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 June 30, 1996 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 July 30, 1996 was 83,478,798 shares. 1
<TABLE> TERADYNE, INC. INDEX Page No. -------- <CAPTION> PART I. FINANCIAL INFORMATION <S> <C> Item 1. Financial Statements: Condensed Consolidated Balance Sheets - June 30, 1996 and December 31, 1995...........................................................3 Condensed Consolidated Statements of Income - Quarters and Six Months Ended June 30, 1996 and July 2, 1995..................................4 Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 1996 and July 2, 1995...............................................5 Notes to Condensed Consolidated Financial Statements...............................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................7-9 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders.................................................10 </TABLE> 2
<TABLE> TERADYNE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) <CAPTION> ASSETS June 30, 1996 December 31, 1995 ------------- ----------------- (Unaudited) <S> <C> <C> Current assets: Cash and cash equivalents.................................................... $ 204,354 $ 182,165 Marketable securities........................................................ 98,739 93,662 Accounts receivable.......................................................... 222,594 254,820 Inventories: Parts.................................................................. 112,820 120,011 Assemblies in process.................................................. 55,932 56,840 ------------ ------------ 168,752 176,851 Deferred tax assets.......................................................... 17,880 19,546 Prepayments and other current assets......................................... 17,485 13,101 ------------ ------------ Total current assets................................................... 729,804 740,145 Property, plant, and equipment, at cost:........................................ 548,436 512,986 Less: Accumulated depreciation............................................ (270,264) (255,968) ------------ ------------ Net property, plant, and equipment..................................... 278,172 257,018 Marketable securities........................................................... 60,991 0 Other assets.................................................................... 23,484 26,668 ------------ ------------ Total assets........................................................... $ 1,092,451 $ 1,023,831 ============ ============ LIABILITIES Current liabilities: Notes payable - banks........................................................ $ 7,744 $ 8,141 Current portion of long-term debt............................................ 2,055 2,082 Accounts payable............................................................. 28,207 42,229 Accrued employees' compensation and withholdings............................. 56,723 66,000 Unearned service revenue and customer advances............................... 62,327 53,587 Other accrued liabilities.................................................... 53,340 41,395 Income taxes payable......................................................... 12,820 16,157 ------------ ------------ Total current liabilities.............................................. 223,216 229,591 Deferred tax liabilities........................................................ 10,178 15,711 Long-term debt.................................................................. 17,538 18,679 ------------ ------------ Total liabilities...................................................... 250,932 263,981 ------------ ------------ SHAREHOLDERS' EQUITY Common stock $0.125 par value, authorized 250,000 shares (125,000 in 1995), issued and outstanding after deduction of reacquired shares, 83,473 in 1996 and 82,634 in 1995.................................... 10,433 10,329 Additional paid-in capital...................................................... 377,478 366,970 Retained earnings............................................................... 453,608 382,551 ------------ ------------ Total shareholders' equity............................................. 841,519 759,850 ------------ ------------ Total liabilities and shareholders' equity............................. $ 1,092,451 $ 1,023,831 ============ ============ <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, 1995 are an integral part of the condensed consolidated financial statements. </FN> </TABLE> 3
<TABLE> TERADYNE, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <CAPTION> For the Quarters Ended For the Six Months Ended (In thousands, except per share amounts) June 30, 1996 July 2, 1995 June 30, 1996 July 2, 1995 ------------- ------------ ------------- ------------ <S> <C> <C> <C> <C> Net sales................................... $ 319,690 $ 284,849 $ 668,657 $ 517,007 Expenses: Cost of products sold.................. 180,618 152,683 367,255 284,308 Product line consolidation............. 34,100 0 34,100 0 ---------- ---------- ----------- ----------- Cost of sales.................... 214,718 152,683 401,355 284,308 Engineering and development............ 38,426 30,795 75,166 55,781 Selling and administrative............. 42,556 42,715 89,485 81,634 ---------- ---------- ----------- ----------- 295,700 226,193 566,006 421,723 ---------- ---------- ----------- ----------- Income from operations...................... 23,990 58,656 102,651 95,284 Other income (expense): Interest income......................... 4,162 3,547 7,921 6,632 Interest expense........................ (610) (730) (1,252) (1,263) ---------- ---------- ----------- ----------- Income before income taxes.................. 27,542 61,473 109,320 100,653 Provision for income taxes.................. 9,640 22,666 38,263 37,372 ---------- ---------- ----------- ----------- Net income.................................. $ 17,902 $ 38,807 $ 71,057 $ 63,281 ========== ========== =========== =========== Net income per common share................. $ 0.21 $ 0.46 $ 0.84 $ 0.76 ========== ========== =========== =========== Shares used in calculations of net income per common share............. 85,001 84,074 84,986 83,212 ========== ========== =========== =========== <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, 1995 are an integral part of the condensed consolidated financial statements. </FN> </TABLE> 4
<TABLE> TERADYNE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <CAPTION> For the Six Months Ended ------------------------ June 30, 1996 July 2, 1995 ------------- ------------ (In thousands) <S> <C> <C> Cash flows from operating activities: Net income........................................................ $ 71,057 $ 63,281 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................................. 24,807 19,682 Deferred income taxes.......................................... (3,867) 952 Product line consolidation..................................... 34,100 0 Other non-cash items, net...................................... (389) 4,209 Changes in operating assets and liabilities: Accounts receivable....................................... 30,826 (54,725) Inventories............................................... (14,297) (17,219) Other assets.............................................. (1,874) (8,214) Accounts payable and accruals............................. (9,313) 30,048 Income taxes payable...................................... (1,651) 16,443 ----------- ----------- Net cash provided by operating activities............. 129,399 54,457 Cash flows from investing activities: Additions to property, plant and equipment........................ (38,658) (33,063) Increase in equipment manufactured by the Company................. (10,430) (9,668) Purchases of marketable securities................................ (184,204) (97,007) Maturities of marketable securities............................... 118,136 19,766 ----------- ----------- Net cash used in investing activities................. (115,156) (119,972) ----------- ----------- Cash flows from financing activities: Net borrowings under short-term borrowing agreements.............. 0 4,400 Payments of long term debt........................................ (980) ( 131) Issuance of common stock under employee stock option and stock purchase plans............................... 8,926 18,859 ----------- ----------- Net cash flows provided by financing activities....... 7,946 23,128 ----------- ----------- Increase (decrease) in cash and cash equivalents....................... 22,189 (42,387) Cash and cash equivalents at beginning of period....................... 182,165 191,869 ----------- ----------- Cash and cash equivalents at end of period............................. $ 204,354 $ 149,482 =========== =========== Supplementary disclosure of cash flow information: Cash paid during the period for: Interest................................................ $ 1,318 $ 1,269 Income taxes............................................ 44,665 18,913 <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, 1995 are an integral part of the condensed consolidated financial statements. </FN> </TABLE> 5
TERADYNE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) A. Accounting Policies Basis of Presentation The accompanying condensed consolidated financial statements include the accounts of Teradyne, Inc. (the "Company") and its subsidiaries, all of which are wholly owned. All significant intercompany balances and transactions are eliminated. Certain prior years' amounts have been reclassified to conform to the current year presentation. On December 1, 1995, the Company completed its acquisition of Megatest Corporation ("Megatest"), by means of a merger of M Merger Corp., a wholly owned subsidiary of the Company, with and into Megatest. As a result of the merger, Megatest became a wholly owned subsidiary of the Company. The Megatest combination has been accounted for as a pooling of interests. The accompanying condensed consolidated financial statements of the Company as of and for the six months ended July 2, 1995 have been restated to include the financial position and results of operations of the combined companies. Preparation of Financial Statements The accompanying condensed consolidated financial statements are unaudited. However, in the opinion of management, all adjustments (consisting only of normal recurring accrual entries) necessary for a fair presentation of such information have been made. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. B. Product Line Consolidation During the second quarter of 1996, the Company announced a plan to consolidate the VLSI product lines of Megatest and Teradyne. In connection with this plan, the Company provided $34.1 million in charges, which included a $26.0 million write-down of inventory to net realizable value and $6.7 million for the cost of identified customer obligations on VLSI systems. C. Acquisition of Midnight Networks, Inc. On June 14, 1996, the Company acquired Midnight Networks, Inc. ("Midnight"), for an initial purchase price of approximately $4.0 million in cash. In addition, the asset purchase agreement calls for the Company to make cash payments in the form of compensation, contingent upon the operating results of Midnight, over a period beginning January 1, 1998 and ending December 31, 2000. Midnight, founded in 1992, develops and markets software programming solutions to test and confirm the correct operation of networking products and systems. The acquisition was accounted for by the purchase method of accounting. Operations of Midnight have been included in the accompanying condensed consolidated financial statements from the date of acquisition. Pro-forma results of operations have not been presented because the effects of the acquisition were not significant. The Company allocated $4.0 million of the purchase price to software products not considered to have reached technological feasibility and therefore were immediately expensed. 6
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 Quarters Ended For the Six Months Ended ---------------------- ------------------------ June 30, 1996 July 2, 1995 June 30, 1996 July 2, 1995 ------------- ------------ ------------- ------------ (In thousands) <S> <C> <C> <C> <C> Net sales...................................... $319,690 $284,849 $668,657 $517,007 ============= ============= ============== ============= Net income..................................... $17,902 $38,807 $71,057 $63,281 ============= ============= ============== ============= Percentage of net sales: Net sales................................. 100% 100% 100% 100% Expenses: Cost of products sold................ 56 54 55 55 Product line consolidation........... 11 0 5 0 ------------- ------------- -------------- ------------- Cost of sales................... 67 54 60 55 ------------- ------------- -------------- ------------- Engineering and development.......... 12 11 11 11 Selling and administrative........... 13 15 14 16 Interest, net........................ (1) (1) (1) (1) ------------- ------------- -------------- ------------- 91 79 84 81 Income before income taxes................ 9 21 16 19 Provision for income taxes................ 3 7 5 7 ------------- ------------- -------------- ------------- Net income................................ 6% 14% 11% 12% ============= ============= -------------- ------------- Provision for income taxes as a percentage of income before income taxes............. 35% 37% 35% 37% ============= ============= ============== ============= <FN> Results of Operations - --------------------- Sales increased 12% to $319.7 million in the second quarter of 1996 compared to the second quarter of 1995. Semiconductor test systems sales increased 13%, circuit-board test systems sales increased 22%, and sales of backplane connection systems increased 6%. Telecommunications test systems sales decreased by 2%. In the first six months of 1996, sales increased 29% to $668.7 million. Net income before income taxes declined to $17.9 million in the second quarter compared to $38.8 million in the same period last year. The decrease in net income was the result of pre-tax nonrecurring charges of $34.1 million for product line consolidation and $4.0 million for the purchase of in-process technology. For the six months of 1996, net income increased $7.8 million compared to the first six months of 1995. 7
Incoming orders were $220.8 million in the second quarter of 1996 compared to $464.0 million (which included $98.0 million in multi-year government contracts) in the second quarter of 1995. The decrease in orders was primarily driven by a slowing of semiconductor test systems orders which reflects the current industry conditions. Circuit-board test systems and telecommunications test systems also declined. Orders for backplane connection systems rose with strong demand from their increasing base of commercial customers. The Company expects shipments and net income to decline in the third quarter as a result of the reduction in semiconductor test systems orders. As a result of the current business environment, the Company has implemented a number of programs aimed at reducing expense and capital expenditures. The Company's backlog was $517.0 million at the end of the second quarter of 1996 compared with $690.0 million at the end of the second quarter of 1995. Cost of products sold as a percentage of sales (excluding product line consolidation charges), increased from 54% in the second quarter of 1995 to 56% in the second quarter of 1996 due to increasing shipments of lower margin government contracts and increased costs in support of semiconductor test systems products. Cost of products sold in both the first six months of 1995 and the first six months of 1996 (excluding product line consolidation charges) were 55%. As a result of the slowing of semiconductor test systems orders, the Company in the second quarter of 1996, decided to accelerate the consolidation of the VLSI product lines of Megatest and Teradyne. In connection with this consolidation, the Company provided $34.1 million in charges, which included a $26.0 million write-down of inventory to net realizable value and $6.7 million for the cost of identified customer obligations on VLSI systems. Engineering and development spending grew to $38.4 million in the second quarter of 1996 from $30.8 million in the second quarter of 1995. Included in the two periods were nonrecurring charges of $4.0 million and $3.0 million, respectively for the purchase of in-process technology to be used in product development. The in-process technology had not reached technological feasibility and was accordingly immediately expensed. The $4.0 million charge in the second quarter of 1996 relates to the purchase of Midnight Networks Inc., which develops and markets software used to test computer networks (also see Note C. to the condensed consolidated financial statements). The expenses before nonrecurring charges grew $6.6 million primarily as a result of increased investment in new product development of semiconductor test systems. As a percentage of sales, engineering and development expenses were 11% in both the first six months of 1995 and the first six months of 1996. Selling and administrative expenses decreased to 13% of sales in the second quarter and 14% of sales in the first six months of 1996 compared with 15% of sales in the second quarter and 16% of sales in the first six months of 1995. The Company has been able to hold level the dollar amount of these expenses as the sales volume has increased. Interest income increased in the second quarter of 1996 to $4.2 million from $3.5 million in the second quarter of 1995 due to an increase in the Company's average invested balances. Interest expense decreased slightly from $.7 million in the second quarter of 1995 to $.6 million in the second quarter of 1996. The Company's effective income tax rate was 35.0% in the first six months of 1996 which is the current estimate for the fiscal year. That compares with 36.3% for fiscal year 1995. The 1995 effective tax rate was driven above the statutory rate of 35% due primarily to non-deductible merger expenses incurred in connection with the Megatest acquisition. Liquidity and Capital Resources - ------------------------------- The Company's cash, cash equivalents and marketable securities balance grew $88.3 million in the first six months of 1996. Cash flow generated from operations was $129.4 million and $8.9 million was generated from the sale of stock to employees under the Company's stock option and stock purchase plans. Cash was used to fund additions to property, plant and equipment of $49.1 million in the first six months of 1996, an increase of $6.4 million compared to $42.7 million in additions in the first six months of 1995. The Company believes its cash and cash equivalents balance of $204.4 million, together with other sources of funds, including marketable securities of $159.7 million, 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 over the next twelve months. 8
Certain Factors That May Affect Future Results - ---------------------------------------------- From time to time, information provided by the Company, statements made by its employees or information included in its filings with the Securities and Exchange Commission (including this Form 10-Q, the Company's Annual Report on Form 10-K, and the Company's Annual Report to Shareholders) may contain statements which are not historical facts, so-called "forward looking statements," which involve risks and uncertainties. In particular, statements in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" relating to the Company's shipment level and profitability in the third quarter of 1996 and the sufficiency of capital to meet working capital and capital expenditure requirements 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. Historically, 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. 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's quarterly and annual operating results are affected by a wide variety of factors that could materially adversely affect revenues and profitability, including: competitive pressures on selling prices; the timing and cancellation of customer orders; changes in product mix; the Company's ability to introduce new products and technologies on a timely basis; introduction of products and technologies by the Company's competitors; market acceptance of the Company's and its competitors' products; 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 stock price. </FN> </TABLE> 9
<TABLE> Item 4. Submission of Matters to a Vote of Security Holders The annual meeting of security holders of the Company was held May 23, 1996 The following were elected as Directors: <CAPTION> Total Vote Total Vote Withheld Nominee For Each Nominee For Each Nominee - ------- ---------------- ---------------- <S> <C> <C> Alex V. d'Arbeloff 70,271,389 1,181,429 Edwin L. Artzt 70,275,133 1,177,685 James W. Bagley 70,282,936 1,169,882 Daniel S. Gregory 70,282,306 1,170,512 <FN> The Term of office for the following directors continued after the meeting: Albert Carnesale, Dwight H. Hibbard, John P. Mulroney, James A. Prestridge, Owen W. Robbins, and Richard J. Testa. </FN> </TABLE> In addition, the following proposals were approved: (A) an amendment to the Registrant's Restated Articles of Organization, to increase the amount of the Registrant's authorized Common Stock, par value $0.125 per share, from 125,000,000 to 250,000,000, was approved, with 63,652,370 shares voting in favor, 7,683,480 shares voting against, and 116,968 shares abstaining. (B) to amend the 1991 Employee Stock Option Plan (the Plan): (i) to increase the aggregate number of shares of Common Stock which may be issued pursuant to the Plan by 3,000,000 shares and (ii)to permit grants threunder to comply with Section 162(m) of the Internal Revenue Code. With 45,116,006 shares voting in favor; 26,182,543 shares voting against; and 154,269 shares abstaining. (C) to approve the adoption of the 1996 Employee Stock Purchase Plan, with 69,678,484 shares voting in favor, 1,644,147 shares voting against, and 130,187 shares abstaining. (D) to ratify the selection of the firm Coopers & Lybrand L.L.P. as auditors for the fiscal year ending December 31, 1996, with 71,250,722 shares voting in favor, 116,003 shares voting against, and 86,093 shares abstaining. 10
SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TERADYNE, INC. ------------------------ Registrant OWEN W. ROBBINS ------------------------ Owen W. Robbins Executive Vice President August 15, 1996 11