-----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, AVwtr8P0LV5/SpnlxWHFrQnsFlyDd4GD4YHjiwgkgbZ0fgtCjsYDrC/bkpqzyYBX 4Z+v8IHLoGoouHkDLJhHog== 0000927016-03-001489.txt : 20030328 0000927016-03-001489.hdr.sgml : 20030328 20030328170858 ACCESSION NUMBER: 0000927016-03-001489 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030328 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06462 FILM NUMBER: 03626133 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-K 1 d10k.txt FORM 10-K ================================================================================ 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, 2002 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 whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12(b-2). 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 June 28, 2002 was $4.3 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 21, 2003 was 184,891,145 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's proxy statement in connection with its 2003 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, a leading provider of high performance interconnection systems and an emerging provider of 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"); . diagnose and test automotive electronics systems ("Diagnostic Solutions"); 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 reporting Teradyne's operating segments. For financial information concerning Teradyne's operating segments, see "Note T: 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 Teradyne produces Semiconductor Test Systems which are used in the manufacturing and testing of a wide variety of integrated devices, including "system on a chip (SOC)", mixed signal, logic, and memory integrated circuits. Semiconductor Test Systems are sold to Integrated Device Manufacturers (IDMs) and to subcontractors (Subcons), that perform design and/or manufacturing functions for the IDMs. The Subcon sector is further divided into companies that perform design of integrated circuits without manufacturing capabilities which, often referred to as "Fabless" companies, companies which have wafer manufacturing capability called Foundries and companies which provide test and assembly services for the final packaged devices. These customers use Teradyne's Semiconductor Test Systems to: . measure product performance; . improve and control product quality; . improve device design; 2 . reduce time to market; . enhance manufacturability; . minimize labor costs; and . increase production yields, with the overall benefit of comprehensively testing advanced performance devices while reducing their total costs associated with testing. The semiconductor test market is comprised of two sub-markets. The first sub-market is system on a chip (SOC) device testing, which includes the testing of a broad range of analog, mixed signal, and logic devices used in automotive, communications, consumer, computer and electronic game applications. The second 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. Teradyne products within the Semiconductor Test Systems market include: System on a Chip ("SOC") Test Solutions System On a Chip devices integrate analog, digital, and embedded memory to implement a complete function on a single chip. The SOC market spans a huge range of functionality, from very simple low cost devices such as operational amplifiers or voltage regulators to complex digital signal processors and microprocessors. Teradyne offers a suite of test solutions to cover this range in the most economical way for each segment. The main test equipment products are described below: The J750 and J750K test systems are designed to address the highest volume semiconductor devices. Devices such as microcontrollers are at the heart of almost every consumer electronics product, from small appliances to automotive engine controllers. These devices are produced in enormous quantities. The lowest cost of test at very high production throughput rates is essential to meeting the economic requirements in these markets. Teradyne's J750 test systems combine compact packaging, high throughput, and ease of production test. This was possible due to the high level of integration in the design. A single circuit board in the J750 test system provides up to 64 digital input/output channels. This innovative approach eliminated the traditional "mainframe", creating a "tester in the test head." Its "zero footprint" design reduces the total cost of ownership and allows for more efficient use of production floor space. The J750 platform technology was used to create Teradyne's IP750 Image Sensor test system. The IP750 is focused on testing current and future image sensor devices used in digital cameras and other imaging products. The Catalyst and Catalyst-Tiger test systems are designed to test a broad range of higher performance integrated mixed signal and system on chip devices. The Catalyst is designed to test devices requiring data rates up to 400 Mega bytes per second (or M bps) with a broad range of analog performance. Over 1,000 Catalyst systems are in use today at IDMs and Subcons testing integrated circuits for DVD players, cellular phones, networking appliances, telecommunications systems, computer peripherals, and many other applications. Teradyne estimates that over 75% of the world's cell phones include devices tested on Teradyne's Catalyst systems, or its predecessor, the A500 series of test systems. The "Tiger" version of Catalyst provides similar analog capability, but extends the digital performance up to 1.6 Giga bps on up to 1,024 input/output channels. This extended digital performance enables complete functional testing of the world's most demanding mixed signal and high speed logic integrated circuits, used in computer graphics, personal computer chip set, microprocessor, and networking applications. The Tiger is installed at both IDMs and Subcons around the world. 3 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. Teradyne's J973EP is one of the only Very Large Scale Integration, ("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. The J973EP expands the performance curve on accuracy, precision device power, and differential bus testing. Teradyne's most recently introduced test system, the FLEX, is the beginning of the next generation of high throughput general purpose SOC test systems and combines the integration and parallelism of the J750 with the synchronization and instrument flexibility of the Catalyst. FLEX, introduced in April of 2002, employs a unique "SOC tester per pin" architecture bringing a higher degree of parallelism to mixed signal and SOC testing. By testing more functions and more devices at the same time ("in parallel") FLEX increases the production efficiency of mixed signal device testing. The core of FLEX design employs a "universal slot" concept, which provides the user the flexibility to install any instrument or tester resource into any of the tester "slots". FLEX is similar to the J750 in that the instrumentation tends to be implemented on self contained circuit boards that plug into the test head. This modular design and the universal slot architecture adds a level of adaptability and flexibility to production testing which is new to the industry. FLEX covers a range of devices in the consumer electronics area, including automotive, higher performance microcontrollers, and power control. FLEX will be expanded to cover wireless and other integrated mixed signal device areas over time. FLEX currently covers devices in the consumer electronics area, including automotive, higher performance microcontroller and power control applications. Its capabilities are rapidly being expanded to cover the other major segments of the SOC device market. Memory Test Solutions Reducing cost of test is especially crucial in the highly price sensitive memory device market. Teradyne's Probe-One DRAM memory test system delivers one of the lowest test costs. Recently, market demand for the system has been very limited. Teradyne's other memory test offering is the J996 memory test system which provides high throughput solutions for both probe and package test. At the end of 2002, Teradyne discontinued the J996 product after a last time buy was offered to Teradyne's customers. Connection Systems Solutions Connection Systems offers a total system solution with a broad suite of technologically differentiated capabilities including high performance printed circuits, high-speed, high-density connectors, multi-gigabit backplane assemblies, electromechanical integration and systems integration and test services. Connection System's technology can be found in such products as Internet routers, computer servers, mass data storage systems and telecom switches. Connection Systems produces complex printed circuit boards, including large format boards called "backplanes" (over 0.400 inches thick, up to 36 inches wide and 54 inches long, and over 60 layers) and high speed and high density smaller format boards called "daughter cards". A backplane plays the crucial role of locating and supporting printed circuit boards within a system, enabling the printed circuit boards to "talk" to each other and to the outside world. Connectors are key elements in the system linking a backplane with printed circuit boards (daughter cards) that perform specific functions. 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, (introduced in 2001) and NexLev connector, have the highest density on the market today in their respective applications and enable data rates to 10 Giga bits per second. Connection Systems also provides electronic manufacturing services, including backplane assembly, electro-mechanical integration of sub-assemblies, and systems integration and test. 4 An essential element of the Connection Systems business is its design and applications engineering expertise at every step in the process. By working early with customers in the system design cycle, this expertise helps balance critical cost and performance needs. In addition, Connection System's program management services become 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 assembly. A circuit board assembly 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 personnel digital assistants (PDAs), phone handsets and laptop computers, both the circuit boards and their components become increasingly complex. The circuit board assembly manufacturing process is also complex and demands a number of test and inspection steps. Teradyne circuit board assembly 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 assembly and inspection product range includes the following products: In-Circuit Test In-circuit test systems examine the assembled and soldered printed circuit board for proper construction under both power-off and power-on conditions. Defective components and solder joints are identified quickly and precisely. High throughput, relatively low cost fault identification and diagnostic accuracy are valued features which cause in-circuit testers to be used universally in every electronics production line. Teradyne in-circuit products support a full range of circuit board test applications, including high-volume production, selective or sample test, prototype testing 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. 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 hidden 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. Military/Aerospace Test & Diagnostics The Mil/Aero Test Solutions business unit applies Teradyne's expertise in the functional test and diagnosis of assemblies of electronics to the military and commercial aerospace markets. These solutions come in the form of systems, instruments, and software products. Teradyne's traditional focus in the military market has been to provide test and diagnostic solutions for Factory and Depot level maintenance and repair activities. These solutions are typically deployed in stable, fixed 5 environments with an emphasis on fast, accurate diagnostics down to a repairable component on a replaceable unit. Teradyne has recently begun to exploit architectural components that allow the repackaging of our solutions into smaller, lighter, ruggedized implementations enabling Teradyne to expand our served markets to include the Intermediate and Operational areas of the military market. The requirements here are to isolate failures down to the smallest replaceable unit in a mobile, harsh environment. The failed unit is then passed back to the Depot or Factory for further diagnosis down to the repairable component before being cycled back into stock. In the Commercial Aerospace market, Teradyne utilizes the same functional test and diagnostics capabilities that apply to the Military markets to test the increasing complex electronic functions found in today's aircraft. The success of our Mil/Aero product line has been demonstrated by recent design wins on major Department of Defense programs such as the F-35 Joint Strike Fighter, C-17, and RT-CASS, as well as with Aerospace customers such as Boeing. These design-ins lay the foundation for significant growth potential, as Teradyne is serving much larger markets than in the past. Diagnostic Solutions Diagnostic Solutions is a supplier of automotive manufacturing and service bay test and diagnostic systems for electronics used in vehicles throughout their lifecycle, from design through manufacture to after sale service. As the number and complexity of electronic systems and software proliferate in vehicles, the ability to manufacture and service those vehicles becomes increasingly dependent on electronic diagnostic equipment. Diagnostic Solutions predominately falls into two categories: Vehicle Configuration and Test Systems ("VCATS") Diagnostic Solution's VCATS products serve the automotive Original Equipment Manufacturer ("OEM") sector. Used directly on automotive production lines, Diagnostic Solutions connects to the vehicle to test and program (or "configure") the electronic systems on vehicles. These include engine control modules and subsystems such as braking, navigation and air conditioning. Diagnostic Solutions is also able to link to an OEM's manufacturing control system in order to provide statistical quality reports to operators and management. In addition, Diagnostic Solutions also provides VCATS solutions to Tier 1 suppliers to the OEMs. OEM Service Diagnostics OEM Dealer service technicians use Diagnostic Solution's systems to find faults and perform routine service functions in order to help maintain the quality of vehicles in use by their customers, and to reduce OEM warranty costs. Historically, the focus has been on fixing faults in the service bay, but is growing to include constant monitoring of the vehicle to predict and prevent failure. Broadband Test Solutions Broadband Test Systems provides Celerity and NetFlare Test Systems for testing speed characteristics and quality of telephone and cable television lines connected to homes and businesses. These state-of-the-art systems support cable and telephone company service provider's goals to sell and deploy DSL and high-speed data services sooner and improve the efficiency of qualification, provisioning, and customer care. Celerity and NetFlare together provide test coverage across approximately 30 million lines. Broadband Test Systems also provides 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 test system reduces operating costs and increases customer satisfaction by reliably detecting and identifying line faults within a telecommunications access network. 6 Teradyne products within the Broadband Test Systems market include: 4TEL & 4TEL II Voice Test Systems Teradyne's 4TEL voice test system automates the ability to precisely identify and isolate faults within a telecommunications network, thus providing cost savings to telephone operating companies. The 4TEL II voice test system uses expert system technology to further isolate faults to such zones as exchange hardware, exchange wiring, access cable, and inside or outside customer premises, without the need for customer isolation equipment. The 4TEL and 4TEL II test systems enable telephone operating companies to automate customer care and field repair processes resulting in substantial reductions in network maintenance and operating costs. NetFlare/TM/ End-to-End Internet Testing Cable and telephone company service providers can reduce broadband service call handling time and erroneous truck dispatches while at the same time increase customer satisfaction and reduce customer churn with Teradyne's NetFlare system. This proven technology allows the consumer or call center representative to emulate the consumer's network experience and determine the source of a problem and the jurisdiction in the network designating the appropriate mechanism for repair. For example, NetFlare technology automatically measures throughput and latency 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. In particular cases when a truck dispatch is required, NetFlare can assist in reducing "fault not found" conditions and can help designate the appropriate level of technical expertise for dispatch. Celerity/TM/ DSL Loop Qualification Test System Service providers need to know which telephone lines between the central office and the customer are qualified for broadband digital subscriber line ("DSL") service and which are not. Existing cable records are typically insufficient. Teradyne's Celerity product uses accurate insertion loss, length and load coil detection, all measured through the narrowband voice switch, to qualify millions of lines for DSL service in hours, and develops a database immediately showing which lines are qualified, which lines require conditioning and which lines are disqualified. This information is then used to augment existing records systems to support point-of-sale and marketing efforts of DSL. In addition, Celerity performs real time provisioning 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 is a revenue enhancement tool as it finds more DSL-ready lines in the network that can be sold to residential and small business customers. Celerity also helps reduce the cost of provisioning DSL through automation of the loop qualification process and reduction of field dispatches. 7 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 -------------------------- 2002 2001 2000 ---- ---- ---- Semiconductor Test Systems............... 46% 50% 67% Connection Systems....................... 32 38 24 Circuit Board Test and Inspection Systems 14 9 5 Other Test Systems....................... 8 3 4 --- --- --- Total.................................... 100% 100% 100%
Investor Information Teradyne, a Massachusetts corporation incorporated on September 23, 1960, is subject to the informational requirements of the Securities Exchange Act of 1934 (the "Exchange Act"). Therefore, Teradyne files periodic reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 450 Fifth Street, NW, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically. You can access financial and other information at Teradyne's Investor Relations website. The address is www.teradyne.com. We make available, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act through Teradyne's website as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. Sales and Distribution Prices for Teradyne's systems can reach $3 million or more. In 2002, 2001, and 2000 no single customer accounted for more than 10% of Teradyne's consolidated net sales. In 2002, 2001, and 2000 Teradyne's three largest customers accounted for 23%, 24%, and 21% of consolidated net sales, respectively. Direct sales to United States government agencies accounted for less than 2% of consolidated net sales in 2002, 2001 and 2000. Approximately 10% of Circuit Board Test and Inspection Systems sales in 2002 were to United States government agencies and another 15% was made to customers who are government contractors. 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 54% of consolidated net sales in 2002, 49% in 2001, and 54% in 2000. Sales to customers located in Taiwan were 9% of consolidated net sales in 2002 and 10% of consolidated net sales 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; 8 . Controls on funds transfer; . Currency fluctuations; . Difficulties in managing distributors; . Potentially adverse tax consequences; and . 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. 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, 2002 and 2001, Teradyne's backlog of unfilled orders in each of its four principal operating segments was as follows:
(in millions) ------------- 2002 2001 ------ ------ Semiconductor Test Systems............... $240.0 $317.2 Connection Systems....................... 104.2 357.6 Circuit Board Test and Inspection Systems 53.4 55.5 Other Test Systems....................... 43.3 32.7 ------ ------ $440.9 $763.0
The decrease in Semiconductor Test Systems and Connection Systems backlog of $77.2 million and $253.4 million respectively was primarily due to customer cancellations and demand reductions. Of the backlog at December 31, 2002, approximately 93% of the Semiconductor Test Systems backlog, 99% of the Connection Systems backlog, 94% of Circuit Board Test and Inspection Systems backlog, and 92% of the Other Test Systems backlog is expected to be delivered in 2003. Generally, Teradyne's backlog policy requires delivery of products and services within twelve months, except for service agreements where delivery may cover a continuous period of up to thirty-six months. 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. 9 Raw Materials Teradyne's products require a wide variety of electronic and mechanical components from 4,000 suppliers of which 55 represent 80% of the spending. 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. Approximately 30% of material purchases require some custom work where having multiple suppliers would be cost prohibitive. 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 based in significant part on proprietary information and technology. Teradyne protects its rights in proprietary information and technology through various methods, such as: . patents and patent applications; . copyrights; . trademarks; . trade secrets; . business practices; . software license agreements, non-disclosure agreements and other contracts; and . employee agreements. However, these protections might not be effective in all circumstances. Competitors might independently develop similar technology or exploit Teradyne's proprietary technology and/or information in countries where Teradyne lacks enforceable intellectual property rights (IP) or enforcement of such rights through the legal system provides an insufficient deterrent. Also, IP protections can be invalidated through legal processes. While Teradyne does not believe that any single piece of intellectual property or proprietary rights is essential to its business, if a significant portion of Teradyne's intellectual property or proprietary rights is invalidated or ineffective, Teradyne's business could be materially affected. Employees As of December 31, 2002, Teradyne employed approximately 7,200 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 $293.9 million in 2002, $287.3 million in 2001, and $348.0 million in 2000. These expenditures amounted to approximately 24% of consolidated net sales in 2002, 20% in 2001, and 11% in 2000. Environmental Affairs Teradyne is subject to various federal, state and local government laws and regulations relating to the protection of employee health and safety and the environment. Teradyne accrues for all known environmental liabilities when it becomes probable that Teradyne will incur cleanup costs and those costs can reasonably be estimated. The amounts accrued do not cover sites that are in the preliminary stages of investigation. Estimated environmental costs are not expected to materially affect the financial position or results of Teradyne's operations in future periods. However, estimates of future costs are subject to change due to protracted cleanup periods and changing environmental remediation laws and regulations. 10 In 2001, Teradyne was designated as a "potentially responsible party" ("PRP") at a clean-up site in Los Angeles, California. This claim arises out of Teradyne's acquisition of Perception Laminates, Inc. in August 2000. Prior to that date, Perception Laminates had itself acquired certain assets of Alco Industries Inc. under an asset purchase agreement dated July 30, 1992. Neither Teradyne nor Perception Laminates have ever conducted any operations at the Los Angeles site. Teradyne has asked the State of California to drop the PRP designation, but California has not yet agreed to do so. Management does not believe the outcome of this matter will have a material adverse effect on Teradyne's financial position or results of operations but there can be no assurance that any such outcome would not have a material adverse effect on Teradyne's financial position or results of operations. In August 2002, Teradyne was designated as a PRP at a site in Whittier, California. Teradyne was identified as a PRP based on shipments from its Woodland Hills, California and Agoura Hills, California sites during 1983 and 1984. Based upon review of the shipping documents, Teradyne believes that any potential liability is limited to that of a de minimus contributor to the site. Management does not believe that any potential liability for the clean-up of this site will have a material adverse effect on Teradyne's financial position or results of operations but there can be no assurance that any potential liability would not have a material adverse effect on Teradyne's financial position or results of operations. 11 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 64 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.. 45 Vice President, Chief Vice President and Chief Financial Officer of Financial Officer and Teradyne since 2001 and Treasurer of Treasurer Teradyne since February 2003; Partner at PricewaterhouseCoopers LLP from 1993 to 2001. Michael A. Bradley.. 54 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. Eileen Casal........ 44 Vice President, General Vice President, General Counsel and Clerk of Counsel and Clerk Teradyne since January, 2003; Vice President, General Counsel and Corporate Secretary of GSI Lumonics Inc. from May 2001 until January 2003; Vice President, General Counsel and Corporate Secretary of Adero, Inc. from April 2000 until March 2001; Vice President, General Counsel and Assistant Clerk of Teradyne, Inc. from April 1999 to April 2000; and from 1986 until March 1999, Ms. Casal held a number of legal positions at Stratus Computer, Inc. including Vice President, General Counsel and Clerk. John M. Casey....... 54 President of Circuit Board President of Circuit Board Test and Inspection Test and Inspection since 2002; Vice President of Teradyne since 1990. G. Richard MacDonald 54 Controller Controller of Teradyne since 2001; Controller of Teradyne's Industrial Consumer Division from 1989 to 2001. Edward Rogas, Jr.... 62 Senior Vice President Senior Vice President of Teradyne since 2000; Vice President of Teradyne from 1984 to 1999. Richard E. Schneider 45 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.
12 Item 2: Properties The following table provides certain information as to Teradyne's principal general offices and manufacturing facilities.
Approximate Major Square Feet of Location Operating Segment Activity+ Floor Space -------- ----------------- --------- -------------- Properties Owned: Nashua, New Hampshire........ Connection Systems 2-3-4-5 524,000 Boston, Massachusetts........ Semiconductor Test & General Offices 1-2-3-4-5 492,000 North Reading, Massachusetts. Semiconductor Test & Circuit Board Test and Inspection 2-3-4-5 273,000 North Reading, Massachusetts. Unoccupied 425,000(a) North Reading, Massachusetts. Unoccupied 242,000(b) Agoura Hills, California..... Semiconductor Test 2-3 360,000 Agoura Hills, California..... Unoccupied 212,000(c) San Diego, California........ Unoccupied 192,000 (c) San Jose, California......... Semiconductor Test 3-5 120,000 Stoughton, Massachusetts..... Unoccupied 120,000(c) La Verne, California......... Connection Systems 2 93,000 Kumamoto, Japan.............. Semiconductor Test 2-3-4-5 66,000 Deerfield, Illinois.......... Broadband Test 2-3-4-5 63,000 --------- Subtotal of Owned Properties................................................. 3,182,000 Properties Leased: Westford, Massachusetts...... Circuit Board Test and Inspection 2-3-4-5 230,000 Woburn, Massachusetts........ Semiconductor Test 2-6 205,000 Hudson, New Hampshire........ Connection Systems 2 144,000 Mexicali, Mexico............. Connection Systems 2 112,000 Nashua, New Hampshire........ Unoccupied 107,000(d) Walnut Creek, California..... Unoccupied 98,000 (e) Shanghai, China.............. Connection Systems, Circuit Board Test and Inspection, and Semiconductor Test 2 87,000 Bedford, Massachusetts....... Semiconductor Test 3 80,000 Manchester, England.......... Diagnostic Solutions 2-3-4-5 75,000 Agoura Hills, California..... Semiconductor Test 6 59,000 Stoughton, Massachusetts..... Unoccupied 55,000(d) Nashua, New Hampshire........ Connection Systems 6 55,000 Plano, Texas................. Unoccupied 50,000(d) Winston-Salem, North Carolina Connection Systems 2 49,000 Dublin, Ireland.............. Connection Systems 2 46,000 Fremont, California.......... Connection Systems 2 46,000 Bracknell, England........... Semiconductor Test, Broadband Test and Circuit Board Test 3-5 44,000 Tai Yuan, Taiwan............. Semiconductor Test and Circuit Board Test 5 43,000 --------- Subtotal of Leased Properties................................................ 1,585,000 --------- Total Square Feet of Floor Space............................................. 4,767,000 =========
+ Major activities have been separated into the following categories: 1. Corporate Administration, 2. Manufacturing, 3. Research and Development, 4. Marketing, 5. Sales and Administration and 6. Storage and Distribution (a) This space is unoccupied. (b) This space is currently being leased to two companies. (c) This space is held for sale. (d) This space is currently being subleased. (e) This space is unoccupied and is currently being marketed for sublease. 13 Item 3: Legal Proceedings After the August 2000 acquisition of Herco Technology Corp. and Perception Laminates, Inc. the former owners of those companies filed a complaint on September 5, 2001 against Teradyne and two of its executive officers. The case is now pending in Federal District Court, San Diego, California. Teradyne and the two individual defendants filed a motion to dismiss the complaint in its entirety. The court granted the motion in part, and the only remaining claims were 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. Teradyne's subsequent motion for partial summary judgment with respect to the breach of contract claims was granted on November 7, 2002. The plaintiffs have asked the Court to reconsider its ruling or, alternatively, for leave to appeal both the dismissal of claims and summary judgment rulings to the Ninth Circuit Court of Appeals. Teradyne has opposed these motions. No ruling has yet been issued. Other than the above described motions, only a small portion of the original complaint relating to alleged fraud in connection with setting the transaction price remains pending before the District Court. Teradyne has answered and denied all liability. Management does not believe that the outcome of these claims will have a material adverse effect on Teradyne's financial position or results of operations but there can be no assurance that any such claims would not have a material adverse effect on Teradyne's financial position or results of operations. Also arising out of the August 2000 acquisition of Herco Technology Corp. and Perception Laminates, Inc. is a demand for arbitration, made on or about October 19, 2001, by the former owners of those companies, which was filed with the American Arbitration Association. The arbitration is with respect to environmental indemnification claims initially asserted by Teradyne under the respective acquisition agreements. These claims arose in connection with environmental matters related to Herco Technology Corp. and Perception Laminates, Inc. facilities in California. The arbitration demand by the former owners seeks release of certain shares of Teradyne's common stock being held in escrow pursuant to the terms of the acquisition agreements and damages related to failure to release the escrow. Teradyne has counterclaimed for enforcement of the environmental indemnity provisions of the acquisition agreements. Hearings in connection with the arbitration have been completed and the parties are currently completing post-hearing briefs for submission to the arbitrators. Management does not believe that the outcome of these claims will have a material adverse effect on Teradyne's financial position or results of operations but there can be no assurance that any such claims would not have a material adverse effect on Teradyne's financial position or results of operations. Teradyne and two of its executive officers were named as defendants in three purported class action complaints that were filed in Federal District Court, Boston, Massachusetts, in October and November 2001. The court consolidated the cases and has appointed three lead plaintiffs. On November 8, 2002, plaintiffs filed and served a consolidated amended class action complaint. The complaint alleges, 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 complaint seeks unspecified damages, including compensatory damages and recovery of reasonable attorneys' fees and costs. Teradyne filed a motion to dismiss all claims asserted in the complaint on February 7, 2003. Teradyne's motion has not yet been heard. Claims asserted in this case are similar to the claims asserted in the case discussed above, which is pending in the Federal District Court in San Diego, California. Teradyne believes it has meritorious defenses to the claims and will defend itself vigorously. Management does not believe that the outcome of these claims will have a material adverse effect on Teradyne's financial position or results of operations but there can be no assurance that any such claims would not have a material adverse effect on Teradyne's financial position or results of operations. By letter dated October 22, 2002, counsel for Electro Mechanical Solutions, Inc., and several affiliated debtors including PRECISMetals in Chapter 11 bankruptcy cases pending in the United States Bankruptcy Court for the Northern District of California (collectively, the "Debtors"), asserted that Teradyne received payments in 2001 totaling $12.4 million from PRECISMetals in the 90 days prior to the bankruptcy filing and that those 14 payments constitute avoidable preferential transfers. Teradyne believes that it has good faith defenses to the alleged preferential transfers and intends to contest the claims vigorously. Management does not believe that the outcome of these claims will have a material adverse effect on Teradyne's financial position or results of operations but there can be no assurance that any such claims would not have a material adverse effect on Teradyne's financial position or results of operations. In October 1998, a former employee of GenRad, Inc., which Teradyne acquired on October 26, 2001, instituted an arbitration proceeding against GenRad alleging breach of his severance agreement. Teradyne believes that the employee's claims are without merit. The last arbitration hearing was conducted on October 28, 2002, and a decision is expected by May 2003. Management does not believe that the outcome of this proceeding will have a material adverse effect on Teradyne's financial position or results of operations but there can be no assurance that the outcome would not have a material adverse effect on Teradyne's financial position or results of operations. Teradyne has also been designated as a potentially responsible party ("PRP") with respect to environmental clean-up matters at two sites in California. See the discussion of these items in Item 1: "Environmental Matters" above. Teradyne disputes all of the claims above and believes they are without merit, and intends to defend vigorously against them. However, an adverse resolution of any of the claims 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 claims and therefore as of December 31, 2002 had not accrued for any potential losses from the claims. In addition, Teradyne is subject to legal proceedings, claims and investigations that arise in the ordinary course of business such as but not limited to patent, commercial and environmental matters. There are no such matters pending that Teradyne expects to be material to its business, financial position or results of operations but there can be no assurance that any such matters would not have a material adverse effect on Teradyne's business, 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 2002 First Quarter. $39.99 $26.15 Second Quarter 40.20 22.81 Third Quarter. 24.20 8.82 Fourth Quarter 17.58 7.10
The number of record holders of Teradyne's Common Stock at February 21, 2003 was 4,784. 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. 15 Item 6: Selected Financial Data
Years Ended December 31,* -------------------------------------------------------- 2002 2001 2000 1999 1998 ---------- ---------- ---------- ---------- ---------- (Dollars in thousands, except per share amounts) Consolidated Statement of Operations Data: Net sales................................ $1,222,236 $1,440,581 $3,043,946 $1,790,912 $1,489,151 ========== ========== ========== ========== ========== (Loss) income before cumulative effect of change in accounting principle......... (718,469) (202,215) 517,754 191,694 102,117 ========== ========== ========== ========== ========== (Loss) income before cumulative effect of change in accounting principle per common share--basic.................... (3.93) (1.15) 2.99 1.12 0.61 ========== ========== ========== ========== ========== (Loss) income before cumulative effect of change in accounting principle per common share--diluted.................. (3.93) (1.15) 2.86 1.07 0.59 ========== ========== ========== ========== ========== Consolidated Balance Sheet Data: Total assets............................. 1,894,677 2,542,391 2,355,868 1,568,213 1,312,814 ========== ========== ========== ========== ========== Long-term obligations.................... 450,561 451,682 8,352 8,948 13,200 ========== ========== ========== ========== ==========
*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 2000" in Notes to Consolidated Financial Statements for further information. 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. 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, goodwill, intangible and other long-lived assets, bad debts, income taxes, pensions, warranties, 16 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. Revenue Recognition 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 within 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 elements must not be essential to the delivered elements. 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 extended warranties, customer support and undelivered products. Service revenue is recognized over the contractual period or as the services are performed. 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 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. These arrangements require 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 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 17 evaluate all inventory for net realizable value. Teradyne records a provision for excess and obsolete inventory when such a writedown is identified through the quarterly review process. The inventory valuation is based upon assumptions about future demand, product mix and possible alternative uses. Income Taxes On a quarterly basis, Teradyne evaluates the realizability of its deferred tax assets and assesses the need for a valuation allowance. As a result of its review undertaken at December 31, 2002, Teradyne concluded under applicable accounting criteria that it was more likely than not that its deferred tax assets would not be realized and established a full valuation allowance. Until an appropriate level of profitability is reached, Teradyne does not expect to recognize tax benefits on operating losses in future results of operations. Goodwill, Intangible and Long-Lived Assets Teradyne assesses the impairment of identifiable intangibles, long-lived assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors Teradyne considers important in the determination of 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, a change in the strategy for Teradyne's overall business and significant negative industry or economic trends. When Teradyne determines that the carrying value of intangibles and long-lived assets 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 commensurate with the associated risks. Teradyne assesses goodwill for impairment at least annually, on a reporting basis, or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. If the book value of a reporting unit exceeds its fair value, the implied fair value of goodwill is compared with the carrying amount of goodwill. If the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recorded in an amount equal to that excess. Allowance for Doubtful Accounts 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. 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. 18 SELECTED RELATIONSHIPS WITHIN THE CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, --------------------- 2002 2001 2000 ----- ----- ----- (dollars in thousands) Percentage of net sales: Net Revenue: Products.................................................................... 81.2% 85.6% 92.9% Service..................................................................... 18.8 14.4 7.1 ----- ----- ----- Total net revenue....................................................... 100.0 100.0 100.0 Expenses: Cost of products............................................................ 67.9 70.5 48.3 Cost of service............................................................. 13.1 10.1 4.5 ----- ----- ----- Total cost of sales..................................................... 81.0 80.6 52.8 Engineering and development................................................. 24.0 20.0 11.4 Selling and administrative.................................................. 23.8 18.7 12.4 Restructuring and other charges............................................. 16.7 5.2 -- ----- ----- ----- 145.5 124.5 76.6 Net interest and other (expense) income........................................ (0.4) 1.9 0.9 ----- ----- ----- (Loss) income before income taxes and cumulative effect of change in accounting principle.................................................................... (45.9) (22.6) 24.3 Provision for (benefit from) income taxes...................................... 12.9 (8.6) 7.3 ----- ----- ----- (Loss) income before cumulative effect of change in accounting principle....... (58.8) (14.0) 17.0 Cumulative effect of change in accounting principle............................ -- -- (2.1) ----- ----- ----- Net (loss) income.............................................................. (58.8)% (14.0)% 14.9% ===== ===== =====
Results of Operations: 2002 compared to 2001 Business Overview Teradyne saw an encouraging start to 2002, as first quarter sales were up 13% over the fourth quarter of 2001, followed by 25% quarter to quarter growth in the second quarter. Net sales growth slowed to 7% in the third quarter followed by flat quarter to quarter performance in the fourth quarter. The combination of a continued weak economy, weak demand for technology products, and the uncertain world political environment overwhelmed the recovery that appeared to be starting early in the year. As of the end of 2002, Teradyne's customers in general have lowered their inventory levels and reduced their overall cost structures, resulting in improved quarterly financial performance. Additionally, utilization of Teradyne's semiconductor test equipment, and semiconductor test equipment in general, has increased over the last year. This has resulted from increased volumes of units shipped by Teradyne's Semiconductor industry customers. These are generally signs of potential increases in demand for Teradyne's products. However, a number of Teradyne's customers continue to lose money, although at a reduced rate. In the Semiconductor industry, this is occurring as decreased unit prices have offset the unit volume gains. As a result, Teradyne's customers continue to defer orders until the last possible moment. Until Teradyne's customers see significant and sustained increases in their business levels, both in units and dollars, Teradyne's orders could remain low or see a further decline. If Teradyne sees further declines in its own order rates, the amount of Teradyne's inventory and certain long-lived assets considered realizable could be significantly reduced. 19 Bookings Net orders increased 12% to $905.3 million in 2002 from $808.2 million in 2001. Net orders increased by 63% and 65% in Semiconductor Test Systems and Circuit Board Test and Inspection Systems, respectively. Connection Systems net orders decreased by 61%. The increase in Semiconductor orders was driven by increased demand for SOC products by Teradyne's Integrated Device Manufacturers (IDMs) and Subcon customers, primarily for use in Asian facilities. The increase in orders for Circuit Board Test and Inspection largely resulted from the full year impact of the GenRad acquisition. The decrease in Connection System orders reflects the impact of cancellations, which are described in the next paragraph. Other Test Systems net orders increased 286%, mostly due to the addition of a full year of activity from Diagnostic Solutions that was part of the GenRad acquisition. Teradyne experienced cancellations of $159.0 million and $285.5 million during 2002 and 2001, respectively. For 2002, cancellations of $53 million and $105 million occurred in the Semiconductor Test Systems and Connection System businesses, respectively. The Semiconductor Test Systems cancellations were largely for orders that were booked in late 2000 and early 2001 by Subcons in anticipation of further increases in their own demand. Cancellations in the Connection Systems business were from major customers in the telecommunication and information technology infrastructure industries, as their own demand levels dropped. Teradyne's net orders for its four principal operating segments for 2002 and 2001 were as follows:
(in millions) ------------- 2002 2001 ------ ------ Semiconductor Test Systems............... $480.5 $294.0 Connection Systems....................... 149.8 385.0 Circuit Board Test and Inspection Systems 167.8 101.4 Other Test Systems....................... 107.2 27.8 ------ ------ $905.3 $808.2
Teradyne's net bookings by region as a percentage of total net bookings were as follows:
2002 2001 ---- ---- United States.... 44% 55% South East Asia.. 19 12 Europe........... 18 24 Japan............ 9 3 Taiwan........... 6 3 Korea............ 2 1 Rest of the World 2 2 --- --- 100% 100%
Teradyne's backlog decreased 42% to $440.9 million in 2002 from $763.0 million in 2001. At December 31, 2002 and 2001, Teradyne's backlog of unfilled orders for its four principal operating segments was as follows:
(in millions) ------------- 2002 2001 ------ ------ Semiconductor Test Systems............... $240.0 $317.2 Connection Systems....................... 104.2 357.6 Circuit Board Test and Inspection Systems 53.4 55.5 Other Test Systems....................... 43.3 32.7 ------ ------ $440.9 $763.0
20 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. 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 -------------------------- 2002 2001 2000 ---- ---- ---- Semiconductor Test Systems............... 46% 50% 67% Connection Systems....................... 32 38 24 Circuit Board Test and Inspection Systems 14 9 5 Other Test Systems....................... 8 3 4 --- --- --- Total.................................... 100% 100% 100%
Teradyne's sales by region as a percentage of total sales were as follows:
2002 2001 ---- ---- United States........................... 46% 51% Europe.................................. 18 19 South East Asia......................... 17 12 Taiwan.................................. 9 10 Japan................................... 6 4 Korea................................... 2 1 Rest of the World....................... 2 3 ---- ---- 100 % 100 %
Product sales decreased 20% in 2002 to $992.1 million from $1,233.7 million in 2001. Service revenue increased largely due to the GenRad acquisition to $230.1 million in 2002 from $206.9 million in 2001. Service revenue is derived from the servicing of Teradyne's installed base of products and includes maintenance contracts, customer support, extended warranties and parts sales. Semiconductor Test Systems sales decreased 22%, to $557.6 million in 2002 from $717.7 million in 2001, Connection Systems sales decreased 27%, to $397.0 million in 2002 from $540.8 million in 2001, and Circuit Board Test and Inspection Systems sales increased 29%, to $170.8 million in 2002 from $132.4 million in 2001. Other Test Systems sales increased 95%, to $96.9 million in 2002 from $49.7 million in 2001. Year to year increases in sales for Teradyne's Circuit Board Test and Inspection Systems and Other Test Systems largely resulted from the full year impact of the acquisition of GenRad during the fourth quarter of 2001. Of the decrease in Semiconductor Test System sales, $98.7 million was due to the accounting impact of the implementation of SAB 101, which is further described in the next paragraph. The Connection Systems business saw downward pricing pressure during 2002, as the average selling prices declined by approximately 15% due to price pressures from both customers and competitors in the face of a weak economy. Additionally, year to year results for Teradyne's Semiconductor and Connection Systems businesses were impacted by 2001's steady decline in quarterly sales, which was followed by a recovery to approximately the current run-rate levels in the first half of 2002. The relatively stronger first half of 2001, which followed Teradyne's record sales year of 2000, further contributed to annual results for 2001 that exceeded 2002 for these businesses. 21 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. In 2002 and 2001, no single customer accounted for more than 10% of consolidated net sales. In 2002 and 2001, Teradyne's three largest customers accounted for 23% and 24% of consolidated net sales, respectively. Gross Margin Gross margin, as a percentage of net sales, decreased to 19.0% in 2002 from 19.4% in 2001. The decrease in the gross margin rate in 2002 compared to 2001 was affected by the following items:
Rate Differential ------------ 2002 charges described below.......................................................... (3.7)% 2001 charges described below.......................................................... 9.7 Higher gross margins on revenue orginally recorded in 2000 which was reversed and recorded in 2001 because title did not pass until payment*.......................... (3.0) Decreased utilization of Teradyne's manufacturing overhead, as sales volume decreased while certain components of cost of sales remained fixed............................ (1.8) Primarily related to price pressures described above, net of favorable product mix and product cost reduction activities................................................... (1.6) ---- Total................................................................................ (0.4) ====
* This accounting change impacted 2001 as described above. During the year ended December 31, 2002, an excess and obsolete inventory provision of $39.0 million was recorded in cost of sales of which $20.7 million related to the lack of demand for the Probe-One product and the discontinuance of the J996 product after a last time buy offer to Teradyne's customers. Additionally, due to consolidating and downsizing of manufacturing locations, approximately $5.7 million of incremental accelerated depreciation was classified in cost of sales. During 2001, Teradyne recorded a provision of $139.7 million for excess and obsolete inventory including 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 $32.3 million related to an inventory writedown for the discontinuance of its Flash 750 memory product. Engineering and Development Engineering and development expenses, as a percentage of sales, increased to 24% in 2002 from 20% in 2001, with spending increasing by $6.6 million. The increase in spending was primarily due to the additional expense base resulting from Teradyne's purchase of GenRad in the fourth quarter of 2001 which increased spending by approximately $23.0 million and to a lesser extent the granting of the prior year's previously frozen salary increases during the third quarter of 2002 which increased spending by approximately $6.0 million. The additional engineering and development expense was partially offset by reductions in discretionary spending across all of Teradyne's engineering groups which decreased spending by approximately $23.2 million. As described in the Gross Margin section above, Teradyne recorded a charge for incremental accelerated depreciation of $0.8 million which is classified in Engineering and Development. 22 Selling and Administrative Selling and administrative expenses increased to 24% of sales in 2002 from 19% of sales in 2001, with spending increasing by $20.3 million. The increase in spending was principally due to additional expenses resulting from Teradyne's purchase of GenRad in the fourth quarter of 2001, with an additional increase coming from the granting of the prior year's previously frozen salary increases during the third quarter of 2002. The additional selling and administrative expense was partially offset by workforce reductions and reductions in discretionary spending. As described in the Gross Margin section above, Teradyne recorded a charge for incremental accelerated depreciation of $1.1 million which is classified in Selling and Administrative. Restructuring and Other Charges The table below summarizes activity for the year ended December 31, 2002, relating to restructuring and other charges:
Goodwill and Severance Intangible Fixed Asset Facility and Asset Impairment Impairment Related Benefits Total ---------------- ----------- -------- --------- --------- (in thousands) Balance at December 31, 2001.... $ -- $ -- $ 1,676 $ 13,523 $ 15,199 2002 provision.................. 86,196 69,734 25,751 22,495 204,176 Cash payments................... -- -- (2,187) (22,724) (24,911) Asset write-downs............... (86,196) (69,734) -- -- (155,930) -------- -------- ------- -------- --------- Balance at December 31, 2002.... $ -- $ -- $25,240 $ 13,294 $ 38,534 ======== ======== ======= ======== ========= The table below summarizes activity for the year ended December 31, 2001, relating to restructuring and other charges: Severance Fixed Asset Facility and Impairment Related Benefits Total ----------- -------- --------- --------- (in thousands) 2001 provision....................................... $ 35,338 $ 1,676 $ 37,278 $ 74,292 Cash payments........................................ -- -- (23,755) (23,755) Asset write-downs.................................... (35,338) -- -- (35,338) -------- ------- -------- --------- Balance at December 31, 2001......................... $ -- $ 1,676 $ 13,523 $ 15,199 ======== ======= ======== =========
During the year ended December 31, 2002, Teradyne recorded $86.2 million in goodwill and intangibles impairment charges. SFAS 142 provides that goodwill of a reporting unit be tested for impairment on an annual basis and between annual tests in certain circumstances including a significant adverse change in the business outlook. During the third quarter of 2002, as a result of significant change in the business outlook, Teradyne tested the goodwill related to the Circuit Board Test and Inspection Systems segment for impairment as of September 29, 2002. Teradyne concluded that the carrying value of the assets and liabilities associated with the Circuit Board Test and Inspection Systems segment exceeded its fair value. In the third quarter of 2002, Teradyne recognized a $78.5 million goodwill impairment charge. The impairment charge was measured by comparing the implied fair value of the goodwill associated with the Circuit Board Test and Inspection Systems segment to its carrying value. The fair value of the segment was estimated using the expected present value of future cash flows. During the year ended December 31, 2002, Teradyne's management concluded, in accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," that certain long-lived assets held for sale were impaired as the estimated fair value was less than the carrying value of these assets, and recorded charges of $69.7 million. The charge for the Connection Systems segment included $25.6 million 23 relating to a held for sale printed circuit board facility in San Diego, California, $2.6 million relating to a held for sale facility in Nashua, New Hampshire, and $17.9 million primarily related to manufacturing equipment which was taken out of service during 2002 and is held for sale. The Semiconductor Test Systems segment recorded a charge of $12.0 million primarily for assets held for sale as a result of the lack of demand for the Probe-One product and the discontinuance of the J996 product after a last time buy offer to our customers, a charge of $9.7 million related to the write down of manufacturing facilities that are held for sale in California, and $0.8 million related to the write down of foundry manufacturing equipment that are held for sale. In addition, an asset impairment charge was recorded of $1.1 million related to a Corporate facility sold in the first quarter of 2003. Teradyne expects the sale of these held for sale assets to occur within a year. The carrying value of Teradyne's assets held for sale is $45.3 million as of December 31, 2002. These assets are included in Property, Plant, and Equipment. During the year ended December 31, 2001, Teradyne recorded a charge of $35.3 million for impaired long-lived assets, consisting of the following: $12.0 million for a held for sale facility in the Connection Systems segment, certain impaired manufacturing assets in the Connection Systems segment of $15.4 million, and equipment manufactured by Teradyne used in manufacturing and engineering and development relating to the discontinuance of the Flash 750 product line in Semiconductor Test Systems segment of $7.9 million. During the year ended December 31, 2002, Teradyne recorded a charge of $25.8 million relating to future lease commitments for vacated manufacturing and administrative space which will be exited prior to the end of the lease term. The charge of $25.8 million includes $18.8 million at Circuit Board Test and Inspection Systems, $5.0 million at Connection Systems and $2.0 million at Semiconductor Test Systems. The lease accruals are expected to be paid out over the lease terms, the latest of which expires in 2010. During the fourth quarter of 2001, Teradyne recorded charges for vacated office space under operating leases at Circuit Board Test and Inspection Systems of $1.7 million. The accrual for lease payments on vacated facilities is reflected in other accrued liabilities and long-term other accrued liabilities. Teradyne recorded a charge for severance and related benefits during 2002 of $22.5 million. There were approximately 1,010 employees terminated across all functional groups during 2002. All remaining severance benefits payable to these employees will be paid by the end of the first quarter of 2004. Teradyne recorded a charge for severance and related benefits during 2001 of $37.3 million. There were approximately 2,900 employees terminated across all functional groups during 2001. As of December 31, 2002, Teradyne has paid all severance benefits relating to the 2001 terminations. The accrual for severance and benefits is reflected in accrued employees' compensation and withholdings. The restructuring actions taken during 2002 are expected to generate cost savings of approximately $88 million annually across all areas of operations. In connection with its restructuring plan for GenRad in 2002, Teradyne recorded $4.3 million of additional goodwill relating to the finalization of its involuntary termination plan and recorded $2.2 million of additional goodwill relating to the completion of facility exit plans for GenRad operating locations. The table below summarizes activity relating to GenRad employee termination and facility closure costs (in thousands):
Severance Facility and Benefits Related Total ------------ -------- ------- Balance at December 31, 2001 $ 1,006 $ -- $ 1,006 Employee termination costs.. 4,289 -- 4,289 Leased facility costs....... -- 2,167 2,167 Cash payments............... (4,970) (450) (5,420) ------- ------ ------- Balance at December 31, 2002 $ 325 $1,717 $ 2,042 ======= ====== =======
24 During the first quarter of 2003, Teradyne had a reduction in workforce of approximately 295 people. The estimated severance charge from this reduction in personnel totals approximately $6.0 million. Interest income and expense Interest income decreased by $5.8 million to $17.0 million during the year ended December 31, 2002 compared to the year ended December 31, 2001. The decreases in interest income were attributable to lower interest rates. Interest expense increased by $17.7 million to $21.8 million during the year ended December 31, 2002 compared to the year ended December 31, 2001. The increase in interest expense was primarily attributable to interest expense related to convertible notes which Teradyne issued in the fourth quarter of 2001. Other income and expense, net Other income and expense, net for the year ended December 31, 2002 and 2001 includes the following:
Gain/(loss) 2002 2001 ----------- ------- ------- (in thousands) ---------------- Repayment of loan by divested entity (1).................. $ 7,144 -- Other than temporary impairment of common stock investment (3,115) -- Writedown of investment in an engineering service provider (2,288) $(1,800) Fair value adjustment on warrants......................... (2,051) 2,035 Sale of Connection Systems aerospace and defense business. -- 14,779 Equity investment (2)..................................... -- (6,974) ------- ------- Total..................................................... $ (310) $ 8,040 ======= =======
- -------- (1) The loan had previously been valued at zero due to its uncertainty of collection. (2) Teradyne's proportionate share of a loss related to an equity investment in Empirix, Inc. The carrying value of this equity investment was zero at December 31, 2002 and 2001. (Loss) income before taxes (Loss) income before income taxes was a loss of $560.9 million in 2002 compared to a loss of $326.2 million in 2001. Semiconductor Test Systems, Connection Systems, and Circuit Board Test and Inspection Systems loss before income taxes increased $18.1 million, $56.6 million, and $158.9 million, respectively in 2002 due to decreased sales in Semiconductor Test Systems and Connection Systems, goodwill and intangible asset impairments in Circuit Board Test and Inspection Systems and the market conditions described above. Other Test Systems income before income taxes increased $4.7 million due to the addition of Diagnostics Solutions in the fourth quarter of 2001 as part of the GenRad acquisition. Income taxes For the year ended December 31, 2002, Teradyne recorded a tax provision of $157.5 million resulting in a tax rate of 28%. The tax rate of 28% is primarily due to the recording of a provision for income taxes to establish a full valuation allowance against net deferred tax assets. As a result of its review undertaken at December 31, 2002, Teradyne concluded under applicable accounting criteria that it was more likely than not that its deferred tax assets would not be realized. Until an appropriate level of profitability is reached, Teradyne will not record tax benefits on operating losses in future results of operations. The effective tax rate benefit for the year ended 2001 was 38%. Teradyne's effective tax rate for the year ended 2001 primarily reflects the U.S. statutory income tax rate, the net effect of state taxes and the effect of tax benefits from its Ireland manufacturing operations. Tax exemptions relating to Ireland operations are effective through 2010. 25 2001 compared to 2000 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
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. Revenue Product sales decreased 56% in 2001 to $1,233.7 million from $2,828.9 million in 2000. Service revenue declined slightly in 2001 to $206.9 million from $215.1 million in 2000 as the overall business declined. Semiconductor Test Systems sales decreased 65%, to $717.7 million in 2001 from $2,044.3 million in 2000, Connection Systems sales 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. 26 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. 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. Gross Margin Gross margin, as a percentage of net sales, decreased to 19.4% in 2001 from 47.2% in 2000. The percentage decrease 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 and additional inventory provisions. 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 $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. 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. 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 $60.7 million. This spending decrease was primarily due to lower prototype 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. 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 of $15.4 million for certain impaired manufacturing assets at Connection Systems, a charge for a Connection Systems impaired facility of $12.0 million, a charge for impaired assets of $7.9 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. All severance benefits for employees terminated in 2001 were paid by the fourth quarter of 2002. 27 Below is a table summarizing activity relating to restructuring and other charges:
Severance Fixed Asset Facility and Impairment Related Benefits Total ----------- -------- --------- -------- (in thousands) 2001 provision.............. $ 35,338 $1,676 $ 37,278 $ 74,292 Cash payments............... -- -- (23,755) (23,755) Asset write-downs........... (35,338) -- -- (35,338) -------- ------ -------- -------- Balance at December 31, 2001 $ -- $1,676 $ 13,523 $ 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. (Loss) 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 $923.3 million, $178.0 million, $43.2 million, and $4.0 million, respectively in 2001 due to decreased sales in each group and the market conditions described above. 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. Liquidity and Capital Resources Teradyne's cash, cash equivalents and marketable securities balance decreased $45.2 million in 2002, to $541.1 million. Teradyne used cash from operating activities of $4.2 million in 2002 and $79.0 million in 2001 and generated cash from operating activities in 2000 of $470.9 million. Net income (loss), adjusted to exclude the effects of non-cash items, used cash of $241.9 million in 2002, used cash of $74.0 million in 2001, and provided cash of $501.6 million in 2000. Changes in operating assets and liabilities, net of businesses sold and acquired provided cash of $237.7 million in 2002 primarily due to decreased inventory balances and the receipt of a tax refund of $85.2 million in March 2002. Changes in operating assets and liabilities used cash of $5.0 million in 2001 and used cash of $30.7 million in 2000. 28 Teradyne used $102.2 million of cash for investing activities in 2002, $247.3 million in 2001, and $312.3 million in 2000. Investing activities consist of purchases, sales, and maturities of marketable securities, proceeds from the sale of businesses, cash acquired in business acquisitions, cash paid for assets, and purchases of capital assets. Capital expenditures decreased by $165.1 million in 2002 compared with 2001, across all operating segments but primarily in the Connection Systems segment. This was due to the actions taken by Teradyne in 2002 to reduce planned capital expenditures due to current market conditions. Capital expenditures were $76.4 million in 2002, $241.4 million in 2001, and $298.2 million in 2000. Teradyne obtained $40.4 million of cash from financing activities in 2002, obtained $401.5 million in 2001, and used $97.5 million in 2000. 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 2002, 2001, and 2000 issuances of common stock under stock option and stock purchase plans generated $41.2 million, $58.5 million, and $55.3 million, respectively. Teradyne used cash for the acquisition of treasury stock of $147.5 million in 2000. 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 2002 and 2001 to repurchase shares of common stock. On October 24, 2001, Teradyne issued $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 began making annual interest payments of $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 excluding the Diagnostic Solutions business. Diagnostic Solutions has been made part of the Other Test 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. 29 The following table reflects Teradyne's current contractual obligations:
Non-cancelable Convertible Mortgage Lease Interest Senior Notes Notes Other Commitments on Debt* Notes Payable Payable Debt Total -------------- -------- ----------- -------- ------- ------ -------- (in thousands) 2003....... $ 23,843 $18,468 $ 1,088 $6,704 $ 277 $ 50,380 2004....... 20,450 18,380 1,172 277 40,279 2005....... 17,592 18,284 1,263 277 37,416 2006....... 13,004 17,936 $400,000 1,244 277 432,461 2007....... 10,840 671 39,224 277 51,012 Beyond 2007 19,993 865 5,040 1,510 27,408 -------- ------- -------- ------- ------ ------ -------- TOTAL...... $105,722 $74,604 $400,000 $49,031 $6,704 $2,895 $638,956
* Includes interest on convertible notes. Teradyne believes its cash, cash equivalents, and marketable securities balance of $541.1 million will be sufficient to meet working capital and expenditure needs for at least the next twenty-four months. Depending on market conditions and funding requirements, Teradyne may seek additional external financing. Inflation has not had a significant long-term impact on earnings. Employee Stock Options Teradyne's equity compensation program is a broad-based, long-term retention program that is intended to attract and retain talented employees and align stockholder and employee interests. Teradyne considers its equity compensation program critical to Teradyne's operation and productivity. Approximately 80% of Teradyne's employees participate in its equity compensation program. Of the stock options Teradyne granted in 2002, 89% went to employees other than the Chief Executive Officer and the five other most highly compensated executive officers. Stock option plan activity for the years 2002, 2001, and 2000 follows (in thousands):
2002 2001 2000 ------ ------- ------ Outstanding at January 1.......... 29,750 22,745 19,225 Options granted................ 7,205 10,289 7,905 Options exercised.............. (1,152) (2,766) (3,217) Options canceled............... (2,382) (518) (1,168) ------ ------- ------ Outstanding at December 31........ 33,421 29,750 22,745 ====== ======= ====== Exercisable at December 31........ 19,296 13,545 8,758 ====== ======= ====== Available for grant at January 1.. 29,841 4,612 11,349 Grants............................ (7,205) (10,289) (7,905) Cancellations..................... 2,382 518 1,168 Additional shares reserved........ -- 35,000 -- ------ ------- ------ Available for grant at December 31 25,018 29,841 4,612 ====== ======= ======
30 Employee and Executive Option Grants
Year Ended December 31, ----------------------- 2002 2001 2000 ------ ------ ----- Net grants during the period as a percentage of outstanding shares at the end of such period................................................................... 2.63% 5.39% 3.90% Grants to Named Executive Officers* during the period as a percentage of outstanding shares at the end of such period.................................. 0.44% 0.63% 0.25% Grants to Named Executive Officers* during the period as a percentage of total options granted during such period............................................ 11.24% 11.16% 5.53% Cumulative options held by Named Executive Officers* as a percentage of total options outstanding at the end of such period........................... 10.33% 8.88% 8.44%
* The term "Named Executive Officers" as used in these notes, includes the Chief Executive Officer and the five other most highly compensated executive officers. Summary of in-the-money and out-of the-money option information at December 31, 2002:
Exercisable Unexercisable Total ----------------------- ----------------------- ----------------------- Weighted-Average Weighted-Average Weighted-Average December 31, 2002 Shares Exercise Price Shares Exercise Price Shares Exercise Price - ----------------- ------ ---------------- ------ ---------------- ------ ---------------- (Shares in thousands) In-the-Money............. 6,394 $10.67 132 $11.64 6,526 $10.69 Out-of-the-Money(1)...... 12,902 29.68 13,993 23.57 26,895 26.50 ------ ------ ------ ------ ------ ------ Total Options Outstanding 19,296 $23.38 14,125 $23.45 33,421 $23.41 ====== ====== ====== ====== ====== ======
(1) Out-of-the-money options are those options with an exercise price equal to or above $13.01, the closing price of Teradyne's common stock as of December 31, 2002. Executive Options Options granted to Named Executive Officers, year-to-date, as of December 31, 2002:
Individual Grants -------------------------------------------------- Number of Percent of Total Securities Options Granted to Exercise Underlying Employees Year to Price Per Expiration Options Granted Date(1) Share Date 5%(2) 10%(2) ---------- ------------------ --------- ---------- ---------- ---------- George W. Chamillard 300,000 4.16% $17.48 7/19/09 $2,134,835 $4,975,072 Gregory R. Beecher.. 100,000 1.39 17.48 7/19/09 711,612 1,658,357 Michael A. Bradley.. 115,000 1.60 17.48 7/19/09 818,353 1,907,111 John M. Casey....... 80,000 1.11 17.48 7/19/09 569,289 1,326,686 Edward Rogas, Jr.... 115,000 1.60 17.48 7/19/09 818,353 1,907,111 Richard E. Schneider 100,000 1.39 17.48 7/19/09 711,612 1,658,357
(1) Based on a year-to-date total of 7,205,435 shares subject to options granted during the year ended December 31, 2002 to employees under Teradyne's option plans. (2) Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term. Amounts reported in these columns represent amounts that may be realized upon exercise of the options immediately prior to the expiration of their term assuming the specified compounded rates of appreciation (5% and 10%) of Teradyne's common stock over the term of the options. These numbers are calculated based on rules promulgated by the Securities and Exchange Commission and do not reflect Teradyne's 31 estimate of future stock price increases. Actual gains, if any, on stock option exercises and common stock holdings are dependent on the timing of such exercise and the future performance of Teradyne's common stock. There can be no assurance that the rates of appreciation assumed in this table can be achieved or that the amounts reflected will be received by the individuals. Year-to-date option exercises and aggregate remaining option holdings and option values of Named Executive Officers as of December 31, 2002:
Number of Securities Underlying Unexercised Values of Unexercised Options at In-the Money Options at Shares Acquired December 31, 2002 December 31, 2002(1) on Year-to-Date Value ------------------------- ------------------------- Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable ---- --------------- -------- ----------- ------------- ----------- ------------- George W. Chamillard 0 $0 785,714 681,855 $726,217 $0 Gregory R. Beecher.. 0 0 59,391 196,570 0 0 Michael A. Bradley.. 0 0 328,922 202,459 403,258 0 John M. Casey....... 0 0 221,215 136,856 241,955 0 Edward Rogas, Jr.... 0 0 325,922 203,459 449,395 0 Richard E. Schneider 0 0 132,841 149,120 78,609 0
(1) Option values based on stock price of $13.01, the closing price of Teradyne's common stock as of December 31, 2002 Equity Compensation Plans In addition to Teradyne's 1996 Employee Stock Purchase Plan discussed in "Note P: Stock Based Compensation," Teradyne maintains three equity compensation plans under which its equity securities are authorized for issuance to the Corporation's employees, directors and/or consultants: 1) 1991 Employee Stock Option Plan; 2) 1997 Employee Stock Option Plan; and 3) 1996 Non-Employee Director Stock Option Plan The purpose of these plans is to promote the interests of Teradyne by attracting and retaining the services of qualified and talented persons to serve as employees, directors and/or consultants of Teradyne. Except for the 1997 Employee Stock Option Plan, each of the foregoing plans was approved by Teradyne's shareholders. The following table presents information about these plans as of December 31, 2002:
(1) (2) (3) -------------------- -------------------- ------------------------------- Number of securities Number of securities remaining to be issued upon Weighted-average available for future issuance exercise of exercise price of under stock option compensation outstanding options, outstanding options, plans (excluding securities Plan category warrants, and rights warrants, and rights reflected in column(1)) ------------- -------------------- -------------------- ------------------------------- (Shares in thousands) Stock option plans approved by shareholders.................... 6,719 $21.78 3,804 Stock option plans not approved by shareholders(1)................. 26,124 $22.70 21,214 ------ ------ ------ Total............................. 32,843 $22.51 25,018 ====== ====== ======
(1) In connection with the acquisition of GenRad, Inc. in October 2001 (the "Acquisition"), Teradyne assumed the outstanding options granted under the GenRad, Inc. 1991 Equity Incentive Plan, the GenRad, Inc. 1991 Directors' Stock Option Plan and the GenRad, Inc. 1997 Non-Qualified Employee Stock Option Plan 32 (collectively, the "GenRad Plans"). Upon the consummation of the Acquisition, these options became exercisable for shares of Teradyne common stock based on an exchange ratio of 0.1733 shares of Teradyne common stock for each share of GenRad common stock. No additional options will be granted pursuant to the GenRad Plans. As of December 31, 2002, there were outstanding options exercisable for an aggregate of 578 shares of Teradyne common stock pursuant to the GenRad Plans, with a weighted average exercise price of $74.77 per share. 1991 Employee Stock Option Plan (the "1991 Plan") Under the 1991 Plan, Teradyne is authorized to issue options which qualify as incentive stock options under the Internal Revenue Code of 1986, as amended ("ISOs") and non-qualified stock options ("NQOs"), up to a maximum of 30,000,000 shares of Teradyne common stock. ISOs may be granted only to employees of Teradyne and its subsidiaries and NQOs may be granted to employees, consultants and directors who are also employees of Teradyne. ISOs must be granted at an exercise price of at least 100% of fair market value of the common stock on the date of grant, and in the case of an employee owning more than 10% of the outstanding voting stock of Teradyne, the price per share must be at least 110% of the fair market value on the date of grant. No more than 200,000 NQOs may be granted at an exercise price less than fair market value. All other NQOs must be granted at an exercise price of at least 100% of fair market value on the date of grant. No employee may be granted options to purchase, in the aggregate, more than 300,000 shares of common stock under the 1991 Plan during any fiscal year. Teradyne's Compensation Committee administers the 1991 Plan and specifies at the time of grant of an option whether such option will be an ISO or NQO, the number of shares subject to the option, its exercise price and other pertinent terms, including vesting provisions. Generally, the term of each option may be for a period not exceeding ten years from the date of grant. Under certain circumstances, if an employee retires from Teradyne, such employee's option may expire prior to expiration of its stated term if such employee is engaged by a competitor of Teradyne. The 1991 Plan is a fixed accounting plan which expires in 2011. The 1997 Employee Stock Option Plan (the "1997 Plan") Under the 1997 Plan, Teradyne is authorized to issue ISOs to employees of Teradyne and its subsidiaries, and NQOs, stock awards and authorizations to purchase Teradyne common stock to employees, consultants or directors (provided that no options may be granted to non-employee directors) up to a maximum of 53,000,000 shares. ISOs must be granted at an exercise price of at least 100% of fair market value of the common stock on the date of grant and in the case of an employee owning more than 10% of the outstanding voting stock of Teradyne, the price per share must be at least 110% of the fair market value on the date of grant. No more than 400,000 NQOs may be granted at an exercise price less than fair market value. All other NQOs must be granted at an exercise price of at least 100% of fair market value on the date of grant. No employee may be granted an option to acquire more than 4,000,000 shares of common stock under the 1997 Plan during any fiscal year. Teradyne's Compensation Committee administers the 1997 Plan and specifies at the time of grant of an award, the pertinent terms of such award, including, if such award is an option, whether such option will be an ISO or NQO, the number of shares subject to the award, its exercise price and vesting provisions. Generally, the term of each award may be for a period not exceeding ten years from the date of grant. Under certain circumstances, if an employee retires from Teradyne, such employee's award may expire prior to expiration of its stated term if such employee is engaged by a competitor of Teradyne. The 1997 Plan is a fixed accounting plan which expires in 2007. Options granted prior to September 2001 under the 1991 and 1997 Plans vest in equal installments over four years and have a maximum term of five years. Beginning in September 2001, options granted under the 1991 and 1997 Plans vest in equal installments over four years and have a maximum term of seven years. In addition, Teradyne made a one-time grant to all employees under the 1991 and 1997 Plans that vests over two years and has a term of seven years. 1996 Non-Employee Director Stock Option Plan (the "1996 Plan") Each non-employee director of Teradyne is entitled to participate in the 1996 Plan. Under the 1996 Plan, Teradyne is authorized to issue options to purchase up to a maximum of 1,600,000 shares of common stock. The 1996 Plan provides for the automatic grant (i) of an option to purchase 22,500 shares of Teradyne common stock 33 to each non-employee director who becomes a member of the Board of Directors on or after August 26, 1999, (ii) on February 5, 2001, of an option to purchase 6,750 shares of Teradyne common stock to each person who was a non-employee director on February 7, 2000, (iii) on February 5, 2001, of an option to purchase 15,750 shares of Teradyne common stock to each non-employee who became a new member of the Board during February 2000, and (iv) of an option to purchase 11,250 shares of Teradyne common stock to each person who is a non-employee director on the first Monday in February in each year beginning on February 5, 2001 and continuing throughout the term of the Plan. No other options shall be granted under the terms of the 1996 Plan. Options granted under the 1996 Plan must be NQOs, shall be granted at 100% of the fair market value of the common stock on the date of grant. Options granted under the 1996 Plan prior to January 2002 expire five years following the date of grant and options granted thereafter expire seven years following the date of grant. Options granted under the 1996 Plan prior to February 5, 2001 become exercisable at the rate of 25% per year and options granted on or after February 5, 2001 are immediately exercisable. Teradyne's Compensation Committee administers the 1996 Plan. Generally, if an optionee ceases to be a director of Teradyne other than by reason of death, no further installments of his or her options become exercisable and the options terminate after three months. However, under certain circumstances, unless a board member becomes a director of a competitor of Teradyne, if the board member goes into government service or retires from the Board of Directors, such option may be exercised within its original terms. The 1996 Plan is a fixed accounting plan which expires in 2006. Recently Issued Accounting Pronouncements In July 2002, FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Teradyne has determined that the adoption of SFAS 146 will not have a material impact on its financial position and results of operations. In December of 2002, FASB issued SFAS 148, "Accounting for Stock-Based Compensation--Transition and Disclosure--an Amendment of FASB Statement No. 123." SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The amendments to SFAS 123 in SFAS 148 shall be effective for financial statements for fiscal years ending after December 15, 2002. The amendment to SFAS 123 and the amendment to Accounting Principles Board No. 28, "Interim Financial Reporting," in SFAS 148 shall be effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. Teradyne has determined that SFAS 148 will not have a material impact on its financial position and results of operations and has adopted the disclosure requirements in this Form 10-K. In February 2003, FASB issued Emerging Issues Task Force 00-21 ("EITF 00-21"), "Revenue Arrangements with Multiple Deliverables". EITF 00-21 requires revenue arrangements with multiple deliverables to be divided into separate units of accounting. If the deliverables in the arrangement meet certain criteria, arrangement consideration should be allocated among the separate units of accounting based on their relative fair values. Applicable revenue recognition criteria should be considered separately for separate units of accounting. The guidance in EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. Teradyne is currently in the process of reviewing EITF 00-21. In November 2002, FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," which elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at 34 the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements in this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. Teradyne has determined that the adoption of FIN 45 will not have a material impact on its financial statements and results of operations and has adopted the disclosure requirements in this Form 10-K. In January 2003, FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," which addresses consolidation by a business of variable interest entities in which it is the primary beneficiary. The Interpretation is effective immediately for certain disclosure requirements and variable interest entities created after January 31, 2003, and periods beginning after June 15, 2003 for variable interest entities created before February 1, 2003. Teradyne does not expect that the adoption of FIN 46 to have a material impact on its financial position and results of operations. 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) contain statements that are not purely historical, but are forward looking statements, made under Section 21E of the Securities Exchange Act of 1934, 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 requirements, capital expenditures, expectations as to customer orders and demand for Teradyne's products and statements relating to backlog, bookings and cancellations, gross margins and pricing considerations. These statements are neither promises nor guarantees but involve risks and uncertainties, both known and unknown, which could cause Teradyne's actual future results to 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. Teradyne's Business Is Impacted by the Slowdown in Economies Worldwide. Teradyne's business has been negatively impacted by the slowdown in the global economies that began in the second half of 2000. The uncertainty regarding the growth rate of the worldwide economies have caused companies to reduce capital investments 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. 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 continue to result in significantly reduced customer orders. Current Geopolitical Turmoil and the Continuing Threat of Domestic and International Terrorist Attacks May Adversely Impact Teradyne's Revenues. International turmoil, exacerbated by the war in Iraq and the escalating tensions in North Korea have contributed to an uncertain political and economic climate, both in the United States and globally, which may affect Teradyne's ability to generate revenue on a predictable basis. In addition, recent terrorist attacks internationally and the threat of future terrorist attacks both domestically and internationally have negatively impacted an already weakened worldwide economy. As Teradyne sells products both in the United States and internationally, the threat of future terrorist attacks may adversely affect Teradyne's business. These conditions make it difficult for Teradyne, and it customers, to accurately forecast and plan future business activities and could have a material adverse effect on Teradyne's business, financial condition and results of operations. 35 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 electronics 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 continued slump in new orders will turn around in the future or that any increase in sales or new orders for a calendar year will be sustained in subsequent years. 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 continue to take measures to address the current slowdown in the market for its products. In particular, Teradyne has reduced its workforce, closed facilities, reduced the pay of certain employees, implemented furloughs, discontinued certain of its product lines, implemented material cost reduction programs, 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, increasing Teradyne's debt, 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 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 on or about September 5, 2001 and is now pending in Federal District Court, San Diego, California, by the former owners of those companies naming as defendants Teradyne and two of its executive officers. This case is further described in "Item 3: Legal Proceedings" in this Form 10-K. 36 Additionally, in 2001, Teradyne was designated as a "potentially responsible party" ("PRP") at a clean-up site in Los Angeles, California. This claim arises out of Teradyne's acquisition of Perception Laminates, Inc. in August 2000. Prior to that date, Perception Laminates had itself acquired certain assets of Alco Industries Inc. under an asset purchase agreement dated July 30, 1992. Neither Teradyne nor Perception Laminates have ever conducted any operations at the Los Angeles site. Teradyne has asked the State of California to drop the PRP designation, but California has not yet agreed to do so. This case is further described in "Item 1: Business" under "Environmental Affairs" in this Form 10-K. 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. Teradyne and two of its executive officers were named as defendants in three purported class action complaints that were filed in Federal District Court, Boston, Massachusetts, in October and November 2001. The court consolidated the cases and has appointed three lead plaintiffs. On November 8, 2002, plaintiffs filed and served a consolidated amended class action complaint. The complaint alleges, 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 complaint seeks unspecified damages, including compensatory damages and recovery of reasonable attorneys' fees and costs. Teradyne filed a motion to dismiss all claims asserted in the complaint on February 7, 2003. Teradyne's motion has not yet been heard. Claims asserted in this case are similar to the claims asserted in the case discussed in "Item 3: Legal Proceedings," which is pending in the Federal District Court in San Diego, California. Teradyne believes it has meritorious defenses to the claims and will defend itself vigorously. Management does not believe that the outcome of these claims will have a material adverse effect on Teradyne's financial position or results of operations but there can be no assurance that any such claims would not have a material adverse effect on 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. 37 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. Teradyne Is Subject to Intense Competition. Teradyne faces significant 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; . compliance with customs regulations; . changes in tariffs and exchange rates; . political and economic instability, acts of terrorism and international conflicts; . 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's Business May Suffer if it is Unable to Attract and Retain Key Employees. Competition for certain employees with skills required by Teradyne is intense in the high technology industry. Teradyne's success will depend on its ability to attract and retain key technical employees in this business segment. The loss of one or more key or other employees, Teradyne's inability to attract additional qualified employees or the delay in hiring key personnel could each have a material adverse effect on Teradyne's business, results of operations or financial condition. 38 If Teradyne's Suppliers do not Meet Teradyne's Product or Delivery Requirements, Teradyne Could Have Reduced Revenues and Earnings. The availability of certain components, including semiconductor chips, may be in short supply from time to time because of high industry demand or the inability of some vendors to consistently meet Teradyne's quality or delivery requirements. If any of Teradyne's suppliers were to cancel contracts or commitments with Teradyne or fail to meet the quality or delivery requirements needed to satisfy customer orders for Teradyne's products, Teradyne could lose time-sensitive customer orders and have significantly decreased quarterly revenues and earnings, which would have a material adverse effect on Teradyne's business, results of operations and financial condition. In addition, Teradyne relies upon third-party contract manufacturers for certain subsystems used in its products, and Teradyne's ability to meet customer orders for those products depends upon the timeliness and quality of the work performed by these subcontractors, over whom Teradyne does not exercise any control. Teradyne May Incur Significant Liabilities if It Fails to Comply With Environmental Regulations. Teradyne is subject to environmental regulations and statutory strict liability 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. 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 Certain Obligations in the Event of a Change in Control. The indenture governing the Notes contains provisions that apply to a change in control of Teradyne. If a change in control as defined in the indenture is triggered, 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. 39 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 sustains continued losses or 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 next twenty-four months. However, Teradyne has a finite amount of cash and in the event Teradyne may need to raise additional funds, due to on-going losses or other reasons, Teradyne cannot be certain that it will be able to obtain such additional financing on favorable terms, if at all, particularly in light of Teradyne's continued quarterly losses. 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. If Teradyne is Required to Account for Options Under Its Employee Stock Plans as a Compensation Expense, Teradyne's Compensation Expense Would Be Increased. There has been an increasing public debate about the proper accounting treatment for employee stock options. Teradyne currently discloses pro forma compensation expense quarterly by calculating the grants fair value and disclosing the impact on net (loss) earnings and net (loss) earnings per share in a footnote to the consolidated financial statements. It is possible that future laws and regulations will require Teradyne to record the fair value of all stock options as compensation expense in its consolidated statement of operations. Note B, "Accounting Policies," of the consolidated financial statements reflects the impact that such a change in accounting treatment would have had on Teradyne's net (loss) income and (loss) earnings per share if it had been in effect during the past three years. Also included in Item 7: "Management's Discussion and Analysis of Financial Condition and Results of Operations," Teradyne has included stock-based compensation disclosures that exceed current disclosure requirements. 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. 40 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; . charges for certain long-lived assets, including goodwill; . 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 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. 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, 2002 and 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 $11.9 million and $11.0 million, respectively. A 10% fluctuation in exchange rates for 2002 and 2001 currencies would change the fair value by approximately $1.2 million and $1.3 million, 41 respectively. 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, 2002 and comparing that with those calculated using hypothetical forward currency exchange rates. Interest Rate Risk Management Teradyne is exposed to potential loss due to changes in interest rates. The principal interest rate exposure is to changes in domestic interest rates. Investments with interest rate risk include short and long-term marketable securities. Debt with interest rate risk includes the fixed rate convertible debt and mortgages. In order to estimate the potential loss due to interest rate risk, a 10% fluctuation in interest rates was assumed. Since the convertible debt was "out-of- the-money" at year end, it was treated as a fixed rate debt security and the analysis assumes that the entire principal amount is repaid in full at maturity and the exercise of the embedded equity option is ignored. Market risk for the short and long-term marketable securities was estimated as the potential decrease in the fair value resulting from a hypothetical increase in interest rates for securities contained in the investment portfolio. On this basis, the potential loss in fair value from changes in interest rates is $6.9 million and $7.1 million as of December 31, 2002 and 2001, respectively. The potential loss reflects a fair value loss on debt offset by a fair value gain on investments. Teradyne expects to hold its debt to maturity or conversion, whichever is sooner. Therefore, the realization of the potential loss on the debt obligations is unlikely. 42 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. Management is responsible for maintaining a system of internal 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 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 26, 2003 43 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 15(a)(1) present fairly, in all material respects, the financial position of Teradyne, Inc. and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 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 15(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. As discussed in Note I to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets on January 1, 2002, in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." PRICEWATERHOUSECOOPERS LLP Boston, Massachusetts January 13, 2003 44 TERADYNE, INC. CONSOLIDATED BALANCE SHEETS December 31, 2002 and 2001
2002 2001 ---------- ---------- (in thousands) ASSETS Current assets:............................................. Cash and cash equivalents.................................. $ 251,521 $ 317,591 Marketable securities...................................... 73,833 50,096 Accounts receivable, less allowance for doubtful accounts of $5,749 and $6,294 in 2002 and 2001, respectively...... 174,838 169,630 Income tax receivable and prepaid amounts.................. 4,816 97,000 Inventories Parts.................................................... 165,149 262,520 Assemblies in process.................................... 106,156 132,097 Finished goods........................................... 8,245 12,372 ---------- ---------- 279,550 406,989 Deferred tax assets........................................ -- 141,013 Prepayments and other current assets....................... 24,715 24,703 ---------- ---------- Total current assets.................................... 809,273 1,207,022 Property, plant, and equipment: Land....................................................... 73,394 73,141 Buildings and improvements................................. 353,641 348,710 Machinery and equipment.................................... 952,830 918,163 Construction in progress................................... 40,615 104,515 ---------- ---------- Total................................................... 1,420,480 1,444,529 ---------- ---------- Less: Accumulated depreciation............................. (735,214) (608,963) ---------- ---------- Net property, plant, and equipment......................... 685,266 835,566 Marketable securities....................................... 215,703 218,544 Deferred tax assets--long-term.............................. -- 4,313 Goodwill.................................................... 118,203 190,276 Intangible and other assets................................. 66,232 86,670 ---------- ---------- Total assets............................................ $1,894,677 $2,542,391 ========== ========== LIABILITIES Current liabilities: Notes payable--banks....................................... $ 6,704 $ 6,557 Current portion of long-term debt.......................... 1,365 1,263 Accounts payable........................................... 63,328 59,761 Accrued employees' compensation and withholdings........... 96,848 78,727 Deferred revenue and customer advances..................... 27,615 52,220 Other accrued liabilities.................................. 73,918 76,519 Accrued income taxes....................................... 9,587 1,292 ---------- ---------- Total current liabilities............................... 279,365 276,339 Long-term other accrued liabilities......................... 136,278 49,986 Long-term debt.............................................. 450,561 451,682 ---------- ---------- Total liabilities........................................... 866,204 778,007 ---------- ---------- Commitments and contingencies (Note J) SHAREHOLDERS' EQUITY Common stock, $0.125 par value, 1,000,000 shares authorized, 209,851 and 207,774 shares issued in 2002 and 2001, respectively and 183,196 and 181,119 shares outstanding in 2002 and 2001, respectively................. 26,231 25,972 Additional paid-in capital.................................. 1,195,246 1,154,266 Treasury stock, at cost, 26,655 shares in 2002 and 2001..... (557,057) (557,057) Accumulated other comprehensive loss........................ (66,423) (7,742) Retained earnings........................................... 430,476 1,148,945 ---------- ---------- Total shareholders' equity.............................. 1,028,473 1,764,384 ---------- ---------- Total liabilities and shareholders' equity.................. $1,894,677 $2,542,391 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 45 TERADYNE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, ---------------------------------- 2002 2001 2000 ---------- ---------- ---------- (in thousands, except per share amounts) Net revenue:........................................... Products.............................................. $ 992,127 $1,233,728 $2,828,892 Services.............................................. 230,109 206,853 215,054 ---------- ---------- ---------- Total net revenue.................................. 1,222,236 1,440,581 3,043,946 Expenses: Cost of products...................................... 829,172 1,016,236 1,468,885 Cost of services...................................... 160,395 145,496 138,489 ---------- ---------- ---------- Total cost of sales................................ 989,567 1,161,732 1,607,374 Engineering and development........................... 293,922 287,318 348,024 Selling and administrative............................ 290,376 270,084 377,783 Restructuring and other charges....................... 204,176 74,292 -- ---------- ---------- ---------- 1,778,041 1,793,426 2,333,181 ---------- ---------- ---------- (Loss) income from operations.......................... (555,805) (352,845) 710,765 Interest income........................................ 16,953 22,743 25,106 Interest expense....................................... (21,783) (4,091) (1,841) Other income and expense, net.......................... (310) 8,040 5,618 ---------- ---------- ---------- (Loss) income before income taxes and cumulative effect of change in accounting principle.............. (560,945) (326,153) 739,648 Provision for (benefit from) income taxes.............. 157,524 (123,938) 221,894 ---------- ---------- ---------- (Loss) income before cumulative effect of change in accounting principle.................................. (718,469) (202,215) 517,754 Cumulative effect of change in accounting principle, net of applicable tax of $27,488 (Note C)............. -- -- (64,138) ---------- ---------- ---------- Net (loss) income...................................... $ (718,469) $ (202,215) $ 453,616 ========== ========== ========== (Loss) income per common share before cumulative effect of change in accounting principle--basic....... $ (3.93) $ (1.15) $ 2.99 ========== ========== ========== Cumulative effect of change in accounting principle--basic...................................... $ -- $ -- $ (0.37) ========== ========== ========== Net (loss) income per common share--basic.............. $ (3.93) $ (1.15) $ 2.62 ========== ========== ========== (Loss) income per common share before cumulative effect of change in accounting principle--diluted..... $ (3.93) $ (1.15) $ 2.86 ========== ========== ========== Cumulative effect of change in accounting principle--diluted.................................... $ -- $ -- $ (0.35) ========== ========== ========== Net (loss) income per common share--diluted............ $ (3.93) $ (1.15) $ 2.51 ========== ========== ========== Shares used in net income per common share--basic...... 182,861 175,828 173,312 ========== ========== ========== Shares used in net income per common share--diluted.... 182,861 175,828 181,011 ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 46 TERADYNE, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years Ended December 31, 2002, 2001 and 2000
Shares ------------------ Accumulated Common Additional Other Total Stock Par Paid-in Treasury Comprehensive Retained Shareholders' Issued Reacquired Value Capital Stock Loss Earnings Equity ------- ---------- --------- ---------- --------- ------------- ---------- ------------- (in thousands) Balance, December 31, 1999...................... 193,205 22,886 $24,151 $ 640,922 $(409,585) $ 0 $ 897,544 $1,153,032 Issuance of stock to employees under benefit plans............. 4,168 521 54,742 55,263 Tax benefit from stock options................... 88,046 88,046 Shares issued to effect acquisition............... 1,841 230 104,256 104,486 Repurchase of stock........ 3,769 (147,472) (147,472) Comprehensive income: Net income................. 453,616 453,616 Total comprehensive income.................. ------- ------ ------- ---------- --------- -------- ---------- ---------- Balance, December 31, 2000...................... 199,214 26,655 $24,902 $ 887,966 $(557,057) $ 0 $1,351,160 $1,706,971 Issuance of stock to employees under benefit plans............. 3,609 451 58,092 58,543 Tax benefit from stock options................... 23,319 23,319 Shares issued to effect acquisition............... 4,951 619 184,889 185,508 Comprehensive loss: 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.................... ------- ------ ------- ---------- --------- -------- ---------- ---------- Balance, December 31, 2001...................... 207,774 26,655 $25,972 $1,154,266 $(557,057) $ (7,742) $1,148,945 $1,764,384 Issuance of stock to employees under benefit plans............. 2,077 259 40,980 41,239 Comprehensive loss: Net loss................... (718,469) (718,469) Foreign currency translation adjustment................ (104) (104) Reclassification adjustment for loss on marketable securities included in net loss net of applicable tax of $0..................... 942 942 Unrealized gains on investments, net of applicable tax of $0........................ 829 829 Additional minimum pension liability, net of applicable tax of $0........................ (60,348) (60,348) Total comprehensive loss.................... ------- ------ ------- ---------- --------- -------- ---------- ---------- Balance, December 31, 2002...................... 209,851 26,655 $26,231 $1,195,246 $(557,057) $(66,423) $ 430,476 $1,028,473 ======= ====== ======= ========== ========= ======== ========== ==========
Comprehensive Income (Loss) ------------- Balance, December 31, 1999...................... Issuance of stock to employees under benefit plans............. Tax benefit from stock options................... Shares issued to effect acquisition............... Repurchase of stock........ Comprehensive income: Net income................. $ 453,616 --------- Total comprehensive income.................. $ 453,616 ========= Balance, December 31, 2000...................... Issuance of stock to employees under benefit plans............. Tax benefit from stock options................... Shares issued to effect acquisition............... Comprehensive loss: 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.................... $(209,957) ========= Balance, December 31, 2001...................... Issuance of stock to employees under benefit plans............. Comprehensive loss: Net loss................... $(718,469) Foreign currency translation adjustment................ (104) Reclassification adjustment for loss on marketable securities included in net loss net of applicable tax of $0..................... 942 Unrealized gains on investments, net of applicable tax of $0........................ 829 Additional minimum pension liability, net of applicable tax of $0........................ (60,348) --------- Total comprehensive loss.................... $(777,150) ========= Balance, December 31, 2002......................
The accompanying notes are an integral part of the consolidated financial statements. 47 TERADYNE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------------- 2002 2001 2000 --------- --------- --------- (in thousands) Cash flows from operating activities: Net (loss) income.................................. $(718,469) $(202,215) $ 453,616 Adjustments to reconcile net (loss) income to net cash (used for) provided by operating activities: Depreciation..................................... 151,811 130,949 99,929 Amortization..................................... 7,878 7,719 1,933 Gain on sale of business......................... -- (14,779) -- Impairment of long-lived assets.................. 155,930 35,338 -- Provision for doubtful accounts.................. 1,073 1,192 1,337 Deferred income tax provision (credit)........... 145,326 (47,091) (44,242) Other non-cash items, net........................ 14,530 14,869 (10,997) Changes in operating assets and liabilities, net of businesses sold and acquired: Accounts receivable............................. (6,281) 285,232 (115,267) Inventories..................................... 128,275 158,669 (235,319) Other assets.................................... 89,775 (74,688) 7,589 Accounts payable, deferred revenue and accruals....................................... 17,609 (367,568) 226,798 Accrued income taxes............................ 8,295 (6,599) 85,482 --------- --------- --------- Net cash (used for) provided by operating activities......................................... (4,248) (78,972) 470,859 --------- --------- --------- Cash flows from investing activities: Additions to property, plant, and equipment........ (46,434) (198,180) (235,189) Increase in equipment manufactured by the Company.. (29,925) (43,269) (63,053) Proceeds from sale of business, net of expenses.... -- 26,250 -- Purchases of held-to-maturity marketable securities....................................... (139,716) (230,255) (409,180) Maturities of held-to-maturity marketable securities....................................... 139,697 156,984 394,006 Purchases of available-for-sale marketable securities....................................... (255,161) (1,876) (177,864) Proceeds from sales and maturities of available-for-sale marketable securities......... 237,741 31,415 177,104 Cash paid for acquisition of assets................ (8,392) -- -- Cash acquired in acquisition....................... -- 11,593 1,885 --------- --------- --------- Net cash used by investing activities............... (102,190) (247,338) (312,291) --------- --------- --------- Cash flows from financing activities: Proceeds from convertible notes, net............... -- 389,000 -- Proceeds from mortgage notes payable............... -- 45,000 -- Payments of long-term debt......................... (871) (91,063) (5,283) Issuance of common stock under stock option and stock purchase plans............................. 41,239 58,543 55,263 Acquisition of treasury stock...................... -- -- (147,472) --------- --------- --------- Net cash provided by (used for) financing activities......................................... 40,368 401,480 (97,492) --------- --------- --------- Increase (decrease) in cash and cash equivalents.... (66,070) 75,170 61,076 Cash and cash equivalents at beginning of year...... 317,591 242,421 181,345 --------- --------- --------- Cash and cash equivalents at end of year............ $ 251,521 $ 317,591 $ 242,421 ========= ========= ========= Supplementary disclosure of cash flow information: Cash paid (received) during the year for: Interest......................................... $ 12,263 $ 1,275 $ 1,728 Income taxes (received) paid..................... $ (88,823) $ (29,182) $ 130,416 Businesses acquired: Fair value of assets acquired.................... $ 364,412 $ 119,887 Liabilities assumed.............................. $ 172,872 $ 15,401 Common stock issued.............................. $ 185,508 $ 104,486
The accompanying notes are an integral part of the consolidated financial statements. 48 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. THE COMPANY Teradyne, Inc. is the world's largest supplier of automatic test equipment, a leading provider of high performance interconnection systems and an emerging provider of 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"); . diagnose and test automotive electronics systems ("Diagnostic Solutions"); 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. 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. 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 excluding the Diagnostic Solutions business. Diagnostic Solutions has been made part of the Other Test 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, goodwill, 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 significantly from these estimates. 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. 49 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) B. ACCOUNTING POLICIES--(Continued) 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 elements must not be essential to the delivered elements. 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 extended warranties, customer support and undelivered products. Service revenue is recognized over the contractual period or as the services are performed. 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. These arrangements require 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 a writedown is identified through the quarterly review process. The inventory valuation is based upon assumptions about future demand, product mix and possible alternative uses. 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. 50 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) B. ACCOUNTING POLICIES--(Continued) 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
Goodwill, Intangible and Long-Lived Assets Beginning January 1, 2002 all goodwill amortization ceased in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." 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 was not being amortized in accordance with the requirements of SFAS No. 142. Prior to January 1, 2002 all other goodwill was amortized over their estimated useful economic life using the straight line method and are carried at cost less accumulated amortization. Teradyne assesses goodwill for impairment at least annually, on a reporting unit basis, or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. If the book value of a reporting unit exceeds its fair value, the implied fair value of goodwill is compared with the carrying amount of goodwill. If the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recorded in an amount equal to that excess. Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," requires one method of accounting for long lived assets disposed of by sale. SFAS 144 was effective for financial statements issued for fiscal years beginning after December 15, 2001. 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. Advertising Costs Teradyne expenses all advertising costs as incurred. Advertising costs were $6.5 million, $10.3 million, and $16.8 million in 2002, 2001, and 2000, respectively. 51 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) B. ACCOUNTING POLICIES--(Continued) Product Warranty Teradyne generally provides a one year warranty on its products commencing upon installation. A provision is recorded upon revenue recognition to cost of sales for estimated warranty expense based upon historical experience. Related costs are expensed as incurred. The balance below is included in other accrued liabilities.
Balance -------------- (in thousands) Balance at December 31, 2001................................................ $ 9,584 Accruals for warranties issued during the period............................ 11,991 Accruals related to pre-existing warranties (including changes in estimates) 902 Settlements made during the period.......................................... (13,390) -------- Balance at December 31, 2002................................................ $ 9,087 ========
When Teradyne receives revenue for extended warranties beyond one year it is deferred and recognized on a straight line basis over the contract period. Related costs are expensed as incurred. The balance below is included in deferred revenue.
Balance -------------- (in thousands) Balance at December 31, 2001..................... $ 4,954 Deferral of new extended warranty revenue........ 1,208 Recognition of extended warranty deferred revenue (4,028) ------- Balance at December 31, 2002..................... $ 2,134 =======
Employee Stock Option Plans and Employee Stock Purchase Plan Teradyne accounts for its stock option plans and stock purchase plan under the provisions of Accounting Principles Board Opinion No. 25 "Accounting For Stock Issued to Employees" ("APB 25") and makes pro forma footnote disclosures as though the fair value method under Statement of Financial Accounting Standard No. 123, "Accounting For Stock-Based Compensation" ("FAS 123"), was followed. Teradyne's employee stock purchase plan is a non-compensatory plan and its stock option plans are accounted for using the intrinsic value method under the provisions of APB 25. Had compensation for Teradyne's stock based compensation plans been accounted for at fair value the amounts reported in the Statement of Operations for the years 2002, 2001, and 2000 would have been (in millions, except per share amounts):
2002 2001 2000 ------- ------- ------ (Loss) income before cumulative effect of change in accounting principle as reported.................................................................. $(718.5) $(202.2) $517.8 Deduct: Total stock-based employee compensation expense determined under fair value method, net of related tax effects............................. (110.3) (73.5) (59.8) Pro forma (loss) income before cumulative effect of change in accounting principle................................................................. (828.8) (275.7) 458.0 (Loss) income before cumulative effect of change in accounting principle per common share--basic as reported........................................... (3.93) (1.15) 2.99 (Loss) income before cumulative effect of change in accounting principle per common share--basic pro forma............................................. (4.53) (1.57) 2.64 (Loss) income before cumulative effect of change in accounting principle per common share--diluted as reported......................................... (3.93) (1.15) 2.86 (Loss) income before cumulative effect of change in accounting principle per common share--diluted pro forma........................................... (4.53) (1.57) 2.53
52 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) B. ACCOUNTING POLICIES--(Continued)
2002 2001 2000 ------- ------- ------ Net (loss) income as reported........................................... $(718.5) $(202.2) $453.6 Deduct: Total stock-based employee compensation expense determined under fair value method, net of related tax effects......................... (110.3) (73.5) (59.8) Pro forma net (loss) income............................................. (828.8) (275.7) 393.8 Net (loss) income per common share-basic as reported.................... (3.93) (1.15) 2.62 Net (loss) income per common share-basic pro forma...................... (4.53) (1.57) 2.27 Net (loss) income per common share-diluted as reported.................. (3.93) (1.15) 2.51 Net (loss) income per common share-diluted pro forma.................... (4.53) (1.57) 2.18
The weighted average grant date fair value for options granted during 2002, 2001 and 2000 was $9.58, $11.90 and $15.34 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:
2002 2001 2000 ---- ---- ---- Expected life (years) 4.3 4.3 4.2 Interest rate........ 3.4% 3.7% 5.7% Volatility........... 67.1% 67.0% 63.7% Dividend yield....... 0.0% 0.0% 0.0%
The weighted-average fair value of employee stock purchase rights granted in 2002, 2001 and 2000 was $5.29, $12.56, and $17.98, respectively. The fair value of the employees' purchase rights was estimated using the Black-Scholes option pricing model with the following assumptions for 2002, 2001 and 2000, respectively:
2002 2001 2000 ---- ---- ---- Expected life (years) 1.0 1.0 1.0 Interest rate........ 1.3% 2.2% 6.0% Volatility........... 63.9% 67.0% 81.5% Dividend yield....... 0.0% 0.0% 0.0%
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, 2002 and 2001, these investments were $6.2 million and $14.4 million, respectively. 53 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) B. ACCOUNTING POLICIES--(Continued) Income Taxes Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The measurement of deferred tax assets is reduced by a valuation allowance if, based upon weighted available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. U.S. income 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. income 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 except for Diagnostic Solutions, 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. The functional currency for non-U.S. subsidiaries is the U.S. dollar except for Diagnostic Solutions. Diagnostic Solutions local currency is its functional currency. 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 and were immaterial for years ended December 31, 2002, 2001, and 2000. Net (Loss) Income per Common Share Basic net (loss) income per common share is calculated by dividing net (loss) income by the weighted average number of common shares outstanding during the period. Diluted net (loss) income per common share is calculated by dividing net (loss) income by the sum of the weighted average number of common shares plus additional common shares that would have been outstanding if potential dilutive common shares had been issued for granted stock option and stock purchase rights. Diluted net (loss) earnings per share for 2002 and 2001 excludes the potentially dilutive effect of common stock equivalents as their effect is antidilutive. Allowance for Doubtful Accounts 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. 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. 54 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) B. ACCOUNTING POLICIES--(Continued) Other Comprehensive (Loss) Income Comprehensive (loss) income includes net (loss) income, minimum pension liability adjustments, unrealized gains and losses on certain investments in debt and equity securities, and cumulative translation adjustments. C. CHANGE IN ACCOUNTING PRINCIPLE IN 2000 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. 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. D. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In July 2002, FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Teradyne has determined that the adoption of SFAS 146 will not have a material impact on its financial position and results of operations. In December of 2002, FASB issued SFAS 148, "Accounting for Stock-Based Compensation--Transition and Disclosure--an Amendment of FASB Statement No. 123." SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The amendments to SFAS 123 in SFAS 148 shall be effective for financial statements for fiscal years ending after December 15, 2002. The amendment to SFAS 123 and the amendment to Accounting Principles Board No. 28, "Interim Financial Reporting," in SFAS 148 shall be effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. Teradyne has determined that SFAS 148 will not have a material impact on its financial position and results of operations and has adopted the disclosure requirements in this Form 10-K. In February 2003, FASB issued Emerging Issues Task Force 00-21 ("EITF 00-21"), "Revenue Arrangements with Multiple Deliverables." EITF 00-21 requires revenue arrangements with multiple deliverables to be divided into separate units of accounting. If the deliverables in the arrangement meet certain criteria, arrangement consideration should be allocated among the separate units of accounting based on their relative fair values. Applicable revenue recognition criteria should be considered separately for separate units of accounting. The 55 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) D. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS--(Continued) guidance in EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The guidance in EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. Teradyne is currently in the process of reviewing EITF 00-21. In November 2002, FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," which elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements in this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. Teradyne has determined that the adoption of FIN 45 will not have a material impact on its financial statements and results of operations and has adopted the disclosure requirements in this Form 10-K. In January 2003, FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," which addresses consolidation by a business of variable interest entities in which it is the primary beneficiary. The Interpretation is effective immediately for certain disclosure requirements and variable interest entities created after January 31, 2003, and periods beginning after June 15, 2003 for variable interest entities created before February 1, 2003. Teradyne does not expect that the adoption of FIN 46 to have a material impact on its financial position and 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 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 and 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 introductions from Teradyne's competitors and competitive pricing pressures, risks of operating internationally, and risks associated with attracting and retaining key employees, possible requirement to expense stock options, risks associated with Teradyne's suppliers' failure to meet Teradyne's product or delivery requirements, risks associated with, among other things, obligations and potential liabilities under environmental laws and regulations, Teradyne's debt service obligations with respect to its issuance in 2001 of convertible senior notes and a mortgage financing completed in 2001 with respect to certain of its owned real estate assets, provisions of Teradyne's charter and by-laws and Massachusetts law that make a takeover of Teradyne more difficult, timing of customer orders and 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 can predict neither the duration of the current slump nor when or if the situation is likely to materially improve. In the absence of significant improvement, orders could remain low or decline further, and the amount of Teradyne's inventory and certain long-lived assets considered realizable could be significantly reduced. 56 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 excluding the Diagnostic Solutions business. Diagnostic Solutions has been made part of the Other Test Systems 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 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. 57 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) F. ACQUISITIONS AND DIVESTITURES--(Continued) 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.............................. 6,032 -------- Total consideration........................ $191,540 -------- 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................... 28,568 Long-term net deferred tax asset............... 25,534 Intangible assets.............................. 44,700 -------- Total identifiable assets acquired......... 216,229 -------- Accounts payable.................................. 23,956 Accrued employees' compensation and benefits...... 31,507 Other accrued liabilities......................... 17,059 Deferred revenue.................................. 10,700 Long-term debt.................................... 89,650 -------- Total liabilities acquired................. 172,872 -------- Total net identifiable assets acquired..... 43,357 -------- Goodwill.......................................... 148,183 -------- Total net assets acquired.................. $191,540 ========
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. Goodwill related to the GenRad acquisition is reported as part of the Circuit Board Test and Inspection Systems segment and is not deductible for tax purposes. In 2002, Teradyne recorded impairment charges of $86.2 million against its Circuit Board Test and Inspection Systems goodwill and intangible assets. See Note I: "Goodwill and Intangible and Other Assets", for further information. In connection with its restructuring plan for GenRad in 2002, Teradyne recorded $4.3 million of additional goodwill relating to the finalization of its involuntary employee termination plan and recorded $2.2 million of additional goodwill relating to the completion of facility exit plans for GenRad operating locations. All remaining severance benefits payable to these employees will be paid by the end of the third quarter of 2003. 58 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) F. ACQUISITIONS AND DIVESTITURES--(Continued) The table below summarizes activity relating to GenRad employee termination and facility closure costs (in thousands):
Severance Facility and Benefits Related Total ------------ -------- ------- Balance at December 31, 2001 $ 1,006 $ -- $ 1,006 Employee termination costs.. 4,289 -- 4,289 Leased facility costs....... -- 2,167 2,167 Cash payments............... (4,970) (450) (5,420) ------- ------ ------- Balance at December 31, 2002 $ 325 $1,717 $ 2,042 ======= ====== =======
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 August 9, 2002, Teradyne acquired certain assets of Precision Concepts Inc. ("PCI"), of Winston-Salem, North Carolina through a bankruptcy court sanctioned sale of assets. PCI was a sole source supplier of certain components to Connection Systems. The acquisition is part of the Connection Systems operating segment. The cost of the acquired manufacturing assets and inventory was $8.4 million in cash. There is no ongoing customer revenue stream that was acquired. The operations will be used to satisfy internal demand in the Connection Systems segment. Based on the purchase price allocation, the following table summarizes the fair values of the assets acquired on August 9, 2002:
(in thousands) -------------- Consideration: Cash paid..................... $8,392 ------ Total consideration....... $8,392 ====== Assets acquired: Inventories................... $ 838 Property, plant, & equipment.. 7,554 ------ Total assets acquired..... $8,392 ======
59 F. ACQUISITIONS AND DIVESTITURES--(Continued) 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 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. As of January 1, 2002, goodwill resulting from the acquisitions is no longer amortized. 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 22% in the new company called Empirix. Teradyne has accounted for its investment in Empirix under the equity method of accounting. At December 31, 2002 and 2001, the carrying value of Teradyne's investment in Empirix was zero. 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, 2002 or 2001. 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. 60 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) G. FINANCIAL INSTRUMENTS--(Continued) 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, 2002 and 2001 these investments are reported as follows (in thousands):
Available-for-Sale -------------------------------------- Fair Market Net Unrealized Held-to- Cost Value Gain/(Loss) Maturity 2002 ----------- ----------- -------------- -------- Short-term marketable securities: U.S. Treasury and government agency securities $ 21,617 $ 21,817 $ 200 $29,905 Corporate debt securities..................... 21,740 22,111 371 ----------- -------- ------ ------- $ 43,357 $ 43,928 $ 571 $29,905 =========== ======== ====== ======= Long-term marketable securities: U.S. Treasury and government agency securities $ 102,889 $104,781 $1,892 Corporate debt securities..................... 107,024 110,922 3,898 ----------- -------- ------ $ 209,913 $215,703 $5,790 =========== ======== ======
Available-for-Sale ----------------------------------- Fair Market Net Unrealized Held-to- Cost Value Gain/(Loss) Maturity 2001 -------- ----------- -------------- -------- Short-term marketable securities: U.S. Treasury and government agency securities $ 7,255 $ 7,282 $ 27 $30,000 Corporate debt securities..................... 12,634 12,814 180 -------- -------- ------ ------- $ 19,889 $ 20,096 $ 207 $30,000 ======== ======== ====== ======= Long-term marketable securities: U.S. Treasury and government agency securities 133,456 $133,958 $ 502 Corporate debt securities..................... 82,390 84,586 2,196 -------- -------- ------ $215,846 $218,544 $2,698 ======== ======== ======
Other As of December 31, 2002, the estimated fair value of Teradyne's convertible notes was approximately $359 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, 2002. 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. 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 and results of operations. 61 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) G. FINANCIAL INSTRUMENTS--(Continued) 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. At December 31, 2002, Teradyne had the following forward currency contracts to buy U.S. dollars for non U.S. currencies with the following notional amounts totaling $11.9 million; $5.0 million Japanese Yen, $6.4 million British pound sterling, and $0.5 million Swedish Krona. At December 31, 2001, the face amount of outstanding forward currency contracts to buy U.S. dollars for non U.S. currencies was $11.0 million. The fair value of the outstanding contracts at December 31, 2002 and 2001 was not material. Realized gains related to forward contracts hedging net monetary position were $0.9 million, $4.1 million, and $7.0 million for 2002, 2001, and 2000, 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, Inc., a public technology company, at an exercise price of $4.86 per share. In accordance with SFAS 133, Teradyne recorded a loss of $2.1 million and a gain of $2.0 million in other income and expense for the changes in fair value of the warrants for the year ended December 31, 2002 and 2001, respectively. 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 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, 2002 and 2001 consisted of the following (in thousands):
2002 2001 -------- -------- Convertible senior notes $400,000 $400,000 Mortgage notes payable.. 49,031 50,040 Other long-term debt.... 2,895 2,905 -------- -------- Total................... 451,926 452,945 Less current maturities. 1,365 1,263 -------- -------- $450,561 $451,682 -------- --------
62 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) H. DEBT--(Continued) The total maturities of long-term debt for the succeeding five years and thereafter are: 2003--$1.4 million; 2004--$1.4 million; 2005--$1.5 million; 2006--$401.5 million; 2007--$39.5 million; and $6.6 million thereafter. Convertible Senior Notes In 2001, Teradyne issued $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 designated periods:
Period Redemption 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 began making annual interest payments of up to $15 million, paid semi-annually, on the Notes 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. 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 41/2 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 in Japan as of December 31, 2002 and 2001 was 1.2% for both years. 63 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) I. GOODWILL, INTANGIBLE AND OTHER ASSETS At December 31, 2002 and 2001, the goodwill and intangible and other assets were:
2002 2001 -------- -------- (In thousands) Goodwill................................................................. $118,203 $190,276 ======== ======== Intangible and other assets: Completed technology.................................................. $ 28,649 $ 35,600 Service and software maintenance contracts and customer relationships. 8,633 8,993 Tradenames and trademarks............................................. 3,800 3,800 Other intangibles assets.............................................. -- 1,535 -------- -------- Total intangible assets........................................... 41,082 49,928 Less accumulated amortization............................................ (10,288) (3,602) -------- -------- Total net intangible assets....................................... 30,794 46,326 Other assets............................................................. 35,438 40,344 -------- -------- Net intangible and other assets................................... $ 66,232 $ 86,670 ======== ========
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 amortizable intangible assets and determined the lives were appropriate. 64 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) I. GOODWILL AND INTANGIBLE AND OTHER ASSETS--(Continued) Amortizable intangible assets consist of the following:
December 31, 2002 ------------------------------------------ Gross Net Weighted Carrying Accumulated Carrying Average Amount Amortization Amount Useful Life -------- ------------ -------- ----------- (in thousands) Completed technology................................... $28,649 $ 5,790 $22,859 7.5 years Service and software maintenance contracts and customer relationships........................................ 8,633 3,944 4,689 5.7 years Tradenames and trademarks.............................. 3,800 554 3,246 8.0 years ------- ------- ------- Total intangible assets............................. $41,082 $10,288 $30,794 6.1 years ======= ======= ======= December 31, 2001 ------------------------------------------ Gross Net Weighted Carrying Accumulated Carrying Average Amount Amortization Amount Useful Life -------- ------------ -------- ----------- (in thousands) Completed technology................................... $35,600 $ 832 $34,768 7.2 years Service and software maintenance contracts and customer relationships........................................ 8,993 2,054 6,939 5.8 years Tradenames and trademarks.............................. 3,800 79 3,721 8.0 years Workforce and other.................................... 1,535 637 898 5.9 years ------- ------- ------- Total intangible assets............................. $49,928 $ 3,602 $46,326 6.9 years ======= ======= =======
During 2002, Teradyne recorded an intangible asset impairment charge of $7.2 million related to the divestiture of two product lines in its Circuit Board Test and Inspection Systems segment. The charge was recorded in Restructuring and Other Charges in the consolidated Statement of Operations. Aggregate amortization expense for the year ended December 31, 2002 and 2001 was $7.3 million and $3.0 million, respectively. Estimated amortization expense for each of the five succeeding fiscal years is as follows (in thousands):
Year Amount ---- ------ 2003 $7,315 2004 4,703 2005 4,703 2006 4,703 2007 4,548
65 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) I. GOODWILL AND INTANGIBLE AND OTHER ASSETS--(Continued) 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 year ended December 31, 2002 and 2001 are as follows:
Circuit Board Test and Connection Inspection Systems Systems Total ---------- ------------- -------- (in thousands) Balance at December 31, 2000............. $52,283 $ 390 $ 52,673 Goodwill acquired........................ 141,627 141,627 Amortization............................. (3,634) (390) (4,024) ------- -------- -------- Balance at December 31, 2001............. $48,649 $141,627 $190,276 Reclassification of workforce............ 407 -- 407 Finalization of purchase price allocation -- 6,456 6,456 Goodwill impairment...................... -- (78,936) (78,936) ------- -------- -------- Balance at December 31, 2002............. $49,056 $ 69,147 $118,203 ======= ======== ========
66 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) I. GOODWILL AND INTANGIBLE AND OTHER ASSETS--(Continued) SFAS 142 requires Teradyne to complete a transitional goodwill impairment test within six months from the date of adoption. Following the adoption of SFAS 142, Teradyne completed an initial impairment test, during the first quarter of 2002, based on the comparison of the fair value of the reporting units with their respective carrying value as of January 1, 2002. Teradyne concluded that there was no impairment in either the Circuit Board Test and Inspection Systems segment or the Connection Systems segment as of adoption. As of January 1, 2002, Teradyne ceased the amortization of goodwill. SFAS 142 provides that goodwill of a reporting unit be tested for impairment on an annual basis and between annual tests in certain circumstances including a significant adverse change in the business outlook. During the third quarter of 2002, as a result of significant change in the business outlook, Teradyne retested the goodwill related to the Circuit Board Test and Inspection Systems segment for impairment as of September 29, 2002. Teradyne concluded that the carrying value of the assets and liabilities associated with the Circuit Board Test and Inspection Systems segment exceeded its fair value. In the third quarter of 2002, Teradyne recognized a $78.5 million goodwill impairment charge recorded in Restructuring and Other Charges in the consolidated Statements of Operations. The impairment charge was measured by comparing the implied fair value of the goodwill associated with the Circuit Board Test and Inspection Systems segment to its carrying value. The fair value of the segment was estimated using the expected present value of future cash flows. The following is the pro-forma effect on net (loss) income and net (loss) income per share had SFAS 142 been in effect for the years ended December 31, 2001 and 2000 (in thousands, except per share amounts):
Year Ended ------------------------- December 31, December 31, 2001 2000 ------------ ------------ Net (loss) income.......................... $(202,215) $453,616 Add back: Impact of goodwill amortization.. 4,024 1,443 --------- -------- Adjusted net (loss) income................. $(198,191) $455,059 ========= ======== Net (loss) income per share--basic......... $ (1.15) $ 2.62 Add back: Impact of goodwill amortization.. 0.02 0.01 --------- -------- Adjusted net (loss) income per share--basic $ (1.13) $ 2.63 ========= ======== Net loss per share--diluted................ $ (1.15) $ 2.51 Add back: Impact of goodwill amortization.. 0.02 0.01 --------- -------- Adjusted net loss per share--diluted....... $ (1.13) $ 2.52 ========= ========
J. COMMITMENTS AND CONTINGENCIES Rental expense for the years ended December 31, 2002, 2001, and 2000 was $32.4 million, $26.0 million, and $21.3 million, respectively. 67 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) J. COMMITMENTS AND CONTINGENCIES--(Continued) The following table reflects Teradyne's current non-cancelable operating lease commitments:
Non-cancelable Lease Commitments -------------- (in thousands) 2003.................................... $ 23,843 2004.................................... 20,450 2005.................................... 17,592 2006.................................... 13,004 2007.................................... 10,840 Beyond 2007............................. 19,993 -------- Total................................... $105,722
After the August 2000 acquisition of Herco Technology Corp. and Perception Laminates, Inc. the former owners of those companies filed a complaint on September 5, 2001 against Teradyne and two of its executive officers. The case is now pending in Federal District Court, San Diego, California. Teradyne and the two individual defendants filed a motion to dismiss the complaint in its entirety. The court granted the motion in part, and the only remaining claims were 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. Teradyne's subsequent motion for partial summary judgment with respect to the breach of contract claims was granted on November 7, 2002. The plaintiffs have asked the court to reconsider its ruling or, alternatively, for leave to appeal both the Court's ruling regarding dismissal of claims and summary judgment to the Ninth Circuit Court of Appeals. Teradyne has opposed these motions. No ruling by the Court has yet been issued. A small portion of the original complaint relating to alleged fraud in connection with setting the transaction price remains pending before the District Court. Teradyne has answered and denied all liability. Management does not believe that the outcomes of these claims will have a material adverse effect on Teradyne's financial position or results of operations but there can be no assurance that any such claims would not have a material adverse effect on Teradyne's financial position or results of operations. Also arising out of the August 2000 acquisition of Herco Technology Corp. and Perception Laminates, Inc. is a demand for arbitration, made on or about October 19, 2001, by the former owners of those companies, which was filed with the American Arbitration Association. The arbitration is with respect to environmental indemnification claims initially asserted by Teradyne under the respective acquisition agreements. These claims arose in connection with environmental matters related to Herco Technology Corp. and Perception Laminates, Inc. facilities in California. The arbitration demand by the former owners seeks release of certain shares of Teradyne's common stock being held in escrow pursuant to the terms of the acquisition agreements and damages related to failure to release the escrow. Teradyne has counterclaimed for enforcement of the environmental indemnity provisions of the acquisition agreements. Hearings in connection with the arbitration have been completed and the parties are currently completing post-hearing briefs for submission to the arbitrators. Management does not believe that the outcome of these claims will have a material adverse effect on Teradyne's financial position or results of operations but there can be no assurance that any such claims would not have a material adverse effect on Teradyne's financial position or results of operations. Teradyne and two of its executive officers were named as defendants in three purported class action complaints that were filed in Federal District Court, Boston, Massachusetts, in October and November 2001. The court consolidated the cases and has appointed three lead plaintiffs. On November 8, 2002, plaintiffs filed and served a consolidated amended class action complaint. The complaint alleges, among other things, that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, by making, during the 68 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) J. COMMITMENTS AND CONTINGENCIES--(Continued) 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 complaint seeks unspecified damages, including compensatory damages and recovery of reasonable attorneys' fees and costs. Teradyne filed a motion to dismiss all claims asserted in the complaint on February 7, 2003. Teradyne's motion has not yet been heard. Claims asserted in this case are similar to the claims asserted in the case discussed above, which is pending in the Federal District Court in San Diego, California. Teradyne believes it has meritorious defenses to the claims and will defend itself vigorously. Management does not believe that the outcomes of these claims will have a material adverse effect on Teradyne's financial position or results of operations but there can be no assurance that any such claims would not have a material adverse effect on Teradyne's financial position or results of operations. By letter dated October 22, 2002, counsel for Electro Mechanical Solutions, Inc., and several affiliated debtors including PRECISMetals in Chapter 11 bankruptcy cases pending in the United States Bankruptcy Court for the Northern District of California (collectively, the "Debtors"), asserted that Teradyne received payments in 2001 totaling $12.4 million from PRECISMetals in the 90 days prior to the bankruptcy filing and that those payments constitute avoidable preferential transfers. Teradyne believes that it has good faith defenses to the alleged preferential transfers and intends to contest the claims vigorously. Management does not believe that the outcomes of these claims will have a material adverse effect on Teradyne's financial position or results of operations but there can be no assurance that any such claims would not 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 a clean-up site in Los Angeles, California. This claim arises out of Teradyne's acquisition of Perception Laminates, Inc. in August 2000. Prior to that date, Perception Laminates had itself acquired certain assets of Alco Industries Inc. under an asset purchase agreement dated July 30, 1992. Neither Teradyne nor Perception Laminates have ever conducted any operations at the Los Angeles site. Teradyne has asked the State of California to drop the PRP designation, but California has not yet agreed to do so. Management does not believe that the outcome of this matter will have a material adverse effect on Teradyne's financial position or results of operations but there can be no assurance that any such outcome would not have a material adverse effect on Teradyne's financial position or results of operations. In August 2002, Teradyne was designated as a PRP at a site in Whittier, California. Teradyne was identified as a PRP based on shipments from its Woodland Hills, California and Agoura Hills, California sites during 1983 and 1984. Based upon review of the shipping documents, Teradyne believes that any potential liability is limited to that of a de minimus contributor to the site. Management does not believe that any potential Teradyne's liability for the clean-up of this site will have a material adverse effect on Teradyne's financial position or results of operations but there can be no assurance that any potential liability would not have a material adverse effect on Teradyne's financial position or results of operations. In October 1998, a former employee of GenRad, Inc., which Teradyne acquired on October 26, 2001, instituted an arbitration proceeding against GenRad alleging breach of his severance agreement. Teradyne believes that the employee's claims are without merit. The last arbitration hearing was conducted on October 28, 2002, and a decision is expected by May 2003. Management does not believe that the outcome of this proceeding will have a material adverse effect on Teradyne's financial position or results of operations but there can be no assurance that the outcome would not have a material adverse effect on Teradyne's financial position or results of operations. Teradyne disputes all of the claims above and believes they are without merit, and intends to defend vigorously against them. However, an adverse resolution of any of the claims could have a material adverse 69 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) J. COMMITMENTS AND CONTINGENCIES--(Continued) 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 claims and therefore as of December 31, 2002 had not accrued for any potential losses from the claims. In addition, Teradyne is subject to legal proceedings, claims and investigations that arise in the ordinary course of business such as but not limited to patent, commercial and environmental matters. There are no such matters pending that Teradyne expects to be material with respect to its business, financial position or results of operation but there can be no assurance that any such matters would not have a material adverse effect on Teradyne's business, financial position or results of operations. Guarantees and Indemnification Obligations Teradyne provides an indemnification, to the extent permitted by law, to its officers, directors, employees and agents for liabilities arising from certain events or occurrences while the officer, director, employee, or agent, is or was serving, at Teradyne's request in such capacity. With respect to acquisitions, Teradyne provides indemnifications to or assumes indemnification obligations for the current and former directors, officers and employees of the acquired companies in accordance with the acquired companies' bylaws and charter. As a matter of practice, Teradyne has maintained directors and officer liability insurance coverage including coverage for directors and officers of acquired companies. Two Teradyne Executive Officers are named defendants in a securities case pending in the Federal District Court in San Diego, CA and two other Teradyne Executive Officers are named defendants in the securities class action pending in the Federal District Court in Boston, MA. Each of these Executive Officers has invoked the indemnification provisions described herein and insurance claims have been submitted to and are being processed by the Company's director and officer liability insurance provider. Teradyne enters into agreements in the ordinary course of business with customers, resellers, distributors, integrators and suppliers. Most of these agreements require Teradyne to defend and/or indemnify the other party against intellectual property infringement claims brought by a third party with respect to Teradyne's products. From time to time, Teradyne also indemnifies customers and business partners for damages, losses and liabilities they may suffer or incur relating to personal injury, personal property damage, product liability, and environmental claims relating to the use of Teradyne's products and services or resulting from the acts or omissions of Teradyne, its employees, authorized agents or subcontractors. On occasion, Teradyne has also provided guarantees to customers regarding the performance of its products in addition to the warranty described below. As a matter of ordinary business course, Teradyne warrants that its products, including software products, will substantially perform in accordance with its standard published specifications in effect at the time of delivery. Most warranties have a one year duration commencing from installation. A provision is recorded upon revenue recognition to cost of sales for estimated warranty expense upon historical experience. When Teradyne receives revenue for extended warranties beyond the standard duration, it is deferred and recognized on a straight line basis over the contract period. Related costs are expensed as incurred. As of December 31, 2002 and 2001, Teradyne had a product warranty accrual of $9.1 million and $9.6 million, respectively in other accrued liabilities and revenue deferrals related to extended warranties of $2.1 million and $5.0 million, respectively in deferred revenue. In addition, and in the ordinary course of business, Teradyne provides minimum purchase guarantees to certain of its vendors to ensure continuity of supply against the market demand. Although some of these guarantees provide penalties for cancellations and/or modifications to the purchase commitments as the market demand decreases, most of the guarantees do not. Therefore, as the market demand decreases, Teradyne re-evaluates these guarantees and determines what charges, if any, should be recorded. 70 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) J. COMMITMENTS AND CONTINGENCIES--(Continued) With respect to its agreements covering product, business or entity divestitures and acquisitions, Teradyne provides certain representations, warranties and covenants to divestiture purchasers and agrees to indemnify and hold such purchasers harmless against breaches of such representations, warranties and covenants. Many of the indemnification claims have a definite expiration date while some remain in force indefinitely. With respect to its acquisitions, Teradyne may, from time to time, assume the liability for certain events or occurrences that took place prior to the date of acquisition. As a matter of ordinary business course, Teradyne occasionally guarantees certain indebtedness obligations of its subsidiary companies, limited to the borrowings from the financial institutions. Except as otherwise indicated above, all such guarantees and obligations were in effect prior to December 31, 2002 and, based on historical experience and information known as of December 31, 2002, Teradyne has not recorded any liabilities for them as of December 31, 2002. K. 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):
2002 2001 2000 --------- --------- -------- (Loss) income before cumulative effect of change in accounting principle............................................................. $(718,469) $(202,215) $517,754 Cumulative effect of change in accounting principle..................... -- -- (64,138) --------- --------- -------- Net (loss) income....................................................... $(718,469) $(202,215) $453,616 ========= ========= ======== Shares used in (loss) income per common share--basic.................... 182,861 175,828 173,312 Effect of dilutive securities: Employee and director stock options..................................... -- -- 7,293 Employee stock purchase rights.......................................... -- -- 406 --------- --------- -------- Dilutive potential common shares........................................ -- -- 7,699 --------- --------- -------- Shares used in (loss) income per common share--diluted.................. 182,861 175,828 181,011 ========= ========= ======== (Loss) income before cumulative effect of change in accounting principle per common share--basic............................................... $ (3.93) $ (1.15) $ 2.99 Cumulative effect of change in accounting principle--basic.............. $ -- $ -- $ (0.37) --------- --------- -------- Net (loss) income per common share--basic............................... $ (3.93) $ (1.15) $ 2.62 ========= ========= ======== (Loss) income before cumulative effect of change in accounting principle per common share--diluted............................................. $ (3.93) $ (1.15) $ 2.86 Cumulative effect of change in accounting principle--diluted............ $ -- $ -- $ (0.35) --------- --------- -------- Net (loss) income per common share--diluted............................. $ (3.93) $ (1.15) $ 2.51 ========= ========= ========
All options and equivalent shares related to the convertible notes outstanding in 2002 and 2001 were excluded from the calculation of diluted net loss per share because the effect would have been antidilutive. As of December 31, 2002, and 2001, there were 33.4 million and 29.8 million options outstanding, respectively. As of December 31, 2002 and 2001, there were 15.4 million equivalent shares related to the convertible notes shares 71 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) K. NET (LOSS) INCOME PER COMMON SHARE--(Continued) 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 were not included in the calculation of diluted net income per share. L. RESTRUCTURING AND OTHER CHARGES The table below summarizes activity for the year ended December 31, 2002, relating to restructuring and other charges:
Goodwill and Intangible Severance Asset Fixed Asset Facility and Impairment Impairment Related Benefits Total ------------ ----------- -------- --------- --------- (in thousands) Balance at December 31, 2001 $ -- $ -- $ 1,676 $ 13,523 $ 15,199 2002 provision.............. 86,196 69,734 25,751 22,495 204,176 Cash payments............... -- -- (2,187) (22,724) (24,911) Asset write-downs........... (86,196) (69,734) -- -- (155,930) -------- -------- ------- -------- --------- Balance at December 31, 2002 $ -- $ -- $25,240 $ 13,294 $ 38,534 ======== ======== ======= ======== =========
The table below summarizes activity for the year ended December 31, 2001, relating to restructuring and other charges:
Severance Fixed Asset Facility and Impairment Related Benefits Total ----------- -------- --------- -------- (in thousands) 2001 provision.............. $ 35,338 $1,676 $ 37,278 $ 74,292 Cash payments............... -- -- (23,755) (23,755) Asset write-downs........... (35,338) -- -- (35,338) -------- ------ -------- -------- Balance at December 31, 2001 $ -- $1,676 $ 13,523 $ 15,199 ======== ====== ======== ========
During the year ended December 31, 2002, Teradyne recognized an $86.2 million goodwill and intangibles asset impairment charge. See Footnote I, Goodwill and Intangible Assets. During the year ended December 31, 2002, Teradyne's management concluded, in accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," that certain long-lived assets held for sale were impaired as the estimated fair value was less than the carrying value of these assets, and recorded charges of $69.7 million. The charge for the Connection Systems segment included $25.6 million relating to a held for sale printed circuit board facility in San Diego, California, $2.6 million related to a held for sale facility in Nashua, New Hampshire, and $17.9 million primarily related to manufacturing equipment which was taken out of service during 2002 and is held for sale. The Semiconductor Test Systems segment recorded a charge of $12.0 million primarily for assets held for sale as a result of the lack of demand for the Probe-One product and the discontinuance of the J996 product after a last time buy offer to our customers, a charge of $9.7 million related to the write down of manufacturing facilities that is held for sale in California, and $0.8 million related to the write down of foundry manufacturing equipment that are held for sale. In addition, an asset impairment charge was recorded of $1.1 million related to a Corporate facility sold in the first quarter of 2003. Teradyne 72 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) L. RESTRUCTURING AND OTHER CHARGES-- (Continued) expects the sale of these held for sale assets to occur within a year. The carrying value of Teradyne's assets held for sale is $45.3 million as of December 31, 2002. These assets are included in Property, Plant, and Equipment. During the year ended December 31, 2001, Teradyne recorded a charge of $35.3 million for impaired long-lived assets, consisting of the following: $12.0 million for held for sale a facility in the Connection Systems segment, certain impaired manufacturing assets in the Connection Systems segment of $15.4 million, and equipment manufactured by Teradyne used in manufacturing and engineering and development relating to the discontinuance of the Flash 750 product line in Semiconductor Test Systems segment of $7.9 million. During the year ended December 31, 2002, Teradyne recorded a charge of $25.8 million relating to future lease commitments for vacated manufacturing and administrative space which will be exited prior to the end of the lease term. The charge of $25.8 million includes $18.8 million at Circuit Board Test and Inspection Systems, $5.0 million at Connection Systems and $2.0 million at Semiconductor Test Systems. The lease accruals are expected to be paid out over the lease terms, the latest of which expires in 2010. During the fourth quarter of 2001, Teradyne recorded charges for vacated office space under operating leases at Circuit Board Test and Inspection Systems of $1.7 million. The accrual for lease payments on vacated facilities is reflected in other accrued liabilities and long-term other accrued liabilities. Teradyne recorded a charge for severance and related benefits during 2002 of $22.5 million. There were approximately 1,010 employees terminated across all functional groups during 2002. All remaining severance benefits payable to these employees will be paid by the end of the first quarter of 2004. Teradyne recorded a charge for severance and related benefits during 2001 of $37.3 million. There were approximately 2,900 employees terminated across all functional groups. As of December 31, 2002 Teradyne has paid all severance benefits relating to the 2001 terminations. The accrual for severance and benefits is reflected in accrued employees' compensation and withholdings. M. OTHER CHARGES The table below reflects certain operating statement activity for the year ended December 31, 2002 and 2001:
Excess and Obsolete Accelerated Inventory Depreciation Total ---------- ------------ -------- (In thousands) 2002 Activity: Cost of sales............... $ 39,021 $5,667 $ 44,688 Engineering and development. 838 838 Selling and administrative.. 1,144 1,144 -------- ------ -------- Total 2002 charges...... $ 39,021 $7,649 $ 46,670 ======== ====== ======== 2001 Activity: Cost of sales............... $139,683 $139,683 -------- ------ -------- Total 2001 charges...... $139,683 -- $139,683 ======== ====== ========
During the year ended December 31, 2002, an excess and obsolete provision of $39.0 million was recorded in cost of sales of which $20.7 million related to the lack demand for the Probe-One product and the discontinuance of the J996 product after a last time buy offer to Teradyne's customers. 73 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) M. OTHER CHARGES--(Continued) During 2002, Teradyne recorded a $7.6 million charge for accelerated depreciation which relates to the incremental additional depreciation over the normal depreciation expense for long-lived assets as a result of the decision to consolidate locations and therefore shorten the service period. The charge includes $4.5 million at the Connection Systems segment related to the Hudson, NH and Fremont, CA facilities; $2.2 million at the Circuit Board Test and Inspection segment related to the Westford, MA facility; $0.6 million at the Semiconductor Test segment related to the Bedford, MA facility; and $0.3 million at Corporate related to a Boston facility. 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 $32.3 million related to an inventory writedown for the discontinuance of its Flash 750 memory product. During the fourth quarter of 2001, Teradyne recorded a charge of $2.3 million for discontinued inventory due to overlapping product lines as a result of the consummation of the GenRad acquisition. Other income and expense, net for the year ended December 31, 2002 and 2001 includes the following:
Gain/(loss) 2002 2001 ----------- ------- ------- (in thousands) Repayment of loan by divested entity (1).................. $ 7,144 -- Other than temporary impairment of common stock investment (3,115) -- Writedown of investment in an engineering service provider (2,288) $(1,800) Fair value adjustment on warrants......................... (2,051) 2,035 Sale of Connection Systems aerospace and defense business. -- 14,779 Equity investment (2)..................................... -- (6,974) ------- ------- Total.................................................. $ (310) $ 8,040 ======= =======
- -------- (1) The loan had previously been valued at zero due to its uncertainty of collection. (2) Teradyne's proportionate share of a loss related to an equity investment in Empirix, Inc. The carrying value of this equity investment was zero at December 31, 2002 and 2001. N. RETIREMENT PLANS Defined Benefit Pension 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"). 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 Q: 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. 74 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) N. RETIREMENT PLANS--(Continued) The expense of these defined benefit pension plans and the December 31 balances of plan assets and obligations are shown below (in thousands):
2002 2001 2000 -------- -------- ------- EXPENSE Service cost.................................. $ 6,140 $ 6,369 $ 6,365 Interest cost................................. 12,702 10,210 8,972 Expected return on plan assets................ (11,232) (10,029) (8,589) Amortization of unrecognized: Net transition obligation.................. 78 74 89 Prior service cost......................... 734 766 843 Net loss................................... 357 264 206 Curtailment loss (gain)/employee contributions -- 2,402 (89) -------- -------- ------- Total expense................................. $ 8,779 $ 10,056 $ 7,797 ======== ======== =======
2002 2001 2000 ---- ---- ---- WEIGHTED AVERAGE ASSUMPTIONS Discount rate............................................. 6.0% 7.0% 7.5% Expected return on plan assets............................ 9.0 9.0 9.0 Salary progression rate................................... 5.0 5.0 5.0
75 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) N. RETIREMENT PLANS--(Continued)
2002 2001 --------- -------- ASSETS AND OBLIGATIONS Projected benefit obligation: Beginning of year.................. $ 181,049 $139,472 Service cost....................... 6,140 6,369 Interest cost...................... 12,702 10,210 Actuarial (gain) loss.............. 37,833 15,329 Benefits paid...................... (4,562) (4,171) Plan amendment..................... 381 212 Curtailment........................ -- (947) GenRad acquisition................. -- 15,695 Non U.S. currency movement......... 3,624 (1,120) --------- -------- End of year........................ 237,167 181,049 Fair value of plan assets: Beginning of year.................. 115,217 114,512 Company contributions.............. 10,539 6,050 Plan participants' contributions... 70 71 Actual return...................... (15,713) (10,964) Benefits paid...................... (4,562) (4,171) GenRad acquisition................. -- 10,365 Non U.S. currency movement......... 741 (646) --------- -------- End of year........................... 106,292 115,217 --------- -------- Funded status......................... (130,875) (65,832) Unrecognized prior service cost....... 5,408 5,315 Unrecognized net transition obligation 242 306 Unrecognized net actuarial loss....... 107,563 43,261 --------- -------- Net amount recognized................. $ (17,662) $(16,950) ========= ========
The impact of the GenRad acquisition and an early retirement program increased the projected benefit obligation by $15.9 million in 2001. 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):
2002 2001 --------- -------- Prepaid pension cost................ $ 4,915 $ 926 Accrued pension liability........... (107,106) (40,104) Intangible asset.................... 5,961 4,022 Accumulated other comprehensive loss 78,568 18,206 --------- -------- Net amount recognized............... $ (17,662) $(16,950) ========= ========
76 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) N. RETIREMENT PLANS--(Continued) 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 2002 and 2001 were as follows:
2002 2001 ------ ------ (In millions) Projected benefit obligation.. $237.2 $181.0 Accumulated benefit obligation 206.2 154.8 Fair value of plan assets..... $106.3 $115.2
An additional minimum pension liability adjustment of $62.3 million was required during 2002 as the accumulated benefit obligation of $206.2 million exceeded the $106.3 million of pension plan assets at year-end. The $99.9 million difference was reduced by an accrued/prepaid benefit cost of $17.7 million and the beginning of the year additional minimum pension liability of $22.2 million previously recorded. Post retirement benefit plans In addition to receiving pension benefits, U.S. Teradyne employees who meet retirement eligibility requirements as of their termination dates may participate in Teradyne's Welfare Plan, which includes medical, dental and death benefits. Death benefits provide a fixed sum to retirees' survivors and is available to all retirees. Substantially all of our current U.S. employees could become eligible for these benefits, and the existing benefit obligation relates primarily to those employees. Post-retirement benefit expense was not material in 2000. For the years ended December 31, 2002 and 2001, Teradyne's net post retirement benefit costs were comprised of (in thousands):
2002 2001 ------ ------ EXPENSE Service cost............................................. $1,003 $ 784 Interest cost............................................ 1,924 1,050 Amortization of unrecognized: Net transition obligation............................. 287 330 Prior service cost.................................... 79 -- Net loss.............................................. 140 29 ------ ------ Total expense............................................ $3,433 $2,193 ====== ====== 2002 2001 ------ ------ WEIGHTED AVERAGE ASSUMPTIONS Discount rate............................................ 6.0% 7.0% Initial medical trend.................................... 9.0 9.0 Ultimate medical trend................................... 5.0 5.0 Medical cost trend rate decrease to ultimate rate in year 2007 2007
77 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) N. RETIREMENT PLANS--(Continued)
2002 2001 ASSETS AND OBLIGATIONS -------- -------- Projected benefit obligation: Beginning of year.................. $ 25,813 $ 12,027 Service cost....................... 1,003 784 Interest cost...................... 1,924 1,050 Actuarial (gain) loss.............. 6,895 1,105 Benefits paid...................... (2,803) (674) Plan amendment..................... 915 2,647 GenRad acquisition................. -- 8,874 -------- -------- End of year........................ 33,747 25,813 Fair value of plan assets: Beginning of year.................. -- -- Company contributions.............. 2,803 674 Benefits paid...................... (2,803) (674) -------- -------- End of year........................... -- -- -------- -------- Funded status......................... (33,747) (25,813) Unrecognized prior service cost....... 834 -- Unrecognized net transition obligation 2,872 3,159 Unrecognized net actuarial loss....... 8,817 2,862 -------- -------- Net amount recognized................. $(21,224) $(19,792) ======== ========
The following table provides amounts recognized in long-term other accrued liabilities in the statement of financial position as of December 31, (in thousands):
2002 2001 -------- -------- Accrued post retirement benefit costs $(21,224) $(19,792)
Assumed health care trend rates could have a significant effect on the amounts reported for health care plans. A one percentage point change in the assumed health care cost trend rates for the year ended December 31, 2002 would have the following effects:
1 Percentage 1 Percentage Point Increase Point Decrease -------------- -------------- (in thousands) Effect on total service and interest cost components $ 382 $ (332) Effect on postretirement benefit obligations........ $3,387 $(3,067)
O. COMMON STOCK REPURCHASE PROGRAM On November 16, 2000, Teradyne's Board of Directors authorized the repurchase of an additional 10.0 million shares, resulting in an aggregate authorization of up to 30.0 million shares of Teradyne's stock on the open market. 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 2002 and 2001, Teradyne did not repurchase any stock. Teradyne records treasury stock at its acquisition cost. 78 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) P. STOCK BASED COMPENSATION Stock Option Plans Under its stock option plans, all of which are fixed accounting plans, Teradyne grants options to purchase common stock at 100% of the fair market value on the date of grant. Options granted to employees prior to September 2001 vest in equal installments over four years and have a maximum term of five years. Beginning in September 2001 options granted to employees vest in equal installments over four years and have a maximum term of seven years. In addition, in 2001, Teradyne made a one-time option grant to all employees that vests over two years and has a term of seven years. Stock option plan activity for the years 2002, 2001, and 2000 follows (in thousands):
2002 2001 2000 ------ ------- ------ Outstanding at January 1.......... 29,750 22,745 19,225 Options granted................ 7,205 10,289 7,905 Options exercised.............. (1,152) (2,766) (3,217) Options canceled............... (2,382) (518) (1,168) ------ ------- ------ Outstanding at December 31........ 33,421 29,750 22,745 ====== ======= ====== Exercisable at December 31........ 19,296 13,545 8,758 ====== ======= ====== Available for grant at January 1.. 29,841 4,612 11,349 Grants............................ (7,205) (10,289) (7,905) Cancellations..................... 2,382 518 1,168 Additional shares reserved........ -- 35,000 -- ------ ------- ------ Available for grant at December 31 25,018 29,841 4,612 ====== ======= ======
Weighted average option exercise price information for the years 2002, 2001 and 2000 follows:
2002 2001 2000 ------ ------ ------ Outstanding at January 1.. $25.28 $22.79 $16.44 Options granted........ 18.09 23.33 34.73 Options exercised...... 15.79 10.89 11.49 Options canceled....... 35.31 32.15 30.62 Outstanding at December 31 23.41 25.28 22.79 Exercisable at December 31 23.38 24.94 16.71
79 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) P. STOCK BASED COMPENSATION--(Continued) Significant option groups outstanding at December 31, 2002 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-$17.48...... 3.61 12,928 $14.03 7,673 $11.80 $19.16-$27.66...... 5.37 8,915 22.08 3,982 21.97 $28.13-$32.13...... 2.52 9,528 29.70 6,244 29.95 $32.78-$173.11..... 3.98 2,050 59.14 1,397 61.63 ------ ------ Total.............. 3.79 33,421 23.41 19,296 23.38 ====== ======
Employee Stock Purchase Plan Under the Teradyne 1996 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 2003, Teradyne issued 1.7 million shares of common stock to employees who participated in the plan during 2002 at a weighted-average price of $11.13 per share. Currently, there are 3.7 million shares reserved for issuance. Q. SAVINGS PLAN 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). Teradyne annually matches employee contributions up to 6% of such compensation at rates ranging from 50% to 100% for employees in the defined benefit plan. For all other employees, Teradyne annually matches up to 5% of such compensation at rates ranging from 100% to 150%. Teradyne's contributions vest 25% per year for the first four years of employment, although contributions for those employees with four 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 $14.2 million in 2002, $14.6 million in 2001, and $16.6 million in 2000. R. 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, 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. 80 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) S. INCOME TAXES The components of (loss) income before income taxes and the provision for (benefit from) income taxes as shown in the consolidated statements of operations are as follows (in thousands)
2002 2001 2000 --------- --------- -------- (Loss) income before income taxes and cumulative effect of change in accounting principle: United States.................................................... $(585,550) $(324,800) $655,103 Non U.S.......................................................... 24,605 (1,353) 84,545 --------- --------- -------- $(560,945) $(326,153) $739,648 ========= ========= ======== Provision (credit) for income taxes: Current: U.S. Federal..................................................... $ 9,155 $ (90,149) $182,202 Non U.S.......................................................... 2,408 (3,093) 29,393 State............................................................ 635 751 19,703 --------- --------- -------- 12,198 (92,491) 231,298 ========= ========= ======== Deferred: U.S. Federal..................................................... 126,513 (24,739) (4,529) Non U.S.......................................................... 6,796 43 (3,172) State............................................................ 12,017 (6,751) (1,703) --------- --------- -------- 145,326 (31,447) (9,404) --------- --------- -------- $ 157,524 $(123,938) $221,894 ========= ========= ========
Significant components of Teradyne's deferred tax assets (liabilities) as of December 31, 2002 and 2001 are as follows (in thousands):
2002 2001 --------- -------- Deferred tax assets: Net operating loss carryforwards..... $ 199,280 $ 45,728 Tax credits.......................... 26,905 33,922 Inventory valuations................. 45,005 31,669 Accruals............................. 41,079 24,565 Research and development............. 18,579 19,821 Vacation............................. 10,256 6,141 Deferred revenue..................... 4,532 5,391 Pension.............................. 29,124 6,918 Other................................ 12,227 8,037 --------- -------- Gross deferred tax assets............... 386,987 182,192 --------- -------- Less: valuation allowance............... (361,314) -- --------- -------- Total deferred tax assets............... 25,673 182,192 ========= ======== Deferred tax liabilities: Excess of tax over book depreciation. (10,283) (17,012) Amortization......................... (12,818) (16,218) Pension.............................. -- (1,102) Other................................ (2,572) (2,534) --------- -------- Total deferred tax liabilities.......... (25,673) (36,866) --------- -------- Net deferred assets..................... $ -- $145,326 ========= ========
81 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) S. INCOME TAXES--(Continued) At December 31, 2002 Teradyne had U.S. Federal operating loss carryforwards of approximately $535.7 million due to the acquisition of GenRad and operating losses that expire in the years 2003 through 2022, state net operating loss carryforwards of $217.2 million that expire in the years 2006 through 2022, and foreign net operating loss carryforwards of $15.1 million that expire in the years 2006 and thereafter. These losses are limited in their use by "change in ownership" rules as defined in the Internal Revenue Code of 1986. Teradyne has approximately $26.9 million of tax credit carryforwards that expire in years 2003 through 2020. Business tax credits of approximately $18.8 million expire in the years 2019 through 2020. Teradyne has foreign tax credits of approximately $6.1 million expiring 2005 through 2007 and alternative minimum tax credits of approximately $2.0 million, which do not expire. As a result of the review undertaken at December 31, 2002, Teradyne concluded under applicable accounting criteria that it was appropriate to establish a full valuation allowance for its net deferred tax assets. Until an appropriate level of profitability is reached, Teradyne will not record tax benefits on operating losses in future results of operations. The valuation allowance includes $26.4 million for net deferred tax assets resulting from minimum pension liabilities and other direct charges or credits to equity. A reconciliation of the effective tax rate for the years 2002, 2001, and 2000 follows:
2002 2001 2000 ----- ----- ---- U.S. statutory federal tax rate............... (35.0)% (35.0)% 35.0% State income taxes, net of federal tax benefit (0.6) (1.8) 1.6 Tax credits................................... -- -- (0.8) Export sales corporation...................... (0.1) (0.7) (4.8) Nondeductible goodwill........................ 4.9 0.6 0.1 Establishment of valuation allowance.......... 59.7 -- -- Other, net.................................... (0.9) (1.1) (1.1) ----- ----- ---- 28.0% (38.0)% 30.0% ===== ===== ====
As of December 31, 2002, a deferred tax liability has not been established for approximately $19.6 million for cumulative undistributed earnings of a non-U.S. manufacturing subsidiary. Teradyne intends to reinvest these earnings indefinitely in operations outside the US. T. 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 is comprised of Broadband Test Systems and Diagnostic Solutions. 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, excluding the Diagnostic Solutions business. Diagnostic Solutions has been made part of the Other Test Systems operating segment. GenRad activity is reflected in Teradyne's results of operations since the acquisition date. 82 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) T. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION--(Continued) 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 2002, 2001 and 2000 no individual customer accounted for more than 10% of consolidated net sales.
Circuit Board Test & Semiconductor Connection Inspection Other Test Corporate Test Systems Systems Systems Systems And Segment Segment Segment Segment Eliminations Consolidated ------------- ---------- ---------- ---------- ------------ ------------ 2002 Sales to unaffiliated customers. $ 557,623 $396,993 $ 170,759 $96,861 -- $1,222,236 Intersegment sales.............. -- 10,525 -- -- $ (10,525) -- --------- -------- --------- ------- ---------- ---------- Net sales....................... 557,623 407,518 170,759 96,861 (10,525) 1,222,236 (Loss) income before taxes(1)... (266,134) (79,601) (200,401) 1,160 (15,969) (560,945) Total assets(2)................. 720,228 317,153 209,541 58,344 589,411 1,894,677 Property additions(3)........... 48,681 21,885 1,076 968 3,749 76,359 Depreciation and amortization expense(3)..................... 61,765 62,115 16,242 3,575 15,992 159,689 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 (Loss) income before taxes(1)... (248,001) (22,970) (41,475) (3,555) (10,152) (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
Circuit Board Test & Semiconductor Connection Inspection Other Test Corporate Test Systems Systems Systems Systems And SAB Segment Segment Segment Segment Eliminations Adjustments(4) Consolidated ------------- ---------- ---------- ---------- ------------ -------------- ------------ 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 (Loss) income 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
(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, which are included in Corporate and Eliminations. 83 TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) T. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION--(Continued) (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):
2002 2001 2000 ---------- ---------- ---------- Sales to unaffiliated customers(1): United States................... $ 561,090 $ 733,617 $1,407,110 Europe.......................... 224,904 264,314 425,694 South East Asia................. 213,156 172,094 626,060 Taiwan.......................... 106,509 148,852 306,611 Japan........................... 71,767 59,745 119,883 Korea........................... 22,029 13,726 88,833 Rest of the World............... 22,781 48,233 69,755 ---------- ---------- ---------- $1,222,236 $1,440,581 $3,043,946 ========== ========== ==========
(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. 84 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.
2002 ----------------------------------------- 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter --------- -------- --------- --------- Net Revenue: Products............................... $ 193,072 $251,907 $ 272,352 $ 274,796 Services............................... 54,936 57,991 58,380 58,802 --------- -------- --------- --------- Total net revenue................... 248,008 309,898 330,732 333,598 Expenses: Cost of products....................... 177,196 199,818 215,036 237,122 Cost of services....................... 39,532 39,376 41,195 40,292 --------- -------- --------- --------- Total cost of sales................. 216,728 239,194 256,231 277,414 Engineering and development............ 69,253 72,371 78,002 74,296 Selling and administrative............. 75,049 75,390 74,318 65,619 Restructuring and other charges........ 5,866 219 138,883 59,208 --------- -------- --------- --------- 366,896 387,174 547,434 476,537 --------- -------- --------- --------- Loss from operations....................... (118,888) (77,276) (216,702) (142,939) Interest income............................ 4,204 4,526 4,357 3,866 Interest expense........................... (5,334) (5,390) (5,447) (5,612) Other income and expense, net.............. (513) (1,124) 1,264 63 --------- -------- --------- --------- Loss before income taxes................... (120,531) (79,264) (216,528) (144,622) (Benefit from) provision for income taxes.. (43,391) (28,535) (49,695) 279,145 --------- -------- --------- --------- Net loss................................... $ (77,140) $(50,729) $(166,833) $(423,767) ========= ======== ========= ========= Net loss per common share--basic........... $ (0.42) $ (0.28) $ (0.91) $ (2.31) ========= ======== ========= ========= Net loss per common share--diluted......... $ (0.42) $ (0.28) $ (0.91) $ (2.31) ========= ======== ========= ========= 2001 ----------------------------------------- 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter --------- -------- --------- --------- Net Revenue: Products............................... $ 548,185 $314,446 $ 204,405 $ 166,692 Services............................... 57,004 51,377 44,950 53,522 --------- -------- --------- --------- Total net revenue................... 605,189 365,823 249,355 220,214 Expenses: Cost of products....................... 328,890 261,705 214,315 211,326 Cost of services....................... 40,124 35,717 32,197 37,458 --------- -------- --------- --------- Total cost of sales................. 369,014 297,422 246,512 248,784 Engineering and development............ 83,570 71,029 64,667 68,052 Selling and administrative............. 73,286 65,908 59,928 70,962 Restructuring and other charges........ 5,705 3,356 48,122 17,109 --------- -------- --------- --------- 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 for (benefit from) 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) ========= ======== ========= =========
Item 9: Changes and disagreements with accountants on accounting and financial disclosure None. 85 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 related stockholder matters, 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 22, 2003, 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 related stockholder matters, 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 22, 2003, 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 and related stockholder matters. Certain information relating to directors and executive officers of Teradyne, executive compensation, security ownership of certain beneficial owners and management and related stockholder matters, 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 22, 2003, 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 "Equity Compensation Plans" in "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations." 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 related stockholder matters, 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 22, 2003, 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 14: Controls and procedures. (a) Evaluation of disclosure controls and procedures. Based on their evaluation as of a date within 90 days of the filing of this annual report, Teradyne's management with the Chief Executive Officer and Chief Financial Officer as participants and supervisors have concluded that Teradyne's disclosure controls and procedures, as defined in Rules 13a-14(c) and 15d-14(c) under the Securities and Exchange Act of 1934 (the Exchange Act), are effective to ensure that information required to be disclosed by Teradyne in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. (b) Changes in internal controls. There were no significant changes in Teradyne's internal controls or, to Teradyne's knowledge, in other factors that could significantly affect these controls subsequent to the date of their evaluation. 86 PART IV Item 15: 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, 2002 and 2001 Statements of Operations for the years ended December 31, 2002, 2001, and 2000 Statements of Shareholders' Equity for the years ended December 31, 2002, 2001, and 2000 Statements of Cash Flows for the years ended December 31, 2002, 2001, and 2000 (a) 2. Financial Statement Schedules The following consolidated financial statement schedule is included in Item 15(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 There were no Form 8-K filings by Teradyne during the quarter ended December 31, 2002, as none were required. Item 15(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: 2002 Allowance for doubtful accounts............. $6,294 $1,073 $ -- $1,618 $5,749 ====== ====== ===== ====== ====== 2001 Allowance for doubtful accounts............. $5,176 $1,192 $ -- $ 74 $6,294 ====== ====== ===== ====== ====== 2000 Allowance for doubtful accounts............. $4,410 $1,337 $ -- $ 571 $5,176 ====== ====== ===== ====== ======
87 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 Company, as amended Report on 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 Exhibit 4.1 to the Company's Form 8-K filed and Fleet National Bank dated as of November 20, 2000. November 17, 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 Retirement Plan* on 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 March 9, 2001* on 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 StatementNo. 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 Exhibit 10.6 to the Company's Annual Report amended* on Form 10-K for the fiscal year ended December 31, 2001. 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.
88
Exhibit No. Description SEC Document Reference - ------- ----------- ---------------------- 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. 10.9 Deed of Trust, Financing Statement, Security Exhibit 10.12 to the Company's Annual Report Agreement and Fixture Filing between on Form 10-K for the fiscal year ended Megatest and the Sun Life Assurance Company December 31, 1995. of Canada (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, Exhibit 10.11 to the Company's Annual Report as amended* on Form 10-K for the fiscal year ended December 31, 2001. 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 Exhibit 4.6 to the Company's Registration Stock 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 Dutkowsky and GenRad, Inc.* Statement No. 333-73700). 10.16 Change in Control Agreement dated Exhibit 10.16 to the Company's Annual Report October 19, 2001 between the Company on Form 10-K for the fiscal year ended and Executive Officer* December 31, 2001. 10.17 Change in Control Agreement dated Exhibit 10.17 to the Company's Annual Report October 19, 2001 between the Company on Form 10-K for the fiscal year ended and Executive Officer* December 31, 2001. 10.18 Change in Control Agreement dated Exhibit 10.18 to the Company's Annual Report October 19, 2001 between the Company on Form 10-K for the fiscal year ended and Executive Officer* December 31, 2001. 10.19 Change in Control Agreement dated Exhibit 10.19 to the Company's Annual Report March 19, 2002 between the Company on Form 10-K for the fiscal year ended and Executive Officer* December 31, 2001. 10.20 Change in Control Agreement dated Exhibit 10.20 to the Company's Annual Report October 19, 2001 between the Company on Form 10-K for the fiscal year ended and Executive Officer* December 31, 2001. 10.21 Change in Control Agreement dated Exhibit 10.21 to the Company's Annual Report October 2, 2001 between the Company on Form 10-K for the fiscal year ended and Executive Officer* December 31, 2001. 10.22 Change in Control Agreement dated Exhibit 10.22 to the Company's Annual Report October 19, 2001 between the Company on Form 10-K for the fiscal year ended and Executive Officer* December 31, 2001.
89
Exhibit No. Description SEC Document Reference - ------- ----------- ---------------------- 10.23 Change in Control Agreement dated Exhibit 10.23 to the Company's Annual Report October 19, 2001 between the Company on Form 10-K for the fiscal year ended and Executive Officer* December 31, 2001. 10.24 Change in Control Agreement dated Exhibit 10.24 to the Company's Annual Report October 19, 2001 between the Company on Form 10-K for the fiscal year ended and Executive Officer* December 31, 2001. 10.25 Promisory Note dated December 19, 2001 between Exhibit 10.25 to the Company's Annual Report the Company, as borrower, and General Electric on Form 10-K for the fiscal year ended Capital Business Asset Funding Corporation, as December 31, 2001. lender 10.26 Form of Commercial Deed of Trust, Security Exhibit 10.26 to the Company's Annual Report Agreement, Assignment of Leases and on Form 10-K for the fiscal year ended Rents, and Fixture Filing Agreement dated December 31, 2001. 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 Exhibit 10.27 to the Company's Annual Report Agreement dated December 19, 2001 between on Form 10-K for the fiscal year ended the Company, as borrower, and General Electric December 31, 2001. Capital Business Asset Funding Corporation, as lender 10.28 Form of Certificate and Indemnity Agreement Exhibit 10.28 to the Company's Annual Report regarding Hazardous Substances dated on Form 10-K for the fiscal year ended December 19, 2001 between the Company, as December 31, 2001. 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). 10.30 Change in Control Agreement dated January 31, Filed herewith. 2003 between the Company and the Executive Officer* 14.1 Ethics Policy: Teradyne's Standards of Business Filed herewith. Conduct 21.1 Subsidiaries of the Company Filed herewith. 23.1 Consent of PricewaterhouseCoopers LLP Filed herewith. 99.1 Certification of CEO (Section 906) Filed herewith. 99.2 Certification of CFO (Section 906 Filed herewith.
* Indicates management contracts or compensatory plans 90 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized this 26th day of March, 2003. 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 26, 2003 - ----------------------------- President, and Chief George W. Chamillard Executive Officer (Principal Executive Officer) /s/ GREGORY R. BEECHER Vice President Chief March 26, 2003 - ----------------------------- Financial Officer and Gregory R. Beecher Treasurer (Principal Financial Officer) /s/ G. RICHARD MACDONALD Controller, Principal March 26, 2003 - ----------------------------- Accounting Officer G. Richard MacDonald /s/ JAMES W. BAGLEY Director March 26, 2003 - ----------------------------- James W. Bagley /s/ ALBERT CARNESALE Director March 26, 2003 - ----------------------------- Albert Carnesale /s/ JOHN P. MULRONEY Director March 26, 2003 - ----------------------------- John P. Mulroney /s/ VINCENT M. O'REILLY Director March 26, 2003 - ----------------------------- Vincent M. O'Reilly /s/ ROY A. VALLEE Director March 26, 2003 - ----------------------------- Roy A. Vallee /s/ PATRICIA S. WOLPERT Director March 26, 2003 - ----------------------------- Patricia S. Wolpert 91 CERTIFICATIONS I, George W. Chamillard, certify that: 1. I have reviewed this annual report on Form 10-K of Teradyne, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 26, 2003 By: /s/__George W. Chamillard George W. Chamillard Chief Executive Officer 92 I, Gregory R. Beecher, certify that: 1. I have reviewed this annual report on Form 10-K of Teradyne, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 26, 2003 By: /s/__Gregory R. Beecher Gregory R. Beecher Chief Financial Officer 93 EX-10.30 3 dex1030.txt CHANGE IN CONTROL AGREEMENT EXHIBIT 10.30 EXECUTIVE OFFICER CHANGE IN CONTROL AGREEMENT EXECUTIVE OFFICER CHANGE IN CONTROL AGREEMENT entered into this 31st day of January, 2003, by and between Teradyne, Inc., a Massachusetts corporation ("Teradyne"), and the undersigned executive officer of Teradyne ("Employee"). WITNESSETH: WHEREAS, Teradyne and Employee desire to set forth certain terms and conditions relating to benefits to be afforded to Employee upon the occurrence of a Change in Control (as hereinafter defined) of Teradyne; NOW THEREFORE, in consideration of the premises and of the mutual covenants and agreements hereinafter set forth, the parties hereto hereby agree as follows: 1. Option Acceleration. (a) during the Term (as hereinafter defined), if within twenty-four (24) months following a Change in Control there is a Termination Event (as hereinafter defined), all of Employee's unvested Options granted prior to, on, or after the date hereof (but only (I) such Options as have been granted to Employee by Teradyne as of the date of the Change in Control or (II) such Options as have been assumed by an acquiring company at the time of a Change in Control or such new options that have been substituted by an acquiring company for Options existing at the time of a Change in Control, each pursuant to the terms of any Teradyne option plan) shall automatically become fully vested as of the date of such Termination Event. The parties hereto acknowledge that the terms of this Agreement are intended to modify the terms of Employee's existing Option agreements and to be a supplement to future Option agreements. (b) For purposes of this Agreement, the following terms shall have the following meanings: "Cause" shall mean conduct involving one or more of the following: (i) the substantial and continuing failure of Employee, after notice thereof, to render services to Teradyne in accordance with the terms or requirements of his or her employment; (ii) Employee's disloyalty, gross negligence, willful misconduct, dishonesty, fraud or breach of fiduciary duty to Teradyne; (iii) Employee's deliberate disregard of the rules or policies of, or breach of an agreement with, Teradyne which results in direct or indirect loss, damage or injury to Teradyne; (iv) the unauthorized disclosure by Employee of any trade secret or confidential information of Teradyne; or (v) the commission by Employee of an act which constitutes unfair competition with Teradyne. A "Change in Control" shall be deemed to have occurred upon the occurrence of any of the following events: (i) any consolidation, cash tender offer, reorganization, -2- recapitalization, merger or plan of share exchange following which the shareholders of Teradyne immediately prior to such transaction own less than a majority of the combined voting power of the then-outstanding securities of the combined corporation or person immediately after such transaction; (ii) any sale, lease, exchange or other transfer of all or substantially all of Teradyne's assets; (iii) the adoption by the Board of Directors of Teradyne of any plan or proposal for the liquidation or dissolution of Teradyne; (iv) a change in the majority of the Board of Directors of Teradyne through one or more contested elections; or (v) any person (as that term is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act of 1934, as amended) becomes beneficial owner of 30% or more of the combined voting power of Teradyne's outstanding voting securities. "Good Reason" shall mean any one or more of the following: (i) any material reduction of Employee's responsibilities (other than for Cause or as a result of death or disability); (ii) any material reduction in Employee's model compensation as in effect on the date of the consummation of the Change in Control, or as the same may be increased from time to time, or any failure by Teradyne to pay to Employee any bonus accrued, but not yet paid, upon written notice by Employee to Teradyne, within 45 days; (iii) a material reduction in the value of Employee's benefit package from the value of Employee's benefit package on the date of the consummation of the Change in Control; or (iv) any permanent assignment of Employee to a job location situated more than 50 miles away from his current job location. "Option" shall mean an option to purchase shares of Teradyne Common Stock. "Termination Event" shall mean (i) any termination of Employee by Teradyne without Cause or (ii) any voluntary termination by Employee for Good Reason. 2. (a) Parachute Payment Gross-Up. If any Payments (as hereinafter defined) to Employee are subject to the Excise Tax (as hereinafter defined), Teradyne shall pay to Employee a Gross-Up Payment (as hereinafter defined). The Gross-Up Payment with respect to any Payment shall be paid no later than 15 days prior to the date that the Excise Tax is due with respect to such Payment. (b) Definitions. For purposes of this Section 2, the following terms shall have the following meanings: (i) "Code" shall mean the Internal Revenue Code of 1986, as amended. (ii) "Excise Tax" shall mean the tax imposed by Section 4999 of the Code. The amount of the Excise Tax (if any) imposed on any non-cash benefits or any deferred payment or benefit shall be reasonably determined by Teradyne, after consultation with its legal and tax advisors. -3- (iii) "Gross-Up Payment" shall mean, with respect to Payments to the Employee, the amount necessary so that the amount retained by Employee, after reduction for (1) any Excise Tax on the Gross-Up Payment and (2) any federal, state, or local income and employment taxes imposed on the Gross-Up Payment, is an amount equal to the Excise Tax on the Payments to Employee, other than the Gross-Up Payment. The amount of the Gross-Up Payment shall be reasonably determined by Teradyne after consultation with its legal and tax advisors. (1) For purposes of determining the amount of the Gross-Up Payment, Employee shall be deemed to pay federal income taxes at the highest marginal rate of federal, state and local income tax in the calendar year in which the Gross-Up Payment is made (determined by reference to Employee's residence for such calendar year), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. (2) In the event that the Excise Tax with respect to the Payments is determined to exceed the amount taken into account hereunder, Teradyne shall make an additional Gross-Up Payment in respect of such excess. For purposes of calculating such Gross-Up Payment, any interest or penalties imposed in connection with such excess Excise Tax shall be treated as an Excise Tax. (3) In the event that the Excise Tax with respect to the Payments is subsequently determined to be less than the amount taken into account for purposes of calculating the Gross-Up Payment, Employee shall promptly repay to Teradyne the after-tax portion of the Gross-Up Payment that exceeds the Gross-Up Payment that otherwise would have been payable in connection with the actual Excise Tax imposed on the Payments. (iv) "Payment" shall mean, with respect to the Employee, any payment in the nature of compensation to (or for the benefit of) such individual, if such payment is contingent on a change (i) in the ownership or effective control of Teradyne or (ii) in the ownership of a substantial portion of the assets of Teradyne (in each case, as reasonably determined by Teradyne in accordance with Section 280G(b)(2) of the Code and the regulations promulgated thereunder). Notwithstanding the foregoing, any amount payable to (or for the benefit of) the Employee shall be a Payment if an -4- Excise Tax is imposed on the Employee with respect to such payment or benefit, and such payment or benefit is contingent on a change (i) in the ownership or effective control of Teradyne or (ii) in the ownership of a substantial portion of the assets of Teradyne (in each case, determined in accordance with Section 280G(b)(2) of the Code and the regulations promulgated thereunder). 3. No Obligation of Employment. Employee understands that the employment relationship between Employee and Teradyne will be "at will" and Employee understands that, prior to any Change in Control, Teradyne may terminate Employee with or without "Cause" at any time. Following any Change in Control, Teradyne may also terminate Employee with or without "cause" at any time subject to Employee's rights and Teradyne's obligations specified in this Agreement. 4. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the Commonwealth of Massachusetts and this Agreement shall be deemed to be performable in Massachusetts. 5. Severability. In case any one or more of the provisions contained in this Agreement for any reason shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement and this Agreement shall be construed to the maximum extent permitted by law. 6. Waivers and Modifications. This Agreement may be modified, and the rights, remedies and obligations contained in any provision hereof may be waived, only in accordance with this Section 6. No waiver by either party of any breach by the other or any provision hereof shall be deemed to be a waiver of any later or other breach thereof or as a waiver of any other provision of this Agreement. This Agreement may not be waived, changed, discharged or terminated orally or by any course of dealing between the parties, but only by an instrument in writing signed by the party against whom any waiver, change, discharge or termination is sought. 7. Assignment. Employee may not assign any of his rights or delegate any of his duties or obligations under this Agreement. The rights and obligations of Teradyne under this Agreement shall inure to the benefit of, and shall be binding upon, the successors and assigns of Teradyne. For purposes of this Agreement, "Teradyne" shall be deemed to include all successors and assigns of Teradyne. 8. Entire Agreement. This Agreement constitutes the entire understanding of the parties relating to the subject matter hereof and supersedes and cancels all agreements, written or oral, made prior to the date hereof between Employee and Teradyne relating to the subject matter hereof; provided, however, that Employee's existing option agreements, as modified hereby, shall remain in effect. -5- 9. Notices. All notices hereunder shall be in writing and shall be delivered in person or mailed by certified or registered mail, return receipt requested, addressed as follows: If to Teradyne, to: Teradyne, Inc. 321 Harrison Avenue Boston, MA 02118 Attention: General Counsel If to Employee, at Employee's address set forth on the signature page hereto. 10. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 11. Section Headings. The descriptive section headings herein have been inserted for convenience only and shall not be deemed to define, limit, or otherwise affect the construction of any provision hereof. 12. Term. The term of this Agreement (the "Term") shall commence upon the date hereof and terminate upon the earlier of (i) twenty-four (24) months following any Change in Control of Teradyne, (ii) the date prior to any Change in Control of Teradyne that employee for any reason ceases to be an employee of Teradyne and (iii) the date following any Change in Control of Teradyne that Employee is terminated for Cause or voluntary terminates his employment (other than for Good Reason). [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. TERADYNE, INC. By: /s/ George W. Chamillard ------------------------------------ Name: George W. Chamillard Title: Chairman, Chief Executive Officer and President of Teradyne, Inc. EMPLOYEE By: /s/ ------------------------------------ Name: Eileen Casal Address: 41 Commonwealth Avenue Boston, Mass. 02116 EX-14.1 4 dex141.txt ETHICS POLICY EXHIBIT 14.1 Dear Members of the Teradyne Community: This is our third edition of "Making the Right Choices -- Teradyne's Standards of Business Conduct." As in all areas, we strive to continuously improve these guidelines in the face of the constant changes we confront both in the company and the business environment.The one constant amidst that change is our commitment to integrity in all that we do. To be successful over the long term, a business must be built on a foundation of honesty and integrity. That principle has guided us throughout our history, as we have consistently chosen the high ground in our dealings with each other and with others in the Teradyne community. Our future depends on our ability to stay true to our ideals and our history. We want to do the right thing, both because it is right and because it makes good business sense. As we grow and change as a company, you should rely on these guidelines of appropriate business conduct to help make better decisions as you are faced with difficult issues. Of course, these guidelines cannot cover every situation, and when in doubt, you should disclose your concern, seek advice from others in the company, and as always, continue to apply common sense. Any person who feels that our conduct does not meet the guidelines set forth in this booklet should contact his or her manager, any other manager or corporate officer, or a member of the Human Resources or Legal Departments. Any member of the Teradyne community also may provide information on a confidential basis to the Legal Department at the following address: Teradyne, Inc. e-mail:ethics_office@teradyne.com Legal Department, Confidential Hotline:617-422-5777 321 Harrison Ave. Boston, MA 02118 George Chamillard Chairman, CEO & President - -------------------------------------------------------------------------------- Making the Right Choices for Teradyne This section describes an employee's obligations to Teradyne. The company's expectation is that Teradyne is the primary focus of your business and professional endeavors. The company expects you to use discretion and good judgment in responding to the variety of situations that may arise. Conflict of Interest Situations You must avoid situations where your loyalties may be divided between Teradyne's interests and your own. You must also consider how the situation appears to others -- inside Teradyne and outside. Whenever you recognize a potential conflict, it is important to discuss the situation with your manager immediately. The following sections discuss typical situations where a conflict of interest may arise. Outside Business Ventures At Teradyne you may not work for or receive payment for services from any competitor, supplier, customer, or distributor of Teradyne. Any sort of active business relationship with any of these types of companies or businesses must be reported to and approved in advance by your manager. This rule applies even if the other company is not a competitor, supplier, customer or distributor of your own division. Any outside activity must be strictly separated from Teradyne employment and should not harm job performance at Teradyne. Financial Interests in Other Companies Whether an investment in Teradyne suppliers or customers could create the appearance of divided loyalties depends on several factors, such as (1) the size of the investment relative to your total assets; (2) the position you hold within Teradyne; and (3) any work you do that intersects with that investment. The best rule is to disclose any such investment to your manager, who then determines who else to inform. Conflict-of-interest standards also apply to family and close personal friends. If any of them has a job or significant financial interest in a competitor, customer, or supplier, you must be alert to the potential conflict for you and Teradyne and you should inform your manager. Gratuities from Third Parties You and your immediate family must not solicit or accept gifts when you believe that the gifts have been offered because of your Teradyne position or in the expectation that the gift giver's interests may be affected by your action. You should accept only those gifts that are nominal in value and that are more in the nature of advertising (calendars or coffee cups, for example). Occasional business meals and other meetings can serve a useful business purpose and can advance Teradyne's interests, though Teradyne should pay the bill as often as the other party does. At the same time, entertainment that is lavish or frequent could appear to influence one's business judgment on Teradyne's behalf. We must all exercise good business judgment and make sure we do nothing that would (a) compromise our objectivity or (b) embarrass either Teradyne or any of us individually. For example, occasional attendance at a sporting event or concert could be acceptable. Attendance at a World Series game or lavish Opening Night would not. Events of this nature should be extremely infrequent, and any time you receive a gift or entertainment worth more than $50, it should be reported in advance to your manager. In rare circumstances, local custom may call for an exchange of gifts having more than nominal value. Giving or receiving such gifts should be done only on behalf of Teradyne and with prior approval from a corporate officer. If you receive a gift under these circumstances, turn it over to your manager for appropriate disposition. Handling Company Information Information is one of Teradyne's most valuable assets. Given our open environment, we are each regularly in receipt of valuable company information as we perform our normal day-to-day jobs. You must be sure that the company's valuable information is safeguarded. Each employee has a responsibility to prevent company information from being inappropriately disclosed or used. You must not disclose any confidential information regarding Teradyne's business, technology, employees, or activities to any person unless that person's responsibilities at Teradyne create a need to know it. This obligation extends to trade secrets, including confidential or private technical, financial, and business information generated by us or received from others in the Teradyne community. It also includes confidential information entrusted to us by customers, suppliers and other third parties. We have the same duty to safeguard their confidential information that we have concerning Teradyne's confidential information. You also must observe government rules and regulations relating to the safeguarding of classified information obtained through work between Teradyne and the government. Inventions and Patents You should report inventions or patentable ideas relating to any Teradyne business immediately to your manager and should treat these ideas as confidential until a patent is granted. You will be named as the inventor, and Teradyne will own the patent. Payment Practices and Business Reporting All Teradyne employees must comply with the laws and regulations of each country where we do business. You are responsible for following the company's procedures for carrying out and reporting business transactions, so that our records accurately reflect the substance of those transactions. If you become aware of or suspect any questionable business practices, you should immediately contact your manager and Teradyne's Internal Audit Group or Legal Department: Examples include: o Unlawful use of company assets. o Establishment of an undisclosed or unrecorded asset or fund. o False or misleading entries on forms or records. o Payments made on behalf of Teradyne without proper supporting documents and approvals. o Payments or gratuities to foreign government officials prohibited by the Foreign Corrupt Practices Act. Teradyne establishes commission and fee arrangements only in writing and only with firms serving as bona fide commercial sales representatives, agents or consultants. Any commissions or fees paid must be reasonable and consistent with normal practices for our industry. We never make payments in cash. Civic and Political Contributions Teradyne often makes contributions to civic and charitable organizations. Suggestions for such contributions may be sent to your division manager or to the vice president of Corporate Relations. No Teradyne funds or assets can be used for U.S. federal political contributions. Company contributions for state or local political campaigns may be made only with prior written approval from the vice president of Corporate Relations. Teradyne does not sponsor Political Action Committees, and no one at the company is authorized to solicit or require any political contribution. Personal political contributions are not reimbursed by Teradyne. Export and Re-Export A significant percentage of Teradyne's sales each year is to destinations outside the United States. This export business is subject to export control regulations established by the U.S. government and by certain other nations. If you are involved with export orders or shipments, you must become familiar with the regulations. Teradyne's Export Control Group provides periodic training to assist you and is always available if a question arises. Conclusion While this section describes several company policies, specific jobs may be subject to additional requirements. Teradyne has the responsibility to educate employees and provide guidance in those cases. It is your responsibility to learn those requirements and follow them. - -------------------------------------------------------------------------------- Making the Right Choices in the Workplace Teradyne expects employees to conduct themselves as mature, responsible, and respectful individuals in all their dealings with co-workers. Maintaining a safe and productive workplace is a shared responsibility for all employees. Environmental, Health, and Safety Teradyne is committed to promoting, creating, and maintaining a safe and healthful workplace and to improving the environmental quality of our operations and surrounding communities. This effort begins with providing a safe physical plant and hazard-free working conditions. Managers and supervisors are accountable for employee safety. We are committed to taking appropriate precautions in handling hazardous chemicals and informing you about potential risks. Certain manufacturing functions at Teradyne are also subject to stringent government requirements for operations and record keeping. Employees who violate those requirements may face direct governmental sanctions. The Environmental Safety and Compliance Group provides training and assistance in this area. Teradyne products are designed and manufactured to be safe, and they incorporate appropriate safeguards, warning labels, and documentation as required by Teradyne Product Safety Guidelines. Our product safety coordinator is a resource for safety issues concerning our products. Many employees have to make decisions involving health and safety every day. These decisions should be made with full knowledge of and compliance with all safety, environmental, and health regulations. You should report any unsafe conditions to your manager or your local safety committee. Equal Employment Opportunity Teradyne will not discriminate in the employment of any person due to race, creed, color, sex, national origin, age, disability, veteran status, or sexual orientation. This applies to all personnel actions including hiring, promotions, transfers, compensation, and benefits. Equal opportunities are provided for all employees, and all employees are encouraged to advance within the company. Direct Supervision of Relatives or Friends Direct supervisors have the ability to make decisions regarding opportunities for advancement, working conditions, or other matters affecting the employees who report to them. For that reason, Teradyne prohibits employees from directly supervising a relative or someone with whom they have a close personal relationship. Inappropriate Conduct We recognize that disagreements arise in daily dealings with others. Most of those disagreements can and are handled appropriately and without incident. However, there are certain acts of misconduct that the company simply will not tolerate, such as: any type of harassment; physical violence; unlawful actions; theft; gambling; and working under the influence of alcoholic beverages or illegal drugs. Actions Leading to Immediate Termination Acts of misconduct involving issues such as company liability or individual civil rights are so serious that immediate termination may be warranted. It is the supervisor's and manager's responsibility to determine the seriousness of the offense and, with the Human Resources representative, to deal with it appropriately. Use of Electronic Communications Resources Teradyne provides employees tools and equipment to be used as resources in doing their jobs. Equipment such as telephones and networked computers are capable of being used for personal phone calls, e-mails, etc. Reasonable personal use may be permitted, but the equipment remains the property of Teradyne. Information residing in the equipment or on the network is also the property of Teradyne. You must not assume the information that you send over computer networks is private or confidential. It is possible that messages could be seen by someone other than the original recipient, either because a network is not secure or archived messages are sought during a legal proceeding. Also, Teradyne equipment is subject to standard maintenance and audits, such as automatic monitoring of Internet usage, as well as reasonable cause searches without notice. Teradyne does not allow improper or inappropriate use of Teradyne information resources. Use is inappropriate when it detracts from your job performance, for example, or ties up excessive bandwidth or data storage. Use is improper when it constitutes harassing, abusive, or illegal behavior, such as accessing pornography, circulating hate mail, or attempting to gain unauthorized access. Furthermore, it is inappropriate to disable, override, or otherwise avoid security or integrity procedures and devices. Teradyne reserves the right to monitor and or block access to systems when necessary. Also, Teradyne equipment is subject to standard maintenance and audits, such as automatic monitoring of Internet usage, as well as reasonable cause searches without notice. It is also improper to use Teradyne resources to participate in business or financial message boards or chat rooms in which Teradyne's business or Teradyne stock is discussed. (See also Disclosing Company Information on p. 8). As a general proposition one is not making the right choice if one is drawn into gossip on a message board concerning Teradyne or our customers or suppliers. Those who violate this policy are subject to discipline including termination. - -------------------------------------------------------------------------------- Making the Right Choices with Customers Teradyne's reputation as an ethical company is one of our most important assets. The manner, methods and style with which we do business with our customers determine our ability to retain that image. Consequently, all commercial dealings must be aboveboard and conducted with the highest ethical standards. This section provides a general overview of the standards and rules that Teradyne employees should follow when dealing with customers. Relations with Our Customers It is Teradyne's policy to treat our customers in an open and honest manner. In our relationship with customers, there are certain business practices that are prohibited: 1. You may not restrict the dealings of our customers by, for instance, requiring them to purchase equipment only from us or not to consider the equipment of any given competitor. 2. Some of our customers are also suppliers or potential suppliers. The two relationships are distinct, and we will not hold the purchase of our products as a precondition of business for our suppliers. 3. A tie-in agreement is a refusal to sell a unique or highly desirable product or service unless a second product or service is also purchased. Such agreements may be illegal where their effect is to force customers to buy a product or service they do not want in order to get one they do want. We are generally free to offer package prices for two or more "bundled products," unless one of the products cannot be bought separately and is highly desirable or unique. 4. Improper methods of competition or deceptive practices are prohibited by U.S. law. Examples of such practices are: o Marketing used equipment as new. o Making false or deceptive comparisons with other products. o Misrepresenting Teradyne's trademark or patent rights. This list does not include all the practices that would be deemed improper, but it should give you a general sense of the concerns in this area. At Teradyne, we adhere to all laws on trade practices, and we also make every effort to compete ethically at all times. Confidential or Proprietary Information In the normal course of business, we often need to supply a customer with proprietary or confidential information or to accept confidential information from a customer. This kind of information should be offered, accepted, or exchanged only after a written nondisclosure agreement covering the information to be disclosed has been reviewed and approved. We recognize and honor our obligations to protect the confidential and proprietary information we receive. If a questionable situation arises with respect to confidential or proprietary information, you should immediately bring it to the attention of your supervisor and, if necessary, senior management. Government Procurement Teradyne's standards for business integrity are no different when the customer is the government, but the interpretation of those standards may be subject to special rules. A supplement describing these special rules is available from the Legal Department for any employee involved in government procurement. - -------------------------------------------------------------------------------- Making the Right Choices with Competitors It's just as important to act in an ethical and honest manner with our competitors as with any other group. The choices an employee makes in these situations should be measured against the guidelines described in this section. Conduct Involving Competitors You should be cautious when taking actions that in any way involve direct interaction with Teradyne's competitors. As a general rule in evaluating potentially unethical conduct, you should ask yourself these questions: "If a competitor acted in a similar way against us, would we consider it improper? If we did something in cooperation with a competitor, would our customer consider it improper?" The guidelines below cover the most typical problems; in any specific instance you should consult the Legal Department. Antitrust Laws Any agreement with one or more competitors regarding prices, terms of sale (e.g., credit, discounts, trade-ins), production volume, or market allocation (an agreement to divide up customers, types of products, geographic areas, or technology) is illegal. Also illegal are boycotts, where two or more competitors agree not to deal with a particular customer or supplier. Informal understandings are as serious as formal documents. Exchanges of information between competitors must be treated carefully, since they could be interpreted as "signals" for anticompetitive conduct. A distributor who purchases products from Teradyne and resells them for its own account is a customer and potentially a competitor. For that reason, there are special rules governing this type of relationship. For example, it is illegal in most countries to dictate the distributor's price for reselling the product. We do, however, monitor resale prices because unusually high margins may suggest improper payments or kickbacks. Any arrangement with a distributor must be documented in writing and reviewed in advance by division management and the Legal Department. Trade Associations Trade associations and professional groups are legitimate and useful for exchanging technical information. However, they pose a risk if discussions turn to one of the topics mentioned previously. If this occurs, you should refuse to join in any conversation on the topic, leave the meeting if the discussion does not stop immediately and notify Teradyne management. Some trade associations have been granted limited exemptions from antitrust laws. In those cases, you must be careful your actions remain within those specific exemptions. Confidential Material Learning all available information about competitors is an essential part of the selling process. But the process has limits. You should not accept or transmit any information about competitors where the circumstances lead you to believe it was obtained improperly or illegally. You may not obtain information through improper means, such as industrial espionage or paying a competitor's employee to disclose confidential information. If you have knowledge of trade secrets from prior employment with a competitor, that knowledge should not be used or disclosed at Teradyne. This obligation does not apply to your general skills and work experience. Conclusion We sell our products on their merits and on the quality we provide as a supplier. Any statement about our products must be substantiated. Any statement about competitive products, quality, services, or the like must be complete and must be based on published or confirmed factual information. - -------------------------------------------------------------------------------- Making the Right Choices with Suppliers Teradyne bases its purchasing decisions on objective criteria such as price, quality, the financial stability and reputation of the supplier, technical requirements, service, and the overall business relationship with them. As an important part of the Teradyne community, suppliers are critical to our success and deserve to be treated in a respectful and cooperative manner. Conduct Involving Suppliers We legally negotiate the best price, terms, and conditions with our suppliers. You should not ask suppliers to restrict the sale of their products to anyone, except when a supplier's product is based on a Teradyne-owned design or a joint relationship. We do not require a supplier to buy from Teradyne in order to obtain our business. Conversely, we do not buy from suppliers simply because they purchase our products. Close relationships with suppliers will often require Teradyne to share confidential information. Teradyne's standard purchase orders and purchase agreements require suppliers to respect Teradyne's confidential data. You should not accept confidential or proprietary information from a supplier unless a written agreement about restrictions on use or disclosure has been signed. Contact the Teradyne Legal Department for procedures to create or review confidentiality agreements. It is our responsibility to inform suppliers of our conflict-of-interest policy described earlier in this brochure so that unintentional violations can be prevented. You may not have a financial interest in any Teradyne supplier that might cause divided loyalty or even the appearance of divided loyalty. Whether there is divided loyalty depends upon many factors, including: (1) your ability to influence Teradyne decisions that affect your personal interests; (2) the size of the investment relative to your finances; and (3) the nature of the relationship between Teradyne and the other business. Potential conflicts should be disclosed to your manager in advance, even in doubtful situations. Discounts You should never misuse Teradyne's buying power for personal gain. All discounts for products and services must be openly and readily available to all employees. You should not, for instance, get a discount on building materials for your home because you have used a certain supplier at Teradyne. (Such a discount would be acceptable, however, if it were known by and available to all Teradyne employees.) Using Copyrighted or Licensed Material It is our policy to comply with copyright laws and licensing agreements for all material obtained from third parties. This is especially important for computer software. When we buy an individual software license, it may be used by only one user. Downloading copyrighted material from a Teradyne network or an outside network is not allowed unless we have the appropriate license. - -------------------------------------------------------------------------------- Making the Right Choices with Shareholders Shareholders are an integral part of the Teradyne community. Shareholders are like customers, but their investment is in Teradyne itself. Employees must not use their position and access to information unfairly against the interests of the investment community. Inside Information Shareholders share in Teradyne's success, similar to others in the Teradyne community. They are entitled to accurate, timely financial information about the company and to know that trading in Teradyne's stock is conducted with integrity and fairness. If you have information about Teradyne that is both material and non-public, also called "material inside information," it is illegal for you to trade in Teradyne stock, engage in any action to take advantage of such information, or recommend to others that they buy or sell Teradyne stock. Information is "material" if it would influence a reasonable person to buy or sell stock. Examples include: undisclosed booking or earnings information; trends in orders, sales or profitability; impending announcements of major new products; acquisitions or equity investments; and important project, product, or litigation developments. Information is "non-public" if it has not been the subject of a Teradyne press release and is not generally known outside Teradyne. If you possess material inside information about Teradyne, you must wait to trade Teradyne stock until a reasonable time, usually 24 hours, after public disclosure of that information. Trading in Teradyne stock includes buying or selling any type of Teradyne security in the open market. These include exchange-traded options and other derivative securities, as well as common stock. Certain material inside information that is related to Teradyne's business may not affect the stock price, but may affect the stock price of another company or the value of other investments. Teradyne employees may not use this material inside information to gain a personal financial benefit. This type of inside information would include a planned investment in another company by Teradyne or the award of a significant contract to a supplier. Teradyne's vice president of Corporate Relations is the proper contact for stockholders, financial analysts, and others seeking financial information about the company. All requests from these groups should be directed to the vice president of Corporate Relations. Teradyne employees should not participate in electronic or web-based message boards or chat rooms concerning Teradyne. Employees' information concerning financial information, business prospects, or any other possibly sensitive information about Teradyne must be regarded as strictly confidential. Another Company's Inside Information If you learn material inside information about another company while performing your Teradyne duties, you also may be considered an insider of that company and be subject to the same trading restrictions in that company's stock. Short Sales Officers and directors are prohibited, by U.S. securities law, from making short sales of Teradyne securities. All employees should be aware that short sales and derivative transactions, such as buying or selling put and call options, carry the potential of placing their personal financial interests in conflict with the interests of Teradyne and its shareholders. Employees should therefore carefully evaluate the risks before entering into such a transaction. For example, short sales and some derivative transactions are profitable only if the price of Teradyne stock declines. Non-Trading Period Directors, officers, and certain other employees of the company who have regular access to sensitive financial information are prohibited from buying or selling the company's securities during the company's official non-trading period, also called "blackout period," as published by the Legal Department. Trading by Family Members The restrictions on trading described above apply not only to you, but also to your spouse, minor children, other persons living in your home or who are your dependents, and any other person or entity who holds stock over which you do or may have some control. Insiders responsible for compliance by such persons should review the company policy with them and the prohibitions on insider trading. Enforcement If you violate insider trading laws, you and Teradyne may be subject to serious and substantial civil and criminal penalties. Those found guilty of insider trading under the U.S. Insider Trading Sanctions Act of 1984 can be fined up to three times the profit gained or loss avoided by use of material inside information. These laws apply to all employees throughout the world. The U.S. Securities and Exchange Commission (SEC) enforces insider trading laws and is aggressive in monitoring and prosecuting insider trading violations even where high-profile employees or significant profits are not involved. August 2002 EX-21.1 5 dex211.txt SUBSIDIARIES OF THE COMPANY EXHIBIT 21.1 SUBSIDIARIES PRESENT SUBSIDIARIES
State or Jurisdiction Percentage of Voting Entity Name Incorporation Securities Owned ----------- ------------------------- -------------------- Teradyne Assembly Holdings Ltd..................... United Kingdom 100% Teradyne Assembly Limited.......................... United Kingdom 100% Teradyne ATE (Wuxi) Co., Ltd....................... Peoples Republic of China 100% Teradyne Benelux, Inc. (Ltd.)...................... Delaware 100% Teradyne Canada Limited............................ Canada 100% Teradyne Connection Systems de Mexico, S.A. de C.V. Mexico 100% Teradyne Connection Systems SDN BHD................ Malaysia 100% Teradyne Connections Systems (Shanghai) Co., Ltd... Peoples Republic of China 100% Teradyne de Costa Rica S.A......................... Costa Rica 100% Teradyne Diagnostic Solutions Inc.................. Delaware 100% Teradyne Diagnostic Solutions Limited.............. United Kingdom 100% Teradyne Diagnostic Solutions GmbH................. Germany 100% Teradyne EMS Inc................................... Delaware 100% Teradyne GmbH...................................... Germany 100% Teradyne Holdings Limited.......................... United Kingdom 100% Teradyne Limited................................... United Kingdom 100% Teradyne Hong Kong, Ltd............................ Delaware 100% Teradyne International, Ltd........................ Barbados 100% Teradyne Ireland Limited........................... Ireland 100% Teradyne Italia SrL................................ Italy 100% Teradyne Japan, Ltd................................ Delaware 100% Teradyne KK........................................ Japan 100% Teradyne Korea, Ltd................................ Delaware 100% Teradyne Leasing, Inc.............................. Massachusetts 100% Teradyne Malaysia, Ltd............................. Delaware 100% Teradyne de Mexico, SA de CV....................... Mexico 100% Teradyne Netherlands BV............................ Netherlands 100% Teradyne Netherlands, Ltd.......................... Delaware 100% Teradyne Performance Systems Limited............... United Kingdom 100% Teradyne Philippines Limited....................... Delaware 100% Teradyne Realty, Inc............................... Massachusetts 100% Teradyne SAS....................................... France 100% Teradyne Scandinavia, Inc.......................... Delaware 100% Teradyne Singapore, Ltd............................ Delaware 100% Teradyne Software and Systems Test, Inc............ Delaware 100% Teradyne Spain, Inc................................ Delaware 100% Teradyne Taiwan, Ltd............................... Delaware 100% Teradyne Thailand Inc.............................. Delaware 100% Aegis Properties Limited........................... United Kingdom 100% Alternative Delivery Systems Support, Inc.......... North Carolina 100% Control Automation, Inc............................ Delaware 100% GenRad, Inc........................................ Massachusetts 100% Autodiagnos, Inc................................ Delaware 100% Autodiagnos AB.................................. Sweden 100% Autodiagnos BV.................................. Netherlands 100% Autodiagnos GmbH................................ Germany 100% Autodiagnos LTD................................. United Kingdom 100%
State or Jurisdiction Percentage of Voting Entity Name Incorporation Securities Owned ----------- ------------------------- -------------------- Autodiagnos UK Limited.......... United Kingdom 100% GenRad AB....................... Sweden 100% GenRad GmbH..................... Germany 100% GenRad Limited.................. United Kingdom 100% GenRad SA....................... France 100% GenRad Asia PTE Limited......... Singapore 100% GenRad Benelux BV............... Netherlands 100% GenRad Canada Limited........... Canada 100% GenRad China Limited............ Peoples Republic of China 100% GenRad Europe Limited........... United Kingdom 100% GenRad Holdings Limited......... United Kingdom 100% GenRad Ireland LTD.............. Ireland 100% GenRad Mexico, Inc.............. Delaware 100% Mastertech Automotive Ltd....... United Kingdom 100% Mitron Europe Limited........... United Kingdom 100% Motor Industry Services Limited. United Kingdom 100% Herco Technology Corp.............. California 100% Kinetrix, Inc...................... Delaware 100% Megatest HK Ltd.................... Hong Kong 100% Tarstock Limited................... Ireland 100% Teradyne Philippines Ltd........... California 100% Perception Laminates, Inc.......... California 100% Softbridge, Inc.................... Delaware 100% TCMS, Inc.......................... Delaware 100% Zehntel Holdings, Inc.............. California 100% 1000 Washington, Inc............... Massachusetts 100%
EX-23.1 6 dex231.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-101983; 333-32547; 333-26045; 33-16077; 33-42352; 33-55123; 33-64683; 333-07177; 333-56373; 333-68074; and 333-73700) and Form S-3 (Nos. 333-75632 and 333-47564) of Teradyne, Inc. of our report dated January 13, 2003 relating to the financial statements and financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP Boston, Massachusetts March 27, 2003 EX-99.1 7 dex991.txt CERTIFICATION OF CEO EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with Annual Report of Teradyne, Inc. (the "Company") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, George W. Chamillard, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C (S)1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ George W. Chamillard - ------------------------------- George W. Chamillard Chief Executive Officer March 26, 2003 A signed original of this written statement required by Section 906 has been provided to Teradyne, Inc. and will be retained by Teradyne, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-99.2 8 dex992.txt CERTIFICATION OF CFO EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with Annual Report of Teradyne, Inc. (the "Company") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gregory R. Beecher, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C (S)1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Gregory R. Beecher - ------------------------------- Gregory R. Beecher Chief Financial Officer March 26, 2003 A signed original of this written statement required by Section 906 has been provided to Teradyne, Inc. and will be retained by Teradyne, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----