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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 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 Number)
321 HARRISON AVENUE,
BOSTON, MASSACHUSETTS 02118
(Address of principal executive
offices) (Zip Code)
Registrant's telephone number, including area code: (617) 482-2700
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
Common Stock, par value
$0.125 per share New York Stock Exchange
Common Stock Purchase
Rights New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12(b-2).
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or in any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of June 28, 2002 was $4.3 billion based upon the composite
closing price of the registrant's Common Stock on the New York Stock Exchange
on that date.
The number of shares outstanding of the registrant's only class of Common
Stock as of February 21, 2003 was 184,891,145 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement in connection with its 2003
annual meeting of shareholders are incorporated by reference into Part III.
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TERADYNE, INC.
FORM 10-K
PART I
Item 1: Business
Teradyne, Inc. is the world's largest supplier 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 ("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 reporting Teradyne's operating segments.
For financial information concerning Teradyne's operating segments, see "Note
T: Operating Segment and Geographic Information" in Notes to Consolidated
Financial Statements.
Statements in this Annual Report on Form 10-K which are not historical
facts, so called "forward looking statements," are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that all forward looking statements involve risks and
uncertainties, including those detailed in Teradyne's filings with the
Securities and Exchange Commission. See also "Item 7: Management's Discussion
and Analysis of Financial Condition and Results of Operations--Certain Factors
That May Affect Future Results" and "Note E: Risks and Uncertainties" in Notes
to Consolidated Financial Statements.
Products
Semiconductor Test Solutions
Teradyne produces Semiconductor Test Systems which are used in the
manufacturing and testing of a wide variety of integrated devices, including
"system on a chip (SOC)", mixed signal, logic, and memory integrated circuits.
Semiconductor Test Systems are sold to Integrated Device Manufacturers (IDMs)
and to subcontractors (Subcons), that perform design and/or manufacturing
functions for the IDMs. The Subcon sector is further divided into companies
that perform design of integrated circuits without manufacturing capabilities
which, often referred to as "Fabless" companies, companies which have wafer
manufacturing capability called Foundries and companies which provide test and
assembly services for the final packaged devices. These customers use
Teradyne's Semiconductor Test Systems to:
. measure product performance;
. improve and control product quality;
. improve device design;
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. reduce time to market;
. enhance manufacturability;
. minimize labor costs; and
. increase production yields,
with the overall benefit of comprehensively testing advanced performance
devices while reducing their total costs associated with testing.
The semiconductor test market is comprised of two sub-markets. The first
sub-market is system on a chip (SOC) device testing, which includes the testing
of a broad range of analog, mixed signal, and logic devices used in automotive,
communications, consumer, computer and electronic game applications. The second
sub-market is memory device testing, which includes the testing of dynamic
random access memory ("DRAMs") of all types (synchronous, double data rate
("DDR") and Rambus/TM/), static random access memory ("SRAMs") and flash memory.
Teradyne products within the Semiconductor Test Systems market include:
System on a Chip ("SOC") Test Solutions
System On a Chip devices integrate analog, digital, and embedded memory to
implement a complete function on a single chip. The SOC market spans a huge
range of functionality, from very simple low cost devices such as operational
amplifiers or voltage regulators to complex digital signal processors and
microprocessors. Teradyne offers a suite of test solutions to cover this range
in the most economical way for each segment. The main test equipment products
are described below:
The J750 and J750K test systems are designed to address the highest volume
semiconductor devices. Devices such as microcontrollers are at the heart of
almost every consumer electronics product, from small appliances to automotive
engine controllers. These devices are produced in enormous quantities. The
lowest cost of test at very high production throughput rates is essential to
meeting the economic requirements in these markets. Teradyne's J750 test
systems combine compact packaging, high throughput, and ease of production
test. This was possible due to the high level of integration in the design. A
single circuit board in the J750 test system provides up to 64 digital
input/output channels. This innovative approach eliminated the traditional
"mainframe", creating a "tester in the test head." Its "zero footprint" design
reduces the total cost of ownership and allows for more efficient use of
production floor space. The J750 platform technology was used to create
Teradyne's IP750 Image Sensor test system. The IP750 is focused on testing
current and future image sensor devices used in digital cameras and other
imaging products.
The Catalyst and Catalyst-Tiger test systems are designed to test a broad
range of higher performance integrated mixed signal and system on chip devices.
The Catalyst is designed to test devices requiring data rates up to 400 Mega
bytes per second (or M bps) with a broad range of analog performance. Over
1,000 Catalyst systems are in use today at IDMs and Subcons testing integrated
circuits for DVD players, cellular phones, networking appliances,
telecommunications systems, computer peripherals, and many other applications.
Teradyne estimates that over 75% of the world's cell phones include devices
tested on Teradyne's Catalyst systems, or its predecessor, the A500 series of
test systems.
The "Tiger" version of Catalyst provides similar analog capability, but
extends the digital performance up to 1.6 Giga bps on up to 1,024 input/output
channels. This extended digital performance enables complete functional testing
of the world's most demanding mixed signal and high speed logic integrated
circuits, used in computer graphics, personal computer chip set,
microprocessor, and networking applications. The Tiger is installed at both
IDMs and Subcons around the world.
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High performance devices such as microprocessors require high performance
automatic test equipment for both functional ("Does it function properly?") and
structural ("Is it constructed properly?") testing. Teradyne's J973EP is one of
the only Very Large Scale Integration, ("VLSI") test systems designed for the
wide range of testing capability needed for structural to functional testing in
a single test system. This product's flexible configuration provides the
ability to switch between functional and structural test in real time,
minimizing test cost by matching test performance to device test requirements.
The J973EP expands the performance curve on accuracy, precision device power,
and differential bus testing.
Teradyne's most recently introduced test system, the FLEX, is the beginning
of the next generation of high throughput general purpose SOC test systems and
combines the integration and parallelism of the J750 with the synchronization
and instrument flexibility of the Catalyst. FLEX, introduced in April of 2002,
employs a unique "SOC tester per pin" architecture bringing a higher degree of
parallelism to mixed signal and SOC testing. By testing more functions and more
devices at the same time ("in parallel") FLEX increases the production
efficiency of mixed signal device testing. The core of FLEX design employs a
"universal slot" concept, which provides the user the flexibility to install
any instrument or tester resource into any of the tester "slots". FLEX is
similar to the J750 in that the instrumentation tends to be implemented on self
contained circuit boards that plug into the test head. This modular design and
the universal slot architecture adds a level of adaptability and flexibility to
production testing which is new to the industry. FLEX covers a range of devices
in the consumer electronics area, including automotive, higher performance
microcontrollers, and power control. FLEX will be expanded to cover wireless
and other integrated mixed signal device areas over time. FLEX currently covers
devices in the consumer electronics area, including automotive, higher
performance microcontroller and power control applications. Its capabilities
are rapidly being expanded to cover the other major segments of the SOC device
market.
Memory Test Solutions
Reducing cost of test is especially crucial in the highly price sensitive
memory device market. Teradyne's Probe-One DRAM memory test system delivers one
of the lowest test costs. Recently, market demand for the system has been very
limited. Teradyne's other memory test offering is the J996 memory test system
which provides high throughput solutions for both probe and package test. At
the end of 2002, Teradyne discontinued the J996 product after a last time buy
was offered to Teradyne's customers.
Connection Systems Solutions
Connection Systems offers a total system solution with a broad suite of
technologically differentiated capabilities including high performance printed
circuits, high-speed, high-density connectors, multi-gigabit backplane
assemblies, electromechanical integration and systems integration and test
services. Connection System's technology can be found in such products as
Internet routers, computer servers, mass data storage systems and telecom
switches.
Connection Systems produces complex printed circuit boards, including large
format boards called "backplanes" (over 0.400 inches thick, up to 36 inches
wide and 54 inches long, and over 60 layers) and high speed and high density
smaller format boards called "daughter cards". A backplane plays the crucial
role of locating and supporting printed circuit boards within a system,
enabling the printed circuit boards to "talk" to each other and to the outside
world. Connectors are key elements in the system linking a backplane with
printed circuit boards (daughter cards) that perform specific functions. High
bandwidth capability packed in a small amount of space is an important
technological advantage of Teradyne's connectors. Connection System's VHDM(R)
and VHDM-HSD/TM/ connector families have become a standard in the industry for
high-speed, high-density interconnect. The GbX/TM/ connector, (introduced in
2001) and NexLev connector, have the highest density on the market today in
their respective applications and enable data rates to 10 Giga bits per second.
Connection Systems also provides electronic manufacturing services, including
backplane assembly, electro-mechanical integration of sub-assemblies, and
systems integration and test.
4
An essential element of the Connection Systems business is its design and
applications engineering expertise at every step in the process. By working
early with customers in the system design cycle, this expertise helps balance
critical cost and performance needs. In addition, Connection System's program
management services become an extension of the customer's operation, delivering
quick turn prototypes and high technology production volumes.
Circuit Board Test and Inspection Solutions
The central element of almost every electronic product is a printed circuit
board assembly. A circuit board assembly includes all the components and their
interconnections that cause the board to perform its intended functions. As
more and more product functionality is packed into smaller packages, such as
personnel digital assistants (PDAs), phone handsets and laptop computers, both
the circuit boards and their components become increasingly complex. The
circuit board assembly manufacturing process is also complex and demands a
number of test and inspection steps. Teradyne circuit board assembly test and
inspection equipment is used throughout the manufacturing process to ensure
high production yields, to maintain overall product quality, to diagnose faults
quickly where and when they occur, and to reduce total manufacturing cost. The
Teradyne circuit board assembly and inspection product range includes the
following products:
In-Circuit Test
In-circuit test systems examine the assembled and soldered printed circuit
board for proper construction under both power-off and power-on conditions.
Defective components and solder joints are identified quickly and precisely.
High throughput, relatively low cost fault identification and diagnostic
accuracy are valued features which cause in-circuit testers to be used
universally in every electronics production line. Teradyne in-circuit products
support a full range of circuit board test applications, including high-volume
production, selective or sample test, prototype testing and final or system
test. Accordingly, Teradyne offers a wide variety of capabilities and options
with its Spectrum 8000-series, Z1800-series and GR TestStation product lines.
Imaging Inspection
As circuit boards become increasingly dense and complex, achieving the
electrical contact required for the traditional in-circuit test method is
becoming more difficult, time-consuming and expensive. "Loss of (electrical)
access" is a primary driver behind the increasing popularity of imaging
inspection systems, which examine the circuit board for physical qualities
including correct component presence and orientation, the absence of electrical
opens and solder quality. Teradyne's imaging inspection systems employ one of
two technologies: automated optical inspection ("AOI"), whereby a visual image
of the board is captured and analyzed; and automated x-ray inspection ("AXI"),
which captures an x-ray image of the board. Each technology has particular
strengths in analyzing various board defect classes. For example, AOI is the
preferred technology for evaluating and diagnosing component-related defects,
while AXI is the preferred technology for analyzing hidden solder-related
defects. Teradyne's Optima 7000-series AOI systems employ advanced and patented
lighting, camera, software, and mechanics, resulting in highly reliable,
repeatable, and accurate optical inspection at high line speeds. The AXI
product line offers fast throughput with high resolution on both its
two-dimensional (2D) and three-dimensional (3D) models, and is the only product
line that includes a combined 2D/3D capability.
Military/Aerospace Test & Diagnostics
The Mil/Aero Test Solutions business unit applies Teradyne's expertise in
the functional test and diagnosis of assemblies of electronics to the military
and commercial aerospace markets. These solutions come in the form of systems,
instruments, and software products.
Teradyne's traditional focus in the military market has been to provide test
and diagnostic solutions for Factory and Depot level maintenance and repair
activities. These solutions are typically deployed in stable, fixed
5
environments with an emphasis on fast, accurate diagnostics down to a
repairable component on a replaceable unit. Teradyne has recently begun to
exploit architectural components that allow the repackaging of our solutions
into smaller, lighter, ruggedized implementations enabling Teradyne to expand
our served markets to include the Intermediate and Operational areas of the
military market. The requirements here are to isolate failures down to the
smallest replaceable unit in a mobile, harsh environment. The failed unit is
then passed back to the Depot or Factory for further diagnosis down to the
repairable component before being cycled back into stock. In the Commercial
Aerospace market, Teradyne utilizes the same functional test and diagnostics
capabilities that apply to the Military markets to test the increasing complex
electronic functions found in today's aircraft.
The success of our Mil/Aero product line has been demonstrated by recent
design wins on major Department of Defense programs such as the F-35 Joint
Strike Fighter, C-17, and RT-CASS, as well as with Aerospace customers such as
Boeing. These design-ins lay the foundation for significant growth potential,
as Teradyne is serving much larger markets than in the past.
Diagnostic Solutions
Diagnostic Solutions is a supplier of automotive manufacturing and service
bay test and diagnostic systems for electronics used in vehicles throughout
their lifecycle, from design through manufacture to after sale service. As the
number and complexity of electronic systems and software proliferate in
vehicles, the ability to manufacture and service those vehicles becomes
increasingly dependent on electronic diagnostic equipment. Diagnostic Solutions
predominately falls into two categories:
Vehicle Configuration and Test Systems ("VCATS")
Diagnostic Solution's VCATS products serve the automotive Original Equipment
Manufacturer ("OEM") sector. Used directly on automotive production lines,
Diagnostic Solutions connects to the vehicle to test and program (or
"configure") the electronic systems on vehicles. These include engine control
modules and subsystems such as braking, navigation and air conditioning.
Diagnostic Solutions is also able to link to an OEM's manufacturing control
system in order to provide statistical quality reports to operators and
management. In addition, Diagnostic Solutions also provides VCATS solutions to
Tier 1 suppliers to the OEMs.
OEM Service Diagnostics
OEM Dealer service technicians use Diagnostic Solution's systems to find
faults and perform routine service functions in order to help maintain the
quality of vehicles in use by their customers, and to reduce OEM warranty
costs. Historically, the focus has been on fixing faults in the service bay,
but is growing to include constant monitoring of the vehicle to predict and
prevent failure.
Broadband Test Solutions
Broadband Test Systems provides Celerity and NetFlare Test Systems for
testing speed characteristics and quality of telephone and cable television
lines connected to homes and businesses. These state-of-the-art systems support
cable and telephone company service provider's goals to sell and deploy DSL and
high-speed data services sooner and improve the efficiency of qualification,
provisioning, and customer care. Celerity and NetFlare together provide test
coverage across approximately 30 million lines. Broadband Test Systems also
provides voice network maintenance solutions for the communications industry.
Testing more than 120 million access lines worldwide for many of the world's
largest telecommunications companies, including British Telecommunications,
Deutsche Telecom and Verizon, Teradyne's 4TEL access network test system
reduces operating costs and increases customer satisfaction by reliably
detecting and identifying line faults within a telecommunications access
network.
6
Teradyne products within the Broadband Test Systems market include:
4TEL & 4TEL II Voice Test Systems
Teradyne's 4TEL voice test system automates the ability to precisely
identify and isolate faults within a telecommunications network, thus providing
cost savings to telephone operating companies. The 4TEL II voice test system
uses expert system technology to further isolate faults to such zones as
exchange hardware, exchange wiring, access cable, and inside or outside
customer premises, without the need for customer isolation equipment.
The 4TEL and 4TEL II test systems enable telephone operating companies to
automate customer care and field repair processes resulting in substantial
reductions in network maintenance and operating costs.
NetFlare/TM/ End-to-End Internet Testing
Cable and telephone company service providers can reduce broadband service
call handling time and erroneous truck dispatches while at the same time
increase customer satisfaction and reduce customer churn with Teradyne's
NetFlare system. This proven technology allows the consumer or call center
representative to emulate the consumer's network experience and determine the
source of a problem and the jurisdiction in the network designating the
appropriate mechanism for repair. For example, NetFlare technology
automatically measures throughput and latency as the consumer experiences it,
determines whether the broadband service provider commitment is met, and
identifies the network source of the problem. NetFlare significantly reduces
average call handling time and reduces the necessity for further technical
support. In particular cases when a truck dispatch is required, NetFlare can
assist in reducing "fault not found" conditions and can help designate the
appropriate level of technical expertise for dispatch.
Celerity/TM/ DSL Loop Qualification Test System
Service providers need to know which telephone lines between the central
office and the customer are qualified for broadband digital subscriber line
("DSL") service and which are not. Existing cable records are typically
insufficient. Teradyne's Celerity product uses accurate insertion loss, length
and load coil detection, all measured through the narrowband voice switch, to
qualify millions of lines for DSL service in hours, and develops a database
immediately showing which lines are qualified, which lines require conditioning
and which lines are disqualified. This information is then used to augment
existing records systems to support point-of-sale and marketing efforts of DSL.
In addition, Celerity performs real time provisioning testing that provides
detailed loop qualification information and tests in-service DSL lines,
identifying the presence and dispatch location of faults that affect data
transmission.
Celerity is a revenue enhancement tool as it finds more DSL-ready lines in
the network that can be sold to residential and small business customers.
Celerity also helps reduce the cost of provisioning DSL through automation of
the loop qualification process and reduction of field dispatches.
7
Summary of Net Sales by Operating Segment
Teradyne's four principal operating segments accounted for the following
percentage of consolidated net sales for each of last three years:
% of consolidated net sales
--------------------------
2002 2001 2000
---- ---- ----
Semiconductor Test Systems............... 46% 50% 67%
Connection Systems....................... 32 38 24
Circuit Board Test and Inspection Systems 14 9 5
Other Test Systems....................... 8 3 4
--- --- ---
Total.................................... 100% 100% 100%
Investor Information
Teradyne, a Massachusetts corporation incorporated on September 23, 1960, is
subject to the informational requirements of the Securities Exchange Act of
1934 (the "Exchange Act"). Therefore, Teradyne files periodic reports, proxy
statements and other information with the Securities and Exchange Commission
(the "SEC"). Such reports, proxy statements and other information may be
obtained by visiting the Public Reference Room of the SEC at 450 Fifth Street,
NW, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. In addition,
the SEC maintains an Internet site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding issuers that
file electronically.
You can access financial and other information at Teradyne's Investor
Relations website. The address is www.teradyne.com. We make available, free of
charge, copies of our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act through
Teradyne's website as soon as reasonably practicable after filing such material
electronically or otherwise furnishing it to the SEC.
Sales and Distribution
Prices for Teradyne's systems can reach $3 million or more. In 2002, 2001,
and 2000 no single customer accounted for more than 10% of Teradyne's
consolidated net sales. In 2002, 2001, and 2000 Teradyne's three largest
customers accounted for 23%, 24%, and 21% of consolidated net sales,
respectively.
Direct sales to United States government agencies accounted for less than 2%
of consolidated net sales in 2002, 2001 and 2000. Approximately 10% of Circuit
Board Test and Inspection Systems sales in 2002 were to United States
government agencies and another 15% was made to customers who are government
contractors.
Teradyne has sales and service offices located throughout North America,
South East Asia, Europe, Taiwan, Japan, and Korea as Teradyne's customers
outside the United States are located primarily in these geographic areas.
Teradyne sells in these areas predominantly through a direct sales force.
Primarily all of Teradyne's manufacturing activities are conducted in the
United States. Sales to customers outside the United States accounted for 54%
of consolidated net sales in 2002, 49% in 2001, and 54% in 2000. Sales to
customers located in Taiwan were 9% of consolidated net sales in 2002 and 10%
of consolidated net sales in 2001 and 2000. Sales are attributed to geographic
areas based on the location of the customer site.
Teradyne is subject to the inherent risks involved in international trade,
such as:
. Political and economic instability and acts of terrorism;
. Restrictive trade policies;
8
. Controls on funds transfer;
. Currency fluctuations;
. Difficulties in managing distributors;
. Potentially adverse tax consequences; and
. Accounts receivable collection.
Teradyne attempts to reduce the effects of currency fluctuations by hedging
those currency exposures associated with certain assets and liabilities
denominated in non-functional currencies and by conducting some of its
international transactions in U.S. dollars or dollar equivalents. See also
"Item 7A. Quantitative and Qualitative Disclosures About Market Risks" and
"Note G: Financial Instruments" in Notes to Consolidated Financial Statements.
Competition
Teradyne faces substantial competition, throughout the world in each of its
operating segments. Some of these 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
that 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.
Backlog
At December 31, 2002 and 2001, Teradyne's backlog of unfilled orders in each
of its four principal operating segments was as follows:
(in millions)
-------------
2002 2001
------ ------
Semiconductor Test Systems............... $240.0 $317.2
Connection Systems....................... 104.2 357.6
Circuit Board Test and Inspection Systems 53.4 55.5
Other Test Systems....................... 43.3 32.7
------ ------
$440.9 $763.0
The decrease in Semiconductor Test Systems and Connection Systems backlog of
$77.2 million and $253.4 million respectively was primarily due to customer
cancellations and demand reductions. Of the backlog at December 31, 2002,
approximately 93% of the Semiconductor Test Systems backlog, 99% of the
Connection Systems backlog, 94% of Circuit Board Test and Inspection Systems
backlog, and 92% of the Other Test Systems backlog is expected to be delivered
in 2003. Generally, Teradyne's backlog policy requires delivery of products and
services within twelve months, except for service agreements where delivery may
cover a continuous period of up to thirty-six months.
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.
9
Raw Materials
Teradyne's products require a wide variety of electronic and mechanical
components from 4,000 suppliers of which 55 represent 80% of the spending.
Teradyne can experience occasional delays in obtaining timely delivery of
certain items. Additionally, Teradyne could experience a temporary adverse
impact if any of its sole source suppliers ceased to deliver products.
Approximately 30% of material purchases require some custom work where having
multiple suppliers would be cost prohibitive. Any prolonged inability to obtain
adequate supplies, or any other circumstances that would require Teradyne to
seek alternative sources of supply could have a material adverse effect on its
business, financial condition, and results of operations.
Patents and Licenses
Teradyne's development of its products, both hardware and software, is based
in significant part on proprietary information and technology. Teradyne
protects its rights in proprietary information and technology through various
methods, such as:
. patents and patent applications;
. copyrights;
. trademarks;
. trade secrets;
. business practices;
. software license agreements, non-disclosure agreements and other
contracts; and
. employee agreements.
However, these protections might not be effective in all circumstances.
Competitors might independently develop similar technology or exploit
Teradyne's proprietary technology and/or information in countries where
Teradyne lacks enforceable intellectual property rights (IP) or enforcement of
such rights through the legal system provides an insufficient deterrent. Also,
IP protections can be invalidated through legal processes. While Teradyne does
not believe that any single piece of intellectual property or proprietary
rights is essential to its business, if a significant portion of Teradyne's
intellectual property or proprietary rights is invalidated or ineffective,
Teradyne's business could be materially affected.
Employees
As of December 31, 2002, Teradyne employed approximately 7,200 people. Since
the inception of Teradyne's business, there have been no work stoppages or
other labor disturbances. Teradyne has no collective bargaining contracts.
Engineering and Development Activities
The highly technical nature of Teradyne's products requires a large and
continuing engineering and development effort. Engineering and development
expenditures were approximately $293.9 million in 2002, $287.3 million in 2001,
and $348.0 million in 2000. These expenditures amounted to approximately 24% of
consolidated net sales in 2002, 20% in 2001, and 11% in 2000.
Environmental Affairs
Teradyne is subject to various federal, state and local government laws and
regulations relating to the protection of employee health and safety and the
environment. Teradyne accrues for all known environmental liabilities when it
becomes probable that Teradyne will incur cleanup costs and those costs can
reasonably be estimated. The amounts accrued do not cover sites that are in the
preliminary stages of investigation. Estimated environmental costs are not
expected to materially affect the financial position or results of Teradyne's
operations in future periods. However, estimates of future costs are subject to
change due to protracted cleanup periods and changing environmental remediation
laws and regulations.
10
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. Management does not
believe the outcome of this matter will have a material adverse effect on
Teradyne's financial position or results of operations but there can be no
assurance that any such outcome would not have a material adverse effect on
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 that any
potential liability is limited to that of a de minimus contributor to the site.
Management does not believe that any potential liability for the clean-up of
this site will have a material adverse effect on Teradyne's financial position
or results of operations but there can be no assurance that any potential
liability would not have a material adverse effect on Teradyne's financial
position or results of operations.
11
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names of all executive officers of
Teradyne and certain other information relating to their positions held with
Teradyne and other business experience. Executive officers of Teradyne do not
have a specific term of office but rather serve at the discretion of the Board
of Directors.
Executive Officer Age Position Business Experience For The Past 5 Years
----------------- --- -------------------------- ----------------------------------------------
George W. Chamillard 64 President, Chairman of the Chairman of the Board since 2000; President
Board, and Chief and Chief Executive Officer of Teradyne since
Executive Officer 1997; Director of Teradyne since 1996;
President and Chief Operating Officer of
Teradyne from 1996 to 1997; Executive Vice
President of Teradyne from 1994 to 1996.
Gregory R. Beecher.. 45 Vice President, Chief Vice President and Chief Financial Officer of
Financial Officer and Teradyne since 2001 and Treasurer of
Treasurer Teradyne since February 2003; Partner at
PricewaterhouseCoopers LLP from 1993 to
2001.
Michael A. Bradley.. 54 President of President of Semiconductor Test since 2001;
Semiconductor Test Vice President of Teradyne from 1992 to
2001; Chief Financial Officer of Teradyne
from 1999 to 2001.
Eileen Casal........ 44 Vice President, General Vice President, General Counsel and Clerk of
Counsel and Clerk Teradyne since January, 2003; Vice President,
General Counsel and Corporate Secretary of
GSI Lumonics Inc. from May 2001 until
January 2003; Vice President, General
Counsel and Corporate Secretary of Adero,
Inc. from April 2000 until March 2001; Vice
President, General Counsel and Assistant
Clerk of Teradyne, Inc. from April 1999 to
April 2000; and from 1986 until March 1999,
Ms. Casal held a number of legal positions at
Stratus Computer, Inc. including Vice
President, General Counsel and Clerk.
John M. Casey....... 54 President of Circuit Board President of Circuit Board Test and Inspection
Test and Inspection since 2002; Vice President of Teradyne since
1990.
G. Richard MacDonald 54 Controller Controller of Teradyne since 2001; Controller
of Teradyne's Industrial Consumer Division
from 1989 to 2001.
Edward Rogas, Jr.... 62 Senior Vice President Senior Vice President of Teradyne since 2000;
Vice President of Teradyne from 1984 to 1999.
Richard E. Schneider 45 President of Connection President of Connection Systems since 2001;
Systems Vice President of Teradyne from 1998 to
2001; Connections Systems manager from
1998 to 2001; Connection Systems Business
Development manager from 1997 to 1998.
12
Item 2: Properties
The following table provides certain information as to Teradyne's principal
general offices and manufacturing facilities.
Approximate
Major Square Feet of
Location Operating Segment Activity+ Floor Space
-------- ----------------- --------- --------------
Properties Owned:
Nashua, New Hampshire........ Connection Systems 2-3-4-5 524,000
Boston, Massachusetts........ Semiconductor Test & General Offices 1-2-3-4-5 492,000
North Reading, Massachusetts. Semiconductor Test & Circuit Board
Test and Inspection 2-3-4-5 273,000
North Reading, Massachusetts. Unoccupied 425,000(a)
North Reading, Massachusetts. Unoccupied 242,000(b)
Agoura Hills, California..... Semiconductor Test 2-3 360,000
Agoura Hills, California..... Unoccupied 212,000(c)
San Diego, California........ Unoccupied 192,000 (c)
San Jose, California......... Semiconductor Test 3-5 120,000
Stoughton, Massachusetts..... Unoccupied 120,000(c)
La Verne, California......... Connection Systems 2 93,000
Kumamoto, Japan.............. Semiconductor Test 2-3-4-5 66,000
Deerfield, Illinois.......... Broadband Test 2-3-4-5 63,000
---------
Subtotal of Owned Properties................................................. 3,182,000
Properties Leased:
Westford, Massachusetts...... Circuit Board Test and Inspection 2-3-4-5 230,000
Woburn, Massachusetts........ Semiconductor Test 2-6 205,000
Hudson, New Hampshire........ Connection Systems 2 144,000
Mexicali, Mexico............. Connection Systems 2 112,000
Nashua, New Hampshire........ Unoccupied 107,000(d)
Walnut Creek, California..... Unoccupied 98,000 (e)
Shanghai, China.............. Connection Systems, Circuit Board Test and
Inspection, and Semiconductor Test 2 87,000
Bedford, Massachusetts....... Semiconductor Test 3 80,000
Manchester, England.......... Diagnostic Solutions 2-3-4-5 75,000
Agoura Hills, California..... Semiconductor Test 6 59,000
Stoughton, Massachusetts..... Unoccupied 55,000(d)
Nashua, New Hampshire........ Connection Systems 6 55,000
Plano, Texas................. Unoccupied 50,000(d)
Winston-Salem, North Carolina Connection Systems 2 49,000
Dublin, Ireland.............. Connection Systems 2 46,000
Fremont, California.......... Connection Systems 2 46,000
Bracknell, England........... Semiconductor Test, Broadband Test and
Circuit Board Test 3-5 44,000
Tai Yuan, Taiwan............. Semiconductor Test and Circuit Board Test 5 43,000
---------
Subtotal of Leased Properties................................................ 1,585,000
---------
Total Square Feet of Floor Space............................................. 4,767,000
=========
+ Major activities have been separated into the following categories: 1.
Corporate Administration, 2. Manufacturing, 3. Research and Development, 4.
Marketing, 5. Sales and Administration and 6. Storage and Distribution
(a) This space is unoccupied.
(b) This space is currently being leased to two companies.
(c) This space is held for sale.
(d) This space is currently being subleased.
(e) This space is unoccupied and is currently being marketed for sublease.
13
Item 3: 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's subsequent motion for partial summary judgment with
respect to the breach of contract claims was granted on November 7, 2002. The
plaintiffs have asked the Court to reconsider its ruling or, alternatively, for
leave to appeal both the dismissal of claims and summary judgment rulings to
the Ninth Circuit Court of Appeals. Teradyne has opposed these motions. No
ruling has yet been issued. Other than the above described motions, only a
small portion of the original complaint relating to alleged fraud in connection
with setting the transaction price remains pending before the District Court.
Teradyne has answered and denied all liability. Management does not believe
that the outcome of these claims will have a material adverse effect on
Teradyne's financial position or results of operations but there can be no
assurance that any such claims would not have a material adverse effect on
Teradyne's financial position or results of operations.
Also arising out of the August 2000 acquisition of Herco Technology Corp.
and Perception Laminates, Inc. is a demand for arbitration, made on or about
October 19, 2001, by the former owners of those companies, which was filed with
the American Arbitration Association. The arbitration is with respect to
environmental indemnification claims initially asserted by Teradyne under the
respective acquisition agreements. These claims arose in connection with
environmental matters related to Herco Technology Corp. and Perception
Laminates, Inc. facilities in California. The arbitration demand by the former
owners seeks release of certain shares of Teradyne's common stock being held in
escrow pursuant to the terms of the acquisition agreements and damages related
to failure to release the escrow. Teradyne has counterclaimed for enforcement
of the environmental indemnity provisions of the acquisition agreements.
Hearings in connection with the arbitration have been completed and the parties
are currently completing post-hearing briefs for submission to the arbitrators.
Management does not believe that the outcome of these claims will have a
material adverse effect on Teradyne's financial position or results of
operations but there can be no assurance that any such claims would not 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 filed a
motion to dismiss all claims asserted in the complaint on February 7, 2003.
Teradyne's motion has not yet been heard. Claims asserted in this case are
similar to the claims asserted in the case discussed above, which is pending in
the Federal District Court in San Diego, California. Teradyne believes it has
meritorious defenses to the claims and will defend itself vigorously.
Management does not believe that the outcome of these claims will have a
material adverse effect on Teradyne's financial position or results of
operations but there can be no assurance that any such claims would not have a
material adverse effect on Teradyne's financial position or results of
operations.
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
14
payments constitute avoidable preferential transfers. Teradyne believes that it
has good faith defenses to the alleged preferential transfers and intends to
contest the claims vigorously. Management does not believe that the outcome of
these claims will have a material adverse effect on Teradyne's financial
position or results of operations but there can be no assurance that any such
claims would not have a material adverse effect on Teradyne's financial
position or results of operations.
In October 1998, a former employee of GenRad, Inc., which Teradyne acquired
on October 26, 2001, 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 was conducted
on October 28, 2002, and a decision is expected by May 2003. Management does
not believe that the outcome of this proceeding will have a material adverse
effect on Teradyne's financial position or results of operations but there can
be no assurance that the outcome would not have a material adverse effect on
Teradyne's financial position or results of operations.
Teradyne has also been designated as a potentially responsible party ("PRP")
with respect to environmental clean-up matters at two sites in California. See
the discussion of these items in Item 1: "Environmental Matters" above.
Teradyne disputes all of the claims above and believes they are without
merit, and intends to defend vigorously against them. However, an adverse
resolution of any of the claims could have a material adverse effect on
Teradyne's financial position or results of operations. Teradyne is not
presently able to reasonably estimate potential losses, if any, related to any
of the claims and therefore as of December 31, 2002 had not accrued for any
potential losses from the claims.
In addition, Teradyne is subject to legal proceedings, claims and
investigations that arise in the ordinary course of business such as but not
limited to patent, commercial and environmental matters. There are no such
matters pending that Teradyne expects to be material to its business, financial
position or results of operations but there can be no assurance that any such
matters would not have a material adverse effect on Teradyne's business,
financial position or results of operations.
Item 4: Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5: Market for Registrant's Common Equity and Related Shareholder Matters
The following table shows the market range for Teradyne's Common Stock based
on reported sale prices on the New York Stock Exchange.
Period High Low
------ ------ ------
2001 First Quarter. $44.05 $29.05
Second Quarter 47.21 26.25
Third Quarter. 37.45 18.43
Fourth Quarter 33.00 18.50
2002 First Quarter. $39.99 $26.15
Second Quarter 40.20 22.81
Third Quarter. 24.20 8.82
Fourth Quarter 17.58 7.10
The number of record holders of Teradyne's Common Stock at February 21, 2003
was 4,784.
Teradyne has never paid cash dividends because it has been Teradyne's policy
to use earnings to finance expansion and growth. Payment of future cash
dividends will rest within the discretion of the Board of Directors and will
depend, among other things, upon Teradyne's earnings, capital requirements, and
financial condition. Teradyne presently expects to retain all of its earnings
for use in the business.
15
Item 6: Selected Financial Data
Years Ended December 31,*
--------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
Consolidated Statement of Operations Data:
Net sales................................ $1,222,236 $1,440,581 $3,043,946 $1,790,912 $1,489,151
========== ========== ========== ========== ==========
(Loss) income before cumulative effect of
change in accounting principle......... (718,469) (202,215) 517,754 191,694 102,117
========== ========== ========== ========== ==========
(Loss) income before cumulative effect of
change in accounting principle per
common share--basic.................... (3.93) (1.15) 2.99 1.12 0.61
========== ========== ========== ========== ==========
(Loss) income before cumulative effect of
change in accounting principle per
common share--diluted.................. (3.93) (1.15) 2.86 1.07 0.59
========== ========== ========== ========== ==========
Consolidated Balance Sheet Data:
Total assets............................. 1,894,677 2,542,391 2,355,868 1,568,213 1,312,814
========== ========== ========== ========== ==========
Long-term obligations.................... 450,561 451,682 8,352 8,948 13,200
========== ========== ========== ========== ==========
*Note: Previously published financial data prior to 2000 has not been
restated to give the pro forma effect of the adoption of the provisions of SAB
101. See "Note C: Change in Accounting Principle in 2000" in Notes to
Consolidated Financial Statements for further information.
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Annual Report
on Form 10-K. In addition to the historical information contained in this
document, the discussion in this Annual Report on Form 10-K contains
forward-looking statements, made pursuant to the Private Securities Litigation
Reform Act of 1995, that involve risks and uncertainties, such as statements of
Teradyne's plans, expectations and intentions. The cautionary statements made
in this Annual Report on Form 10-K should be read as being applicable to all
related forward-looking statements whenever they appear in this Annual Report
on Form 10-K. Teradyne's actual results could differ materially from the
results contemplated by these and any other forward-looking statements. Factors
that could contribute to such differences include those discussed below as well
as those cautionary statements and other factors set forth in "Certain Factors
That May Affect Future Results" and elsewhere herein.
Critical Accounting Policies and Estimates
Teradyne has identified the policies discussed below as critical to
understanding its business and its results of operations. The impact and any
associated risks related to these policies on its business operations is
discussed throughout Management's Discussion and Analysis of Financial
Condition and Results of Operations where such policies affect its reported and
expected financial results.
Preparation of Financial Statements and Use of Estimates
The preparation of consolidated financial statements requires Teradyne to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
liabilities. On an on-going basis, Teradyne evaluates its estimates, including
those related to inventories, investments, goodwill, intangible and other
long-lived assets, bad debts, income taxes, pensions, warranties,
16
contingencies and litigation. Teradyne bases its estimates on historical
experience and on appropriate and customary assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Revenue Recognition
Teradyne recognizes revenue when there is persuasive evidence of an
arrangement, title and risk of loss have passed, delivery has occurred or the
services have been rendered, the sales price is fixed or determinable and
collection of the related receivable is reasonably assured. It is Teradyne's
policy to require an arrangement with its customers, either in the form of a
written or electronic contract or purchase order containing all of the terms
and conditions governing the arrangement, prior to the recognition of revenue.
Title and risk of loss generally passes to the customer at the time of delivery
of the product to a common carrier. At the time of the transaction, Teradyne
assesses whether the sales price is fixed or determinable based upon the
payment terms of the arrangement. If a significant portion of the sales price
is not due within normal payment terms, the sales price may not be deemed fixed
and revenue would be recognized as the amounts become due. Teradyne does not
offer a right of return on its products.
Teradyne assesses collectibility based on a number of factors, including
past transaction and collection history with a customer and the
credit-worthiness of the customer. Teradyne performs on-going credit
evaluations of its customer's financial condition but generally does not
require collateral from its customers. If Teradyne determines that
collectibility of the sales price is not reasonably assured, revenue is
deferred until such time as collection becomes reasonably assured, which is
generally upon receipt of payment from the customer.
Revenue is recognized upon delivery provided that customer acceptance
criteria can be demonstrated prior to shipment. Where the criteria cannot be
demonstrated prior to shipment, or in the case of new products, revenue is
deferred until acceptance has been received. For multiple element arrangements,
Teradyne defers the greater of the fair value of any undelivered elements of
the contract or the portion of the sales price which is not payable until the
undelivered elements are delivered. Teradyne also defers the portion of the
sales price that is not due until acceptance, which represents deferred profit.
Fair value is the price charged when the element is sold separately. In order
to recognize revenue the functionality of the undelivered elements must not be
essential to the delivered elements. Installation is not considered essential
to the functionality of the product as these services do not alter the product
capabilities, do not require specialized skills or tools and can be performed
by the customers or other vendors. In addition to installation, other elements
may include extended warranties, customer support and undelivered products.
Service revenue is recognized over the contractual period or as the services
are performed. Teradyne's products are generally subject to warranty and
related costs are provided for in cost of sales when product revenue is
recognized.
Interconnection systems and electronic manufacturing assembly services
revenue is recognized upon shipment or delivery according to the shipping terms
of the arrangement as there is no installation required and there are no
contractual acceptance requirements.
For certain contracts eligible for contract accounting under Statement of
Accounting Position No. 81-1, "Accounting for Performance of Construction-Type
and Certain Production-Type Contracts," revenue is recognized using the
percentage-of-completion accounting method based upon an efforts-expended
method. These arrangements require significant production, modification or
customization. In all cases, changes to total estimated costs and anticipated
losses, if any, are recognized in the period in which determined. To date
revenue under contract accounting has not been material.
Inventories
Inventories which include materials, labor and manufacturing overhead are
stated at the lower of cost (first-in, first-out basis) or net realizable
value. On a quarterly basis, Teradyne uses consistent methodologies to
17
evaluate all inventory for net realizable value. Teradyne records a provision
for excess and obsolete inventory when such a writedown is identified through
the quarterly review process. The inventory valuation is based upon assumptions
about future demand, product mix and possible alternative uses.
Income Taxes
On a quarterly basis, Teradyne evaluates the realizability of its deferred
tax assets and assesses the need for a valuation allowance. As a result of its
review undertaken at December 31, 2002, Teradyne concluded under applicable
accounting criteria that it was more likely than not that its deferred tax
assets would not be realized and established a full valuation allowance. Until
an appropriate level of profitability is reached, Teradyne does not expect to
recognize tax benefits on operating losses in future results of operations.
Goodwill, Intangible and Long-Lived Assets
Teradyne assesses the impairment of identifiable intangibles, long-lived
assets and goodwill whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. Factors Teradyne considers important
in the determination of an impairment include significant underperformance
relative to expected historical or projected future operating results,
significant changes in the manner of Teradyne's use of the acquired asset, a
change in the strategy for Teradyne's overall business and significant negative
industry or economic trends. When Teradyne determines that the carrying value
of intangibles and long-lived assets may not be recoverable based upon the
existence of one or more of the above indicators of impairment, Teradyne
measures any impairment based on a projected discounted cash flow method using
a discount rate commensurate with the associated risks. Teradyne assesses
goodwill for impairment at least annually, on a reporting basis, or more
frequently when events and circumstances occur indicating that the recorded
goodwill may be impaired. If the book value of a reporting unit exceeds its
fair value, the implied fair value of goodwill is compared with the carrying
amount of goodwill. If the carrying amount of goodwill exceeds the implied fair
value, an impairment loss is recorded in an amount equal to that excess.
Allowance for Doubtful Accounts
The volatility of the industries that Teradyne serves can cause certain of
its customers to experience shortages of cash flows, which can impact their
ability to make required payments. Teradyne maintains allowances for doubtful
accounts for estimated losses resulting from the inability of its customers to
make required payments. Estimated allowances for doubtful accounts are reviewed
periodically taking into account the customer's current payment history, the
customer's current financial statements and other information regarding the
customer's credit worthiness. If the financial condition of Teradyne's
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required.
18
SELECTED RELATIONSHIPS WITHIN THE CONSOLIDATED
STATEMENTS OF OPERATIONS
Year Ended December
31,
---------------------
2002 2001 2000
----- ----- -----
(dollars in thousands)
Percentage of net sales:
Net Revenue:
Products.................................................................... 81.2% 85.6% 92.9%
Service..................................................................... 18.8 14.4 7.1
----- ----- -----
Total net revenue....................................................... 100.0 100.0 100.0
Expenses:
Cost of products............................................................ 67.9 70.5 48.3
Cost of service............................................................. 13.1 10.1 4.5
----- ----- -----
Total cost of sales..................................................... 81.0 80.6 52.8
Engineering and development................................................. 24.0 20.0 11.4
Selling and administrative.................................................. 23.8 18.7 12.4
Restructuring and other charges............................................. 16.7 5.2 --
----- ----- -----
145.5 124.5 76.6
Net interest and other (expense) income........................................ (0.4) 1.9 0.9
----- ----- -----
(Loss) income before income taxes and cumulative effect of change in accounting
principle.................................................................... (45.9) (22.6) 24.3
Provision for (benefit from) income taxes...................................... 12.9 (8.6) 7.3
----- ----- -----
(Loss) income before cumulative effect of change in accounting principle....... (58.8) (14.0) 17.0
Cumulative effect of change in accounting principle............................ -- -- (2.1)
----- ----- -----
Net (loss) income.............................................................. (58.8)% (14.0)% 14.9%
===== ===== =====
Results of Operations:
2002 compared to 2001
Business Overview
Teradyne saw an encouraging start to 2002, as first quarter sales were up
13% over the fourth quarter of 2001, followed by 25% quarter to quarter growth
in the second quarter. Net sales growth slowed to 7% in the third quarter
followed by flat quarter to quarter performance in the fourth quarter. The
combination of a continued weak economy, weak demand for technology products,
and the uncertain world political environment overwhelmed the recovery that
appeared to be starting early in the year.
As of the end of 2002, Teradyne's customers in general have lowered their
inventory levels and reduced their overall cost structures, resulting in
improved quarterly financial performance. Additionally, utilization of
Teradyne's semiconductor test equipment, and semiconductor test equipment in
general, has increased over the last year. This has resulted from increased
volumes of units shipped by Teradyne's Semiconductor industry customers. These
are generally signs of potential increases in demand for Teradyne's products.
However, a number of Teradyne's customers continue to lose money, although at a
reduced rate. In the Semiconductor industry, this is occurring as decreased
unit prices have offset the unit volume gains. As a result, Teradyne's
customers continue to defer orders until the last possible moment. Until
Teradyne's customers see significant and sustained increases in their business
levels, both in units and dollars, Teradyne's orders could remain low or see a
further decline. If Teradyne sees further declines in its own order rates, the
amount of Teradyne's inventory and certain long-lived assets considered
realizable could be significantly reduced.
19
Bookings
Net orders increased 12% to $905.3 million in 2002 from $808.2 million in
2001. Net orders increased by 63% and 65% in Semiconductor Test Systems and
Circuit Board Test and Inspection Systems, respectively. Connection Systems net
orders decreased by 61%. The increase in Semiconductor orders was driven by
increased demand for SOC products by Teradyne's Integrated Device Manufacturers
(IDMs) and Subcon customers, primarily for use in Asian facilities. The
increase in orders for Circuit Board Test and Inspection largely resulted from
the full year impact of the GenRad acquisition. The decrease in Connection
System orders reflects the impact of cancellations, which are described in the
next paragraph. Other Test Systems net orders increased 286%, mostly due to the
addition of a full year of activity from Diagnostic Solutions that was part of
the GenRad acquisition.
Teradyne experienced cancellations of $159.0 million and $285.5 million
during 2002 and 2001, respectively. For 2002, cancellations of $53 million and
$105 million occurred in the Semiconductor Test Systems and Connection System
businesses, respectively. The Semiconductor Test Systems cancellations were
largely for orders that were booked in late 2000 and early 2001 by Subcons in
anticipation of further increases in their own demand. Cancellations in the
Connection Systems business were from major customers in the telecommunication
and information technology infrastructure industries, as their own demand
levels dropped.
Teradyne's net orders for its four principal operating segments for 2002 and
2001 were as follows:
(in millions)
-------------
2002 2001
------ ------
Semiconductor Test Systems............... $480.5 $294.0
Connection Systems....................... 149.8 385.0
Circuit Board Test and Inspection Systems 167.8 101.4
Other Test Systems....................... 107.2 27.8
------ ------
$905.3 $808.2
Teradyne's net bookings by region as a percentage of total net bookings were
as follows:
2002 2001
---- ----
United States.... 44% 55%
South East Asia.. 19 12
Europe........... 18 24
Japan............ 9 3
Taiwan........... 6 3
Korea............ 2 1
Rest of the World 2 2
--- ---
100% 100%
Teradyne's backlog decreased 42% to $440.9 million in 2002 from $763.0
million in 2001. At December 31, 2002 and 2001, Teradyne's backlog of unfilled
orders for its four principal operating segments was as follows:
(in millions)
-------------
2002 2001
------ ------
Semiconductor Test Systems............... $240.0 $317.2
Connection Systems....................... 104.2 357.6
Circuit Board Test and Inspection Systems 53.4 55.5
Other Test Systems....................... 43.3 32.7
------ ------
$440.9 $763.0
20
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.
Revenue
Teradyne's four principal operating segments accounted for the following
percentages of consolidated net sales for each of last three years:
% of consolidated net sales
--------------------------
2002 2001 2000
---- ---- ----
Semiconductor Test Systems............... 46% 50% 67%
Connection Systems....................... 32 38 24
Circuit Board Test and Inspection Systems 14 9 5
Other Test Systems....................... 8 3 4
--- --- ---
Total.................................... 100% 100% 100%
Teradyne's sales by region as a percentage of total sales were as follows:
2002 2001
---- ----
United States........................... 46% 51%
Europe.................................. 18 19
South East Asia......................... 17 12
Taiwan.................................. 9 10
Japan................................... 6 4
Korea................................... 2 1
Rest of the World....................... 2 3
---- ----
100 % 100 %
Product sales decreased 20% in 2002 to $992.1 million from $1,233.7 million
in 2001. Service revenue increased largely due to the GenRad acquisition to
$230.1 million in 2002 from $206.9 million in 2001. Service revenue is derived
from the servicing of Teradyne's installed base of products and includes
maintenance contracts, customer support, extended warranties and parts sales.
Semiconductor Test Systems sales decreased 22%, to $557.6 million in 2002 from
$717.7 million in 2001, Connection Systems sales decreased 27%, to $397.0
million in 2002 from $540.8 million in 2001, and Circuit Board Test and
Inspection Systems sales increased 29%, to $170.8 million in 2002 from $132.4
million in 2001. Other Test Systems sales increased 95%, to $96.9 million in
2002 from $49.7 million in 2001. Year to year increases in sales for Teradyne's
Circuit Board Test and Inspection Systems and Other Test Systems largely
resulted from the full year impact of the acquisition of GenRad during the
fourth quarter of 2001.
Of the decrease in Semiconductor Test System sales, $98.7 million was due to
the accounting impact of the implementation of SAB 101, which is further
described in the next paragraph. The Connection Systems business saw downward
pricing pressure during 2002, as the average selling prices declined by
approximately 15% due to price pressures from both customers and competitors in
the face of a weak economy. Additionally, year to year results for Teradyne's
Semiconductor and Connection Systems businesses were impacted by 2001's steady
decline in quarterly sales, which was followed by a recovery to approximately
the current run-rate levels in the first half of 2002. The relatively stronger
first half of 2001, which followed Teradyne's record sales year of 2000,
further contributed to annual results for 2001 that exceeded 2002 for these
businesses.
21
During the fourth quarter of 2000, Teradyne implemented Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB 101)
retroactive to the beginning of the year. Included in 2001 sales was $98.7
million related to shipments of customer orders in 2000 where title was
retained by Teradyne until customer payment in order to perfect a security
interest. Teradyne no longer retains title until customer payment.
In 2002 and 2001, no single customer accounted for more than 10% of
consolidated net sales. In 2002 and 2001, Teradyne's three largest customers
accounted for 23% and 24% of consolidated net sales, respectively.
Gross Margin
Gross margin, as a percentage of net sales, decreased to 19.0% in 2002 from
19.4% in 2001. The decrease in the gross margin rate in 2002 compared to 2001
was affected by the following items:
Rate
Differential
------------
2002 charges described below.......................................................... (3.7)%
2001 charges described below.......................................................... 9.7
Higher gross margins on revenue orginally recorded in 2000 which was reversed and
recorded in 2001 because title did not pass until payment*.......................... (3.0)
Decreased utilization of Teradyne's manufacturing overhead, as sales volume decreased
while certain components of cost of sales remained fixed............................ (1.8)
Primarily related to price pressures described above, net of favorable product mix and
product cost reduction activities................................................... (1.6)
----
Total................................................................................ (0.4)
====
* This accounting change impacted 2001 as described above.
During the year ended December 31, 2002, an excess and obsolete inventory
provision of $39.0 million was recorded in cost of sales of which $20.7 million
related to the lack of demand for the Probe-One product and the discontinuance
of the J996 product after a last time buy offer to Teradyne's customers.
Additionally, due to consolidating and downsizing of manufacturing locations,
approximately $5.7 million of incremental accelerated depreciation was
classified in cost of sales.
During 2001, Teradyne recorded a provision of $139.7 million for excess and
obsolete inventory including discontinued product lines. The total inventory
provision for excess and obsolete inventory, excluding the discontinued product
lines, was $105.2 million in 2001 and was principally due to the sharp decline
in incoming Semiconductor Test Systems and Connection Systems orders. During
the third quarter of 2001, Teradyne recorded a charge of $32.3 million related
to an inventory writedown for the discontinuance of its Flash 750 memory
product.
Engineering and Development
Engineering and development expenses, as a percentage of sales, increased to
24% in 2002 from 20% in 2001, with spending increasing by $6.6 million. The
increase in spending was primarily due to the additional expense base resulting
from Teradyne's purchase of GenRad in the fourth quarter of 2001 which
increased spending by approximately $23.0 million and to a lesser extent the
granting of the prior year's previously frozen salary increases during the
third quarter of 2002 which increased spending by approximately $6.0 million.
The additional engineering and development expense was partially offset by
reductions in discretionary spending across all of Teradyne's engineering
groups which decreased spending by approximately $23.2 million. As described in
the Gross Margin section above, Teradyne recorded a charge for incremental
accelerated depreciation of $0.8 million which is classified in Engineering and
Development.
22
Selling and Administrative
Selling and administrative expenses increased to 24% of sales in 2002 from
19% of sales in 2001, with spending increasing by $20.3 million. The increase
in spending was principally due to additional expenses resulting from
Teradyne's purchase of GenRad in the fourth quarter of 2001, with an additional
increase coming from the granting of the prior year's previously frozen salary
increases during the third quarter of 2002. The additional selling and
administrative expense was partially offset by workforce reductions and
reductions in discretionary spending. As described in the Gross Margin section
above, Teradyne recorded a charge for incremental accelerated depreciation of
$1.1 million which is classified in Selling and Administrative.
Restructuring and Other Charges
The table below summarizes activity for the year ended December 31, 2002,
relating to restructuring and other charges:
Goodwill and Severance
Intangible Fixed Asset Facility and
Asset Impairment Impairment Related Benefits Total
---------------- ----------- -------- --------- ---------
(in thousands)
Balance at December 31, 2001.... $ -- $ -- $ 1,676 $ 13,523 $ 15,199
2002 provision.................. 86,196 69,734 25,751 22,495 204,176
Cash payments................... -- -- (2,187) (22,724) (24,911)
Asset write-downs............... (86,196) (69,734) -- -- (155,930)
-------- -------- ------- -------- ---------
Balance at December 31, 2002.... $ -- $ -- $25,240 $ 13,294 $ 38,534
======== ======== ======= ======== =========
The table below summarizes activity for the year ended December 31, 2001, relating to restructuring and
other charges:
Severance
Fixed Asset Facility and
Impairment Related Benefits Total
----------- -------- --------- ---------
(in thousands)
2001 provision....................................... $ 35,338 $ 1,676 $ 37,278 $ 74,292
Cash payments........................................ -- -- (23,755) (23,755)
Asset write-downs.................................... (35,338) -- -- (35,338)
-------- ------- -------- ---------
Balance at December 31, 2001......................... $ -- $ 1,676 $ 13,523 $ 15,199
======== ======= ======== =========
During the year ended December 31, 2002, Teradyne recorded $86.2 million in
goodwill and intangibles impairment charges. 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 tested the goodwill related to the
Circuit Board Test and Inspection Systems 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. In the third quarter of 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 year ended December 31, 2002, Teradyne's 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 $69.7 million. The charge for the Connection Systems
segment included $25.6 million
23
relating to a held for sale printed circuit board facility in San Diego,
California, $2.6 million relating to a held for sale facility in Nashua, New
Hampshire, and $17.9 million primarily related to manufacturing equipment which
was taken out of service during 2002 and is held for sale. The Semiconductor
Test Systems segment recorded a charge of $12.0 million primarily for assets
held for sale as a result of the lack of demand for the Probe-One product and
the discontinuance of the J996 product after a last time buy offer to our
customers, a charge of $9.7 million related to the write down of manufacturing
facilities that are held for sale in California, and $0.8 million related to
the write down of foundry manufacturing equipment that are held for sale. In
addition, an asset impairment charge was recorded of $1.1 million related to a
Corporate facility sold in the first quarter of 2003. Teradyne expects the sale
of these held for sale assets to occur within a year. The carrying value of
Teradyne's assets held for sale is $45.3 million as of December 31, 2002. These
assets are included in Property, Plant, and Equipment.
During the year ended December 31, 2001, Teradyne recorded a charge of $35.3
million for impaired long-lived assets, consisting of the following: $12.0
million for a held for sale facility in the Connection Systems segment, certain
impaired manufacturing assets in the Connection Systems segment of $15.4
million, and 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.
During the year ended December 31, 2002, Teradyne recorded a charge of $25.8
million relating to future lease commitments for vacated manufacturing and
administrative space which will be exited prior to the end of the lease term.
The charge of $25.8 million includes $18.8 million at Circuit Board Test and
Inspection Systems, $5.0 million at Connection Systems and $2.0 million at
Semiconductor Test Systems. The lease accruals are expected to be paid out over
the lease terms, the latest of which expires in 2010. During the fourth quarter
of 2001, Teradyne recorded charges for vacated office space under operating
leases at Circuit Board Test and Inspection Systems of $1.7 million. The
accrual for lease payments on vacated facilities is reflected in other accrued
liabilities and long-term other accrued liabilities.
Teradyne recorded a charge for severance and related benefits during 2002 of
$22.5 million. There were approximately 1,010 employees terminated across all
functional groups during 2002. All remaining severance benefits payable to
these employees will be paid by the end of the first quarter of 2004. Teradyne
recorded a charge for severance and related benefits during 2001 of $37.3
million. There were approximately 2,900 employees terminated across all
functional groups during 2001. As of December 31, 2002, Teradyne has paid all
severance benefits relating to the 2001 terminations. The accrual for severance
and benefits is reflected in accrued employees' compensation and withholdings.
The restructuring actions taken during 2002 are expected to generate cost
savings of approximately $88 million annually across all areas of operations.
In connection with its restructuring plan for GenRad in 2002, Teradyne
recorded $4.3 million of additional goodwill relating to the finalization of
its involuntary termination plan and 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 Facility
and Benefits Related Total
------------ -------- -------
Balance at December 31, 2001 $ 1,006 $ -- $ 1,006
Employee termination costs.. 4,289 -- 4,289
Leased facility costs....... -- 2,167 2,167
Cash payments............... (4,970) (450) (5,420)
------- ------ -------
Balance at December 31, 2002 $ 325 $1,717 $ 2,042
======= ====== =======
24
During the first quarter of 2003, Teradyne had a reduction in workforce of
approximately 295 people. The estimated severance charge from this reduction in
personnel totals approximately $6.0 million.
Interest income and expense
Interest income decreased by $5.8 million to $17.0 million during the year
ended December 31, 2002 compared to the year ended December 31, 2001. The
decreases in interest income were attributable to lower interest rates.
Interest expense increased by $17.7 million to $21.8 million during the year
ended December 31, 2002 compared to the year ended December 31, 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, net
Other income and expense, net for the year ended December 31, 2002 and 2001
includes the following:
Gain/(loss) 2002 2001
----------- ------- -------
(in thousands)
----------------
Repayment of loan by divested entity (1).................. $ 7,144 --
Other than temporary impairment of common stock investment (3,115) --
Writedown of investment in an engineering service provider (2,288) $(1,800)
Fair value adjustment on warrants......................... (2,051) 2,035
Sale of Connection Systems aerospace and defense business. -- 14,779
Equity investment (2)..................................... -- (6,974)
------- -------
Total..................................................... $ (310) $ 8,040
======= =======
- --------
(1) The loan had previously been valued at zero due to its uncertainty of
collection.
(2) Teradyne's proportionate share of a loss related to an equity investment in
Empirix, Inc. The carrying value of this equity investment was zero at
December 31, 2002 and 2001.
(Loss) income before taxes
(Loss) income before income taxes was a loss of $560.9 million in 2002
compared to a loss of $326.2 million in 2001. Semiconductor Test Systems,
Connection Systems, and Circuit Board Test and Inspection Systems loss before
income taxes increased $18.1 million, $56.6 million, and $158.9 million,
respectively in 2002 due to decreased sales in Semiconductor Test Systems and
Connection Systems, goodwill and intangible asset impairments in Circuit Board
Test and Inspection Systems and the market conditions described above. Other
Test Systems income before income taxes increased $4.7 million due to the
addition of Diagnostics Solutions in the fourth quarter of 2001 as part of the
GenRad acquisition.
Income taxes
For the year ended December 31, 2002, Teradyne recorded a tax provision of
$157.5 million resulting in a tax rate of 28%. The tax rate of 28% is primarily
due to the recording of a provision for income taxes to establish a full
valuation allowance against net deferred tax assets. As a result of its review
undertaken at December 31, 2002, Teradyne concluded under applicable accounting
criteria that it was more likely than not that its deferred tax assets would
not be realized. Until an appropriate level of profitability is reached,
Teradyne will not record tax benefits on operating losses in future results of
operations.
The effective tax rate benefit for the year ended 2001 was 38%. Teradyne's
effective tax rate for the year ended 2001 primarily reflects the U.S.
statutory income tax rate, the net effect of state taxes and the effect of tax
benefits from its Ireland manufacturing operations. Tax exemptions relating to
Ireland operations are effective through 2010.
25
2001 compared to 2000
Bookings
Net orders decreased 76% to $808.2 million in 2001 from $3,320.9 million in
2000. Net orders decreased in all operating segments and were led by a 85%
decrease in Semiconductor Test Systems net orders. Connection Systems net
orders, Circuit Board Test and Inspection Systems net orders, and Other Test
Systems net orders decreased 64%, 33%, and 78%, respectively. Teradyne
experienced cancellations of $285.5 million during 2001. Teradyne's net orders
for its four principal operating segments for 2001 and 2000 were as follows:
(in millions)
---------------
2001 2000
------ --------
Semiconductor Test Systems............... $294.0 $1,960.5
Connection Systems....................... 385.0 1,082.0
Circuit Board Test and Inspection Systems 101.4 151.6
Other Test Systems....................... 27.8 126.8
------ --------
$808.2 $3,320.9
Teradyne's backlog decreased 45% to $763.0 million in 2001 from $1,382.1
million in 2000. At December 31, 2001 and 2000, Teradyne's backlog of unfilled
orders for its four principal operating segments was as follows:
(in millions)
---------------
2001 2000
------ --------
Semiconductor Test Systems............... $317.2 $ 742.1
Connection Systems....................... 357.6 534.4
Circuit Board Test and Inspection Systems 55.5 68.4
Other Test Systems....................... 32.7 37.2
------ --------
$763.0 $1,382.1
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.
Revenue
Product sales decreased 56% in 2001 to $1,233.7 million from $2,828.9
million in 2000. Service revenue declined slightly in 2001 to $206.9 million
from $215.1 million in 2000 as the overall business declined. Semiconductor
Test Systems sales decreased 65%, to $717.7 million in 2001 from $2,044.3
million in 2000, Connection Systems sales decreased 26%, to $540.8 million in
2001 from $734.6 million in 2000, and Circuit Board Test and Inspection Systems
sales decreased 6%, to $132.4 million in 2001 from $141.2 million in 2000.
These decreases reflect the overall economic and industry market conditions
described below. Circuit Board Test and Inspection Systems sales include the
two-month impact of the GenRad acquisition which contributed sales of $19.0
million. Other Test Systems sales decreased 60%, to $49.7 million in 2001 from
$124.1 million in 2000, which principally reflects the divestiture of Software
Test Systems at the end of 2000 as well as the overall economic and industry
market conditions described below. During the fourth quarter of 2000, Teradyne
implemented Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial
Statements" (SAB 101) retroactive to the beginning of the year. Included in
2001 sales was $98.7 million related to shipments of customer orders in 2000
where title was retained by Teradyne until customer payment in order to perfect
a security interest. Teradyne no longer retains title until customer payment.
26
Teradyne's business has been adversely impacted by the slowdown in economies
worldwide including the effects of the hostilities begun in September 2001.
Teradyne has also been adversely affected by the cyclical nature of the
electronics and semiconductor industries, which experience recurring periods of
oversupply of products and equipment of the type Teradyne sells. These factors
have resulted in a downturn in the demand for Teradyne's products. During 2001,
orders declined significantly across all of Teradyne's product lines when
compared with the orders Teradyne received during 2000.
In 2001 and 2000, no single customer accounted for more than 10% of
consolidated net sales. In 2001, Teradyne's three largest customers accounted
for 24% of consolidated net sales.
Gross Margin
Gross margin, as a percentage of net sales, decreased to 19.4% in 2001 from
47.2% in 2000. The percentage decrease in 2001 was attributable to the
decreased utilization of Teradyne's manufacturing capacity, as sales volume
decreased while certain components of costs of sales remained fixed and
additional inventory provisions. The decrease in the percentage of gross margin
was also impacted to a lesser extent by increased competitive price pressure as
current semiconductor products mature and the mix of Teradyne's business
changes as Connection Systems and Circuit Board Test and Inspection System
sales, which have lower gross margins, become a larger percentage of Teradyne's
business.
Inventory provision for excess and obsolete inventory was $105.2 million in
2001, which excludes the inventory writedowns for product line discontinuance,
compared to $27.5 million in 2000, included in cost of sales. The increase in
the inventory provision was caused by the worldwide economic slowdown during
2001. Between 2000 and 2001, orders declined by approximately $2,512.7 million,
a 76% decrease. This drop in orders combined with lead time requirements for
inventory procurement and Teradyne's new product introduction plans
necessitated additional charges for excess and obsolete inventory. During 2001,
Teradyne recorded an inventory writedown in Semiconductor Test Systems due to
the discontinuance of the Flash 750 product line of $32.3 million.
Engineering and Development
Engineering and development expenses, as a percentage of sales, increased to
20% in 2001 from 11% in 2000, with spending decreasing by $60.7 million. This
spending decrease was primarily due to lower prototype material costs and the
impact of workforce reductions, salary cuts, and furloughs in Semiconductor
Test Systems and Circuit Board Test and Inspection Systems, excluding the
impact of the GenRad acquisition. Connection Systems engineering and
development spending increased 5% from 2000 to 2001.
Selling and Administrative
Selling and administrative expenses increased to 19% of sales in 2001 from
12% of sales in 2000, with spending decreasing by $107.7 million. The decrease
in spending was principally due to certain cost containment programs such as
workforce reductions, salary cuts, and furloughs.
Restructuring and Other Charges
Restructuring and other charges include a workforce reduction and early
retirement provision of $37.3 million, a charge of $15.4 million for certain
impaired manufacturing assets at Connection Systems, a charge for a Connection
Systems impaired facility of $12.0 million, a charge for impaired assets of
$7.9 million relating to the discontinuance of the Flash 750 product line in
Semiconductor Test Systems, and a charge for vacated space under certain
operating leases of $1.7 million in Circuit Board Test and Inspection Systems.
There were approximately 2,900 employees terminated in 2001 across all
functional groups. All severance benefits for employees terminated in 2001 were
paid by the fourth quarter of 2002.
27
Below is a table summarizing activity relating to restructuring and other
charges:
Severance
Fixed Asset Facility and
Impairment Related Benefits Total
----------- -------- --------- --------
(in thousands)
2001 provision.............. $ 35,338 $1,676 $ 37,278 $ 74,292
Cash payments............... -- -- (23,755) (23,755)
Asset write-downs........... (35,338) -- -- (35,338)
-------- ------ -------- --------
Balance at December 31, 2001 $ -- $1,676 $ 13,523 $ 15,199
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.
Interest income and expense
Interest income decreased by $2.4 million to $22.7 million in 2001 compared
to $25.1 million in 2000. The decrease in 2001 was attributable to decreases in
the average invested balances and lower interest rates. Interest expense
increased by $2.3 million as a result of interest expense for two months
associated with Teradyne's convertible notes.
Other income and expense
Included in other income in 2001 is a gain from the sale of Connections
Systems aerospace and defense business of $14.8 million. Included in other
expense for 2001 is Teradyne's proportionate share of a loss related to an
equity method investment of $7.0 million.
(Loss) income before taxes
(Loss) income before income taxes and cumulative effect of change in
accounting principle was a loss of $326.2 million in 2001 compared to income of
$739.6 million in 2000. Semiconductor Test Systems, Connection Systems, Circuit
Board Test and Inspection Systems, and Other Test Systems income before income
taxes decreased $923.3 million, $178.0 million, $43.2 million, and $4.0
million, respectively in 2001 due to decreased sales in each group and the
market conditions described above.
Income taxes
Teradyne's effective tax rate benefit was 38% in 2001. The effective tax
rate provision for the year ended 2000 was 30%. The change in the tax rate is a
result of a loss in 2001. In 2000, Teradyne was able to reduce its effective
tax rate with tax benefits from its foreign sales corporation and Ireland
manufacturing operations.
Liquidity and Capital Resources
Teradyne's cash, cash equivalents and marketable securities balance
decreased $45.2 million in 2002, to $541.1 million. Teradyne used cash from
operating activities of $4.2 million in 2002 and $79.0 million in 2001 and
generated cash from operating activities in 2000 of $470.9 million. Net income
(loss), adjusted to exclude the effects of non-cash items, used cash of $241.9
million in 2002, used cash of $74.0 million in 2001, and provided cash of
$501.6 million in 2000. Changes in operating assets and liabilities, net of
businesses sold and acquired provided cash of $237.7 million in 2002 primarily
due to decreased inventory balances and the receipt of a tax refund of $85.2
million in March 2002. Changes in operating assets and liabilities used cash of
$5.0 million in 2001 and used cash of $30.7 million in 2000.
28
Teradyne used $102.2 million of cash for investing activities in 2002,
$247.3 million in 2001, and $312.3 million in 2000. Investing activities
consist of purchases, sales, and maturities of marketable securities, proceeds
from the sale of businesses, cash acquired in business acquisitions, cash paid
for assets, and purchases of capital assets. Capital expenditures decreased by
$165.1 million in 2002 compared with 2001, across all operating segments but
primarily in the Connection Systems segment. This was due to the actions taken
by Teradyne in 2002 to reduce planned capital expenditures due to current
market conditions. Capital expenditures were $76.4 million in 2002, $241.4
million in 2001, and $298.2 million in 2000.
Teradyne obtained $40.4 million of cash from financing activities in 2002,
obtained $401.5 million in 2001, and used $97.5 million in 2000. Financing
activities include the issuance of convertible notes, mortgage borrowings,
sales and repurchases of Teradyne's common stock, as well as repayments of
debt. In 2001, Teradyne assumed debt of $89.7 million from the GenRad
acquisition which Teradyne repaid on October 26, 2001. During 2002, 2001, and
2000 issuances of common stock under stock option and stock purchase plans
generated $41.2 million, $58.5 million, and $55.3 million, respectively.
Teradyne used cash for the acquisition of treasury stock of $147.5 million in
2000. Since 1996, Teradyne has used $540.8 million of cash to repurchase 20.0
million shares of its common stock on the open market though no cash was used
in 2002 and 2001 to repurchase shares of common stock.
On October 24, 2001, Teradyne issued $400 million principal amount of 3.75%
Convertible Senior Notes due 2006 (the "Notes") in a private placement and
received net proceeds of $389 million. The Notes are convertible at the option
of the holders at a rate which is equivalent to a conversion price of
approximately $26.00 per share, which is equal to a conversion rate of
approximately 38.4615 shares of common stock per $1,000 principal amount of
Notes. The Notes are redeemable by Teradyne at any time after October 18, 2004
at specified prices. Teradyne began making annual interest payments of $15
million, paid semi-annually, on the Notes commencing on April 15, 2002. The
Notes are senior unsecured obligations of Teradyne that rank equally with
Teradyne's existing and future unsecured and unsubordinated indebtedness. In
the event of a change in control by which Teradyne merges with or sells
substantially all of its assets to a third party, the holders of the Notes may
be able to require Teradyne to redeem some or all of the Notes either in
discounted Teradyne common stock or in cash. On February 8, 2002, the
Securities and Exchange Commission declared effective a Registration Statement
on Form S-3 covering both the Notes and the shares of common stock into which
they can be converted.
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"). Principal payments are made according to a twenty-year
amortization schedule through December 2006, with the remaining principal due
on January 1, 2007. Teradyne began making monthly principal and interest
payments of $0.4 million on February 1, 2002.
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. GenRad's 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. Under the terms of the acquisition,
each outstanding share of GenRad common stock was converted into 0.1733 shares
of Teradyne common stock. The total number of Teradyne shares exchanged for the
shares of GenRad, based on the shares of GenRad outstanding as of the closing,
was approximately 5.0 million.
29
The following table reflects Teradyne's current contractual obligations:
Non-cancelable Convertible Mortgage
Lease Interest Senior Notes Notes Other
Commitments on Debt* Notes Payable Payable Debt Total
-------------- -------- ----------- -------- ------- ------ --------
(in thousands)
2003....... $ 23,843 $18,468 $ 1,088 $6,704 $ 277 $ 50,380
2004....... 20,450 18,380 1,172 277 40,279
2005....... 17,592 18,284 1,263 277 37,416
2006....... 13,004 17,936 $400,000 1,244 277 432,461
2007....... 10,840 671 39,224 277 51,012
Beyond 2007 19,993 865 5,040 1,510 27,408
-------- ------- -------- ------- ------ ------ --------
TOTAL...... $105,722 $74,604 $400,000 $49,031 $6,704 $2,895 $638,956
* Includes interest on convertible notes.
Teradyne believes its cash, cash equivalents, and marketable securities
balance of $541.1 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.
Employee Stock Options
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 80% of
Teradyne's employees participate in its equity compensation program. Of the
stock options Teradyne granted in 2002, 89% went to employees other than the
Chief Executive Officer and the five other most highly compensated executive
officers.
Stock option plan activity for the years 2002, 2001, and 2000 follows (in
thousands):
2002 2001 2000
------ ------- ------
Outstanding at January 1.......... 29,750 22,745 19,225
Options granted................ 7,205 10,289 7,905
Options exercised.............. (1,152) (2,766) (3,217)
Options canceled............... (2,382)