Securities and Exchange Commission
Washington, D.C. 20549
----------------------
Form 10-Q
---------
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(D) of the Securities
Exchange Act of 1934
for the quarterly period ended October 3, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(D) of the Securities
Exchange Act of 1934
for the transition period from __________ to ______________
Commission File No. 1-6462
TERADYNE, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2272148
(State or Other Jurisdiction (I.R.S. Employer
Incorporation or Organization) Identification No.)
321 Harrison Avenue, Boston, Massachusetts 02118
(Address of principal executive offices) (Zip Code)
617-482-2700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(D) of the Securities Exchange Act of
1934 during the preceding 12 Months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 Days. Yes X No _
The number of shares outstanding of the registrant's only class of common
stock as of October 31, 1999 was 170,997,816 shares.
<PAGE>
<TABLE>
Teradyne, Inc.
Index
Page No.
--------
<CAPTION>
<S> <C>
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
October 3, 1999 and December 31, 1998.........................................................3
Condensed Consolidated Statements of Income for the
Three and Nine Months Ended October 3, 1999 and September 27, 1998............................4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended October 3, 1999 and September 27, 1998......................................5
Notes to Condensed Consolidated Financial Statements..............................................6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................... 9-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........................................12
Part II. Other Information
Item 1. Legal Proceedings...................................................................................12
Item 6 (b). Reports On Form 8-K.............................................................................12
</TABLE>
<PAGE>
<TABLE>
Teradyne, Inc.
Condensed Consolidated Balance Sheets
<CAPTION>
Assets
October 3, 1999 December 31, 1998
--------------- -----------------
(Unaudited)
(In thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................... $ 121,205 $ 185,514
Marketable securities........................................................ 102,624 15,914
Accounts receivable.......................................................... 314,953 219,303
Inventories:
Parts.................................................................. 124,460 154,706
Assemblies in Process.................................................. 158,171 111,641
---------- ---------
282,631 266,347
Deferred tax assets.......................................................... 49,262 49,262
Prepayments and other current assets......................................... 34,120 23,200
---------- ---------
Total current assets................................................... 904,795 759,540
Property, plant, and equipment, at cost:........................................ 945,833 857,551
Less: accumulated depreciation............................................ (476,754) (422,594)
---------- ---------
Net property, plant, and equipment..................................... 469,079 434,957
Marketable securities........................................................... 133,379 96,494
Other assets.................................................................... 27,136 21,823
---------- ---------
Total assets........................................................... $ 1,534,389 $ 1,312,814
========== =========
Liabilities
Current liabilities:
Notes payable - banks........................................................ $ 8,012 $ 7,393
Current portion of long-term debt............................................ 4,729 1,309
Accounts payable............................................................. 119,810 45,042
Accrued employees' compensation and withholdings............................. 94,231 68,431
Unearned service revenue and customer advances............................... 66,983 64,674
Other accrued liabilities.................................................... 71,111 54,071
Income taxes payable......................................................... 2,048 14,770
--------- ---------
Total current liabilities.............................................. 366,924 255,690
Deferred tax liabilities........................................................ 17,554 17,554
Long-term debt.................................................................. 8,841 13,200
--------- ---------
Total liabilities...................................................... 393,319 286,444
--------- ---------
Shareholders' Equity
Common stock, $0.125 par value, 250,000 shares authorized,
171,237 and 83,744 net shares issued and outstanding
in 1999 and 1998, respectively............................................... 21,405 10,468
Additional paid-in capital...................................................... 297,355 310,052
Retained earnings............................................................... 822,310 705,850
--------- ---------
Total Shareholders' Equity............................................. 1,141,070 1,026,370
--------- ---------
Total Liabilities and Shareholders' Equity............................. $ 1,534,389 $ 1,312,814
========= =========
<FN>
The accompanying notes, together with the Notes to Consolidated Financial Statements included in the Company's Annual Report On
Form 10-K for the year ended December 31, 1998 are an integral part of the condensed consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Teradyne, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
<CAPTION>
For the Three Months Ended For the Nine Months Ended
-------------------------- -------------------------
October 3, 1999 September 27, 1998 October 3, 1999 September 27, 1998
--------------- ------------------ --------------- ------------------
(In thousands,except per share amounts)
<S> <C> <C> <C> <C>
Net sales................................... $ 497,039 $ 335,227 $ 1,242,397 $ 1,173,032
Expenses:
Cost of Sales.......................... 281,299 239,131 738,097 737,535
Engineering and development............ 60,331 49,569 164,884 147,655
Selling and administrative............. 70,470 47,288 184,337 163,550
------------- -------------- --------------- ----------------
412,100 335,988 1,087,318 1,048,740
-------------- -------------- --------------- ----------------
Income (loss) from operations............... 84,939 (761) 155,079 124,292
Other income (expense):
Interest income......................... 4,794 2,756 12,414 9,100
Interest expense........................ (217) (120) (1,121) (633)
-------------- -------------- --------------- ----------------
Income before income taxes.................. 89,516 1,875 166,372 132,759
Provision for income taxes.................. 26,855 600 49,912 42,483
------------- ------------- -------------- ---------------
Net income.................................. $ 62,661 $ 1,275 $ 116,460 $ 90.276
============= ============== ============== ===============
Net income per common share - basic......... $ 0.37 $ 0.01 $ 0.68 $ 0.54
============= ============== ============== ===============
Net income per common ahare - diluted....... $ 0.35 $ 0.01 $ 0.65 $ 0.53
============= ============== ============== ===============
Shares used in calculations of net income
per common share - basic................ 171,098 168,038 170,458 167,546
============= ============== ============== ===============
Shares used in calculations of net income
per common share - diluted.............. 179,026 171,252 178,361 171,457
============= ============== ============== ===============
<FN>
The accompanying notes, together with the Notes to Consolidated Financial Statements included in the Company's Annual Report On
Form 10-K for the year Ended December 31, 1998 are an integral part of the condensed consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Teradyne, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
For the Nine Months Ended
October 3, 1999 September 27, 1998
--------------- -------------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................ $ 116,460 $ 90,276
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation .................................................. 63,779 55,070
Amortization................................................... 831 676
Provision for excess inventory................................. 23,000
Other non-cash items, net...................................... 3,313 (3,335)
Changes in operating assets and liabilities:
Accounts receivable....................................... (95,650) 19,836
Inventories............................................... (16,284) (47,292)
Other assets.............................................. (17,063) (3,610)
Accounts payable and accruals............................. 119,918 3,352
Income taxes payable...................................... 36,404 (9,542)
-------------- -------------
Net cash provided by operating activities............. 211,708 128,431
-------------- -------------
Cash flows from investing activities:
Additions to property, plant and equipment........................ (78,418) (98,079)
Increase in equipment manufactured by the Company................. (21,853) (46,469)
Purchases of available-for-sale marketable securities............. (116,002) (61,333)
Maturities of available-for-sale marketable securities............ 81,634 157,512
Purchases of held-to-maturity marketable securities............... (118,991) (19,697)
Maturities of held-to-maturity marketable securities.............. 29,763
-------------- -------------
Net cash used for investing activities.................... (223,867) (68,066)
-------------- -------------
Cash flows from financing activities:
Payments of long term debt........................................ (1,263) (1,222)
Acquisition of treasury stock..................................... (120,605) (22,256)
Issuance of common stock under employee stock
option and stock purchase plans............................... 69,718 19,709
-------------- -------------
Net cash flows used for financing activities.......... (52,150) (3,769)
-------------- -------------
(Decrease) increase in cash and cash equivalents....................... (64,309) 56,596
Cash and cash equivalents at beginning of period....................... 185,514 74,668
-------------- -------------
Cash and cash equivalents at end of period............................. $ 121,205 $ 131,264
============== =============
Supplementary disclosure of cash flow information:
Cash paid during the period for:
Interest................................................ $ 1,157 $ 656
Income taxes............................................ 13,874 49,494
<FN>
The accompanying notes, together with the Notes to Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998 are an integral part of the condensed consolidated financial statements.
</FN>
</TABLE>
<PAGE>
Teradyne, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A. The Company
- --------------
Teradyne, Inc. (the "Company") designs, manufactures, markets, and services
test systems and backplane connection systems. The Company has five principal
products; semiconductor test systems, backplane connection systems,
circuit-board test systems, telecommunications test systems, and software test
systems.
Semiconductor test systems are used by electronic component manufacturers
in the design and testing of their products. Backplane connection systems are
used principally for the computer, communications, and military/aerospace
industries. A backplane is an assembly into which printed circuit boards are
inserted that provides for the interconnection of electrical signals between the
circuit boards and the other elements of the system. Circuit-board test systems
are used by electronic equipment manufacturers for the design and testing of
circuit boards and other assemblies. Telecommunication test systems are used by
telephone operating companies for the testing and maintenance of their
subscriber telephone lines and related equipment. Software test systems are used
by a number of industries to test communications networks, computerized
telecommunication systems, and client/server applications.
B. Accounting Policies
- ----------------------
Basis of Presentation
The condensed consolidated interim financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
balances and transactions have been eliminated. The December 31, 1998 condensed
consolidated balance sheet data were derived from audited financial statements,
but do not include all disclosures required by generally accepted accounting
principles.
Preparation of Financial Statements
The accompanying condensed consolidated interim financial statements are
unaudited. However, in the opinion of management, all adjustments (consisting
only of normal recurring accrual entries) necessary for a fair statement of the
results for the interim periods have been made. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements. In addition estimates and assumptions
affect the reported amounts of revenues and expenses during the reported
periods. Actual results could differ from those estimates.
Other Comprehensive Income
The Company previously adopted SFAS No. 130, "Reporting Comprehensive
Income" (Statement 130), which established standards for reporting and
displaying comprehensive income and its components in a financial statement that
is displayed with the same prominence as other financial statements.
Comprehensive income is equal to net income, for the three and nine month
periods ended October 3, 1999 and September 27, 1998.
C. Recently Issued Accounting Pronoucements
- ---------------------------------------------
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133." SFAS No. 137 amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which was issued
in June 1998 and was to be effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. SFAS No. 137 defers the effective date of SFAS
No. 133 to be effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. Accordingly, the Company will adopt the provisions of SFAS
No. 133 for its 2001 fiscal year. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and the type of hedge transaction. Management is currently
evaluating the effects of this change on its recording of derivatives and
hedging activities.
<PAGE>
Teradyne, Inc.
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
D. Common Stock Split
- ---------------------
On July 30, 1999 the Company's Board of Directors authorized a two for one
stock split effected in the form of a 100% stock dividend to be distributed on
August 31, 1999 to shareholders of record as of August 17, 1999. As a result of
the stock split, the accompanying condensed consolidated interim financial
statements reflect an increase in the number of outstanding shares of common
stock and the transfer of the par value of these additional shares from paid-in
capital. All share and per share amounts have been stated to reflect the
retroactive effect of the stock split, except for the capitalization of the
Company at December 31, 1998.
<TABLE>
E. Net Income per Common Share
- --------------------------------
<CAPTION>
The following table sets forth the computation of basic and diluted net income per common share (in thousands, except per
share amounts):
For the Three Months Ended For the Nine Months Ended
-------------------------- -------------------------
October 3, 1999 September 27, 1998 October 3, 1999 September 27, 1998
--------------- ------------------ --------------- ------------------
<S> <C> <C> <C> <C>
Net Income.......................................... $ 62,661 $ 1,275 $116,460 $ 90,276
Shares used in net income per common share - basic.. 171,098 168,038 170,458 167,546
Effect of dilutive securities:
Employee and director stock options........ 7,299 2,090 7,519 3,298
Employee stock purchase rights............. 629 1,124 384 613
------- ------- ------- -------
Dilutive potential common shares............... 7,928 3,214 7,903 3,911
------- ------- ------- -------
Shares used in net income per common share - diluted 179,026 171,252 178,361 171,457
======= ======= ======= =======
Net income per common share - basic................. $ 0.37 $ 0.01 $ 0.68 $ 0.54
====== ====== ====== ======
Net income per common share - diluted............... $ 0.35 $ 0.01 $ 0.65 $ 0.53
====== ====== ====== ======
<FN>
For purposes of computing diluted earnings per share, weighted average common share equivalents do not include stock options
with an exercise price that exceeds the average fair market value of the Company's common stock for the three and nine month periods
ended October 3, 1999 and September 27, 1998, respectively. Outstanding options to purchase 27,566 and 7,979,216 shares of common
stock during the three months ended October 3, 1999 and September 27, 1998, respectively, were not included in the calculation of
diluted net income per common share. Outstanding options to purchase 56,118 and 4,934,674 shares of common stock during the nine
months ended October 3, 1999 and September 27, 1998, respectively, were not included in the calculation of diluted net income per
common share.
</FN>
</TABLE>
<PAGE>
Teradyne, Inc.
Notes to Condensed Consolidated Financial Statements - Concluded
(Unaudited)
<TABLE>
F. Operating Segment Information
- --------------------------------
The Company has five principal operating segments which are the design, manufacturing and marketing of semiconductor test
systems, backplane connection systems, circuit-board test systems, telecommunication test systems, and software test systems.
These operating segments were determined based upon the nature of the products and services offered. The Company has three
reportable segments; semiconductor test systems segment, backplane connection systems segment, and other test systems segment. The
other test systems segment is comprised of circuit-board test systems, telecommunication test systems, and software test systems.
The Company evaluates performance based on several factors, of which the primary financial measure is business segment income
before taxes. The accounting policies of the business segments are the same as those described in "Note B: Accounting Policies" in
the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Intersegment sales are accounted for at estimated
fair value as if sales were to third parties. Operating segment information for the three and nine month periods ended October 3,
1999, and September 27, 1998 follows (in thousands):
<CAPTION>
Sales to Income Sales to Income
Unaffiliated Intersegment Net Before Unaffiliated Intersegment Net Before
Customers Sales Sales Taxes (1) Customers Sales Sales Taxes (1)
--------- ----- ----- --------- --------- ----- ----- ---------
Three months ended October 3, 1999: Three months ended September 27, 1998:
----------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Semiconductor Test $ 359,193 $ 359,193 $ 103,523 $ 201,764 $ 201,764 $(13,546)
Backplane Connections 90,023 $ 5,124 95,147 15,336 72,100 $ 428 72,528 9,802
Other Test 47,823 47,823 (6,822) 61,363 61,363 6,341
Corporate 0 (5,124) (5,124) (22,521) 0 (428) (428) (722)
--------- ------- -------- -------- ---------- -------- -------- --------
Consolidated $ 497,039 $ 0 $ 497,039 $ 89,516 $ 335,227 $ 0 $ 335,227 $ 1,875
========= ======= ========= ======== ========== ======== ========= =========
Nine months ended October 3, 1999: Nine months ended September 27, 1998:
---------------------------------- -------------------------------------
Semiconductor Test $ 820,622 $ 820,622 $ 174,507 $ 795,778 $ 795,778 $ 105,866
Backplane Connections 266,114 $ 11,128 277,242 44,538 190,050 $ 10,543 200,593 22,907
Other Test 155,661 155,661 (10,435) 187,204 187,204 23,588
Corporate 0 (11,128) (11,128) (42,238) 0 (10,543) (10,543) (19,602)
---------- -------- ---------- --------- ---------- -------- ---------- ---------
Consolidated $1,242,397 $ 0 $1,242,397 $ 166,372 $1,173,032 $ 0 $1,173,032 $ 132,759
========== ======== ========== ========= ========== ======== ========== =========
<FN>
(1) Income before taxes of the principal businesses exclude the effects of employee profit sharing, management incentive
compensation, other unallocated expenses, and net interest income.
</FN>
</TABLE>
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
<TABLE>
SELECTED RELATIONSHIPS WITHIN THE CONDENSED CONSOLIDATED
STATEMENTS OF INCOME
<CAPTION>
For the Three Months Ended For the Nine Months Ended
-------------------------- -------------------------
October 3, September 27, October 3, September 27,
1999 1998 1999 1998
---- ---- ---- ----
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Net sales.................................... $ 497,039 $ 335,227 $ 1,242,397 $ 1,173,032
=========== ============ =========== ===========
Net income................................... $ 62,661 $ 1,275 $ 116,460 $ 90,276
=========== ============ =========== ===========
Percentage of net sales:
Net sales............................... 100% 100% 100% 100%
Expenses:
Cost of products sold............... 57 64 60 61
Provision for excess inventory...... 0 7 0 2
---------- --------- --------- ----------
Cost of sales............... 57 71 60 63
Engineering and development......... 12 15 13 13
Selling and administrative.......... 14 14 15 14
Interest, net....................... (1) (1) (1) (1)
--------- --------- --------- ----------
82 99 87 89
Income before income taxes.............. 18 1 13 11
Provision for income taxes.............. 5 0 4 3
--------- --------- --------- ----------
Net income.............................. 13% 1% 9% 8%
========= ========= ========= ==========
Provision for income taxes as a percentage of income
before taxes............................ 30% 32% 30% 32%
========= ========= ========= ==========
<FN>
Results of Operations
- ---------------------
The Company recorded record sales of $497.0 million in the third quarter of 1999 an increase of $161.8 million or 48% from the
third quarter of 1998. Third quarter 1999 semiconductor test systems sales and backplane connection system sales to unaffiliated
customers increased 78% and 25%, respectively, when compared to the third quarter of 1998. Third quarter 1999 other test systems
sales decreased 22% over the corresponding period in 1998. Sales increased 24% in the third quarter of 1999 over the second quarter
of 1999 due to an increase in incoming orders of semiconductor test systems during the first half of 1999. The Company recorded
sales of $1.24 billion in the first nine months of 1999 an increase of $69.4 million or 6% over the first nine months of 1998.
Semiconductor test systems sales and backplane connection system sales to unaffiliated customers increased 3% and 40%, respectively,
when compared to the first nine months of 1998. Other test systems sales for the first nine months of 1999 decreased 17% over the
corresponding period in 1998. Income before income taxes in the third quarter of 1999 increased $87.6 million from the third quarter
of 1998 to $89.5 million. The third quarter of 1998 results included a pre-tax provision for excess inventory of $23.0 million. For
the first nine months of 1999, income before income taxes increased $33.6 million to $166.4 million.
Incoming orders were $490.5 million in the third quarter of 1999 compared to $244.8 million in the third quarter of 1998. The
increase in incoming orders was led by a 186% increase in semiconductor test systems orders. The Company's backlog was $843.0
million at the end of the third quarter of 1999 compared with $524.7 million at the end of the third quarter of 1998.
Cost of sales decreased from 64% of sales in the third quarter of 1998 (excluding the provision for excess inventory) to 57%
in the third quarter of 1999 and from 61% in the first nine months of 1998 (excluding the provision for excess inventory) to 60%
in the first nine months of 1999. The quarter over quarter margin improvement was due to the increased utilization of the
Company's manufacturing overhead as sales volume increased while certain components of cost of sales remained fixed. In addition,
the Company experienced a favorable change in its product mix.
<PAGE>
Engineering and development expenses, as a percentage of sales, decreased from 15% in the third quarter of 1998 to 12% in the
third quarter of 1999. This percentage decrease was due to engineering and development expenses growing at a lesser rate than sales.
Engineering and development expenses, as a percentage of sales, was 13% in the first nine months of 1999 and 1998. The dollar amount
of engineering and development expenses for the third quarter of 1999 and the first nine months of 1999 increased $10.8 million and
$17.2 million, respectively over the corresponding periods in 1998. These spending increases were primarily in direct support of new
product development efforts in semiconductor test systems.
Selling and administrative expenses, as a percentage of sales, was 14% in the third quarter of 1999 and 1998. The dollar
amount of selling and administrative expenses for the third quarter and nine months of 1999 increased $23.2 million and $20.8
million over the third quarter and nine months of 1998, respectively, due to higher compensation related expenses which vary with
operating results. Selling and administrative expenses, as a percentage of sales, was 15% in the first nine months of 1999
compared to 14% of sales in the first nine months of 1998.
The Company's overall effective tax rate was 30% in the third quarter of 1999 and the first nine months of 1999. The overall
effective tax rate for the year ended 1998 was also 30%. The Company utilized export sales corporation benefits and certain
research and development tax credits to operate below the U.S. statutory rate of 35%.
Liquidity and Capital Resources
- -------------------------------
The Company's cash, cash equivalents and marketable securities balances increased $59.3 million in the first nine months of
1999, to $357.2 million. Cash generated from operations was $211.7 million in the first nine months of 1999. Cash generated from
operations was principally due to net income of $116.5 million plus non-cash charges for depreciation and amortization of $64.6
million and a net change in operating assets and liabilities of $27.3 million. Cash was used to fund additions to property, plant
and equipment of $100.3 million in the first nine months of 1999. Property, plant and equipment expenditures relate primarily
to the expansion of production capacity in semiconductor test and backplane connection systems.
The Company repurchased 3.6 million shares of common stock for $120.6 million in the first nine months of 1999. Cash of $69.7
million in the first nine months of 1999 was generated from the sale of stock to employees and the exercise of stock options by
employees and certain directors under the Company's stock purchase and stock option plans.
The Company believes its cash, cash equivalents, and marketable securities balance of $357.2 million, together with other
sources of funds, including cash flow generated from operations and the available borrowing capacity of $120.0 million under its
line of credit agreement, will be sufficient to meet working capital and capital expenditure requirements for the foreseeable
future.
Certain Factors That May Affect Future Results
- ----------------------------------------------
From time to time, information provided by the Company, statements made by its employees or information included in its
filings with the Securities and Exchange Commission (including this Form 10-Q and the Company's Annual Report to Shareholders) may
contain statements which are not historical facts, so-called "forward looking statements," which involve risks and uncertainties.
In particular, statements in "Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations"
relating to the sufficiency of capital to meet working capital and planned capital expenditures, may be forward looking
statements. The Company's actual future results may differ significantly from those stated in any forward looking statements.
Factors that may cause such differences include, but are not limited to, the factors discussed below. Each of these factors, and
others, are discussed from time to time in the Company's filings with the Securities and Exchange Commission.
The Company's future results are subject to substantial risks and uncertainties. The Company's business and results of
operations depend in significant part upon capital expenditures of manufacturers of semiconductors, which in turn depend upon the
current and anticipated market demand for semiconductors and products incorporating semiconductors. The semiconductor industry has
been highly cyclical with recurring periods of over supply, which often have had a severe effect on the semiconductor industry's
demand for test equipment, including systems manufactured and marketed by the Company. The Company believes that the markets for
newer generations of semiconductors will also be subject to similar fluctuations. There can be no assurance that any increase in
semiconductor test systems bookings for a calendar quarter will be sustained in subsequent quarters. In addition, any factor
adversely affecting the semiconductor industry or particular segments within the semiconductor industry may adversely affect the
Company's business, financial condition and operating results.
The Company relies on certain intellectual property protections to preserve its intellectual property rights, including
patents, copyrights, and trade secrets. While the Company believes that its patents, copyrights, and trade secrets have value, in
general no single one is in itself essential. The Company believes that its technological position depends primarily on the
technical competence and creative ability of its research and development personnel. From time to time the Company is notified
that it may be in violation of patents, copyrights and trade secrets held by others. An assertion of patent copyright, and/or
trade secret infringement against the Company, if successful, could have a material adverse effect on the Company's business or
could require a lengthy and expensive defense which could adversely affect the Company's financial condition and/or operating
results.
<PAGE>
The development of new technologies, commercialization of those technologies into products, and market acceptance and customer
demand for those products is critical to the Company's success. Successful product development and introduction depends upon a
number of factors, including new product selection, development of competitive products by competitors, timely and efficient
completion of product design, timely and efficient implementation of manufacturing and assembly processes and product performance
at customer locations.
The Company faces substantial competition, throughout the world, in each operating segment. Some of these competitors have
substantially greater financial and other resources to pursue engineering, manufacturing, marketing and distribution of their
products. The Company also faces competition from internal suppliers at several of its customers. Certain of the Company's
competitors have introduced or announced new products with certain performance characteristics which may be considered equal or
superior to those currently offered by the Company. The Company expects its competitors to continue to improve the performance of
their current products and to introduce new products or new technologies that provide improved cost of ownership and performance
characteristics. New product introductions by competitors could cause a decline in sales or loss of market acceptance of the
Company's existing products. Moreover, increased competitive pressure could lead to intensified price based competition and lower
gross margins, which could materially adversely affect the Company's business, financial condition and/or results of operations.
The Company derives a significant portion of its total revenue from customers outside the United States. International sales
are subject to significant risks, including unexpected changes in legal and regulatory requirements and policy changes affecting
the Company's markets, changes in tariffs, exchange rates and other barriers, political and economic instability, difficulties in
accounts receivable collection, difficulties in managing distributors and representatives, difficulties in staffing and managing
international operations, difficulties in protecting the Company's intellectual property and potentially adverse tax consequences.
Competition for employees with skills required by the Company for its primary business segments is intense. The Company's
success will depend on its ability to attract and retain key technical employees in these business segments.
The Company's quarterly and annual operating results are affected by a wide variety of factors that could materially adversely
affect revenues and profitability, including: competitive pressures on selling prices; the timing and cancellation of customer
orders; changes in product mix; the Company's ability to introduce new products and technologies on a timely basis and transition
customers from existing to new products; introduction of products and technologies by the Company's competitors; market acceptance
of the Company's and its competitors' products; fulfilling backlog on a timely basis; reliance on sole source suppliers; potential
retrofit costs; the level of orders received which can be shipped in a quarter; and the timing of investments in engineering and
development. As a result of the foregoing and other factors, the Company may experience material fluctuations in future operating
results on a quarterly or annual basis which could materially and adversely affect its business, financial condition, operating
results and/or stock price.
Year 2000 Readiness
- -------------------
The "Year 2000 problem" arose because many existing computer programs use only the last two digits to refer to a year.
Therefore, these computer programs do not properly recognize a year that begins with "20" instead of "19". If not corrected, many
computer applications could fail or create erroneous results. The Company is employing a combination of internal resources and
outside consultants to coordinate and implement its program for Year 2000 readiness.
The Company has committed to having all its current products Year 2000 ready in advance of the Year 2000. All of the
Company's current products have been assessed, using industry accepted test procedures, and most have been determined to be Year
2000 ready. The Company has also evaluated which of its former products, still in use but no longer sold, will be made Year 2000
ready. The schedule of Company products which will or will not be made Year 2000 ready is published and updated regularly by the
Company on its web site.
The Company has completed an inventory and assessment of internal business systems that use date-sensitive software. All
enterprise-wide business systems and the majority of the Company's less critical internal systems are Year 2000 ready.
The Company is also at risk of disruption to its business if Year 2000 problems are experienced by its key suppliers. To
mitigate this risk, the Company has surveyed and done follow-up investigations with a large number of its suppliers to determine
their readiness for the year 2000. Telephone audits and on-site visits to evaluate key suppliers are substantially complete as of
October 31, 1999.
<PAGE>
Most of the Company's effort toward Year 2000 readiness is funded as ongoing operating expenses, as a part of ongoing software
support operations. The Company is not able to estimate the amount of accelerated upgrade costs that have been or will be
incurred for third party software or systems. Expenditures directly related to the Year 2000 readiness program, consisting
primarily of dedicated staff and consulting services, are estimated at less than $5.0 million through 1999.
The Company believes that its Year 2000 readiness project will be completed by year-end. The Company believes that the year
2000 transition will not have a material adverse effect on the Company's financial condition or overall trends in its operating
results. However, there can be no assurance that unexpected delays or problems, including failure of Year 2000 readiness programs
by its product and service suppliers, will not occur and have an adverse effect on the Company's financial condition or
performance, or its competitive position.
The Company has contingency plans in place for Y2K issues that may arise at year-end.
</FN>
</TABLE>
Item 3: Quantitative and Qualitative Disclosures about Market Risk
There were no material changes in the Company's exposure to market risk
from December 31, 1998.
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. Management does not believe these actions will have
a material adverse affect on the financial position or results of operations of
the Company.
Item 6(b): Reports on Form 8-K
A Current Report on Form 8-K dated August 31, 1999, was filed with the
Securities and Exchange Commission on September 8, 1999 relating to the
declaration of a two for one stock split effected in the form of a 100% stock
dividend distributed on August 31, 1999 to shareholders of record on August 17,
1999.
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES
<S> <C>
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TERADYNE, INC.
--------------
Registrant
/s/ MICHAEL A. BRADLEY
------------------------
Michael A. Bradley
Vice President and
Chief Financial Officer
November 17, 1999
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated balance sheet at October 3, 1999 and the condensed
consolidated statement of income for the nine months ended October 3, 1999 and
is qualified in its entirety by reference to such financial staements.
</LEGEND>
<CIK> 0000097210
<NAME> Teradyne, Inc.
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