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UNITED STATES
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 July 4, 2004
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 1-6462
TERADYNE, INC.
(Exact name of registrant as specified in its charter)
Massachusetts | 04-2272148 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer 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 ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
The number of shares outstanding of the registrant’s only class of Common Stock as of July 30, 2004 was 194,124,642 shares.
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INDEX
Page No. | ||||
PART I. FINANCIAL INFORMATION | ||||
Item 1. | Financial Statements: | |||
Condensed Consolidated Balance Sheets as of July 4, 2004 and December 31, 2003 | 3 | |||
4 | ||||
5 | ||||
6 | ||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 20 | ||
Item 3. | 44 | |||
Item 4. | 44 | |||
PART II. OTHER INFORMATION | ||||
Item 1. | 45 | |||
Item 4. | 46 | |||
Item 6. | 46 |
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CONDENSED CONSOLIDATED BALANCE SHEETS
July 4, 2004 | December 31, 2003 | |||||||
(in thousands, except per share data) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 224,335 | $ | 228,444 | ||||
Marketable securities | 104,849 | 60,974 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $5,691 and $5,986 on July 4, 2004 and December 31, 2003, respectively | 295,453 | 229,532 | ||||||
Inventories: | ||||||||
Parts | 134,218 | 109,538 | ||||||
Assemblies in process | 149,692 | 105,396 | ||||||
283,910 | 214,934 | |||||||
Prepayments and other current assets | 34,603 | 35,393 | ||||||
Total current assets | 943,150 | 769,277 | ||||||
Property, plant, and equipment, at cost | 1,313,382 | 1,305,254 | ||||||
Less: accumulated depreciation | (774,913 | ) | (760,885 | ) | ||||
Net property, plant, and equipment | 538,469 | 544,369 | ||||||
Marketable securities | 320,203 | 296,618 | ||||||
Goodwill | 116,176 | 118,203 | ||||||
Other assets | 49,834 | 56,895 | ||||||
Total assets | $ | 1,967,832 | $ | 1,785,362 | ||||
LIABILITIES | ||||||||
Current liabilities: | ||||||||
Notes payable—banks | $ | 7,217 | $ | 7,272 | ||||
Current portion of long-term debt | 308 | 310 | ||||||
Accounts payable | 130,942 | 74,097 | ||||||
Accrued employees’ compensation and withholdings | 87,575 | 91,244 | ||||||
Deferred revenue and customer advances | 34,698 | 25,391 | ||||||
Other accrued liabilities | 66,553 | 75,125 | ||||||
Income taxes payable | 13,179 | 7,376 | ||||||
Total current liabilities | 340,472 | 280,815 | ||||||
Pension liability | 82,573 | 93,878 | ||||||
Long-term other accrued liabilities | 47,977 | 53,441 | ||||||
Convertible senior notes | 400,000 | 400,000 | ||||||
Other long-term debt | 7,486 | 7,658 | ||||||
Total liabilities | 878,508 | 835,792 | ||||||
Commitments and contingencies (Note J) | ||||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common stock, $0.125 par value, 1,000,000 shares authorized, 194,095 and 218,628 shares issued and 194,095 and 191,973 shares outstanding at July 4, 2004 and December 31, 2003, respectively | 27,598 | 27,329 | ||||||
Additional paid-in capital | 763,670 | 1,294,661 | ||||||
Accumulated other comprehensive loss | (59,167 | ) | (51,846 | ) | ||||
Retained earnings | 357,223 | 236,483 | ||||||
Treasury shares, at cost, 26,655 shares at December 31, 2003 | — | (557,057 | ) | |||||
Total shareholders’ equity | 1,089,324 | 949,570 | ||||||
Total liabilities and shareholders’ equity | $ | 1,967,832 | $ | 1,785,362 | ||||
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, 2003 are an integral part of the condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
July 4, 2004 | June 29, 2003 | July 4, 2004 | June 29, 2003 | |||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
Net revenues: | ||||||||||||||||
Products | $ | 466,802 | $ | 276,394 | $ | 840,769 | $ | 557,659 | ||||||||
Services | 59,661 | 55,135 | 116,297 | 108,446 | ||||||||||||
Net revenues | 526,463 | 331,529 | 957,066 | 666,105 | ||||||||||||
Cost of revenues: | ||||||||||||||||
Cost of products | 259,500 | 203,781 | 474,902 | 414,708 | ||||||||||||
Cost of services | 40,335 | 39,140 | 79,561 | 78,683 | ||||||||||||
Gross profit | 226,628 | 88,608 | 402,603 | 172,714 | ||||||||||||
Operating expenses: | ||||||||||||||||
Engineering and development | 66,914 | 63,804 | 131,608 | 132,389 | ||||||||||||
Selling and administrative | 69,991 | 61,512 | 136,233 | 128,914 | ||||||||||||
Restructuring and other charges | 152 | 13,378 | 282 | 32,864 | ||||||||||||
Gain on sale of business | (865 | ) | — | (865 | ) | — | ||||||||||
Operating expenses | 136,192 | 138,694 | 267,258 | 294,167 | ||||||||||||
Income (loss) from operations | 90,436 | (50,086 | ) | 135,345 | (121,453 | ) | ||||||||||
Interest income | 3,470 | 3,299 | 7,061 | 7,478 | ||||||||||||
Interest expense | (4,895 | ) | (5,402 | ) | (9,527 | ) | (10,813 | ) | ||||||||
Other income and expense, net | 426 | 1,400 | 1,277 | (1,299 | ) | |||||||||||
Income (loss) before income taxes | 89,437 | (50,789 | ) | 134,156 | (126,087 | ) | ||||||||||
Income tax expense | 8,944 | 1,700 | 13,416 | 2,900 | ||||||||||||
Net income (loss) | $ | 80,493 | $ | (52,489 | ) | $ | 120,740 | $ | (128,987 | ) | ||||||
Net income (loss) per common share—basic | $ | 0.41 | $ | (0.28 | ) | $ | 0.62 | $ | (0.70 | ) | ||||||
Shares used in calculations of net income (loss) per common share—basic | 194,015 | 185,465 | 193,934 | 185,177 | ||||||||||||
Net income (loss) per common share—diluted | $ | 0.39 | $ | (0.28 | ) | $ | 0.60 | $ | (0.70 | ) | ||||||
Shares used in calculations of net income (loss) per common share—diluted | 213,486 | 185,465 | 214,383 | 185,177 | ||||||||||||
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, 2003 are an integral part of the condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended | ||||||||
July 4, 2004 | June 29, 2003 | |||||||
(in thousands) | ||||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | 120,740 | $ | (128,987 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: | ||||||||
Depreciation | 61,687 | 76,069 | ||||||
Amortization | 2,922 | 3,808 | ||||||
Impairment of long-lived assets | 277 | 13,988 | ||||||
(Gain) loss on sale of product lines | (865 | ) | 8,048 | |||||
Provision for inventory | 6,563 | 5,592 | ||||||
Provision for doubtful accounts | 94 | 842 | ||||||
Other non-cash items, net | 377 | 4,578 | ||||||
Changes in operating assets and liabilities, net of product lines sold: | ||||||||
Accounts receivable | (66,015 | ) | (49,143 | ) | ||||
Inventories | (53,780 | ) | 35,387 | |||||
Other assets | 3,648 | (18,553 | ) | |||||
Accounts payable, deferred revenue and accrued expenses | 37,517 | 24,494 | ||||||
Accrued income taxes | 5,803 | (2,487 | ) | |||||
Net cash provided by (used for) operating activities | 118,968 | (26,364 | ) | |||||
Cash flows from investing activities: | ||||||||
Additions to property, plant and equipment | (24,778 | ) | (13,753 | ) | ||||
Increase in equipment manufactured by Teradyne | (53,688 | ) | (23,318 | ) | ||||
Proceeds from asset disposal | — | 5,964 | ||||||
Proceeds from sale of product lines | 865 | 2,114 | ||||||
Purchases of available-for-sale marketable securities | (135,907 | ) | (106,619 | ) | ||||
Maturities of available-for-sale marketable securities | 62,301 | 75,989 | ||||||
Maturities of held-to-maturity marketable securities | — | 29,905 | ||||||
Net cash used for investing activities | (151,207 | ) | (29,718 | ) | ||||
Cash flows from financing activities: | ||||||||
Payments of long term debt and notes payable | (229 | ) | (590 | ) | ||||
Issuance of common stock under employee stock option and stock purchase plans | 28,359 | 43,055 | ||||||
Net cash flows provided by financing activities | 28,130 | 42,465 | ||||||
Decrease in cash and cash equivalents | (4,109 | ) | (13,617 | ) | ||||
Cash and cash equivalents at beginning of period | 228,444 | 251,521 | ||||||
Cash and cash equivalents at end of period | $ | 224,335 | $ | 237,904 | ||||
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, 2003 are an integral part of the condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. The Company
Teradyne, Inc. is a leading supplier of automatic test equipment and a leading provider of high performance interconnection systems.
Teradyne’s automatic test equipment products include systems that:
• | test semiconductors (“Semiconductor Test Systems”); |
• | test and inspect circuit-boards (“Assembly Test Systems”); |
• | diagnose and test automotive electronics systems (“Diagnostic Solutions”); and |
• | test voice and broadband access networks (“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 |
• | high performance circuits and connectors. |
Broadband Test Systems and Diagnostic Solutions have been combined into “Other Test Systems” for purposes of disclosing Teradyne’s reportable segments.
Statements in this Quarterly Report on Form 10-Q which are not historical facts, so called “forward looking statements,” are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934. 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 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Certain Factors That May Affect Future Results.”
B. 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. These financial statements reflect all normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of such interim financial statements. Certain prior years’ amounts were reclassified to conform to the current year presentation. 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 accompanying financial information should be read in conjunction with the consolidated financial statements and notes thereto contained in Teradyne’s Annual Report on Form 10-K, filed with the United States Securities and Exchange Commission on March 15, 2004 for the year ended December 31, 2003.
Preparation of Financial Statements
The preparation of consolidated financial statements requires management to make estimates and judgments that affect the amounts reported in the financial statements. Actual results may differ significantly from these estimates.
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TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
B. Accounting Policies—(Continued)
Product Warranty
Teradyne generally provides a one year warranty on its products commencing upon installation or shipment. A provision is recorded upon revenue recognition to cost of revenues for estimated warranty expense based on historical experience. Related costs are charged to the warranty accrual as incurred. The balance below is included in other accrued liabilities (in thousands).
For the Six Months Ended | ||||||||
July 4, 2004 | June 29, 2003 | |||||||
Balance at beginning of period | $ | 11,436 | $ | 9,087 | ||||
Accruals for warranties issued during the period | 12,083 | 8,416 | ||||||
Accruals related to pre-existing warranties (including changes in estimates) | (657 | ) | 971 | |||||
Settlements made during the period | (7,510 | ) | (7,833 | ) | ||||
Balance at end of period | $ | 15,352 | $ | 10,641 | ||||
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 other accrued liabilities (in thousands).
For the Six Months Ended | ||||||||
July 4, 2004 | June 29, 2003 | |||||||
Balance at beginning of period | $ | 1,650 | $ | 2,134 | ||||
Deferral of new extended warranty revenue | 1,872 | 563 | ||||||
Recognition of extended warranty deferred revenue | (558 | ) | (1,205 | ) | ||||
Balance at end of period | $ | 2,964 | $ | 1,492 | ||||
Employee Stock Option Plans and Employee Stock Purchase Plan
Teradyne accounts for its stock option plans and stock purchase plan under the recognition and measurement principles of Accounting Principles Board Opinion No. 25 “Accounting For Stock Issued to Employees” (“APB 25”) and related Interpretations. Teradyne’s employee stock purchase plan is a non-compensatory plan. Teradyne’s stock option plans are accounted for using the intrinsic value method under the provisions of APB 25. Teradyne has not recorded expense for employee or director stock options or employee stock purchase plans. Proceeds from the exercise of stock options and the issuance of the employee stock purchase plan under Teradyne’s stock plans are credited to common stock at par value and the excess is credited to additional paid-in capital.
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TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
B. Accounting Policies—(Continued)
Teradyne makes pro forma footnote disclosures as though the fair value method was followed under Statement of Financial Accounting Standard (“SFAS”) No. 123, “Accounting For Stock-Based Compensation” (“SFAS 123”), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” 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 three and six months ended July 4, 2004 and June 29, 2003 would have been the following (in millions, except per share amounts):
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
July 4, 2004 | June 29, 2003 | July 4, 2004 | June 29, 2003 | |||||||||||||
Net income (loss) as reported | $ | 80.5 | $ | (52.5 | ) | $ | 120.7 | $ | (129.0 | ) | ||||||
Deduct: Total stock-based employee compensation expense determined under fair value method | (17.9 | ) | (27.7 | ) | (51.3 | ) | (48.4 | ) | ||||||||
Pro forma net income (loss) | 62.6 | (80.2 | ) | 69.4 | (177.4 | ) | ||||||||||
Net income (loss) per common share - basic as reported | 0.41 | (0.28 | ) | 0.62 | (0.70 | ) | ||||||||||
Net income (loss) per common share - diluted as reported | 0.39 | (0.28 | ) | 0.60 | (0.70 | ) | ||||||||||
Net income (loss) per common share - basic pro forma | 0.32 | (0.43 | ) | 0.36 | (0.96 | ) | ||||||||||
Net income (loss) per common share - diluted pro forma | 0.31 | (0.43 | ) | 0.36 | (0.96 | ) |
The weighted average grant date fair value for options granted during the three months ended July 4, 2004 and June 29, 2003 was $11.98 and $6.42 per option, respectively, and for the six months ended July 4, 2004 and June 29, 2003 was $14.60 and $6.40 per option, respectively. The fair value of options at the date of grant was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:
For the Three Months Ended | For the Six Months Ended | |||||||||||
July 4, 2004 | June 29, 2003 | July 4, 2004 | June 29, 2003 | |||||||||
Expected life (years) | 4.5 | 4.4 | 4.5 | 4.4 | ||||||||
Interest rate | 3.6 | % | 2.5 | % | 3.0 | % | 2.5 | % | ||||
Volatility | 64.7 | % | 68.2 | % | 65.7 | % | 68.2 | % | ||||
Dividend yield | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % |
The weighted-average fair value of employee stock purchase rights granted during the three and six months ended July 4, 2004 and June 29, 2003 was $6.93 and $5.74 per right, respectively. The fair value of the employees’ purchase rights was estimated using the Black-Scholes option-pricing model with the following assumptions:
For the Three Months Ended | For the Six Months Ended | |||||||||||
July 4, 2004 | June 29, 2003 | July 4, 2004 | June 29, 2003 | |||||||||
Expected life (years) | 1.0 | 1.0 | 1.0 | 1.0 | ||||||||
Interest rate | 1.3 | % | 1.1 | % | 1.3 | % | 1.1 | % | ||||
Volatility | 44.9 | % | 65.4 | % | 44.9 | % | 65.4 | % | ||||
Dividend yield | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % |
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TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
B. Accounting Policies—(Continued)
Other Comprehensive Income (Loss)
Comprehensive income (loss) includes net income (loss), minimum pension liability adjustments, unrealized gains and losses on derivative instruments, unrealized gains and losses on certain investments in debt and equity securities and cumulative translation adjustments. The components of comprehensive income (loss) are as follows (in thousands):
For the Three Months Ended | ||||||||
July 4, 2004 | June 29, 2003 | |||||||
Net income (loss) | $ | 80,493 | $ | (52,489 | ) | |||
Foreign currency translation adjustments | (289 | ) | 1,151 | |||||
Change in unrealized loss on derivative instruments | (289 | ) | — | |||||
Unrealized (loss) gain on marketable securities, net of applicable tax of $0 | (9,145 | ) | 4,411 | |||||
Comprehensive income (loss) | $ | 70,770 | $ | (46,927 | ) | |||
For the Six Months Ended | ||||||||
July 4, 2004 | June 29, 2003 | |||||||
Net income (loss) | $ | 120,740 | $ | (128,987 | ) | |||
Foreign currency translation adjustments | 294 | (48 | ) | |||||
Change in unrealized loss on derivative instruments | (289 | ) | — | |||||
Unrealized (loss) gain on marketable securities, net of applicable tax of $0 | (6,363 | ) | 6,696 | |||||
Reclassification adjustment for gain on marketable securities included in net income (loss), net of applicable tax of $0 | (963 | ) | — | |||||
Comprehensive income (loss) | $ | 113,419 | $ | (122,339 | ) | |||
C. Goodwill and Intangible Assets
Amortizable intangible assets consist of the following and are included in other assets on the balance sheet (in thousands):
July 4, 2004 | |||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted Average Useful Life | ||||||||
Completed technology | $ | 19,193 | $ | 6,861 | $ | 12,332 | 7.5 years | ||||
Service and software maintenance contracts and customer relationships | 8,342 | 5,140 | 3,202 | 5.7 years | |||||||
Tradenames and trademarks | 3,800 | 1,267 | 2,533 | 8.0 years | |||||||
Total intangible assets | $ | 31,335 | $ | 13,268 | $ | 18,067 | 7.2 years | ||||
December 31, 2003 | |||||||||||
�� | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted Average Useful Life | |||||||
Completed technology | $ | 19,193 | $ | 5,577 | $ | 13,616 | 7.5 years | ||||
Service and software maintenance contracts and customer relationships | 8,342 | 4,840 | 3,502 | 5.7 years | |||||||
Tradenames and trademarks | 3,800 | 1,029 | 2,771 | 8.0 years | |||||||
Total intangible assets | $ | 31,335 | $ | 11,446 | $ | 19,889 | 7.1 years | ||||
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TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
C. Goodwill and Intangible Assets—(Continued)
In the first quarter of 2003, Assembly Test Systems sold its manufacturing software product line and manual x-ray inspection and rework product line for total cash proceeds of $2.1 million. These transactions resulted in a loss of $5.8 million, which has been recorded in restructuring and other charges for the six months ended June 29, 2003. Included in the $5.8 million loss is an intangible asset impairment charge of $3.7 million.
Aggregate amortization expense for the three months ended July 4, 2004 and June 29, 2003 was $0.9 million and $1.2 million, respectively. Aggregate amortization expense for the six months ended July 4, 2004 and June 29, 2003 was $1.8 million and $2.5 million, respectively. Estimated amortization expense for each of the five succeeding fiscal years is as follows (in thousands):
Year | Amount | ||
2004 (remainder) | $ | 1,821 | |
2005 | 3,643 | ||
2006 | 3,643 | ||
2007 | 3,529 | ||
2008 | 2,962 |
Goodwill in the Connection Systems segment was reduced by $2.0 million during the six months ended July 4, 2004 as a result of the return of escrowed shares related to the Herco Technology, Corp. and Perception Laminates, Inc. acquisitions.
D. Net Income (Loss) per Common Share
The following table sets forth the computation of basic and diluted net income (loss) per common share (in thousands, except per share amounts):
For the Three Months Ended | For the Six Months Ended | |||||||||||||
July 4, 2004 | June 29, 2003 | July 4, 2004 | June 29, 2003 | |||||||||||
Net income (loss) | $ | 80,493 | $ | (52,489 | ) | $ | 120,740 | $ | (128,987 | ) | ||||
Income impact of assumed conversion of convertible debentures | 3,668 | — | 7,337 | — | ||||||||||
Net income (loss) - diluted | $ | 84,161 | $ | (52,489 | ) | $ | 128,077 | $ | (128,987 | ) | ||||
Shares used in income (loss) per common share - basic | 194,015 | 185,465 | 193,934 | 185,177 | ||||||||||
Effect of dilutive securities: | ||||||||||||||
Incremental shares from assumed conversion of notes payable | 15,385 | — | 15,385 | — | ||||||||||
Employee and director stock options | 4,005 | — | 5,014 | — | ||||||||||
Employee stock purchase rights | 81 | — | 50 | — | ||||||||||
Dilutive potential common shares | 19,471 | — | 20,449 | — | ||||||||||
Shares used in income (loss) per common share - diluted | 213,486 | 185,465 | 214,383 | 185,177 | ||||||||||
Net income (loss) per common share - basic | $ | 0.41 | $ | (0.28 | ) | $ | 0.62 | $ | (0.70 | ) | ||||
Net income (loss) per common share - diluted | $ | 0.39 | $ | (0.28 | ) | $ | 0.60 | $ | (0.70 | ) | ||||
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TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
D. Net Income (Loss) per Common Share—(Continued)
The computation of diluted income (loss) per common share for the three and six months ended July 4, 2004 excludes the effect of the potential exercise of options to purchase approximately 17.0 million and 16.0 million shares, respectively, because the option price was greater than the average market price of the common shares and the effect would have been anti-dilutive. All options and equivalent shares related to the convertible notes outstanding in the three and six months ended June 29, 2003 were excluded from the calculation of diluted net loss per share because the effect would have been anti-dilutive. As of June 29, 2003 there were 36.1 million options outstanding. The effect of Teradyne’s outstanding convertible notes on diluted net income per share for the three and six months ended July 4, 2004 was calculated using the “if converted” method as required by SFAS No. 128, “Earnings per Share” (“SFAS 128”). In using the “if converted” method, $3.7 million and $7.3 million of interest expense related to the convertible notes for the three and six months ended July 4, 2004, net of tax and profit sharing expenses, was added back to net income to arrive at diluted net income.
E. Treasury Stock
Effective July 1, 2004, the Massachusetts Business Corporation Act was revised to eliminate the use of treasury shares by Massachusetts corporations. As a result, all of Teradyne’s treasury shares were automatically converted to unissued shares on July 1, 2004.
F. Restructuring and Other Charges
The tables below represent activity related to restructuring charges in the three and six months ended July 4, 2004 and June 29, 2003. The accrual for severance and benefits is reflected in accrued employees’ compensation and withholdings. The accrual for lease payments on vacated facilities is reflected in other accrued liabilities and other long-term accrued liabilities and is expected to be paid out over the lease terms, the latest of which expires in 2012. Teradyne expects to pay out approximately $6.0 million against the lease accruals over the next twelve months. Teradyne’s future lease commitments are net of expected sublease income of $13.0 million as of July 4, 2004. Teradyne has subleased approximately 23% of its unoccupied space as of July 4, 2004 and is actively attempting to sublease the remaining space.
The table below summarizes the liability and activity for the three months ended July 4, 2004 relating to restructuring and other charges (in thousands):
Long-Lived Asset Impairment | Severance and Benefits | Facility Related | Other Charges | Total | ||||||||||||||||
Balance at April 4, 2004 | $ | — | $ | 4,590 | $ | 28,079 | $ | 1,273 | $ | 33,942 | ||||||||||
Second quarter 2004 provision (reversal) | (100 | ) | (458 | ) | 1,201 | (491 | ) | 152 | ||||||||||||
Cash payments | — | (1,868 | ) | (5,880 | ) | 375 | (7,373 | ) | ||||||||||||
Asset write-downs | 100 | — | — | — | 100 | |||||||||||||||
Balance at July 4, 2004 | $ | — | $ | 2,264 | $ | 23,400 | $ | 1,157 | $ | 26,821 | ||||||||||
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TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
F. Restructuring and Other Charges—(Continued)
The table below summarizes the liability and activity for the six months ended July 4, 2004 relating to restructuring and other charges (in thousands):
Long-Lived Asset Impairment | Severance and Benefits | Facility Related | Other Charges | Total | ||||||||||||||||
Balance at December 31, 2003 | $ | — | $ | 7,766 | $ | 29,222 | $ | 1,273 | $ | 38,261 | ||||||||||
First six months 2004 provision (reversal) | (603 | ) | (760 | ) | 2,136 | (491 | ) | 282 | ||||||||||||
Cash payments | — | (4,742 | ) | (7,958 | ) | 375 | (12,325 | ) | ||||||||||||
Asset write-downs | 603 | — | — | — | 603 | |||||||||||||||
Balance at July 4, 2004 | $ | — | $ | 2,264 | $ | 23,400 | $ | 1,157 | $ | 26,821 | ||||||||||
In the second quarter of 2004, Teradyne recorded a charge of $1.2 million consisting primarily of revised estimates of losses due to changes in the assumed amount and timing of sublease income on facilities that have been exited prior to the end of the lease term. The Semiconductor Test Systems segment recorded $0.2 million of this charge, and $1.0 million was recorded in the Assembly Test Systems segment. During the six months ended July 4, 2004 Teradyne recorded a charge of $2.1 million, consisting of $1.2 million of revised estimates of losses due to changes in the assumed amount and timing of sublease income on facilities that have been exited prior to the end of the lease term, and $0.9 million in the Connection Systems segment for a settlement of the remaining lease obligation on a facility.
During the three and six months ended July 4, 2004, Teradyne revised its estimates on future benefits for severed employees, decreasing the current provision by approximately $0.8 million and $1.9 million, respectively. This revision is offset by charges taken for severance and related benefits of $0.3 million and $1.1 million for the three and six months ended July 4, 2004, respectively. There were approximately 13 and 23 employees terminated in the first and second quarters of 2004, respectively, across Teradyne. As of July 4, 2004, $2.3 million in severance and benefits remains unpaid and is included in accrued employees’ compensation and withholdings.
During the three and six months ended July 4, 2004, Teradyne recorded, as a gain on the sale of a business, proceeds of $0.9 million from the previous sale of certain assets and product lines. These amounts relate to an earn out provision from a divestiture in the Connection Systems segment in 1999.
The table below summarizes the liability and activity for the three months ended June 29, 2003, relating to restructuring and other charges (in thousands):
Long-Lived Asset Impairment | Severance and Benefits | Loss on Sale of Product Lines | Facility Related | Total | ||||||||||||||||
Balance at March 30, 2003 | $ | — | $ | 9,039 | $ | — | $ | 24,271 | $ | 33,310 | ||||||||||
Second quarter 2003 provision | 6,494 | 3,407 | 1,055 | 2,422 | 13,378 | |||||||||||||||
Cash payments | — | (4,470 | ) | — | (2,412 | ) | (6,882 | ) | ||||||||||||
Asset write-downs | (6,494 | ) | — | (1,055 | ) | — | (7,549 | ) | ||||||||||||
Balance at June 29, 2003 | $ | — | $ | 7,976 | $ | — | $ | 24,281 | $ | 32,257 | ||||||||||
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TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
F. Restructuring and Other Charges—(Continued)
The table below summarized the liability and activity for the six months ended June 29, 2003, relating to restructuring and other charges (in thousands):
Long-Lived Asset Impairment | Severance and Benefits | Loss on Sale of Product Lines | Facility Related | Total | ||||||||||||||||
Balance at December 31, 2002 | $ | — | $ | 8,242 | $ | — | $ | 25,240 | $ | 33,482 | ||||||||||
First six months of 2003 provision | 13,988 | 9,563 | 6,891 | 2,422 | 32,864 | |||||||||||||||
Cash payments | — | (9,829 | ) | — | (3,381 | ) | (13,210 | ) | ||||||||||||
Asset write-downs | (13,988 | ) | — | (6,891 | ) | — | (20,879 | ) | ||||||||||||
Balance at June 29, 2003 | $ | — | $ | 7,976 | $ | — | $ | 24,281 | $ | 32,257 | ||||||||||
During the three months ended June 29, 2003, Teradyne recorded charges of $6.5 million primarily for certain long-lived assets held for sale that were impaired as the estimated fair value was less than the carrying value of the assets. The charge for the Connection Systems segment of $3.8 million included $2.5 million related to the decision to sell a facility in Laverne, CA, $1.1 million for the impairment of manufacturing assets held for sale, and $0.2 million for a reduction in the fair value of a property held for sale in Nashua, NH. The charge for the Semiconductor Test Systems segment of $2.4 million included $1.9 million related to a reduction in the fair value of properties held for sale in Agoura Hills, CA and $0.5 million for the impairment of manufacturing assets held for sale. The charge for the Assembly Test Systems segment of $0.3 million relates to the impairment of manufacturing assets held for sale. The charge for the properties held for sale resulted from deterioration in real estate market conditions.
During the six months ended June 29, 2003, Teradyne recorded charges of $14.0 million primarily for certain long-lived assets held for sale that were impaired as the estimated fair value was less than the carrying value of the assets. The charge for the Connection Systems segment of $8.2 million includes $3.3 million for a reduction in the fair value of properties held for sale in Nashua, NH and San Diego, CA, $2.5 million related to the decision to sell a facility in Laverne, CA, and $2.4 million for the impairment of manufacturing assets held for sale. The charge for the Semiconductor Test Systems segment of $5.5 million related primarily to a reduction in the fair value of properties held for sale in Agoura Hills, CA. The charge for the properties held for sale resulted from deterioration in real estate market conditions. The charge in the Assembly Test Systems segment of $0.3 million relates to the impairment of manufacturing assets held for sale.
Teradyne recorded a charge for severance and related benefits during the three and six months ended June 29, 2003 of $3.4 million and $9.6 million, respectively. There were approximately 120 employees terminated in the second quarter of 2003 and 460 employees terminated in the first six months of 2003 across Teradyne.
During the three and six months ended June 29, 2003, Teradyne recorded a charge of $2.3 million and $8.1 million, respectively, for the loss on sale of product lines, of which $1.1 million and $6.9 million, respectively has been recorded in restructuring and other charges and $1.2 million in each period has been recorded in cost of sales. The product lines sold were in the Assembly Test Systems segment and the Other Test Systems segment. In the first quarter of 2003, the Assembly Test Systems segment sold its manufacturing software product line and manual x-ray inspection and rework product line for total cash proceeds of $2.1 million. These transactions resulted in a loss of $0.9 million during the three months ended June 29, 2003 and $6.7 million for the six months ended June 29, 2003 of which $0.4 million and $6.2 million, respectively, has been recorded in restructuring and other charges, and $0.5 million has been recorded in cost of sales for both periods. In the three and six months
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TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
ended June 29, 2003, the Other Test Systems Segment recorded a charge of $1.4 million to write down its net assets relating to the sale of the Autodiagnosis automotive after market product line of which $0.7 million has been recorded in restructuring and other charges and $0.7 million has been recorded in cost of sales.
In the second quarter of 2003, Teradyne recorded a charge of $2.4 million consisting primarily of revised estimates of losses due to changes in the assumed amount and timing of sublease income on facilities that have been exited prior to the end of the lease term. The Connection Systems segment recorded $1.4 million of this charge and $1.0 million was recorded in the Assembly Test Systems segment.
G. Other Income and Expense, net
Other income and expense, net for the three and six months ended July 4, 2004 and June 29, 2003 includes the following (in thousands):
For the Three Months Ended | For the Six Months Ended | ||||||||||||||
July 4, 2004 | June 29, 2003 | July 4, 2004 | June 29, 2003 | ||||||||||||
Gain on sale of an investment | $ | — | $ | 1,250 | $ | 1,058 | $ | 1,250 | |||||||
Repayment of loan (1) | 585 | — | 585 | — | |||||||||||
Other than temporary impairment of investment | — | — | — | (2,592 | ) | ||||||||||
Fair value adjustment on warrants | (159 | ) | 150 | (366 | ) | 43 | |||||||||
Total | $ | 426 | $ | 1,400 | $ | 1,277 | $ | (1,299 | ) | ||||||
(1) | The loan had previously been valued at zero due to its uncertainty of collection. |
H. Retirement Plans
Teradyne has defined benefit pension plans covering a majority of domestic employees and employees of certain non-U.S. subsidiaries. Benefits under these plans are based on employees’ years of service and compensation. Teradyne’s funding policy is to make contributions to the plans in accordance with local laws and to the extent that such contributions are tax deductible. 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 and the Internal Revenue Code.
Components of net periodic pension cost for the three and six months ended July 4, 2004 and June 29, 2003, respectively, are as follows (in thousands):
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
July 4, 2004 | June 29, 2003 | July 4, 2004 | June 29, 2003 | |||||||||||||
Net Periodic Benefit Cost: | ||||||||||||||||
Service cost | $ | 1,592 | $ | 1,672 | $ | 3,196 | $ | 3,343 | ||||||||
Interest cost | 3,526 | 3,458 | 7,062 | 6,917 | ||||||||||||
Expected return on plan assets | (3,197 | ) | (2,765 | ) | (6,397 | ) | (5,531 | ) | ||||||||
Amortization of unrecognized: | ||||||||||||||||
Net transition obligation | 22 | 22 | 44 | 44 | ||||||||||||
Prior service cost | 215 | 215 | 430 | 430 | ||||||||||||
Net loss | 855 | 925 | 1,712 | 1,851 | ||||||||||||
Total expense | $ | 3,013 | $ | 3,527 | $ | 6,047 | $ | 7,054 | ||||||||
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TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
H. Retirement Plans—(Continued)
Contributions
Teradyne expects to contribute approximately $25.6 million to the pension plans in fiscal 2004. As of July 4, 2004, $16.6 million of contributions had been made. Teradyne anticipates contributing an additional $9.0 million to fund its pension plan in 2004.
Postretirement benefit plans
In addition to receiving pension benefits, Teradyne’s U.S. 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 are available to all retirees.
Substantially all of Teradyne’s current U.S. employees could become eligible for these benefits, and the existing benefit obligation relates primarily to those employees.
Components of net periodic postretirement cost are as follows (in thousands):
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
July 4, 2004 | June 29, 2003 | July 4, 2004 | June 29, 2003 | |||||||||||||
Net Periodic Benefit Cost: | ||||||||||||||||
Service cost | $ | 342 | $ | 278 | $ | 684 | $ | 556 | ||||||||
Interest cost | 491 | 464 | 982 | 929 | ||||||||||||
Expected return on plan assets | — | — | — | — | ||||||||||||
Amortization of unrecognized: | ||||||||||||||||
Net assets | 72 | 72 | 144 | 144 | ||||||||||||
Prior service cost | (18 | ) | (18 | ) | (36 | ) | (36 | ) | ||||||||
Net loss | 117 | 93 | 234 | 186 | ||||||||||||
Total expense | $ | 1,004 | $ | 889 | $ | 2,008 | $ | 1,779 | ||||||||
I. Segment Information
Teradyne has four principal reportable segments which include the design, manufacturing and marketing of Semiconductor Test Systems, Connection Systems, Assembly Test Systems, and Other Test Systems. These reportable segments were determined based upon the nature of the products and services offered by each. The Other Test Systems segment is comprised of Broadband Test Systems and Diagnostic Solutions.
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TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
I. Segment 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” in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2003. Intersegment sales are accounted for at fair value as if sales were made to third parties. Segment information for the three and six months ended July 4, 2004 and June 29, 2003 is as follows (in thousands):
Semiconductor Test Systems Segment | Connection Systems Segment | Assembly Test Systems Segment | Other Test Systems Segment | Corporate and Eliminations | Consolidated | |||||||||||||||||||
Three months ended July 4, 2004: | ||||||||||||||||||||||||
Net revenue to unaffiliated customers | $ | 361,685 | $ | 99,139 | $ | 39,113 | $ | 26,526 | $ | — | $ | 526,463 | ||||||||||||
Intersegment sales | — | 9,081 | — | — | (9,081 | ) | — | |||||||||||||||||
Net sales | 361,685 | 108,220 | 39,113 | 26,526 | (9,081 | ) | 526,463 | |||||||||||||||||
Income (loss) before taxes (1)(2) | $ | 95,393 | $ | 12,146 | $ | (197 | ) | $ | 1,701 | $ | (19,606 | ) | $ | 89,437 | ||||||||||
Three months ended June 29, 2003: | ||||||||||||||||||||||||
Net revenue to unaffiliated customers | $ | 174,656 | $ | 91,585 | $ | 38,389 | $ | 26,899 | $ | — | $ | 331,529 | ||||||||||||
Intersegment sales | — | 13,106 | — | — | (13,106 | ) | — | |||||||||||||||||
Net sales | 174,656 | 104,691 | 38,389 | 26,899 | (13,106 | ) | 331,529 | |||||||||||||||||
Loss before taxes (1)(2) | $ | (23,199 | ) | $ | (7,779 | ) | $ | (18,573 | ) | $ | (1,156 | ) | $ | (82 | ) | $ | (50,789 | ) | ||||||
Semiconductor Test Systems Segment | Connection Systems Segment | Assembly Test Systems Segment | Other Test Systems Segment | Corporate and Eliminations | Consolidated | |||||||||||||||||||
Six months ended July 4, 2004: | ||||||||||||||||||||||||
Net revenue to unaffiliated customers | $ | 635,801 | $ | 194,400 | $ | 72,489 | $ | 54,376 | $ | — | $ | 957,066 | ||||||||||||
Intersegment sales | — | 16,983 | — | — | (16,983 | ) | — | |||||||||||||||||
Net sales | 635,801 | 211,383 | 72,489 | 54,376 | (16,983 | ) | 957,066 | |||||||||||||||||
Income (loss) before taxes (1)(2) | $ | 144,351 | $ | 21,653 | $ | (2,402 | ) | $ | 4,544 | $ | (33,990 | ) | $ | 134,156 | ||||||||||
Six months ended June 29, 2003: | ||||||||||||||||||||||||
Net revenue to unaffiliated customers | $ | 342,208 | $ | 183,454 | $ | 82,353 | $ | 58,090 | $ | — | $ | 666,105 | ||||||||||||
Intersegment sales | — | 17,489 | — | — | (17,489 | ) | — | |||||||||||||||||
Net sales | 342,208 | 200,943 | 82,353 | 58,090 | (17,489 | ) | 666,105 | |||||||||||||||||
Loss before taxes (1)(2) | $ | (60,275 | ) | $ | (19,604 | ) | $ | (38,870 | ) | $ | 192 | $ | (7,530 | ) | $ | (126,087 | ) |
(1) | Income (loss) before taxes of the principal businesses excludes 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. |
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TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
I. Segment Information—(Continued)
(2) | Included in the income (loss) before taxes for the following segments are charges for the first three and six months of 2004 and 2003 that include restructuring and other charges, accelerated depreciation, impairment of investments, inventory provisions and inventory write downs: |
Included in the Semiconductor Test Systems segment are charges for the following (in thousands):
For the Three Months Ended | For the Six Months Ended | |||||||||||||
July 4, 2004 | June 29, 2003 | July 4, 2004 | June 29, 2003 | |||||||||||
Cost of revenues – inventory | $ | 1,600 | $ | 1,314 | $ | 2,841 | $ | 2,514 | ||||||
Engineering and development – accelerated depreciation | — | 74 | — | 526 | ||||||||||
Selling and administrative – accelerated depreciation | — | 22 | 66 | 191 | ||||||||||
Restructuring charges (reversals) | (542 | ) | 3,570 | (849 | ) | 9,865 | ||||||||
Total | $ | 1,058 | $ | 4,980 | $ | 2,058 | $ | 13,096 | ||||||
Included in the Connection Systems segment are charges for the following (in thousands):
For the Three Months Ended | For the Six Months Ended | ||||||||||||||
July 4, 2004 | June 29, 2003 | July 4, 2004 | June 29, 2003 | ||||||||||||
Cost of revenues – inventory | $ | 319 | $ | 225 | $ | 1,234 | $ | (790 | ) | ||||||
Cost of revenues – accelerated depreciation | — | — | — | 1,827 | |||||||||||
Gain on Sale of Business | (865 | ) | — | (865 | ) | — | |||||||||
Restructuring charges | — | 5,893 | 616 | 11,213 | |||||||||||
Total | $ | (546 | ) | $ | 6,118 | $ | 985 | $ | 12,250 | ||||||
Included in the Assembly Test Systems segment are charges for the following (in thousands):
For the Three Months Ended | For the Six Months Ended | ||||||||||||
July 4, 2004 | June 29, 2003 | July 4, 2004 | June 29, 2003 | ||||||||||
Cost of revenues – inventory | $ | 310 | $ | 2,821 | $ | 2,144 | $ | 4,298 | |||||
Cost of revenues – accelerated depreciation | — | 1,142 | — | 2,884 | |||||||||
Engineering and development – accelerated depreciation | — | 381 | — | 960 | |||||||||
Selling and administrative – accelerated depreciation | — | 703 | — | 1,774 | |||||||||
Restructuring charges (reversals) | 418 | 2,954 | (542 | ) | 9,935 | ||||||||
Total | $ | 728 | $ | 8,001 | $ | 1,602 | $ | 19,851 | |||||
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TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
I. Segment Information—(Continued)
Included in the Other Test Systems segment are charges for the following (in thousands):
For the Three Months Ended | For the Six Months Ended | |||||||||||
July 4, 2004 | June 29, 2003 | July 4, 2004 | June 29, 2003 | |||||||||
Cost of revenues – inventory | $ | 75 | $ | 722 | $ | 344 | $ | 728 | ||||
Restructuring charges | — | 866 | 59 | 1,351 | ||||||||
Total | $ | 75 | $ | 1,588 | $ | 403 | $ | 2,079 | ||||
Included in the Corporate and Eliminations segment are charges for the following (in thousands):
For the Three Months Ended | For the Six Months Ended | |||||||||||||
July 4, 2004 | June 29, 2003 | July 4, 2004 | June 29, 2003 | |||||||||||
Other income and expense, net | $ | (585 | ) | $ | — | $ | (585 | ) | $ | 2,592 | ||||
Selling and administrative – accelerated depreciation | — | — | — | 590 | ||||||||||
Restructuring charges | 276 | 95 | 998 | 500 | ||||||||||
Total | $ | (309 | ) | $ | 95 | $ | 413 | $ | 3,682 | |||||
J. Commitments and Contingencies
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, in 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. On December 9, 2002, the plaintiffs filed a motion asking the court to reconsider its summary judgment ruling or, alternatively, for certification under Rule 54(b) which would grant the plaintiffs leave to appeal both the Court’s ruling regarding dismissal of claims and its ruling granting summary judgment to the Ninth Circuit Court of Appeals. Teradyne opposed these motions. On April 22, 2003, the Court denied the plaintiffs’ motion for reconsideration and the plaintiffs’ request for certification under Rule 54(b). The only claim still pending before the District Court from the original complaint relates to fraud in connection with the setting of the transaction price. Teradyne has answered and denied all liability.
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
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TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
J. Commitments and Contingencies—(Continued)
to dismiss all claims asserted in the complaint on February 7, 2003. On January 16, 2004, the U.S. Magistrate Judge recommended to the U.S. District Court that Teradyne’s motion to dismiss the consolidated amended class action complaint in its entirety be allowed without prejudice. On February 2, 2004, the lead plaintiffs filed an objection to the U.S. Magistrate Judge’s recommendation. Teradyne filed its response to the lead plaintiff’s objection on March 2, 2004, and the matter remains pending in the Federal District Court in San Diego, California.
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.
On April 30, 2004, Hampshire Equity Partners II, LP (“HEP”) filed a complaint against Teradyne and Teradyne’s Connection Systems segment (“TCS”) in the United States District Court of the Southern District of New York, relating to its February 21, 2001 investment of $55.0 million in Connector Service Corporation, aka AMAX Plating, Inc. (“CSC”), which was a supplier to TCS at the time. During the due diligence that HEP conducted prior to making that investment, an agent of HEP spoke with TCS, among other CSC customers, concerning CSC. On or about September 24, 2003, CSC filed for bankruptcy protection. HEP has now brought suit against Teradyne and TCS asserting fraud and negligence based claims, and a claim for intentional interference with economic opportunity, relating to statements that a TCS representative made to HEP’s agent prior to HEP’s February 2001 investment in CSC. HEP seeks to hold Teradyne and TCS responsible for its decision to invest in CSC and for the losses that it suffered upon the bankruptcy of CSC. HEP is now seeking damages for an unstated amount of not less than $55.0 million. On June 17, 2004, Teradyne and TCS filed a motion to dismiss HEP’s compliant in its entirety. On August 9, 2004, HEP filed its opposition to the motion to dismiss, and that motion remains pending.
Teradyne believes that it has meritorious defenses against the above unsettled claims and intends to vigorously contest them. While it is not possible to predict or determine the outcomes of the unsettled claims or to provide possible ranges of losses that may arise, Teradyne believes the losses associated with all of these actions will not have a material adverse effect on its consolidated financial position or liquidity, but could possibly be material to the consolidated results of operations of any one period.
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, employment, commercial and environmental matters. Although there can be no assurance, there are no such matters pending that Teradyne expects to be material with respect to its business, financial position or results of operations.
Guarantees and Indemnification Obligations
For “Guarantees and Indemnification Obligations” see Note J: “Commitments and Contingencies” in our Annual Report on Form 10-K for the year ended December 31, 2003. In addition to the guarantee and indemnification obligations set forth in our Annual Report, Teradyne occasionally guarantees the performance obligations and responsibilities of its subsidiary and affiliate companies.
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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
SELECTED RELATIONSHIPS WITHIN THE CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
July 4, 2004 | June 29, 2003 | July 4, 2004 | June 29, 2003 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Net revenue | $ | 526,463 | $ | 331,529 | $ | 957,066 | $ | 666,105 | ||||||||
Net income (loss) | 80,493 | (52,489 | ) | 120,740 | (128,987 | ) | ||||||||||
Percentage of net revenues: | ||||||||||||||||
Products | 88.7 | % | 83.4 | % | 87.8 | % | 83.7 | % | ||||||||
Services | 11.3 | 16.6 | 12.2 | 16.3 | ||||||||||||
Net revenues | 100 | 100 | 100 | 100 | ||||||||||||
Cost of revenues: | ||||||||||||||||
Cost of products | 49.3 | 61.5 | 49.6 | 62.3 | ||||||||||||
Cost of services | 7.7 | 11.8 | 8.3 | 11.8 | ||||||||||||
Gross profit | 43.0 | 26.7 | 42.1 | 25.9 | ||||||||||||
Operating expenses: | ||||||||||||||||
Engineering and development | 12.7 | 19.2 | 13.8 | 19.9 | ||||||||||||
Selling and administrative | 13.3 | 18.6 | 14.2 | 19.4 | ||||||||||||
Restructuring and other charges | — | 4.0 | — | 4.9 | ||||||||||||
Gain on sale of business | (0.2 | ) | — | (0.1 | ) | — | ||||||||||
Operating expenses | 25.8 | 41.8 | 27.9 | 44.2 | ||||||||||||
Income (loss) from operations | 17.2 | (15.1 | ) | 14.2 | (18.3 | ) | ||||||||||
Interest income | 0.7 | 1.0 | 0.7 | 1.1 | ||||||||||||
Interest expense | (1.0 | ) | (1.6 | ) | (1.0 | ) | (1.6 | ) | ||||||||
Other income and expense, net | 0.1 | 0.4 | 0.1 | (0.2 | ) | |||||||||||
Income (loss) before income taxes | 17.0 | (15.3 | ) | 14.0 | (19.0 | ) | ||||||||||
Provision for income taxes | 1.7 | 0.5 | 1.4 | 0.4 | ||||||||||||
Net income (loss) | 15.3 | % | (15.8 | )% | 12.6 | % | (19.4 | )% | ||||||||
Provision for income taxes as a percentage of income (loss) before income taxes | 10.0 | % | (3.3 | )% | 10.0 | % | (2.3 | )% | ||||||||
Results of Operations
Business Overview
We recorded net income in the first two quarters of 2004, after eleven consecutive quarters of losses. Semiconductor Test Systems led the growth in revenue with an increase of $187.0 million from the second quarter of last year. Total company net bookings increased to $557.9 million, the highest level since the fourth quarter of 2000.
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Second Quarter 2004 Compared to Second Quarter 2003
Bookings
Net bookings for our four principal reportable segments were as follows (in millions, except percent change):
For the Three Months Ended | % Change | ||||||||
July 4, 2004 | June 29, 2003 | ||||||||
Semiconductor Test Systems | $ | 386.8 | $ | 186.4 | 108 | % | |||
Connection Systems | 108.2 | 64.6 | 67 | ||||||
Assembly Test Systems | 43.5 | 31.8 | 37 | ||||||
Other Test Systems | 19.4 | 21.8 | (11 | ) | |||||
$ | 557.9 | $ | 304.6 | 83 | % | ||||
As total Semiconductor Test Systems orders more than doubled from the second quarter of 2003 to the second quarter of 2004, Semiconductor Test’s percentage of total bookings grew as well, increasing from 61.2% of total bookings in the second quarter of 2003 to 69.3% for the second quarter of 2004. The growth in orders was driven by both new and existing products, when compared to the same period in 2003. The growth was concentrated primarily in South East Asia, Taiwan, and Korea where total Semiconductor Test Systems orders more than doubled year over year. This growth was spurred by higher demand in a variety of markets, such as optical disk applications, cellular phone power management, graphics and chipsets for personal computers, smart card devices, broadband and other consumer devices.
The growth in Connection Systems orders was led by stronger customer demand in the wireless market segment across both connector and backplane assembly products. This growth was partially offset by a decline in orders due to the decision to exit the lower margin portion of Connection Systems’ EMS business.
Increased orders in Assembly Test Systems were attributable to a 7.7% increase in the commercial business as well as an 86.7% increase in orders in the military/aerospace (“mil/aero”) business. The increase in mil/aero was primarily the result of follow-on orders from two large contractors.
The decrease in Other Test Systems’ orders resulted from a decrease in both Broadband Test and Diagnostic Systems bookings, primarily as a result of the timing of significant orders from automotive test system customers. Other Test Systems’ bookings are program related and have significant fluctuations.
Cancellations for our four principal reportable segments were as follows (in millions):
For the Three Months Ended | ||||||
July 4, 2004 | June 29, 2003 | |||||
Semiconductor Test Systems | $ | — | $ | 4.3 | ||
Connection Systems | — | 3.5 | ||||
Assembly Test Systems | — | 0.4 | ||||
Other Test Systems | — | 0.1 | ||||
$ | — | $ | 8.3 | |||
The Connection Systems cancellations in the second quarter of 2003 were from major customers in the telecommunications and networking infrastructure industries, due principally to product program cancellations. Customers may delay delivery of products or cancel orders suddenly and without significant notice, subject to
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possible cancellation penalties. In the second quarter of 2004 and 2003, there were no significant cancellation penalties received. Due to possible changes in delivery schedules and cancellations of orders, our 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 materially adverse effect on our business, financial condition and results of operations.
Net bookings by region as a percentage of total net bookings were as follows:
For the Three Months Ended | ||||||
July 4, 2004 | June 29, 2003 | |||||
United States | 26 | % | 31 | % | ||
Taiwan | 18 | 11 | ||||
South East Asia | 18 | 18 | ||||
Singapore | 18 | 15 | ||||
Europe | 12 | 13 | ||||
Japan | 4 | 9 | ||||
Rest of the World | 4 | 3 | ||||
100 | % | 100 | % |
Backlog of unfilled orders for our four principal reportable segments was as follows (in millions):
For the Three Months Ended | ||||||
July 4, 2004 | June 29, 2003 | |||||
Semiconductor Test Systems | $ | 457.3 | $ | 236.2 | ||
Connection Systems | 93.3 | 67.8 | ||||
Assembly Test Systems | 61.5 | 39.7 | ||||
Other Test Systems | 48.3 | 25.3 | ||||
$ | 660.4 | $ | 369.0 | |||
Revenue
Net revenues for our four principal reportable segments were as follows (in millions, except percent changes):
For the Three Months Ended | % Change | ||||||||
July 4, 2004 | June 29, 2003 | ||||||||
Semiconductor Test Systems | $ | 361.7 | $ | 174.7 | 107 | % | |||
Connection Systems | 99.1 | 91.5 | 8 | ||||||
Assembly Test Systems | 39.1 | 38.4 | 2 | ||||||
Other Test Systems | 26.6 | 26.9 | (1 | ) | |||||
$ | 526.5 | $ | 331.5 | 59 | % | ||||
Semiconductor Test Systems revenue made up 68.7% of total revenue for the second quarter of 2004, up from 52.7% a year ago. The growth in sales came from both new and existing products and was spread over all regions, led by the United States, Singapore, Taiwan and South East Asia.
The growth in Connection Systems sales was led by stronger customer demand in the wireless market segment across both connector and backplane assembly products. This growth was partially offset by a decline in sales due to the decision to exit the lower margin portion of Connection Systems’ EMS business.
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The increase in Assembly Test Systems sales was due primarily to an increase in the mil/aero business. The increase in mil/aero sales was driven by existing orders with two large contractors.
Our sales by region as a percentage of total net sales were as follows:
For the Three Months Ended | ||||||
July 4, 2004 | June 29, 2003 | |||||
United States | 25 | % | 37 | % | ||
South East Asia | 21 | 14 | ||||
Taiwan | 17 | 8 | ||||
Europe | 16 | 19 | ||||
Singapore | 15 | 10 | ||||
Japan | 4 | 9 | ||||
Korea | 2 | 1 | ||||
Rest of the World | — | 2 | ||||
100 | % | 100 | % | |||
Gross Margin
Our gross profit was as follows (dollars in millions):
For the Three Months Ended | Period Change | ||||||||||
July 4, 2004 | June 29, 2003 | ||||||||||
Gross Profit | $ | 226.6 | $ | 88.6 | $ | 138.0 | |||||
Percent of Total Revenue | 43.0 | % | 26.7 | % | 16.3 |
The gross margin improvement from the second quarter of 2003 to 2004 was a result of several factors. An improvement of 12 points is credited to an increase in sales volume and a shift in our mix of revenues, with higher Semiconductor Test Systems content coupled with a shift of Connection Systems business from EMS to connectors. The remainder is attributable to lower material costs and a reduction in fixed manufacturing costs, including depreciation and facility costs resulting from past restructuring actions.
We assess the carrying value of our inventory on a quarterly basis by estimating future demand and comparing that demand against on-hand and on-order inventory provisions. Forecasted revenue information is obtained from the sales and marketing groups and incorporates factors such as backlog and future revenue demand. This quarterly process identifies obsolete and excess inventory. Obsolete inventory, which represents items for which there is no demand, is fully reserved. Excess inventory, which represents inventory items
that are not expected to be consumed during the next four quarters, is written down to estimated net realizable value.
The provisions for excess and obsolete inventory were $2.3 million and $3.9 million for the three months ended July 4, 2004 and June 29, 2003, respectively. During the three months ended July 4, 2004, we scrapped $13.8 million of inventory and sold $0.3 million of previously written-down or written-off inventory. As of July 4, 2004, we have inventory related reserves for amounts which had been written-down or written-off of $173.9 million. We have no pre-determined timeline to scrap the remaining inventory.
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Engineering and Development
Engineering and development expenses were as follows (dollars in millions):
For the Three Months Ended | Period Change | |||||||||||
July 4, 2004 | June 29, 2003 | |||||||||||
Engineering and Development | $ | 66.9 | $ | 63.8 | $ | 3.1 | ||||||
Percent of Total Revenue | 12.7 | % | 19.2 | % | (6.5 | ) |
The increase of $3 million in engineering and development expenses is primarily the result of our strong commitment to sustained levels of investment in product research and development offset by the results of on-going actions to reduce fixed costs. The increase can be attributed to the following:
• | $3 million increase due to variable employee compensation; |
• | $2 million increase in prototype material for engineering development projects; and |
• | $1 million from an increase in outsourced contract engineering. |
These increases were offset in part by the following:
• | $2 million decrease for the salaries and fringe benefits due to a decrease in headcount; and |
• | $1 million in lower depreciation as a result of lower capital spending, asset write-downs and facility closures. |
Selling and Administrative
Selling and administrative expenses were as follows (dollars in millions):
For the Three Months Ended | Period Change | |||||||||||
July 4, 2004 | June 29, 2003 | |||||||||||
Selling and Administrative | $ | 70.0 | $ | 61.5 | $ | 8.5 | ||||||
Percent of Total Revenue | 13.3 | % | 18.6 | % | (5.3 | ) |
The increase of $8 million in selling and administrative spending is due primarily to the following:
• | $7 million increase due to variable employee compensation; |
• | $2 million from an increase in consulting expenses; and |
• | $1 million increase in travel and training costs. |
These increases were offset in part by the following:
• | $1 million in lower depreciation costs due to asset write-downs and capital spending cutbacks; and |
• | $1 million decrease for the salaries and fringe benefits due to a decrease in headcount. |
Restructuring and Other Charges
The tables below represent activity related to restructuring charges for the three months ended July 4, 2004 and June 29, 2003. The accrual for severance and benefits is reflected in accrued employees’ compensation and withholdings. The accrual for lease payments on vacated facilities is reflected in other accrued liabilities and other long-term accrued liabilities and is expected to be paid out over the lease terms, the latest of which expires
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in 2012. Teradyne expects to pay out approximately $6.0 million against the lease accruals over the next twelve months. Teradyne’s future lease commitments are net of expected sublease income of $13.0 million as of July 4, 2004. Teradyne has subleased approximately 23% of its unoccupied space as of July 4, 2004 and is actively attempting to sublease the remaining space.
The table below summarizes the liability and activity for the three months ended July 4, 2004 relating to restructuring and other charges (in thousands):
Long-Lived Asset Impairment | Severance and Benefits | Facility Related | Other Charges | Total | ||||||||||||||||
Balance at April 4, 2004 | $ | — | $ | 4,590 | $ | 28,079 | $ | 1,273 | $ | 33,942 | ||||||||||
Second quarter 2004 provision | (100 | ) | (458 | ) | 1,201 | (491 | ) | 152 | ||||||||||||
Cash payments | — | (1,868 | ) | (5,880 | ) | 375 | (7,373 | ) | ||||||||||||
Asset write-downs | 100 | — | — | — | 100 | |||||||||||||||
Balance at July 4, 2004 | $ | — | $ | 2,264 | $ | 23,400 | $ | 1,157 | $ | 26,821 | ||||||||||
In the second quarter of 2004, Teradyne recorded a charge of $1.2 million consisting primarily of revised estimates of losses due to changes in the assumed amount and timing of sublease income on facilities that have been exited prior to the end of the lease term. The Semiconductor Test Systems segment recorded $0.2 million of this charge and $1.0 million was recorded in the Assembly Test Systems segment.
During the three months ended July 4, 2004, Teradyne revised its estimates on future benefits for severed employees, decreasing the current provision by approximately $0.8 million. This revision is offset by charges taken for severance and related benefits of $0.3 million for the three months ended July 4, 2004. There were approximately 23 employees terminated in the second quarter of 2004, all of whom had been employed in the IT department. As of July 4, 2004, $2.3 million in severance and benefits remain unpaid and included in accrued employees’ compensation and withholdings. All remaining severance benefits payable to these employees are expected to be paid by the end of the first quarter of 2005.
During the three months ended July 4, 2004, Teradyne recorded, as a gain on the sale of a business, proceeds of $0.9 million from the previous sale of certain assets and product lines. These amounts relate to an earn out provision from a divestiture in the Connection Systems segment in 1999.
The table below summarizes the liability and activity for the three months ended June 29, 2003, relating to restructuring and other charges (in thousands):
Long-Lived Asset Impairment | Severance and Benefits | Loss on Sale of Product Lines | Facility Related | Total | ||||||||||||||||
Balance at March 30, 2003 | $ | — | $ | 9,039 | $ | — | $ | 24,271 | $ | 33,310 | ||||||||||
Second quarter 2003 provision | 6,494 | 3,407 | 1,055 | 2,422 | 13,378 | |||||||||||||||
Cash payments | — | (4,470 | ) | — | (2,412 | ) | (6,882 | ) | ||||||||||||
Asset write-downs | (6,494 | ) | — | (1,055 | ) | — | (7,549 | ) | ||||||||||||
Balance at June 29, 2003 | $ | — | $ | 7,976 | $ | — | $ | 24,281 | $ | 32,257 | ||||||||||
During the three months ended June 29, 2003, Teradyne recorded charges of $6.5 million primarily for certain long-lived assets held for sale that were impaired as the estimated fair value was less than the carrying value of the assets. The charge for the Connection Systems segment of $3.8 million included $2.5 million related
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to the decision to sell a facility in Laverne, CA, $1.1 million for the impairment of manufacturing assets held for sale, and $0.2 million for a reduction in the fair value of a property held for sale in Nashua, NH. The charge for the Semiconductor Test Systems segment of $2.4 million included $1.9 million related to a reduction in the fair value of properties held for sale in Agoura Hills, CA and $0.5 million for the impairment of manufacturing assets held for sale. The charge for the Assembly Test Systems segment of $0.3 million relates to the impairment of manufacturing assets held for sale. The charge for the properties held for sale resulted from deterioration in real estate market conditions.
Teradyne recorded a charge for severance and related benefits during the three months ended June 29, 2003 of $3.4 million. There were approximately 120 employees terminated in the second quarter of 2003 across Teradyne.
During the three months ended June 29, 2003, Teradyne recorded a charge of $2.3 million for the loss on sale of product lines in the Assembly Test Systems and Other Test Systems segments, of which $1.1 million has been recorded in restructuring and other charges and $1.2 million in each period has been recorded in cost of sales. The product lines sold were in the Assembly Test Systems segment and the Other Test Systems segment. In the first quarter of 2003, the Assembly Test Systems segment sold its manufacturing software product line and manual x-ray inspection and rework product line for total cash proceeds of $2.1 million. These transactions resulted in a loss of $0.9 million during the three months ended June 29, 2003 of which $0.4 million has been recorded in restructuring and other charges and $0.5 million has been recorded in cost of sales for the three months ended June 29, 2003. In the three months ended June 29, 2003, the Other Test Systems segment recorded a charge of $1.4 million to write down its net assets relating to the sale of the Autodiagnos automotive after market product line of which $0.7 million has been recorded in restructuring and other charges and $0.7 million has been recorded in cost of sales.
In the second quarter of 2003, Teradyne recorded a charge of $2.4 million consisting primarily of revised estimates of losses due to changes in the assumed amount and timing of sublease income on facilities that have been exited prior to the end of the lease term. The Connection Systems segment recorded $1.4 million of this charge and $1.0 million was recorded in the Assembly Test Systems segment.
Interest Income and Expense
Interest income increased slightly to $3.5 million for the second quarter of 2004 from $3.3 million in the second quarter of 2003 due to an overall increase in Teradyne’s cash and marketable securities balance. Interest expense decreased to $4.9 million in the second quarter of 2004 from $5.4 million in the second quarter of 2003 as a result of the prepayment of our mortgage for our California properties in the third quarter of 2003.
Other Income and Expense, Net
Other income and expense, net for the three months ended July 4, 2004 and June 29, 2003, respectively, includes the following (in thousands):
For the three months ended | |||||||
July 4, 2004 | June 29, 2003 | ||||||
Gain on sale of an investment | $ | — | $ | 1,250 | |||
Repayment of loan (1) | 585 | — | |||||
Fair value adjustment on warrants | (159 | ) | 150 | ||||
Total | $ | 426 | $ | 1,400 | |||
(1) | The loan had previously been valued at zero due to its uncertainty of collection. |
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Income Taxes
As a result of incurring significant operating losses from 2001 through 2003, we determined that it is more likely than not that our deferred tax assets may not be realized, and since the fourth quarter of 2002 we have established a full valuation allowance for our net deferred tax assets. If we generate sustained future taxable income against which these tax attributes may be applied, some portion or all of the valuation allowance would be reversed. If the valuation allowance were reversed, a portion would be recorded as an increase to additional paid in capital, and the remainder would be recorded as a reduction to income tax expense. The tax expense in the second quarter of 2004 and 2003 relates primarily to a tax provision for foreign taxes, and was recorded using an effective tax rate of 10% and 3%, respectively.
Six Months of 2004 Compared to Six Months of 2003
Bookings
Net bookings for our four principal reportable segments were as follows (in millions, except percent change):
For the Six Months Ended | Percent Change | ||||||||
July 4, 2004 | June 29, 2003 | ||||||||
Semiconductor Test Systems | $ | 759.2 | $ | 338.3 | 124 | % | |||
Connection Systems | 210.7 | 135.5 | 55 | ||||||
Assembly Test Systems | 77.2 | 71.0 | 9 | ||||||
Other Test Systems | 62.0 | 48.8 | 27 | ||||||
$ | 1,109.1 | $ | 593.6 | 87 | % | ||||
As total Semiconductor Test Systems orders more than doubled from the first six months of 2003 to the first six months of 2004, Semiconductor Test’s percentage of total bookings grew as well, increasing from 57.0% of total bookings in the first six months of 2003 to 68.5% for the first six months of 2004. The growth in orders was spread across all products, both new and existing, and was concentrated primarily in South East Asia, Singapore, and Taiwan, where total Semiconductor Test Systems orders almost doubled year over year. This growth was spurred by higher demand in a variety of markets, such as optical disk applications, cellular phone power management, graphics and chipsets for personal computers, smart card devices, broadband and other consumer devices.
The growth in Connection Systems orders was led by stronger customer demand in the wireless market segment across both connector and backplane assembly products. This growth was partially offset by a decline in orders due to the decision to exit the lower margin portion of Connection Systems’ EMS business.
Orders in Assembly Test Systems were increased in the mil/aero business, offset by a decrease in the commercial business due to the sale of the manual X-ray, rework and AOI product lines, resulting in an overall increase year over year.
Other Test Systems’ order growth resulted from an increase in Broadband Test Systems bookings, primarily a result of the timing of significant hardware orders for voice line test from two large telecommunications providers in the first six months of 2004, offset by a decrease in orders in Diagnostic Solutions. Other Test Systems’ bookings are program related and have significant fluctuations.
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Cancellations for our four principal reportable segments were as follows (in millions):
For the Six Months Ended | ||||||
July 4, 2004 | June 29, 2003 | |||||
Semiconductor Test Systems | $ | — | $ | 6.6 | ||
Connection Systems | — | 15.7 | ||||
Assembly Test Systems | 0.2 | 0.4 | ||||
Other Test Systems | — | 0.1 | ||||
$ | 0.2 | $ | 22.8 | |||
The Connection Systems cancellations in the first six months of 2003 were from major customers in the telecommunications and networking infrastructure industries, due principally to product program cancellations. Customers may delay delivery of products or cancel orders suddenly and without significant notice, subject to possible cancellation penalties. In the first six months of 2004 and 2003 there were no significant cancellation penalties received. Due to possible changes in delivery schedules and cancellations of orders, our 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 materially adverse effect on our business, financial condition and results of operations.
Net bookings by region as a percentage of total net bookings were as follows:
For the Six Months Ended | ||||||
July 4, 2004 | June 29, 2003 | |||||
United States | 27 | % | 34 | % | ||
South East Asia | 20 | 18 | ||||
Taiwan | 19 | 8 | ||||
Europe | 15 | 18 | ||||
Singapore | 14 | 8 | ||||
Japan | 4 | 11 | ||||
Rest of the World | 1 | 3 | ||||
100 | % | 100 | % | |||
Revenue
Net revenues for our four principal reportable segments were as follows (in millions, except percent changes):
For the Six Months Ended | % Change | ||||||||
July 4, 2004 | June 29, 2003 | ||||||||
Semiconductor Test Systems | $ | 635.8 | $ | 342.2 | 86 | % | |||
Connection Systems | 194.4 | 183.4 | 6 | ||||||
Assembly Test Systems | 72.5 | 82.4 | (12 | ) | |||||
Other Test Systems | 54.4 | 58.1 | (6 | ) | |||||
$ | 957.1 | $ | 666.1 | 44 | % | ||||
Semiconductor Test Systems revenue made up 66.4% of total revenue for the first six months of 2004, up from 51.4% a year ago. The growth in sales came from both new and existing products and was spread over all regions, led by Singapore and Taiwan.
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The growth in Connection Systems sales was led by stronger customer demand in the wireless market segment across both connector and backplane assembly products. This growth was partially offset by a decline in sales due to the decision to exit the lower margin portion of Connection Systems’ EMS business.
The decline in Assembly Test Systems sales was due primarily to a decrease in revenue in the commercial business from the sale of the manual X-ray, rework and AOI product lines as well as lower in-circuit test sales. The decline in the sales of the commercial business were offset by a moderate increase in mil/aero sales.
Our sales by region as a percentage of total net sales were as follows:
For the Six Months Ended | ||||||
July 4, 2004 | June 29, 2003 | |||||
United States | 29 | % | 38 | % | ||
Europe | 17 | 19 | ||||
South East Asia | 17 | 13 | ||||
Singapore | 15 | 9 | ||||
Taiwan | 15 | 9 | ||||
Japan | 4 | 9 | ||||
Korea | 3 | 1 | ||||
Rest of the World | — | 2 | ||||
100 | % | 100 | % | |||
Gross Margin
Our gross profit was as follows (dollars in millions):
For the Six Months Ended | Period Change | ||||||||||
July 4, 2004 | June 29, 2003 | ||||||||||
Gross Profit | $ | 402.6 | $ | 172.7 | $ | 229.9 | |||||
Percent of Total Revenue | 42.1 | % | 25.9 | % | 16.2 |
The gross margin improvement from the first six months of 2003 to the first six months of 2004 was a result of several factors. An improvement of 11 points of gross margin is credited to an increase in sales volume and a shift in our mix of revenues, with higher Semiconductor Test Systems content coupled with a shift of Connection Systems business from EMS to connectors. The remainder is attributable to lower material costs and a reduction in fixed manufacturing costs, including depreciation and facility costs resulting from past restructuring actions.
We assess the carrying value of our inventory on a quarterly basis by estimating future demand and comparing that demand against on-hand and on-order inventory provisions. Forecasted revenue information is obtained from the sales and marketing groups and incorporates factors such as backlog and future revenue demand. This quarterly process identifies obsolete and excess inventory. Obsolete inventory, which represents items for which there is no demand, is fully reserved. Excess inventory, which represents inventory items that are not expected to be consumed during the next four quarters, is written down to estimated net realizable value.
The provisions for excess and obsolete inventory were $6.6 million and $5.6 million for the six months ended July 4, 2004 and June 29, 2003, respectively. During the six months ended July 4, 2004, we scrapped $18.0 million of inventory and sold $0.3 million of previously written-down or written-off inventory. As of July 4, 2004, we have inventory related reserves for amounts which had been written-down or written-off of $173.9 million. We have no pre-determined timeline to scrap the remaining inventory.
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Engineering and Development
Engineering and development expenses were as follows (dollars in millions):
For the Six Months Ended | Period | |||||||||||
July 4, 2004 | June 29, 2003 | |||||||||||
Engineering and Development | $ | 131.6 | $ | 132.4 | $ | (0.8 | ) | |||||
Percent of Total Revenue | 13.8 | % | 19.9 | % | (6.1 | ) |
The decrease of $1 million in engineering and development expenses can be attributed primarily to the following:
• | $6 million decrease in the salaries and fringe benefits due to a decrease in headcount; and |
• | $4 million decrease in depreciation as a result of lower capital spending including a decrease of $2 million in accelerated depreciation related to asset write-downs and facility closures in the first six months of 2003. |
These decreases were offset in part by the following:
• | $4 million increase due to variable employee compensation; |
• | $3 million increase in prototype material for engineering development projects; and |
• | $2 million from an increase in outsourced contract engineering. |
Selling and Administrative
Selling and administrative expenses were as follows (dollars in millions):
For the Six Months Ended | Period Change | |||||||||||
July 4, 2004 | June 29, 2003 | |||||||||||
Selling and Administrative | $ | 136.2 | $ | 128.9 | $ | 7.3 | ||||||
Percent of Total Revenue | 14.2 | % | 19.4 | % | (5.2 | ) |
The increase of $7 million in selling and administrative spending is due primarily to the following:
• | $11 million increase due to variable employee compensation; |
• | $1 million from an increase in consulting expenses; and |
• | $1 million increase in travel and training costs. |
These increases were offset in part by the following:
• | $3 million decrease in the salaries and fringe benefits due to a decrease in headcount; and |
• | $3 million in lower depreciation costs due to asset write-downs and capital spending cutbacks. |
Restructuring and Other Charges
The tables below represent activity related to restructuring charges in the six months ended July 4, 2004 and June 29, 2003.
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The table below summarizes the liability and activity for the six months ended July 4, 2004 relating to restructuring and other charges (in thousands):
Long-Lived Asset Impairment | Severance and Benefits | Facility Related | Other Charges | Total | ||||||||||||||||
Balance at December 31, 2003 | $ | — | $ | 7,766 | $ | 29,222 | $ | 1,273 | $ | 38,261 | ||||||||||
First six months 2004 provision (reversal) | (603 | ) | (760 | ) | 2,136 | (491 | ) | 282 | ||||||||||||
Cash payments | — | (4,742 | ) | (7,958 | ) | 375 | (12,325 | ) | ||||||||||||
Asset write-downs | 603 | — | — | — | 603 | |||||||||||||||
Balance at July 4, 2004 | $ | — | $ | 2,264 | $ | 23,400 | $ | 1,157 | $ | 26,821 | ||||||||||
During the six months ended July 4, 2004, Teradyne recorded a charge of $2.1 million, of which $1.2 million consisted of revised estimates of losses due to changes in the assumed amount and timing of sublease income on facilities that have been exited prior to the end of the lease term and $0.9 million for settlement of the remaining lease obligation on a facility. The Semiconductor Test Systems segment recorded $0.2 million, the Connection Systems segment recorded $0.9 million, and $1.0 million of the charge was recorded in the Assembly Test segment.
During the six months ended July 4, 2004, Teradyne revised its estimates on future benefits for severed employees, decreasing the current provision by approximately $1.9 million. This revision was offset by charges taken for severance and related benefits for $1.1 million in the six months ended July 4, 2004. There were approximately 36 employees terminated in the first and second quarter of 2004 across all functional groups. The remaining severance benefits payable to these employees are expected to be paid by the end of the first quarter of 2005.
During the six months ended July 4, 2004, Teradyne recorded, as a gain on the sale of a business, proceeds of $0.9 million from the previous sale of certain assets and product lines. These amounts relate to an earn out provision from a divestiture in the Connection Systems segment in 1999.
The table below summarizes the liability and activity for the six months ended June 29, 2003, relating to restructuring and other charges (in thousands):
Long-Lived Asset Impairment | Severance and Benefits | Loss on Sale of Product Lines | Facility Related | Total | ||||||||||||||||
Balance at December 31, 2002 | $ | — | $ | 8,242 | $ | — | $ | 25,240 | $ | 33,482 | ||||||||||
First six months of 2003 provision | 13,988 | 9,563 | 6,891 | 2,422 | 32,864 | |||||||||||||||
Cash payments | — | (9,829 | ) | — | (3,381 | ) | (13,210 | ) | ||||||||||||
Asset write-downs | (13,988 | ) | — | (6,891 | ) | — | (20,879 | ) | ||||||||||||
Balance at June 29, 2003 | $ | — | $ | 7,976 | $ | — | $ | 24,281 | $ | 32,257 | ||||||||||
During the six months ended June 29, 2003, Teradyne recorded charges of $14.0 million primarily for certain long-lived assets held for sale that were impaired as the estimated fair value was less than the carrying value of the assets. The charge for the Connection Systems segment of $8.2 million includes $3.3 million for a reduction in the fair value of properties held for sale in Nashua, NH and San Diego, CA, $2.5 million related to the decision to sell a facility in Laverne, CA, and $2.4 million for the impairment of manufacturing assets held for sale. The charge for the Semiconductor Test Systems segment of $5.5 million related primarily to a reduction in the fair value of properties held for sale in Agoura Hills, CA. The charge for the properties held for sale resulted from deterioration in real estate market conditions. The charge in the Assembly Test Systems segment of $0.3 million relates to the impairment of manufacturing assets held for sale.
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Teradyne recorded a charge for severance and related benefits during the six months ended June 29, 2003 of $9.6 million. There were approximately 460 employees terminated in the first six months of 2003 across Teradyne.
During the six months ended June 29, 2003, Teradyne recorded a charge of $8.1 million for the loss on sale of product lines, of which $6.9 million has been recorded in restructuring and other charges and $1.2 million has been recorded in cost of sales. The product lines sold were in the Assembly Test Systems segment and the Other Test Systems segment. In the first six months of 2003, the Assembly Test Systems segment sold its manufacturing software product line and manual x-ray inspection and rework product line for total cash proceeds of $2.1 million. These transactions resulted in a loss of $6.7 million for the six months ended June 29, 2003 of which $6.2 million has been recorded in restructuring and other charges, and $0.5 million has been recorded in cost of sales. In the six months ended June 29, 2003, the Other Test Systems Segment recorded a charge of $1.4 million to write down its net assets relating to the sale of the Autodiagnosis automotive after market product line of which $0.7 million has been recorded in restructuring and other charges and $0.7 million has been recorded in cost of sales.
In the first and second quarter of 2003, Teradyne recorded a charge of $2.4 million consisting primarily of revised estimates of losses due to changes in the assumed amount and timing of sublease income on facilities that have been exited prior to the end of the lease term. The Connection Systems segment recorded $1.4 million of this charge and $1.0 million was recorded in the Assembly Test Systems segment.
Interest Income and Expense
Interest income decreased to $7.1 million for the first six months of 2004 from $7.5 million in the first six months of 2003, due primarily to a reduction in interest rates. Interest expense decreased to $9.5 million in the first six months of 2004 from $10.8 million in the first six months of 2003 as a result of the prepayment of our mortgage for our California properties in the third quarter of 2003.
Other Income and Expense, Net
Other income and expense, net for the six months ended July 4, 2004 and June 29, 2003, respectively, includes the following (in thousands):
For the six months ended | ||||||||
July 4, 2004 | June 29, 2003 | |||||||
Other than temporary impairment of investment | $ | — | $ | (2,592 | ) | |||
Repayment of loan (1) | 585 | — | ||||||
Gain on sale of an investment | 1,058 | 1,250 | ||||||
Fair value adjustment on warrants | (366 | ) | 43 | |||||
Total | $ | 1,277 | $ | (1,299 | ) | |||
(1) | The loan had previously been valued at zero due to its uncertainty of collection. |
Income Taxes
As a result of incurring significant operating losses from 2001 through 2003, we determined that it is more likely than not that our deferred tax assets may not be realized, and since the fourth quarter of 2002 we have established a full valuation allowance for our net deferred tax assets. If we generate sustained future taxable income against which these tax attributes may be applied, some portion or all of the valuation allowance would be reversed. If the valuation allowance were reversed, a portion would be recorded as an increase to additional paid in capital, and the remainder would be recorded as a reduction to income tax expense. The tax expense in
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the first six months of 2004 and 2003 relates primarily to a tax provision for foreign taxes, and was recorded using an effective tax rate of 10% and 2%, respectively.
Liquidity and Capital Resources
Our cash, cash equivalents and marketable securities balance increased $63.4 million in the first six months of 2004, to $649.4 million. Cash activity for the first six months of 2004 and 2003 was as follows (in millions):
For the Six Months Ended | ||||||||
July 4, 2004 | June 29, 2003 | |||||||
Cash provided by (used for) operating activities: | $ | 119.0 | $ | (26.4 | ) | |||
Cash provided by (used for) net income (loss), adjusted for non-cash items | $ | 191.8 | $ | (16.1 | ) | |||
Changes in operating assets and liabilities, net of product lines sold | (72.8 | ) | (10.3 | ) | ||||
Total cash provided by (used for) operating activities | $ | 119.0 | $ | (26.4 | ) | |||
Cash used for investing activities | (151.2 | ) | (29.7 | ) | ||||
Cash provided by financing activities | 28.1 | 42.5 | ||||||
Total cash used | $ | (4.1 | ) | $ | (13.6 | ) | ||
Changes in operating assets and liabilities, net of product lines sold used cash of $72.8 million in the first six months of 2004 due to increased accounts receivable and inventory balances, offset by an increase in accounts payable, deferred revenue and accrued expenses. Accounts receivable balances increased $66.0 million, primarily in the Semiconductor Test segment, due to an increase in sales offset by a decrease in days sales outstanding from 61 days as of June 29, 2003 to 51 days as of July 4, 2004. Inventory increased $53.8 million in the first six months of 2004 due primarily to volume increases in our Semiconductor Test Systems segment. Accounts payable, deferred revenue and accrued expenses had a net increase of $37.5 million, which was partially offset by a contribution to our U.S. Qualified Pension Plan of approximately $16.6 million. We plan to contribute an additional $9.0 million to the U.S. Qualified Pension Plan in the remainder of 2004. Changes in operating assets and liabilities, net of product lines sold used cash of $10.3 million in the first six months of 2003, primarily due to an increase in accounts receivable balances offset by a decrease in inventory.
Investing activities consist of purchases, the sale and maturity of marketable securities, proceeds from the sale of businesses, proceeds from asset disposals, proceeds from the sale of product lines, cash paid for assets and purchases of capital assets. Capital expenditures, including internally manufactured equipment, increased by $41.4 million in the first six months of 2004 compared to the first six months of 2003 across all operating segments, primarily related to increased spending on internally constructed systems and computer equipment.
Financing activities represent the sale of our common stock. The decrease of $14.3 million from the first six months of 2003 to the first six months of 2004 is due primarily to a decrease in stock option exercises.
We believe our cash, cash equivalents and marketable securities balance of $649.4 million will be sufficient to meet working capital and expenditure needs for at least the next twelve months. Inflation has not had a significant long-term impact on earnings.
Employee Stock Options
Our 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. Of the stock options we granted in 2003, 87% went to employees other than the Chief Executive Officer and the five other most highly compensated executive officers.
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Stock option plan activity for the first six months of 2004, and the years ended December 31, 2003 and 2002 follows (in thousands):
Six Months July 4, | Year Ended December 31, | Year Ended | |||||||
Outstanding at beginning of period | 29,923 | 33,421 | 29,750 | ||||||
Options granted | 6,631 | 6,659 | 7,205 | ||||||
Options exercised | (519 | ) | (7,115 | ) | (1,152 | ) | |||
Options canceled | (987 | ) | (3,042 | ) | (2,382 | ) | |||
Outstanding at end of period | 35,048 | 29,923 | 33,421 | ||||||
Exercisable at the end of the period | 18,633 | 16,949 | 19,296 | ||||||
Available for grant at beginning of period | 21,401 | 25,018 | 29,841 | ||||||
Grants | (6,631 | ) | (6,659 | ) | (7,205 | ) | |||
Cancellations | 987 | 3,042 | 2,382 | ||||||
Additional shares reserved | — | — | — | ||||||
Available for grant at end of period | 15,757 | 21,401 | 25,018 | ||||||
Employee and Executive Option Grants
Six Months Ended July 4, 2004 | Year Ended December 31, | ||||||||
2003 | 2002 | ||||||||
Net grants during the period as a percentage of outstanding shares at the end of such period | 2.91 | % | 1.88 | % | 2.63 | % | |||
Grants to Named Executive Officers* during the period as a percentage of outstanding shares at the end of such period | 0.55 | % | 0.42 | % | 0.44 | % | |||
Grants to Named Executive Officers* during the period as a percentage of total options granted during such period | 16.23 | % | 12.28 | % | 11.42 | % | |||
Cumulative options held by Named Executive Officers* as a percentage of total options outstanding at the end of such period | 12.07 | % | 11.54 | % | 10.33 | % |
* | The term “Named Executive Officers” as used in these notes, includes the Chief Executive Officer and the five other most highly compensated executive officers for the six months ended July 4, 2004. |
Summary of in-the-money and out-of the-money option information at July 4, 2004 (shares in thousands):
Exercisable | Unexercisable | Total | |||||||||||||
Shares | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | ||||||||||
In-the-Money | 4,251 | $ | 14.46 | 7,239 | $ | 14.46 | 11,490 | $ | 14.46 | ||||||
Out-of-the-Money(1) | 14,382 | 29.73 | 9,176 | 25.72 | 23,558 | 28.17 | |||||||||
Total Options Outstanding | 18,633 | 26.25 | 16,415 | 20.75 | 35,048 | 23.67 | |||||||||
(1) | Out-of-the-money options are those options with an exercise price equal to or above $20.93, the closing price of our common stock on July 4, 2004. |
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Executive Options
Options granted to Named Executive Officers, during the six months ended July 4, 2004:
Individual Grants | ||||||||||||||||
Number of Securities Underlying Options | Percent of Total Options Granted to Employees(1) | Exercise Price Per Share | Expiration Date | 5%(2) | 10%(2) | |||||||||||
George W. Chamillard | 250,000 | 3.83 | % | $ | 27.06 | 1/28/2011 | $ | 2,754,034 | $ | 6,418,071 | ||||||
Gregory R. Beecher | 95,000 | 1.46 | 27.06 | 1/28/2011 | 1,046,533 | 2,438,867 | ||||||||||
Michael A. Bradley | 150,000 | 2.30 | 27.06 | 1/28/2011 | 1,652,421 | 3,850,843 | ||||||||||
Michael A. Bradley | 300,000 | 4.60 | 21.91 | 5/27/2011 | 2,675,872 | 6,235,918 | ||||||||||
John M. Casey | 76,000 | 1.17 | 27.06 | 1/28/2011 | 837,226 | 1,951,094 | ||||||||||
Edward Rogas, Jr. | 110,000 | 1.69 | 27.06 | 1/28/2011 | 1,211,775 | 2,823,951 | ||||||||||
Richard E. Schneider | 95,000 | 1.46 | 27.06 | 1/28/2011 | 1,046,533 | 2,438,867 |
(1) | Based on July 4, 2004 total of 6,631,045 shares subject to options granted in the first six months of 2004 to employees under our 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 our 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 our 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 our 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. |
Option exercises and aggregate remaining option holdings and option values of Named Executive Officers as of July 4, 2004 and during the six months ended July 4, 2004:
Name | Shares Acquired Six Months of | Value Realized | Number of Securities Underlying Unexercised Options at July 4, 2004 | Values of Unexercised In-the Money Options at | |||||||||||
Exercisable | Unexercisable | Exercisable | Unexercisable | ||||||||||||
George W. Chamillard | 0 | $ | 0.00 | 877,569 | 830,000 | $ | 1,536,000 | $ | 2,304,000 | ||||||
Gregory R. Beecher | 0 | 0.00 | 208,711 | 242,250 | 512,000 | 768,000 | |||||||||
Michael A. Bradley | 0 | 0.00 | 367,381 | 559,000 | 588,800 | 883,200 | |||||||||
John M. Casey | 0 | 0.00 | 217,771 | 194,300 | 409,600 | 614,400 | |||||||||
Edward Rogas, Jr. | 0 | 0.00 | 304,381 | 287,000 | 588,800 | 883,200 | |||||||||
Richard E. Schneider | 0 | 0.00 | 205,161 | 235,800 | 512,000 | 768,000 |
(1) | Option values based on stock price of $20.93, the closing price of our common stock on July 4, 2004. |
Equity Compensation Plans
In addition to our 1996 Employee Stock Purchase Plan discussed in Note B: “Accounting Policies,” in our Annual Report on Form 10-K for the year ended December 31, 2003, we maintain three equity compensation plans under which equity securities are authorized for issuance to our 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 |
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The purpose of these plans is to promote our interests by attracting and retaining the services of qualified and talented persons to serve as employees, directors and/or consultants. Except for the 1997 Employee Stock Option Plan, each of the foregoing plans was approved by our shareholders.
The following table presents information about these plans as of July 4, 2004 (shares in thousands):
(1) | (2) | (3) | ||||
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants, and rights | Weighted-average exercise price of outstanding options, warrants, and rights | Number of securities remaining available for future issuance under stock option compensation plans (excluding securities reflected in column(1)) | |||
Stock option plans approved by shareholders | 6,244 | 23.95 | 2,042 | |||
Stock option plans not approved by shareholders(1) | 28,528 | 23.16 | 13,717 | |||
Total | 34,772 | 23.30 | 15,759 | |||
(1) | In connection with the acquisition of GenRad, Inc. in October, 2001 (the “Acquisition”), we 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 (collectively, the “GenRad Plans”). Upon the consummation of the Acquisition, these options became exercisable for shares of our 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 July 4, 2004, there were outstanding options exercisable for an aggregate of 276 shares of our common stock pursuant to the GenRad Plans, with a weighted average exercise price of $70.84 per share. |
For further information on our stock option plans see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2004.
Risk Factors
Certain Factors That May Affect Future Results
From time to time, information we provide, statements made by our employees or information included in our filings with the Securities and Exchange Commission (including this Form 10-Q) contain statements that are not purely historical, but are forward looking statements, made under 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 our 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 our 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 our 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 our filings with the Securities and Exchange Commission, including in our Annual Report on Form 10-K for the year ended December 31, 2003.
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Our Business Is Impacted by the Slowdown in Economies Worldwide.
Capital equipment providers in the electronics and semiconductor industries, such as Teradyne, were negatively impacted by the slowdown in the global economies, and resulting reductions in customer capital investments, that began in the second half of 2000. Future slowdowns in global economies and reductions in customer capital investments, which may adversely impact our business, are difficult to predict.
Acts of War, Terrorists Attacks and the Threat of Domestic and International Terrorist Attacks May Adversely Impact Our Business.
Acts of war and terrorists attacks may cause damage or disruption to our employees, facilities, customers, suppliers and distributors which could have a material adverse effect on our business, results of operation or financial condition. As we sell and manufacture products both in the United States and internationally, the threat of future terrorist attacks could lead to changes in security and operations at those locations which could increase our operating costs and which may adversely affect our business. Such conflicts may also cause damage or disruption to transportation and communication systems. All of these conditions make it difficult for us, and our customers, to accurately forecast and plan future business activities and could have a material adverse effect on our business, financial condition and results of operations.
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 products. The market demand for electronics was impacted by the economic slowdown that began in the latter portions of 2000 and the effects of the hostilities which began 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 we manufacture and market. We believe that the markets for newer generations of electronic products such as those that we manufacture and market will also be subject to similar fluctuations. We are dependent on the timing of orders from our customers and the deferral or cancellation of previous customer orders could have an adverse effect on our results of operations. We cannot assure that the level of revenues or new orders for a calendar quarter will be sustained in subsequent quarters. In addition, any factor adversely affecting the electronics industry or particular segments within the electronics industry may adversely affect our business, financial condition and operating results.
We Have Taken Measures to Address the Past Slowdown in the Market for Our Products Which Could Have Long-term Negative Effects on Our Business.
During 2001, 2002 and 2003, we took measures to address the slowdown in the market for our products. In particular, we reduced our workforce, closed and/or sold facilities, discontinued certain product lines, implemented material cost reduction programs and reduced planned capital expenditures and expense budgets. Each measure we took to address the slowdown could have long-term negative effects on our business by reducing our pool of technical talent, decreasing or slowing improvements in our products, increasing our debt, and making it more difficult to respond to customers or competitors, as the market and customer orders turn around.
We May Not Be Able to Adequately Address a Rapid Increase in Customer Demand.
Because we took measures during the past three years to scale back operations and reduce expenses in response to decreased customer demand for products and services, we may not be able to satisfy a rapid increase in customer demand. Our ability to meet rapid increases in customer demand is also, to a certain extent, dependant upon the ability of our suppliers and contractors to meet increased product or delivery requirements, over which we have little or no control.
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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; |
• | the costs associated with and/or the inability to effectively integrate an acquired business into our 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 our 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; |
• | significant underperformance of the acquired business relative to our expectations; |
• | the amortization of acquired identifiable intangibles, which may adversely affect our 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 our executive officers. This case is further described in “Item 1: Legal Proceedings” in this Form 10-Q.
Additionally, in 2001, we were designated as a “potentially responsible party” (“PRP”) at a clean-up site in Los Angeles, California. This claim arises out of our 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. This case is further described in “Item 1: Legal Proceedings” in this Form 10-Q.
We Currently Are and in the Future May Be Subject to Litigation that Could Have an Adverse Effect on Our Business.
From time to time, we may be subject to litigation or other governmental proceedings that could require significant management time and resources and cause us to incur expenses and, in the event of an adverse decision, pay damages in an amount that could have a material adverse effect on our financial position or results of operations.
For example, on April 30, 2004, Hampshire Equity Partners II, L.P. (“HEP”), filed a complaint against Teradyne and Teradyne Connection Systems segment (“TCS”) asserting fraud and negligence based claims, and a claim for intentional interference with economic opportunity. In the complaint, HEP alleges that it relied upon statements made by a representative of TCS to a HEP agent during its due diligence prior to investing $55 million in Connector Services Corporation, aka AMAX Plating, Inc (“CSC”). HEP seeks to hold Teradyne and
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TCS responsible for its decision to invest in CSC and for the losses it has suffered upon the bankruptcy of CSC. HEP seeks damages in an unstated amount exceeding $55 million. The case is currently pending in the U.S. District Court of the Southern District of New York. We believe we have meritorious defenses to the claims and will defend ourselves vigorously. Management does not believe that the outcomes of these claims will have a material adverse effect on our financial position or results of operations but there can be no assurance that any such claims would not have a material adverse effect on our financial position or results of operations. This case is further described in “Item 1: Legal Proceedings” in this Form 10-Q.
We Currently Face, 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 our 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 our business operations and future prospects. The complaint seeks unspecified damages, including compensatory damages and recovery of reasonable attorneys’ fees and costs. A motion was filed to dismiss all claims asserted in the complaint on February 7, 2003. On January 16, 2004, the U.S. Magistrate Judge recommended to the U.S. District Court that our motion to dismiss the consolidated amended class action complaint in its entirety be allowed without prejudice. On February 2, 2004, the lead plaintiffs filed an objection to the U.S. Magistrate Judge’s recommendation. On March 2, 2004, we filed our response to the lead plaintiffs objection and the matter remains pending in the Federal District Court in San Diego, California. We believe we have meritorious defenses to the claims and will defend ourselves vigorously. Management does not believe that the outcomes of these claims will have a material adverse effect on our financial position or results of operations but there can be no assurance that any such claims would not have a material adverse effect on our financial position or results of operations. These cases are further described in “Item 1: Legal Proceedings” in this Form 10-Q.
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 certain lines of 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; |
• | restructuring, inventory and other charges which may affect our results of operations; and |
• | the decreased diversification of our product lines caused by the divestiture of a line of business which may make our operating results subject to increased market fluctuations. |
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, trade secrets and by contract (“IP”). However, even with these protections, our IP may still be challenged, invalidated or subject to other infringement actions. While we believe that our IP has value in the aggregate, no single element of our IP is in itself essential. If a significant portion of our IP is invalidated or ineffective, our business could be materially adversely affected. In addition, we receive notifications from time to time that we may be in
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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 require a significant use of management resources and necessitate 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, Our Revenues Will Be Adversely Affected.
We believe that our technological position depends primarily on the technical competence and creative ability of our engineers. In a rapidly evolving market, such as ours, the development of new technologies, commercialization of those technologies into products and market acceptance and customer demand for those products are critical to our success. Successful product development and introduction depends upon a number of factors, including:
• | new product selection; |
• | ability to meet customer requirements; |
• | 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. |
We Are Subject to Intense Competition.
We face significant competition throughout the world in each of our operating segments. Some of our competitors 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 revenues 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.
A significant portion of our total revenue is derived from customers outside the United States. Our international sales and operations are subject to significant risks and difficulties, including:
• | unexpected changes in legal and regulatory requirements and in policy changes affecting international markets; |
• | changes in tariffs and exchange rates; |
• | social, political and economic instability, acts of terrorism and international conflicts; |
• | difficulties in accounts receivable collection; |
• | cultural differences in the conduct of business; |
• | difficulties in staffing and managing international operations; |
• | potentially adverse tax consequences; and |
• | compliance with customs regulations. |
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In addition, an increasing portion of our products are sourced or manufactured in foreign locations, including China, and a large portion of the devices our products test are fabricated and tested by foundries and subcontractors in Taiwan, Singapore, China and other parts of Asia. As a result, we are subject to a number of economic and other risks, particularly during times of political or financial instability in these regions. Disruption of manufacturing or supply sources in these international locations could materially adversely impact our ability to fill customer orders and potentially result in lost business.
Our Business May Suffer if We Are Unable to Attract and Retain Key Employees.
Competition for employees with skills we require is intense in the high technology industry. Our success will depend on our ability to attract and retain key technical employees. The loss of one or more key or other employees, our inability to attract additional qualified employees, or the delay in hiring key personnel could each have a material adverse effect on our business, results of operations or financial condition.
If Our Suppliers do not Meet Product or Delivery Requirements, We Could Have Reduced Revenues and Earnings.
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 our quality or delivery requirements. Approximately 30% of material purchases require some custom work where having multiple suppliers would be cost prohibitive. If any of our suppliers were to cancel contracts or commitments or fail to meet the quality or delivery requirements needed to satisfy customer orders for our products, we could lose time-sensitive customer orders and have significantly decreased quarterly revenues and earnings, which would have a material adverse effect on our business, results of operations and financial condition. In addition, we rely on contract manufacturers for certain subsystems used in our products, and our ability to meet customer orders for those products depends upon the timeliness and quality of the work performed by these subcontractors, over whom we do not exercise any control.
We are also dependent on the financial strength of our suppliers and may be subject to litigation arising from our relationships with suppliers and others. For example, on September 24, 2003, one of our suppliers filed a petition for Chapter 11 bankruptcy. Subsequently, on April 30, 2004 we were sued by an investor in that supplier. This case is described in “Item 1: Legal Proceedings” in this Form 10-Q. While the loss of this supplier has not had a material adverse effect on our business, results of operations or financial condition, there can be no assurance that the loss of other suppliers either as a result of bankruptcy or otherwise will not have a material adverse effect on our business, results of operations or financial condition.
We May Incur Significant Liabilities if We Fail to Comply With Environmental Regulations.
We are subject to both domestic and international environmental regulations and statutory strict liability relating to the use, storage, discharge, site cleanup and disposal of hazardous chemicals used in our manufacturing processes. If we fail to comply with present and future regulations, or are required to perform site remediation, we could be subject to future liabilities or the suspension of production. Present and future regulations may also:
• | restrict our ability to expand facilities; |
• | require us to acquire costly equipment; or |
• | require us to incur other significant costs and expenses. |
Pursuant to present regulations and agreements, we are conducting groundwater and subsurface assessment and monitoring and are implementing remediation and corrective action plans for facilities located in California, Massachusetts and New Hampshire which are no longer conducting manufacturing operations. As of August 11, 2004, we have not incurred material costs as result of the monitoring and remediation steps taken at the California, Massachusetts and New Hampshire sites.
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On January 27, 2003, the European Union adopted the following directives: (i) the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (the “RoHS Directive”); and (ii) the Waste Electrical and Electronic Equipment Directive (the “WEEE Directive”). Both the RoHs Directive and the WEEE Directive will alter the type and manner in which electronic equipment is imported, sold and handled in the European Union. Ensuring compliance with the RoHs Directive and the WEEE Directive could result in additional costs and disruption to operations and logistics and thus, could have a negative impact on the business, operations and financial condition. The RoHs Directive and the WEEE Directive will be become effective on July 6, 2006.
We Have Substantially Increased Our Indebtedness.
On October 24, 2001, we completed a private placement of $400 million principal amount of 3.75% Convertible Senior Notes (the “Notes”) due October 15, 2006 and received net proceeds of $389 million. As a result, we have incurred approximately $400 million principal amount of additional indebtedness, substantially increasing our ratio of debt to total capitalization. The level of our indebtedness, among other things, could:
• | make it difficult to make payments on our debt and other obligations; |
• | make it difficult 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 our flexibility in planning for, or reacting to changes in our business and the industries in which we compete; |
• | place us at a possible competitive disadvantage with respect to less leveraged competitors and competitors that have better access to capital resources; and |
• | make us more vulnerable in the event of a downturn in our business. |
There can be no assurance that we will be able to meet our debt service obligations, including our obligations under the Notes.
We 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” occurs, the holders of the Notes have the right to require us to repurchase all of the Notes not previously called for redemption. The price that we are required to pay is 100% of the principal amount of the Notes to be repurchased, together with interest accrued but unpaid to, but excluding, the repurchase date. At our option and subject to the satisfaction of certain conditions, instead of paying the repurchase price in cash, we may pay the repurchase price in common stock valued at 95% of the average of the closing prices of common stock for the five trading days immediately preceding and including the third trading day prior to the repurchase date. If we are required to repurchase the Notes, there is no guarantee that we will have enough funds to pay such amounts.
As a result, a change in control could have a material adverse effect on our business, results of operations or financial condition.
We May Not Be Able to Pay Our Debt and Other Obligations.
If our cash flow is inadequate to meet our obligations, we could face substantial liquidity problems. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments on the Notes or certain of our other obligations, we 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 we may incur. Any such default could have a material adverse effect on our business, prospects, financial position and operating results. In addition, we cannot assure that we would be able to repay amounts due in
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respect of the Notes if those obligations were to be accelerated following the occurrence of any other event of default as defined in the instruments creating those obligations. Moreover, we cannot assure that we will have sufficient funds or will be able to arrange for financing to pay the principal amount due on the Notes at maturity.
We May Need Additional Financing, Which Could Be Difficult to Obtain.
We expect that our existing cash and marketable securities and cash generated from operations will be sufficient to meet our cash requirements to fund operations and expected capital expenditures for the next twelve months. However, we have a finite amount of cash and in the event we may need to raise additional funds, due to losses or other reasons, we cannot be certain that we will be able to obtain such additional financing on favorable terms, if at all. Further, if we issue 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 we operate our business. If we cannot raise funds on acceptable terms, if and when needed, we may not be able to develop or enhance our products and services, take advantage of future opportunities, grow our business or respond to competitive pressures, which could seriously harm our business.
If We Are Required to Account for Options Under Our Employee Stock Plans as a Compensation Expense, Our Reported Operating Results Will Be Adversely Affected.
There has been an increasing public debate about the proper accounting treatment for employee stock options. We currently disclose pro forma compensation expense quarterly and annually by calculating the grants’ fair value and disclosing the impact on net income (loss) and net income (loss) per share in a footnote to the consolidated financial statements. If future laws and regulations require us to record the fair value of all stock options as compensation expense in our consolidated statement of operations, our reported operating results will be adversely affected. Note B: “Accounting Policies,” of the consolidated financial statements reflects the impact that such a change in accounting treatment would have had on net income (loss) and net income (loss) per share if it had been in effect during the three months ended July 4, 2004 and June 29, 2003. Included in Item 2: “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are additional stock-based compensation disclosures.
Provisions of Our Charter and By-Laws and Massachusetts Law Make a Takeover of Teradyne More Difficult.
Our basic corporate documents, our stockholder rights plan and Massachusetts law contain provisions that could discourage, delay or prevent a change in control, even if a change in control might be regarded as beneficial to some or all of our stockholders.
Our Operating Results Are Likely to Fluctuate Significantly.
Our annual operating results are affected by a wide variety of factors that could materially adversely affect revenues and profitability.
The following factors set out below are expected to impact future operations:
• | competitive pressures on selling prices; |
• | our ability to introduce and the market acceptance of new products planned for 2004 and beyond; |
• | changes in product revenue mix resulting from changes in customer demand; |
• | the level of orders received which can be shipped in a quarter resulting from the tendency of customers to wait until late in a quarter to commit to purchase due to capital expenditure approvals and constraints occurring at the end of a quarter, or the hope of obtaining more favorable pricing from a competitor seeking the business; |
• | engineering and development investments relating to new product introductions in 2004 and beyond, and the expansion of manufacturing and engineering operations in Asia; |
• | the ability of our suppliers and subcontractors to meet product quality or delivery requirements needed to satisfy customer orders for our products, especially if product demand increases rapidly; |
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• | provisions for excess and obsolete inventory relating to the lack of demand for and the discontinuance of products; and |
• | impairment charges for certain long-lived assets. |
In particular, due to the introduction of a number of new, complex test systems in 2003 and the planned introduction of other systems in 2004 and beyond, there can be no assurance that we will not experience delays in shipment of our products or that our 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.
We have Significant Guarantees and Indemnification Obligations
From time to time we make guarantees to customers regarding the performance of our products, guarantee certain indebtedness obligations of our subsidiary companies and have agreed to provide indemnification to our officers, directors, employees and agents, to the extent permitted by law, arising from certain events or occurrences while the officer, director, employee or agent, is or was serving at our request in such capacity. If we become liable under any of these obligations, it could materially and adversely affect our business, financial condition and operating results. For additional information regarding “Guarantees and Indemnification Obligations” see Note J: “Commitments and Contingencies” in our Annual Report on Form 10-K for the year ended December 31, 2003. In addition to the guarantee and indemnification obligations set forth in our Annual Report, Teradyne occasionally guarantees the performance obligations and responsibilities of its subsidiary and affiliate companies.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
For “Quantitative and Qualitative Disclosures about Market Risk” affecting Teradyne, see Item 7a. “Quantitative and Qualitative Disclosures About Market Risks,” in our Annual Report on Form 10-K filed with the SEC on March 15, 2004. There were no material changes in our exposure to market risk from those set forth in our Annual Report for the fiscal year ended December 31, 2003.
Item 4: Controls and Procedures.
As of the end of the period covered by this report, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that material information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such material information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
During the period covered by this report, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. The design of a control system is based in part upon certain assumptions of the likelihood of certain future events, and there can be no assurance that any design will succeed in achieving its goals under all possible future conditions. Because of inherent limitations in any control system, misstatements due to error or fraud may occur and not be detected.
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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 our executive officers. The case is now pending in Federal District Court, in San Diego, California. We filed a motion to dismiss the complaint in its entirety on behalf of Teradyne and the two individual defendants. The court granted the motion in part, and the only remaining claims were that the sale of our common stock to the former owners violated certain California securities statutes and common law and that we had breached certain contractual obligations in the agreements relating to the acquisitions. Our subsequent motion for partial summary judgment with respect to the breach of contract claims was granted on November 7, 2002. On December 9, 2002, the plaintiffs filed a motion asking the court to reconsider its summary judgment ruling or, alternatively, for certification under Rule 54(b) which would grant the plaintiffs leave to appeal both the Court’s ruling regarding dismissal of claims and its ruling granting summary judgment to the Ninth Circuit Court of Appeals. We opposed these motions. On April 22, 2003, the Court denied the plaintiffs’ motion from reconsideration and the plaintiffs’ request for certification under Rule 54(b). The only claim still pending before the District Court from the original complaint relates to an allegation of fraud in connection with the setting of the transaction price. We have answered and denied all liability.
Teradyne and two of our 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 our business operations and future prospects. The complaint seeks unspecified damages, including compensatory damages and recovery of reasonable attorneys’ fees and costs. We filed a motion to dismiss all claims asserted in the complaint on February 7, 2003. On January 16, 2004, the U.S. Magistrate Judge recommended to the U.S. District Court that our motion to dismiss the consolidated amended class action complaint in its entirety be allowed without prejudice. On February 2, 2004, the lead plaintiffs filed an objection to the U.S. Magistrate Judge’s recommendation. We filed our response to the lead plaintiff’s objection on March 2, 2004 and the matter remains pending in the Federal District Court in San Diego, California. We believe we have meritorious defenses to the claims and will defend ourselves vigorously.
In 2001, we were designated as a “potentially responsible party” (“PRP”) at a clean-up site in Los Angeles, California. This claim arises out of our 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. We have asked the State of California to drop the PRP designation, but California has not yet agreed to do so.
On April 30, 2004, Hampshire Equity Partners II, LP (“HEP”) filed a complaint against Teradyne and Teradyne’s Connection Systems segment (“TCS”) in the United States District Court of the Southern District of New York, relating to its February 21, 2001 investment of $55 million in Connector Service Corporation aka AMAX Plating, Inc. (“CSC”), which was a supplier to TCS at the time. During the due diligence that HEP conducted prior to making that investment, an agent of HEP spoke with TCS, among other CSC customers, concerning CSC. On or about September 24, 2003, CSC filed for bankruptcy protection as discussed above. HEP has now brought suit against Teradyne and TCS asserting fraud and negligence based claims, and a claim for intentional interference with economic opportunity, relating to statements that a TCS representative made to HEP’s agent prior to HEP’s February 2001 investment in CSC. HEP seeks to hold Teradyne and TCS responsible for its decision to invest in CSC and for the losses that it suffered upon the bankruptcy of CSC. HEP is now
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seeking damages for an unstated amount of not less than $55 million. On June 17, 2004, Teradyne and TCS filed a motion to dismiss HEP’s compliant in its entirety. On August 9, 2004, HEP filed its opposition to the motion to dismiss and that motion remains pending.
We believe that we have meritorious defenses against the above unsettled claims and intend to vigorously contest them. While it is not possible to predict or determine the outcomes of the unsettled claims or to provide possible ranges of losses that may arise, we believe the losses associated with all of these actions will not have a material adverse effect on our consolidated financial position or liquidity, but could possibly be material to our consolidated results of operations of any one period.
In addition, we are subject to legal proceedings, claims and investigations that arise in the ordinary course of business such as, but not limited to, patent, employment, commercial and environmental matters. Although there can be no assurance, there are no such matters pending that we expect to be material with respect to our business, financial position or results of operations.
Item 4: Submission of Matters to a Vote of Security Holder
The annual meeting of the security holders of Teradyne was held on May 27, 2004. The following were elected as Class III directors, to serve for a three (3) year term and until their successors gave been duly elected and qualified:
Nominee | Total Vote For Each Nominee | Total Vote Withheld For Each Nominee | ||
John P. Mulroney | 170,227,062 | 7,759,919 | ||
Patricia S. Wolpert | 164,206,888 | 13,780,093 |
In addition, the security holders approved an amendment to Teradyne’s 1996 employee Stock Purchase Plan to increase the aggregate number of shares of Common Stock that may be issued pursuant to said plan by 5,000,000 shares, with 123,758,800 shares voting in favor, 28,437,661 shares voting against, 1,607,448 shares abstaining, and 24,183,072 shares that were broker no-votes.
Lastly, the security holders also ratified the selection of the firm of PricewterhouseCooper LLP as auditors for the fiscal year ending December 31, 2004, with 172, 981,823 shares voting in favor, 4,231,105 shares voting against, and 774,053 shares abstaining.
Item 6: Exhibits and Reports on Form 8-K
(a): Exhibits
Exhibit Number | Description | |
3.4 | Amended and Restated Bylaws of Teradyne (filed herewith) | |
10.6 | 1996 Employee Stock Purchase Plan, as amended (filed herewith)* | |
10.35 | Employment Agreement between Teradyne and Eileen Casal (filed herewith)* | |
10.36 | Employment Agreement between Teradyne and John Casey (filed herewith)* | |
10.37 | Employment Agreement between Teradyne and Mark Jagiela (filed herewith)* | |
10.38 | Employment Agreement between Teradyne and Michael A. Bradley (filed herewith)* | |
10.39 | Employment Agreement between Teradyne and Edward Rogas, Jr. (filed herewith)* | |
10.40 | Employment Agreement between Teradyne and Gregory R. Beecher (filed herewith)* | |
10.41 | Employment Agreement between Teradyne and Jeffrey R. Hotchkiss (filed herewith)* |
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Exhibit Number | Description | |
10.42 | Employment Agreement between Teradyne and Richard Schneider (filed herewith)* | |
10.43 | Employment Agreement between Teradyne and Richard MacDonald (filed herewith)* | |
10.44 | Employment Agreement between Teradyne and George Chamillard (filed herewith)* | |
14.1 | Ethics Policy: Teradyne’s Standards of Business Conduct and Ethics, as amended (filed herewith) | |
31.1 | Certification of Principal Executive Officer, pursuant to Rule 13a-14(a) of Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) | |
31.2 | Certification of Principal Financial Officer, pursuant to Rule 13a-14(a) of Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) | |
32.1 | Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) | |
32.2 | Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) |
* | Indicates management contracts or compensatory plans |
(b): Reports on Form 8-K
(1) | A Current Report on Form 8-K was filed on April 20, 2004, furnishing, pursuant to Item 12, information relating to Teradyne’s first quarter financial results. |
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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 (Duly Authorized Officer and
August 13, 2004 |
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