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, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-6462
TERADYNE, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2272148
(State or other
jurisdiction of (I.R.S. Employer
incorporation or
organization) Identification Number)
321 HARRISON AVENUE,
BOSTON, MASSACHUSETTS 02118
(Address of principal
executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 482-2700
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ----------------
Common Stock, par value
$0.125 per share New York Stock Exchange
Common Stock Purchase
Rights New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or in any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 24, 2002 was $5.4 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 24, 2002 was 182,358,506 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement in connection with its 2002
annual meeting of shareholders are incorporated by reference into Part III.
TERADYNE, INC.
FORM 10-K
PART I
Item 1: Business
Teradyne, Inc. is the world's largest supplier of automatic test equipment
and is also a leading provider of high performance interconnection systems and
electronic manufacturing services.
Teradyne's automatic test equipment products include systems that:
. test semiconductors ("Semiconductor Test Systems");
. test and inspect circuit-boards ("Circuit Board Test and Inspection
Systems"); and
. test high speed voice and data communication ("Broadband Test Systems").
Teradyne's interconnection systems products and services ("Connection
Systems") include:
. high bandwidth backplane assemblies and associated connectors used in
electronic systems; and
. electronic manufacturing services of assemblies that include Teradyne
backplanes and connectors.
On October 26, 2001 Teradyne completed its acquisition of GenRad, Inc. of
Westford, MA, a leading manufacturer of automatic test equipment, related
software and diagnostic solutions. GenRad's business has been made part of the
Circuit Board Test and Inspection Systems operating segment. GenRad activity is
reflected in Teradyne's results of operations since the acquisition date. See
"Note F: Acquisitions and Divestitures" and "Note S: Operating Segment and
Geographic Information" in Notes to Consolidated Financial Statements for
further information.
Broadband Test Systems, Diagnostic Solutions, and, prior to 2001, Software
Test Systems have been combined into "Other Test Systems" for purposes of
reporting Teradyne's operating segments. For financial information concerning
Teradyne's operating segments, see "Note S: Operating Segment and Geographic
Information" in Notes to Consolidated Financial Statements.
Statements in this Annual Report on Form 10-K which are not historical
facts, so called "forward looking statements," are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that all forward looking statements involve risks and
uncertainties, including those detailed in Teradyne's filings with the
Securities and Exchange Commission. See also "Item 7: Management's Discussion
and Analysis of Financial Condition and Results of Operations--Certain Factors
That May Affect Future Results" and "Note E: Risks and Uncertainties" in Notes
to Consolidated Financial Statements.
Products
Semiconductor Test Solutions
Semiconductor Test Systems produced by Teradyne are used by electronic
component manufacturers in the design and testing of a wide variety of
semiconductor devices, including logic, memory, mixed signal, and "system on a
chip" integrated circuits. Semiconductor Test Systems are sold to semiconductor
manufacturers, often referred to as "Integrated Device Manufacturers," and
subcontractors to the semiconductor industry who may perform design and/or
manufacturing functions, often referred to as "Fabless/Subcons." Customers use
Teradyne's Semiconductor Test Systems to:
. measure product performance;
. control and improve product quality;
. improve device design;
. reduce time to market;
. enhance manufacturability;
2
. minimize labor costs; and
. increase production yields,
with the overall benefit of comprehensively testing advanced performance
devices while reducing total costs associated with testing.
The semiconductor test market is comprised of two sub-markets. The first
sub-market is memory device testing, which includes the testing of dynamic
random access memory ("DRAMs") of all types (synchronous, double data rate
("DDR") and Rambus(TM)), static random access memory ("SRAMs") and flash
memory. The second sub-market is non-memory device testing, which includes the
testing of analog, mixed-signal and system-on-a-chip devices, high performance
logic devices and logic devices produced in high volumes.
Teradyne products within the Semiconductor Test Systems market include:
Memory Test Solutions
Reducing cost of test is especially crucial in the highly price sensitive
memory device market. Wafer probing, or contacting the silicon die to test it
prior to packaging, has become an increasingly popular means to increase yield
and reduce test costs. Teradyne's Probe-One memory test system delivers one of
the shortest possible test times per wafer and one of the lowest test costs.
The Probe-One's Flex-Die(TM) architecture delivers the ability to test multiple
memory arrays in parallel, further increasing test productivity and reducing
test cost. The Probe-One was introduced in 2001. The testing of packaged memory
devices remains an important market, as well. Teradyne's J996 memory test
system provides high throughput package test solutions for next generation
memory devices. The J996 has the accuracy and waveform fidelity to test 250
MegaHertz devices, and is able to test sixty-four 16 Input/Output devices in
parallel with a minimal amount of floor space. Teradyne's Aires test system is
designed for newest-generation memory devices such as DDR, Direct Rambus(TM)
DRAMs and fast SSRAMs. Accurately delivering the high speed, complex patterns
required for characterization of these emerging devices, Aires' FlexSystem
architecture combines full function memory and logic pattern generators with a
per-pin timing system.
System-on-a-Chip / Mixed Signal / Analog Test Solutions
Semiconductor devices that employ both analog and digital circuits are
referred to as "mixed-signal devices." Recent mixed-signal devices called
"system on chip," such as those employed in consumer electronics and wireless
communication products, include significantly increased functionality compared
to earlier mixed-signal devices. The introduction of Teradyne's Catalyst test
systems in 1996 began the system-on-a-chip test revolution, providing a single,
integrated test environment for system-on-a-chip testing. Teradyne's Catalyst
Tiger test system, introduced in 2000, extends component and functional test
capability to very high device operating speeds. Catalyst and Catalyst Tiger
test systems reduce time to market and cost to test across the customer
spectrum, from Integrated Device Manufacturers to Fabless/Subcons. With a
market share nearly double its nearest competitor, a majority of people who use
a personal computer, surf the Internet, or watch a DVD, are using a product
whose semiconductor device was tested with the Catalyst test systems. Teradyne
also estimates that 75% of the world's cell phones include devices tested on
Teradyne system-on-a-chip / mixed-signal test systems. As of December 31, 2001,
more than 1,000 Catalyst test systems have been shipped to customers worldwide.
Teradyne's predecessor to the Catalyst test systems, the A5 test systems of
advanced mixed-signal test systems has a worldwide installed base of more than
1,000 systems and covers a wide range of device applications, including
automotive and telecommunications.
High Performance Test Solutions
High performance devices such as microprocessors require high performance
automatic test equipment for both functional ("Does it function properly?") and
structural ("Is it constructed properly?") testing. Very Large Scale
Integration ("VLSI") test systems offer solutions for the broadest range of
high performance devices used in today's electronics and Internet products,
such as personal computers and video game consoles, Internet routers and
switches, and network servers. Almost every type of high-end microprocessor,
integrated processor,
3
and graphic device in the world today is tested on a Teradyne high performance
logic test system. Teradyne's J973EP is one of the only VLSI test systems
designed for the wide range of testing capability needed for structural to
functional testing in a single test system. This product's flexible
configuration provides the ability to switch between functional and structural
test in real time, minimizing test cost by matching test performance to device
test requirements only when needed. The J973EP expands the performance curve on
accuracy, precision device power, and differential bus testing.
High Volume Device Test Solutions
Devices tested in high volume, such as microcontrollers, are at the heart of
almost every consumer electronics product, from small appliances to automotive
engine controllers. Produced in enormous quantities where every penny matters,
delivering the lowest cost of test at very high production throughput rates is
essential. Teradyne's Integra test systems combine compact packaging, high
performance, and ease of use into a system designed to meet the high volume /
low cost requirements of microcontroller production test. Increasing the level
of integration in the system is key to reducing system cost and size. Teradyne
is the first automatic test equipment vendor to combine four channels of
automatic test equipment timing functionality into a single custom
semiconductor device. Teradyne's design team created an innovative technique
that enabled integration of a full 64 channels of test capability onto a single
printed circuit board. This design approach eliminated the mainframe and
interconnection cabling resulting in a complete test system housed in a compact
test head-only configuration. Its "zero footprint" design reduces the total
cost of ownership and allows for more efficient use of production floor space.
Teradyne's Integra test systems include the J750 and J750k. Using the same
compact, low cost architecture Teradyne's IP750 CCD Image Sensor test system
enjoys the world's largest shipment volume and installed base in the image
sensor device test market, driven by the burgeoning popularity of digital
cameras and other imaging products.
Connection Systems Solutions
Connection Systems is a global supplier of high-performance components and
electronic manufacturing services. Connection System's component technology can
be found in such diverse products as Internet routers, computer servers, mass
data storage and telecom switches. Connection Systems offers a total
interconnect solution with a broad suite of technologically differentiated
capabilities including printed circuit boards, high-speed, high-density
connectors, multi-gigabit backplane assemblies and complete systems integration
and test.
A backplane plays the crucial roll of locating and supporting printed
circuit boards within a system, enabling them to "talk" to each other and to
the outside world. Connection Systems produces custom, large format backplanes,
up to .400 inches thick and 24 inches x 54 inches in size with up to 64 layers.
Connectors are devices that allow the backplane and other printed circuit
boards (sometimes called daughter cards) to plug together. High bandwidth
capability packed in a small amount of space is an important technological
advantage of Teradyne's connectors. Connection System's VHDM(R) and
VHDM-HSD(TM) connector families have become a standard in the industry for
high-speed, high-density interconnect. The GbX(TM) connector was introduced in
2001 to achieve even higher data rates and greater interconnection density. The
Connection Systems organization also provides electronic manufacturing
services, including backplane assembly, electro-mechanical integration of
sub-assemblies, and complete systems integration and test.
An essential element of the Connection Systems business is its design and
applications engineering expertise at every step in the process. This expertise
helps customers balance critical cost and performance needs during system
design. In addition, by providing program management services, Connection
Systems becomes an extension of the customer's operation, delivering quick turn
prototypes and high technology production volumes.
Circuit Board Test and Inspection Solutions
The central element of almost every electronic product is a printed circuit
board. A circuit board includes all the components and their interconnections
that cause the board to perform its intended functions. As more and more
product functionality is packed into smaller packages, such as PDAs, phone
handsets and laptop computers, both the circuit boards and their components are
increasingly complex. The circuit board manufacturing process
4
is also complex and demands a number of inspection and test steps. Teradyne
circuit board test and inspection equipment is used throughout the
manufacturing process to ensure high production yields, to maintain overall
product quality, to diagnose faults quickly where and when they occur, and to
reduce total manufacturing cost. The Teradyne circuit board and inspection
product range includes the following products:
In-Circuit Test
In-circuit test systems examine the assembled and soldered circuit board for
proper construction under both power-off and power-on conditions. Faulty
components or solder problems are identified quickly and precisely. Because of
their relatively low cost, high throughput and diagnostic accuracy, in-circuit
testers are used universally in every electronics production line. Teradyne
in-circuit products support a full range of circuit board test applications,
including prototype and ramp up, high-volume production, selective or sample
test and final or system test. Accordingly, Teradyne offers a wide variety of
capabilities and options with its Spectrum 8000-series, Z1800-series and GR
TestStation product lines. Specialized systems such as the GR Pilot and Javelin
"flying probers" round out one of the industry's broadest and most capable
product families.
Imaging Inspection
As circuit boards become increasingly dense and complex, achieving the
electrical contact required for the traditional in-circuit test method is
becoming more difficult, time-consuming and expensive. "Loss of (electrical)
access" is a primary driver behind the increasing popularity of imaging
inspection systems, which examine the circuit board for physical qualities
including correct component presence and orientation, the absence of electrical
opens and solder quality. Teradyne's imaging inspection systems employ one of
two technologies: automated optical inspection ("AOI"), whereby a visual image
of the board is captured and analyzed; and automated x-ray inspection ("AXI"),
which captures an x-ray image of the board. Each technology has particular
strengths in analyzing various board defect classes. For example, AOI is the
preferred technology for evaluating and diagnosing component-related defects,
while AXI is the preferred technology for analyzing solder-related defects.
Teradyne's Optima 7000-series AOI systems employ advanced and patented
lighting, camera, software, and mechanics, resulting in highly reliable,
repeatable, and accurate optical inspection at high line speeds. The AXI
product line offers fast throughput with high resolution on both its
two-dimensional (2D) and three-dimensional (3D) models, and is the only product
line that includes a combined 2D/3D capability.
Functional Test
Functional test systems examine the circuit board to determine whether it
will meet its performance specifications and whether it will properly perform
its intended "function." Functional testing is typically employed at the
conclusion of the manufacturing process, as the final check step, to ensure the
product will work as designed. Teradyne's functional test product line
encompasses a full range of functional test applications, including high-volume
production, final or system test, and field or depot diagnosis and repair.
Available products range from VXI and PXI open architecture instruments and
systems, to fully configured platforms for a wide range of manufacturing and
depot test applications. Teradyne functional test systems include focused
solutions for the communications, computer, and automotive markets, addressing
functional test requirements for products such as automotive engine control
units, telecom/datacom infrastructure equipment, wireless handheld devices, and
complex/mission critical military/aerospace products. All Teradyne functional
test solutions are designed specifically for the production test environment,
which helps ensure that the test system has been optimized for throughput,
reliability, and repeatability.
Design to Build Software
Electronics manufacturers employ a variety of circuit board test and
inspection equipment throughout their production lines. This broad range of
circuit board test and inspection choices requires extensive test planning and
preparation, often referred to as "design to build" or "D2B". Teradyne's
Strategist software tool enables users to model, simulate, optimize and execute
a cost-effective test and inspection strategy, which optimally
5
divides test and inspection tasks among the imaging inspection, in-circuit and
functional systems used on the manufacturing line. Once the strategy is
determined, the user then employs Teradyne's Alchemist software to generate
test software and documentation for the test and inspection equipment being
used in the manufacturing line.
Broadband Test Solutions
Broadband Test Systems test the capacity and quality of telephone and cable
television lines connected to homes and businesses. These state-of-the-art
testing capabilities support cable and telephone company service provider's
goals to sell and deploy broadband services sooner and improve the efficiency
of qualification, provisioning, and customer care. Broadband Test Systems
provide voice network maintenance solutions for the communications industry.
Testing more than 120 million access lines worldwide for many of the world's
largest telecommunications companies, including British Telecommunications,
Deutsche Telecom and Verizon, Teradyne's 4TEL access network maintenance
systems reduce operating cost and increase customer satisfaction by reliably
detecting and identifying line faults within a telecommunications access
network. With ten years of Internet protocol testing experience, Teradyne also
provides products to telecommunications companies such as local exchange
carriers for Internet testing, customer care and voice network maintenance.
Teradyne products within the Broadband Test Systems market include:
4TEL & 4TEL II Voice Test Systems
Teradyne's 4TEL voice test system precisely identifies and isolates faults
within a telecommunications network, inside or outside customer premises,
without the need for customer isolation equipment. The 4TEL II voice test
system accurately isolates faults to such zones as exchange hardware, exchange
wiring, access cable, inside premises wiring and customer equipment.
The 4TEL system quickly locates the precise geographic location of a fault,
enabling service providers to dispatch craftspeople to fix a fault, rather than
dispatching them to find the fault. The 4TEL voice test system also reliably
identify when a dispatch is not needed, such as when the problem exists in
customer-owned equipment. Teradyne's 4TEL system currently tests one seventh of
the world's voice lines.
NetFlare(TM) End-to-End Internet Testing
Cable and telephone company service providers can reduce broadband service
call handling time with Teradyne's NetFlare system. This newly developed
technology allows the consumer or call center representative to emulate the
consumer's network experience and determine the source of a problem. For
example, NetFlare technology automatically measures throughput as the consumer
experiences it, determines whether the broadband service provider commitment is
met, and identifies the network source of the problem. NetFlare significantly
reduces average call handling time and reduces the necessity for further
technical support.
Celerity(TM) Speed Provisioning and Qualification Products
Service providers need to know which cable lines between the central office
and the end user are qualified for digital subscriber lines ("DSL") and which
are not. Existing cable records are typically insufficient. Teradyne's Celerity
product qualifies millions of lines for DSL capability in hours, and develops a
database immediately showing which lines are qualified, which lines require
conditioning and which lines are disqualified. Celerity performs real time
testing that provides detailed loop qualification information and tests
in-service DSL lines, identifying the presence and dispatch location of faults
that affect data transmission. Celerity customers are able to significantly
reduce costs of deployment and identify new lines and high-speed lines for
increased revenue.
Diagnostic Solutions
Diagnostic Solutions is a major supplier of automotive manufacturing test
and service bay diagnostic systems supporting vehicle electronics systems
throughout their lifecycle, from design through manufacturing to service.
Diagnostic Solutions products are used by automotive and transportation
original equipment manufacturers, as well as by independent service providers.
6
Software Test Solutions
Software Test Systems, which Teradyne divested in December 2000, are used by
a number of industries to test communications networks, computerized
telecommunication systems, and web based applications.
Summary of Net Sales by Operating Segment
Teradyne's four principal operating segments accounted for the following
percentage of consolidated net sales for each of last three years:
% of consolidated net sales
--------------------------
2001 2000 1999
---- ---- ----
Semiconductor Test Systems....................... 50% 67% 68%
Connection Systems............................... 38 24 21
Circuit Board Test and Inspection Systems........ 9 5 6
Other Test Systems............................... 3 4 5
--- --- ---
Total............................................ 100% 100% 100%
Sales and Distribution
Teradyne's systems are extremely complex and require extensive support both
by the customer and by Teradyne. Prices for Teradyne's systems can reach $3
million or more. In 2001, no single customer accounted for more than 10% of
Teradyne's consolidated net sales. In 2001, Teradyne's three largest customers
accounted for 24% of consolidated net sales.
Direct sales to United States government agencies accounted for less than 1%
of consolidated net sales in 2001, 2000, and 1999. Approximately 5% of Circuit
Board Test and Inspection Systems sales in 2001 were to the United States
government agencies. Sales were also made within each of Teradyne's segments to
customers who are government contractors. Approximately 3% of Connection
Systems sales and approximately 27% of Circuit Board Test and Inspection
Systems sales fell into that category in 2001. On June 22, 2001, Teradyne sold
its aerospace and defense connector and backplane business to Amphenol
Corporation of Wallingford, Connecticut.
Teradyne has sales and service offices located throughout North America,
South East Asia, Europe, Taiwan, Japan, and Korea as Teradyne's customers
outside the United States are located primarily in these geographic areas.
Teradyne sells in these areas predominantly through a direct sales force.
Primarily all of Teradyne's manufacturing activities are conducted in the
United States. Sales to customers outside the United States accounted for 49%
of consolidated net sales in 2001, 54% in 2000, and 52% in 1999. Sales to
customers located in Taiwan were 10% in 2001 and 2000. Sales are attributed to
geographic areas based on the location of the customer site.
Teradyne is subject to the inherent risks involved in international trade,
such as:
. political and economic instability and acts of terrorism;
. restrictive trade policies;
. controls on funds transfer;
. currency fluctuations;
. difficulties in managing distributors;
. potentially adverse tax consequences; and
. the possibility of difficulty in accounts receivable collection.
Teradyne attempts to reduce the effects of currency fluctuations by hedging
those currency exposures associated with certain assets and liabilities
denominated in non-functional currencies and by conducting some of its
international transactions in U.S. dollars or dollar equivalents. See also
"Item 7A. Quantitative and Qualitative Disclosures About Market Risks" and
"Note G: Financial Instruments" in Notes to Consolidated Financial Statements.
7
Competition
Teradyne faces substantial competition, throughout the world in each of its
operating segments. Some of these competitors have substantial financial and
other resources to pursue engineering, manufacturing, marketing and
distribution of their products. Teradyne also faces competition from internal
suppliers at several of its customers. Some of Teradyne's competitors have
introduced or announced new products with certain performance characteristics
that may be considered equal or superior to those Teradyne currently offers.
Teradyne expects its competitors to continue to improve the performance of
their current products and to introduce new products or new technologies that
provide improved cost of ownership and performance characteristics. New product
introductions by competitors could cause a decline in sales or loss of market
acceptance of Teradyne's products. Moreover, increased competitive pressure
could lead to intensified price based competition, which could materially
adversely affect Teradyne's business, financial condition and results of
operations.
Backlog
At December 31, 2001 and 2000, Teradyne's backlog of unfilled orders in each
of its four principal operating segments was as follows:
(in millions)
---------------
2001 2000
------ --------
Semiconductor Test Systems............... $317.2 $ 742.1
Connection Systems....................... 357.6 534.4
Circuit Board Test and Inspection Systems 55.5 68.4
Other Test Systems....................... 32.7 37.2
------ --------
$763.0 $1,382.1
Of the backlog at December 31, 2001, approximately 97% of the Semiconductor
Test Systems backlog, 100% of the Connection Systems backlog, 92% of Circuit
Board Test and Inspection Systems backlog, and 59% of the Other Test Systems
backlog is expected to be delivered in 2002. Teradyne's experience indicates
that a portion of orders included in the backlog may be canceled or
rescheduled. During 2001, Teradyne experienced an increase in the rescheduling
of delivery dates by some of its customers, and thus the timing of the delivery
of a significant portion of Teradyne's backlog is uncertain. In 2001, Teradyne
experienced cancellations of $285.5 million. Teradyne may experience additional
cancellations in the future. There are no seasonal factors related to the
backlog.
Raw Materials
Teradyne's products require a wide variety of electronic and mechanical
components. Teradyne can experience occasional delays in obtaining timely
delivery of certain items. Additionally, Teradyne could experience a temporary
adverse impact if any of its sole source suppliers ceased to deliver products.
Any prolonged inability to obtain adequate supplies, or any other circumstances
that would require Teradyne to seek alternative sources of supply could have a
material adverse effect on its business, financial condition, and results of
operations.
Patents and Licenses
Teradyne's development of its products, both hardware and software, is
largely based on proprietary information. Teradyne 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 Teradyne's intellectual property rights could have a
material adverse effect on its business.
8
Employees
As of December 31, 2001, Teradyne employed approximately 8,400 people. Since
the inception of Teradyne's business, there have been no work stoppages or
other labor disturbances. Teradyne has no collective bargaining contracts.
Engineering and Development Activities
The highly technical nature of Teradyne's products requires a large and
continuing engineering and development effort. Engineering and development
expenditures were approximately $288.7 million in 2001, $348.0 million in 2000,
and $261.9 million in 1999. These expenditures amounted to approximately 20% of
consolidated net sales in 2001, 11% in 2000, and 15% in 1999.
Environmental Affairs
Teradyne'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;
. 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 effect upon the financial position or results of operations of
Teradyne.
In 2001, Teradyne was designated as a "potentially responsible party"
("PRP") at two clean-up sites, one in California and one in Rhode Island.
Teradyne does not believe that it has any liability for the cleanup of the
California site, and has requested the state of California to remove Teradyne's
name from the list of PRPs, however, Teradyne has not yet received a reply. In
the opinion of management, the costs associated with complying with the
clean-up of this site, if required, are not expected to have a material effect
upon the financial position or results of operations of Teradyne. However,
Teradyne cannot predict what its liability, if any, may be for the clean-up of
this site and can give no assurance that it will not materially adversely
affect Teradyne's financial condition or results of operations. With respect to
the second site, in Rhode Island, additional information is currently being
collected to better understand Teradyne's financial obligations, if any, for
its portion of the clean-up of this site.
9
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names of all executive officers of
Teradyne and certain other information relating to their positions held with
Teradyne and other business experience. Executive officers of Teradyne do not
have a specific term of office but rather serve at the discretion of the Board
of Directors.
Executive Officer Age Position Business Experience For The Past 5 Years
----------------- --- -------- ----------------------------------------
George W. Chamillard 63 President, Chairman of the Chairman of the Board since 2000; President
Board, and Chief and Chief Executive Officer of Teradyne since
Executive Officer 1997; Director of Teradyne since 1996;
President and Chief Operating Officer of
Teradyne from 1996 to 1997; Executive Vice
President of Teradyne from 1994 to 1996.
Gregory R. Beecher.. 44 Vice President and Chief Vice President and Chief Financial Officer of
Financial Officer Teradyne since 2001; Partner at
PricewaterhouseCoopers LLP from 1993 to
2001.
Edward Rogas, Jr.... 61 Senior Vice President Senior Vice President of Teradyne since 2000;
Vice President of Teradyne from 1984 to 1999.
David L. Sulman*.... 58 Senior Vice President Senior Vice President of Teradyne from 2000
to 2001; Vice President of Teradyne from 1994
to 1999.
Thomas S. Grilk..... 54 Vice President and General Vice President and General Counsel of
Counsel Teradyne since 2000; VP of Government
Affairs and Assistant General Counsel at
Compaq Computer Corp and Digital
Equipment Corp from 1994 to 2000.
Michael A. Bradley.. 53 President of President of Semiconductor Test since 2001;
Semiconductor Test Vice President of Teradyne from 1992 to 2001;
Chief Financial Officer of Teradyne from 1999
to 2001.
John M. Casey....... 53 President of Circuit Board President of Circuit Board Test and Inspection
Test and Inspection since 2002; Vice President of Teradyne since
1990.
Richard E. Schneider 44 President of Connection President of Connection Systems since 2001;
Systems Vice President of Teradyne from 1998 to 2001;
Connections Systems manager from 1998 to
2001; Connection Systems Business
Development manager from 1997 to 1998.
G. Richard MacDonald 53 Controller Controller of Teradyne since 2001; Controller
of Teradyne's Industrial Consumer Division
from 1989 to 2001.
Stuart M. Osattin... 56 Vice President and Vice President and Treasurer of Teradyne
Treasurer since 1994.
*Mr. Sulman retired from Teradyne on December 31, 2001.
10
Item 2: Properties
Teradyne'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 Teradyne's principal general offices and
manufacturing facilities.
Approximate
Square Feet
Property of Floor
Location Operating Segment Interest Space
-------- ------------------------------------ -------- -----------
Boston, Massachusetts........ Semiconductor Test & General Offices Own 492,000
Agoura Hills, California..... Semiconductor Test Own 572,000
Nashua, New Hampshire........ Connection Systems Own 569,000
North Reading, Massachusetts. Semiconductor Test & Circuit Board
Test and Inspection Own 273,000
North Reading, Massachusetts. Unoccupied Own 425,000*
Westford, Massachusetts...... Circuit Board Test and Inspection Lease 230,000
Woburn, Massachusetts........ Semiconductor Test Lease 205,000
San Diego, California........ Connection Systems Own 192,000
Hudson, New Hampshire........ Connection Systems Lease 144,000
San Jose, California......... Semiconductor Test Own 120,000
Stoughton, Massachusetts..... Unoccupied Own 120,000*
Mexicali, Mexico............. Connection Systems Lease 112,000
La Verne, California......... Connection Systems Own 93,000
Shanghai, China.............. Unoccupied Lease 87,000*
Manchester, England.......... Diagnostic Solutions Lease 75,000
Kumamoto, Japan.............. Semiconductor Test Own 66,000
Deerfield, Illinois.......... Broadband Test Own 63,000
Walnut Creek, California..... Circuit Board Test and Inspection Lease 60,000
Plano, Texas................. Connection Systems Lease 50,000
Dublin, Ireland.............. Connection Systems Lease 46,000
Fremont, California.......... Connection Systems Lease 46,000
*This space is unoccupied and therefore available for future expansion.
Item 3: Legal Proceedings
In connection with the August 2000 acquisition of each of Herco Technology
Corp., a California company, and Perception Laminates, Inc., a California
company, a complaint was filed by the former owners of those companies on or
about September 5, 2001 naming as defendants Teradyne and two of its executive
officers. The case was originally filed in the Superior Court in San Diego
County, California, and was subsequently removed by the defendants to federal
court. On or about November 14, 2001, Teradyne and the two individual
defendants filed a motion to dismiss the amended complaint in its entirety. The
federal court granted in part and denied in part that motion to dismiss. The
claims that were dismissed were dismissed with prejudice. At the federal
court's request, the plaintiffs filed a second amended complaint on March 4,
2002 setting forth their remaining claims. The second amended complaint
alleges, among other things, that the sale of Teradyne's common stock to the
former owners violated certain California securities statutes and common law,
and that Teradyne breached certain contractual obligations in the agreements
relating to the acquisitions. The second amended complaint seeks unspecified
damages, including compensatory, consequential and punitive damages, and
recovery of reasonable attorneys' fees and costs. On March 25, 2002, Teradyne
and the two individual defendants filed their answer to the second amended
complaint.
Teradyne and two of its executive officers are named as defendants in three
purported class action complaints that were filed in the United States District
Court for the District of Massachusetts, Boston, Massachusetts, on or about
October 16, 2001, October 19, 2001 and November 7, 2001. The complaints allege,
among other things, that the defendants violated Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, by making, during the period from July 14,
2000 until October 17, 2000, material misrepresentations and omissions to the
investing public regarding Teradyne's business operations and future prospects.
The complaints seek unspecified damages, including compensatory damages and
recovery of reasonable attorneys' fees and costs.
11
Teradyne disputes all of the claims above and believes they are without
merit, and intends to defend vigorously against the lawsuits. However, an
adverse resolution of any of the lawsuits could have a material adverse effect
on Teradyne's financial position or results of operations. Teradyne is not
presently able to reasonably estimate potential losses, if any, related to any
of the lawsuits and therefore has not accrued for any potential losses from the
lawsuits.
In addition, Teradyne is subject to legal proceedings and claims that arise
in the ordinary course of business. Management does not believe these actions
will have a material adverse effect on Teradyne's financial position or results
of operations.
Item 4: Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5: Market for Registrant's Common Equity and Related Shareholder Matters
The following table shows the market range for Teradyne's Common Stock based
on reported sale prices on the New York Stock Exchange.
Period High Low
------ ---- ---
2001 First Quarter.............................................. $ 44.05 $29.05
Second Quarter............................................. 47.21 26.25
Third Quarter.............................................. 37.45 18.43
Fourth Quarter............................................. 33.00 18.50
2000 First Quarter.............................................. $ 94.94 $54.88
Second Quarter............................................. 115.44 65.00
Third Quarter.............................................. 81.00 34.94
Fourth Quarter............................................. 41.63 23.00
The number of record holders of Teradyne's Common Stock at February 22, 2002
was 891.
Teradyne has never paid cash dividends because it has been Teradyne's policy
to use earnings to finance expansion and growth. Payment of future cash
dividends will rest within the discretion of the Board of Directors and will
depend, among other things, upon Teradyne's earnings, capital requirements, and
financial condition. Teradyne presently expects to retain all of its earnings
for use in the business.
Item 6: Selected Financial Data
Years Ended December 31,*
-------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
Net sales................................ $1,440,581 $3,043,946 $1,790,912 $1,489,151 $1,266,274
========== ========== ========== ========== ==========
(Loss) income before cumulative effect of
change in accounting principle......... $ (202,215) $ 517,754 $ 191,694 $ 102,117 $ 127,608
========== ========== ========== ========== ==========
(Loss) income before cumulative effect of
change in accounting principle per
common share--basic.................... $ (1.15) $ 2.99 $ 1.12 $ 0.61 $ 0.76
========== ========== ========== ========== ==========
(Loss) income before cumulative effect of
change in accounting principle per
common share--diluted.................. $ (1.15) $ 2.86 $ 1.07 $ 0.59 $ 0.74
========== ========== ========== ========== ==========
Total assets............................. $2,542,391 $2,355,868 $1,568,213 $1,312,814 $1,251,674
========== ========== ========== ========== ==========
Long-term obligations.................... $ 451,682 $ 8,352 $ 8,948 $ 13,200 $ 13,141
========== ========== ========== ========== ==========
*Note: Previously published financial data prior to 2000 has not been
restated to give the pro forma effect of the adoption of the provisions of SAB
101. See "Note C: Change in Accounting Principle" in Notes to Consolidated
Financial Statements for further information.
12
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Annual Report
on Form 10-K. In addition to the historical information contained in this
document, the discussion in this Annual Report on Form 10-K contains
forward-looking statements, made pursuant to the Private Securities Litigation
Reform Act of 1995, that involve risks and uncertainties, such as statements of
Teradyne's plans, expectations and intentions. The cautionary statements made
in this Annual Report on Form 10-K should be read as being applicable to all
related forward-looking statements whenever they appear in this Annual Report
on Form 10-K. Teradyne's actual results could differ materially from the
results contemplated by these and any other forward-looking statements. Factors
that could contribute to such differences include those discussed below as well
as those cautionary statements and other factors set forth in "Certain Factors
That May Affect Future Results" and elsewhere herein.
Critical Accounting Policies and Estimates
Teradyne has identified the policies discussed below as critical to
understanding its business and its results of operations. The impact and any
associated risks related to these policies on its business operations is
discussed throughout Management's Discussion and Analysis of Financial
Condition and Results of Operations where such policies affect its reported and
expected financial results.
The preparation of consolidated financial statements requires Teradyne to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
liabilities. On an on-going basis, Teradyne evaluates its estimates, including
those related to inventories, investments, intangible and other long-lived
assets, bad debts, income taxes, pensions, warranties, contingencies and
litigation. Teradyne bases its estimates on historical experience and on
appropriate and customary assumptions that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
Teradyne recognizes revenue when there is persuasive evidence of an
arrangement, title and risk of loss have passed, delivery has occurred or the
services have been rendered, the sales price is fixed or determinable and
collection of the related receivable is reasonably assured. It is Teradyne's
policy to require an arrangement with its customers, either in the form of a
written or electronic contract or purchase order containing all of the terms
and conditions governing the arrangement, prior to the recognition of revenue.
Title and risk of loss generally passes to the customer at the time of delivery
of the product to a common carrier. At the time of the transaction, Teradyne
assesses whether the sales price is fixed or determinable based upon the
payment terms of the arrangement. If a significant portion of the sales price
is not due with normal payment terms, the sales price may not be deemed fixed
and revenue would be recognized as the amounts become due. Teradyne does not
offer a right of return on its products.
Teradyne assesses collectibility based on a number of factors, including
past transaction and collection history with a customer and the
credit-worthiness of the customer. Teradyne performs on-going credit
evaluations of its customer's financial condition but generally does not
require collateral from its customers. If Teradyne determines that
collectibility of the sales price is not reasonably assured, revenue is
deferred until such time as collection becomes reasonably assured, which is
generally upon receipt of payment from the customer.
Revenue is recognized upon delivery provided that customer acceptance
criteria can be demonstrated prior to shipment. Where the criteria cannot be
demonstrated prior to shipment, or in the case of new products, revenue is
deferred until acceptance has been received. For multiple element arrangements,
Teradyne defers the greater of the fair value of any undelivered elements of
the contract or the portion of the sales price which is not payable until the
undelivered elements are delivered. Teradyne also defers the portion of the
sales price that is not due until acceptance, which represents deferred profit.
Fair value is the price charged when the element is sold separately. In order
to recognize revenue the functionality of the undelivered element must not be
essential to the delivered element. Installation is not considered essential to
the functionality of the product as these services do not alter the product
capabilities, do not require specialized skills or tools and can be performed
by the customers or other vendors. In addition to installation, other elements
may include service arrangements and undelivered products. Teradyne's products
are generally subject to warranty and related costs are provided for in cost of
sales when product revenue is recognized.
13
Interconnection systems and electronic manufacturing assembly services
revenue is recognized upon shipment or delivery according to the shipping terms
of the arrangement as there is no installation required and there are no
contractual acceptance requirements.
For certain contracts eligible for contract accounting under Statement of
Accounting Position No. 81-1, "Accounting for Performance of Construction-Type
and Certain Production-Type Contracts," revenue is recognized using the
percentage-of-completion accounting method based upon an efforts-expended
method. The software in these arrangements requires significant production,
modification or customization. In all cases, changes to total estimated costs
and anticipated losses, if any, are recognized in the period in which
determined. To date revenue under contract accounting has not been material.
Inventories which include materials, labor and manufacturing overhead are
stated at the lower of cost (first-in, first-out basis) or net realizable
value. On a quarterly basis, Teradyne uses consistent methodologies to evaluate
all inventory for net realizable value. Teradyne records a provision for excess
and obsolete inventory when such an impairment is identified through the
quarterly review process. Excess and obsolete inventory, consisting of on-hand
and non-cancelable on-order inventory, in excess of estimated usage over the
next 12 months is written down to its estimated net realizable value, if less
than cost. The excess and obsolescence evaluation is based upon assumptions
about future demand, product mix and possible alternative uses. In 2001,
Teradyne recorded an inventory provision for excess and obsolete inventory of
$139.7 million which includes a writedown for discontinued product lines of
$34.5 million. If actual demand, product mix or possible alternative uses are
less favorable than those projected by management, additional inventory
write-downs may be required.
On a quarterly basis, Teradyne evaluates the realizability of its deferred
tax assets and assesses the need for a valuation allowance. Realization of
Teradyne's net deferred tax assets is dependent on its ability to generate
approximately $415 million of future taxable income. Teradyne believes that it
is more likely than not that its net deferred tax assets will be realized based
on forecasted income, however, there can be no assurance that Teradyne will be
able to meet its expectations of future income. If Teradyne continues to incur
significant losses for an extended period of time, Teradyne could be required
to establish a valuation allowance against all or a significant portion of its
net deferred tax assets. To the extent Teradyne establishes a valuation
allowance, an expense will be recorded within the provision for income taxes
line in the statement of operations.
Teradyne assesses the impairment of identifiable intangibles, long-lived
assets and related goodwill whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors Teradyne
considers important which could indicate an impairment include significant
underperformance relative to expected historical or projected future operating
results, significant changes in the manner of Teradyne's use of the acquired
asset or the strategy for Teradyne's overall business and significant negative
industry or economic trends. When Teradyne determines that the carrying value
of intangibles, long-lived assets and related goodwill may not be recoverable
based upon the existence of one or more of the above indicators of impairment,
Teradyne measures any impairment based on a projected discounted cash flow
method using a discount rate determined by its management to be commensurate
with the risk inherent in its current business model. During 2001, Teradyne
recorded charges of $32.3 million related to the impairment of certain excess
facilities and long-lived assets. Intangible assets, long-lived assets, and
goodwill amounted to $1.1 billion as of December 31, 2001.
The volatility of the industries that Teradyne serves can cause certain of
its customers to experience shortages of cash flows, which can impact their
ability to make required payments. Teradyne maintains allowances for doubtful
accounts for estimated losses resulting from the inability of its customers to
make required payments. At December 31, 2001, this allowance for doubtful
accounts amounted to $6.3 million. Estimated allowances for doubtful accounts
are reviewed periodically taking into account the customer's current payment
history, the customer's current financial statements and other information
regarding the customer's credit worthiness. If the financial condition of
Teradyne's customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.
14
SELECTED RELATIONSHIPS WITHIN THE CONSOLIDATED
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
----------- ---------- ----------
(dollars in thousands)
Net sales........................................................ $1,440,581 $3,043,946 $1,790,912
=========== ========== ==========
(Loss) income before cumulative effect of change in accounting
principle...................................................... $ (202,215) $ 517,754 $ 191,694
=========== ========== ==========
(Decrease) increase in net sales from preceding year:
Amount........................................................... ($1,603,365) $1,253,034 $ 301,761
=========== ========== ==========
Percentage....................................................... (53)% 70 % 20%
=========== ========== ==========
(Decrease) increase in income (loss) from preceding year......... $ (719,969) $ 326,060 $ 89,577
=========== ========== ==========
Percentage of net sales:
Net sales........................................................ 100.0 % 100.0 % 100.0%
Expenses:
Cost of sales.................................................... 70.9 52.8 56.1
Cost of sales - inventory provision and other charges............ 11.1 -- --
Engineering and development...................................... 20.1 11.4 14.6
Selling and administrative....................................... 18.7 12.4 14.9
Restructuring and other charges.................................. 3.7 -- --
----------- ---------- ----------
124.5 76.6 85.6
Net interest and other income.................................... 1.9 0.9 0.9
----------- ---------- ----------
(Loss) income before income taxes and cumulative effect of change
in accounting principle........................................ (22.6) 24.3 15.3
(Benefit) provision for income taxes............................. (8.6) 7.3 4.6
----------- ---------- ----------
(Loss) income before cumulative effect of change in
accounting principle........................................... (14.0) 17.0 10.7
Cumulative effect of change in accounting principle.............. -- (2.1) --
----------- ---------- ----------
Net (loss) income................................................ (14.0)% 14.9 % 10.7%
=========== ========== ==========
On October 26, 2001, Teradyne completed its acquisition of GenRad, Inc. of
Westford, MA, a leading manufacturer of electronic automatic test equipment,
related software, and diagnostic solutions. GenRad's business has been made a
part of the Circuit Board Test and Inspection Systems operating segment. GenRad
activity is reflected in Teradyne's results of operations since the acquisition
date. See "Note F: Acquisitions and Divestitures" in Notes to Consolidated
Financial Statements for further information.
Results of Operations:
2001 compared to 2000
Revenue
Teradyne's four principal operating segments accounted for the following
percentages of consolidated net sales for each of last three years:
% of consolidated
net sales
----------------
2001 2000 1999
---- ---- ----
Semiconductor Test Systems............... 50% 67% 68%
Connection Systems....................... 38 24 21
Circuit Board Test and Inspection Systems 9 5 6
Other Test Systems....................... 3 4 5
--- --- ---
Total.................................... 100% 100% 100%
15
Sales decreased 53% in 2001 to $1,440.6 million from $3,043.9 million in
2000. Semiconductor Test Systems sales decreased 65%, to $717.7 million in 2001
from $2,044.0 million in 2000, Connection Systems sales to unaffiliated
customers decreased 26%, to $540.8 million in 2001 from $734.6 million in 2000,
and Circuit Board Test and Inspection Systems sales decreased 6%, to $132.4
million in 2001 from $141.2 million in 2000. These decreases reflect the
overall economic and industry market conditions described below. Circuit Board
Test and Inspection Systems sales include the two-month impact of the GenRad
acquisition which contributed sales of $19.0 million. Other Test Systems sales
decreased 60%, to $49.7 million in 2001 from $124.1 million in 2000, which
principally reflects the divestiture of Software Test Systems at the end of
2000 as well as the overall economic and industry market conditions described
below. During the fourth quarter of 2000, Teradyne implemented Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB 101)
retroactive to the beginning of the year. Included in 2001 sales was $98.7
million related to shipments of customer orders in 2000 where title was
retained by Teradyne until customer payment in order to perfect a security
interest. Teradyne no longer retains title until customer payment.
Teradyne's business has been adversely impacted by the slowdown in economies
worldwide including the effects of the hostilities begun in September 2001.
Teradyne has also been adversely affected by the cyclical nature of the
electronics and semiconductor industries, which experience recurring periods of
oversupply of products and equipment of the type Teradyne sells. These factors
have resulted in a downturn in the demand for Teradyne's products. During 2001,
orders declined significantly across all of Teradyne's product lines when
compared with the orders Teradyne received during 2000. The reduction in net
orders across Teradyne for 2001 compared with 2000 was approximately $2,512.7
million. Teradyne's experience in previous downturns has been that orders
improve as Teradyne's customers' capital expenditures increase. At present,
however, Teradyne cannot say how long the current downturn will last or when
the situation will improve. In the absence of significant improvement, orders
could remain low or decline further, and the amount of Teradyne's inventory,
deferred tax assets, and certain long-lived assets considered realizable could
be significantly reduced.
In 2001 and 2000, no single customer accounted for more than 10% of
consolidated net sales. In 2001, Teradyne's three largest customers accounted
for 24% of consolidated net sales.
Bookings
Net orders decreased 76% to $808.2 million in 2001 from $3,320.9 million in
2000. Net orders decreased in all operating segments and were led by a 85%
decrease in Semiconductor Test Systems net orders. Connection Systems net
orders, Circuit Board Test and Inspection Systems net orders, and Other Test
Systems net orders decreased 64%, 33%, and 78%, respectively. Teradyne
experienced cancellations of $285.5 million during 2001. Teradyne's net orders
for its four principal operating segments for 2001 and 2000 were as follows:
(in millions)
2001 2000
------ --------
Semiconductor Test Systems............... $294.0 $1,960.5
Connection Systems....................... 385.0 1,082.0
Circuit Board Test and Inspection Systems 101.4 151.6
Other Test Systems....................... 27.8 126.8
------ --------
$808.2 $3,320.9
Teradyne's backlog decreased 45% to $763.0 million in 2001 from $1,382.1
million in 2000. At December 31, 2001 and 2000, Teradyne's backlog of unfilled
orders for its four principal operating segments was as follows:
(in millions)
2001 2000
------ --------
Semiconductor Test Systems............... $317.2 $ 742.1
Connection Systems....................... 357.6 534.4
Circuit Board Test and Inspection Systems 55.5 68.4
Other Test Systems....................... 32.7 37.2
------ --------
$763.0 $1,382.1
16
Customers may delay delivery of products or cancel orders suddenly and
without significant notice, subject to possible cancellation penalties. Due to
possible customer changes in delivery schedules and cancellation of orders,
Teradyne's backlog at any particular date is not necessarily indicative of the
actual sales for any succeeding period. Delays in delivery schedules and/or
cancellations of backlog during any particular period could have a material
adverse effect on Teradyne's business and results of operations.
Gross Margin
Certain costs in 2001 and 2000 have been reclassified from cost of sales
into engineering and development and selling and administrative. These
reclassified costs consist of new product development costs incurred in
manufacturing engineering, test technology and applications engineering costs
supporting sales. The costs reclassified from cost of sales to engineering and
development represent work performed to develop and implement manufacturing and
test processes focused on the introduction of new product platforms. The costs
reclassified from cost of sales to selling and administrative represent the
development of applications programming used to demonstrate new product
capabilities. The impact of the reclassifications is detailed below:
Year Ended Year Ended
December 31, December 31,
Increase / (Decrease) 2001 2000
--------------------- ------------ ------------
(in thousands)
Cost of sales.............. ($57,046) ($62,325)
Engineering and development 39,750 47,104
Selling and administrative. 17,296 15,221
Cost of sales, excluding the charges described below, increased to 71% of
sales in 2001 from 53% of sales in 2000. The percentage increase in 2001 was
attributable to the decreased utilization of Teradyne's manufacturing capacity,
as sales volume decreased while certain components of costs of sales remained
fixed. The increase in the percentage of cost of sales was also impacted to a
lesser extent by increased competitive price pressure as current semiconductor
products mature and the mix of Teradyne's business changes as Connection
Systems and Circuit Board Test and Inspection System sales, which have lower
gross margins, become a larger percentage of Teradyne's business.
Teradyne introduced a number of new products in 2001. Generally, Teradyne's
new products begin their product life with lower gross margins and margins
improve as volume purchases increase and cost reduction activities are
implemented. There can be no assurance that significant improvements in gross
margins will be achieved on current or new Teradyne products through either
volume purchases or cost reduction activities.
Cost of sales related to inventory provisions and other charges for asset
impairments and vacated leases was $159.8 million in 2001. Inventory provision
for excess and obsolete inventory was $105.2 million in 2001, which excludes
the inventory writedowns for product line discontinuance, compared to $27.5
million in 2000, included in cost of sales, representing a 5% increase. The
increase in the inventory provision was caused by the worldwide economic
slowdown during 2001. Between 2000 and 2001, orders declined by approximately
$2,512.7 million, a 76% decrease. This drop in orders combined with lead time
requirements for inventory procurement and Teradyne's new product introduction
plans necessitated additional charges for excess and obsolete inventory. During
2001, Teradyne recorded an inventory writedown in Semiconductor Test Systems
due to the discontinuance of the Flash 750 product line of $32.3 million and
related asset impairments of $4.6 million. In the third and fourth quarters of
2001, Teradyne recorded a charge of $15.4 million for certain impaired
manufacturing assets and vacated space under operating leases at Connection
Systems.
Engineering and Development
Engineering and development expenses, as a percentage of sales, increased to
20% in 2001 from 11% in 2000, with spending decreasing by $59.4 million. This
spending decrease was primarily due to lower material costs and the impact of
workforce reductions, salary cuts, and furloughs in Semiconductor Test Systems
and Circuit Board Test and Inspection Systems, excluding the impact of the
GenRad acquisition. Connection Systems engineering and development spending
increased 5% from 2000 to 2001.
17
Selling and Administrative
Selling and administrative expenses increased to 19% of sales in 2001 from
12% of sales in 2000, with spending decreasing by $107.7 million. The decrease
in spending was principally due to certain cost containment programs such as
workforce reductions, salary cuts, and furloughs.
Restructuring and Other Charges
Restructuring and other charges include a workforce reduction and early
retirement provision of $37.3 million, a charge for a Connection Systems
impaired facility of $12.0 million, a charge for impaired assets of $1.9
million relating to the discontinuance of the Flash 750 product line in
Semiconductor Test Systems, and a charge for vacated space under certain
operating leases of $1.7 million in Circuit Board Test and Inspection Systems.
There were approximately 2,900 employees terminated in 2001 across all
functional groups. These terminations will result in future cost savings in
2002 of approximately $132.0 million. Teradyne has paid $23.8 million in
severance benefits during 2001. All remaining severance benefits for employees
terminated in 2001 will be paid by the fourth quarter of 2002.
Below is a table summarizing activity relating to restructuring and other
charges:
Lease
Payments
Severance on
and Vacated Impaired Impaired
Benefits Facilities Facilities Assets Total
--------- ---------- ---------- -------- --------
(in thousands)
2001 provision.............. $ 37,278 $1,676 $ 12,000 $ 1,923 $ 52,877
Cash payments............... (23,755) -- -- -- (23,755)
Non-cash charges............ -- -- (12,000) (1,923) (13,923)
-------- ------ -------- ------- --------
Balance at December 31, 2001 $ 13,523 $1,676 $ -- $ -- $ 15,199
======== ====== ======== ======= ========
The accrual for severance and benefits is reflected in accrued employees'
compensation and withholdings and the accrual for lease payments on vacated
facilities is reflected in other accrued liabilities.
Interest income and expense
Interest income decreased by $2.4 million to $22.7 million in 2001 compared
to $25.1 million in 2000. The decrease in 2001 was attributable to decreases in
the average invested balances and lower interest rates. Interest expense
increased by $2.3 million as a result of interest expense for two months
associated with Teradyne's convertible notes.
Other income and expense
Included in other income in 2001 is a gain from the sale of Connections
Systems aerospace and defense business of $14.8 million. Included in other
expense for 2001 is Teradyne's proportionate share of a loss related to an
equity method investment of $7.0 million.
Income before taxes
(Loss) income before income taxes and cumulative effect of change in
accounting principle was a loss of $326.2 million in 2001 compared to income of
$739.6 million in 2000. Semiconductor Test Systems, Connection Systems, Circuit
Board Test and Inspection Systems, and Other Test Systems income before income
taxes decreased $907.2 million, $167.5 million, $40.3 million, and $3.3
million, respectively in 2001 due to decreased sales in each group and the
market conditions described above.
18
Income taxes
Teradyne's effective tax rate benefit was 38% in 2001. The effective tax
rate provision for the year ended 2000 was 30%. The change in the tax rate is a
result of a loss in 2001. In 2000, Teradyne was able to reduce its effective
tax rate with tax benefits from its foreign sales corporation and Ireland
manufacturing operations.
On a quarterly basis, Teradyne evaluates the realizability of its deferred
tax assets and assesses the need for a valuation allowance. Realization of
Teradyne's net deferred tax assets is dependent on its ability to generate
approximately $415 million of future taxable income. Teradyne believes that it
is more likely than not that its net deferred tax assets will be realized based
on forecasted income. However, if Teradyne continues to incur significant
losses for an extended period of time, it could be required to establish a
valuation allowance against all or a significant portion of its net deferred
tax assets. To the extent Teradyne establishes a valuation allowance, an
expense will be recorded within the provision for income taxes line in the
statement of operations.
In response to an adverse World Trade Organization (WTO) finding that the
U.S. Foreign Sales Credit (FSC) tax provisions were a prohibited export
subsidy, the U.S. repealed FSC and enacted replacement legislation
(Extraterritorial Income Exclusion Act of 2000). The European Union filed a WTO
challenge to the new law and the WTO has upheld the European Union's challenge.
The U.S. has decided to appeal and the appellate process and final resolution
of this matter could extend beyond 2002. The U.S. government and industry
groups are evaluating options. It is not possible to predict what impact, if
any, this issue will have on future earnings pending final resolution of the
challenge. During the years ended December 31, 2001, 2000, and 1999, the FSC
benefited Teradyne's effective tax rate as follows:
2001 2000 1999
---- ---- ----
Export sales corporation (0.7%) (4.8%) (4.7%)
2000 compared to 1999
Revenue
Sales increased 70% in 2000 to a record $3,043.9 million from $1,790.9
million in 1999. Semiconductor Test Systems shipments increased by 69% due to
increased sales to semiconductor manufacturers and subcontractors as these
customers increased capacity to meet their customer's requirements. Sales of
Connection Systems to unaffiliated customers grew 97% as a result of
significant growth in demand from networking, data storage, and other high
technology customers. Circuit Board Test and Inspection Systems sales increased
by 19% from 1999. Other Test Systems sales increased 40% from 1999 with
increases in Broadband Test Systems of 10% and Software Test Systems of 64%.
Due to the sale of a majority interest in the software test business in
December 2000, Software Test Systems revenue will not be reflected on an
on-going basis.
Bookings
Incoming net orders increased 52% from $2,190.6 million in 1999 to a record
$3,320.9 million in 2000. Net orders increased in all operating segments and
were led by a 159% increase in Connection Systems net orders. Semiconductor
Test Systems net orders increased 24%. Broadband Test Systems net orders
increased 77% and Circuit Board Test and Inspection Systems and Software Test
Systems increased 26% and 70%, respectively. Teradyne's backlog increased 41%
to a record $1,382.1 million.
Gross Margin
Certain costs in 2000 and 1999 have been reclassified from cost of sales
into engineering and development and selling and administrative. These
reclassified costs consist of new product development costs incurred in
manufacturing engineering, test technology and applications engineering costs
supporting sales. The costs
19
reclassified from cost of sales to engineering and development represent work
performed to develop and implement manufacturing and test processes focused on
the introduction of new product platforms. The costs reclassified from cost of
sales to selling and administrative represent the development of applications
programming used to demonstrate new product capabilities. The impact of the
reclassifications is detailed below:
Year Ended Year Ended
December 31, December 31,
Increase / (Decrease) 2000 1999
--------------------- ------------ ------------
(in thousands)
Cost of sales.............. $(62,325) $(43,536)
Engineering and development 47,104 33,291
Selling and administrative. 15,221 10,245
Costs of sales as a percentage of sales decreased from 56% of sales in 1999
to 53% of sales in 2000. The decrease in cost of sales was primarily due to the
increased utilization of Teradyne's manufacturing overhead as sales volume
increased while certain components of cost of sales remained fixed.
Engineering and Development
Engineering and development expenses decreased from 15% of sales in 1999 to
11% of sales in 2000, even though spending increased $86.2 million. The
increase in spending was primarily due to new product development expenses in
Semiconductor Test Systems, and, to a lesser extent, increased expenses related
to product development in Connection Systems, Circuit Board Test and Inspection
Systems, and Software Test Systems.
Selling and Administrative
Selling and administrative expenses as a percentage of sales decreased from
15% in 1999 to 12% in 2000. Spending increased by $111.1 million year over year
in support of increased Semiconductor Test Systems, Connection Systems, and
Software Test Systems sales.
Interest income and expense
Interest income increased $7.8 million to $25.1 million in 2000 compared to
$17.3 million in 1999. Interest income increased due to an increase in
Teradyne's average invested balances and higher interest rates.
Other income and expense
Included in other income in 2000 is an immaterial gain relating to the
divestiture of the software test business.
Income before taxes
Income before income taxes and cumulative effect of change in accounting
principle increased $465.8 million from $273.8 million in 1999 to $739.6
million in 2000. Semiconductor Test Systems, Connection Systems, Circuit Board
Test and Inspection Systems, and Other Test Systems income before income taxes
increased $387.4 million, $91.8 million, $7.0 million, and $9.5 million,
respectively in 2000 due to increased sales in each group.
Income taxes
Teradyne's effective tax rate was 30% in 2000 and 1999. Teradyne continued
to utilize export sales corporation benefits and other tax benefits to operate
below the U.S. statutory rate of 35%.
20
Liquidity and Capital Resources
Teradyne's cash, cash equivalents and marketable securities balance
increased $121.8 million in 2001, to $586.2 million. Teradyne used cash from
operating activities of $79.0 million in 2001 and generated cash from operating
activities in 2000 and 1999 of $470.9 million and $367.5 million, respectively.
Net income (loss), adjusted to exclude the effects of non-cash items, used cash
of $77.1 million in 2001, and provided cash of $501.6 million and $279.7
million in 2000 and 1999, respectively. Changes in operating assets and
liabilities net of businesses sold and acquired used cash of $1.9 million in
2001 as accounts payable and accruals balances decreased as purchases slowed.
The decrease in accounts payable and accruals was partially offset by reduced
accounts receivable and inventory balances. Changes in operating assets and
liabilities used cash of $30.7 million in 2000 and generated cash of $87.7
million in 1999.
Teradyne used $247.3 million of cash for investing activities in 2001,
$312.3 million in 2000, and $244.8 million in 1999. Investing activities
consist of purchases, sales, and maturities of marketable securities, proceeds
from the sale of businesses, cash acquired in business acquisitions, and
purchases of capital assets to support long-term growth. Capital expenditures
decreased by $56.8 million in 2001 compared with 2000, primarily in the
Semiconductor Test Systems segment. This was due to the actions taken by
Teradyne in 2001 to reduce planned capital expenditures due to current market
conditions. Capital expenditures were $241.4 million in 2001, $298.2 million in
2000, and $151.2 million in 1999.
Teradyne generated $401.5 million of cash from financing activities in 2001,
used $97.5 million in 2000, and used $126.8 million in 1999. Financing
activities include the issuance of convertible notes, mortgage borrowings,
sales and repurchases of Teradyne's common stock, as well as repayments of
debt. In 2001, Teradyne assumed debt of $89.7 million from the GenRad
acquisition which Teradyne repaid on October 26, 2001. During 2001, 2000, and
1999 issuances of common stock under stock option and stock purchase plans
generated $58.5 million, $55.3 million, and $82.3 million, respectively.
Teradyne used cash for the acquisition of treasury stock of $147.5 million and
$207.8 million in 2000 and 1999, respectively. Since 1996, Teradyne has used
$540.8 million of cash to repurchase 20.0 million shares of its common stock on
the open market though no cash was used in 2001 to repurchase shares of common
stock.
On October 24, 2001, Teradyne sold $400 million principal amount of 3.75%
Convertible Senior Notes due 2006 (the "Notes") in a private placement and
received net proceeds of $389 million. The Notes are convertible at the option
of the holders at a rate which is equivalent to a conversion price of
approximately $26.00 per share, which is equal to a conversion rate of
approximately 38.4615 shares of common stock per $1,000 principal amount of
Notes. The Notes are redeemable by Teradyne at any time after October 18, 2004
at specified prices. Teradyne will begin making annual interest payments of up
to $15 million, paid semi-annually, on the Notes commencing on April 15, 2002.
The Notes are senior unsecured obligations of Teradyne that rank equally with
Teradyne's existing and future unsecured and unsubordinated indebtedness. In
the event of a change in control by which Teradyne merges with or sells
substantially all of its assets to a third party, the holders of the Notes may
be able to require Teradyne to redeem some or all of the Notes either in
discounted Teradyne common stock or in cash. On February 8, 2002, the
Securities and Exchange Commission declared effective a Registration Statement
on Form S-3 covering both the Notes and the shares of common stock into which
they can be converted.
On December 19, 2001, Teradyne obtained a loan of approximately $45 million
in the form of a 7.5% mortgage loan maturing on January 1, 2007, (the
"Mortgage"). Principal payments are made according to a twenty-year
amortization schedule through December 2006, with the remaining principal due
on January 1, 2007. Teradyne began making monthly principal and interest
payments of $0.4 million on February 1, 2002.
On October 26, 2001, Teradyne completed its acquisition of GenRad, Inc. of
Westford, MA, a leading manufacturer of electronic automatic test equipment,
related software and diagnostic solutions. GenRad's business has been made part
of the Circuit Board Test and Inspection Systems operating segment. Under the
terms of the acquisition, each outstanding share of GenRad common stock was
converted into 0.1733 shares of Teradyne common stock. The total number of
Teradyne shares exchanged for the shares of GenRad, based on the shares of
GenRad outstanding as of the closing, was approximately 5.0 million.
21
The following table reflects Teradyne's current contractual obligations:
Non-cancelable Convertible Mortgage
Lease Senior Notes Notes Other
Commitments Notes Payable Payable Debt Total
-------------- ----------- -------- ------- ------ --------
(in thousands)
2002......... $ 24,019 $ 1,009 $6,557 $ 254 $ 31,839
2003......... 20,417 1,088 254 21,759
2004......... 17,532 1,172 254 18,958
2005......... 14,754 1,263 254 16,271
2006......... 10,490 $400,000 1,244 254 411,988
Beyond 2006.. 34,442 44,264 1,635 80,341
-------- -------- ------- ------ ------ --------
Total........ $121,654 $400,000 $50,040 $6,557 $2,905 $581,156
Teradyne believes its cash, cash equivalents, and marketable securities
balance of $586.2 million, together with a tax refund of $85.2 million received
in March 2002, will be sufficient to meet working capital and expenditure needs
for the foreseeable future. Depending on market conditions and funding
requirements, Teradyne may seek additional external financing.
Inflation has not had a significant long-term impact on earnings.
Recently Issued Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations." SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interest method.
In July 2001, FASB issued SFAS 142, "Goodwill and Other Intangible Assets",
which is effective for Teradyne on January 1, 2002. SFAS 142 requires, among
other things, the discontinuance of goodwill amortization and includes
provisions for the reclassification of certain existing recognized intangibles
as goodwill, reassessment of the useful lives of existing recognized
intangibles, and reclassification of certain intangibles out of previously
reported goodwill. In 2001, Teradyne recorded goodwill amortization of
approximately $3.9 million. At December 31, 2001 Teradyne had $190.3 million of
goodwill which will not be amortized. In 2002, Teradyne will record
amortization of approximately $7.4 million relating to other intangibles
primarily in connection with the GenRad acquisition. SFAS 142 also requires
Teradyne to complete a transitional goodwill impairment test six months from
the date of adoption. Teradyne has completed a preliminary evaluation of the
impact of SFAS 142 and currently does not expect to record a goodwill
impairment.
In August 2001, FASB issued SFAS 143, "Accounting for Obligations Associated
with the Retirement of Long-Lived Assets." SFAS 143 provides the accounting
requirements for retirement obligations associated with tangible long-lived
assets. SFAS 143 is effective for financial statements for fiscal years
beginning after June 15, 2002. Teradyne has determined that SFAS 143 will not
have an impact on its financial position and results of operations.
In October 2001, FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 requires one method of accounting for
long lived assets disposed of by sale. SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001. Teradyne
has adopted SFAS 144 effective January 1, 2002. SFAS 144 did not have an impact
on Teradyne's financial position or results of operations.
22
Certain Factors That May Affect Future Results
From time to time, information provided by Teradyne, statements made by its
employees or information included in its filings with the Securities and
Exchange Commission (including this Form 10-K and Teradyne's Annual Report to
Shareholders) contain statements which are not purely historical facts, but are
forward looking statements, made under the Safe Harbor provisions of the
Private Securities Litigation Reform Act of 1995, which involve risks and
uncertainties. In particular, forward looking statements are contained in "Item
1: Business", and in "Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations" relating to projections, plans, and
objectives for Teradyne's business, financial condition, operating results,
future economic performance or statements relating to the sufficiency of
capital to meet working capital, planned capital expenditures, and expectations
as to customer orders. Teradyne'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 Teradyne's filings with the Securities and Exchange Commission.
Teradyne's Business Is Impacted by the Slowdown in Economies Worldwide.
Teradyne's business has been negatively impacted by the slowdown in the
economies of the United States, Asia and elsewhere that began in the second
half of 2000. The uncertainty regarding the growth rate of the worldwide
economies has caused companies to reduce capital investment and may cause
further reduction of such investments. These reductions have been particularly
severe in the electronics and semiconductor industry which Teradyne serves and
have contributed to Teradyne incurring losses in recent periods. Teradyne
cannot predict if or when the growth rate of worldwide economies will rebound,
whether the growth rate of its business will rebound when the worldwide
economies begin to grow, or if or when Teradyne will return to profitability.
While Teradyne's diverse business may allow it to perform better than some
companies in periods of economic decline, the effects of the economic decline
are being felt across all of Teradyne's business segments and have
significantly slowed customer orders.
Teradyne's Business is Dependent on the Current and Anticipated Market for
Electronics.
Teradyne's business and results of operations depend in significant part
upon capital expenditures of manufacturers of semiconductors and other
electronics, which in turn depend upon the current and anticipated market
demand for those products. The current and anticipated market demand for
electronics has been impacted by the economic slowdown that began in the latter
portions of 2000 and the effects of the hostilities begun in September 2001.
Historically, the electronic and semiconductor industry has been highly
cyclical with recurring periods of over-supply, which often have had a severe
negative effect on demand for test equipment, including systems manufactured
and marketed by Teradyne. Teradyne believes that the markets for newer
generations of electronic products such as those that Teradyne manufactures and
markets will also be subject to similar fluctuations. Teradyne is dependent on
the timing of customer orders and the deferral or cancellation of previous
customer orders could have an adverse effect on its results of operations.
Teradyne cannot assure you that the downward trend in new orders will turn
around in the future or that any increase in sales or new orders for a calendar
quarter will be sustained in subsequent quarters. In addition, any factor
adversely affecting the electronics industry or particular segments within the
electronics industry may adversely affect Teradyne's business, financial
condition and operating results.
Teradyne Has Taken and Expects to Continue to Take Measures to Address the
Current Slowdown in the Market for Its Products Which Could Have Long-term
Negative Effects on Teradyne's Business.
Teradyne has taken and expects to take additional measures to address the
current slowdown in the market for its products. In particular, Teradyne has
reduced its workforce, frozen hiring, delayed salary increases, reduced the pay
of substantially all employees, implemented furloughs, discontinued its Flash
750 memory product line, recorded asset impairment charges and reduced its
planned capital expenditures and expense
23
budgets. These measures have reduced expenses in the face of decreased revenues
due to decreased or cancelled customer orders. However, each measure Teradyne
has taken and any additional measures taken in the future to contain
expenditures could have long-term negative effects on Teradyne's business by
reducing its pool of technical talent, decreasing or slowing improvements in
its products, and making it more difficult for Teradyne to respond to customers
or competitors.
Teradyne's Business May Be Adversely Impacted by Acquisitions Which May Affect
Its Ability to Manage and Maintain Its Business.
Since Teradyne's inception, it has acquired a number of businesses. In the
future, Teradyne may undertake additional acquisitions of businesses that
complement its existing operations. Such past or future acquisitions could
involve a number of risks, including:
. the possibility that one or more such acquisitions may not close due to
closing conditions in the acquisition agreements, the inability to
obtain regulatory approval, or the inability to meet conditions imposed
for government or court approvals for the transaction;
. the diversion of the attention of management and other key personnel;
. the inability to effectively integrate an acquired business into
Teradyne's culture, product and service delivery methodology and other
standards, controls, procedures and policies;
. the inability to retain the management, key personnel and other
employees of an acquired business;
. the inability to retain the customers of an acquired business;
. the possibility that Teradyne's reputation will be adversely affected by
customer satisfaction problems of an acquired business;
. potential known or unknown liabilities associated with an acquired
business, including but not limited to regulatory, environmental and tax
liabilities;
. the amortization of acquired identifiable intangibles, which may
adversely affect Teradyne's reported results of operations; and
. litigation which has or which may arise in the future in connection with
such acquisitions.
For example, in connection with the August 2000 acquisition of each of Herco
Technology Corp., a California company, and Perception Laminates, Inc., a
California company, a complaint was filed by the former owners of those
companies on or about September 5, 2001 naming as defendants Teradyne and two
of its executive officers. This case is further described in "Item 3: Legal
Proceedings" on this Form 10-K. Teradyne cannot predict the outcome of the
lawsuit at this time, and can give no assurance that it will not materially
adversely affect Teradyne's financial position or results of operations.
In addition to the foregoing, any acquired business could significantly
underperform relative to Teradyne's expectations.
Teradyne Currently Faces, and in the Future May Be the Subject of, Securities
Class Action Litigation Due to Past or Future Stock Price Volatility.
When the market price of a stock has been volatile, holders of that stock
sometimes institute securities class action litigation against the company that
issued the stock. Currently, Teradyne and two if its executive officers are
named as defendants in three purported class action complaints that were filed
in the United States District Court for the District of Massachusetts, Boston,
Massachusetts, on or about October 16, 2001, October 19, 2001 and November 7,
2001. The complaints allege, among other things, that the defendants violated
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, by making,
during the period from July 14, 2000 until October 17, 2000, material
misrepresentations and omissions to the investing public regarding Teradyne's
business operations and future prospects. The complaints seek unspecified
damages, including compensatory damages and recovery of reasonable attorneys'
fees and costs. Teradyne strongly believes that the purported class action
complaints lack merit and it intends to defend against the claims vigorously.
However, Teradyne could
24
incur substantial costs defending the lawsuits. The lawsuits could also divert
the time and attention of Teradyne's management. Teradyne cannot predict the
outcome of the lawsuits at this time, and can give no assurance that they will
not materially adversely affect Teradyne's financial position or results of
operations.
Teradyne's Business May be Adversely Impacted by Divestitures of Lines of
Business Which May Affect Its Ability to Manage and Maintain Its Business.
Since Teradyne's inception, it has divested itself of certain lines of
business. In the future, Teradyne may undertake additional such divestitures.
Such past or future divestitures could involve a number of risks, including:
. the diversion of the attention of management and other key personnel;
. disruptions and other effects caused by the divestiture of a line of
business on Teradyne's culture, product and service delivery methodology
and other standards, controls, procedures and policies;
. customer satisfaction problems caused by the loss of a divested line of
business; and
. the decreased diversification of Teradyne's product lines caused by the
divestiture of a line of business which may make Teradyne's operating
results subject to increased market fluctuations.
If Teradyne Is Unable to Protect Its Intellectual Property, Teradyne May Lose a
Valuable Asset or May Incur Costly Litigation to Protect Its Rights.
Teradyne's products incorporate technology that it protects in several ways,
including patents, copyrights and trade secrets. While Teradyne believes that
its patents, copyrights and trade secrets have value in general, no single one
is in itself essential. At times, Teradyne has been notified that it may be in
violation of patents held by others. An assertion of patent infringement
against Teradyne, if successful, could have a material adverse effect on its
ability to sell its products, or could require a lengthy and expensive defense
which could adversely affect its operating results.
If Teradyne Fails to Develop New Technologies to Adapt to Its Customers' Needs
and if Its Customers Fail to Accept Its New Products, Teradyne's Revenues Will
Be Adversely Affected.
Teradyne believes that its technological position depends primarily on the
technical competence and creative ability of its engineers. Teradyne's
development of new technologies, commercialization of those technologies into
products, and market acceptance and customer demand for those products is
critical to Teradyne's success. Successful product development and introduction
depends upon a number of factors, including:
. new product selection;
. development of competitive products by competitors;
. timely and efficient completion of product design;
. timely and efficient implementation of manufacturing; and
. assembly processes and product performance at customer locations.
Intense Competition in Teradyne's Industry May Affect Its Revenues.
Teradyne faces substantial competition throughout the world in each of its
operating segments. Some of Teradyne's competitors have substantial financial
and other resources to pursue engineering, manufacturing, marketing and
distribution of their products. Teradyne also faces competition from internal
suppliers at several of its customers. Some of Teradyne's competitors have
introduced or announced new products with certain performance characteristics
which may be considered equal or superior to those Teradyne currently offers.
Teradyne expects its competitors to continue to improve the performance of
their current products and to introduce new products or new technologies that
provide improved cost of ownership and performance characteristics. New
25
product introductions by competitors could cause a decline in sales or loss of
market acceptance of Teradyne's products. Moreover, increased competitive
pressure could lead to intensified price based competition, which could
materially adversely affect Teradyne's business, financial condition and
results of operations.
Teradyne Is Subject to Risks of Operating Internationally.
Teradyne derives a significant portion of its total revenue from customers
outside the United States. Teradyne's international sales are subject to
significant risks and difficulties, including:
. unexpected changes in legal and regulatory requirements and in policy
changes affecting international markets;
. changes in tariffs and exchange rates;
. political and economic instability and acts of terrorism;
. difficulties in accounts receivable collection;
. difficulties in staffing and managing international operations; and
. potentially adverse tax consequences, such as the World Trade
Organization's dispute against the U.S. Foreign Sales Credit.
Teradyne May Incur Significant Liabilities if It Fails to Comply With
Environmental Regulations.
Teradyne is subject to environmental regulations relating to the use,
storage, discharge, site cleanup, and disposal of hazardous chemicals used in
its manufacturing processes. If Teradyne fails to comply with present and
future regulations, or is required to perform site remediation, Teradyne could
be subject to future liabilities or the suspension of production. Present and
future regulations may also:
. restrict Teradyne's ability to expand its facilities;
. require Teradyne to acquire costly equipment; or
. require Teradyne to incur other significant costs and expenses.
Teradyne Has Substantially Increased Its Indebtedness.
On October 24, 2001, Teradyne completed a private placement of $400 million
principal amount of 3.75% Convertible Senior Notes (the "Notes") due 2006 and
received net proceeds of $389 million. On December 19, 2001, Teradyne obtained
a loan of approximately $45 million in the form of a 7.5% mortgage loan
maturing on January 1, 2007 (the "Mortgage"). As a result, Teradyne has
incurred approximately $445 million principal amount of additional
indebtedness, substantially increasing its ratio of debt to total
capitalization. Teradyne may incur substantial additional indebtedness in the
future. The level of Teradyne's indebtedness, among other things, could:
. make it difficult for Teradyne to make payments on its debt and other
obligations;
. make it difficult for Teradyne to obtain any necessary future financing
for working capital, capital expenditures, debt service requirements or
other purposes;
. require the dedication of a substantial portion of any cash flow from
operations to service for indebtedness, thereby reducing the amount of
cash flow available for other purposes, including capital expenditures;
. limit Teradyne's flexibility in planning for, or reacting to changes in,
its business and the industries in which Teradyne competes;
. place Teradyne at a possible competitive disadvantage with respect to
less leveraged competitors and competitors that have better access to
capital resources; and
. make Teradyne more vulnerable in the event of a further downturn in its
business.
There can be no assurance that Teradyne will be able to meet its debt
service obligations, including its obligations under the Notes and the Mortgage.
26
Teradyne May Not Be Able to Satisfy a Change in Control Offer.
The indenture governing the Notes contains provisions that apply to a change
in control of Teradyne. If someone triggers a change in control as defined in
the indenture, Teradyne may be required to offer to purchase the Notes with
cash. If Teradyne has to make that offer, Teradyne cannot be sure that it will
have enough funds to pay for all the Notes that the holders could tender.
In the event of a change in control of Teradyne, the mortgage lender may
elect to declare all amounts due under the Mortgage to be immediately due and
payable, and may elect to take possession of or sell the property subject to
the Mortgage.
Teradyne May Not Be Able to Pay Its Debt and Other Obligations.
If Teradyne's cash flow is inadequate to meet its obligations, Teradyne
could face substantial liquidity problems. If Teradyne is unable to generate
sufficient cash flow or otherwise obtain funds necessary to make required
payments on the Notes, the Mortgage, or certain of its other obligations,
Teradyne would be in default under the terms thereof, which would permit the
holders of those obligations to accelerate their maturity and also could cause
defaults under future indebtedness Teradyne may incur. Any such default could
have a material adverse effect on Teradyne's business, prospects, financial
position and operating results. In addition, Teradyne cannot assure that it
would be able to repay amounts due in respect of the Notes or the Mortgage if
payment of those obligations were to be accelerated following the occurrence of
any other event of default as defined in the instruments creating those
obligations. Moreover, Teradyne cannot assure that it will have sufficient
funds or will be able to arrange for financing to pay the principal amount due
on the Notes or the Mortgage at their respective maturities.
Teradyne May Need Additional Financing, Which Could Be Difficult to Obtain.
Teradyne expects that its existing cash and marketable securities, cash
generated from operations, the proceeds of the Notes offering in October 2001
and the proceeds from the Mortgage financing in December 2001, will be
sufficient to meet Teradyne's cash requirements to fund operations and expected
capital expenditures for the foreseeable future. In the event Teradyne may need
to raise additional funds, Teradyne cannot be certain that it will be able to
obtain such additional financing on favorable terms, if at all. Further, if
Teradyne issues additional equity securities, stockholders may experience
additional dilution or the new equity securities may have rights, preferences
or privileges senior to those of existing holders of common stock. Future
financings may place restrictions on how Teradyne operates its business. If
Teradyne cannot raise funds on acceptable terms, if and when needed, Teradyne
may not be able to develop or enhance its products and services, take advantage
of future opportunities, grow its business or respond to competitive pressures,
which could seriously harm Teradyne's business.
Provisions of Teradyne's Charter and By-Laws and Massachusetts Law Make a
Takeover of Teradyne More Difficult.
Teradyne's basic corporate documents, its stockholder rights plan, and
Massachusetts law contain provisions that could discourage, delay or prevent a
change in the control of Teradyne, even if a change of control might be
regarded as beneficial to some or all of Teradyne's stockholders.
Teradyne's Operating Results Are Likely to Fluctuate Significantly.
Teradyne's quarterly and annual operating results are affected by a wide
variety of factors that could materially adversely affect revenues and
profitability, including:
. competitive pressures on selling prices;
. the timing of customer orders and the deferral or cancellation of orders
previously received;
. provisions for excess and obsolete inventory;
. changes in product mix;
. Teradyne's ability to introduce new products and technologies on a
timely basis;
. the introduction of products and technologies by Teradyne's competitors;
27
. market acceptance of Teradyne's and its competitors' products;
. fulfilling backlog on a timely basis;
. reliance on sole source suppliers;
. potential retrofit costs;
. the level of orders received which can be shipped in a quarter; and
. the timing of investments in engineering and development.
In particular, due to Teradyne's introduction of a number of new, complex
test systems in 2001 and the planned introduction of other such systems in
2002, there can be no assurance that Teradyne will not experience delays in
shipment of its products or that its products will achieve customer acceptance.
As a result of the foregoing and other factors, Teradyne has and may
continue to experience material fluctuations in future operating results on a
quarterly or annual basis which could materially and adversely affect its
business, financial condition, operating results and stock price.
Item 7a: Quantitative and Qualitative Disclosures About Market Risks
Concentration of Credit Risk
Financial instruments which potentially subject Teradyne to concentrations
of credit risk consist principally of cash investments, forward currency
contracts, and accounts receivable. Teradyne maintains cash investments
primarily in U.S. Treasury and government agency securities and corporate debt
securities, rated AA or higher, which have minimal credit risk. Teradyne places
forward currency contracts with high credit-quality financial institutions in
order to minimize credit risk exposure. Concentrations of credit risk with
respect to accounts receivable are limited due to the large number of
geographically dispersed customers. Teradyne performs ongoing credit
evaluations of its customers' financial condition and does not require
collateral to secure accounts receivable.
Exchange Rate Risk Management
Teradyne regularly enters into forward contracts in European and Japanese
currencies to hedge its overseas net monetary position and has in the past
entered into forward contracts to hedge non-U.S. currency forecasted
transactions. Forward currency contracts generally have maturities of less than
one year. These contracts are used to reduce Teradyne's risk associated with
exchange rate movements, as gains and losses on these contracts are intended to
offset exchange losses and gains on underlying exposures. Teradyne does not
engage in currency speculation.
At December 31, 2001, the face amount of outstanding forward currency
contracts to buy U.S. dollars to hedge those currency exposures associated with
certain assets and liabilities denominated in non-functional currencies was
$11.0 million. A 10% fluctuation in exchange rates for these currencies would
change the fair value by approximately $1.3 million. However, since these
contracts hedge non-U.S. currency assets and liabilities, any change in the
fair value of the contracts would be offset by opposite changes in the
underlying value of these assets and liabilities being hedged. The hypothetical
movement was estimated by calculating the fair value of the forward currency
contracts at December 31, 2001 and comparing that with those calculated using
hypothetical forward currency exchange rates.
Interest Rate Risk Management
At December 31, 2001, the fair value of outstanding short and long-term
marketable securities was approximately $270.0 million. A hypothetical 10%
increase in interest rates for securities contained in the investment portfolio
would change the fair value by approximately $2.3 million. Market risk was
estimated as the potential decrease in the fair value resulting from a
hypothetical increase in interest rates for issues contained in the investment
portfolio.
28
REPORT OF MANAGEMENT
Management is responsible for the preparation and integrity of the
consolidated financial statements appearing in this Annual Report on Form 10-K.
The financial statements were prepared in conformity with accounting principles
generally accepted in the United States of America appropriate in the
circumstances and, accordingly, include some amounts based on management's best
judgments and estimates. Financial information in this Annual Report on Form
10-K is consistent with that in the financial statements.
Management is responsible for maintaining a system of internal business
controls and procedures to provide reasonable assurance, at an appropriate
cost/benefit relationship, that assets are safeguarded and that transactions
are authorized, recorded and reported properly. The internal control system is
augmented by appropriate reviews by management, written policies and
guidelines, careful selection and training of qualified personnel and a written
code of business ethics applicable to all employees of Teradyne and its
subsidiaries. Management believes that Teradyne's internal controls provide
reasonable assurance that assets are safeguarded against material loss from
unauthorized use or disposition and that the financial records are reliable for
preparing financial statements and other data and maintaining accountability
for assets.
The Audit Committee of the Board of Directors, composed solely of Directors
who are not employees or officers of Teradyne, meets periodically with the
independent accountants, internal auditors and management to discuss internal
business controls, auditing and financial reporting matters. The Audit
Committee reviews with the independent accountants the scope and results of the
audit. The Audit Committee also meets with the independent accountants without
management present to ensure that the independent accountants have free access
to the Audit Committee.
The independent accountants, PricewaterhouseCoopers LLP, are engaged to
audit the consolidated financial statements of Teradyne and to conduct such
tests and related procedures as they deem necessary in accordance with auditing
standards generally accepted in the United States of America. The opinion of
the independent accountants, based upon their audits of the consolidated
financial statements, is contained in this Annual Report on Form 10-K.
/S/ GEORGE W. CHAMILLARD
------------------------------------------
George W. Chamillard
Chairman, President and Chief Executive Officer
/S/ GREGORY R. BEECHER
------------------------------------------
Gregory R. Beecher
Vice President and Chief Financial Officer
March 29, 2002
29
Item 8: Financial Statements and Supplementary Data
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Shareholders of Teradyne, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of Teradyne, Inc. and its subsidiaries at December 31, 2001
and 2000, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 14(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
As discussed in Note C to the consolidated financial statements, during the
year ended December 31, 2000 the Company changed its method of recognizing
revenue.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 15, 2002
30
TERADYNE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
2001 2000
---------- ----------
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents.................................................................. $ 317,591 $ 242,421
Marketable securities...................................................................... 50,096 60,154
Accounts receivable, less allowance for doubtful accounts of $6,294 and $5,176 in 2001 and
2000, respectively........................................................................ 169,630 420,040
Income tax receivable and prepaid amounts.................................................. 97,000 11,206
Inventories................................................................................
Parts.................................................................................... 262,520 318,790
Assemblies in process.................................................................... 132,097 159,123
Finished goods........................................................................... 12,372 34,650
---------- ----------
406,989 512,563
Deferred tax assets........................................................................ 141,013 93,958
Prepayments and other current assets....................................................... 24,703 37,492
---------- ----------
Total current assets.................................................................... 1,207,022 1,377,834
Property, plant, and equipment:..............................................................
Land....................................................................................... 73,141 54,774
Buildings and improvements................................................................. 348,710 293,124
Machinery and equipment.................................................................... 918,163 831,539
Construction in progress................................................................... 104,515 75,520
---------- ----------
Total................................................................................... 1,444,529 1,254,957
---------- ----------
Less: Accumulated depreciation............................................................. (608,963) (521,171)
---------- ----------
Net property, plant, and equipment...................................................... 835,566 733,786
Marketable securities........................................................................ 218,544 161,848
Deferred tax assets--long-term............................................................... 4,313 --
Goodwill..................................................................................... 190,276 52,673
Intangible and other assets.................................................................. 86,670 29,727
---------- ----------
Total assets............................................................................ $2,542,391 $2,355,868
========== ==========
LIABILITIES
Current liabilities:
Notes payable--banks....................................................................... $ 6,557 $ 7,389
Current portion of long-term debt.......................................................... 1,263 169
Accounts payable........................................................................... 59,761 153,897
Accrued employees' compensation and withholdings........................................... 98,519 149,845
Deferred revenue and customer advances..................................................... 52,220 183,465
Other accrued liabilities.................................................................. 76,519 86,637
Accrued income taxes....................................................................... 1,292 28,914
---------- ----------
Total current liabilities............................................................... 296,131 610,316
Long-term other accrued liabilities.......................................................... 30,194 8,972
Deferred tax liabilities..................................................................... -- 21,257
Long-term debt............................................................................... 451,682 8,352
Commitments and contingencies (Note J).......................................................
---------- ----------
Total liabilities............................................................................ 778,007 648,897
---------- ----------
SHAREHOLDERS' EQUITY
Common stock, $0.125 par value, 1,000,000 shares authorized, 181,119 and 172,559 net shares
issued and outstanding in 2001 and 2000, respectively....................................... 22,640 21,570
Additional paid-in capital................................................................... 600,541 334,241
Accumulated other comprehensive loss......................................................... (7,742) --
Retained earnings............................................................................ 1,148,945 1,351,160
---------- ----------
Total shareholders' equity.............................................................. 1,764,384 1,706,971
---------- ----------
Total liabilities and shareholders' equity.............................................. $2,542,391 $2,355,868
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
31
TERADYNE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
---------- ---------- ----------
(in thousands, except per share amounts
Net sales..................................................... $1,440,581 $3,043,946 $1,790,912
Expenses:
Cost of sales................................................. 1,022,049 1,607,374 1,004,216
Cost of sales - inventory provision and other charges......... 159,759 -- --
Engineering and development................................... 288,657 348,024 261,861
Selling and administrative.................................... 270,084 377,783 266,637
Restructuring and other charges............................... 52,877 -- --
---------- ---------- ----------
1,793,426 2,333,181 1,532,714
---------- ---------- ----------
(Loss) income from operations................................. (352,845) 710,765 258,198
Interest income............................................... 22,743 25,106 17,307
Interest expense.............................................. (4,091) (1,841) (1,656)
Other income and expense, net................................. 8,040 5,618 --
---------- ---------- ----------
(Loss) income before income taxes and cumulative effect of
change in accounting principle.............................. (326,153) 739,648 273,849
(Benefit) provision for income taxes.......................... (123,938) 221,894 82,155
---------- ---------- ----------
(Loss) income before cumulative effect of change in accounting
principle................................................... (202,215) 517,754 191,694
Cumulative effect of change in accounting principle, net of
applicable tax of $27,488 (Note C).......................... -- (64,138) --
---------- ---------- ----------
Net (loss) income............................................. $ (202,215) $ 453,616 $ 191,694
========== ========== ==========
(Loss) income per common share before cumulative effect of
change in accounting principle -- basic..................... $ (1.15) $ 2.99 $ 1.12
========== ========== ==========
Cumulative effect of change in accounting principle -- basic.. $ - $ (0.37) $ -
========== ========== ==========
Net (loss) income per common share -- basic................... $ (1.15) $ 2.62 $ 1.12
========== ========== ==========
(Loss) income per common share before cumulative effect of
change in accounting principle -- diluted................... $ (1.15) $ 2.86 $ 1.07
========== ========== ==========
Cumulative effect of change in accounting principle -- diluted $ - $ (0.35) $ -
========== ========== ==========
Net (loss) income per common share -- diluted................. $ (1.15) $ 2.51 $ 1.07
========== ========== ==========
Shares used in net income per common share -- basic........... 175,828 173,312 170,519
========== ========== ==========
Shares used in net income per common share -- diluted......... 175,828 181,011 178,550
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
32
TERADYNE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Common Accumulated
Shares Stock Additional Other
------------------ Par Paid-in Comprehensive Retained
Issued Reacquired Value Capital Loss Earnings
------- ---------- ------- ---------- ------------- ----------
(in thousands)
Balance, December 31, 1998................................... 92,411 8,667 $10,468 $ 310,052 $ 0 $ 705,850
Issuance of stock to employees under benefit plans........... 3,205 401 60,730
Repurchase of stock.......................................... 1,366 (171) (86,980)
Two-for-one stock split effected in the form of a 100% stock
dividend.................................................... 95,616 10,033 10,698 (10,698)
Issuance of stock to employees under benefit plans after two-
for-one stock split......................................... 1,973 246 20,947
Tax benefit from stock options............................... 60,462
Repurchase of stock after two-for-one stock split............ 2,820 (352) (120,315)
Comprehensive income:
Net income................................................... 191,694
Total comprehensive income.................................
------- ------ ------- --------- -------- ----------
Balance, December 31, 1999................................... 193,205 22,886 $21,290 $ 234,198 $ 0 $ 897,544
Issuance of stock to employees under benefit plans........... 4,168 521 54,742
Tax benefit from stock options............................... 88,046
Shares issued to effect acquisition.......................... 1,841 230 104,256
Repurchase of stock.......................................... 3,769 (471) (147,001)
Comprehensive income:
Net income................................................... 453,616
Total comprehensive income.................................
------- ------ ------- --------- -------- ----------
Balance, December 31, 2000................................... 199,214 26,655 $21,570 $ 334,241 $ 0 $1,351,160
Issuance of stock to employees under benefit plans........... 3,609 451 58,092
Tax benefit from stock options............................... 23,319
Shares issued to effect acquisition.......................... 4,951 619 184,889
Comprehensive income:
Net loss..................................................... (202,215)
Unrealized gains on investments, net of tax of $2,168........ 3,546
Additional minimum pension liability, net of tax of $6,918... (11,288)
Total comprehensive loss...................................
------- ------ ------- --------- -------- ----------
Balance, December 31, 2001................................... 207,774 26,655 $22,640 $ 600,541 $ (7,742) $1,148,945
======= ====== ======= ========= ======== ==========
Total
Shareholders' Comprehensive
Equity Income (Loss)
------------- -------------
(in thousands)
Balance, December 31, 1998................................... $1,026,370
Issuance of stock to employees under benefit plans........... 61,131
Repurchase of stock.......................................... (87,151)
Two-for-one stock split effected in the form of a 100% stock
dividend.................................................... 0
Issuance of stock to employees under benefit plans after two-
for-one stock split......................................... 21,193
Tax benefit from stock options............................... 60,462
Repurchase of stock after two-for-one stock split............ (120,667)
Comprehensive income:
Net income................................................... 191,694 $ 191,694
---------
Total comprehensive income................................. $ 191,694
---------- =========
Balance, December 31, 1999................................... $1,153,032
Issuance of stock to employees under benefit plans........... 55,263
Tax benefit from stock options............................... 88,046
Shares issued to effect acquisition.......................... 104,486
Repurchase of stock.......................................... (147,472)
Comprehensive income:
Net income................................................... 453,616 $ 453,616
---------
Total comprehensive income................................. $ 453,616
---------- =========
Balance, December 31, 2000................................... $1,706,971
Issuance of stock to employees under benefit plans........... 58,543
Tax benefit from stock options............................... 23,319
Shares issued to effect acquisition.......................... 185,508
Comprehensive income:
Net loss..................................................... (202,215) $(202,215)
Unrealized gains on investments, net of tax of $2,168........ 3,546 3,546
Additional minimum pension liability, net of tax of $6,918... (11,288) (11,288)
---------
Total comprehensive loss................................... $(209,957)
---------- =========
Balance, December 31, 2001................................... $1,764,384
==========
The accompanying notes are an integral part of the consolidated financial
statements.
33
TERADYNE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
--------- --------- ---------
(in thousands)
Cash flows from operating activities:
Net (loss) income..................................................................... $(202,215) $ 453,616 $ 191,694
Adjustments to reconcile net (loss) income to net cash (used for) provided by
operating activities:
Depreciation........................................................................ 130,949 99,929 85,279
Amortization........................................................................ 7,719 1,933 1,107
Gain on sale of business............................................................ (14,779) -- --
Impairment of fixed assets.......................................................... 32,261 -- --
Provision for doubtful accounts..................................................... 1,192 1,337 1,407
Deferred income tax provision (credit).............................................. (47,091) (44,242) (4,101)
Other non-cash items, net........................................................... 14,869 (10,997) 4,354
Changes in operating assets and liabilities, net of businesses sold and acquired:
Accounts receivable................................................................ 285,232 (115,267) (78,263)
Inventories........................................................................ 158,669 (235,319) (2,346)
Other assets....................................................................... (74,688) 7,589 (24,576)
Accounts payable and accruals...................................................... (364,491) 226,798 115,750
Accrued income taxes............................................................... (6,599) 85,482 77,171
--------- --------- ---------
Net cash (used for) provided by operating activities.................................... (78,972) 470,859 367,476
--------- --------- ---------
Cash flows from investing activities:
Additions to property, plant, and equipment......................................... (198,180) (235,189) (119,780)
Increase in equipment manufactured by the Company................................... (43,269) (63,053) (31,376)
Proceeds from sale of business, net of expenses..................................... 26,250 -- --
Purchases of held-to-maturity marketable securities................................. (230,255) (409,180) (177,650)
Maturities of held-to-maturity marketable securities................................ 156,984 394,006 118,990
Purchases of available-for-sale marketable securities............................... (1,876) (177,864) (204,824)
Proceeds from sales and maturities of available-for-sale marketable securities...... 31,415 177,104 169,824
Cash acquired in acquisition........................................................ 11,593 1,885 --
--------- --------- ---------
Net cash used by investing activities................................................... (247,338) (312,291) (244,816)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from convertible notes, net................................................ 389,000 -- --
Proceeds from mortgage notes payable................................................ 45,000 -- --
Payments of long-term debt.......................................................... (91,063) (5,283) (1,333)
Issuance of common stock under stock option and stock purchase plans................ 58,543 55,263 82,323
Acquisition of treasury stock....................................................... -- (147,472) (207,819)
--------- --------- ---------
Net cash provided by (used for) financing activities.................................... 401,480 (97,492) (126,829)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents........................................ 75,170 61,076 (4,169)
Cash and cash equivalents at beginning of year.......................................... 242,421 181,345 185,514
--------- --------- ---------
Cash and cash equivalents at end of year................................................ $ 317,591 $ 242,421 $ 181,345
========= ========= =========
Supplementary disclosure of cash flow information:
Cash paid (received) during the year for:
Interest........................................................................... $ 1,275 $ 1,728 $ 1,615
Income taxes (received) paid....................................................... $ (16,119) $ 130,416 $ 22,747
Businesses acquired:
Fair value of assets acquired...................................................... $ 357,733 $ 119,887
Liabilities assumed................................................................ $ 166,257 $ 15,401
Common stock issued................................................................ $ 185,508 $ 104,486
The accompanying notes are an integral part of the consolidated financial
statements.
34
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. THE COMPANY
Teradyne, Inc. is the world's largest supplier of automatic test equipment
and is also a leading provider of high performance interconnection systems and
electronic manufacturing services.
Teradyne's automatic test equipment products include systems that:
. test semiconductors ("Semiconductor Test Systems");
. test and inspect circuit-boards ("Circuit Board Test and Inspection
Systems"); and
. test high speed voice and data communication ("Broadband Test Systems").
Teradyne's interconnection systems products and services ("Connection
Systems") include:
. high bandwidth backplane assemblies and associated connectors used in
electronic systems; and
. electronic manufacturing services of assemblies that include Teradyne
backplanes and connectors.
Broadband Test Systems, Diagnostic Solutions, and, prior to 2001, Software
Test Systems have been combined into "Other Test Systems" for purposes of
disclosing Teradyne's reportable segments.
B. ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Teradyne and
its subsidiaries. All significant intercompany balances and transactions are
eliminated. Certain prior years' amounts were reclassified to conform to the
current year presentation.
Certain costs in 2001, 2000, and 1999 have been reclassified from cost of
sales into engineering and development and selling and administrative. These
reclassified costs consist of new product development costs incurred in
manufacturing engineering, test technology and applications engineering costs
supporting sales. The costs reclassified from cost of sales to engineering and
development represent work performed to develop and implement manufacturing and
test processes focused on the introduction of new product platforms. The costs
reclassified from cost of sales to selling and administrative represent the
development of applications programming used to demonstrate new product
capabilities.
On October 26, 2001 Teradyne completed its acquisition of GenRad, Inc. of
Westford, MA, a leading manufacturer of electronic automatic test equipment,
related software and diagnostic solutions. The GenRad business has been made
part of the Circuit Board Test and Inspection Systems operating segment. GenRad
activity is reflected in Teradyne's results of operations since the acquisition
date.
Preparation of Financial Statements and Use of Estimates
The preparation of consolidated financial statements requires Teradyne to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
liabilities. On an on-going basis, Teradyne evaluates its estimates, including
those related to inventories, investments, intangible and other long-lived
assets, bad debts, income taxes, pensions, warranties, contingencies and
litigation. Teradyne bases its estimates on historical experience and on
appropriate and customary assumptions that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
35
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
B. ACCOUNTING POLICIES--(Continued)
Revenue Recognition
In accordance with the guidance provided by the Securities and Exchange
Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements", Teradyne recognizes revenue when there is persuasive
evidence of an arrangement, title and risk of loss have passed, delivery has
occurred or the services have been rendered, the sales price is fixed or
determinable and collection of the related receivable is reasonably assured.
For equipment where there is hardware and software that is incidental to the
product, revenue is recognized upon shipment provided that customer acceptance
criteria can be demonstrated prior to shipment. Where the criteria cannot be
demonstrated prior to shipment, or in the case of new products, revenue is
deferred until acceptance has been received. For multiple element arrangements,
Teradyne defers the greater of the fair value of any undelivered elements of
the contract or the portion of the sales price which is not payable until the
undelivered elements are delivered. Teradyne also defers the portion of the
sales price that is not due until acceptance, which represents deferred profit.
Fair value is the price charged when the element is sold separately. In order
to recognize revenue the functionality of the undelivered element must not be
essential to the delivered element. Installation is not considered essential to
the functionality of the product as these services do not alter the product
capabilities, do not require specialized skills or tools and can be performed
by the customers or other vendors. In addition to installation, other elements
may include service arrangements and undelivered products. Teradyne's products
are generally subject to warranty and related costs are provided for in cost of
sales when product revenue is recognized.
Interconnection systems and electronic manufacturing assembly services
revenue is recognized upon shipment or delivery according to the shipping terms
of the arrangement as there is no installation required and there are no
contractual acceptance requirements.
For transactions involving the sale of software which is not incidental to
the product, revenue is recognized in accordance with American Institute of
Certified Public Accountants ("AICPA") Statement of Position No. 97-2 (SOP No.
97-2), "Software Revenue Recognition", as amended by SOP No. 98-9 "Modification
of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions." Teradyne recognizes revenue when there is persuasive evidence of
an arrangement, delivery has occurred, the sales price is fixed or determinable
and collectibility is probable. Revenue is deferred in instances when vendor
specific objective evidence of fair value of undelivered elements is not
determinable. Vendor specific evidence of fair value is the price charged when
the element is sold separately. Revenue for the separate elements is only
recognized where the functionality of the undelivered element is not essential
to the delivered element.
For certain contracts eligible for contract accounting under SOP No. 81-1
"Accounting for Performance of Construction-type and Certain Production-Type
Contracts", revenue is recognized using the percentage-of-completion accounting
method based upon an efforts-expended method. The software in these
arrangements requires significant production, modification or customization. In
all cases, changes to total estimated costs and anticipated losses, if any, are
recognized in the period in which determined.
Inventories
Inventories which include materials, labor and manufacturing overhead are
stated at the lower of cost (first-in, first-out basis) or net realizable
value. On a quarterly basis, Teradyne uses consistent methodologies to evaluate
all inventory for net realizable value. Teradyne records a provision for excess
and obsolete inventory when such an impairment is identified through the
quarterly review process. Excess and obsolete inventory, consisting of on-hand
and non-cancelable on-order inventory, in excess of estimated usage over the
next 12 months is written down to its estimated net realizable value, if less
than cost. The excess and obsolescence evaluation is based upon assumptions
about future demand, product mix and possible alternative uses.
36
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
B. ACCOUNTING POLICIES--(Continued)
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost and depreciated over the
estimated useful lives of the assets. Leasehold improvements and major renewals
are capitalized and included in property, plant, and equipment accounts while
expenditures for maintenance and repairs and minor renewals are charged to
expense. When assets are retired, the assets and related allowances for
depreciation and amortization are removed from the accounts and any resulting
gain or loss is reflected in operations.
Teradyne provides for depreciation of its assets principally on the
straight-line method with the cost of the assets being charged to expense over
their useful lives as follows:
Buildings........................... 40 years
Buildings improvements.............. 5 to 10 years
Leasehold improvements.............. 5 to 10 years
Furniture and fixtures.............. 10 years
Test systems manufactured internally 6 years
Machinery and equipment............. 3 to 5 years
Software............................ 3 to 5 years
Test technology..................... 2 years
Goodwill and Intangible and Other Assets
Goodwill and intangible assets are amortized over their estimated useful
economic life using the straight line method and are carried at cost less
accumulated amortization. Goodwill resulting from the GenRad acquisition which
was completed after June 30, 2001 is not being amortized in accordance with the
requirements of SFAS No. 142, "Goodwill and Other Intangible Assets". Beginning
January 1, 2002 all other goodwill amortization will cease in accordance with
SFAS No. 142.
In accordance with Statement of Financial Accounting Standards No. 121
("SFAS 121") "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", Teradyne reviews long-lived assets for
impairment whenever events or changes in business circumstances indicate that
the carrying amount of the assets may not be fully recoverable or that the
useful lives of these assets are no longer appropriate. Each impairment test is
based on a comparison of the estimated undiscounted cash flows to the recorded
value of the asset. If an impairment is indicated, the asset is written down to
its estimated fair value based on a discounted cash flow analysis. The cash
flow estimates used to determine the impairment, if any, contain management's
best estimates using appropriate assumptions and projections at that time.
Engineering and Development Costs
Teradyne's products are highly technical in nature and require a large and
continuing engineering and development effort. Software development costs
incurred prior to the establishment of technological feasibility are charged to
expense. Software development costs incurred subsequent to the establishment of
technological feasibility are capitalized until the product is available for
release to customers. To date, the period between achieving technological
feasibility and general availability of the product has been short and software
development costs eligible for capitalization have not been material.
Engineering and development costs are expensed as incurred.
37
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
B. ACCOUNTING POLICIES--(Continued)
Advertising Costs
Teradyne expenses all advertising costs as incurred. Advertising costs were
$10.3 million, $16.8 million, and $9.0 million in 2001, 2000, and 1999,
respectively.
Investments in Other Companies
Teradyne holds minority interests in public and private companies having
operations or technology in areas within its strategic focus. These investments
are included in other long-term assets and include investments accounted for at
cost and under the equity method of accounting. Under the equity method of
accounting, which generally applies to investments that represent a 20 to 50
percent ownership of the equity securities of the investees, Teradyne's
proportionate share of the earnings or losses of the investees is included in
other income and expense. Teradyne records an impairment charge when it
believes an investment has experienced a decline in value that is
other-than-temporary. At December 31, 2001, these investments were $14.4
million.
Income Taxes
Deferred tax assets and liabilites are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The measurement of deferred tax assets is
reduced by a valuation allowance if, based upon weighted available evidence, it
is more likely than not that some or all of the deferred tax assets will not be
realized.
U.S. Federal taxes are provided for on the retained earnings of non-U.S.
sales and service subsidiaries whose earnings are expected to be remitted to
the United States. U.S. Federal taxes are not provided for on the earnings of a
non-U.S. manufacturing subsidiary which are expected to be reinvested
indefinitely in operations outside the U.S.
Translation of Non U.S. Currencies
Assets and liabilities of non U.S. subsidiaries, which are denominated in
currencies other than the U.S. dollar, are remeasured into U.S. dollars at
rates of exchange in effect at the end of the fiscal year except nonmonetary
assets and liabilities which are remeasured using historical exchange rates.
Revenue and expense amounts are remeasured using an average of exchange rates
in effect during the year, except those amounts related to nonmonetary assets
and liabilities, which are remeasured at historical exchange rates. Net
realized gains and losses resulting from currency remeasurement are included in
operations.
Net Income (Loss) per Common Share
Basic net income (loss) per common share is calculated by dividing net
income (loss) by the weighted average number of common shares outstanding
during the period. Diluted net income (loss) per common share is calculated by
dividing net income (loss) by the sum of the weighted average number of common
shares plus
38
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
B. ACCOUNTING POLICES--(Continued)
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 (Loss)
Teradyne reports comprehensive income (loss) in accordance with Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). Comprehensive income (loss) includes net income (loss), minimum pension
liability adjustments, and unrealized gains and losses on certain investments
in debt and equity securities.
C. CHANGE IN ACCOUNTING PRINCIPLE
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). SAB 101 summarizes certain areas of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. During the fourth quarter of 2000, Teradyne implemented the SEC's
SAB 101 guidelines, retroactive to the beginning of the year. This was reported
as a cumulative effect of a change in accounting principle as of January 1,
2000. The cumulative effect of the change in accounting principle on prior
years resulted in a charge to income of $64.1 million (net of income taxes of
$27.5 million) or $0.35 per diluted share which has been included in income for
the fiscal year ending December 31, 2000. For the fiscal year ending December
31, 2000, Teradyne recognized $126.1 million in revenue that is included in the
cumulative effect adjustment as of January 1, 2000. The results for the first
three quarters of fiscal year ending December 31, 2000 have been restated in
accordance with SAB 101. Included in 2001 sales was $98.7 million which
resulted in $48.8 million of income (net of tax of $20.9 million) related to
shipments in 2000 where title was retained until payment. Title is no longer
retained until payment as a normal business practice. Prior years do not
reflect the change in accounting principle as the effect could not be
reasonably determined.
D. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations." SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interest method.
In July 2001, FASB issued SFAS 142, "Goodwill and Other Intangible Assets",
which is effective for Teradyne on January 1, 2002. SFAS 142 requires, among
other things, the discontinuance of goodwill amortization and includes
provisions for the reclassification of certain existing recognized intangibles
as goodwill, reassessment of the useful lives of existing recognized
intangibles, and reclassification of certain intangibles out of previously
reported goodwill. In 2001, Teradyne recorded goodwill amortization of
approximately $3.9 million. At December 31, 2001 Teradyne had goodwill of
$190.3 million which will not be amortized. In 2002, Teradyne will record
amortization of approximately $7.4 million relating to other intangibles
primarily in connection with the GenRad acquisition. SFAS 142 also requires
Teradyne to complete a transitional goodwill impairment test six months from
the date of adoption. Teradyne has completed a preliminary evaluation of the
impact of SFAS 142 and currently does not expect to record a goodwill
impairment.
In August 2001, FASB issued SFAS 143, "Accounting for Obligations Associated
with the Retirement of Long-Lived Assets." SFAS 143 provides the accounting
requirements for retirement obligations associated with tangible long-lived
assets. SFAS 143 is effective for financial statements for fiscal years
beginning after June 15, 2002. Teradyne has determined that SFAS 143 will not
have an impact on its financial position and results of operations.
39
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
D. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS--(Continued)
In October 2001, FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 requires one method of accounting for
long lived assets disposed of by sale. SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001. Teradyne
has adopted SFAS 144 effective January 1, 2002. SFAS 144 did not have an impact
on Teradyne's financial position or results of operations.
E. RISKS AND UNCERTAINTIES
Teradyne's future results of operations involve a number of risks and
uncertainties. These factors include, but are not limited to, the slowdown in
economies worldwide, the effects of the hostilities begun in September 2001,
the current and anticipated market for electronics, risks associated with any
measures Teradyne takes to address the current slowdown in the market,
enforcement of Teradyne's intellectual property rights, failure to develop new
technologies, risks associated with acquisitions and divestitures, securities
class action litigation due to past or future stock activity, competition,
risks of operating internationally, risks associated with obligations and
potential liabilities under environmental regulations, Teradyne's debt service
obligations with respect to its recent sale of convertible senior notes and a
mortgage financing with respect to certain of its owned real estate assets, the
difficulty in obtaining future financing if needed, provisions of Teradyne's
charter and by-laws and Massachusetts law that make a takeover of Teradyne more
difficult, competitive pricing pressures, changes in product mix, timing of
customer orders or any deferral or cancellation of orders previously received,
market acceptance of Teradyne's products, new product introductions from
Teradyne's competitors, reliance on sole source suppliers, potential retrofit
costs, and the timing of investments in engineering and development. At
present, Teradyne cannot say how long the current business downturn will last
or when the situation will improve. In the absence of significant improvement,
orders could remain low or decline further, and the amount of Teradyne's
inventory, deferred tax assets, and certain long-lived assets considered
realizable could be significantly reduced.
F. ACQUISITIONS AND DIVESTITURES
On October 26, 2001 Teradyne completed its acquisition of GenRad, Inc. of
Westford, MA, a leading manufacturer of electronic automatic test equipment,
related software, and diagnostic solutions. GenRad's business has been made
part of the Circuit Board Test and Inspection Systems operating segment. Under
the terms of the acquisition, each outstanding share of GenRad common stock was
converted into 0.1733 shares of Teradyne common stock. Under the terms of the
acquisition, Teradyne assumed approximately $89.7 million of debt which
Teradyne repaid on October 26, 2001. The results of GenRad have been included
since the acquisition date.
The primary reasons for Teradyne's acquisition of GenRad, and the factors
that contributed to a purchase price that resulted in recognition of goodwill,
are:
. the combination of Teradyne's circuit board test systems with GenRad
will strengthen Teradyne's product offerings;
. Teradyne's global presence in Europe and Asia among large electronics
manufacturing services companies and original equipment manufacturers in
the circuit board test and inspection markets will be strengthened as a
result of the acquisition; and
. to enable Teradyne to compete more effectively in the circuit board test
and inspection markets.
Based on the exchange ratio of 0.1733 shares of Teradyne common stock for
each GenRad share, Teradyne issued approximately 5.0 million common shares and
1.2 million vested employee stock options in the exchange, which increased
common stockholders' equity by approximately $185.5 million. The common stock
was valued at $34.90 per share, which was Teradyne's average common stock price
over a five-day trading period, which
40
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
F. ACQUISITIONS AND DIVESTITURES--(Continued)
included the public announcement date of August 2, 2001 and two days before and
after the public announcement date. The employee stock options were valued
using the Black-Scholes option pricing model, based on following assumptions
prevalent at the August 2001 announcement date:
Expected life (years). 6.0
Interest rate..... 4.1%
Volatility........ 63.2%
Dividend yield.... 0.0%
This transaction was accounted for using the purchase method of accounting
as required by SFAS 141, "Business Combinations," which was issued in the
second quarter of 2001.
The purchase price allocation is preliminary and subject to future
adjustment based on the completion of facility exit and restructuring plans.
Based on the purchase price allocation, the following table summarizes the fair
values of the assets acquired and liabilities assumed on October 26, 2001:
(in thousands)
Consideration:
Common stock issued........................ $172,761
Employee stock options..................... 12,747
Transaction costs.......................... 5,968
--------
Total consideration...................... $191,476
========
Assets and liabilities acquired:
Cash and cash equivalents.................. $ 11,593
Accounts receivable........................ 40,124
Inventories................................ 57,863
Other current assets....................... 7,847
Property, plant, & equipment............... 28,445
Long-term net deferred tax asset........... 25,534
Intangible assets.......................... 44,700
--------
Total identifiable assets acquired....... 216,106
--------
Accounts payable............................ 23,956
Accrued employees' compensation and benefits 28,032
Other accrued liabilities................... 13,919
Deferred revenue............................ 10,700
Long-term debt.............................. 89,650
--------
Total liabilities acquired............... 166,257
--------
Total net identifiable assets acquired... 49,849
--------
Goodwill.................................... 141,627
--------
Total net assets acquired................ $191,476
========
The $44.7 million of intangible assets consists of $35.6 million of
completed technology, $5.3 million of service and software maintenance
contracts and customer relationships, and $3.8 million of tradenames and
trademarks. The intangible assets are subject to amortization with a weighted
average amortization period of 7 years.
41
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
F. ACQUISITIONS AND DIVESTITURES--(Continued)
Goodwill related to the GenRad acquisition is reported as part of the
Circuit Board Test and Inspection Systems segment.
The following unaudited pro forma data presents information as if GenRad had
been acquired at the beginning of each period presented. The pro forma amounts
include an adjustment for amortization of intangibles of $5.1 million in 2001
and $6.2 million in 2000. The pro forma amounts do not reflect any benefits
from economies which might be achieved from combining the operations. The pro
forma information does not necessarily reflect the actual results that would
have occurred had the companies been combined during the periods presented, nor
is it necessarily indicative of the future results of operations of the
combined companies:
Year Ended
----------------------
2001 2000
(in thousands except per share amounts) ---------- ----------
Revenue............................................................................ $1,609,374 $3,385,601
(Loss) income before cumulative effect of change in accounting principle........... (361,811) 535,079
Net (loss) income.................................................................. (361,811) 470,941
(Loss) income before cumulative effect of change in accounting principle--per share
of common stock..................................................................
Basic........................................................................... $ (2.01) $ 3.00
Diluted......................................................................... $ (2.01) $ 2.88
(Loss) income--per share of common stock...........................................
Basic........................................................................... $ (2.01) $ 2.64
Diluted......................................................................... $ (2.01) $ 2.53
On June 22, 2001, Teradyne sold its aerospace and defense connector and
backplane business to Amphenol Corporation of Wallingford, Connecticut for cash
proceeds of $26.3 million. This transaction resulted in a pre-tax gain of $14.8
million which has been recorded in other income and expense.
On August 15, 2000, Teradyne acquired two California-based companies, both
in the printed circuit board (PCB) industry: Herco Technology Corp. of San
Diego, California, a fabricator of printed circuit boards, and Perception
Laminates, Inc. of La Verne, California, which supplies PCB laminates and is a
major supplier to Herco. The acquisitions are part of the Connection Systems
operating segment. The cost of the acquired companies was $104.5 million with
approximately 1.8 million shares of common stock issued. The acquisitions were
accounted for using the purchase method of accounting and accordingly, the
results have been included in our consolidated results of operations from the
date of acquisition. Goodwill resulting from the acquisitions will no longer be
amortized beginning in 2002.
The components of the purchase price allocation are as follows:
(in thousands)
--------------
Current assets............... $ 20,140
Property, plant and equipment 41,650
Acquired intangibles......... 4,736
Goodwill..................... 53,361
Less: Liabilities assumed.... 15,401
--------
Total..................... $104,486
On December 29, 2000, Teradyne sold a controlling interest in its software
test business to an investor group led by Matrix Partners of Waltham,
Massachusetts for approximately $28.7 million. The gain from the sale was
immaterial. Teradyne has retained an ownership position of approximately 21% in
the new company called Empirix. Teradyne has accounted for its investment in
Empirix under the equity method of accounting. At December 31, 2001, the
carrying value of Teradyne's investment in Empirix was zero.
42
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
G. FINANCIAL INSTRUMENTS
Cash Equivalents
Teradyne considers all highly liquid investments with original maturities of
three months or less at the date of acquisition to be cash equivalents.
Marketable Securities
Teradyne classifies investments in marketable securities as trading,
available-for-sale or held-to-maturity at the time of purchase and periodically
re-evaluates such classification. There were no securities classified as
trading at December 31, 2001 or 2000. Securities are classified as
held-to-maturity when Teradyne has the positive intent and ability to hold the
securities to maturity. Held-to-maturity securities are stated at cost with
corresponding premiums or discounts amortized over the life of the investment
to interest income. Securities classified as available-for-sale are reported at
fair value. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in interest
income. Unrealized gains and losses are included in accumulated other
comprehensive income. The cost of securities sold is based on the specific
identification method.
The short-term marketable securities mature in less than one year. Long-term
marketable securities have maturities of one to five years. At December 31,
2001 and 2000 these investments are reported as follows (in thousands):
2001 2000
--------------------------- ------------------------------
Held-to- Held-
Available-For-sale Maturity Available-For-sale to-Maturity
------------------ -------- ------------------ -----------
Short-term marketable securities:
U.S. Treasury and government agency securities $ 7,282 $30,000 $ 13,918 $29,539
Corporate debt securities..................... 12,814 16,697
-------- ------- -------- -------
$ 20,096 $30,000 $ 30,615 $29,539
======== ======= ======== =======
Long-term marketable securities:
U.S. Treasury and government agency securities $133,958 $ 55,778 $30,000
Corporate debt securities..................... 84,586 76,070
-------- -------- -------
$218,544 $131,848 $30,000
======== ======== =======
Other
As of December 31, 2001, the estimated fair value of Teradyne's convertible
notes was approximately $547 million compared to the carrying value of $400
million. The estimated fair value of the convertible notes is based on the
quoted market price of the convertible notes on December 31, 2001. The quoted
market price for the convertible notes primarily reflects the conversion value
of the notes into Teradyne's common stock.
Fair values for Teradyne's non-convertible debt were determined based on
interest rates that are currently available to Teradyne for the issuance of
debt with similar terms and remaining maturities for debt issues and
approximate carrying values.
43
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
G. FINANCIAL INSTRUMENTS--(Continued)
For all other balance sheet financial instruments, the carrying amount
approximates fair value.
Derivatives
Teradyne adopted SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS 137 and SFAS 138 in the first quarter
of 2001. SFAS 133 requires Teradyne to recognize all derivatives on the balance
sheet at fair value. Adoption of SFAS 133 did not have a material impact on
Teradyne's financial position or results of operations.
Teradyne conducts business in a number of foreign countries, with certain
transactions denominated in local currencies. The purpose of Teradyne's foreign
currency management is to minimize the effect of exchange rate fluctuations on
certain foreign denominated net monetary assets and anticipated cash flows. The
terms of currency instruments used for hedging purposes are consistent with the
timing of the transactions being hedged. Teradyne does not use derivative
financial instruments for trading or speculative purposes.
Teradyne enters into foreign currency forward contracts to hedge currency
exposures associated with monetary assets and liabilities denominated in
non-functional currencies. These contracts are used to reduce Teradyne's risk
associated with exchange rate movements, as gains and losses on these contracts
are intended to offset exchange losses and gains on underlying exposures.
Changes in the fair value of these derivatives are recorded immediately in
earnings which are used to offset the changes in the underlying net monetary
position being hedged.
Teradyne periodically hedges certain forecasted foreign currency denominated
sales, over a maximum period of twelve months. The derivatives are designated
as cash-flow hedges, and changes in their fair value are carried in accumulated
other comprehensive income until the underlying transaction occurs. Once the
underlying forecasted transaction occurs, the appropriate gain or loss from the
derivative designated as a hedge of the transaction is reclassified from
accumulated other comprehensive income to net sales. During 2001 the amount of
net realized gains from cash-flow hedges was immaterial. As of December 31,
2001, there were no outstanding cash-flow hedges and therefore there is no
amount to be reclassified from accumulated other comprehensive income.
At December 31, 2001, Teradyne had the following forward currency contracts
to buy U.S. dollars for non U.S. currencies with the following notional amounts
totaling $11.0 million; $2.4 million Japanese Yen, $3.6 million Euro, $4.4
million British pound sterling, and $0.6 million Swedish Krona. At December 31,
2000, the face amount of outstanding forward currency contracts to buy U.S.
dollars for non U.S. currencies was $73.0 million. The fair value of the
outstanding contracts at December 31, 2001 was $0.2 million. Realized gains
related to forward contracts hedging net monetary position were $4.1 million,
$7.0 million, and $0.1 million for 2001, 2000, and 1999, respectively. Both the
contract gains and losses and the gains and losses on the items being hedged
are included in selling and administrative expenses.
Teradyne holds warrants to purchase 0.3 million shares of common stock of
LogicVision, a public technology company, at an exercise price of $4.86 per
share. In accordance with SFAS 133, Teradyne recorded a gain of $2.0 million in
other income for the fair value of the warrants for the year ended December 31,
2001. The fair value of the warrant is included in other assets.
Concentration of Credit Risk
Financial instruments which potentially subject Teradyne to concentrations
of credit risk consist principally of marketable securities, forward currency
contracts, and accounts receivable. Teradyne maintains cash investments
primarily in U.S. Treasury and government agency securities and corporate debt
securities, rated
44
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
G. FINANCIAL INSTRUMENTS--(Continued)
AA or higher, which have minimal credit risk. Teradyne places forward currency
contracts with high credit-quality financial institutions in order to minimize
credit risk exposure. Concentrations of credit risk with respect to accounts
receivable are limited due to the large number of geographically dispersed
customers. Teradyne performs ongoing credit evaluations of its customers'
financial condition but does not require collateral to secure accounts
receivable.
H. DEBT
Long-term debt at December 31, 2001 and 2000 consisted of the following (in
thousands):
2001 2000
-------- ------
Convertible senior notes $400,000 --
Mortgage notes payable.. 50,040 $5,040
Other long-term debt.... 2,905 3,481
-------- ------
Total................... 452,945 8,521
Less current maturities. 1,263 169
-------- ------
$451,682 $8,352
======== ======
The total maturities of long-term debt for the succeeding five years and
thereafter are: 2002 -- $1.3 million; 2003 -- $1.3 million; 2004 -- $1.4
million; 2005 -- $1.5 million; 2006 -- $401.5 million; and $45.9 million
thereafter.
Convertible Senior Notes
In 2001, Teradyne sold $400 million principal amount of 3.75% Convertible
Senior Notes due 2006 (the "Notes") in a private placement and received net
proceeds of $389 million. The Notes are convertible at the option of the
holders at a rate which is equivalent to a conversion price of approximately
$26.00 per share, which is equal to a conversion rate of approximately 38.4615
shares of common stock per $1,000 principal amount of Notes. On or after
October 18, 2004, Teradyne may redeem the Notes in whole or in part at the
prices set forth below. The redemption price, expressed as a percentage of
principal amount, is as follows for the following periods:
Redemption
Period Price
------ ----------
Beginning on October 18, 2004 and ending on October 14, 2005 101.50%
Beginning on October 15, 2005 and ending on October 14, 2006 100.75%
and thereafter equal to 100% of the principal amount.
Teradyne will begin making annual interest payments of up to $15 million,
paid semi-annually, on the Notes commencing on April 15, 2002. The Notes are
senior unsecured obligations of Teradyne that rank equally with Teradyne's
existing and future unsecured and unsubordinated indebtedness. In the event of
a change in control by which Teradyne merges with or sells substantially all of
its assets to a third party, the holders of the Notes may be able to require
Teradyne to redeem some or all of the Notes either in discounted Teradyne
common stock or in cash.
Mortgage Notes Payable
On December 19, 2001, Teradyne obtained a loan of approximately $45 million
in the form of a 7.5% mortgage loan maturing on January 1, 2007. This loan is
collateralized by certain Teradyne California real estate properties. Principal
payments are made according to a twenty-year amortization schedule through
December 2006, with the remaining principal due on January 1, 2007. Teradyne
began making monthly principal and interest payments of $0.4 million on
February 1, 2002.
45
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
H. DEBT--(Continued)
In 1983, Teradyne obtained a loan of $4.5 million from the Boston
Redevelopment Authority in the form of a 3% mortgage loan maturing March 31,
2013. This loan is collateralized by Teradyne's property at 321 Harrison
Avenue, which may, at Teradyne's option, become subordinated to another
mortgage up to a maximum of $5.0 million. Interest for the first 4 1/2 years of
the loan was capitalized up to a principal amount of $5.0 million. Since
September 30, 1987, Teradyne has been making semi-annual interest payments.
Short-term Borrowings
The weighted average interest rates on short-term borrowings outstanding as
of December 31, 2001 and 2000 was 1.2% for both years.
I. GOODWILL AND INTANGIBLE AND OTHER ASSETS
At December 31, 2001 and 2000, the goodwill and intangible and other assets
were:
2001 2000
-------- -------
(In thousands)
Goodwill............................................................. $197,036 $55,409
Less accumulated amortization........................................ (6,760) (2,736)
-------- -------
Net goodwill......................................................... $190,276 $52,673
======== =======
Intangibles and other assets:
Completed technology................................................. $ 35,600 --
Service and software maintenance contracts and customer relationships 8,993 $ 3,693
Tradenames and trademarks............................................ 3,800 --
Other intangibles assets............................................. 1,535 1,044
-------- -------
Total intangibles.................................................... 49,928 4,737
Less accumulated amortization........................................ (3,602) (645)
-------- -------
Total net intangible assets.......................................... 46,326 4,092
Other assets......................................................... 40,344 25,635
-------- -------
Net intangible and other assets...................................... $ 86,670 $29,727
======== =======
J. COMMITMENTS AND CONTINGENCIES
Rental expense for the years ended December 31, 2001, 2000, and 1999 was
$26.0 million, $21.3 million, and $18.8 million, respectively.
The following table reflects Teradyne's current non-cancelable operating
lease commitments:
Non-cancelable
Lease
Commitments
--------------
(in thousands)
2002.......... $ 24,019
2003.......... 20,417
2004.......... 17,532
2005.......... 14,754
2006.......... 10,490
Beyond 2006... 34,442
--------
Total......... $121,654
46
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
J. COMMITMENTS AND CONTINGENCIES--(Continued)
In connection with the August 2000 acquisition of each of Herco Technology
Corp., a California company, and Perception Laminates, Inc., a California
company, a complaint was filed by the former owners of those companies on or
about September 5, 2001 naming as defendants Teradyne and two of its executive
officers. The case was originally filed in the Superior Court in San Diego
County, California, and was subsequently removed by the defendants to federal
court. An amended complaint was filed in the federal court on October 12, 2001.
On or about November 14, 2001, Teradyne and the two individual defendants filed
a motion to dismiss the amended complaint in its entirety. The federal court
granted in part and denied in part that motion to dismiss. The claims that were
dismissed were dismissed with prejudice. At the federal court's request, the
plaintiffs filed a second amended complaint on March 4, 2002 setting forth
their remaining claims. The second amended complaint alleges, among other
things, that the sale of Teradyne's common stock to the former owners violated
certain California securities statutes and common law, and that Teradyne
breached certain contractual obligations in the agreements relating to the
acquisitions. The amended complaint seeks unspecified damages, including
compensatory, consequential and punitive damages, and recovery of reasonable
attorneys' fees and costs. On March 25, 2002, Teradyne and the two individual
defendants filed their answer to the second amended complaint.
Teradyne and two of its executive officers are named as defendants in three
purported class action complaints that were filed in the United States District
Court for the District of Massachusetts, Boston, Massachusetts, on or about
October 16, 2001, October 19, 2001 and November 7, 2001. The complaints allege,
among other things, that the defendants violated Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, by making, during the period from July 14,
2000 and October 17, 2000, material misrepresentations and omissions to the
investing public regarding Teradyne's business operations and future prospects.
The complaints seek unspecified damages, including compensatory damages and
recovery of reasonable attorneys' fees and costs.
Teradyne disputes all of the claims above and believes they are without
merit, and intends to defend vigorously against the lawsuits. However, an
adverse resolution of any of the lawsuits could have a material adverse effect
on Teradyne's financial position or results of operations. Teradyne is not
presently able to reasonably estimate potential losses, if any, related to any
of the lawsuits and therefore has not accrued for any potential losses from the
lawsuits.
In addition, Teradyne is subject to legal proceedings and claims that arise
in the ordinary course of business. Management does not believe these actions
will have a material adverse effect on Teradyne's financial position or results
of operations.
In 2001, Teradyne was designated as a "potentially responsible party"
("PRP") at two clean-up sites, one in California and one in Rhode Island.
Teradyne does not believe that it has any liability for the cleanup of the
California site and has requested the state of California to remove Teradyne's
name from the list of PRPs, however, Teradyne has not as yet received a reply.
In the opinion of management, the costs associated with complying with the
clean-up of this site, if required, are not expected to have a material effect
upon the financial position or results of operations of Teradyne. With respect
to the second site, in Rhode Island, additional information is currently being
collected to better understand Teradyne's financial obligations, if any, for
its portion of the clean-up of this site.
K. NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per common share (in thousands, except per share amounts):
47
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
K. NET INCOME (LOSS) PER COMMON SHARE--(Continued)
2001 2000 1999
--------- -------- --------
(Loss) income before cumulative effect of change in accounting
principle................................................... $(202,215) $517,754 $191,694
Cumulative effect of change in accounting principle........... -- (64,138) --
--------- -------- --------
Net (loss) income............................................. $(202,215) $453,616 $191,694
========= ======== ========
Shares used in (loss) income per common share--basic.......... 175,828 173,312 170,519
Effect of dilutive securities:
Employee and director stock options........................... -- 7,293 7,540
Employee stock purchase rights................................ -- 406 491
--------- -------- --------
Dilutive potential common shares.............................. -- 7,699 8,031
--------- -------- --------
Shares used in (loss) income per common share--diluted........ 175,828 181,011 178,550
========= ======== ========
(Loss) income before cumulative effect of change in accounting
principle per common share--basic........................... $ (1.15) $ 2.99 $ 1.12
Cumulative effect of change in accounting principle--basic.... $ -- $ (0.37) $ --
--------- -------- --------
Net (loss) income per common share--basic..................... $ (1.15) $ 2.62 $ 1.12
========= ======== ========
(Loss) income before cumulative effect of change in accounting
principle per common share--diluted......................... $ (1.15) $ 2.86 $ 1.07
Cumulative effect of change in accounting principle--diluted.. $ -- $ (0.35) $ --
--------- -------- --------
Net (loss) income per common share--diluted................... $ (1.15) $ 2.51 $ 1.07
========= ======== ========
All options and equivalent shares related to the convertible notes
outstanding in 2001 were excluded from the calculation of diluted net loss per
share because the effect would have been antidilutive. As of December 31, 2001,
there were 16.4 million options outstanding. As of December 31, 2001, there
were 15.4 million equivalent shares related to the convertible notes shares
outstanding. For purposes of computing diluted earnings per share, weighted
average common share equivalents do not include stock options with an exercise
price that exceed the average fair market value of Teradyne's common stock.
Accordingly, options to purchase 1.5 million shares of common stock in 2000 and
0.1 million shares of common stock in 1999 were not included in the calculation
of diluted net income per share.
L. INVENTORY PROVISIONS AND SPECIAL CHARGES
The charges described below have been recorded as follows in the Statement
of Operations during 2001:
Excess
and
Workforce Obsolete Asset Vacated
Reduction Inventory Impairment Leases Total
--------- --------- ---------- ------- --------
(In thousands)
Cost of sales - inventory provision and other
charges.................................... $139,683 $16,999 $3,077 $159,759
Engineering and development.................. 1,339 1,339
Restructuring and other charges.............. $37,278 13,923 1,676 52,877
------- -------- ------- ------ --------
Total........................................ $37,278 $139,683 $32,261 $4,753 $213,975
======= ======== ======= ====== ========
48
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
L. INVENTORY PROVISIONS AND SPECIAL CHARGES--(Continued)
During 2001, Teradyne recorded charges of $37.3 million in connection with
workforce reductions and an early retirement program. The provision for
severance and early retirement benefits was recorded in restructuring charges
and related asset impairments. There were approximately 2,900 employees
terminated in 2001 across all functional groups. Teradyne has paid $23.8
million in severance benefits during 2001. All remaining severance benefits for
the terminations in 2001 will be paid by the fourth quarter of 2002.
During 2001, Teradyne recorded a provision of $139.7 million for excess and
obsolete inventory and for discontinued product lines. The total inventory
provision for excess and obsolete inventory, excluding the discontinued product
lines, was $105.2 million in 2001 and was principally due to the sharp decline
in incoming Semiconductor Test Systems and Connection Systems orders. During
the third quarter of 2001, Teradyne recorded a charge of $40.2 million related
to the discontinuance of its Flash 750 memory product. The Flash 750 memory
product charge included an inventory writedown of $32.3 million and the
impairment of long-lived assets directly related to the support of the Flash
memory product line of $7.9 million. During the fourth quarter of 2001,
Teradyne recorded a charge of $2.3 million for obsolete inventory due to
overlapping product lines as a result of the consummation of the GenRad
acquisition.
During the third and fourth quarters of 2001, management concluded that
certain Connection Systems long-lived assets held for disposal were impaired as
the estimated fair value was less than the carrying value of these assets. The
impaired assets charge included a $12.0 million writedown related to a
partially completed manufacturing facility held for sale and a writedown of
$12.4 million for certain manufacturing assets that were taken out of
operations and are held for disposal. Fair value of the impaired facility was
determined by a market appraisal.
During the fourth quarter of 2001, Teradyne recorded charges for vacated
office space under operating leases at Connection Systems and Circuit Board
Test and Inspection Systems of $3.1 million and $1.7 million, respectively.
The table below summarizes activity relating to restructuring and other
charges:
Lease
Payments
Severance on
and Vacated Impaired Impaired
Benefits Facilities Facilities Assets Total
--------- ---------- ---------- -------- --------
(in thousands)
2001 provision.............. $ 37,278 $1,676 $ 12,000 $ 1,923 $ 52,877
Cash payments............... (23,755) -- -- -- (23,755)
Non-cash charges............ -- -- (12,000) (1,923) (13,923)
-------- ------ -------- ------- --------
Balance at December 31, 2001 $ 13,523 $1,676 $ -- $ -- $ 15,199
======== ====== ======== ======= ========
The accrual for severance and benefits is reflected in accrued employees'
compensation and withholdings and the accrual for lease payments on vacated
facilities is reflected in other accrued liabilities.
M. RETIREMENT PLANS
Teradyne has defined benefit pension plans covering a majority of domestic
employees and employees of certain non U.S. subsidiaries. Benefits under these
plans are based on employees' years of service and compensation. Teradyne's
funding policy is to make contributions to the plans in accordance with local
laws and to the extent that such contributions are tax deductible. The assets
of these plans consist primarily of equity and fixed income securities. In
addition, Teradyne has an unfunded supplemental executive defined benefit plan
in the United States to provide retirement benefits in excess of levels allowed
by the Employment Retirement Income Security Act (ERISA) and the Internal
Revenue Code (the "IRC").
49
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
M. RETIREMENT PLANS--(Continued)
During the fourth quarter of 1999, Teradyne offered all eligible domestic
employees participating in the U.S. plan a choice: to continue to have benefits
accumulate in the U.S. plan and continue to be eligible for the then current
Savings Plan match described in "Note P: Savings Plans" or to stop accumulating
benefits in the U.S plan and be eligible for an increased match in the Savings
Plan. The accrued benefit of those employees who selected the enhanced Savings
Plan match was frozen on January 1, 2000 resulting in an insignificant
curtailment gain.
The expense of these defined benefit pension plans and the December 31
balances of plan assets and obligations are shown below (in thousands):
2001 2000 1999
-------- ------- -------
EXPENSE
Service cost..................................... $ 6,369 $ 6,365 $ 7,874
Interest cost.................................... 10,210 8,972 8,247
Expected return on plan assets................... (10,029) (8,589) (7,394)
Amortization of unrecognized:
Net transition obligation...................... 74 89 102
Prior service cost............................. 766 843 612
Net loss....................................... 264 206 1,592
Curtailment loss (gain) / employee contributions. 2,402 (89) (87)
-------- ------- -------
Total expense.................................... $ 10,056 $ 7,797 $10,946
======== ======= =======
2001 2000 1999
-------- ------- -------
WEIGHTED AVERAGE ASSUMPTIONS
Discount rate.................................... 7.0% 7.5% 8.0%
Expected return on plan assets................... 9.0 9.0 9.0
Salary progression rate.......................... 5.0 5.0 5.0
2001 2000
ASSETS AND OBLIGATIONS -------- --------
Projected benefit obligation:
Beginning of year.................... $139,472 $124,546
Service cost......................... 6,369 6,365
Interest cost........................ 10,210 8,972
Actuarial (gain) loss................ 15,329 3,859
Benefits paid........................ (4,171) (3,372)
Plan amendment....................... 212 623
Curtailment.......................... (947) --
GenRad acquisition................... 15,695 --
Non U.S. currency movement........... (1,120) (1,521)
-------- --------
End of year.......................... 181,049 139,472
Fair value of plan assets:
Beginning of year.................... 114,512 111,535
Company contributions ............... 6,050 9,445
Plan participants' contributions..... 71 79
Actual return........................ (10,964) (2,285)
Benefits paid........................ (4,171) (3,372)
GenRad acquisition................... 10,365 --
Non U.S. currency movement........... (646) (890)
-------- --------
End of year............................ 115,217 114,512
-------- --------
Funded status.......................... (65,832) (24,960)
Unrecognized prior service cost........ 5,315 7,110
Unrecognized net transition obligation. 306 470
Unrecognized net actuarial (gain) loss. 43,261 8,597
-------- --------
Net amount recognized.................. $(16,950) $ (8,783)
======== ========
50
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
M. RETIREMENT PLANS--(Continued)
The impact of the GenRad acquisition and an early retirement program
increased the projected benefit obligation by $15.9 million. GenRad had its own
retirement plan for its employees which was merged into Teradyne's plan during
2001. In the third quarter of 2001, Teradyne provided certain employees the
option to retire early.
The following table provides amounts recognized in the statement of
financial position as of December 31, (in thousands):
2001 2000
-------- --------
Prepaid pension cost................ $ 926 $ 3,162
Accrued benefit liability........... (17,876) (11,945)
Additional minumum pension liability (22,228) --
Intangible asset.................... 4,022 --
Accumulated other comprehensive loss 18,206 --
-------- --------
Net amount recognized............... $(16,950) $ (8,783)
======== ========
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets for 2001 and 2000 were as follows:
2001 2000
------ -----
(In millions)
Projected benefit obligation....................................................... $181.0 $22.2
Accumulated benefit obligation..................................................... 154.8 14.3
Fair value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets............................................................ $115.2 $ 3.7
An additional minimum pension liability adjustment of $22 million was
required during 2001 as the accumulated benefit obligation of $155 million
exceeded the $115 million of pension plan assets at year end. The $40 million
difference was reduced by an accrued benefit liability of $18 million resulting
in an additional minimum pension liability of $22 million.
N. COMMON STOCK REPURCHASE PROGRAM
Teradyne's Board of Directors has authorized the repurchase of 30.0 million
shares of Teradyne's stock on the open market. During 1999, Teradyne
repurchased 5.6 million shares at a cost of $207.8 million. During 2000,
Teradyne repurchased 3.8 million shares at a cost of $147.5 million, increasing
the cumulative shares purchased under this program through 2000 to 20.0 million
shares at an aggregate cost of $540.8 million. During 2001, Teradyne did not
repurchase any stock. Teradyne records treasury stock at its acquisition cost.
O. STOCK BASED COMPENSATION
Teradyne has both employee and non-employee stock option plans and an
employee stock purchase plan. Teradyne previously adopted the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation"
(SFAS 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. Teradyne is required to disclose the pro forma net
income and net income per common share amounts as if compensation costs for
Teradyne's
51
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
O. STOCK BASED COMPENSATION--(Continued)
stock based compensation plans had been determined based on the fair value at
the grant dates for awards under those plans. Had compensation expense for the
stock based compensation plans been accounted for at fair value according to
SFAS 123, amounts reported in the Statement of Operations for 2001, 2000, and
1999, respectively would have been:
2001 2000 1999
------- ------ ------
(Loss) income before cumulative effect of change in accounting principle. ($275.7) $458.0 $153.6
(Loss) income before cumulative effect of change in accounting principle
per common share--basic................................................ ($ 1.57) $ 2.64 $ 0.90
(Loss) income before cumulative effect of change in accounting principle
per common share--diluted.............................................. ($ 1.57) $ 2.53 $ 0.86
Stock Option Plans
Under its stock option plans, all of which are fixed accounting plans,
Teradyne granted options to directors, officers, certain employees, and other
individuals entitling them to purchase common stock at 100% of the fair market
value on the date of grant. Options granted to employees prior to 2001 vest in
equal installments over four years and have a maximum term of five years.
Beginning in September 2001 options granted to employees also vest in equal
installments over four years but have a maximum term of seven years. In 2001,
Teradyne had a one-time option grant for all employees that vests over two
years and has a term of seven years.
Stock option plan activity for the years 2001, 2000, and 1999 follows (in
thousands):
2001 2000 1999
------ ------ ------
Outstanding at January 1............. 22,745 19,225 21,548
Options granted.................. 10,289 7,905 5,631
Options exercised................ (2,766) (3,217) (7,272)
Options canceled................. (518) (1,168) (682)
------ ------ ------
Outstanding at December 31........... 29,750 22,745 19,225
====== ====== ======
Exercisable at December 31........... 13,545 8,758 6,355
====== ====== ======
Available for grant at December 31... 29,841 7,130 13,867
====== ====== ======
Weighted average option exercise price information for the years 2001, 2000
and 1999 follows:
2001 2000 1999
------ ------ ------
Outstanding at January 1..... $22.79 $16.44 $ 9.73
Options granted.......... $23.33 $34.73 $32.13
Options exercised........ $10.89 $11.49 $ 9.03
Options canceled......... $32.15 $30.62 $12.68
Outstanding at December 31... $25.28 $22.79 $16.44
Exercisable at December 31... $24.94 $16.71 $12.59
52
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
O. STOCK BASED COMPENSATION--(Continued)
Significant option groups outstanding at December 31, 2001 and related
weighted average price and remaining contractual life information follows
(options in thousands):
Options Outstanding Options Exercisable
------------------------------------ -----------------------
Weighted
Average
Remaining
Contractual Weighted-Average Weighted-Average
Range Of Exercise Prices Life (Years) Shares Exercise Price Shares Exercise Price
------------------------ ------------ ------ ---------------- ------ ----------------
$ 3.82 - $20.94...... 1.62 7,756 $11.29 5,632 $11.24
$21.65............... 6.67 8,177 $21.65 1,722 $21.65
$23.09 - $32.13...... 3.77 11,280 $29.33 4,692 $29.84
$32.78 - $173.11..... 5.11 2,537 $61.74 1,499 $64.86
------ ------
Total................ 4.12 29,750 $25.28 13,545 $24.94
====== ======
The weighted average grant date fair value for options granted during 2001,
2000 and 1999 was $11.90, $15.34 and $16.21 per option, respectively. The fair
value of options at date of grant was estimated using the Black-Scholes option
pricing model with the following weighted average assumptions:
2001 2000 1999
---- ---- ----
Expected life (years). 4.3 4.2 4.1
Interest rate......... 3.7% 5.7% 6.1%
Volatility............ 67.0% 63.7% 56.7%
Dividend yield........ 0.0% 0.0% 0.0%
Employee Stock Purchase Plan
Under the Teradyne Employee Stock Purchase Plan, eligible employees may
purchase shares of common stock through regular payroll deductions of up to 10%
of their compensation. The price paid for the common stock is equal to 85% of
the lower of the fair market value of Teradyne's common stock on the first
business day in January (July for new hires) or the last business day of
December. In January 2002, Teradyne issued 0.9 million shares of common stock
to employees who participated in the plan during 2001 at a weighted-average
price of $25.60 per share. Currently, there are 0.4 million shares reserved for
issuance.
The weighted-average fair value of employee stock purchase rights granted in
2001, 2000 and 1999 was $12.56, $17.98 and $8.18, respectively. The fair value
of the employees' purchase rights was estimated using the Black-Scholes option
pricing model with the following assumptions for 2001, 2000 and 1999,
respectively:
2001 2000 1999
---- ---- ----
Expected life (years). 1.0 1.0 1.0
Interest rate......... 2.2% 6.0% 4.5%
Volatility............ 67.0% 81.5% 58.4%
Dividend yield........ 0.0% 0.0% 0.0%
53
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
P. SAVINGS PLANS
Teradyne sponsors an employee retirement Savings Plan covering substantially
all U.S. employees. Under Teradyne's savings plan, employees may contribute up
to 15% of their compensation (subject to Internal Revenue Service limitations).
For employees that elected in 1999 to continue to accrue benefits under
Teradyne's defined benefit plan, as described in "Note M: Retirement Plans,"
Teradyne annually matches employee contributions up to 6% of such compensation
at rates ranging from 50% to 100%. Employees that elected in 1999 to stop
accruing benefits under Teradyne's defined benefit plan, as described in "Note
M: Retirement Plans," are eligible for an increased Teradyne match of 100% to
150% on employee contributions up to 5% of compensation. Teradyne's
contributions vest after two years, although contributions for those employees
with five years of service vest immediately. Teradyne has also established an
unfunded Supplemental Savings Plan to provide savings benefits in excess of
those allowed by ERISA and the IRC. The provisions of this plan are the same as
the Savings Plan. Under Teradyne's savings plans, amounts charged to operations
were $14.6 million in 2001, $16.6 million in 2000, and $9.8 million in 1999.
Q. STOCKHOLDER RIGHTS PLAN
Teradyne's Board of Directors adopted a Stockholder Rights Plan on November
16, 2000, under which a dividend of one Common Stock Purchase Right (each a
"Right") was distributed for each outstanding share of Common Stock. The plan
entitles Right holders to purchase shares of Teradyne's common stock for $540
per share subject to adjustment (the "Purchase Price") in certain events, such
as a tender offer to acquire 20% or more of Teradyne's outstanding shares.
Under some circumstances, such as a determination by continuing Directors that
an acquiring party's interests are adverse to those of Teradyne, the Plan
entitles such holders (other than an acquiring party or adverse party) to
purchase Common Stock (or other securities or consideration owned by Teradyne)
having a value equal to two times the Purchase Price of the Right for the
Purchase Price. The Rights expire on November 27, 2010.
R. INCOME TAXES
The components of (loss) income before income taxes and the (benefit)
provision for income taxes as shown in the consolidated statements of income
are as follows (in thousands)
2001 2000 1999
--------- -------- --------
(Loss) income before income taxes and cumulative effect of change in
accounting principle:
United States.................................................... $(324,800) $655,103 $239,453
Non U.S.......................................................... (1,353) 84,545 34,396
--------- -------- --------
$(326,153) $739,648 $273,849
========= ======== ========
Provision (credit) for income taxes:
Current:
U.S. Federal..................................................... $ (90,149) $182,202 $ 65,104
Non U.S.......................................................... (3,093) 29,393 14,296
State............................................................ 751 19,703 6,856
--------- -------- --------
(92,491) 231,298 86,256
--------- -------- --------
Deferred:
U.S. Federal..................................................... (24,739) (4,529) (184)
Non U.S.......................................................... 43 (3,172) (3,461)
State............................................................ (6,751) (1,703) (456)
--------- -------- --------
(31,447) (9,404) (4,101)
--------- -------- --------
$(123,938) $221,894 $ 82,155
========= ======== ========
54
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
R. INCOME TAXES--(Continued)
Significant components of Teradyne's deferred tax assets (liabilities) as of
December 31, 2001 and 2000 are as follows (in thousands):
2001 2000
-------- --------
Deferred tax assets:
Net operating loss carryforwards..... $ 45,728 $ 592
Tax credits.......................... 33,922 9,686
Inventory valuations................. 31,669 13,494
Accruals............................. 24,565 23,495
Research and development............. 19,821 2,898
Vacation............................. 6,141 9,211
Deferred revenue..................... 5,391 32,088
Other................................ 14,955 2,494
-------- --------
Total deferred tax assets............... 182,192 93,958
-------- --------
Deferred tax liabilities:
Excess of tax over book depreciation. (17,012) (16,509)
Amortization......................... (16,218) (916)
Pension.............................. (1,102) (3,572)
Other................................ (2,534) (260)
-------- --------
Total deferred tax liabilities.......... (36,866) (21,257)
-------- --------
Net deferred asset...................... $145,326 $ 72,701
======== ========
At December 31, 2001 Teradyne had U.S. Federal operating loss carryforwards
of approximately $113.5 million primarily due to the operating loss
carryforwards related to the GenRad acquisition that expire in the years 2003
through 2020, state operating loss carryforwards of $88.5 million that expire
in the years 2006 through 2021, and foreign operating loss carryforwards of
$9.6 million. These losses are limited in their use by "change in ownership"
rules as defined in the Internal Revenue Code of 1986.
Teradyne believes that it is more likely than not that its net deferred tax
assets will be realized.
Teradyne has approximately $33.9 million of tax credit carryforwards that
expire in years 2003 through 2019. Business tax credits of approximately $24.1
million expire in the years 2003 through 2019. Foreign tax credits of
approximately $7.7 million expire in the years 2005 through 2006. Alternative
minimum tax credits of $2.1 million do not expire.
A reconciliation of the effective tax rate for the years 2001, 2000, and
1999 follows:
2001 2000 1999
----- ---- ----
U.S. statutory federal tax rate............... (35.0)% 35.0% 35.0%
State income taxes, net of federal tax benefit (1.8) 1.6 1.5
Tax credits................................... -- (0.8) (1.3)
Export sales corporation...................... (0.7) (4.8) (4.7)
Other, net.................................... (0.5) (1.0) (0.5)
----- ---- ----
(38.0)% 30.0% 30.0%
===== ==== ====
U.S. federal taxes have not been provided for approximately $63.1 million,
$59.0 million, and $30.0 million of cumulative undistributed earnings of a
non-U.S. manufacturing subsidiary in 2001, 2000, and 1999, respectively.
Teradyne intends to reinvest these earnings indefinitely in operations outside
the US.
55
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
S. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
Teradyne has four principal operating segments which are the design,
manufacturing and marketing of Semiconductor Test Systems, Connection Systems,
Circuit Board Test and Inspection Systems, and Other Test Systems. These
operating segments were determined based upon the nature of the products and
services offered. The Other Test Systems segment in 2001 is comprised of
Broadband Test Systems and Diagnostic Solutions. In 2000 and 1999, the Other
Test Systems segment is comprised of Broadband Test Systems and Software Test
Systems.
Teradyne evaluates performance based on several factors, of which the
primary financial measure is business segment income before taxes. The
accounting policies of the business segments are the same as those described in
"Note B: Accounting Policies." Intersegment sales are accounted for at fair
value as if sales were to third parties. During 2001 and 2000 no individual
customer accounted for more than 10% of consolidated net sales. During 1999,
principally all of Teradyne's operating segments reported sales to one customer
accounting for a total of 11% of consolidated net sales.
Circuit
Board
Test &
Semiconductor Connection Inspection Other Test Corporate SAB 101
Test Systems Systems Systems Systems And Adjustments
Segment Segment Segment Segment Eliminations (4) Consolidated
------------- ---------- ---------- ---------- ------------ ----------- ------------
2001
Sales to
unaffiliated
customers..... $ 717,655 $540,755 $132,448 $ 49,723 -- -- $1,440,581
Intersegment
sales......... -- 4,119 -- -- ($4,119) -- --
---------- -------- -------- -------- --------- ------ ----------
Net sales....... 717,655 544,874 132,448 49,723 (4,119) -- 1,440,581
Income (loss)
before taxes
(1)........... (231,869) (12,477) (38,505) (2,880) (40,422) -- (326,153)
Total assets (2) 643,412 417,296 353,605 56,455 1,071,623 -- 2,542,391
Property
additions (3). 82,307 103,416 2,605 1,760 51,361 -- 241,449
Depreciation and
amortization
expense (3)... 56,014 55,588 6,881 2,314 17,871 -- 138,668
2000
Sales to
unaffiliated
customers..... $2,044,330 $734,642 $141,208 $124,133 -- ($367) $3,043,946
Intersegment
sales......... -- 29,294 -- -- ($29,294) -- --
---------- -------- -------- -------- --------- ------ ----------
Net sales....... 2,044,330 763,936 141,208 124,133 (29,294) (367) 3,043,946
Income (loss)
before taxes
(1)........... 675,315 155,040 1,761 415 (92,729) (154) 739,648
Total assets (2) 920,629 511,083 86,161 19,174 780,926 37,895 2,355,868
Property
additions (3). 119,705 92,403 4,878 4,394 76,862 -- 298,242
Depreciation and
amortization
expense (3)... 47,497 33,118 3,357 2,906 14,984 -- 101,862
56
TERADYNE, INC
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
S. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION--(Continued)
Circuit
Board
Test & Other
Semiconductor Connection Inspection Test Corporate SAB 101
Test Systems Systems Systems Systems And Adjustments
Segment Segment Segment Segment Eliminations (4) Consolidated
------------- ---------- ---------- ------- ------------ ----------- ------------
1999
Sales to unaffiliated
customers.......... $1,210,543 $373,051 $118,599 $88,719 -- -- $1,790,912
Intersegment
sales.............. -- 15,069 -- -- ($15,069) -- --
---------- -------- -------- ------- -------- ------ ----------
Net sales............ 1,210,543 388,120 118,599 88,719 (15,069) -- 1,790,912
Income (loss) before
taxes (1).......... 287,960 63,249 (5,205) (9,093) (63,062) -- 273,849
Total assets (2)..... 564,536 219,763 56,481 37,615 686,656 -- 1,565,051
Property
additions (3)...... 47,054 38,500 5,608 2,885 57,109 -- 151,156
Depreciation
and amortization
expense (3)........ 32,086 18,567 5,139 3,218 27,376 -- 86,386
(1) Income before taxes of the principal businesses exclude the effects of
employee profit sharing, management incentive compensation, other
unallocated expenses, and net interest and other income.
(2) Total business assets are directly attributable to each business. Corporate
assets consist of cash and cash equivalents, marketable securities,
unallocated fixed assets of support divisions and common facilities and
certain other assets.
(3) Corporate property additions and depreciation and amortization expense
include items attributable to the unallocated fixed assets of support
divisions and common facilities.
(4) Corporate adjustment reflects the impact of SAB 101 on sales, income before
taxes, and total assets in 2000. During the fourth quarter of 2000 Teradyne
implemented SAB 101. Segments reflect their results before the change in
accounting principle.
Information as to Teradyne's sales in different geographical areas is as
follows (in thousands):
2001 2000 1999
---------- ---------- ----------
Sales to unaffiliated customers (1):
United States. .................. $ 735,264 $1,407,110 $ 859,638
Europe........................... 261,675 425,694 268,637
South East Asia. ................ 169,539 626,060 359,430
Taiwan........................... 150,277 306,611 147,876
Japan............................ 60,353 119,883 89,546
Korea. .......................... 14,012 88,833 12,058
Other............................ 49,461 69,755 53,727
---------- ---------- ----------
$1,440,581 $3,043,946 $1,790,912
========== ========== ==========
--------
(1) Sales are attributable to geographic areas based on location of customer
site.
Because a substantial portion of Teradyne's sales are derived from the sales
of product manufactured in the United States, long-lived assets located outside
the United States are less than 10% of total assets.
57
SUPPLEMENTARY INFORMATION
(Unaudited)
The following sets forth certain unaudited consolidated quarterly statements
of operations data for each of Teradyne's last eight quarters. In management's
opinion, this quarterly information reflects all adjustments, consisting only
of normal recurring adjustments, necessary for a fair statement for the periods
presented. Such quarterly results are not necessarily indicative of future
results of operations and should be read in conjunction with the audited
consolidated financial statements of Teradyne and the notes thereto included
elsewhere herein.
2001
----------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
-------- -------- --------- ---------
Net sales................................................ $605,189 $365,823 $ 249,355 $ 220,214
Expenses:
Cost of sales.......................................... 355,298 259,477 205,292 201,982
Cost of sales - inventory provision and other charges.. 13,716 37,945 53,528 54,570
Engineering and development............................ 83,570 71,029 66,006 68,052
Selling and administrative............................. 73,286 65,908 59,928 70,962
Restructuring and other charges........................ 5,705 3,356 34,475 9,341
-------- -------- --------- ---------
531,575 437,715 419,229 404,907
-------- -------- --------- ---------
Income (loss) from operations............................ 73,614 (71,892) (169,874) (184,693)
Interest income.......................................... 6,194 5,149 4,553 6,847
Interest expense......................................... (244) (296) (286) (3,265)
Other income and expense, net............................ (2,480) 12,918 (1,914) (484)
-------- -------- --------- ---------
Income (loss) before income taxes........................ 77,084 (54,121) (167,521) (181,595)
Provision (benefit) for income taxes..................... 23,125 (13,940) (64,117) (69,006)
-------- -------- --------- ---------
Net income (loss)........................................ $ 53,959 $(40,181) $(103,404) $(112,589)
======== ======== ========= =========
Net income (loss) per common share -- basic.............. $ 0.31 $ (0.23) $ (0.59) $ (0.63)
======== ======== ========= =========
Net income (loss) per common share -- diluted............ $ 0.30 $ (0.23) $ (0.59) $ (0.63)
======== ======== ========= =========
58
SUPPLEMENTARY INFORMATION--(Continued)
(Unaudited)
2000
--------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Net sales..................................................... $615,358 $747,458 $859,478 $821,652
Expenses:
Cost of sales............................................... 324,896 388,254 441,855 452,369
Engineering and development................................. 79,510 85,165 91,126 92,223
Selling and administrative.................................. 82,059 95,729 99,107 100,888
-------- -------- -------- --------
486,465 569,148 632,088 645,480
-------- -------- -------- --------
Income from operations........................................ 128,893 178,310 227,390 176,172
Interest income............................................... 4,962 6,235 6,641 7,268
Interest expense.............................................. (425) (412) (570) (434)
Other income and expense, net................................. -- -- -- 5,618
-------- -------- -------- --------
Income before income taxes and cumulative effect of change in
accounting principle........................................ 133,430 184,133 233,461 188,624
Provision for income taxes.................................... 40,029 55,240 70,038 56,587
-------- -------- -------- --------
Income before cumulative effect of change in accounting
principle................................................... 93,401 128,893 163,423 132,037
Cumulative effect of change in accounting principle........... (64,138) -- -- --
-------- -------- -------- --------
Net income.................................................... $ 29,263 $128,893 $163,423 $132,037
======== ======== ======== ========
Income before cumulative effect of change in accounting
principle per common share -- basic......................... $ 0.54 $ 0.74 $ 0.94 $ 0.76
======== ======== ======== ========
Cumulative effect of change in accounting principle per common
share -- basic.............................................. $ (0.37) $ -- $ -- $ --
======== ======== ======== ========
Net income per common share -- basic.......................... $ 0.17 $ 0.74 $ 0.94 $ 0.76
======== ======== ======== ========
Income before cumulative effect of change in accounting
principle per common share -- diluted....................... $ 0.52 $ 0.71 $ 0.90 $ 0.74
======== ======== ======== ========
Cumulative effect of change in accounting principle per common
share -- diluted............................................ $ (0.35) $ -- $ -- $ --
======== ======== ======== ========
Net income per common share -- diluted........................ $ 0.16 $ 0.71 $ 0.90 $ 0.74
======== ======== ======== ========
Item 9: Changes and disagreements with accountants on accounting and financial
disclosure
None.
59
PART III
Item 10: Directors and executive officers of the registrant.
Certain information relating to directors and executive officers of
Teradyne, executive compensation, security ownership of certain beneficial
owners and management, and certain relationships and related transactions is
incorporated by reference herein from Teradyne's definitive proxy statement in
connection with its Annual Meeting of Shareholders to be held on May 23, 2002,
which proxy statement will be filed with the Securities and Exchange Commission
not later than 120 days after the close of the fiscal year. For this purpose,
the Management Compensation and Development Committee Report and Performance
Graph included in such proxy statement are specifically not incorporated
herein. (Also see "Item 1 -- Executive Officers of the Company" elsewhere in
this report.)
Item 11: Executive compensation.
Certain information relating to directors and executive officers of
Teradyne, executive compensation, security ownership of certain beneficial
owners and management, and certain relationships and related transactions is
incorporated by reference herein from Teradyne's definitive proxy statement in
connection with its Annual Meeting of Shareholders to be held on May 23, 2002,
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
Teradyne, executive compensation, security ownership of certain beneficial
owners and management, and certain relationships and related transactions is
incorporated by reference herein from Teradyne's definitive proxy statement in
connection with its Annual Meeting of Shareholders to be held on May 23, 2002,
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
Teradyne, executive compensation, security ownership of certain beneficial
owners and management, and certain relationships and related transactions is
incorporated by reference herein from Teradyne's definitive proxy statement in
connection with its Annual Meeting of Shareholders to be held on May 23, 2002,
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.
60
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:
Report of Independent Accountants Balance Sheets as of December 31, 2001
and 2000 Statements of Operations for the years ended December 31, 2001,
2000, and 1999
Statements of Shareholders' Equity for the years ended December 31, 2001,
2000, and 1999
Statements of Cash Flows for the years ended December 31, 2001, 2000, and
1999
(a) 2. Financial Statement Schedules
The following consolidated financial statement schedule is included in Item
14(d):
Schedule II -- Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted since they are
either not required or information is otherwise included.
(a) 3. Listing Of Exhibits
The Exhibits which are filed with this report or which are incorporated by
reference herein are set forth in the Exhibit Index.
(b) Reports On Form 8-K
A Current Report on Form 8-K dated October 18, 2001, was filed with the
Securities and Exchange Commission on October 18, 2001 relating to (i)
Teradyne's third quarter financial results and its interim financial statements
and (ii) two legal complaints filed against Teradyne.
A Current Report on Form 8-K dated October 19, 2001, was filed with the
Securities and Exchange Commission on October 19, 2001 relating to (i)
Teradyne's intent to offer Convertible Senior Notes due 2006 in a private
placement and (ii) the pricing terms of the offering.
A Current Report on Form 8-K dated October 24, 2001, was filed with the
Securities and Exchange Commission on October 24, 2001 relating to Teradyne's
completion of its offering of Convertible Senior Notes due 2006 in a private
placement.
61
Item 14(d) Financial Statement Schedules
TERADYNE, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
-------- -------- --------------------- -------- --------
Additions
---------------------
Balance at Charged to Charged to Balance
Beginning Cost and Other at End of
Description of Period Expenses Accounts Deductions Period
----------- ---------- ---------- ---------- ---------- ---------
(thousands of dollars)
Valuation reserve deducted in the balance sheet from
the asset to which it applies:
Accounts receivable:
2001 Allowance for doubtful accounts............... $5,176 $1,192 $ -- $ 74 $6,294
====== ====== ==== ==== ======
2000 Allowance for doubtful accounts............... $4,410 $1,337 $ -- $571 $5,176
====== ====== ==== ==== ======
1999 Allowance for doubtful accounts............... $2,395 $1,407 $804 $196 $4,410
====== ====== ==== ==== ======
62
EXHIBIT INDEX
The following designated exhibits are, as indicated below, either filed
herewith or have heretofore been filed with the Securities and Exchange
Commission and are referred to and incorporated by reference to such filings.
Exhibit
No. Description SEC Document Reference
--- ----------- ----------------------
3.1 Restated Articles of Organization of the Exhibit 3.01 to the Company's Quarterly Report on
Company, as amended Form 10-Q for the quarter ended July 2, 2000.
3.2 Amended and Restated Bylaws of the Company Exhibit 3.3 to the Company's Annual Report on
Form 10-K for the fiscal year ended
December 31, 1996.
4.1 Rights Agreement between the Company and Exhibit 4.1 to the Company's Form 8-K filed
Fleet National Bank dated as of November 17, November 20, 2000.
2000
4.2 Indenture by and between the Company and State Exhibit 4.4 to the Company's Registration
Street Bank and Trust Company as Trustee Statement on Form S-3 (Registration
dated as of October 24, 2001, including the Statement No. 333-75632).
form of Note
4.3 Form of Note Included in Exhibit 4.4 to the Company's
Registration Statement on Form S-3
(Registration Statement No. 333-75632).
4.4 Registration Rights Agreement by and between Exhibit 4.6 to the Company's Registration
the Company and Goldman, Sachs & Co. and Statement on Form S-3 (Registration
Banc of America Securities LLC dated as of Statement No. 333-75632).
October 24, 2001
10.1 Teradyne, Inc. Supplemental Executive Exhibit 10.4 to the Company's Annual Report on
Retirement Plan* Form10-K for the fiscal year ended
December 31, 1997.
10.2 1991 Employee Stock Option Plan, as amended* Exhibit 4.2 to the Company's Registration
Statement on Form S-8 (Registration
Statement No. 333-07177).
10.3 Amendment to 1991 Stock Plan dated Exhibit 10.3 to the Company's Annual Report on
March 9, 2001* Form 10-K for the fiscal year ended
December 31, 2000.
10.4 Megatest Corporation 1990 Stock Option Plan* Exhibit 4.1 to the Company's Registration
Statement on Form S-8 (Registration
Statement No. 333-64683).
10.5 Megatest Corporation Director Stock Option Exhibit 4.2 to the Company's Registration
Plan* Statement on Form S-8 (Registration
Statement No. 333-64683).
10.6 1996 Employee Stock Purchase Plan, as Filed herewith.
amended*
10.7 Master Lease Agreement between Megatest and Exhibit 10.10 to the Company's Annual Report
General Electric Capital Corporation dated on Form 10-K for the fiscal year ended
August 10, 1995 December 31, 1995.
10.8 Loan and Security Agreement between Megatest Exhibit 10.11 to the Company's Annual Report
and the CIT Group/Equipment Financing, Inc. on Form 10-K for the fiscal year ended
dated August 14, 1995 December 31, 1995.
63
Exhibit
No. Description SEC Document Reference
--- ----------- ----------------------
10.9 Deed of Trust, Financing Statement, Security Exhibit 10.12 to the Company's Annual Report on
Agreement and Fixture Filing between Megatest Form 10-K for the fiscal year ended
and the Sun Life Assurance Company of Canada December 31, 1995.
(U.S.) dated August 25, 1995
10.10. 1997 Employee Stock Option Plan, as amended* Exhibit 10.01 to the Company's Quarterly Report
on Form 10-Q for the quarter ended July 1, 2001.
10.11. 1996 Non-Employee Director Stock Option Plan, as Filed herewith.
amended*
10.12. GenRad, Inc. 1991 Equity Incentive Plan* Exhibit 4.4 to the Company's Registration
Statement on Form S-8 (Registration Statement
No. 333-73700).
10.13. GenRad, Inc. 1991 Directors' Stock Option Plan* Exhibit 4.5 to the Company's Registration
Statement on Form S-8 (Registration Statement
No. 333-73700).
10.14. GenRad, Inc. 1997 Non-Qualified Employee Stock Exhibit 4.6 to the Company's Registration
Option Plan* Statement on Form S-8 (Registration Statement
No. 333-73700).
10.15. GenRad, Inc. Non-Statutory Stock Option Exhibit 4.7 to the Company's Registration
Agreement by and between Robert M. Statement on Form S-8 (Registration Statement
Dutkowsky and GenRad, Inc.* No. 333-73700).
10.16. Change in Control Agreement dated October 19, 2001 Filed herewith.
between the Company and Executive Officer*
10.17. Change in Control Agreement dated October 19, 2001 Filed herewith.
between the Company and Executive Officer*
10.18. Change in Control Agreement dated October 19, 2001 Filed herewith.
between the Company and Executive Officer*
10.19. Change in Control Agreement dated March 19, 2002 Filed herewith.
between the Company and Executive Officer*
10.20. Change in Control Agreement dated October 19, 2001 Filed herewith.
between the Company and Executive Officer*
10.21. Change in Control Agreement dated October 2, 2001 Filed herewith.
between the Company and Executive Officer*
10.22. Change in Control Agreement dated October 19, 2001 Filed herewith.
between the Company and Executive Officer*
10.23. Change in Control Agreement dated October 19, 2001 Filed herewith.
between the Company and Executive Officer*
10.24. Change in Control Agreement dated October 19, 2001 Filed herewith.
between the Company and Executive Officer*
10.25. Promisory Note dated December 19, 2001 between the Filed herewith.
Company, as borrower, and General Electric
Capital Business Asset Funding Corporation, as
lender
10.26. Form of Commercial Deed of Trust, Security Filed herewith.
Agreement, Assignment of Leases and Rents, and
Fixture Filing Agreement dated December 19,
2001 between the Company, as borrower, and
General Electric Capital Business Asset Funding
Corporation, as lender
10.27 Form of Assignment of Rents and Leases Filed herewith.
Agreement dated December 19, 2001 between
the Company, as borrower, and General
Electric Capital Business Asset Funding
Corporation, as lender
64
Exhibit
No. Description SEC Document Reference
--- ----------- ----------------------
10.28 Form of Certificate and Indemnity Agreement Filed herewith.
regarding Hazardous Substances dated
December 19, 2001 between the Company, as
borrower, and General Electric Capital
Business Asset Funding Corporation, as lender
10.29 Lease Agreements dated July 26, 1996 between Exhibit 10 to GenRad, Inc.'s Quarterly Report on
GenRad, Inc. and Michelson Farm-Westford Form 10-Q for the quarter ended June 29, 1996
Technology Park Trust (Commission File No. 1-8045).
12.1 Statement regarding Computation of Ratio of
Earnings to Fixed Charges Filed herewith.
21.1 Subsidiaries of the Company Filed herewith.
23.1 Consent of PricewaterhouseCoopers LLP Filed herewith.
* Indicates management contracts or compensatory plans
65
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 29th day of
March, 2002.
TERADYNE, INC.
By: /s/ GREGORY R. BEECHER
-----------------------------
Gregory R. Beecher,
Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ GEORGE W. CHAMILLARD Chairman of the Board, March 29, 2002
----------------------------- President,
George W. Chamillard and Chief Executive Officer
(Principal Executive
Officer)
/s/ GREGORY R. BEECHER Vice President and March 29, 2002
----------------------------- Chief Financial Officer
Gregory R. Beecher (Principal Financial
Officer)
/s/ G. RICHARD MACDONALD Controller, Principal March 29, 2002
----------------------------- Accounting Officer
G. Richard MacDonald
/s/ JAMES W. BAGLEY Director March 29, 2002
-----------------------------
James W. Bagley
/s/ ALBERT CARNESALE Director March 29, 2002
-----------------------------
Albert Carnesale
/s/ DANIEL S. GEGORY Director March 25, 2002
-----------------------------
Daniel S. Gegory
/s/ DWIGHT H. HIBBARD Director March 28, 2002
-----------------------------
Dwight H. Hibbard
/s/ JOHN P. MULRONEY Director March 26, 2002
-----------------------------
John P. Mulroney
/s/ VINCENT M. O'REILLY Director March 27, 2002
-----------------------------
Vincent M. O'Reilly
/s/ RICHARD J. TESTA Director March 29, 2002
-----------------------------
Richard J. Testa
/s/ ROY A. VALLEE Director March 29, 2002
-----------------------------
Roy A. Vallee
/s/ PATRICIA S. WOLPERT Director March 25, 2002
-----------------------------
Patricia S. Wolpert
66