,989)
Net income.............................. 102,117
------ ----- ------- --------- --------
Balance, December 31, 1998................... 92,411 8,667 $10,468 $ 310,052 $705,850
====== ===== ======= ========= ========
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
test systems and related software, and backplanes and associated connectors. The
Company has five principal products; semiconductor test systems, backplane
connection systems, circuit-board test systems, telecommunications test systems,
and software test systems.
Semiconductor test systems are used by electronic component manufacturers
in the design and testing of their products. Backplane connection systems are
used principally for the computer, communications, and military/aerospace
industries. A backplane is an assembly into which printed circuit boards are
inserted that provides for the interconnection of electrical signals between the
circuit boards and the other elements of the system. Circuit-board test systems
are used by electronic equipment manufacturers for the design and testing of
circuit boards and other assemblies. Telecommunication test systems are used by
telephone operating companies for the testing and maintenance of their
subscriber telephone lines and related equipment. Software test systems are used
by a number of industries to test communications networks, computerized
telecommunication systems, and client/server applications.
B. ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions are
eliminated. Certain prior years' amounts were reclassified to conform to the
current year presentation.
Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reported periods. Actual results could differ from those estimates.
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 the Company's final test procedures. Service revenue is recognized ratably
over applicable contract periods or as services are performed. In certain
situations, revenue is recorded 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.
17
19
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
B. ACCOUNTING POLICIES -- (CONTINUED)
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
The Company previously adopted SFAS No. 128, "Earnings per Share"
(Statement 128). Statement 128 specifies the calculation and presentation of
basic and diluted net income per share. Basic net income per common share is
calculated by dividing net income by the weighted average number of common
shares outstanding during the period. Diluted net income per common share is
calculated by dividing net income by the sum of the weighted average number of
common shares plus additional common shares that would have been outstanding if
potential dilutive common shares had been issued for granted stock option and
stock purchase rights.
Other Comprehensive Income
During 1998, The Company adopted SFAS No. 130, "Reporting Comprehensive
Income" (Statement 130), which established standards for reporting and
displaying comprehensive income and its components in a financial statement that
is displayed with the same prominence as other financial statements.
Comprehensive income is equal to net income, for the years ended December 31,
1998, 1997 and 1996.
C. FINANCIAL INSTRUMENTS
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less at the date of acquisition to be cash
equivalents.
Marketable Securities
The Company classifies investments in marketable securities as trading,
available-for-sale or held-to-maturity at the time of purchase and periodically
re-evaluates such classification. All securities were classified as
available-for-sale at December 31, 1998 and 1997. 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
18
20
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
C. FINANCIAL INSTRUMENTS -- (CONTINUED)
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 ten years. At December 31, 1998 and 1997 these investments
are reported as follows (in thousands):
1998 1997
---- ----
Short-term marketable securities:
U.S. Treasury and government agency securities........... $ 8,142 $ 14,665
Corporate debt securities................................ 7,772 4,028
------- --------
$15,914 $ 18,693
======= ========
Long-term marketable securities:
U.S. Treasury and government agency securities........... $37,888 $ 60,937
Corporate debt securities................................ 58,606 95,637
------- --------
$96,494 $156,574
======= ========
Other
For all other balance sheet financial instruments, the carrying amount
approximates fair value.
Off-Balance Sheet Risk
The Company regularly enters into forward contracts in European and
Japanese currencies to hedge its non U.S. currency net monetary position and
firm commitments. The Company's firm commitments consist of certain orders
received in currencies other than U.S. dollars. Forward currency contracts have
maturities of less than one year. These contracts are used to reduce the
Company's risk associated with exchange rate movements, as gains and losses on
these contracts are intended to offset exchange losses and gains on underlying
exposures. The Company does not engage in currency speculation. Gains or losses
associated with the termination of the underlying contract for which a firm
commitment no longer exists are immediately included in selling and
administrative expenses.
At December 31, 1998, 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 thousands):
BUY SELL
--- ----
French francs...................................... $ 9,675 $ 6,251
Japanese yen....................................... 8,566 3,453
British pound sterling............................. 8,148
German deutschemarks............................... 7,339 602
Belgian francs..................................... 1,422
Italian lira....................................... 1,225
------- -------
$36,375 $10,306
======= =======
19
21
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
C. FINANCIAL INSTRUMENTS -- (CONTINUED)
At December 31, 1997 the face amount of outstanding forward currency
contracts to buy and sell U.S. dollars for non U.S. currencies was $61.5 million
and $8.5 million, respectively.
The fair value of these contracts as of December 31, 1998 and 1997,
determined by applying year end currency exchange rates to the notional contract
amounts, represented a net unrealized loss of $0.2 million in 1998 and a net
unrealized gain of $4.1 million in 1997. The Company's policy is to defer gains
and losses on these contracts until the corresponding losses and gains are
recognized on the items being hedged. Both the contract gains and losses and the
gains and losses on the items being hedged are included in selling and
administrative expenses.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash investments, forward
currency contracts, and accounts receivable. The Company maintains cash
investments primarily in U.S. Treasury and government agency securities and
corporate debt securities, rated AA or higher, which have minimal credit risk.
The Company places forward currency contracts with high credit-quality financial
institutions in order to minimize credit risk exposure. Concentrations of credit
risk with respect to accounts receivable are limited due to the large number of
diverse and geographically dispersed customers.
D. DEBT
Long-term debt at December 31, 1998 and 1997 consisted of the following (in
thousands):
1998 1997
---- ----
Mortgage notes payable............................... $ 9,939 $10,122
Capital equipment notes payable...................... 1,087 2,440
Other long-term debt................................. 3,483 2,386
------- -------
Total........................................... 14,509 14,948
Less current maturities.............................. 1,309 1,807
------- -------
$13,200 $13,141
======= =======
The total maturities of long-term debt for the succeeding five years and
thereafter are: 1999 -- $1.3 million; 2000 -- $4.7 million; 2001 -- $0.2
million; 2002 -- $0.3 million; 2003 -- $0.3 million and $7.7 million thereafter.
Revolving Credit Agreement
The Company's available revolving credit line, in effect through January
31, 2001, is $120.0 million. At expiration of the revolver, any amounts
outstanding are converted into a two year term note. As of December 31, 1998, no
amounts were outstanding under this agreement. The terms of this line of credit
include restrictive covenants regarding working capital, tangible net worth, and
leverage. Interest rates on borrowings are either at the stated prime rate,
based upon Eurocurrency, or certificate of deposit interest rates. Pursuant to
the terms of the credit agreement, the Company may incur additional indebtedness
of up to $30.0 million outside the agreement provided that the liabilities of
the Company, exclusive of deferred income taxes and subordinated debt, shall not
exceed 100% of the Company's tangible net worth.
Mortgage Notes Payable
In 1983, the Company received a loan of $4.5 million from the Boston
Redevelopment Authority in the form of a 3% mortgage loan maturing March 31,
2013. This loan is collateralized by a mortgage on the Company's property at 321
Harrison Avenue which may, at the Company's option, become subordinated to
20
22
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
D. DEBT -- (CONTINUED)
another mortgage up to a maximum of $5.0 million. Interest for the first 4 1/2
years of the note was capitalized up to a principal amount of $5.0 million.
Since September 30, 1987, the Company has been making semi-annual interest
payments.
In conjunction with the purchase of operating facilities in San Jose, the
Company received a $5.5 million mortgage loan which matures on August 31, 2000.
The loan is collateralized by a mortgage on the San Jose facilities. The loan
bears interest at 8.1% per annum and is payable in 59 consecutive monthly
installments of $0.05 million with a $4.6 million balloon payment due at
maturity. The terms of this mortgage note payable include 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, 1998 and 1997 was 2.1%.
E. COMMITMENTS
Rental expense for the years ended December 31, 1998, 1997, and 1996 was
$17.7 million, $15.1 million, and $14.6 million, respectively. Minimum annual
rentals under all noncancellable leases are: 1999 -- $10.1 million; 2000 -- $7.1
million; 2001 -- $5.2 million; 2002 -- $3.8 million; 2003 -- $2.6 million; and
$7.8 million thereafter, totaling $36.6 million.
F. NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net
income per common share (in thousands, except per share amounts):
1998 1997 1996
---- ---- ----
Net income......................................... $102,117 $127,608 $93,574
======== ======== =======
Shares used in net income per common
share -- basic................................... 83,822 83,434 83,262
Effect of dilutive securities:
Employee and director stock options........... 1,747 2,601 1,422
Employee stock purchase rights................ 396 284 376
-------- -------- -------
Dilutive potential common shares................. 2,143 2,885 1,798
-------- -------- -------
Shares used in net income per common
share -- diluted................................. 85,965 86,319 85,060
======== ======== =======
Net income per common share -- basic............... $ 1.22 $ 1.53 $ 1.12
======== ======== =======
Net income per common share -- diluted............. $ 1.19 $ 1.48 $ 1.10
======== ======== =======
Options to purchase 2.0 million shares of common stock in 1998, 0.4 million
shares in 1997, and 1.7 million shares in 1996 were outstanding during the years
then ended, but were not included in the year to date calculation of diluted net
income per share because the options' exercise price was greater than the
average market price of the common shares during those periods.
G. RETIREMENT PLANS
The Company has defined benefit pension plans covering substantially all
domestic employees and employees of certain non U.S. subsidiaries. Benefits
under these plans are based on the employees' years of service and compensation.
The Company's funding policy is to make contributions to the plans in accordance
with local laws and to the extent that such contributions are tax deductible.
The assets of these plans consist primarily of equity and fixed income
securities. In addition, the Company has an unfunded supplemental
21
23
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
G. RETIREMENT PLANS -- (CONTINUED)
defined benefit plan in the United States to provide retirement benefits in
excess of levels allowed by the Employment Retirement Income Security Act
(ERISA).
The expense of these defined benefit pension plans and the December 31
balances of plan assets and obligations are shown below (in thousands):
EXPENSE
- -------
1998 1997 1996
------- ------- -------
Service cost.......................................... $ 5,852 $ 5,057 $ 4,559
Interest cost......................................... 6,789 6,031 5,208
Expected return on plan assets........................ (6,317) (5,413) (6,676)
Amortization of unrecognized:
Net transition (asset)/obligation................ 81 67 (166)
Prior service cost............................... 584 525 525
Net loss......................................... 1,196 1,024 2,892
------- ------- -------
Total expense......................................... $ 8,185 $ 7,291 $ 6,342
======= ======= =======
WEIGHTED AVERAGE ASSUMPTIONS
- ----------------------------
1998 1997 1996
------- ------- -------
Discount rate......................................... 7.0% 7.0% 7.25%
Expected return on plan assets........................ 9.0% 9.0% 9.0 %
Salary progression rate............................... 5.0% 5.0% 5.0 %
ASSETS AND OBLIGATIONS
- ----------------------
1998 1997
-------- --------
Projected benefit obligation:
Beginning of year...................................... $ 98,149 $ 79,926
Service cost........................................... 5,852 5,073
Interest cost.......................................... 6,789 6,016
Actuarial loss......................................... 12,132 9,936
Benefits paid.......................................... (2,309) (2,138)
Amendments and other................................... 621 (664)
-------- --------
End of year............................................ 121,234 98,149
Fair value of plan assets:
Beginning of year...................................... 77,809 61,776
Company contributions.................................. 6,224 6,014
Actual return.......................................... 11,870 12,157
Benefits paid.......................................... (2,309) (2,138)
-------- --------
End of year................................................. 93,594 77,809
-------- --------
Funded status............................................... (27,640) (20,340)
Unrecognized prior service cost............................. 4,363 4,245
Unrecognized net actuarial loss............................. 16,911 11,981
-------- --------
Accrued pension cost........................................ $ (6,366) $ (4,114)
======== ========
The following table provides amounts recognized in the statement of
financial position as of December 31, of both years (in thousands):
1998 1997
---- ----
Prepaid pension cost..................................... $ 2,519 $ 2,816
Accrued benefit liability................................ (8,885) (6,930)
------- -------
Accrued pension cost..................................... $(6,366) $(4,114)
======= =======
22
24
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
G. RETIREMENT PLANS -- (CONTINUED)
There is no additional minimum pension liability to be recognized as of
December 31, 1998 and 1997. The projected benefit obligation, accumulated
benefit obligation, and fair value of plan assets for pension plans with
accumulated benefit obligations in excess of plan assets were $17.6 million,
$11.5 million and $2.5 million, respectively, as of December 31, 1998 and $13.6
million, $9.0 million and $1.9 million, respectively, as of December 31, 1997.
H. COMMON STOCK REPURCHASE PROGRAM
In 1998, the Company's Board of Directors authorized a 5.0 million share
extension to the existing common stock repurchase program that, along with a
previous authorization will allow the Company to repurchase up to 10.0 million
shares of its common stock on the open market. In 1998, the Company repurchased
1.4 million shares at a cost of $51.2 million, increasing the cumulative shares
purchased under this program through 1998 to 5.3 million shares at an aggregate
cost of $185.5 million.
I. STOCK BASED COMPENSATION
At December 31, 1998, the Company had both stock option plans and stock
purchase plans. The Company previously adopted SFAS No. 123 "Accounting for
Stock-Based Compensation" (Statement 123), and as permitted by this standard,
will continue to apply Accounting Principles Board (APB) Opinion 25 and related
interpretations in accounting for its plans. The Company is required to disclose
pro forma net income and net income per common share amounts had compensation
cost for the Company's stock based compensation plans been determined based on
the fair value at the grant dates for awards under those plans. Had compensation
expense for the stock based compensation plans been consistent with the method
of Statement 123, the amounts reported for 1998, 1997, and 1996, respectively
would have been; net income of $77.8 million, $115.4 million and $86.4 million;
net income per common share - basic of $0.93, $1.38 and $1.04; and net income
per common share - diluted of $0.91, $1.34 and $1.02. The impact to reported net
income and per common share amounts of this pro forma disclosure are not
comparable among 1998, 1997, and 1996 as Statement 123 did not apply to awards
prior to 1995. The amounts of this pro forma disclosure are also not indicative
of the impact on net income for future years.
Stock Option Plans
Under its stock option plans, all of which are fixed, the Company granted
options to 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 1998, 1997, and 1996 follows (in
thousands):
1998 1997 1996
---- ---- ----
Outstanding at January 1................................ 8,566 8,503 7,230
Options granted.................................... 6,889 3,176 2,401
Options exercised.................................. (1,235) (2,850) (795)
Options canceled................................... (3,446) (263) (333)
------ ------ ------
Outstanding at December 31.............................. 10,774 8,566 8,503
====== ====== ======
Exercisable at December 31.............................. 4,199 3,394 3,995
====== ====== ======
Available for grant at December 31...................... 9,408 5,683 5,042
====== ====== ======
23
25
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
I. STOCK BASED COMPENSATION -- (CONTINUED)
Weighted average option exercise price information for the years 1998, 1997
and 1996 follows:
1998 1997 1996
---- ---- ----
Outstanding at January 1................................ $22.48 $13.53 $13.63
Options granted.................................... $22.95 $36.44 $12.13
Options exercised.................................. $12.35 $11.75 $ 8.11
Options canceled................................... $35.47 $18.80 $18.61
Outstanding at December 31.............................. $19.45 $22.48 $13.53
Exercisable at December 31.............................. $17.32 $17.50 $12.46
Significant option groups outstanding at December 31, 1998 and related
weighted average price and life information follows (options in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
RANGE OF CONTRACTUAL AVERAGE AVERAGE
EXERCISE PRICES LIFE (YEARS) SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------------- ------------ ------ -------------- ------ --------------
$ 3.31 - $18.38................ 2.00 2,668 $12.18 1,812 $12.30
$19.19 - $19.19................ 4.58 3,215 $19.19 621 $19.19
$19.53 - $22.88................ 1.44 1,667 $20.82 1,188 $20.73
$23.63 - $46.19................ 4.54 3,224 $25.02 578 $24.05
------ -----
Total..................... 3.45 10,774 $19.45 4,199 $17.32
====== =====
During 1998, the Company canceled options to purchase 3.2 million shares.
The canceled options were originally granted during 1997 at $36.50 per share.
New options to purchase 3.2 million shares at $19.19 were then granted. All
vesting under the canceled options was lost and new vesting periods were
started. The effect of this option repricing on the above pro forma disclosures
is considered, under Statement 123, a modification of the terms of the
outstanding options. Accordingly, the 1998 pro forma disclosure includes
compensation cost for the incremental fair value, under Statement 123, resulting
from such modification.
The weighted average fair value at date of grant for options granted during
1998, 1997 and 1996 was $10.69, $16.11 and $4.79 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:
1998 1997 1996
---- ---- ----
Expected life (years).................................... 4.3 4.3 3.9
Interest rate............................................ 5.5% 6.5% 6.7%
Volatility............................................... 47.9% 44.2% 41.8%
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 0.7 million shares for future issuance. In 1998, the Company
authorized an additional 2.0 million shares. 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 1999, the Company issued 0.6 million shares of common stock
to employees who participated in the plan during 1998 at a weighted-average
price of $27.62 per share. Currently, there are 1.6 million shares reserved for
issuance.
24
26
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
I. STOCK BASED COMPENSATION -- (CONTINUED)
The weighted-average fair value of purchase rights granted in 1998, 1997
and 1996 was $13.02, $7.70 and $8.37, respectively. The fair value of the
employees' purchase rights was estimated using the Black-Scholes model with the
following assumptions for 1998, 1997 and 1996, respectively; dividend yield of
0.0% for all years; an expected life of 1 year for all years; expected
volatility of 58.8%, 45.5% and 44.7%; and risk-free interest rates of 5.5%, 5.6%
and 5.2%.
J. SAVINGS PLANS
The Company sponsors a Savings Plan covering substantially all U.S.
employees. Under this plan, employees may contribute up to 12% of their
compensation (subject to Internal Revenue Service limitations). The Company
annually matches employee contributions up to 6% of such compensation at rates
ranging from 50% to 100%. The Company's contributions vest after two years,
although contributions for those employees with five years of service vest
immediately. The Company has also established a Supplemental Savings Plan to
provide savings benefits in excess of those allowed by ERISA. The provisions of
this plan are the same as the Savings Plan. Under the Company's savings plans,
amounts charged to operations were $9.3 million in 1998 and 1997, and $6.3
million in 1996.
K. 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.
L. 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):
1998 1997 1996
---- ---- ----
Income before income taxes:
United States................................. $131,571 $161,942 $106,708
Non U.S....................................... 14,311 31,403 32,955
-------- -------- --------
$145,882 $193,345 $139,663
======== ======== ========
Provision (credit) for income taxes:
Current:
U.S. Federal............................. $ 43,501 $ 45,302 $ 40,033
Non U.S.................................. 11,021 13,053 14,802
State.................................... 3,850 6,041 5,861
-------- -------- --------
58,372 64,396 60,696
======== ======== ========
Deferred:
U.S. Federal............................. (6,102) 77 (13,667)
Non U.S.................................. (7,655) 1,140 (632)
State.................................... (850) 124 (308)
-------- -------- --------
(14,607) 1,341 (14,607)
-------- -------- --------
$ 43,765 $ 65,737 $ 46,089
======== ======== ========
25
27
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
L. INCOME TAXES -- (CONTINUED)
Significant components of the Company's deferred tax assets (liabilities)
as of December 31, 1998 and 1997 are as follows (in thousands):
1998 1997
---- ----
Deferred tax assets:
Inventory valuations.............................. $ 28,605 $ 16,733
Accruals.......................................... 9,786 11,335
Vacation.......................................... 7,257 6,907
In process research and development............... 2,751 2,456
Deferred revenue.................................. 2,741 62
U.S. Federal operating loss carryforwards......... 350 975
Tax credits....................................... 1,955 2,502
Other............................................. 3,037
-------- --------
Total deferred tax assets.............................. 53,445 44,007
-------- --------
Deferred tax liabilities:
Excess of tax over book depreciation.............. (15,292) (22,828)
Amortization...................................... (2,023) (818)
Pension........................................... (3,482) (827)
Other............................................. (940) (2,433)
-------- --------
Total deferred tax liabilities......................... (21,737) (26,906)
-------- --------
Net deferred asset..................................... $ 31,708 $ 17,101
======== ========
A reconciliation of the effective tax rate for the years 1998, 1997, and
1996 follows:
1998 1997 1996
---- ---- ----
U.S. statutory federal tax rate........................ 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit......... 1.3 2.1 2.6
Tax credits............................................ (3.1) (1.6) (1.0)
Export sales corporation............................... (3.4) (2.8) (2.9)
Non-deductible costs related to acquisitions........... 0.7
Other, net............................................. 0.2 0.6 (0.7)
---- ---- ----
30.0% 34.0% 33.0%
==== ==== ====
At December 31, 1998 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 $2.0 million of U.S. business tax
credit carryforwards that expire in the years 1999 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.
M. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
The Company adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" (Statement No. 131), during the fourth
quarter of 1998. Statement No. 131 established standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to stockholders. It also established standards for related disclosures
about products and services and geographic areas.
The Company has five principal operating segments which are the design,
manufacturing and marketing of semiconductor test systems, backplane connection
systems, circuit-board test systems, telecommunication test systems, and
software test systems. These operating segments were determined based upon the
nature of the products and services offered. The Company has three reportable
segments; semiconductor test systems
26
28
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
M. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION -- (CONTINUED)
segment, backplane connection systems segment, and other test systems segment.
The other test systems segment is comprised of circuit-board test systems,
telecommunication test systems, and software test systems. These operating
segments were not separately reported as they do not meet any of Statement 131's
quantitative thresholds.
The Company evaluates performance based on several factors, of which the
primary financial measure is business segment income before taxes. The
accounting policies of the business segments are the same as those described in
"Note B: Accounting Policies". Intersegment sales are accounted for at fair
value as if sales were to third parties.
SEMICONDUCTOR BACKPLANE OTHER
TEST CONNECTION TEST CORPORATE
SYSTEMS SYSTEMS SYSTEMS AND
SEGMENT SEGMENT SEGMENT ELIMINATIONS CONSOLIDATED
------------- ---------- ------- ------------ ------------
1998
Sales to unaffiliated customers... $967,147 $268,363 $253,641 -- $1,489,151
Intersegment sales................ -- 11,473 -- $(11,473) --
-------- -------- -------- -------- ----------
Net sales......................... 967,147 279,836 253,641 (11,473) 1,489,151
Income before taxes (1)........... 104,586 34,027 32,245 (24,976) 145,882
Total assets (2).................. 510,938 189,338 114,734 497,804 1,312,814
Property additions (3)............ 87,390 31,417 5,866 39,767 164,440
Depreciation and amortization
expense(3)...................... 39,973 14,079 7,581 14,671 76,304
1997
Sales to unaffiliated customers... $849,144 $218,532 $194,092 4,506 $1,266,274
Intersegment sales................ -- 16,235 -- $(16,235) --
-------- -------- -------- -------- ----------
Net sales......................... 849,144 234,767 194,092 (11,729) 1,266,274
Income before taxes (1)........... 166,766 33,501 10,431 (17,353) 193,345
Total assets (2).................. 593,290 159,116 118,813 380,455 1,251,674
Property additions (3)............ 76,555 31,523 10,555 13,498 132,131
Depreciation and amortization
expense(3)...................... 34,304 9,486 5,118 10,243 59,151
1996
Sales to unaffiliated customers... $759,474 $177,894 $217,669 16,578 $1,171,615
Intersegment sales................ -- 9,065 -- $ (9,065) --
-------- -------- -------- -------- ----------
Net sales......................... 759,474 186,959 217,669 7,513 1,171,615
Income before taxes (1)........... 144,008 26,665 24,346 (55,356) 139,663
Total assets (2).................. 321,297 114,147 106,399 554,973 1,096,816
Property additions (3)............ 39,260 16,422 3,262 16,285 75,229
Depreciation and amortization
expense(3)...................... 32,640 7,448 2,946 7,869 50,903
- ---------------
(1) Income before taxes of the principal businesses exclude the effects of
employee profit sharing, management incentive compensation, other
unallocated expenses, net interest income, and certain special charges. In
1997 and 1996 special charges included $5.0 million and $4.0 million for
acquired in-process technology, respectively. Special charges in 1996 also
includes a $34.1 million product line consolidation charge and a $10.8
million workforce reduction charge.
(2) Total business assets are the owned or allocated assets used by each
business. Corporate assets consist of cash and cash equivalents, marketable
securities, unallocated fixed assets of support divisions and common
facilities and certain other assets.
27
29
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
M. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION -- (CONTINUED)
(3) Corporate property additions and depreciation and amortization expense
include items attributable to the unallocated fixed assets of support
divisions and common facilities.
Information as to the Company's sales in different geographical areas is as
follows (in thousands):
1998 1997 1996
---- ---- ----
Sales to unaffiliated customers (1):
United States......................................... $ 797,143 $ 616,838 $ 536,826
Asia Pacific region................................... 266,409 299,624 209,429
Europe................................................ 247,795 190,220 241,244
Japan................................................. 102,900 114,212 139,095
Other................................................. 74,904 45,380 45,021
---------- ---------- ----------
$1,489,151 $1,266,274 $1,171,615
========== ========== ==========
- ---------------
(1) Sales are attributable to geographic areas based on location of customer.
Because a substantial portion of the Company's sales are derived from the
sales of product manufactured in the United States, long-lived assets located
outside the United States are less than 10%.
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.
1998
--------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
Net sales.................................... $431,569 $406,236 $335,227 $316,119
Expenses:
Cost of sales........................... 251,947 246,457 239,131 209,639
Engineering and development............. 48,922 49,164 49,569 47,503
Selling and administrative.............. 58,713 57,549 47,288 49,335
-------- -------- -------- --------
359,582 353,170 335,988 306,477
-------- -------- -------- --------
Income (loss) from operations................ 71,987 53,066 (761) 9,642
Interest income......................... 3,473 2,871 2,756 4,414
Interest expense........................ (247) (266) (120) (933)
-------- -------- -------- --------
Income before income taxes................... 75,213 55,671 1,875 13,123
Provision for income taxes................... 25,572 16,311 600 1,282
-------- -------- -------- --------
Net income................................... $ 49,641 $ 39,360 $ 1,275 $ 11,841
======== ======== ======== ========
Net income per common share -- basic......... $ 0.59 $ 0.47 $ 0.02 $ 0.14
======== ======== ======== ========
Net income per common share -- diluted....... $ 0.58 $ 0.46 $ 0.01 $ 0.14
======== ======== ======== ========
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
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
======== ======== ======== ========
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 27,
1999, 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 27,
1999, 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 27,
1999, 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 27,
1999, 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, 1998 and 1997
Statements of Income for the years ended December 31, 1998, 1997, and
1996
Statements of Cash Flows for the years ended December 31, 1998, 1997, and
1996
Statements of Changes in Shareholders' Equity for the years ended
December 31, 1998, 1997, and 1996
(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, 1998.
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 Exhibit 3.1 to the Company's Annual
the Company, as amended Report on Form 10-K for the fiscal year
ended December 31, 1997.
3.2 Amendment, dated May 23, 1996, to Exhibit 3.2 to the Company's Annual
Restated Articles of Organization of 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 Exhibit 4.1 to the Company's Annual
and The First National Bank of Boston Report on Form 10-K for the fiscal year
dated as of March 14, 1990 ended December 31, 1997.
10.1 Amended and Restated Multicurrency Exhibit 10.3 to the Company's Annual
Revolving Credit Agreement dated as of Report on Form 10-K for the fiscal year
January 1, 1996. ended December 31, 1995.
10.2 First Amendment to Amended and Restated Exhibit 10.2 to the Company's Annual
Multicurrency Revolving Credit Report on Form 10-K for the fiscal year
Agreement dated as of January 31, 1997 ended December 31, 1997.
10.3 Second Amendment to Amended and Exhibit 10.3 to the Company's Annual
Restated Multicurrency Revolving Credit Report on Form 10-K for the fiscal year
Agreement dated as of May 20, 1997 ended December 31, 1997.
10.4 Third Amendment to Amended and Restated
Multicurrency Revolving Credit
Agreement dated as of August 21, 1998
10.5 Teradyne, Inc. Supplemental Executive Exhibit 10.4 to the Company's Annual
Retirement Plan Report on Form 10-K for the fiscal year
ended December 31, 1997.
10.6 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).
10.7 Megatest Corporation 1990 Stock Option Exhibit 4.1 to the Company's
Plan Registration Statement on Form S-8
(Registration Statement No. 333-64683).
10.8 Megatest Corporation Director Stock Exhibit 4.2 to the Company's
Option Plan Registration Statement on Form S-8
(Registration Statement No. 333-64683).
10.9 1996 Stock Purchase Plan Exhibit 4.1 to the Company's
Registration Statement on Form S-8
(Registration Statement No. 333-07177).
10.10 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.
10.11 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.
32
34
EXHIBIT NO. DESCRIPTION SEC DOCUMENT REFERENCE
- ----------- ----------- ----------------------
10.12 Deed of Trust, Financing Statement, Exhibit 10.12 to the Company's Annual
Security Agreement and Fixture Filing Report on Form 10-K for the fiscal year
between Megatest and the Sun Life ended December 31, 1995.
Assurance Company of Canada (U.S.)
dated August 25, 1995
10.13 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.
10.14 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.
10.15 1996 Non-Employee Director Stock Option Exhibit 10.15 to the Company's Annual
Plan Report on Form 10-K for the fiscal year
ended December 31, 1996.
10.16 Letter Agreement dated June 1, 1997 Exhibit 10.15 to the Company's Annual
between the Company and Member of Board Report on Form 10-K for the fiscal year
ended December 31, 1997.
10.17 Letter Agreement dated June 1, 1997 Exhibit 10.16 to the Company's Annual
between the Company and Member of Board Report on Form 10-K for the fiscal year
ended December 31, 1997.
22.1 Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
27.2 Financial Data Schedule for the Form
10-Q for the nine months ended
September 27, 1997
27.3 Financial Data Schedule for the Form
10-Q for the six months ended June 28,
1998
27.4 Financial Data Schedule for the Form
10-Q for the three months ended March
29, 1998
27.5 Financial Data Schedule for the Form Exhibit 27.1 to the Company's Annual
10-K for the fiscal year ended December Report on Form 10-K for the fiscal year
31, 1997 ended December 31, 1997.
27.6 Financial Data Schedule for the Form Exhibit 27.2 to the Company's Annual
10-Q for the nine months ended Report on Form 10-K for the fiscal year
September 28, 1997 ended December 31, 1997.
27.7 Financial Data Schedule for the Form Exhibit 27.3 to the Company's Annual
10-Q for the six months ended June 29, Report on Form 10-K for the fiscal year
1997 ended December 31, 1997.
27.8 Financial Data Schedule for the Form Exhibit 27.4 to the Company's Annual
10-Q for the three months ended March Report on Form 10-K for the fiscal year
30, 1997 ended December 31, 1997.
27.9 Financial Data Schedule for the Form Exhibit 27.5 to the Company's Annual
10-K for the fiscal year ended December Report on Form 10-K for the fiscal year
31, 1996 ended December 31, 1997.
27.10 Financial Data Schedule for the Form Exhibit 27.6 to the Company's Annual
10-Q for the nine months ended Report on Form 10-K for the fiscal year
September 29, 1996 ended December 31, 1997.
33
35
EXHIBIT NO. DESCRIPTION SEC DOCUMENT REFERENCE
- ----------- ----------- ----------------------
27.11 Financial Data Schedule for the Form Exhibit 27.7 to the Company's Annual
10-Q for the six months ended June 30, Report on Form 10-K for the fiscal year
1996 ended December 31, 1997.
27.12 Financial Data Schedule for the Form Exhibit 27.8 to the Company's Annual
10-Q for the three months ended March Report on Form 10-K for the fiscal year
31, 1996 ended December 31, 1997.
34
36
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 25th day of March,
1999.
TERADYNE, INC.
By: /s/ JEFFREY R. HOTCHKISS
----------------------------------
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
--------- ----- ----
/s/ ALEXANDER V. d'ARBELOFF Chairman of the Board March 25, 1999
- ---------------------------------------------------
ALEXANDER V. d'ARBELOFF
/s/ GEORGE W. CHAMILLARD President, Chief Executive March 25, 1999
- --------------------------------------------------- Officer, and Member of the Board
GEORGE W. CHAMILLARD
/s/ JEFFREY R. HOTCHKISS Vice President and Chief March 25, 1999
- --------------------------------------------------- Financial Officer
JEFFREY R. HOTCHKISS
/s/ DONALD J. HAMMAN Controller (Principal Accounting March 25, 1999
- --------------------------------------------------- Officer)
DONALD J. HAMMAN
/s/ JAMES W. BAGLEY Director March 25, 1999
- ---------------------------------------------------
JAMES W. BAGLEY
/s/ ALBERT CARNESALE Director March 25, 1999
- ---------------------------------------------------
ALBERT CARNESALE
/s/ DANIEL S. GREGORY Director March 25, 1999
- ---------------------------------------------------
DANIEL S. GREGORY
/s/ DWIGHT H. HIBBARD Director March 25, 1999
- ---------------------------------------------------
DWIGHT H. HIBBARD
/s/ JOHN P. MULRONEY Director March 25, 1999
- ---------------------------------------------------
JOHN P. MULRONEY
/s/ VINCENT M. O'REILLY Director March 25, 1999
- ---------------------------------------------------
VINCENT M. O'REILLY
/s/ JAMES A. PRESTRIDGE Director March 25, 1999
- ---------------------------------------------------
JAMES A. PRESTRIDGE
/s/ OWEN W. ROBBINS Director March 25, 1999
- ---------------------------------------------------
OWEN W. ROBBINS
/s/ RICHARD J. TESTA Director March 25, 1999
- ---------------------------------------------------
RICHARD J. TESTA
/s/ PATRICIA S. WOLPERT Director March 25, 1999
- ---------------------------------------------------
PATRICIA S. WOLPERT
35