-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D33rHARKHNeqcydZeQrkBtZqjEt7UOI4IdWkq/TMxsgJqrgV9u8enyh+U3MXhuty ldrLCxttQIQ8oVA3zsOTbQ== 0000927016-02-002827.txt : 20020514 0000927016-02-002827.hdr.sgml : 20020514 ACCESSION NUMBER: 0000927016-02-002827 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TERADYNE INC CENTRAL INDEX KEY: 0000097210 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 042272148 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06462 FILM NUMBER: 02645786 BUSINESS ADDRESS: STREET 1: 321 HARRISON AVE STREET 2: MAIL STOP H93 CITY: BOSTON STATE: MA ZIP: 02118 BUSINESS PHONE: 6174822700 MAIL ADDRESS: STREET 1: 321 HARRISON AVENUE STREET 2: H93 CITY: BOSTON STATE: MA ZIP: 02118 10-Q 1 d10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------- FORM 10-Q ------------- (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to ______________ Commission File No. 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 No.) 321 Harrison Avenue, Boston, Massachusetts 02118 (Address of Principal Executive Offices) (Zip Code) 617-482-2700 (Registrant's Telephone Number, Including Area Code) 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 --- --- The number of shares outstanding of the registrant's only class of Common Stock as of April 26, 2002 was 182,882,204 shares. TERADYNE, INC. INDEX Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001........................... 3 Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2002 and April 1, 2001............ 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002 and April 1, 2001............ 5 Notes to Condensed Consolidated Financial Statements............. 6-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 12-19 Item 3. Quantitative and Qualitative Disclosures about Market Risk....... 19 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................ 19-20 Item 6. Exhibits and Reports on Form 8-K................................. 20 2 TERADYNE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2002 December 31, 2001 -------------- ----------------- (In thousands) ASSETS Current assets: Cash and cash equivalents............................................... $ 211,352 $ 317,591 Marketable securities................................................... 187,442 50,096 Accounts receivable..................................................... 175,808 169,630 Income tax receivable and prepaid amounts............................... 12,925 97,000 Inventories: Parts................................................................... 213,808 262,520 Assemblies in process................................................... 150,535 132,097 Finished goods.......................................................... 8,890 12,372 ---------- ---------- 373,233 406,989 Deferred tax assets..................................................... 115,074 141,013 Prepayments and other current assets.................................... 24,618 24,703 ---------- ---------- Total current assets........................................................ 1,100,452 1,207,022 Property, plant, and equipment, at cost..................................... 1,448,718 1,444,529 Less: accumulated depreciation.......................................... (636,120) (608,963) ---------- ---------- Net property, plant, and equipment................................. 812,598 835,566 Marketable securities....................................................... 217,616 218,544 Deferred tax assets - long-term............................................. 87,172 4,313 Goodwill.................................................................... 194,120 190,276 Other assets................................................................ 86,374 86,670 ---------- ---------- Total assets....................................................... $2,498,332 $2,542,391 ========== ========== LIABILITIES Current liabilities: Notes payable - banks................................................... $ 6,486 $ 6,557 Current portion of long-term debt....................................... 1,279 1,263 Accounts payable........................................................ 61,334 59,761 Accrued employees' compensation and withholdings........................ 71,096 98,519 Deferred revenue and customer advances.................................. 52,020 52,220 Other accrued liabilities............................................... 72,518 76,519 Income taxes payable.................................................... 11,343 1,292 ---------- ---------- Total current liabilities.......................................... 276,076 296,131 Long-term other accrued liabilities......................................... 42,329 30,194 Long-term debt.............................................................. 451,325 451,682 Commitments and contingencies (Note I)...................................... ---------- ---------- Total liabilities.................................................. 769,730 778,007 ---------- ---------- SHAREHOLDERS' EQUITY Common stock, $0.125 par value, 1,000,000 shares authorized, 182,778 and 181,119 net shares issued and outstanding at March 31, 2002 and December 31, 2001, respectively...................................... 22,847 22,640 Additional paid-in capital.................................................. 642,843 600,541 Accumulated other comprehensive loss........................................ (8,893) (7,742) Retained earnings........................................................... 1,071,805 1,148,945 ---------- ---------- Total shareholders' equity......................................... 1,728,602 1,764,384 ---------- ---------- Total liabilities and shareholders' equity......................... $2,498,332 $2,542,391 ========== ==========
The accompanying notes, together with the Notes to Consolidated Financial Statements included in Teradyne's Annual Report on Form 10-K for the year ended December 31, 2001 are an integral part of the condensed consolidated financial statements. 3 TERADYNE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended --------------------------------- March 31, 2002 April 1, 2001 --------------- ------------- (In thousands, except per share amounts) Net sales....................................................................... $ 248,008 $ 605,189 Expenses: Cost of sales.............................................................. 217,552 369,014 Engineering and development................................................ 69,253 83,570 Selling and administrative................................................. 75,049 73,286 Restructuring and other charges............................................ 5,042 5,705 --------- --------- 366,896 531,575 --------- --------- (Loss) income from operations................................................... (118,888) 73,614 Interest income............................................................ 4,204 6,194 Interest expense........................................................... (5,334) (244) Other expense.............................................................. (513) (2,480) --------- --------- (Loss) income before taxes...................................................... (120,531) 77,084 (Benefit from) provision for income taxes....................................... (43,391) 23,125 --------- --------- Net (loss) income............................................................... $ (77,140) $ 53,959 ========= ========= Net (loss) income per common share - basic...................................... $ (0.42) $ 0.31 ========= ========= Net (loss) income per common share - diluted.................................... $ (0.42) $ 0.30 ========= ========= Shares used in calculations of net (loss) income per common share - basic............................................................... 182,332 173,791 ========= ========= Shares used in calculations of net (loss) income per common share - diluted............................................................. 182,332 179,750 ========= =========
The accompanying notes, together with the Notes to Consolidated Financial Statements included in Teradyne's Annual Report on Form 10-K for the year ended December 31, 2001 are an integral part of the condensed consolidated financial statements. 4 TERADYNE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended ------------------------------------ March 31, 2002 April 1, 2001 -------------- ------------- (In thousands) Cash flows from operating activities: Net (loss) income.......................................................... $ (77,140) $ 53,959 Adjustments to reconcile net (loss) income to net cash provided by (used for) operating activities: Depreciation............................................................ 35,696 28,646 Amortization............................................................ 1,908 1,745 Impairment of fixed assets.............................................. 824 - Provision for doubtful accounts......................................... 219 - Deferred income tax provision (benefit)................................. (56,920) 20,588 Other non-cash items, net............................................... 9,154 2,434 Changes in operating assets and liabilities: Accounts receivable.................................................. (6,397) 76,249 Inventories.......................................................... 33,755 (7,643) Other assets......................................................... 76,970 3,230 Accounts payable and accruals........................................ (17,900) (235,241) Income taxes payable................................................. 15,498 5,703 --------- --------- Net cash provided by (used for) operating activities.............. 15,667 (50,330) --------- --------- Cash flows from investing activities: Additions to property, plant and equipment................................. (14,896) (77,702) Increase in equipment manufactured by Teradyne............................. (6,663) (17,228) Purchases of available-for-sale marketable securities...................... (107,957) (29,060) Maturities of available-for-sale marketable securities..................... 80,771 37,832 Purchases of held-to-maturity marketable securities........................ (109,811) (469) Maturities of held-to-maturity marketable securities....................... - 29,539 --------- --------- Net cash used for investing activities............................ (158,556) (57,088) --------- --------- Cash flows from financing activities: Payments of long term debt................................................. (412) (692) Issuance of common stock under employee stock option and stock purchase plans......................................... 37,062 37,146 --------- --------- Net cash flows provided by financing activities................... 36,650 36,454 --------- --------- Decrease in cash and cash equivalents......................................... (106,239) (70,964) Cash and cash equivalents at beginning of period.............................. 317,591 242,421 --------- --------- Cash and cash equivalents at end of period.................................... $ 211,352 $ 171,457 ========= ========= Supplementary disclosure of cash flow information: Cash paid (received) during the period for: Interest................................................................. $ 1,541 $ 225 Income taxes............................................................. $ (86,702) $ 17,891
The accompanying notes, together with the Notes to Consolidated Financial Statements included in Teradyne's Annual Report on Form 10-K for the year ended December 31, 2001 are an integral part of the condensed consolidated financial statements. 5 TERADYNE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS A. Teradyne, Inc. 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 and Diagnostic Solutions have been combined into "Other Test Systems" for purposes of disclosing Teradyne's reportable segments. B. 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, failure to adequately protect Teradyne's intellectual property rights, failure to develop new technologies or customers' failure to accept new products, risks associated with acquisitions and divestitures, securities class action litigation due to past or future stock activity, competition, including new product introduction from Teradyne's competitors and competitive pricing pressures, risks of operating internationally, risks associated with obligations and potential liabilities under environmental regulations, Teradyne's debt service obligations with respect to its sale in 2001 of convertible senior notes and a mortgage financing completed in 2001 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, timing of customer orders or any deferral or cancellation of orders previously received, reliance on sole source suppliers, potential retrofit costs, and the timing of investments in engineering and development. At present, Teradyne 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. C. Accounting Policies Basis of Presentation The condensed consolidated interim financial statements include the accounts of Teradyne and its subsidiaries. All significant intercompany balances and transactions have been eliminated. The year-end condensed consolidated balance sheet data were derived from audited financial statements, but do not include all disclosures required by generally accepted accounting principles. Certain costs in the first quarter of 2001 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. 6 TERADYNE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS C. Accounting Policies - (Continued) Preparation of Financial Statements The accompanying condensed consolidated interim financial statements are unaudited. However, in the opinion of management, all adjustments (consisting only of normal recurring accrual entries) necessary for a fair statement of the results for the interim periods have been made. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. Other Comprehensive (Loss) Income The components of comprehensive (loss) income are as follows (in thousands): For the Three Months Ended -------------------------------- March 31, 2002 April 1, 2001 -------------- ------------- Net (loss) income........................... $ (77,140) $ 53,959 Unrealized (loss) gain on marketable securities, net of applicable tax of ($643) and $916 for the three months ended March 31, 2002 and April 1, 2001, respectively.............................. (1,151) 2,138 --------- -------- Comprehensive (loss) income................. $ (78,291) $ 56,097 ========= ======== D. Recently Issued Accounting Pronouncements 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 adopted SFAS 144 effective January 1, 2002. SFAS 144 did not have an impact on Teradyne's financial position or results of operations. E. Goodwill and Intangible Assets In July 2001, FASB issued SFAS 142, "Goodwill and Other Intangible Assets." SFAS 142 requires, among other things, the discontinuance of goodwill amortization and includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, and reclassification of certain intangibles out of previously reported goodwill. Intangible assets Teradyne adopted SFAS 142 on January 1, 2002. In accordance with this statement Teradyne reassessed the classification of its goodwill and intangible assets. This analysis, which was completed during the quarter ended March 31, 2002, resulted in the reclassification of workforce related intangibles of $0.4 million to goodwill. Also, in accordance with this statement, Teradyne reassessed the useful lives of its amortized intangible assets and determined the lives were appropriate. 7 TERADYNE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS E. Goodwill and Intangible Assets - (Continued) Amortized intangible assets consist of the following: March 31, 2002 (in thousands)
Gross Net Weighted Carrying Accumulated Carrying Average Amount Amortization Amount Useful Life -------- ------------ --------- ----------- Completed technology.................................... $35,600 $ 2,091 $33,509 7.2 years Service and software maintenance contracts and customer relationships........................... 8,993 2,584 6,409 5.8 years Tradenames and trademarks............................... 3,800 198 3,602 8.0 years ------- ------- ------- Total intangible assets................................. $48,393 $ 4,873 $43,520 7.0 years ======= ======= =======
Aggregate amortization expense for the quarter ended March 31, 2002 was $1.9 million. Estimated amortization expense for each of the five succeeding fiscal years is as follows (in thousands): Year Amount ---- ------ 2002 $7,406 2003 6,694 2004 6,175 2005 6,175 2006 6,175 Goodwill Teradyne has identified two reporting units with goodwill, Connection Systems and Circuit Board Test and Inspection Systems, which are also reportable segments. The changes in the carrying amounts of goodwill during the quarter ended March 31, 2002 are as follows:
Circuit Board Test and Connection Inspection Systems Systems Total ---------- -------------- ------- (in thousands) Balance at December 31, 2001.............................. $ 48,649 $141,627 $190,276 Employee restructuring plan............................... - 3,437 3,437 Reclassification of workforce............................. 407 - 407 -------- -------- -------- Balance at March 31, 2002................................. $ 49,056 $145,064 $194,120 ======== ======== ========
8 TERADYNE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS E. Goodwill and Intangible Assets - (Continued) SFAS 142 requires Teradyne to complete a transitional goodwill impairment test six months from the date of adoption. As of March 31, 2002, Teradyne completed the transitional goodwill impairment test and no adjustment to goodwill was necessary. As of January 1, 2002, Teradyne ceased the amortization of goodwill. The following is the pro-forma effect on net income and net income per share had SFAS 142 been in effect for the three months ended April 1, 2001 (in thousands, except per share amounts): Net income..................................................... $53,959 Add back: Impact of goodwill amortization, net of tax of $362........................................... $ 844 ------- Pro forma net income........................................... $54,803 ======= Net income per share - basic................................... $0.31 Add back: Impact of goodwill amortization, net of taxes........ $0.01 ----- Pro forma net income per share - basic......................... $0.32 ===== Net income per share - diluted................................. $0.30 Add back: Impact of goodwill amortization, net of taxes........ $0.00 ----- Pro forma net income per share - diluted....................... $0.30 ===== F. Net (Loss) Income per Common Share The following table sets forth the computation of basic and diluted net (loss) income per common share (in thousands, except per share amounts):
For the Three Months Ended ---------------------------------- March 31, 2002 April 1, 2001 -------------- ------------- Net (loss) income ................................................ $(77,140) $53,959 ========= ======= Shares used in net (loss) income per common share - basic ........ 182,332 173,791 Effect of dilutive securities: Employee and director stock options ..................... - 5,773 Employee stock purchase rights .......................... - 186 --------- ------- Dilutive potential common shares ............................ - 5,959 --------- ------- Shares used in net (loss) income per common share - diluted ...... 182,332 179,750 ========= ======= Net (loss) income per common share - basic ....................... $ (0.42) $ 0.31 ======== ======= Net (loss) income per common share - diluted ..................... $ (0.42) $ 0.30 ======== =======
All options and equivalent shares related to the convertible notes outstanding at the quarter ended March 31, 2002 were excluded from the calculation of diluted net loss per share because the effect would have been antidilutive. As of March 31, 2002, there were 26.9 million options outstanding. As of March 31, 2002, 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 1.3 million shares of common stock for the three months ended April 1, 2001 were not included in the calculation of diluted net income per share. G. Workforce Reduction and Asset Impairments During the first quarter of 2002, Teradyne recorded a pre-tax charge of $5.0 million in connection with a workforce reduction. The $5.0 million provision for severance benefits was recorded in restructuring and other charges. There were 220 employees terminated in the first quarter of 2002 across all functional groups. Teradyne paid approximately $1.1 million of the restructuring charge during the first quarter of 2002. All remaining benefits will be paid by the end of first quarter of 2003. During the first quarter of 2001, Teradyne also recorded a pre-tax charge of $5.7 million in connection with a workforce reduction. The $5.7 million provision for severance benefits was recorded in restructuring and other charges. There were 650 employees terminated in the first quarter of 2001 across all functional groups. All benefits were paid by the end of the fourth quarter of 2001. 9 TERADYNE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS G. Workforce Reduction and Asset Impairments - (Continued) The table below summarizes activity relating to restructuring and other charges:
Severance Lease Payments and on Vacated Benefits Facilities Total --------- ---------- --------- (in thousands) Balance at December 31, 2001 ...... $ 13,523 $1,676 $15,199 First quarter, 2002 provision ..... 5,042 -- 5,042 Cash payments ..................... (6,384) (180) (6,564) -------- ------ ------- Balance at March 31, 2002 ......... $ 12,181 $1,496 $13,677 ======== ======= ========
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. During the first quarter of 2002, Teradyne management concluded in accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," that certain Semiconductor Test Systems long-lived assets held for disposal were impaired as the estimated fair value was less than the carrying value of these assets. The charge for the impaired assets held for disposal was $0.8 million and was recorded in cost of sales. H. Operating Segment 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 segment is comprised of Broadband Test Systems and Diagnostic Solutions. 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" in Teradyne's Annual Report on Form 10-K for the year ended December 31, 2001. Intersegment sales are accounted for at fair value as if sales were to third parties. Operating segment information for the three month period ended March 31, 2002 and April 1, 2001 follows (in thousands):
Circuit Semiconductor Board Test Test Connection & Inspection Other Test Corporate Systems Systems Systems Systems and Segment Segment Segment Segment Eliminations Consolidated ------- ------- ------- ------- ------------ ------------ Three months ended March 31, 2002: Sales to unaffiliated customers ..... $ 87,526 $95,787 $ 38,963 $ 25,732 - $ 248,008 Intersegment sales .................. - 59 - - $ (59) - -------- ------- -------- -------- --------- --------- Net sales ........................... 87,526 95,846 38,963 25,732 (59) 248,008 (Loss) income before taxes (1) ...... $(79,354) $(2,480) $(30,809) $ 2,874 $ (10,762) $(120,531) Three months ended April 1, 2001: Sales to unafiiliated customers ..... $356,121 $204,643 $ 34,026 $ 10,399 - $ 605,189 Intersegment sales .................. - 1,984 - - $ (1,984) - -------- -------- --------- --------- -------- --------- Net sales ........................... 356,121 206,627 34,026 10,399 $ (1,984) 605,189 (Loss) income before taxes (1) ...... $ 59,493 $ 28,552 $ (4,630) $ (209) $ (6,122) $ 77,084
(1) (Loss) income before taxes of the principal businesses exclude the effects of employee profit sharing, management incentive compensation, restructuring charges, other unallocated expenses, and net interest and other income. 10 TERADYNE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS I. Commitments and Contingencies 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. In addition, second amended complaint alleges 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. 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 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. 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. 11 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations SELECTED RELATIONSHIPS WITHIN THE CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2002 April 1, 2001 -------------- ------------- (In thousands) Net sales .................................................................. $ 248,008 $ 605,189 ========== ========= Net (loss) income .......................................................... (77,140) $ 53,959 ========== ========= Percentage of net sales: Net sales ............................................................. 100.0% 100.0% Expenses: Cost of sales ..................................................... 87.7 61.0 Engineering and development ....................................... 27.9 13.8 Selling and administrative ........................................ 30.3 12.1 Restructuring and other charges ................................... 2.0 1.0 Other and interest, net ........................................... 0.7 (0.6) ---------- --------- 148.6 87.3 (Loss) income before taxes ............................................ (48.6) 12.7 Provision for (benefit from) income taxes ............................. (17.5) 3.8 ---------- --------- Net (loss) income ..................................................... (31.1)% 8.9% ========== ========= (Benefit from) provision for income taxes as a percentage of income before taxes ................................................... (36.0%) 30.0% ========== =========
Results of Operations Revenue Teradyne recorded sales of $248.0 million in the first quarter of 2002, a decrease of $357.2 million or 59% from the first quarter of 2001. Semiconductor Test Systems sales and Connection Systems sales to unaffiliated customers decreased 75% and 53%, respectively from the first quarter of 2001 which reflects the overall economic and current industry conditions as described below. Circuit Board Test and Inspection Systems and Other Test Systems sales increased by 15% and 147%, respectively from the first quarter of 2001 due to GenRad related sales which Teradyne acquired in October of 2001. Included in the first three months of 2001 sales of $605.2 million was a non-recurring adjustment of $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 was received. Teradyne no longer retains title until receipt of payment. Teradyne's business has been adversely impacted by the slowdown in economies worldwide. 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 the first quarter of 2002, orders declined significantly compared with the orders Teradyne received during the first quarter of 2001. 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. Bookings Incoming net orders were $210.3 million in the first quarter of 2002 compared to $357.1 million in the first quarter of 2001. The decrease in incoming net orders was led by a 77% decrease in Connection Systems orders and a 25% decrease in Semiconductor Test System orders. Circuit Board Test and Inspection Systems and Other Test Systems net orders increased by 56% and 347% due to GenRad related orders which Teradyne acquired in October of 2001. Teradyne experienced cancellations of $27.2 million and $24.9 million in the first three months of 2002 and 2001, respectively. Teradyne's net orders for its four principal operating segments were as follows: 12
(in millions) Quarter Ended March 31, April 1, 2002 2001 ------ ------- Semiconductor Test Systems ................................................ $ 89.6 $ 119.4 Connections Systems ....................................................... $ 46.4 $ 206.0 Circuit Board Test and Inspection Systems ................................. $ 36.1 $ 23.1 Other Test Systems ........................................................ $ 38.2 $ 8.6 ------- -------- $ 210.3 $ 357.1
Customers may delay delivery of products or cancel orders suddenly and without significant notice, subject to possible cancellation penalties. Due to possible customer changes in delivery schedules and cancellation of orders, Teradyne's backlog at any particular date is not necessarily indicative of the actual sales for any succeeding period. Delays in delivery schedules and/or cancellations of backlog during any particular period could have a material adverse effect on Teradyne's business and results of operations. Gross Margin Certain costs in the first quarter of 2001 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: Quarter Ended April 1, Increase / (Decrease) 2001 - --------------------- --------- (in thousands) Cost of sales ........................... ($16,593) Engineering and development ............. 12,373 Selling and administrative .............. 4,220 Gross margin decreased to 12% of sales in the first quarter of 2002 from 39% of sales in the first quarter of 2001. The percentage decrease in the first quarter of 2002 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 decrease in the percentage of gross margin was also impacted to a lesser extent by increased competitive price pressure as current semiconductor products mature and the mix of Teradyne's business changes as Connection Systems and Circuit Board Test and Inspection System sales, which have lower gross margins, become a larger percentage of Teradyne's business. Inventory provision for excess and obsolete inventory was $6.2 million in the first three months of 2002 compared to $13.7 million in the first three months of 2001. During the first quarter of 2002, Teradyne recorded an asset impairment in Semiconductor Test Systems of $0.8 million for certain impaired manufacturing assets. Engineering and Development Engineering and development expenses, as a percentage of sales, increased to 28% in the first quarter of 2002 from 14% in the first quarter of 2001, with spending decreasing by $14.3 million. This spending decrease was primarily due to lower material costs and the impact of workforce reductions and pay cuts. Selling and Administrative Selling and administrative expenses increased to 30% of sales in the first quarter of 2002 from 12% of sales in the first quarter of 2001 with spending increasing by $1.8 million. The increase in spending was due to additional expenses as a result of Teradyne's purchase of GenRad in the fourth quarter of 2001. The additional selling and administrative expenses was partially offset by workforce reductions and pay cuts. 13 Restructuring and Other Charges During the first quarter of 2002, Teradyne recorded a pre-tax charge of $5.0 million in connection with a workforce reduction. The $5.0 million provision for severance benefits was recorded in restructuring and other charges. There were 220 employees terminated in the first quarter of 2002 across all functional groups. Teradyne paid approximately $1.1 million of the restructuring charge during the first quarter of 2002. All remaining benefits will be paid by the end of 2003. During the first quarter of 2001, Teradyne also recorded a pre-tax charge of $5.7 million in connection with a workforce reduction. The $5.7 million provision for severance benefits was recorded in restructuring and other charges. There were 650 employees terminated in the first quarter of 2001 across all functional groups. All benefits were paid by the end of fourth quarter of 2001. The table below summarizes activity relating to restructuring and other charges:
Severance Lease Payments and on Vacated Benefits Facilities Total -------- ---------- ----- (in thousands) Balance at December 31, 2001 $ 13,523 $ 1,676 $ 15,199 First quarter, 2002 provision 5,042 -- 5,042 Cash payments (6,384) (180) (6,564) -------- --------- --------- Balance at March 31, 2002 $ 12,181 $ 1,496 $ 13,677 ======== ========= =========
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 $2.0 million to $4.2 million in the first quarter of 2002 compared to the first quarter of 2001. The decrease in interest income in the three months was attributable to lower interest rates. Interest expense increased by $5.1 million to $5.3 million in the first quarter of 2002 compared to the first quarter of 2001. The increase in interest expense was primarily attributable to convertible notes interest expense. The convertible notes were issued in the fourth quarter of 2001. Other Expense In accordance with SFAS 133, Teradyne recorded a loss of $0.5 million during the first quarter of 2002 in other expense for the fair value of warrants held in LogicVision, a publicly traded company. Included in other expense in the first quarter of 2001 is Teradyne's proportionate share of a loss related to an equity method investment of $2.5 million. The carrying value of this equity investment was zero at December 31, 2001. Income Taxes Teradyne's effective tax rate benefit was 36% in the first three months of 2002. The effective tax rate benefit for the year ended 2001 was 38%. The change in the tax rate is a result of lower favorable tax attributes from its foreign sales corporation and state income taxes. 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 $578 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 would 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: 14 2001 2000 1999 ------ ------ ------ Export sales corporation (0.7%) (4.8%) (4.7%) Liquidity and Capital Resources Teradyne's cash, cash equivalents and marketable securities balance increased $30.2 million in the first three months of 2002, to $616.4 million. Teradyne generated cash from operating activities of $15.7 million in the first three months of 2002 and used cash of $50.3 million in the first three months of 2001. Cash from net (loss) income, excluding the effects of non-cash items, used $86.3 million and generated $107.4 million of cash for the first three months of 2002 and 2001, respectively. Changes in operating assets and liabilities generated cash of $101.9 million in the first three months of 2002 as Teradyne received a tax refund in March 2002 of $85.2 million and inventory balances decreased. In the first three months of 2001, changes in operating assets and liabilities used cash of $157.7 million. Teradyne used $158.6 million of cash for investing activities in the first three months of 2002 and $57.1 million in the first three months of 2001. Investing activities consist of purchases, sales, and maturities of marketable securities, and purchases of capital assets to support long-term growth. Capital expenditures were $21.6 million in the first three months of 2002 and $94.9 million in the first three months of 2001. The decrease in capital expenditures was due to actions taken by Teradyne beginning in 2001 to reduce planned capital expenditures due to current market conditions. Financing activities provided $36.7 million and $36.5 million of cash during the first three months of 2002 and 2001, respectively. Financing activities include issuance of Teradyne's common stock through employee stock option and stock purchase plans and repayments of debt. During the first three months of 2002 and 2001, common stock activity provided cash of $37.1 million. Teradyne believes its cash, cash equivalents, and marketable securities balance of $616.4 million 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. 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-Q) contain statements that are not purely historical, 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 made herein include projections, plans, and objectives for Teradyne's business, financial condition, operating results, future operations, or future economic performance, statements relating to the sufficiency of capital to meet working capital, capital expenditures, expectations as to customer orders and statements relating to backlog, bookings and cancellations and gross margins. Teradyne's actual future results may differ materially from those stated in any forward looking statements. Factors that may cause such differences include, but are not limited to, the factors discussed below. These factors, and others, are discussed from time to time in Teradyne's filings with the Securities and Exchange Commission, including in Teradyne's Annual Report on Form 10-K for the year ended December 31, 2001. 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. 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 that the downward trend in new orders will turn around in the future or that any increase 15 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 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 1: Legal Proceedings" on this Form 10-Q. 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. Additionally, in 2001, Teradyne was designated as a "potentially responsible party" ("PRP") at two clean-up sites related to acquisitions of businesses, one in California and one in Rhode Island. Teradyne does not believe that it has any liability for the clean-up 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. 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 16 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 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 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; 17 - 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. 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. 18 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; - 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 3: Quantitative and Qualitative Disclosures about Market Risk There were no material changes in Teradyne's exposure to market risk from December 31, 2001. PART II. OTHER INFORMATION Item 1: 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. In addition, the second amended complaint alleges 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 19 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. 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 6: Exhibits and Reports on Form 8-K (a) : Exhibits Exhibit Number Description 10.01 1996 Non-Employee Director Stock Option Plan, as amended (filed as Exhibit 10.11 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2001, File No. 001-06462).* 10.02 Change in Control Agreement dated March 19, 2002 between the Registrant and Executive Officer (filed as Exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2001, File No. 001-06462).* * Indicates management contracts or compensatory plans. (b): Reports on Form 8-K A Current Report on Form 8-K dated January 15, 2002, was filed with the Securities and Exchange Commission on February 5, 2002 relating to Teradyne's fourth quarter financial results and its interim financial statements. SIGNATURES ---------- Pursuant to the requirements 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. TERADYNE, INC. ------------------------------- Registrant /s/ GREGORY R. BEECHER ----------------------------- Gregory R. Beecher Vice President and Chief Financial Officer (Principal Financial Officer) May 14, 2002 20 -----END PRIVACY-ENHANCED MESSAGE-----