ITEM 1: BUSINESS
Teradyne, Inc. is a manufacturer of electronic test systems and backplane connection systems used in the electronics and telecommunications industries. For financial information concerning these two industry segments, see "Note L: Industry Segment and Geographic Information" in Notes to Consolidated Financial Statements. Unless the context indicates otherwise, the term "Company" as used herein includes Teradyne, Inc. and all its subsidiaries.
ELECTRONIC TEST SYSTEMS
The Company designs, manufactures, markets, and services electronic test systems and related software used by component manufacturers in the design and testing of their products and by electronic equipment manufacturers for the incoming inspection of components and for the design and testing of circuit boards and other assemblies. Manufacturers use such systems and 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. The Company's electronic systems are also used by telephone operating companies for the testing and maintenance of their subscriber telephone lines and related equipment.
Electronic systems produced by the Company include: (i) test systems for a wide variety of semiconductors, including digital and analog integrated circuits, (ii) test systems for circuit boards and other assemblies, and (iii) test systems for telephone lines and networks. The Company's test systems are all controlled by computers, and programming and operating software is supplied both as an integral part of the product and as a separately priced enhancement.
The Company's systems are extremely complex and require extensive support both by the customer and by the Company. Prices for the Company's systems range from less than $100,000 to $5 million or more.
BACKPLANE CONNECTION SYSTEMS
The Company also manufactures backplane connection systems, principally for the computer, telecom-munications, and military/aerospace industries. A backplane is a panel that supports the circuit boards in an electronic assembly and carries the wiring that connects the boards to each other and to other elements of a system. The Company produces both printed-circuit and metal backplanes, along with mating circuit-board connectors. Backplanes are custom-configured to meet specific customer requirements. The Company has begun to evolve the manufacture of backplane connection systems to the manufacture of fully integrated electronic assemblies that include backplane, card cage, cabling, and related design and production services.
MARKETING AND SALES
MARKETS
The Company sells its products across most sectors of the electronics industry and to companies in other industries that use electronic devices in high volume. The Company believes that it could suffer the loss of one or even a few major customers without serious long-term adverse effects. Sales to Motorola, Inc. were $69.3 million in 1993, which were greater than 10% of the Company's net sales in 1993. No other customer accounted for more than 10% of net sales in 1993.
Direct sales to United States Government agencies accounted for approximately 2% of net sales in 1993 and 1992, and 1% in 1991. In addition, sales are made, within each of the Company's segments, to customers who are government contractors. Approximately 33% of all backplane connection systems sales and less than 10% of all electronic test systems sales fell into this category during 1993.
The Company's overseas customers are located primarily in Europe, Asia Pacific, and Japan. Sales to overseas customers consist principally of electronic test systems, and these sales occur either through foreign sales subsidiaries or through direct exports. Substantially all of the Company's manufacturing activities are conducted in the United States.
Sales to overseas customers accounted for 41% of net sales in 1993, 42% in 1992, and 47% in 1991. Identifiable assets of the Company's foreign subsidiaries, consisting principally of accounts receivable and other operating assets, approximated $65.0 million at December 31, 1993, $86.0 million at December 31, 1992, and $82.0 million at December 31, 1991. Of these identifiable assets at December 31, 1993, $39.0 million were in Europe, $23.0 million were in Japan, and $3.0 million were in Asia Pacific. Since sales to overseas customers have little correlation with the location of manufacture, it is not meaningful to present operating profit by geographic area.
The Company is subject to the inherent risks involved in international trade, such as political instability, restrictive trade policies, controls on funds transfer, and foreign currency fluctuations. The Company attempts to reduce the effects of currency fluctuations by hedging part of its exposed position and by conducting some of its foreign transactions in U.S. dollars or dollar equivalents.
DISTRIBUTION
The Company sells its electronic systems primarily through a direct sales force. Backplane connection systems are sold by direct sales personnel as well as by manufacturers' representatives. The Company has sales and service offices throughout North America, Europe, Asia Pacific, and Japan.
COMPETITION
Competition is intense in each of the business areas that the Company operates. In each market there are several significant competitors (three to five). Many of these competitors have greater resources than the Company. Competition is principally based on technical performance, equipment and service reliability, reputation and accessibility to the vendor, and price. While relative positions vary from year to year, the Company believes that it operates with a significant market share position in each of its businesses.
BACKLOG
On December 31, 1993, the Company's backlog of unfilled orders for electronic test systems and backplane connection systems was approximately $238.9 million and $49.1 million, respectively, compared with $183.0 million and $34.8 million, respectively, on December 31, 1992. Of the backlog at December 31, 1993, approximately 75% of the electronic test systems backlog, and substantially all of the backplane connection systems backlog is expected to be delivered in 1994, although the Company's past experience indicates that a portion of orders included in the backlog may be cancelled. There are no seasonal or unusual factors related to the backlog.
RAW MATERIALS
The Company's products require a wide variety of electronic and mechanical components. In the past, the Company has experienced occasional delays in obtaining timely delivery of certain items. Additionally, the Company could experience a temporary adverse impact if any of its sole source suppliers ceased to deliver products. Management believes, however, that alternate sources could be developed.
PATENTS AND LICENSES
The development of products by the Company, both hardware and software, is largely based on proprietary information. The various copyrights, trademarks, and patents owned by the Company, together with patent applications pending, are generally not significant in relation to the Company's overall business. However, protection of such proprietary information, through methods such as patents, software license agreements with customers and employee agreements, is important for certain of the Company's products. The Company does not hesitate to assert its rights to intellectual property when, in its view, these rights are infringed upon. Also from time to time, claims have been asserted that certain of its products and technologies infringe the patent rights of third parties. In the opinion of management, none of these claims are expected to have a material effect on the consolidated financial or competitive position of the Company.
EMPLOYEES
As of December 31, 1993, the Company employed approximately 4,000 persons. Since the inception of the Company's business, there have been no work stoppages or other labor disturbances. The Company has no collective bargaining contracts.
ENGINEERING AND DEVELOPMENT ACTIVITIES
The highly technical nature of the Company's products requires a large and continuing engineering and development effort. Engineering and development expenditures for new and improved products were approximately $62.4 million in 1993, and $62.0 million in 1992 and 1991. These expenditures amounted to approximately 11% of net sales in 1993, and 12% in 1992 and 1991.
ENVIRONMENTAL AFFAIRS
The Company's manufacturing facilities are subject to numerous laws and regulations designed to protect the environment, particularly from plant wastes and emissions. These include laws such as the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the Occupational Safety and Health Act, the Clean Air Act, the Clean Water Act, the Hazardous and Solid Waste Amendments of 1984 and Resource Conservation and Recovery Act of 1976. In the opinion of management, compliance with these laws and regulations has not had and will not have a material effect upon the capital expenditures, earnings and competitive position of the Company.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names of all executive officers of the Company and certain other information relating to their positions held with the Company and other business experience. Executive officers of the Company do not have a specific term of office but rather serve at the discretion of the Board of Directors.
The Company owns the majority of its manufacturing and office facilities. The Company believes its present and planned facilities and equipment are adequate to service its current and immediately foreseeable business needs.
Approximately 120,000 square feet of the Agoura Hills property listed above is currently unoccupied. The Company is subleasing an additional 85,000 square feet of space in Walnut Creek through the expiration of the lease in June 1996.
ITEM 3:
ITEM 3: LEGAL PROCEEDINGS
The Company is not a party to any litigation that, in the opinion of management, could reasonably be expected to have a material adverse impact on the Company's financial position.
ITEM 4:
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II
ITEM 5:
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS
The following table shows the market range for the Company's Common Stock based on reported sales prices on the New York Stock Exchange.
The number of record holders of the Company's Common Stock at February 25, 1994 was 3,225.
The Company has never paid cash dividends because it has been its policy to use earnings to finance expansion and growth. While payment of future dividends will rest within the discretion of the Board of Directors and will depend, among other things, upon the Company's earnings, capital requirements and financial condition, the Company presently expects to retain all of its earnings for use in the business.
ITEM 6:
ITEM 6: SELECTED FINANCIAL DATA
ITEM 7:
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SELECTED RELATIONSHIPS WITHIN THE CONSOLIDATED STATEMENTS OF INCOME
RESULTS OF OPERATIONS:
1993 Compared to 1992
Sales increased 5% in 1993, to $554.7 million. The increase in sales was primarily due to a 13% increase in sales of semiconductor test systems and, to a lesser extent, a 7% increase in sales of backplane connection systems. Sales of semiconductor test systems increased as semiconductor manufacturers added capacity in response to rising demand for their products. Sales of circuit-board test systems and telecommunications systems declined 7% and 18%, respectively, in 1993 compared to 1992. Incoming orders increased 19% in 1993 to $625.0 million over 1992 with increased orders occurring in each of the Company's major groups. The Company's backlog grew during 1993 to $288.0 million.
Income before taxes increased by $25.3 million from 1992 to 1993 on a sales increase of $25.2 million as the Company continued to control the growth in its operating expenses. In addition, costs in 1993 were lower in the Company's circuit-board test operations following actions taken by the Company in 1992 to consolidate those operations. These lower costs helped to offset the impact of the reduced sales of circuit-board test systems.
Cost of sales decreased from 59% of sales in 1992 to 57% in 1993. While sales increased in 1993, the fixed and semi-variable components of cost of sales decreased as a result of the Company's cost reduction programs. The changes in engineering and development expenses and selling and administrative expenses were each less than 1% in 1993, compared to 1992. These expenses have essentially remained at their current level since 1991, as the Company has controlled the growth of its fixed costs.
Interest income increased 44% in 1993 as a result of a $76.2 million increase in the Company's cash and cash equivalents balance during the year. Interest expense decreased 12% in 1993 primarily as a result of the Company's retirement of its 9.25% outstanding convertible subordinated debentures in the fourth quarter.
The Company's effective tax rate increased from 13.5% in 1992 to 30% in 1993. The Company had been able to utilize net operating loss carryforwards to lower its United States taxable income for financial reporting purposes in 1992, while in 1993 those carryforwards were no longer available. However, the Company's tax rate in 1993 was below the United States statutory rate of 35%, as a result of the utilization of tax credit carryforwards and foreign net operating loss carryforwards. There continue to be tax credit carryforwards and foreign net operating loss carryforward amounts which will lower the Company's prospective tax rate if utilized. The Company adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" at the beginning of 1993. The effect of this change in accounting principle was not material to the Company's consolidated financial position. See "Note K: Income Taxes" in Notes to Consolidated Financial Statements.
In connection with the retirement of the Company's outstanding 9.25% convertible subordinated debentures, the Company incurred, in the fourth quarter of 1993, an extraordinary charge of $0.7 million, net of income taxes, for the costs of the redemption premium of 3.7% and the write off of unamortized debt issuance costs.
1992 Compared to 1991
Sales increased 4% in 1992, to $529.6 million. The sales increase was primarily due to a 13% increase in sales of semiconductor test systems over 1991 and, to a lesser extent, a 7% increase in sales of connection systems. Offsetting the increased sales were reduced sales of circuit-board test systems and telecommunications systems which were down 12% and 5%, respectively. The Company believes that the over-all market for semiconductor test systems declined in 1992 and that, the increase in sales represents market-share growth. The decline in sales of circuit-board test systems was primarily due to a decrease in demand from U.S. government defense contractors.
During the year, the Company decided to concentrate its efforts in Electronic Design Automation (EDA) on software products for test generation and design verification. This decision led to the closing of the EDA operation in Santa Clara, California and the consolidation of the EDA operation in Boston, Massachusetts with the circuit-board test division. The Company also decided to move the circuit-board assembly operation in Walnut Creek, California to the central circuit-board assembly operation in Boston.
Cost of sales increased as a percent of sales from 58% to 59%. This increase was due to the fact that, while the Company reduced its overhead associated with circuit-board test systems and telecommunications systems, it did not reduce such expenses proportionately with the reduction in sales of these two product lines.
Engineering and development expenses were essentially unchanged in 1992, while the amount of selling and administrative expenses increased less than 1% as the Company controlled the growth of these expenses.
Interest income increased 78% in 1992 to $2.5 million due to an increase in the Company's cash and cash equivalents balance beginning in the second half of 1991. Cash had grown by $63.8 million from June 29, 1991 to December 31, 1992. Interest expense decreased 21% in 1992 due to a reduction in the average level of debt outstanding during the year and lower average short-term interest rates.
The Company's effective tax rate increased from 10% in 1991 to 13.5% in 1992. At the end of 1992, the Company had utilized all of its available U.S. Federal net operating loss carryforwards for financial reporting purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance increased by $76.2 million in 1993, following an increase of $32.0 million in 1992. Cash flow generated from operations was $91.8 million in 1993 and $40.7 million in 1992. Additional cash of $33.6 million in 1993 and $15.7 million in 1992 was generated from the sale of stock to employees under the Company's stock option and stock purchase plans. In 1992, cash of $3.2 million was also raised from a bank note to finance future construction of a plant in Kumamoto, Japan.
Cash was used to fund additions to property, plant and equipment of $32.2 million in 1993 and $28.2 million in 1992. The Company also used $14.7 million of its cash to retire outstanding debt and $2.3 million to purchase stock from its shareholders pursuant to the Company's open market stock repurchase program. The debt retirement included $10.8 million for the repurchase of the outstanding convertible debentures and a cash payment of $3.2 million for the exercise of a purchase option on the Company's headquarters building in Boston, Massachusetts.
The Company believes its cash and cash equivalents balance of $143.6 million, together with other sources of funds, including cash flow generated from operations and available borrowing capacity of $80.0 million under its line of credit agreement, will be sufficient to meet future working capital and capital expenditure requirements.
Inflation has not had a significant long-term impact on earnings. If there were inflation, the Company's efforts to cover cost increases with price increases would be frustrated in the short term by its relatively high backlog.
ITEM 8:
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Shareholders of TERADYNE, INC.:
We have audited the consolidated financial statements and financial statement schedules of Teradyne, Inc. and Subsidiaries listed below. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Teradyne, Inc. and Subsidiaries as of December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
COOPERS & LYBRAND Boston, Massachusetts January 24, 1994
TERADYNE, INC.
The accompanying notes are an integral part of the consolidated financial statements.
TERADYNE, INC.
CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes are an integral part of the consolidated financial statements.
TERADYNE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the consolidated financial statements.
TERADYNE, INC.
The accompanying notes are an integral part of the consolidated financial statements.
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ACCOUNTING POLICIES:
Basis of Presentation
The consolidated financial statements include the accounts of Teradyne, Inc. and its subsidiaries, all of which are wholly owned (referred to collectively in these notes as the "Company"). All significant intercompany balances and transactions have been eliminated. Certain prior years' amounts have been reclassified to conform to the current year presentation.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or market (net realizable value).
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Leasehold improvements and major renewals are capitalized and included in property, plant and equipment accounts while expenditures for maintenance and repairs and minor renewals are charged to expense. When assets are retired, the assets and related allowances for depreciation and amortization are eliminated from the accounts and any resulting gain or loss is reflected in operations.
The Company provides for depreciation of its property principally on the straight-line method by charges to expense which are sufficient to write off the cost of the assets over their estimated useful lives.
Revenue Recognition
Revenue is recorded when products are shipped or, in instances where products are configured to customer requirements, upon the successful completion of test procedures. Service revenue is recognized ratably over applicable contract periods or as services are performed. In certain situations, revenue is recorded using the percentage of completion method based upon the completion of measurable milestones, with changes to total estimated costs and anticipated losses, if any, recognized in the period in which determined.
Engineering and Development Costs
The Company's products are highly technical in nature and require a large and continuing engineering and development effort. All engineering and development costs are expensed as incurred.
Income Taxes
Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." This statement superseded the previous accounting standard for income taxes, SFAS 96, which the Company adopted January 1, 1991. The adoption of SFAS 109 had no material effect on the results of operations.
Under SFAS 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The measurement of deferred tax assets is reduced by a valuation allowance if, based upon weighted available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
In general, the Company's practice is to provide U.S. federal taxes on undistributed earnings of the Company's foreign sales and service subsidiaries.
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ACCOUNTING POLICIES -- (CONTINUED)
Translation of Foreign Currencies
Assets and liabilities of foreign subsidiaries which are denominated in foreign currencies have been remeasured into U.S. dollars at rates of exchange in effect at the end of the fiscal year except fixed assets which have been remeasured using historical exchange rates. Revenue and expense accounts have been remeasured using an average of exchange rates in effect during the year. Net realized and unrealized gains and losses resulting from foreign currency remeasurement are included in operations.
Financial Instruments and Related Disclosures
Financial instruments consist primarily of investments in cash, cash equivalents and accounts receivables and obligations under accounts payable and debt instruments. Fair value of financial instruments have been determined through information obtained from market sources and management estimates. At December 31, 1993, the fair value of the Company's financial instruments approximates the carrying value.
The Company enters into foreign exchange contracts to hedge assets, liabilities, and transactions denominated in foreign currencies on a continuing basis for periods consistent with its committed exposures. The foreign exchange contracts are used to reduce the Company's risk associated with exchange rate movements, as gains and losses on these contracts are intended to offset foreign exchange gains and losses on the assets, liabilities, and transactions being hedged. As of December 31, 1993, the Company had $51.9 million of foreign exchange contracts outstanding, $40.0 million of which were in German marks, $11.0 million in various other European currencies, and $0.9 million in Japanese yen. The German mark contracts have maturities of one to three years. The Company's other foreign exchange contracts generally have maturities which do not exceed six months. All of the foreign exchange contracts require the Company to exchange foreign currencies for U.S. dollars at maturity, at rates agreed to at inception of the contracts.
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash equivalents and trade receivables. The Company places its cash equivalents in high grade financial instruments and, by policy, limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with respect to trade receivables are limited due to the large number of diverse and geographically dispersed customers.
Net Income Per Common Share
Net income per common share is based upon the weighted average number of common and common equivalent shares (when dilutive) outstanding each year. Common equivalent shares result from the assumed exercise of outstanding stock options, the proceeds of which are then assumed to have been used to repurchase outstanding common stock at the average market price during the year.
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
B. CASH AND CASH EQUIVALENTS
Cash equivalents consist of short-term investments in money market instruments with an original maturity of three months or less. These amounts are carried at cost plus accrued interest, which approximates market value. Of the $143.6 million cash and cash equivalents balance at December 31, 1993, cash equivalents amounted to $125.3 million, which included $112.5 million of U.S. Treasury bills. Of the $67.4 million cash and cash equivalents balance at December 31, 1992, cash equivalents amounted to $58.8 million, which included $50.8 million of U.S. Treasury bills.
C. LONG-TERM DEBT
Long-term debt at December 31, 1993 and 1992 consisted of the following (in thousands):
The total maturities of long-term debt for each of the next five years are $0.5 million.
Revolving Credit Agreement
The Company has $80.0 million of revolving credit available through January 31, 1996 under a domestic line of credit agreement with its banks. Under the terms of the agreement, any amounts outstanding at December 31, 1996 are converted into a one year term note. As of December 31, 1993, no amounts were outstanding under this agreement. The terms of this line of credit also include restrictive covenants regarding the working capital, tangible net worth and leverage. Interest rates on borrowings are either at the stated prime rate or based upon Eurocurrency or certificate of deposit interest rates. Additional domestic and foreign borrowings up to $30.0 million are permitted outside the agreement provided that the liabilities of the Company, exclusive of deferred income taxes and subordinated debt, shall not exceed 100% of the Company's tangible net worth.
Mortgage Note Payable
The Company has received a loan of $4.5 million from the Boston Redevelopment Authority in the form of a 3% mortgage loan maturing March 31, 2013. This loan is collateralized by a mortgage on the Company's property at 321 Harrison Avenue which may, at the Company's option, become subordinated to another mortgage up to a maximum of $5.0 million. For the first 4 1/2 years of the note, interest was accrued but not paid ("Accrued Interest"). Beginning September 30, 1987, semi-annual interest payments are being paid on principal and Accrued Interest. The principal and Accrued Interest are payable in full at maturity.
Industrial Revenue Bonds
At December 31, 1993, the Company has outstanding industrial revenue bonds, in the amount of $1.3 million, maturing in 1998 and 1999. These bonds are payable in quarterly installments, including interest at the higher of 75% of the stated prime rate or 7 1/2%. The bonds are collateralized by mortgage interests on certain properties owned by the Company.
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
C. LONG-TERM DEBT -- (CONTINUED) Capitalized Lease Obligations
On December 31, 1993, the Company exercised its lease option to purchase the property located at 321 Harrison Avenue, Boston, Massachusetts for $3.2 million.
Other Long-term Debts
At December 31, 1993, other long-term debt consists principally of a Japanese yen-denominated note in the amount of $3.6 million at an interest rate of 4.8%, secured by land in Kumamoto, Japan, with interest only payable until March 31, 1995, and principal and interest payable in monthly installments from April 29, 1995 to March 30, 2007.
D. CONVERTIBLE SUBORDINATED DEBENTURES
At December 31, 1992, the Company had outstanding $15.4 million of 9.25% convertible subordinated debentures due March 15, 2012. These debentures were convertible into shares of the Company's common stock any time prior to maturity at a conversion price of $23.50 per share. The amount shown on the Consolidated Balance Sheets at December 31, 1992 was net of $1.0 million unamortized debt issue costs.
During 1993, $5.0 million principle amount of debentures were converted into 210,585 shares of common stock resulting in an increase of $4.7 million of shareholders' equity (net of the related $0.3 million unamortized debt issue costs). On November 19, 1993, the Company exercised its option to repurchase the remaining $10.4 million outstanding debentures. The Company used $10.8 million of available cash from operations to repurchase the debentures at a premium of 103.7% of the principal amount. The premium amount and the writeoff of the remaining unamortized debt issue cost resulted in a charge of $1.0 million. This charge, net of the related taxes of $0.3 million, is reflected as an extraordinary loss in the Consolidated Statements of Income.
E. COMMITMENTS
Rental expense for the years ended December 31, 1993, 1992, and 1991 was $11.2 million, $12.6 million, and $13.0 million, respectively. Minimum annual rentals under all noncancellable leases are: 1994 -- $6.8 million; 1995 -- $5.5 million; 1996 -- $2.6 million; 1997 -- $1.1 million; 1998 -- $0.9 million; and $6.3 million thereafter, totalling $23.2 million. Offsetting the future lease payments, the Company's income from noncancellable subleases totals $1.2 million.
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F. PENSION PLANS
The Company has defined benefit pension plans covering substantially all domestic employees and employees of certain international subsidiaries. Benefits under these plans are based on the employee's years of service and compensation. The Company's funding policy is to make contributions to the plans in accordance with local laws and to the extent that such contributions are tax deductible. The assets of the plans consist primarily of equity and fixed income securities.
In 1993, the Company established a supplemental defined benefit pension plan in the United States to provide retirement benefits in excess of levels allowed by ERISA.
In 1992, the Company established a defined benefit pension plan covering its employees in Japan. The Company's foreign plans were not included in the table below in 1991 because they were not significant in the aggregate. Net pension expense for the domestic plans was $2.4 million in 1993, $1.8 million in 1992, and $1.5 million in 1991.
The components of net pension expense are summarized as follows (in thousands):
The following table sets forth the plans' funded status at December 31 (in thousands):
The Company has recorded an additional minimum pension liability for underfunded plans of $7.5 million at December 31, 1993, representing the excess of unfunded accumulated benefit obligations over previously recorded pension cost liabilities. A corresponding amount has been recognized as an intangible asset to the extent of related unrecognized prior service cost of $5.2 million, with the remaining amount of $1.5 million, net of taxes of $0.8 million, recorded as a charge to stockholders' equity.
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
G. STOCK OPTION PLANS
Under its stock option plans, the Company has granted options to certain directors, officers and employees entitling them to purchase common stock at 100% of market value at the date of grant.
There have been no charges to income in connection with these options other than incidental expenses related to the issuance of shares.
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
H. SAVINGS PLAN
The Company sponsors a Savings Plan covering substantially all domestic employees. Under this plan, employees may contribute up to 12% of their compensation (subject to Internal Revenue Service limitations). The Company annually matches employee contributions of up to 6% of such compensation at rates ranging from 50% to 100%. The Company's contributions vest after two years, although contributions for those employees with five years of service vest immediately.
The trustees of the Savings Plan have been granted an option to purchase 900,000 shares of the Company's common stock, exercisable at $9.50 per share (the fair market value of the Company's common stock at the date of the grant) in five cumulative annual installments beginning in 1990. The trustees exercised 335,000, 200,000, and 100,000 shares respectively in 1993, 1992, and 1991. Under the terms of the Plan, any gains realized from the sale of option shares are first allocated to participants' accounts to fund up to one-half of the minimum Company contribution, with any excess applied to additional funding.
Under this plan, the amounts charged to operations were $2.0 million in 1993 and 1992, and $1.8 million in 1991.
I. EMPLOYEE STOCK PURCHASE PLAN
Under the 1979 Stock Purchase Plan, employees are entitled to purchase shares of common stock through payroll deductions of up to 10% of their compensation. The price paid for the common stock is equal to 85% of the lower of the fair market value of the Company's common stock on either the first or last business day of the year. In January 1994, the Company issued 375,124 shares of common stock to employees who participated in the plan during 1993 at a price of $12.82 per share. Currently there are 405,869 shares reserved for issuance.
There have been no charges to income in connection with this plan other than incidental expenses related to the issuance of shares.
J. STOCKHOLDER RIGHTS PLAN
The Company's Board of Directors adopted a Stockholder Rights Plan on March 14, 1990. Under the Plan, the Company distributed to stockholders a dividend of one Common Stock Purchase Right for each outstanding share of Common Stock. Initially, the Purchase Rights enable a stockholder to purchase one share of Teradyne Common Stock for $40.00. Upon certain events, such as the initiation of a tender offer for more than 30% of the Company's Common Stock, the Purchase Rights allow stockholders to purchase $80.00 worth of Common Stock (or other securities or consideration as determined by Continuing Directors of the Company) for $40.00. Generally, at any time until 10 days following the announcement that a person has acquired 20% of the outstanding shares of the Company, the Company may redeem the Purchase Rights for $0.01 per share. The Plan will expire March 26, 2000, unless earlier redeemed by the Company.
K. INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." As permitted by SFAS 109, the Company has elected not to restate its financial statements for any periods prior to 1993. The effect on operations for 1993 was immaterial. However, upon adoption of SFAS 109 the Company increased Additional Paid-in Capital by $5.7 million relating to the tax benefits to be derived from the utilization of U.S. net operating loss carryforward amounts resulting from tax deductions pertaining to the issuance of the Company's stock to employees under its benefit plans.
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
K. INCOME TAXES -- (CONTINUED)
The components of income before income taxes and extraordinary item and the provision (credit) for income taxes as shown in the Consolidated Statements of Income are as follows (in thousands):
Under SFAS 109, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets (liabilities) as of December 31, 1993 are as follows (in thousands):
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
K. INCOME TAXES -- (CONTINUED)
The valuation allowance applies to U.S. federal and foreign tax credit carryforwards, and net operating losses carryforwards in certain foreign jurisdictions that may expire before the Company can utilize them. For U.S. federal and foreign tax return purposes, the Company has approximately $8.4 million and $10.7 million, respectively of net operating loss carryforwards, of which $5.2 million expire in the years 1995 through 1998, $8.4 million expire in the year 2005, and $5.5 million may be carried forward indefinitely. The Company also has available U.S. federal and foreign tax credits carryforwards of approximately $4.1 million, of which $2.4 million expire in the years 2000 through 2002, $0.5 million in the year 2008, and the remainder indefinitely.
The components of the provision (benefit) for deferred income taxes for the years ended December 31, 1992 and 1991 are as follows (in thousands):
Below is a reconciliation of the effective tax rates for the three years indicated:
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
L. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in principally two industry segments, which are the design, manufacturing and marketing of electronic test systems and backplane connection systems. Corporate assets consist principally of cash and cash equivalents, deferred tax assets and certain other assets.
The Company's sales to unaffiliated customers for the three years ended December 31 were made to customers in the following geographic areas:
See "Item 1: Business -- Marketing and Sales" elsewhere in this report for information on the Company's export activities, identifiable assets of foreign subsidiaries, and major customers.
SUPPLEMENTARY INFORMATION (UNAUDITED)
Quarterly financial information for 1993 and 1992 (in thousands of dollars, except per share amounts):
ITEM 9:
ITEM 9: DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10:
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Certain information relating to directors and executive officers of the Company, executive compensation, security ownership of certain beneficial owners and management, and certain relationships and related transactions is incorporated by reference herein from the Company's definitive proxy statement in connection with its Annual Meeting of Stockholders to be held on May 26, 1994, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year. For this purpose, the Management Compensation and Development Committee Report and Performance Graph included in such proxy statement are specifically not incorporated herein. (Also see "Item I -- Executive Officers of the Company" elsewhere in this report.)
ITEM 11:
ITEM 11: EXECUTIVE COMPENSATION.
Certain information relating to directors and executive officers of the Company, executive compensation, security ownership of certain beneficial owners and management, and certain relationships and related transactions is incorporated by reference herein from the Company's definitive proxy statement in connection with its Annual Meeting of Stockholders to be held on May 26, 1994, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year. For this purpose, the Management Compensation and Development Committee Report and Performance Graph included in such proxy statement are specifically not incorporated herein.
ITEM 12:
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Certain information relating to directors and executive officers of the Company, executive compensation, security ownership of certain beneficial owners and management, and certain relationships and related transactions is incorporated by reference herein from the Company's definitive proxy statement in connection with its Annual Meeting of Stockholders to be held on May 26, 1994, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year. For this purpose, the Management Compensation and Development Committee Report and Performance Graph included in such proxy statement are specifically not incorporated herein.
ITEM 13:
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Certain information relating to directors and executive officers of the Company, executive compensation, security ownership of certain beneficial owners and management, and certain relationships and related transactions is incorporated by reference herein from the Company's definitive proxy statement in connection with its Annual Meeting of Stockholders to be held on May 26, 1994, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year. For this purpose, the Management Compensation and Development Committee Report and Performance Graph included in such proxy statement are specifically not incorporated herein.
PART IV
ITEM 14:
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A)1. FINANCIAL STATEMENTS
The following consolidated financial statements are included in Item 8:
Balance Sheets as of December 31, 1993 and 1992 Statements of Income for the years ended December 31, 1993, 1992 and 1991 Statements of Cash Flows for the years ended December 31, 1993, 1992 and 1991 Statements of Changes in Shareholders' Equity for the years ended December 31, 1993, 1992 and 1991
(A)2. FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedules are included in Item 14(d):
Schedule V -- Property Schedule VI -- Accumulated Depreciation, Depletion and Amortization of Property Schedule IX -- Short-term Borrowings Schedule X -- Supplementary Income Statement Information
Schedules other than those listed above have been omitted since they are either not required or the information is otherwise included.
(A)3. LISTING OF EXHIBITS
Executive Compensation Plans and Arrangements 1. 1987 Non-Employee Director Stock Option Plan (filed as Exhibit 3.10(iii) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992). 2. Teradyne, Inc. Supplemental Executive Retirement Plan (filed as Exhibit 3.10(iv) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992).
(B) REPORTS ON FORM 8-K
There have been no 8-K filings during the three months ended December 31, 1993.
(C) EXHIBITS
The Company hereby files as part of this Form 10-K the exhibits listed in Item 14 (a) 3 as set forth above.
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 THIS DAY OF MARCH, 1994.
TERADYNE, INC.
By: /s/ OWEN W. ROBBINS ------------------------------------ OWEN W. ROBBINS, EXECUTIVE VICE PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
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