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 test 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, telecommunications, 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 extend the manufacture of backplane connection systems to include the manufacture of fully integrated electronic assemblies that incorporate 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 approximately 10% of net sales in 1994. No other customer accounted for more than 10% of net sales in 1994.
Direct sales to United States government agencies accounted for less than 1% of net sales in 1994 and about 2% of net sales in 1993 and 1992. Sales are also made within each of the Company's segments to customers who are government contractors. About 22% of backplane connection systems sales and less than 10% of electronic test systems sales fell into this category during 1994.
The Company's international customers are located primarily in Europe, the Asia Pacific region, and Japan. The Company sells in these areas both directly and through foreign sales subsidiaries. Substantially all of the Company's manufacturing activities are conducted in the United States.
Sales to international customers accounted for 46% of net sales in 1994, 41% in 1993, and 42% in 1992. Identifiable assets of the Company's foreign subsidiaries, consisting principally of operating assets, approximated $86.6 million at December 31, 1994, $65.0 million at December 31, 1993, and $86.0 million at December 31, 1992. Of these identifiable assets at December 31, 1994, $42.6 million were in Europe, $40.3 million were in Japan, and $3.4 million were in the Asia Pacific region. Since sales to international 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, the Asia Pacific region, and Japan.
COMPETITION
Competition is intense in each of the business areas that the Company operates. In each market there are several significant competitors. 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, 1994, the Company's backlog of unfilled orders for electronic test systems and backplane connection systems was approximately $337.8 million and $76.2 million, respectively, compared with $238.9 million and $49.1 million, respectively, on December 31, 1993. Of the backlog at December 31, 1994, approximately 92% of the electronic test systems backlog, and approximately 91% of the backplane connection systems backlog are expected to be delivered in 1995. The Company's past experience indicates that a portion of orders included in the backlog may be canceled. 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 Company protects its rights in proprietary information through various methods such as copyrights, trademarks, patents and patent applications, software license agreements, and employee agreements.
EMPLOYEES
As of December 31, 1994, 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 $70.4 million in 1994, $62.4 million in 1993, and $62.0 million in 1992. These expenditures amounted to approximately 10% of net sales in 1994, 11% in 1993, and 12% in 1992.
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, the costs associated with complying 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.
ITEM 2:
ITEM 2: PROPERTIES
The Company's executive offices are in Boston, Massachusetts. Manufacturing and other operations are carried on in several locations. The following table provides certain information as to the Company's principal general offices and manufacturing facilities:
The Company owns most of its manufacturing and office facilities. In 1994, construction began on 28,000 square feet of Electronic Test System manufacturing space in Kumamoto, Japan. The Company intends to utilize this space beginning in 1995. Approximately 120,000 square feet of the Agoura Hills property listed above was unoccupied through 1994. The Company plans to occupy this facility in 1995. The Company is subleasing an additional 85,000 square feet of space to a third party 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 SHAREHOLDER 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 24, 1995 was 3,056.
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:
1994 compared to 1993
Sales increased 22% in 1994 to $677.4 million. Sales increased in each of the major product lines of the Company -- semiconductor test systems, circuit-board test systems, telecommunications systems and backplane connection systems. The largest increases in sales occurred in semiconductor test systems, which increased 22%, and backplane connection systems, which increased 48%. Sales of semiconductor test systems grew as semiconductor manufacturers continued to add capacity in response to rising demand for their products. This capacity expansion was evidenced by a number of new semiconductor manufacturing plants coming on line. Sales of backplane connection systems increased in response to the rising demand for the high technology products in the Company's commercial customer base. As a result of the increase in sales, income before extraordinary item almost doubled in 1994, increasing $35.0 million to $70.9 million.
Incoming orders grew faster than sales in 1994, increasing 28% to $803.4 million. The increase in orders, like the increase in sales, was primarily due to increases in semiconductor test system orders, which increased 49%, and in backplane connection systems, which increased 55%. As a result of the increase in orders, the Company's backlog grew 44% in 1994, finishing the year at $414.0 million.
Cost of sales as a percentage of sales decreased from 57% in 1993 to 56% in 1994. The improvement was the result of the following two factors. First, the increase in sales volume permitted increased utilization of certain fixed and semi-variable components of the Company's overhead structure. Second, there was an unfavorable change in mix as sales of backplane connection systems, whose product margins are generally lower than those of electronic test systems, were higher as a percentage of total Company sales.
Engineering and development expenses declined as a percentage of sales from 11% in 1993 to 10% in 1994, as these expenses did not increase at the same rate as sales. The dollar amount of these expenses grew $8.1 million in 1994 as a result of increased investment in new product development of semiconductor test systems. Selling and administrative expenses decreased to 20% of sales in 1994 compared with 23% of sales in 1993, as the dollar volume of these expenses grew less than 3% while sales increased 22%.
Interest income increased 75% in 1994 to $6.4 million due to an increase in the Company's average cash balance and higher interest rates during the year. Interest expense decreased from $3.6 million in 1993 to $1.7 million in 1994 as a result of the Company's retirement of its 9.25% convertible subordinated debentures in the fourth quarter of 1993.
The Company's effective tax rate was 31% in 1994 compared with 30% in 1993. The Company was able to operate with an effective tax rate below the federal statutory rate of 35% in both years through the utilization of tax credit carryforward and foreign loss carryforward amounts. The Company expects its tax rate to approximate the statutory rate of 35% in 1995.
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 reduce the size of 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 with 1992. These expenses were essentially flat for the period 1991 through 1993 as the Company 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 was able to utilize net operating loss carryforwards to lower its United States taxable income for financial reporting purposes in 1992, while in 1993 the U.S. 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. 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 writeoff of unamortized debt issuance costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance grew $39.2 million in 1994 following an increase of $76.2 million in 1993. Cash flow generated from operations was $89.4 million in 1994 and $91.8 million in 1993. Additional cash of $25.3 million in 1994 and $33.6 million in 1993 was generated from the sale of stock to employees, including the related tax benefit, under the Company's stock option and stock purchase plans.
Cash was used to fund additions to property, plant and equipment of $29.6 million in 1994 and $32.2 million in 1993. The total capital spending over the two years of $61.8 million was less than depreciation expense, creating a decrease in the Company's net investment in property plant and equipment. Property, plant and equipment declined from $185.1 million at the beginning of 1993 to $183.6 million at the end of 1994. The Company also invested $19.8 million in a U.S. Treasury Bill. In 1993 the Company's Board of Directors authorized the repurchase of 1,000,000 shares of the Company's stock on the open market. Cash of $24.6 million in 1994 and $2.3 million in 1993 was utilized for this buyback of the Company's stock. Cash was also used to retire debt of $1.6 million in 1994 and $14.7 million in 1993. The debt retirement in 1993 included $10.8 million for the repurchase of the Company's outstanding convertible debentures.
The Company believes its cash and cash equivalents balance of $182.8 million, together with other sources of funds, including marketable securities of $19.8 million, cash flow generated from operations, and the available borrowing capacity of $80.0 million under its line of credit agreement, will be sufficient to meet working capital and capital expenditure requirements in 1995.
Inflation has not had a significant long-term impact on earnings. If there was inflation, the Company's efforts to cover cost increases with price increases could be frustrated in the short-term by its relatively high backlog.
ITEM 8:
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Shareholders of TERADYNE, INC.:
We have audited the consolidated financial statements of Teradyne, Inc. and Subsidiaries listed below. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts January 20, 1995
CONSOLIDATED FINANCIAL STATEMENTS COVERED BY THE REPORT OF INDEPENDENT ACCOUNTANTS
Consolidated Financial Statements filed in Item 8:
Balance Sheets as of December 31, 1994 and 1993
Statements of Income for the years ended December 31, 1994, 1993 and 1992
Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992
Statements of Changes in Shareholders' Equity for the years ended December 31, 1994, 1993 and 1992
TERADYNE, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1994 AND 1993
ASSETS
LIABILITIES
SHAREHOLDERS' EQUITY
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.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
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 are 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." 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.
The Company's practice is to provide U.S. federal taxes on undistributed earnings of the Company's foreign sales and service subsidiaries.
Translation of Foreign Currencies
Assets and liabilities of foreign subsidiaries which are denominated in foreign currencies are remeasured into U.S. dollars at rates of exchange in effect at the end of the fiscal year except fixed assets which are remeasured using historical exchange rates. Revenue and expense accounts are 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.
TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A. ACCOUNTING POLICIES - (CONTINUED) 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.
B. FINANCIAL INSTRUMENTS
Fair Value
The Company considers all highly liquid temporary cash investments with maturities of three months or less at date of acquisition to be cash equivalents. At December 31, 1994 marketable securities consist of a short-term investment in a U.S. Treasury Bill with an original maturity of greater than three months. Marketable securities and cash equivalents are carried at amortized cost plus accrued interest, which approximates fair value. The Company's debt consists of subsidized loans whose fair value is not practicable to estimate. For all other balance sheet financial instruments, the carrying amount approximates fair value.
Off-Balance Sheet Risk
The Company regularly enters into forward foreign exchange contracts in European and Japanese currencies to hedge assets, liabilities, and transactions denominated in foreign currencies, for periods consistent with its committed exposures. These 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 losses and gains on the assets, liabilities, and transactions being hedged. Forward foreign exchange contracts have maturities of less than one year, unless they relate to long term sales contracts denominated in foreign currency; these maturities are from one to three years.
At December 31, 1994 and 1993, the face amount of forward foreign exchange contracts outstanding was $67.9 million and $51.9 million, respectively. The fair value of such contracts at December 31, 1994, determined by applying the year end foreign currency exchange rates to the contract amounts, was immaterial.
The Company's policy is to defer gains and losses on these contracts until the corresponding losses and gains are recognized on the items being hedged. During 1994, the Company recorded in other current assets a $2.9 million loss on a deferred forward foreign exchange contract relating to a long term sales contract denominated in foreign currency. This loss will serve to offset foreign exchange transaction gains to be recognized on the contract revenue.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash investments and trade accounts receivable. Concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of diverse and geographically dispersed customers. The Company maintains cash investments primarily in U.S. government obligations which essentially have no credit risk.
TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
C. DEBT
Long-term debt at December 31, 1994 and 1993 consisted of the following (in thousands):
The total maturities of long-term debt for each of the next five years are $0.3 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 January 31, 1996 are converted into a one year term note. As of December 31, 1994, no amounts were outstanding under this agreement. The terms of this line of credit include restrictive covenants regarding 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 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 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. Interest for the first 4 1/2 years of the note was capitalized up to a principle amount of $5.0 million. Since September 30, 1987, the Company has been making semi-annual interest payments.
Other Long-term Debt
At December 31, 1994, other long-term debt consists of a Japanese yen-denominated note with 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 28, 1995 to March 30, 2007.
Short-term Borrowings
The weighted average interest rate on short-term borrowings outstanding as of December 31, 1994 and 1993 was 3.2% and 3.4%, respectively.
TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
D. CONVERTIBLE SUBORDINATED DEBENTURES
During 1993, $5.0 million principle amount of debentures was 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 write-off 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, 1994, 1993, and 1992 was $10.2 million, $11.2 million, and $12.6 million, respectively. Minimum annual rentals under all noncancellable leases are: 1995 - $6.5 million; 1996 - $3.2 million; 1997 - $1.7 million; 1998 - $1.4 million; 1999 - $1.1 million; and $5.7 million thereafter, totaling $19.6 million. Offsetting the future lease payments, the Company's income from noncancellable subleases totals $0.7 million.
TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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):
In accordance with the provisions of Financial Accounting Standards No. 87, the Company recorded a minimum pension liability adjustment of $6.8 million at December 31, 1993, representing the excess of accumulated benefit obligations over the fair value of plan assets and accrued pension liabilities. The additional liability was offset by an intangible asset to the extent of previously unrecognized prior service cost of $4.6 million. The amount in excess of previously unrecognized prior service cost was recorded as a reduction of shareholder's equity in the amount of $1.5 million, net of applicable deferred income taxes of $0.7 million. In 1994, this adjustment was reversed as the plan assets exceeded the accumulated benefit obligation.
In addition to the above plans, the Company in 1993 established an unfunded supplemental defined benefit pension plan in the United States to provide retirement benefits in excess of levels allowed by the Employee Retirement Income Security Act (ERISA). The actuarial present value of accumulated plan benefits totaled $1.3 million and $1.1 million at December 31, 1994 and 1993, respectively. Net pension expense was $0.4 million in 1994 and 1993.
TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
G. STOCK OPTION PLANS
Under its stock option plans, the Company granted options to certain directors, officers and employees entitling them to purchase common stock at 100% of market value at the date of grant.
Information with respect to options granted, forfeited, and exercised is set forth below:
There were no charges to income in connection with these options other than incidental expenses related to the issuance of shares.
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 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 were 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. In 1994, the trustees exercised the remaining 265,000 shares. 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. Any excess is applied to additional funding.
In 1994, the Company established a Supplemental Savings Plan to provide savings benefits in excess of those allowed by ERISA. The provisions of which are the same as the Savings Plan.
Under these plans, the amount charged to operations was $2.0 million in 1994, 1993 and 1992.
TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1995, the Company issued 245,229 shares of common stock to employees who participated in the Plan during 1994 at a price of $22.74 per share. During 1994, the Company amended the Plan to increase the number of shares authorized thereunder by 400,000 shares. Currently there are 560,640 shares reserved for issuance.
J. STOCKHOLDER RIGHTS PLAN
The Company's Board of Directors adopted a Stockholder Rights Plan on March 14, 1990, under which a dividend of one Common Stock Purchase Right was distributed for each outstanding share of Common Stock. The Plan entitles Stock Purchase Right holders to purchase shares of Company Common Stock for $40 per share in certain events, such as a tender offer to acquire 30% or more of the Company's outstanding shares. Under some circumstances, such as a determination by Continuing Directors that an acquiring party's interests are adverse to those of the Company, the Plan entitles such holders (other than an acquiring party or adverse party) to purchase $80 worth of Common Stock (or other securities or consideration owned by the Company) for $40. The Plan will expire March 26, 2000 unless earlier redeemed by the Company.
K. INCOME TAXES
The components of income before income taxes and extraordinary item and the provision for income taxes as shown in the Consolidated Statement of Income are as follows (in thousands):
TERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1994 and 1993 are as follows (in thousands):
As of December 31, 1994, the valuation allowance principally applies to U.S. foreign tax credit carryforwards that may not be fully utilized by the Company. For foreign tax return purposes, the Company has approximately $3.0 million of net operating loss carryforwards which may be carried forward indefinitely.
Below is a reconciliation of the effective tax rates for the three years indicated:
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 -- (CONTINUED)
L. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates principally in 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, marketable securities, accounts receivable 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 1994 and 1993 (in thousands of dollars, except per share amounts):
ITEM 9:
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 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 Shareholders to be held on May 24, 1995, 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 1 - 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 Shareholders to be held on May 24, 1995, 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 Shareholders to be held on May 24, 1995, 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 Shareholders to be held on May 24, 1995, 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, 1994 and 1993 Statements of Income for the years ended December 31, 1994, 1993 and 1992 Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992 Statements of Changes in Shareholders' Equity for the years ended December 31, 1994, 1993 and 1992
(A) 2. FINANCIAL STATEMENT SCHEDULES
Financial statement schedules have been omitted since either they are not required or the information is otherwise included.
(A) 3. LISTING OF EXHIBITS
The Exhibits which are filed with this report or which are incorporated by reference herein are set forth in the Exhibit Index.
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).
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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 23RD DAY OF MARCH, 1995.
TERADYNE, INC.
By: 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.
EXHIBIT INDEX
The following designated exhibits are, as indicated below, either filed herewith or have heretofore been filed with the Securities and Exchange Commission and are referred to and incorporated by reference to such filings.