<PAGE> 1
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 1, 2000
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 29, 2000 was 174,473,839 shares.
<PAGE> 2
TERADYNE, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
October 1, 2000 and December 31, 1999............................ 3
Condensed Consolidated Statements of Income for the Three
and Nine Months Ended October 1, 2000 and October 3, 1999........ 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended October 1, 2000 and October 3, 1999............ 5
Notes to Condensed Consolidated Financial Statements............... 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 11-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk......... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 15
Item 2. Changes in Securities and Use of Proceeds.......................... 15
Item 4. Submission of Matters to a Vote of Security Holders................ 15
Item 6(b). Reports on Form 8-K................................................ 15
</TABLE>
<PAGE> 3
TERADYNE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
OCTOBER 1, 2000 DECEMBER 31, 1999
--------------- -----------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................................... $ 227,090 $ 181,345
Marketable securities ............................................... 98,785 66,316
Accounts receivable ................................................. 538,208 296,159
Inventories:
Parts ......................................................... 296,351 123,300
Assemblies in process ......................................... 176,512 145,393
----------- -----------
472,863 268,693
Deferred tax assets ................................................. 49,716 49,716
Prepayments and other current assets ................................ 42,387 45,458
----------- -----------
Total current assets .......................................... 1,429,049 907,687
Property, plant, and equipment, at cost ................................ 1,174,995 981,986
Less: accumulated depreciation ................................... (499,936) (484,247)
----------- -----------
Net property, plant, and equipment ............................ 675,059 497,739
Marketable securities .................................................. 135,906 139,752
Other assets ........................................................... 80,559 23,035
----------- -----------
Total assets .................................................. $ 2,320,573 $ 1,568,213
=========== ===========
LIABILITIES
Current liabilities:
Notes payable - banks ............................................... $ 7,801 $ 8,221
Current portion of long-term debt ................................... 102 4,659
Accounts payable .................................................... 189,126 104,335
Accrued employees' compensation and withholdings .................... 147,425 117,314
Unearned service revenue and customer advances ...................... 88,065 60,096
Other accrued liabilities ........................................... 97,930 66,223
Income taxes payable ................................................ 32,552 31,478
----------- -----------
Total current liabilities ..................................... 563,001 392,326
Deferred tax liabilities ............................................... 19,778 13,907
Long-term debt ......................................................... 8,630 8,948
----------- -----------
Total liabilities ............................................. 591,409 415,181
----------- -----------
SHAREHOLDERS' EQUITY
Common stock, $0.125 par value, 1,000,000 and 250,000 shares authorized,
175,220 and 170,319 net shares issued and outstanding
at October 1, 2000 and December 31, 1999, respectively ................ 21,903 21,290
Additional paid-in capital ............................................. 409,548 234,198
Retained earnings ...................................................... 1,297,713 897,544
----------- -----------
Total shareholders' equity .................................... 1,729,164 1,153,032
Total liabilities and shareholders' equity .................... $ 2,320,573 $ 1,568,213
=========== ===========
</TABLE>
The accompanying notes, together with the Notes to Consolidated Financial
Statements included in Teradyne's Annual Report on Form 10-K for the year ended
December 31, 1999 are an integral part of the condensed consolidated financial
statements.
3
<PAGE> 4
TERADYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
OCTOBER 1, 2000 OCTOBER 3, 1999 OCTOBER 1, 2000 OCTOBER 3, 1999
--------------- --------------- --------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net sales ............................... $ 848,027 $ 497,039 $ 2,255,113 $ 1,242,397
Expenses:
Cost of sales ...................... 460,752 281,299 1,212,162 738,097
Engineering and development ........ 78,963 60,331 221,625 164,884
Selling and administrative ......... 95,149 70,470 266,087 184,337
----------- ----------- ----------- -----------
634,864 412,100 1,699,874 1,087,318
----------- ----------- ----------- -----------
Income from operations .................. 213,163 84,939 555,239 155,079
Other income (expense):
Interest income .................... 6,641 4,794 17,838 12,414
Interest expense ................... (570) (217) (1,407) (1,121)
----------- ----------- ----------- -----------
Income before income taxes .............. 219,234 89,516 571,670 166,372
Provision for income taxes .............. 65,770 26,855 171,501 49,912
----------- ----------- ----------- -----------
Net income .............................. $ 153,464 $ 62,661 $ 400,169 $ 116,460
=========== =========== =========== ===========
Net income per common share - basic ..... $ 0.88 $ 0.37 $ 2.31 $ 0.68
=========== =========== =========== ===========
Net income per common share - diluted ... $ 0.84 $ 0.35 $ 2.20 $ 0.65
=========== =========== =========== ===========
Shares used in calculations of net income
per common share - basic ........... 174,369 171,098 173,218 170,458
=========== =========== =========== ===========
Shares used in calculations of net income
per common share - diluted ......... 181,937 179,026 181,502 178,361
=========== =========== =========== ===========
===========================================================================================================================
</TABLE>
The accompanying notes, together with the Notes to Consolidated Financial
Statements included in Teradyne's Annual Report on Form 10-K for the year ended
December 31, 1999 are an integral part of the condensed consolidated financial
statements.
4
<PAGE> 5
TERADYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
-------------------------
OCTOBER 1, 2000 OCTOBER 3, 1999
--------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income ......................................................... $ 400,169 $ 116,460
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation .................................................... 73,874 63,779
Amortization .................................................... 1,656 831
Other non-cash items, net ....................................... (8,086) 3,313
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable ........................................ (232,098) (95,650)
Inventories ................................................ (195,619) (16,284)
Other assets ............................................... 7,573 (17,063)
Accounts payable and accruals .............................. 165,049 119,918
Income taxes payable ....................................... 80,196 36,404
--------- ---------
Net cash provided by operating activities .................. 292,714 211,708
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment ......................... (167,448) (78,418)
Increase in equipment manufactured by Teradyne ..................... (40,478) (21,853)
Purchases of available-for-sale marketable securities .............. (276,490) (116,002)
Maturities of available-for-sale marketable securities ............. 268,300 81,634
Purchases of held-to-maturity marketable securities ................ (118,325) (118,991)
Maturities of held-to-maturity marketable securities ............... 97,892 29,763
Cash acquired in acquisitions ...................................... 1,885 0
--------- ---------
Net cash used for investing activities ..................... (234,664) (223,867)
--------- ---------
Cash flows from financing activities:
Payments of long term debt ......................................... (4,659) (1,263)
Acquisition of treasury stock ...................................... (60,659) (120,605)
Issuance of common stock under employee stock
option and stock purchase plans .................................... 53,013 69,718
--------- ---------
Net cash flows used for financing activities ........... (12,305) (52,150)
--------- ---------
Increase/(decrease) in cash and cash equivalents ........................ 45,745 (64,309)
Cash and cash equivalents at beginning of period ........................ 181,345 185,514
--------- ---------
Cash and cash equivalents at end of period .............................. $ 227,090 $ 121,205
========= =========
Supplementary disclosure of cash flow information:
Cash paid during the period for:
Interest ........................................................ $ 1,339 $ 1,157
Income taxes .................................................... $ 72,498 $ 13,874
Business acquired:
Fair value of assets acquired ................................. $ 119,888
Liabilities assumed ........................................... 15,401
Common stock issued ........................................... $ 104,487
</TABLE>
The accompanying notes, together with the Notes to Consolidated Financial
Statements included in Teradyne's Annual Report on Form 10-K for the year ended
December 31, 1999 are an integral part of the condensed consolidated financial
statements.
5
<PAGE> 6
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. TERADYNE, INC.
We design, manufacture, market and service test systems and related
software, as well as backplanes and associated connectors. We currently have
five principal products:
- semiconductor test systems;
- backplane connection systems;
- circuit-board inspection and test systems;
- broadband test systems; and
- software test systems.
Semiconductor Test Systems. We produce semiconductor test systems for use
by electronic component manufacturers in the design and testing of a wide
variety of semiconductor products, including logic, memory, mixed signal, and
"system on a chip" integrated circuits. Semiconductor test systems are sold to
semiconductor manufacturers and subcontractors to the semiconductor industry.
Semiconductor manufacturers use our semiconductor test systems to:
- measure product performance;
- improve product quality;
- shorten time to market;
- enhance manufacturability;
- conserve labor costs; and
- increase production yields.
Backplane Connection Systems. The computer, communications, and
military/aerospace industries are the principal users of our backplane
connection systems. 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. We produce both printed
circuit and metal backplanes, along with mating circuit-board connectors. Our
backplane connection systems customers include makers of data storage systems,
telecommunications gear, and routers and servers. In addition, backplane
connection systems have a long-standing military/aerospace customer base.
Circuit-board Inspection and Test Systems. Electronic equipment
manufacturers use our circuit-board inspection and test systems for the design,
inspection and testing of circuit boards and other assemblies. We also sell
circuit-board inspection and test systems to customers across most sectors of
the electronics industry and to companies in other industries that use
electronic devices in high volume. Similar to semiconductor test systems, our
customers use their systems and related software to increase product
performance, to improve product quality, to shorten time to market, to enhance
manufacturability, to conserve labor costs, and to increase production yields.
Broadband Test Systems. Broadband test systems support communications
service providers' goals to sell and deploy more services sooner and improve the
efficiency of qualification, provisioning and customer care.
Software Test Systems. A number of industries use our software test systems
to test communications networks, computerized telecommunication systems, and web
based applications. In September 2000, we announced that we are consolidating
our software test units into a single company to be called Empirix. The
employees of Empirix and an outside investor group will subsequently own a
controlling position in the new company, and we will retain an ownership
position. The transaction is expected to be completed at the end of the fourth
quarter of 2000.
6
<PAGE> 7
B. ACCOUNTING POLICIES
Basis of Presentation
The condensed consolidated interim financial statements include the
accounts of Teradyne and its subsidiaries. All significant intercompany balances
and transactions have been eliminated. The year-end condensed consolidated
balance sheet data were derived from audited financial statements, but do not
include all disclosures required by generally accepted accounting principles.
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 and the reported amounts of revenues and
expenses during the reported periods. Actual results could differ from those
estimates.
Revenue Recognition
Product revenue is recognized upon shipment. Teradyne's products are
generally subject to warranty, and we provide for such estimated costs when
product revenue is recognized. We recognize service revenue as the services are
provided or ratably over the period of the related contract, as applicable.
Teradyne unbundles service revenue from product sales and maintenance services
from software license fees based upon amounts charged when such elements are
separately sold. For certain contracts eligible under American Institute of
Certified Public Accountants ("AICPA") Statement of Position No. 81-1, revenue
is recognized using the percentage-of-completion accounting method based upon an
efforts-expended method. In all cases, changes to total estimated costs and
anticipated losses, if any, are recognized in the period in which determined.
Other Comprehensive Income
Comprehensive income does not materially differ from net income for the
three and nine month periods ended October 1, 2000 and October 3, 1999.
7
<PAGE> 8
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
C. ACQUISITIONS AND DIVESTITURES
On August 15, 2000, we acquired two California-based companies, both in the
printed circuit board (PCB) industry: Herco Technology of San Diego, CA, a
fabricator of printed circuit boards, and Synthane Taylor of La Verne, CA, which
supplies PCB laminates and is a major supplier to Herco. The acquisitions will
be part of the backplane connections systems operating segment. The cost of the
acquired companies was $104.5 million with approximately 1.8 million shares of
common stock issued. The acquisitions have been accounted for by the purchase
method of accounting and accordingly, the results have been included in our
consolidated results of operations from the date of acquisition. Pro-forma
amounts for the acquisitions are not included as their effect is not material to
the financial statements. Goodwill of $53.3 million resulting from the
acquisitions is being amortized on a straight-line basis over a 15-year period.
The components of the purchase price allocation are as follows:
($000'S)
Current assets $ 20,140
Property, plant and equipment 41,650
Acquired intangibles 4,737
Goodwill 53,361
Less: Liabilities assumed 15,401
---------
Total $ 104,487
On September 6, 2000, Teradyne announced that it would be consolidating its
software test units, acquired over the last several years, into a single company
to be called Empirix. The employees of Empirix and an investor group led by
Matrix Partners of Waltham, MA will own a controlling interest in the new
company, with Teradyne retaining an ownership position. The date of the
transaction is subject to certain closing conditions, including receipt of
regulatory approvals and is expected to be completed at the end of the fourth
quarter of 2000.
D. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 the first quarter of all fiscal years beginning after June 15, 2000.
Accordingly, Teradyne 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. In June 2000, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No.138 "Accounting for Certain Derivative Instruments and
Hedging Activities - an amendment of FASB Statement No.133." SFAS No.138 amends
the accounting and reporting standards of SFAS No.133 for certain derivative
instruments and certain hedging activities. SFAS No.138 will be adopted
concurrently with SFAS No.133. Management is currently evaluating the effects of
this change on its recording of derivatives and hedging activities.
On June 26, 2000, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101B which amended Question 2 of Section B
of Topic 13 of the Staff Accounting Bulletin Series. SAB No. 101B delays the
implementation date of SAB No. 101 "Revenue Recognition in Financial Statements"
until Teradyne's fourth quarter of the fiscal year 2000. SAB No. 101 summarizes
the SEC's view in applying generally accepted accounting principles to selected
revenue recognition issues. The effects of applying the guidance in SAB No. 101,
if any, will be reported as the cumulative effect adjustment resulting from a
change in accounting principle. Teradyne has not completed its evaluation of SAB
101 and is therefore unable to determine the impact the SAB will have on its
financial statements.
8
<PAGE> 9
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
E. NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net
income per common share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
OCTOBER 1, 2000 OCTOBER 3, 1999 OCTOBER 1, 2000 OCTOBER 3, 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net Income ................................................. $153,464 $ 62,661 $400,169 $116,460
======== ======== ======== ========
Shares used in net income per common share - basic ......... 174,369 171,098 173,218 170,458
Effect of dilutive securities
Employee and director stock options ............... 7,082 7,299 8,005 7,519
Employee stock purchase rights .................... 486 629 279 384
-------- -------- -------- --------
Dilutive potential common shares ...................... 7,568 7,928 8,284 7,903
-------- -------- -------- --------
Shares used in net income per common share - diluted ....... 181,937 179,026 181,502 178,361
======== ======== ======== ========
Net income per common share - basic ........................ $ 0.88 $ 0.37 $ 2.31 $ 0.68
======== ======== ======== ========
Net income per common share - diluted ...................... $ 0.84 $ 0.35 $ 2.20 $ 0.65
======== ======== ======== ========
</TABLE>
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 Teradyne's common stock during the
three and nine month periods presented above. Options to purchase 656,605 and
27,566 shares of common stock respectively, during the three months ended
October 1, 2000 and October 3, 1999 and 251,776 and 56,118 shares of common
stock, respectively, during the nine months ended October 1, 2000 and October 3,
1999 were outstanding during the periods then ended. These options were not
included in the calculation of diluted net income per common share because the
options' exercise price was greater than the average market price of the common
shares during those periods.
9
<PAGE> 10
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONCLUDED
(UNAUDITED)
F. OPERATING SEGMENT INFORMATION
Teradyne has five principal operating segments which are the design,
manufacturing and marketing of semiconductor test systems, backplane connection
systems, circuit-board test systems, broadband test systems, and software test
systems. These operating segments were determined based upon the nature of the
products and services offered. Teradyne has three reportable segments;
semiconductor test systems segment, backplane connection systems segment, and
other. The other segment is comprised of circuit-board test systems, broadband
test systems, and software test systems.
Teradyne evaluates performance based on several factors, of which the
primary financial measure is business segment income before taxes. The
accounting policies of the business segments are the same as those described in
"Note B: Accounting Policies" in the Teradyne's Annual Report on Form 10-K for
the year ended December 31, 1999. Intersegment sales are accounted for at fair
value as if sales were to third parties. Operating segment information for the
three and nine month periods ended October 1 2000 and October 3, 1999 follows
(in thousands):
<TABLE>
<CAPTION>
Sales to Sales to
Unaffilliated Intersegment Net Income (Loss) Unaffilliated Intersegment Net Income (Loss)
Reportable Segments Customers Sales Sales Before Taxes Customers Sales Sales Before Taxes
------------------- ------------- ------------ ----- ------------- ------------- ------------ ----- ------------
THREE MONTHS ENDED OCTOBER 1, 2000: THREE MONTHS ENDED OCTOBER 3, 1999:
----------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Semiconductor Test Systems $ 580,299 $ -- $ 580,299 $ 202,913 $ 359,193 $ -- $ 359,193 $103,523
Backplane Connection Systems 195,956 10,586 206,542 43,000 90,023 5,124 95,147 15,336
Other 71,772 -- 71,772 2,191 47,823 -- 47,823 (6,822)
Corporate and Eliminations -- (10,586) (10,586) (28,870) -- (5,124) (5,124) (22,521)
-------------------------------------------------------------------------------------------------------
Consolidated $ 848,027 $ -- $ 848,027 $ 219,234 $ 497,039 $ -- $ 497,039 $ 89,516
=======================================================================================================
NINE MONTHS ENDED OCTOBER 1, 2000: NINE MONTHS ENDED OCTOBER 3, 1999:
---------------------------------- ----------------------------------
Semiconductor Test Systems $ 1,571,152 $ -- $1,571,152 $ 548,035 $ 820,622 $ -- $ 820,622 $174,507
Backplane Connection Systems 498,266 24,252 522,518 107,977 266,114 11,128 277,242 44,538
Other 185,695 185,695 116 155,661 -- 155,661 (10,435)
Corporate and Eliminations (24,252) (24,252) (84,458) (11,128) (11,128) (42,238)
-------------------------------------------------------------------------------------------------------
Consolidated $ 2,255,113 $ -- $2,255,113 $ 571,670 $1,242,397 $ -- $1,242,397 $166,372
=======================================================================================================
</TABLE>
(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.
10
<PAGE> 11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SELECTED RELATIONSHIPS WITHIN THE CONDENSED CONSOLIDATED
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
OCTOBER 1, OCTOBER 3, OCTOBER 1, OCTOBER 3,
---------- ---------- ---------- ----------
2000 1999 2000 1999
---------- ----------- ----------- -----------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales ................................... $ 848,027 $ 497,039 $ 2,255,113 $ 1,242,397
=========== =========== =========== ===========
Net income .................................. $ 153,464 $ 62,661 $ 400,169 $ 116,460
=========== =========== =========== ===========
Percentage of net sales:
Net sales .............................. 100% 100% 100% 100%
Expenses:
Cost of sales ...................... 54 57 54 60
Engineering and development ........ 9 12 10 13
Selling and administrative ......... 11 14 12 15
Interest, net ...................... (1) (1) (1) (1)
----------- ----------- ----------- -----------
Income before income taxes ............. 26 18 25 13
Provision for income taxes ............. 8 5 7 4
----------- ----------- ----------- -----------
Net income ............................. 18% 13% 18% 9%
=========== =========== =========== ===========
Provision for income taxes as a percentage of
income before taxes .................... 30% 30% 30% 30%
=========== =========== =========== ===========
</TABLE>
RESULTS OF OPERATIONS
Teradyne recorded record sales of $848.0 million in the third quarter of
2000, an increase of $351.0 million or 71% from the third quarter of 1999.
Semiconductor test systems sales increased 62% from the third quarter of 1999
due to increased orders resulting from capacity expansion by semiconductor
manufacturers and subcontractors. Sales of backplane connection systems to
unaffiliated customers increased 118% from the third quarter of 1999 as a result
of continued growth in demand from networking, data storage, and other high
technology customers. Other test systems sales increased 50% over the third
quarter of 1999. Teradyne recorded sales of $2.3 billion in the first nine
months of 2000, an increase of $1.0 billion or 82% over the first nine months of
1999. Semiconductor test systems sales and backplane connection systems sales to
unaffiliated customers increased 91% and 87%, respectively, when compared to the
first nine months of 1999. Other test systems sales for the first nine months of
2000 increased 19% over the corresponding period in 1999. Income before taxes in
the third quarter of 2000 increased $129.7 million from the third quarter of
1999 to $219.2 million. For the first nine months of 2000, income before taxes
increased $405.3 million to $571.7 million when compared to the first nine
months of 1999.
Incoming orders were $818.7 million in the third quarter of 2000 compared
to $490.5 million in the third quarter of 1999. The increase in incoming orders
was led by an 187% increase in backplane connection systems orders and a 21%
increase in semiconductor test systems orders. For the nine month periods ended
October 1, 2000 and October 3, 1999, incoming orders were $2,669.3 million and
$1,505.6 million, respectively. The increase in incoming orders was led by a
162% increase in backplane connection systems orders and a 57% increase in
semiconductor test systems orders. Teradyne's backlog was $1,406.4 million at
the end of the third quarter of 2000, as adjusted for acquired backplane
connection systems backlog, compared with $843.0 million at the end of the third
quarter of 1999.
Cost of sales decreased from 57% of sales in the third quarter of 1999 to
54% of sales in the third quarter of 2000 and from 60% in the first nine months
of 1999 to 54% in the first nine months of 2000. These percentage decreases were
primarily attributable to increased utilization of Teradyne's manufacturing
overhead, as sales volume increased while certain components of cost of sales
remained fixed.
11
<PAGE> 12
Engineering and development expenses, as a percentage of sales, decreased
from 12% in the third quarter and 13% in the first nine months of 1999 to 9% in
the third quarter and 10% in the first nine months of 2000, while increasing by
$18.6 million and $56.7 million, respectively. This spending growth was
primarily due to increased investments in new products in each operating
segment.
Selling and administrative expenses, as a percentage of sales, decreased
from 14% in the third quarter and 15% in the first nine months of 1999 to 11% in
the third quarter and 12% in the first nine months of 2000, while increasing by
$24.7 million and $81.8 million, respectively. This spending growth was due to
higher compensation related expenses and spending in support of increased
semiconductor test systems, software test systems, and backplane connection
systems sales.
Interest income increased by $1.8 million to $6.6 million in the third
quarter of 2000 compared to the third quarter of 1999 and by $5.4 million to
$17.8 million in the first nine months of 2000 compared to the first nine months
of 1999. These increases are attributable to increases in the Teradyne's average
invested balances.
Teradyne's overall effective tax rate was 30% in the third quarter of 2000
and the first nine months of 2000. The overall effective tax rate for the year
ended 1999 was also 30%. Teradyne 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
Teradyne's cash, cash equivalents and marketable securities balance
increased $74.4 million in the first nine months of 2000, to $461.8 million.
Teradyne generated cash from operating activities of $292.7 million in the first
nine months of 2000 and $211.7 million in the nine months of 1999. Cash
generated from net income, excluding the effects of non-cash items, was $467.6
million and $184.4 million for the first nine months of 2000 and 1999,
respectively. Changes in operating assets and liabilities used cash of $174.9
million in the first nine months of 2000 as a result of increases in working
capital to support increased sales. In the first nine months of 1999, changes in
operating assets and liabilities provided cash of $27.3 million.
Teradyne used $234.7 million of cash for investing activities in the first
nine months of 2000 and $223.9 million in the first nine months of 1999.
Investing activities consist of purchases, sales, and maturities of marketable
securities and purchases of capital assets to support long-term growth. Capital
expenditures were $207.9 million in the first nine months of 2000 and $100.3
million in the first nine months of 1999.
Financing activities used $12.3 million of cash during the first nine
months of 2000 and $52.2 million of cash in the first nine months of 1999.
Financing activities include issuance of Teradyne's common stock through
employee stock option and stock purchase plans, repurchase of common stock
through a stock buyback program and repayments of debt. During the first nine
months of 2000, net common stock activity used cash of $7.6 million. During the
first nine months of 1999, net common stock activity used cash of $50.8 million.
Since 1996, Teradyne has used $453.9 million of cash to repurchase 17.1 million
shares of its common stock on the open market.
Teradyne believes its cash, cash equivalents, and marketable securities
balance of $461.8 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.
On August 15, 2000, Teradyne acquired two California-based companies, both
in the printed circuit board (PCB) industry: Herco Technology of San Diego, CA,
a fabricator of printed circuit boards, and Synthane Taylor of La Verne, CA,
which supplies PCB laminates and is a major supplier to Herco. The acquisition
provides added capacity to the backplane connections systems operating segment.
Inflation has not had a significant long-term impact on earnings.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided by Teradyne, statements made by its
employees or information included in its filings with the Securities and
Exchange Commission (including this Form 10-Q and our Annual Report to
Shareholders) contains statements that are not purely historical, but are
forward looking statements, which involve risks and uncertainties. In
particular, forward looking statements may include projections, plans, and
objectives for Teradyne's business, financial condition, operating results,
future operations, future economic performance or statements relating to the
sufficiency of capital to meet working capital and planned capital expenditures.
Teradyne's actual future results may differ materially from those stated in any
forward looking statements. Factors that may cause such differences include, but
are not limited to, the factors discussed below. These factors, and others, are
discussed from time to time in Teradyne's filings with the Securities and
Exchange Commission, including in Teradyne's Annual Report on Form 10-K for the
year ended December 31, 1999.
OUR SEMICONDUCTOR TESTING BUSINESS IS DEPENDENT ON THE CURRENT AND ANTICIPATED
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MARKET FOR SEMICONDUCTORS, WHICH IS HIGHLY CYCLICAL.
Our 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 us. We believe that the markets for newer
generations of semiconductors will also be subject to similar fluctuations. We
cannot assure that any future increase in semiconductor test systems sales or
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 our
business, financial condition and operating results.
IF WE EXPERIENCE CANCELLATIONS OR OUR CUSTOMERS FAIL TO PLACE NEW ORDERS BECAUSE
OF OUR CURRENT ORDER BACKLOG, IT WOULD HAVE AN ADVERSE EFFECT ON OUR RESULTS OF
OPERATIONS.
We typically maintain a large multi-week order backlog. If we are unable to
fill these orders and meet customer delivery expectations, customers may cancel
existing orders or fail to place new orders in the future, which would have an
adverse effect on our revenues and results of operations. Factors that affect
our ability to meet customer delivery expectations include:
- the availability of expanded manufacturing facilities;
- our ability to attract and retain qualified manufacturing personnel to
meet anticipated manufacturing levels;
- the difficulties inherent in manufacturing highly complex products
that have only recently been introduced; and
- the availability of components, including semiconductor chips, which
may be in short supply from time to time.
In addition, we rely upon third-party contract manufacturers for certain
subsystems used in our products, and our ability to meet customer orders for
those products depends upon the timeliness and quality of the work performed by
these subcontractors, over whom we do not exercise any control.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WE MAY LOSE A VALUABLE
ASSET OR MAY INCUR COSTLY LITIGATION TO PROTECT OUR RIGHTS.
Our products incorporate technology that we protect in several ways,
including patents, copyrights, and trade secrets. While we believe that our
patents, copyrights, and trade secrets have value, in general no single one is
in itself essential. At times we have been notified that we may be in violation
of patents held by others. An assertion of patent infringement against us, if
successful, could have a material adverse effect on our ability to sell our
products, or could require a lengthy and expensive defense which could adversely
affect our operating results.
IF WE FAIL TO DEVELOP NEW TECHNOLOGIES TO ADAPT TO OUR CUSTOMERS' NEEDS AND IF
OUR CUSTOMERS FAIL TO ACCEPT OUR NEW PRODUCTS, IT WILL ADVERSELY AFFECT OUR
REVENUES.
We believe that our technological position depends primarily on the
technical competence and creative ability of our engineers. Our development of
new technologies, commercialization of those technologies into products, and
market acceptance and customer demand for those products is critical to our
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; and
- timely and efficient implementation of manufacturing and assembly
processes and product performance at customer locations.
INTENSE COMPETITION IN OUR INDUSTRY MAY AFFECT OUR REVENUES.
We face substantial competition, throughout the world, in each of our
operating segments. Some of these competitors also have substantial financial
and other resources to pursue engineering, manufacturing, marketing and
distribution of their products. We also
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face competition from internal suppliers at several of our customers. Some of
our competitors have introduced or announced new products with certain
performance characteristics which may be considered equal or superior to those
we currently offer. We expect our 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 our products. Moreover, increased
competitive pressure could lead to intensified price based competition, which
could materially adversely affect our business, financial condition and results
of operations.
WE ARE SUBJECT TO RISKS OF OPERATING INTERNATIONALLY.
We derive a significant portion of our total revenue from customers outside
the United States. Our international sales are subject to significant risks and
difficulties, including:
- unexpected changes in legal and regulatory requirements and in policy
changes affecting our markets;
- changes in tariffs and exchange rates;
- political and economic instability;
- difficulties in accounts receivable collection;
- difficulties in staffing and managing international operations; and
- potentially adverse tax consequences.
In addition, we generate a significant portion of our semiconductor test
systems revenue from customers operating in South Asian countries and Taiwan.
Although the economies of South Asian countries and Taiwan have stabilized to
some degree since mid fiscal 1998, if these economies deteriorate the negative
economic developments would increase the likelihood of either a direct or
indirect adverse impact on the our future operating results.
OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY.
Our 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;
- our ability to introduce new products and technologies on a timely
basis;
- introduction of products and technologies by our competitors;
- market acceptance of our and our 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, we have and may continue to
experience material fluctuations in future operating results on a quarterly or
annual basis which could materially and adversely affect our business, financial
condition, operating results and stock price.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in Teradyne's exposure to market risk from
December 31, 1999.
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Teradyne is subject to legal proceedings and claims that arise in the
ordinary course of business. Management does not believe these actions will have
a material adverse affect on the financial position or results of our
operations.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 15, 2000, in consideration for the acquisitions of Herco
Technology and Synthane Taylor, Teradyne issued 1,841,162 shares of common stock
to the three selling shareholders of the acquired companies. The securities were
issued in reliance on Rule 506 promulgated under Regulation D of the Securities
Act of 1933. Teradyne subsequently registered the shares on a form S-3
registration statement, declared effective by the SEC on October 19, 2000.
ITEM 6(b): REPORTS ON FORM 8-K
There were no Form 8-K filings during the quarter ended October 1, 2000, as
none were required.
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
TERADYNE, INC.
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Registrant
/s/ MICHAEL A. BRADLEY
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Michael A. Bradley
Vice President and
Chief Financial Officer
November 15, 2000
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