SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ______________
Commission File No. 1-6462
TERADYNE, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2272148
(State or Other Jurisdiction (I.R.S.Employer
Incorporation or Organization) Identification No.)
321 Harrison Avenue, Boston, Massachusetts 02118
(Address of principal executive offices) (Zip Code)
617-482-2700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days. Yes X No _
The number of shares outstanding of the registrant's only class of
Common Stock as of October 25, 1996 was 82,962,219 shares.
1
TERADYNE, INC.
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
September 29, 1996 and December 31, 1995......................................................3
Condensed Consolidated Statements of Income -
Quarters and Nine Months Ended September 29, 1996 and October 1, 1995.........................4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 29, 1996 and October 1, 1995......................................5
Notes to Condensed Consolidated Financial Statements...............................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................................7-9
2
TERADYNE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
September 29, 1996 December 31, 1995
------------------ -----------------
(Unaudited)
Current assets:
Cash and cash equivalents.................................................... $ 291,559 $ 182,165
Marketable securities........................................................ 59,352 93,662
Accounts receivable.......................................................... 190,143 254,820
Inventories:
Parts.................................................................. 91,941 120,011
Assemblies in process.................................................. 63,911 56,840
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155,852 176,851
Deferred tax assets.......................................................... 17,902 19,546
Prepayments and other current assets......................................... 16,896 13,101
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Total current assets................................................... 731,704 740,145
Property, plant, and equipment, at cost:........................................ 554,758 512,986
Less: accumulated depreciation............................................ (281,634) (255,968)
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Net property, plant, and equipment..................................... 273,124 257,018
Marketable securities........................................................... 61,889 0
Other assets.................................................................... 21,855 26,668
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Total assets........................................................... $ 1,088,572 $ 1,023,831
============= ============
LIABILITIES
Current liabilities:
Notes payable - banks........................................................ $ 7,662 $ 8,141
Current portion of long-term debt............................................ 1,731 2,082
Accounts payable............................................................. 28,985 42,229
Accrued employees' compensation and withholdings............................. 46,720 66,000
Unearned service revenue and customer advances............................... 59,415 53,587
Other accrued liabilities.................................................... 61,684 41,395
Income taxes payable......................................................... 2,665 16,157
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Total current liabilities.............................................. 208,862 229,591
Deferred tax liabilities........................................................ 11,614 15,711
Long-term debt.................................................................. 15,807 18,679
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Total liabilities...................................................... 236,283 263,981
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SHAREHOLDERS' EQUITY
Common stock $0.125 par value, authorized 250,000 shares (125,000 in 1995),
issued and outstanding after deduction of reacquired
shares, 82,924 in 1996 and 82,634 in 1995.................................... 10,364 10,329
Additional paid-in capital...................................................... 368,748 366,970
Retained earnings............................................................... 473,177 382,551
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Total shareholders' equity............................................. 852,289 759,850
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Total liabilities and shareholders' equity............................. $ 1,088,572 $ 1,023,831
============= ============
<FN>
The accompanying notes, together with the Notes to Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 are an integral part of the condensed consolidated
financial statements.
</FN>
3
TERADYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Quarters Ended For the Nine Months Ended
(In thousands, except per share amounts)
September 29, 1996 October 1, 1995 September 29, 1996 October 1, 1995
------------------ --------------- ------------------ ---------------
Net sales................................. $ 261,671 $ 322,658 $ 930,328 $ 839,665
Expenses:
Cost of products sold................ 163,747 172,316 531,002 456,624
Product line consolidation........... 0 0 34,100 0
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Cost of sales................... 163,747 172,316 565,102 456,624
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Engineering and development.......... 35,022 32,966 110,188 88,747
Selling and administrative........... 41,535 45,353 131,020 126,987
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240,304 250,635 806,310 672,358
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Income from operations.................... 21,367 72,023 124,018 167,307
Other income (expense):
Interest income....................... 5,089 3,670 13,010 10,302
Interest expense...................... (513) (715) (1,765) (1,978)
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Income before income taxes................ 25,943 74,978 135,263 175,631
Provision for income taxes................ 6,374 26,756 44,637 64,128
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Net income................................ $ 19,569 $ 48,222 $ 90,626 $ 111,503
========== ========== ========== ===========
Net income per common share............... $ 0.23 $ 0.57 $ 1.07 $ 1.33
========== ========== ========== ===========
Shares used in calculations of
net income per common share........... 84,948 85,250 84,973 83,891
========== ========== ========== ===========
<FN>
The accompanying notes, together with the Notes to Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 are an integral part of the condensed consolidated
financial statements.
</FN>
4
TERADYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended
September 29, 1996 October 1, 1995
(In thousands)
Cash flows from operating activities:
Net income........................................................ $ 90,626 $ 111,503
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................................. 37,552 31,251
Deferred income taxes.......................................... (2,453) 1,802
Product line consolidation..................................... 34,100 0
Other non-cash items, net...................................... (242) 4,021
Changes in operating assets and liabilities:
Accounts receivable....................................... 63,277 (91,248)
Inventories............................................... 1,449 (38,398)
Other assets.............................................. (435) (9,733)
Accounts payable and accruals............................. (13,108) 34,083
Income taxes payable...................................... (11,622) 22,999
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Net cash provided by operating activities............. 199,144 66,280
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Cash flows from investing activities:
Additions to property, plant and equipment........................ (48,861) (62,354)
Increase in equipment manufactured by the Company................. (10,257) (10,947)
Purchases of marketable securities................................ (215,198) (97,299)
Maturities of marketable securities............................... 187,619 106,699
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Net cash used in investing activities................. (86,697) (63,901)
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Cash flows from financing activities:
Net borrowings under short-term borrowing agreements.............. 0 5,900
Payments of long term debt........................................ (2,997) (365)
Additions to long-term debt....................................... 0 12,500
Acquisition of treasury stock..................................... (9,766) 0
Issuance of common stock under employee stock
option and stock purchase plans............................... 9,710 24,186
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Net cash flows provided (used) by financing activities (3,053) 42,221
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Increase in cash and cash equivalents.................................. 109,394 44,600
Cash and cash equivalents at beginning of period....................... 182,165 191,869
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Cash and cash equivalents at end of period............................. $ 291,559 $ 236,469
========= ==========
Supplementary disclosure of cash flow information:
Cash paid during the period for:
Interest................................................ $ 1,832 $ 2,093
Income taxes............................................ 59,395 38,498
<FN>
The accompanying notes, together with the Notes to Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 are an integral part of the condensed consolidated
financial statements.
</FN>
5
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of Teradyne, Inc. (the "Company") and its subsidiaries. All significant
intercompany balances and transactions are eliminated. Certain prior years'
amounts have been reclassified to conform to the current year presentation. On
December 1, 1995, the Company completed its acquisition of Megatest Corporation
("Megatest"), by means of a merger of M Merger Corp., a wholly owned subsidiary
of the Company, with and into Megatest. As a result of the merger, Megatest
became a wholly owned subsidiary of the Company. The Megatest combination has
been accounted for as a pooling of interests. The accompanying condensed
consolidated financial statements of the Company as of and for the nine months
ended October 1, 1995 have been restated to include the financial position and
results of operations of the combined companies.
Preparation of Financial Statements
The accompanying condensed consolidated financial statements are unaudited.
However, in the opinion of management, all adjustments (consisting only of
normal recurring accrual entries) necessary for a fair presentation of such
information have been made. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reported periods. Actual results could differ from those estimates.
B. Product Line Consolidation
During the second quarter of 1996, the Company announced a plan to
consolidate the VLSI product lines of Megatest and Teradyne. In connection with
this plan, the Company provided $34.1 million in charges, which included a $26.0
million write-down of inventory to net realizable value and $6.7 million for the
cost of identified customer obligations on VLSI systems.
6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
SELECTED RELATIONSHIPS WITHIN THE CONDENSED CONSOLIDATED
STATEMENTS OF INCOME
For the Quarters Ended For the Nine Months Ended
---------------------- -------------------------
September 29, 1996 October 1, 1995 September 29, 1996 October 1, 1995
------------------ --------------- ------------------ ---------------
(In thousands)
Net sales...................................... $ 261,671 $ 322,658 $ 930,328 $ 839,665
============= ========== ============= =============
Net income..................................... 19,569 $ 48,222 $ 90,626 $ 111,503
============= ========== ============= =============
Percentage of net sales:
Net sales................................. 100.0% 100.0% 100.0% 100.0%
Expenses:
Cost of products sold................ 62.6 53.4 57.1 54.4
Product line consolidation........... 0.0 0.0 3.7 0.0
------------- ------------ -------------- -------------
Cost of sales................... 62.6 53.4 60.8 54.4
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Engineering and development.......... 13.4 10.2 11.8 10.6
Selling and administrative........... 15.9 14.1 14.1 15.1
Interest, net........................ (1.8) (0.9) (1.2) (1.0)
------------- ------------ -------------- -------------
90.1 76.8 85.5 79.1
Income before income taxes................ 9.9 23.2 14.5 20.9
Provision for income taxes................ 2.4 8.3 4.8 7.6
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Net income................................ 7.5% 14.9% 9.7% 13.3%
============= ============ -------------- -------------
Provision for income taxes as a percentage
of income before income taxes............. 24.6% 35.7% 33.0% 36.5%
============= ============ ============== =============
<FN>
Results of Operations
- ---------------------
Sales decreased 18.9% to $261.7 million in the third quarter of 1996
compared to the third quarter of 1995. Semiconductor test systems sales and
telecommunications test systems sales decreased 30.4% and 29.7%, respectively,
while circuit-board test systems sales increased 24.0% and sales of backplane
connection systems increased 18.0%. In the first nine months of 1996, sales
increased 10.8% to $930.3 million. Net income before income taxes declined to
$25.9 million in the third quarter compared to $75.0 million in the same period
last year due to the reduction in sales. In the nine months of 1996, net income
decreased $20.9 million compared to the first nine months of 1995.
7
Incoming orders were $215.2 million in the third quarter of 1996 compared
to $312.7 million in the third quarter of 1995. The decrease in orders was
primarily driven by a slowing of semiconductor test systems orders, which
reflects current industry conditions. Circuit-board test systems orders declined
by a lesser amount. Orders for backplane connection systems rose as did
telecommunications test systems. The Company expects shipments and net income to
continue to decline in the fourth quarter of 1996 as a result of the reduction
in semiconductor test systems orders. The Company's backlog was $454.3 million
at the end of the third quarter of 1996 (adjusted for $16.2 million in order
cancellations) compared to $681.0 million at the end of the third quarter of
1995.
Cost of products sold as a percentage of sales increased from 53.4% in the
third quarter of 1995 to 62.6% in the third quarter of 1996. The increased cost
of sales percentage was due to the following factors. First, as semiconductor
test sales have fallen, the Company has not reduced the fixed and semi-variable
components of overhead costs. A significant proportion of the overhead costs are
supporting the introduction of new products. Additionally, there was an
unfavorable change in mix as sales of semiconductor test systems declined and
sales of lower margin products under government contracts and lower margin
backplane connection systems increased. In the first nine months of 1996, cost
of products sold increased to 57.1% of sales from 54.4% in the first nine months
of 1995.
As a result of the slowing of semiconductor test systems orders, the
Company in the second quarter of 1996, decided to accelerate the consolidation
of the VLSI product lines of Megatest and Teradyne. In connection with this
consolidation, the Company provided $34.1 million in charges, which included a
$26.0 million write-down of inventory to net realizable value and $6.7 million
for the cost of identified customer obligations on VLSI systems. Due to
continuing uncertainty in the semiconductor industry, the Company announced
voluntary early retirement and workforce reduction programs during the third
quarter of 1996.
Engineering and development spending was $35.0 million in the third quarter
of 1996 compared to $33.0 million in the third quarter of 1995 increasing from
10.2% of sales to 13.4% of sales. These expenses grew $2.0 million primarily as
a result of maintaining investment in new product development of semiconductor
test systems. The Company has recently announced major new products in each of
the three semiconductor test markets in which it participates. Shipments of
these new products are scheduled to begin in the first half of 1997. As a
percentage of sales, engineering and development expenses were 10.6% in the
first nine months of 1995 and 11.8% in the first nine months of 1996.
Selling and administrative expenses were 15.9% of sales in the third
quarter of 1996 and 14.1% of sales in the first nine months of 1996 compared
with 14.1% of sales in the third quarter of 1995 and 15.1% of sales in the first
nine months of 1995. Although the Company has been able to reduce the dollar
amount of these expenses during the third quarter of 1996 by 8.4%, the sales
volume has decreased by 18.9%.
Interest income increased in the third quarter of 1996 to $5.1 million from
$3.7 million in the third quarter of 1995 due to an increase in the Company's
average invested balances. Interest expense decreased from $0.7 million in the
third quarter of 1995 to $0.5 million in the third quarter of 1996.
The Company's effective income tax rate was 33.0% in the first nine months
of 1996 (which is the current estimate for the fiscal year) compared with 36.3%
for the twelve months ended 1995. The 1995 effective tax rate was driven above
the federal statutory rate of 35.0% due primarily to non-deductible merger
expenses incurred in connection with the Megatest acquisition. In 1996, the
Company expects to benefit , at an increased rate over 1995, from state and
federal business tax credits and foreign sales corporation benefits.
Liquidity and Capital Resources
- -------------------------------
The Company's cash, cash equivalents and marketable securities balance grew
$137.0 million in the first nine months of 1996. Cash flow generated from
operations was $199.1 million while $9.7 million was generated from the sale of
stock to employees under the Company's stock option and stock purchase plans.
Cash was used to fund additions to property, plant and equipment of $59.1
million in the first nine months of 1996, a decrease of $14.2 million compared
to $73.3 million in additions in the first nine months of 1995. During the third
quarter of 1996 the Company adopted a Stock Repurchase Program which authorizes
the purchase, in the open market, of up to 5,000,000 shares of its common stock
to offset shares issued under the Company's stock options plans. $9.8 million in
cash was used to acquire 635,000 shares of treasury stock in the third quarter
of 1996. In addition, $3.0 million was used in the first nine months of 1996 to
repay long-term debt obligations.
The Company believes its cash and cash equivalents balance of $291.6
million, together with other sources of funds, including marketable securities
of $121.2 million, cash flow generated from operations, and the available
borrowing capacity of $120.0 million under its line of credit agreement, will be
sufficient to meet working capital, planned capital expenditure, and stock
repurchase requirements over the next twelve months.
8
Certain Factors That May Affect Future Results
- ----------------------------------------------
From time to time, information provided by the Company, statements made by
its employees or information included in its filings with the Securities and
Exchange Commission (including this Form 10-Q, the Company's Annual Report on
Form 10-K, and the Company's Annual Report to Shareholders) may contain
statements which are not historical facts, so-called "forward looking
statements," which involve risks and uncertainties. In particular, statements in
"Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations" relating to the Company's shipment level and profitability and
the sufficiency of capital to meet working capital, planned capital expenditure,
and stock repurchase requirements may be forward looking statements. The
Company's actual future results may differ significantly from those stated in
any forward looking statements. Factors that may cause such differences include,
but are not limited to, the factors discussed below. Each of these factors, and
others, are discussed from time to time in the Company's filings with the
Securities and Exchange Commission.
The Company's future results are subject to substantial risks and
uncertainties. The Company's business and results of operations depend in
significant part upon capital expenditures of manufacturers of semiconductors,
which in turn depend upon the current and anticipated market demand for
semiconductors and products incorporating semiconductors. Historically, the
semiconductor industry has been highly cyclical with recurring periods of over
supply, which often have had a severe effect on the semiconductor industry's
demand for test equipment, including systems manufactured and marketed by the
Company. The Company believes that the markets for newer generations of
semiconductors will also be subject to similar fluctuations. In addition, any
factor adversely affecting the semiconductor industry or particular segments
within the semiconductor industry may adversely affect the Company's business,
financial condition and operating results.
The Company's quarterly and annual operating results are affected by a wide
variety of factors that could materially adversely affect revenues and
profitability, including: competitive pressures on selling prices; the timing
and cancellation of customer orders; changes in product mix; the Company's
ability to introduce new products and technologies on a timely basis;
introduction of products and technologies by the Company's competitors; market
acceptance of the Company's and its competitors' products; the level of orders
received which can be shipped in a quarter; and the timing of investments in
engineering and development. As a result of the foregoing and other factors, the
Company may experience material fluctuations in future operating results on a
quarterly or annual basis which could materially and adversely affect its
business, financial condition, operating results and stock price.
</FN>
9
SIGNATURES
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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.
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Registrant
OWEN W.ROBBINS
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Owen W. Robbins
Executive Vice President
November 15, 1996
10