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 March 29, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ______________
Commission File No. 1-6462
TERADYNE, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2272148
(State or Other Jurisdiction (I.R.S.Employer
Incorporation or Organization) Identification No.)
321 Harrison Avenue, Boston, Massachusetts 02118
(Address of principal executive offices) (Zip Code)
617-482-2700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days. Yes X No _
The number of shares outstanding of the registrant's only class of
Common Stock as of April 24, 1998 was 83,510,119 shares.
TERADYNE, INC.
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
March 29, 1998 and December 31, 1997.............................................................3
Condensed Consolidated Statements of Income -
Three Months Ended March 29, 1998 and March 30, 1997.............................................4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 29, 1998 and March 30, 1997.............................................5
Notes to Condensed Consolidated Financial Statements..................................................6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................................................8-10
TERADYNE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 29, 1998 December 31, 1997
-------------- -----------------
(Unaudited)
(In thousands)
Current assets:
Cash and cash equivalents.................................................... $ 32,911 $ 74,668
Marketable securities........................................................ 8,550 18,693
Accounts receivable.......................................................... 379,101 300,933
Inventories:
Parts.................................................................. 223,177 168,385
Assemblies in process.................................................. 106,942 103,972
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330,119 272,357
Deferred tax assets.......................................................... 40,530 40,530
Prepayments and other current assets......................................... 30,249 19,902
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Total current assets................................................... 821,460 727,083
Property, plant, and equipment, at cost:........................................ 747,528 692,832
Less: Accumulated depreciation............................................ (369,075) (349,707)
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Net property, plant, and equipment..................................... 378,453 343,125
Long-term marketable securities................................................. 122,099 156,574
Other assets.................................................................... 23,626 24,892
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Total assets........................................................... $1,345,638 $1,251,674
========== ==========
LIABILITIES
Current liabilities:
Notes payable - banks........................................................ $ 6,663 $ 6,632
Current portion of long-term debt............................................ 1,829 1,807
Accounts payable............................................................. 101,016 58,685
Accrued employees' compensation and withholdings............................. 54,075 77,299
Unearned service revenue and customer advances............................... 50,563 49,122
Other accrued liabilities.................................................... 76,962 65,642
Income taxes payable......................................................... 39,137 18,786
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Total current liabilities.............................................. 330,245 277,973
Deferred tax liabilities........................................................ 23,429 23,429
Long-term debt.................................................................. 12,716 13,141
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Total liabilities...................................................... 366,390 314,543
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SHAREHOLDERS' EQUITY
Common stock $0.125 par value; 250,000 shares authorized;
83,462 and 83,303 shares issued and outstanding after deduction of reacquired
shares in 1998 and 1997, respectively........................................ 10,432 10,413
Additional paid-in capital...................................................... 315,442 322,985
Retained earnings............................................................... 653,374 603,733
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Total shareholders' equity............................................. 979,248 937,131
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Total liabilities and shareholders' equity............................. $1,345,638 $1,251,674
========== ==========
<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, 1997 are an integral part of the condensed consolidated
financial statements.
</FN>
TERADYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three Months Ended
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March 29, 1998 March 30, 1997
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(In thousands, except per share amounts)
Net sales..................................................... $ 431,569 $ 248,302
Expenses:
Cost of sales............................................ 251,947 152,935
Engineering and development.............................. 48,922 33,308
Selling and administrative............................... 58,713 40,783
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359,582 227,026
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Income from operations........................................ 71,987 21,276
Other income (expense):
Interest income........................................... 3,473 5,665
Interest expense.......................................... (247) (541)
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Income before income taxes.................................... 75,213 26,400
Provision for income taxes.................................... 25,572 9,240
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Net income.................................................... $ 49,641 $ 17,160
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Net income per common share - basic........................... $ 0.59 $ 0.21
========== ==========
Net income per common share - diluted......................... $ 0.58 $ 0.20
========== ==========
Shares used in calculations of net income
per common share - basic.................................. 83,651 83,309
========== ==========
Shares used in calculations of net income
per common share - diluted................................ 85,928 85,810
========== ==========
<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, 1997 are an integral part of the condensed consolidated
financial statements.
</FN>
TERADYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended
--------------------------
March 29, 1998 March 30, 1997
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(In thousands)
Cash flows from operating activities:
Net income........................................................ $ 49,641 $ 17,160
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation................................................... 16,852 14,344
Amortization................................................... 178 330
Other non-cash items, net...................................... (3,760) (572)
Changes in operating assets and liabilities:
Accounts receivable....................................... (78,168) (14,338)
Inventories............................................... (57,762) (10,668)
Other assets.............................................. (9,259) 664
Accounts payable and accruals............................. 31,868 (28,313)
Income taxes payable...................................... 21,463 6,297
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Net cash (used) by operating activities...... (28,947) (15,096)
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Cash flows from investing activities:
Additions to property, plant and equipment........................ (31,716) (11,194)
Increase in equipment manufactured by the Company................. (16,661) (860)
Purchases of available-for-sale marketable securities............. (28,489) (55,070)
Maturities of available-for-sale marketable securities............ 73,107 17,513
Purchases of held-to-maturity marketable securities............... (84,983)
Maturities of held-to-maturity marketable securities... 34,501
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Net cash (used) by investing activities................. (3,759) (100,093)
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Cash flows from financing activities:
Payments of long term debt........................................ (415) (420)
Acquisition of treasury stock..................................... (22,256) (15,415)
Issuance of common stock under employee stock
option and stock purchase plans............................... 13,620 21,261
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Net cash flows provided (used) by financing activities (9,051) 5,426
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Decrease in cash and cash equivalents.................................. (41,757) (109,763)
Cash and cash equivalents at beginning of period....................... 74,668 201,452
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Cash and cash equivalents at end of period............................. $ 32,911 $ 91,689
============ ============
Supplementary disclosure of cash flow information:
Cash paid during the period for:
Interest................................................ $ 476 $ 732
Income taxes............................................ 10,640 2,409
<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, 1997 are an integral part of the condensed consolidated
financial statements.
</FN>
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. The Company
- --------------
Teradyne, Inc. (the "Company") designs, manufactures, markets, and services
electronic test systems and related software used by component manufacturers in
the design and testing of their products and by electronic equipment
manufacturers for the design and testing of circuit boards and other assemblies.
Manufacturers use such systems and software to increase product performance, to
improve product quality, to shorten time to market, to enhance
manufacturability, to conserve labor costs, and to increase production yields.
The Company's electronic systems are also used by telephone operating companies
for the testing and maintenance of their subscriber telephone lines and related
equipment.
The Company also manufactures backplane connection systems, principally for
the computer, telecommunications, and military/aerospace industries. A backplane
is an assembly, into which printed circuit boards are inserted, that provides
for the interconnection of electrical signals between the circuit boards and the
other elements of the system.
B. Accounting Policies
- ----------------------
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated. The year-end condensed balance sheet data were derived
from audited financial statements, but do not include all disclosures required
by generally accepted accounting principles.
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.
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
C. Recently Issued Accounting Standards
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In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 131, "Disclosure about
Segments of an Enterprise and Related Information," which changes the manner in
which public companies report information about their operating segments. SFAS
No. 131, which is based on the management approach to segment reporting,
establishes requirements to report selected segment information quarterly and to
report entity-wide disclosures about products and services, major customers, and
the geographic locations in which the entity holds assets and reports revenue.
Management is currently evaluating the effects of this change on its reporting
of segment information. The Company will adopt SFAS No. 131 for its fiscal year
ending December 31, 1998.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which sets forth increased
disclosure requirements for public entities. SFAS No. 132 only affects
disclosure issues and does not change any existing measurement or recognition
provisions previously required. The statement is effective for fiscal years
beginning after December 15, 1997. Reclassification for earlier periods is
required for comparative purposes. Management is currently evaluating the
effects of this change on its reporting of pensions and other postretirement
benefits. The Company will adopt SFAS No. 132 for its fiscal year ending
December 31, 1998.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Internal Use Software," which provides
guidance on the accounting for the costs of software developed or obtained for
internal use. SOP 98-1 is effective for fiscal years beginning after December
15, 1998. Management does not expect the statement to have a material impact on
its financial position or results of operations.
D. Net Income per Common Share
- ------------------------------
The following table sets forth the computation of basic and diluted net
income per common share (in thousands, except per share amounts):
For the Three Months Ended
--------------------------
March 29, 1998 March 30, 1997
-------------- --------------
Net Income................................................ $ 49,641 $ 17,160
======== ========
Shares used in net income per common share - basic........ 83,651 83,309
Effect of dilutive securities:.......................
Employee and director stock options.............. 2,188 2,432
Employee stock purchase rights................... 89 69
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Dilutive potential common shares..................... 2,277 2,501
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Shares used in net income per common share - diluted...... 85,928 85,810
======== ========
Net income per common share - basic....................... $ 0.59 $ 0.21
======== ========
Net income per common share - diluted..................... $ 0.58 $ 0.20
======== ========
<FN>
Options to purchase 100,828 and 64,195 shares of common stock were outstanding
during the three months ended March 29, 1998 and March 30, 1997, respectively,
but were not included in the calculation of diluted net income per common share
because the options' price was greater than the average market price of the
common shares during those periods.
</FN>
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 Three Months Ended
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March 29, 1998 March 30, 1997
-------------- --------------
(In thousands)
Net sales.................................................. $ 431,569 $ 248,302
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Net income................................................. $ 49,641 $ 17,160
========== ==========
Percentage of net sales:
Net sales............................................. 100% 100%
Expenses:
Cost of sales..................................... 58 62
Engineering and development....................... 11 13
Selling and administrative........................ 14 16
Interest, net..................................... (1) (2)
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82 89
Income before income taxes............................ 18 11
Provision for income taxes............................ 6 4
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Net income............................................ 12% 7%
========== ==========
Provision for income taxes as a percentage of
income before taxes................................... 34% 35%
========== ==========
Results of Operations
- ---------------------
Sales of $431.6 million in the first quarter of 1998 were $183.3 million or
74% above those of the first quarter of 1997. The increase in sales was
primarily due to a 116% increase in shipments of semiconductor test systems
following increased orders during 1997. As a result of the increase in sales in
the first quarter of 1998 compared to 1997, income before income taxes increased
$32.5 million to $49.6 million.
Incoming orders were $340.6 million in the first quarter of 1998 compared
to $335.6 million in the first quarter of 1997. Orders for backplane connection
systems increased, while semiconductor and circuit board test systems orders
declined. The Company's backlog was $771.6 million at the end of the first
quarter of 1998 compared with $603.7 million at the end of first quarter of
1997.
Cost of products sold as a percentage of sales decreased from 62% of sales
in the first quarter of 1997 to 58% of sales in the first quarter of 1998 as
sales volume increased while certain overhead components of cost of products
sold did not increase at the same rate. In addition, there was a favorable
change in mix as sales of backplane connection systems and circuit board test
systems, whose product margins are generally lower than those of semiconductor
test systems, were lower as a percentage of total Company sales.
Engineering and development expenses, as a percentage of sales, decreased
from 13% in the first quarter of 1997 to 11% in the first quarter of 1998.
Selling and administrative expenses, as a percentage of sales, decreased from
16% in the first quarter of 1997 to 14% in the first quarter of 1998.
Engineering and development and selling and administrative spending increased
$15.6 million and $17.9 million, respectively, in the first quarter of 1998 over
the same period in 1997. These spending increases were primarily related to the
design, introduction and marketing of new semiconductor test systems products.
The Company's effective income tax rate was 34% in the first three months
of 1998, the same rate as fiscal year 1997.
Liquidity and Capital Resources
- -------------------------------
The Company's cash, cash equivalents, and marketable securities balance
decreased $86.4 million in the first three months of 1998. Cash used by
operations was $28.9 million during this period primarily due to increases in
accounts receivable and inventory offset somewhat by an increase in current
liabilities. Accounts receivable increased $78.2 million in the first three
months of 1998 due to a $39.9 million increase in sales over the fourth quarter
of 1997 and as the Company ramped the shipment of new products, a greater
portion of the shipments occurred in the last month of the quarter. Inventories
increased $57.8 million in the first quarter of 1998 in order to support the
Company's shipments of new products. Backlog at the end of the first quarter of
1998 includes a substantial number of the Company's new products, which require
longer manufacturing and test cycle times. Cash was used to fund additions to
property, plant and equipment of $48.4 million in the first three months of
1998. Property, plant and equipment expenditures relate primarily to the
expansion of production capacity.
The Company purchased 0.6 million shares of the Company's common stock for
$22.3 million under the Company's stock buyback plan. Cash of $13.6 million was
generated in the first quarter of 1998 from the sale of stock to employees under
the Company's stock option and stock purchase plans.
The Company believes its cash, cash equivalents and marketable securities
balance of $163.6 million, together with other sources of funds, including the
available borrowing capacity of $120.0 million under its line of credit
agreement, will be sufficient to meet working capital and capital expenditure
requirements in 1998.
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 of
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 sufficiency of capital to meet working capital
and planned capital expenditure, 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. 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. The most recent downturn, which
occurred in 1996, contributed to a 37% decline in semiconductor test system
orders. There can be no assurance that any future increase in semiconductor test
systems bookings for a calendar quarter will be sustained in subsequent
quarters. 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.
Also, the Company relies on certain intellectual property protections to
preserve its intellectual property rights, including patents, copyrights and
trade secrets. While the Company believes that its patents, copyrights and trade
secrets have value, in general no single one is in itself essential. The Company
believes that its technological position depends primarily on the technical
competence and creative ability of its research and development personnel. From
time to time the Company is notified that it may be in violation of patents held
by others. An assertion of patent infringement against the Company, if
successful, could have a material adverse effect on the Company or could require
a lengthy and expensive defense which could adversely affect the Company's
operating results.
The development of new technologies, commercialization of those
technologies into products, and market acceptance and customer demand for those
products is critical to the Company's success. Successful product development
and introduction depends upon a number of factors, including new product
selection, development of competitive products by competitors, timely and
efficient completion of product design, timely and efficient implementation of
manufacturing and assembly processes and product performance at customer
locations.
The Company faces substantial competition throughout the world, primarily
from electronic test systems manufacturers located in the United States, Europe
and Japan, as well as internal test equipment groups at several of the Company's
customers. Some of these competitors have substantially greater financial and
other resources to pursue engineering, manufacturing, marketing and distribution
of their products. Certain of the Company's competitors have introduced or
announced new products with certain performance characteristics which may be
considered equal or superior to those currently offered by the Company. The
Company expects its competitors to continue to improve the performance of their
current products and to introduce new products or new technologies that provide
improved cost of ownership and performance characteristics. New product
introductions by competitors could cause a decline in sales or loss of market
acceptance of the Company's existing products. Moreover, increased competitive
pressure could lead to intensified price based competition, which could
materially adversely affect the Company's business, financial condition and
results of operations.
The Company derives a significant portion of its total revenue from
customers outside the United States. International sales are subject to
significant risks, including unexpected changes in legal and regulatory
requirements and policy changes affecting the Company's markets, changes in
tariffs, exchange rates and other barriers, political and economic instability,
difficulties in accounts receivable collection, difficulties in managing
distributors and representatives, difficulties in staffing and managing
international operations, difficulties in protecting the Company's intellectual
property and potentially adverse tax consequences.
In the recent past there has been significant economic instability in
several countries in Asia. Continued economic instability would increase the
likelihood of either a direct or indirect adverse impact on the Company's future
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; fulfilling backlog on
a timely basis; reliance on sole source suppliers; potential retrofit costs; the
level of orders received which can be shipped in a quarter; and the timing of
investments in engineering and development. In particular, the Company has
introduced a significant number of new, complex test systems in 1996 and 1997,
and there can be no assurance that the Company will not experience delays in
shipment of such products or that such products will achieve customer
acceptance. As a result of the foregoing and other factors, 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.
Many computer systems experience problems handling dates beyond the year
1999. Therefore, some computer hardware and software will need to be modified
prior to the year 2000 in order to remain functional. The Company is assessing
both the internal readiness of its computer systems and the compliance of its
computer products and software sold to customers for handling the year 2000. The
Company expects to implement successfully the systems and programming changes
necessary to address year 2000 issues, and does not believe that the cost of
such actions will have a material effect on the Company's results of operations
or financial condition. There can be no assurance, however, that there will not
be a delay in, or increased costs associated with, the implementation of such
changes, and the Company's inability to implement such changes could have an
adverse effect on future results of operations.
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.
------------------------------
Registrant
/s/ JEFFREY R. HOTCHKISS
------------------------------
Jeffrey R. Hotchkiss
Vice President and
Chief Financial Officer
May 13, 1998