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 September 29, 2002
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 (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, 2002 was 183,081,406 shares.
1
TERADYNE, INC.
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
September 29, 2002 and December 31, 2001 ................................. 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 29, 2002 and September 30, 2001 .... 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 29, 2002 and September 30, 2001 .............. 5
Notes to Condensed Consolidated Financial Statements ........................ 6-19
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............................ 20-31
Item 3. Quantitative and Qualitative Disclosures about Market Risk .................. 31
Item 4. Controls and Procedures ..................................................... 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................................... 32
Item 6. Exhibits and Reports on Form 8-K ............................................ 33
Exhibit Index ....................................................................... 33
2
TERADYNE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 29, 2002 December 31, 2001
------------------ -----------------
(In thousands)
Current assets:
Cash and cash equivalents ............................................. $ 289,356 $ 317,591
Marketable securities ................................................. 31,512 50,096
Accounts receivable ................................................... 223,283 169,630
Income tax receivable and prepaid amounts ............................. 4,718 97,000
Inventories:
Parts ................................................................. 196,364 262,520
Assemblies in process ................................................. 121,744 132,097
Finished goods ........................................................ 8,467 12,372
-------------- -------------
326,575 406,989
Deferred tax assets ................................................... 116,148 141,013
Prepayments and other current assets .................................. 29,056 24,703
-------------- -------------
Total current assets ...................................................... 1,020,648 1,207,022
Property, plant, and equipment, at cost: 1,441,062 1,444,529
Less: accumulated depreciation. ....................................... (703,973) (608,963)
-------------- -------------
Net property, plant, and equipment ............................... 737,089 835,566
Marketable securities ..................................................... 222,504 218,544
Deferred tax assets - long-term ........................................... 164,404 4,313
Goodwill .................................................................. 118,653 190,276
Other assets .............................................................. 74,571 86,670
-------------- -------------
Total assets ..................................................... $ 2,337,869 $ 2,542,391
============== =============
LIABILITIES
Current liabilities:
Notes payable - banks ................................................. $ 6,949 $ 6,557
Current portion of long-term debt ..................................... 1,338 1,263
Accounts payable ...................................................... 84,218 59,761
Accrued employees' compensation and withholdings ...................... 108,006 98,519
Deferred revenue and customer advances ................................ 36,554 52,220
Other accrued liabilities ............................................. 77,167 76,519
Income taxes payable .................................................. 6,855 1,292
-------------- -------------
Total current liabilities ........................................ 321,087 296,131
Long-term other accrued liabilities ....................................... 47,638 30,194
Long-term debt ............................................................ 450,871 451,682
Commitments and contingencies (Note L) ....................................
-------------- -------------
Total liabilities ................................................ 819,596 778,007
-------------- -------------
SHAREHOLDERS' EQUITY
Common stock, $0.125 par value, 1,000,000 shares authorized, 183,082
and 181,119 net shares issued and outstanding at September 29, 2002 and
December 31, 2001, respectively ......................................... 22,885 22,640
Additional paid-in capital ................................................ 648,237 600,541
Accumulated other comprehensive loss ...................................... (7,092) (7,742)
Retained earnings ......................................................... 854,243 1,148,945
-------------- -------------
Total shareholders' equity ....................................... 1,518,273 1,764,384
-------------- -------------
Total liabilities and shareholders' equity ....................... $ 2,337,869 $ 2,542,391
============== =============
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, 2001 are an integral part of the condensed consolidated financial
statements.
3
TERADYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended For the Nine Months Ended
-------------------------- -------------------------
September 29, 2002 September 30, 2001 September 29, 2002 September 30, 2001
------------------ ------------------ ------------------ ------------------
(In thousands, except per share amounts)
Net sales ...................................... $ 330,732 $ 249,355 $ 888,638 $ 1,220,367
Expenses:
Cost of sales ............................. 256,231 246,512 712,153 912,948
Engineering and development ............... 78,002 64,667 219,626 219,266
Selling and administrative ................ 74,318 59,928 224,757 199,122
Restructuring and asset impairments ....... 138,883 48,122 144,968 57,183
------------- ------------- ------------- --------------
547,434 419,229 1,301,504 1,388,519
------------- ------------- ------------- --------------
Loss from operations ........................... (216,702) (169,874) (412,866) (168,152)
Interest income ............................ 4,357 4,553 13,087 15,896
Interest expense ........................... (5,447) (286) (16,171) (826)
Other income and expense, net .............. 1,264 (1,914) (373) 8,524
------------- ------------- ------------- --------------
Loss before taxes .............................. (216,528) (167,521) (416,323) (144,558)
Benefit from income taxes ...................... (49,695) (64,117) (121,621) (54,932)
------------- ------------- ------------- --------------
Net loss ....................................... $ (166,833) $ (103,404) $ (294,702) $ (89,626)
============= ============= ============= ==============
Net loss per common share - basic .............. $ (0.91) $ (0.59) $ (1.61) $ (0.51)
============= ============= ============= ==============
Net loss per common share - diluted ............ $ (0.91) $ (0.59) $ (1.61) $ (0.51)
============= ============= ============= ==============
Shares used in calculations of net loss
per common share - basic ................... 183,063 175,689 182,776 174,673
============= ============= ============= ==============
Shares used in calculations of net loss
per common share - diluted ................. 183,063 175,689 182,776 174,673
============= ============= ============= ==============
================================================================================
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, 2001 are an integral part of the condensed consolidated financial
statements.
4
TERADYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended
-------------------------
September 29, 2002 September 30, 2001
------------------ ------------------
(In thousands)
Cash flows from operating activities:
Net loss ................................................................ $ (294,702) $ (89,626)
Adjustments to reconcile net loss to net cash used for operating
activities:
Depreciation ......................................................... 109,979 96,116
Amortization ......................................................... 6,043 4,937
Impairment of long-lived assets ...................................... 119,864 28,548
Gain on sale of business ............................................. - (14,779)
Provision for doubtful accounts ...................................... 1,361 -
Deferred income tax (benefit) provision .............................. (135,226) 22,062
Other non-cash items, net ............................................ 12,242 4,747
Changes in operating assets and liabilities, net of businesses sold
and acquired:
Accounts receivable ............................................. (55,014) 228,012
Inventories ..................................................... 81,250 94,447
Other assets .................................................... 84,233 (63,124)
Accounts payable and accruals ................................... 37,532 (298,386)
Income taxes payable ............................................ 12,882 (21,817)
------------ -------------
Net cash used for operating activities ...................... (19,556) (8,863)
------------ -------------
Cash flows from investing activities:
Additions to property, plant and equipment .............................. (39,054) (176,016)
Increase in equipment manufactured by Teradyne .......................... (20,084) (42,210)
Cash paid for acquisition of PCI assets.................................. (8,392) -
Proceeds from the sale of business ...................................... - 26,250
Purchases of available-for-sale marketable securities ................... (192,348) (128,509)
Maturities of available-for-sale marketable securities .................. 181,033 117,824
Purchases of held-to-maturity marketable securities ..................... (109,811) (1,407)
Maturities of held-to-maturity marketable securities .................... 139,697 30,477
------------ -------------
Net cash used for investing activities .......................... (48,959) (173,591)
------------ -------------
Cash flows from financing activities:
Payments of long-term debt .............................................. (344) (513)
Issuance of common stock under employee stock
option and stock purchase plans ..................................... 40,624 53,306
------------ -------------
Net cash flows provided by financing activities ............. 40,280 52,793
------------ -------------
Decrease in cash and cash equivalents ........................................ (28,235) (129,661)
Cash and cash equivalents at beginning of period ............................. 317,591 242,421
------------ -------------
Cash and cash equivalents at end of period ................................... $ 289,356 $ 112,760
============ =============
Supplementary disclosure of cash flow information:
Cash paid (received) during the period for:
Interest ...................................................... $ 11,173 $ 718
Income taxes .................................................. $ (86,786) $ 32,484
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, 2001 are an integral part of the condensed consolidated financial
statements.
5
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. Teradyne, Inc.
Teradyne, Inc. is one of the world's leading suppliers of automatic test
equipment, a leading provider of high performance interconnection systems and
an emerging provider of electronic manufacturing services.
Teradyne's automatic test equipment products include systems that:
- test semiconductors ("Semiconductor Test Systems");
- test and inspect circuit-boards ("Circuit Board Test and Inspection
Systems");
- diagnose and test automotive electronics systems ("Diagnostic
Solutions"); and
- test high speed voice and data communication 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
- electronic manufacturing services of assemblies that include Teradyne
backplanes and connectors.
Broadband Test Systems and Diagnostic Solutions have been combined into
"Other Test Systems" for purposes of disclosing Teradyne's reportable segments.
B. Risks and Uncertainties
Teradyne's future results of operations involve a number of risks and
uncertainties. These factors include, but are not limited to, the slowdown in
economies worldwide, the current and anticipated market for electronics, risks
associated with any measures Teradyne takes to address the current slowdown in
the market, failure to adequately protect Teradyne's intellectual property
rights, failure to develop new technologies and customers' failure to accept new
products, risks associated with acquisitions and divestitures, securities class
action litigation due to past or future stock activity, competition, including
new product introductions from Teradyne's competitors and competitive pricing
pressures, risks of operating internationally, and risks associated with
attracting and retaining key employees, risks if Teradyne's suppliers do not
meet Teradyne's product or delivery requirements, risks associated with, among
other things, obligations and potential liabilities under environmental
regulations, Teradyne's debt service obligations with respect to its sale in
2001 of convertible senior notes and a mortgage financing completed in 2001 with
respect to certain of its owned real estate assets, provisions of Teradyne's
charter and by-laws and Massachusetts law that make a takeover of Teradyne more
difficult, timing of customer orders and any deferral or cancellation of orders
previously received, reliance on sole source suppliers, potential retrofit
costs, and the timing of investments in engineering and development.
At present, Teradyne can predict neither the duration of the current slump
nor when or if the situation is likely to materially improve. In the absence of
significant improvement, orders could remain low or decline further, and the
amount of Teradyne's deferred tax assets, inventory, and certain long-lived
assets considered realizable could be significantly reduced.
C. Accounting Policies
Basis of Presentation
The condensed consolidated interim financial statements include the
accounts of Teradyne and its subsidiaries. All significant intercompany balances
and transactions have been eliminated. The year-end condensed consolidated
balance sheet data were derived from audited financial statements, but do not
include all disclosures required by generally accepted accounting principles.
On October 26, 2001 Teradyne completed its acquisition of GenRad, Inc. of
Westford, MA, a leading manufacturer of electronic automatic test equipment,
related software and diagnostic solutions. The GenRad business has been made
part of the Circuit Board Test and Inspection Systems operating segment
excluding the Diagnostic Solutions business. Diagnostic Solutions has been made
part of the Other Test Systems operating segment. GenRad activity is reflected
in Teradyne's results of operations since the acquisition date.
6
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
C. Accounting Policies - (Continued)
Reclassifications
Certain costs in the third quarter of 2001 and first nine months of 2002
and 2001 have been reclassified from cost of sales, engineering and development,
and selling and administrative into restructuring and asset impairments.
Teradyne is reclassifying these costs in an attempt to better summarize
restructuring and asset impairments through a one line presentation. These
reclassified costs in 2001 consist primarily of impaired equipment manufactured
by Teradyne used in manufacturing and engineering and development relating to
the discontinuance of the Flash 750 product line in the Semiconductor Test
Systems segment of $6.0 million and to certain impaired manufacturing assets in
the Connections Systems segment of $7.6 million. Reclassifications for 2002
include certain impaired manufacturing assets in the Semiconductor Test Systems
segment of $0.8 million and selling and administrative workforce reduction costs
of $0.2 million. The impact of the reclassifications is detailed below:
Three Months Ended Nine Months Ended Nine Months Ended
September 30, 2001 September 29, 2002 September 30, 2001
------------------ ------------------ ------------------
Increase/(Decrease)
(in thousands)
Cost of sales ........................ $(12,308) $(824) $(12,308)
Engineering and development .......... (1,339) - (1,339)
Selling and administrative ........... - (219) -
Restructuring and asset impairments .. 13,647 1,043 13,647
Preparation of Financial Statements
The accompanying condensed consolidated interim financial statements are
unaudited. However, in the opinion of management, all adjustments (consisting
only of normal recurring accrual entries) necessary for a fair statement of the
results for the interim periods have been made. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the 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.
Other Comprehensive Loss
The components of comprehensive loss are as follows (in thousands):
For the Three Months Ended
--------------------------
September 29, 2002 September 30, 2001
------------------ ------------------
Net loss ....................................... $ (166,833) $ (103,404)
Foreign currency translation adjustments ....... (131) -
Unrealized gain on marketable securities,
net of applicable tax of $1,629 and $434 ..... 2,896 845
Reclassification adjustment for loss on
marketable securities included in net loss
net of applicable tax of $442................. 942 -
----------- ----------
Comprehensive loss ............................. $ (163,126) $ (102,559)
=========== ==========
7
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
C. Accounting Policies - (Continued)
For the Nine Months Ended
-------------------------
September 29, 2002 September 30, 2001
------------------ ------------------
Net loss ....................................... $ (294,702) $ (89,626)
Foreign currency translation adjustments ....... (131) -
Unrealized (loss) gain on marketable
securities, net of applicable tax of
($87) and $1,474 ............................ (161) 2,405
Reclassification adjustment for loss on
marketable securities included in net loss
net of applicable tax of $442................. 942 -
---------- ---------
Comprehensive loss ............................. $ (294,052) $ (87,221)
========== =========
D. Recently Issued Accounting Pronouncements
In August 2001, FASB issued SFAS 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets." SFAS 143 provides the
accounting requirements for retirement obligations associated with tangible
long-lived assets. SFAS 143 is effective for financial statements for fiscal
years beginning after June 15, 2002. Teradyne has determined that SFAS 143 will
not have an impact on its financial position and results of operations.
In October 2001, FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 requires one method of accounting for
long-lived assets disposed of by sale. SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001. Teradyne
adopted SFAS 144 effective January 1, 2002. The initial adoption of SFAS 144 did
not have an impact on Teradyne's financial position or results of operations.
In May 2002, FASB issued SFAS 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of
April 2002." SFAS 145 rescinds FASB Statement No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," and an amendment of that statement, FASB Statement
No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements."
SFAS 145 also rescinds FASB Statement No. 44, "Accounting for Intangible Assets
of Motor Carriers." SFAS 145 amends FASB Statement No. 13, "Accounting for
Leases," to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. SFAS 145 also amends other existing authoritative pronouncements
to make various technical corrections, clarify meanings, or describe their
applicability under changed conditions. SFAS 145 is effective for financial
statements for fiscal years beginning after May 15, 2002. Teradyne has
determined that SFAS 145 will not have an impact on its financial position and
results of operations.
In July 2002, FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS 146 requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan and nullifies Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS 146 is to be applied prospectively to
exit or disposal activities initiated after December 31, 2002. Teradyne does
not expect the adoption of SFAS 146 to have a material impact on its financial
position and results of operations.
E. Goodwill and Intangible Assets
In July 2001, FASB issued SFAS 142, "Goodwill and Other Intangible Assets."
SFAS 142 requires, among other things, the discontinuance of goodwill
amortization and includes provisions for the reclassification of certain
existing recognized intangibles as goodwill, reassessment of the useful lives of
existing recognized intangibles, and reclassification of certain intangibles out
of previously reported goodwill.
8
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
E. Goodwill and Intangible Assets - (Continued)
Intangible assets
Teradyne adopted SFAS 142 on January 1, 2002. In accordance with this
statement, Teradyne reassessed the classification of its goodwill and intangible
assets. This analysis, which was completed during the quarter ended March 31,
2002, resulted in the reclassification of workforce related intangibles of $0.4
million to goodwill. Also, in accordance with this statement, Teradyne
reassessed the useful lives of its amortized intangible assets and determined
the lives were appropriate.
Amortized intangible assets consist of the following:
September 29, 2002
(in thousands)
Gross Net Weighted
Carrying Accumulated Carrying Average
Amount Amortization Amount Useful Life
------ ------------ -------- -----------
Completed technology ........................... $35,600 $ 4,610 $30,990 7.2 years
Service and software maintenance contracts
and customer relationships ................... 8,993 3,587 5,406 5.8 years
Tradenames and trademarks ...................... 3,800 436 3,364 8.0 years
------- ------- -------
Total intangible assets ........................ $48,393 $ 8,633 $39,760 7.0 years
======= ======= =======
Aggregate amortization expense for the three and nine months ended September 30,
2001 was $0.4 million and $1.1 million, respectively. Aggregate amortization
expense for the three and nine months ended September 29, 2002 was $1.9 million
and $5.7 million, respectively. Estimated amortization expense for each of the
five succeeding fiscal years is as follows (in thousands):
Year Amount
---- ------
2002 $7,406
2003 6,694
2004 6,175
2005 6,175
2006 6,175
Goodwill
Teradyne has identified two reporting units with goodwill, Connection
Systems and Circuit Board Test and Inspection Systems, which are also reportable
segments. The changes in the carrying amounts of goodwill during the nine months
ended September 29, 2002 are as follows:
Circuit Board
Test and
Connection Inspection
Systems Systems Total
------- ------- -----
(in thousands)
Balance at December 31, 2001 .......... $ 48,649 $141,627 $190,276
Employee severance .................... - 3,437 3,437
Reclassification of workforce ......... 407 - 407
-------- -------- --------
Balance at March 31, 2002 ............. $ 49,056 $145,064 $194,120
Employee severance .................... - 852 852
-------- -------- --------
Balance at June 30, 2002 .............. $ 49,056 $145,916 $194,972
Facility restructuring plan ........... - 2,167 2,167
Goodwill impairment ................... - (78,486) (78,486)
-------- -------- --------
Balance at September 29, 2002 ......... $ 49,056 $ 69,597 $118,653
======== ======== ========
9
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
E. Goodwill and Intangible Assets - (Continued)
During the third quarter of 2002, Teradyne recorded $2.2 million of
additional goodwill relating to the completion of facility exit plans for
GenRad operating locations.
SFAS 142 requires Teradyne to complete a transitional goodwill impairment
test six months from the date of adoption. Following the adoption of SFAS 142,
Teradyne completed an initial impairment test, during the first quarter of 2002,
based on the comparison of the fair value of the reporting units with their
respective carrying values as of January 1, 2002. Teradyne concluded that there
was no impairment in either the Circuit Board Test and Inspection Systems
segment or the Connection Systems segment as of adoption. As of January 1, 2002,
Teradyne ceased the amortization of goodwill. The following is the pro-forma
effect on net loss and net loss per share had SFAS 142 been in effect for the
three and nine months ended September 30, 2001 (in thousands, except per share
amounts):
Three Months Nine Months
Ended Ended
September 30, 2001 September 30, 2001
------------------ ------------------
Net loss .................................... $(103,404) $(89,626)
Add back: Impact of goodwill amortization ... 1,097 3,418
--------- --------
Adjusted net loss ........................... $(102,307) $(86,208)
========= ========
Net loss per share - basic .................. $(0.59) $(0.51)
Add back: Impact of goodwill amortization ... 0.01 0.02
--------- --------
Adjusted net loss per share - basic ......... $(0.58) $(0.49)
========= ========
Net loss per share - diluted ................ $(0.59) $(0.51)
Add back: Impact of goodwill amortization ... 0.01 0.02
--------- --------
Adjusted net loss per share - diluted ....... $(0.58) $(0.49)
========= ========
SFAS 142 provides that goodwill of a reporting unit be tested for
impairment on an annual basis and between annual tests in certain circumstances
including a significant adverse change in the business outlook. During the third
quarter of 2002, as a result of significant change in the business outlook,
Teradyne retested the goodwill related to the Circuit Board Test and Inspection
segment for impairment as of September 29, 2002. Teradyne concluded that the
carrying value of the assets and liabilities associated with the Circuit Board
Test and Inspection Systems segment exceeded its fair value. As of September 29,
2002, Teradyne recognized a $78.5 million goodwill impairment charge. The
impairment charge was measured by comparing the implied fair value of the
goodwill associated with the Circuit Board Test and Inspection Systems segment
to its carrying value. The fair value of the segment was estimated using the
expected present value of future cash flows.
F. Acquisitions and Divestitures
On October 26, 2001 Teradyne completed its acquisition of GenRad, Inc.
of Westford, MA, a leading manufacturer of electronic automatic test equipment,
related software and diagnostic solutions. In connection with its restructuring
plan for GenRad in the first and second quarters of 2002, Teradyne recorded
involuntary employee termination costs of $3.4 million and $0.9 million,
respectively. During the third quarter of 2002, Teradyne recorded $2.2 million
of additional goodwill relating to the completion of facility exit plans for
GenRad operating locations.
10
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
F. Acquisitions and Divestitures - (Continued)
The table below summarizes activity relating to GenRad employee
termination and facility closure costs (in thousands):
Severance Facilities
and Benefits Related Total
------------ ------- -----
Balance at December 31, 2001 ........................... $1,006 $ - $1,006
First quarter, 2002 employee termination costs ......... 3,437 - 3,437
Cash payments .......................................... (2,288) - (2,288)
------ -------- ------
Balance at March 31, 2002 .............................. $2,155 $ - $2,155
Second quarter, 2002 employee termination costs ........ 852 - 852
Cash payments .......................................... (660) - (660)
------ -------- ------
Balance at June 30, 2002 ............................... $2,347 $ - $2,347
Third quarter, 2002 leased facility costs .............. - 2,167 2,167
Cash payments .......................................... (297) (227) (524)
------ -------- ------
Balance at September 29, 2002 .......................... $2,050 $ 1,940 $3,990
====== ======== ======
On August 9, 2002, Teradyne acquired certain assets of Precision Concepts
Inc. ("PCI"), of Winston-Salem, North Carolina through a bankruptcy court
sanctioned sale of assets. PCI was a sole source supplier of certain components
to Connection Systems. The acquisition is part of the Connection Systems
operating segment. The cost of the acquired manufacturing assets and inventory
was $8.4 million in cash. There is no ongoing customer revenue stream that was
acquired. The operations will be used to satisfy internal demand in the
Connection Systems segment. Based on the purchase price allocation, the
following table summarizes the fair values of the assets acquired on August 9,
2002:
(in thousands)
Consideration:
Cash paid ..................... $8,392
------
Total consideration ........... $8,392
======
Assets acquired:
Inventories ................... $ 838
Property, plant, & equipment .. 7,554
------
Total assets acquired ......... $8,392
======
On June 22, 2001, Teradyne sold its aerospace and defense connector and
backplane business to Amphenol Corporation of Wallingford, Connecticut for cash
proceeds of $26.3 million. This transaction resulted in a pre-tax gain of $14.8
million which has been recorded in other income and expense, net.
11
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
G. Net Loss per Common Share
The following table sets forth the computation of basic and diluted net
loss per common share (in thousands, except per share amounts):
For the Three Months Ended For the Nine Months Ended
-------------------------- -------------------------
September 29, September 30, September 29, September 30,
------------- ------------- ------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Net loss .............................................. $(166,833) $(103,404) $ (294,702) $ (89,626)
========= ========= ========== =========
Shares used in net loss per common
share - basic ....................................... 183,063 175,689 182,776 174,673
Effect of dilutive securities:
Employee and director stock options .......... - - - -
Employee stock purchase rights ............... - - - -
---------- --------- ---------- ---------
Dilutive potential common shares ................. - - - -
---------- --------- ---------- ---------
Shares used in net loss per common share-diluted ...... 183,063 175,689 182,776 174,673
========== ========= ========== =========
Net loss per common share - basic ..................... $ (0.91) $ (0.59) $ (1.61) $ (0.51)
========== ========= ========== =========
Net loss per common share - diluted ................... $ (0.91) $ (0.59) $ (1.61) $ (0.51)
========== ========= ========== =========
All options and equivalent shares related to the convertible notes outstanding
for the third quarter ended and for the first nine months ended September 29,
2002 were excluded from the calculation of diluted net loss per share because
the effect would have been antidilutive. All options for the third quarter ended
and for the first nine months ended September 30, 2001 were excluded from the
calculation of diluted net loss per share because the effect would have been
antidilutive. As of September 29, 2002, there were 34.2 million options
outstanding. As of September 30, 2001, there were 29.1 million options
outstanding. For each of the third quarter ended and the first nine months ended
September 29, 2002, there were 15.4 million equivalent shares related to the
convertible notes outstanding.
H. Restructuring and Asset Impairments
The following table summarizes the activity for the nine months ended
September 29, 2002 with respect to Teradyne's restructuring and asset impairment
charges (in thousands):
Severance and Facilities Goodwill Fixed Asset
Benefits Related Impairment Impairment Total
--------------- ---------- ----------- ----------- ----------
Balance at December 31, 2001..... $ 13,523 $ 1,676 $ - $ - $ 15,199
Provision........................ 17,483 7,621 78,486 41,378 144,968
Cash payments.................... (13,663) (555) - - (14,218)
Asset write-downs................ - - (78,486) (41,378) (119,864)
--------- -------- -------- --------- --------
Balance at September 29, 2002.... $ 17,343 $ 8,742 $ - $ - $ 26,085
========= ======== ======== ========= ========
During the three and nine months ended September 29, 2002, Teradyne
recognized a $78.5 million goodwill impairment charge. See Footnote E, Goodwill
and Intangible Assets.
During the three and nine months ended September 29, 2002, Teradyne
management concluded, in accordance with SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," that certain long-lived assets
held for sale were impaired as the estimated fair value was less than the
carrying value of these assets, and recorded charges of $40.6 million and $41.4
million, respectively. The charge for the Connection Systems segment for
impaired assets held for sale was $27.2 million during the three and nine months
ended September 29, 2002 relating to the shutdown of a printed circuit board
facility in San Diego, California. The Semiconductor Test Systems segment
recorded a charge of $9.7 million during the three and nine months ended
September 29, 2002 related to the write down of manufacturing facilities that
are held for sale in California, and $0.8
12
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
H. Restructuring and Asset Impairments - (Continued)
million in the first quarter of 2002 related to the write down of foundry
long-lived assets that are being held for disposal. In addition, asset
impairment charges of $3.7 million related to two facilities, a Connections
Systems facility and a Corporate facility, held for sale were recorded during
the three and nine months ended September 29, 2002. Teradyne expects the sale of
these impaired assets to occur within a year. The carrying value of Teradyne's
assets held for sale is $44.6 million as of September 29, 2002. These assets are
included in Property, Plant, and Equipment.
Teradyne recorded a pre-tax charge in connection with a workforce
reduction and early retirement program for the following periods:
For the Three Months Ended For the Nine Months Ended
-------------------------- -------------------------
(in thousands) September 29, 2002 September 30, 2001 September 29, 2002 September 30, 2001
- -------------- ------------------ ------------------ ------------------ ------------------
Employee severance benefits....... $12,222 $20,552 $17,483 $29,612
There were approximately 500 employees terminated across all functional
groups in the third quarter of 2002, 22 employees terminated in the second
quarter of 2002 in selling and administrative and approximately 220 employees
terminated in the first quarter of 2002 across all functional groups. All
remaining severance benefits payable to these employees will be paid by the end
of 2003.
There were 1,000 employees terminated in the third quarter of 2001, 600
employees terminated in the second quarter of 2001 and 650 employees terminated
in the first quarter of 2001, in each case, across all functional groups. All
remaining benefits payable to these employees will be paid by the end of the
fourth quarter of 2002.
The accrual for severance and benefits is reflected in accrued employees'
compensation and withholdings and the accrual for lease payments on vacated
facilities is reflected in other accrued liabilities.
During the three and nine months ended September 29, 2002, Teradyne
recorded a pre-tax charge of $7.6 million relating to future lease commitments
for vacated manufacturing and administrative space.
During the three and nine months ended September 30, 2001, Teradyne
recorded a pre-tax charge of $27.5 million for impaired long-lived assets,
consisting of the following: $12.0 million for a facility in the Connection
Systems segment that will not be completed, equipment manufactured by Teradyne
used in manufacturing and engineering and development relating to the
discontinuance of the Flash 750 product line in Semiconductor Test Systems
segment of $7.9 million and certain impaired manufacturing assets in the
Connection Systems segment of $7.6 million.
I. Other Charges
During the three and nine months ended September 29, 2002, a provision of
$1.4 million was recorded for inventory, of which $1.0 million related to
discontinued product lines in the Circuit Board Test and Inspection Systems
segment and $0.4 million related to the shutdown of a printed circuit board
facility in San Diego, California in the Connection Systems segment. These
charges were recorded in cost of sales. During the three and nine months ended
September 29, 2002, Teradyne also recorded a net pre-tax gain of $1.7 million in
other income and expense, net, consisting of a gain of $7.1 million from the
repayment of a loan to a divested entity, which had been previously valued at
zero due to the uncertainty of its collection, offset to a lesser extent by an
other than temporary impairment of a common stock investment of $3.1 million and
a write down of a mortgage loan to an engineering services provider of $2.3
million.
During the nine months ended September 30, 2001, Teradyne recorded a
charge of $70.1 million consisting of the following: $32.2 million for an
inventory writedown from the discontinuance of the Flash 750 product line and
$37.9 million for excess inventory due to the sharp decline in incoming
Semiconductor Test Systems and Connection Systems orders. These inventory
provisions were recorded in cost of sales.
J. Stock Based Compensation
Teradyne's equity compensation program is a broad-based, long-term
retention program that is intended to attract and retain talented employees and
align stockholder and employee interests. Teradyne considers its equity
compensation program critical to Teradyne's operation and productivity.
Approximately 71% of Teradyne's employees participate in its equity compensation
program. Of the stock options Teradyne granted in 2001, 89% went to employees
other than the Chief Executive Officer and the five other most highly
compensated executive officers.
13
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
J. Stock Based Compensation - (Continued)
Teradyne has stock option plans and an employee stock purchase plan.
Teradyne previously adopted the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation," and as permitted by this standard,
will continue to apply Accounting Principles Board Opinion 25 and related
interpretations in accounting for its plans. Teradyne is required annually to
disclose the pro forma net income and net income per common share amounts as if
compensation costs for Teradyne's stock-based compensation plans had been
determined based on the fair value at the grant dates for awards under those
plans. Had compensation expense for Teradyne's stock-based compensation plans
been accounted for at fair value according to SFAS 123, amounts reported in the
Statement of Operations for the three and nine months ending September 29, 2002
and September 30, 2001 would have been (in millions, except per share amounts):
For the Three Months Ended For The Nine Months Ended
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
-------- -------- -------- --------
Net loss ................................. $(189.7) $(129.7) $(348.6) $(144.5)
Net loss per common share--basic ......... $ (1.04) $ (0.74) $ (1.91) $ (0.83)
Net loss per common share--diluted ....... $ (1.04) $ (0.74) $ (1.91) $ (0.83)
Stock Option Plans
Under its stock option plans, all of which are fixed accounting plans,
Teradyne granted options to directors, officers, and the majority of employees
entitling them to purchase common stock at 100% of the fair market value on the
date of grant. Options granted to employees prior to September 2001 vest in
equal installments over four years and have a maximum term of five years.
Beginning in September 2001 options granted to employees vest in equal
installments over four years and have a maximum term of seven years. In
addition, in 2001, Teradyne made a one-time option grant to all employees that
vests over two years and has a term of seven years.
The weighted average grant date fair value for options granted during the
three and nine month periods ending September 29, 2002 was $9.56 and $9.95,
respectively, per option and for the three and nine month periods ending
September 30, 2001, was $12.05 and $12.58, respectively, per option. The fair
value of options at 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 Nine Months Ended
-------------------------- -------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Expected life (years) ..... 4.3 4.3 4.3 4.3
Interest rate ............. 3.3% 3.7% 3.4% 3.7%
Volatility ................ 67.2% 67.0% 67.2% 67.0%
Dividend yield ............ 0.0% 0.0% 0.0% 0.0%
Employee Stock Purchase Plan
Under the Teradyne Employee Stock Purchase Plan, eligible employees may
purchase shares of Teradyne common stock through regular payroll deductions of
up to 10% of their compensation. The price paid for the common stock is equal to
85% of the lower of the fair market value of Teradyne's common stock on the
first business day in January (July for new hires) or the last business day of
December. The weighted average fair value of employee stock purchase rights
granted during the three and nine month periods ended September 29, 2002 was
$3.87 and for the three and nine month periods ending September 30, 2001 was
$8.13. The fair value of the employees' stock purchase rights was estimated
using the Black-Scholes option pricing model with the following assumptions:
For the Three and Nine Months Ended
-----------------------------------
September 29, 2002 September 30, 2001
------------------ ------------------
Expected life (years) ..... 1.0 1.0
Interest rate ............. 1.6% 2.2%
Volatility ................ 61.2% 67.0%
Dividend yield ............ 0.0% 0.0%
14
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
J. Stock Based Compensation - (Continued)
Employee and Executive Option Grants
Option grants as of the end of:
Nine Months
Ended, Year Ended December 31,
September 29, ---------------------------
2002 2001 2000
------------ ------------ ------------
Net grants during the period as a percentage of outstanding shares
at the end of such period............................................ 3.01% 5.39% 3.90%
Grants to Named Executive Officers* during the period as a percentage
of total options granted during such period.......................... 11.47% 11.04% 5.53%
Grants to Named Executive Officers* during the period as a percentage
of outstanding shares at the end of such period...................... 0.44% 0.63% 0.25%
Cumulative options held by Named Executive Officers* as a percentage
of total options outstanding at the end of such period............... 10.09% 8.88% 8.44%
*The term "Named Executive Officers" as used in these notes, includes the Chief
Executive Officer and the five other most highly compensated executive officers.
During the first nine months of 2002, Teradyne granted options to purchase
approximately 7.1 million shares of Teradyne's stock to its employees, which was
a net grant of options for 5.5 million shares after deducting options for 1.6
million shares that were forfeited. The net options granted after forfeitures
represented 3.1% of Teradyne's total outstanding shares of approximately 181.1
million as of December 31, 2001.
Summary of stock option activity as of:
Options Outstanding
---------------------
Weighted
Shares Average
Available Number of Exercise
for Options Shares Price
(Shares in thousands)
------------ --------- --------
December 31, 2000........................ 4,612 22,745 $22.79
Grants................................... (10,289) 10,289 23.33
Exercises................................ - (2,766) 10.89
Cancellations............................ 518 (518) 32.15
Additional shares reserved............... 35,000 - -
----------- ---------
December 31, 2001........................ 29,841 29,750 25.28
Grants................................... (7,063) 7,063 18.18
Exercises................................ - (1,050) 16.40
Cancellations............................ 1,546 (1,546) 37.90
----------- ---------
September 29, 2002........................ 24,324 34,217 $23.57
=========== =========
15
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
J. Stock Based Compensation - (Continued)
Summary of in-the-money and out-of the-money option information at September 29,
2002:
Exercisable Unexercisable Total
------------------------------- ------------------------------- -----------------------------
September 29, 2002 Weighted Average Weighted Average Weighted Average
(Shares in thousands) Shares Exercise Price Shares Exercise Price Shares Exercise Price
----------- ---------------- -------- ---------------- --------- ----------------
In-the-Money 3,336 $ 9.57 1 $ 9.16 3,337 $ 9.57
Out-of-the-Money (1) 14,186 25.88 16,694 24.40 30,880 25.08
----------- ------ -------- ------ --------- ------
Total Options Outstanding 17,522 $22.77 16,695 $24.40 34,217 $23.57
=========== ====== ======== ====== ========= ======
(1) Out-of-the-money options are those options with an exercise price equal to
or above $9.81, the closing price of Teradyne's common stock as of
September 29, 2002.
Executive Options
- -----------------
Options granted to Named Executive Officers, year-to-date, as of September 29,
2002:
Individual Grants
-------------------------------------------------------------
Number of Percent of Total
Securities Options Granted to Exercise
Underlying Employees Year to Price Per Expiration
Options Granted Date(1) Share Date 5%(2) 10%(2)
--------------- ------------------ -------- ---------- ---------- ----------
George W. Chamillard 300,000 4.25% $17.48 7/19/09 $2,134,826 $4,975,063
Edward Rogas, Jr. 115,000 1.63 17.48 7/19/09 818,345 1,907,102
Michael A. Bradley 115,000 1.63 17.48 7/19/09 818,345 1,907,102
John M. Casey 80,000 1.13 17.48 7/19/09 569,281 1,326,677
Gregory R. Beecher 100,000 1.42 17.48 7/19/09 711,603 1,658,348
Richard E. Schneider 100,000 1.42 17.48 7/19/09 711,603 1,658,348
(1) Based on a year-to-date total of 7,063,335 shares subject to options
granted to employees under Teradyne's option plans.
(2) Potential Realizable Value at Assumed Annual Rates of Stock Price
Appreciation for Option Term. Amounts reported in these columns represent
amounts that may be realized upon exercise of the options immediately prior
to the expiration of their term assuming the specified compounded rates of
appreciation (5% and 10%) of Teradyne's common stock over the term of the
options. These numbers are calculated based on rules promulgated by the
Securities and Exchange Commission and do not reflect Teradyne's estimate
of future stock price increases. Actual gains, if any, on stock option
exercises and common stock holdings are dependent on the timing of such
exercise and the future performance of Teradyne's common stock. There can
be no assurance that the rates of appreciation assumed in this table can be
achieved or that the amounts reflected will be received by the individuals.
Year-to-date option exercises and aggregate remaining option holdings and option
values of Named Executive Officers as of September 29, 2002:
Number of Securities Values of Unexercised In-the
Underlying Unexercised Money Options at September 29,
Options at September 29, 2002 2002(1)
----------------------------- ------------------------------
Shares Acquired
Name on Year-to-Date Value
Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- -------------------- --------------- -------- ----------- ------------- ----------- -------------
George W. Chamillard 0 $0 734,714 732,855 $34,592 $0
Edward Rogas, Jr. 0 0 325,922 230,459 21,620 0
Michael A. Bradley 0 0 302,922 228,459 19,458 0
John M. Casey 0 0 198,715 159,356 11,675 0
Gregory R. Beecher 0 0 59,391 196,570 0 0
Richard E. Schneider 0 0 119,841 162,120 3,459 0
(1) Option values based on stock price of $9.81, the closing price of
Teradyne's common stock as of September 29, 2002
16
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
J. Stock Based Compensation - (Continued)
Stock Option Plans
(Shares in thousands) (1) (2) (3)
- -------------------------------------------------------------------------------------------------------
Number of securities Number of securities remaining
to be issued upon Weighted-average available for future issuance
exercise of exercise price of under stock option compensation
outstanding options, outstanding options, plans (excluding securities
Plan category warrants, and rights warrants, and rights reflected in column (1))
- ------------- -------------------- -------------------- -------------------------------
Stock option
plans approved by
shareholders.............. 7,381 $26.29 3,131
Stock option
plans not approved by
shareholders.............. 26,836 $22.82 21,193
------ ------ ------
Total..................... 34,217 $23.57 24,324
====== ====== ======
K. Operating Segment Information
Teradyne has four principal operating segments consisting of
Semiconductor Test Systems, Connection Systems, Circuit Board Test and
Inspection Systems, and Other Test Systems. These operating segments were
determined based upon the nature of the products and services offered. The Other
Test Systems segment is comprised of Broadband Test Systems and Diagnostic
Solutions.
On October 26, 2001 Teradyne completed its acquisition of GenRad, Inc.
of Westford, MA, a leading manufacturer of electronic automatic test equipment,
related software and diagnostic solutions. The GenRad business has been made
part of the Circuit Board Test and Inspection Systems operating segment,
excluding the Diagnostic Solutions business. Diagnostic Solutions has been made
part of the Other Test Systems operating segment. GenRad activity is reflected
in Teradyne's results of operations since the acquisition date.
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, 2001. Intersegment sales are accounted for at fair value
as if sales were to third parties. Operating segment information for the three
and nine month periods ended September 29, 2002 and September 30, 2001 follows
(in thousands):
Semiconductor Circuit Board
Test Connection Test & Inspection Other Test Corporate
Systems Systems Systems Systems and
Segment Segment Segment Segment Eliminations Consolidated
------------ ----------- ----------------- ---------- ------------ ------------
Three months ended September 29, 2002:
- --------------------------------------
Sales to unaffiliated customers $ 167,666 $ 96,981 $ 44,927 $ 21,158 - $ 330,732
Intersegment sales - 4,281 - - $ (4,281) -
---------- --------- ---------- -------- ---------- ----------
Net sales 167,666 101,262 44,927 21,158 (4,281) 330,732
Loss before taxes (1) (55,591) (43,476) (109,316) (4,551) (3,594) (216,528)
Total assets $ 619,964 $ 360,865 $ 232,312 $ 55,844 $1,068,884 $2,337,869
17
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
K. Operating Segment Information - (Continued)
Semiconductor Circuit Board
Test Connection Test & Inspection Other Test Corporate
Systems Systems Systems Systems and
Segment Segment Segment Segment Eliminations Consolidated
------- ------- ------- ------- ------------ ------------
Three months ended September 30, 2001:
- --------------------------------------
Sales to unaffiliated customers $ 108,643 $ 110,473 $ 23,921 $ 6,318 - $ 249,355
Intersegment sales - 685 - - $ (685) -
------------- ---------- ----------- ---------- ------------ ------------
Net sales 108,643 111,158 23,921 6,318 (685) 249,355
Loss before taxes (1) $ (118,208) $ (31,076) $ (9,580) $ (3,708) $ (4,949) $ (167,521)
Semiconductor Circuit Board
Test Connection Test & Inspection Other Test Corporate
Systems Systems Systems Systems and
Segment Segment Segment Segment Eliminations Consolidated
------- ------- ------- ------- ------------ ------------
Nine months ended September 29, 2002:
- -------------------------------------
Sales to unaffiliated customers $ 399,816 $ 295,322 $ 124,129 $ 69,371 - $ 888,638
Intersegment sales - 6,966 - - $ (6,966) -
------------- ---------- ----------- ---------- ------------ ------------
Net sales 399,816 302,288 124,129 69,371 (6,966) 888,638
Loss before taxes (1) (188,856) (45,349) (165,662) (598) (15,858) (416,323)
Total assets $ 619,964 $ 360,865 $ 232,312 $ 55,844 $ 1,068,884 $ 2,337,869
Nine months ended September 30, 2001:
- -------------------------------------
Sales to unaffiliated customers $ 634,467 $ 466,356 $ 91,196 $ 28,348 - $ 1,220,367
Intersegment sales - 3,758 - - $ (3,758) -
------------- ---------- ----------- ---------- ------------ ------------
Net sales 634,467 470,114 91,196 28,348 (3,758) 1,220,367
Income (loss) before taxes (1) $ (129,105) $ 13,567 $ (17,777) $ (3,917) $ (7,326) $ (144,558)
(1) Income (loss) before taxes of the segments excludes the effects of
employee profit sharing, management incentive compensation, other
unallocated expenses, and net interest and other expense which are
included in Corporate and Eliminations.
L. 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, 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 filed a subsequent motion for partial
summary judgment on August 9, 2002 with respect to the breach of contract
claims. A hearing on the motion was held on October 28, 2002. On November 7,
2002, the court granted Teradyne's motion for partial summary judgment,
dismissing all of the plaintiffs' breach of contract claims. A small portion of
the original complaint now remains pending. Teradyne has answered and denied all
liability. Management does not believe Teradyne's liability for the remaining
claims in the complaint will have a material adverse effect on Teradyne's
financial position or results of operations.
18
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
L. Commitments and Contingencies - (Continued)
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 will be moving to dismiss all claims asserted in the
complaint. Teradyne is unable to predict the outcome of this case or reasonably
estimate a range of possible loss given the current status of the litigation.
By letter dated October 22, 2002, counsel for Electro Mechanical
Solutions, Inc. and several affiliated debtors including PRECISMetals in Chapter
11 bankruptcy cases pending in the United States Bankruptcy Court for the
Northern District of California (collectively, the "Debtors"), asserted that
Teradyne received payments in 2001 totaling $12.4 million from PRECISMetals in
the 90 days prior to the bankruptcy filing and that those payments constitute
avoidable preferential transfers. Teradyne believes that it has good faith
defenses to the alleged preferential transfers. Teradyne is unable to predict
the outcome of this case or reasonably estimate a range of possible loss given
the current status of the litigation.
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. At this time, Teradyne
cannot predict what its liability, if any, may be for the clean-up of this site
and can give no assurance that the claim will not materially adversely affect
Teradyne's financial position or results of operations.
In August 2002, Teradyne was designated as a PRP at a site in
Whittier, California. Teradyne was identified as a PRP based on shipments from
its Woodland Hills, California and Agoura Hills, California sites during 1983
and 1984. Based upon review of the shipping documents, Teradyne believes it is a
de minimus contributor to the site. Management does not believe Teradyne's
liability for the clean-up of this site will have a material adverse effect on
Teradyne's financial position or results of operations.
In October, 1998, a former employee of GenRad, Inc. instituted an
arbitration proceeding against GenRad alleging breach of his severance
agreement. Teradyne believes that the employee's claims are without merit. The
last arbitration hearing date was conducted on October 28, 2002, and a decision
is expected by May, 2003. Teradyne is unable to predict the outcome of this case
or to reasonably estimate the range of possible loss.
In addition, Teradyne is subject to legal proceedings and claims that
arise in the ordinary course of business. Management does not believe these
actions will have a material adverse effect on Teradyne's financial position or
results of operations.
M. Subsequent Event
On November 12, 2002, Teradyne announced a reduction in workforce of
approximately 240 people. The estimated severance charge from this reduction in
personnel totals approximately $3.9 million. Teradyne anticipates further
restructuring activities, however is currently unable to determine the impact.
19
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 Nine Months Ended
------------------------------ -------------------------------
September 29, September 30, September 29, September 30,
------------- ------------- ------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
(In thousands, except percentages) (In thousands, except percentages)
Net sales ...................................... $ 330,732 $ 249,355 $ 888,638 $ 1,220,367
============= ============= ============= ===========
Net loss ....................................... $ (166,833) $ (103,404) $ (294,702) $ (89,626)
============= ============= ============= ===========
Percentage of net sales:
Net sales ................................. 100.0% 100.0% 100.0% 100.0%
Expenses:
Cost of sales ......................... 77.5 98.9 80.1 74.8
Engineering and development ........... 23.6 25.9 24.7 17.9
Selling and administrative ............ 22.5 24.0 25.3 16.3
Restructuring and asset impairments ... 42.0 19.3 16.3 4.7
Other and interest, net ............... (0.1) (0.9) 0.4 (1.9)
------------- ------------- ------------- -----------
165.5 167.2 146.8 111.8
Loss before taxes ......................... (65.5) (67.2) (46.8) (11.8)
Benefit from income taxes ................. (15.1) (25.7) (13.6) (4.5)
------------- ------------- ------------- -----------
Net loss .................................. (50.4)% (41.5)% (33.2)% (7.3)%
============= ============= ============= ===========
Benefit from income taxes as a percentage of
income before taxes ....................... (23.0)% (38.3)% (29.2)% (38.0)%
============= ============= ============= ===========
Results of Operations
Business Overview
Teradyne's business has been adversely impacted by slowing economies
worldwide, as well as by the cyclical nature of the electronics and
semiconductor industries, which experience recurring periods of decreased demand
for various electronic products and services that are sold to end-users. This in
turn negatively affects the demand for the capital equipment and embedded
product content that is furnished by Teradyne to the manufacturers of these
semiconductor and electronics products. The depth and duration of the current
down cycle has been unprecedented in Teradyne's experience and at present,
Teradyne can predict neither the duration of the current slump nor when or if
the situation is likely to materially improve. While recently within the markets
Teradyne sells to, inventory levels have declined and the utilization of
already-installed capital equipment has increased, in general, Teradyne's
customers continue to defer orders for Teradyne's products and services. In the
absence of significant improvement, orders could remain low or decline further,
and the amount of Teradyne's deferred tax assets, inventory, and certain
long-lived assets considered realizable could be significantly reduced.
As noted above, the outlook remains unclear as the forecast for the
technology segment of the economy remains weak. Teradyne has been downsizing in
response to the adverse business climate while simultaneously making selective
investments in internal process improvements, field resources and engineering
programs. At the same time Teradyne has been consolidating its manufacturing
infrastructure to reduce fixed costs. The growth Teradyne saw earlier in 2002
has stalled resulting in further actions to downsize the business to a lower
sales break-even level. However, there can be no assurance that Teradyne will be
successful in sizing the business to a break-even level that would require only
modest revenue growth during 2003 due to, among other factors, the impact of
adverse product mix changes and further pricing declines.
20
Bookings
Teradyne's net orders for its four principal operating segments were as
follows:
(in millions)
Three Months Ended Nine Months Ended
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Semiconductor Test Systems ................. $ 123.4 $ 50.1 $ 351.9 $ 233.2
Connections Systems ........................ 46.4 46.0 116.8 377.7
Circuit Board Test and Inspection Systems .. 40.1 15.8 123.4 54.4
Other Test Systems ......................... 21.6 1.6 78.0 15.4
------- ------- ------- -------
$ 231.5 $ 113.5 $ 670.1 $ 680.7
Teradyne's net orders by region as a percentage of total net orders
were as follows:
Three Months Ended Nine Months Ended
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
---- ---- ---- ----
United States .............................. 45% 42% 44% 55%
Europe ..................................... 17 31 16 24
Japan ...................................... 8 5 8 3
Korea ...................................... 3 1 2 1
South Asia ................................. 19 19 22 11
Taiwan ..................................... 6 3 6 3
Rest of World .............................. 2 (1) 2 3
--- --- --- ---
100% 100% 100% 100%
The increase in incoming net orders during the third quarter of 2002
relative to the third quarter of 2001 was led by a 146% increase in
Semiconductor Test System orders. This increase was a result of growth in demand
for system-on-a-chip testers. The increase in Circuit Board Test and Inspection
Systems and Other Test Systems net orders compared to the third quarter of 2001
was due to GenRad related orders which Teradyne acquired in October of 2001.
Teradyne experienced cancellations of $15.7 million and $98.3 million in the
third quarter of 2002 and 2001, respectively. Of the third quarter 2002
cancellations, $14.8 million was in the Connection Systems segment, primarily
from large telecommunications customers, compared to $82.2 million of
cancellations in Connection Systems in the third quarter of 2001. Semiconductor
Test Systems had cancellations of $16.1 million in the third quarter of 2001.
The increase in Circuit Board Test and Inspection Systems and Other
Test Systems net orders compared to the first nine months of 2001 was due to
GenRad related orders which Teradyne acquired in October of 2001. Teradyne
experienced cancellations of $87.3 million and $200.9 million in the first nine
months of 2002 and 2001, respectively. Of the $87.3 million in cancellations
during the first nine months of 2002, $80.8 million was in Connection Systems
primarily driven by cancellations from large telecommunications customers. Of
the $200.9 million in cancellations during the first nine months of 2001, $137.2
million was in Connection Systems and $61.6 million was in Semiconductor Test
Systems.
Customers may delay delivery of products or cancel orders suddenly and
without significant notice, subject to possible cancellation penalties. Due to
possible customer changes in delivery schedules and cancellation of orders,
Teradyne's backlog at any particular date is not necessarily indicative of the
actual sales for any succeeding period. Delays in delivery schedules and/or
cancellations of backlog during any particular period could have a material
adverse effect on Teradyne's business and results of operations.
21
Revenue
Teradyne's sales for its four principal operating segments were as
follows:
(in millions)
Three Months Ended Nine Months Ended
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Semiconductor Test Systems ................. $ 167.7 $ 108.7 $ 399.8 $ 634.5
Connections Systems ........................ 97.0 110.5 295.3 466.4
Circuit Board Test and Inspection Systems .. 44.9 23.9 124.1 91.2
Other Test Systems ......................... 21.1 6.3 69.4 28.3
------- ------- ------- --------
$ 330.7 $ 249.4 $ 888.6 $1,220.4
Teradyne's sales by region as a percentage of total sales were as
follows:
Three Months Ended Nine Months Ended
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
---- ---- ---- ----
United States ............................. 42% 62% 46% 49%
Europe .................................... 18 15 18 18
Japan ..................................... 7 4 5 4
Korea ..................................... 3 0 2 1
South Asia ................................ 17 13 18 12
Taiwan .................................... 11 3 9 12
Rest of World ............................. 2 3 2 4
--- --- --- ---
100% 100% 100% 100%
Semiconductor Test Systems sales increased by 54% from the third
quarter of 2001, due to higher unit volume of shipments in system-on-a-chip
testers primarily to customers in Taiwan. Connection Systems sales to
unaffiliated customers decreased 12% from the third quarter of 2001 due to
reductions in capital spending by end users in the telecommunications and
corporate data processing industries, and the corresponding reduced demand for
products supplied by Connection Systems customers. Circuit Board Test and
Inspection Systems and Other Test Systems sales increased from the third quarter
of 2001 due to GenRad related sales which Teradyne acquired in October of 2001.
Semiconductor Test Systems sales and Connection Systems sales to
unaffiliated customers each decreased 37% from the first nine months of 2001.
The decline in Semiconductor Test Systems was across all product types with
the largest decline in the high performance logic testers. By geography,
Semiconductor Test Systems revenue was down by over 25% in the United States,
Europe, and Taiwan. This reduction was partially offset by increases in sales to
Korea and Southeast Asia of 28% and 10%, respectively, over the first nine
months of 2001. The decrease in Connection Systems revenue on a year to date
basis is largely due to declines in end user demand for telecommunications and
corporate data processing infrastructures. Circuit Board Test and Inspection
Systems and Other Test Systems sales increased from the first nine months of
2001 due to GenRad related sales which Teradyne acquired in October of 2001.
Included in the first nine months of 2001 sales of $1,220.4 million was the
recognition of $98.7 million in sales which resulted in $48.8 million of income
(net of tax of $20.9 million) related to shipments in 2000 where title was
retained until payment was received. Teradyne no longer retains title until
receipt of payment.
Cost of Sales and Expenses
Percentage of net sales Three Months Ended Nine Months Ended
-------------------------------------------------- ----------------------------
September 29, June 30, March 31, September 30, September 29, September 30,
2002 2002 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
Cost of sales ........................... 77% 77% 87% 99% 80% 75%
Engineering and development ............ 24 23 28 26 25 18
Selling and administrative .............. 23 24 30 24 25 16
Restructuring and asset impairments ..... 42 0 2 19 16 5
22
Gross Margin
Certain costs in the third quarter of 2001 and first nine months of
2002 and 2001 have been reclassified from cost of sales, engineering and
development, and selling and administrative into restructuring and asset
impairments. Teradyne is reclassifying these costs in an attempt to better
summarize restructuring and asset impairments through a one line presentation.
These reclassified costs in 2001 consist primarily of impaired equipment
manufactured by Teradyne used in manufacturing and engineering and development
relating to the discontinuance of the Flash 750 product line in the
Semiconductor Test Systems segment of $6.0 million and to certain impaired
manufacturing assets in the Connections Systems segment of $7.6 million.
Reclassifications for 2002 include certain impaired manufacturing assets in the
Semiconductor Test Systems segment of $0.8 million and selling and
administrative workforce reduction costs of $0.2 million. The impact of the
reclassifications is detailed below:
Three Months Ended Nine Months Ended Nine Months Ended
September 30, 2001 September 29, 2002 September 30, 2001
------------------ ------------------ ------------------
Increase/(Decrease)
(in thousands)
Cost of sales .............................. $(12,308) $ (824) $(12,308)
Engineering and development ................ (1,339) - (1,339)
Selling and administrative ................. - (219) -
Restructuring and asset impairments ........ 13,647 1,043 13,647
Gross margin increased to 23% of sales in the third quarter of 2002
from 1% of sales in the third quarter of 2001. The percentage increase in the
third quarter of 2002 was primarily attributable to an inventory writedown in
the third quarter of 2001 of $32.2 million for the discontinuance of the
Semiconductor Test Systems segment's Flash 750 product line. The increase in the
percentage of gross margin during the third quarter of 2002 was also impacted to
a lesser extent by increased utilization of Teradyne's manufacturing overhead,
relative to the same period of 2001, as sales volume increased while certain
components of cost of sales remained fixed, particularly in the Semiconductor
Test Systems segment.
Gross margin decreased to 20% of sales in the first nine months of 2002
from 25% of sales in the first nine months of 2001. The percentage decrease in
the first nine months of 2002 was primarily attributable to decreased
utilization of Teradyne's manufacturing overhead, relative to the same period of
2001, as sales volume decreased while certain components of cost of sales
remained fixed, particularly in the Semiconductor Test Systems and Connections
Systems segments. The decrease in gross margin was partially offset by lower
inventory provisions of $14.9 million during the first nine months of 2002
compared to an inventory provision of $92.9 million during the first nine months
of 2001. The decrease in the percentage of gross margin was also impacted to a
lesser extent by increased competitive price pressure on Connection Systems
products and changes to the mix of Teradyne's business as Circuit Board Test and
Inspection System sales, which has lower gross margins, becomes a larger
percentage of Teradyne's business.
Inventory provision for excess and obsolete inventory was $14.9 million
in the first nine months of 2002 compared to $92.9 million in the first nine
months of 2001. Included in the inventory provision for the nine months ended
September 29, 2002, was a provision of $1.4 million, of which $1.0 million
related to discontinued product lines in the Circuit Board Test and Inspection
segment and $0.4 million related to the shutdown of a printed circuit board
facility in San Diego, California in the Connection Systems segment. Included in
the inventory provision for the nine months ended September 30, 2001 was a
charge of $70.1 million consisting of the following: $32.2 million for an
inventory writedown from the discontinuance of the Flash 750 product line and
$37.9 million for excess inventory due to the sharp decline in incoming
Semiconductor Test Systems and Connection Systems orders.
Teradyne in each of its businesses is operating in very competitive and
often hostile markets. The pricing pressure has been intense particularly in the
Connections Systems segment both at the component level, particularly for
printed circuit boards due to significant excess capacity and the emergence of
competitors in South Asia and China, and also at the assembly business,
particularly in electrical mechanical integration. In addition, as Connections
Systems expands into systems integration and test, its margins will likely
decline as more third party equipment is purchased. More recently, Connections
Systems business mix has been unfavorably impacted by a reduction in higher
margin components business and an increase in lower margin electrical mechanical
integration business. In Semiconductor Test Systems, the Catalyst Tiger is
expected to become an increasing portion of shipments over the next several
quarters. As is common with new large complex testers, Catalyst Tiger's margin
will initially be lower as cumulative pricing arrangements and cost reductions
are not yet impacting the product costs in a meaningful manner. Teradyne expects
that the intense pricing environment will continue in each of its businesses.
Teradyne is responding in part through material cost reduction programs with
vendors, increased use of outsourcing, reducing its manufacturing locations, and
shifting some of its manufacturing to lower cost regions.
Engineering and Development
Engineering and development expenses, as a percentage of sales,
decreased to 24% in the third quarter of 2002 compared to 26% in the third
quarter of 2001 with spending increasing by $13.3 million. This spending
increase was across all operating segments and was due to the discontinuance of
salary cuts and the granting of the prior year's previously frozen salary
increases which occurred during the third quarter of 2002. The increase in
spending was also due to a lesser extent to additional expenses resulting from
Teradyne's purchase of GenRad in the fourth quarter of 2001. Engineering and
development expenses, as a percentage of sales, increased to 25% in the first
nine months of 2002 compared to 18% in the first nine months of 2001 with
spending increasing by $0.4 million.
Selling and Administrative
Selling and administrative expenses decreased to 23% of sales in the
third quarter of 2002 from 24% of sales in the third quarter of 2001 with
spending increasing by $14.4 million. Selling and administrative expenses
increased to 25% of sales in the first nine months of 2002 from 16% of sales in
the first nine months of 2001 with spending increasing by $25.6 million. The
increase in spending in the third quarter and first nine months of 2002 was due
to additional expenses resulting from Teradyne's purchase of GenRad in the
fourth quarter of 2001 and due to the discontinuance of salary cuts and the
granting of the prior year's previously frozen salary increases which occurred
during the third quarter of 2002. The additional selling and administrative
expense was partially offset by workforce reductions.
23
Restructuring and Asset Impairments
The following table summarizes the activity for the nine months ended
September 29, 2002 with respect to Teradyne's restructuring and asset impairment
charges (in thousands):
Severance and Facilities Goodwill Fixed Asset
Benefits Related Impairment Impairment Total
------------- ---------- ---------- ----------- ---------
Balance at December 31, 2001...... $ 13,523 $ 1,676 $ - $ - $ 15,199
Provision......................... 17,483 7,621 78,486 41,378 144,968
Cash payments..................... (13,663) (555) - - (14,218)
Asset write-downs................. - - (78,486) (41,378) (119,864)
------------- ---------- ---------- ----------- ---------
Balance at September 29, 2002..... $ 17,343 $ 8,742 $ - $ - $ 26,085
============= ========== ========== =========== =========
SFAS 142 provides that goodwill of a reporting unit be tested for
impairment on an annual basis and between annual tests in certain circumstances
including a significant adverse change in the business outlook. During the third
quarter of 2002, as a result of significant change in the business outlook,
Teradyne retested the goodwill related to the Circuit Board Test and Inspection
segment for impairment as of September 29, 2002. Teradyne concluded that the
carrying value of the assets and liabilities associated with the Circuit Board
Test and Inspection Systems segment exceeded its fair value. As of September 29,
2002, Teradyne recognized a $78.5 million goodwill impairment charge. The
impairment charge was measured by comparing the implied fair value of the
goodwill associated with the Circuit Board Test and Inspection Systems segment
to its carrying value. The fair value of the segment was estimated using the
expected present value of future cash flows.
During the three and nine months ended September 29, 2002, Teradyne
management concluded, in accordance with SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," that certain long-lived assets
held for sale were impaired as the estimated fair value was less than the
carrying value of these assets, and recorded charges of $40.6 million and $41.4
million, respectively. The charge for the Connection Systems segment for
impaired assets held for sale was $27.2 million during the three and nine months
ended September 29, 2002 relating to the shutdown of a printed circuit board
facility in San Diego, California. The Semiconductor Test Systems segment
recorded a charge of $9.7 million during the three and nine months ended
September 29, 2002 related to the write down of manufacturing facilities that
are held for sale in California, and $0.8 million in the first quarter of 2002
related to the write down of foundry long-lived assets that are being held for
disposal. In addition, asset impairment charges of $3.7 million related to two
facilities, a Connections Systems facility and a Corporate facility held for
sale were recorded during the three and nine months ended September 29, 2002.
Teradyne expects the sale of these impaired assets to occur within a year. The
carrying value of the Teradyne's assets held for sale is $44.6 million as of
September 29, 2002. These assets are included in Property, Plant and Equipment.
Teradyne recorded a pre-tax charge in connection with a workforce reduction
and early retirement program for the following periods:
For the Three Months Ended For the Nine Months Ended
-------------------------- -------------------------
(in thousands) September 29, 2002 September 30, 2001 September 29, 2002 September 30, 2001
- -------------- ------------------ ------------------ ------------------ ------------------
Employee severance benefits....... $12,222 $20,552 $17,483 $29,612
There were approximately 500 employees terminated across all functional
groups in the third quarter of 2002, 22 employees terminated in the second
quarter of 2002 in selling and administrative and approximately 220 employees
terminated in the first quarter of 2002 across all functional groups. All
remaining severance benefits payable to these employees will be paid by the end
of 2003.
There were 1,000 employees terminated in the third quarter of 2001, 600
employees terminated in the second quarter of 2001 and 650 employees terminated
in the first quarter of 2001, in each case, across all functional groups. All
remaining benefits payable to these employees will be paid by the end of the
fourth quarter of 2002.
The accrual for severance and benefits is reflected in accrued employees'
compensation and withholdings and the accrual for lease payments on vacated
facilities is reflected in other accrued liabilities.
During the three and nine months ended September 29, 2002, Teradyne
recorded a pre-tax charge of $7.6 million relating to future lease commitments
for vacated manufacturing and administrative space.
24
During the three and nine months ended September 30, 2001, Teradyne
recorded a pre-tax charge of $27.5 million for impaired long-lived assets,
consisting of the following: $12.0 million for a facility in the Connection
Systems segment that will not be completed, equipment manufactured by Teradyne
used in manufacturing and engineering and development relating to the
discontinuance of the Flash 750 product line in Semiconductor Test Systems
segment of $7.9 million and certain impaired manufacturing assets in the
Connection Systems segment of $7.6 million.
On November 12, 2002, Teradyne announced a reduction in workforce of
approximately 240 people. The estimated severance charge from this reduction in
personnel total approximately $3.9 million. Teradyne anticipates further
restructuring activities, however is currently unable to determine the impact.
On October 26, 2001 Teradyne completed its acquisition of GenRad, Inc. of
Westford, MA, a leading manufacturer of electronic automatic test equipment,
related software and diagnostic solutions. In connection with its restructuring
plan for GenRad in the first and second quarters of 2002, Teradyne recorded
involuntary employee termination costs of $3.4 million and $0.9 million,
respectively. During the third quarter of 2002, Teradyne recorded $2.2 million
of additional goodwill relating to the completion of facility exit plans for
GenRad operating locations.
The table below summarizes activity relating to GenRad employee termination
and facility closure costs (in thousands):
Severance Facilities
and Benefits Related Total
------------ ---------- -------
Balance at December 31, 2001 ........................ $ 1,006 $ - $ 1,006
First quarter, 2002 employee termination costs ...... 3,437 - 3,437
Cash payments ....................................... (2,288) - (2,288)
------- ------ -------
Balance at March 31, 2002 ........................... $ 2,155 $ - $ 2,155
Second quarter, 2002 employee termination costs ..... 852 - 852
Cash payments ....................................... (660) - (660)
------- ------ -------
Balance at June 30, 2002 ............................ $ 2,347 $ - $ 2,347
Third quarter, 2002 leased facility costs ........... - 2,167 2,167
Cash payments ....................................... (297) (227) (524)
------- ------- -------
Balance at September 29, 2002 ....................... $ 2,050 $1,940 $ 3,990
======= ====== =======
Interest Income and Expense
Interest income decreased by $0.2 million to $4.4 million in the third
quarter of 2002 compared to the third quarter of 2001 and decreased by $2.8
million to $13.1 million in the first nine months of 2002 compared to the first
nine months of 2001. The decreases in interest income were attributable to lower
interest rates. Interest expense increased by $5.2 million to $5.4 million in
the third quarter of 2002 compared to the third quarter of 2001 and increased by
$15.3 million to $16.2 million in the first nine months of 2002 compared to the
first nine months of 2001. The increase in interest expense was primarily
attributable to interest expense related to convertible notes which Teradyne
issued in the fourth quarter of 2001.
Other Income and Expense
Teradyne recorded a gain in the third quarter of 2002 of $7.1 million from
the repayment of a loan to a divested entity. The loan had previously been
valued at zero due to the uncertainty of its collection. This gain was offset to
a lesser extent by losses in the third quarter of 2002 of $3.1 million for an
other than temporary impairment of a common stock investment and $2.3 million
for the writedown of a mortgage loan to an engineering service provider. Also
included in other expense is a loss of $0.5 million during the third quarter of
2002 and a loss of $2.2 million during the first nine months of 2002 for the
fair value of warrants held in LogicVision, a publicly traded company. Included
in other expense in the third quarter and first nine months of 2001 is
Teradyne's proportionate share of a loss related to an equity method investment
of $1.9 million and $6.2 million, respectively. The carrying value of this
equity investment was zero at December 31, 2001. Included in other income in the
first nine months of 2001 is a gain of $14.8 million from the sale of Connection
Systems aerospace and defense business.
25
Income Taxes
Teradyne's overall effective tax rate benefit was 23% in the third
quarter of 2002 and 29% for the first nine months of 2002. The effective tax
rate for the third quarter and for the nine months of 2002 was significantly
less than the United States statutory rate due to a $78.5 million goodwill
impairment charge, which was not tax deductible. The effective tax rate for the
three and nine months of 2002 excluding this impairment would have been 36%. The
effective tax rate benefit for the year ended December 31, 2001 was 38%. The
change in the tax rate is a result of lower favorable tax attributes from
Teradyne's foreign sales corporation and state income taxes.
On a quarterly basis, Teradyne evaluates the realizability of its
deferred tax assets and assesses the need for a valuation allowance. Realization
of Teradyne's net deferred tax assets is dependent on its ability to generate
approximately $802 million of future taxable income. Teradyne believes that it
is more likely than not that its net deferred tax assets will be realized based
on forecasted income. The amount of the net deferred tax assets actually
realized could vary if there are differences in the timing or amount of future
reversals of existing deferred tax liabilities or changes in the actual amounts
of future taxable income. Teradyne has incurred significant losses from
operations over several quarters. If Teradyne's operating results do not improve
significantly in the near term and if the outlook remains unclear Teradyne will
be required to establish a valuation allowance against all of its net deferred
tax assets based upon applicable accounting criteria. To the extent Teradyne
establishes a valuation allowance, an expense will be recorded within the
provision for income taxes line in the Statement of Operations.
In response to an adverse World Trade Organization (WTO) finding that
the U.S. Foreign Sales Credit (FSC) tax provisions were a prohibited export
subsidy, the United States repealed FSC and enacted replacement legislation
(Extraterritorial Income Exclusion Act of 2000 (ETI)). The WTO has found that
both the FSC and ETI are prohibited export subsidies. The United States has
indicated that it will bring its tax laws in compliance with the WTO ruling. The
U.S. government and industry groups are evaluating options. It is not possible
to predict what impact this issue will have on future earnings pending final
resolution. During the years ended December 31, 2001, 2000, and 1999, the FSC
benefited Teradyne's effective tax rate as follows:
2001 2000 1999
---- ---- ----
Export sales corporation (0.7%) (4.8%) (4.7%)
Liquidity and Capital Resources
Teradyne's cash, cash equivalents and marketable securities balance
decreased $42.9 million in the first nine months of 2002, to $543.4 million.
Teradyne used cash from operating activities of $19.6 million and $8.9 million
in the first nine months of 2002 and the first nine months of 2001,
respectively. Cash used from net loss, excluding the effects of non-cash items,
was $180.4 million in the first nine months of 2002 and cash generated from net
loss, excluding the effects of non-cash items, was $52.0 million for the first
nine months of 2001. Changes in operating assets and liabilities net of
businesses acquired generated cash of $160.9 million in the first nine months of
2002 primarily due to the receipt of a tax refund of $85.2 million in March 2002
and decreased inventory balances. In the first nine months of 2001, changes in
operating assets and liabilities net of businesses sold used cash of $60.9
million primarily due to accounts payable and accruals balances which decreased
as purchases slowed.
Teradyne used $49.0 million of cash for investing activities in the
first nine months of 2002 and $173.6 million in the first nine months of 2001.
Investing activities consist of purchases and maturities of marketable
securities, cash payment for an acquisition of PCI assets, proceeds from the
sale of a business, and purchases of capital assets to support long-term growth.
Capital expenditures were $59.1 million in the first nine months of 2002 and
$218.2 million in the first nine months of 2001. The decrease in capital
expenditures was due to actions taken by Teradyne beginning in 2001 to reduce
planned capital expenditures due to current market conditions.
Financing activities provided $40.3 million and $52.8 million of cash
during the first nine months of 2002 and 2001, respectively. Financing
activities include issuance of Teradyne's common stock through employee stock
option and stock purchase plans and repayments of debt. During the first nine
months of 2002 and 2001, common stock activity provided cash of $40.6 million
and $53.3 million, respectively.
Teradyne believes its cash, cash equivalents, and marketable securities
balance of $543.4 million will be sufficient to meet working capital and
expenditure needs for at least the next twenty-four months. Depending on market
conditions and funding requirements, Teradyne may seek additional external
financing. Inflation has not had a significant long-term impact on earnings.
26
Certain Factors That May Affect Future Results
From time to time, information provided by Teradyne, statements made by
its employees or information included in its filings with the Securities and
Exchange Commission (including this Form 10-Q) contain statements that are not
purely historical, but are forward looking statements, made under Section 21E of
the Securities Exchange Act of 1934, which involve risks and uncertainties. In
particular, forward looking statements made herein include projections, plans,
and objectives for Teradyne's business, financial condition, operating results,
future operations, or future economic performance, statements relating to the
sufficiency of capital to meet working capital requirements, capital
expenditures, expectations as to customer orders and demand for Teradyne's
products and statements relating to backlog, bookings and cancellations, gross
margins and pricing considerations. These statements are neither promises nor
guarantees but involve risks and uncertainties, both known and unknown, which
could cause Teradyne's actual future results to differ materially from those
stated in any forward looking statements. Factors that may cause such
differences include, but are not limited to, the factors discussed below. These
factors, and others, are discussed from time to time in Teradyne's filings with
the Securities and Exchange Commission, including in Teradyne's Annual Report on
Form 10-K for the year ended December 31, 2001.
Teradyne's Business Is Impacted by the Slowdown in Economies Worldwide.
Teradyne's business has been negatively impacted by the slowdown in the
global economies that began in the second half of 2000. The uncertainty
regarding the growth rate of the worldwide economies and concerns regarding
corporate governance have caused companies to reduce capital investments and may
cause further reduction of such investments. These reductions have been
particularly severe in the electronics and semiconductor industry which Teradyne
serves and have contributed to Teradyne incurring losses. Teradyne cannot
predict if or when the growth rate of worldwide economies will rebound, whether
the growth rate of its business will rebound when the worldwide economies begin
to grow, or if or when Teradyne will return to profitability. The effects of the
economic decline are being felt across all of Teradyne's business segments and
continue to result in significantly reduced customer orders.
Teradyne's Business is Dependent on the Current and Anticipated Market for
Electronics.
Teradyne's business and results of operations depend in significant
part upon capital expenditures of manufacturers of semiconductors and other
electronics, which in turn depend upon the current and anticipated market demand
for those products. The current and anticipated market demand for electronics
has been impacted by the economic slowdown that began in the latter portions of
2000 and the effects of the hostilities begun in September 2001. Historically,
the electronics and semiconductor industry has been highly cyclical with
recurring periods of over-supply, which often have had a severe negative effect
on demand for test equipment, including systems manufactured and marketed by
Teradyne. Teradyne believes that the markets for newer generations of electronic
products such as those that Teradyne manufactures and markets will also be
subject to similar fluctuations. Teradyne is dependent on the timing of customer
orders and the deferral or cancellation of previous customer orders could have
an adverse effect on its results of operations. Teradyne cannot assure that the
continued downturn in new orders will turn around in the future or that any
increase in sales 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 Teradyne's business, financial condition and operating results.
Teradyne Has Taken and Expects to Continue to Take Measures to Address the
Current Slowdown in the Market for Its Products Which Could Have Long-term
Negative Effects on Teradyne's Business.
Teradyne has taken and expects to continue to take measures to address
the current slowdown in the market for its products. In particular, Teradyne has
reduced its workforce, frozen hiring, closed facilities, reduced the pay of
certain employees, implemented furloughs, discontinued its Flash 750 product
line, recorded asset impairment charges, implemented material cost reduction
programs, reduced its planned capital expenditures and expense budgets, and
raised cash through a $400 million convertible debt offering and $45 million
mortgage of real estate in California. These measures have reduced expenses in
the face of decreased revenues due to decreased or cancelled customer orders.
However, each measure Teradyne has taken and any additional measures taken in
the future to contain expenditures could have long-term negative effects on
Teradyne's business by reducing its pool of technical talent, decreasing or
slowing improvements in its products, increasing Teradyne's debt, and making it
more difficult for Teradyne to respond to customers or competitors.
27
Teradyne's Business May Be Adversely Impacted by Acquisitions Which May Affect
Its Ability to Manage and Maintain Its Business.
Since Teradyne's inception, it has acquired a number of businesses. In
the future, Teradyne may undertake additional acquisitions of businesses that
complement its existing operations. Such past or future acquisitions could
involve a number of risks, including:
- the possibility that one or more such acquisitions may not close due
to closing conditions in the acquisition agreements, the inability
to obtain regulatory approval, or the inability to meet conditions
imposed for government or court approvals for the transaction;
- the diversion of the attention of management and other key
personnel;
- the inability to effectively integrate an acquired business into
Teradyne's culture, product and service delivery methodology and
other standards, controls, procedures and policies;
- the inability to retain the management, key personnel and other
employees of an acquired business;
- the inability to retain the customers of an acquired business;
- the possibility that Teradyne's reputation will be adversely
affected by customer satisfaction problems of an acquired business;
- potential known or unknown liabilities associated with an acquired
business, including but not limited to regulatory, environmental and
tax liabilities;
- the amortization of acquired identifiable intangibles, which may
adversely affect Teradyne's reported results of operations; and
- litigation which has or which may arise in the future in connection
with such acquisitions.
For example, in connection with the August 2000 acquisition of each of
Herco Technology Corp., a California company, and Perception Laminates, Inc., a
California company, a complaint was filed and is now pending in Federal District
Court, San Diego, California, by the former owners of those companies on or
about September 5, 2001 naming as defendants Teradyne and two of its executive
officers. This case is further described in "Item 1: Legal Proceedings" on this
Form 10-Q.
Additionally, in 2001, Teradyne was designated as a "potentially
responsible party" ("PRP") at a clean-up site in Los Angeles, California. This
claim arises out of Teradyne's acquisition of Perception Laminates, Inc. in
August 2000. Prior to that date, Perception Laminates had itself acquired
certain assets of Alco Industries Inc., under an asset purchase agreement dated
July 30, 1992. Neither Teradyne nor Perception Laminates have ever conducted any
operations at the Los Angeles site. Teradyne has asked the State of California
to drop the PRP designation, but California has not yet agreed to do so. This
case is further described in "Item 1: Legal Proceedings" on this Form 10-Q.
In addition to the foregoing, any acquired business could significantly
underperform relative to Teradyne's expectations.
Teradyne Currently Faces, and in the Future May Be the Subject of, Securities
Class Action Litigation Due to Past or Future Stock Price Volatility.
When the market price of a stock has been volatile, holders of that
stock sometimes institute securities class action litigation against the company
that issued the stock. In October and November, 2001, three purported class
action complaints were filed in Federal District Court, Boston, Massachusetts,
naming Teradyne and two of its executive officers as defendants. 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 strongly believes that the purported class action complaint lacks merit
and is defending against the claims vigorously. Teradyne will be moving to
dismiss all claims asserted in the complaint. However, Teradyne could incur
substantial costs defending the lawsuit. The lawsuit could also divert the time
and attention of Teradyne's management. Teradyne cannot predict the outcome of
the lawsuits at this time, and can give no assurance that it will not materially
adversely affect Teradyne's financial position or results of operations.
28
Teradyne's Business May be Adversely Impacted by Divestitures of Lines of
Business Which May Affect Its Ability to Manage and Maintain Its Business.
Since Teradyne's inception, it has divested itself of certain lines of
business. In the future, Teradyne may undertake additional such divestitures.
Such past or future divestitures could involve a number of risks, including:
- the diversion of the attention of management and other key
personnel;
- disruptions and other effects caused by the divestiture of a line of
business on Teradyne's culture, product and service delivery
methodology and other standards, controls, procedures and policies;
- customer satisfaction problems caused by the loss of a divested line
of business; and
- the decreased diversification of Teradyne's product lines caused by
the divestiture of a line of business which may make Teradyne's
operating results subject to increased market fluctuations.
If Teradyne Is Unable to Protect Its Intellectual Property, Teradyne May Lose a
Valuable Asset or May Incur Costly Litigation to Protect Its Rights.
Teradyne's products incorporate technology that it protects in several
ways, including patents, copyrights and trade secrets. While Teradyne believes
that its patents, copyrights and trade secrets have value in general, no single
one is in itself essential. At times, Teradyne has been notified that it may be
in violation of patents held by others. An assertion of patent infringement
against Teradyne, if successful, could have a material adverse effect on its
ability to sell its products, or could require a lengthy and expensive defense
which could adversely affect its operating results.
If Teradyne Fails to Develop New Technologies to Adapt to Its Customers' Needs
and if Its Customers Fail to Accept Its New Products, Teradyne's Revenues Will
Be Adversely Affected.
Teradyne believes that its technological position depends primarily on
the technical competence and creative ability of its engineers. Teradyne's
development of new technologies, commercialization of those technologies into
products, and market acceptance and customer demand for those products is
critical to Teradyne's success. Successful product development and introduction
depends upon a number of factors, including:
- new product selection;
- development of competitive products by competitors;
- timely and efficient completion of product design;
- timely and efficient implementation of manufacturing; and
- assembly processes and product performance at customer locations.
Additionally there are risks outside Teradyne's control relating to the
market acceptance of Teradyne's customers products and to the innovation and
invention in the design process for silicon devices, such as:
- market acceptance of digital subscriber lines (DSL) as a leading
access link to the internet; and
- commercialization of design for test strategies or adoption of
various distributed test approaches.
Intense Competition in Teradyne's Industry May Affect Its Revenues.
Teradyne faces significant competition throughout the world in each of
its operating segments. Some of Teradyne's competitors have substantial
financial and other resources to pursue engineering, manufacturing, marketing
and distribution of their products. Teradyne also faces competition from
internal suppliers at several of its customers. Some of Teradyne's competitors
have introduced or announced new products with certain performance
characteristics which may be considered equal or superior to those Teradyne
currently offers. Teradyne expects its competitors to continue to improve the
performance of their current products and to introduce new products or new
technologies that provide improved cost of ownership and performance
characteristics. New product introductions by competitors could cause a decline
in sales or loss of market acceptance of Teradyne's products. Moreover,
increased competitive pressure could lead to intensified price based
competition, which could materially adversely affect Teradyne's business,
financial condition and results of operations.
Teradyne Is Subject to Risks of Operating Internationally.
Teradyne derives a significant portion of its total revenue from
customers outside the United States. Teradyne's international sales are subject
to significant risks and difficulties, including:
- unexpected changes in legal and regulatory requirements and in
policy changes affecting international markets;
- compliance with customs regulations;
- changes in tariffs and exchange rates;
- political and economic instability, acts of terrorism and
international conflicts;
- difficulties in accounts receivable collection;
- difficulties in staffing and managing international operations; and
- potentially adverse tax consequences, such as the World Trade
Organization's dispute against the U.S. Foreign Sales Credit.
29
Teradyne's Business May Suffer if it is Unable to Attract and Retain Key
Employees.
Competition for certain employees with skills required by Teradyne for
its Semiconductor Test Systems segment is intense in the high technology
industry. Teradyne's success will depend on its ability to attract and retain
key technical employees in this business segment. The loss of one or more key or
other employees, Teradyne's inability to attract additional qualified employees
or the delay in hiring key personnel could each have a material adverse effect
on Teradyne's business, results of operations or financial condition.
If Teradyne's Suppliers do not Meet Teradyne's Product or Delivery Requirements,
Teradyne Could Have Reduced Revenues and Earnings.
The availability of certain components, including semiconductor chips,
may be in short supply from time to time because of high industry demand or the
inability of some vendors to consistently meet Teradyne's quality or delivery
requirements. If any of Teradyne's suppliers were to cancel contracts or
commitments with Teradyne or fail to meet the quality or delivery requirements
needed to satisfy customer orders for Teradyne's products, Teradyne could lose
time-sensitive customer orders and have significantly decreased quarterly
revenues and earnings, which would have a material adverse effect on Teradyne's
business, results of operations and financial condition. In addition, Teradyne
relies upon third-party contract manufacturers for certain subsystems used in
its products, and Teradyne's ability to meet customer orders for those products
depends upon the timeliness and quality of the work performed by these
subcontractors, over whom Teradyne does not exercise any control.
Teradyne May Incur Significant Liabilities if It Fails to Comply With
Environmental Regulations.
Teradyne is subject to environmental regulations and statutory strict
liability relating to the use, storage, discharge, site cleanup, and disposal of
hazardous chemicals used in its manufacturing processes. If Teradyne fails to
comply with present and future regulations, or is required to perform site
remediation, Teradyne could be subject to future liabilities or the suspension
of production. Present and future regulations may also:
- restrict Teradyne's ability to expand its facilities;
- require Teradyne to acquire costly equipment; or
- require Teradyne to incur other significant costs and expenses.
Teradyne Has Substantially Increased Its Indebtedness.
On October 24, 2001, Teradyne completed a private placement of $400
million principal amount of 3.75% Convertible Senior Notes (the "Notes") due
2006 and received net proceeds of $389 million. On December 19, 2001, Teradyne
obtained a loan of approximately $45 million in the form of a 7.5% mortgage loan
maturing on January 1, 2007 (the "Mortgage"). As a result, Teradyne has incurred
approximately $445 million principal amount of additional indebtedness,
substantially increasing its ratio of debt to total capitalization. Teradyne may
incur substantial additional indebtedness in the future. The level of Teradyne's
indebtedness, among other things, could:
- make it difficult for Teradyne to make payments on its debt and
other obligations;
- make it difficult for Teradyne to obtain any necessary future
financing for working capital, capital expenditures, debt service
requirements or other purposes;
- require the dedication of a substantial portion of any cash flow
from operations to service for indebtedness, thereby reducing the
amount of cash flow available for other purposes, including capital
expenditures;
- limit Teradyne's flexibility in planning for, or reacting to changes
in, its business and the industries in which Teradyne competes;
- place Teradyne at a possible competitive disadvantage with respect
to less leveraged competitors and competitors that have better
access to capital resources; and
- make Teradyne more vulnerable in the event of a further downturn in
its business.
There can be no assurance that Teradyne will be able to meet its debt
service obligations, including its obligations under the Notes and the Mortgage.
Teradyne May Not Be Able to Satisfy Certain Obligations in the Event of a
Change in Control.
The indenture governing the Notes contains provisions that apply to a
change in control of Teradyne. If someone triggers a change in control as
defined in the indenture, Teradyne may be required to offer to purchase the
Notes with cash. If Teradyne has to make that offer, Teradyne cannot be sure
that it will have enough funds to pay for all the Notes that the holders could
tender.
In the event of a change in control of Teradyne, the Mortgage lender
may elect to declare all amounts due under the Mortgage to be immediately due
and payable, and may elect to take possession of or sell the property subject to
the Mortgage.
30
Teradyne May Not Be Able to Pay Its Debt and Other Obligations.
If Teradyne's cash flow is inadequate to meet its obligations, Teradyne
could face substantial liquidity problems. If Teradyne sustains continued losses
or is unable to generate sufficient cash flow or otherwise obtain funds
necessary to make required payments on the Notes, the Mortgage, or certain of
its other obligations, Teradyne would be in default under the terms thereof,
which would permit the holders of those obligations to accelerate their maturity
and also could cause defaults under future indebtedness Teradyne may incur. Any
such default could have a material adverse effect on Teradyne's business,
prospects, financial position and operating results. In addition, Teradyne
cannot assure that it would be able to repay amounts due in respect of the Notes
or the Mortgage if payment of those obligations were to be accelerated following
the occurrence of any other event of default as defined in the instruments
creating those obligations. Moreover, Teradyne cannot assure that it will have
sufficient funds or will be able to arrange for financing to pay the principal
amount due on the Notes or the Mortgage at their respective maturities.
Teradyne May Need Additional Financing, Which Could Be Difficult to Obtain.
Teradyne expects that its existing cash and marketable securities, cash
generated from operations, the proceeds of the Notes offering in October 2001
and the proceeds from the Mortgage financing in December 2001, will be
sufficient to meet Teradyne's cash requirements to fund operations and expected
capital expenditures for the next twenty-four months. However, Teradyne has a
finite amount of cash and in the event Teradyne may need to raise additional
funds, due to on-going losses or other reasons, Teradyne cannot be certain that
it will be able to obtain such additional financing on favorable terms, if at
all, particularly in light of Teradyne's continued quarterly losses. Further, if
Teradyne issues additional equity securities, stockholders may experience
additional dilution or the new equity securities may have rights, preferences or
privileges senior to those of existing holders of common stock. Future
financings may place restrictions on how Teradyne operates its business. If
Teradyne cannot raise funds on acceptable terms, if and when needed, Teradyne
may not be able to develop or enhance its products and services, take advantage
of future opportunities, grow its business or respond to competitive pressures,
which could seriously harm Teradyne's business.
Provisions of Teradyne's Charter and By-Laws and Massachusetts Law Make a
Takeover of Teradyne More Difficult.
Teradyne's basic corporate documents, its stockholder rights plan, and
Massachusetts law contain provisions that could discourage, delay or prevent a
change in the control of Teradyne, even if a change of control might be regarded
as beneficial to some or all of Teradyne's stockholders.
Teradyne's Operating Results Are Likely to Fluctuate Significantly.
Teradyne's quarterly and annual operating results are affected by a
wide variety of factors that could materially adversely affect revenues and
profitability, including:
- competitive pressures on selling prices;
- the timing of customer orders and the deferral or cancellation of
orders previously received;
- provisions for excess and obsolete inventory;
- allowances for deferred tax assets;
- charges for certain long-lived assets, including goodwill;
- changes in product mix;
- Teradyne's ability to introduce new products and technologies on a
timely basis;
- the introduction of products and technologies by Teradyne's
competitors;
- market acceptance of Teradyne's and its competitors' products;
- fulfilling backlog on a timely basis;
- reliance on sole source suppliers;
- potential retrofit costs;
- the level of orders received which can be shipped in a quarter; and
- the timing of investments in engineering and development.
In particular, due to Teradyne's introduction of a number of new,
complex test systems in 2001 and 2002, there can be no assurance that Teradyne
will not experience delays in shipment of its products or that its products will
achieve customer acceptance.
As a result of the foregoing and other factors, Teradyne has and may
continue to experience material fluctuations in future operating results on a
quarterly or annual basis which could materially and adversely affect its
business, financial condition, operating results and stock price.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
There were no material changes in Teradyne's exposure to market risk from
December 31, 2001.
31
Item 4: Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Based on their evaluation
as of a date within 90 days of the filing of this quarterly report, Teradyne's
management with the Chief Executive Officer and Chief Financial Officer as
participants and supervisors have concluded that Teradyne's disclosure controls
and procedures, as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
and Exchange Act of 1934 (the Exchange Act), are effective to ensure that
information required to be disclosed by Teradyne in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) Changes in internal controls. There were no significant changes in
Teradyne's internal controls or, to Teradyne's knowledge, in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
After the August 2000 acquisition of Herco Technology Corp. and
Perception Laminates, Inc. the former owners of those companies filed a
complaint on September 5, 2001 against Teradyne and two of its executive
officers. The case is now pending in Federal District Court, San Diego,
California. Teradyne and the two individual defendants filed a motion to dismiss
the complaint in its entirety. The court granted the motion in part, and the
only remaining claims were that the sale of Teradyne's common stock to the
former owners violated certain California securities statutes and common law and
that Teradyne breached certain contractual obligations in the agreements
relating to the acquisitions. Teradyne filed a subsequent motion for partial
summary judgment on August 9, 2002 with respect to the breach of contract
claims. A hearing on the motion was held on October 28, 2002. On November 7,
2002, the court granted Teradyne's motion for partial summary judgment,
dismissing all of the plaintiffs' breach of contract claims. A small portion of
the original complaint now remains pending. Teradyne has answered and denied all
liability. Management does not believe Teradyne's liability for the remaining
claims in the complaint will have a material adverse effect on Teradyne's
financial position or results of operations.
Teradyne and two of its executive officers were named as defendants in
three purported class action complaints that were filed in Federal District
Court, Boston, Massachusetts, in October and November, 2001. The court
consolidated the cases and has appointed three lead plaintiffs. On November 8,
2002, plaintiffs filed and served a consolidated amended class action complaint.
The complaint alleges, among other things, that the defendants violated
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, by making,
during the period from July 14, 2000 until October 17, 2000, material
misrepresentations and omissions to the investing public regarding Teradyne's
business operations and future prospects. The complaint seeks unspecified
damages, including compensatory damages and recovery of reasonable attorneys'
fees and costs. Teradyne will be moving to dismiss all claims asserted in the
complaint. Teradyne is unable to predict the outcome of the case or reasonably
estimate a range of possible loss given the current status of the litigation.
By letter dated October 22, 2002, counsel for Electro Mechanical
Solutions, Inc., and several affiliated debtors including PRECISMetals in
Chapter 11 bankruptcy cases pending in the United States Bankruptcy Court for
the Northern District of California (collectively, the "Debtors"), asserted that
Teradyne received payments in 2001 totaling $12.4 million from PRECISMetals in
the 90 days prior to the bankruptcy filing and that those payments constitute
avoidable preferential transfers. Teradyne believes that it has good faith
defenses to the alleged preferential transfers. Teradyne is unable to predict
the outcome of this case or reasonably estimate a range of possible loss given
the current status of the litigation.
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. At this time, Teradyne
cannot predict what its liability, if any, may be for the clean-up of this site
and can give no assurance that the claim will not materially adversely affect
Teradyne's financial position or results of operations.
In August 2002, Teradyne was designated as a PRP at a site in
Whittier, California. Teradyne was identified as a PRP based on shipments from
its Woodland Hills, California and Agoura Hills, California sites during 1983
and 1984. Based upon review of the shipping documents, Teradyne believes it is a
de minimus contributor to the site. Management does not believe Teradyne's
liability for the clean-up of this site will have a material adverse effect on
Teradyne's financial position or results of operations.
In October, 1998, a former employee of GenRad, Inc. instituted an
arbitration proceeding against GenRad alleging breach of his severance
agreement. Teradyne believes that the employee's claims are without merit. The
last arbitration hearing date was conducted on October 28, 2002, and a decision
is expected by May, 2003. Teradyne is unable to predict the outcome of this case
or to reasonably estimate the range of possible loss.
In addition, Teradyne is subject to legal proceedings and claims that
arise in the ordinary course of business. Management does not believe these
actions will have a material adverse effect on Teradyne's financial position or
results of operations.
32
Item 6: Exhibits and Reports on Form 8-K
(a): Exhibits
Exhibit Number Description
- -------------- -----------
99.1 Certification pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b): Reports on Form 8-K
A Current Report on Form 8-K dated August 8, 2002, was filed with the
Securities and Exchange Commission on August 9, 2002 relating to the statements
under oath of Teradyne's Principal Executive Officer and its Principal Financial
Officer regarding facts and circumstances relating to the accuracy of the
Company's filings under the Securities Exchange Act of 1934, as amended. George
W. Chamillard, Chairman, Chief Executive Officer and President of the Company,
and Gregory R. Beecher, Vice President and Chief Financial Officer of the
Company, signed these statements on August 8, 2002. The statements were
submitted to the Securities and Exchange Commission (the "Commission") on August
9, 2002, pursuant to the Commission's "Order Requiring the Filing of Sworn
Statements Pursuant to Section 21(a)(1) of the Securities Exchange Act of 1934"
(File No. 4-460, June 27, 2002).
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
(Principal Financial Officer)
November 13, 2002
33
CERTIFICATIONS
I, George W. Chamillard, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Teradyne, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
-----------------------------
By: /s/ George W. Chamillard
------------------------------
George W. Chamillard
Chief Executive Officer
34
I, Gregory R. Beecher, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Teradyne, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
-----------------------------
By: /s/ Gregory R. Beecher
------------------------------
Gregory R. Beecher
Chief Financial Officer
35