-----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, GvAw4OTd/KdApfwPlKuglkzsG1dMQRXZlwWHR6zWiBAlPR9Sw2gxYQyNuikqELN1 2mHQ5ds3UFhebEj/lhx/KA== 0000950135-01-501294.txt : 20010516 0000950135-01-501294.hdr.sgml : 20010516 ACCESSION NUMBER: 0000950135-01-501294 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010401 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TERADYNE INC CENTRAL INDEX KEY: 0000097210 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 042272148 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06462 FILM NUMBER: 1638046 BUSINESS ADDRESS: STREET 1: 321 HARRISON AVE STREET 2: MAIL STOP H93 CITY: BOSTON STATE: MA ZIP: 02118 BUSINESS PHONE: 6174822700 MAIL ADDRESS: STREET 1: 321 HARRISON AVENUE STREET 2: H93 CITY: BOSTON STATE: MA ZIP: 02118 10-Q 1 b39297tie10-q.txt TERADYNE INC 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- FORM 10-Q ------------- (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 1, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO ______________ COMMISSION FILE NO. 1-6462 TERADYNE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MASSACHUSETTS 04-2272148 (STATE OR OTHER JURISDICTION (I.R.S.EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 321 HARRISON AVENUE, BOSTON, MASSACHUSETTS 02118 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) 617-482-2700 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes X No - - The number of shares outstanding of the registrant's only class of Common Stock as of April 27, 2001 was 174,310,831 shares. 2 TERADYNE, INC. INDEX
PAGE NO. PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets as of April 1, 2001 and December 31, 2000.............................. 3 Condensed Consolidated Statements of Income for the Three Months Ended April 1, 2001 and April 2, 2000..................... 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 1, 2001 and April 2, 2000............... 5 Notes to Condensed Consolidated Financial Statements............... 6-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 10-15 Item 3. Quantitative and Qualitative Disclosures about Market Risk......... 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings.................................................. 15 Item 6(b). Reports on Form 8-K................................................ 15
3 TERADYNE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS APRIL 1, 2001 DECEMBER 31,2000 ------------- ---------------- (IN THOUSANDS) Current assets: Cash and cash equivalents .......................... $ 171,457 $ 242,421 Marketable securities .............................. 23,286 60,154 Accounts receivable ................................ 343,791 420,040 Inventories: Parts .............................................. 363,708 318,790 Assemblies in process .............................. 156,191 159,123 Finished goods ..................................... 307 34,650 ----------- ----------- 520,206 512,563 Deferred tax assets ................................ 73,058 93,958 Prepayments and other current assets ............... 46,228 48,698 ----------- ----------- Total current assets ......................... 1,178,026 1,377,834 Property, plant, and equipment, at cost ............... 1,330,697 1,254,957 Less: accumulated depreciation ..................... (531,851) (521,171) ----------- ----------- Net property, plant, and equipment ........... 798,846 733,786 Marketable securities ................................. 163,012 161,848 Other assets .......................................... 78,685 82,400 ----------- ----------- Total assets ................................. $ 2,218,569 $ 2,355,868 =========== =========== LIABILITIES Current liabilities: Notes payable - banks .............................. $ 6,931 $ 7,389 Current portion of long-term debt .................. 225 169 Accounts payable ................................... 120,716 153,897 Accrued employees' compensation and withholdings ... 80,215 158,817 Deferred revenue and customer advances ............. 79,081 183,465 Other accrued liabilities .......................... 67,563 86,637 Income taxes payable ............................... 27,116 28,914 ----------- ----------- Total current liabilities .................... 381,847 619,288 Deferred tax liabilities .............................. 20,945 21,257 Long-term debt ........................................ 8,062 8,352 ----------- ----------- Total liabilities ............................ 410,854 648,897 ----------- ----------- SHAREHOLDERS' EQUITY Common stock, $0.125 par value, 1,000,000 shares authorized, 174,183 and 172,559 net shares issued and outstanding at April 1, 2001 and December 31, 2000, respectively ..................... 21,773 21,570 Additional paid-in capital ............................ 378,685 334,241 Accumulated other comprehensive income ................ 2,138 - Retained earnings ..................................... 1,405,119 1,351,160 ----------- ----------- Total shareholders' equity ................... 1,807,715 1,706,971 ----------- ----------- Total liabilities and shareholders' equity ... $ 2,218,569 $ 2,355,868 =========== ===========
The accompanying notes, together with the Notes to Consolidated Financial Statements included in Teradyne's Annual Report on Form 10-K for the year ended December 31, 2000 are an integral part of the condensed consolidated financial statements. 4 TERADYNE, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months Ended --------------------------------------- April 1, 2001 April 2, 2000 -------------- -------------- (In thousands, except per share amounts) Net sales..................................................... $ 605,189 $ 615,358 Expenses: Cost of sales............................................ 385,607 338,484 Engineering and development.............................. 71,197 69,025 Selling and administrative............................... 74,771 78,956 ----------- ----------- 531,575 486,465 ----------- ----------- Income from operations........................................ 73,614 128,893 Interest income............................................... 6,194 4,962 Interest and other expense.................................... (2,724) (425) ----------- ----------- Income before taxes and cumulative effect of change in accounting principle........................................ 77,084 133,430 Provision for income taxes.................................... 23,125 40,029 ----------- ----------- Income before cumulative effect of change in accounting principle................................................... 53,959 93,401 Cumulative effect of change in accounting principle, net of applicable tax of $27,488................................... - (64,138) ----------- ----------- Net income.................................................... $ 53,959 $ 29,263 =========== =========== Income per common share before cumulative effect of change in accounting principle - basic............................. $ 0.31 $ 0.54 =========== =========== Cumulative effect of change in accounting principle - basic... $ - $ (0.37) =========== =========== Net income per common share - basic........................... $ 0.31 $ 0.17 =========== =========== Income per common share before cumulative effect of change in accounting principle - diluted........................... $ 0.30 $ 0.52 =========== =========== Cumulative effect of change in accounting principle - diluted. $ - $ (0.35) =========== =========== Net income per common share - diluted......................... $ 0.30 $ 0.16 =========== =========== Shares used in calculations of net income per common share - basic.................................. 173,791 172,127 ======= ======= Shares used in calculations of net income per common share - diluted................................ 179,750 180,873 ======= =======
The accompanying notes, together with the Notes to Consolidated Financial Statements included in Teradyne's Annual Report on Form 10-K for the year ended December 31, 2000 are an integral part of the condensed consolidated financial statements. 5 TERADYNE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED ------------------------------ APRIL 1, 2001 APRIL 2, 2000 ------------- ------------- (IN THOUSANDS) Cash flows from operating activities: Net income ................................................ $ 53,959 $ 29,263 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ........................................... 28,646 23,890 Amortization ........................................... 1,745 402 Deferred income tax provision (credit) ................. 20,588 (34,211) Other non-cash items, net .............................. 2,434 (120) Changes in operating assets and liabilities: Accounts receivable ............................... 76,249 (128,203) Inventories ....................................... (7,643) (84,383) Other assets ...................................... 3,230 7,826 Accounts payable and accruals ..................... (235,241) 207,340 Income taxes payable .............................. 5,703 27,832 --------- --------- Net cash (used for) provided by operating activities ........... (50,330) 49,636 --------- --------- Cash flows from investing activities: Additions to property, plant and equipment ................ (77,702) (30,791) Increase in equipment manufactured by Teradyne ............ (17,228) (15,965) Purchases of available-for-sale marketable securities ..... (29,060) (89,628) Maturities of available-for-sale marketable securities .... 37,832 79,909 Purchases of held-to-maturity marketable securities ....... (469) (39,791) Maturities of held-to-maturity marketable securities ...... 29,539 - --------- --------- Net cash used for investing activities ......................... (57,088) (96,266) --------- --------- Cash flows from financing activities: Payments of long term debt ................................ (692) (36) Acquisition of treasury stock ............................. - (46,293) Issuance of common stock under employee stock option and stock purchase plans ......................... 37,146 41,809 --------- --------- Net cash flows provided by (used for) financing activities ..... 36,454 (4,520) --------- --------- Increase/(decrease) in cash and cash equivalents ............... (70,964) (51,150) Cash and cash equivalents at beginning of period ............... 242,421 181,345 --------- --------- Cash and cash equivalents at end of period ..................... $ 171,457 $ 130,195 ========= ========= Supplementary disclosure of cash flow information: Cash paid during the period for: Interest ............................................... $ 225 $ 413 Income taxes ........................................... $ 17,891 $ 1,115
The accompanying notes, together with the Notes to Consolidated Financial Statements included in Teradyne's Annual Report on Form 10-K for the year ended December 31, 2000 are an integral part of the condensed consolidated financial statements. 6 TERADYNE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) A. TERADYNE, INC. We design, manufacture, market and service test and inspection systems and related software, as well as backplanes and associated connectors. Teradyne currently has four principal product lines: - semiconductor test systems; - connection systems; - circuit-board test and inspection systems; and - broadband test systems. Semiconductor Test Systems. We produce semiconductor test systems for use by electronic component manufacturers in the design and testing of a wide variety of semiconductor products, including logic, memory, mixed signal, and "system on a chip" integrated circuits. Semiconductor test systems are sold to semiconductor manufacturers and subcontractors to the semiconductor industry. Semiconductor manufacturers use our semiconductor test systems to: - measure product performance; - improve product quality; - shorten time to market; - enhance manufacturability; - minimize labor costs; and - increase production yields. Connection Systems. Our connection systems include backplane assemblies, connectors and electro-mechanical systems integration for customers in the telecom, data networking, storage, server, and aerospace/defense industries. A backplane is an assembly into which printed circuit boards are inserted that provides for the interconnection of electrical signals between the circuit boards and the other elements of the system. Our connection systems provide both a technology advantage and the benefits of vertical integration to our customers. Connection systems product technology can be found in diverse products such as Internet routers, computer servers, mass data storage, telecom switches and aerospace devices. Circuit-board Test and Inspection Systems. Electronic equipment manufacturers use our circuit-board test and inspection systems for the design, inspection and testing of circuit boards and other assemblies. We also sell circuit-board test and inspection systems to customers across most sectors of the electronics industry and to companies in other industries that use electronic devices in high volume. Similar to semiconductor test systems, our customers use their systems and related software to increase product performance, to improve product quality, to shorten time to market, to enhance manufacturability, to minimize labor costs, and to increase production yields. Broadband Test Systems. Broadband test systems are used by the communications industry for Internet testing, customer care and voice network maintenance. Broadband test systems perform qualification testing for Digital Subscriber Line (DSL) services, assist customer care centers in isolating network service problems, and perform integrated surveillance and maintenance for voice networks. 7 TERADYNE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) A. TERADYNE, INC. - (Continued) 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. Teradyne retains a minority ownership in the new company called Empirix. Software test systems activity is included in Teradyne's results in 2000. B. RISKS AND UNCERTAINTIES Teradyne's future results of operations involve a number of risks and uncertainties. These factors include, but are not limited to, the slowdown in economies worldwide, the current and anticipated market for electronics, risks associated with any remedial measures we take to address the current slowdown in the market, enforcement of our intellectual property, failure to develop new technologies, risks associated with acquisitions and divestitures, competition, risks of operating internationally, competitive pricing pressures, changes in product mix, timing of customer orders or any deferral or cancellation of orders previously received, market acceptance of our products, new product introductions from our competitors, reliance on sole source supplies, potential retrofit costs, and the timing of investments in engineering and development. It is reasonably possible that Teradyne may incur additional charges in the future related to inventory or other asset carrying values if demand for our products weaken. C. ACCOUNTING POLICIES Basis of Presentation The condensed consolidated interim financial statements include the accounts of Teradyne and its subsidiaries. All significant intercompany balances and transactions have been eliminated. The year-end condensed consolidated balance sheet data were derived from audited financial statements, but do not include all disclosures required by generally accepted accounting principles. The results for the three months ended April 2, 2000 have been adjusted to reflect the adoption of Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). Preparation of Financial Statements The accompanying condensed consolidated interim financial statements are unaudited. However, in the opinion of management, all adjustments (consisting only of normal recurring entries) necessary for a fair statement of the results for the interim periods have been made. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. 8 TERADYNE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) C. ACCOUNTING POLICIES - (Continued) Comprehensive Income The components of comprehensive income / (loss) are as follows (in thousands):
For the Three Months Ended ------------------------------- April 1, 2001 April 2, 2000 ------------- ------------- Net income.................................. $ 53,959 $ 29,263 Unrealized gain on marketable securities, net of applicable tax of $916............. 2,138 - ---------- ----------- Comprehensive income, after tax............. $ 56,097 $ 29,263 ========== ===========
D. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Teradyne adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 137 and SFAS No. 138 in the first fiscal quarter of 2001. SFAS 133 requires Teradyne to recognize all derivatives on the balance sheet at fair value. Adoption of SFAS 133 did not have a material impact on Teradyne's financial position or results of operations. Teradyne conducts business in a number of foreign countries, with certain transactions denominated in local currencies. The purpose of Teradyne's foreign currency management is to minimize the effect of exchange rate fluctuations on certain foreign denominated cash flows. The terms of currency instruments used for hedging purposes are consistent with the timing of the transactions being hedged. We do not use derivative financial instruments for trading or speculative purposes. Teradyne hedges certain forecasted foreign currency denominated sales, over a maximum period of twelve months, using forward exchange contracts. These derivatives are designated as cash-flow hedges, and changes in their fair value are carried in accumulated other comprehensive income until the underlying transaction occurs. Once the underlying forecasted transaction is realized, the appropriate gain or loss from the derivative designated as a hedge of the transaction is reclassified from accumulated other comprehensive income to net sales. During the three months ended April 1, 2001, the amount of net realized gains was immaterial. As of April 1, 2001, the amount that will be reclassified from accumulated other comprehensive income over the next twelve months is immaterial. In addition, we enter into foreign currency forward contracts to hedge those currency exposures associated with certain assets and liabilities denominated in non-functional currencies. Changes in the fair value of these derivatives are recorded immediately in earnings to offset the changes in the fair value of the assets or liabilities being hedged. E. NET INCOME PER COMMON SHARE The following table sets forth the computation of basic and diluted net income per common share (in thousands, except per share amounts):
For the Three Months Ended ---------------------------- April 1, 2001 April 2, 2000 ------------- ------------- Income before cumulative effect of change in accounting principle........................................ $ 53,959 $ 93,401 Cumulative effect of change in accounting principle........... - (64,138) --------- --------- Net income.................................................... $ 53,959 $ 29,263 ========= ========= Shares used in net income per common share - basic............ 173,791 172,127 Effect of dilutive securities: Employee and director stock options.................. 5,773 8,671 Employee stock purchase rights....................... 186 75 --------- -------- Dilutive potential common shares......................... 5,959 8,746 --------- --------
9 TERADYNE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) E. NET INCOME PER COMMON SHARE - (Continued)
For the Three Months Ended ---------------------------- April 1, 2001 April 2, 2000 ------------- ------------- Shares used in net income per common share - diluted.. 179,750 180,873 ========= ======== Income per common share before cumulative effect of change in accounting principle - basic.............. $ 0.31 $ 0.54 ========= ======== Cumulative effect of change in accounting principle - basic................................... $ - $ (0.37) ========= ======== Net income per common share - basic................... $ 0.31 $ 0.17 ========= ======== Income per common share before cumulative effect of change in accounting principle - diluted............ $ 0.30 $ 0.52 ========= ======== Cumulative effect of change in accounting principle - diluted................................. $ - $ (0.35) ========= ======== Net income per common share - diluted................. $ 0.30 $ 0.16 ========= ========
For purposes of computing diluted earnings per share, weighted average common share equivalents do not include stock options with an exercise price that exceeds the average fair market value of Teradyne's common stock during the three month periods presented above. Accordingly, options to purchase 1,262,765 and 30,424 shares of common stock that were outstanding during the three months ended April 1, 2001 and April 2, 2000, respectively, were not included in the calculation of diluted net income per common share because the options' exercise price was greater than the average market price of the common shares during those periods. F. WORKFORCE REDUCTION During the first quarter of 2001, we recorded a pre-tax charge of $5.7 million in connection with a workforce reduction. The $5.7 million provision for severance benefits was recorded in selling and administrative expenses. There were 650 employees terminated in the first quarter of 2001 across all functional groups. No benefits were paid during the first quarter. All benefits will be paid in the second quarter of 2001. G. OPERATING SEGMENT INFORMATION Teradyne has four principal operating segments which are the design, manufacturing and marketing of semiconductor test systems, connection systems, circuit-board test and inspection systems, and broadband test systems. These operating segments were determined based upon the nature of the products and services offered. Teradyne has three reportable segments; semiconductor test systems segment, connection systems segment, and other. The other segment is comprised of circuit-board test and inspection systems and broadband test systems. In 2000, the other segment included software test systems. Teradyne evaluates performance based on several factors, of which the primary financial measure is business segment income before taxes. The accounting policies of the business segments are the same as those described in "Note B: Accounting Policies" in the Teradyne's Annual Report on Form 10-K for the year ended December 31, 2000. Intersegment sales are accounted for at fair value as if sales were to third parties. Operating segment information for the three month periods ended April 1, 2001 and April 2, 2000 follows (in thousands):
Semiconductor Other Test & Test Connection Inspection Corporate SAB 101 Systems Systems Systems and Adjustments Segment Segment Segment Eliminations (2) Consolidated ------------ ---------- ------------ ------------ ----------- ------------ Three months ended April 1, 2001: - --------------------------------- Sales to unaffiliated customers $257,398 $204,643 $44,425 - $98,723 $605,189 Intersegment sales - 1,984 - ($1,984) - - -------- -------- ------- ------- ------- -------- Net sales 257,398 206,627 44,425 (1,984) 98,723 605,189 Income before taxes (1) ($10,176) $ 28,552 ($4,839) ($6,122) $69,669 $ 77,084 ======== ======== ======= ======= ======= ========
10 TERADYNE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) G. OPERATING SEGMENT INFORMATION - (Continued)
Semiconductor Other Test & Test Connection Inspection Corporate SAB 101 Systems Systems Systems and Adjustments Segment Segment Segment Eliminations (2) Consolidated ------------- ---------- ------------ ------------ ----------- ------------ Three months ended April 2, 2000: - --------------------------------- Sales to unaffiliated customers $456,503 $132,642 $58,986 - ($32,773) $615,358 Intersegment sales - 5,417 - ($5,417) - - -------- -------- ------- ------- ------- -------- Net sales 456,503 138,059 58,986 (5,417) (32,773) 615,358 Income before taxes (1) $151,695 $ 26,664 $ 1,925 ($24,437) ($22,417) $133,430 ======== ======== ======= ======== ======= ========
(1) Income before taxes of the principal businesses exclude the effects of employee profit sharing, management incentive compensation, other unallocated expenses, and net interest income. (2) SAB 101 adjustment reflects the impact of SAB 101 on sales and income before taxes in 2001 and 2000. Segments reflect their results before the change in accounting principle. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SELECTED RELATIONSHIPS WITHIN THE CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months Ended ------------------------------- April 1, 2001 April 2, 2000 ------------- ------------- (In thousands) Net sales.................................................. $ 605,189 $ 615,358 ========= ========= Net income................................................. $ 53,959 $ 29,263 ========= ========= Percentage of net sales: Net sales............................................. 100.0% 100.0% Expenses: Cost of sales..................................... 63.7 55.0 Engineering and development....................... 11.8 11.2 Selling and administrative........................ 12.4 12.8 Interest, net..................................... (0.6) (0.7) -------- --------- 87.3 78.3 Income before taxes and cumulative effect of change in accounting principle............................. 12.7 21.7 Provision for income taxes............................ 3.8 6.5 -------- --------- Income before cumulative effect of change in accounting principle................................ 8.9 15.2 Cumulative effect of change in accounting principle... - (10.4) -------- --------- Net income............................................ 8.9% 4.8% ======== ========= Provision for income taxes as a percentage of income before taxes.......................................... 30.0% 30.0% ======== =========
RESULTS OF OPERATIONS Teradyne recorded sales of $605.2 million in the first quarter of 2001, a decrease of $10.2 million or 2% from the first quarter of 2000. Semiconductor test systems sales decreased 16% from the first quarter of 2000 which reflects the current industry conditions. Sales of connection systems to unaffiliated customers increased 54% from the first quarter of 2000 due to growth in demand from networking, data storage and telecom customers. However, connection systems sales decreased by $31.7 million in the first quarter of 2001 compared with the fourth quarter of 2000. Other test and inspection systems sales decreased 25% 11 from the first quarter of 2000 due to the divestiture of software test systems business. The decrease from the divestiture was offset by increases in circuit-board test and inspection and broadband test systems sales of 3% and 13%, respectively, over the first quarter of 2000. Included in the first quarter sales of $605.2 million was a non-recurring adjustment of $98.7 million which resulted in $48.8 million of income (net of tax of $20.9 million) related to shipments in 2000 where title was retained until payment. Teradyne no longer retains title until payment. Income before taxes and cumulative effect of change in accounting principle in the first quarter of 2001 decreased $56.3 million from the first quarter of 2000 to $77.1 million. As described in "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors That May Affect Future Results" of Form 10-K for the year ended December 31, 2000, our business has been impacted by the slowdown in economies worldwide. We have been further affected by the cyclical nature of the electronics and semiconductor industry with recurring periods of oversupply. These factors have resulted in a downturn in the demand for our products. We currently do not have visibility as to the length or severity of the downturn. During the first quarter of 2001, Teradyne experienced a significant slowdown in new orders as market conditions weakened. New orders declined by approximately $295 million compared to the fourth quarter of 2000. We do expect new orders to improve once customers adjust to the period of oversupply and historical levels of capital expenditures resume. There has been no current evidence, however, that customer buying patterns will increase in the near term. There is a risk that the slowdown may be prolonged. If the factors discussed above result in a continued further decline in the amount of new orders received, the amount of inventory and certain long-lived assets considered realizable could be reduced. Teradyne will continue to assess the net realizable value of its assets at each balance sheet date based on all available evidence. Incoming orders were $357.1 million in the first quarter of 2001 compared to $1,024.2 million in the first quarter of 2000. The majority of the decrease in incoming orders was due to an 84% decrease in semiconductor test systems orders. Circuit-board test and inspection orders also declined while connection systems orders and broadband test systems orders rose by 5% and 17%, respectively, from their first quarter of 2000 levels. Teradyne's backlog was $1,134.1 million at the end of the first quarter of 2001, compared with $1,514.4 million at the end of the first quarter of 2000. Teradyne's experience indicates that a portion of orders included in the backlog may be canceled or rescheduled. We have recently experienced an increase in the volume of the rescheduling of delivery dates by some of our customers, and thus the timing of the delivery of a significant portion of the backlog is uncertain. Cost of sales increased from 55% of sales in the first quarter of 2000 to 64% of sales in the first quarter of 2001. This percentage increase was primarily attributable to decreased utilization of Teradyne's manufacturing overhead, as sales volume decreased while certain components of cost of sales remained fixed. An additional factor in the increase in cost of sales was the mix change between the semiconductor test systems to connection systems business segments. Engineering and development expenses, as a percentage of sales, increased from 11% in the first quarter of 2000 to 12% in the first quarter of 2001, with spending increasing by $2.2 million. This spending growth was primarily due to new product development expenses in semiconductor test systems, and, to a lesser extent, increased expenses related to product development in connection systems, circuit-board test and inspection systems, and broadband test systems. Selling and administrative expenses, as a percentage of sales, excluding a charge of $5.7 million for a workforce reduction provision, decreased from 13% in the first quarter of 2000 to 11% in the first quarter of 2001. Spending decreased by $9.9 million. This spending reduction was primarily due to a decrease in expenses resulting from the divestiture of the software test business. During the first quarter of 2001, we recorded a pre-tax charge of $5.7 million in connection with a workforce reduction. The $5.7 million provision for severance benefits was recorded in selling and administrative expenses. There were 650 employees terminated in the first quarter of 2001 across all functional groups. No benefits were paid during the first quarter. All benefits will be paid in the second quarter of 2001. Interest and other expense, excluding our share of a loss related to an equity investment, increased by $1.4 million to $6.0 million in the first quarter of 2001 compared to the first quarter of 2000. This increase is attributable to higher interest rates. Teradyne's overall effective tax rate was 30% in the first quarter of 2001. The overall effective tax rate for the year ended 2000 was also 30%. Teradyne continued to utilize export sales corporation benefits and other tax benefits to operate below the U.S. statutory rate of 35%. LIQUIDITY AND CAPITAL RESOURCES Teradyne's cash, cash equivalents and marketable securities balance decreased $106.7 million in the first three months of 2001, to $357.8 million. Teradyne used cash from operating activities of $50.3 million in the first three months of 2001 and generated cash of $49.6 million in the three months of 2000. 12 Cash generated from net income, excluding the effects of non-cash items, was $107.4 million and $19.5 million for the first three months of 2001 and 2000, respectively. Changes in operating assets and liabilities used cash of $157.7 million in the first three months of 2001. This was primarily due to accounts payable and accruals balances decreasing by 40% as the accounts payable balance decreased as purchases slowed and accrued compensation and withholdings balances were paid at the beginning of the period. The use of cash by accounts payable and accruals was partially offset by a lower accounts receivable balance. In the first three months of 2000, changes in operating assets and liabilities provided cash of $30.4 million. Teradyne used $57.1 million of cash for investing activities in the first three months of 2001 and $96.3 million in the first three months of 2000. Investing activities consist of purchases, sales, and maturities of marketable securities and purchases of capital assets to support long-term growth. Capital expenditures were $94.9 million in the first three months of 2001 and $46.8 million in the first three months of 2000. The increase in capital expenditures was due to continued capacity expansion on specific buildings and improvement, machinery and equipment, and information technology projects that were started in 2000. Financing activities provided $36.5 million of cash during the first three months of 2001 and used $4.5 million of cash in the first three months of 2000. Financing activities include issuance of Teradyne's common stock through employee stock option and stock purchase plans, repurchase of common stock through a stock buyback program and repayments of debt. During the first three months of 2001, net common stock activity provided cash of $37.1 million. During the first three months of 2000, net common stock activity used cash of $4.5 million. Since 1996, Teradyne has used $540.8 million of cash to repurchase 20.0 million shares of its common stock on the open market. Teradyne believes its cash, cash equivalents, and marketable securities balance of $357.8 million, together with other sources of funds, including cash flow generated from operations, will be sufficient to meet working capital and capital expenditure requirements for the foreseeable future. Inflation has not had a significant long-term impact on earnings. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS From time to time, information provided by Teradyne, statements made by its employees or information included in its filings with the Securities and Exchange Commission (including this Form 10-Q and our Annual Report to Shareholders) contains statements that are not purely historical, but are forward looking statements, made under the safe harbor provisions of the Private Securities Litigation Act of 1995, which involve risks and uncertainties. In particular, forward looking statements may include projections, plans, and objectives for Teradyne's business, financial condition, operating results, future operations, future economic performance or statements relating to the sufficiency of capital to meet working capital and planned capital expenditures. Teradyne's actual future results may differ materially from those stated in any forward looking statements. Factors that may cause such differences include, but are not limited to, the factors discussed below. These factors, and others, are discussed from time to time in Teradyne's filings with the Securities and Exchange Commission, including in Teradyne's Annual Report on Form 10-K for the year ended December 31, 2000. OUR BUSINESS IS IMPACTED BY THE SLOWDOWN IN ECONOMIES WORLDWIDE. Our business is dependent on current and anticipated market demand for electronics, which has been impacted by the slowdown in the economies of the United States, Asia, and elsewhere that began in second half of 2000. While our diverse businesses may allow us to perform better than some companies in periods of economic decline, there is no guarantee that this will be the case currently. OUR BUSINESS IS DEPENDENT ON THE CURRENT AND ANTICIPATED MARKET FOR ELECTRONICS. Our 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 13 products. The electronic and semiconductor industry has been highly cyclical with recurring periods of over supply, which often have had a severe effect on demand for test equipment, including systems manufactured and marketed by us. We believe that the markets for newer generations of electronic products will also be subject to similar fluctuations. We are dependent on the timing of customer orders and the deferral or cancellation of previous customer orders could impact our results of operations. We cannot assure that any future increase in sales or bookings for a calendar quarter will be sustained in subsequent quarters. In addition, any factor adversely affecting the electronic industry or particular segments within the electronic industry may adversely affect our business, financial condition and operating results. WE HAVE TAKEN AND EXPECT TO CONTINUE TO TAKE REMEDIAL MEASURES TO ADDRESS THE RECENT SLOWDOWN IN THE MARKET FOR OUR PRODUCTS WHICH COULD HAVE LONG-TERM EFFECTS ON OUR BUSINESS. We have taken and expect to continue to take remedial measures to address the recent slowdown in the market for our products. In particular, we have reduced our workforce, frozen hiring, delayed salary increases, reduced senior managers' pay, implemented furloughs, and reduced our planned capital expenditures and expense budgets. These measures will reduce our expenses in the face of decreased revenues due to decreased or cancelled customer orders. However, each of these measures could have long-term effects on our business by reducing our pool of technical talent, decreasing or slowing improvements in our products, and making it more difficult for us to respond to customers. IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WE MAY LOSE A VALUABLE ASSET OR MAY INCUR COSTLY LITIGATION TO PROTECT OUR RIGHTS. Our products incorporate technology that we protect in several ways, including patents, copyrights, and trade secrets. While we believe that our patents, copyrights, and trade secrets have value, in general no single one is in itself essential. At times we have been notified that we may be in violation of patents held by others. An assertion of patent infringement against us, if successful, could have a material adverse effect on our ability to sell our products, or could require a lengthy and expensive defense which could adversely affect our operating results. IF WE FAIL TO DEVELOP NEW TECHNOLOGIES TO ADAPT TO OUR CUSTOMERS' NEEDS AND IF OUR CUSTOMERS FAIL TO ACCEPT OUR NEW PRODUCTS, IT WILL ADVERSELY AFFECT OUR REVENUES. We believe that our technological position depends primarily on the technical competence and creative ability of our engineers. Our development of new technologies, commercialization of those technologies into products, and market acceptance and customer demand for those products is critical to our 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; and - timely and efficient implementation of manufacturing and assembly processes and product performance at customer locations. OUR BUSINESS MAY BE ADVERSELY IMPACTED BY ACQUISITIONS WHICH MAY AFFECT OUR ABILITY TO MANAGE AND MAINTAIN OUR BUSINESS. Since our inception, we have acquired a number of businesses. In the future, we may undertake additional acquisitions of businesses that complement our 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; - inability to effectively integrate an acquired business into our culture, product and service delivery methodology and other standards, controls procedures and policies; - inability to retain the management, key personnel and other employees 14 of an acquired business; - the inability to retain the customers of an acquired business; - current customer satisfaction problems caused by an acquired business could affect our reputation; - potential known or unknown liabilities associated with an acquired business, including but not limited to regulatory, environmental and tax liabilities; and - the amortization of goodwill, which may adversely affect our reported results of operations. In addition, any acquired business could significantly underperform relative to our expectations. OUR BUSINESS MAY BE ADVERSELY IMPACTED BY DIVESTITURES OF LINES OF BUSINESS WHICH MAY AFFECT OUR ABILITY TO MANAGE AND MAINTAIN OUR BUSINESS. Since our inception, we have divested ourselves of certain lines of our business. In the future, we 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 our 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 could affect our reputation; and - the decreased diversification of our product lines caused by the divestiture of a line of business may make our operating results subject to increased market fluctuations. In addition, any divested line of business could significantly outperform relative to our expectations. INTENSE COMPETITION IN OUR INDUSTRY MAY AFFECT OUR REVENUES. We face substantial competition, throughout the world, in each of our operating segments. Some of these competitors also have substantial financial and other resources to pursue engineering, manufacturing, marketing and distribution of their products. We also face competition from internal suppliers at several of our customers. Some of our competitors have introduced or announced new products with certain performance characteristics which may be considered equal or superior to those we currently offer. We expect our 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 our products. Moreover, increased competitive pressure could lead to intensified price based competition, which could materially adversely affect our business, financial condition and results of operations. WE ARE SUBJECT TO RISKS OF OPERATING INTERNATIONALLY. We derive a significant portion of our total revenue from customers outside the United States. Our international sales are subject to significant risks and difficulties, including: - unexpected changes in legal and regulatory requirements and in policy changes affecting our markets; - changes in tariffs and exchange rates; - political and economic instability; - difficulties in accounts receivable collection; - difficulties in staffing and managing international operations; and - potentially adverse tax consequences. 15 OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY. Our 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; - write-offs of excess and obsolete inventory; - changes in product mix; - our ability to introduce new products and technologies on a timely basis; - introduction of products and technologies by our competitors; - market acceptance of our and our 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, we will introduce a significant number of new, complex test systems in 2001 and there can be no assurance that Teradyne will not experience delays in shipment of such products or that such products will achieve customer acceptance. As a result of the foregoing and other factors, we have and may continue to experience material fluctuations in future operating results on a quarterly or annual basis which could materially and adversely affect our business, financial condition, operating results and stock price. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There were no material changes in Teradyne's exposure to market risk from December 31, 2000. PART II. OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS Teradyne is subject to legal proceedings and claims that arise in the ordinary course of business. Management does not believe these actions will have a material adverse affect on the financial position or results of our operations. ITEM 6(b): REPORTS ON FORM 8-K There were no Form 8-K filings during the quarter ended April 1, 2001, as none were required. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TERADYNE, INC. ---------------------------------------------- Registrant /s/ GREGORY R. BEECHER ---------------------------------------------- Gregory R. Beecher Vice President and Chief Financial Officer May 15, 2001 -----END PRIVACY-ENHANCED MESSAGE-----